How At&T Plans to Reach Out and Touch Everyone

By THOMAS McCARROLL

The postmodern building that houses AT&T's microelectronics division is obscured from view by the thick forests of suburban New Jersey, and to some it once seemed an apt metaphor: for much of the 1980s, the unit was really lost in the woods. It was expected to lead AT&T's charge into the computer business, but its microchips sold poorly because they were overpriced, and the company's first commercial computers -- from PCs to a midsize system -- were flops. With losses topping $3 billion, AT&T was forced to pull back from the market. Says William Warwick, president of AT&T Microelectronics: "We were naive. We thought our name and reputation would open doors. They didn't; we learned a very painful lesson."

But today the atmosphere at the New Jersey outpost is crackling. Rather than worry about their jobs or fret about the future, workers walk the corridors smiling and high-fiving each other. AT&T Microelectronics is now a leading source of computer chips used in cellular phones, modems, disk-drive controls and fiber-optic communications. Sales surged about 50% last year, including a 90% increase in Japan and a 110% jump in Europe. AT&T's computer business is in the black and ranks No. 7 in sales, coming up fast behind such world-class firms as IBM, Fujitsu and Hewlett-Packard.

This week AT&T will win the competition to market the first hand-held computer when it rolls out its highly touted Personal Communicator 440. Part computer and part cellular telephone, the $3,000 machine -- based on AT&T's Hobbit chip for portable devices -- will let users send faxes and electronic mail by writing on the small display screen with a special pen. It will also transmit and store voice messages as well as make cellular phone calls. Designed and manufactured by EO, a new Silicon Valley company that is 50% owned by AT&T, the Communicator will have a head start on several rivals expected later in the year, including Apple Computer's similar Newton model and Motorola's Dragon. To celebrate, Warwick gave the team that developed the Hobbit a symbolic gift: a desk clock. "It was to remind us that we received our wake-up call," he says.

The sudden success of the microelectronics division is just one sign of the emergence of a new AT&T. While many large corporations such as IBM and General Motors are struggling to remake themselves, AT&T has apparently pulled off one of the most remarkable makeovers in U.S. corporate history. Although traditional long-distance service still accounts for 62% of its revenues, AT&T is no longer just a telephone company. Through acquisitions and homegrown start-ups, it has transformed itself into one of the most powerful -- and feared -- players in information technology.

AT&T is the nation's leading producer of electronic cash registers and the world's largest manufacturer of automated teller machines for banks. The company is the third biggest issuer of credit cards, behind only American Express and Citibank. It has also expanded into the field of multimedia (machines that can combine text, graphics, sound and video) by buying pieces of EO, interactive computer maker 3DO Co. and software start-up General Magic. Earlier this month, the phone giant entered the video-game business through a joint venture with Sega Enterprises that will enable players to take on opponents over AT&T's phone lines, and it formed an alliance with Viacom, a cable-TV programmer, to launch a two-way video service that will let viewers receive movies on demand and shop from home. AT&T is also discussing a partnership with the nation's largest cable-TV operator, Tele-Communications Inc. (TCI). Says AT&T chairman and chief executive Robert Allen: "This ain't Ma Bell."

While it may no longer be Ma Bell, AT&T continues to have Bell-size ambitions. The ultimate goal of the old AT&T was to serve as the primary information pipeline into every U.S. home and business. But in 1984 the company was forced by a federal court to spin off the regional Bell operating companies, or Baby Bells, which own most of the nation's local phone lines. AT&T still has its grand vision, but instead of concentrating on telephone ^ calls, the company is aiming to become an all-purpose superplayer on the electronic superhighway that will carry interactive services, information, shopping and entertainment into America's homes.

That electronic superhighway will involve many players: local cable and phone companies that could provide the connections to individual consumers; media and entertainment companies that will provide the shows, games, interactive services and information products; and computer and communications wizards who will create the technology and software. Each week new alliances and marriages of convenience are announced. AT&T has begun to carve out a broad role that capitalizes on the many strengths it can bring to the party, including a long-distance network and switching capabilities, new electronics devices and technologies, and its ability to package consumer-friendly services.

"AT&T is pursuing its 'communacopia' strategy," says Robert Morris III, an investment analyst at Goldman Sachs. "It wants to be the horn of plenty for every conceivable information technology, and be to multimedia what Ma Bell was to telephones." The odds of success, says Morris, are in AT&T's favor: "There is no other company with all the necessary talent, tools and muscle under one roof."

Most of the credit for AT&T's resurgence goes to the company's risk-taking CEO, Bob Allen. Lanky and quietly determined, Allen has spent his entire 36- year career within the Bell System and AT&T. He learned to take chances from his father Walter, who quit his job of 21 years with the J.J. Newberry chain of five-and-dimes to purchase a bankrupt children's clothing store in New Castle, Indiana. "Talk about courage," recalls Allen, still in admiration and awe.

Allen took charge of AT&T after the sudden death of CEO James Olson in 1988. Olson had guided the company through the painful period following the breakup of Ma Bell, when it chopped its labor force 19%, or 70,000 workers. It was Allen, though, who changed the company's lockstep culture. Going against tradition, he recruited top executives from outside, including Alex Mandl, former president of the Sea-Land ocean-shipping concern, as chief financial officer; Jerre Stead, former chief executive of electrical-equipment maker Square D, as head of the computer division; and Richard Bodman, of the Comsat satellite-communications consortium, as top strategist. Allen also brought in managers from small Silicon Valley firms to help teach AT&T's stodgy staff the newest tricks of the trade.

