AT&T CORPORATION

The AT&T story is the saga of a giant "natural monopoly" compelled to engage in periodic massive reorganizations in order to comply with the swings in government policy from non-regulation to regulation to de-regulation. The American Telephone and Telegraph Company (AT&T) was established by the American Bell Telephone Company in 1885 as its long-distance subsidiary. At the time the U.S. telephone system consisted primarily of unconnected local networks; Bell wanted to put a long-distance network in place before its patents expired in 1894. Theodore J. Vail, Bell's general manager since 1879, was named president of AT&T, but he left in 1887 over differences with Bell's Boston-based financiers.

As AT&T discovered it would be more expensive to lay underground cables for a long-distance telephone network, the company raised funds by selling bonds to public investors. Throughout its history, AT&T would raise money from the public through the sale of stocks and bonds, and for many years AT&T stock was the most widely held in the world. The need to attract investors disciplined AT&T to be an efficiently run company, even though it faced little competition for much of its history.

In 1892 the company completed a New York-Chicago long-distance line, and the following year Boston-Chicago and New York-Cincinnati lines were introduced. When Bell's patents expired in 1894, the company faced increasing competition from independent telephone companies, especially in the West and Midwest. Bell was forced to expand more rapidly than it had planned, growing from 240,000 telephones in 1892 to 800,000 in 1899.

The rapid expansion in the last decade of the nineteenth century forced Bell to raise more capital. American Bell was based in Massachusetts, which imposed more regulatory interference to Bell's plans than did New York, where AT&T was based. As a result, the company reorganized and made AT&T the parent company of the Bell System, which it remained until the breakup of the company in 1984.

AT&T aggressively met the challenge from independent telephone companies, which were unable to compete with it for very long. Telephone systems sprouted like weeds in rural areas, increasing from 267,000 in 1902 to 1.4 million in 1907, a year in which independent phone companies operated 51 percent of all phones. AT&T's response was to slash phone rates, emphasize customer service, and buy out the failing independent companies. The company often used its political and financial clout to make it hard for the competition to survive.

As AT&T grew in the first decade of the twentieth century, its finances weakened, allowing financier J.P. Morgan to gain control of the company in 1907. Morgan and his investor group brought back Vail as president for the purpose of creating a comprehensive, nationwide communications system. At the time Vail took over AT&T's operations, it had more than three million telephones in service, but was plagued with a bad public image, low morale, poor service, numerous debts, and serious technological problems.

Vail was one of the first U.S. business leaders who knew how to balance the profit motive with the need to please customers. Within a decade he turned AT&T around and made it a model of corporate success. He improved the company's finances by selling bonds at a discount to shareholders. He increased the amount of research and development and laid the foundation for what would become Bell Labs in 1925.

Although Vail and Morgan were monopolists, they were unable to make AT&T the sole supplier of U.S. telecommunications services. After acquiring a controlling interest in Western Union in 1910 and buying out numerous independent telephone companies, Vail decided to sell Western Union in 1913 and allow the independents access to AT&T's long-distance lines. These decisions were made in response to growing anti-monopoly sentiments against AT&T and resulted in a better image for the company.

In 1915 AT&T completed the first coast-to-coast long-distance line from New York to San Francisco. Thus, AT&T dramatized their linkup when Alexander Graham Bell and Thomas Watson re-enacted their famous first-ever telephone conversation between the two cities. AT&T was also able to send the first transatlantic message in 1915. With the telephone becoming a matter of national interest, pressure for federal regulation was growing.

AT&T provided significant support to the military during World War I (1914-1918) when its telephone network was used for military communications. It also set up radio and telephone communication lines in France. In 1918 the U.S. government took control of AT&T, making it a branch of the U.S. Post Office for the duration of the war. Once the government had control of the nation's telephone lines, however, it began to raise rates and introduce service connection charges. Popular support for government ownership quickly faded and in August 1919 the government gave up control of AT&T. Vail retired that same year.

