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The Economy | Andrew Cassel

A long, twisted path for AT&T

You've dialed more than a few wrong numbers in your day, my friend, if you can remember Lily Tomlin as Ernestine the telephone operator, sitting by her switchboard chortling as she cut distressed callers off in midsentence.

"Of course we don't care," she would nasally declare. "We don't have to. We're the phone company."

Call me nuts, but I thought I heard ol' Ernestine's voice this week as AT&T announced plans for yet another major breakup ("One ringy-dingy . . . two ringy-dingies . . .").

Of course, this ain't the Ma Bell of old. Today's AT&T is a shadow of its former self - though still big enough to make number eight on the last Fortune 500 list. But to appreciate how far things have come, you have to recall when "babies" such as Verizon and Lucent Technologies were still tugging at Ma Bell's skirts.

The old AT&T epitomized a lot of what was wrong with mid-20th-century corporate America. An old-fashioned, vertically integrated, regulated utility, its culture wasn't far removed from that of state-owned telephone companies in Europe and elsewhere.

Few choices for consumers

AT&T manufactured, installed and owned the telephones in most American homes, along with the switches and wires that connected them. It had almost no competition and offered few choices. As with Henry Ford's early Model T's, you could have any color phone you wanted, as long as it was black. Service was stable, innovation was tightly managed, and profits were guaranteed, as were the shareholders' dividends.

It couldn't last forever, and it didn't. Thanks to technology and the antitrust laws, AT&T was forced in 1982 to choose between its long-distance franchise, which was being opened to competition, and its local-service monopolies. The company spun off seven regional "Baby Bells," but that wasn't the end of the story. The offspring grew, mated, and eventually turned hostile, blocking Ma's attempts to compete on their turf.

Technology, meanwhile, rendered most of the old definitions of telecommunications obsolete. "Telephone" service can now include everything from movies piped on demand over a wire to electronic mail sent through the air to a handheld computer. Trying to maintain its market dominance while keeping up with all of this has led AT&T down a long and twisted path.

To enter the computer-hardware field, the company bought NCR in 1991, only to sell it at a huge loss in 1996. It also spun off its manufacturing arm, now Lucent, while making major wireless and cable-TV acquisitions.

Revising its strategies

Eighteen months ago, still determined to crack the regional phone monopolies held by Verizon and its other progeny, AT&T revised its strategy: It would offer comprehensive telephone and Internet service to consumers through both cable and wireless channels. Wall Street endorsed the plan but grew impatient with the slow pace of growth. AT&T stock has recently seen nearly a decade's worth of gains erased.

So now the company intends to break off more pieces of itself, setting up its wireless, broadband-cable, consumer long-distance, and business services as separate entities. Some will evolve into independent companies, with their own stock. Others may be sold to competitors.

Whether the plan will benefit AT&T stockholders is still unclear. Consumers, however, will probably come out losers, according to economist Nicholas Economides of New York University. When AT&T was pushing aggressively to offer telephone and Internet service via cable, Economides said, the local phone companies had a reason to improve their services, while keeping prices reasonable.

AT&T's retreat eases the competitive pressure on local phone companies such as Verizon, allowing them to behave like Ernestine at her most infuriating.