AT&T winnowing suppliers in new buying model, analyst says

AT&T (NYSE: T) senior management appears to be leading an initiative to significantly reduce the number of suppliers it works with directly, forging a new model of carrier-vendor relationship, according to Simon Leopold, an analyst with Morgan Keegan.

AT&T held a meeting with most of its suppliers in mid-May as part of an effort to reduce the number of vendors it works with from 40 or so to 28, Leopold said in a research note released late yesterday, citing conversations with multiple sources. The carrier is reportedly trying to pick just two vendors to serve each of 14 technology areas or “domains.”

If a chosen vendor lacks a technological function or offering that AT&T desires, Leopold wrote, “AT&T will ‘encourage’ partnering. Furthermore, if a supplier has an incumbent position but is not selected, its equipment won’t be removed, but it will be ‘encouraged’ to form a partnership with the company awarded the related domain.”

Leopold emphasized his view that the initiative was not necessarily cause for panic among equipment vendors, but he said the risk deserves attention, in part because so many questions remain about the program – for example, it’s unknown what defines each of the 14 technology domains, he said.

“The policy may favor larger and more diversified suppliers such as Alcatel-Lucent, Cisco and Ericsson yet could complicate business for smaller players such as Adtran, Ciena and perhaps Juniper,” Leopold said. “The domain winners may gain more sources of revenue, greater control and inertia; however, this comes with added responsibility and costs. For the smaller network participants, risks increase, and gross margin could face pressure as the domain owners extract a portion of the profit; however, the new structure may enable the vendor to reduce sales and marketing expenses.”

AT&T’s actions are likely motivated by a desire to reduce risk, complexity and costs, in part by wielding greater purchasing power, Leopold said.

The new model of supplier relationship AT&T is pursuing may have been inspired at least in part by its 2004 appointment of Alcatel-Lucent as the chief integrator of its fiber-to-the-node project (back when the carrier was SBC, and the vendor was Alcatel). That $1.7-billion deal allowed Alcatel to subcontract with other suppliers and gave SBC “one throat to choke,” Leopold said.

Industry consolidation since 2004, including SBC’s mergers with both AT&T and BellSouth, has only escalated Bell carriers’ power over vendors (even potentially endangering innovation, some vendors have said). And AT&T has in the recent past been perceived as exerting pressure on vendors to partner with or even acquire other vendors in order to win its business, such as was the speculation surrounding Ciena’s $300-million acquisition of AT&T Ethernet equipment supplier Worldwide Packets last year.