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Biz 2 Column: Dave Dorman

By - October 27, 2004

b2_396x73Dave Dorman is a hoot to talk with. Who else would call his competitors a “leper colony”?
This interview is in this month’s Business 2.0.

TITANS OF TECH
Dorman’s Calling
The CEO of AT&T is on a mission to restore his company to greatness. His plan: Use the Internet to unplug the competition.

By John Battelle, November 2004 Issue

Is David Dorman a telecom lifer or a startup survivor? In truth, he’s both. He started out working at Sprint, then became CEO of Pacific Bell, where he created the first regional-phone-company Internet service provider. He then took a detour into the dotcom world, where he led PointCast, a much-hyped “push” technology company, until shortly before it went under. Chastened, he returned to the business he knew best: telecom.

But as it turned out, someone who’d tried out an untested new business model was exactly who Ma Bell would need. When Dorman joined AT&T (T) in late 2000, then-CEO Michael Armstrong held a grand vision for integrating what Dorman calls the “magic five” — local, long distance, high-speed data, wireless, and video. But things didn’t turn out as planned. Instead of reigning over a vast telecom empire, Dorman ended up leading AT&T through the most perilous period in its 127-year history. Teetering finances forced Armstrong to divest wireless and cable. Factor in a recent regulatory decision that Dorman claims left him no choice but to abandon AT&T’s residential phone business — which represents about 25 percent of the company’s revenue — and it’s no wonder Wall Street is tepid about AT&T’s prospects.

Dorman responds by pointing out that AT&T is the clear leader in providing networking to Fortune 500 companies, and, he says, his competitors are in shambles. More intriguing, he has a strategy to put AT&T back on top.

It’s clear that Dorman grasps the disruptive nature of the Internet. Right now the Net is changing voice — Dorman really lights up when you ask him about CallVantage, AT&T’s voice-over-IP service. But at some point, it could lead to video-over-IP, a potential competitor to cable. Add it all up — the old long-distance and high-speed data businesses, CallVantage, a new wireless play, maybe even video — and Dorman may be rebuilding AT&T into the company he once thought he would lead, one magic-five application at a time.

When you announced you were leaving the residential telephone business, your share price dropped. Why do you think the markets reacted negatively?

We don’t have to have residential telephone business to be a successful company. So many of the stories I’ve seen say, “They’re going to go away. It’s over.”

That question’s on my list here …

This is a $30 billion company, and consumer is $8 billion of that. I’ve got the best business-services franchise in the world. And I’ve got a leper colony of competitors. We know what MCI’s been through. Sprint — they’re a wireless company, just ask them. And you look at the rest of the guys — Qwest (Q), XO Communications, Wiltel, Level 3. Is a major company like Citigroup (C) or J.P. Morgan Chase (JPM) going to bet on someone like that vs. going with us?

Your industry has not covered itself in glory these past five years — MCI, for starters.

You know something people didn’t understand? A big part of Tyco’s (TYC) value was TyCom — an optical network. And Enron had $30 billion-plus of its market cap based on its broadband-trading business. So the three biggest frauds in American history had a direct impact on telecom. Add Qwest and Global Crossing, and we had five major catastrophes in the industry. AT&T didn’t cause that; we just have to deal with the aftermath.

Must be fun to be a telecom CEO.

It was a great thing 10 years ago. We’re in a cycle. The most frustrating, gut-wrenching thing for me is, I can’t tell you how long the cycle’s going to last. But the overcapacity will get reconciled. If we didn’t have Qwest fighting for its life and MCI fighting for its life, prices would stabilize.

(more in extended entry…read on, it’s a fun one)

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You’re leaving the residential business because the government let stand an FCC ruling that favored the Baby Bells. What do you wish the government would do?

The telecom industry for 14 years had no policy. AT&T wrote its own divestiture accord and came up with this idea to separate local and long distance — in order for AT&T to compete with IBM (IBM) in the computer business. I mean, that was the thesis: “We want to keep Western Electric because the future is computers.”

That didn’t work out so well.

The way I look at it is, you can’t keep changing your mind, right? Now I’m not even going to try to argue more regulation or less regulation. I’m not going to try to outguess the next sitting chairman of the FCC or the next president. I have to make decisions that last through administrations.

So what do you think of FCC chairman Michael Powell? He’s prone to saying that regulation is not needed, as technology solves the market’s problems.

Michael Powell is a smart guy, but he has an aspirational model for competition that most Americans can’t take advantage of. If you really want to be just super-ass generous, 4 million people today buy local telephone service from a cable company or a VOIP provider. But 20 million people once bought service on phone lines leased from the Baby Bells.

So when you decided to stop marketing traditional residential service, those customers lost.

I have an amazing ability to produce long-distance minutes, but I don’t own a local network. If I don’t have access to the Bells’ network on a cost-effective basis, how am I going to provide local service in the short term? Powell’s answer is, Go do broadband over power line, or go do Wi-Max. I say, “OK, great, how much will it cost? Can I get the approvals? Can I relocate the ham-radio operators?”

