Stalking New Markets

By Christopher Byron.

A slimmer AT&Twill compete fiercely in the world of high technology

No longer do we perceive that our business will be limited to telephony or, for that matter, telecommunications. Ours is the business of information handling, the knowledge business. And the market that we seek is global.

Such was the corporate philosophy set forth by AT&T in its 1980 annual report to stockholders. Suddenly, a year later, the words have taken on real meaning--not only for the Bell System's 3 million shareholders but for just about everybody the world over.

Two weeks after the far-reaching agreement that settled the U.S. Government's seven-year-old antitrust suit against the company, AT&T officials are still trying to absorb all the implications. After 48 years as the world's largest corporate monopoly, Ma Bell faces the prospect of being freed from federal regulation to compete, like any other company, in whatever businesses it chooses to enter. The consequences for consumers and businesses alike are certain to be historic. Says Ralph Acampora, an investment analyst for the New York City brokerage firm of Kidder Peabody & Co.: "It is Gulliver's Travels retold for the 1980s. The Lilliputians, like the Government, controlled a big giant. But one at a time, the strings began to fall away. Now we are confronted by this company with tremendous strength and resources that has been dormant for years and has at last broken free."

Not since the breakup of John D. Rockefeller's Standard Oil empire in 1911 has there been a more complex and potentially revolutionary restructuring of a U.S. corporation. The agreement opens the way for AT&T to divest itself of the least profitable and slowest-growing side of its business, local telephone service, by spinning off its 22 operating subsidiaries. At the same time, the company will be permitted to hang on to its very profitable and rapidly growing long-distance operations, which in 1980 accounted for more than 50% of AT&T's $51 billion in revenue. Even more important, the company will be able to keep its $12 billion-a-year Western Electric Co. manufacturing subsidiary and its highly prized Bell Laboratories, the world's largest and most sophisticated industrial research facility.

Though the settlement gave the Justice Department much of what it had sought in its original antitrust suit, the divestiture will also be of enormous potential benefit to AT&T. Taken together, the changes will enable a slimmed-down--and toned-up--company to plunge head long into the explosively expanding new world of computer-based information processing, a postindustrial business universe that embraces everything from personal computers to space technology, and all points in between.

Once having divested itself of the local operating companies, where most of its investment is concentrated, AT&T will be able to surge ahead with more and more new products and services without fear of being stopped by Government regulation. Says former Federal Communications Commission Chairman Richard Wiley, who presided over the regulation of AT&T's interstate activities during the mid-1970s: "The settlement was a brilliant master stroke on the company's part. AT&T gave away the future railroads of the telephone industry, kept the moneymakers that the firm already had, and won the right to go after everything else on the high-revenue side."

Yet as consumers, politicians and businessmen paused to take a good look at the AT&T settlement, they found that they had far more questions about it than there were answers. Among the first concerns was that the breakup might unleash an explosion in telephone costs. In Washington, Colorado Democrat Timothy Wirth, chairman of the House

Subcommittee on Telecommunications, warned of "sharp increases" in the charges for local telephone service and promised hearings to assess the full impact of the settlement. Among those planning to testify before Wirth's committee are AT&T Chairman Charles L. Brown and Assistant Attorney General William Baxter, the two men who negotiated the agreement. The Senate Commerce Committee has also announced plans to hold hearings that will look into the historic settlement.

Meanwhile, Federal District Court Judge Harold Greene, who has presided since 1978 over the Justice Department's suit against AT&T, became concerned that the deal had been reached without full consideration of all the issues and implications involved. To give consumer groups, corporate competitors and others an opportunity to file their opinions in the matter, he ordered a 60-day delay before making a formal decision on the arrangement.

