AT&T CIRCLES THE DRAIN
May 11, 2000
SMART Letter #39 - May 11, 2000
Copyright 2000 by David S. Isenberg
isen.com -- "the living company"
email@example.com -- http://isen.com/ -- 1-888-isen-com
> Quote of Note: C. Michael Armstrong
> AT&T Circles the Drain
> AT&T Had it Coming, by Don Luskin
> Conferences on my Calendar, Copyright Notice, Administrivia
Quote of Note: C. Michael Armstrong
"The sky has not fallen. We forecast a 5% reduction from
our previous Earnings Per Share estimate for 2000.
"In a sense, we are victims of our own success. Wireless
is taking business away from consumer long distance . . .
High value customers are moving to our One Rate calling
plans. Services like Net2Phone, in which we have a
significant stake, are growing in popularity. As we
focus our marketing on heavy long distance users, we're
losing share at the low end of the consumer market.
All of this was expected, but it's all happening
faster than anyone could have predicted."
C. Michael Armstrong, letter to AT&T employees, May 8, 2000
[CONTEST ANNOUNCEMENT: Find the quote in "The Innovator's
Dilemma" that most directly relates to C. Mike's quote
above. Make your case as to *why* it relates. All
non-trivial answers win. Winning entries will be
published in The SMART Letter. The decision of the
judge is final. -- David I]
AT&T CIRCLES THE DRAIN
by David S Isenberg
There is no joy in my heart to watch the slow-motion debacle at
AT&T. I had too many good times there. I learnt too much at Ma
Bell's skirts while she nurtured me and helped me grow. I
wanted to see -- indeed, I still want to see AT&T succeed. But
alas, it is not to be.
Loyalty is a strong emotion, albeit maladaptive sometimes,
especially when things go south. Some of my good friends who
still work at AT&T are held in its sway. They continue to devote
their lives to making AT&T a great company, and I grieve for
them. I also feel for the ex-AT&T people whose quality of
retirement is tied to the price of AT&T stock.
When I joined AT&T, we felt superior because we could complete
calls a few hundred milliseconds faster than the competition.
Then, for a few short years we had a superior brand. We broke
ground with a fee-less credit card and flat-rate cellular
service. We had oodles of patents and a few Nobel Prize
winners. Once, briefly, we even had the best retail Internet
service. Now what?
AT&T, with the help of a billion dollars of lawyers and
lobbyists (and the pro-competitive folks at the FCC) has
succeeded in holding off RBOC entry into long distance longer
than I'd have ever thought. Yet today long distance revenues
are eroding faster than a Basking Ridge.
It is time for AT&T to go. They got it wrong so many times --
in cellular telephony, in PC hardware and operating systems, in
next-generation switches, in Internet services, in Internet
backbones, in credit cards, in on-line music, in global business
services, at NCR. Now they're getting it dreadfully wrong in
broadband access -- and even in plain old telephony! There is
no longer any room in the new economy for it's top-heavy,
culture-encrusted, patrimonial bureaucracy. C. Michael
Armstrong is a product of this culture -- the values that got
him to the top are the same ones that drag AT&T down -- so don't
expect C. Mike to fix things.
Imagination and greed drive the new economy. The AT&T employees
whose imagination and greed exceeded their loyalty are long
gone. Dan Hesse's left-behind $50 million is only the latest
public example. For sixteen years of demoralizing
reorganization and fat force-reduction packages, the great
intellects of the new network uprooted their AT&T-honed
intellectual assets to find their fortune elsewhere.
There are probably several hundred tech-savvy folks who,
unencumbered by AT&T's legacy, would make a great "end-to-end
solutions" consulting firm. There are many AT&T people who
could enter the academy -- humanity needs good researchers and
teachers at every level. There are people who, once the cord
were cut, would be a strong asset to new network service firms:
firms that sell pans to the miners; CLECs, DLECs and ELECs; data
centers and dot.coms; B2Bs, B2Cs and the X2Ys of the future.
And there'd be the losers who continue to eke refuge in the
folds of AT&T's residual fat -- fortunately for them, AT&T's
retirement fund still has assets.
Then there's AT&T's infrastructure.
You'd think there'd be some value in AT&T's rights of way. If
so, AT&T could overbuild then with new technology to join
tomorrow's networking giants like Qwest, Level3, Global Crossing
and Metromedia Fiber Networks. But AT&T's right of way, like
its network, is a historically accreted patchwork that is much
too expensive to maintain, let alone modify.
