Consumers Pay Toll for Bell Breakup
For consumers, it’s been a rough road. American Telephone & Telegraph hasn’t had an easy go of it either.
The only big winners, in fact, from the historic breakup of AT&T; are the seven “Baby Bell” companies that were set up to operate the local Bell phone systems.
Five years after AT&T; was forced to spin off its local telephone operations to settle a longstanding antitrust lawsuit, the telecommunications world is a far different place. AT&T;, once an unflappable giant, is trying to bounce back from its first unprofitable year ever. The young regional phone companies, with such high-tech names as Ameritech, Nynex and Pacific Telesis, are thriving and pushing to expand their horizons.
And consumers, who once enjoyed the security of a stable phone system, have been befuddled by a blizzard of changes and tagged with substantial, if not dramatic, rate increases.
Consumers, in fact, have worried almost from the moment the breakup was announced.
“Our telephone service will probably get a lot worse, and it’s definitely going to cost us a lot more,” a Los Angeles resident gloomily predicted in one of many pre-divestiture letters to The Times. A Pasadena reader called the corporate dismemberment “the crime of the century,” claiming that AT&T; not only kept what was profitable--the long-distance business--but also gained the government’s blessing to enter the formerly forbidden computer and international telecommunications markets.
Costs Are Up 15%
Even if the doom-sayers were off target, divestiture clearly changed the way that customers related to “the phone company.”
Suddenly, these companies would no longer provide or repair telephones. Suddenly, consumers had to choose a long-distance carrier from a roster of competing firms with unfamiliar names instead of just dialing “1” and letting “the phone company” take it from there.
Suddenly, consumers got one phone bill for local service, often another for long distance and maybe a third for leased equipment. And they soon found themselves deluged with phone books they never ordered, published by companies they’d never heard of.
Moreover, telephone service for most people costs more today than it did five years ago--about 15% more, after taking inflation into account, according to a survey published last month by the Consumer Federation of America. That may appear modest, and it’s far from the two-fold and three-fold increases foreseen by divestiture’s most adamant critics. But by way of comparison, the Consumer Federation found that, taking inflation into account, phone costs actually fell 64% over the 50 years from 1934 to 1984.
Long-distance rates have declined. But those reductions benefit mostly businesses and only those residential customers who regularly run up about $20 a month in long-distance calls. That is what it takes to offset the so-called subscriber line charge that the Federal Communications Commission invented after the breakup.
But the Washington-based Consumer Federation notes that half of all residential customers spend less than $3 a month on interstate, long-distance calls. And 80% spend less than $10--far too little to benefit from the new rate setup.
“We want to highlight that it doesn’t make the majority of consumers better off,” said Gene Kimmelman, the study’s co-author.
Giving E.T. a Break
According to Fred B. Goldberg, counsel to the National Assn. of State Utility Consumer Advocates, “Divestiture could have worked out better for consumers than it has,” mainly because of the subscriber line charge, now $3.20 a month and due to increase to $3.50 in April.
“Essentially,” Goldberg said, “the pro-business regulators are intent on providing us with a system capable of providing all kinds of enhanced services that are more expensive and not necessarily wanted by consumers.
“They seem to want to ensure that if, three years from now, E. T. wants to phone home, he’ll be able to,” Goldberg argued, referring to the “extraterrestrial” character in the 1982 feature film.
In short, consumer advocates and some independent industry analysts believe that AT&T;’s divestiture led to the end of what had been one of history’s great bargains. They maintain that the breakup prompted government officials to soften regulation of the phone industry.
“Had we preserved traditional regulation,” Kimmelman argued, “consumers would be paying about $4 per month less for local service, and rate-payers would be saving $1 billion to $2 billion each year.”
The result, he said, is a leveling off in what had been a steadily expanding national telephone network. While 92.8% of all households do have phone service today, unchanged since 1980, one out of four of the nation’s poorest households--those with annual incomes of less than $5,000--have no phone, and one in six households with incomes of less than $10,000 lack phones.
For the Baby Bell companies, which were portrayed by some investment analysts as the poor stepchildren of divestiture five years ago, it has been a much happier story.
Since taking over the local phone business, the Baby Bells have not only strengthened their balance sheets but have spent several billion dollars in launching 150 or so new ventures that are not regulated. These include such logical extensions of their basic phone business as cellular radio, electronic paging and directory publishing. But they also have gone into financial services and property development.
“They came out of the blocks faster than anyone anticipated,” observed Robert B. Morris III, a telecommunications analyst with Goldman, Sachs & Co. in San Francisco.
Diverse Businesses
San Francisco-based Pacific Telesis, for example, has put together a variety of new businesses--including cellular radio, paging, property management and financial services. Those units make up the company’s PacTel Corp. subsidiary, which, President Lee Cox said, now contributes to the parent firm’s profits, which for 1988 are expected to top $1 billion.
