The last call of an American legend

Jan 31st 2005
From The Economist Global Agenda

SBC’s acquisition of the company that spawned it will create America’s biggest telecommunications company and perhaps spark a wave of consolidation in the business. But none of the firms competing to supply phone communications through a variety of channels is likely to attain the status of AT&T, which held a monopoly over America’s phones for more than a century

THE history of AT&T and of American telephony is one and the same story, so SBC Communications’ $16 billion acquisition of “Ma Bell”, announced on Monday January 31st, is unlikely to wipe AT&T’s iconic name from the corporate landscape. The name should come in useful to attract long-distance business customers far from SBC’s base in San Antonio, Texas. AT&T has been undone by cheaper internet technology, the huge growth of the mobile-phone industry and regulatory changes that squeezed it out of the local phone market. But its acquisition by SBC will create America’s biggest phone company and set a challenge to SBC’s rivals.

The American Telephone and Telegraph Corporation’s roots go back to 1877 when Alexander Graham Bell, a Scottish inventor, and a pair of colleagues formed the Bell Telephone Company to take advantage of Bell’s new invention, the “talking telegraph”. AT&T was formed in 1885 to handle the firm's long-distance telephone network of copper cables that first connected America’s big cities and eventually covered the whole country, bringing affordable telephone communications to the masses. Such was the success of the monopoly that America’s government made a number of attempts to combat it, most notably in 1913, when AT&T settled an antitrust suit by agreeing to allow other local telephone firms to connect with its network. In 1949, the government filed another antitrust case, which was eventually settled in 1956 after the firm agreed to mild concessions.

The landmark for American telephony came in 1984, when yet another antitrust case resulted in the break-up of the company into a long-distance carrier and several local “Baby Bell” operating companies. This marked the beginning of the decline of AT&T, as the former monopoly found itself unable to contend with the harsh realities of the market and lacking the dexterity to keep up with more nimble competitors. It also served as the template for AT&T’s strategy in the years to come: when things get tough, split the company into several bits.

AT&T’s rump business consisted of the long-distance phone lines and its equipment arm. Though prices were buoyant in the long-distance market at first, they soon began to fall as a result of pressure from new entrants such as Sprint and WorldCom. As new technologies for delivering voice communication flourished, AT&T tried to offset the decline of its long-distance business. In 1991 it bought NCR for $7.3 billion, an expensive and ill-fated attempt to exploit the convergence of communications and computer technology. In 1994 it spent $11.5 billion to buy McCaw Cellular, which subsequently became AT&T Wireless. But the break-up of its monopoly led to AT&T's market share in American telecoms plummeting from more than 90% in 1984 to around 50% by 1996.

In 1995 AT&T announced the largest voluntary break-up in the history of American business, restructuring into three separate companies: a systems and equipment arm (which became Lucent Technologies), a computer company, and the remainder of AT&T, now designated a communications-services company. Its bosses said they hoped to create more focused businesses, but analysts interpreted it as a panicked attempt to revive a flagging business.

AT&T had spent billions of dollars to prise open local markets and take business from the Baby Bells, but it got nowhere. Under the terms of the 1996 Telecommunications Act, the Baby Bells were expected to open their local monopolies in exchange for access to the long-distance market. AT&T attempted to turn the tables on its siblings-turned-rivals by buying Tele-Communications Inc, America’s biggest cable-TV firm, for $48 billion, and forming a joint venture with Time Warner, then the country’s second-biggest cable group, to deliver local-telephone services through the cable system, thus by-passing the Baby Bells’ local monopoly of copper-wire connections. The unit became the largest cable company in the United States. It also tried to shake up America’s wireless market by launching a service that let customers make calls anywhere in the country for a flat rate. But this cannibalised its own long-distance profits as it encouraged customers to use their mobiles to make long-distance calls rather than landlines.

The huge gamble on cable failed to pay off quickly. Partly as a result, in 2000, AT&T broke itself up again. Struggling under debts of $65 billion, the company was forced to sell off its mobile-phone and broadband divisions. Revenues at AT&T have fallen over recent years and the slide is forecast to continue.

Mini Ma

SBC's takeover of AT&T is expected to meet with close antitrust scrutiny since it goes some way to reuniting those services that were broken up in 1984. SBC has 50m local phone customers, mostly in the mid-west and South. AT&T has around 30m long-distance customers and is the largest provider of phone and data services to corporate America. SBC hopes that this corporate business will offset the decline of local phone revenues caused by mobile phones and the emergence of internet phone services.

The deal could spark more activity that would bring the Baby Bells into closer competition. Though the Bells operate mainly locally and regionally (with mobile-phone interests), rumours have circulated that MCI (formerly WorldCom) could become a takeover target for BellSouth or Verizon as they also try to penetrate the corporate market. SBC’s attempt to become a “Mini Ma Bell” could set off a round of fresh connections among America’s big phone companies. But AT&T, so long the industry's dominant force, has made its last call.

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