AT&T Corp

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AT&T CORP.

AT&T Corp. is the world's leading long-distance telephone service provider and also one of the top telecommunications services providers. As competition among long-distance firms intensified throughout the 1980s and 1990s, AT&T struggled to find new markets in which it could succeed. Efforts to convert cable television lines into integrated Internet, local phone, and entertainment networks were sharply criticized by analysts in 2000. Late that year, CEO Michael Armstrong announced plans to split the telecommunications giant into four separate companies. AT&T Wireless is the third-largest wireless firm in the United States, behind Verizon Wireless and Cingular Wireless. AT&T Broadband is comprised of AT&T's cable holdings, which sells local phone, Internet, and cable television services via cable telephony lines to roughly 400,000 customers. AT&T Consumer houses the firm's traditional long-distance services and the WorldNet dial-up Internet service. All other AT&T operations are housed in AT&T Business, the largest of the four units.

EARLY HISTORY

Alexander Graham Bell and two partners created the Bell Telephone Co. in 1877 with plans to begin marketing the newly-invented telephone. Bell Telephone licensee New Haven District Telephone Co. developed the world's first telephone exchange and issued the world's first telephone directory one year later. To handle the licensing of various patents, Bell Telephone founded the New England Telephone Co. In 1879, Bell Telephone merged with New Haven District Telephone to form the National Bell Telephone Co., which reorganized as the American Bell Telephone Company in 1880, after acquiring various holdings from Western Union. A year later, American Bell acquired Western Union's telegraph equipment supplier, Western Electric Manufacturing Co. As a result of the purchase, American Bell became the sole manufacturer of Western Union equipment. The firm diversified into long-distance telephone operations with the formation of American Telephone and Telegraph Co. (AT&T) in 1885. American Bell hoped its new subsidiary would be able to create a widespread national telephone network before several of its patents expired in 1893.

Shortly after its inception, AT&T began building its first long-distance telephone line, which would connect New York City to Philadelphia, Pennsylvania. In 1888, after several blizzards in the northeastern U.S. destroyed long-distance lines, AT&T began looking into underground cable options. Two years later, American Bell began upgrading its one-wire circuits to two-wire circuits to allow for long-distance transmissions. Within two years, these two-wire, or metallic, circuits connected roughly 12 percent of American Bell's 240,000 customers. When Bell's original telephone patent expired in 1893, several competitors emerged, prompting lawsuits by AT&T, which strove to retain its monopoly in the long-distance market. Busy with this litigation, AT&T eventually lost substantial market share to rivals in the West and Midwest.

AT&T's network comprised more than 2.2 million telephones in 1905. Although that number rose to more than 3 million in 1907, the firm struggled with public relations problems, low employee morale, and mounting debt. These problems prompted management to begin taking over competitors, rather than engaging in litigation against them. The firm also started cutting prices, discounted bond prices in an effort to generate fresh capital, and bolstered its research and development arm. In 1913, faced with charges of unlawful conspiracy to monopolize the long-distance market in the Northwest, AT&T agreed to sell previously purchased Western Union assets and to allow competing local telephone service providers to use its long-distance lines.

During World War I, AT&T supplied phone service to the U.S. military. The firm also put in place a communications system of radios, telephones, and telegraph lines in France for use by American forces. In 1918, President Wilson nationalized the U.S. phone network, promising that rates would fall under public control. However, expenses related to wartime activities prompted AT&T to raise prices, and U.S. citizens began calling for the government to release control of the phone system. By then, AT&T operated a network of roughly 10 million telephones. Mounting public pressure prompted the government to privatize AT&T in 1919. Two years later, AT&T linked Key West, Florida, and Havana, Cuba, via its first submarine cable. After the government began allowing telephone company mergers in the early 1920s, AT&T launched an expansion effort that was fueled by several acquisitions. AT&T spun off its research and development arm as Bell Telephone Laboratories in 1925. The new firm was funded by both AT&T and Western Electric.

In 1934, the U.S. government created the Federal Communications Commission (FCC) to regulate the interstate telephone industry. The FCC launched an investigation of AT&T's competitive practices the following year. By then, the firm controlled 83 percent of U.S. phones and 98 percent of long-distance cables. Officials also were concerned about its Western Electric subsidiary, which held a 90-percent share of the nation's telephone equipment market. With assets of $5 billion, AT&T was the largest company in the United States.

