TechKnowledge No. 83

Shed No Tears for AT&T

By Adam D. Thierer
June 16, 2004

The writing is on the wall. AT&T’s days are numbered. A combination of recent regulatory developments and strategic business blunders over the past few years has sealed its fate. But while it brings me no joy to report that this once-great company may soon meet its demise, I will also not be shedding any tears on the day that “T” disappears from the stock market ticker and our telecom landscape. While AT&T and its supporters claim it is the victim of a nefarious conspiracy by the Baby Bells and over-zealous deregulators, the reality is quite different. This company rolled the dice in the post-Telecom Act era and lost. It had a chance to be a major player-perhaps the preeminent player-in the Digital Age, but the firm’s bull-headed reliance on a misguided regulatory regime, and its foolish abandonment of important investments and technologies meant the company largely dug its own grave long ago.

“Castles Made of Ampersands.” A recent Slate critique of AT&T’s latest advertising campaign included the wonderful headline “Castles Made of Ampersands.” Author Seth Stevenson was referring to the fact that AT&T officials apparently think they can make it on their brand name alone these days. Besides the fact that this latest ad campaign is “an ill-conceived mess” in Stevenson’s opinion, his broader thesis is what is really important here: the firm is now using its incredibly powerful brand name to keep its head above water. Without it, one wonders if AT&T would still be afloat.

Things didn’t have to turn out this way. Indeed, AT&T made some very bold moves following the Telecom Act to diversify its product offerings and position itself against competitors. It invested over $100 billion in cable systems to acquire a competing wire to the home and offer high-speed Internet services to customers; they strung fiber across America to connect those systems; they aggressively deployed a wireless architecture to be a major player in the cell phone market; and they even toyed with something called “Project Angel” that would have offered a wireless “last mile” solution for those homes they couldn’t reach with their cable systems. And on top of all of this, the firm still had the recognition that goes along with having one of the most powerful brand names the world had ever known and a single letter designation (T) on the Big Board as one America’s oldest and most stable investment options.

This combination had a lot of people on Wall Street and in Washington (including yours truly) predicting that this was the company to watch in the Information Age. T had covered all its bases by diversifying its product mix and was well positioned to offer consumers a complete suite of communications services bundled into one simple bill. Certainly they couldn’t mess this up, right? Well, they did. The cable gamble proved to be an expensive one that company officials ultimately felt compelled to abandon, selling all their cable systems to Comcast for roughly $50 billion, half of what they paid for them. Their fiber and long-distance networks faced intense competition, and they were unable to ever be a price leader in the field. “Project Angel” was abandoned before the ink was dry on the blueprints. And, just recently, AT&T Wireless was sold to Cingular for $41 billion. The net result of this endless shedding of assets is a hollowed-out shell of a once great company. With the long-distance market being cannibalized by wireless and VoIP, and the business customer market subject to such intense competition, there’s little chance that those two remaining units will be able to keep T afloat much longer.

Regulators to the Rescue. But AT&T had one last hope: Coax federal and state regulators to rig telecom regulations in such a way as to handicap the Baby Bells while tossing T a life preserver. In this regard, AT&T’s knight in shining armor was former FCC chairman Reed Hundt and his merry band of infrastructure-sharing regulators. Throughout the late 1990s, Hundt and Co. ushered in staggering volumes of new “open access” mandates aimed at forcing the Baby Bells to essentially share every component of their local telecom infrastructure with competitors like AT&T at greatly reduced rates. In theory, this would keep the Bells’ market power in check while giving T and other rivals a chance to resell services over Bell networks under their own name.

It doesn’t take a Ph.D. economist to see the nagging flaw in this scheme: If everyone is encouraged to share the old networks, who is going to build the new ones? But put this innovation / investment issue aside and consider the more troubling question which T and the other infrastructure-sharing crew should have been asking themselves: What good is a business model that relies on access to my competitors’ networks? Ford doesn’t depend on access to Chevy’s factories to build cars; Ford builds their own factories. Same goes for telecom, but regulators and rivals like AT&T weren’t willing to take the hard road when the open access path offered immediate results in the form of imaginary telecom “competition.” And, so, infrastructure sharing trumped infrastructure creation in telecom markets and everybody sued everybody else for eight years trying to figure out how to make these rules “fair.” Meanwhile, this farce did nothing to benefit consumers and also was primarily to blame for the telecom market crash of the late 1990s. It was the triumph of good intentions over good economics.

Lessons Learned? Nonetheless, for a time, it appeared that many regulators were willing to pay any price and bear any burden to prop up this misguided regulatory regime to help keep AT&T and others afloat. Although the rules were challenged from many quarters, as part of a last ditch attempt to save the infrastructure-sharing scheme, AT&T and others mounted an intense lobbying effort in 2003 to convince the FCC to prop up this house of cards as part of the agency’s major Triennial Review Order. Amazingly, it worked. Republican Kevin Martin joined the Commission’s two Democrats and brokered a convoluted deal aimed at keeping hope alive for AT&T and Co. But then came a resounding defeat on March 2 as the rules were struck down for a third time by the U.S. District Court of Appeals in a harshly-worded reprimand. And then, just last week, Solicitor General Ted Olson announced that the Bush Administration would not seek Supreme Court review of the D.C. Circuit decision. The game was up for T.

Will policymakers take other steps to prop up AT&T? Unlikely. Barring a Chrysler-esque bailout (which will never happen) or a radical revision of the Telecom Act imposing even more onerous infrastructure sharing requirements (still unlikely), it appears that T is out of options. A merger of what remains of the company with some other major telecom provider seems inevitable at some point. That great brand name can only sustain them for so long (although T’s contract with the Federal Trade Commission to run the “Do Not Call” list provides them some temporary life support).

If AT&T’s post-Telecom Act troubles have taught policymakers and telecom companies anything it should be this: Real companies must build real networks if they want to survive. Networks built of paper-which is about all the Telecom Act’s infrastructure-sharing rules produced-have very little chance of surviving in the long run. Although there may be room for a handful of telecom resellers in this market, it will likely remain a small niche, and that is how it should be. It’s time to let the big boys get on with the serious business of building the big networks this country needs. AT&T R.I.P.

Adam Thierer (athierer [at] cato [dot] org) is the director of telecommunications studies at the Cato Institute in Washington, D.C. To subscribe, or see a list of all previous TechKnowledge articles, visit www.cato.org/tech/tk-index.html.