To be sure, diversification has not always worked out for Pacific Telesis. It decided to scrap a directory-publishing business, and the company converted its switchboard, or PBX, sales business into a joint venture with Northern Telecom.
Most of the other Baby Bells have had their losers, too. At U S West, based in Englewood, Colo., Chairman Jack A. MacAllister said his company’s failed attempt at expanding sales of telephone equipment beyond its 14-state region taught the former monopoly a costly lesson--a $100-million charge against 1986 earnings--about open competition.
Overall, however, gains far outpaced losses. Since 1984, shareholders of Chicago-based Ameritech have seen the value of their investment, in terms of stock appreciation and dividends, increase 199%. For the Baby Bells as a whole, the return averaged 188%, far surpassing the 103% gain registered by Standard & Poor’s index of 500 stocks.
Setback for AT&T;
AT&T;, on the other hand, stumbled badly almost from the moment that divestiture took place. It has struggled in the computer industry, and its sales of telephone equipment have leveled off as its former captive market--now the Baby Bells--found other suppliers of major switches and other network gear. Until this year, the company relied on its long-distance telephone business and several waves of cost-cutting layoffs to stay profitable.
For the first time in its history, AT&T; expects to record an annual loss for 1988. It is absorbing the $6.7-billion cost of a speeded-up modernization to battle aggressive long-distance competitors and stop shrinkage of its 70% share of that $50-billion market.
“While our bottom line for the year will show a loss,” said chief financial officer Morris Tanenbaum, “our earnings have been on a strong, growing trend.”
Analysts this time tended to agree, and some of them expect 1989 to reveal a newly aggressive AT&T.;
As it looks further into the future, AT&T; is counting on what Vice Chairman Randall L. Tobias recently called divestiture’s “great unfulfilled promise”: overhauling the regulatory machinery that kept Ma Bell a benevolent monopoly. And the Baby Bells, chafing at restrictions placed on their activities by the antitrust settlement have challenged Congress and regulators to “free the Bell 7.”
For one thing, AT&T; and the Baby Bells want to be able to change prices at will, within limits set by regulators, in order to respond quickly to competitive pressures. For another, the Baby Bells want to be freed to provide information services instead of just carrying those provided by outside firms, as at present.
AT&T; and the Baby Bells will face a fight in their push for deregulation, though, because many consumers activists and competitors believe the restrictions are still necessary.
The Seven Baby Bells
Ameritech, Chicago. Provides local phone service in Illinois, Indiana, Michigan, Ohio and Wisconsin. Unregulated subsidiaries active in financial services, cellular phones, pagers and directory publishing. 1987 net income was $1.2 billion on revenue of $9.5 billion. Assets total $18.8 billion.
Bell Atlantic, Philadelphia. Local phone service in Maryland, New Jersey, Pennsylvania, Virginia, West Virginia and Washington. Unregulated ventures include computer maintenance, equipment leasing, data and network software, yellow pages publishing and cellular phones. 1987 net income was $1.2 billion on revenue of $10.3 billion. Assets total $21.2 billion.
BellSouth, Atlanta. Local phone service in Louisiana, Mississippi, Alabama, Georgia, Florida, South Carolina, North Carolina, Tennessee and Kentucky. Other ventures include computer leasing and maintenance, directory publishing, communications systems and equipment sales, cellular phones and paging services. 1987 net income was $1.7 billion on revenue of $12 billion. Assets total $27.4 billion, largest of the seven Baby Bells.
NYNEX, White Plains, N.Y. Local phone service in Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, New York and parts of southern Connecticut. Unregulated businesses include computer and software marketing, financial products and services, directory publishing, cellular phones, paging and real estate brokerage. 1987 net income was $1.3 billion on revenue of $12.1 billion. Assets total $22.8 billion.
Pacific Telesis, San Francisco. Local phone service in California and Nevada. Unregulated units involved in cellular telephone and paging, international consulting, cable television and real estate development. 1987 net income was $950 million on revenue of $9.1 billion. Assets total $21 billion.
Southwestern Bell, St. Louis, Mo. Local phone service in Texas, Oklahoma, Arkansas, Missouri and Kansas. Unregulated activities include directory publishing, telecommunications-systems marketing, cellular phones and paging services. 1987 net income was $1 billion on revenue of $8 billion. Assets total $21.5 billion.
US West, Englewood, Colo. Local phone service in Washington, Oregon, Idaho, Montana, Wyoming, Utah, Colorado, Arizona, New Mexico, North Dakota, South Dakota, Nebraska, Minnesota and Iowa. Unregulated units in transaction-processing software, real estate, financial services, cellular and paging services, publishing and software products to manage information. 1987 net income was $1 billion on revenue of $8.4 billion. Assets total $19.1 billion.
