How Randall Stephenson Took AT&T into the Future of Digital

What makes AT&T Great
It’s no accident that the digital economy was the single bright spot during the Great Recession. Despite the downturn, the technology industry responded on an unprecedented scale. AT&T alone spent $140 billion between 2009 and 2014 to build advanced wireline and mobile networks—more in the U.S. than any public company. These networks became innovation platforms for Silicon Valley and numerous entrepreneurs. As a result, whole industries were transformed and new ones created.

“They were the first to focus on smartphones, the first to offer the iPhone and, in fact, the only provider to do so for years,” says Jack Kagan, Equities.com analyst, who notes that AT&T and AT&T Mobility have been leaders in carrier transformation and connected networks. “They are at the forefront of not only expanding their company, but of transforming and expanding the entire communications industry.”

AT&T pioneered the all-in-one entertainment and communications package with U-Verse; and the company’s acquisition of DirecTV takes it one step closer to becoming the digital-entertainment hub for the home.

“The $147B Dallas-based company has invested aggressively in mobile, fast and secure connectivity to 355M people in the U.S. and Mexico—a seamless cross-border network that’s unique in the marketplace.”

Under Stephenson, the emphasis has been on adapting to the marketplace, where the keywords are ‘instantaneous connectivity’, ‘virtualization’ and ‘cloud computing’. This push extends to employees, who are encouraged to take skills-improvement classes on their own time or risk on-the-job obsolescence. As early as 2012, Stephenson realized that to be a premier integrated-communications company, its workforce of 280,000 had to improve its skills. Vision 2020, Stephenson’s signature program, combines classroom-based and online classes in areas like data science and digital networking to elevate people’s technology skills.

The man behind this transformation is a tall, soft-spoken former accountant born in Moore, Oklahoma whose father ran a cattle-feed business. Thirty-four years ago, Randall, then 22, and his brother Kevin, then 23, took jobs at a local Southwestern Bell office after figuring that the cattle-feed business wasn’t for them. Kevin worked as a lineman fixing the traditional copper lines that still connect landline telephones in most homes. Randall worked his way up the ranks, eventually becoming CFO under Ed Whitacre, the larger-than-life CEO who ran Southwestern Bell, which became SBC Communications and took over the old AT&T in an acquisition in 2005. Two years later, Stephenson succeeded Whitacre at the helm of the new company that took the AT&T name.

Stephenson’s father and Ed Whitacre were major influences on his life, particularly when it came to managing risk. “My dad told me once that you will never have a lot of success until you’ve had a lot of failure because until you’ve had a big failure you’ll be afraid of it,” he says. Whitacre, who would later serve 10 months as chairman and CEO of GM after it emerged from bankruptcy, told Stephenson that “when you have a very large company, you have to do significant things to move the needle and significant things in terms of the kind of people you hire.” “He encouraged me to take risks on people,” the AT&T chief recounts.

It’s safe to say that the AT&T of today barely resembles the Ma Bell of yesterday. The $147 billion Dallas-based company has invested aggressively in mobile, fast and secure connectivity to 355 million people in the U.S. and Mexico—a seamless cross-border network that’s unique in the marketplace. This includes high-speed fiber connections to more than 1 billion U.S. locations, as well as global IP network services that connect businesses on six continents representing 3.5 million businesses or 99% of the world’s economy.

In addition, AT&T has invested $1.3 billion in a high-quality wireless spectrum to get a jump on demand for mobile Internet services—particularly video entertainment, thanks in part to its 2014 acquisition of Cricket and a $18.2 billion acquisition of a near-nationwide block of high-quality spectrum in a 2015 government auction. Switching to a software-defined network (SDN) by replacing hardware with software is enabling AT&T to move more data at a lower cost-per-bit. The goal is to have the lowest cost structure in the industry—in effect beating Moore’s Law in network performance.

As he relates in the following interview, Stephenson is a big believer in the IoT where sensors—in everything from cargo containers and jet engines to machines on a factory floor—are connected. By the end of 2015, AT&T had more than 26 million connected devices and had certified more than 2,200 different types of connected devices on its network.

