AT&T: 20 Years of Change

AT&T
20 Years of Change
PREPARED BY: ADHAM MOHAMED GHALY
PRESENTED TO: DR. ZIAD ROTABA

Introduction:
 This is an interesting case of Strategic Management.
 It shows how dynamic the process of Strategic Management is.
 It demonstrates: Why visions change, How visions change, and the
impact of their change.
 It reveals the influence of external stakeholders on enterprise
competitiveness.
 It demonstrates how visions affect the mission and action plan of an
enterprise.

Contents:
 The Early Days (1876-1894).
 The Early Days (1894-1904).
 Theodore Vail’s Vision (1907).
 The FCC Duels (1934-1982).
 The Divestiture (1984).
 The Telecommunications Act (1996).
 The Re-structuring.
 Michael Armstrong’s vision(1997-2000).
 Failing Strategy.

The Early Days (1876-1894):
 1876: Alexander Graham Bell invented the telephone and earned a
patent.
 1877: The Bell Telephone Company was formed.
 1878-1894: The company provided Telephone services exclusively in
the United States through its licensees.

Opportunities
 Technological Factors:
 The invention of the Telephone provided a new untapped market with
huge growth potential.
 Legal Factors:
 The protection policy (patents) allowed the company to avoid early
competition.
 Economic Factors:
 Demand for the new service was booming.

Opportunities
 Market Analysis:
 The entry barrier was infinity due to the patent.
 Bargaining Power of Customers was Minimal, due to Bell being the only
provider .

Threats
 Threat of Potential Substitutes:
 Threat of Substitute Products: The only potential substitute was the
Telegraph, provided by Western Union.

Strengths
 American Bell was the only company that have the technology and
allowed legally to use it.
 The product was extremely differentiated.

Weaknesses
 The patent would expire in 1894.
 The telephone network still needed lots of investment in order to
increase coverage.

Business Definition
 Markets: Households, Business, and Government.
 Functions served: Communication among distant entities.
 Technologies Utilized: Harmonic Telegraphy using variable resistance
in a liquid.
 Products/Services: Short Distance Voice Communications.

Strategic Implementation
 American Bell aimed at Creating a Monopoly to benefit from its
legal protection.
 Diffusing the technology through licensing to operating companies.
 Backward integration: Acquiring a majority in Western Electric
Company (1882), creating the firm’s own manufacturing unit.
 Forward integration: Acquiring most of its licensees across the United
States, resulting in the creation of the Bell System or ―Ma Bell‖.
 Entering the Long Distance service market by establishing AT&T.

 Bell’s second patent expired on 30th January, 1894.
 Ma Bell was no longer the only company that could legally operate
telephone systems in the United States.
 Over 6000 new telephone companies (Operators and
Manufacturers) were established, called the Independents.

 Stromberg-Carlson (1894)
 Kellogg SwitchBoard and Supply Company (1897)
 Automatic Electric Company (1901)
 Brown Telephone Company (1899)  Sprint Nextel

Opportunities
 The market was still rapidly growing.
 The long distance market was still untouched.
 Networks were not interconnected, meaning that subscribers to
different telephone companies could not call each other.

Threats
 Legal Factors:
 The end of the patent protection.
 The company’s growth had been capped by the laws of Capitalization
of Massachusetts.
 Competition was intensifying.
 Entry barriers were lower, resulting in increasing number of new entrants.
 People now had many options, raising the bargaining power of
customers.

Strengths
 The company owned the only long distance network.
 The company's much larger customer base made its service much
more valuable.
 The company’s quality of service was better than its competitors.

Business Definition
 Technologies Utilized: Harmonic Telegraphy using variable resistance
in a liquid.
 Products/Services: Short and Long Distance Voice Communications.

 American Bell aimed at Enforcing its Monopoly over the market to
react to the intensifying competition.
 This led to hiring Theodore Vail as a CEO in 1907.
 He was a telephone industrialist. His philosophy of using closed
systems, centralized power, and as much network control as
possible, in order to maintain monopoly power, has been
called Vailism.

“
”
One System,
One Policy,
Universal Service.
Theodore Vail’s Vision (1907):

 AT&T under Vail focused on Enforcing the Monopoly and
Competing with Innovation.
 The most important stakeholder: The government.
 He convinced President Woodrow Wilson that the telephone would
spread more rapidly if brought under one monopoly so as to ensure
uniform provision of services throughout the country.
 To avoid antitrust action, Vail agreed to the Kingsbury
Commitment of 1913.

