WHEN GENTEEL RIVALS BECOME MORTAL ENEMIES COMPANIES AROUND THE GLOBE ARE AT WAR, AND THE FIGHTING IS MORE CUTTHROAT THAN YOU THINK. JUST ASK AT&T, MCI, AND SPRINT, WHICH ARE BATTLING IT OUT FOR LONG-DISTANCE DOLLARS IN THE U.S.
By JACLYN FIERMAN REPORTER ASSOCIATE SUZANNE BARLYN

(FORTUNE Magazine) – If you think O.J.-free television is hard to find, try going an evening without bumping into the biggest, baddest advertising war in memory--the scramble for your long- distance dollars. The pitches by AT&T, MCI, and Sprint, as merciless as they are amusing, pose a challenge worthy of Talmudic scholars: Each claims to have the best deal. Sorting through the many offers could easily cost more time than most people actually spend on the phone. But one thing rings clear to just about every viewer: That staid bastion of bureaucracy, Ma Bell, has turned into one mean mother.

Even Madison Avenue, the ammunition factory itself, is surprised by the battle's intensity. "It's the craziest category I've ever seen," says J. Walter Thompson's David Riemer, who manages the Sprint account. Last year, advertising by the three long-distance carriers soared past $1 billion. AT&T aired nearly 100 TV spots, many of which accused MCI of misleading and annoying customers. So intense was the barrage that last December, MCI ran a full-page ad in the New York Times, crying, SHAME ON YOU, AT&T. Says BBDO Worldwide's Phil Dusenberry, who as vice chairman of Pepsi-Cola's agency is no stranger to conflict: "For a market leader, AT&T has broken all the rules. They're starting to look like one of the guys in the street."

Around the world the streets are full of companies like AT&T, made fierce by competitors that dart out of nowhere because of deregulation, privatization, and technological change. They never know who will challenge them next: car companies are competing with banks in the credit card war, and software and cable companies are vying for the right to transport tomorrow's consumer on the information superhighway. "Chivalry is dead," says Richard D'Aveni, author of Hypercompetition, a modern-day analogue to The Art of War, the ancient Chinese classic that is the bible of many corporate strategists.

Size, common sense, and past experience count for little in these unpredictable times. Speed and execution are paramount. "Even five years ago, competitors were fixed targets," says Sony managing director Kazunori Somaya, who for more than 20 years has gone head to head against rival Japanese electronics giant Matsushita. "It was easy. You could pull the trigger and shoot. Today the target is always moving, like a Scud missile. You have to launch the Patriot missile right away to hit the Scud."

Rivalry, of course, is as American as Coca-Cola, which has been clashing with Pepsi for nearly a century. But even these aging warriors have had to rearm to beat back private-label brands sold in copycat cans--and to wage still fiercer battles against each other. Coke brought back its curvaceous bottle last year, and Pepsi rolled out a new, cube-shaped package that fits neatly in the fridge. In March, Pepsi broke ground again with a mid-calorie cola called XL. "We don't like Coke," says Craig Weatherup, head of Pepsi-Cola North America, "and Coke doesn't like us."

Anyone who doubts Weatherup might be interested in hearing how Coca-Cola president M. Douglas Ivester spoke to his competitors at a meeting of beverage companies in Atlanta last fall. Expecting a good old boy pep talk from one of the industry's elder statesmen, the group fell silent when they got anything but. "I'd like to earn your friendship, but that's not really my priority," said Ivester. "And I want to earn your respect. But that's not really my priority either. I want your customers. I want your space on the shelves. I want your share of the consumer's stomach. And I want every single bit of beverage growth potential that exists out there."

Even sleepy companies in industries as strait-laced as banking have sprung from their torpor. And it's not always the big guys picking the fights. In a recent TV campaign in New England, Boston's USTrust (assets: $1.8 billion) took a shot at Fleet Financial Group and Shawmut National, whose pending merger will create a fearsome power with assets of $81 billion. The spot showed a rear view of two fat and balding bankers seated on a bench. "Now that they have twice the assets," a voice asked, "will they sit on your loan twice as long?"