With telephone communications made exempt from the Sherman Antitrust Act by the Graham Act of 1921, AT&T prospered during the 1920s. It expanded into side businesses, including radio and film. By 1932 AT&T had the second largest financial interest in the film industry which it sold in 1936; its national network of 17 radio stations was sold in the mid-1920s. In 1925 Bell Labs became a separate company, jointly funded by AT&T and Western Electric (AT&T's telephone equipment manufacturing subsidiary). Walter S. Gifford, who became president of the company and would serve in that capacity until 1948, exerted a strong influence on the growing telephone industry.

AT&T suffered during the first years of the 1930s when the Great Depression forced many families to give up their phones because they could no longer afford them. Sales at Western Electric fell from 411 million dollars in 1929 to 70 million dollars in 1933, and revenues from subscribers dropped from 1.05 billion dollars to 853 million dollars for the same period.

Americans soon found, however, that the telephone had become a necessity, not just a convenience and by 1937, phone connections exceeded pre-Depression levels. By 1939 AT&T controlled 5 billion dollars in assets—more capital than any other company had controlled up to that time. The immense size of AT&T prompted the newly formed Federal Communications Commission (FCC) to investigate AT&T's competitive practices. There were renewed concerns over AT&T's monopoly of telephone service. While the FCC's final report was ignored as World War II (1939-1945) broke out, the findings would have an impact on the company later on.

During World War II, Western Electric and Bell Labs concentrated on military work. This government subsidized research turned into a cornucopia of invention with vast implications for the company in the postwar world. Research brought about patented "spinoff" inventions and technological innovations, like radar and microwave radio relay systems. Other applications based on war-time research included coaxial cable to carry television signals and the invention of the transistor, which eventually replaced the vacuum tube.

In 1949, following up on the FCC's investigation, the U.S. Department of Justice, filed a suit seeking to split Western Electric from AT&T. However, Western Electric's work during the 1950s on Nike anti-aircraft missiles, the air defense radar system, and other defense projects gave AT&T some leverage with the Justice Department. In 1956 AT&T settled the antitrust suit by agreeing to limit its business to providing common carrier service and to confine Western Electric to providing equipment to the Bell System.

During the 1950s AT&T improved telephone communications and lowered long-distance rates by making it possible to dial directly to other cities without using an operator. In 1955 it laid the first transatlantic telephone cable, which it owned jointly with the British Post Office and the Canadian Overseas Telecommunications Corporation. As the nation's economy boomed in the late 1950s, telephone usage reached unprecedented levels. Private lines replaced party lines, and telephone based services became more common. AT&T was in enviable financial shape.

AT&T became involved in satellite communications when it formed Bellcom to supply most of the communications and guidance systems for the U.S. space program from 1958 to 1969. The first AT&T satellite, Telstar, was launched in 1962. That same year Comsat was launched as a half public, half private company to handle U.S. satellite communications; AT&T owned a 27.5 percent interest at a cost of 58 million dollars.

AT&T spent more than 500 million dollars to develop another communications innovation, an electronic switching system, during the 1950s and 1960s. As the United States became more of an information-based society, the speed and automation of the system made possible huge increases in telephone hardware efficiency during the 1970s and 1980s,.

AT&T's dominance in the communications industry again prompted concern about its monopoly status. In 1974 the company faced two antitrust lawsuits. One suit, brought by long-distance provider MCI, claimed AT&T was preventing it from competing in long-distance calling. The second suit, brought by the Department of Justice, called for the dismemberment of AT&T, charging that it had used its dominant position to stifle competition. As the Department of Justice suit dragged on, AT&T earned record profits in 1980 and 1981.

When the Department of Justice suit came to trial in 1981, both sides wanted to settle the case. AT&T wanted to enter the computer and information services business but was prevented from doing so by the 1956 consent decree. In 1982 AT&T was forced to set up a separate, unregulated subsidiary called American Bell to sell equipment and enhanced services. In January 1982 AT&T and the Justice Department reached an agreement to break up the Bell System, leaving AT&T free to compete in non-long-distance businesses such as computers. Final approval to the AT&T breakup was given in August 1983 by Federal Judge Harold Greene and the breakup became effective January 1, 1984.

