(Long) WSJ article about AT&T and its history.
AT&T, Once a Corporate Icon,
Finally Yields to a Humbler Role
By CYNTHIA CROSSEN and DEBORAH SOLOMON
Staff Reporters of THE WALL STREET JOURNAL
After more than a century of binding America together with sound waves and
wire, AT&T Corp., once the country's biggest, wealthiest and strongest
company, is itself unraveling.
Just a few decades ago, AT&T seemed like a paragon of corporate success
and endurance: It offered the cheapest and best telephone service in the world,
as available and affordable to a Nebraska homestead as it was to a Wall Street
broker. The laboratories of the Bell System, as the company was known until
1984, were the world's undisputed leaders in technological research. The
company's millions of "widow and orphan" stockholders enjoyed a generous
and dependable dividend. If ever there was a company that seemed primed for
the future, AT&T was it.
But AT&T grew fat and complacent in the 1970s and 1980s while the
telecommunications market was getting lean and hungry. After a historic 1984
consent decree forced the company to spin off its local phone companies,
AT&T struggled with an ambitious mission on a battlefield that kept changing:
trying to serve all its customers' transmission needs, business or residential,
voice or data, cable or wireless.
AT&T's announcement Wednesday that it would split into four distinct units
closed an era in the telecommunications war, as its oldest combatant conceded
defeat on its latest attempt at being all things to all people. "One system, one
policy, universal service" was the mantra coined by the legendary former
chairman, Theodore Vail. Before Wednesday's humbling retreat AT&T's
current chief, C. Michael Armstrong, spent more than $100 billion on cable
systems in a vain effort to achieve the same goal in the era of broadband
information networks. Now, AT&T is finally acknowledging that it can't pursue
that goal anymore.
The story of AT&T's 115-year rise and fall
illustrates two simple lessons of American
capitalism. The first is that no company, however
large and prosperous, is safe from the convulsions
of social, economic and technological change. Who could have predicted,
during the Bell System's halcyon days of the 1950s and 1960s, that the
company was turning into its own worst enemy? With its revenue secure and
growing, and its markets protected from competition, AT&T's combative
muscle atrophied. Its profits were capped by federal and state regulators, so
the company placed little value on entrepreneurial ventures. Exempt from the
boom and bust of business cycles, AT&T developed few systems to soften the
impact of a shrinking or expanding work force. Its managers were home-grown
and so inculcated with the company dogma that they were called "Bellheads."
The second lesson began to hit home after 1984. When Ma Bell lost its local
service, it lost a vital connection to its customers, millions of employees and the
marketplace. No longer was it Ma Bell, everyone's mother who took care of
her children's needs. And with that loss came a decline in the political clout the
company had always taken for granted.
In its youthful days, the company was a model of cutthroat aggressiveness. In
1902, Bell was competing with more than 1,500 independent telephone
companies. But because it controlled all long-distance lines, Bell could limit
competitors' growth simply by denying them connections to the national
network.
Bell also cut rates in competitive markets, and refused to sell its patented
telephone equipment to non-Bell companies. The company's banker, J.P.
Morgan & Co., used its influence to prevent competitors from getting lines of
credit, and many undercapitalized and underequipped independents were
absorbed into the Bell system. Bell painstakingly developed a public-relations
strategy to persuade both customers and the government that the telephone
system was a "natural monopoly" -- efficient, uniform and reliable service in
exchange for "rational" profits.
For the rest of AT&T's life, its monopoly status would be a double-edged
sword, and its relationship with the government frustratingly unpredictable.
Although the Department of Justice had granted AT&T its competitive
protection in 1913, many government officials vehemently opposed the idea
that a private company should control a system essential to the security and
stability of the nation. Competition was a natural regulator, many people
believed, and consumers would always be at a disadvantage in a contest with a
monopoly.
At various times in its life, AT&T has faced challenges from Congress, the
Interstate Commerce Commission, the Federal Communications Commission
and the Department of Justice. Concern about AT&T's size and power has
waxed and waned with the political climate -- antitrust suits were filed in 1913
and 1949, and the FCC conducted a lengthy investigation in the 1930s. Aside
from minor concessions, however, Ma Bell survived these attacks, and its
power and influence grew.
Yet AT&T's safety from competition also fostered a management culture that
ultimately would play a large part in the company's undoing. AT&T's managers
saw profit as a way to support and extend the monopoly, not an end in itself.
