Long-Term Ramifications of the AT&T Ma Bell Breakup

Introduction

"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 epigraphs 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 regional "Baby Bells" and 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- and long-term ways. To determine those short- and long-term ramifications, this paper provides a review of the relevant literature, followed by a summary of the research and important findings in the conclusion.

Background and Overview of AT&T's Monopoly

Among American business and social institutions, the American Telephone and Telegraph Company (AT&T) occupies a singular place by virtue of its enormous impact on the development of the nation — and the world — as well as the 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 management style was a significant innovation in business processes that would have profound effects on the American consciousness and economy in the years to come. After Alexander Graham Bell turned over control of the company near the end of the fin de siècle, AT&T grew to become one of the first authentic modern corporations controlled by its managers and shareholders. As Geisst notes, "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. As Heim reports, "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."

Stone likewise 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 and Boston, and the company transferred its assets to this new long-distance subsidiary for accounting purposes in 1899. During the next hundred 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 available. As McMurrer reports, "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, while 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 order 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 the "Modification of Final Judgment," required that the 22 Bell operating companies comprising the monopolized Ma Bell 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, discussed further below.

Short-Term Ramifications of the Ma Bell Breakup

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. As Geisst reports, "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 was the creation of so-called "telcos." 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 telecommunications companies)." Formally known as Regional Bell Operating Companies (RBOCs), seven Baby Bells were created following the breakup in 1984; however, of these seven, just four remain in operation today. As Boudreaux and Sloboda confirm, "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," while GTE, Nynex, Bell Atlantic, and MCI 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.

As Dizard reports, "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 required to sustain its reinvented incarnation caused the company to engage in some image-polishing to maintain its consumer base. Crawford also notes 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 regulatory arena, only AT&T has had the distinction of being labeled a "dominant carrier" in U.S. telecommunications by the FCC. The company was so large that even after breaking itself up into three parts in 1995, it had to be treated as a special case in government regulatory matters.

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

1. Improved international dialing;
2. Improved quality of calls; and
3. Faster Internet connections.

These positive changes, however, carried a substantial price tag. 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 case, 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 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 marketplace, a number of telephone service providers sought refuge in alternative corporate organizational forms. 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 order to compete more effectively with MCI, AT&T, and Sprint in the long-distance telephone service markets opened up by 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 further law in 1997 and 1998 as part of the fallout from the AT&T breakup. This restructuring would have long-term ramifications for American consumers and the telephone industry alike, discussed further below.

Conclusion

The adage that "history repeats itself" appears to be relevant to Ma Bell, and the company continues what appears to be an inexorable march from its existing oligopoly to the complete monopoly that existed prior to the corporation's breakup in 1982. The research showed that the breakup of AT&T spawned seven new regional "Baby Bells" that have since merged into four major telephone service providers. The research also showed that the short-term ramifications of this federal antitrust action included improved international dialing, improved quality of calls, and faster Internet connections. These consumer gains were offset by significant corresponding costs associated with the breakup. Finally, the research showed that the increasingly globalized and competitive environment in which the telephone industry competes will mean further changes to the industry in the future, as these major telephone service providers seek to maintain their existing market share and grow their businesses in new markets abroad.