Click! Ma Is Ringing Off

By John S. DeMott

COVER STORY

The breakup of giant AT&T sets the stage for a telecommunications upheaval

Time is running out for the largest company on earth. Ending too is a long era of inexpensive phone service that Americans have taken for granted. But just on the horizon, heralding its arrival with the attention-getting power of a jillion jangling telephones, is a revolution in telecommunications. Propelled by both marketing and technology, the coming changes will rank second in importance only to the establishment of the U.S. telephone system itself, acknowledged as the world's best.

It all starts happening on New Year's Day, just six weeks from now. Under the banner of promoting competition in the U.S. phone service, American Telephone & Telegraph, the Bell System, will die at age 107, shattered in the largest court-mandated breakup of a company since the split-up of Standard Oil in 1911. In place of the old Ma Bell will stand the "new" AT&T and seven regional telephone holding companies, all beginning life as giants and carrying such unfamiliar names as Nynex, Ameritech, U S West and Pacific Telesis. The eight new companies will immediately join the ranks of the 50 largest U.S. corporations in terms of assets.

The breakup will affect all of America's millions of phone users in ways large and small. Instead of receiving a single monthly bill for phone service, for example, consumers may now get three or more: one for local service, another from one of AT&T's proliferating competitors for long-distance tolls, and one from AT&T Information Systems for the lease of the telephone. Many people who previously rented their phones, though, may now buy them outright. Next week AT&T will launch the biggest private direct-mail operation in history. It will send brochures to 70 million customers telling them that under divestiture it will be taking over ownership of their telephone equipment. Consumers currently renting phones will be given options to buy them, continue leasing them, or purchase new equipment from AT&T or from non-Bell suppliers like Uniden or GTE.

For the moment the clearest thing about the breakup of AT&T is the confusion. As recently as last week, it was unclear, for instance, whether local phone companies had the right to offer phone services like weather and time of day after Jan, 1. The gigantic physical task of divvying the Bell System's assets among the new parts, from whole telephone exchanges down to trucks, repair equipment, paper clips and brooms, is still going on. Though phone service has not been hampered, companies trying to do business with Bell report that they sometimes have trouble finding out who is in charge of an office or division.

Much of the American public seems bewildered about the breakup. Polls show that only one in five people knows what is about to happen to their phone system. Says Cecil Woods, 33, a Chicago maintenance worker: "I think it's supposed to be a good thing for everybody, but I don't quite understand how. I just hope something good comes of it, and I think it will."

Even among those who are aware that something big is on the way, there is gnawing concern that telephone service will suffer. Says Yale Professor Stephen Ross, an expert on telecommunications: "We may be trading in a Cadillac for a Ford." Frets Senator Barry Goldwater, normally a fan of freer markets and less government regulation: "We're going to be sorry that we tampered with a system that was functioning well. I wish this divestiture had never happened."

Consumers seem apprehensive--and concerned. Colleen Todd, 32, a writer for a Tulsa ad agency, says, "Ideally, I think breaking up the monopoly was the thing to do. But realistically, I'm not sure it was the thing to do. I don't think it's necessarily a bargain for the consumer." Says Wilbur E. McCoy, 42, a machinist from Akron: "From what I hear, it's going to cost me more money for them to break up a monopoly. To tell you the truth, I never looked at AT&T as a monopoly, but I guess that's what it is." Worries Dorothea White, 86, a widow living alone in Los Angeles: "I think it'll make my phone bills go up. I don't really see why they had to break it up. It was a good system, and it seemed to be working."

Those concerns about higher phone bills have been heard by vote-sensitive Washington politicians, who are rushing in with legislation to keep prices down. Last week, despite heavy opposition from AT&T's lobbyists and the Reagan Administration, the House passed decisively a proposal to ban a surcharge on local phone bills that was to be part of an overall restructuring of phone prices.

To Wall Streeters and communications-industry executives, the breakup presents countless questions and, particularly for stockbrokers, the opportunity to make a great deal of money. Will the new parts of AT&T be equal to the whole? How well will the new companies adjust to the world of competition after decades of guaranteed prices and government regulation? Will the corporate culture of the old Bell System, with its emphasis on service, be lost or weakened?

