Once
a corporate icon, AT&T finally yields to a humbler role.
Two
lessons:
1.
No
company is safe from change
2.
Don’t
forget customers!
After
more than a century of binding America with sound waves and wire, AT&T
Corporation, once the country’s biggest, wealthiest and strongest company,
itself is unraveling!
Just
a few decades ago, AT&T seemed like a paragon of corporate success and
endurance. It offered the cheapest and best telephone services in the world as
available and affordable to a Nebraska homesteader as it was to a Wall Street
broker.
The
laboratories of the Bell System, as the company was known until 1984, were the
world’s undisputed leaders in technological research. The companies millions of
widows and orphans stockholders enjoyed a generous and dependable dividend. If
ever there was a company that seemed for the future, AT&T was it!
But
AT&T grew fat and complacent in the 1970s and 1980s. While the
telecommunications market was getting lean & hungry. After 1984, a consent
degree forced the company to spin off into four its local phone companies.
AT&T
struggled with the ambitious missions in a battlefield that kept changing,
trying to serve all its customers transmission needs, business or residential,
voice or data, cable or wireless.
AT&T
announced October 26 that it would split into four distinct units closed an era
in the telecommunications market as its oldest combatant conceded defeat on its
latest attempt to be all things to all people. Theodore Vail, former Chairman,
coined the phrase, “one system, one policy, universal service.”
Current
Chief, C. Michael Armstrong, spent more than $100 Billion on cable systems in a
vain effort to achieve the same goal in the era of broadband information
networks. Now, AT&T is finally acknowledging that it can’t pursue that goal
anymore.
The
story of AT&T’s 115-year rise and fall illustrates two simple lessons of
American capitalism. The first is that no company, however large and
prosperous, is safe from the convulsions of social, economic and technological
change. Who could have predicted, during the Bell System’s halcyon days of the
1950s and 1960s, that the company was turning into its own worst enemy?
With its revenue secure and growing, and its markets protected from competition, AT&T’s combative muscle atrophied. Federal and state regulators capped its profits, so the company placed little value on entrepreneurial ventures. Exempt from the boom and bust of business cycles, AT&T developed few systems to soften the impact of a shrinking or expanding work force. Its managers were homegrown and so inculcated with the company dogma that they were called “Bellheads.”
The
second lesson began to hit home after 1984. When Ma Bell lost its local
service, it lost a vital connection to its customers, millions of employees and
the market place. No longer was it Ma Bell, everyone’s mother who took care of
her children’s needs. And with that loss came a decline in the political clout
the company had always taken for granted.
In
its youthful days, the company was a model of cutthroat aggressiveness. In
1902, Bell was competing with more than 1,500 independent telephone companies.
But because it controlled all long-distance lines, Bell could limit
competitors’ growth simply by denying them connections to the national network.
Bell
also cut rates in competitive markets and refused to sell its patented
telephone equipment to non-Bell companies.
The company’s banker, J.P. Morgan & Co., used its influence to
prevent competitors from getting lines of credit, and many undercapitalized and
under equipped independents were absorbed into the Bell system. Bell painstakingly developed a
public-relations strategy to persuade both customers and the government that
the telephone system was a “natural monopoly” – efficient, uniform, and
reliable service in exchange for “rational” profits.
For
the rest of AT&T’s life, its monopoly status would be a double-edged sword,
and its relationship with the government frustratingly unpredictable. Although
the Department of Justice had granted AT&T its competitive protection in
1913, many government officials vehemently opposed the idea that a private
company should control a system essential to the security and stability of the
nation. Competition was a natural regulator, many people believed, and consumers
would always be at a disadvantage in a contest with a monopoly.
At
various times in its life, AT&T has faced challenges from Congress, the
Interstate Commerce Commission, the Federal Communications Commission and the
Department of Justice. Concern about AT&T’s size and power has waxed and
waned with the political climate – antitrust suits were filed in 1913 and 1949,
and the FCC conducted a lengthy investigation in the 1930s. Aside from minor
concessions, however, Ma Bell survived these attacks, and its power and
influence grew.
Yet
AT&T’s safety from competition also fostered a management culture that
ultimately would play a large part in the company’s undoing. AT&T’s
managers saw profit as a way to support and extend the monopoly, not an end in
itself. Cost control was an issue less for corporate efficiency than for
ensuring that outlays didn’t upset the company’s regulatory overseers. With
customers taken for granted, sales representatives received a straight salary,
no commissions, and were warned not to oversell. The most important tools for
gauging success and ascending the corporate ladder were achieving the maximum
efficiency and getting the right numbers in the “green book,” the company’s
internal productivity report.
“Don’t
make waves, not even ripples, is the norm,” one assistant vice president told
Steven P. Feldman, who spent a year inside a Bell operating company for his
1986 doctoral dissertation. “We wait until it is close to unanimous before we
make a decision. Sometimes it takes 10,000 Bell managers to make one half a
decision.”
Dr.
Feldman, now an associate professor of management policy at the Weatherhead
School of Management at Case Western Reserve University, remembers Ma Bell as a
“tight culture of conformity, where you had to fit in and please your boss.”
Indeed, another assistant vice president told him, “I never tell my
subordinates I don’t like beards or nonwhite shirts, but I tell tem they never
see me with a beard or a nonwhite shirt.”
This
culture of control created managers who were averse to risk and who could,
should a risky venture like the 1969 Picturephone fail, pass the charges on to
the customer. Nor were they required to anticipate or accommodate customer
demand, because they could never lose it. Until 1959, AT&T didn’t even have
a marketing department. Of course, other big companies had similar
characteristics, but only AT&T had no competition.
