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Video Journal

Vol. 20 No. 2

Classic AT&T

inside AT&T

Part III

January 1, 1984 — January 1, 2004
AT&T 20 Years Later

Whatever Happened to the World’s Largest Corporation?
See What Former AT&T Leaders Have to Say About It.



 Special Guests

Edward Block
Harold Burlingame
Alfred Patroll
EDWARD M. BLOCK was AT&T Senior Vice President, Public Relations and Employee Information; he has been Vice President of that department since 1975. Prior to that he was Illinois Bell’s Vice President-Public Relations. His Bell System career has spanned numerous positions in Public Relations at AT&T and at Southwestern Bell, where he began as Information Assistant in 1952. Public affiliations include directorships of the American Council for the Arts and the National Arts Stabilization Fund. A native of Texas, Mr. Block holds a B.A. and honorary doctorate of law from St. Edwards University. HAROLD (HAL) W. BURLINGAME retired as Executive Vice President at AT&T in July 2001, when he joined AT&T Wireless as it spun off as an independent company. Currently Mr. Burlingame is associated with AT&T Wireless as a Senior Executive Advisor where he has led Human Resources and Public Relations, recruited members of the Board of Directors, and staffed senior positions for the new firm. Prior to this most recent role, Mr. Burlingame headed the AT&T Human Resources Organization from 1987–1999, and handled Merger and Joint venture Integration. During that period, AT&T went through several restructuring steps. He was deeply involved in helping lead those efforts including the Trivestiture that spun off Lucent Technologies and NCR. Earlier, in 1982, he was on the advance team that broke up the Bell System. ALFRED C. PARTOLL was AT&T Communications Exec. Vice President for External Affairs. A member of the Illinois and New York State Bars, he began his Bell System career as attorney with Long Lines, and held subsequent legal posts at AT&T and New York Telephone before becoming AT&T Director of Strategic Planning in 1978. He is a native of Chicago, and holds & B.A. degree from the University of Illinois and a J.D. cum laude from DePaul University.
Richard Romano
William Ellinghaus
Michael Beilis
RICHARD A. ROMANO was Vice President, Government Affairs, Eastern Region of AT&T Corp. and President of the AT&T Communications Companies in the Northeast and Mid-Atlantic areas. He received both his undergraduate (B.S., Business Economics) and graduate (MBA) degrees from Marquette University. He began his career with Wisconsin Telephone Company. He held a variety of positions at AT&T, including Director, Financial Planning. In that role he chaired the Company’s Joint Financial Task Force that prepared the financial studies utilized in the decision to divest the Bell System of its local telephone companies. Mr. Romano serves as a member of the Board of Advisors for Rutgers University Business Education Programs and the Board of Directors of the New Jersey Insurance Underwriter’s Association, the New Jersey Sales and Marketing Executives Association and is Vice Chairman of the Affinity Federal Credit Union Board of Directors (assets of $1.3 billion). Upon retirement, Mr. Romano formed RRC Consulting and is its President. He has been appointed a Distinguished Executive in Residence at Rutgers University’s Business School-Newark and New Brunswick. WILLIAM M. ELLINGHAUS became Chairman of the Board of PBS/Channel 13 in April 1984, after serving as AT&T’s President from 1979 to 1984 and Vice Chairman from 1976 to 1979. From 1970 to 1976 he was President of New York Telephone Company. His Bell System career, begun as installer with the Chesapeake and Potomac Telephone Company in 1940, included numerous positions with C&P and with AT&T. Mr, Ellinghaus’ wide-ranging civic and corporate affiliations have included Directorships of Bankers Trust, Bristol-Myers, Armstrong World Industries, and International Paper Co., and of the New York Chamber of Commerce and Industry and the United Way of New York City, He was Chairman of the National Arts Stabilization Fund and of the U.S. Council for World Communications Year 1983. He is a native of Baltimore, Maryland. MIKE BEILIS, Executive Producer & Moderator
President, KMB Video Journal

Understand how management decisions can be caught in a situation that is neither rationale or predictable. Understand how personalities, issues, and events have shaped decisions with unforeseen consequences.

The questions and comments that follow are based on the major issues and events that confronted AT&T in the last 20 years and are designed to help stimulate further discussion.