AT&T and its seven new sisters will begin answering some of the questions this week, when they file stock-registration statements with the Securities and Exchange Commission, along with volumes of financial projections as big as Manhattan phone books. What investors think of the new companies' prospects will start becoming clear later this month, when something like 655 million shares of seven holding companies begin showing up on the New York Stock Exchange. They will be offered on a "when issued" basis, meaning they will be traded as if they already existed, even though the stock certificates will not be delivered until mid-February.

A total of 3.2 million individuals and organizations own shares in AT&T, the paradigmatic "widows and orphans" investment, making it the most widely held security in the world. People now holding AT&T stock will keep those shares, which will automatically be equity in the new AT&T. And for every ten of those shares, they will receive one share in each of the seven regional companies. Investors with fewer than ten shares will receive cash for their partial holding.

Just printing the new stock certificates cost $2 million. Distributing them and dealing with other transfer details of the new issue require an AT&T staff of 1,400, housed in a three-story building in Jacksonville. Individual investors with ten to 499 shares will be able to swap stock ownership among the seven new regional companies through AT&T at a cost of 25-c- per share until mid-April.

But there will also be plenty of trading on Wall Street. The New York Stock Exchange is adding a computer to the three it already uses just to keep up with an anticipated 15 million-share-a-day increase in trading volume.

What should an AT&T investor do? Buy, sell or hold? Experienced Wall Streeters advise: do nothing immediately, just wait for the chaos to subside. Once it does, investors could begin trading out of one holding company and into another or concentrate their investment in the new AT&T. Merrill Lynch, Dean Witter and several other brokerages have set up mutual or trust funds made up of stocks from all the new companies. The accounts, called Humpty Dumptys, in effect put AT&T back together again for an investor.

The American phone network and the AT&T divestiture are collections of superlatives. After all, the Bell System has spread telephones just about everywhere imaginable in America, from the bottom of the Grand Canyon to the 106th floor of New York City's World Trade Center. Americans make more than 800 million phone calls a day and have twice as many telephones (183 million) as home toilets (87 million).

The breakup of AT&T has so many possible ramifications that few people even pretend to understand it thoroughly. Wall Street firms have held dozens of investor seminars on the divestiture, all run by veteran staffers bristling with law degrees and M.B.A.s. But at one session last month, "I don't know" was a tellingly frequent response from, among others, panelist Alfred Kahn, chairman of the Civil Aeronautics Board under Jimmy Carter. An expert on the telephone industry, Kahn presided over the deregulation of U.S. airlines in the late 1970s and is now a professor of political economy at Cornell. Says Ulric Weil, telecommunications analyst for investment bank Morgan Stanley: "No honest observer can claim to know where this is all going." Agrees Peter J. Jadrosich, a vice president of Paine Webber Jackson & Curtis: "We believe historical performance may be nearly irrelevant to predicting future success."

History, in the case of the Bell System, goes back more than a century, to March 10, 1876. That was the day Alexander Graham Bell, 29, sent his booming voice over a wire to an assistant: "Mr. Watson--come here--I want to see you." Bell's patent, which was actually filed before he built a working telephone, made possible the construction of the American phone network.

It was Theodore N. Vail, though, who invented the Bell System. Brilliant, sweeping, subtle, an organizing genius with uncanny foresight, Vail was boss from 1878 to 1887, during which time he put together all the pieces of the modern goliath. He built up an engineering department to develop new phone technology, and a manufacturing department to build telephone equipment. All the while he systematically sought to exclude non-Bell phone companies from his network. But Vail felt thwarted by Boston financiers more interested in fast profits than his far-reaching ideas, and so he quit at 42 and went into retirement.

In 1907, after a 20-year absence, bankers summoned Vail back to save AT&T from financial ruin. The company was a mess. The original Bell patents had expired. Populists were attacking the firm over rates, and farmers were organizing their own telephone companies. The system was becoming technically obsolete; independents offered dial phones before Bell. Within a decade, Vail had transformed AT&T into a communications power. By the time he died in 1920, he had set the foundation for vigorous growth. Indeed, AT&T by 1929 was the first corporation to generate annual revenues of more than $1 billion.

