10/07/96 CAN AT&T KEEP LEARNING TO LOVE THE NET?

CAN AT&T KEEP LEARNING TO LOVE THE NET?

Is there a technology bullet somewhere out there aimed at the heart of AT&T? Is the world's most powerful telecommunications company about to be laid low by some cheaper, better gizmo--in the same way that IBM was wounded by the microprocessor?
The most obvious threat to AT&T--and other phone companies--is the Internet. The Net started innocuously as a handful of computers that routed packets of data over telephone circuits. Since those circuits were leased from the likes of AT&T, the phone companies thought of the Internet as harmless--and a nice piece of business. But now that the Internet is being refitted to carry faxes, phone calls, live radio programs, and even video teleconferences, they're alarmed. Suddenly, the Net is becoming the kind of multimedia Information Superhighway that phone companies like AT&T had expected to offer.
True, the Internet runs over circuits leased from phone companies. But that's the low-cost, commodity part of the business. The Internet service providers that buy this capacity at wholesale prices use their own equipment, known as routers, to direct calls. They never pay to go through the phone-company switches where toll calls pass--and where a carrier such as AT&T charges by the minute and by the mile. ``For us, circuit bandwidth is a raw material. It's almost like iron ore,'' sniffs Jeffrey A. Shapard, senior product manager for corporate services at PSINet Inc., a big Internet service provider based in Herndon, Va.
But give AT&T executives credit for beginning to grapple with the problem. AT&T decided a year ago to embrace the Internet. It scrapped its proprietary online services and launched WorldNet, its own Internet-access service. Reluctantly, AT&T is even ready to embrace Internet calling. Today, Internet calling is mainly a novelty. Fewer than 50,000 people make Internet phone calls regularly. And part of its cost advantage--an exemption from paying access charges to local phone companies--will be swept away in the next few years. Still, Probe Research Inc. estimates that as much as 16% of U.S. voice traffic could be moving over the Internet by 2000.
So, while AT&T engineers disdain the second-rate quality of Net calls, an AT&T Laboratories researcher says WorldNet will offer its customers the software for Internet telephony by the end of the year. ``We debated that one long and hard,'' says Tom I. Evslin, the vice-president who heads AT&T WorldNet Service. While he refuses to confirm the rollout plan, he does say that sitting tight until Internet telephony reaches the quality of ordinary telephony is a losing strategy.
WEB-TO-VOICE. AT&T's chief long-distance rivals, MCI Communications Corp. and Sprint Corp., have far more experience on the Internet. Knowing that, AT&T is trying to soup up its Internet offerings by linking them with the company's powerful phone network. Example: Instant Answer, a new service which allows a customer to click on a Web page of a merchant and be connected by a toll-free voice line to an operator who can answer questions about a product.
While negotiating the Internet remains a tricky proposition, other coming technologies could actually play into AT&T's hands (table). New high-speed links to the home, such as cable modems, could make it easier for AT&T to bypass local phone companies. And AT&T is well-positioned to provide convenient, find-you-anywhere calling services. Sure, a technology bullet may be headed AT&T's way. But the phone giant is loading up with some ammunition of its own.
By Peter Coy in New York