Sunday, April 25, 2010

Ma and Baby Bells: a Retrospect

Few days ago, Wall Street Journal reported that CenturyTel is acquiring and merging with Qwest. You probably don’t  know who are CenturyTel and Qwest.  Well, you are not alone. 

When studying Electrical Engineering and Computer Sciences in college and graduate school, I did not have any idea how good old telephone networks work (nor did I care).  The first time I heard any level of technical details of it was in late 70’s when a Bell Labs department head and graduate school alumni came to the department to give a seminar about insights into the occasional overloads and meltdowns of the networks and clever solutions to circumvent them.

A year later I ended up joining Bell Labs and began to work on networking technologies.   Bell Labs was the research and development center of AT&T, the one-hundred-years-old holding company of what was commonly known as the Bell System whose name was synonymous with phone services.   Most people did not know nor care what the Ts’ stand for; the current business of the name clearly likes everyone to forget about that as well and treat it as an abstract brand name (ok, it means Telephone and Telegraph and A stands for American).  In any case, like many during the American Gilded Age of the late 19th century, AT&T had tremendous growth in its early years since founded in 1885 out of the original Alexander Bell’s Bell Telephone Company of 1877.  It enjoyed the legal protection of the famous telephone patents and resulting monopoly till 1894 when the patent rights expired.  However with the vision and leadership of Theodore Vail, AT&T developed the first national long distance network and choked off its competitions by refusing to interconnect their local services.  Faced with anti-trust moves, Theodore Vail convinced the government the merits of having one centrally controlled network and universal services and managed to get AT&T’s monopoly formalized in 1913’s Kingsbury Commitment.  The concession of this first divestiture for AT&T was divesting of Western Union and agreeing to interconnecting local carrier’s networks (but not in between different carriers!).  Interestingly, only few decades earlier, Western Union was the most powerful telegraph company of the land who passed up the opportunity to buy Alexander Bell’s patents for $100,000 because they believed that telephone was nothing more than a passing novelty.   

AT&T/Bell System’s dominance and monopoly would last for the next 70 years till the 1984 divestiture.  It wasn’t until 1934 when FCC was set up by the Congress to be the regulatory body for communications.  By the way, in case you did not know, Theodore Vail’s first cousin - Alfred Vail is believed to be the one who invented the commonly used form of Morse Code in telegraph and other applications today, although his collaborator Samuel Morse got more recognition.

As a regulated monopoly, AT&T/Bell System needed to get approval from FCC and state Public Utility Commissions for proposed rate change at the interstate, and state and local level respectively.  As a point of reference, the 1981 rate of return was set at 12.75% by FCC for all companies it regulated at including the interstate business of AT&T.  In fact, AT&T stock was considered in those days a prime example of “widow and orphan” stocks for its stability like public utilities and relatively low rate of return.  
At its peak days, AT&T had about 1 million employees and controlled 22 local Bell Operating Companies across the nation for local accesses, one long distance company (AT&T Long Line), an International Division (AT&T Intl).  It had a manufacturing arm (Western Electric) that makes equipment for its operating companies and others, and a R&D unit - Bell Labs - that does anything between basic research (and earning Nobel Prizes), design, development, testing, and engineering of products and services.  At early 80’s, there were about 20,000 employees at the Bell Labs.  Universal Service of telephony was the mandate of the land that guaranteed everyone in U.S. can have the basic telephone service at a fixed rate, made possible through a copper wire to every house which are then terminated with standard jacks and leased Western Electric phones installed by your friendly Bell System, regardless where you live or if you had any neighbor up or down or sideways.  

To give you a sense of what the visions of communications was like in a regulated monopoly world, just consider the fact that there was an ambitious multi-billion dollar attempt in mid to late 70’s to develop a “Universal Data Service” that would provide a conceptually equivalent  service for data terminals and computers.  Well, the idea was ahead of its time and eventually was abandoned.  Indeed something like it is available to people today which is called Internet with a completely different technology and architecture!

