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The Inevitable Demise of 'Ma Bell'

While innumerable theorists, critics and pundits have debated the challenges and strategy of AT&T Corp., a strong majority seem to agree on one thing: Because of its inability to compete, AT&T is today a very vulnerable and desperate company.

AT&T's recent decision 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 U.S. industrialist William Knudsen 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."

BIRTH OF A TITAN

AT&T Corp. 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 "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 Co., General Electric Co., and General Motors Corp. 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 the United States.

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, initially known as the American Telephone & Telegraph Co. 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. 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 wireless communications.

By 1974, the U.S. Justice Department filed an antitrust case charging that AT&T unfairly limited competition in long-distance service and phone equipment. Microwave Communications Inc. (MCI) filed some related lawsuits and pressed both the Justice Department and the Federal Communications Commission 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 its role as just 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 structure, the expectation that AT&T would find a dominant role in the telecommunications industry did not come to pass.

By 1995, AT&T had 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 competitive mix of products and services. As its audience of critics grew, it became clear the giant was on defense, not offense.

At a conference in 1997, Allen said: "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.

Under Armstrong, AT&T invested heavily in alternative lines of business to offset falling long-distance profits. By 1998, there were over 500 U.S. long-distance companies prices had fallen 60 percent. AT&T's long-distance presence dwindled from 90 percent to just 50 percent of the market.

AT&T began acquiring companies. Its largest purchases were the cable operators Tele-Communications Inc. and MediaOne Group Inc., for a combined $120 billion.

The acquisitions put tremendous pressure on Armstrong to show results. Meanwhile, competitors such as RCN Corp., MCI WorldCom and Sprint Corp. 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 were still generated from its long-distance business, slowly depleting the company's deep pockets, which funded the ongoing makeover. Meanwhile, AT&T's stock continued to reach new lows.

In the past year alone, AT&T stock devaluations reduced the company's worth by almost $160 billion.

BLACK OCTOBER

Meanwhile, Armstrong's vision of a "one-stop" source for communications was vehemently challenged by shareholders angry about the diminishing fortunes of AT&T. Armstrong's company faced earnings difficulties, shareholder frustration and a new problem: $62 billion of debt.

On Oct. 25, 2000, AT&T announced it would break itself up again, this time into four parts-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 said: "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 still had chronic, fundamental problems.

The AT&T case exposes the fallacy in believing that market dominance,brand name, or financial position 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.