AT&T'S new operator (cont.)

It is a different world from the one Ed Whitacre shaped just a few years ago with his consolidation gambit. In his quest for growth, Stephenson finds himself taking a page from an important supplier's playbook, echoing iPhone maker Apple's simple-is-beautiful mantra.

He is forging surprising partnerships - a venture fund with a Hollywood talent agency, for example - and exploring new, untested businesses such as cellphone advertising, all while trying to maintain AT&T's leading position in the fast-changing phone business. "Ed changed this industry by trusting his gut," says John Stankey, head of AT&T's telecom operations. "For Randall it's now more of a finesse game."

Stephenson likes to say he got his job the old-fashioned way, from his brother. He was a 22-year-old student at the University of Oklahoma when his older brother, Kevin, helped him land a part-time gig in the data center at the old Southwestern Bell.

He worked the night shift as a "tape monkey," pulling in $8 an hour loading 18-inch reels of magnetic tape for billing systems. (Kevin Stephenson, incidentally, still works at the company, installing broadband in Oklahoma. "A darn good technician," his younger brother boasts.) After graduation Stephenson turned down a job with Arthur Andersen, opting for a post with Southwestern Bell's corporate tax group in St. Louis.

The next several years were filled with a whirlwind of appointments that culminated in a key position: Whitacre dispatched the 31-year-old finance whiz to Mexico City to work with Carlos Slim Helú, the Mexican magnate who had purchased state-owned Teléfonos de México with SBC's financial help. Stephenson - with his wife and two young daughters in tow - spent three years as the finance director for SBC International.

Slim was impressed. "Every question you'd ask him - revenues, profits, number of customers, financial forms - he could answer," recalls Slim, whose $60 billion net worth makes him one of the world's richest men. "He just had a full understanding."

Stephenson's education was far from complete, however. He returned to headquarters in San Antonio in 1994, and Whitacre put him through a series of jobs - as comptroller, in consumer-marketing roles, and as CFO. In the spring of 2004, Whitacre named Stephenson COO, telling him that it was his final test for the top job. "I put him in several situations where he would have to make hard decisions," recalls Whitacre. "And I was never disappointed."

Stephenson, who grew up in a home where even getting into the family car was a competition with his two brothers, recalls his career climb this way: "Every job I've been in... I approached by saying, 'You take the job apart, then put it back together and leave it better than when you took it.'?"

Stephenson took over last June, and as part of the transition, he shuffled around many top executives and blended sales forces from different divisions. In his view it doesn't make sense to sell wireless service separately from, say, corporate services; pretty soon it will all go wireless. He frequently sends out text messages to tens of thousands of employees, and he shoots off YouTube-style video e-mails to fire up his troops. Whitacre, by contrast, didn't have a computer in his office.

The company's board noticed a more inclusive style. Before each meeting, board members receive a menu to check off what they'd like for dinner. Under Whitacre there was no choice. "It was always meat, meat, meat," says former Bank One CEO John McCoy, a director for eight years.

Then came Stephenson, and suddenly a fish option appeared. "It's a little thing, but it means something," says McCoy. The meetings themselves - lightning-fast under Whitacre - also changed. McCoy recalls Stephenson beginning his first meeting by saying, "Ya know, I'm a bit new. We're going to have a little longer executive session this time." What used to take ten minutes turned into a half-hour discussion.

He created a new position, global marketing officer, filled by SBC veteran Cathy Coughlin. Her job is to make the world think of AT&T as a cutting-edge wireless company. (SBC changed its name to AT&T following the acquisition after finding that the 125-year-old brand didn't have negative baggage and had a strong image internationally.)

Coughlin's tough task - turning Ma Bell into a cool kid - got a nice boost in 2007 from the relentlessly hyped release of the iPhone, which runs exclusively on the AT&T network in the U.S. AT&T timed all the changes - its name, its billboards, its ad campaigns, and its customer bills - to the release of the iPhone.

The deal between AT&T and Apple (AAPL, Fortune 500) is unusual. AT&T, for instance, pays a slice of the service fee it collects to Apple, which is unheard-of in the telecom industry. Because of that, it's often assumed that AT&T gave up a lot just to be associated with the product. Stephenson says that's nonsense, though the company hasn't broken out financial terms or benefits. But consultancy Rubicon says almost half of the estimated three million iPhone customers AT&T has signed up switched from other carriers.

The partnership is resulting in an untold number of intangible benefits too, beyond upping AT&T's youth cred. Even Steve Jobs' relentless commitment to simplicity is rubbing off on AT&T. Jobs, for example, insisted on offering just four basic plans for the iPhone. Now AT&T is looking at eliminating the array of plans it offers on its other phones. Consumers, Jobs taught AT&T, don't want so many choices.

