SBC Communications Inc.

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SBC Communications Inc.

175 East Houston Street
San Antonio, Texas 78205
U.S.A.
Telephone: (210) 821-4105
Fax: (210) 351-2274
Web site: http://www.sbc.com

Public Company
Incorporated: 1920 as Southwestern Bell Telephone Company
Employees: 203,000
Sales: $46 billion (1998)
Stock Exchanges: New York
Ticker Symbol: SBC
NAIC: 513310 Wired Telecommunications Carriers; 513322 Cellular and Other Wireless Telecommunications; 511140 Telephone Directory Publishers

Originally one of the seven regional holding companies formed after the breakup of American Telephone & Telegraph Corporation’s (AT&T) Bell System in 1983, SBC Communications Inc. has emerged in the 1990s as a national provider of local telephone services. It acquired other regional bell operating companies (RBOCs)—Pacific Telesis, Southern New England, and Ameritech—in the 1990s following passage of the Telecommunications Act of 1996. Second in size only to the proposed Bell Atlantic-GTE combination, SBC was poised to offer a full range of local, long-distance (not yet permitted, but expected in 2000), and wireless services throughout the United States and internationally.

Early History to 1920

Southwestern Bell Telephone Company was created in 1920 from about 20 predecessor companies. The four largest of these were American District Telegraph Company, formed in St. Louis, Missouri, in 1878; the Kansas City Telephone Exchange, formed in Kansas City, Missouri, in 1879; Southwestern Telegraph & Telephone Company, which began serving Texas and Arkansas in 1881; and Pioneer Telephone & Telegraph Company, which provided telephone service beginning in 1904 in Oklahoma—not then a state, but known as Indian Territory—and in parts of Kansas. During their early years these four companies became affiliated with the Bell System, acquired other companies, and went through a number of name changes. In 1912 they consolidated various operating functions and became the Southwestern Bell Telephone System.

In 1917 the four companies began moving toward a more formal merger, with the Missouri & Kansas Telephone Company—the new name of the Kansas City Telephone Exchange—acquiring Bell Telephone Company of Missouri, successor to American District Telegraph. The resulting company was named Southwestern Bell Telephone Company (Missouri). In 1920 this company bought Southwestern Telephone & Telegraph and Southwestern Bell Telephone Company (Oklahoma), the successor to Pioneer Telephone & Telegraph, establishing the new Southwestern Bell Telephone Company, which was a subsidiary of AT&T. The new company had headquarters in Kansas City, Missouri, but moved to St. Louis the following year. Its president was Eugene D. Nims, a veteran executive at several other companies.

Growth and Consolidation: 1920s

During the 1920s Southwestern Bell absorbed several other companies. In 1923 it bought the Kinloch Telephone System, which had been a competitor in St. Louis. Southwestern Bell and Kinloch had been two of the last telephone companies to compete in a major U.S. city. In 1925 Southwestern Bell bought back from the Dallas Telephone Company the Dallas-based telephone business that Southwestern Telephone & Telegraph had sold in 1918. In 1927 Southwestern Bell Telephone made another reacquisition, this time of the Kansas City phone business, which the Southwestern system had sold to a non-Bell company in 1919. Southwestern Bell did divest itself of a few operations, selling 23 Missouri telephone exchanges to Southeastern Missouri Telephone Company in 1929.

In 1926, the year Southwestern Bell installed its one millionth telephone, the company completed its new operations center in St. Louis. At 31 stories, the building was the tallest in Missouri at that time. New or renovated administrative offices followed in Dallas, Kansas City, and Oklahoma City in 1929.

