SBC and AT&T��nature vs. nurture

SBC's proposed acquisition of AT&T raises the age-old question of nature vs. nurture. Was SBC born with inherent traits that made it inevitable to succeed over its parent, AT&T? Or did better management by SBC produce this outcome?

The idea that economic fundamentals--nature--favored SBC over AT&T holds considerable weight. The U.S. vs. AT&T antitrust suit settlement in 1982 reflected the U.S. Department of Justice's theory that the local Bell telephone companies (SBC and Verizon's predecessors) had a headlock on the entire industry with their monopoly control of the local subscriber loop.

There is some support for this view in that neither AT&T nor the pure CLECs have been able to succeed as providers of local telephone or DSL services. It also is true that monthly subscriber line fees (including those for DSL service) and message minute voice services (both local and long-distance) depend on ownership of the local loop and are a mainstay of the financial stability of SBC, Verizon and other local telephone companies.

Another economic fundamental that favored the RBOCs was the monopoly nature of communications networks. Assuming equally competent management, one large network always costs less to operate than two or more separate networks serving the same customers. This favors the RBOCs because, within their franchised territories, their networks are much larger than other carriers' networks.

AT&T had several important market and regulatory factors in its favor. The Bell companies were prohibited from providing advanced data service, long-distance telephone service and telephone equipment and were not allowed to bundle services. AT&T was not subject to these restrictions. AT&T, furthermore, had a nationwide--even worldwide--presence and network footprint in contrast to the RBOCs' regional businesses.

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Management: a.k.a Nurture

Now consider management--or nurture. The Bell companies entered 1984 with a number of handicaps, such as the lack of marketing functions and a great number of legal restrictions on which services they were allowed to sell and how they could price them. These companies have worked consistently to expand their businesses into the prohibited areas and overcome the structural constraints.

At the same time they labored under a number of organizational/cultural constraints that dated back to the founding of the Bell System in 1876. That culture had ossified into one where functional departments organized on a state-by-state basis (e.g., engineering, operations, traffic, finance) had very rigid roles and where turf battles were endemic.

Each company undertook many rounds of reorganization and process re-engineering to overcome these organizational constraints. First, the state level organizations were abolished and molded into regional companies (e.g., Bell Atlantic's seven-state operations became a single organization.). Then regional operations were combined to operate as single super regional organizations (e.g., SBC with operations from Connecticut to California).

Management, also, was effective at exploiting the many hard-fought legal and regulatory victories. Once permitted entry, the Bell companies successfully developed new market opportunities, including advanced data communications, Internet access, long distance and mobile wireless. As they entered these new markets, they re-engineered efforts to present a single face to the customer and provide bundled services. This required overcoming much entrenched organizational opposition that prompted many early retirement programs.

AT&T's Failings

For its part, AT&T has consistently failed in its efforts at process re-engineering and entering new markets. AT&T management never took on the hard job of making its quarreling employees and operating units work together for the good of the company. AT&T acquired NCR in order to enter the computer business but could not reconcile NCR's way of doing business with its own. It gave up and spun off NCR for a price well below purchase price.

A similar pattern followed with Lucent Technologies. AT&T could not resolve the conflicts between the management of the manufacturing business and the telecom services unit, so Lucent was spun off. Ironically, in the same time frame, IBM built a services business in a highly successful strategy to complement its declining manufacturing business.

AT&T continued its pattern with entry into cable television, acquiring cable MSOs TCI and Metromedia with high stock premiums. They were eventually sold to Comcast after tens of billions of dollars in write-downs. Recently, AT&T gave up on its wireless business by selling it to Cingular, a SBC/BellSouth joint venture.

Marketing Missteps

AT&T's inability to market consumer long-distance services was such a failure that no buyers were found. The traditionally dominant engineering and regulatory organizations' unwillingness to let marketing people run the business caused much of the problem in this business unit.

So is nature or nurture the stronger factor in determining service provider success? I believe nurture is more important. But not only AT&T has been gobbled up. In earlier acquisitions, SBC took over PacBell, Ameritech and SNET, while Bell Atlantic took over NYNEX and GTE before changing its name to Verizon.

The telecom industry is fortunate and consumers are better off today with two well-managed firms dominating the U.S. market rather than the single AT&T Bell System titan that existed in 1983.

RELATED ARTICLE: AT&T'S Failed Forays

1. Computer business entry via NCR

2. Consumer long-distance services

3. Cable TV entry via TCI, Metromedia

4. Equipment venture via Lucent

Michael Kennedy is co-founder and managing partner of Network Strategy Partners, LLC (NSP), management consultants to the networking industry. ([email protected])

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