Reviews of Program

Henry Geller
This program raises critical issues about what happened to AT&T, post-divestiture, and gives fascinating insights for its decline. As to whether there was an initial flaw in divestiture itself, the answer is surely yes. The structural separation of the 22 local Bell operating companies from the rest of AT&T was effected by the Department of Justice (DOJ) to further antitrust policy — to bring about full and effective competition in long distance; DOJ stated that it had separated the workably competitive from the naturally monopolistic. But as events have shown and continue to do so, local telephony is not a natural monopoly; further, the action did not take into account that local and long distance were artificial constraints in the emerging telecom scene; and it failed to focus on the growing importance of data and information services as against voice transmission. In short, the DOJ greatly disruptive action looked to the past, not the future in this dynamic field. (We at NTIA unsucessfully urged upon DOJ a much more modest approach — to spin off three Bell local companies, one a "jewel" like Pacific Bell, to serve as "bellwethers" to insure fair and efffective interconnection at the local level). Further, it did not help AT&T that the regulators, especially at the State level, were reluctant to truly deregulate, with the result that for too long, there was "regulated competition," as Al Partoll points out.

However, the main reason for the decline lies with AT&T management. The program notes the lack of a "vision" for the new AT&T. But the program contains a visionary statement by Charles Brown that is breathtaking in its scope and foresight: that the future lies with emerging services and technologies that will connect and bring information to all people for commerce, education, and a great variety of social purposes. The crucial task for AT&T was to implement this vision, and in this it failed. It tried acquisitions in the computer field that turned out badly (e.g., NCR); it recognized the importance of wireless late and made a large acquisition, now spun off from the core company; and it recognized the importance of a connection to the local customer, especially a broadband one, and acquired cable companies, overpaying for the largest one which needed extensive infrastructure upgrading (Bell Atlantic did due diligence and avoided this pitfall). As the Wordsworth poem states, getting and spending it lay waste its powers. Al Partoll put it aptly: There are transactionalists and transformalists; the latter effort is difficult but was vitally necessary for the new AT&T to effect the above Brown vision; however, AT&T lacked the great wisdom and competency needed in this crucial transforming respect. The end result is ironical: A diminished AT&T waiting to be acquired by some obliging Bell Company. If GE will be studied for how a company should proceed in uncertain and dynamic times, AT&T will be studied for the opposite reason.

Victoria Mason
What has happened to AT&T Corp., formerly the world’s largest corporation, over the past 20 years is a sad story in every respect. Government policies, dramatic changes in corporate values, poor business decisions, and marketplace shifts all have contributed heavily to AT&T’s astounding decline in revenues, number of employees and services, global and domestic power, and reputation. But plain-old internal "people issues" seem to have been the biggest problem, according to former AT&T executives appearing on the KMB Video Journal’s "Inside AT&T: Part III." Business leaders struggling with today’s unpredictable market conditions – heightened competitiveness, fickle yet demanding customers, fast technology changes, government oversight, corporate malfeasance, and debilitating internal politics – would appreciate the candid views of execs who carried out the 1984 breakup of the Bell System. There also are important lessons here for today’s business school graduates who will face an economy and workforce in turmoil. Now-deceased AT&T Chairman Charles Brown, who presided over the company when the antitrust consent decree was negotiated in the early 1980s to divest major portions of the old Bell System, explained to employees at the time, "Our future was going to change whether we did nothing, kept on with what we were doing, or took the step we did." Execs interviewed on KMB’s video continue to support Mr. Brown’s actions, but they are highly critical of "outside" leaders who came to the company later. Hindsight is always "20/20," they say, acknowledging that all the implications of AT&T’s divestiture and restructuring decisions could not possibly have been foreseen. "Managements are less prescient than they are given credit for," says one. Another adds, "In the last part of the 1990s and early 2000s, AT&T endured a perfect storm of [many previous] things crashing in at once." He believes "this is underscored dramatically by what has happened at Worldcom and elsewhere" in the business world. What has occurred within AT&T in the last 20 years? The company has shocked its customers, shareholders, and workers. For more than a century it was a strong, proud organization, with high-quality management, approval from customers, an integration with the communities it served, and a clear vision of its role and commitments. Divestiture shattered its business model built around the local exchange, and the company never succeeded in devising a successor strategy. Confusion about "what we were going to be when we grew up" was pervasive, says one exec. AT&T’s business was founded on the idea of a "three-legged stool": It treated customers, shareholders, and employees equally, in order to stay in balance. All that changed after divestiture, and the employee part was lost in the shuffle. In addition, the public, which long had viewed AT&T as invincible, "checked out on us once divestiture was described," an exec tells KMB. AT&T had to establish a fresh identity, including a new name, logo, list of services, and way of doing business. The results were wildly mixed. In addition, AT&T relied too much on "idiotic" outside consultants, says one exec. Finally, although many federal and state regulatory problems – including incorrect assumptions – had to be addressed after the Bell System’s breakup, the company failed to marshal all its internal resources to explain the new business realities to regulators.

