AT&T restructures into three independent entities
GEORGE KOTELLY
Confronted by increased competition in the long-distance arena, anticipating similar rivalry in entering the local-loop market and expecting federal and state deregulation rulings in both markets, AT&T--the largest telecommunication services company in the United States--plans to strategically restructure itself into three, stand-alone, globally competitive companies that would be targeted at three discrete communications markets.
In addition, the telephone company proposes to divide its world-renowned corporate research and development center-- AT&T Bell Laboratories--into two dissociated units, raising industry analysts` concerns about the impact on fiber-optic and opto-electronic technology investigations.
AT&T is taking these bold steps to capitalize on the future lucrative opportunities universally predicted in communications services, network equipment systems and information transaction computing (see related story, page 34.) The restructuring is projected to be completed before January 1, 1997.
According to Robert Allen, AT&T chairman and chief executive, "This action has a single purpose--to give AT&T`s businesses the nimbleness and the agility to seize the best market opportunities. This restructuring of AT&T is the logical turn in our journey since divestiture. For AT&T`s businesses to take advantage of the growth opportunities in every part of the information industry, they have to separate into smaller and more focused businesses.
"We undertake this restructuring on our own initiative. It anticipates the direction of our industry and we`re taking it to get ahead of the curve. It is intended to let us take the future and not react to it. The restructuring will make AT&T businesses more valuable and responsive. We take this bold step from a position of strength," declares Allen.
In general, industry analysts applauded the company`s decision, agreeing that the move would boost telecommunications service and product innovations, hone the telecommunications industry`s focus and improve competition. On the debit side, though, industry analysts seriously question the breakup of Bell Laboratories into two separate units and their related effects on lightwave research and development efforts.
Gary Kim, senior vice president at Probe Research Inc., a market research consultancy in Cedar Knolls, NJ, sees the restructuring this way: "AT&T`s move is both a declaration of war on the local telephone companies and a tactical recognition that it could not continue to sell equipment to firms it was attacking. We are likely to see a new round of "bulking up" activities by major local telephone companies to meet the new threat posed by AT&T.
"Expect to see fewer than seven "Baby Bells" when the mergers are finished. AT&T will not stop with wireless as it moves aggressively, and preemptively, into the local loop. Look for additional alliances on the wireline side," adds Kim.
Impact on suppliers
Evaluating the impact on fiber-optic equipment manufacturing, Mark Lutkowitz, president of Trans-formation Inc., a transmission equipment market consultancy in Birmingham, AL, comments, "The breakup of AT&T will impact suppliers of fiber-optic equipment. In recent years, AT&T`s manufacturing businesses took a back seat as the company focused its global strategy on long-distance services. Consequently, other players were able to invade AT&T`s equipment markets, especially in the local loop, with impunity.
"Competitors are not currently ready to deal with the impending onslaught by a new company that already has formidable advantages, such as strong, historic ties to the regional Bell operating companies. A strategic focus totally on selling equipment will tremendously bolster AT&T`s market position.
"In addition, competitors will no longer be able to charge that the manufacturer is taking away millions of dollars of service business from customers by bypassing the local telephone companies. Moreover, large interexchange carriers, such as MCI and Sprint, may eventually purchase fiber-optic gear from the new entity. The only solace for other manufacturers is that AT&T will be more open to new suppliers," notes Lutkowitz.
Fred A. Joyce, president of Joyce Telecom Group, a competitive access marketing strategy company in Colorado Springs, CO, contends, "Assuming that AT&T has plans to enter the local-loop business, dividing AT&T into more concentrated entities makes sense. AT&T lost nearly 40% of its long-distance market share in the first few years after the first divestiture approximately 12 years ago. Now that AT&T`s market share is about to be flung open to local exchange carriers, cable-TV multiple systems operators and others, the core profitable business is exposed again.
