FREEWIRE

AT&T Heads Back To The Future

by Bill Frezza

Few companies in American history have both unleashed and survived the kinds of technological, cultural and business transformations that have challenged AT&T through its 100-year tenure as the world's preeminent telecommunications company.

As Chair Robert Allen's latest restructuring takes shape--separating AT&ampT's core communications services from its communications equipment businesses, while quietly cutting loose its failed computer venture--a new vision is emerging. In many ways, this vision hearkens back to AT&ampT's historical roots. Can Allen's call to make AT&T the "wo rld's best anytime, anywhere communications and information services company" deliver another century of success in the tangled forest of competition?

The very idea of trying to make a $50 billion behemoth grow in an era of devolution gives one pause. This arduous task falls to the primary successor company, AT&T Communications Services. The $20 billion equipment business will no doubt thrive as it dukes it out with Motorola, Ericsson, Northern Telecom and the other hardware vendors that are collectively reaping the fruits of worldwide deregulation and increased market demand. With divestiture, however, AT&T Network Systems falls out of the family tree, as did the Regional Bell Operating Companies (RBOCs) a decade ago. The legacy of the AT&T name is now firmly in the hands of people whose primary job is to move bitstreams from point A to point B.

Consider the startin g numbers. AT&ampT's worldwide network processed more than 60 billion calls in 1995. Network capacity has grown to the point wh ere 200-million-call days are taken completely in stride. In the years since the last great divestiture, AT&T has vigorously pruned its bloated management structure, driving the least productive bureaucrats out the door by the thousands, while learning to give as good as it gets from feisty rivals. Though AT&T may not have tackled the unions head on, it has used automation and attrition to make itself nearly invulnerable to the kind of disruption that will soon be facing the RBOCs when they commence the unpleasant task of weaning their workers from the monopoly slop-trough.

Whadda We Do Now, Ma? Imagine that you were handed this colossal machine and told to make it grow. What would you do? The United States long-distance business, after settling into a comfortable duopoly plus one, will soon be up for grabs again when the RBOCs enter the fray. While modest increases in aggregate traffic can be expected as competition drives prices down, from this point forward AT&ampT's market share c an only decrease.

International opportunities beckon, with an invigorated focus on the part of the administration to pry open protected foreign markets, but these initiatives are notoriously fickle. One day Commerce Secretary Ron Brown is on the front page leading a telecom delegation to China and the next he's caught with his hand in the cookie jar. The glamour of new media has caught the eye of the remaining dreamers in corporate strategy, but the entire revenue of this nascent industry would hardly make a dent in AT&ampT's gargantuan cash flow. Besides, AT&ampT's track record in this area is rather sorry, replete with a number of failed makeovers of lackluster operations like AT&T Easylink and the General Magic debacle-in-the-making, which should soon be moving on to its closing act.

No, the business that AT&T covets most, the one it is best e quipped to tackle, and the one where it could deliver the best value is precisely the business it surrendered to Judge Green in return for being allowed to enter the computer industry: local service.

Wireless Is the Key Taking control of the local loop and bypassing its restive children, waiting only for legislative go-ahead to attack long distance, is more than just a cost savings imperative. Yes, 40 cents on every long-distance dollar gets forked over to the local phone companies as a monopoly tax for the privilege of completing calls. Yet there is more to this than counting beans.

From a marketing perspective, AT&T needs to gain end-to-end account control, allowing it to offer bundled services so it can compete on equal footing. From a technology perspective, AT&T needs to raise the bar beyond Plain Old Telephone Service (POTS), pushing an advanced mix of voice and data that will be attractive not only to businesses, but to upscale consumers. The RBOCs thus far have uniformly stumbled deploying ISDN. Can AT&T change the dynamics of this game on a national level, making deployment a competit ive imperative in which it has the upper hand?

For this to happen, one thing is certain: Wireless must be exploited to its full potential. Digging up the streets and laying down fiber is fine for Competitive Access Providers (CAPs) cream-skimming selected downtown business districts, but fiber can't spread fast enough to have an impact on the broader market. Sprint has thrown in with the cable TV operators--a dubious proposition--but even with cable's established rights-of-way, massive rebuilds are required before cable telephony moves beyond tests and trials.

AT&T's acquisition of McCaw Communications' cellular business, therefore, becomes the opening salvo in a war that must eventually harness the vast quantities of spectrum still locked away, including the idle UHF TV channels held hostage by the broadcasting industry. The system architectures used to exploit this ba ndwidth, moreover, must mature beyond the current emphasis on t he mobile user, with its costly solutions to high-sp eed handoff and Rayleigh fading, toward low mobility systems that are optimized for wireless ISDN-like services in high-density, local-loop environments.

PACS a Punch Strangely enough, the technology required to do this has been around for quite a while, though the wireless industry has largely ignored it. Originally developed by Bellcore and later improved with the addition of Japanese Personal Handyphone System (PHS) technology, the Personal Access Communications System (PACS) has tremendous promise to break the price barrier that otherwise renders cellular cost prohibitive as an alternative to wireline local-loops.

PACS can either be described as low-mobility cellular or extended-range cordless. Subscribers will be able to wander their offices, yards and neighborhoods, but they will not be able to roam across town. PACS voice quality is said to be superb compared with the mixed reviews usually given to digital cellular, and it c an support ISDN data rates. Best of all, the architecture is applicable to both medium- and high-density installations, with inexpensive pole-top radios serving as micro-cellular base stations. These attributes offer enormous cost and deployment advantages over traditional cellular or PCS base stations, with their cumbersome siting requirements.

Approximately 70 percent of the U.S. population lives in areas that are PACS appropriate, and for these people PACS offers about a five-to-one cost-per-traffic-channel advantage over high-mobility cellular. With cell sizes that can vary from one mile to as small as 100 feet, the system is flexible enough to be rapidly deployed with large cells to gain initial coverage and can be later cell-divided for increased capacity.

PACS has thus far garnered the support of Motorola, Hughes, Siemens, PCSI, NEC and Panasonic--all of whom are part of the PACS Providers Forum. Ironically, AT&T Network Syste ms is promoting a rival system called Airloo p based on still-unproven CDMA technology. Truth be told, if C DMA is ever going to live up to its hype, its best shot is in the local loop where the problems of soft handoff and dynamic power control go away. It would be a shame, though, to see another destructive standards battle derail what should be a slam-dunk opportunity.

Holding the Cards for a Winning Hand Regardless of the approach, AT&T Communications holds most of the cards required to build a winning hand. Will it devote its precious PCS licenses to create yet another mobile phone competitor to kick up price wars with the six to 10 players expected to crowd that market? Seeing these frequencies used to attack the local loop using PACS would be far more interesting. This would allow AT&T to offer viable competition to the RBOCs quickly, selling bundled local and long distance transport services, while promoting wireless ISDN as the preferred on-ramp to the Internet. Alas, this is probably wishful thinking. AT&T Wireless has already signaled its intentions to deploy IS-136 high-mobilit y TDMA technology as a strategic complement to its existing 800-MHz digital cellular service.

Thankfully, there really is more spectrum where that came from. Perhaps AT&T can muster the political will to pry loose some idle UHF channels. If not, maybe Bob Allen should think about buying out and retiring some TV broadcasters. I hear they're for sale.

Bill Frezza is the president of Wireless Computing Associates. He can be reached via e-mail at frezza@radiomail.net or he can be reached on the Web at http://techweb.cmp.com/gurus .

February 13, 1996