Carrier Channel: AT&T Wholesale Turns Up the Heat

Posted: 9/2003

Competitors: AT&T Wholesale Turns Up the Heat

By Josh Long

AT&T Corp., with its consumer revenue
shrinking year after year in the face of wireless substitution and competition
from the Bell companies among other factors, is replacing sales lost from direct
customers with the wholesale business of some of the very rivals assaulting its
consumer services unit.

This is nothing new about a company privately befriending
public enemies, but its perhaps more common than ever as the No. 1
long-distance company grapples to salvage sales. Revenue in AT&Ts
consumer unit has declined by $7.1 billion over the past two years.

New Jersey-based AT&T has changed its wholesale group from
a relatively low-key organization to an aggressive unit that recently has won
some huge accounts, including Verizon Communications Inc., Verizon Wireless Inc.
and T-Mobile USA, say numerous sources outside the company. PHONE+ could not
directly confirm those statements. A Verizon Wireless spokesman says the company
does not comment on its relationships with suppliers, and a TMobile spokesman
did not return numerous phone calls seeking comment. A spokesman for Verizon did
not respond to repeated requests for comment. AT&T also declined to be
interviewed for this article and refused comment when asked about its reported
relationships with Verizon, Verizon Wireless and T-Mobile. An AT&T
spokeswoman says the company does not disclose its wholesale customers.

However, AT&T is on record about wholesale becoming a
larger part of its business. During a call regarding first-quarter earnings,
AT&T President Betsy Bernard said long-distance wholesale traffic (voice and
data), as a percentage of total volume is 45 percent, up from 33 percent last
year in the business services unit. For the first time in eight quarters,
Bernard said, AT&T grew longdistance voice revenue, driven by a spike in
wholesale traffic. Wholesale is a good business and a growing business for
us, Bernard said.

In the second quarter, long-distance voice revenue declined
10.9 percent quarter over quarter within the business services unit, but volume
grew 12 percent as a result of the increase in wholesale business. Wholesale
represented 47 percent of total long-distance volume, says Dave Peterson, a
director with Fitch Ratings.

By ramping up its network with the minutes of other carriers,
AT&T can generate sales with little additional capital expenditures, some
sources say. AT&T can cover fixed costs by running wholesale volumes on
its network during the evening, when traffic coming from retail customers in the
business services unit is slow.

Research and consulting firm Atlantic-ACM estimates AT&T
will grow its wholesale voice business by 16 percent this year, compared to
2002, ending this year with nearly $2.4 billion in revenue. The Boston-based
firm predicts AT&T will generate $4.2 billion in wholesale domestic and
international outbound voice traffic by 2008, averaging 12.6 percent growth over
those years. That is way higher than the industry average, says Taher
Bouzayen, vice president of Atlantic-ACM.

I would say they [AT&T wholesale] changed pretty
dramatically in the past three to four months, said Pete Bell, vice president
and general manager of sales with WilTel Communications Group Inc., during an
interview in July. They have become much more aggressive. Their rates have
dropped, on the international side anyway, close to 30 percent. Many people outside of AT&T say the phone giant didnt
put such emphasis on its wholesale group until recently. In the words of one
wholesale executive with a competitive provider, the unit used to be buried
under the network organization. Betsy has created literally a wholesale
business unit in the way we have here [at our company] and has put focus on it. They are treating themselves like a business unit which means
they have revenue commitments, sales quotas, says the executive. We
absolutely are seeing AT&T in the market. We never used to see them in the
wholesale side. They are aggressive and they seem to be showing a renewed
interest in the marketplace.

AT&T also is having an impact on wholesale prices, says at
least one source. The source claims the phone giant won a huge chunk of business
from Verizon early this year, significantly undercutting rivals on price. I
have talked to many other carriers and they are all discussing the way we
believe AT&T has taken down the business, meaning they didnt have to go
there [to that level of pricing] to get the business, the executive says.

Seth Libby, an analyst covering the wholesale market with The
Yankee Group, says he also was told AT&T picked up a big chunk of business
from Verizon. However, he also says his sources were not willing to go on the
record.

What is the extent of AT&Ts relationship with Verizon,
the No. 1 local phone company? It depends who you ask. A senior executive at yet
another company competing with AT&T says the report about Verizon is not
true at all. AT&T, according to the executive who claims to have spoken
to a Verizon insider, is not even one of Verizons top three carriers.

Despite disagreement over accounts won or lost, there is
consensus on one point: Wholesalers are encountering AT&T like never before.

Meanwhile, AT&Ts archrival MCI is getting aggressive in
the wholesale market, according to some carrier executives competing with the
company. One source contends MCI is much more aggressive on pricing
than AT&T.

WorldCom Inc., which has unofficially changed its corporate
name to MCI, declined to be interviewed for this article. After the giant
revealed its fraud in June 2002 and filed the largest bankruptcy in U.S.
history, its rivals swooped in to seize its accounts.

During an interview last year following WorldComs
accounting-related disclosure, Art MacDowell, Sprints vice president of
wholesale service, told PHONE+ Sprint had started to get a lot more interest
from carriers we have not been that close to.

That was then; this is now. Last years uncertainty over the
future of WorldCom has subsided. WorldCom has reached a $750 million settlement
agreement with the Securities and Exchange Commission over the fraud and aims to
emerge from bankruptcy in the fall. Still, the road to recovery isnt entirely
smooth. A new speed bump appeared this summer amid a federal probe over whether
the carrier improperly rerouted phone calls to avoid paying access charges.