Baby Bell SBC May Buy Its Onetime Parent AT&T;

Since its founding by Alexander Graham Bell, AT&T; Corp. has been synonymous with the telephone. But the venerable corporate giant once known as “Ma Bell” may soon be eaten by one of its young.

SBC Communications Inc., one of the so-called Baby Bells spawned from AT&T;’s 1984 breakup, is in talks to buy its former parent, according to people familiar with the negotiations.

A deal could be announced as early as Monday. Even if the acquisition attempt falters, though, AT&T;’s days as a stand-alone firm may be numbered -- the company falling victim to new technologies, changing regulations and bad bets its executives made about the future of telecommunications.

The storied Bedminster, N.J., company has stumbled for more than a decade.

Its share of the long-distance market has dwindled from more than 90% 20 years ago to about 30% today. Meanwhile, AT&T; executives sold or spun off businesses that might have helped it better compete, including its cable and high-speed Internet unit as well as its wireless operation.

“The consistent problem for AT&T; ... was that it did not recognize that it had competition and that customers had choice,” said Meta Group analyst David Willis. “They always had a view that they founded telecom and no one else is trustworthy. It turns out others can do the job just as well. Bravado has been their downfall.”

Despite that, AT&T;’s brand name remains sterling, and its worldwide fiber-optic network and dominance in the market for big corporate customers are extremely attractive assets.

And in an age when just about everything is connected to everything else, AT&T;’s network would appeal to more than phone companies. Industry observers said IBM Corp. and Microsoft Corp. could just as easily bid for AT&T;, which remains the nation’s largest long-distance company.

No price in the SBC talks was disclosed, but the markets valued AT&T; at $14.8 billion, based on Thursday’s stock price. The talks were first reported by the Wall Street Journal.

For SBC and AT&T;, which are negotiating seriously for the second time in a decade, the stage for a possible reunion was set more than 20 years ago -- at the time of their breakup. Separation of local and long-distance phone businesses, once seen as crucial to competition in long distance, proved unsustainable in the face of sweeping regulatory changes and new technologies such as wireless phones and Internet-based calling.

“It looks like we’re undoing the 1984 decree that broke up AT&T;, but the world has changed a lot since then,” said Don Baker, the former Justice Department antitrust lawyer who filed the case to bust up the AT&T; monopoly.

Only eight years ago, when SBC and AT&T; were last discussing a merger, Federal Communications Commission Chairman Reed Hundt called it “unthinkable.” The talks ended.

Today, a combination of the two may be difficult but doable, according to industry observers.

FCC Chairman Michael K. Powell, reached in Davos, Switzerland, told Bloomberg News that the talks between SBC and AT&T; were “part of a growing recognition that the communications market is really converging.” But he won’t be around to review any deal. He’s leaving the agency within two months.

The American Bell Telephone Co., co-founded in 1877 by inventor Bell, created a subsidiary, American Telephone & Telegraph, in 1885 to build the nation’s first long-distance network. AT&T; became the parent of the Bell system in 1899.

In 1913, the federal government blessed the Bell system’s monopoly in exchange for AT&T;’s pledge to abandon the telegraph business and cooperate with noncompeting independent phone companies. The arrangement worked for more than half a century.

But AT&T;’s aggressive response to MCI Inc.’s attempts to sell long distance led the Justice Department in 1974 to bring the antitrust lawsuit that split apart AT&T; a decade later.

The ultimate result was eight separate companies: AT&T; in a competitive long-distance market and seven Baby Bells, each a monopoly in different regions of the country.

But Congress would soon change the landscape again. Eager to boost competition in phone and cable television service, lawmakers overhauled federal regulations with the Telecommunications Act of 1996. The measure allowed the Bells for the first time to offer long distance if they also opened their networks to competitors.

The change triggered a prolonged battle at the FCC, state utility boards and the courts. On one side was the Bells; on the other was AT&T; and other firms that relied on the Bells to connect them to their customers.

Frustrated by its dealings with the Bells, AT&T; -- which paid nearly $12 billion for a mobile phone network in 1994 -- spent more than $100 billion to buy two major cable TV systems.

The acquisitions turned AT&T; into the country’s biggest cable TV operator, with systems in 20 of the nation’s largest markets. Leo Hindery Jr., who ran AT&T;’s cable operations, said the plan was for the company to buy as many cable systems as it could, then strike partnerships with other major operators to offer local and long-distance service through their networks under the AT&T; brand.

Despite interest from all the major cable companies, Hindery said, the deals fell apart largely because AT&T;, then under the leadership of Chief Executive C. Michael Armstrong, demanded too much. “It was ‘My way or the highway,’ ” Hindery said.

For its part, San Antonio-based SBC, until 1999 known as Southwestern Bell, was following a similar strategy of consolidation. It snapped up Pacific Bell and others to grow into the nation’s No. 2 local phone company.