Weathering the Great Depression: 1930s

During the Great Depression that followed the 1929 stock market crash, Southwestern Bell bought up numerous small telephone companies in its region. Often these companies were on the brink of insolvency. The largest Depression-era purchase was United Telephone Company of Kansas, bought in 1938. In the Depression years, Southwestern Bell took on some employees from its parent company, AT&T, which did not want to lay them off; the Bell System operating companies were not hit as hard by the Depression as AT&T’s Western Electric manufacturing arm. Southwestern Bell felt the effects of the Depression sufficiently, however, to give employees incentives to bring in new customers or to persuade existing customers not to have their phone service shut off. During the Depression, unionization of Southwestern Bell’s workforce was heightened. Several of U.S. President Franklin D. Roosevelt’s New Deal programs, such as the Wagner Act of 1935, encouraged the formation of labor unions and protected workers from being penalized for joining unions. Southwestern Bell and its unionized employees had relatively cordial relations during this period.

Expanding Following World War II: 1940s

More than 3,000 Southwestern Bell workers served in the armed forces in World War II. The company took steps to conserve materials, such as copper and rubber, that were in short supply during the war. Telephone sets also were scarce, but Southwestern Bell’s territory held a position of priority in their allocation, because the five-state area contained many defense plants and military training facilities. Other Bell operating companies transferred parts of their inventory to Southwestern Bell. The number and length of telephone calls, particularly long-distance calls, increased greatly during the war, often resulting in long delays for callers. Southwestern Bell launched an advertising campaign encouraging customers to hold their calls to five minutes each, and operators interrupted conversations that went past this limit.

After the war ended, Southwestern Bell expanded its engineering operations to meet pent-up demand for phone service; at one point in 1945 the company had a waiting list of 205,000. The number of phones the company operated had reached two million in 1944 and soared to three million by 1948. Southwestern Bell also stepped up the marketing of enhanced telephone equipment and services, such as extensions; this effort had begun in the late 1930s but was pushed aside by more pressing matters during the war.

The late 1940s brought a break in the company’s peaceful labor relations. The National Federation of Telephone Workers, the union that later became the Communications Workers of America, organized the first nationwide strike against telephone companies in 1947. The strike lasted more than 40 days. In 1953 Missouri governor Phil Donnelly signed the King-Thompson Act that outlawed utility strikes in the state, but unions and their supporters subsequently won a repeal of the act.

Responding to Social Changes: 1950s–60s

In 1951 Southwestern Bell acquired Southeastern Missouri Telephone Company, the company that had bought some of Southwestern Bell’s exchanges in 1929. In 1952 it added Southwest Telephone Company of Kansas. The number of phones operated by Southwestern Bell reached four million in 1952, five million in 1956, and six million in 1960. The figure was ten million by 1969.

The 1950s and 1960s brought a wave of new products and services from Western Electric and Bell Laboratories, two other AT&T companies. These innovations included phones in various colors and styles, the ability to interrupt or forward calls, and push-button service. To sell all these products, Southwestern Bell Telephone created its first marketing department in 1967.

The 1950s and 1960s also were a time of social change. During the 1950s Southwestern Bell shut down a St. Louis customer service office that had been staffed entirely by blacks since the 1940s. The company had set up this office so that black customers dealt with only black employees; the growing civil rights movement, however, led the company to integrate its workforce. In 1966 Southwestern Bell named its first woman manager of a business unit.

Promotion of minorities and women in Bell System companies was not moving fast enough to please the U.S. Equal Employment Opportunity Commission (EEOC), however. In 1970 the EEOC accused AT&T and its Bell System of discrimination on the basis of race and sex. The companies responded that they were moving minorities and women gradually into parity with white males. In 1973 and 1974, AT&T and the Bell companies agreed to provide millions of dollars in back pay and salary increases to thousands of minority and women employees, although the companies did not admit to having discriminated in the past.

Company Perspectives:

SBC Communications Inc. is a global telecommunications company offering a wide range of innovative services and solutions to meet customers’ needs. Through leading brands, the SBC Telecom strategy (an initiative to expand nationally into 30 top markets outside of our traditional service region), and investments in telecommunications businesses in 22 countries outside the U.S., SBC stands ready to serve customers, wherever they may be.