AT&T's new cable TV assets are still salvageable if they bring
Leo Hindery back in time to save the video entertainment piece
of the business. Quick, though, before TCI becomes another NCR.
AT&T's buildings would make great Internet data centers, once
the obsolete scrap metal that used to switch calls is hauled
away. And the huge AT&T headquarters building at Basking Ridge
could then reveal its true identity as a conference center and
Goodbye AT&T. You helped bring modern communications to Planet
Earth. I'll miss you. But it is time to go.
AT&T HAD IT COMING
by Donald L. Luskin, CBS MarketWatch, May 10, 2000
SAN FRANCISCO (CBS.MW) -- Why were investors so surprised last
week when AT&T warned of lower earnings and sales growth for the
rest of the year?
And don't tell me they weren't surprised! Why else would the
stock of this venerable bluest of the blue chips fall more than
14% in a single day, and an additional 7% by the end of the
Investors were surprised because they've been listening to
simplistic analysis coming out of Wall Street and the
traditional media-- superficial measurements like price/earnings
ratios that made AT&T seem like a bargain compared to high-
flying technology stocks. But not everyone was surprised. There
are a few people -- who work far from Wall Street -- who really
understand the technology that drives AT&T and its competition,
and those people were warning that AT&T was in deep trouble.
The earliest and most provocative warnings came from David
Isenberg, formerly a network scientist with AT&T's Bell Labs. In
1998 Isenberg wrote a paper called "The Rise of the Stupid
Network." The paper was scathingly critical of AT&T's network
architecture and corporate culture. So when he posted it on the
Internet and it ended up with a cult following among the
digerati, Isenberg was ostracized by the TelCo establishment.
Today he's an independent consultant, a self-described "telecom
heretic," and a member of MetaMarkets.com's Think Tank of
Isenberg's key insight was that AT&T's "intelligent network" is
optimized to mastermind traditional voice traffic between simple
devices like telephones. But in the age of the Internet, voice
traffic isn't growing nearly as rapidly as data traffic. And
data traffic is best served by "stupid networks" like the
Internet: just pure bandwidth designed to do nothing but
"deliver the bits" between intelligent computers.
The data-oriented structure of "stupid networks" like the
Internet can easily carry voice traffic too, and at far lower
cost than AT&T's intelligent network. And a single bundle of
Lucent's state-of-the-art fiber can now carry all the voice
traffic in America on Mother's Day -- the busiest phone day of
the year. So the price of voice traffic is destined to fall to
nearly zero, while all the revenue migrates to broadband data
That's going to be fatal for AT&T, because it gets the vast
majority of its revenue from voice traffic. Last September,
Isenberg wrote on our discussion boards on the MetaMarkets.com
website, "The predominant discount residential long distance
rate has fallen from 15 cents to five over three years.
Extrapolating, that puts it under two cents by 2002. In a world
like that, AT&T will be breaking even at best, if it scurries to
accelerate its ongoing cost cutting regime . . . "
That was enough to convince me. As adviser to a $35 million
mutual fund, last October I took a short position in AT&T in the
mid 40's, which the fund still holds. When AT&T announced its
AT&T Wireless Services tracking stock, AT&T's stock soared to
above 60 -- and I came in for a lot of criticism for the
A typical message on our discussion boards: "Beware any short
position in T! This short position should be tossed out just
like any other position that just ain't working." Another said,
"This stock will break above 100 before it sees 40 again..." And
still another said, "It seems like you are obsessed by the T
demon and want to be proven right."
For a while it seemed that the Wireless spin-off might be the
answer to all of AT&T's problems -- unlocking value in what many
people thought was an undervalued corporate crown jewel. In
March, a MetaMarkets.com site visitor who calls himself
"brightness" wrote, "Sprint PCS has a market cap of $62 billion
and rising with considerable momentum, and AT&T wireless has a
subscription base that is roughly four times . . . as large."
But when the Wireless tracking stock transaction was completed,
AT&T had still to come to terms with deeper weaknesses. Indeed,
last September Isenberg had warned that such maneuvers would be
a tip-off: "We could see significant AT&T restructuring --
acquisitions, break-offs, etc., if the core business isn't
And Isenberg turned out to be exactly right. Last week, when
AT&T lowered its forecasts for earnings and revenue in its core
long distance business, Isenberg's technology vision was
vindicated. AT&T shares closed Tuesday at 37 11/16.