Though AT&T has six months to draft a specific plan of divestiture and twelve months more to put it into effect, the company is so complex and sprawling that the entire process could easily drag on for years. Scores of million-dollar questions await answers. Among them are such basic issues as whether AT&T or the divested local operating companies will wind up owning the more than 142.5 million telephones that Americans now lease from the Bell System. Most likely, ownership of the phones will not be passed on to the local operating companies. Likewise unresolved is the question of whether telephone users in the future will continue to get one monthly bill that itemizes both local and long-distance charges on a single statement or separate bills for both. One bill is likely.

The most pressing issue for consumers is the future of phone rates. The breakup of AT&T into separate corporate entities, one for local calls and one for long-distance ones, will effectively undermine AT&T's traditional practice of charging premium prices for long-distance service in order to hold down the cost of local calls. This internal subsidy system has worked remarkably well over the years. Though inflation has pushed up overall consumer prices in the U.S. by nearly 130% in the past ten years, the cost of local telephone service has risen by only 51.7%. In fact, the price of a local call from a phone booth in many parts of the country is still the same as it has been for years: 100.

Bell officials last week were trying to ease public concerns about price hikes. Executives passed out memos urging employees to tell outsiders that there "is nothing in the consent decree that changes local rates." But despite those soothing words, some telephone charges will be going up. Warns Ulric Weil of Morgan Stanley & Co.: "Don't be surprised if, in some parts of the country in the future, it will cost you $100 to have the telephone repairman come to your home." Most likely to suffer are people in rural areas, where telephone equipment is often aging and the number of subscribers is low. To prevent a runaway surge in local costs and fees, Congressman Wirth proposes establishing a national telecommunications fund. The fund would use surcharges on long-distance calls to help offset the cost of maintaining local service.

Another basic question that remains up in the air is the corporate shape of the divested telephone companies. Theoretically, AT&T could spin these off as 22 separate companies or even as one new and enormous operating company. Though 22 operating companies might produce administrative overlap and waste, simply creating a single megacom-pany could perpetuate the firm's current dominance over supplying telecommunications equipment in the U.S.

One possible compromise might be to create five or ten regional operating companies, each big enough to benefit from economies of scale. At the same time, the existence of several large potential equipment buyers would make it difficult for any one supplier to corner the entire market.

No matter how those complex issues are finally resolved, the coming battle in telecommunications will be a multi-billion-dollar struggle of giants. AT&T is already one of the world's leading producers of an array of highly sophisticated electronics equipment and computer-driven data and information-processing equipment. Yet the outside world rarely learns of its prodigious high-tech output, since virtually all of it is consumed internally by subsidiaries and affiliates throughout the Bell System. Now the company can begin offering its products to anyone who wants to buy them.

In the field of telecommunications alone, AT&T already has under development such 21st century-sounding devices as phones that use miniature display screens to identify the source of a call before the receiver is answered; phones that can edit out and block pre-selected callers from reaching a person's number at all; phones that can even double as personal desktop computers. Also in the works is a broad range of video phones for offices and, most exotic of all, portable and cordless little devices that can provide instant direct-dial access to telephones around the world. Beyond telecommunications, divestiture is expected to take AT&T into such red-hot markets as office automation, electronic information and bankat-home services, and even the mainframe computer business, a field now dominated by IBM.

Shorn of its local operating subsidiaries, AT&T's gross revenues are expected to drop from a current level of $57 billion to $30 billion. But a 270-page study of the impact of the settlement on the company by International Resource Development Inc., a Connecticut-based consulting firm, projects that inflation-adjusted revenues will double in the coming eight years, with nearly all of the gain coming from new businesses.

For AT&T's rivals, the shake-up will create both opportunities and challenges aplenty. Virtually overnight, a giant new competitor has loomed up to cast its shadow over their markets. To stay in business, even such multi-billion-dollar corporations as IBM, ITT, RCA and General Telephone & Electronics will have to run harder and innovate faster than they ever have before. Meanwhile, just behind the American companies are Japanese firms like Nippon Electric that are becoming more important every year in the rapidly growing field of high-technology communications.