"The surviving AT&T is expected to zero in on the $90 billion local-loop bottleneck still retained by the cash-rich local exchange carriers. This near monopoly is probably the target of AT&T`s near-term strategy of acquiring a huge slice of the local-loop pie. Today`s fledgling local-loop competitors--the fiber-based competitive access providers--will become acquisition targets for the major interexchange carriers, including AT&T," says Joyce.
The grand plan
Under the proposed AT&T breakup plan, one of the three new companies would focus on providing telephone communications and information services. This communications services company--the only new company to operate under the "AT&T" brand--would consist of AT&T`s Communications Services Group, AT&T Universal Card Services Corp., the AT&T Solutions consulting and systems integration organization, and AT&T Wireless Services, formerly McCaw Cellular Communications. In 1994, these AT&T services had combined revenues of more than $49 billion.
The Communications Services company also expects to create an AT&T Laboratories research and development unit. It would absorb the Bell Laboratories group currently dedicated to communications service activities and establish a research group focused on network and service innovations.
Unnamed at press time, but currently referred to as Network Systems, the second new company would concentrate on telephone and network equipment manufacturing, combining AT&T`s product and systems businesses, and Bell Laboratories` researchers not selected by the new AT&T Communications Services Co. It would include AT&T`s Network Systems Group, Global Business Communications Systems, Multimedia Consumer Products and the other businesses in the Multimedia Products group, AT&T Paradyne, and AT&T Microelectronics. In 1994, these businesses had total sales of approximately $20 billion.
The third new company--Global Information Solutions--would continue to develop and sell computer systems but would focus its capabilities on three targeted markets--financial, retail and communications. As part of its turnabout effort, this company would halt the manufacture of personal computers. However, it would continue to offer computers as part of total solutions through an agreement with an outside supplier to be selected. In 1994, this computer business accrued sales of $8 billion.
Long-term viability
According to Larry Yokell, president of Convergence Industry Associates, a telecommunications and cable-TV consulting company in Boulder, CO, "Clearly, AT&T felt it had to do something to position itself for anticipated competition in its core businesses. The dumping of its floundering computer business was long overdue, but the long-term viability of whatever becomes of Global Information Systems is questionable, especially because the AT&T and NCR brand names will be gone.
"In contrast, the reconstituted Network Systems unit could experience explosive growth from sales of both traditional telecommunications and next-generation broadband equipment to the regional Bell operating companies and various domestic and international carriers that were previously leery of doing business with a competitive AT&T," says Yokell.
Richard Tomlinson, president of Glastonbury, CT-based Connecticut Research, a telecommunications consultancy, advises. "The reorganization of AT&T into three separate units makes sense from both a business and market position perspective. Putting the former computer unit, Global Information Systems, on its own, removes a millstone from around the necks of the other operations. Separating communications services from communications equipment will benefit both companies and is almost mandated in the emerging, deregulated telecommunications environment.
"Although AT&T has simultaneously been the largest customer, largest supplier and largest competitor of the regional Bells for several years, the situation is about to become untenable. States are opening the local telephone markets to competition. In January 1995, only four states had authorized competitive local exchange carriers, but as of last September, 22 states had approved some form of switched-service competition. Former competitive access providers have been installing central- office-class switches--65 by September--and many of these are AT&T switches.
"As the transition to integrated local and long-distance services progresses, AT&T, MCI and Sprint are entering into direct competition with the regional Bells. When California accepted applications for competitive local exchange carrier status on the first of September, 66 companies filed applications. Many were long-distance carriers, including AT&T, which filed for certification both as a reseller and as a facilities-based provider of local-switched service.
"By 1998, the regional Bells and AT&T will be in total head-to-head competition for telephone customers. Under the old organization, this [competition] would have put the AT&T Network Systems Group in an impossible situation to serve as a major supplier to the regional Bells," concludes Tomlinson.
Donald L. Dittberner, president of Dittberner Associates Inc. in Bethesda, MD, observes, "This was a timely and perhaps brilliant move by [AT&T chairman] Allen. The biggest winner in the breakup will be the AT&T communications services company.