By naming itself in the same breath as the front-runner, USTrust hopes to separate itself from the pack and convince consumers that there are now just two horses in the race. Six Flags, an amusement park chain belonging to Time Warner (owner of Fortune's publisher), is using the same strategy when it compares itself with the gold standard, Disneyland. But instead of insulting its rival, Six Flags' television ads damn with faint praise: "Disney is a great vacation destination," a voice says. "So is Australia." When the original campaign broke two years ago, Disney was not amused. The company failed to renew several million dollars in advertising in Time Inc. publications, and to Six Flags' great delight, Disney's Michael Eisner made his rival front-page news by reportedly calling the ads "reasonably despicable."

Weapons in the corporate arsenal go well beyond advertising. Litigation, for instance, is a way for high-tech market leaders to weaken thinly capitalized competitors. Take the feud between nascent chipmaker Cyrix and Intel, which controls 88% of the PC market for preinstalled microprocessors and had sales last year of $11.5 billion. For the past five years, the two have been skirmishing with suits and countersuits over patent infringement and other matters. Cyrix, which has settled some suits and won others, has accumulated more than $20 million in legal bills--a large sum for a company whose revenues last year were only $250 million. Says Cyrix marketing chief Steve Domenik of Intel's CEO: "I can't say we encourage our people to think ill of Andy Grove, but we did put Intel's tombstone in our lobby atrium, and we make sure the flowers stay fresh."

Sometimes just the fear of litigation is enough to cow a comer. Irving Green, a small CD-ROM publisher in Cedarhurst, New York, recently got a sense of how far Microsoft is willing to go to defend its turf, trustbusters be damned. In March, Green received a letter from Microsoft's lawyers saying they owned the rights to the word "bookshelf" when used in the title of a CD-ROM; therefore, calling his Jewish reference work the First Electronic Jewish Bookshelf violated Microsoft's trademark. "They didn't sue me," says Green, "but the mere fact they sent me a letter with 97 names on the letterhead--that's a lot of intimidation."

Microsoft insists it does not want to drive Green out of business, and the two sides are trying to resolve the conflict. But Green says he will have to give up on his product if he has to repackage it. Implicit in the incident is the message that not even Microsoft can rest on its laurels. Says antitrust attorney Joseph Kattan of Morgan Lewis & Bockius in Washington, D.C.: "The rate of technological change in this industry is so dizzying that winning round one simply entitles you to show up on the playing field for round two."

In the U.S., nothing illustrates the ferocious nature of the new art of war better than the rivalry among the three major long-distance carriers. An equally intense contest is under way in Thailand, where Japanese giants Sony and Matsushita are battling for the consumer electronics market. The fighting styles present a study in contrasts: premeditative and cerebral in Asia, a game of one-upmanship in the U.S.

The transition from genteel shadowboxer to barroom brawler hasn't come easily to AT&T. Drawn and quartered by the Justice Department in 1984, the former monopolist was far more reluctant than Microsoft to take on noisome upstarts. For nearly a decade it sat back while its share of the long-distance business faded like a bad connection. MCI scored big with the industry's best marketing idea ever, its Friends & Family discount program. Begun in 1991, Friends & Family capitalized on the fact that people tend to limit their long-distance calls to a small circle of intimates. MCI offered better rates for calling these folks--as long as they too were MCI customers. In effect, scrappy MCI was getting consumers to help with its marketing by enticing them to sign on their parents, children, and close friends as MCI customers. By 1993, MCI had snared 18% of the long-distance market. AT&T was left with 60%, vs. 90% in 1984.

AT&T may have been purposely letting its share slide as far as it did to avoid federal scrutiny. But in December 1993, the silent sufferer decided enough was enough. Joe Nacchio, AT&T's new chief of consumer long distance-with help from henchmen who had fought cookie and cola wars at other companies-launched AT&T's Scud missile, a massive discount campaign called True. Backed by hundreds of millions of dollars in advertising and the voice of Whitney Houston, True offers everything from frequent-flier miles to free calling minutes.