The "new" AT&T made some horrendous decisions about acquisitions and lines of business, and cultural assimilation of diverse groups of employees became impossible because of the lack of a shared vision and corporate culture. But other "people issues," however, took an even greater toll on the company. Internally, the long-admired management development programs were curtailed, there were massive reductions in force, and key employees were hired from outside the company. Because AT&T employees felt they no longer could move up in the organization, there was a "brain drain" as good people took buyout packages and went elsewhere. AT&T may have been correct in hiring from the outside the talent it lacked, but many of the new employees "didn’t speak the same language. They couldn’t coordinate and talk to each other," KMB’s video explains. Former execs participating in the video have studied upheavals at Chrysler, General Electric, and IBM. AT&T’s unfortunate experience is compared to what these companies did to achieve transitions successfully. The lessons will be valuable to American businesses, regulators, and the financial markets for decades to come.

— Vicky Mason, communications consultant and former editor-in-chief at Telecommunications Reports and TRDaily

Paul Kjellander
If hindsight has the benefit of 20/20 vision, then getting that view from the people who lived through an event provides a more perfect perspective. This KMB Video presentation brings former AT&T leaders together in an attempt to identify what went wrong from divestiture forward. While their separate comments expose unique aspects of AT&T’s struggles, collectively they point to a major shortcoming. The significant belief these insiders share is that AT&T’s difficulties stem from a lack of a clearly articulated vision for the company’s future. The problem started with divestiture and never improved and was further exacerbated by AT&T’s new blood that mistakenly equated divestiture with deregulation.

Ken Robinson
I’d definitely recommend this television program to business school students — maybe even their learned professors — who are interested in how large and complex companies should, and shouldn’t cope.

In late 1981, when the Antitrust Division and AT&T officials were busily divvying up the Bell System’s assets like a Thanksgiving turkey, it’s pretty clear one major resource — the company’s work force — was overlooked. The old Bell System workforce, something in excess of 1 million people, was superior by any measure: education, longevity, productivity, dedication, commitment to diversity. You name it. They were truly the best. But the Government and AT&T management proceeded with an enormous — and, enormously disruptive — transaction as if the people of the Bell System didn’t really matter. And, that indifference to people seems to be a recurring story over the next 20 years, doesn’t it?

Most of this KMB program focuses on pretty fundamental personnel management shortcomings. For example, I was struck by one participant recounting how a new AT&T CEO at his first senior staff meeting agreed to go along with the statement of values the company had developed over more than a century because, if they were taken down from the wall, they’d leave a mark! I was interested to hear several participants explain how continually bringing in outsiders to very senior levels told Bell System personnel they didn’t stand much chance of promotion. It was also interesting to learn that the old Bell System graded executives on how well they arranged for their own succession — can you imagine that being undertaken by AT&T today?

The past couple of years there have been several best-sellers on management practices — Doug Garr’s book on IBM, Lou Gerstner, and the Business Turnaround of the Decade, for instance, or former GE CEO Jack Welch’s story. Not many of those books have focused on the men and women who, in the final analysis, constitute today’s corporations. The assumption appears to be that companies are real estate, equipment, and computers, and that not much else really matters. But is that really true?

AT&T today is a bit like Lewis Carroll’s "Cheshire Cat" — lots of smile, but not much cat. The old work force has attenuated to a shadow. The company no longer commands nearly the prestige or community standing that it did. It’s too bad.

Compare what’s happened to AT&T with some other important American institutions — the Postal Service, for example. Today, nearly every public statement by a U.S. Postal Service executive begins by seriously recounting that they recognize their stewardship, their responsibility to an ancient and honored organization with important national responsibilities — and, to the workforce and its tens of millions of customers.

High officers in the Bell System used to speak much the same way. All the participants in this program stood at or near the top of the Bell System hierarchy. I think this is the first time so many former chiefs have come together publicly and bemoaned the treatment of the Bell System "Indians." Of course, all the bemoaning in the world isn’t going to bring AT&T back. One of today’s stock market realities is the value of AT&T will remain a function of its acquire-ability. The fewer companies interested in buying the company, the lower the stock values will go. But B-school students and teachers might learn lots from this program. And, that might help future decision-makers avoid some of the problems which the Bell System breakup occasioned.