Government and Labor, New Challenges: 1968–1980

In the late 1960s the first challenges to the Bell System’s monopoly appeared. In 1968 came the Federal Communications Commission’s (FCC) Carterfone decision, which struck down prohibitions on connections of other companies’ equipment or systems with the Bell telephone system. Then, in 1969, the FCC decided to allow Microwave Communications, Inc. (MCI) to build a long-distance line between St. Louis and Chicago. In 1974 the U.S. Department of Justice filed an antitrust suit against AT&T—the suit that broke up the Bell System a decade later.

In the meantime, many of the Bell companies were having labor problems. A 1968 strike lasted 18 days at Southwestern Bell, although it stretched to five months in some other parts of the system. Another strike followed in 1971; workers at Southwestern Bell and most other system companies settled within six days.

A crisis of 1974 involved management-level employees. T.O. Gravitt, who ran Southwestern Bell’s Texas operations, committed suicide that year, leaving behind papers that alleged bribery of regulators and other offenses by the company. In civil litigation, Gravitt’s widow won substantial compensation from Southwestern Bell, but the court’s decisions were reversed on appeal. The allegations prompted an audit by AT&T of all Bell operating companies; the audit found questionable practices only in Texas and North Carolina. The situation also prompted the state of Texas, which heretofore had left telephone regulation to its cities, to establish the Public Utility Commission of Texas in 1976. It had been the last state in the union without such a commission. In one of its first actions, the commission granted Southwestern Bell less than 20 percent of a $298 million rate increase the company had requested.

In 1978 Southwestern Bell installed its 15 millionth telephone; it was the first company in the Bell System to reach this level. By 1982, 70 percent of Southwestern Bell’s customers were served by electronic switching systems, a percentage that also was the highest among Bell companies. In 1982 the company made another acquisition, of the El Paso, Texas, telephone business that had been operated by Mountain States Telephone Company.

Competing with Other Bell Companies: 1980s

In 1982 AT&T and the Justice Department approved the consent decree that broke up the Bell System. AT&T agreed to divest itself of the Bell operating companies, and the department agreed to drop its antitrust suit. In 1983 Southwestern Bell Corporation was formed as the regional holding company for Southwestern Bell Telephone Company.

Before the breakup was effected, there was another nationwide telephone strike, which lasted for 21 days in 1983. Workers won improved benefits as well as provisions for additional severance pay or retraining if they lost their jobs—a particular concern at the time of the divestiture.

Ownership of Southwestern Bell Telephone Company was officially transferred to Southwestern Bell Corporation on January 1, 1984. SBC had three other subsidiaries: Southwestern Bell Publications, Inc., a directory publisher; Southwestern Bell Mobile Systems, Inc., in the business of mobile telephone service; and Southwestern Bell Telecommunications, Inc., focusing on marketing phone equipment to business customers. The new holding company’s president, chairman, and CEO was Zane Edison Barnes, who had been president of the telephone company since 1973. SBC moved its headquarters into a new 44-story building in St. Louis.

Unlike some other regional Bell holding companies, which diversified into such fields as real estate and computer sales, SBC stuck with businesses closely related to telephone service. Through several acquisitions, it solidified its position as the largest directory publisher in the United States. It purchased Mast Advertising & Publishing, Inc., from Continental Telecom for $120 million in 1985. Mast was the 12th largest U.S. directory publisher and brought SBC a national sales force and an entrance into the publication of directories for independent telephone companies. SBC took its publishing ventures to the international market when its publications subsidiary in 1984 won a contract to be the Yellow Pages sales and collection agent for Telecom Australia.

SBC’s customers were hurt by the recession in the oil business in the mid-1980s, and this in turn affected SBC. By 1986 the company’s sales growth was the slowest of any regional telephone holding company, and its earnings growth was next to last. The situation began to turn around, however, after SBC bought Metromedia Inc.’s cellular and paging business in 1987. This purchase made SBC the third largest cellular-communications company in the United States, behind McCaw Cellular and Pacific Telesis. In 1989 SBC’s cellular business began to be profitable, while its larger competitors were still showing losses. In overall profitability, SBC ranked second only to Pacific Telesis among regional telephone holding companies in 1989.

