AT&T's big gamble

Pushed by the loss of several key federal contracts, the last division of AT&T to operate in a protected competitive environment has entered the rough-and-tumble world of post-reform telecommunications. It's a new world where agencies are free to choose providers, where margins are slim, and losers can surrender millions.

Top-level managers at AT&T Government Markets asserted last week that - contrary to speculation from competitors and analysts - they are committed to the federal market and will fight hard to maintain their customer base. Mary Jane McKeever, president of AT&T Government Markets, and other officials at the company said that the loss of the government's $5 billion FTS 2001 long-distance contract, while disappointing, will not alter the company's focus on the federal market.

"We intend to move to a more segmented approach," McKeever said. "The market is very large, and we intend to compete very aggressively." To that end, the company already has begun cutting its pricing on its existing FTS 2000 bridge contract at least to match the published prices of MCI WorldCom and Sprint on the first year of FTS 2001.

In addition, the company has bid on three of the General Services Administration's Metropolitan Area Acquisition contracts for local telecommunications service in the New York City, Chicago and San Francisco areas. Because FTS 2001 is not a "mandatory use" program like its predecessor, its provisions allow any company that wins an MAA to offer long-distance service through GSA beginning early next year, McKeever said.

"This is a nonmandatory environment," she said. "We are going to stay in it."

The company plans to concentrate on building its information-assurance business and its professional services, particularly security services. "We have many satisfied customers that we don't discuss openly due to the national security nature of their business,'' said Larry Spilman, vice president for national information systems at AT&T Government Markets.

McKeever acknowledged that the loss of FTS 2001 was a disappointment for the company. AT&T handles nearly three-

quarters of the traffic on the FTS 2000 network that provides long-distance service to agencies throughout government. GSA awarded contracts for the FTS 2001 program, which added telecommunications services such as Internet-based services and videoconferencing, to Sprint and MCI in December and January.

AT&T's loss - and its subsequent decision not to protest the awards - spurred speculation that the company would be scaling back its efforts in the federal arena. Other recent events that added fuel to the speculation included:

* MCI last month won a contract worth more than $1 billion for the Army and Air Force Exchange Service pay phone program, which is business previously held by AT&T.

* AT&T opted not to bid on the $4 billion Defense Information Systems Network Transmission Services-Pacific (DTS-P).

* The Defense Information Systems Agency (DISA) announced this month it selected MCI to provide voice service throughout the Defense Department via FTS 2001. AT&T stands to lose the estimated $400 million DOD voice traffic it now runs on FTS 2000.

Frank Dzubeck, president of Communications Network Architects, Washington, D.C., said these events reflect that AT&T's corporate leaders do not view the federal market as a priority because of the low margins associated with it.

"They've had a tough time with the feds, and sometimes you have to reassess the business," Dzubeck said. "The federal government is the largest customer, so they are dealing with the lowest rate structures. AT&T doesn't need that market share anymore. They are focusing on the more profitable markets."

Brian Eisenbarth, a portfolio manager for the securities firm Collins & Co., Larkspur, Calif., said AT&T does not appear to be giving up on the federal sector. But, he added, AT&T is focusing on commercial clients, which offer faster growth than the federal market.

The federal government "is not where the focus is on [AT&T's] strategy since they've kind of switched gears in the last 12 months or so," said Eisenbarth, referring to recent mergers with cable giant Tele-Communications Inc. and Teleport Communications Group Inc., a supplier of local phone service and data communications in more than 60 major cities. "All of the sudden, attacking the business market became a key part of what they want to do," Eisenbarth said.

Attorney Jim McAleese, principal at contracting firm McAleese & Associates, McLean, Va., said the fact that AT&T did not protest its exclusion from FTS 2001 led him to believe that AT&T is not behind its government division.

"Given the billions of dollars at stake, any incumbent in its right mind would protest," McAleese said. "The impression [that not protesting] creates is that there are much bigger stakes afoot than just the federal market from an AT&T corporate standpoint."

AT&T officials disagree. Michael Keith, president of AT&T Business Services, said, "The federal government is one of our most valued customers. Our team in Washington has every intention of continuing to serve these customers and broadening the array of services that we offer them. I'm confident that our government markets operation will continue to be a vital part of AT&T."

Many trace AT&T's troubles in the federal arena back to 1995 and the second FTS 2000 competition in which AT&T and Sprint bid for a portion of each other's FTS 2000 business. AT&T's bid was extremely low and increased the company's share of FTS 2000 traffic from 60 percent to more than 70 percent.

But the increase came at a cost to AT&T, which found its resources taxed when it came to moving the Treasury Department from Sprint's network. The transition, which was supposed to have taken six months, took more than a year. Eventually, Treasury decided to leave many of its data services on Sprint's network, spurring AT&T to file a $122 million claim for lost business against GSA last year. The claim has not yet been resolved, and McKeever refused to comment on the claim.

But about the changeover she said, "AT&T did not delay the transition. We had every incentive to transition the service to us as quickly as possible. Those are the facts. We expect that when the facts come out the perception [about AT&T's performance] will change."

At the time, federal telecommunications managers began to see AT&T's customer service deteriorate. "AT&T was put in a difficult position of having to offer services at very low prices that they could not afford," said a federal manager who uses AT&T services on FTS 2000. "So they pulled off resources from their customer service teams. We had problems with lost service orders, slipped installation dates and distress from our managers in getting support in provisioning new services."

The official said it is unlikely his department will stay with AT&T now that FTS 2001 vendors are offering attractive deals.

"AT&T is doing everything we can to make sure we can offer a broad array of services so that agencies will have choices in the competitive marketplace," McKeever said.

Many of the top- and midlevel managers in the Government Markets division subsequently left the organization, taking advantage of voluntary retirement incentives offered by the parent corporation. Although McKeever said last week that she has filled all of the vacated positions, the exodus of employees only increased speculation that things were not going well at the company.

Although AT&T may face a battle to retain its federal customers in the face of the FTS 2001 onslaught from Sprint and MCI, officials at the company are preparing for the marketing fight.

"We have announced a series of price discounts which we believe meets or exceeds the first-year pricing reductions under FTS 2001," said John Doherty, AT&T's vice president for FTS 2000 and civilian markets. "We have waived service initiation and feature initiation charges.... AT&T is doing everything in its power to offer a broad array of services at competitive prices, so agencies can have a choice."

Dzubeck suggested AT&T could remain a successful player in the federal market by simply selling low-price services to agencies directly from tariffs. But McKeever said it will not be her strategy to circumvent the middleman roles of GSA and DISA.

It does appear that AT&T will become more selective about the business it chooses to pursue, as evidenced by the decision not to bid on DTS-P. But sources close to the company said it will bid on a number of other upcoming DOD contracts. AT&T also has been mentioned as a likely bidder on the National Capital Region Metropolitan Area Network, in addition to the GSA MAA programs.

"There is no lack of opportunities," Spilman said. "The issue is which ones to go after."

-- L. Scott Tillett contributed to this article.