Indeed,
one reason why Mr. Armstrong says he’s breaking the company into four pieces is
to spark the innovation and entrepreneurial focus that has been lacking at
AT&T. In his remarks yesterday, Mr. Armstrong said each of the four new
AT&T’s “will move faster in meeting customers needs” and that employees
“will be even more highly motivated because they’ll be working for industry-leading
companies that don’t have to compete internally for capital or attention.”
When
the tide began to turn against the Bell monopoly in the 1960s and 1970s, the
company was psychologically unprepared for the competition that was swarming
into its industry. The company had begun to lose energy and put on weight. Its
managers were experts at efficient operations, not futuristic visionaries, and
the hierarchy was becoming as fixed as the steel and cement of an old plant.
AT&T’s cash cow, long-distance telephone service, demanded so much
attention a- and paid so handsomely – that management had little appetite or
incentive for innovation.
As
the 1980s loomed, demand for telecommunications was expanding too rapidly and
becoming too complex to be served by the Bell System alone. People, especially
in business, wanted more than voice transmission from their wires: They wanted
to move and process data at high speed, too. With the development of electronic
switching stations, microwave transmission and satellite communications, the
technological justification for AT&T’s monopoly disappeared. Because there
were now other ways to provide communications services, AT&T’s lock on the
market no longer made sense. Even then, AT&T fought to preserve its monopoly
by using regulation as a competitive ploy, stalling decisions that might help
competitors.
Then
in 1984 came divesture, when AT&T’s much vaunted vertical integration was
gutted by the Dept. of Justice, the company which until then had controlled
both the local and long distance markets had to choose whether it wanted to be
a Baby Bell.
A
government official who was involved in the 1996 telecommunications act says
AT&T may have “made the wrong call.” When it was a local phone company,
AT&T had reached almost every consumer in America with it s wires and
bills. That alone gave the company clout with politicians, some of whose
constituents also worked for AT&T in their home states. After divesture,
the ability to reach the individual customer, as well as more than half a
million employees belonged to the regional companies.
Some
government officials in Washington D.C. became more protective of the baby
Bells in their home states. During negotiations over the Telecommunication Act
of 1996 the Baby Bells wielded their political might with members of Congress
who were writing and voting on the bill. While AT&T lobbied hard for some
concessions, the law was largely viewed as a win for the Bells and sure enough,
they went on to become the foundation of some of the strategic best-positioned
telecommunications giants of the 21st century, Verizon
communications, SBC Communications, Qwest Communications International and Bell
South Corporation.
After
1984, AT&T suddenly found itself trying to operate in a world utterly
foreign to its experience. The company had picked off hungry competitors in the
early Twentieth Century was being picked apart by savage competition. Like any
mature company trying to compete in a booming market. AT&T either had to
transform itself or die. Its new goal: offering one-stop shopping to
telecommunications customer.
In
the past 15 years AT&T has had to tackle three enormous obstacles to that
goal
1)
keeping
up with new technology
2)
reinvesting
itself as a competitive player rather than a monopoly and
3)
retooling
its rigidly bureaucratic management.
The
company has made extraordinary strides in all three areas.
But
in 1996, the Telecommunications Act gave the Baby Bells and other competitors
the right to compete in long-distance service, ant AT&T suddenly found its
lock on the long-distance market at risk. New entrants with lower prices and
state-of-the-art service and technology were nibbling at AT&T’s
bread-and-butter business. And the Bells-with their millions of captive
consumers – were eager to break into the lucrative long-distance business.
AT&T
could have tried to build its own network to match the Bells’ facilities, but
decided against it. “The day after the telecom act was passed, AT&T should
have announced a massive capital investment to build a local network,” says
Brian Adamik, an analyst with Yankee Group who has tracked AT&T for 20
years.
Instead
of spending the $200 billion to $300 billion such a network would have cost,
AT&T tried instead to negotiate agreements with the Bells to lease parts of
their networks and resell the Bells’ phone service. Even if it could hammer out
such agreements, however, the fees AT&T would have to pay made the
company’s prices less competitive. Realizing the economics were against them,
AT&T set out to find other ways of reaching “the last mile” into people’s
homes that it had ceded to the Baby Bells – first with fixed wireless
technology and then cable television.
Fixed
wireless has shown promise, though the company has been painfully slow in
rolling it out. Its cable acquisition campaign has been aggressive, making it
the country’s biggest cable provider, with lies passing 26 million homes. But
its purchases give it “a Swiss cheese footprint throughout the U.S.,” says Mr.
Adamik.
Meanwhile,
the company has jumped with both feet into competition for other alliances,
mergers and acquisitions. It has tried, not always successfully, to form
partnerships with companies such as Time Warner Inc. and American Online Inc.
It acquired a leader in the wireless business, McCaw Cellular communications
Inc., as well as two big players int eh cable industry, Tele-communications
Inc. and MediaOne Group. In 1997, it brought in the first outsider ever to lead
AT&T, Mr. Armstrong, a former IBM executive who had just given the aging defense
contractor Hughes Electronics Corp. a new lease on life in satellite
communications.
“They
do seem to lurch from one thing to another,” says Peter Temin, a professor of
economics at the Massachusetts Institute of Technology and author of “The Fall
of the Bell System.” “But the problem for a company with such a large installed
base is that it’s hard to make a new move because you’re afraid of disturbing
your current cash cow.”
Whether
the cause was fear or misfortune, the past 15 years have also seen costly
mistakes and missed opportunities. In its hurry to enter the personal-computer
business, AT&T mounted a hostile takeover for NCR Corp. in 1991, paying
$7.4 billion for the company. The two companies never meshed, and NCR quickly
began losing customers and managers. After pumping a further $2.8 billion into
the beleaguered business, AT&T finally spun off NCR in early 1997, just a
few months after AT&T’s equipment business became independent as Lucent
Technologies Inc.