Long-Term Ramifications of the Ma Bell Breakup

¶ … Long-Term Ramifications of the Ma Bell Breakup

The old Ma Bell was far from perfect, but she deserved her good name. -- Tom Nolle, 2003

Given its prospects, the new Ma Bell looks an awful lot like the old Ma Bell. And that's not a good thing. -- Shannon M. Heim, 2005

The dichotomy of views exemplified by the epigraph above is reflective of the love-hate relationship that Americans have always had with their telephone service provider. Following the breakup of AT&T, or "Ma Bell" in 1982, one of the few legal monopolies in the United States, seven so-called smaller regional "Baby Bells" long-distance providers were created, four of which remain in operation today. After almost a century in operation, the breakup of Ma Bell was followed by a wave of deregulation and competition that profoundly affected the telecommunications industry in both short- as well as long-term ways. To determine the short- and long-term ramifications of the breakup of Ma Bell in 1982, this paper provides a review of the relevant literature, followed by a summary of the research and important findings in the conclusion.

Review and Discussion

Background and Overview

Among American business and social institutions, the American Telephone and Telegraph Company (AT&T) enjoys a singular place by virtue of its enormous impact on the development of the nation -- and the world -- as well as special dispensations that were provided to the company during its early, formative years. In this regard, Geisst reports that, "The giant company was one of the few state-recognized monopolies allowed to exist other than the electric utilities. And unlike the other giant monopolies of the past, from early in its history it was dominated not by its founder but by a class of professional managers."

The introduction of the Bell style was a significant innovation in business management processes that would have profound effects on the American consciousness and economy alike in the years to come. For example, after Alexander Graham Bell turned over the control of the company near the end of the fin de siecle, AT&T grew to become one of the first authentic modern corporations that was controlled by its managers and shareholders. In this regard, Geisst notes that, "The managers often discussed the share value of the company and its impact, realizing early that AT&T was one of the first widely held corporations in American history. AT&T had grown to be the . . . most widely held stock in the country and the symbol of American ingenuity and efficiency."

The process by which Ma Bell achieved this lofty status was not entirely scrupulous, but it was effective in creating a unified national network of telephone service providers. For instance, Heim reports that, "As the Bell System grew in political power and technological superiority, it purchased, coerced and manipulated the competitive Independent Telephone Companies to come within its monopoly umbrella."

Likewise, Stone emphasizes that, "American telecommunications from the invention of the telephone through the present day has been dominated by a single firm -- AT&T and its predecessors -- nicknamed Ma Bell. The company has been challenged by business rivals and government actions from its beginnings in 1876, but AT&T managed to come through all of its travails as the dominant player in telecommunications."

In 1884, Bell formed a long distance subsidiary, AT&T to provide telephone services between New York to Boston, and the company transferred its assets this new long-distance subsidiary for accounting purposes in 1899.

During the next 100 years, the combined company created one of the most pervasive monopolies in American history."

Indeed, Ma Bell was not only the carrier of choice for most American consumers, it was the only carrier around. In this regard, McMurrer reports that, "For much of the twentieth century before the breakup of AT&T from its former so-called 'Ma Bell' status in 1982, telephone users had had no choice but to use the telephones provided by AT&T."

Many modern American consumers may not remember the lawsuit that led to the breakup of Ma Bell, and for those who do, the monopoly enjoyed by AT&T was an accepted part of life because, after all, that is the way things had always been -- and for good reason. As McMurrer points out, "When AT&T emerged in the early 1900s, the telephone system was poorly organized and non-standardized; it certainly made sense for someone to step in and focus on creating a uniformity of experience and implementation of technology in order to prevent the whole system from falling in on itself."

Therefore, the "any color of telephone you want as long as it's black" and hard-wired configurations provided by Ma Bell at the time lacked the choice and modularity enjoyed by modern consumers, the giant company did bring organizational cosmos to the previous chaos that largely characterized the telephone industry in the United States.

The breakup of Ma Bell was formalized with the filing of a consent decree between AT&T and the U.S. Department of Justice in 1984; the decree, commonly referred to as a "modification of the final judgment, required that the 22 Bell operating companies that comprised the monopolized Ma Bell at the time be reorganized into seven regional and independent companies that could offer long-distance services to American consumers.

According to McMurrer, "The breakup of the AT&T monopoly signified a shift in public policy as much as a settlement of the dispute: the American public lost patience with the lack of competition in the long distance and local telephone market. The resulting state and federal antitrust litigation created a momentum for change that AT&T could not ignore."

This momentum for change would have both short- and long-term ramifications, and these are discussed further below.

Short-Term Ramifications

Given the magnitude of the breakup of Ma Bell in 1982, it is not surprising that a great deal of attention was focused on the company and the implications of the landmark decision on the future of telecommunications in the United States. For example, Geisst reports that, "Much discussion followed the breakup of AT&T for years after the fateful settlement changed the face of American telecommunications."

Perhaps the most visible short-term ramification of the breakup of Ma Bell was the creation of so-called "telcos." In this regard, Crawford reports that, "Telcos (a common nickname for the Baby Bells, generated when AT&T -- known familiarly as Ma Bell -- settled an antitrust action against it by breaking into multiple telecommuncations companies)."

