More NewsThe AT&T Empire Is Doomed

The AT&T Empire Is Doomed

AT&T is breaking up again. It's ironic that its corporate symbol looks like an idealized Death Star from "Star Wars." The thousands of ISPs and optical networking outfits are like the rebels piloting those little X-Wing fighters. What AT&T Chairman Michael Armstrong doesn't know is that these Luke Skywalkers have already fired their charges at the core of his business plan. The AT&T Empire is doomed, and even Armstrong's decision to blow it up himself won't save it.

The latest news at AT&T, the incredible shrinking company, is that there’s to be another breakup. The folks who gave you the regional Bell operating companies (RBOCs), Lucent Technologies, and NCR will now bring you new stocks covering the company’s cable, long distance, and wireless operations.

Although previous breakups made shareholders filthy rich (the first one, in 1984, was especially fine), investors haven’t warmed to this one. These days, AT&T’s stock chart looks suspiciously like that of an Internet stock, which is no longer a compliment.

What do investors know that AT&T Chairman and CEO Michael Armstrong doesn’t? It could be that they understand Moore’s Law.

Named for former Intel Corp. Chairman Gordon Moore, Moore’s Law holds that the cost of computing power drops by half every 18 months or so. In the 1980’s and 1990’s, Moore’s Law mainly affected computer makers. Microsoft and Intel kept PC prices high through most of the period by making each release of Microsoft software more complex and feature laden, causing new purchases of Intel-based hardware to be necessary.

The Internet has lessened the impact of Moore’s Law by making the PC less important. It has also resulted in a corollary to Moore’s Law called Nielsen’s Law, named after usability guru Jakob Nielsen. This one holds that your connection speed roughly doubles every year.

It’s the combination of Moore’s and Nielsen’s Laws that’s killing AT&T.

Over the last few years, the equipment bought by telephone companies to build, expand, or repair their networks has begun responding to Moore’s Law. Giant leaps have also been made in delivering more data for less money on metal and fiber cables, as Nielsen’s Law holds. Now a new generation of wireless equipment will let Internet service providers (ISPs) leapfrog those cable and telephone networks, and the cost of this gear, too, will respond to Moore’s Law.

Michael Armstrong built his company to be a gatekeeper. AT&T owns cable that, he thought, gave it a necessary role in supplying broadband to American homes. He is still seeking to exploit this role for maximum advantage.

But we don’t need that cable anymore. Long-distance prices are falling as more traffic is routed onto the Internet. Soon a lot of wireless traffic will move from expensive licensed frequencies owned by companies like AT&T Wireless onto unlicensed frequencies. The companies that are building new networks with new equipment can dramatically undercut AT&T on cost because most of its stuff was bought based on 20- or 30-year depreciation schedules.

How can a depreciation schedule compete with Moore’s Law? It can’t, and the situation grows worse by the day.

It’s so ironic that AT&T’s corporate symbol looks like an idealized version of the Death Star from “Star Wars.”

The thousands of ISPs and optical networking outfits are like the rebels piloting those little X-Wing fighters. What Armstrong doesn’t know is that these Luke Skywalkers have already fired their charges at the core of his business plan.

The AT&T Empire is doomed, and even Armstrong’s decision to blow it up himself won’t save it.

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