The Kingsbury Commitment
 The government agreed not to pursue its case against AT&T as a
monopolist,
 AT&T agreed to divest the controlling interest in the Western Union
telegraph company,
 AT&T agreed not to acquire any more independent phone
companies without the approval of the Interstate Commerce
Commission.
 AT&T allowed independents to connect to its network.

 Founding Bell Labs in 1925.
 The First Trans-Atlantic phone service began in 1926 (via two-way
radio).
 Inventing the Transistor in 1947.
 First Microwave Relay system was created in 1948

The FCC Duels (1934-1982):
 The FCC had been created by the Communications act of 1934,
taking over regulation of communication from Interstate Commerce
Commission.
 The Federal Communications Commission (FCC) regulated all
service across state lines, controlling the rates that companies could
charge, and the specific services and equipment they could offer.

“
”
To make available, so far as possible, to all
the people of the United States a rapid,
efficient, nationwide, and worldwide wire
and radio communication service with
adequate facilities at reasonable charges

 The FCC filed an antitrust lawsuit against AT&T in 1949.
 In 1956, AT&T agreed to restrict its activities to the regulated business
of the national telephone system and government work.

Opportunities
 Demand was still high.
 The penetration of telephone service into American households
increased from 50 percent in 1945 to 90 percent in 1969.
 The transition to electronic components allowed more powerful and less
expensive customer and network equipment.
 Rapid Development kept the market growing.

Threats
 Legal Factors:
 Change in regulations by the creation of the FCC in 1934.
 Antitrust case filed by the FCC in 1949.
 Regulations and Case Settlement of the case capped AT&T’s business.

Strengths
 Continuous development kept the company way ahead of
competition.
 The company still owned the largest coverage network.
 The company still had a monopoly on the long distance market.

Weaknesses
 Safety from competition created a negative effect on management’s
culture.
 Managers saw profits as a way to support the monopoly, not an end in
itself.
 Cost control was ensured to satisfy regulatory overseers.
 Sales representatives were warned not to oversell, as customers were
taken for granted.
 Managers became risk averse.

 Continuous Innovation, providing alternatives, and creating new
revenue generation mechanisms:
 Leasing Telephone equipment to users, instead of selling them ‖ BELL
SYSTEM PROPERTY — NOT FOR SALE.‖.
 Invention of the microwave relay systems (an alternative to copper
wires).
 First communications satellite in 1962, providing an additional alternative
for international communications.
 These provided alternatives for international communications.

 1971: The FCC opened private-line service to all competitors,
allowing them to use AT&T technology, to allow more competition.
 The FCC filed another antitrust lawsuit against AT&T in 1974, believing
that a monopoly still existed for the local exchanges.
 1982: AT&T agreed to divest itself of the wholly owned Bell Operating
Companies (Baby Bells).
 In return, the government lifted restrictions of 1956.

The Divestiture (1984):
 The divestiture took place on January 1, 1984.
 The Bell System: AT&T and seven operating companies:
 Ameritech, acquired by SBC in 1999, now part of AT&T Inc.
 Bell Atlantic (now Verizon Communications), which acquired GTE in 2000.
 BellSouth, acquired by AT&T Inc. in 2006.
 NYNEX, acquired by Bell Atlantic in 1996, now part of Verizon
Communications.
 Pacific Telesis, acquired by SBC in 1997, now part of AT&T Inc.
 Southwestern Bell (later SBC, now AT&T Inc.), which acquired AT&T Corp. in
2005.
 US West, acquired by Qwest in 2000, which in turn was acquired
by CenturyLink in 2011.

 AT&T retained $34 billion of the $149.5 billion in assets and 373,000 of
its previous 1,009,000 employees.
 The Bell Logo had been given to the RBOCs.

Business Definition
 Technologies Utilized: Improved Telephony and Automatic
Switching.
 Products/Services: Long Distance Voice Communications.

Opportunities
 AT&T was no longer restricted to the regulated business of National
Telephone and Government Work.
 The company continued generating enormous positive cash flows
although it was steadily losing market share.