While touting True, AT&T also aims endless low blows at Friends & Family. Calling circles are a nuisance, its ads imply; MCI telemarketers are pests; and asking people for the names of their closest friends and family is an invasion of privacy. Vintage spot: a wedding ceremony at home. Dad takes his daughter's arm, the two descend the stairs, guests gasp. Suddenly the phone rings. The daughter answers. "Dad, it's that MCI guy again," she groans. "Oh," she continues, "you got my name from Uncle Al." A red-faced gentleman squirms in his seat.

Other ads dismiss MCI's discounts as deceptive. How can AT&T level such a charge? "We bought thousands of bills from MCI customers and had our econometricians at Bell Labs analyze them," says Dan Clark, senior vice president of marketing. (Clark's idea to study the bills was an old marketing trick he picked up at Pepsi, where, he says, "we used to analyze the ingredients in Coke all the time to see what its strengths and weaknesses were.") AT&T says it found that most of the people MCI customers call are not fellow subscribers, which means the calls aren't eligible for deep discounts. AT&T claims that participants in Friends & Family II, the second incarnation of MCI's program, receive only 13% off, on average, not the 40% MCI touts. Therefore, says AT&T, its 20% discount is better than MCI's 40%. You follow?

The claims and counterclaims are so tough to sort through that many consumers have simply stopped listening. The public bickering got so intense that at one point MCI's adman Tom Messner swept his office for bugs because he was convinced that AT&T was lampooning ads he hadn't yet released. Almost nothing MCI does escapes AT&T's cynical eye. One MCI spot features Dr. Joyce Brothers, who after a soul-searching session on the couch decides to ditch AT&T for the cheaper alternative. AT&T claims that when the famous psychologist went through the motions of establishing herself as an AT&T customer so that she could later make the switch--truth in advertising required her to do so--an AT&T telemarketer twice offered to sign her up on a discount plan. She reportedly refused, insisting instead on the higher base rate. "Of course MCI's discounts beat our base rates," says AT&T marketing vice president Debra Isenberg. AT&T has yet to figure out a way to call MCI on this in a 30-second TV spot.

AT&T doesn't rely on ads alone to win back customers. An army of telemarketers does its fair share of harassing people at dinner time. And AT&T has bought hordes of converts by writing checks for up to $100 to folks who quit the competition and come home again. MCI, which has used the same tactic on a far smaller scale, estimates that last December alone, AT&T mailed out $55 million in checks to MCI customers, negotiable only upon deserting the enemy camp.

At year-end AT&T declared itself the winner. Profits were a record $5 billion on sales of $75 billion. Its consumer long- distance division had won the coveted Malcolm Baldrige award for quality. CEO Robert Allen was beaming about his acquisition of McCaw Cellular Communications, his new link to local consumers. And for the first time since divestiture, AT&T had reversed the slide in its long-distance market share, claiming a net gain of 1.2 million customers, most of them from MCI.

The victory dance was premature. In January, MCI launched a third version of Friends & Family that responds to criticisms from AT&T. MCI now guarantees a 25% discount on all long-distance calls, even if the other party is an AT&T customer. At the same time, MCI raised the discount on calls within calling circles to 50%. To date, AT&T has found nothing about the plan to parody, nor has it topped the offer. Says MCI's Messner: "The boca grande over there, Nacchio, took his bows too early."

Sprint has played a curious role in this rivalry. Wisely trying to fight a one-front war, AT&T and MCI rarely mention Sprint. Says MCI's Tim Price: "We don't see them. We don't feel them." Consumers do, however. With a long-running campaign that features a nonconfrontational but seductive Candice Bergen, Sprint has won close to 10% of the long-distance market.

Quick! How much do you pay for a minute of long distance? If you're like two-thirds of the nation, you haven't got a clue. In January, Sprint played off that ignorance--and the widespread confusion over rates--by introducing Sprint Sense. Instead of receiving a discount off the base rate, Sprint Sense subscribers pay 10 cents a minute at night and 22 cents during the day. (For the skinny on long-distance rates and some clues as to how consumers and shareholders have fared in the battle, see box below.)

