Editor's Note: This column first appeared in The Tech Edge, a proprietary newsletter, on Tuesday, April 15. For more information on The Tech Edge, click here

.

Leave it to

AT&T

(T) - Get Report

to drop the business services ball.

The past year's bizarre string of telecom scandals put a big fat opportunity squarely in Ma Bell's lap: a chance to dominate the most lucrative niche in a faltering industry.

But in a failure that could haunt the house of phone for years to come, AT&T has stumbled in trying to cash in on setbacks at a pair of rivals. Now, having failed to secure the hoped-for bounty of big-business phone and data service contracts, many of AT&T's top managers won't be around to see what happens next.

As I noted in the Feb. 4 issue of

The Tech Edge

("Ma Bell Sticks to Her Knitting as Rivals Unravel"), AT&T fans were gleeful at the prospect of collecting customers bolting from troubled rivals. There seemed to be great cause for optimism following the cooked-book implosion at No. 2 competitor

WorldCom

, now known as MCI, and the tax shelter imbroglio that overtook No. 3

Sprint

.

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But a couple of recent events indicate that the exodus from MCI and Sprint may not have been quite as vast as AT&T bulls had hoped. First, MCI started looking healthy, reporting an actual monthly profit on its way to filing a timely reorganization plan. And then AT&T started in with what could be called the shock and awe phase of its latest management shakeup.

T Off
The stock stumbles

CEO Dave Dorman replaced two high-profile division heads -- sales chief Ken Sichau and top engineer Frank Ianna -- with their underlings, and promised similar changes would follow. It will get worse before it gets better for insiders: People close to AT&T say the "house cleaning" will involve some 50 high-ranking managers who will be sent packing in the weeks and months to come.

AT&T declined to comment on the number of employees that may be affected by the revamping. The phone giant says the reorganization is its first attempt to adjust the structure and size of the company to the market since its spinoff of its wireless and cable businesses. A spokeswoman adds that the shakeup has nothing to do with MCI's resilience.

But some industry observers scoff at AT&T's spin on the events. For the umpteenth time, say critics, AT&T claims it's dismantling the management fiefdoms that have long gummed up the company's effectiveness. "They've been saying that for as long as I can remember," says one telecom consultant who asked not to be identified.

Industry insiders say the truth is much uglier than the appearance. AT&T has won some business from the WorldCom debacle -- roughly $600 million per year, by analysts' estimates. But considering that MCI had $37 billion in sales last year, that wasn't enough to convince key people that AT&T had its A-game working.

According to one analyst,

BellSouth

(BLS)

pulled out of informal merger discussions with AT&T once it became clear that Ma Bell was hopelessly behind in its efforts to win more business. A BellSouth spokesman denied there were any discussions.

Perhaps even more sobering is the prospect that the window of opportunity for AT&T has closed. Typically, corporations, for security and redundancy purposes, split their communications work between carriers. For most big-ticket accounts, AT&T and MCI offer the kind of scale required to meet a multinational's needs.

While some companies may shift more traffic to AT&T, few are willing to drop MCI outright. And now that MCI's restructuring plan has been filed, the worst seems over for the former WorldCom. "Changing vendors now would be pointless," says a New York-based debt analyst who holds WorldCom bonds.

Obviously, this doesn't suggest AT&T is doomed, but it is now clear that Ma Bell must share the coveted business niche that it once had a chance at dominating.

In keeping with TSC's editorial policy, Scott Moritz doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. While he cannot provide personalized investment advice or recommendations, Moritz invites you to send comments on his column to

Scott.Moritz@thestreet.com.

Scott Moritz is also the author of TheStreet.com's, The Tech Edge -- a premium subscription newsletter containing Scott's valuable insights into today's tech market.

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