Thursday, January 12, 2006

Ma Bell Regroups

A blog is supposed to have fresh new content posted regularly. I am remiss in keeping my blog active. Visitors, parents, holidays, and other projects are my excuse, but it only takes a few minutes to put something up there. There are plenty of great topics that I missed as a result, but SBC’s assumption of the AT&T name is just too much to pass on.

Free markets have a funny way of reaching equilibrium when people and governments try to manipulate them for their own benefit. Sorry to disappoint those in the blue states, but SBC’s acquisition of AT&T and Verizon’s acquisition of MCI prove that things that don’t make sense have a way of working out. I learned this fact very early in my career from a sage Department Head (Clark Ryan) in AT&T Bell Labs. As a logical thinking Electrical Engineer, I never thought that the structure of the divesture of AT&T in 1984 made sense, but logic had nothing to do with it. The design of the breakup was orchestrated by bureaucrats, lawyers, and accountants, not engineers for the most part.

Think back to the early 80’s when AT&T’s long distance and equipment businesses were the cash cows for the company. Business and long distance services were providing most of the revenue and profit for the company. Western Electric, which was to become AT&T Network Systems, dominated the market for almost every major category of equipment. Through these two divisions, AT&T could continue its dominance on the U.S. telecommunications market…or so they thought.

Shedding the labor and capital intensive local telephone business seemed like pure genius at the time. Most wire centers needed expensive upgrades to digital switches and an upgrade to the outside plant. Billions of dollars needed to be invested in this part of the business which would affect earnings for decades. If AT&T could divest them of this burden, then they were free to invest in computers, ala NCR, and international expansion. Their lack of success in computing is well chronicled. Their international expansion in equipment fared much better, but selling services proved much harder.

The divestiture was approved by Judge Green and the Regional Bell Operating Companies (RBOC) was created. AT&T was left standing with its business and long distance services, equipment arm, and world renowned Bell Laboratories. Up and coming executives like Joe Nacchio, Carly Fiorina, and Rich McGinn were the futures of the company…or so it seemed at the time. The wheeler-dealers in the company at the time continued to make bad business and investment decisions. The equipment and computer arms of the company were cut off into NCR, Lucent Technologies, and Avaya. Later Lucent spun off the semiconductor division into Agere Systems. Carly and Joe headed to greener pastures and Rich took over the helm at Lucent Technologies. All three underperformed at leading their companies while making exorbitant salaries.

What was left at AT&T was a failing long distance business and lack-luster performing business services. Their brief foray into wireless and residential broadband services ended by selling the divisions off to Cingular and Comcast, respectively. AT&T did not have much of a future for itself except an excellent brand and a host of top tier business customers. In contrast, the RBOC have worked for years to break down the artificial barriers imposed by divestiture. The Telecommunications Act of 1986 allowed them into long distance as long as they could prove that there was competition in markets where they wanted to offer long distance services.

The writing was more than on the wall. Customers wanted a full service provider. SBC and Verizon wanted to fill that missing link in their service offering which is why SBC decided that it made sense to purchase AT&T and Verizon sought MCI. These moves put back together the network that divestiture broke up. Business and residential subscribers could now purchase services from a single provider no matter where they were located. Billing and maintenance are greatly simplified for the consumer. Of course, there were the usual regulatory and consumer complaints but these two acquisitions made perfect sense to give customers the products and services they desire.

As consumers, we have competition and lower prices due to economies of scale. AT&T and Verizon can now offer subscribers the services they want without artificial barriers. They can offer most of these services globally to their customers. A new class of “megacarriers” is beginning to emerge from the ashes of divestiture. Look for these companies to make more acquisitions of video companies. Finally the shackles of divestiture are disappearing and the consumer will benefit from it.

Tag: AT&T, SBC