Expansive growth followed by consolidation in the telephone industry occurred initially between around 1910 and some would contend, 1982. Telephone service in the United States was almost solely the domain of AT&T, or The American Telephone and Telegraph Company. AT&T was a large, highly regulated monopoly. In other countries telephone service was mostly a government utility, usually part of the post office, thus the acronym PTT for Postal, Telephone, and Telegraph service.
An example of successful consolidation and growth in the telephone industry involves the consolidation of the original Bell Telephone Company and New England Telephone Company into American Bell, Inc. On December 30, 1899, American Bell became a wholly owned subsidiary of American Telephone and Telegraph Corporation, a New York Long Distance Company, and a wholly owned subsidiary of American Telephone and Telegraph Company.
AT&T was incorporated in 1885 to manage and expand the long distance business of American Bell Telephone Company and its licensees. In 1899, it assumed the business and property of American Bell and became the parent company of the Bell System, yet another informal name.
The company grew and consolidated over many years as a legal regulated monopoly. It literally built a public telephone system in the United States with connections and relationships outside the United States that were the envy of the world for many years. The company was organized across three lines of business: local and long distance, (including international), telephone service and equipment manufacturing (Figure 1). Regulation of the company was centered on the prices it could charge for it’s local and long distance service. The US Federal Communications Commission (FCC) dealt with interstate and international pricing. State Public Utility Commissions (PUCs) regulated intra-state pricing.
Figure 1: AT&T Business Entities Before 1982
Overall economics of the company turned on revenue produced by the local operating companies and the long distance business. The local operating companies built and maintained the local exchange networks. There were two basic parts to the local services business. Local telephone service typically included both the ability for one subscriber to call another in a common service area and service across a wider geographic area that was not deemed long distance. The second service or capability was also the point where long distance calls were handled, thus the name access network. Together, these two local service entities would later become the basis for creation of the local access and transport area (LATA) in a consent decree with the US Department of Justice.
Because the local services business was regulated by the PUC in each state, these companies typically were organized and operated locally with unique names and local management. Examples include New Jersey Bell, Chesapeake and Potomac Telephone, Nevada Bell, Michigan Bell, and so on.
The long distance business operated under the name of ‘‘AT&T Long Lines.’’ AT&T Long Lines, essentially a domestic US business, was responsible for building and maintaining the interstate long distance network and switching gateways to the international network. The long distance business was the first to deploy digital transmission and switching technology. The basic operation of the long distance network was simply to take a call from one local service network, connect it to a peer local company, and terminate the call. The originating company kept track of the date, time, and duration of the call and billed it as a separate item or ‘‘Long Distance Call.’’ On a periodic basis, the entities separated the revenue, paid their suppliers, employees, and invested in new plant and equipment, all under the watchful eyes of the FCC and state PUCs.
Two other important, but less well-known entities were Western Electric Manufacturing and Bell Labs. Western Electric was the company’s equipment manufacturing business. Essentially, this entity manufactured equipment and in later years developed software to run it. Its output was switching and transmission products and systems.
AT&T survived, grew, and prospered as the Bell System until 1984 when it was broken up by the consent decree. One corporate entity was converted overnight into eight. The long distance and equipment manufacturing business retained the AT&T brand; the seven new entities got the Bell name. The seven new entities Regional Bell Operating Companies—RBOC, for short—were given the rights to the famous Bell Logo, while AT&T got the rights to the word Bell as in Bell Labs.
On January 8, 1982, AT&T announced that it had agreed to break up the Bell System in response to Justice Department demands. This news was very unsettling to the company’s 992,000 employees and welcome news to competitors, many of whom had been chipping away at its business for many years. Why? Different people will interpret the facts in various ways. However, most agree that the company’s once unchallenged position had been seriously curtailed. Regulatory and judicial rulings had whittled away its ability to protect its business, starting with the Carterfone decision in 1968.
At the time, the most lucrative part of AT&T’s business was the long distance business. For many years, the operating companies or local exchange business had used their share of long distance revenues to make up for losses incurred in providing local service. Long distance competitors using Bell telephones as terminal points set up service at reduced pricing. AT&T long distance rates were set on average cost and included the subsidy paid to local exchange companies. Long distance competitors picked high traffic routes, leaving the lower traffic, higher cost routes to AT&T. Such action was referred to as cream skimming or cherry picking.
On another front, Western Electric was restricted from selling its output to any domestic customer except the Bell Operating Companies. Bell Labs, where the transistor was invented, had to make its patents available to one and all and was not allowed to use them in products other manufacturing businesses were making and selling. Competition was a one-way street. Other companies could use Bell facilities and discoveries to benefit their business, but AT&T was forbidden to start any new enterprise that might be construed as taking advantage of its size, skill, and knowledge.
Big and powerful though it was, the 22 Bell operating companies were not the only ones in the business. At the time, almost 1500 independent companies provided service to some 35 million subscribers. The 1982 Consent Decree did not apply to these companies, but they were impacted in many ways because of working relationships with various parts of the Bell System. 1983 was a year of planning and preparing for January 1, 1984. This was the date of start of business for the Bell Systems’ 22 operating companies. Each entity was organized under one of the seven newly created regional Bell operating companies (RBOCs).
Assets, liabilities, and equity of AT&T were partitioned off into eight new corporate entities. One share of stock was replaced with eight shares of the new entities. A single listing on the New York Stock Exchange turned into eight. AT&T stock now represented equipment manufacturing and long distance businesses. Seven new stock listings including Ameritech, Bell Atlantic, BellSouth, Nynex, Pacific Telesis, Southwestern Bell, and US West represented the local service business.
Two other actions worth noting involved the famous Bell Labs. In addition to splitting the Bell name and logo, the assets associated with Bell Labs were divided between the new AT&T and the seven regional operating companies. All research and development remained with AT&T’s equipment manufacturing arm. A ninth entity was created and named Bellcore. Bellcore was essentially the part of the former Bell Labs responsible for standards development and important things, such as the North American numbering plan. Bellcore was set up as an independent entity with its own set of books; however, ownership was held by the RBOCs and managed by representatives of each of the RBOCs. This entity would later be sold off to a third party and renamed Telcordia.
The new AT&T consisted of administrative staff, AT&T Communications , AT&T Technologies, (Western Electric and Bell Labs) and AT&T International (Figure 2).
Figure 2: AT&T Post 1984
The RBOCs lost all their share of long distance revenue except charges for intra-LATA calls not included in fixed monthly service charges, but retained the directory services business. They were permitted to sell equipment in competition with AT&T Information Systems, but restricted from designing and manufacturing equipment.
The seven RBOCs included Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and US West.
Economically, the RBOCs were viewed as being in trouble. Charges for monthly service covering calls within a local access and transport area or LATA belonged entirely to the BOCs. The resulting revenue didn’t cover expenses. Loss of so much of the long distance revenue made them unprofitable. Previously, state PUCs had refused to allow increases in pricing for local service. Now that long distance revenue was gone, something had to be devised to make up for the loss in revenue. So the FCC created an access charge to be added to all long distance charges. The charge showed up on bills sent to long distance carriers and on subscriber monthly bills.
The RBOCs are permitted to sell new customer premises equipment that is not of AT&T Technologies sourcing. They cannot manufacture equipment but are permitted to enter other lines of business with restrictions.
Calls between LATAs or across LATA boundaries belong to the long distance carriers.
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