AT&T: Fall of an icon

Ed Block knew the future was bleak. "What the hell do we do now?" he asked himself when AT&T agreed to the 1984 consent decree that broke up the company and gave birth to the regional Bell operating companies, one of which, SBC, is finalizing its $16 billion acquisition of AT&T.

Block, then senior vice president of advertising and assistant to AT&T Chairman Charles Brown, knew the company made a catastrophic decision when it agreed to divest its local-exchange assets in return for the right to retain its long-distance, equipment manufacturing and R&D operations. "Without the local exchange, you had no future," Block says.

Divesting the RBOCs was only one of a string of pre- and post-breakup blunders that led to the demise of this 130-year-old American business icon, whose stock was once the most widely held in the country. Although the brand AT&T will live on, with SBC adopting it as its new corporate name, the company as we know it will be gone.

Interviews with former AT&T insiders, regulators, analysts and other observers concluded one thing: It didn't have to end this way.

"It's a sad, sad outcome," says the reflective Block.

The M trait

AT&T's end actually has something to do with its beginning. The company became a monopoly in the early 1900s and tried to continue to operate this way even after the 1984 breakup, observers say.

"AT&T always thrived in the old days on the absoluteness of its monopoly," says Fred Goldstein, principal of Ionary Consulting and author of The Great Telecom Meltdown. "The company was built around the structure."

That structure was introduced in 1907 by then AT&T President Theodore Vail, who created the Bell system by lashing together several local phone networks across the country. Vail argued that the most efficient way to make telephone service universal was to establish AT&T as a monopoly protected by government regulation.

The Vail model stood for the next 77 years, building the company into a behemoth with $150 billion in assets, $70 billion in revenue and 1 million employees. Yet it also made management complacent, insular and resistant to change.

Being a monopoly meant having few, if any, competitors. And having no competition meant few strategic decisions had to be made - it was all about maintenance of the status quo.

At the root of the problem was management inertia. Up until the mid-1990s AT&T was reluctant to hire outsiders, for fear of introducing philosophical change, Goldstein says.

"To get to the top of the company you had to be promoted over 25 times," he says. "If you're entitled to one promotion a year at most, each time you took a job you immediately began work on your next promotion. You never stayed more than a year so you never had time to learn your job. You had a management culture composed of people who didn't really understand the business but they understood internal politics and they understood sucking up. When the world changed it was very hard for the organization to adapt."

The company couldn't even capitalize on its own innovations, such as the 1947 invention of the transistor, which reinvented electronics, communications and computing. "They put themselves out of business because [the transistor] led to an increase in the rapidity of change," Goldstein says.

Breaking up is hard to do

Change was finally foisted on AT&T in 1984 when it agreed to divestiture to end a long, contentious antitrust suit brought by the U.S. Department of Justice. AT&T had two choices: spin off its 22 local operating companies into seven Bell holding companies, while retaining equipment manufacturing and R&D - Western Electric and Bell Labs, respectively; or retain the Bell operating companies and divest equipment manufacturing and R&D.

AT&T chose the former and it turned out to be a colossal blunder. The carrier didn't foresee that equipment would become a commodity, that calls would just become calls - no matter local or long-distance - and that the real value would be in owning the customer, a truism that would ultimately give the Bells control of the market.

"An awful lot of money was wasted in trying to find a way to stay in the equipment business long after it was obvious that's the last business you wanted to be in," says Block, who retired from AT&T in 1986. "The whole economics of the business was built around the local exchange."

What's more, Block says it felt like AT&T never really shook off the monopoly cloak. "It seemed to me that management was not sufficiently aware that the divestiture of the Bell companies destroyed the Vail model, and a whole new business model had to be devised," he said. "Instead, all of the efforts seemed to go into taking the leftover parts and trying to make businesses out of them. Some of them had no future."

Although it was a shadow of its former self, after divestiture AT&T was still the industry heavyweight with $34 billion in revenue and 373,000 employees.

More change to bungle

While AT&T landed on its feet and successfully built up its services and brand, the 1990s saw a series of high-profile strategic fits and starts, none of which went right.

By acquiring computer vendor NCR in 1991 for $7.3 billion, AT&T placed a bold bet on a future about integrated computing and communications. But the deal never resulted in any advances and AT&T jettisoned NCR in 1996 at a substantial loss. It also spun off its Western Electric equipment and Bell Labs R&D business into what is now known as Lucent, a restructuring that was known at the time as "trivestiture."

"I'm not aware of any NCR successes," says Sheldon Hochheiser, a 16-year company historian at AT&T who left the company last year. "By the mid-'90s [AT&T Chairman Robert] Allen realized there were negative synergies having long-distance and manufacturing businesses. Recognizing this and acting on it is a very positive thing for Allen to have done."

Click to see: AT&T's history of antitrust trouble

Concurrent with AT&T's trivestiture, Congress was passing new telecom legislation in the form of the Telecommunications Act of 1996. The act sought to spur competition by allowing the RBOCs to enter the long-distance market if they allowed long-distance carriers access to local loops at government-mandated wholesale rates.