AT&T; CEO Reflects on Industry Changes

After a year of chipping away at California’s local telephone market, AT&T; Corp. is preparing to pick up the pace.

In the next few months, the nation’s largest long-distance company hopes to entice residents with a package of products that includes wireless service and high-speed Internet access.

AT&T; Chairman and CEO David Dorman said he expected the package to sell well in the state because of the penchant of California consumers to adopt all things fast and wireless.

Sustaining competitive phone service “depends on profitable competitors who are growing their customer base so they can finance new technology deployment,” Dorman said. “And we’re clearly not there yet.”

Much will depend on how California regulators administer the new rules passed by the Federal Communications Commission last month. The rules give rivals of Baby Bells, including SBC Communications Inc., California’s dominant local phone company, the chance to lease Bell lines and equipment at deeply discounted wholesale rates.

Dorman is looking beyond those rules and the copper lines that connect households to the intricate web of the telephone network. AT&T; is investing in a variety of wireless facilities and is working with electric companies to get around the stranglehold that SBC and the other Bells have on the last mile of copper wire to the home.

Dorman, 49, who spent 14 years at Sprint Corp. before joining Pacific Bell as its chairman, chief executive and president in 1994, spoke with The Times about competing with the Bells and about his vision for AT&T.;

Question: Last week, you called for an end to the industry’s “civil war” over regulated rates. Isn’t that easy for you to say because it’s not your wholesale rates being cut?

Answer: The point I’m trying to make is that for some indeterminate amount of time, we have the ability to resell the Bell rates based on a set of regulatory tests that will be applied at the state level, market by market. My real olive branch was, “Look, we’re letting regulators dispense Solomonic judgment, and we get uneven and unpredictable outcomes regime by regime. Wouldn’t it be better if we really got to the table?”

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Q: Don’t the Bells already have enough competition from cable and wireless companies?

A: Only 12% of Americans have cable telephony available; only 2% have taken it. Wireless is making some impact, but we all know that the wireless networks were not built to serve the neighborhoods in a consistent fashion. It’s more for commuter corridors and the urban areas. So while I am completely comfortable that over time wireless companies will expand their coverage and find new ways to place metal trees in neighborhoods to get around zoning restrictions, it’s still going to be spotty.

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Q: That would leave competition to the traditional wire-line phone companies.

A: Regulators need to ensure that choice [in wire-line service] exists, because from choice comes sustainable competition. It’s inconceivable at this point, given the bubble that we’ve all gone through, that competitors to the Bells are going to pursue “Field of Dreams” technology deployment, saying, “OK, we’ve now built the capability to serve every home in Irvine, and you guys come get it; we’re open for business.” It’s not going to work that way.

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Q: Has all that has happened in the industry served the American people well?

A: If you go back to the breakup of AT&T; in 1984, AT&T;’s retail rates had about a 55% discount [for big corporate customers]. So if you were an individual subscriber, let’s say, you paid 40 cents a minute for a long-distance call, and if you were a great big business customer, you paid 22 cents a minute, or something like that.

What the government said is, “We’re going to make you sell to these long-distance companies as if they were your big customers. And then they can mark that up and sell it to little customers.” That process allowed Sprint and MCI to form capital. And over a 20-year period, [Sprint] built ultimately a better mousetrap. We jumped over AT&T;, and we built a fiber network.

Now the consequence of that: AT&T; was a plodding monopoly that had a plan to get all-digital and all-fiber 10 years later. This upstart Sprint comes along and says, “We’re going to do it in four years.” And it forced AT&T; to scrap its 10-year plan and build a national fiber network itself by 1987. Competitive necessity forced AT&T; to do something that was not in its fiscal interests in the long-term-planning front but became a competitive necessity because this little upstart was going to put a better product out.

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Q: Are the Bells handling this transition less well than AT&T; did?

A: I think that the bite of competition happened for AT&T; more quickly than it happened for the Bells. By the end of the 1980s, both MCI and Sprint had networks that you could argue were maybe not the physical equal of AT&T;’s but technologically superior. So AT&T; was forced to make changes quickly.

The Bells have had, since the time they were divested by AT&T; -- 1984 to 1996 -- sort of a golden 12 years. No competition, economic growth, [revenue-generating] features. They got to charge $10 for caller ID, something that cost them 5 cents. Wireless was growing. It was a duopoly. They had more than 50% of every market. So their model was really attractive.

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Q: What new technology would best get around that last mile of copper wire and the gear that the Bells own -- the issue that has created so much discord? Is it wireless?

A: The thing that we all like about wireless compared to wired technologies is that the cost per incremental subscriber is really oriented towards “when you get the customer, you spend the money.”

In the wired industry, so much of it has to be built in advance of getting the customer. [In wireless], you get a customer, then you deploy a higher percentage of the capital in the handset or base station or the little terminal thing in the neighborhood.

We are investing in a range of technologies to bypass the Bell infrastructure.

We are working with power companies in a couple of different locations to develop technology that creates digital communications carrier capability over the electrical grid into the neighborhood.

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Q: In what cities are you experimenting with electrical grids?

A: We haven’t revealed that yet. It is pretty clear right now there’s not going to be one answer. There’s not one silver bullet. And for us, with a national interest, urban, suburban, rural are going to be served by different technologies, and we’re going to be agile with that.

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Q: Is fixed wireless going to be a viable strategy for you in particular?

A: If I had to bet, if you look at AT&T; five years from now, wireless local access is going to play a big role in what we do, along with our fiber investment for the business community. It will be about how we [put] that fiber and wireless together to get to that subscriber, big and small.

I also think that passive optical technology -- the cost of getting into buildings -- is getting cheaper. And the cost of splitting a fiber signal and sending it to every floor in the building is getting cheaper too.

So I think you are going to see all of these different kinds of things out there. But you need to have players like us who are in the market, who have customers to serve, because doing it from sort of a garden start, it’s going to be hard getting the capital.

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Q: What about voice over Internet Protocol technology?

A: It is more likely that it will be in our consumer efforts, the so-called VoIP, or what we refer to as the hosted voice services. We are investing heavily in that. We intend to be the leader in that.

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Q: Are you saying that you are investing in local facilities, just not in the same kind that the Bells are using?

A: If I were out investing in circuit switched technology as our first line -- we still are, to be clear -- but that wouldn’t be real sensible. We know where the puck is going. So we’re trying to ensure that we have customers and a relationship with customers, and we’ll continue to evolve this technology.

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Q: What will AT&T; be like in five years?

A: We intend to be the most successful business communications provider offering a full range of services that businesses require in order to network and communicate. That’s IP services and data service and international services, as well as voice. And serving the broad business market from small to large. That’s pretty clear.

The consumer market, people have sort of written off and said, “Well, that will just wither and die.” Our view is, that’s not true. We have a 40-million-customer franchise today. The Bells will have a big share, and we intend to be in the consumer business. And we think that we can. It will be smaller. I believe we have the staying power and the brand and the ideas, especially as the market transitions to voice over IP kinds of services that will allow us to have a very big position. We intend to be an innovator.