Cost control was an issue less for corporate efficiency than for ensuring that
outlays didn't upset the company's regulatory overseers. With customers taken
for granted, sales representatives received a straight salary, no commissions,
and were warned not to oversell. The most important tools for gauging success
and ascending the corporate ladder were achieving maximum efficiency and
getting the right numbers in the "green book," the company's internal
productivity report.
"Don't make waves, not even ripples, is the norm," one assistant vice president
told Steven P. Feldman, who spent a year inside a Bell operating company for
his 1986 doctoral dissertation. "We wait until it is close to unanimous before we
make a decision. Sometimes it takes 10,000 Bell managers to make one half of
a decision."
Dr. Feldman, now an associate professor of management policy at the
Weatherhead School of Management at Case Western Reserve University,
remembers Ma Bell as a "tight culture of conformity, where you had to fit in and
please your boss." Indeed, another assistant vice president told him, "I never tell
my subordinates I don't like beards or nonwhite shirts, but I tell them they never
see me with a beard or a nonwhite shirt."
This culture of control created managers who were averse to risk and who
could, should a risky venture like the 1969 Picturephone fail, pass the charges
on to the customer. Nor were they required to anticipate or accommodate
customer demand, because they could never lose it. Until 1959, AT&T didn't
even have a marketing department. Of course, other big companies had similar
characteristics, but only AT&T had no competition.
Indeed, one reason why Mr. Armstrong says he's breaking the company into
four pieces is to spark the innovation and entrepreneurial focus that has been
lacking at AT&T. In his remarks Wednesday, Mr. Armstrong said each of the
four new AT&Ts "will move faster in meeting customer needs" and that
employees "will be even more highly motivated because they'll be working for
industry-leading companies that don't have to compete internally for capital or
attention."
When the tide began to turn against the Bell monopoly in the 1960s and 1970s,
the company was psychologically unprepared for the competition that was
swarming into its industry. The company had begun to lose energy and put on
weight. Its managers were experts at efficient operations, not futuristic
visionaries, and the hierarchy was becoming as fixed as the steel and cement of
an old plant. AT&T's cash cow, long-distance telephone service, demanded so
much attention -- and paid so handsomely -- that management had little
appetite or incentive for innovation.
As the 1980s loomed, demand for telecommunications was expanding too
rapidly and becoming too complex to be served by the Bell System alone.
People, especially in business, wanted more than voice transmission from their
wires: They wanted to move and process data at high speed, too. With the
development of electronic switching stations, microwave transmission and
satellite communications, the technological justification for AT&T's monopoly
disappeared. Even then, AT&T fought to preserve its monopoly by using
regulation as a competitive ploy, stalling decisions that might help competitors.
Then, in 1984, came divestiture, when AT&T's much-vaunted vertical
integration was gutted by the Department of Justice. The company, which until
then had controlled both the local and long-distance markets, had to choose
whether it wanted to be a Baby Bell or a long-distance company. AT&T chose
to keep the long-distance business, leaving local service to the seven Baby
Bells.
An official who was involved in the 1996 Telecommunications Act says AT&T
may have "made the wrong call." When it was a local phone company, AT&T
had reached almost every consumer in America with its wires and bills. That
alone gave the company clout with politicians, some of whose constituents also
worked for AT&T in their home states. After divestiture, the ability to reach the
individual customer, as well as more than half a million employees, belonged to
the regional companies.
Some government officials in Washington, D.C., became more protective of the
Baby Bells in their home states. During negotiations over the
Telecommunications Act of 1996, the Baby Bells wielded their political might
with members of Congress who were writing and voting on the bill. While
AT&T lobbied hard for some concessions, the law was largely viewed as a win
for the Bells. And sure enough, they went on to become the foundations of
some of the strategically best-positioned telecommunications giants of the 21st
century: Verizon Communications, SBC Communications Inc., Qwest
Communications International Inc., and BellSouth Corp.
After 1984, AT&T suddenly found itself trying to operate in a world utterly
foreign to its experience. The company that had picked off hungry competitors
in the early 20th century was being picked apart by savage competition. Like
any mature company trying to compete in a booming market, AT&T either had
to transform itself or die. Its new goal: offering one-stop shopping to
telecommunications customers.
In the past 15 years, AT&T has had to tackle three enormous obstacles to that
goal: keeping up with new technology; reinventing itself as a competitive player
rather than a monopoly protectorate; and retooling its rigidly bureaucratic
management. The company has made extraordinary strides in all three areas.