Stephenson is sitting in his office holding up his BlackBerry (yes, he uses one of those too) and preaching the virtues of mobility. "I don't care what it is," he says. "Make it mobile." People talk more on the phone because it's mobile, he likes to point out. And they use the Web more because it's getting easier to access from anywhere - something that the iPhone is showing to be true. Revenue for the wireless division rose almost 14%, to nearly $43 billion, last year - and so far it has been unscathed by the souring economy. Profit margins, now at 38%, have been steadily widening.

Yet competition among wireless companies is brutal, and wireless penetration is peaking. So Stephenson is counting on wireless data to keep the party going. Data revenue hit a record $2 billion in AT&T's latest quarter - a 58% increase over the prior year - and Stephenson argues that this market is in its infancy.

Today just 13% of its cell customers regularly access e-mail and the Web on their phones - and most of those people are corporate customers. That will surely change as handset makers come up with iPhone-like devices that make Web surfing a breeze. (Stephenson is also helping fund new ways for consumers to waste their time on the Web, teaming up with talent agency William Morris and Silicon Valley venture capitalists on a new investment fund to back digital entertainment startups.)

Less of a sure thing is AT&T's high-profile push into television. The company is spending billions to upgrade its pipes so that it can pump high-definition video streams into the home to compete with cable. But the service, called U-verse, initially was beset by delays, and critics say AT&T still isn't delivering enough bandwidth for consumers' future needs. They point to rival Verizon's effort to lay optical fiber, the fastest pipe around, directly to its customers' homes - at a staggering cost of $23 billion, or $1,350 per household over a seven-year period.

AT&T, using a different approach, by the end of this year will have spent as much as $7 billion, or roughly $300 per home, to lay fiber trunk lines to neighborhoods throughout its 22-state region. It then uses existing copper wires to bring the signals into the home. "This is a multimedia world, and you don't get bandwidth over copper," says Tom Nolle, CEO of consultancy CIMI Corp., who thinks AT&T will need to keep upgrading. "Ultimately, AT&T will end up paying a lot more."

Stephenson dismisses such talk. For one thing, he argues, people don't need an endless supply of bandwidth. AT&T's research finds that the vast majority of homes will need no more than two high-definition video-stream sets running simultaneously - and he says U-verse eventually will be able to handle four, all while offering a hefty computer connection to the Web. Moreover, AT&T is relying on technological advances - such as new ways to compress the signal - to keep up with growing broadband demands.

There's another doomsday scenario out there, one in which AT&T and Verizon do keep up with broadband demands, only to have consumers bypass their new cablelike TV offerings in favor of getting their entertainment directly from the Web, simply by going to sites such as ABC.com. AT&T could end up a pure commodity player, supplying the pipes through which others run far more profitable businesses. Already, in telecom circles, Google is referred to as a "bandwidth parasite" - a super-profitable business that rides on the backs of the telcos' networks.

Google, the ultimate disrupter, could become a headache in several ways. It has indicated a willingness to buy wireless spectrum and already owns fiber it could use to get into the telecom business. It has partnered with 34 tech and telecom companies to develop Android, an open operating system for mobile phones. Google's main goal is to create software that, like the iPhone, makes using the wireless Web easier. That, in turn, will drive more ad revenue.

And Google may not stop there. The bigger threat to wireless is the possibility of an ad-supported cellphone model. The idea here, still several years off, is that Google comes up with a palatable way to serve ads on a cellphone. Customers would pay less in exchange for receiving ads.

Google could team with a carrier, such as Sprint, and use new wireless broadband technology, such as WiMax, to steal those data customers Stephenson needs to keep his wireless business growing. (AT&T thinks WiMax is a potential complement to its broadband offering, and it also plans to offer better broadband wireless by upgrading its current cellular network.)

Stephenson isn't sitting still. He too is preparing for the possibility of an ad-supported wireless business. He has teamed with Yahoo, no friend of Google's, to explore ways to target ads not only to AT&T's mobile users but also to its TV customers. "Randall, better than anybody, understands all the changes going on," says Yahoo (YHOO, Fortune 500) CEO Jerry Yang. If cellphones and TV sets run over Internet networks, it is much easier to serve up useful ads, the way Yahoo now can over computers. These Internet ads, Stephenson says, will become a multibillion-dollar revenue opportunity for AT&T - as will selling Internet TV itself.

Still, Google (GOOG, Fortune 500) and other technology companies are on the minds of AT&T (ATT) employees. At the town-hall meeting in New Jersey, Stephenson responds to a question about Google's push into telecom by saying, "Sure, some of the lines are blurring, but I'm not going to lie awake at night and worry that Google's going to build a telephone company." Stephenson knows firsthand that building a phone company isn't easy. He also knows that running one is even harder.