Bob Blau
Volume 20, No. 2 of the KMB Video Journal, AT&T 20 Years Later: Whatever Happened to the World’s Largest Corporation? truly represents a significant footnote in the annals of U.S. business and economic history. It also deserves an award if, for nothing else, unusual candor in broadcast journalism. From discussion about former AT&T chairman Mike Armstrong’s apparent contempt for the former Bell System’s corporate values, to the suggestion that AT&T’s acquisition strategies effectively prevented the company from successfully reinventing itself (like IBM) following the break-up, the tape is chalk full lessons to avoid in dismantling any large institution certainly including the World’s then largest corporation. The tape further demonstrates what most public policy "wonks" know deep down but, too often, chose to ignore or forget. What’s that? Well, have a look at Mike’s tape and see if you can figure it out!

Harold Furchtgott-Roth
Inside AT&T: Part III, is one of the most provocative KMB Video Journals. Video clips from the Divestiture era help recreate some of the tension between AT&T and the government in its antitrust suit. Charlie Brown, AT&T chief executive at the time of divestiture poignantly ponders aloud in 1983: "I assume there is life after the Decree." The camera pans to an audience filled with nervous laughter. Twenty years later, the assumption is still the subject of debate.

In Inside AT&T: Part III, Mike Beilis in 2003 interviews five individuals who were AT&T senior executives before divestiture. Their views on what happened to the world’s largest corporation are insightful, candid, and unconstrained. To paraphrase Shakespeare, they have come to bury AT&T, not to praise it. This twentieth anniversary tribute to the AT&T divestiture is a gripping program for anyone who has followed the telecommunications industry.

The Crandall Perspective

AT&T Insiders Look Back in Anguish
Robert W. Crandall
The Brookings Institution

Mike Beilis’s three-part series on AT&T’s handling of its antitrust crisis and subsequent divestiture provides us with some fascinating material. Nevertheless, watching the most recent of these programs in which retired AT&T executives try to explain what went wrong can be a frustrating experience. It is somewhat like watching Bill Buckner try to explain why the Red Sox lost the World Series. At the very end of the program, however, we hear what many of us now know with the benefit of hindsight – it was the “vision” thing, as President G.H.W. Bush was fond of saying. And of course we know how his vision was rewarded in 1992!

No one can understand the AT&T Breakup as anything but a remarkable series of accidents. Seeing Howard Trienens, Charles Brown, and Bill Baxter on the Beilis tape once again only serves to remind us how the confluence of Watergate, the Reagan Cabinet, and Judge Greene led to an antitrust outcome that was by no means predestined or even necessary. Yet, it happened, and the unfortunate leaders of AT&T at the time had to deal with it. What, in their experience, would provide them with guidance on how to proceed? Clearly, nothing! This is not a criticism – it is a fact. Businessmen lead by learning from others’ experiences.

When the unexpected or uncharted occurs, businessmen are generally left to their own instincts. Do they license the Haloid patent and become Xerox, or do they pursue the “word processor” and become Wang Laboratories? When you hear a replay of Charlie Brown opining in 1985 that fiber optics and microelectronics will change the world, you cannot fault him. But you could not predict that, in this environment, his successor would pay a fortune for NCR or that his successor’s successor would buy two of the three largest cable companies and fail to make them work. The successful gamble by Michael Armstrong on DirecTV got him the job at AT&T. The gamble on Comcast and MediaOne lost him his next job at AT&T and his position in the Pantheon of great American businessmen.

Of course, Charles Brown has left us and cannot look back with anguish with the other five live AT&T retirees that Beilis assembles on this show. Of these reflecting executives, four were involved in regulatory, public affairs, or employee relations. None ran the company, and all have watched while various outsiders came in and rode AT&T downward – notice that I do not say “drove” it downward. Perhaps no one could have seen the new world of fiber optics and packet switching that would drive the price of AT&T’s basic commodity to virtually zero. To these veterans, the blame for AT&T’s decline falls variously on declining employee relations, imported executives, and the referees, i.e., the regulators.

The last of these causes can easily be dismissed. AT&T was regulated after the breakup, but only through 1995. This regulation succeeded in keeping long distance prices up, hardly the cause of AT&T’s decline! But before diagnosing the travails of AT&T, one should consult the following chart. When did AT&T begin to hit the shoals? In1984? After Robert Allen bought NCR for a mere $7.5 billion? Hardly! The decline began in 1996, after AT&T was deregulated and the Internet was exploding. In fact, through 1995, AT&T outperformed the S&P 500 even though it was in an increasingly (but not fully) competitive business.