"On the other hand, this decision should serve as a further warning to the regional Bell operating companies to stay out of the manufacturing business--and to pursue their core businesses with focus and increased intensity.
"The impact on the worldwide telecommunications community will not be significant in the short term. AT&T Network Systems is doing well and will continue to do well. Given its independence, the Global Information Solutions company might even build back the reputation and market role that NCR previously enjoyed for many years. Most significantly, the move gives AT&T communications services the full spectrum of opportunities to compete in the local cellular and wireless access markets without a negative impact on the equipment group.
"As the new AT&T communications services company moves aggressively into full competition with the regional Bell operating companies, a significant negative reaction can still be expected toward the Network Systems company. Overseas, Network Systems may also lose some stature because it can no longer claim to have the "experience" of running one of the largest telephone networks in the world.
"With the opening of local operating area markets to competition, the conflict among competing carriers must intensify. This AT&T second divestiture is one of the major results of this new competition for local and long-distance markets," states Dittberner.
National resource
Acknowledged as a national resource by many scientists and engineers involved in fiber-optic and opto-electronic technologies, AT&T Bell Laboratories is slated to be split into two separate units. One research unit is expected to be named AT&T Laboratories, and it has been designated to support the new AT&T communications services company. The second research unit, unnamed at press time, is expected to become part of the new Network Systems communications equipment manufacturing company.
Although Bell Laboratories was previously funded with an annual budget of more than $3 billion, the two laboratory units are predicted to endure reduced budgets, be directed away from pure research and be focused more on product and service developments, according to industry analysts. The areas of increased focus, say analysts, include software, wireless communications and speech recognition. However, AT&T executives claim that basic fiber-optic communications research is expected to continue at a high level.
Explains Gerry Butters, president of AT&T Global Network Systems of AT&T Network Systems in Morristown, NJ, "The lion`s share of Bell Laboratories will be included into the new systems and technology company [Network Systems]. We will get the researchers whose primary domain was in areas such as new uses for materials, chemistry and physics, and network mathematics and algorithms. It would also include all of the capabilities that relate to lasers, semiconductors and new forms, as well as micro-electronics and the in-house foundry.
"The part of Bell Laboratories that was doing [long-distance and local telephone services] research will move to the new AT&T Laboratories unit as part of the new AT&T communications services company," he says.
"We want the conversion of invention to product to occur through new forms of innovation. We are looking to get high conversion rates from research breakthroughs into products in much shorter periods of time. At the same time, we want to foster more inventions," adds Butters.
"For example, we are moving toward "application networking," which is a photonic transport network layer. We are demonstrating 1/3-terabit wavelength-division multiplexing transmission over 150 kilometers using 17 wavelengths at 20 gigabits per second. This transmission technology will become one of our fundamental building blocks in what we call a new class of application networking infrastructure products. We are headed toward multiple wavelength optical networking as being a new critical piece in networks. Our internal code name for this strategy is `Quantum Leap.`
"The new [AT&T] structure gives us an ability to grasp at a broader reach for this kind of technology than we could have had originally," observes Butters.
According to analyst Yokell, "A serious concern is that the [AT&T] breakup will destroy the integrity of Bell Laboratories, a potent strategic asset that has been undervalued and poorly utilized for many years. AT&T`s Allen will either go down in history as a leader with vision or as the one who broke up AT&T before the regional Bells ever fired a shot and dismantled a national treasure [Bell Laboratories] that has produced nearly a patent a day since its inception [in 1925]."
Analysts calculate that the majority of the 26,000 workers at the present Bell Laboratories would be moved to the new Network Systems company, and approximately 4000 workers would be transferred to the new AT&T Laboratories unit. They also hint at a researcher layoff.
Remarks analyst Tomlinson, "[AT&T] research and development will survive. But the global competitive situation among telecommunications equipment providers will dictate that almost all of it will be applied research. The golden days of basic research of the type championed by Bell Laboratories are gone; not just for AT&T, but for all industrial companies." q