The Industry

The Breakup of AT&T

I finally got around to reading a book that’s been on my list for a long time. The book is The Deal of the Century: The Breakup of AT&T by Steve Coll. This book came out in the 1980s and chronicled the events and the big personalities involved in the divestiture of AT&T into the Baby Bells on January 1, 1984. I worked with Southwestern Bell until just before divestiture and watched how the topic consumed everybody inside the old Ma Bell business. The monopoly that has been steady for a century was suddenly a perilous place to work, and career employees found their futures to be uncertain.

This is blog is not a book review, although I recommend this book for anybody that wants to understand how we ended up with the telecom industry we have today. The book has two focuses. It looks at the court cases involved in the processes. People may not remember that the antitrust case against AT&T had been going on for a long time before Judge Harold H. Greene took over the case. He brought discipline to the prosecution and singlehandedly got the case on track.

The book also looks at the big personalities involved in the case. In addition to Judge Greene was John D. deButts and Charles Brown, the presidents of AT&T that fought, but eventually agreed to the divestiture.  On the prosecution side was Assistant Attorney General Charles Brown and outside counsel George Saunders. Also playing a big role from Congress was Peter Rodino from New Jersey and Tim Wirth from Colorado. The book describes the chain of events and interplay of personalities that eventually led to breaking up AT&T.

Looking back 36 years after the breakup it’s easy to see how divestiture changed the telecom industry in both good and bad ways. On the plus side, it introduced competition. The premise of the divestiture was about allowing competition for long-distance service. It’s probably hard for kids today to believe that making a long-distance call required an affordability assessment when talking to somebody outside the local calling area cost ten cents or more per minute – at wage levels a fraction of today. Long-distance has gotten so cheap today that it is thrown in on telecom products. Nobody thinks twice about calling somebody and talking for an hour on a cellphone or across a computer link.

However, the idea of competition didn’t end with divesture and there is a straight line between the AT&T divestiture and the Telecommunications Act of 1996 that allowed competition for local service in addition to long-distance. That spelled the end of the telecom monopoly.

Probably the best outcome of the breakup of AT&T was the way that competition opened up the development of the Internet. If Judge Greene had not been successful, we may not have seen the success of the dial-up ISPs that relied on telephone lines to function. An AT&T monopoly would have been able to fend off and maybe block cable company broadband networks. Without robust long-distance competition, we probably wouldn’t have seen the same successful development of the cellular industry – it likely would have remained as a tool for corporations and the wealthy.

But there is a flip side to the successes due to competition. Increased competition led to decreased regulation. As long-distance companies and the cable companies pummeled the regulated telcos we saw federal and state regulators allow the telcos to deregulate. That deregulation is probably the biggest factor that has culminated in today’s badly deteriorated and non-functional rural telecom networks. The idea of carrier-of-last-resort has seeped away over the years and regulators stopped insisting that regulated telcos take care of the needs of rural customers. In most parts of rural America, the telecom landscape is probably the worst it’s been for a century. Nobody is tasked with making sure rural America has broadband.

Unfortunately, the idea that everything in the telecom world ought to be open to competition ignores the fact that landline networks work best as monopolies. We’ve seen the consequences of the competition movement in two big ways. In urban areas, the cable companies have largely become the new monopolies, but nobody seems to want to invoke that word or talk about invoking monopoly regulation. In rural areas, every big telco has largely walked away, and nobody wants to make infrastructure investments that don’t make high rates of return. The only long-term solution to having broadband everywhere is a regulated environment that ensures that most rural places share in the benefits of affordable communications. The challenge we face is figuring out a path from today’s fully deregulated world back to something that will work for rural America. I’ve heard dozens of simplistic suggestions on how to make this work again, but it’s a puzzle that I’m not sure can be solved.

The Industry

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.

Regulation - What is it Good For?

Recognizing the Cable Company Monopolies

In most cities in the US the cable company is now a broadband monopoly. They have won the competition battle and have largely taken customers formerly served by telco DSL. The cable companies have grown into monopolies due to being better competitors and by offering superior broadband products. There are still some markets where the cable companies are not monopolies – they may be competing with a fiber overbuilder or an aggressive CLEC using DSL, or the cable company has not made the upgrades in a given market to the fastest broadband products. But for most towns in the US the cable companies now fit the definition of a classic monopoly.

What I find alarming as a consumer is that there is no talk at the national or even the state level of reacting to the monopoly status of the big cable companies. I know that this conversation will eventually arise as has happened in the past with other monopolies. Monopolies naturally abuse their monopoly power more and more over time until the government is forced to react to regulate them.

The nature of monopolies is well understood and there are well-stablished reasons why governments eventually step in to regulate monopolies:

  • Price Gouging. Monopolies always raise prices over time when there are no competitors to keep them in check. We know that Wall Street is currently urging the big cable companies to aggressively raise broadband prices.
  • Poor Service. Monopolies tend toward providing poor customer service because they have no incentive to do better. The big ISPs are already today are rated by consumers as their least favorite corporations.
  • Monopsony Power. This economics term refers to the tendency for monopolies to exploit their purchasing power by forcing low prices on their supply chain. Perhaps the best example of this is Comcast swallowing up the programmers that supply the content for their cable product.

We know from a few centuries of experience how to deal with monopolies. Governments have numerous options:

Promote Competition. Governments sometimes try to curb monopolies by promoting competition. In the broadband world this could involve the government providing funding to build urban fiber or supporting alternate technologies like 5G to directly compete with the cable monopolies.

Price Regulation. Many natural monopolies are regulated through price caps where regulators must approve rate increases. This remedy is most effective with natural monopolies like electricity or water systems which serve everybody in a community.

Quality of Service Regulation. Regulators have often intervened and forced customer service standards on monopolies. The best example is the old Ma Bell and regulators over the years defined much of the interface between AT&T and customers. They regulated many aspects of that interface such as the rules governing disconnecting customers for non-payment or be defining acceptable time period to make repairs.

Divestiture. An extreme remedy is divestiture, or breaking up a monopoly into different components. We’ve seen this in our industry when the government forced the divestiture of AT&T into local telephone companies and a nationwide long-distance network. It’s harder to see such a clean split for cable companies, but the government could make them divest of programming assets or other ventures that enable them to inflict monopoly abuses.

Rate of Return Regulation. Another effective form of regulation is rate of return regulation. This is still done today for large power companies who must defend their expenditures and rates to regulators. Earnings for the core business are strictly regulated and excess profits returned to customers.

Penalties for Monopoly Abuse. Finally, the government can impose penalties for monopoly abuses. The FCC has always had this authority and issues fines against bad actors in the industry. The Federal Trade Commission also can fine cable companies for operating practices that harm customers.

We are in an environment today where big ISPs and many other large corporations have gained the upper hand in the market through the lobbying of legislators and regulators. However, historically the treatment of monopolies has always been cyclical, and eventually the monopoly abuses become unbearable and the public demands regulation. I would think that if the cable companies follow Wall Street’s advice and raise base broadband rates to $90 per month that we’ll see the government be forced to react.

It’s also possible that some alternate technology like 5G might eventually create competitive pressure for the cable companies. But it’s just as likely that in most places that wireless carriers will be other large companies and we’ll see duopoly competition like we’ve seen for years between Verizon FiOS and the cable companies in the Northeast, where both charge similar prices and don’t really compete.

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