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February 01, 2005

AT&T: Lesson From the Crypt #1: Don’t Manage for Quarterly Results

The slow sinking of the once great ship that was AT&T has been sad to watch.  Like the stories of shipwrecks in the sailing magazines I like to read, there is much to learn from this catastrophe.

Here’s one example I saw from the inside of how managing for the quarter hurt AT&T:

In late 1995 I had the privilege of leading a very talented team at AT&T which launched AT&T WorldNet Service, the company’s first ISP.  We realized that there were four fears that needed to be overcome in getting masses of people (AT&T customers) to cross the chasm and become Internet users:

  1. fear of leaving something running and getting a huge bill;
  2. fear of children accessing pornography;
  3. fear of having a credit card stolen and misused;
  4. fear of dealing with (then) unknown companies like AOL and PSI.

We addressed these with:

  1. flat-rate monthly pricing which we didn’t invent but did popularize;
  2. site-blocking filters which we also didn’t invent but could promote credibly given the brand;
  3. an agreement by our then subsidiary AT&T Universal Card not to charge the $50 deductible which they hardly ever charged anyway for misuse of a card used to purchase on WorldNet;
  4. the still great AT&T brand and well-trained (outsourced) customer service.

It worked.  For a while we had more new signups per week in absolute numbers than AOL, the 800 pound gorilla of the day.  In fact, AOL was forced to follow us in offering monthly pricing and then had to spend its ad budget apologizing from the resulting busy signals when their usage soared above what they designed for.

We had a phenomenally low cost of customer acquisition thanks to the strength of the brand.  But, still, as in almost any subscription business, each new customer was EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)-negative in the first year.  Our churn rate was very low so we could see where future profitability would come from; but, the faster we grew, the more per quarter we lost.

AT&T had promised “The Street” that it would grow EBITDA 10% annually.  They accomplished this goal for several years simply by cutting fat.  But the company began to run out of easily-cut fat.  When the goal was in danger, every EBITDA hole had to be plugged.  That included WorldNet.  We cut our advertising and growth rate to help the company make analysts’ expectations for the quarter.  Steve Case and AOL were nothing if not resilient and, although WorldNet continued to grow, it didn’t remain the challenge to the industry leader it might have been.

I don’t mean to say that not becoming a great ISP doomed AT&T.  This is just an example I’m close to.  You have to multiply this example by many other opportunities to build on the company’s very real strengths which were sacrificed to quarterly goals to understand why, eventually, the ship ran out of steam.

Nor do I mean to say it is easy to resist managing to The Street’s expectations.  AT&T stock would have fallen sooner had the company failed to meet these expectations sooner than it eventually did.  I was a public company CEO and had the advantage of this experience and I can’t honestly claim that I wasn’t influenced by what The Street expected.

But optimizing for the quarter is about as smart as increasing speed in a sea full of icebergs to make up for lost time.

Lesson from the Crypt #2 is you can’t innovate flawlessly.

Lesson from the Crypt #3 is vertical integration doesn’t work anymore.

Lesson from the Crypt #4 is don’t sent your losers to heaven.

Lesson from the Crypt #5 is navel gazing is a bad culture.

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