In a series of famous essays, Vail put forth the idea that fatter profits are not the be-all and end-all of a corporation. Service counts more, he wrote, and the Bell System could deliver it best by being a regulated monopoly that struck a balance between public and private interests. In a 1908 advertising campaign, Vail sounded the theme that prevailed until the current divestiture: "One system, one policy, universal service."

Monopoly, to Vail, meant that AT&T would have U.S. telephone service mostly to itself, in exchange for submitting its rates to federal and state regulatory authorities for approval. Non-Bell phone companies, which handled about half the phones in the U.S. at that time, did not like that idea. Neither did the Federal Government. It questioned Bell at every turn. As far back as 1913, when European phone systems were being nationalized, the Postmaster General advocated Government ownership of the phone system. But a privately controlled monopoly seemed to be the most efficient way to run a national phone system, and Vail's concept won out.

AT&T's quasi-monopoly, however, was always an uncomfortable arrangement. The company wanted to get into related fields like computers when they began developing; other firms were eager to enter the phone business; and the Government was worried by the size and power of the telephone giant. In a far-reaching decision, the FCC in 1968 allowed a Texas firm to sell a device called a Carterfone, which connected mobile radios to AT&T lines. It was the first time any non-Bell product had ever won the right to be wired into the Bell System and was the first electronic breach in the monopoly.

One by one, other bars to competition began to fall. By the end of the 1960s certain forms of long-distance telecommunications other than Bell's were approved by the FCC. Still, Bell supplied 79.5% of U.S. telephone service. That was too much, said antitrust enthusiasts. On Nov. 20, 1974, the Justice Department filed a suit to break off Western Electric, the telephone company's manufacturing division, from the rest of AT&T.

The Justice Department's suit dragged on endlessly in court like the Jarndyce and Jarndyce case in Dickens' Bleak House. The first judge in the case died and was replaced in 1978 by Judge Harold Greene, a refugee from Nazi Germany who had helped draw up the Civil Rights Act of 1964 while working in the Justice Department. Greene conducted more than 18 months of hearings, pretrial discovery and major filings by the parties. Not until January 1981 did the trial begin.

By then, the feeling was growing among officials of both AT&T and the Government that the time had come to settle the case. AT&T wanted to catch up with the communications revolution that was increasingly blurring the lines between computers and telephones, but it was unable to get into that business because of its status as a regulated monopoly. Competitors were itching to get closer to phone users, but AT&T's monopoly kept them from doing much more than chipping away at that market. The new Reagan Administration wanted to settle the longstanding case. In a stunning move on Jan. 8, 1982, the Justice Department and AT&T struck a deal to break up the Bell System.

Greene did not immediately accept their deal. Meticulously, he read 8,000 pages of comments and interviewed 600 witnesses. Among those who spoke out in opposition to the breakup was Defense Secretary Caspar Weinberger, who said that dealing with an array of companies could threaten national defense and drive up communications costs. Greene also reviewed 25,000 pages of trial transcripts. Many months passed, with Greene raising objections along the way, continually shaping and modifying the parts that were now to be independent. In August 1983, Greene gave final approval to the divestiture agreement.

Whether the company was guilty of antitrust-law violations has never been proved, although some suits by competitors have yet to be resolved. Some Wall Streeters think AT&T gave in too easily and in fact could have struck some sort of compromise short of total breakup. But all that is now academic. As AT&T Chairman Charles Brown says of divestiture: "The ship has left the dock."

The AT&T vessel that is lifting anchor has $155 billion in assets. It is bigger than GM, Mobil and Exxon combined. With nearly a million employees, it is the second largest employer in America, behind only the U.S. Government. Its annual spending of $17 billion equals about 4% of all U.S. capital investment. Its Bell Laboratories, incubator of the transistor, the laser and Direct Distance Dialing, is the world's foremost industrial research organization. Western Electric makes 80% of all the telephone equipment used in America, including most of AT&T's 827 million miles of copper wire.