AT&T Chart

Source: www.finance.yahoo.com

So what went wrong? Again, it was the vision thing. As Alfred Partoll, AT&T’s former Executive VP for External Affairs, explains at the end of the program, there are executives who are “transformationalists” and those who are “transactionists.” Modestly, he puts himself and his colleagues on the Beilis panel in the latter category. They knew how to do what AT&T always had done, and they could do it rather well. They could get the long distance bills out on time. What they and their successors could not do was learn how to survive in a world of the Internet, Global Crossing, WorldCom, and exploding wireless deployment.

After a short inter-regnum following the Robert Allen era, Michael Armstrong became chairman of AT&T in November 1997. AT&T’s stock price had begun to fall even before he arrived; by the time Armstrong became CEO it was fully 30 percent below the S&P, as the chart shows. But the worst was yet to come. Armstrong was a “transformationalist.” He had bet the ranch at Hughes to launch DirecTV, and he now boldly paid huge premiums to get AT&T back into the local distribution business through the acquisition of two cable companies. Unfortunately, he was not a “transactionist;” he could not get the AT&T/cable amalgam to work. By the time he was through, he had spun off AT&T Wireless and was forced to admit defeat in the cable gambit, spinning off the cable companies to Comcast in early 2002. Just before the Comcast deal, AT&T’s stock had fallen to 73 percent below the S&P, indexing both to February 1984.

The Beilis program will not tell you what went wrong at AT&T, but it will suggest why things went wrong. In very choppy seas, people brought up in the old AT&T could not begin to understand how to deal with the new era. Most bicycle manufacturers went broke after Henry Ford began producing cars in earnest in 1903. Wang folded when others introduced much more flexible personal computers. Howard Hughes could not keep RKO Pictures alive after television began spreading to U.S. households.

In this very different post-1996 era, the long-distance company that was carved out of the 1984 AT&T decree looks like an anachronism. Conventional wisdom suggests that its only hope is that BellSouth will pay more for it than it is worth. But this speculation is keeping its price too high for BellSouth to pull the trigger. Perhaps AT&T should look for a way to make a bid for BellSouth! Now, there’s vision! Where are Michael Armstrong and Robert Allen, now that AT&T needs a “transformationalist” again? Wait for Part 4 of this series to explain this final denouement.

Communications Policymaking
Historical Series Memorandum

Re: AT&T: Two Decades of Bad
Management Come Home to Roost.

by Ken Robinson

Who would have ever thought that AT&T management would be reduced to shopping the company? Remember Heritage and Destiny, or Martin Mayer's Telephone? Remember the once-revered phone company whose Bell Labs invented the transistor and received Nobel Prizes? The enterprise which was declared an American "flagship," a "national treasure" by former Senator Ernest F. ("Fritz") Hollings?

The old AT&T was the world's largest -- and, most respected -- corporation, rightly proud of its accomplishments. Its workforce and executive cadre were of the highest caliber. They were universally respected. They had some 8 million shareowners. AT&T was the "widows-and-orphans" stock.

Who would have ever thought this proud tradition would end up in the hands of leaders who consistently failed virtually all assignments -- other than preparing their own executive compensation agreements. Even a stopped clock tells the right time twice daily. How was AT&T management able always to get everything wrong -- except, again, its own extraordinary compensation?

What precipitated this sad collapse? Well, pretty clearly the last CEO of the Bell System -- the late Charles Brown -- wasn't up to the challenge of changing times. Bill Gates stood up to the Justice Department and prevailed. Larry Ellison, too. Charlie Brown, however, caved. He abandoned the tradition of stewardship which had once bounded his office. Thus, Brown presided over the initial dismantling of Theodore Vail's empire.

The untimely death of AT&T CEO Jim Olson soon after the Bell System breakup in 1984 may be part of the problem, too. Highly regarded, Olson was replaced by a Bell Atlantic official, one Robert Allen, who soon proved out of his depth. Resembling public television's "Mr. Rogers," Allen was like "Joe Blftsplk" in the old "Li'l Abner" comic strip -- that gloomy little character with a perpetual cloud over his head, visiting calamity to literally all that he touched. The only thing Bob Allen did well was design his compensation plan.

Notably, under Allen there was a disastrous hostile takeover of NCR Corp., followed by a stream of management mishaps -- all of which nearly destroyed NCR and cost AT&T shareowners more than $30 billion, according to Forbes and Business Week. Allen told AT&T workers there'd be no or minimal layoffs, then instituted them. Paying himself tens of millions of dollars, he and his "management team" wreaked havoc with the corporation, its customers, and its market prospects. Stewardship? No AT&T executive since John DeButts has shown much interest in that!

