Meet AT&T's New Boss

Randall Stephenson is taking over for long-standing chief executive Ed Whitacre. Can he handle the job?

On the surface, Randall Stephenson and Ed Whitacre don't look much alike. Stephenson, who on Apr. 27 was named to succeed Whitacre as chief executive of telecom giant AT&T (T), has jet-black hair that he wears slicked back—à la NBA basketball coach Pat Riley. Whitacre's coif is gray and thin. And though they're both over 6 feet, Stephenson looks substantially smaller because of a lanky, athletic build he keeps in part by zipping down the slopes on his regular ski trips.

But that's on the outside. As the 65-year-old Whitacre prepares to step down as CEO and hand the reins to the 47-year-old Stephenson on June 3, the key is that the two executives think very much alike. For the past several years, Stephenson, first as chief financial officer and then as chief operating officer since 2004, has worked closely with Whitacre while "Big Ed" transformed the former Southwestern Bell telephone company from the smallest of the Baby Bells into the biggest, richest communications carrier in the land. "As COO, he's been involved in everything, and implementing and advising on most everything in the firm," Scott Cleland, president of broadband consultancy Precursor, says of Stephenson. "He's been an active, very close No. 2."

"Scope and Scale"

So, it's no surprise that Stephenson is the man that the AT&T board has chosen to succeed Whitacre. But the reality is, Whitacre's are gargantuan shoes to fill. It was Whitacre's vision to create a company with the "scope and scale," as he often liked to say, that would dominate telecom.

To that end, he engineered several fabled acquisitions. In 1996, with the ink barely dry on telecom reform legislation that permitted such deals, Whitacre engineered the acquisition of Pacific Telesis, leading the way in what has become sweeping industrywide consolidation. He later cut a deal to combine AT&T Wireless with Cingular, the joint venture he created with BellSouth, to form the largest wireless carrier in the U.S. He followed that up by acquiring AT&T in 2005 and adopting the Ma Bell name, along with the industry's most enviable big-business customer list. Then last year, he capped his career as consolidator by acquiring BellSouth, giving him full control of the fast-growing Cingular.

It's all been bold stuff—and it has paid off. AT&T will generate more than $118 billion in revenue this year and nearly $17 billion in net income, according to UBS (UBS). The acquisitions have reaped billions in cost savings, allowing AT&T to maintain one of the best balance sheets in the business and earn a place as one of the favorites on Wall Street. AT&T shares climbed 46% in 2006, making it one of the top performing blue chips for the year. Since the beginning of the year, the stock has risen another 11%, to $39.

Transition Time

Still, AT&T's future depends on Stephenson's ability to perform a difficult balancing act. AT&T needs to boost revenues from new services, such as wireless and broadband Internet, faster than its old businesses fade away. And he probably will have to do it without major acquisitions—since there are no major telecom companies in the U.S. left to buy. "Stephenson takes the reins of an organization that will have to rely on organic subscriber growth and focus on the tough challenge of building out new kinds of capacity, market by market," says Cliff Raskind of Strategy Analytics.

So far, the decline in AT&T's traditional voice service has been countered by steady growth in wireless and broadband. But the slide in voice is expected to accelerate in the years ahead, and wireless growth is slowing down. Researcher Sanford C. Bernstein (AB) expects annual growth to drop from an average of 15% in years past to 6% or less in the years ahead.

Can Stephenson handle it? He has been the guy heading up the integration of all those acquisitions. Just as important, he has led the company's transition into what he says is the most important technological shift of this era: the movement to Net technology known as Internet protocol. "It's a very unique time," Stephenson told BusinessWeek from a makeshift interview room at the CTIA cellular industry conference earlier this month. "What makes today unique? It's real simple: IP."

Behind Stephenson's lead, AT&T has spent some $5 billion to revamp its wireline network with fiber and IP gear. A similar investment is under way to create a new speedy Internet-based wireless network. Stephenson is racing rivals to deliver an interconnected communications world to users—one that allows people to connect to their data and make calls from anywhere: the mobile phone, the home phone, the PC, or the TV.

Behind Cable Rivals

The big question is whether Stephenson can do it better and more quickly than competitors. AT&T's biggest traditional rival is Verizon Communications (VZ), the New York-based telecom giant. He's also facing a host of new competitors, including companies that are using Net technology to offer cheap phone calls and others that use a wireless technology called WiMAX for speedy Internet access. Among the most formidable are cable companies such as Comcast (CMCSA) and Time Warner (TWX), which are pursuing a strategy similar to AT&T's.

In the minds of many experts, the cable companies have an edge. Both Comcast and Time Warner want to control the consumer's communications tool box. Each side wants to provide your phone, Internet, and TV service. But the cable operators are much further along in providing phone service than AT&T is in offering TV. AT&T partners with satellite companies to sell television, and they are beginning to sign up customers for U-verse, their new Internet-based TV offering. The trouble is, "there have been noticeable kinks in getting the U-verse product up and running," says Standard & Poor's analyst Todd Rosenbluth.

The numbers tell the story: Comcast, the nation's largest cable provider, signed up 571,000 digital phone subscribers in the first quarter. AT&T added 187,000 video subscribers in the first quarter, and only about 13,000 U-verse subscribers, bringing the total to roughly 20,000.

Stephenson was not available for interviews on Apr. 27. But he has acknowledged to BusinessWeek in the past just how tough the competition with AT&T's cable rivals is. "Look at our competitive losses, that's where it goes," he said. "And look at broadband competition, [cable is] the only place that it exists."

On His Own

Stephenson has never been a CEO. And while at AT&T, he has always had the advantage of being able to walk down the hall and review strategy with Whitacre. AT&T's board did not say whether Stephenson will name someone to fill his COO spot. But without a strong No. 2, he may have a rough go. "Ed Whitacre had Randall Stephenson…the guy to get it done," says Eric Paulak, an analyst at Gartner (IT). "Stephenson needs to find a replacement for himself. You don't want to get in a situation where Randall the CEO also continues as a COO."

Stephenson's ride will be a tough one, no doubt. It will be filled with bumps, a lot like the moguls he faces on those downhill ski runs. The people who know him say Stephenson's a pretty good skier. Shareholders hope he's just as good from behind the CEO's desk.

Before it's here, it's on the Bloomberg Terminal.