3/98 CommIntl article on AT&T plans to spend billions to upgrade networks
totaltele.com
C A R R I E R S
A spoonful of sugar
For AT&T, recovery will depend on the corporation swallowing
some strong medicine. However, as Ed Wehde reports from
Washington DC, Michael Armstrong's strategy for AT&T's
international market expansion is the sugar on a bitter pill
At an analysts' gathering at the ComNet show in Washington in January, US
telecomms giant AT&T announced that it is to reduce its workforce by up to
18,000 people - that's a massive 14% of the company's employees!
Medicine administered late in the day tends to be very strong, and that is the
case here. To make it slightly more palatable the company simultaneously
announced plans to introduce a wide variety of new services, including cheap
Internet phone calls and a wireless service that (at long last) does not hammer
subscribers for the privilege of taking incoming calls.
This news formed a substantial part of the first public pronouncements that C.
Michael Armstrong has made since he took over as CEO from Robert Allen,
back in November.
AT&T is also to commit billions of dollars to upgrade networks, which, Armstrong admits, are not as efficient as some of the newer systems used by other US carriers.
The cull will, in the main, affect management ranks, and
a voluntary early retirement package has been drafted
to encourage departures. AT&T expects that some
10,000 to 11,000 managers will go for the redundancy
option.
In addition, another 5,000 to 7,000 non-management employees will go as a
result of previously-announced downsizings. However, a company spokesperson
told CI that, should the voluntary retirees not depart in sufficient numbers, AT&T
will make some employees compulsorily redundant.
The exercise will cost AT&T some US$800 million to $1.2 billion (before taxes)
and will be accounted for during the first half of 1999.
Armstrong also spoke in some detail about domestic US telecomms issues, in
apparent disregard of the fact that at least 25% of the company's revenues come
from overseas ventures.
However, his omission was redressed by company spokesperson Sue Flemming,
who told CI that Armstrong is, in fact, acutely aware that the international market
will be vital to AT&T's future expansion plans. She is not alone; industry analysts
all agree that the international telecomms market has massive potential for
revenue growth.
"Globalisation of business, combined with the deregulation of the telecomms
industry in many parts of the world makes telecomms a very attractive sector,"
said Steve Koppman, an analyst with Dataquest.
Supporting this thesis, Mark Winter, group vice president of worldwide
telecommunications with the International Data Corporation, pointed out that,
while domestic call minutes are now increasing at about 7% annually,
international minutes are growing at double that rate; that is, at about 15% to
16% per annum.
However, on the downside, it must be noted that many of AT&T's overseas
partners are much smaller than those that have signed up in alliance with
competitors such as Sprint and MCI.
Furthermore, he says that AT&T has had little control over quality of service
outside the continental US, which makes it potentially difficult for the company to
guarantee multinational clients the high levels of service and seamless networking
that they demand.
"Multinational corporations want service level guarantees to be the same in
Chicago, Paris, Harare, Ulan Bator or wherever. The trouble is, they can't
necessarily get it," said Winter. "There is just too much riding on the capabilities
of local carriers. I'm sorry, but, despite AT&T's best efforts, I can't see how they
can guarantee to provide the same level of service internationally as they do
domestically." (But see CI, February 1998, pages 19-22, for one solution,
Ed.)
Build out or buy out?
One solution would be for AT&T to expand its own networks globally, and Armstrong apparently thinks this is the right answer. Such a scenario might be accomplished in one of two ways - through construction or acquisition.
It should be remembered that AT&T was once in merger negotiations with
Cable & Wireless of the UK. However, Armstrong, as the new broom, has not
restarted the talks and now regards all the major foreign carriers as potential
acquisition targets.
Winter said that AT&T is lagging its competitors on both the acquisition and construction fronts and said that AT&T would probably have to employ both options extensively as part of its expansion strategy.
However, Winter also noted that construction and acquisition routes can have
some serious pitfalls.
Thus, he said, while expanding through acquisition would provide AT&T with
country-wide solutions, it could not buy multinational ones. Furthermore, as
many large foreign telcos are former monopolies which, in many cases retain at
least a degree of government ownership, the acquisition process itself can be
long and fraught with difficulties.
As for building an international network, the bugbear (as usual) is cost. Winter said, "You have to have switches, lines, real estate, support staff, sales staff; the works. It's all very expensive."
When asked by CI, Flemming said that, despite the lack of a specific current
plan, AT&T does intend to grow its share of the market in regard to multinational
corporate telecomms. Winter, however, suggested that this might not be the best
way forward as such high-profile big-spending customers can be difficult to
please.
"The dilemma is that multinational corporations are going to want AT&T to
match their sites exactly and you can't do that," he said.
Big clients but small profits?
Winter also pointed out that, while large international companies might appear to
be ideal clients, it can be difficult to make substantial profits from them as their
sheer size gives them bargaining power to drive down rates and drive up service
levels.
It is Winter's belief that AT&T should concentrate its international expansion
efforts on domestic consumers and small businesses. He said that both these
segments are making more and more international calls and, in having less
economic and political clout than large corporations, can be charged more.
Within AT&T, international ventures and international strategy have traditionally
been split into two distinct entities. However, last September, in a break with
tradition, one man, Mark Baker, was named as vice president for all international
operations, including joint ventures.
Flemming told CI that Armstrong too believes that one person should manage
the company's international business, and is therefore unlikely to rescind one of
the last corporate decisions Bob Allen made before heading for retirement and
the golf course.
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