World War II granted AT&T a reprieve from the antitrust investigation. However, the FCC did force the firm to cut prices then. By the war's end, long-distance telephone calls had started to take the place of letter writing in American society as the most common means of communication. The FCC's investigation heated up again in 1949, prompting the U.S. Attorney General to file suit against AT&T for violating antitrust laws. Although the attorney general's recommendation included separating AT&T and Western Electric, the two firms managed to remain united by agreeing to several limitations. For example, AT&T was restricted to providing common carrier service, while Western Electric was limited to supplying equipment to AT&T and fulfilling government contracts. The complex litigation was formally resolved in 1956.

AT&T, the British Post Office, and the Canadian Overseas Telecommunications Corp. put in place the first transatlantic telephone cable in 1955. Two years later, AT&T and Western Electric landed a contract to build an early warning radar system for the U.S. military. AT&T also created a new subsidiary, named Bellcom, to manufacture communications equipment for the U.S. space program. The firm launched a $2.6 billion infrastructure overhaul in 1960. Developments during the early part of the decade included the first wide area telephone service, which allowed customers to pay a flat fee for unlimited long-distance calls; Centrex, which allowed offices to maintain their own automatic switching exchange; and Telstar, AT&T's first satellite. The firm also created Comsat to oversee its U.S. satellite communications operations and began offering touch-tone service for the first time. By mid-decade, AT&T had established the seven-digit phone number as standard throughout North America. The installation of electronic switching equipment allowed for an increased volume of calls. Employees totaled roughly 1 million.

AT&T's legal battles continued in the mid-1970s when both Microwave Communications Inc. (MCI) and the U.S. Department of Justice filed two suits against the telephone giant, alleging both monopoly and conspiracy to monopolize the telecommunications industry. Six years later, a jury found AT&T guilty in the MCI suit and ordered AT&T to pay damages of $1.8 billion. A jury eventually reduced those damages to $37.8 million in an appeal. In 1982, AT&T and the U.S. Department of Justice settled their landmark antitrust suit when AT&T agreed to sell off its regional operating companies, which would become unregulated, competing businesses. As part of the agreement, AT&T created American Bell Inc. as a separate, unregulated subsidiary to sell equipment and services. AT&T was allowed to once again pursue non-telecommunications ventures, a freedom that would enable it to enter the computer market.

Plans for the breakup of AT&T were formalized in 1983, and the firm began spinning off BellSouth, Bell Atlantic, NYNEX, American Information Technologies, Southwestern Bell, U.S. West, and Pacific Telesis as regional phone service providers. Although AT&T retained control of its long-distance services, it was no longer protected from competition. Once the divestitures were completed, AT&T reorganized its remaining operations into two units; its communications unit managed the long-distance network, and its technologies unit manufactured and sold telecommunications equipment.

Within a year of its reorganization, AT&T had started pursuing markets across the globe in anticipation of increased domestic competition. Along with establishing a regional headquarters in Brussels, Belgium, for operations in Europe, the Middle East, and Africa, AT&T also began forging joint ventures with overseas companies. Its share of the U.S. long-distance market fell in 1987 to 76 percent, compared to 91 percent just four years earlier. AT&T laid off 16,000 workers and took a one-time $6.7 billion network modernization charge, which resulted in a $1.7 billion loss in 1988.

When government regulators allowed AT&T to match the lower long-distance rates of competitors MCI Communications Corp. and Sprint Corp. in 1989, profits rebounded to $2.7 billion, their highest point since the 1984 spin-offs. In 1991, AT&T diversified into computers for the first time when it bought NCR Corp. for $7.4 billion, becoming the fourth-largest U.S. and seventh-largest worldwide computer maker. The firm entered the cellular telephony market in 1993 by paying $12.6 billion for McCaw Cellular. The NCR unit was renamed AT&T Global Information Solutions in 1994.

