» Archive for March, 2006

Breaking Up Is Hard to Do (So Let’s Rebuild Humpty Dumpty)

Sunday, March 5th, 2006 by Jonathan Spira

It was only a little more than a year ago that AT&T was swallowed up by its progeny, SBC, for $15 billion.  At the time, Verizon realized it had to take immediate action and took control of MCI.  Today (yes, I’m writing this on a Sunday), AT&T (the “new” AT&T) announced it would acquire BellSouth for $67 billion.  This move created a telecommunications giant that will serve ca. 70 million local phone customers.  It also gives AT&T complete control of Cingular Wireless, which has been a partnership of BellSouth and SBC.

Of course, upon hearing the news someone immediately called me commenting on how AT&T had gone full circle.  But, as I explained to the caller, it had not.

AT&T was the parent corporation when it was divested of the seven so-called Baby Bells (or Regional Bell Operating Companies) on 1 January 1984.  Now what was left after several divestitures (Lucent among others) was acquired by a former Baby Bell, which took on the name of the acquired entity (AT&T).  The current acquisition really should be looked at as the “former” SBC (now called AT&T) buying Bell South (i.e. RBOC buys RBOC).  Just so happens that the former owns a portion of its former parent (the portion that operated Long Lines).

I knew right away that I’d have to write several columns on this and it was something I was well prepared for.  I wrote my first column on the subject in 1983, entitled “Breaking Up is Hard to Do.”  I also wrote a column at that time describing the Humpty Dumpty effect that might occur if the companies were to be somehow rejoined.

And let’s look at exactly that, starting in the late 1990s.

* 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

One thing I try to emphasize to clients is that, no matter what course of action is taken, things have a tendency to return to their natural form.  It should be noted that the break-up of AT&T in the early 1980s was a catalyst in creating an almost worldwide deregulated telecoms environment.  How many countries followed the United States’ lead?  Germany, the United Kingdom, Austria, the list goes on and on.  State sanctioned monopolies are rare today.

But the break-up of AT&T in the U.S. had a greater impact than that which took place in other markets, creating eight companies out of one and an environment where each of the companies had to deal with regulated and deregulated aspects of the business.  Each company had similar overhead, staffing, services, etc., and of course companies with multiple locations around the U.S. had to deal with multiple vendors.

Today’s transaction, as well as the SBC/AT&T acquisition and Verizon’s acquisition of MCI, reflects everyone’s interest in growing their businesses of selling voice and data services to enterprise and corporate customers, a $250 billion market.

But it also marks a return to a time when TPC (“the phone company”) meant just that, no matter where you were.

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