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Start-ups struggle to manage AT&T deals

As Ma Bell tries to re-create itself to fit a changing marketplace, its smaller partners are scrambling to keep pace with all of the strategy shifts.

A year and a half ago, Richard Fisher's RespondTV announced the biggest deal in the start-up's short life: AT&T had agreed to use its technology as part of a high-profile new interactive TV service.

For the small San Francisco company, the deal was nothing short of a coup, looking at the time like an unalloyed ticket to success. Like many start-ups aiming at a market dominated by giants, RespondTV needed to piggyback on one of the giants' networks to sell anything. In the cable business, AT&T was as big as they came.

Fast-forward to today. AT&T and other cable companies have backed away from their interactive TV plans. The shift has left RespondTV scrambling to build technology that fits the giants' new plans, and hoping it can survive long enough to help with AT&T and other partners' strategies.

A painful set of layoffs and company reorganizations later, Fisher still has warm words for AT&T, but he's not happy.

"AT&T's strategy shifts have been hard to keep up with," the RespondTV president said. "It's been frustrating."

Fisher's story is playing itself out with increasing frequency in Silicon Valley and other technology circles, as AT&T tries to re-create itself to fit a changing marketplace.

The company's draw is still apparent. AT&T may be a tottering behemoth, but with customer reach and financial power far beyond what any entrepreneur can muster, it remains a prized relationship for ambitious start-ups. However, as stories ranging from Excite@Home's public fall from grace to RespondTV's ongoing travails show, the relationships can have a dark side.

Partnering with Ma Bell, it seems, is the corporate version of playing with fire: Deals can produce considerable light and heat, but the unwary can get burned badly.

"You can gain a tremendous advantage by partnering with big, well-established companies, and people are going to continue to do that," Will Hearst, a venture capitalist at Kleiner Perkins Caufield & Byers, said after watching his own company Excite@Home, controlled by AT&T, tumble into bankruptcy court. "But those companies are going to find it very difficult to put their new start-up venture ahead of their own corporate responsibilities. So when you have a start-up controlled by big, established companies, it's going to be a little different than a real, standalone start-up."

Even large companies seem to have trouble dealing with AT&T. Software giant Microsoft invested $5 billion in AT&T in 1999 so it could extend the reach of its software to set-top boxes on AT&T's cable network. But AT&T also cut a deal with competitor Liberate Technologies, in a move widely viewed as a rebuke to Microsoft's set-top technology.

AT&T declined to comment on the issue of its relationships with start-ups.

A cautionary tale
Once the bluest of blue-chip symbols of corporate stability, Ma Bell is now being buffeted by bitter financial winds outside its control. The company is in the midst of a four-way breakup, is talking to its bitterest enemies about mergers, and remains hamstrung by a cash crunch and declining long-distance revenue.

Even during its descent it has remained an active investor in many smaller companies. Excite@Home is the best known of these, but the giant also has taken stakes in RespondTV, voice portal Tellme Networks and Internet telephony pioneer Net2Phone, among others.

Executives from these and other companies report different working relationships with the giant. The funding can be critical, they say, the direction from senior AT&T executives helpful, and the help getting products to market invaluable.

see Special report: Excite@Home marriage doomed at the altar? But all of this can come with a high cost. Executives from several smaller companies described their dealings with AT&T but declined to use their names for fear of damaging the sometimes fragile relationships.

Excite@Home, the cable modem and Web portal company controlled by AT&T before going into bankruptcy, has become the textbook case in the industry of how not to work with the giant, Silicon Valley executives say. Veterans of that company say a conflict between old-school cable executives and a brash young generation of Internet executives paralyzed the company, pulling it between conflicting goals.

Part of that battle was a toxic culture clash, exacerbated by the overnight wealth of the Excite@Home executives, insiders say. The cable giants, even those executives worth hundreds of millions of dollars, had worked a lifetime to get what Excite@Home founders had amassed in months.

"It was always a money game," said one former Excite@Home senior executive. "You would have very bitter meetings where that was the subtext."

But as Hearst noted, the giant cable companies also simply had corporate agendas that extended beyond the interests of their Internet partner. With AT&T controlling the board, executives found themselves hamstrung when they wanted to move quickly against America Online, push further into the content business, or do anything beyond what AT&T wanted. Eliminating this tension would have been no guarantee of Excite@Home's success, but insiders say it was certainly one contributing factor to the rapid-fire shift in directions that plagued that company's last year.

Other companies working with AT&T have taken that lesson to heart, sometimes as a result of direct advice from Excite@Home veterans. Letting AT&T have too much control over the direction is dangerous, they say.

"You never want to get in a position where AT&T can influence your agenda," one start-up executive said. "You need to influence AT&T."

The org chart is your bible
That's no easy task. But the key, start-up executives say, is knowledge--knowing exactly whom to talk to, who reports to whom, what political games are being played inside AT&T conference rooms, and what allies and enemies inside the corporate structure might want or need.

"Kremlinology, that's exactly what this is," one start-up executive said, referring to the Cold War practice of trying to figure out who controlled the Soviet leadership. "Every AT&T-related meeting we have, we go through their org chart."

Some tell of getting involved in power struggles inside AT&T, even going so far as to lobby for dismissal or reassignment of people who stood in the way of plans. While clearly a risky path for an outsider to take, it worked if a start-up's patrons inside AT&T wielded sufficient power, executives said.

Other political gambits were less aggressive. RespondTV's Fisher tells the story of how his company was able to win the deal with AT&T last year. The company had already invested in the technology, and AT&T Broadband Vice President Rich Fickle was serving as an official observer at their board meetings. Fickle was able to describe whom to talk to and what message to carry to help win the contract, Fisher said.

The personnel turnover during the past year, while AT&T has laid off staff and restructured in advance of its breakup, has often made this relationship-tending a difficult process. Start-up executives say Ma Bell's senior management appear to have remained focused, but that lower-ranking staffers have been more difficult to work with.

"Multiple levels on down, you can get into a loop, chasing one red herring after another" through different departments and people with responsibility for different projects, one executive said.

The turnover has led to situations where "a guy will say, 'Now, what do you do?' when we've had a deal with them for a year," another executive said.

None of this means that any of the companies working with AT&T is willing to give up the relationship, however. In more cases than not, those that have the AT&T relationship have been able to survive where peers have fallen in shaky economic times.

Take Net2Phone, in which AT&T led a $1.4 billion investment round last year. That company hasn't yet seen deep adoption of its Internet telephony technology inside AT&T's network, but the relationship has helped keep Net2Phone afloat while other Net phone companies have foundered.

At Tellme, in which AT&T invested $60 million last year, the company is relying on AT&T as a conduit for much of its new business and recently took over one of Ma Bell's directory assistance numbers, providing hugely valuable revenue in a time of telecommunications drought.

"AT&T is a gigantic company," said IDC telecommunications analyst Mark Winther, adding that small companies need a platform for their creations. "Innovation alone is not an effective business."

News.com's Ben Heskett contributed to this report.