AT&T the “experience” company?

In a recent article, Analyst Jon Arnold, talks about the long raging debate over vertical integration or lack thereof. Jon suggests that service providers who are vertically integrated, those that can provide the network and the services, are in a better position:

The problem with this hypothesis is that it isn’t support by history. For some reason, analysts and industry “experts” (and often investors) always seem to be sucked into this thinking. Intuitively, vertical integration looks like an advantage. However, historically this has not proven to be the case across many industries. This history has repeated over and over. The success stories for vertical integration are paled by those for segmentation, or horizontal focus and excellence. Despite this reality, analysts and experts still gravitate back to argue in favor of vertical integration with a predictable regularity.

For example, consider the computer industry, where at one time IBM was a model of vertical integration. From the chips, to the operating systems, to the application software and training – they did it all. But look at the industry now. It is highly segmented, or in other words, horizontal. Different players dominate each segment (or layer). IBM almost died as a result of this change and only survives today because they abandoned vertical integration.

Ironically, the telecommunications industry itself is another example – the same industry where today’s experts proclaim vertical integration to be the eventual winner. At it’s zenith, (the old) AT&T was a wonder in vertical integration. They produced everything from the wires in the mud to the phones in homes and business, and everything in between, including undersea cable, satellites, switching equipment, fleets of trucks, and so on. Like the computer industry, telecommunications today is a highly segmented industry, with focused companies dominating distinct layers: fiber, switches, routers, telephone equipment, service providers etc.

Analysts were pounding the vertical integration drums again when the Internet came along. Vertically integrated AT&T was presumed to have a big advantage in owning POPs (Points of Presence) and customers, enabling them to “leverage all these assets” (sound familiar?). Meanwhile, other companies went horizontal, such as UUNET, who focused on the wholesale segment, renting their POPs to Internet Service Providers (ISPs) such as MSN and EarthLink, who in turn, focused on the retail segment.

In all these cases, and many more, the industries evolved to be very horizontal and not vertically integrated.

Consider Jon’s comment above about AT&T providing an “integrated experience, where voice, video and data can work seamlessly across each other.” Boy, does that sound familiar. Except when has it ever happened? Consider their existing DSL service. What part of that “experience” is AT&T branded? The bill. We use Google for search. Yahoo! for email. Youtube for video. Skype for voice. Linksys for routers/hubs. Dell for computers. Microsoft or Firefox for browsers. Where is the AT&T “seamless experience”? If they haven’t been able to “leverage all these assets” to provide even the slightest bit of integrated “experience” with broadband (after 10 years), what makes anybody think they will be able to do it for voice/video/broadband going forward? If you’re thinking about things like “seamless experience” is SBC/Bellsouth/AT&T what jumps to mind?

The new SBC AT&T clearly thinks they can make vertical integration work again – and the analysts are getting in line to agree with them. History tells us they may have a tough time doing so.