Breaking up AT&T?

Craig Moffett of MoffetttNathanson was on CNBC recently and said that he eventually expected AT&T to be broken up. This caught my eye since I was at Southwestern Bell and have strong memories of the first divestiture of AT&T into separate companies.

The AT&T divestiture happened on January 1, 1984, when the AT&T parent long-distance company was separated from seven ‘baby Bells’ that operated the last-mile networks. That divestiture was government ordered by judge Harold H. Greene and was aimed to break up the monopoly that AT&T held in the long-distance market. The divestiture had the desired effect and long-distance rates tumbled in ensuing years to the point that people today make unlimited long distance calls on a cellphone without giving it a second thought. But pre-divestiture, long-distance rates average more than 10 cents per minute and were a major hindrance to interstate commerce.

In proof that you can’t hold a monopoly down, AT&T gathered back a lot of the pieces from divestiture over time, acquiring BellSouth, Ameritech, Southwestern Bell, and Pacific Telesis – four of the seven Baby Bells. However, it is not those acquisitions that led Craig Moffett to predict the second breakup of AT&T. Since Divestiture AT&T, along with Verizon has come to dominate the cellular business. AT&T did that through organic growth, but also by acquiring Cellular One and Leap Wireless. In 2011 AT&T tried unsuccessfully to merge with T-Mobile. The company has also bought into the satellite business with the acquisition of DirecTV. AT&T expanded its fiber network through the acquisition of Centennial. The biggest new venture for the company was the acquisition of the content creator Time Warner, that included Turner Broadcasting and Warner Bros. Studios.

Moffett believes that big diversified companies don’t do as well in the market as would the individual component companies. He also believes that at some point that Comcast will separate from NBC/Universal. When companies like AT&T and Comcast acquired content providers, both touted the huge benefits that could come from being both a content provider and a content purchaser. But those cross-benefits have never materialized to the extent envisioned by the original purchase.

Moffett said that at some point somebody will force AT&T to split off valuable assets like Warner Communications. He believes that likely will be the result of pressure from Wall Street and investors, but it’s also possible that a breakup could be urged by the government. Several Democratic candidates have mentioned breaking up the big telecoms as part of their platform.

Watching big companies over time is a big preoccupation in the telecom industry. Everybody in the industry watches the big corporations buy and sell companies like moving chess pieces. The acquisitions are always big news, but the impact in the industry mostly involves the employees affected by the mergers and acquisitions and not the rest of us.

Companies like AT&T seem to have little choice but to grow through acquisition. Wall Street drives companies to continue to increase earnings and it was a big shock for AT&T management when they were dropped from the Dow Industrial average in 2015. AT&T’s core business is still telecom. The company ignored the landline business for a long time, and you could barely find mention of the business in their annual reports a decade ago. The company has lately been touting the advantages or expanding its last-mile fiber network. For many years AT&T thought of itself as a cellular company, but that business has gotten more competitive and prices have dropped. Much of the company’s core business now earns infrastructure level returns – which are nice and steady and spinoff cash, but which don’t create the kind of returns that stockholders want to see.

Moffett’s prediction reminds us that the stories of the big corporations are never finished. They merge and buy companies to grow, and over time split or retract when they get too large. Big companies reinvent themselves when their industries undergo big changes. It wouldn’t be surprising to see AT&T repeat this cycle several times over the rest of this century.

3 thoughts on “Breaking up AT&T?

  1. Doug,

    The reduction in long distance rates was a side benefit of Divestiture; however, it was not the underlying cause. The anti-trust case the government filed against AT&T was based on the AT&T ownership of Western Electric, which manufactured most of the equipment that was purchased by AT&T affiliates like Southern Bell and AT&T Long Distance. Since the cost of the equipment purchases went into the Rate Bases of the companies, the government believed that the prices were inflated to increase the cost of underlying assets of the Companies and therefore the rates that were charged to the consumers. All the government was requesting was that Western Electric be split off into a separate company. AT&T decided that the future was in manufacturing and long distance and wanted to get rid of the local telephone companies that were so capital intensive and limited by their regulatory rate-of-return.

    When the cellular areas were awarded, one license went to the local telephone company, or companies, that served the area, and one went to a non-telco in a lottery. I’ll bet AT&T wish they had kept the local telephone companies. AT&T did not have any cellular licenses, that I remember. It just became AT&T brand when Southwestern Bell and their acquisitions acquired AT&T and used the value of the AT&T name to rebrand everything.

