Shed No Tears for AT&T

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The writing is on the wall. AT&T's days are numbered. Acombination of recent regulatory developments and strategicbusiness blunders over the past few years has sealed its fate. Butwhile it brings me no joy to report that this once-great companymay soon meet its demise, I will also not be shedding any tears onthe day that "T" disappears from the stock market ticker and ourtelecom landscape. While AT&T and its supporters claim it isthe victim of a nefarious conspiracy by the Baby Bells andover-zealous deregulators, the reality is quite different. Thiscompany rolled the dice in the post-Telecom Act era and lost. Ithad a chance to be a major player-perhaps the preeminent player-inthe Digital Age, but the firm's bull-headed reliance on a misguidedregulatory regime, and its foolish abandonment of importantinvestments and technologies meant the company largely dug its owngrave long ago.

"Castles Made of Ampersands." A recentSlate critique of AT&T's latest advertising campaignincluded the wonderful headline "Castles Made ofAmpersands." Author Seth Stevenson was referring to the factthat AT&T officials apparently think they can make it on theirbrand name alone these days. Besides the fact that this latest adcampaign is "an ill-conceived mess" in Stevenson's opinion, hisbroader thesis is what is really important here: the firm is nowusing its incredibly powerful brand name to keep its head abovewater. Without it, one wonders if AT&T would still beafloat.

Things didn't have to turn out this way. Indeed, AT&T madesome very bold moves following the Telecom Act to diversify itsproduct offerings and position itself against competitors. Itinvested over $100 billion in cable systems toacquire a competing wire to the home and offer high-speed Internetservices to customers; they strung fiber across America to connectthose systems; they aggressively deployed a wireless architectureto be a major player in the cell phone market; and they even toyedwith something called "Project Angel" that would have offered a wireless"last mile" solution for those homes they couldn't reach with theircable systems. And on top of all of this, the firm still had therecognition that goes along with having one of the most powerfulbrand names the world had ever known and a single letterdesignation (T) on the Big Board as one America's oldest and moststable investment options.

This combination had a lot of people on Wall Street and inWashington (including yours truly) predicting that this wasthe company to watch in the Information Age. T had coveredall its bases by diversifying its product mix and was wellpositioned to offer consumers a complete suite of communicationsservices bundled into one simple bill. Certainly they couldn't messthis up, right? Well, they did. The cable gamble proved to be an expensiveone that company officials ultimately felt compelled to abandon,selling all their cable systems to Comcast forroughly $50 billion, half of what they paid for them. Their fiberand long-distance networks faced intense competition, and they wereunable to ever be a price leader in the field. "Project Angel" was abandoned before the inkwas dry on the blueprints. And, just recently, AT&T Wireless was sold to Cingular for $41billion. The net result of this endless shedding of assets is ahollowed-out shell of a once great company. With the long-distancemarket being cannibalized by wireless and VoIP, and the businesscustomer market subject to such intense competition, there's littlechance that those two remaining units will be able to keep T afloatmuch longer.

Regulators to the Rescue. But AT&T had onelast hope: Coax federal and state regulators to rig telecomregulations in such a way as to handicap the Baby Bells whiletossing T a life preserver. In this regard, AT&T's knight inshining armor was former FCC chairman Reed Hundt and his merry bandof infrastructure-sharing regulators. Throughout the late 1990s,Hundt and Co. ushered in staggering volumes of new "openaccess" mandates aimed at forcing the Baby Bells to essentiallyshare every component of their local telecom infrastructure withcompetitors like AT&T at greatly reduced rates. In theory, thiswould keep the Bells' market power in check while giving T andother rivals a chance to resell services over Bell networks undertheir own name.

It doesn't take a Ph.D. economist to see the nagging flaw inthis 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 questionwhich T and the other infrastructure-sharing crew should have beenasking themselves: What good is a business model that relies onaccess to my competitors' networks? Ford doesn't depend on accessto Chevy's factories to build cars; Ford builds their ownfactories. Same goes for telecom, but regulators and rivals likeAT&T weren't willing to take the hard road when the open accesspath offered immediate results in the form of imaginary telecom"competition." And, so, infrastructure sharing trumpedinfrastructure creation in telecom markets and everybody suedeverybody else for eight years trying to figure out how to makethese rules "fair." Meanwhile, this farce did nothing to benefitconsumers and also was primarily to blame for the telecom marketcrash of the late 1990s. It was the triumph of good intentions overgood economics.

Lessons Learned? Nonetheless, for a time, itappeared that many regulators were willing to pay any price andbear any burden to prop up this misguided regulatory regime to helpkeep AT&T and others afloat. Although the rules were challengedfrom many quarters, as part of a last ditch attempt to save theinfrastructure-sharing scheme, AT&T and others mounted anintense lobbying effort in 2003 to convince the FCC to prop up thishouse of cards as part of the agency's major Triennial ReviewOrder. Amazingly, it worked.Republican Kevin Martin joined the Commission's two Democrats andbrokered a convoluted deal aimed at keeping hope alive for AT&Tand Co. But then came a resounding defeat on March 2 as the ruleswere struck down for a third time by the U.S. District Court ofAppeals in a harshly-worded reprimand. And then, just lastweek, Solicitor General Ted Olson announced that the BushAdministration 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 neverhappen) or a radical revision of the Telecom Act imposing even moreonerous infrastructure sharing requirements (still unlikely), itappears that T is out of options. A merger of what remains of thecompany with some other major telecom provider seems inevitable atsome 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 temporarylife support).

If AT&T's post-Telecom Act troubles have taught policymakersand telecom companies anything it should be this: Real companiesmust build real networks if they want to survive. Networks built ofpaper-which is about all the Telecom Act's infrastructure-sharingrules produced-have very little chance of surviving in the longrun. Although there may be room for a handful of telecom resellersin this market, it will likely remain a small niche, and that ishow it should be. It's time to let the big boys get on with theserious business of building the big networks this country needs.AT&T R.I.P.