Commentary: The challenge for AT&T

By Maribel Lopez, Principal Analyst

Forrester had breakfast a while back with Dave Dorman, CEO of AT&T. Dorman delivered an aggressive message, promising a more customer-centric sales approach, competitive prices and new VoIP services. Dorman is on track overall, but Forrester believes that AT&T will be seriously challenged by the regional Bells.

Dorman was cautiously optimistic about the communications market and confident about AT&T's chances of success. We were

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• "Consolidation is inevitable." Dorman said the market can't support 14 carriers (four regional Bell companies, three long-distance and seven wireless) because excess capacity has caused artificially low prices. Dorman also said he believes that a merger between a long-haul provider and a regional Bell makes sense, because it will reduce both capital and customer care costs. Forrester believes that AT&T would be stronger with a regional Bell partner but must forget about a stock premium, if it wants a merger.

• "We are not cowering in fear of the competition." Dorman dismissed the notion that AT&T could not withstand impending price wars. He noted that through the third quarter of 2003, the company generated $5 billion in free cash flow and has EBITDA (earnings before interest, taxes, depreciation and amortization) margins of 26 percent--twice that of MCI or Sprint Communications. Dorman said AT&T would not be beaten on price and that he believes the competition will have difficulty dropping prices any further. We agree, but price competition will still limit AT&T's growth and devalue its price in a merger.

• "We will be a strong player in VoIP services." Dorman said carriers like Vonage that are focused on voice over Internet Protocol technology

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• "We've moved from a network-centric to a customer-centric approach." Given the tight competition in the telecom, AT&T believes that customer service will be its differentiator. Dorman claims that AT&T has realigned the sales force, moved away from product-centric pitches and streamlined the contract renewal process. How is Dorman measuring success? By retained and enhanced account value. Nice story, but we've heard this from every carrier within the past year.

• "Wireless is a critical component of AT&T's future offerings." Forrester questioned Dorman about the importance of a wireless presence. Dorman said AT&T could fill the short-term gaps with mobile virtual networks, but AT&T also believes that owning a wireless presence is critical. Forrester believes that a lack of wireless capability will hurt AT&T in the consumer market, but it has at least a year before businesses start asking for integrated wireless and wireline offerings.

© 2004, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.