At the time of the breakup, AT&T was the largest corporation in the world with 155 billion dollars in assets (even more than General Motors). After the breakup its assets were reduced to 34 billion dollars and net income dropped from 7.1 billion dollars to 2.1 billion dollars. Its 22 regional operating companies were divided into seven regional holding companies and AT&T was prohibited from using the Bell name.

The company was then organized in two major groups: AT&T Communications, which handled the company's long-distance services, and AT&T Technologies, which manufactured and marketed telecommunications equipment. The latter began concentrating on switching and transmission systems for telephone companies, an area in which AT&T was losing ground to competitors. American Bell became AT&T Information Systems and began investing heavily in computers.

In 1986 James E. Olson became chairman of AT&T, and Robert E. Allen became president. AT&T's computer operations lost 1.2 billion dollars in 1986, due to the lack of acceptance of AT&T's newly developed Unix operating system. After Unix made some progress in 1986 and 1987, AT&T formed a consortium of Unix manufacturers that included Unisys and Sun Microsystems. AT&T won two major government contracts, including one to build a new government telephone system. When Olson died in 1988, Allen became chairman and CEO until 1997, when he was replaced by C. Michael Armstrong, former chairman of Hughes Electronics.

AT&T reported its first-ever loss in 1988, a staggering 1.7 billion dollars. Then in 1989 it had a 2.7 billion dollars profit, the largest since the breakup. With AT&T losing market share in long-distance services, regulators gave the company permission to match the low prices of its long-distance competitors such as MCI and U.S. Sprint. Long-distance service was the company's primary source of revenue, but it used its financial and information resources to enter other businesses. In 1990 it introduced its Universal Card, which combined the features of credit and calling cards. In 1993 it acquired McCaw Cellular for 11.5 billion dollars, making it the dominant provider of wireless communication services. AT&T's structure as an integrated services, equipment, and computer company was no longer appropriate for the rapidly changing industry;

In September of 1995, AT&T announced that it would be splitting into three companies. One, a "new" AT&T, would concentrate on providing communications services. A second company, Lucent Technologies, would work in the area of research and development of communications technologies. The third new company, NCR, acquired in 1996 for an exchange of stock valued at 7.3 billion dollars, would focus on transaction-intensive computing. NCR and Lucent Technologies became separate, independent companies, leaving telecommunications and long-distance services AT&T's core business.

AT&T itself split into three main divisions addressing specific markets: business markets, consumer markets, and wireless services. For 1997, business markets generated 22.03 billion dollars in revenue, consumer markets brought in 23.52 billion dollars, and wireless services generated 4.43 billion dollars. The company's net income was 4.6 billion dollars, down from the 5.9 billion dollars net income in 1996. Other businesses and divisions that remained attached to AT&T included AT&T Solutions (an integrated partner of the business markets division); the local services division (which led the company's efforts to enter local service markets); and AT&T Universal Card Services (the company's credit card unit). These divisions were supported by Network and Computing Services, which ensured the reliability of AT&T products and services, and AT&T Labs, which created new technologies, products, and services.

Throughout its history, AT&T's financial strength allowed it to grow, improve, and make acquisitions. Its accomplishments included the multi-billion-dollar digitization of its entire network as well as its entrance into the international market in more than 200 countries. AT&T launched WorldNet to meet competition from the Internet arena and it also introduced DIRECTV, a television satellite system. At the end of 1998 AT&T announced it would acquire IBM's Global Network business for 5 billion dollars in cash. The IBM Global Network served large global companies, mid-sized businesses, and individual Internet users in 59 countries. At the beginning of 1999 AT&T acquired cable television giant, TCI (Tele-Communications Inc.), for 46 billion dollars, giving it 12.5 million cable subscribers who were also potential customers for local telephone service, a market AT&T was interested in developing. As the twentieth century drew to a close, AT&T's prospects looked bright. It continued to be on the cutting edge of technology and product development. As a polymorphous entity that acquired and divested itself of huge subsidiaries, it had outlasted the public's limited attention span and survived the threat of government regulation. Maybe it was a monopoly and maybe it wasn't. One thing was sure: the phone bills kept going up.

AT&T CORPORATION

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