IPO point man

AT&T is an all or nothing kind of company. That strategy can spell big wins or big losses. Take the wired IP trend: AT&T slumbered through it and missed heading down an important road that is shaping the telecommunications world. That's the do-nothingside of AT&T. Now take its cable strategy: AT&T has spent big bucks - some say too big - on scooping up cable giants in an effort to reach the last mile. While it remains to be seen if that risky ploy will pay off, that's the go-for-it-all side of AT&T.

Now AT&T is betting big again, this time on wireless. An early December announcement charged John Zeglis, the company's former president and heir apparent to Chairman C. Michael Armstrong, with heading an expanded wireless group as chairman and CEO.

The announcement detailed plans to create a new tracking stock for AT&T Wireless Group and to execute an IPO for the stock this spring. It unveiled a fixed wireless strategy, known for years as the mysterious Project Angel, which has been undergoing trials in Texas. In addition, the company promised to foray into international markets and begin "incubating" wireless Internet application development companies.

While all this news paints the picture of a telecom giant hoping to earn greater revenues from its successful wireless business, that may not be the crux of what the changes mean. Some believe that the reconfiguration at AT&T Wireless Group is about more than increasing wireless profits. Instead, they believe it points to a new AT&T that sees its wireless business as a platform for launching a slew of businesses and as an entry into another world of communications.

Old hand, new hat

AT&T's charge into this new world will be led by Zeglis, who, while hardly new blood at AT&T - he's a 16-year AT&T veteran - will be a new face to AT&T's wireless business.

He's already making moves to fit in - literally. Despite rumors during the last few years that AT&T Wireless might uproot and relocate to the mother ship in New Jersey, it seems the business will stay true to its Northwest roots, at least for a while. Zeglis is moving with his family to the Seattle area, where AT&T Wireless has been based since it was bought from McCaw Cellular.

He'll work alongside Dan Hesse, president and CEO of AT&T Wireless Services. With Zeglis at the helm of the larger AT&T Wireless business, Hesse, noted for delivering the industry-altering Digital One Rate, will run the mobile voice, data and international pieces of the business (see sidebar on page 36).

As the new head of AT&T's expanded wireless business, Zeglis aims to capitalize on what he envisions will be incredible growth in wireless. Although skyrocketing stock values in virtually every sector of the wireless industry - most notably data - show that rapid growth in wireless already has taken off, the U.S. may have hardly begun its surge.

"Wireless has had this explosive growth," Zeglis said during a late January interview with Telephony. "But, put our 30% penetration against 40% to 50% in other countries. You have to count us as just getting started." Some Nordic countries, such as Finland, have quickly surpassed even the 50% penetration mark.

"The black-and-white TV story in the mid-'50s is a good metaphor for how much runway we have left here," Zeglis said. In other words, the number of people in the U.S. who owned black and white TVs 50 years ago is comparable with the percentage of people using wireless phones today - and using them almost exclusively for voice.

In addition to space for tremendous growth in the U.S., Zeglis is banking on his belief that the industry is on the verge of a major upheaval. "My view of the world is that there are two great revolutions going on in communications - and revolutions are rare in telecom," he said. Those two revolutions, wireless communication and the Internet, are coming together and yielding an incredible opportunity for growth.

AT&T plans to take advantage of that growth in several ways.

Means to an end

Although the IPO and tracking stock certainly will raise money for AT&T's wireless business, there may be more to the IPO than meets the eye.

Most predict that the tracking stock will do exceptionally well for AT&T Wireless. In the past, AT&T Wireless had to compete with other AT&T businesses for funding. The tracking stock offersAT&T Wireless a vehicle for investment growth that isn't limited to how much operating cash the business earns.

Issuing the tracking stock also is expected to increase operating performance because the investment community will have better visibility into the business and the company will be more compelled to perform, said Pascal Aguirre, vice president and general manager of GeoPartners Renaissance.

While such a spinoff typically is expected to generate a 20% to 30% gain in market cap over the business' previous arrangement, many believe this IPO will earn far more. In fact, some predict that the offering will be the largest IPO ever.

Still, Aguirre said that those aren't the primary reasons why AT&T decided to create the tracking stock. "What they're setting out to do...is to create a platform for hyper growth - a platform that uses the mobility business for a springboard to launch many other businesses," he said. Those ventures include a national competitive local exchange carrier (CLEC), investments in e-businesses and international endeavors.

The CLEC business will chase a unique play, different from most CLECs. Though Zeglis was unable to speak of specifics about the new strategies during the January interview because of the upcoming IPO, he spoke more candidly during the company's announcement in December. At that time, he said AT&T will use fixed wireless in the 50% of the U.S. where the operator doesn't own cable properties or have agreements with cable operators. The fixed wireless service, currently in trials in Dallas, offers users multiple lines of voice and high-speed data access.

"This is a sophisticated play," Aguirre said. Instead of chasing the high-density markets, which are the clearest places to make a business case for fixed wireless services, AT&T will use fixed wireless in second tier markets. Rather than compete with a handful of operators in large markets, AT&T will approach customers that in many cases have never seen competition.