After Jan. 1, each of the eight brobdingnagian pieces of the old AT&T will sell conventional regulated telephone services but will also be free to venture into certain nonregulated communications fields. The parts:

The "new" AT&T. With about $35 billion in assets, it will be far smaller than the old AT&T. Yet the firm will still be as big as Mobil, and twice as large as

GTE, its nearest competitor. Moreover, it will be a powerhouse of money, research talent and manufacturing muscle. Bell Labs and Western Electric will remain parts of the new entity.

To the average citizen, the most familiar part of the shrunken firm will be AT&T Communications. Essentially Bell's former Long Lines Division, it will provide long-distance service as well as the familiar WATS (Wide Area Telephone Service) lines and 800 Area Code calling. These will account for more than half the new company's revenues, perhaps $35 billion.

But more jazzy things are in store, as seen in some of AT&T's sci-fi television ads. Those stress the more glamorous unregulated activities of information systems for business--services like teleconferencing and data processing. In those areas AT&T now will be free to square off with IBM, Burroughs and Honeywell.

At its Western Electric facilities, AT&T will make telephone equipment for sale to consumers and all kinds of exotic electronic whizmos like powerful memory chips for computers. Through AT&T International, the company has already struck a deal with N.V. Philips' Gloeilam-penfabrieken of The Netherlands to sell switching equipment throughout the world. Says Gerrit Jeelof, head of Philips' Telecommunications Division: "It was a natural marriage between two of the most desirable partners in the world." The new subsidary will pit AT&T against GTE and ITT in the European market, which it abandoned in 1925 to concentrate on the U.S. telephone system. AT&T and Philips could pry open an unusually tough market long closed to outside suppliers because of dominance by state-owned post, telephone and telegraph services.

Regional holding companies. The 22 local Bell telephone operating companies will continue much as before, collecting revenues from Yellow Pages (around $3.6 billion at present), mailing bills to customers under the familiar names of Michigan Bell, New York Telephone, or whatever, and providing phone service in all states except Alaska and Hawaii, which have independent firms. But the 22 will be stitched together into huge new holding companies that are roughly equal in numbers of telephones and potential revenues. The holding companies, with small staffs at the top, will be free to tread where no phone company has ever gone, into almost any nonregulated business, except manufacturing telephones or certain kinds of information processing. Some have chosen to use the Bell name and logo, a privilege that Greene denied the parent AT&T, while others have attempted to get away from the dowdy image of the "telephone company."

The new Bell companies: Nynex of New York City will cover New York and parts of six New England states; Bell Atlantic of Philadelphia will serve New Jersey, Pennsylvania, Delaware, Maryland, Virginia, West Virginia and the District of Columbia; BellSouth of Atlanta will have customers in Georgia, North Carolina, South Carolina, Florida, Alabama, Kentucky, Louisi ana, Mississippi and Tennessee; Ameritech of Chicago will reach the heartland states of Indiana, Michigan, Illinois, Ohio and Wisconsin; Southwestern Bell of St. Louis will join Arkansas, Kansas, Texas, Missouri and Oklahoma; U S West of Denver will cover the largest geographical area, 14 states in the Midwest, Rocky Mountains and Northwest; and Pacific Telesis of San Francisco will oversee California and Nevada.

Who got the choicest cuts in the carving up of the Bell System is a matter of intense debate among industry analysts. Some feel that AT&T walked off with what was really important in the network, leaving only one-third of the revenue-generating capability to the operating companies. Says Cornell's Kahn: "AT&T won by losing." Others believe the local companies have bright futures and good potential in their markets, although there are doubts as to just how eager their top managers, mostly old telephone-company men with decades of doing things the Bell way, are to enter the new world of competition.

Just how well the newly independent parts fare is critical to the question of how much phone bills will rise after the split. If the regionals make money, attract investors, improve efficiency and keep costs down, phone bills stand a better chance of staying reasonable. If they do not, pressure to collect money from phone users for lost revenues will increase.

Bills are destined to go up anyway, though, at least at first. Some charges, say consumer groups like Boston's Fair Share, may go up by 50% to 100% during the next twelve to 36 months. But total phone bills are not likely to increase by that much. Chairman Charles Brown estimates they will increase by only 8% to 10% a year for the next five years, slightly more than the average rate of increase since 1940.

