TELECOM Digest OnLine - Sorted: The Telcos Still Don't Get it

The Telcos Still Don't Get it

Business Week Magazine Editorial (
Tue, 25 Jul 2006 13:31:42 -0500

The Phone Companies Still Don't Get It
They block competition and charge too much. You call this a
communications revolution?

One day this spring in San Antonio, I sat on a couch to watch TV with
two AT&T (T) executives and three public-relations aides. It's not a
bad job, sitting on a comfortable sofa in a pretty, air-conditioned
brick Tudor watching TV, and the way I got it was by telling AT&T's PR
folks that I was working on a story that could wind up saying that in
this age of enormous technological upheaval, their very own behemoth
was not adding to innovation but standing in its way. No, no, they
said, that's all wrong. If only I could go down and see AT&T's new
video technology in action. Some 200 participants in AT&T's test there
were the first beneficiaries of the great new network war, the
mega-telcos' drive into video. Come down to San Antonio, they said,
we'll take you to a customer's house to show you.

The day before my trip to Texas, on my way back from a tour of AT&T's
Florham Park (N.J.) labs, a PR guy had clarified that they didn't mean
just any home. "Hundreds of reporters have asked to see this," he
said, and they couldn't ask their test customers to take them all
in. So the customer probably would be, while not an AT&T employee,
someone with some connection to the company. "A friendly," the PR
person had said.

When I get to Texas, however, still another PR person confides to me
that, despite the many press requests, I will be only the second
reporter to see the new video offering in action. You would think
rounding up a bona fide customer for two reporters shouldn't be
impossible, but the proud homeowner who meets me at the door is
wearing brightly polished cap-toed oxfords and a blue button-down
shirt, an odd outfit for a guy sitting around his own house waiting
for a reporter to stop by. And so we make our greetings and I sit down
in front of the TV. In the armchair next to me Jeff Weber, the AT&T
vice-president in charge of Project Lightspeed, grabs the remote
control. He presses a button. The channel changes (much faster, he
points out, than on a conventional cable system). He hits another
button. It changes again.

He gives a little flourish and gestures to the set. "TV," he says. "It

I ask if this brand-new system will let me record one show while
watching another, as TiVo or my own cable box at home do. Sure, says
Weber, as soon as AT&T gets the new generation of set-top boxes built
and delivered.

Meanwhile, the homeowner has remained standing, watching me watch TV. So
I try to break the ice, asking what he does, assuming he doesn't work
for AT&T. Actually, he corrects me, he does.

"So what exactly do you do?" I ask. "I'm the architect of Project
Lightspeed." For a few seconds I take this in, wondering why nobody
bothered to tell me.

Baby Steps

It's a classic moment, an illustration of where the power lies in
telecom. It is tough -- no, make that impossible -- to think of
another ostensibly technology-focused industry where the chief
technical architect of a planned multibillion-dollar, company-changing
project does not merit so much as an introduction. In fact, in San
Antonio, that architect, John Kirby, neatly managed to dispel any
confusion about the status of engineering at the company when, after
clarifying what it is he does, he explained that when it came to big
new projects, "marketing dreams it up, and then I have to design it."

Ah. Welcome to Telco Land, a strange country where the biggest players
talk more and more about innovation yet approach new ideas with baby
steps, build little themselves, and when they think about technology
are apt to believe it's a threat they have to fight.

In case you haven't been keeping score, after the original phone
company, American Telephone & Telegraph, was broken up in 1984, the
country was left with eight major regional telcos. Over the past
decade these companies proceeded to cannibalize and eat each other
up. Now there are four: AT&T, Verizon (VZ ), BellSouth (BLX ), and
Qwest (Q ). Just keeping track of the mergers and names is an endless
challenge and requires a scorecard to keep track of the remaining
players. The "new" AT&T is actually the rechristened SBC, based in
Austin, Tex., which acquired the venerable name last year -- and it's
in the process of buying BellSouth. That will leave two phone giants,
Verizon and AT&T, and the much smaller Qwest. The biggest wireless
carriers are Verizon Wireless, majority owned by Verizon, and
Cingular, which is soon to be wholly owned by AT&T. It's not exactly
the return of the old Ma Bell monopoly -- the world has gotten way too
complicated for that -- but that's a lot of power in the hands of just
two companies.

One way in which these companies are very different from the old phone
monopoly is that while the original AT&T had a world-class research
operation, its successors don't. One of the signal facts of the
communications revolution is that virtually all the new technologies
that made it possible were developed outside the phone world. Last
year, Verizon's revenue came in at nearly $80 billion. AT&T (without
BellSouth or Cingular) had revenue of $44 billion. And yet while Intel
Corp. (INTC ) spent $5.1 billion last year on research and
development, AT&T spent just $130 million. The word "research" doesn't
even appear in Verizon's annual report.

But if in the era of telecom deregulation the most common industry
buzzword was "competition," it is now "innovation." And Verizon and
AT&T increasingly are asking to be viewed as leaders in the realm of
ideas. Do a Web search on "Verizon" and "innovation" and you'll pull
up speeches by Verizon CEO Ivan G. Seidenberg extolling its
importance. The phone giants have even used "innovation" as a key
justification for their aggressive merger wave. Last year, when SBC
was buying the remnants of AT&T, SBC Chief Executive Edward E. Whitacre
made sure to note that by merging, the combined company would have
"the intellectual and financial resources to spur innovation."

Verizon and AT&T are under great pressure to recast themselves as
innovators. They lag behind the cable companies in their efforts to sell
high-speed Internet access. Their local telephone monopolies are under
attack as those same cable companies' offer to provide phone service at
lower rates along with TV and data. Looking ahead, wireless technologies
ranging from the familiar Wi-Fi to more powerful wireless standards
being advanced by researchers in academia and companies such as Intel
pose a whole new set of threats.

