A Brief History of AT&T – Part 3

by Colin Berkshire

Today’s AT&T isn’t much like the AT&T from pre-divestature. It doesn’t own Western Electric, it doesn’t have Bell Laboratories, and it isn’t even the same corporation.

Today’s AT&T is a renamed Bell South, one of the divested Bell Operating Companies. Bell South simply purchased the AT&T name, along with some of its assets. You see, AT&T basically failed as a company after divestiture. But the name and some of its assets were worth purchasing.

Most of the Bell Operating Companies failed miserably after being divested. They lacked good management, they lacked a mission, and they lacked the monopoly they had depended upon.

Some of them merged, like Pacific Northwest Bell and Mountain States Telephone. Some like Bell South started to acquire the weaker companies. They acquired and merged with Southwestern Bell and Pacific Bell. The important thing to remember that the main skill the CEO needed was to be good at finance and Mergers & Acquisitions. Knowing about technology had long been a skillset weeded out of the executive suite.

Even after merging, these “clueless” companies did poorly. Today, none of them are memorable or are leaders at anything.

Bell South had particularly good (“ruthless”) finance people. But they knew that the phone company business was not the place to be. As they looked around for more companies to acquire they found the old AT&T was struggling financially. It had a lot of debt and there were even whispers that it could eventually default on some obligations.

But AT&T had two valuable things: It had acquired Mc Caw Cellular so it was in the burgeoning cellular business and it had the AT&T name, which somehow had become widely recognized by the public (which is ironic, since during the days of the Bell System the AT&T name was almost unknown by the public.)

Through the magic of M&A MBA skills, Bell South acquired the valuable parts of AT&T and then renamed itself “at&t”. (The use of lower case letters from the previous upper case AT&T was senior management’s idea of innovation, but it was about the same era that Carley Fiorina added “invent” to the HP logo, so it was in keeping with an MBA’s idea of marketing innovation I suppose.)

All of the pieces were now in place for the new “at&t” to return to its glory days and become a “monopolist.” It started to purchase competitors and acquire right of ways (“spectrum.”) This is the same formula that the old AT&T had used in the 1900s.

AT&T knew that if it had a monopoly it would be heavily regulated, and its prices would be reduced and it would have to provide good service. They no longer had Western Electric with which to push profits into. So they needed a different solution. That solution was to form what is called an “Oligopoly.” Basically, if there is a monopoly that is controlled by more than one company, it is not a monopoly, but is an Oligopoly.

The solution was to tacitly create an oligopoly with one other company that would benefit from playing the same game. The obvious partner was the company known today as Verizon. Verizon grew out of the other BellSystem known as GTE. They had acquired a number of the Bell Operating Companies and they had a similar heritage. Best of all, they had been and knew the value of being a monopoly. They would benefit from and know how to play the oligopoly game.

Whether or not at&t and Verizon ever met and overtly conspired to form an oligopoly is subject to speculation. I do personally know that in the early 1990s Bell South would have meetings up in Canada to discuss re-monopolization of telecommunications. (They needed to be held in Canada so that no US laws were being broken.) Either way, if there were only two major players, then prices could rise.

at&t started acquiring competitors and markets, and especially they started acquiring exclusive right-of-ways (“spectrum.”) Eventually, Verizon and at&t would own the vast majority of spectrum.

An unfortunate hiccup in the plan was when the T-Mobile acquisition wasn’t approved. That would have secured the right-of-way monopoly. Verizon heartily backed the T-Mobile acquisition because then it could acquire Sprint, who was financially struggling. (Verizon+Sprint) would be smaller than at&t-mobile so that acquisition would surely be approved.) T-Mobile and AT&T shared GSM technology while Verizon and Sprint shared CDMA technology. It would be ideal.

Also, along the way, American television was going to become digital and this would free up giant swaths of bandwidth. This bandwidth represented an enormous threat to the at&t strategy because it could allow new cellular competitors. For this reason, at&t and Verizon both “independently” found the need to acquire most of the digital tv spectrum. They had no plans for it, and to this day they haven’t used much of it. But, they did stop a giant competitive opportunity/threat. Perhaps, they will find a use for this spectrum; they certainly need to plausibly and inefficiently use it up so that they can continue to claim that their networks are overloaded and that they need to continue acquiring spectrum/competitors/etc. (A good way to inefficiently use up spectrum is to space cell towers very far apart, making the cells excessively large. This is exactly the strategy that at&t uses today.)

So, if at&t had been able to acquire T-Mobile then Verizon would have been able to acquire Sprint, and the historic oligopoly would have been restored. It would have been wonderful.

In an oligopoly it is not necessary to provide good service. If the prices are nearly identical and if the service is equally poor, consumers have no effective choice and they just randomly pick a carrier. (Have you noticed that Verizon and at&t rates are for all practical purposes identical to-the-dollar? It is no accident.) There is a reason that cellular service is 5x to 10x more expensive than in many other countries that have better coverage.

So what does the future look like?

The same strategy should work just fine. It simply needs to be nuanced.

at&t can continue to talk about how they desperately need bandwidth (which they do because of their ginormously large cell sizes which are highly inefficient in their spectrum utilization.) They can then start acquiring the right to utilize T-Mobile capacity, exclusively. at&t can then simply transform T-Mobile from being a retailer of cell phone service to being a wholesaler. It then makes no difference whether at&t owns T-Mobile or not because retail prices are effectively set by the two oligopoly members and T-Mobile had no bandwidth for its own customers. Along with this, at&t can make it prohibitive for T-Mobile customers to access at&t towers (by charging T-Mobile excessive prices or just by claiming that at&t has no excess bandwidth to share.)

One way or another, T-Mobile and Sprint are dead.

What can we expect from the future? We can expect at&t to vigorously acquire all remaining spectrum and to fight any company that owns spectrum to prevent them from starting up a cell company. You see that happening with Lightspeed and with Dish today. For a while you may even see prices drop, as this will squeeze out the marginal operators, which at&t can then acquire. But in the end you can expect to continue to pay 5x or 10x as much as much of the rest of the world for cell service.

The successful strategy for at&t is not to excel at great service. Indeed, this will hurt at&t. At this point, at&t needs to use its spectrum as inefficiently as possible. The more customers complain the more political pressure there will be to allow at&t to acquire the rest of the available spectrum.

And, I think this explains why the management of at&t are not engineers anymore. Management needs to be very good at M&A and at MBA stuff and needs good Public Relations.

By the way, it is absolutely true that the term “Public Relations” was invented by AT&T, about a hundred years ago. The first use of that term was from its founder, Theodore Newton Vail. (Sorry, no, Alexander GrahamBell did not found AT&T.) So at&t may know something about effective PR.