AT&T's competitors, though, are ready to do battle. Earlier this month IBM completed a major restructuring of its marketing operation in order to be in a better position to maintain its computer market dominance. RCA, which already has four communications satellites above the earth, is likewise undaunted. Even tiny MCI, the long-distance phone company that has already launched a serious fight for some of AT&T's long-distance markets, is confident that it can stand up to the giant. Said MCI President V. Orville Wright: "We can beat them from the standpoint of cost. I see the possibility now that we could get a third of the longdistance market."

The challenge for AT&T will be to capitalize on its extraordinary opportunity. Though it is the world's largest corporation, with more than a million employees and $137 billion in assets, financial strength alone does not guarantee company success. One immediate problem for which no amount of corporate bulk can compensate is the firm's lack of marketing expertise.

Having grown to maturity as a regulated and protected monopoly, Bell has never really had to sell anything, and some of the company's attempts at consumer marketing have been disappointments. For example, while a number of aggressive young companies were designing and promoting imaginative and increasingly sophisticated telephone receivers and terminals that could be connected to Bell System lines, AT&T was stuffing its 1,500 retail PhoneCenter outlets with uninspired designer phones in the shapes of Mickey Mouse and Snoopy. Says Rosemarie Tevelow, who oversees Bankers Trust Co.'s investment portfolio of 5.2 million shares in AT&T, the second largest block held anywhere: "I am only modestly bullish on AT&T's future. It is hard for me to put a value on a stream of products as yet uninvented, a marketing operation as yet not in place, and a distribution system that is still largely nonexistent. Conceptually, AT&T's potential is tremendous, just so long as you are aware that if you buy into the company now you are buying a concept and nothing more."

Another challenge facing AT&T as a result of divestiture will be to assure continued effective management of both the main company and the local operating firms that will now go off on their own. Said Morris Tanenbaum, AT&T's executive vice president for planning: "In the past we built a network around as much integration of operations as possible. Now we will have to divide everything into two pieces. We will lave to bring this about in a graceful way so that it will have no negative effect on users. That will be a tremendous job."

The route to senior corporate positions in AT&T has traditionally passed through Bell System subsidiaries and field operations. Illinois Bell, for example, was long a proving ground for executives on the way to AT&T corporate headquarters in New York. In the future, a top job there could mean the end of the line, not a transfer and a raise. Similarly, AT&T employees in years to come may find that the route to the chairmanship passes through Bell Labs or perhaps the company's finance or planning departments.

Some company employees see the coming changes as the end of a golden era and the beginning of a period of uncertainty. Said Delbert Staley, president of New York Telephone: "I cannot say that I will be left in an unhappy job. It is just that after 35 years in the Bell System there is a feeling that something has been lost." Said Greg Anderson, 30, a telephone repairman with Pacific Telephone and Telegraph in San Francisco: "The workers are troubled by the lack of information. There has just been none. The whole thing has been pretty shady." Added Leonard Moody, 38, a systems repairman in Los Angeles: "I think the telephone company is one of the few things in this country that still works. People complain about it, but the telephone service is something the country can be proud of. Why try to fix something that already works?"

The really important question raised by the breakup of AT&T, of course, is whether it will undermine or enhance the quality of American tele phone service. That is something that no one can know for sure until the divestiture takes place and telephone users across the country actually experience the results. Yet there is good reason to be optimistic.

Though AT&T officials have argued for years that the Justice Department's assiduous efforts to break up their company would imperil the smooth and efficient functioning of the entire system, the claim has never had much validity. Nearly 20% of the nation's telephone subscribers are served by independently owned and operated companies that are not part of the Bell System, yet the quality of their service is virtually identical. Having now shaken hands with the Government on a divestiture plan that could bring enormous benefits to AT&T, Ma Bell must see to it that such quality is fully maintained. --By Christopher Byron. Reported by David S. Jackson/Washington and Frederick Ungeheuer/New York

With reporting by David S. Jackson/Washington, Frederick Ungeheuer/New York

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