Star Wars of a Different Kind

By John S. DeMott.

Luke Skywalker would be dazzled. Darth Vader would be downright intimidated. Right here on earth, and not in any distant galaxy, a new kind of war is escalating between technological stars IBM and AT&T. By the end of the century, the way that Americans get all sorts of information, from television programs to bank-account balances, could be changed. Between them, IBM and AT&T dominate the U.S. computer and telecommunications industries. Both have long itched to invade each other's markets, but not until now have they faced off with arsenals so fully loaded.

To Americans already baffled by their complex new phone bills and mystified by computers, the confrontation may seem like so much high-tech alphabet soup. But these new developments mean that AT&T and IBM are fighting to be first to provide all the equipment and services for transmitting, storing and processing information for the next century. It is a fragmented, turbulent but potentially rich market.

Since the breakup of the Bell System 1 1/2 years ago freed it to compete in computers, AT&T (1984 sales: $33.2 billion) has had only tepid success in stealing computer business from IBM ($46 billion). But now AT&T is winning big orders through discounts and making its machines compatible with IBM's. At the same time, IBM is treading on AT&T's territory. The computer giant made another move into the $50 billion U.S. market for long-distance service when it announced plans to buy up to 30% of MCI Communications of Washington, whose $2 billion in revenues makes it the second-largest long-distance company after AT&T.

IBM's partnership with MCI should intensify the competition in telecommunications that the Bell System breakup was intended to bring about. Despite MCI's rapid growth during the past decade, the company still accounts for only about 6% of U.S. long-distance calls. AT&T remains the leader, with nearly 90% of the business. Now that it has IBM behind it, MCI should have far more of the muscle and corporate prestige needed to stand up to AT&T.

The purchase of MCI stock is not IBM's first move into telecommunications. In 1974 it started Satellite Business Systems, a venture with Aetna and Comsat that was designed to provide data and telephone communications mainly for large corporations. The operation, however, has not been successful, losing $1.3 billion in the past eleven years. IBM eventually bought out Aetna and Comsat. Despite that setback, IBM has continued to push ahead into telecommunications. Last year it bought Rolm, the third-largest maker of telephone switching equipment, for $1.2 billion. IBM and Merrill Lynch have created International MarketNet, a service that supplies information to the financial community. And IBM has joined Sears and CBS in a venture called Trintex, a two-way videotex service for home computers.

In the deal with MCI, IBM agreed to turn over Satellite Business Systems to MCI. In exchange, the computer company got 45 million MCI shares, or 16% of the total outstanding, along with the rights to buy another 7 million. IBM promised to invest an additional $400 million in MCI during the next three years.

The partnership will bring immediate benefits to both companies. IBM stands to gain experience in telecommunications and get rid of the troubled SBS. For | MCI, a transfer of IBM's long-distance business could bring as much as $100 million a year in revenue. In addition, MCI will immediately gain more than 200,000 customers from SBS, representing about $35 million in monthly revenues and 1% of the long-distance market.

In a sense, the IBM move represents a sweet revenge for MCI against its telephone rival. In May a federal jury awarded MCI just $37.8 million in its decade-old suit against AT&T. MCI had asked for nearly $6 billion in damages, accusing the telephone giant of unfair marketing practices. Said MCI Chairman William G. McGowan last week: "We were looking for a major investor. The best of all worlds is one with a name like IBM and a lot of money. We got both."

While IBM has started to move deeper into communications, AT&T has been making new connections in computers. Last week it reached an arrangement with 18 Japanese companies to sell technology that would enable different kinds of computers to communicate with each other, beating IBM on that front in Japan. The Defense Department has awarded a plum to AT&T. It granted the company a contract to install and service minicomputers for the National Security Agency. Value of the deal: $950 million over the next three years. The size of the agreement, though, was less important than its psychological impact. Says Jean Yates, a California consultant: "AT&T has won a major contract against IBM. That's the way to look at it."

To become still more competitive with IBM in its backyard of computers, the telephone company is expected by industry analysts to go shopping for a major acquisition of its own. Among the most frequently discussed possible targets are several prominent data-processing firms. They include Digital Equipment, the second-largest maker of computers, and Amdahl, a manufacturer of mainframe machines.

As with any clash of empires, the battle of the giants in telecommunications is going to make it difficult for anyone smaller to survive. GTE (1984 sales: $14.5 billion), for example, is having troubles with Sprint, its long-distance telephone service. MCI may have found the secret for survival by hitching its wagon to IBM's star.

With reporting by Raji Samghabadi/New York and John E. Yang/Washington