Most industry watchers agree on one thing: telephone service has been too cheap, for too long, with costs spread unevenly. Says Lee Selwyn, president of Economics and Technology Inc. of Boston, a telecommunications consultant: "People were simply not aware of how cheap service really was."

Thomas Bolger, the new chairman of Bell Atlantic, is fond of pointing out that the prices of other commonplace products like a Chevrolet have increased about 1,000% since 1940, while the average basic monthly U.S. telephone rate has gone up from $3.67 to just $11.38 during that period, or by 210%. A private line to a dwelling in Great Falls, Mont., costs about $8 "for access to the world," says U S West Chief Executive Jack MacAllister, while it costs $30 to install and maintain the connection. Even if that basic monthly bill doubles, to $16, it is "still only about the price of a tank of gasoline," he says.

The level of telephone bills after divestiture will depend on whether the user is an individual or a business, how many local and longdistance calls are made, over what distance and for how long. The entire philosophical underpinning of pricing phone services is changing, a departure much in line with the national thrust toward deregulation in many other fields. In essence, Americans are going to begin paying more and more of the full and true cost of phone services they use. At the same time, they will not pay as much for those they do not use.

That has seldom, if ever, been the case. Through a complex system of cross subsidies, brilliant in concept but worrisome in practice, one type of phone service has helped pay for another. That kept phone costs down and within almost everyone's reach, but led to price inequities. A phone line in San Francisco that cost Pacific Telephone $29 to install and maintain monthly was billed to the customer at $7. The difference was made up by higher prices for other services, like heavy tolls for calls from one end of the Bay Area to the other. Similar subsidies allowed the dime for a pay phone call in New York City; the true cost is more like 28-c-.

Without some congressional action, a big chunk of the cross-subsidy system is going to disappear, putting fierce upward pressure on bills for local phone services. Regional phone companies stand to lose about $3.3 billion in revenues that they received from AT&T's long-distance tolls when they were still under Ma Bell's roof. Currently, about 37-c- from each dollar in revenues from long-distance charges is plowed back into the local companies.

To compensate for the loss, the regional phone firms are going to have to get money from somewhere. That means phone subscribers in general can expect higher prices for almost all aspects of local service, fees that in the past were bundled in packages and, for the most part, never seen by users. Rates will certainly go up for local services like calls to the grocery down the street or to the pharmacy. Higher rates are in store for calls to distant points within states, along with sharp escalations in fees for local directory assistance, phone-line installation and pay telephones.

The Federal Communications Commission has proposed one way of helping local companies make up for part of the loss of the long-distance subsidy. It has called for customers to pay local phone companies for access to long-distance lines. The monthly access charge would start at $2 and could rise to $6 or $7 by 1989. Businesses would pay $6 at the beginning. But the proposal is running into trouble. Legislation proposed by Colorado's Democratic Congressman Timothy Wirth and Oregon's Republican Senator Bob Packwood would eliminate the charge to private individuals and small businessmen and shift it back to AT&T and other long-distance phone companies. Theodore Brophy, chairman of GTE, calls the access charge "an unmanageable economic burden on those who make minimum use of long-distance service."

Wirth's bill passed the House last week, but Senate action is not expected until next year. In any case, the FCC last month delayed the fees until April 3 to give itself more time to study AT&T's arguments in favor of the surcharge.

When the long-distance subsidy stops, AT&T will find itself with an additional $3.3 billion a year, and has proposed giving some of that money back to consumers by cutting the cost of long-distance calls by 10.5%. Critics point out that this would add up to a reduction of only $1.75 billion, or about half the amount AT&T is getting. Says John Bryant, a Congressman from Texas, in a medley of metaphors: "They're trying to have their cake and eat it too. That put the last nail in the coffin of AT&T as a truthteller." Judge Greene will conduct a hearing into the entire matter next week.

The latest House action disturbs many industry officials, including Archie McGill, a former IBM vice president, onetime head of AT&T Information Systems and now president of Rothschild Ventures. Says he: "It's a real tragedy that Congress is poking its nose in at this point. The game plan is in place. To shake it up for two bucks a month is just not rational."

