AT&T's CEO Puts Positive Spin On A Negative Move

Telecom Policy Report, July 28, 2004

Oh, how the mighty are fallen.

AT&T, the former behemoth telecommunications service provider, late last week (July 22) dealt a stunning psychological blow to the competitive local exchange carrier (CLEC) industry when it announced that it would no longer seek new customers in the consumer marketplace (e.g., residential local and long distance services). For all intents and purposes, AT&T -- once the nation's largest CLEC -- is transitioning out of the CLEC arena.

This is not to say that AT&T is totally abandoning its existing residential customers -- at least not yet. The company will continue servicing its existing residential accounts, but has no plans to further expand that part of its business, AT&T Chairman and CEO David Dorman told industry analysts during a conference call last Thursday. Of course, if AT&T makes no effort to expand its consumer business, it stands to reason that the company is content to let that segment of its business go the way of the dinosaurs. And without sufficient marketing to support its existing consumer business, the extinction of AT&T's residential services market is just a matter of time -- perhaps as little as 12 to 18 months.

"While we provide our existing customers with quality service, and they can continue to expect that from AT&T, we will not invest additional dollars on acquiring new customers, and we will not invest to fight legal battles that no longer make sense given the dramatic shift in the government's position on local market competition," Dorman told the analysts.

The FCC rules for the past eight years, as mandated by the Telecom Act, have supported the resale of Bell company facilities. "Those rules are going to change radically," Dorman said. "That's why we're taking this action. Some might ask, 'Why now?' versus waiting for new rules. The fact is the residential telecom market has been transformed by competition to a market of bundles with more than 40 percent of American households now taking some form of bundled service -- and the numbers are growing rapidly."

Dorman said marketplace momentum toward bundled offerings has accelerated to include new services such as video, wireless and broadband. AT&T developed a "carefully reasoned transition plan" based on a regulatory regime that recognized the need to deliver competitive local services to consumers, he said. However, a "shift" in the regulatory regime has eliminated AT&T's ability to maintain a basic competitive bundle of services for consumers. It also has eliminated a critical path needed to transition to facilities-based competition over time, according to Dorman.

Dorman's reference to a "shift" in the regulatory regime was a polite form of finger-pointing at FCC Chairman Michael Powell and the Bush White House. As the nation's top telecom regulator for the past three and a half years, Powell, according to his critics, has overseen the systematic removal from the regulatory landscape of virtually all of the pro-competition elements of the 1996 Telecom Act. Most recently, he -- with help from the Bush Administration --orchestrated the sunset of Section 251 (b)(3) of the Act. That key part of the federal law requires incumbent telcos, including the Regional Bell Operating Companies (RBOCs), to provide competitors with access to "unbundled network elements [UNEs] in a manner that allows requesting carriers to combine such elements" in order to provide competitive telecom services.

With respect to UNEs, "the RBOCs have been unwilling suppliers," Dorman told the analysts. "Without pro-competitive commercial arrangements, there's simply too much risk and uncertainty for AT&T to base our future on reluctant participants in a regulated environment that has been constantly in flux. While we don't relish the decision to discontinue competing in the residential markets, it's clearly the right choice given everything we now know. We believe that our focus on the business market represents the best way for AT&T to exploit our strengths while controlling our own destiny."

As a result of AT&T's decision to cease competing in the consumer marketplace, the company no longer needs to spend much time or energy arguing the definition of terms such as "essential facilities," "cost plus a reasonable profit" and "non-discriminatory access." Instead, AT&T now can focus its energies on defining the future of communications through initiatives such as application-aware networking, Internet Protocol (IP) and services-on-demand, Dorman asserted.

"Obviously, this is a historical shift that has broad-reaching implications not only for AT&T, but the industry at large," he said. While about 75 percent of AT&T's revenue currently comes from AT&T Business, the AT&T brand has been seen around the world as a premiere provider of consumer telecom services. However, without the support of the regulatory environment to allow for AT&T's evolution to facilities-based competition, the company's focus for the future needs to be on the business market where AT&T has advantages over traditional interexchange carriers and the RBOCs, Dorman said.