The CEO pumped new life into the company with a daring diversification strategy. Determined to end AT&T's humiliation in computers, he decided to buy his way to respectability. AT&T eyed several potential takeover targets, including Apple, EDS, Hewlett-Packard, Data General, Wang and Digital Equipment, before it settled on NCR Corp. AT&T first approached the Ohio-based manufacturer in 1988, but retreated after it was spurned by NCR management. Two years later, AT&T made another bid for NCR, but this time it was a $7.5 billion hostile takeover offer that the company could not resist. AT&T folded most of its money-losing computer operations into NCR, but the real appeal to AT&T was the potential for linking its own long-distance telephone system to NCR's worldwide network of cash registers and ATMs.

Previous computer-telephone mergers, such as IBM-Rolm, have been unsuccessful, but AT&T has managed to integrate the two businesses. In fact, there are now some 250 ongoing projects involving NCR and AT&T units, focusing on such crucial areas as messaging, network computing, wireless communications and desktop video. The merged companies, for instance, are developing a cash machine that identifies customers by voice rather than by a numerical code punched on a keypad. NCR has been given the key to the famed Bell Laboratories research center. Says Stead: "It's like a kid being let loose in a candy store."

The backbone of AT&T's communacopia strategy is the company's 2 billion- circuit-mile telephone grid. First built in 1879, the network has been continually upgraded. In the past 10 years, AT&T has replaced most of its old- fashioned copper-cable network with advanced fiber-optic wires, which give the grid a massive carrying capacity, or bandwidth. AT&T's long-distance system handles 150 million phone calls and data transmissions a day. It has the capacity to carry at least twice as much traffic, at no greater cost.

"AT&T wants all roads to lead to its electronic superhighway," says Fritz Ringling, a telecommunications consultant at Network Dynamics in New York City. "It wants Johnny in Atlanta to play Sega video games with his cousin in Seattle; Mom to use the Universal card and have her purchases rung up on an NCR cash register that uses an AT&T fax to transmit credit-verification data; and Dad to send messages to his office while he's out on a sales call using his AT&T hand-held computer." AT&T also intends to be a main source for the ; pocket phones, portable computers and other devices that tap into the network, as well as the optical-fiber wires and telephone switches needed to build networks.

There are, however, two missing links in this strategy. First of all, AT&T does not produce the full range of products that consumers will want from the electronic highway. Although the company has been adept at providing communication links and transactional services such as banking, it does not make or own the video games, television shows, movies and information products that will be the staple of what consumers order in their homes. To that end, it is considering joint ventures like the one with Sega, but in other cases it may simply be the conduit through which other media companies transmit products.

Second, its forced divestiture of the local Bell companies means that AT&T no longer has a direct conduit into individual homes and businesses -- and the 1984 federal-court consent decree makes it difficult to get back into that business. Like other long-distance carriers, AT&T must go through the local telephone system and pay access fees for the connection. The telecommunications titan paid $14 billion in such charges last year.

One way that AT&T may try to bypass the Baby Bells is by joining forces with local cable operators, such as through the rumored deal with TCI. AT&T would provide cable systems with the valuable switching technology they need to offer interactive, or two-way, services such as home shopping and movies-on- demand. This type of combined strength was the rationale behind the deal between Time Warner (parent company of this magazine) and U S West, one of the Baby Bells.

Another way AT&T can directly connect to consumers is through the cellular market, which was one reason for its $3.8 billion purchase of 33% of McCaw Cellular Communications, the largest cellular company. This, however, could present regulatory problems. The seven regional Baby Bells accuse AT&T of trying to subvert the 1984 divestiture order by using the McCaw link to surreptitiously re-enter the local phone business. They want the Federal Communications Commission either to force AT&T to dissolve its McCaw alliance, or to lift the ban prohibiting local phone companies from offering long- distance service. Says Richard Brown, vice chairman of Ameritech, the Chicago-based Baby Bell: "AT&T is trying to put Humpty-Dumpty back together again."

AT&T must step gingerly. The Baby Bells are customers as well as $ competitors. The seven regional companies, for instance, account for 40% of AT&T's $7.7 billion in sales of central-office telephone switches. That percentage, however, has been declining as the local phone companies try to reduce their dependence on their former parent.

Other companies have moved to defend their turf against the phone giant. In retaliation for AT&T's invasion of its credit-card market, American Express has formed a joint venture with long-distance rival Sprint. Alcatel, the French phone-equipment manufacturer, has entered a partnership with Sprint. And two weeks ago, British Telecom acquired a 20% stake in MCI. Says Ronald LeMay, president of the long-distance-service division of Sprint: "The more AT&T expands, the more allies it creates for us."

Allen denies that his company is trying to re-create the old Bell System, and dismisses the Baby Bells' complaints as "mainly political." He doubts that "a showdown" between AT&T and the Baby Bells is inevitable, but he offers no such assurances to others: "If we want to serve customers, we'll expand into more fields and make more enemies. If we're seen as a threat because we're good competitors, then more power to us."

The biggest danger AT&T faces, Allen feels, is not stirring up enemies but the opposite: becoming too staid and complacent. "I live in fear that what's happening to IBM will happen to us," he says. "So we can't get too comfortable or stop asking the right questions." Sounds as if the makeover of AT&T has just begun.