By SCOTT MORITZ
Staff Writer

For a century, AT&T Corp. has dedicated the most brilliant minds in its industry to developing what is widely recognized as the gold standard in telephone networks. Then came the Internet -- a wildly unreliable, relatively anarchic, cheap, and ubiquitous network of boundless communication potential.

 AT&T's dominance -- and possibly its long-term survival -- is in danger as the new Internet-based communications network takes shape.

 The venerable phone company -- which some say is intricately bound by size, convention, and tunnel vision to the communications equivalent of a souped-up Model T -- is ambivalent about how to greet the future, as more nimble companies race ahead with networks that will deliver words, pictures, sounds, and perhaps other forms of communications yet to be discovered.

 AT&T is wedded to the technology of the voice network, which requires that a whole line be tied up for one conversation, whereas the technology of the new network can handle all types of information in fast-moving digital packets that do not need to be specially formatted to travel on a certain line.

 "The concept of telecommunications provider as it exists today will change dramatically," said Stephen Kane, a product planner with Northern Telecom Ltd. in Rochester, N.Y. "You will have this big broad-band pipe in the sky that everybody plugs into, maybe through their power line, maybe through their wireless communications device, maybe through their cable TV. However they get there, this big tube in the sky will deliver any message from anybody anywhere."

 Voice communication -- the mainstay of AT&T's one-line-connecting-two-callers network -- now figures to be an almost free and minor feature of the Internet-based network. However, the company continues to milk convention -- at the rate of $50 billion per year in revenues.

 Qwest Communications International, Level 3, Worldcom are a few on the fast-growing list of companies building a new generation of global pipelines to speed digital packets on Internet-based networks. Individually, these companies represent a distant threat to AT&T, but taken collectively, analysts say, these upstarts will rapidly siphon customers away from AT&T.

 Some compare AT&T's situation today to that of IBM a decade ago, when its industry dominance was seriously threatened by the rise of the PC and its challenge to the mainframe computer business. IBM rebounded, but only after falling severely behind changes in the marketplace, says Clayton Christensen, author of "The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail" (Harvard University Press, 1997).

 Asking a 113-year-old monolith such as AT&T to adapt to new technology while operating its existing phone network would be impossible, said Christensen, a professor at the Harvard Business School.

 "It is like when people were trying to learn how to fly by strapping wings on their arms and flapping hard," Christensen said. "They are fighting against some fundamental laws of organizational nature."

 For more than a decade, some within AT&T had a very good view of the future, yet were unable to persuade top decision makers that the company needed to alter its course.

 By the mid-1980s, AT&T researchers, plotting the increases in transmission capacity, were telling the company that new communication technology -- later to be known as the Internet -- would be available to pipe vast amounts of information in and out of the home as early as 1992.

 Some AT&T executives heeded that call. Joseph Nacchio, the company's former chief of long distance, left two years ago and now runs Qwest, a fiber-optic, Internet-based communications network with headquarters in Denver.

 And Tom Evslin, who headed AT&T's WorldNet Service, the company's Internet service, left last year to start ITXC Corp., based in North Brunswick. ITXC this month started selling Internet call routing.

 Analysts and industry insiders say that AT&T's slowness to respond to threats and opportunities in new technology boils down to money.

 "You have to remember you have two hands, one is holding $50 billion dollars and the other hand is holding $10 million worth of distractions," said Greg Blonder, referring to the traditional phone service, on the one hand, and emerging forms of communication-delivery on the other. Blonder is a former director of research for AT&T who left the company this year to help run AT&T Ventures LLP, a venture capital firm in Basking Ridge.

"Fifty-billion-dollar companies look at $10 million opportunities and usually chose not to pursue them," Blonder said. "Because at some point we can usually come in later and do well. So why take the risk? That's the typical thinking."

 Blonder said his five-year-old venture firm invests in 10 to 20 companies a year, in part to make money for AT&T, and to keep abreast of new ideas in communications. "This is a way to deal with the tens-of-millions part of the industry."

 But having knowledge of new technology is not the same as actually using that technology. Blonder said AT&T has the potential to do many of the things the new networks are doing if it has the commitment.

 "We have the option to be quite powerful," Blonder said, "but you know, the sleeping bear has to wake up."

 The sleeping bear is stirring somewhat.

 This spring, AT&T will offer Internet calling in three major cities yet to be named.

And last week, after years of leasing access to Internet systems owned by other companies, CEO C. Michael Armstrong dedicated $300 million toward expansion of AT&T's own six-month-old Internet system.

 AT&T's chief of future network development, Daniel Sheinbein, said AT&T is not late to the packet-based information game and that he looks at the potential challenge of an Internet-based network "through a different set of glasses."

 Sheinbein, a 30-year AT&T veteran, said the company's concern that Internet-based calls would be of poor quality and that the equipment could be unreliable prevented AT&T from offering packet-based network communications to its general customers.

 Ironically, AT&T was the world leader in phone-equipment development until it spun off Lucent Technologies, formerly Bell Labs, two years ago.

 As vice president of network technology and development, Sheinbein's principle responsibility is to lead AT&T's network into the future and at the same time maintain the company's reputation for dependability. Retooling the network poses a risk to that reputation.

 "My boss tells me, 'Your top three priorities are reliability, reliability, reliability. If you are not sure of the first one, pick either of the other two.' "

 Industry experts wonder if AT&T can simultaneously develop a new network and maintain its gold standard in customer service, and do it fast enough to fend off budding, less encumbered rivals.

 "If the management at AT&T just flaps their wings, they are likely to fail," Christensen said. "If, on the other hand, they set up a different company, structured in a way that it could make money in the new paradigm . . . then they have a chance."

Copyright © 1998 Bergen Record Corp.