Control of millions of lines gave SBC significant power to lobby against the 1996 rules that allowed AT&T; to sell long- distance and local service over SBC lines. SBC and other regional companies, meanwhile, aggressively started marketing long distance to their customers, usually at the expense of AT&T.;

One serious blow to AT&T;’s long-distance business turned out to be self-inflicted: Its AT&T; Wireless One Rate plans in 1998 led the cellular industry to offer long-distance calls for no extra fee. The move shifted business from the wired networks.

By 2001, the high-tech industry was in a nose dive. Companies that relied on the Internet -- and phone service to stay connected -- failed by the hundreds. At the same time, Global Crossing Ltd. and others had built huge fiber-optic networks. The combination created a glut in long-haul capacity, driving long-distance prices down further.

After getting rid of its cable and wireless divisions in a desperate bid for cash, AT&T; focused again on its core phone business. It used its own fiber and copper lines and gear to serve corporate customers but still had to rely on renting lines from the Baby Bells to serve residential consumers.

But the Bells fought the setup, saying the discounted rates they were forced to offer AT&T; and others were below their own costs.

Last year, a federal court agreed. It threw out key FCC local phone competition rules -- marking the third time the rules were tossed. The Bush administration decided not to appeal. In a series of orders on related issues, the FCC effectively gave up on enforcing competition for residential customers.

AT&T; conceded defeat in midsummer, saying it would no longer market conventional phone service to households.

Rep. Edward J. Markey (D-Mass.), long involved in telecom issues in Congress, chastised regulators Thursday, saying they created the environment that led to the SBC-AT&T; talks.

“This merger would have been utterly unthinkable without the series of FCC decisions ... which essentially emptied a six-shooter into telecommunications competitors” like AT&T;, Markey said. “The FCC has taken the unthinkable and apparently turned it into the inevitable, and that result would be to the great detriment of consumers, high-tech workers, innovators and entrepreneurs.”

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Long history

1876: Alexander Graham Bell invents the telephone.

1877: Bell Telephone Co. is formed by Bell and two financial backers.

1878: The first telephone exchange in the United States begins operating in New Haven, Conn., under license from Bell Telephone.

1882: Now named American Bell Telephone, the company acquires controlling interest in Western Electric, a telephone equipment supplier.

1885: American Telephone & Telegraph Co. is incorporated as a subsidiary of American Bell and is chartered to build and operate the first long-distance telephone network.

1892: AT&T; opens a long-distance line connecting New York and Chicago.

1899: AT&T; acquires the assets of American Bell and becomes the new parent company.

1913: The company settles its first federal antitrust suit, shedding its controlling interest in Western Union and establishing itself as a government-sanctioned monopoly.

1915: The company connects telephone systems across the U.S., allowing for transcontinental phone calls.

1925: AT&T; establishes Bell Telephone Laboratories as a research arm.

1927: AT&T; begins transatlantic telephone service.

1934: The company begins telephone service between the United States and Japan.

1951: The company begins limited direct-dial long-distance service.

1956: To end an antitrust case brought in 1949, the company agrees to restrict its activities to the national telephone system and special federal projects.

1962: AT&T; launches the first active communications satellite.

1974: The U.S. government, seeking to break up the Bell system, files an antitrust suit against AT&T.;

1982: AT&T; agrees to divest itself of 22 regional companies.

1984: On Jan. 1, the Bell system is replaced by seven regional phone companies -- known as Baby Bells -- and AT&T;, which retains long-distance service, manufacturing and research.

1991: AT&T; acquires NCR Corp. for $7.4 billion, making it a significant player in the computer and data communications industry.

1994: AT&T; completes its merger with McCaw Cellular Communications, resulting in what becomes AT&T; Wireless.

1995: AT&T; restructures into three separate companies: a services company called AT&T; a product and systems company later named Lucent Technologies; and a computer company called NCR.

1996: Congress passes the Telecommunications Act, designed to allow broader competition in phone service.

1996: Lucent and NCR are both spun off from AT&T.;

1997: C. Michael Armstrong becomes chief executive of AT&T; and describes a focus on providing voice, data and video services.

1998: AT&T; acquires Teleport Communications Group.

1999: The company acquires cable giant Tele-Communications Inc.

2000: The company acquires MediaOne Group, becoming the country’s largest cable operator.

2000: AT&T;’s stock begins to crumble as investors grow impatient, seeing no payoff from Armstrong’s $100-billion purchases of cable and communications companies.

2000: AT&T; announces it will restructure into four independent, publicly held companies: AT&T; Wireless, AT&T; Broadband, AT&T; Business and AT&T; Consumer.

2001: AT&T; splits off AT&T; Wireless into a separate company.

2001: BellSouth Corp. considers buying AT&T;’s phone unit.

2001: The company agrees to sell its cable television unit to Comcast Corp. for $52 billion.

July 2004: The company announces it will stop marketing residential phone service, saying it could not compete with the local phone companies it once owned.

This week: Sources say SBC Communications Inc., one of the Baby Bells to emerge from AT&T;’s 1984 breakup, is in talks to buy its former parent.

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Sources: AT&T;, Times research; compiled by Times librarian John Jackson

Los Angeles Times