Key Dates:

1920:: Southwestern Bell Telephone Company is consolidated from about 20 predecessor companies.
1926:: Southwestern Bell installs its one millionth telephone and completes its operations center in St. Louis, Missouri.
1978:: Southwestern Bell installs its 15 millionth telephone, making it the largest company in the Bell System.
1984:: Southwestern Bell Corporation, a holding company, officially takes ownership of Southwestern Bell Telephone Company following the breakup of AT&T.
1990:: Edward Whitacre becomes CEO of Southwestern Bell.
1995:: Southwestern Bell changes its name to SBC Communications Inc.
1996:: SBC acquires Pacific Telesis Group for $16.5 billion.
1998:: SBC acquires Southern New England Telecommunications Corp. for $4.4 billion and Ameritech for $62 billion.

Aggressive Acquisitions Strategy Under Whitacre: 1990s

In January 1990 Edward Whitacre succeeded Barnes. Whitacre had been with SBC and Southwestern Bell Telephone for 27 years. During 1990 SBC increased its international focus. Its subsidiary, Southwestern Bell International Holdings Corporation (SBIHC), joined a consortium that bought 20.4 percent of the total equity and 51 percent of the shares with full voting rights in Teléfonos de México, S.A. de C.V., Mexico’s national telephone company. SBIHC’s partners in the consortium were France Cables et Radio, S.A.—a subsidiary of France Telecom—and Mexican company Grupo Carso. The total purchase price was $1.76 billion; SBIHC’s share of this was $486 million. Participation gave SBC a chance to sell services, such as long-distance telephone communications, that it was prohibited from offering in the United States. Mexico had an antiquated telephone system, but potential for significant growth; only one in 17 households had a telephone. Another international move in 1990 was SBC’s agreement to purchase West Midlands Cable Communications in the United Kingdom; this system included the largest cable television franchise in that country. In 1991 SBC increased its ownership to 98 percent of the United Kingdom’s Oyston Cable.

In the early 1990s, SBC, like other regional holding companies, was seeking changes in the regulations that arose from the AT&T breakup. These regulations restricted the businesses that regional holding companies could enter; among those prohibited were video programming production and various other communications products. As it awaited the outcome of its fight to lift these constraints, SBC continued to focus on its core businesses, as it had done ever since the divestiture.

In February 1993 SBC moved its headquarters from St. Louis to San Antonio, Texas. It joined a local group of businesses to acquire the San Antonio Spurs basketball team for $75 million. It also became the first regional Bell telephone-company to acquire a cable television company outside of its service area when it paid $650 million to Hauser Communications for two cable systems in Maryland and Virginia.

In 1994 SBC called off a proposed $1.6 billion acquisition of a 40 percent interest in Cox Cable of San Diego Inc. SBC’s management felt that the FCC’s rulings regarding cable television would negatively impact the company’s cash flow. Over the next several years SBC would divest its remaining interests in cable television companies.

Emerging As a National Local Service Provider: 1996–2000

Following a 1995 name-change to SBC Communications, the company combined its Southwestern Bell Telecom division, which provided telephone equipment, with Southwestern Bell Telephone Co. as a cost-saving measure. Under new federal rules customers were allowed to purchase local phone connections and phone equipment or systems from the same source. Under the 1984 breakup of AT&T, regional Bell companies had been required to operate their phone service and phone equipment businesses as separate divisions or subsidiaries.

In April 1996 SBC announced it would acquire Pacific Telesis Group (PacTel), an RBOC serving California and Nevada, for $16.5 billion. The two companies’ service regions were not contiguous, but both had interests in phone service in and to Mexico. For the previous year SBC had $12.7 billion in revenues and 14.1 million local access lines, while PacTel had $9.0 billion in revenues and 15.8 million local access lines. The merger received the necessary approvals from SBC shareholders, the FCC, and the California Public Utilities Commission in 1997. SBC planned to build a cellular service in California as well as an Internet service. California accounted for an estimated 25 percent of all U.S. Internet users.