Allen decided to manipulate the old Western Electric supply system, all the better to control the Bell companies. For example, AT&T refused to supply various central office switch features and functionalities -- and, as a result, the Bell companies spread their demand to new suppliers, including Nortel, Cisco, and Siemens. Instead of trying to adapt and cope with new market conditions, Allen also made the decision AT&T would focus on gaming the regulatory system. Instead of recruiting inventors, top engineers, or marketing personnel, AT&T bulked-up on lawyers. AT&T concentrated on competing in front of the FCC or Congress, and staying clear of the marketplace.

Allen's plan to tie-up the Bell companies in regulatory knots, however, proved an "incomplete success." Legislation passed in 1996 which greatly complicated AT&T's scheme. Thus, AT&T management made its first effort to sell the company. As former Attorney General Mitchell quipped, "When the going gets tough, the tough get going." AT&T's top management evidently wanted major money, so they could get out fast.

But in June 1997, FCC Chairman Reed Hundt declared the merger of AT&T and any Bell company (including SBC, at the time) was "unthinkable." Plans for merger were halted. Pestered to name a successor, Allen selected an obscure R.R. Donnelly executive who one of his own board of directors later declared "mentally incompetent." (The fellow was competent enough, however, to collect some $25 million for a brief sojourn at AT&T.)

Allen having been ousted, the new AT&T CEO, Mike Armstrong, thought he could make money by grossly overpaying for cable television properties which Dr. John Malone -- smartest man in cable -- no longer wanted. Eventually, the hapless Armstrong spent some $100 billion for cable systems the company later would have to divest for about $60 billion. Like Bob Allen, the fellow was well out of his depth.

Swamped with debt, AT&T sloughed off assets at fire-sale prices. It sold its cable systems to Philadelphia's Comcast (which was to find many systems in a shambles). True to form, AT&T CEO Armstrong negotiated a hefty payment for himself, however, even becoming "non-executive chairman" of what was supposed to be named "AT&T Comcast" (the AT&T was soon dropped).

In 2001, the new AT&T top management decided to try to sell the company again, and talks were held with the richest (and most solvent) of the Bell companies, BellSouth. But AT&T management demanded too much money for the faltering firm. According to the trade press, too, it wasn't clear what role the new AT&T top management saw in the future for themselves.

AT&T, at present, is a veritable shadow of itself, with a market capitalization of about $15 billion -- and, far fewer than 50,000 employees. The widows and orphans have long ago ditched their AT&T stock. The company's now majority owned by hedge funds and other speculators. The once-hallowed Bell Labs no longer really exists. AT&T's workforce also may well be the most thoroughly demoralized in the telecommunications business. More than 13,000 were pushed out the door in 2004 alone! Just imagine trying to recruit high-caliber personnel when you're in the predicament of AT&T today!

Well, General Dynamics in the 1970s established the so-called "slipping company" exception from antitrust law sanctions. Certainly AT&T would fulfill the requirements of that section 7 exception. One unresolved question, however: What's going to happen to "Golden Boy," that large art deco image of Mercury which once crowned 195 Broadway. The statue resided for a while in the lobby of 550 Madison Avenue -- the "Chippendale" high-rise the late Philip Johnson designed for AT&T shortly before it was broken up (it's now the Sony Building). "Golden Boy" was moved to Basking Ridge, and then was moved ignominiously to AT&T's latest headquarters, somewhere near Pizzaland in north Jersey.

Armstrong reportedly shut-down AT&T's historical archives and, indeed, tried to spin-off "Golden Boy" (presumably to spare the cost of periodic cleaning and re-gilding). Will "Golden Boy" end up in San Antonio?

Following the collapse of the Austro-Hungarian Empire, the spirit of Franz-Josef lived on in provincial capitals including Zagreb, Budapest, and Prague. Except that so many of the Bell System alumni have been forcibly retired, the merger of AT&T and any Bell company might be something of a happy family reunion. But consolidation will at least preserve something of AT&T's heritage-and-destiny, won't it? If it rekindles that sense of stewardship and national service commitment for which the old Bell System was well-known, that would be good for the American public, too.

