Business war? Enemy? Such words weren’t used in the tranquil household of Ma Bell. But nine years after a federal antitrust suit busted up the family, AT&T has transformed itself into an aggressive actor in communications and computers-even as its flashier competitor, IBM, gasps for breath (page 46). The change has been abrupt: by acquiring computer-maker NCR in 1991 and agreeing last month to pay $3.8 billion for one third of cellular-phone giant McCaw Communications, AT&T suddenly can offer a data-hungry world a broad array of computers and the wires, cables and radio devices to link them. The vision is breathtaking. The question left is, can AT&T make it pay?
Until recently, AT&T looked like anything but a winner. In 1982, the same year IBM beat back assaults from the Justice Department’s Antitrust Division, AT&T acceded to the trustbusters’ demands that it spin off its local phone monopolies. The 1984 breakup left AT&T with most of its long-distance arm, the huge Western Electric manufacturing operation and a vague dream of combining computers and telephones. Although its computer-operating system, Unix, proved a smashing success, stakes in companies like Olivetti and a poorly received line of personal computers left it a bit player. But the nonstop turmoil spared AT&T the self-satisfied prosperity that eventually crippled IBM. Watching MCI, Alcatel and Northern Telecom grab chunks of its core businesses, AT&T stirred itself to action before things got desperate. Says the soft-spoken Allen, “In some respects we may have been more fortunate [than IBM) because change was forced upon us in a very dramatic way.”
Since Allen took over in 1988, he has rooted out the cozy culture of a regulated utility. The barriers that separated manufacturing, marketing and service are largely gone; one unit is now responsible for telephone-transmission gear from start to finish. Although AT&T’s prestigious Bell Laboratories still exists, it no longer tosses ideas “over the wall” for others to build and sell; now most Bell Labs engineers can be found side by side with product designers at manufacturing plants. On the factory floor, AT&T, with union approval, has created work teams responsible for cutting costs and improving quality-and heightening awareness that low-cost competitors lurk everywhere. In case the message didn’t sink in Allen stunned the inbred company by naming outsiders to key jobs: maritime executive Alex Mandl as chief financial officer, electrical-industry veteran Jerre Stead to manage business-phone systems and Digital Equipment’s David Stone to oversee network software. The most striking departure of all was the hostile bid for NCR in 1990-a move that threatened to go awry until AT&T raised its price and persuaded NCR’s management to stay and shape up AT&T’s own troubled computer unit.
The new culture is finally beginning to pay dividends. International sales have taken off. Business-phone systems are profitable for the first time in eight years. Concepts long familiar in other companies, like drastically shortening production time, have finally reached AT&T; the Denver plant now guarantees shipment of custom-made PBX office-phone systems within seven working days, thanks to such innovations as a stress test that checks durability in 45 minutes instead of 40 hours. Pushing profit responsibility down through the ranks has also paid off in far simpler ways. The shrinking physical size of phone systems had left much of the million-square-foot Denver plant empty; now two thirds of it is leased to various AT&T units as office space. For all the restructuring, though, productivity improvement still lags. At the mammoth works in North Andover, Mass., past layoffs had such a devastating effect on quality that management has rejected further cuts despite overstaffing. That may be a wise trade-off, but it’s one reason why stock analyst Michael Elling of Oppenheimer & Co. calculates that outside the long-distance business, revenue per employee isn’t rising.
AT&T’s sprawling operations are united by a clear corporate strategy: the complete integration of computers and communications. The vision starts with NCR, which, even before AT&T came calling, had foreseen that microprocessors would make centrally located mainframes obsolete and put powerful computers on individual desktops. The computers are NCR’s-but the computers need to talk, and that’s AT&T’s business. “It’s a very communication-intensive way of approaching computing,” says NCR chairman Gilbert Williamson. Computers around the office might share a local radio network developed by Bell Labs. Want to see a client in San Francisco? Turn on the terminal’s camera and have a teleconference from your desk over AT&T’s fiber-optic lines, while you transmit the latest sales figures to the client’s terminal as you talk. On the run, carry an NCR notebook computer; the cellular modem (made by AT&T) will connect YOU to McCaw’s transmitter (from AT&T), which hooks into AT&T’s long-distance lines, which lead through AT&T switches to another McCaw transmitter connecting you with the bigger NCR computer back at the office. Or, of course, you can ring up from your pocket phone. Suddenly, data, voice and pictures can flow from anywhere, to anywhere. And AT&T can profit from every bit of the transaction, selling the equipment, the phone service, even the engineering of the in-house system. Not even the local phone company need get a cut.
The AT&T-NCR connection is turning much of this vision into technological reality; Bell Labs’ expertise in compressing pictures so they don’t take up as much computer memory, for example, is helping NCR develop bank-teller machines that can also put a depositor face to face with a salesperson for mutual funds. But the fact that only AT&T can offer end-to-end computing doesn’t mean there’s a market for it. Sophisticated customers would just as soon plug other machines into their networks unless NCR’s price is right. And they won’t tender all of their long-distance traffic to any single company, lest one broken cable leave them incommunicado. “To go end to end would be to give AT&T all of our business, and we’re not about to do that,” says an executive at a major bank.
Despite the dramatic changes, AT&T’s bottom line rests very much where it always has: on phone service. Long distance accounts for 62 percent of AT&T’s revenue and a whopping 80 percent of its profits. This year’s rosy profit picture is due, in good part, to the fact that MCI, Sprint and AT&T have cooled their cutthroat rate war. “We see customers becoming less sensitive to small price distinctions,” says group executive Victor Pelson. Business customers disagree violently. “Pennies per call are very important to us,” says an official at a company that switched to MCI. Nonetheless, AT&T’s earnings are up sharply, driving the company’s once stodgy stock to the highest level in more than two decades. Mandl says that revenue, which has barely budged since the breakup, should start rising 6 to 10 percent annually, with long distance’s share of the profits undiminished.
In the long run, though, AT&T faces the same brutal economics as every other high-tech company. No matter how sophisticated its technology, competition will squeeze manufacturing and basic services like long distance. In almost every part of its business, AT&T executives acknowledge, profits will largely come not from selling goods or leasing networks, but from the software and design expertise required to make generic systems meet unique demands. Moving a $65 billion corporation in that direction is no easy task, as IBM chairman John Akers can testify. But understanding that it has to go there is half the battle.
Includes phones, switches, undersea cables and systems for local phone companies
Products such as retail checkout systems, laptops and bank ATMs
Includes the Universal credit card and AT&T Capital Corp.
Includes microelectronic chips, products for government agencies
Operator assistance, WATS lines, 1-800 services and more
SOURCE: AT&T (BLUMRICH–NEWSWEEK)