Threats
 Legal Forces:
 The imposed divestiture stripped AT&T from its competitive position.
 Economical Forces:
 AT&T’s long distance market share dropped from 90% (1984) to 50%
(1996).
 Technological Forces:
 The company had to keep up with emerging technologies, such as fiber
optic transmission.

Threats
 Competition had been intensifying in all of AT&T’s portfolio.
 The end of AT&T’s regulated monopoly over the Telephone industry.
 Availability of substitutes for AT&T’s manufacturing operations (AT&T
Network Systems).

Strengths
 The company still owned great technology, provided by the famous
Bell Labs.
 The company could still rely on personnel strength.

Weaknesses
 AT&T became a firm without a local network into offices and homes.
 AT&T lost its ability to reach almost every consumer in the United
States by its wires and bills. The ―last mile‖ would be controlled by
the RBOCs.
 Corporate culture needed re-invention to match the new
competitive environment.

 AT&T negotiated agreements with the RBOCs to lease parts of their
networks and resell the service to its own customers.
 AT&T was lobbying state regulators to break the regional Bells into
two companies: One that would sell services like dial tone and DSL,
and another that would lease the network to both competitors and
to the incumbent local phone company.
 Given the high fees for leased access, the company decided to
find an alternative. The options were Fixed Wireless Technology and
Cable TV lines.

 AT&T aimed at Diversifying Business, Seeking Alternatives and
Relying on Convergence.
 AT&T saw the convergence of communications and computing
industries. AT&T tried to link the different businesses to gain synergies.
 1991: Acquiring Computer maker NCR for $7.4 billion.
 1994: Acquiring McCaw Cellular, the US leader in wireless business
for $11.5 billion.

 AT&T gained direct access to consumers for the first time in a
decade.

The Telecommunications Act (1996):
 According to the FCC, the goal of the law was to "let anyone enter
any communications business – to let any communications business
compete in any market against any other.―
 Allowed the RBOCs and other competitors to compete in the long
distance service.

Opportunities
 The Wireless Communications industry, as well as the computer
industry, had been fiercely growing and becoming global.

Threats
 Increased pressure on AT&T, Sprint, MCI-WorldCom, and other
players in the market.
 The former RBOCs: Verizon Communications, SBC Communications
Inc., Qwest Communications International Inc., and BellSouth Corp.,
became the strategically best positioned telecommunications firms
in the United States.
 The changing telecom environment and increasing deregulation
made the market more complex.
 The new telecom competitors, including cable firms, RBOCs, and
mobile service companies, had many options from whom to buy
their equipment.

Strengths
 AT&T was still the leading force in the fast growing wireless
telecommunications market.
 AT&T also was the biggest cable provider in the United States.

Weaknesses
 The absence of synergies across AT&T’s businesses.
 The computer subsidiary was suffering from mounting losses ($5.9
billion in 3 years).
 Corporate culture clash resulted in confusion, complacency, and
loss of direction.
 The commitment to become one of the world’s top three PC
makers resulted in a product line and an expense structure that was
out of line with market demand.

Weaknesses
 The equipment department failed to attract many customers as
competitors feared that AT&T would see their plans and use the
profits to act against them.

 AT&T decided to spin-off its computer division, its telecom network,
switching and transmission equipment business, as well as the
famous Bell Labs.
 This led to a voluntary divestiture.

The Restructuring:
 Restructuring of AT&T into three companies: a systems and
equipment company (which became lucent Technologies), a
computer company (NCR), and a communications services
company (which remained AT&T).
 After the spin-off of Lucent, Lucent was able to win contracts it
would probably never have won when it was part of AT&T.

“
”
Transforming AT&T from a long distance
company to an ―any-distance‖ company. From
a company that handles mostly voice calls to a
company that connects you to information in
any form that is useful to you. From a primarily
domestic company to a global company
Michael Armstrong (1997-2000):

Opportunities
 Data Communications was growing rapidly.
 New trends like video telephony, VOIP, and Video Over IP were
gaining popularity.
 The Wireless Communications market continued growing.

Threats
 AT&T was under the mercy of its competitors. It had to succeed in
negotiations with other cable operators to achieve its goal of offering
branded telephony coverage to at least 60 percent of US homes.
 The long distance business (AT&T’s major business) was shrinking quickly.
 Technological Forces:
 Providing these services over cables was still in theoretical stages.
Practically it had never been demonstrated.

