Hardball 9/2/09: Could AT&T Become A Giant Qwest?

About 10 months ago, we pointed out AT&T desperately needs to significantly increase its 3G wireless spending.  At present, it is still moving too slowly in making improvements, which is adversely affecting its iPhone service.  The battles between the old Ed Whitacre supporters and the Randall Stephenson faction over future direction across the board are continuing to immobilize the corporation.

We wrote over two years ago, that major changes at the top of AT&T could not be made overnight without an all-out war.  Stephenson launched the first public salvo in an interview with the Wall Street Journal in April of this year in which he was kind of talking in the third person and was seeking outside pressure to change corporate culture in his favor.  The next big battle may be at the upcoming AT&T board meeting.   It would not be surprising if Stephenson brings in several high-level executives to support his case, including his desire to shift the corporate focus more to wireless.  Even to this day, it appears that AT&T is only doing what it needs to minimally in terms of spending money on upgrades and expansion.  Of course, this type of activity should not have to be a slow process.  With all of the great success in selling the iPhone, the RBOC did not have the network to meet the demand.  Along with the insane focus on the fiber to the node, AT&T is at present showing no kind of matching performance to Verizon.  

 

While becoming a big version of Qwest seems to be a remote possibility now, it is definitely not to be dismissed.  As Verizon becomes stronger, it is emboldened in taking out the competition, such as its recent move to lower the cost to $50 on its BlackBerry Storm.  (It is probably not all about getting rid of inventory.)  AT&T bringing down the price of the iPhone has diminishing returns if its wireless network is not able to handle the influx of traffic that comes with a sale.  There are still far too many locations in major metropolitan areas in which there are dead zones or it does not fully work properly, such as in at least a few places in Manhattan.  It is simply ridiculous for a major carrier to apparently have problems around Columbus Circle.  A company certainly cannot call itself a world leader in wireless communications and have this level of quality.   As soon as AT&T completed the deal with iPhone, it should have invested the necessary capital and resources into the network to get it up to full speed immediately.  Had it done so, much of the 3G competition would have been stifled.   

 

In contrast, Verizon Wireless’ network is just about everywhere.  While there can be difficulties with roaming in getting full service in remote areas, it has nothing to do with Verizon’s own facilities.   

 

Granted, Verizon Wireless did get negatively impacted by the AT&T exclusivity of the iPhone.  Verizon has been very careful in bringing out new offerings in that it has not tried to come out with an iPhone-type release.  However, AT&T’s inertia almost guarantees that Verizon will get at least a piece of the future 4G iPhone opportunity.  The big point is that the latter is determined not to put in a sub-standard LTE network.   

 

In the meantime, Verizon is hitting AT&T hard with FiOS (including large businesses) in two of its major cities, Los Angeles and Dallas.   Verizon also has a strong presence in Chicago in general and it is probably only a matter of time before it goes after Fortune 2000 businesses in a big way with direct fiber.  If AT&T loses its grip on some its major cities for high-margin services and becomes a distant number two in wireless, it will start to resemble Qwest.  Even Sprint is starting to beat up AT&T a little bit on the wireless side.

Samuel Greenholtz consults with leading institutions through GLG