» Archive for February, 2005

Humpty Dumpty Part II

Saturday, February 5th, 2005 by Jonathan Spira

All the king’s horses
And all the king’s men
Couldn’t put Humpty together again*

*But in the end, the telecommunications industry did one better

For decades, companies and households had but one supplier to turn to for all of their telephony needs: Ma Bell.  More formally known as AT&T and represented through local Bell Operating Companies such as New York Telephone and Pacific Bell, Ma Bell was reminiscent of a kind but stern parent, happy to provide a dial tone but not letting others compete for their children’s attention.

That situation began to change in 1963, when MCI (Microwave Communications, Inc.), the first non-Bell long distance company in the modern communications age authorized (after multiple court battles) to compete against AT&T by the FCC, was founded by Jack Goeken.
Eventually, AT&T agreed to divest itself of its Local Exchange Carriers (LECs), forming seven “Baby Bells”: Ameritech, Bell Atlantic, Bell South, Nynex, Pacific Bell, Southwestern Bell, US West, which focused on providing what was dial tones to local customers.  AT&T kept the long-distance and equipment businesses, which at the time were thought to be where the money was.  As of 1 January 1984, when divestiture, as it is formally known, took effect, AT&T controlled 90% of the U.S. long distance market.  Some pundits (myself included) wrote about a Humpty Dumpty-like scenario, whereby an investor or other third party would attempt to reconstruct the Bell System by taking over several Baby Bells.  (Several stock exchanges, including NYSE and CBE, announced plans around this timeframe to trade a “Humpty Dumpty” sub-index, which would consist of AT&T and the seven Baby Bells.)

The Telecommunications Act of 1996 relaxed the regulatory climate that had bound the telecomms industry, and industry observers and regulators hoped to see increased competition.  Instead, the local phone companies embarked upon a buy-out binge.  In a few short years, the original seven Baby Bells were four and consolidation, not competition, was the name of the game.  The landscape became increasingly confusing.

In case you missed it:
* Nynex was purchased by Bell Atlantic in 1997
* Pacific Bell was purchased by SBC (née Southwestern Bell) in 1998
* Ameritech was purchased by SBC in 1999
* US West merged with Qwest, a long distance and fiber optics company, in 2000
* Bell Atlantic purchased GTE, which was a non-AT&T regional operating company, in 2000, and changed its name to Verizon

In 2002, when the WorldCom bankruptcy filing eclipsed even that of Enron, Bellheads savored the fairly brief moment when it appeared that AT&T had outlasted MCI (then part of WorldCom).

Last year, WorldCom emerged from bankruptcy protection as MCI, after nearly collapsing from an $11 billion accounting fraud.  MCI was a shadow of its former self, but it did have a worldwide voice and data network that was highly desirable.  Although the company’s capacity is about half that of AT&T, only Sprint, a distant third, remains as an independent supplier of voice and data comm. services.

When AT&T was swallowed up by its former progeny, SBC, last week for $15 billion, Verizon realized it had to take immediate action.  By then, a full reversal of the court ordered breakup was in play and the competitive landscape was changing quickly and unpredictably.  In a last minute deal, Verizon bested its much smaller rival, Qwest, for control of MCI.  The deal brought the telecommunications industry full circle from the reverse Humpty Dumpty phenomenon that had started with the Regional Bell Operating Company (RBOC) consolidation of the 1990s.  The period of increased competition and deregulation, which had begun when Bill McGowan, the litigious MCI chief, first challenged AT&T’s monopoly after joining MCI in 1968, and which had continued at the Department of Justice into the 1970s was over.  Although neither deal has closed, for all intents and purposes, MCI outlived AT&T for but a few days.

These deals reflect Verizon’s and SBC’s interest in growing their businesses of selling voice and data services to enterprise and corporate customers, a $250 billion market.  Interestingly enough, Sprint, which in the early days of the deregulated telecomms industry was the number three player in long distance services, remains as an independent provider of voice and data services, and that company agreed in December 2004 to merge with Nextel, forming the U.S.’s third-largest wireless company.  (A month later, Alltel, a regional mobile operator, said it would buy Western Wireless.)  Sprint plans on spinning off its local telecommunications business to its shareholders following the merger.

Jonathan B. Spira is CEO and Chief Analyst at Basex.