pecial Report: Armstrong decrees a new
network for AT&T
By David Rohde
Network World Fusion, 1/27/98
AT&T under new Chairman and CEO C. Michael Armstrong will feature a
radically altered network providing hundreds of new user access points for
local, IP, wireless and other services.
Combined with a supercharged SONET/ATM backbone and a slimmed-down
corporate staff, Armstrong's AT&T will attempt to bring down prices while
also boosting returns for its shareholders.
That was the message at what amounted to Armstrong's coming-out party
Monday before hundreds of financial and technical analysts in New York City.
At the meeting, Armstrong and new AT&T President John Zeglis announced a
historic change in the structure of the AT&T network, which they described as
being close to the choking point. The executives said high-volume users'
dedicated access trunks had just about used up the available termination ports
on the carrier's 136 long-distance circuit switches, known as the 4ESS switch
from former AT&T equipment house Lucent Technologies, Inc.
Going forward, AT&T will use the local telephone switches of its new merger partner, Teleport
Communications Group, Inc., as the foundation for a rollout of new edge switches. AT&T will add
new Lucent 5ESS and Northern Telecom, Inc. DMS 250 switches - the type local phone companies
employ - at hundreds of points of presence. Enhancements to these switches mean they can terminate
trunks from transport facilities originating on electric power utility lines, digital subscriber lines or
various wireless technologies, Zeglis said.
In addition, the carrier is expected to add new multiservice ATM switches - primarily from Ascend
Communications Corp., according to analysts - at up to 200 points in the network to provide
additional user-to-network interfaces for frame relay, ATM and IP services.
By year-end, in the backbone AT&T will have completed 52 SONET rings and, like other major
carriers, will attempt to unify its various voice and data networks over a unified ATM switching
infrastructure.
Analysts said the moves could ultimately reverse the upward pressure on prices for ports on AT&T's
shared networks, such as frame relay, as well as the rising cost and lengthening installation intervals for
high-capacity private lines. "The port costs are tremendously lower on the edge switches," said Peter
Bernstein, president of Infonautics Consulting, Inc.
AT&T executives were anxious not to promise dramatically lower prices off the bat with the new
network architecture. Demand is so high right now that new ports and circuits will likely be spoken for
as soon as they are installed, Ken Sichau, AT&T's vice president for business markets, told Network
World after the meeting.
Price: A leg to stand on
Still, giving AT&T the ability to compete on price seemed to be taking center stage at Armstrong's
AT&T, a far cry from a year ago when the failed executive tandem of Chairman Robert Allen and
President John Walter - both now gone - emphasized "value bundles."
And Armstrong gave the clearest statement yet by a major telecommunications executive that
Moore's Law - the dictum that computer processing power doubles every 18 months for the same
expenditure of money - might eventually apply to telecom, as well.
"As the cost of communications goes down, the elasticity goes up," Armstrong said. AT&T could
count on selling even more services to business and residential users as price stops being a barrier, he
said. A former IBM executive, Armstrong said concerns about the failure of the telecom industry to
bring down unit costs had concerned IBM several years ago.
In a number of areas, though, Armstrong's grand plan remains incomplete.
A notable problem area is AT&T's strategy for global enterprise networks, which remains a
hodgepodge of partnerships and alliances that still have not unified switching architectures or provided
consistent levels of local customer service.
Armstrong begged for more time, saying AT&T's competitors are no further along in getting their
global act together. "We're doing better, and relative to the rest we're doing pretty good," Armstrong
said. "But we're not satisfying our customers."
In addition, AT&T's Project Angel - a move to substitute wireless local loops for local-carrier dial-up
lines - does not appear ready for prime time. AT&T Wireless Services President Dan Hesse said the
system has been successfully tested at about 15 AT&T employees' homes in the Chicago area. But
apparently the costs of the system are still excessive. "Mike, of course, is interested in better price
performance before we go ahead to market," Hesse said.
Yet in other areas analysts said they were stunned by the speed with which Armstrong was moving.
For example, Armstrong surprised the group by beating all of his major rivals among long-distance
carriers with an announcement of an IP telephony service.
The service, called AT&T WorldNet Voice, is a phone-to-phone service that employs an
IP-to-PSTN gateway in the AT&T network.
To use the service, a caller dials the gateway, enters a preassigned authorization code and PIN, and
then the phone number. AT&T WorldNet Voice will cost 7.5 to 9.0 cents per minute when launched
in seven to 10 markets by the second quarter. AT&T will require users to prepay their accounts.
The service does exhibit some latency compared to circuit-switched telephony. In a demonstration for
the analysts, an AT&T employee called by Zeglis appeared to take an extra quarter of a second to
respond to Zeglis's statements.
But analysts said AT&T had a key political motive in racing to market with the service, so far offered
only by smaller, emerging carriers such as Qwest Communications Corp.
By using the WorldNet IP network for voice transport, AT&T cuts out the usual 2 to 3
cent-per-minute access fee owed to the regional Bell operating companies because Internet traffic is
exempt from RBOC access fees. If, on the other hand, the Federal Communications Commission
ends up imposing per-minute access fees on Internet traffic under pressure from the RBOCs, AT&T
still comes out ahead, analysts said. That is because the corresponding new revenue to finance the
nation's universal telephone service fund would almost certainly be used to reduce the per-minute levy
on ordinary long distance - still the bulk of AT&T's revenue.
Zeglis acknowledged as much. "We win either way," he said, smiling broadly.
And that's not all
In other aspects of the new AT&T strategy:
- AT&T will reduce its notoriously high corporate overhead - known as "selling, general and
administrative" expenses, or SG&A - from 29% of revenue to 22% of revenue by the end of 1999,
Armstrong said. A combination of a new early retirement program with enriched pension benefits and
a continuation of AT&T's layoff program will help do the trick, he said.
- AT&T is marching into the field of Web commerce with a new offer for a variation of its One Rate
Plus residential calling plan. Users who sign up for the service on the Internet and agree to review their
bills on the Web with a pre-arranged credit card debiting system will pay only $1 per month plus 10
cents a minute 24 hours a day, said Gail McGovern, executive vice president for consumer markets.
WorldNet customers will pay only 9 cents per minute, with no monthly fee.
- AT&T is willing to lease capacity from the four new national fiber networks now coming on board.
"We'll swap fibers where we need to close some loops," said Frank Ianna, executive vice president
for network and computer services. To use as barter, AT&T will offer these carriers - including
Qwest and others rapidly laying new nationwide SONET networks - so-called "fat loop resale" over
the Teleport local networks. That provides T-1 and T-3 trunks between the new carriers and RBOC central offices, a key to any carrier looking to provide end-to-end service. |