In response, AT&T and Verizon are rushing to build networks to deliver
TV service and high-speed broadband access. They point to them to make
the case that, yes, they are technology companies. Verizon is spending
billions to roll out a next-generation phone, data, and video network
called FiOS (as in "fiber optic") to give its customers faster
Internet service and an alternative to cable. While not matching FiOS'
impressive speeds, AT&T promises to do something similar with
Lightspeed, which it started marketing in parts of San Antonio under
the brand name "U-verse" not long after my visit.

The rhetoric of the tech biz has always been about who can
out-revolutionize whose revolution, and executives at AT&T and Verizon
are embracing it. Says Thomas J. Tauke, a former Iowa congressman who
is now Verizon's chief Washington lobbyist: "As we deploy new
technology, what is happening is that we are the insurgents who are
trying to come in and change the marketplace."

To give Verizon its due, the company has made some major strides. Its
FiOS broadband and video network is by most accounts the state of the
art in network technology. (It's pricey, though -- the highest level
of FiOS home broadband service costs $109 to $139 a month.)

But dissonant realities remain. Isn't it a little odd, for example, to
hear the CEO of a company the size of AT&T talk about needing to get
bigger to have the resources to innovate? In fact, over the past
decade the big telcos have mostly looked outside for technological
innovation. "We develop services, and we figure out how to use and
deploy technology that many others are developing," says Verizon's
Tauke. Edmond J. Thomas, who ran the labs at Verizon when it was Bell
Atlantic, puts it another way. "They do very little fundamental
research and very little advanced development," he says. "Their view
of the world is: 'We can buy it elsewhere."'

There is something to be said for "buying it elsewhere." If the big
telcos built everything themselves, there would be no Cisco (CSCO ) and
no Motorola (MOT ). But years of buying it elsewhere has yielded a
culture distrustful of technology -- and of progress: It's impossible to
imagine Microsoft (MSFT ) developing a big new product and having the
lead engineer shift from foot to foot in the corner pretending to be
just another customer. It has meant, as with AT&T's Lightspeed, that
telcos are likely to offer services that only match, but not surpass,
those available from others. And increasingly their approach has put the
telcos on the wrong side of technological innovation, leaving them in
the position of protecting their investments in their networks from the
encroachments of new ideas.

To some extent, Verizon and AT&T have been forced to take innovation
seriously and move into offering TV and improved broadband. A world in
which big telcos competed with big cable companies was something
envisioned as far back as the 1996 Telecom Act. It only became a reality
when Internet-based phone services allowed cable companies to offer the
dreaded "triple play" of television, broadband, and phone, putting AT&T
and Verizon on the defensive. But even as they've pushed into this new
area, in others the telcos' instinctual response has also been to fight
new technologies rather than foster them.

Throwing Sand in the Gears

That's what happened in the skirmish over "municipal WiFi" -- the
effort by cities such as San Francisco and Philadelphia to offer
citywide wireless services that AT&T and Verizon fought (a struggle
Verizon has largely abandoned but AT&T is still pursuing). It's
evident in battles that are just starting on Capitol Hill over
emerging technologies, such as a proposal to open the empty space
between TV channels to powerful WiFi-like services that would pose a
serious threat to the telcos' $60- to $80-a-month wireless broadband
businesses. And you can see it in less technologically sexy areas as
well: Verizon crippling freatures on its phones that would let users
send photos or games to and from their computers without paying
Verizon, or AT&T's yearlong foot-dragging in giving Internet phone
competitor Vonage (VG ) access to its 911 switches.

But fighting innovation is just a stopgap. The giant telcos have been
in the driver's seat when it comes to communications technologies
because of their sheer size. "Our motto," says CEO Paul E. Jacobs of
Qualcomm Inc. (QCOM ), which develops many of the chips and
technologies that make cell phones work, "is love the carriers. We
know which side our bread is buttered on." Increasingly, though, the
telcos are not the only game in town. And with competition gearing up,
getting serious about innovation increasingly becomes a necessity, not
just words.

Will the telcos use their positions to bring more new ideas to
consumers? For years technologists have talked about the possibilities
opened up by combining television and high-speed Internet. But neither
Verizon nor AT&T take advantage of that. Talk to them about what's
next, and both companies bring up the possibility of providing weather
and sports scores in a box on the TV screen. Not exactly radical. But
it's what you'd expect from companies that are afraid of new technology.

That paucity of new ideas has led critics to think the telcos see
their future not in developing better services but in extracting
greater and greater tolls from anyone who wants to use their
networks. Over the last few months AT&T in particular has managed to
scare the heck out of technology companies by talking about charging
Internet content providers such as Google Inc. (GOOG ) or YouTube for
access to the customers on its new network. That's a logical plan for
a company like AT&T, but it's probably not one that can be sustained

There's another strategy the telcos could consider. In San Antonio,
AT&T tried very hard to sell me on the virtues of Project
Lightspeed. But the most impressive thing you're likely to see in
AT&T's labs might be a feature of Homezone. Lightspeed's less
ballyhooed sibling, Homezone is a simpler video and Internet system
that combines satellite TV with a DSL line. One feature of the set-top
box AT&T has developed for Homezone is the ability to get music files
easily from a PC and play them on a television or home entertainment
system. It was the one time during my visit that I thought: "Wow, I'd
like to have this at home." Homezone demands no expensive new network
infrastructure and no partnership in which companies pay AT&T for
exclusive access. It's proof that a simple new idea can grow inside a
giant telco. It's a hint of what AT&T might achieve if it spent on
research and development even half of what a company like Intel
does. But it may not be a hint the telcos are ready to take.

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