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How AT&T Works


After the Breakup

AT&T went from nearly $150 billion in assets before the breakup to $34 billion in total assets. That's a 77 percent drop in asset value, and it happened with the stroke of a pen. AT&T spent the years after 1984 trying to preserve its long-distance business and seeking new streams of revenue in a rapidly changing, competitive market.

AT&T went from the safe confines of monopoly power into the "sink or swim" environment of the free market. The 1984 decree opened long-distance service to outside competition for the first time. In the Ma Bell days, the company depended on long-distance service to keep profits up. Local service was priced nearly at cost, while long distance prices could be inflated without much complaint. The post-divesture AT&T may have had Ma Bell's profit machine, but that machine's potential for driving profits would decline significantly in a "price war" atmosphere. Looking to grab a piece of AT&T's market, long-distance carriers such as Sprint and MCI priced their services low enough to undersell AT&T.

MCI emerged as AT&T's main competitor in the long-distance market. Price wars between these two companies shaved profits away from AT&T. No one knew that the company that would become WorldCom was deceiving Wall Street with overly optimistic performance reports.

Companies looking to grow often borrow capital to invest in their infrastructure. SBC, which began as the Baby Bell named Southwestern Bell, invested in expanding its services to include data, video and voice. By doing this, SBC went from being the smallest of the Baby Bells to being the biggest.

AT&T continued with its plan to end dependence on long-distance as a profit center. This was made more difficult by the exponential increase in long-distance volume in the years following divesture. In 1984, AT&T carried an average of 37.5 million long distance calls each business day. Five years later, it carried 105.9 million calls. Ten years after that,it carried 270 million calls on the average business day. It was hard for AT&T to ignore a 620 percent increase in market demand. But AT&T boldly pursued its strategy. In 1991, the company acquired computer manufacturer NCR, so that it could leverage its networking knowledge and skill toward computer manufacture. Three years later, AT&T finally jumped into the cellular market by purchasing McCaw Cellular, the largest cellular operator in the country at the time.

The McCaw purchase marked a major change in direction for AT&T. In 1995, the company announced that it would separate into three companies: NCR, Lucent Technologies and AT&T. AT&T's manufacturing arm and the Bell Labs name went to Lucent, and NCR went its own way. AT&T's hope for a piece of the computer market did not pay off, and manufacturing was getting in the way of its plan to become a communications services company. AT&T kept many of the Bell Labs' scientists to create AT&T Labs, still an innovator in communications technology.

The restructuring couldn't have come at a better time, because the Telecommunication Act of 1996 was just coming around the corner. This sweeping legislation finally opened up local and long-distance telephone service, as well as cable television markets, to more competition. This represented a golden opportunity for AT&T to follow the trend to converge voice, data and video services into one digital service. It also exposed their primary markets to larger and more dynamic competitors.

Undaunted, AT&T jumped in with both feet. The company spent billions of dollars to convert its entire network from analog to digital data delivery, acquire local phone service providers, purchase cable giants MediaOne and TCI and launch its successful WorldNet Internet service. AT&T also pioneered new media services such as interactive television, broadband Internet service, business-to-business communication solutions, TV phones, Television over Internet Protocol (IPTV) and voice over Internet Protocol (VoIP).

AT&T's fortunes continued to wane with each reinvention. It seemed that no matter how successful one of AT&T's new businesses was, the company still clung to long distance to drive its profits. By the end of the 1990s, AT&T's long-distance revenue was decreasing at a rate of 20 percent per year.

In October 2000, AT&T made an announcement many considered to be the beginning of the end. AT&T had just spent over $100 billion to acquire two cable television providers as part of a plan to offer bundled services under the AT&T brand. It believed that delivering cable TV, long distance, wireless, local phone service and Internet access could create that new stream of revenue AT&T desperately needed. This strategy was central to insuring AT&T's future.

Suddenly, Chairman Mike Armstrong announced that the company was restructuring. AT&T was to split into four companies, each delivering separate services. After going into debt to acquire cable providers MediaOne and Tele-Communications Inc., AT&T was on the verge of bankruptcy. Separating the companies would isolate the debt, and hopefully raise the money it needed to remain solvent. Unfortunately, Wall Street could see that too. AT&T's stock lost $3 per share that day and $6 more per share after that, totaling in a loss of $100 billion of market value for the year.

In 2005, SBC purchased the company for $16 billion. The numbers speak for themselves. AT&T, once the largest company on earth, was bought at a discount by one of its former satellites.

SBC: Ma Bell's Heir Apparent?

Unlike AT&T, SBC used government power to its advantage. Where the government forced AT&T to cede its share of the market to competitors, SBC got laws on the books that protected their markets from outside competition. This tactic, guided by SBC Chairman Ed Whitacre, worked well when the SBC was the smallest of the Baby Bells. When SBC appeared on government radar as a coming giant, the company had to change its approach. Even as SBC opened its territory to competitors, it acquired another Baby Bell (Ameritech) and expanded its reach to Chicago and the Midwest.

Ed Whitacre's acquisitions showed the many potential strengths of SBC. His choice of acquisition, usually a Baby Bell, meant that he was integrating former pieces of a larger company. These pieces had a better chance of meshing well with the core company, something known as synergy.

SBC's strategy of perpetual growth gave it the power it needed when competition threatened its markets. Over time, SBC put itself in position to become worthy of a predecessor to Ma Bell. SBC is not a monopoly by any means, but it has visionary leadership and a grand strategy for the future. Just as the AT&T once contended with triumph and adversity by following its "universal service" dictum, SBC has followed Ed Whitacre's mission of creating a universal platform for digital communications in the information age.

Many have insisted that SBC's purchase of AT&T represents "the end" for AT&T as an independent company. SBC began as a Baby Bell and is the creation of Ed Whitacre -- who worked his whole life for AT&T before the break up. Now SBC-AT&T calls itself "the new AT&T." This new company has the size, the infrastructure and the leadership to play a part in networked media's future.

Times have radically changed since 1984. The technology that first enabled the Internet to reach your home was the telephone line. Now VoIP is poised to overtake "traditional telephony" as the way people communicate. Given the many ways devices can connect to the Internet, from broadband cable to to WiFi, a single company controlling every point of contact between subscriber and service is hard to imagine.

As the largest telecommunications company in the United States, the new AT&T may give that concept a run for its money. Offering a wide assortment of cutting-edge communications services, and promising the delivery of "next wave" technologies like IPTV in the near future, AT&T can stake a claim to communication's future just as it owned its past. After 130 years, AT&T remains at the vanguard of innovation and commerce.

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