But in 1996, the Telecommunications Act gave the Baby Bells and other
competitors the right to compete in long-distance service, and AT&T suddenly
found its lock on the long-distance market at risk. New entrants with lower
prices and state-of-the-art service and technology were nibbling at AT&T's
bread-and-butter business. And the Bells -- with their millions of captive
consumers -- were eager to break into the lucrative long-distance business.
AT&T could have tried to build its own network to match the Bells' facilities,
but decided against it. "The day after the telecom act was passed, AT&T
should have announced a massive capital investment to build a local network,"
says Brian Adamik, an analyst with Yankee Group who has tracked AT&T for
20 years.
Instead of spending the $200 billion to $300 billion such a network would have
cost, AT&T tried instead to negotiate agreements with the Bells to lease parts
of their networks and resell the Bells' phone service. Even if it could hammer
out such agreements, however, the fees AT&T would have to pay made the
company's prices less competitive. Realizing the economics were against them,
AT&T set out to find other ways of reaching "the last mile" into people's homes
that it had ceded to the Baby Bells -- first with fixed wireless technology and
then cable television.
Fixed wireless has shown promise, though the company has been painfully slow
in rolling it out. Its cable acquisition campaign has been aggressive, making it the
country's biggest cable provider, with lines passing 26 million homes. But its
purchases give it "a Swiss cheese footprint throughout the U.S.," says Mr.
Adamik.
Meanwhile, the company has jumped with both feet into competition for other
alliances, mergers and acquisitions. It has tried, not always successfully, to form
partnerships with companies such as Time Warner Inc. and America Online
Inc. It acquired a leader in the wireless business, McCaw Cellular
Communications Inc., as well as two big players in the cable industry,
Tele-Communications Inc. and MediaOne Group. In 1997, it brought in the
first outsider ever to lead AT&T, Mr. Armstrong, a former IBM Corp.
executive who had just given the aging defense contractor Hughes Electronics
Corp. a new lease on life in satellite communications.
"They do seem to lurch from one thing to another," says Peter Temin, a
professor of economics at the Massachusetts Institute of Technology and
author of "The Fall of the Bell System." "But the problem for a company with
such a large installed base is that it's hard to make a new move because you're
afraid of disturbing your current cash cow."
Whether the cause was fear or misfortune, the past 15 years have also seen
costly mistakes and missed opportunities. In its hurry to enter the
personal-computer business, AT&T mounted a hostile takeover for NCR
Corp. in 1991, paying $7.4 billion for the company. The two companies never
meshed, and NCR quickly began losing customers and managers. After
pumping a further $2.8 billion into the beleaguered business, AT&T finally spun
off NCR in early 1997, just a few months after AT&T's equipment business
became independent as Lucent Technologies Inc.
In 1997, the company ventured into the Internet business with WorldNet,
which signed up some one million customers in just a few months. In the
beginning, says Tom Evslin, former head of AT&T WorldNet who now runs
ITXC Corp., an Internet telephony firm, WorldNet was "outgrowing America
Online and adding more new subscribers than they were." But when sales
began to slow, AT&T was unwilling to invest in an aggressive marketing
campaign to keep the business growing. Today the WorldNet subscriber base
is about two million, while AOL has 21 million customers.
AT&T has accumulated, mainly through acquisitions, a staggering $61 billion in
debt, which costs the company more than $2 billion a year in interest.
Long-distance telephone rates have been plummeting, and the company's
lucrative but disorganized Business Services unit has been losing customers.
The expected growth of "cable telephony" customers has fallen well below
projections, and the company has failed to strike the deals it envisioned with
other cable operators to augment its own system.
AT&T's penalty for these blunders: Its stock price is hovering around historic
lows and the company has lost more than $70 billion in market valuation since
January. The stock closed at $23.56 Wednesday in 4 p.m. composite trading
on the New York Stock Exchange, down from a 52-week high of $61. "This is
a sector of the economy that has been outpaced by technological change," says
Phil Verveer, a partner at Wilkie, Farr & Gallagher in Washington, D.C., who
was a member of the Department of Justice team that investigated AT&T in the
1970s. "The corporate culture of traditional companies like AT&T just couldn't
adapt quickly enough."
Write to Cynthia Crossen at cynthia.crossen@wsj.com2 and Deborah
Solomon at deborah.solomon@wsj.com3
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