Telecom's New Tag Team

Intel and AT&T's alliance for new chips could shake up the communications biz

Intel (INTC ) and AT&T (T ): The two icons of American business are both a bit down on their luck these days. In the past five years AT&T has plunged from its perch as one of the world's most powerful communications companies to a shrinking player whose survival as an independent company is in question. Unable to defend its long-distance business from local phone, cable-TV, and cellular competitors, it has seen its market cap plunge from $174 billion in 1999 to $15 billion now.

While Intel Corp.'s problems are much less severe, it too has struggled. The Santa Clara (Calif.) chipmaker remains the dominant supplier of microprocessors, but its efforts to expand into new markets, particularly communications, have been mixed.

Now BusinessWeek has learned that this unlikely pair is working together in an effort to ring up better results. The companies are cooperating on a new generation of chips that will combine the computing power of Intel with the communications expertise of AT&T. The goal is to make it easier and cheaper for customers to get everything from basic phone service and wireless broadband to HDTV-quality videoconferences and hackproof e-mail. By putting the capabilities to help deliver all those services onto chips, AT&T and Intel believe they can fundamentally change the field of communications. "This is [a] disruptive partnership that will shake the industry for 10 to 20 years," says AT&T Chief Technology Officer Hossein Eslambolchi.

For starters, AT&T is helping Intel with the development of a wireless broadband technology called WiMax. The technology, which Intel will include in a line of chips dubbed Roseville beginning next year, lets computer users tap into high-speed Net connections from as far away as 30 miles from a WiMax tower. AT&T is contributing antenna expertise that promises to improve WiMax's performance, both in terms of the distances it can span and the speeds at which it can transmit. The benefit for AT&T? It will be able to sell WiMax and use the technology to offer other services like Internet calling and network security.


WiMax is just the beginning. The companies also are working on chips to power a new class of products that AT&T plans to sell as an "office in a box." Expected to hit the market in 2006, these all-in-one networking devices will direct Web traffic, maintain firewalls against viruses, provide videoconferencing, and give telecommuters nearly unhackable access to their office e-mail, Eslambolchi says. These products are expected to cost a few hundred dollars, insiders say, compared with more than $1,500 to buy the collection of needed gear today. What's more, these devices will be able to handle telephone service that runs on Internet technology. That means a 10-person outfit that now spends roughly $300 a month for traditional phone lines could slash costs by switching to a Net calling service like AT&T's CallVantage. "[This partnership] is an important step for us," says Sean M. Maloney, general manager for Intel's Communications Group. "We share a very similar vision for how the world moves from the old-fashioned [telephone] network to an intelligent network to last for the next 30 years."

While the alliance has loads of potential, the companies have everything to prove. The new chips remain in the lab, and AT&T and Intel still need to persuade hardware manufacturers, such as PC makers and networking giant Cisco Systems Inc. (CSCO ), to make products based on those chips. Meanwhile, rivals are racing ahead with competing technologies that will deliver many of the same services. Verizon Communications Inc. (VZ ), for example, is investing billions to string fiber optic lines to homes throughout its territory, with plans to deliver Net connections of up to 100 megabits per second. WiMax service, in contrast, likely will max out at 18 megabits per second.

The AT&T-Intel alliance began last year. Eslambolchi first approached Intel after word got back to him that the companies were working on many of the same things -- especially WiMax, computer security, and Net phoning. He found that Maloney was in favor of closer cooperation and this summer the companies signed an agreement specifying projects on which they would cooperate. AT&T CEO David W. Dorman and Intel CEO-designate Paul S. Otellini have met in person twice to discuss the joint effort, including a sit-down two weeks ago. "Lots of times it seems we're finishing each other's sentences," says Dorman.

Much is at stake for both companies. AT&T's market cap has plunged in recent years as revenues and profits have tumbled. That has fueled speculation that it will be acquired -- BellSouthCorp. (BLS ) has even negotiated, off and on, to buy Ma Bell. But Eslambolchi hopes to reverse AT&T's fortunes by cranking up sales of Web services. After spending billions to upgrade its network, AT&T boasts state-of-the-art technology. While most phone networks treat all kinds of Net traffic the same, AT&T's can identify each bit and adapt to make sure it gets the right treatment. The result is that AT&T'S Internet voice services work 99.991% of the time -- a tad higher than its century-old, traditional phone network. "It's the model for where other [phone companies] are trying to go," says analyst Michael V. Howard of Infonetics Research.

For Intel the joint effort could help with much-needed diversification. The company has made public pronouncements about expanding beyond microprocessors, particularly into communications, but it has struggled to do so. With AT&T contributing its technical expertise and backing that up with its marketing clout, Intel could see customers scrambling to buy laptops and desktops equipped with WiMax and other features. Separately, Intel has agreed to invest an undisclosed sum in Clearwire Inc., wireless pioneer Craig McCaw's company, which is building a nationwide WiMax network. Although none of the companies has provided specifics of how they'll work together, the most likely scenario is that McCaw will build the WiMax network, and AT&T will use his network to market its own services.

While the AT&T-Intel alliance is more promise than reality at this point, both sides are optimistic. "It turns out we've got a very similar view of how Internet infrastructure will be rolled out over the next three to five years," says Intel's Maloney. If they're right, the two companies may be able to show that their efforts in communications are more than just talk.

By Peter Burrows in San Mateo, Calif.

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