Stephenson admits to one disappointment: the government frustrating AT&T’s bid to acquire T-Mobile from Deutsch Telekom in 2011 without technically blocking it. “We ended up replacing the spectrum we would have gotten through a different route so we landed in a good place,” he says. Soon afterward, the wireless industry split into two directions, with AT&T pushing the envelope with new offerings and a spectrum-rich portfolio.

The company is partnering with Ericsson and Intel to develop its 5G network, which it expects to deliver broadband speeds 10 to 100 times faster than existing LTE network connections. Customers will likely see speeds in the range of gigabits per second instead of megabits. (Verizon is working with Alcatel-Lucent, Ericsson, Cisco, Nokia, Qualcomm and Samsung to test 5G also.)

“My odyssey has been amazing,” Stephenson reflects. “Who could have ever conceived of a kid born in Moore, Oklahoma having the opportunity to run a company like AT&T? I get a little frustrated with a lot of the talk about inequality in our country today. I look at AT&T today and the people moving up in the company today are a lot like me.”

A voracious reader of books about Winston Churchill, he believes “there’s a lot to be learned about his leadership style, conviction, dogged determination and ability to rally an entire country to endure what was going on in that era and not give up and not lose hope.” Conviction and hope are attributes he appears to have in abundance.

Q: The communications industry industry has gone through waves of growth. Local phone service grew until the early 2000s and then started to decline. Wireless has grown for decades with the acceleration of the iPhone and Android. Now that growth of smartphones is slowing, what do you see as the next growth wave and how do you plan to capitalize on it?
A: We’ve been investing aggressively in pursuing the smartphone wave and trying to stay ahead of it. This required an enormous amount of investment. In fact, one of the hidden secrets of our industry is how much money companies like ours must pour into just buying licenses to operate wireless networks. Since I’ve had this job, we’ve spent almost $40 billion in just licenses to operate these wireless networks and building spectrum. It’s about fast, scaled ubiquitous networks that can handle incredible amounts of data to accommodate mobile phones and facilitating mobile video.

Video is the future—the ability for people to watch video anywhere, anytime on whatever device they want. We are at a point where this is now possible. Video consumption is moving to smaller and remote devices. Getting there requires not only the network commitment, but also a major investment in access to content to deliver.

“There’s a lot to be learned about his leadership style, conviction, dogged determination and ability to rally an entire country to endure what was going on in that era and not give up and not lose hope.”

The current ecosystem has not been conducive to this. That’s why we bought DirectTV. We bought DirectTV because it’s the largest pay TV provider on the globe, not because we like satellite technology. It gives us a unique place with the people who develop and make content.

By combining the largest pay-TV provider with one of the largest smartphone customer bases on the planet, you have a unique marriage to partner with the content folks. This fall, we will roll out a whole new category of video that’s “TV Everywhere.” It will offer inexpensive video for mobile-centric consumers all the way up to ultra-high-def consumers who want tons of sports programming and multiple TVs in a large home and everything in between.

In addition, we’ve partnered with the Chernin Group to form Otter Media, a joint venture offering subscription-based online video services, such as Fullscreen to deploy content targeted towards millennials. If you’re my age, you wouldn’t recognize any of them—I don’t recognize any of them, but this is a platform that’s growing very fast. This is the future.

The second major wave is sensor technology. Low-cost sensors are popping up everywhere. My hot water heater is connected to our wireless network. It can sense when water is leaking and will send me a message accordingly. The automobile industry is moving aggressively toward a world of sensors in every car. Think about healthcare with sensors on the body. I’m wearing one on my wrist right now. People call this the Internet of Things, but it’s just low-cost sensors connected to networks.

This second wave is not about changing how we think about networks; it’s forcing every industry to change how it thinks about itself. Think about the last car commercial you saw. What did they advertise? In all likelihood they advertised their connectivity, not so much the car. We’re moving towards smart cities where traffic lights and city infrastructure have these sensors and everything will be connected to cars.