MOVE TO CABLE AND INTERNET MARKETS

To promote its image as a leading technology developer and content provider, AT&T launched a Web site, with various online services, in 1995. The Telecommunications Act of 1996, which essentially deregulated the U.S. telecommunications industry, allowed local and long-distance phone companies, Internet firms, and cable businesses to begin competing in each other's markets. AT&T took advantage of the legislation almost immediately, launching WorldNet, an Internet Service Provider (ISP), in March. By November, WorldNet had secured roughly 425,000 subscribers. Other leading telecommunications firms began announcing billion dollar mergers. While consolidation in the industry already had been happening on a limited basis prior to February of 1996, the act opened up unprecedented cross-market penetration opportunities. To prepare itself for such deals, AT&T split into three separate entities in December. The firm retained its communications operations; consolidated the Bell Laboratories equipment manufacturing operations into a new public company, called Lucent Technology; and spun off its struggling computer operations, which had lost roughly $4 billion over the past five years.

In 1997, AT&T added two electronic catalogs—one for residential customers and one for small business clients—to its Web site. Plans to allow e-commerce transactions to take place on the site were launched by the newly formed AT&T Interactive Group. The firm also began marketing its first virtual private network (VPN) service to corporations in December. Earlier in the year, C. Michael Armstrong had replaced Robert Allen as CEO. Wanting to reduce his firm's reliance on the increasingly competitive long-distance market, particularly since attempts to penetrate the computer market had failed, Armstrong orchestrated the $11.3 billion purchase of Teleport Communications Group—a local phone service for businesses owned by cable operators Tele-Communications Inc. (TCI), Cox Enterprises, and Comcast—in 1998. That year, in a deal valued at $10 billion, AT&T and British Telecommunications PLC agreed to merge their international operations to form WorldPartners.

Believing that local telephone, cable, and Internet services would converge into one giant industry in the near future, AT&T also began eyeing cable and Internet firms. Almost immediately after taking over as CEO, Armstrong had approached TCI, attracted to its broadband Internet services and cable operations. After watching several deals unfold—the $10.8 billion purchase of Continental Cablevision, the third largest U.S. cable operator, by regional telephone operator U.S. West Inc.; the $16 billion purchase of Pacific Telesis by SBC Communications to form the second-largest phone company in North America; the $25.6 million joining of Bell Atlantic Corp. and Nynex Corp.; and the $37 billion merger of World-Com Inc. and MCI Communications Corp.—AT&T and TCI decided to act. They announced a $48 million merger agreement in June of 1998 and received Justice Department approval in January of 1999. When the $59 billion deal closed in March, AT&T changed TCI's name to AT&T Broadband & Internet Services. The firm then began working on upgrading TCI's infrastructure to allow for integrated local telephone, cable television, and broadband Internet services.

AT&T became the largest U.S. cable carrier when it paid $58 billion for MediaOne Group Inc. in the middle of the year. However, stock prices began to plummet when several analysts criticized the firm for underestimating the cost and complexity of transforming cable networks into local telephone and Internet pipelines. According to a February 2001 article in Multichannel News, "In its struggle to transform itself into an Internet and wireless communications leader, AT&T slowly began to implode. Almost $20 billion of its revenues were still generated from its long-distance business, slowly depleting the company's deep pockets, which funded the ongoing makeover. Meanwhile, AT&T's stocks continued to reach new lows."

Early in 2001, AT&T sold 574,000 cable subscribers to Charter Communications for $1.79 billion and 840,000 subscribers to Mediacom Communications Corp. for $2.2 billion. AT&T and British Telecommunications revealed plans to shut down Concert, a joint venture they had established in January of 2000 to provide high-speed Internet and phone services to multinational corporations. In May, AT&T agreed to purchase bankrupt Internet Service Provider (ISP) NorthPoint Communications Inc., including its Digital Subscriber Line (DSL) services. Although the firm's WorldNet ISP had grown rapidly to 1.1 million subscribers by mid-1998, its growth in 1999 and 2000 had been stagnant. AT&T hoped to bolster its performance with the launch of DSL services by the end of 2001. In June, the firm announced its intent to begin acting as an ISP in Thailand. According to Armstrong, who insists that AT&T's diversification into cable telephony will pay off for the firm, despite the dire predictions of analysts, the four-way split of AT&T's operations will be finalized by the middle of 2002.