Threats
 Legal Forces:
 The FCC accepted AT&T’s plans provided that the company accepts
one of three choices:
 Divest MediaOne’s 25 percent stake in Time Warner Entertainment.
 Sell Liberty Media Group, a minority stake in Rainbow Media Holdings Inc.
and MediaOne’s programming networks.
 Sell 9.7 million cable subscribers, which was more than half of the company’s
current subscribers.
 Economic Forces:
 The necessary acquisitions will load AT&T with too much debt.

Strengths
 AT&T had the required financial status to achieve the required
upgrades.
 AT&T had the necessary technical knowledge to upgrade its
network.
 AT&T was the largest cable and wireless network operator in the
country.

Weaknesses
 AT&T Cable Systems were far from supporting the required
bandwidth for these services.
 AT&T was under the mercy of its competitors. It had to succeed in
negotiations with other cable operators to achieve its goal of
offering branded telephony coverage to at least 60 percent of US
homes.
 Lack of entrepreneurial spirit within AT&T and the clash of cultures
can affect the employees of newly acquired companies.

Business Definition
 Functions served: Voice, Data, and Video Communications.
 Technologies Utilized: VOIP, Video Over IP, Internet Technologies.
 Products/Services: Internet Services, Voice Services, Media Services.

 AT&T began to implement the vision of a global company by
integrating the cable, wireless, and long distance businesses.
 It took cost-cutting measures to make AT&T the low-cost provider in
the communications industry by cutting the workforce in its long
distance business by 15,000 to 18,000 people over the following two
years and by offering a voluntary retirement program for managers.
 AT&T initiated a series of joint ventures and acquisitions.

 The goal was to broaden the company’s scope to areas such as
data networking services, digital voice encryption, broadband
cable telephony, and video telephony.
 The other goal was to increase AT&T’s global reach.
 1998: AT&T acquired Teleport Communications Group (TCG) for
$11.5 billion. TCG was the leading local telecommunications service
provider for business customers in the United States.

 It provided networks that were an alternative to those of the RBOCs
and allowed AT&T to save tens of millions of dollars in access
charges previously paid to connect its customers to the Baby Bells’
networks.
 It was to provide AT&T with the ability to offer high speed service to
businesses in major US urban areas.
 It allowed AT&T to provide customers with a complete
communications solution by integrating TCG’s local services with
AT&T end to end telecommunication services packages for business
customers.

 In 1999 AT&T acquired Telecommunications Inc (TCI), the second
largest cable company in the United States, for $55 billion.
 Next, AT&T completed an acquisition of MediaOne, a cable
operator, for $56 billion cash and stock transaction.
 The two acquisitions made AT&T the leading cable television
operator in the US. The acquisition of cable internet and TV services
led to the creation of AT&Y’s newest division: AT&T broadband and
Internet services.

Failing Strategy
 The reality of creating the vision was much more difficult than
Armstrong anticipated.
 AT&T invested $115 billion to achieve Armstrong’s vision.
 By 2001, AT&T was only able to upgrade 65 percent of the cable
lines within its cable network, which matched only about one-fourth
of AT&T’s 60 million total customer base.

Failing Strategy
 Had the firm waited, newer internet technologies would have
substantially lowered the upgrade cost. AT&T was spending about
$1200 to add a phone subscriber to the cable network. By 2001,
new technologies had lowered the cost of converting cable to
allow phone service to about $700 per subscriber.
 In addition, AT&T did not succeed in striking a deal with other cable
operators to lease their lines, which was necessary in order to
broaden AT&T’s cable telephony customer base. (e.g.: Time
Warner)

Failing Strategy
 The company also had not succeeded in entering local phone
service competition with the RBOCs.
 The acquisitions left the company with $64 billion in debt, making
AT&T one of the industry’s most indebted companies and affecting
its stock.
 AT&T also failed to promote its ISP business (WorldNet) in front of
AOL.

Failing Strategy
 October 2000: AT&T announced a restructuring plan to break the
company into separate Wireless, Broadband, Business Long
Distance, and Consumer Long Distance companies.
 Restructuring aimed at attracting new investors and provide cash to
reduce the enormous debt load.
 AT&T announced that it would sell non-strategic assets.

Failing Strategy

AT&T: 20 Years of Change

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