AT&T is re-starting its engine of innovation to compete with Apple and Google

The new CEO of AT&T Labs talked about innovation at the Aspen Forum in Colorado last week. It marked a change in the company’s strategy as Dr. Krish Prabhu stated that AT&T took several steps to open its network infrastructure and work with software developers.  Without equivoque, this move follows the strategic decisions of Apple and Facebook to open their leading smart phone and social network platforms several years ago. To when an AT&T “app store”?

Dr. Prabhu is a known figure in the Telecom Industry. Although he started his carrier at Bell Labs before AT&T was split up in 1984, it is at Rockwell International, and then Alcatel, that he made a name for himself by leading the digital cross-connect market. He retired in 2008 after a four-year stint as the CEO of Tellabs. He has worked closely with a number of VC firms over the years, Mergenthaler Ventures for instance.

This singular career puts him a position to be “a key driver for AT&T’s innovation strategy, which focuses on creating an open environment and bringing the best minds together to deliver the best products and services for our customers” according AT&T’s CTO John Donavan. In Aspen, Krish Prabhu discussed AT&T's four-pronged approach to innovation focusing on the AT&T Labs, The Innovation Pipeline, Fast Pitch and the AT&T Foundry.

Prabu’s speech is not a seldom act of public relations. AT&T has been running a series of commercials on television featuring new applications on its “network of possibilities”. Far away from pounding that it is the oldest and largest US carrier, the commercials showcased a couple of situations that customers can relate to. In one, a couple walks through the streets and look for a restaurant through the camera of a smart phone, in what amounts to a better version of Google Map.

Why did Dr. Prabhu come out of retirement? He is convinced that the rate of innovation is going to continue, and even increase compared to the evolution of what he dubs the "intelligent digital network" over the last 30 years. His view contrasts with the argument of Clarium Capital’s Peter Thiel that our current technological progress is “decelerating and stalled out.” Krishna Prabhu actually feels “privileged to have the opportunity at this point” to lead AT&T Labs.

There is no question that AT&T has history to spur innovation, leading the invention of the transistor after World War 2 and developing many of the technologies like Unix used in digital communication today. Since it lost its monopoly, the role of AT&T has nonetheless steadily decreased, with the advent of the Internet as a tipping point. Prabhu explained to TechCrunch that AT&T is "not your grand-father’s network" and can spur more innovation.

AT&T could also change their "father of everything attitude" that failed bringing key innovations to market in the last decade. Today, their large number of registered patents (two per day) pale with the products that Google and Apple brought to market and changed our lives. Some will argue those companies would not be able to innovate without the infrastructure that AT&T put in place. That is true but it is not an excuse for not bringing new services to market. At the core of the issue is internal conflict of interests to launch new applications that outdate existing and lucrative phone line services.

Can AT&T change course today? After losing control of the wireline business to companies like Google and Facebook that dominate advertisement revenues, AT&T has to settle with decreasing phone revenues. AT&T is also left to bear the cost to deploy high-speed broadband with other carriers to support the load of video downloads, hence the debate of net neutrality. This time, AT&T does not want to miss the boat on the growing wireless market and wants a bigger piece of the advertizing revenues. This is why AT&T is making a serious push at the targeted ad business.

AT&T Labs think they can better leverage their R&D engine and their existing network infrastructure by working with developers. Dr. Prabhu announced the opening of a third “Foundry” location in Palo Alto, CA after Plano, TX and Ra’anana, Israel. He explained in Aspen that “this effort represents an $80 million investment by AT&T and industry collaborators” under their acceleration program.

Reversely, Google has quietly become an infrastructure force. Deploying data centers around the world, it has deployed its own network infrastructure in some areas and even participated in a submarine network consortium. Google also launched a 1Gbps broadband network initiative in Kansas City, KA to spur new services that allow customers to download HD movies in less than 5 minutes and share 3D medical images over the fiber-optic network.

Clearly Google and AT&T are going on each other’s turf in strategic markets. This is a difficult balancing act as AT&T is a customer of Google, having the choice to deploy Android based phones or Apple’s iPhones. Google’s search engine is available on every network, not just AT&T’s but is reported to pay Apple to be the deault serach engine on Safari. Telling of the growing mportance of Google, AT&T spent $8M in AdWors advertizing for the month of June 2010 during the launch of Apple's iPhone 4 according to AdAge. 

Lines are becoming more blurry in the digital age between Mobile Service Providers like AT&T and the Search Engines like Google. Even car manufacturers like GM with ONStar are getting Into the mix. GM signed partnership agreements with Google to make the Chevy Volt and Android car, and a potential new space for advertisements. AT&T really has no other choice but to change of strategic direction and find new source of advertising revenues, especially as there increasing calls to lower the number of printed yellow pages books to save paper.

Yellow Page books are critical for local businesses to operate, but environmental organizations argue that customers should not receive the heavy printed book unless they requested a copy. The number of phone lines is dropping rapidly now and more people are relying on their cell phone. As a matter of fact, the number of telephone landlines in the US dropped from 188 million in 2000 to 172 million in 2005, and to 115 million in 2010. During that time, the number of cellular subscribers has grown steadily to 277 million as of 2010.

Yellow pages remain an important source of revenues with $15Bn in 2010 although they are decreasing slowly. This compares to Google’s $28Bn in AdWords revenues in the same year. AT&T Advertizing Solutions publishes 1,250 directories under the AT&T Real Yellow Pages brand. After losing money in 2009 and other publishers entering into debt, AT&T Advertizing Solutions has generated double-digit revenue growth by investing in their online operations. Internet yellow pages are now accounting for 20% of the total yellow pages market according to Simbia Information.

In 2009, Google revised the AdWords interface and introduced Local Business Ads for Google Maps and Video Ads. Google is clearly competing with yellow pages services, and the new frontier is mobile search and targeted advertising. While AT&T Labs is increasing number of patents every day, Google recently bought Motorola for its intellectual property’s “treasure chest”. If patents can be useful in court rooms, accelerating the availability of new mobile applications that end-consumers can embrace could be the key to grow revenues in an increasingly competitive market.