The End of the Road for AT&T, MCI, . . . and Twenty Years of Telecom Regulation

Robert W. Crandall
The Brookings Institution

The last few weeks have witnessed the end of the U.S. telecom regulatory architecture that was originally spawned by the 1974 AT&T antitrust suit. The vertical fragmentation of the telecom sector and the isolation of the Bell-companies’ local networks, created by the 1984 AT&T divestiture, was replaced by the 1996 Telecom Act’s requirement that these local networks be shared with rivals, including the major long distance companies. Even though regulators aggressively enforced the 1996 Act by allowing the new entrants access to the Bell companies’ networks at low, subsidized rates, few of the new Competitive Local Exchange Companies (CLECs) have survived, and now even AT&T and MCI (formerly WorldCom) are exiting the stage. These latter two companies could not and cannot survive as un-integrated suppliers of long distance in competition with wireless (cellular) carriers, the Bell companies and –most recently – Internet telephony despite the best efforts of regulators to let them share the Bell company networks. As a result, these erstwhile giants have been forced by the twin forces of technology and competition into the hands of SBC and Verizon (or, perhaps, Qwest). This consolidation, by itself, will neither assure nor threaten competition, but it surely will bring an end to the endless regulatory squabbles that have paralyzed U.S. telecom policy for most of the last decade.

AT&T
Before looking forward to the policy issues raised by these two mega-mergers, it is useful to look back for a moment at the environment that fostered them. AT&T had tried and abandoned almost everything in an effort to recast itself as a candidate for survival. First, it bought NCR in an attempt to harvest the alleged synergies between computer and telecom equipment manufacturing. When this did not work, it divested both NCR and Lucent Technologies, its telecom manufacturing arm. Later, it tried to remedy its vertical isolation from its customer base by buying Teleport – a company with fiber-optics capacity serving major urban business corridors --for about $11 billion and two cable companies for $110 billion. When it could not convert the cable systems into integrated platforms for the delivery of voice, data, and video to the mass market, it divested them to Comcast at a large loss. Along the way, it also spun off its wireless operations, which subsequently were acquired for $41 billion by Cingular, far more than the parent company subsequently brought from SBC.

By late 2002, AT&T had thrown itself to the wolves by stripping down to being just a long distance carrier, competing with the new “bucket plans” of long distance minutes offered by cellular companies and with the various other long distance companies who had over-expanded capacity during the stock-market bubble of the late 1990s. For a short time, it tried to connect to its customers by leasing from the Bell companies the so-called “UNE Platform” at low regulated rates, and option that the FCC had invented out of the language of the 1996 Telecom Act before it was overturned by the federal courts in 2004, thereby ending AT&T’s short-lived attempt at pseudo vertical integration.

No one should think, however, that leasing the entire local network from the Bell companies could have saved AT&T or any other company without its own local facilities. The UNE Platform was more of a burden to the Bell companies than a life raft for the long distance companies and the gaggle of failing new entrants who tried to use it. Without their own local network, none of these companies could offer anything new or innovative to their customers. The principal beneficiaries of this regulatory invention were the telemarketers who tried to convince us that a Bell company’s services were better if they were called “AT&T” or “MCI.”

AT&T has now agreed to sell what remained of its business to SBC for $16 billion plus the assumption of about $9 billion of long-term debt. This is not an insignificant amount of money, but it pales in comparison to the $50 billion that AT&T spent on new capital facilities plus Teleport between 1996 and 2003, not to mention the un-depreciated portion of the network assets that remain from pre-1996 capital expenditures. Clearly, AT&T and its brethren invested far too much in network capacity during the telecom bubble, capacity that is now being gobbled up at fire-sale prices.

MCI, WorldCom, etc.
Verizon’s offer to buy MCI comes immediately after a more sordid tale that is now playing out in the New York trial of WorldCom’s former chairman, Bernie Ebbers. MCI, formerly known as WorldCom and MCI-WorldCom, entered bankruptcy in July 2002, the victim of the market forces that sank other long distance carriers, such as AT&T, and of its own accounting irregularities. WorldCom was built out of a seemingly endless series of mergers, the most important of which was the acquisition of MCI in 1998. Soon thereafter, it also bought local fiber-optics carriers MFS and Brooks Fiber for nearly $16 billion in its (overvalued) stock.

WorldCom and MCI reported $45 billion in capital expenditures between 1996 and 2003, even after restatement of their 2000 and 2001 financials. Thus, in pursuing the illusory benefits of the apparently unlimited growth of the Internet, the company spent at least as much as AT&T for network facilities, including the $16 billion spent on Brooks Fiber and MFS and additional billions on the purchases of companies such as Intermedia and UUNet. After being reorganized in bankruptcy, MCI emerged with assets that it appears will bring perhaps $7 billion or $8 billion from Verizon or Qwest. Accounting fraud may have been the event that triggered WorldCom’s bankruptcy, but excessive investment and the cruel economics of the long distance business would surely have targeted it for extinction anyway.