The $2 surcharge is not the only rate increase in the works. Local phone companies have been madly filing for price hikes with state public service commissions. A total of $6.7 billion hi increases has been requested this year. The outlook for those applications is uncertain, and public service commissions are expected to be tough with the phone companies.

By asking for so much so soon, some of the operating companies have expended goodwill even before getting started. Judge Greene has accused them of using divestiture as an excuse to request more money, and called some of the requests "unjustified."

One of the biggest questions facing the new AT&T is how well it will do in the world of competition. For most of its 107 years, the phone company has been shielded from rivals by its controlled monopoly status.

Wall Street analysts and industry experts disagree on how successful AT&T will be. In general, the new AT&T is expected to excel at its traditional business of long-distance telephone service. But it may run into trouble when it tries to take on other markets. Says ITT Chairman Rand Araskog: "AT&T has to learn all over to compete. It has definitely lagged behind technology and the competition."

The most interesting competitive skirmish to come out of the telephone divestiture will be the head-on confrontation between AT&T and IBM. AT&T, which is now free to enter the computer market in full force, has the size and resources to match IBM. The phone company has been making computers largely for its own use for a generation; most telephone calls are switched by computers developed by AT&T for the Bell System. For legal reasons, though, they were called microprocessors. Says Vice Chairman James Olson: "We can now call them computers without looking over our shoulder." AT&T will have a desktop business computer ready early next year. The machine will probably be built around a super chip that has more than 256,000 bytes of random access memory. Says Robert Casale, head of marketing and sales for AT&T Information Systems: "We will be selling the leading edge of technology. Nobody can touch us."

Another bruising market battle will be over long-distance service, where a host of companies are trying to take business away from AT&T. The most aggressive has been MCI Communications, based in Washington, which since 1969 has been permitted by the FCC to offer long-distance service in competition with AT&T. Under Chairman William McGowan, 54, MCI has grown to more than 1 million subscribers (vs. AT&T's 70 million) and to $1.1 billion in sales.

MCI and the other new competitors in the long-distance market, GTE's Sprint and ITT's Longer Distance, have been able to offer sharply discounted longdistance rates. The firms connect only markets with heavy phone traffic, where the big profits are, using the most modern equipment, leaving to AT&T the smaller, less profitable areas. But some potential customers considered the low-cost competitors inconvenient because customers have to punch in up to eleven extra numbers to make a call. An MCI customer making a long-distance call has to hit as many as 22 digits. Beginning next fall, though, all long-distance lines will be on an equal footing. Whether a customer is using AT&T, MCI, Sprint or Longer Distance, the person will use the same dialing procedure.

AT&T's Western Electric division will face very stiff competition. It will be entering a market with such powerful competitors as Canada's Northern Telecom, Rolm, GTE and ITT. In 1982, Western did 90% of its $12.6 billion in business with the Bell companies. Now those companies will be free to buy their equipment from anyone, at the best price. They are, in fact, doing that already. This year three Bell companies reached deals with TIE/Communications of Connecticut for $125 million worth of switchboards.

Western Electric sales could be cut in half next year, according to one particularly grim Wall Street view. That is nonsense, says Charles Meetsma, general manager of the division's plant in Allentown, Pa. Says he: "We're aware that many persons deride Western Electric's ability to compete. But to them I say, 'You haven't seen anything yet.'" With its Bell Labs providing research for ingenious new products, Western Electric is confident that it will do well.

The new regional phone companies will be kept busy at first just providing local telephone service, where they will not face competition. It will be a while before they realize big earnings from any activities other than the plain old telephone business. Says Pacific Telesis Chairman Donald Guinn: "Our first priority is to keep the core business--the Bell operating company--healthy. That's the place where most of our money comes from."

Nonetheless, the holding companies are trying to stir up investor interest by stressing glamour, growth and marketing in a rush of ads, and in talks before financial analysts. Typical is Ameritech, which uses the snappy slogan "A company you'll be hearing from." Says Chairman William L. Weiss, 54: "The future of our industry lies in exotic services. It lies in the explosion of information services."