The level of fury these companies have brought to the consumer long-distance war suggests that much more is at stake than the $320 million in revenues for each point of market share won or lost. As soon as deregulators clear the way, the long-distance trio and the regional Bell operating companies that control the $90 billion local market will be free to invade one another's turf. But what really drives AT&T is the desire to become a major player in the global information industry, where it faces not only familiar telephone rivals but companies like Microsoft and Viacom as well.

Clumsy as it has been in these early rounds, AT&T seems to have learned a lesson: Unless you want to portray yourself as the Hyundai of your industry, competing on price is a panic reaction--and almost always a mistake. The exception would be if you deliberately waged a price war to weaken your opponent, the way Kazunori Somaya did in Thailand, where he manages Sony's consumer electronics business. But Somaya, 48, never throws a stone until he can predict its farthest ripple. He says he tries to think the way an expert chess player does--ten steps ahead. He advances only when he is sure he will overtake his rival. "I study them from A to Z," he says, "what kind of products they have, what they are doing, what their strategy is."

Somaya thinks about strategy while meditating in his Bangkok home. But he also looks for clues about his competitors by studying their distant pasts. He collects ceramic shards in Southeast Asia that date back as far as the 14th century. He's not interested in the whole vase, just the broken pieces. They reveal to Somaya's tutored eye just how sophisticated a culture is.

Although he meditates with fanatic intensity, Somaya moves quickly in battle. Speed is everything in mounting an attack, he says. Just how fast a response is required? Within a week? A day? "One minute," says Somaya, who looks anxiously at my telephone, which has just begun to ring. "I tell my people to pick up the phone by the second ring,'' he says, his face noticeably calmer now that I have answered the call.

Twice over the past 20 years, Somaya has successfully challenged Matsushita in markets where Sony had virtually no presence in consumer electronics, first in Saudi Arabia and currently in Thailand. Interestingly, he has faced the same warlord each time, Matsushita executive Hisashi Nakai (who refused to be interviewed for this story). Today, he says, Sony and Matsushita have about the same market share in Thailand. But when Somaya first arrived in 1988, his rival controlled one-third of the market and had a lock on downtown Bangkok. "Matsushita was king of kings," he says. "There was no way for me to go in. Areawise, we had no chance; productwise, we had no chance; and dealerwise, we had no chance."

Instead of launching a frontal attack, Somaya decided to surround and suffocate Matsushita, borrowing a strategy from Chairman Mao. "Mao didn't attack Shanghai directly. First he captured the rice fields, and then he attacked the city," says Somaya. "First I surrounded the downtown, ta-ta-ta-ta," he recalls, imitating the sound of an automatic weapon. "I captured the department stores outside the center, where Matsushita had no presence."

Somaya then closed in on two fronts, advertising and price. "I waged a war of perception," he says. "I understood the psychology of the Thais. They're even more brand conscious than the Japanese." Somaya established Sony as a status symbol by selling only high-end items and promoting their image rather than their technical attributes, the way Matsushita does. "I never sell a Walkman," he says. "I sell Sony fashion to the Walkman generation."

Somaya broke the central Bangkok market by waging a price war in televisions. In a counterintuitive move, he attacked Matsushita not where his rival was weakest--in the high end of the market--but where it was strongest and had the most to lose, in smaller screens. He did so by cutting the price of his 21-inch television set to that of his rival's 20-inch set. That, he says, forced Matsushita to lower prices on the 20-inch set. But the more the company lowered the price, the more it threatened its best-selling product, the 14-inch set. Why would consumers want to buy a 14-inch TV if they could get one six inches larger for almost the same price? When the price difference dropped to just $40, Matsushita gave up on the 20-inch set. "They had to give us room," says Somaya. "In the higher end, we are the king of kings."

For now, anyway. Somaya would be the first to concede that the war never ends and that all leads are temporary. Companies that gain the upper hand in rivalries and then maintain their position will be the ones that learn how to take opponents by surprise again and again, using the rivals' own strengths against them. If Ma Bell is still honing these skills, her first rounds in the ring make clear that her heart, at least, is in the right place. As another great lady, Mae West, once said: "When I'm good, I'm very good, but when I'm bad I'm better."