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.