The Demise of AT&T
Michael Kastre
December 2000
While innumerable theorists, critics and pundits have debated the challenges and strategy of AT&T, a strong concensus seem to agree to one thing - because of its inability to compete, today AT&T is a very vulnerable and desperate company. The recent decision by AT&T to break itself into four companies proves without a doubt, that any firm can fail, irrespective of its financial resources, brand recognition, or market position. As William Knudsen, US industrialist put it, "in business, the competition will bite you if you keep running; if you stand still, they will swallow you." Whether AT&T's new companies survive or not, the telecom giant's story dispels the myth of "the invincible company."
Background
AT&T Corporation is an American icon. Known as "Ma Bell" for over a century, AT&T was the undisputed leader in telecommunications; its very name was synonymous with the "telephone." For decades, AT&T's size, resources, and market position made it a Wall Street favorite, ranking it among blue chip giants such as Ford Motor, General Electric, and General Motors. At the time of its breakup in 1984, 3.2 million people held 920 million shares of AT&T, making it the most widely held stock in America.
Today, things are drastically different for AT&T. The pressure of changing customer demands, technology advances, and fierce competition has brought AT&T face to face with the reality that the only way to save itself is to split into four different companies. Despite a steady rise in its stock of about $10 a share per year from 1994 into 1999, all vestiges of AT&T's invincible image were finally stripped away by its extraordinary slide in 2000. In December of 1999, for example, its stock sold for over $60 per share; today AT&T's stock has plummeted to less than $20 a share, lower than its 1994 price of $25 per share.
Prior to 1984
AT&T Corporation, initially known as the American Telephone and Telegraph Company was incorporated in 1885 in New York as a wholly owned subsidiary of the American Bell Telephone Company. Its purpose was to provide long distance capabilities to American Bell, which was set up to provide local service. AT&T continued in this role until 1899 when in a corporate reorganization it assumed the business management and property of American Bell and became the parent company.
For most of its history, Ma Bell functioned as a legally sanctioned and regulated monopoly. This early operating model was based on a fundamental principle formulated in 1907 by Theodore Vail, then president of AT&T. He believed that a nationwide telephone system would operate most effectively as a monopoly. His view was that government regulation was an acceptable substitute for an open and competitive marketplace "provided it is independent, intelligent, considerate, thorough, and just."
AT&T had an iron grip on communications research, development, and engineering. Nevertheless, new technologies soon redefined the industry. The 1970s saw the emergence of computers, new voice and data techniques, and and wireless communications. By 1974, the Justice Department filed an antitrust case charging that AT&T unfairly limited competition in long distance service and phone equipment. MCI (Microwave Communications Inc.) filed related lawsuits and pressed both the Justice Department and the FCC to take action.
The suit was finally settled in 1982 and AT&T agreed to divest itself of the local Bell operating companies. In 1984 the original Bell System was replaced by a new AT&T and seven independent regional telephone companies, which became known as the "baby bells." For the first time, AT&T had to compete in the open market.
Strategy after the 1984 Breakup
Although, AT&T had a comfortable revenue stream from long distance services, senior AT&T management knew that if the company were to have a future, it would have to transform itself from just being a long distance company as new technologies reshaped the marketplace. AT&T's strategy was to become an integrated provider of communications services, products, network equipment and computer systems.
One by one, AT&T was forced to recede from each market segment as a loser, falling back to its mainstay product - long distance. Despite massive changes in strategy and structuring, the expectation that AT&T would find a dominant role in the telecommunications industry did not come to pass. By 1995, AT&T spun off Lucent technologies and NCR Corp., a computer manufacturer. CEO Robert Allen commented at a press conference in 1996, "... It has become clear to me that for AT&T's business to take advantage of the incredible growth opportunities...it has to separate into smaller and more focused businesses. We have reached the point where the advantages of our size and scope will be offset by the time and cost of coordinating and integrating sometimes conflicting business strategies."
Years after the Lucent and NCR spinoff, AT&T still struggled to find a mix of products and services to compete. As its audience of critics grew in its pursuit of markets, it became clear the giant was on defense, not offense. At a conference in 1997, Allen commented, "...We're all big boys and girls. Nobody expects to walk into a market and have market share handed to them like a housewarming present. That's not going to happen in the U.S., or anywhere else in the world." Later in 1997, Allen was replaced by C. Michael Armstrong who was celebrated as a corporate miracle worker who would transform AT&T from a 'big aging telephone company adrift' to a leader in the explosive Internet, wireless, and broadband environment.
A new era - worse results
Under Armstrong, AT&T invested heavily in alternative areas to offset falling long-distance profits. By 1998, there were over 500 long distance companies in America and long distance prices had fallen 60%. AT&T's long distance presence dwindled from 90 percent to just 50 percent of the market. AT&T began acquiring companies; its largest acquisition- a combined $120 billion purchase for cable properties MediaOne and Tele-Communications Inc (TCI).
The acquisitions put tremendous pressure on Armstrong to show results after having spent huge sums of money. Meanwhile, competitors such as RCN, MCIWorldcom, and Sprint continued to cut into AT&T's efforts to gain a foothold in the new voice, video and data communications market. In its struggle to transform itself into an Internet and wireless communications leader, AT&T slowly began to implode. Almost $20 billion of its revenues remained generated from its long distance business, slowly deteriorating the company's deep pockets to continue remaking itself. Meanwhile, AT&T's stock continued to reach new lows. In the past year alone, AT&T stock devaluations reduced AT&T's worth by almost $160 billion.
Black October
Meanwhile, Armstrong's vision of creating a "one stop" source for communications was vehemently challenged by shareholders angry with the diminishing fortunes of AT&T. Armstrong's AT&T faced earnings difficulties, shareholder frustration and the new problem of $62 billion of debt. On October 25, 2000, AT&T announced that it would break itself up again, this time into four parts, proposing its biggest restructuring since the local Bell companies were spun off in 1984. The new companies will be called AT&T Wireless, AT&T Broadband, AT&T Business and AT&T Consumer. In his announcement detailing the breakup, Armstrong commented, "...I hope to dispel the myth that it's (the breakup) for any short-term purpose or any lack of operational execution as some like to suggest." For many AT&T old-timers, it seems like yesterday all over again.
The restructuring announcement precipitated widespread skepticism. Even in four pieces, analysts argued that AT&T had chronic, fundamental problems. "We continue to believe that AT&T shares are undervalued...but we are unconvinced that the company has developed a solid strategy to allow this value to grow over time", said Michael Hodel, analyst for Morningstar.com. Ken McGee, analyst for the Gartner Group wrote, "In a scant few weeks, once the uproar dies down, it will probably seem as though no split had occurred: the four entities will likely perform as poorly as they do now." "It's the last twitch of the corpse," commented Donald L. Luskin, manager of the Open Fund in San Francisco,"this company is dying."
While it remains to be seen if experts are right about the future of AT&T, one thing is clear, the state of AT&T is a vivid reminder that the free market is alive, well, and very hungry. International business consultant W. Edwards Deming was famous for saying, "learning is not compulsory...neither is survival." The ATT case exposes the fallacy in believing that market dominance, brand name, or financials allows any company, regardless of its size, to ignore, avoid or escape competition.
Michael Kastre is a Senior Fellow at the Alexis de Tocqueville Institution.