The fact that those customers have been largely ignored is the key to the opportunity in these secondary markets, Zeglis said in December. He believes that putting a choice in front of customers who never have had choice is an extremely powerful offering. He also believes that AT&T's wireless CLEC services can be offered for lower prices than existing competitive services and will support higher-speed data access.

The other key to success for AT&T's fixed wireless play is that buildout can be extremely inexpensive. The operator can use towers that it already uses for its mobility business. As a result, it can offer service in a market for very little cost, spending more incrementally only as customers sign up. "In the industry, we see fixed wireless connections as a viable and economically attractive way to deliver voice and data to homes. It scales nicely and doesn't lose the economics when you go into second tier markets," Zeglis said.

It's the strategy of combining fixed and mobile infrastructure that Zeglis views as an opportunity for wireless operators to expand internationally. "Some other countries have high penetration, but a lot don't have our penetration, let alone a combined solution like mobility and fixed," he said. "There's an opportunity to put them together and take them to parts of the world that are under penetrated in mobility and don't have state-of-the-art wired penetration to begin with."

An obvious region for AT&T might be Latin America, where several countries also use TDMA technology. "We're interested in a larger international presence," said Hesse, who will oversee AT&T Wireless' push internationally. Issuing the tracking stock could help raise funds needed by AT&T Wireless to begin expanding into other countries more aggressively. In Europe, expansion would happen through AT&T's relationship with BT. "BT is the expert on Europe," Hesse said. AT&T will follow BT's lead there.

Branching out to e-business

The next bold move in AT&T's new plan is its strategy of investing in e-businesses.

"In the communications industry, on one hand, you have the legacy companies that are putt-putting along," Aguirre said. "On the other hand, you're seeing the emergence of Internet models that grow at phenomenal rates and take the industry by storm." AT&T hopes to join the companies following the Internet model.

One way AT&T hopes to do that is by investing in wireless e-business companies. In December, Zeglis said that AT&T would "incubate" e-businesses, offering them AT&T's experience and access to subscribers on its networks. AT&T, he said then, is in the ideal position to identify the companies that have developed winning ideas.

AT&T has never before taken part in the applications business, historically serving only as the transport provider. Nor has it ever pursued a strategy of investing in businesses in a certain segment.

By investing in start-ups that aim to use AT&T's networks to deliver services, AT&T can begin earning revenue on both ends of the value chain. The investments will enable AT&T to benefit from its transport offerings as well as applications that run over that transport.

Those applications are shaping up to follow a progressive course, starting with simple information services that are available today. The next level, Zeglis said, are the time-sensitive applications, such as alerts regarding changes in stock values. Beyond that will come location-specific services, which could notify a user that a certain store is nearby. Finally, applications will evolve that users won't even think about. "It's an unconscious exchange of information," Zeglis said. For example, an application could notify customers that their flights will be delayed or that traffic ahead is clogged.

Taking a stake in such e-business applications may be a winning move. "The future of communications is no longer in the pipes and transport, but it's shifting dramatically to the applications," Aguirre said. He believes AT&T's strategy is forward-thinking and positioned to exploit the potential growth in wireless e-business.

The devil is in the details, though. AT&T has yet to shed its lumbering monopoly style, lacking the reputation and experience of cutting-edge start-ups running on Internet time. Nonetheless, AT&T could pull it off. "The fact that a board like that of AT&T could have the vision to even embark on this voyage suggests that they're starting to look at a new thinking," Aguirre said. "They wouldn't make the decision unless they were serious about embracing a new paradigm of management."

Aside from the many changes made in December surrounding the tracking stock and new strategies, AT&T Wireless Services' mobility business is moving full steam ahead. Like most operators today, talk mostly revolves around data.

Although AT&T Wireless offers data services only where it has built its cellular digital packet data (CDPD) network, AT&T's top brass believe that the experience gained from operating that network will give AT&T an advantage over other operators when it rolls out data across its nationwide network.

"With CDPD, one thing that is underappreciated is the degree of maturity around the network," said Rod Nelson, chief technical officer for AT&T Wireless Services. "All the tools already exist - billing, network monitoring tools, measurement.

"[Other] operators will struggle with that as they introduce services that need a full set of business tools. CDPD carriers are ahead," he said.

CDPD operators also have the advantage in data because they now have experience offering a packet data network, as opposed to some operators that today are offering circuit-switched services, said Dan Hesse, president and CEO of AT&T Wireless Services.

AT&T Wireless also may be well-positioned for data because it has extensive coverage in the U.S., Hesse said. "In voice, you could always roam to analog. In data, there won't be an analog network in the U.S., except in very rural areas," he said. "So footprint becomes more important."

Ultimately, the key to wireless data will be in proper pricing. "Per-minute pricing is doomed," Hesse said. The Internet industry has set the precedent for flat-rate pricing and Internet users have come to expect that.

"We've learned that Internet users don't expect to pay for minutes on the Internet," he said.