For 1996 SBC posted its fifth consecutive year of double-digit increases in earnings. The company reported earnings of $2.1 billion for 1996, a 12 percent increase from $1.9 billion in 1995. Its wireless business added 739,000 subscribers, and overall the company added 1.5 million customer lines during the year. Internationally the company’s customer base increased to one million access lines, 307,000 wireless customers, and 350,000 video subscribers. SBC retained a ten percent interest in Teléfonos de Mexico (Telmex), but was facing increased competition there due to Mexican deregulation. Under the Telecommunications Act of 1996, SBC was looking forward to entering the long-distance market. With competition now permitted in local telephone service, SBC signed 56 interconnection agreements in 1996 with 32 companies that planned to enter local markets.

In 1997 rumors of a proposed merger between AT&T, the United States’ largest long-distance carrier, and SBC, the largest local service provider, came to an end when the FCC voiced its disapproval. Later in the year SBC completed its exit from cable television when it sold the two systems in Maryland and Virginia it had acquired from Hauser Communications in 1993. The company was also in the process of completing negotiations to leave the Americast joint venture it had formed in 1995 with Ameritech, BellSouth, and the Walt Disney Co. In December 1997 SBC sold Pacific Bell Video Services, the digital wireless cable operation it had acquired as part of PacTel. For 1997 SBC had more than $23 billion in revenues.

Hoping to enter the long-distance field, SBC announced in January 1998 it would acquire Southern New England Telecommunications Corp. (SNET) for $4.4 billion in stock. SNET was based in New Haven, Connecticut. SBC had recently won a court judgment that would make it easier for RBOCs to enter the long-distance market, but the decision was still being challenged by AT&T and the FCC. The FCC approved SBC’s acquisition of SNET in October 1998, giving SBC a total of 36.9 million local access lines.

In May 1998 SBC and Ameritech, two of the remaining five RBOCs, announced a planned $62 billion merger, with SBC taking over Ameritech. The acquisition added Ameritech’s 21 million local telephone lines in five Midwest states to the SBC system. The FCC approved the merger in October 1999 and attached a list of 30 conditions that SBC must meet. SBC planned to move Ameritech’s corporate functions to San Antonio, and Ameritech’s top executives were given a multimillion-dollar severance package. For the time being, the merger made SBC the largest RBOC, at least until the FCC approved a merger between Bell Atlantic and GTE.

Also in 1998 SBC strengthened its position in the rapidly growing data service market by paying $22 million for a four percent interest in Concentric Network Corp. of Cupertino, California. The two companies planned to develop a collection of business products that would include virtual private networks, web hosting, shared software, and electronic commerce. Combined 1998 revenues were $46 billion, including Ameritech, placing SBC among the top 15 companies in the Fortune 500.

In January 1999 SBC announced it would purchase Comcast Cellular, the wireless subsidiary of Comcast Corporation, for $1.7 billion, including the assumption of $1.3 billion of debt. Under the agreement SBC’s wireless service regions (Washington-Baltimore, Connecticut, Rhode Island, Massachusetts, and upstate New York), would join with Comcast Cellular’s wireless systems in Philadelphia, New Jersey, and Delaware. SBC would also acquire wireless systems in Illinois and personal communications system licenses in Pennsylvania. SBC would add about 800,000 customers to its wireless customer base of more than 6.5 million people.

Continuing to prepare for the day when it would be allowed to compete for long-distance service, SBC announced in February 1999 it would acquire up to ten percent of Williams Companies’ telecommunications division for about $500 million. Williams was about two-thirds of the way to completing a nationwide fiber-optic network and would carry SBC’s long-distance traffic.

In the first quarter of 1999 SBC reported net income of $1.1 billion on revenue of $7.3 billion. As 1999 drew to a close, the company was not yet permitted to offer long-distance services, but it fully anticipated that approval would be granted in 2000. SBC operated more than 59 million access lines and had more than ten million domestic wireless customers. It served eight of the United States’ ten largest metropolitan areas, and it had strategic investments in 23 countries worth an estimated $22 billion.