AT&T's Designs for the Wireless Market

In one wing of AT&T (T)'s sprawling corporate campus just outside Atlanta's upscale Buckhead neighborhood, a cadre of wireless employees is doing business in a way that's anything but usual for the telecom behemoth. The newly assembled team, led by about a dozen executives, operates more like a startup than a part of the 132-year-old AT&T. And with good reason: Their mission is to come up with innovative ways for people to use AT&T's wireless network. The idea is to go beyond cell phones and hook up all manner of electronics to the Internet—from digital cameras and navigation devices to parking meters—to change the way people live and work.

Despite the unusual operating arrangement, AT&T CEO Randall L. Stephenson says this is no sideline for his company. He believes that figuring out how to take advantage of mobile access to the Internet will be critical to AT&T's growth. "It is the strategic initiative. It is the business model," says Stephenson in an interview. "It supports everything we're going to be doing over the next five to 10 years."


The Atlanta team, officially called the Emerging Devices group, is led by Glenn Lurie, a 43-year-old industry veteran who earned his stripes managing AT&T's iPhone partnership with Apple (AAPL). Stephenson has backed up his high expectations by giving Lurie wide latitude in testing ideas and arranging additional partnerships. What he wants in return is for the team to help AT&T gain share in what by 2013 is forecast to be a $93 billion market for linking gadgets to wireless networks.

AT&T executives won't disclose exactly what kinds of devices they will offer next. But people familiar with the company's plans say one product on the way later this year is an electronic book reader, similar to (AMZN)'s Kindle. AT&T could partner with companies that make rival e-books, such as Sony (SNE) or startup Plastic Logic. Also in the works is a portable navigation device that lets motorists use AT&T's network to collect real-time traffic data. And there's a gadget that lets drivers alert others to speed traps with the press of a button. AT&T is working with manufacturers to develop the products. As it does with the iPhone, the company plans to sell the devices through its own stores and may share wireless service revenues with manufacturers. "We have to break the rules," says Lurie.

In the future, AT&T plans to offer more advanced gadgets: digital cameras that link to the Net for sharing and printing photos; tools that help city agencies monitor parking meters from afar; and devices that alert businesses when they need to replace candy or soda in vending machines. "In three to four years it's not inconceivable a user may have four to five devices hooked onto a wireless plan," says mobile consultant Chetan Sharma.

Stephenson, 49, can't afford to stick with the status quo. A native Oklahoman who began in the IT department of Southwestern Bell 27 years ago, Stephenson succeeded Edward E. Whitacre Jr. as CEO in 2007. Whitacre, who was just tapped as outside chairman of General Motors, transformed Southwestern Bell into the new AT&T with a series of blockbuster acquisitions totaling more than $200 billion. But with no major targets left, the days of cutting megadeals to grow are over.

What's more, AT&T's own growth is slowing. The traditional wired phone service is shrinking by about 10% a year, and wireless growth has slipped enough that it may no longer make up the difference. Analysts expect sales to drop by $1 billion this year from $124 billion in 2008. Next year, AT&T may lose the exclusive right to sell the iPhone for Apple in the U.S., which has helped lure millions of new subscribers.


Stephenson is betting he can turn the tide with new wireless gadgets. Already, AT&T is selling inexpensive portable computers called netbooks, and the CEO thinks that could soon be a $1 billion business. Lurie believes his team can pull in another $1 billion from other wireless-connected devices over the next few years. "If you get a few billion-dollar businesses I'd say you're doing pretty good," says Stephenson.

But how much difference will this make for AT&T? It will take time to persuade customers to consider buying computers and cameras from the telecom giant, instead of, say, Best Buy (BBY). Even if AT&T adds $2 billion in new revenues over the next three years, that's less than 2% of the total. It may not be enough to get AT&T back to positive revenue growth, given the declines in its other businesses. "It's hard to find things to move the needle for a company as large as AT&T," says John Hodulik, an analyst at UBS (UBS).

At the same time, AT&T's rivals are pursuing similar avenues of growth. Verizon Wireless (VZ) is already selling inexpensive netbooks in more regions than AT&T. In addition, Verizon's network often ranks higher than AT&T's in surveys measuring reliability. "This is a game of catch-up on [AT&T's] part," says a Verizon spokesman.

For his part, Stephenson took an unprecedented step when he signed off on the iPhone partnership that gave Apple a slice of the monthly service revenues from each device. Now he plans to break more new ground with the next generation of wireless devices. "Mobile broadband is where the growth is going to come from," he says. "And we don't think we are even scratching the surface yet."

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