SAN FRANCISCO (Business 2.0 Magazine) -- In telecom, nobody wants to be just a dumb pipe.

Dumb pipes, which are networks that do nothing more than transmit phone calls and other bits of data, are, of course, what's made AT&T the country's largest telecom. But dumb pipes are no longer a high-growth business, which is why AT&T is making a smart play for some software smarts.

Last week AT&T (Charts) announced plans to buy USinternetworking, a privately held application service provider that brought in an estimated $130 million in revenues last year from customers like Microsoft (Charts) and Oracle (Charts).

Application service providers host customer software in data centers and delivering it over the Internet.

The concept, also known as "managed application hosting," was heavily hyped in the late 1990s but lost favor among investors when the tech bubble burst. USi filed for bankruptcy in 2002. Today, ASPs are making a comeback, with USi among the leaders of the pack.

Research firm IDC estimates that annual demand for application service providers, also known as "managed application hosting," will triple to $6.1 billion by 2010.

AT&T wants a chunk of that future business.

But that's not all that AT&T is after. Unlike the original wave of ASPs, which just resold other people's software and delivered it over the Internet, USi has a proven track record of developing its own software applications, including e-commerce and security programs. From AT&T's perspective, USi has the software engineering know-how it needs to help it diversify its services.

AT&T has a storied history in the software business. Its former Bell Labs unit gave birth to the C programming language and the Unix operating system, which in turn provided the inspiration for Linux. But AT&T effectively abandoned the computer business when it spun off both NCR and Bell Labs in the 1990s. NCR (Charts) became an independent company, while Bell Labs was folded into Lucent.

In recent years, AT&T has shown little interest in its remaining software businesses, even as its core businesses have become commoditized. A long-distance minute is a long-distance minute, and a T1 line is a T1 line, no matter who's selling it, which is why prices on voice calls and basic Internet connections have plummeted.

USi may be just a drop in the bucket of AT&T's $44 billion in revenues, but its software expertise could take AT&T in new, and potentially lucrative, directions. Managed applications, for instance, require data centers for hosting as well as network connections to deliver software to users.

More importantly, bundling software into AT&T's other offerings will make its overall business less vulnerable to cutthroat competition.

Mike Antieri, a senior vice president at AT&T who's overseeing the integration of USi, says that AT&T could rely on USi's application-development expertise to build industry-specific software in areas where AT&T has strong relations with customers.

"We are going to develop some specific applications with USi for the government, education, and healthcare markets," says Antieri.

Antieri didn't elaborate. But one example might be a hospital that uses AT&T for long-distance and Internet services might commission the company to develop software that will allow it to transmit MRI scans over the Internet. With USi's skills, AT&T could now build that application, benefiting not just from selling the company that software but also from the increased Internet traffic the program generates.

Software, as investors in Microsoft and Oracle know, has rich profit margins, and by combining software, data-center hosting, and application management in a single sale, AT&T should be able to command higher prices than it could for network services alone. In other words, AT&T's pipe just got a little smarter.

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