The Regulatory Issues
Major telecom mergers, such as SBC-AT&T and Verizon(Qwest?)-MCI must survive regulatory screenings by state commissions, the FCC, and the Department of Justice. One can already hear the buzz of the opponents who hope to get their pound of flesh as each of the two mergers slowly wends its way through the regulatory approval process. The most common charge leveled at these combinations is that they will reduce competition in the large business (“enterprise”) market. Less concern is expressed about the consumer market, largely because most of us have gravitated to wireless for a large share of our long distance calling and still others are lining up for “Voice over Internet Protocol” (VoIP) services offered over broadband connections.

It will be interesting to see how the arguments over the effect of the mergers on the enterprise market play out before the various regulatory bodies. Each one of these regulators was instrumental in delaying the Bell companies’ entrance into the enterprise market by denying them for four to seven years the state-by-state approval required to enter the long distance market under Section 271 of the 1996 Telecom Act. During the early part of this period, this delay also resulted in less competition in the consumer market. The avowed reason for delaying the Bells’ entry into in-region long distance services, and therefore the enterprise market, was the desire to perfect the entry conditions for the new Competitive Local Exchange Carriers (CLECs), but the futility of this exercise was surely apparent by late 2000 or early 2001 as the CLECs began to fail in droves. Nevertheless, the regulators persisted in trying to keep the illusion of local competition alive by lowering the Bell companies’ wholesale rates, allowing the entrants to lease the entire complement of Bell local-network facilities (the UNE Platform), and delaying the last Section 271 approvals for Bell-company entrance into long distance until 2003.

Are these same regulatory bodies now going to oppose the SBC-AT&T and Verizon(Qwest)-MCI mergers on the grounds that the mergers could nip in the bud the competition finally being provided by SBC and Verizon in the enterprise market? Why, then, did they bend over backwards to delay SBC and Verizon’s entry into this market for so many years? And if SBC and Verizon were not to buy AT&T and MCI, how rapidly would the Bell companies and the wireless carriers drive the flagging long-distance giants into the ground anyway? These two erstwhile long-distance behemoths’ revenues have been declining at 10 to 15 percent per year for the last few years. Could they survive much longer as these revenue declines continued or even intensified?

Surely the existence of excess capacity in national transmission networks and the potential competition from the other two Bell companies, Global Crossing, Level 3, and other carriers should discipline SBC-AT&T and Verizon-MCI if the latter try to raise rates in the enterprise market. Even if these rates do rise for some period of time, however, the losses to consumers will pale in comparison to the $20 billion that the regulators cost consumers by keeping the Bell companies out of long distance between 1996 and 2003.

The Real Benefits of the Merger—A Regulatory Armistice
The most important benefits from these two mergers is a likely end to the intense intramural regulatory squabbles that have gripped the U.S. telecom sector since the 1996 Act replaced the AT&T decree. MCI (or its forebear, WorldCom) and AT&T have played important roles in arguing for increasingly subsidized access to the Bell companies’ networks so that they could try to gain access to their customers. The FCC and state regulators had been responsive to their pleas for political reasons – these companies employ(ed) thousands of workers across the country -- and because the regulators desperately hoped that they could perpetuate the illusion of competition created by the entry of scores of new carriers, however artificial it may have been. As these new entrants began to fail, the regulators were even more receptive to the pleas of AT&T, MCI (WorldCom), and the surviving CLECs.

Unfortunately for the regulators, each successive new set of regulations designed to ease the plight of these failing local telecom entrants, including the long distance companies, was overturned by the federal courts. The FCC was finally forced to retreat from this effort when the Administration refused last year to appeal the FCC’s latest court reversal to the Supreme Court. This was perhaps the final straw for AT&T and MCI, who must have seen that their lobbying expenditures in Washington had begun to generate returns that were as low as the returns to their network investments over the previous decade. It was time to pack it in and look for an escape from failure.

With AT&T and MCI out of the way, the regulatory battles will surely recede in intensity. It is unlikely that the combined political clout of US LEC, Z Tel, ICG, RCN, Choice One, XO, Covad and the other CLECs still clinging to life will have the weight of AT&T and MCI in the state and federal regulatory arenas. The attention of regulators has already shifted from this battle anyway as the result of repeated court reversals and the failure of the entrants. It is likely that the competitive battleground will now feature the Bell companies, the wireless carriers, and the cable companies slugging it out with the regulators simply watching, as confused as the rest of us are about the eventual outcome. Regulation will increasingly become a struggle to preserve the billions of dollars in annual “universal service” funds that are extracted from telecom revenues to be sprinkled across schools, libraries, rural health facilities, high-cost rural telephone companies, and lower-income subscribers. After the last nine years, what a relief this will be!

 

 

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