While most of those new businesses have yet to be determined, some local phone companies have shown where they are heading. Ameritech intends to go into fiber optics, the superfine lines increasingly used as an efficient and versatile new way to carry telephone signals. Ameritech, BellSouth and the other holding companies are planning major efforts in AMPS, for Advanced Mobile Phone Service, a Bell Labs invention that currently is the hottest telecommunications innovation around. The system is expected to increase radiotelephone use in cars greatly. Buick became the first automaker to offer such a phone as an option on some 1984 models. The cost is about $3,000, but prices are bound to come down.

The seven holding companies are likely to develop in very different directions once they leave Ma Bell. BellSouth is favored by a good economic climate in the Sunbelt. Ameritech has a vast and important industrial base, but in a declining area. Pacific Telesis has battled long and hard with ratemakers reluctant to permit higher charges, so it feels tested and ready for anything. Says Chairman Guinn: "Divestiture doesn't pose any problems that are more difficult than the ones we've already faced."

Both the new AT&T and the seven operating firms are preparing for the new era of competition by looking for ways to cut costs and changing some old company habits. Managers everywhere are searching for places to slash payrolls. Some companies are turning to extensive early retirements, although layoffs have also occurred. That goes against a long tradition of Bell paternalism. To many AT&T employees who were kept on payrolls during the Depression of the 1930s, "the President" was not Franklin D. Roosevelt but AT&T President Walter GifFord.

Some 16,000 Bell employees already have taken early-retirement inducements, and 8,000 more are expected to do so by year's end. That could cut payrolls by $500 million a year. Pacific Telesis expects 1,400 to 1,800 people to accept early retirement. Throughout the Bell System, families are being uprooted as employees shift between the various entities. In some cases former colleagues are becoming competitors.

Perhaps the most important long-range impact of the AT&T breakup will be to speed up the already breathtaking developments in telecommunications. With more competition from more companies, progress is likely to be even faster. Says MCI's McGowan: "The technological revolution is arriving fast in the phone business. Look at that instrument on my desk. It looks like a phone, but it's really a computer. By pressing buttons, I instruct a computer to do things it's programmed to do."

One of the signs of that technological revolution is the way major corporations and state agencies are literally setting up their own phone companies. By building microwave dish antennas and aiming them at communications satellites, they can legally bypass public phone systems. That significantly cuts into the revenue of AT&T and all other phone companies. Says Gideon Gartner, a telecommunications researcher: "The danger to AT&T of bypass cannot be overestimated."

The Port Authority of New York and New Jersey, working with Western Union and Merrill Lynch, is building a gigantic $84 million Teleport on New York City's Staten Island. Its 17 earth stations will be beamed at all domestic and some international satellites and will feed communications into the World Trade Center, skirting the phone company in New York City. Citicorp, the largest U.S. bank, is installing its own $100 million system in Wall Street's financial district, which will take most of its communications out of the phone system. Even Salt Lake City's Mormon Church is getting into the act. Its private microwave link to Brigham Young University 45 miles distant in Provo, Utah, has replaced an AT&T system and is costing Mountain Bell $42,000 annually in lost revenues.

Metropolitan phone companies are vulnerable to bypassing because so much of their business comes from so few customers. About 24% of the revenues of New York Telephone last year came from just 1% of business customers. All the bypass systems already constructed have drained as much as $32 million in revenues from the AT&T operating companies.

The promise, and the peril, of telephone bypass is typical of the new era in telecommunications. The Bell System, in the end, was done in by the rush of technology. The system's structure could not contain or protect itself against better and cheaper ways of allowing people to reach out and touch someone. Boundaries crumbled between voice and data transmission, between domestic and international calling points, between telex, submarine cable and satellite. What counted was communication between parties, sometimes machines, no matter how or where.

The new competition, plus new technology that allows more information to be carried more efficiently, will lead to a bountiful array of new uses for telephones and telephone lines (see box). Says James Martin, author of The Wired Society: "Deregulation of the U.S. telecommunications industry will stimulate our imaginations. It will briefly raise the cost of telephone service, but in the end we'll all profit from a revamping of the system." With any luck, as a result of deregulation, the world's best telephone system could become even better. --By John S. DeMott. Reported by Bruce van Voorst/New York, with other bureaus

With reporting by Bruce van Voorst/New York This file is automatically generated by a robot program, so viewer discretion is required.