The New Phone Game
Until 1984, people like Mary Quintana and Laer Pearce rarely thought about their telephone service.
There was one company -- AT&T; Corp. -- and it charged one basic price for local calls. Long-distance service cost extra and was too expensive not to watch the clock while talking.
Then a federal court mandate turned the telecommunications industry upside down, and millions of Americans suddenly had to start paying attention.
In breaking up AT&T;'s monopoly, a court-approved antitrust settlement that took effect 20 years ago today forced Ma Bell to turn over its local phone businesses to seven regional Baby Bells and open up its long-distance network to rivals.
The result was “too much complexity” for average consumers, Pearce said recently. For her part, Quintana said dealing with two companies and two bills was “awful.”
Now, the company founded by Alexander Graham Bell is trying to recapture a big part of its past. New technologies and regulations are helping the world’s biggest long-distance carrier again woo the local callers it once held tightly in its grip.
This time, AT&T; is the upstart, going head-to-head with the local phone companies it once owned and the long-distance companies that thrived after its break-up. After some consolidation, AT&T;'s local-phone spinoffs have become: BellSouth Corp., Qwest Communications International Inc., SBC Communications Inc. and Verizon Communications Inc. Still, the market is so cluttered that AT&T; almost merged last spring with BellSouth.
The consumer phone market is “an intensely competitive space,” said Maribel L. Dolinov, chief telecom analyst at Forrester Research Inc. in Cambridge, Mass. “They’re going to be challenged by the regional Bells and others, and it’s going to be hard for AT&T; to differentiate itself when it doesn’t have a large consumer base.”
But AT&T; has a big advantage: its storied name.
“Communications technology is just so vital that I don’t feel comfortable trusting it to someone I don’t know,” said Pearce, a Laguna Hills media consultant for the building industry. He has always had AT&T; long-distance and is considering switching his local service to the company.
As retiree Quintana of Oceanside put it: “It’s something I recognize.”
AT&T; Chairman David Dorman is counting on brand recognition as the company navigates massive changes in the telecom industry. The federal Telecommunications Act of 1996 threw open local markets with the intent of spurring competition, and now wireless and cable companies are rushing in with the long-distance and other rivals. Deals abound for consumers, but the market is littered with dead companies and billions of dollars of wasted investments.
“It’s still true that we have an enormous brand reach and brand presence and unaided awareness,” Dorman said. “But we can’t take that for granted.”
Unlike in its monopoly days, analysts say, the new AT&T; must be slimmer and nimbler to succeed at offering local, toll and long-distance service in one package. The company, leasing Baby Bell equipment in 35 states covering 60% of the national market, is going after the critical mass needed to ensure it stays in the local market “for the long term,” Dorman said. “We believe the consumer franchise has the ability to survive and actually grow.”
In the last two years, AT&T; has picked up nearly 4 million local residential phone lines, including about 600,000 in California, the nation’s biggest telecom market. It’s adding about 7,000 customers a week nationwide.
Still, that pales in comparison with the Bells, which own the local lines and still control 85% of the local market nationwide. In California alone, SBC, which bought Pacific Bell to become the state’s dominant local carrier, serves 17.3 million lines, and Verizon, the state’s second-largest local carrier, has 4.6 million lines.
With the Baby Bells gaining long-distance customers and able to free themselves from regulated pricing by installing fiber-optic cable to homes, some analysts think that AT&T;'s days are numbered. “I doubt AT&T; will be an independent entity in four or five years,” said analyst F. Drake Johnstone of Davenport & Co. in Richmond, Va.
But Dorman believes the company has the flexibility and cash flow to stay the course. He sees the residential market as a key to AT&T;'s success. Its consumer unit, through the first nine months of 2003, posted a $1.6-billion operating profit on $7.3 billion in revenue.
“So it’s not a small business,” Dorman said. “But right now, it’s sort of viewed as, ‘Well, that business is going away.’ Obviously, the facts belie that.”
Indeed, the nine-month operating profit was slightly higher than that for the business unit, which caters to large corporations and brings in two-thirds of annual revenue.
AT&T; and other telecom firms have suffered through two years of declining sales as slack demand, overcapacity of fiber-optic lines and stiff competition have driven prices lower. Dorman said cuts in expenses and gains in local customers helped AT&T; maintain margins in 2003.
Credit Suisse First Boston analysts at a December conference weren’t wowed by the company’s consumer plans. They focused instead on Dorman’s estimate that the crucial big-business unit would suffer a 6% drop in sales this year, instead of the expected 5% drop, because of pricing pressures.
They downgraded the stock to “neutral” from “outperform.”
Analyst Vik Grover of Needham & Co. in New York is more optimistic, putting a “buy” recommendation on the stock. “We believe the company is the main beneficiary of a flight to quality,” he wrote in an October report. AT&T; rose 27 cents Wednesday to $20.30 on the New York Stock Exchange. They have lost 22% of their value for the year.
Analysts such as Grover credit Dorman for AT&T;'s aggressive move into voice over Internet protocol, a technology that transmits voice along the high-speed lines that data travel. The company plans to roll out VoIP in the nation’s 100 largest markets by the end of March.
The technology, which promises lower-cost phone service with worldwide calling at no extra charge, will come with a host of features that probably will be priced as options. AT&T; won’t divulge pricing plans yet, but analysts warn that U.S. consumers don’t like paying more for features.
“This is the kind of new technology that will prove the naysayers are wrong when they say long-distance companies and, in fact, the whole telecom industry is in trouble,” said independent analyst Jeff Kagan of Atlanta. “They are only in trouble if they do not embrace and adapt to new technologies.”