There are three morals to this story, lessons in successful
investing in our age of rapidly evolving technology. One is that
the companies that seem the safest are often the most at risk.
The second is that to find the truth, you have to look beyond
traditional financial data, and really understand the dynamics
of the underlying technologies. And the third is that when you
are convinced that you understand the technology story behind an
investment, stick to your guns.
[Don got three little things wrong in this article. First,
Mother's Day is the busiest *holiday* for telephoning. Lots of
weekdays are busier. Second, the U.S. voice busy hour can run
through a single *fiber*, not, as Don said, a fiber bundle.
Third, I may have been "exactly right" but that wouldn't have made
me rich. I wouldn't have had the cojones to short AT&T in the mid-
40s, and I'd be covering now in the 30s, because I'm certain
that C. Mike is 24x7 on the next desperation move to get T to
bounce again. Maybe that's why Don calls the market moves and I
wave my arms on the sidelines. -- David I]
[Don Luskin is the CEO of MetaMarkets.com, the home of
OpenFund.com, the first interactive mutual fund. I'm on the
MetaMarkets ThinkTank with Lori Andrews, Reuven Brenner, Nolan
Bushnell, Peter Leyden, Nicholas Negroponte, and Peter Sprague.
Don warns me that I can't say anything that looks like an
advertisement for MetaMarkets without incurring the SEC's wrath,
so you'll have to go to the MetaMarkets.com website and find out
about it for yourself. -- David I]
CONFERENCES ON MY CALENDAR
May 23-26, 2000. Laguna Niguel CA. VORTEX. I'll be co-
kibitzing the VC panel with Bob Metcalfe, then appearing on
stage with a mystery guest (and SMART Person) -- but I can't
tell you any more because the latest schedule says, "TOP SECRET
-- FOR YOUR EYES ONLY". For the OFFICIAL story, see
May 27, 2000. San Diego CA. Porter Stansberry's Pirate
Investor Conference. Avast me hearties! The bucko tar can
sail to windward. Don Luskin (CEO MetaMarkets) will be aboard
too! Sign the log at (www.pirateinvestor.com), or call
800-433-1528. Pre-registration $99, or register
at the gangplank for $149.
June 7-10, 2000. Toronto ON. TED CITY. My only role here is
as a paying member of the audience, but I think that Richard
Saul Wurman does a real job with his TED conferences -- every
one I have been to has had deep lasting impact.
June 26-27, 2000. New York City. Entertainment Internet 2000.
I'll be on a panel with some of my favorite fiber and bandwidth
companies. The website is thin, but there's info there --
http://www.imn.org/2000/a245 or call 212-336-6000.
September 13-15, 2000. Lake Tahoe CA. TELECOSM. Featuring
George Gilder, Clayton Christensen, yours truly, and a cast of
geniuses, troublemakers, and people who got rich by listening to
George. This thing sells out, folks -- a word to the SMART.
September 22-24, 2000. Woods Hole MA. An equinoctial weekend
of deliberation for SMART People here beside the rising tide.
Details soon -- but mark your calendars now.
COPYRIGHT NOTICE: Redistribution of this document, or any
part of it, is permitted for non-commercial purposes,
provided that the two lines below are reproduced with it:
Copyright 2000 by David S. Isenberg
firstname.lastname@example.org -- http://www.isen.com/ -- 1-888-isen-com
[to subscribe to the SMART Letter, please send a brief,
PERSONAL statement to email@example.com (put "SMART" in the
Subject field) saying who you are, what you do, maybe who
you work for, maybe how you see your work connecting to mine,
and why you are interested in joining the SMART List.]
[to unsubscribe to the SMART List, send a brief unsubscribe
message to firstname.lastname@example.org]
[for past SMART Letters, see
[Policy on reader contributions: Write to me. I won't quote you
without your explicitly stated permission. If you're writing to
me for inclusion in the SMART Letter, *please* say so. I'll
probably edit your writing for brevity and clarity. If you ask
for anonymity, you'll get it. ]
David S. Isenberg email@example.com
isen.com, inc. 888-isen-com
-- The brains behind the Stupid Network --