Analyst: New AT&T Policy Puts Vendors at Risk
A new telecom technology purchasing strategy being introduced by AT&T Inc. (NYSE: T) "should be taken seriously and regarded as a risk to the vendor community," according to Morgan Keegan & Company Inc. analyst Simon Leopold.
In a research note issued Tuesday, Leopold states that, when the carrier first held meetings to discuss the new purchasing policy in mid-May, AT&T's approach, which involves reducing the number of vendors it deals with, didn't look anything out of the ordinary, as all major operators are looking to simplify their procurement strategies and increase efficiencies.
However, feedback from Leopold's contacts suggests the move, which will see AT&T "identify two primary suppliers in each of roughly 14 technology domains" is not just driven by the procurement department, but "has senior level management support."
That's important because, in the past, the analyst writes, attempts by carrier procurement departments to restrict the number of technology suppliers has met with resistance from the networking and operations teams, which have insisted on deploying the most appropriate technology available in the market. This time, though, Leopold believes the move has the backing of AT&T's CTO, John Donovan, who, with a background at VeriSign Inc. (Nasdaq: VRSN) and Deloitte Consulting, "did not follow a more typical career path in the Bell System."
As a result, Leopold believes, the new policy will increasingly favor large, diversified vendors like Alcatel-Lucent (NYSE: ALU), Cisco Systems Inc. (Nasdaq: CSCO), and Ericsson AB (Nasdaq: ERIC), and, potentially, "complicate business for smaller players such as Adtran Inc. (Nasdaq: ADTN), Ciena Corp. (NYSE: CIEN), and perhaps Juniper Networks Inc. (NYSE: JNPR)," though he stresses it's "premature to panic."
Further details of AT&T's plans are sketchy, however. The new strategy will involve "identifying roughly 14 technology domains and selecting two vendors for each. We suspect the domain definitions have yet to be finalized." Where a dominant vendor in a particular domain can't supply the required capabilities, partnerships will be encouraged.
That would give AT&T a maximum of 28 principal vendors, though that number would likely be somewhat lower, as some large equipment suppliers would likely feature in multiple domains. The analyst estimates that AT&T currently deals with about 40 key vendors.
The main objectives of the new procurement policy, according to Leopold, are:
However AT&T decides to arrange those procurement domains, the "winners may gain more sources of revenue, greater control and inertia; however, this comes with added responsibility and costs," states the analyst. Smaller, more specialist vendors face increasing risks, because having to work through larger partners could lower their margins, though it could also enable those smaller players to cut costs by reducing sales and marketing teams.
For the winners, the spoils are potentially great. Even with a reduction of up to 15 percent in its capital expenditure budget this year, AT&T is still planning to spend up to $18.3 billion this year. (See AT&T Cuts Capex by up to $3B and AT&T Plans $1B Global Spend.)
That capex reduction, and a more cautious approach by the operator towards spending in 2008 (particularly towards the end of the year), has already had a direct impact on some of the mid-sized equipment companies that could feel the greatest impact of AT&T's new plans. (See Ciena Cuts 200 Jobs as Sales Plummet and Sonus: So Tough to Call.)
AT&T declined to comment.
— Ray Le Maistre, International News Editor, Light Reading
In a research note issued Tuesday, Leopold states that, when the carrier first held meetings to discuss the new purchasing policy in mid-May, AT&T's approach, which involves reducing the number of vendors it deals with, didn't look anything out of the ordinary, as all major operators are looking to simplify their procurement strategies and increase efficiencies.
However, feedback from Leopold's contacts suggests the move, which will see AT&T "identify two primary suppliers in each of roughly 14 technology domains" is not just driven by the procurement department, but "has senior level management support."
That's important because, in the past, the analyst writes, attempts by carrier procurement departments to restrict the number of technology suppliers has met with resistance from the networking and operations teams, which have insisted on deploying the most appropriate technology available in the market. This time, though, Leopold believes the move has the backing of AT&T's CTO, John Donovan, who, with a background at VeriSign Inc. (Nasdaq: VRSN) and Deloitte Consulting, "did not follow a more typical career path in the Bell System."
As a result, Leopold believes, the new policy will increasingly favor large, diversified vendors like Alcatel-Lucent (NYSE: ALU), Cisco Systems Inc. (Nasdaq: CSCO), and Ericsson AB (Nasdaq: ERIC), and, potentially, "complicate business for smaller players such as Adtran Inc. (Nasdaq: ADTN), Ciena Corp. (NYSE: CIEN), and perhaps Juniper Networks Inc. (NYSE: JNPR)," though he stresses it's "premature to panic."
Further details of AT&T's plans are sketchy, however. The new strategy will involve "identifying roughly 14 technology domains and selecting two vendors for each. We suspect the domain definitions have yet to be finalized." Where a dominant vendor in a particular domain can't supply the required capabilities, partnerships will be encouraged.