Formally known as "Regional Bell Operating Companies" or RBOCs,

seven Baby Bells were created following the breakup of Ma Bell in 1984; however, of these seven, just four remain in operation today.

Likewise, Boudreaux and Slobada report that, "Sometimes referred to as regional Bell operating companies or RBOCs, the Baby Bells were created by the breakup of Ma Bell in 1984."

The former corporations, AT&T, Southwestern Bell, Ameritech, SNET, Pacific Bell, and BellSouth, became collectively known as "AT&T" and GTE, Nynex, Bell Atlantic, and MCI likewise merged to create Verizon.

These two major Baby Bells, AT&T and Verizon, currently control telco access across the United States and their influence continues to grow along with their market share.

Indeed, Dizard reports that, "In 1984, it had more than half of its assets stripped away by the government breakup decree, a loss that would have fatally weakened any other company. But AT&T reinvented itself, to the point of maintaining its leading position in the industry."

The all-out marketing effort that was needed to sustain its reinvented incarnation caused the company to engage in some greenwashing to maintain its consumer base. For instance, Crawford also points out that, "In its consumer ads, AT&T still likes to portray itself as a warm-and-fuzzy telephone company. The reality is that it has shed its old Ma Bell image to become an aggressive, innovative, and sometimes arrogant competitor."

In the sober world of FCC regulation, only AT&T has had the distinction of being labeled a "dominant carrier" in U.S. telecommunications. The company was so big that even after breaking itself up into three parts in 1995 it has to be handled as a special case in government regulatory matters.

Many of the short-term ramifications that resulted from the breakup of AT&T were, in fact, positive from the consumers' perspective and involved all of the major innovations in telecommunications that occurred during the closing years of the 20th century, including the following:

1. Improved international dialing;

2. Improved quality of calls; and,

3. Faster Internet connections.

These positive changes, though, carried a substantial price tag. For instance, according to Geisst, "The costs were enormous. The seven new Baby Bells all became self-supporting as a result of the breakup and had to individually raise money in the marketplace rather than rely on 'Ma Bell.'"

With respect to the magnitude of the breakup, Geisst suggests that, "United States v. AT&T proved to be the greatest victory for the Antitrust Division of the Justice Department since the Standard Oil and American Tobacco cases seventy years before."

Nevertheless, many American consumers remained loyal, at least in the short-term (perhaps due to convenience more than anything else), to their old AT&T provider notwithstanding the growing number of service providers that were available. As Wexler points out, "When MCI and Sprint popped on the scene after the Ma Bell breakup, customers liked the idea of competition and savings and dipped their toes in the water - but it took several years for them to really start to impact AT&T's market share."

In response to the increasingly competitive nature of the marketplace, a number of telephone service providers sought refuge in alternative corporate organizational forms. For instance, Dizard reports that, "Merger mania broke out in the phone industry. In the West, two regional Bell companies, Pacific Telesis and Southwestern Bell, joined forces in 1996. Bell Atlantic and Nynex made the same move in the East."

The overarching purpose of both mergers was to achieve efficiencies of scale and the consolidation of talent and organizational resources in an effort to more effectively compete with MCI, AT&T, and Sprint in the long-distance telephone service markets that were made available to the regional Bells through the legislation. According to Dizard, "GTE, the largest provider of local phone service in the country, with 17 million customers, expanded into long-distance operations. Meanwhile, the three long-distance companies were restructuring themselves to compete in local telephone markets."

In addition, the U.S. Congress introduced new telecommunications legislation in 1996 regarding the Internet and software marketing practices and enacted law in 1997 and 1998 as part of the fallout from the AT&T breakup.

This restructuring would have some long-term ramifications for American consumers and the telephone industry alike, and these issues are discussed further below.

Long-Term Ramifications

One of the more glaring long-term ramifications of the breakup of Ma Bell was the lurching approach and sometimes misguided methods used by AT&T's marketing team. For instance, Wall and Wall cite the example of the long-term impact of AT&T's business decisions immediately following the breakup: "Look at AT&T's 1991 acquisition of NCR. AT&T admitted that it had failed to develop a successful computer business; this was a clearly stated strategy that followed the Ma Bell breakup in 1984."

This failure was further exacerbated by a misguided attempt to impose AT&T's corporate culture on its computer business, an approach that was doomed from the outset. In this regard, Wall and Wall report that, "From the start, AT&T made a pig's ear out of the computer business. They bought NCR to learn the business from them, and then spent the next five years trying to make them just like AT&T. The interesting thing about this failed merger was that the acquiring company, AT&T, had developed what might be considered a more 'enlightened' culture and attempting to impose that culture caused great difficulties."

The financial ramifications of this failed business experiment for AT&T were staggering. According to Wall and Wall, "In 1996, the company that they had paid $7.5 billion for and spent more than $2 billion to integrate (renamed AT&T Global Information Solutions) was again on the block for about $4 billion. It was spun off; NCR's revenues for the first nine months of 1997 were $4.6 billion, and operating losses were $29 billion during that time."

Consequently, the company's major stakeholders -- including its customers -- were stuck with the bill for this corporate misadventure.