    Hindsight is always better than making decisions without all the facts. I don’t know what the US telecom industry would look like without Divestiture, but it would certainly be much different.

    David

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  2. First off Doug, the AT&T you knew is NOT the AT&T of today. Randall Stephenson who is the current CEO since 1982 started out as the head of Southwestern Bell which was a nasty baby bell. Through all the mergers and acquisitions of the other bells, he bought out the last remnants of the former and renamed his former bell companies as AT&T.

    What was once AT&T some of it was also bought up by what eventually grew to be Comcast along with the acquisition of Adelphia.

    AT&T, Comcast, Verizon (which was New England Telephone, NYNEX, Bell Atlantic and GTE) and CenturyLink ALL need to be broken up as these behemoths proved too large as regional monopolies, high prices and utterly despicable corruption of communications and equally atrocious customer service.

    And if you want to discuss the terrible state of broadband in this country, if there is any more reason enough as to where the CAF II funding to expand and improve internet access ACTUALLY goes, THIS is the reason. Executives sitting on their thrones making decisions to cut the people that actually do the work versus the poor decision makers or the processes that are too time-consuming to actually get the work done because of all the “templates” or “reports” that need to go out. How many executives would give up part of their compensation to help the company??? NONE OF THEM.

    Take a look and decide for yourselves if these people deserve this kind of compensation in exchange for the sub-par or NO service you get in the areas they
    are currently or supposed to serve :

    Consolidated Communications CEO Bob Udell
    Total Compensation (2014): $846,825
    Total compensation (2013): $1,256,508
    Salary: $323,000
    Other compensation (stock awards, bonuses, etc.): $523,825
    Duration with company: Since 1993

    FairPoint CEO Paul Sunu
    Total compensation (2014): $2,559,319
    Total compensation (2013): $2,359,299
    Salary: $815,000
    Other compensation (stock awards, bonuses, etc.): $1,744,239
    Duration with company: Since 2005

    TDS Telecom CEO David A. Wittwer
    Total compensation (2014): $2,616,877
    Total compensation (2013): $2,322,278
    Salary: $587,000
    Other compensation (stock awards, bonuses, etc.): $2,029,877
    Duration with company: Since 1983

    Cincinnati Bell CEO Ted Torbeck
    Total compensation (2014): $3,339,000
    Total compensation (2013): $5,338,744
    Salary: $750,000
    Other compensation (stock awards, bonuses, etc.): $2,589,000
    Duration with company: Since 2010. Torbeck took over the CEO post from John Cassidy, who retired in 2013.

    Windstream CEO Tony Thomas
    Total compensation (2014): $3,367,476
    Total compensation (2013): $2,121,115
    Salary: $538,461
    Other compensation (stock awards, bonuses, etc.): $2,829,015
    Duration with company: Since 1998

    Frontier CEO Dan McCarthy before being replaced by Bernie Han
    Total compensation (2014): $3,979,239
    Total compensation (2013): $2,611,725
    Salary: $658,333
    Other compensation (stock awards, bonuses, etc.): $3,320,906
    Duration with company: Since 1990

    Level 3 Communications CEO Jeff Storey before the CenturyLink acquisition
    Total compensation (2014): $10,850,861
    Total compensation (2013): $8,018,232
    Salary: $978,846
    Other compensation (stock awards, bonuses, etc.): $6,872,015
    Duration with company: Joined company in 2008 as COO and became CEO in April 2013.

    CenturyLink CEO Glen F. Post III
    Total compensation (2014): $13,131,448
    Total compensation (2013): $8,993,247
    Salary: $1,100,000
    Other compensation (stock awards, bonuses, etc.): $12,031,448
    Duration with company: Since 1982

    Verizon Communications CEO Lowell McAdam
    Total compensation (2014): $18,306,509
    Total compensation (2013): $15,826,606
    Salary: $1,580,769
    Other compensation (stock awards, etc.): $16,725,740
    Duration with company: Since 2000 (inception of Verizon Wireless)

    AT&T CEO Randall Stephenson
    Total compensation (2014): $23,984,315
    Total compensation (2013): $23,247,167
    Salary: $1,691,667
    Other compensation (stock awards, etc.): $22,292,648
    Duration with company: Since 1982

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