That would give AT&T a maximum of 28 principal vendors, though that number would likely be somewhat lower, as some large equipment suppliers would likely feature in multiple domains. The analyst estimates that AT&T currently deals with about 40 key vendors.
The main objectives of the new procurement policy, according to Leopold, are:
- To cut costs as a result of reduced administration, and more favorable pricing from vendors winning a bigger slice of the overall pie;
- To reduce risks by working with the most financially stable suppliers -- "We suspect Nortel Networks Ltd. ’s bankruptcy filing sounded an alarm on this topic," notes the analyst; and
- To streamline projects, as having fewer points of contact should speed up processes. Leopold believes using AlcaLu as the systems integrator for U-verse was a test case for this. (See Nortel Files for Bankruptcy Protection and Nortel Appoints EMEA Administrator.)
However AT&T decides to arrange those procurement domains, the "winners may gain more sources of revenue, greater control and inertia; however, this comes with added responsibility and costs," states the analyst. Smaller, more specialist vendors face increasing risks, because having to work through larger partners could lower their margins, though it could also enable those smaller players to cut costs by reducing sales and marketing teams.
For the winners, the spoils are potentially great. Even with a reduction of up to 15 percent in its capital expenditure budget this year, AT&T is still planning to spend up to $18.3 billion this year. (See AT&T Cuts Capex by up to $3B and AT&T Plans $1B Global Spend.)
That capex reduction, and a more cautious approach by the operator towards spending in 2008 (particularly towards the end of the year), has already had a direct impact on some of the mid-sized equipment companies that could feel the greatest impact of AT&T's new plans. (See Ciena Cuts 200 Jobs as Sales Plummet and Sonus: So Tough to Call.)
AT&T declined to comment.
— Ray Le Maistre, International News Editor, Light Reading
paolo.franzoi
12/5/2012 | 4:02:46 PM
re: Analyst: New AT&T Policy Puts Vendors at Risk
No, Craig...it is an old policy. I am trying to give you some idea how old. At least 5 years. They are just doing some publicity on the policy.
seven
Pete Baldwin
12/5/2012 | 4:02:46 PM
re: Analyst: New AT&T Policy Puts Vendors at Risk
George Notter (Jefferies & Co.) has a note out today saying the new AT&T policy "Shouldn't be a big deal."
The main reason, as 7's note suggests, is that AT&T pretty much buys from just the big vendors already. Notter sees the policy as a way to encourage those vendors to keep up R&D spending, and as "air cover" for telling smaller vendors that they don't want to talk to them.
Maybe more important: Notter writes that AlcaLu has won second-source status behind Juniper for AT&T's IP aggregation contract. Could take 18-24 months to kick in, "as AT&T is still working through the network deployment / OSS integration with Juniper and other vendors."
netapolooza
12/5/2012 | 4:02:44 PM
re: Analyst: New AT&T Policy Puts Vendors at Risk
The "Domain" concept that AT&T is briefing to some vendors is different than the old policy and would represent a significant change in procurement practices if actually implemented as described.
paolo.franzoi
12/5/2012 | 4:02:43 PM
re: Analyst: New AT&T Policy Puts Vendors at Risk
The old policy was to go to their primary vendors for each technology and give them a shot at bidding on something. Only if these vendors had or did not do anything in an area did SBC open up bidding. They can call it something new, but nothing has changed.
Let's use Adtran as an example. They go to Alcatel first for access equipment. But Alcatel does not build HDSL equipment, so they buy it from Adtran. They have approved Adtran for EoCu as Alcatel has no equipment their. But ADSL and VDSL DSLAMs are another matter and Adtran is not approved.
They may have a new name for it now, but it has not changed an iota.
seven
bollocks187
12/5/2012 | 4:02:38 PM
re: Analyst: New AT&T Policy Puts Vendors at Risk
Vendor selection at large carriers has always been a political decision. Consolidation of vendors by ATT is nothing new. It is a very BAD thing for the industry as it stiffles innovation and competition.
Case in point millions of end users have had for decades very little choice for alternative providers that is why this country is SO SO behind in the broadband market.
We talk of "choice" but we have no 'real' choice.
netapolooza
12/5/2012 | 4:02:37 PM
re: Analyst: New AT&T Policy Puts Vendors at Risk
Not sure I'm following how a privately owned company trying to streamline its operation to increase its profits is anti-American or socialistic. But, let's say it is and is the reason "why this country is SO SO behind in the broadband market". My question is: behind who? The socialist countries?
I guess you guys never got copies of the (then) SBC memo around U-Verse - which said "Don't call us. We'll call you." What you describe has been AT&T policy for about 5 years and actually has been loosening up a bit.
seven