Another good example is the shipping industry. Maersk, the big shipping-container company, has 300,000 of their containers all over the globe connected with sensors that allow the company to know where those containers are at any point in time anywhere in the world. Not only do they know that, but they know what the temperature is inside, whether the container is being jostled or if it falls off the ship. Maersk can even reroute the shipment.

There is not an industry that is being untouched in a radical way by what is called the Internet of Things, especially when these low-cost devices are paired with cloud technology and Big Data. This world is all meshing together in ways we haven’t fully anticipated.

Q: How will AT&T change over the next five years as it relates to this reality?
A: We will always be an aggressive competitor for the smartphone marketplace because the connected world will come together at the level of the smartphone or the tablet. The home once served as the hub for content. In the next two years it will become just one connection among many.

From a business perspective, information about one’s customers will come from sensors via cloud technology and Big Data. We have tools now that allow any company to develop insights and analytics we could not have conceived of five years ago.

I’ll give you an example for what this means for us. We’re accumulating massive amounts of data on how our network is performing. That data is now being aggregated in the cloud. Big Data tools are being used and our network is constantly tuning itself without human intervention.

“The idea that people go to a doctor for an annual check-up will be superseded in a world with biometric sensors where real-time data about your body—heart rate, sugar levels, everything that you might want to know about your health—is now available.”

Q: What do you mean by tuning itself?
A: You can’t see it from this office, but up here there are antennas that can adjust to follow traffic or people down there in this courtyard below us. So if there’s a big event, say, a major parade here in downtown Dallas, the antenna can be adjusted for better performance on your network. Self-optimizing antennas or networks can adjust to maximize information and data. We think it’s pretty radical in terms of how a company like ours is run.

Think about the billboard-advertising business. By virtue of connected devices, billboard companies can know not only how many people are passing by that billboard at a particular time of day, they can know the demographics of the people passing by that billboard. Assuming people are willing to give permission to the billboard company, they can determine who went to the place advertised on the billboard.

The biggest change will likely come in healthcare. The idea that people go to a doctor for an annual check-up will be superseded in a world with biometric sensors where real-time data about your body—heart rate, sugar levels, everything that you might want to know about your health—is now available. This will radically change how a doctor administers medicine. We are working with MD Anderson and IBM using artificial intelligence and connected devices to see how medical care can be advanced.

Q: Given what you’ve said and the fact that much of the technology you’ve invested in is software AT&T seems closer to companies like Google, Amazon and Netflix than to traditional phone companies. Describe your new competitive set.
A: You just did. Our traditional competitors, Verizon and Comcast, will be our competitors for a long time. Google is building fiber into networks, so they’re a direct competitor there. Google is also working to build connectivity and leverage their data centers. They’re working to use advertising-supported models to displace what we call subscription models. Amazon is, obviously, in the video business and so are we.

As we branch out and do more it brings new competitors. Netflix is a major competitor of ours, but they’re also a major driver of bandwidth, which is a good thing for us. The competitive environment just keeps getting more and more complex.

Q: How far along are you in your conversion to a so-called software-defined network that replaces hardware with software? How will this effort reduce your costs?
A: lot of people get confused about what software-defined networks means. Think about what the cloud did. It stored computer data in a data center that was formerly very expensive to store. The cloud virtualized the hardware by using software. The cost in a data center to store and manipulate all this data has plummeted. Software-defined networking takes this technology and moves it into our network. Our network is doing what the data center did, allowing up to 60% greater efficiency in some places.

Yes, it drives cost down. But more importantly it revitalizes the innovation cycle, allowing us to bring new products to market faster. New products like Net-Bond are developed in months, not years. We have a capability called Network on Demand that allows business customers connected to our network to automatically turn bandwidth up and down as needed, giving the customer the flexibility to manage cost as well as to manage their networks.