If I went out tomorrow and said, “You know what, I’m going to be a real man. I’m wiring L.A. Tomorrow the backhoes are showing up; we’re going to do it,” how long do you think it would take me? Ten years!

Yet with CallVantage, your new VOIP product, and recent announcements about a new wireless business, it doesn’t sound like you’re leaving the consumer marketplace.

We have a great brand. The question is, Can that brand work for other people? Look at how Intel’s (INTC) brand, for example, helps Dell (DELL). Today we carry more than 50 percent of the wireless industry’s long-distance minutes, between T-Mobile, Verizon, Cingular, and guys like that. The consumer doesn’t know he’s using AT&T, but we carry the traffic. I think in VOIP we have the same kind of opportunity.

And while AT&T spun off its wireless business, you now have a deal where Sprint will be the network provider for a new AT&T-branded wireless service.

This is opportunism. Day one after the Cingular deal closes, I can start selling the AT&T Wireless (AWE) name again. There are 22 million consumers who made an affirmative decision to buy something from AT&T Wireless. Virgin Mobile is a reseller of Sprint’s network. They pioneered the concept of taking a brand that works and applying it to wireless. We think there’s a segment of the marketplace that will pick an AT&T-branded product.

Like Virgin, you can build a business on Sprint’s network.

Eureka!

Are you getting credit for that plan yet in your stock price?

We’re getting zero. We haven’t given the Street details.

Let’s step back a second and review how you ended up running AT&T. As I recall, you got this job by asking your board to shut down Concert, a joint venture between AT&T and British Telecom you were running.

They had committed to doing an IPO to finance the business. AT&T and BT were very distracted. My point was, “Look, if you’re not going to do this, we’re better off not going any further.” I was prepared just to walk away. That’s when Armstrong said, “I’ve got these other problems …”

But when you took the AT&T job, you had to believe you were going to be running a massive cable/telephone play. Now you’ve got less debt but also fewer companies.

Armstrong believed that he could accomplish a complete remake of AT&T. He had the right pieces, but it needed to be managed better. He largely kept wireless, cable, consumer, and business as separate operating entities. To me the great value was consolidating the consumer franchise, having one place where you sold it all. A bundled set of assets, the magic five: local, long distance, high-speed data, wireless, and video.

So do you wish the cable divestiture hadn’t happened?

Well, I wish that wireless hadn’t happened more, because wireless I think was more central to the core business. But I’d love to have had both of them.

Why, in the end, did AT&T sell off wireless and cable?

By the summer of 2000, Chuck Noski, the CFO, had pretty much pegged it: We cannot finance these three businesses with $65 billion in debt. We had $5 billion of interest expense. Coming up on 2001, MCI was starting to shudder, the whole bubble had burst. It was getting ugly. In October, AT&T said, “We’re going to break the company up.”

So you knew what you were getting into.

We were going to IPO the wireless business — it wasn’t clear that we were going to spin it off. And cable, we said, we will probably IPO in another year. I think in Armstrong’s mind it meant that he could still keep it together. Then, of course, Brian Roberts did his bear hug.

What’s your view of Comcast? You’re partners now, right?

We have a marketing agreement selling cable voice-over-IP. It has proven to be a fairly good operator in an environment that is changing dramatically. The wild cards of Dish Network and Rupert Murdoch’s DirecTV, the telcos overbuilding, downloads from the Internet, the DVR — all of that is dramatically changing its core video business.

Why should I keep giving $115 a month to Comcast if I can download video to my TiVo over broadband, right?

I think you’re right, in the long term. And Murdoch’s launching more satellites and completely transforming the viewing experience with all kinds of camera angles. The cable guys fear Murdoch. He has an inverse model to theirs — maximize content value, make others pay highly.

Cable has built its defensibility on a gatekeeper model: “We own the path video takes to the home.”

Absolutely. And the cable model is forever altered by new distribution mechanisms for content owners who have every incentive to give you different ways to get to them.

The same goes for the Baby Bells as well, right?

Yes. Ultimately they have to own broadband to your house. When they lose it to cable, it’s really tough to get it back, and that’s the reason they’re selling DSL cheaper and cheaper. If they don’t win this, they lose it all.

And what about you? Will you go after cable’s business again? When video-over-IP becomes a reality, perhaps?

We’re an application-hosting business. We have giant servers and giant storage. We’re clearly capable of delivering video over our network; we’re doing it now.

To finish, let’s do a little exercise. I’ll say a word and you give me the first thought that comes to your head. OK?

Sure.

OK. Skype.

Disruptive technology.

Lucent.

Tough hand.

The government.

Impedance.

Baby Bells.

Monopolists.

The Internet.

The universe.

The telecom industry.

Perfect storm.

John Battelle is program chair of the Web 2.0 conference and author of “The Search” (Portfolio, 2005).

Find this article at http://www.business2.com/b2/subscribers/articles/0,17863,710051,00.html

©2004 Business 2.0 Media Inc. All rights reserved.
Reproduction in whole or in part without permission is prohibited.


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