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AT&T chief refuses to 'miss' VoIP

David Dorman, AT&T's chief executive, is determined to turn voice over Internet Protocol into an HBO-like service that it can sell.

David Dorman, AT&T's chief executive, is determined not to let history repeat itself.

Ma Bell--under prior management in the 1990s--let the Internet revolution slip from its grasp, as companies like America Online, EarthLink and MSN grabbed the lead in providing Internet access.

Now amid cutthroat pricing, rival MCI's emergence from bankruptcy, and a regulatory climate that led AT&T to step away from consumer telephone service, the company is relying on voice over Internet Protocol, or VoIP, as one of the tools to accelerate growth in its business segment.

That segment, which comprises about 75 percent of AT&T's approximately $30 billion in annual revenue, may not receive a huge windfall in revenue from Net telephony. But VoIP, which allows businesses and consumers to make inexpensive phone calls via the Internet, plays a significant role in AT&T's long-term strategy of being the next HBO-like service to cable companies and the Baby Bells.

Dorman, who recently met with reporters and editors from CNET News.com, talked about his company's views and strategy on VoIP and AT&T's CallVantage program.

Q: How would you describe the competitive landscape for VoIP?
A: It's a battle between the cable guys and the Bells. People talk about it being a duopoly. It's not a duopoly. It's asymmetrical. The cable guys are focused on video and the Bell guys are focused on VoIP, and they're converging at the broadband level.

In our view--and we can argue about the timing, three, five, eight years--the broadband pipe will be the high-value piece. That's because applications will run on that broadband pipe and VoIP--as much as the Bell guys don't like to hear this, VoIP is an application.

It's a battle between the cable guys
and the Bells.
The cable guys look at VoIP and are really in a dilemma now. Is VoIP a feature of a broadband network like e-mail? And we all know where e-mail went; it got free really quickly. Or is it a business itself that they can enter into incrementally to add value to their broadband business? My bet is VoIP is becoming a feature that's going to be chargeable, but it's not going to be $40 per subscriber. It's going to be $15 or $20 a subscriber with a lot of features.

How large is the VoIP market, and what are your expectations for its growth?
Today, there are about 26 million to 30 million broadband households and about 1 million of them are VoIP users. But that's growing rapidly. This quarter, for the first time, the net subscriber adds for DSL exceeded the net adds for cable. I think it's quite likely that the penetration of VoIP within the broadband segment will be 60 or 70 percent over time because it's such an easy thing to do. If you can pay $19.95 for local and long-distance calls, 10-way personal conferencing, follow-and-locate-me services, and you make your life simpler, you probably would do it if it works reasonably well.

Now that we can see that the technology has advanced itself, VoIP is coming into its own. It's a viable substitute for wired-line telephony, especially in a world where wireless is available as a backup. If your cable modem croaks, or the power goes out, you have a cell phone. This means you're not lifeline-dependent upon VoIP.

Where does AT&T see itself in the VoIP market?
We want to create a growth business around VoIP as an a la carte supplier using the AT&T brand as the hook. We think that brand compares favorably to Vonage and all the different guys out there. We also think we understand the downstream networking requirements better than they do. Vonage has a platform around the management of VoIP. But they don't manage the network. They don't manage the assets. We think we understand the end-to-end quite well.

I'm trying to create an HBO/ESPN model for the cable guys, only friendlier.
I'm trying to create a model, a non-threatening, my-enemy-is-my-friend model. It's one that says you can go out and build a voice network, invest in first-generation software technology, buy a bunch of Cisco routers, spend $200 million to $300 million and learn how to tie this together. Or you can rent it from us. We'd sell it like HBO. I'm trying to create an HBO/ESPN model for the cable guys, only friendlier. In other words, you can co-brand it, you can sell it as an AT&T-branded voice channel, you can own the customer, and I provide the deployment. I can make money as a wholesaler, a co-brander, a sort of Intel Inside. We're becoming the world's high-scale, high-quality, high-feature applications service provider for VoIP.

The notion that the cable guys are going to replicate that by buying a whole bunch of Cisco stuff and soft switches, and then go "Yeeha, we're going to be in the VoIP business" doesn't make good sense. Why bother?

If I'm right about how this fight is going to take off with the cable guys and the Bells, investing more capital to do VoIP is a poor choice for the cable guys, versus investing more and better ways to merchandise their content and sell the heck out of broadband. The battle between the telcos and cable is all about who gets the broadband pipe.

Earlier this month, AT&T announced joint-marketing agreements with a number of cable companies for your CallVantage VoIP offering. Can you elaborate?
What we were finding was 40 percent of the people who called us about CallVantage said they saw our commercial and thought it was cool. They said they wanted to get it, but then we found they didn't have broadband.


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They'd say, "What is that?" And we'd say, "It's a high-speed cable modem or DSL, are you interested?" And they'd say, "Yes."

I needed a way to fulfill that. The cable guys like to sell broadband, so it seemed like a pretty logical thing to (enter a joint-marketing agreement). We also asked the Bells. We said, "We get these calls, would you like us to sell them DSL?" The Bells said, "We don't want to talk to you, we're not interested, leave us alone," while the cable guys said, "Heck yeah, we'd love to sell more cable modems."

With this joint-marketing agreement and the money you're putting into marketing your CallVantage service, do you feel like you're carrying the cable guys' water?
There is no question they are getting some benefit, but you need to think about how big this market will be. My sense is this will be a really big market and you only get one chance to seize leadership. I think AT&T made a terrible mistake with WorldNet, watching AOL, MSN, EarthLink and Mindspring run away with the dial-up access business when it had a national network and could have offered it for $15. It sat there and said, "We really don't understand why people would ever do this." I was at Pacific Bell back in those days, knocking myself out trying to get into the dial-up business because I was convinced it would be a huge thing. AT&T just ignored it.

I'm not going to let that happen with VoIP. VoIP is a transformational application. Having run a Bell company, been through the building of Sprint, working at PointCast and getting a sense of all this, I sit here looking at people paying a Bell company $112 for two lines, not including long distance, and I can sell them VoIP for (a promotional monthly fee of) $19.95, plus the cost of broadband with better features and more capabilities. I'm not going to miss that.