Q: You’ve spent $140 billion over five years—in wireless, wireline, networking, software on demand. How long can you keep this up?
A: Industry analysts always ask me what our capital spend is going to be—basically a different version of the question you just asked. I tell them if you want to be a serious competitor in this industry, you better get ready because it requires an incredible amount of capital investment and it’s really not very complicated. Take revenues times 15% or 16% and drag it as far out as you want and that’s what you’re going to spend.

We just completed our 4G network build, putting LTE in our network, so our capital spend spiked for a period of time. What’s going on now? Fiber to the home. This will take the place of what just came out of our spend. We’re hopeful that the 15% to 16% doesn’t become mechanical and that, by virtue of software-defined networks, we can get to a slightly more efficient investment model. But it’s still a lot of money. You have to be committed to investing in this industry if you want to be a serious competitor.

Q: In his recent book The Third Wave, AOL founder Steve Case argues that regulation of the Internet will greatly diminish innovation. Where do you stand on the current administration’s efforts to treat the Internet as a utility?
A: History will look back and see 2015 and 2016 as a period when the government threw an incredible amount of sand in the gears of telecommunications, Internet and technological innovation. The implications of the regulatory framework that was put in place in 2015 will drag on indefinitely. The chairman of the FCC said he had no intention of regulating pricing with his regulations. Yet the evidence so far suggests that he’s actively and aggressively involved in how pricing is set.

We will look back and see that the pace of innovation, and the investment in innovation, will have been affected by what happened in ’15 and ’16 unless the courts tell the FCC that it has overstepped what the law says it can do. There is a big lawsuit right now pending in the circuit court. If the courts invalidate this, as we’re hopeful they will, then hopefully this is just a bad dream that we’ll all wake up from and realize that the innovation can continue apace.

“Rather than going to Georgia Tech to get a master of computer science degree for $41,000, our program costs about $6,700. The same accreditation, the exact same degree, at a fraction of the cost. That’s big.”

Q: Having the right people with the right skills is one of your biggest challenges in transforming AT&T. How are you dealing with the need to adapt and retrain a workforce of 280,000?
A: Over the next five to six years, one of our biggest logistical challenges will be how to re-skill our workforce. You can’t just replace them. One thing we are doing is leveraging technology to improve educational outcomes, training and development. We took a big step by engaging with Georgia Tech and Udacity to develop a fully accredited master of computer science program that students can do from home through the Massive Open Online Course (MOOC) environment.

Here’s the beauty of it. Rather than going to Georgia Tech to get a master of computer science degree for $41,000, our program costs about $6,700. The same accreditation, the exact same degree, at a fraction of the cost. That’s big.

So far, a million courses have been completed by tens of thousands of our people. The training qualifies them for new responsibilities and jobs and it’s all being integrated into our HR system. This is key. You can’t just put these tools out there and say, “Go train yourself.” By integrating it in with your HR system, people see what jobs are trending up and which ones are declining. They can tell what online training they need to qualify for specific internal jobs.

I am convinced that by 2020 we’re going to have—not all—but a great deal of our workforce reskilled and retrained for the work that we need.

Q: You see AT&T as an innovation company. What specific innovations during your tenure are you most proud of?
A: We believe we revolutionized how networks are developed, engineered and built to handle the mobile Internet. I feel really good about our leadership with this. Our development of software-defined networking was ahead of the curve, taking that innovation and putting it into the open-source environment so that it could be propagated broadly and developed into what is a radical advance in terms of how telecom networks are built and developed.

This fall we’re going to see a very different experience on TV—the TV Everywhere experience. We will be offering a different user interface for watching live TV in a mobile world or in a fixed-TV-mounted-on-a-wall world.

In addition, our bandwidth-on-demand (network-on-demand), which allows companies to manage bandwidth and data demand within their environment, will prove revolutionary in terms of how companies interact with their telecom providers.

Finally, our use of technology to change the game in reskilling the workforce will revolutionize training and development. We are demonstrating that you can accelerate the pace of learning and dramatically expand the footprint of skills using technology. It’s something that elementary, secondary and higher education should all mimic.

Read more:

Why the Selection Committee Chose Randall Stephenson

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