Does the AT&T breakup still matter 25 years on?

Although the Ma Bell monopoly is no more, debate swirls over whether or not the industry is better for it

When AT&T agreed to break itself up 25 years ago, it was seen as one of the most momentous events in the history of the telecommunications industry. Today, however, some analysts are questioning not only whether the breakup of AT&T was necessary, but whether it even had any long-term impact on the telecom market.

When AT&T grudgingly agreed to break itself up 25 years ago, it was seen as a truly momentous event in the history of the telecommunications industry. Today, however, some experts question not only whether the breakup of AT&T was necessary, but whether it even had any long-term impact on the telecom market.

The breakup deal forced AT&T to spin off its local divisions that would then become local exchange carriers, and in return AT&T was allowed to keep its long-distance services division.

(View slideshow of the changing shape of Ma Bell and the Baby Bells.)

However, the rise of wireless services as alternatives to landlines, as well as the entrance of cable companies such as Comcast and Time-Warner into the VoIP market, has led some to conclude that the breakup of Ma Bell is irrelevant to the current telecom market.

"The world that existed in 1984 no longer exists because of changes in technology," says Robert Crandall, a senior fellow of economics studies at the Brookings Institution. "The government had originally wanted to set up long-distance companies that would have provided us with lower long-distance rates. But separate long-distance companies are simply not viable now because of the advent of wireless and VoIP."

Timeline of AT&T

Another reason that the breakup of Ma Bell has become increasingly irrelevant has been the mergers of many of the local phone companies, which has created a telecom industry that is far more consolidated than any of the breakup's advocates had anticipated. For instance, of the seven Baby Bells originally created by the AT&T breakup that became effective on Jan. 1, 1984, four of them -- Ameritech, BellSouth, Pacific Telesis and South Western Bell -- are now back under the AT&T umbrella. Of the remaining three, Verizon now owns what used to be Bell Atlantic and Nynex, while Qwest bought U.S. West back in 2000.

"The local phone companies have all merged now to the point where there are only three left and they operate in areas where they are huge regional fiefdoms," says Ben Scott, the policy director for Free Press. "We broke up a monopoly and it's basically reconstructed itself without the regulations that used to apply."

A question of innovation

But while technological innovation has made the old world of local landline carriers increasingly less relevant to modern telecommunications, there is still a question about whether breaking up Ma Bell has helped or hampered innovation in the telecommunications market. A. Michael Noll, a professor emeritus at the Annenberg School for Communication at the University of Southern California and a former researcher at Bell Labs, says that breaking up AT&T has actually been detrimental to the advancement of technology in the United States. In particular, he cites the negative impact that the breakup had on his former employer Bell Labs and its ability to innovate.

"The great industrial research labs from the past are pretty much gone," he says. "Bell Labs brought us cell phones, it brought us material science such as digital switching. During World War II you had a lot of innovations that came out of Bell Labs for radar and sonar technology. Today, there have been a lot of advances in existing technologies, but they seem to be incremental improvements in technologies rather than anything totally new."

Others, however, think that the Ma Bell breakup has led to innovation in the wireless market that would not have occurred had AT&T been allowed to stay together.

"It's always difficult to determine what kind of innovation wouldn't have occurred if AT&T had remained a monopoly, but I don't think the Internet would have progressed to where it is today without the breakup," says Gartner analyst Alex Winogradoff. "I think the Web might still be used primarily as an educational device as opposed to being a commercial network. And the development of the mobile environment would also not be as advanced today without the AT&T breakup."

Telecom analyst Jeff Kagan, agrees that breaking up Ma Bell has led to a tremendous amount of innovation within the wireless world, but says that several telecom firms had to start merging in order to really see the market develop. The reason for this, he says, is that innovation requires a lot of capital that cannot be spent by smaller firms. But while this industry consolidation has been a necessary step toward making companies that are big enough to innovate, Kagan thinks that there is a danger that any further big mergers would hurt the industry in the future.

"Ten years ago, we had a dozen major telecom providers and today we have three or four major providers," he says. "But I would not like to see the industry go back to having only two players. We've still got the three Baby Bells and four big wireless players."

But although analysts and historians like to make educated guesses about where the telecom market would be today without the Ma Bell breakup, they readily acknowledge that they are still making guesses. Crandall, for one, doesn't think that breaking up Ma Bell has had any meaningful impact on innovation in today's telecom market as cable companies and wireless providers would have naturally jumped in to compete with its landline services at some point over the past 25 years.

"The fact is that other countries didn't break up their telephone companies and they are in the same place today that we are," he says. "Whether we could have gotten to this place today without breaking up AT&T is an interesting question, but it's largely irrelevant."

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