AT&T;'s roll-out would be the most aggressive of all the carriers. Baby Bells SBC, Verizon, BellSouth and Qwest are making plans to offer consumer VoIP service. AT&T; and long-distance carriers Sprint Corp. and MCI, a unit of WorldCom Inc., already offer the technology to large corporations.
Among the features AT&T; will be offering are ones that block certain calls and junk faxes, allow multipoint conference calling, send voicemail to e-mail and -- in what analyst Dolinov calls a “killer” application -- switch a call from a home land-line phone to a cellphone in mid-conversation.
“IP is a PacMan, and everything in its way is going to be eaten,” said Hossein Eslambolchi, AT&T;'s chief technology officer.
A big glitch for AT&T; in California is that VoIP at home requires a broadband Internet connection. SBC, which controls most of the wiring to homes in California, will allow a competitor’s broadband service only to customers who buy SBC’s local service. In some states, the Bells are required to offer DSL regardless of which company provides local service.
AT&T;, like MCI and other Bell rivals, has joined with Covad Communications Group Inc., the nation’s largest independent DSL provider, to get around the Bell restrictions. But AT&T; has rolled out the Covad service in only 11 states so far. Plans to offer Covad DSL in California this fall were delayed, and neither company would say when it would be available.
Eslambolchi is testing several technologies to get around that so-called last mile of copper wire connecting homes to Bell central offices, but they may take several years to roll out on a mass scale.
But eventually, combinations of those new technologies are going to bypass the Bells’ lines into homes and are “literally going to change the game,” he said.
Meanwhile, AT&T; has to rely on regulated rates to lease lines from the Bells.
The Bells have complained vociferously that the regulated prices are below their own costs. The Bells have mounted a $40-million lobbying campaign to try to end such price regulation.
The Bells’ lobbying group, the U.S. Telecom Assn., is taking the occasion of the 20th anniversary of AT&T;'s break-up to argue for an end to wholesale price regulations, implying that it is time to take AT&T; and other rivals off regulated rates and let them sink or swim.
“It’s been an extraordinary journey from the AT&T; monopoly to today’s competitive marketplace,” said Walter B. McCormick Jr., president of the association. “But in the modern marketplace, it is time for a new communications policy that empowers consumers to determine market winners, rather than regulators.”
Consumer advocate Samuel A. Simon, a lawyer in Washington, D.C., who urged the break-up of AT&T;, said that, in hindsight, the company should have been split into a number of national competitors, each with local and long-distance service.
Regulation, new laws and market forces are creating four or five giant companies anyway, he said, though “we aren’t quite there yet.” He believes it would be good for consumers and the economy to halt government’s “micro-management” of the industry and to allow those large companies to develop.
Had the court in 1984 formed those integrated giants, he said, the nation could have avoided two decades of tortuous regulations, legislation and court challenges.
The only thing lost, he said, would have been AT&T;, “because no single entity would exist to claim the AT&T; brand.”
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A telecom powerhouse
1877 -- Bell Telephone is formed a year after the invention of the telephone by Alexander Graham Bell.
1885 -- Bell subsidiary American Telephone and Telegraph is launched with a mandate to build a national long-distance network.
1913 -- AT&T; settles its first federal antitrust suit, becoming a government-sanctioned monopoly in return for accepting regulations and giving up controlling interest in Western Union.
1974 -- The Justice Department files an antitrust suit against AT&T.;
1982 -- AT&T; agrees to divest itself of local telephone operations as part of a tentative settlement of the federal antitrust suit.
1984 -- The Bell System ceases to exist on Jan. 1. AT&T;'s 22 regional operating companies are divided into seven new regional holding companies, and the revamped AT&T; opens its long-distance business to competitors.
1994 -- AT&T; purchases McCaw Cellular Communications, the nation’s largest cellular phone provider, for $12.8 billion in stock. The new unit eventually is renamed AT&T; Wireless.
1996 -- The Federal Telecommunications Act of 1996 takes effect, opening local telephone service to competition.
* AT&T; forms AT&T; Broadband & Internet Services after acquiring TeleCommunications Inc.
* AT&T; begins offering local telephone service in Texas and New York, the first time it has entered the local phone market since the 1984 break-up of the Bell System.
* American Cellular Corp. is acquired for $2.4 billion through a joint venture.
* Cable giant MediaOne Group is acquired and merged with AT&T; Broadband.
2001 -- AT&T; Wireless and cable programming company Liberty Media Corp. are spun off.
* AT&T; Broadband is sold to Comcast Corp. for $51 billion.
* AT&T; begins local phone service in California, one of only eight states in which it has such an offer.
* Local service is expanded, with AT&T; service available in 35 states.
* Plans are announced to offer voice over Internet protocol, a lower-cost technology that carries voice calls like e-mail over high-speed cable.
Sources: AT&T;, Mergent, Times research
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Ma Bell takes on her offspring
AT&T; Corp. is focusing on the consumer market, challenging Baby Bells SBC Communications Inc. and Verizon Communications Inc. in California. Here’s a comparison of monthly prices in the state for packages of unlimited local and long-distance service*:
*--* Unlimited Calling Package with local and Free-call features high-speed Company long distance destinations included DSL SBC All Distance $48.95 United States 3 $75.90 AT&T; One Rate $48.95 United States, 4 N/A USA (for SBC area) Virgin Islands, Puerto Rico Verizon Freedom $59.95 United States, 5 $89.90 Canada, U.S. territories AT&T; One Rate $54.95 United States, 4 N/A USA (for Verizon Virgin area) Islands, Puerto Rico
* Excluding introductory or other special rates, taxes, fees and surcharges. Packages may require 1- to 2-year contracts with fees for early termination and certain upfront costs.
N/A: Not available yet but expected to be offered soon.
Sources: AT&T;, SBC, Verizon