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The March 10, 2005 Issue Provided by System Dynamics Inc.
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"Ma Bell" Fades Away

The last few months symbolize the dramatic transformation in the US telecommunications industry. SBC is buying AT&T and either Verizon or Qwest will buy MCI. This completes the process started nearly thirty years ago when MCI became the first company to successfully challenge AT&T's hundred-year monopoly on US telephone service. That resulted in the slow-motion breakup of AT&T into equipment, long-distance and local service businesses. Now the "Baby Bells" are swallowing what's left of "Ma Bell" and its long-time antagonist.

The SBC acquisition will end AT&T's 128 years as an independent company. Valued at $16 billion, the deal involves stock-and-cash plus SBC's assumption of approximately $6 billion in AT&T's net debt. It's startling to note that this purchase price is in the same ballpark as the reported offering price by Time Warner and Comcast for the bankrupt Adelphia cable company!

From Headlines to Footnotes

Although we try to report on most stories from an objective perspective, it's hard to write the AT&T story that way. Sandy worked at AT&T for almost twenty years starting in 1977. Working mostly at headquarters, she experienced much of the history first-hand. Here's her view of how AT&T moved from being the US national symbol of telecommunications to a long-distance carrier that had given up on its core consumer markets.

My (Sandy's) tenure at AT&T made me both witness to and participant in a long string of major events. The 1984 divestiture--in which AT&T spun off the local telephone operating companies and kept long distance--was perhaps the biggest of these. But others paved the way to AT&T's current status.

Easy Come, Easy Go

AT&T recognized that data would become bigger than voice and that was part of the rationale for the NCR acquisition in 1991. Its purchase of McCaw Cellular in 1994 came from understanding the trend of fixed-line communications becoming increasingly supplanted by mobile. But in 1995, acknowledging that it had failed in achieving the integrated communications company it had aimed to be, the company restructured into three separate ones: a services company, which retained the AT&T name; a products and systems company which became Lucent Technologies; and a computer company, which reassumed the NCR name. I left shortly thereafter.

In 1999, AT&T bought cable giant TCI. It publicly acknowledged the critical importance of owning facilities connecting directly to customers--and the value of providing consumers with a complete bundle of digital TV, video on demand, broadband data and cable telephony. That $54 billion acquisition was followed in 2000 by another $55 billion spent acquiring MediaOne.

None of the acquisitions lasted very long. NCR was spun off as an independent company at the end of 1996. The decision to sell AT&T Broadband (comprised of the TCI and MediaOne purchases) to Comcast was announced in late 2000. AT&T Wireless, based upon the McCaw purchase, was spun off as an independent company in 2001; in 2004 it was acquired by Cingular, owned jointly by SBC and BellSouth, two of the Baby Bells.

There are many books to be written about why this story didn't have a "happily ever after" ending. The storylines for each acquisition differ, but each had execution and integration problems. In the case of wireless, the timeframe between acknowledging that wireless was key to AT&T's future and the actual acquisition of McCaw meant the price paid was way above what it might have been. Much the same was true of the huge cable acquisitions. Beyond that, only the people who made the decisions could tell whether top management really understood the enormous upgrade the TCI plant needed, how much it would cost, how long it would take and how much work was needed to repair customer relations and service. Looking at the NCR acquisition with the benefit of hindsight, it's not clear it was the right choice to help AT&T succeed in a world where data communications services overtook voice.

We won't try to write the book here, but the bottom line is that AT&T saw the inevitability of convergence. They envisioned themselves as delivering all the elements and decided those acquisitions were the path to doing so. But they were unable to solve the multi-dimensional puzzle of making the company work as an integrated whole. AT&T saw the shape of the future, tried to adapt to it, but failed.

Convergence: From Buzz Word to Being

AT&T's story is more than the tale of one company. Its last twenty years are intertwined with the evolution of the telecommunications industry from primarily a fixed-line voice-based business to a converged business based on fixed and mobile voice, data and video.

The stirrings of competition and government anti-trust actions brought about the 1984 divestiture, when Ma Bell was separated from her local exchange offspring. Consumers began to have more choices, prices dropped and innovation increasingly flourished.

However, there was also a price paid in customer confusion. Consumers had trouble understanding the division into local and long-distance service, especially the crazy-quilt of Local Access and Transport Areas (LATAs). The early days of unbundling evoked disreputable sales techniques. Some companies bought others, while some faced bankruptcy.

Meanwhile, new modes of personal communications like mobile telephony and email emerged. Over time new technologies blurred the distinctions between what happened over copper lines, MSO cables and wireless. The sharp distinctions between voice, data and video services faded as they all started becoming digital data streams over IP.

Companies expanded and got into each other's businesses. Cable operators announced--and fulfilled--their intention to deliver the "triple play" of video, data and voice. Local telephone companies responded by adding data and video to their voice services. Mobile operators started deploying mobile broadband data and mobile video services.

And here we are in 2005. Consumers again have the option of one-stop shopping--for local and long distance telephony, for fixed and mobile communications, and for TV entertainment and broadband data services. Once again a few large companies are aiming to deliver a complete bundle. Only this time, one of the names on the door is SBC, not AT&T.

( www.sbc.com ) ( www.att.com ) ( www.verizon.com ) ( www.qwest.com ) ( www.mci.com ) ( www.timewarner.com ) ( www.comcast.com ) ( www.adelphia.com )