Not only did I not know what telephone network was when I joined, I did not know there were pending anti-trust lawsuits against AT&T brought by MCI as well as U.S. Justice Department in 1974.  What is interesting is the underlying technical-business dynamics with the MCI case (MCI later became the second largest long distance service provider in the nation for quite some time).  Basically some smart guys figured out how to cherry pick the highly profitable business services of Bell System’s by employing low cost microwave towers on large buildings/high rises to connect and move volume business customers’ data and voices traffic  through AT&T’s networks.   After years of litigations, MCI did win a judgment against A&T in 1981 and an agreement was reached between AT&T and Justice Department in 1982 to break up Bell System along the line of local services vs. practically everything.  Baby Bells were born and separated from Ma on January 1st, 1984.  American telecommunication industry entered a new era with an increasingly turbulent and exciting landscape. 

Twenty six years later, you may ask what happened to Ma and Baby Bells?  The 22 Bell Operating Companies were originally grouped geographically and held by 7 Regional Holding Companies, also known as Regional Bell Operating Companies (RBOCs).  You may recall and recognize some of the names because more than likely you had been served by at least one of them: Pacific Telesis, Bell South, Southwest Bell, Nynex (New York), Ameritech, US West, and Bell Atlantic.  Facilitated by the Telecommunications Act of 1996, Bell Atlantic, Nynex later merged in 1997 to become Verizon who acquired MCI in 2006.  Southwest Bell renamed SBC Communications and acquired Pacific Telesis in 1997, Ameritech in 1999, the Ma - AT&T, and renamed the new company AT&T in late 2005.  Early 2006, it acquired Bell South to complete its redraw plan.  The last lone baby - US West, whose territory included the less populated and lowest growth mountain and north western regions was bought by Qwest in 2000.  Of course, Qwest just made to the news and is being acquired by CenturyTel that got me started going down the memory lane and this blog to begin with.  Is it all clear now? 

Oh, forgot to mention what happened to Bell Labs.  Bellcore (Bell Communications Research) was created during 1984 divestiture with a small portion of Bell Labs engineers and researchers and assets to support the Baby Bells while Bell Labs itself and name followed Ma.  Bellcore was later renamed Telecordia Technologies and acquired by SAIC in 1997, a company that focuses on government business, and later was sold to private equities in 2004.  During the 1996 self-initiated trivestiture and spin-off of AT&T, roughly 80% of Bell Labs and the name went with Lucent Technologies, the new equipment and product company which was later acquired/merged by Alcatel, a French telecommunication company in 2006 to become today's Alcatel-Lucent.  By the way, the third piece of the trivestiture of 1996 was NCR, the computing/"cash register" business that AT&T acquired only 5 years earlier.  It is the only piece that remained largely in-tact till today.

You may also ask why all the fuss and efforts in breaking up the regulated monopoly of Bell System, when the map changed so many times and you can’t even find the original lines of the division?  This question is so interesting that you can find numerous papers, studies and events like Has Divestiture Worked? A 25th Anniversary Assessment of the Breakup of AT&T for in depth discussions.

It suffices to say that one can’t predict the future when you can’t forecast technology well and don’t understand or control the market which is partially influenced by government policies.  There are unexpected consequences when one forges a business-political compromise and overlooks the fundamentals and the interplays of technology and social-economics.  Just look at the wireless services today which weren’t getting much attention before and during the 1984 divestiture.   Yet, less than 20 years after the divestiture, good old wired services began to give ways to the wireless ones at an incredible rate.  Neither of our kids has a phone number associated with the good old household telephone termination any more.   I am sure that is the case for most youngsters and many others now.  Meanwhile, broadband and Internet access services are becoming a must for many with the biggest competition of the “Bells” coming from Cable Services which wasn’t on most people’s radar screen in early 80’s either.  No, I did not see any of these coming in 1984.

Welcome to the fascinating and dynamic telecomm world that connects us to the rest of the world.  Let me assure you it won’t be long before you and I become a part of the network itself.  Talk to you soon!

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