AT&T goes for broke

Ian Austen January 23 1984

AT&T goes for broke

Ian Austen January 23 1984

AT&T goes for broke


Ian Austen

The past month has been full of turmoil for Robert Sageman, the president of AT&T International, an arm of the New York-based American Telephone and Telegraph Co. But last week he was at least getting some relief at the start of each day. “I look gratefully at The Wall Street Journal in the morning and see that we are not in the paper that day,” he told Maclean’s. Indeed, Sageman has good cause to be apprehensive. Although the end of the 107-year-old Bell System on New Year’s Eve created a fireball of favorable publicity for AT&T, more recent events have shown that the antitrust-inspired dissolution of the telecommunications giant has not been without confusion and pain for customers, employees and investors.

The handing over of the former AT&T’s $155 billion worth of assets to a slimmed-down central company and seven newly created operating corporations, which took over local phone service, occurred on Jan. 1 after AT&T agreed to settle a long-festering antitrust action out of court. Nevertheless, important matters such as new long-distance rates remained unsettled. Making the problem worse, sour relationships developed between AT&T and the new operating companies—and consumers have been caught in the middle of the confusion. At least the changeover, which affected nearly one million employees, has not caused any largescale service disruption.

The breakup brought an end to AT&T’s longstanding, but fragile, near monopoly of U.S. telephone trade. But the terms could not have been more favorable for the corporation. The most costly and slowest-growing portion of its business—local telephone service— is now the domain of the seven regional companies: Pacific Telesis, US West, Southwestern Bell Corp., American Information Technologies Inc. (Ameri-

tech), Bell Atlantic Corp., Nynex Corp. and BellSouth Corp. In turn, AT&T retained the choice fruits of the old system: the long-distance lines, the

Western Electric Cö. and its manufacturing facilities, as well as Bell Laboratories. What is more, the arrangement also frees AT&T to enter the world of data processing—a corporate goal long thwarted by regulators.

Relations between the various entities have been difficult. In Chicago a wall now separates onetime co-workers in the cafeteria used by AT&T and Amer-

itech employees. More significantly, customers in many regions complained that their phones sat unrepaired for days while AT&T and the local operating company argued over who was to blame for the service breakdown. After one dispute caused dead phones for three days, a Boston-based company purchased a $25,000 diagnostic system that will determine if the problem is in the phone system or their office equipment and, in turn, tell them which company to contact. (AT&T looks after the phones, the local operator maintains the lines.)

For residential customers, service has been just as confused. Despite mailouts and soothing print and television

ads, many customers still apparently do not know what is going on. In fact, because of the breakup they have three options: keep renting telephones from AT&T; buy them from AT&T; or return them while replacing the AT&T equipment with another firm’s product. The last two options, in some cities at least, have not been easy to exercise. Many of AT&T’s phone stores have closed, and the surviving outlets are frequently difficult to find. One store in Maple Heights, Ohio, was so disorganized last week that its telephone was still not operating.

Adding to the woes of residential customers is the proliferation of bills that will soon stream into their mailboxes. Some people will get a bill for equipment rentals from AT&T, a bill for local service and then long-distance invoices from AT&T or one of the many other companies that offer low-cost longdistance service between major U.S. cities. What is more, the amounts that consumers can expect to pay are still uncertain. AT&T gave users the first good news after the breakup earlier this month when it announced plans for a 10.5per-cent cut in long-distance rates. But there was a catch. The rate reduction will only start if the U.S. Congress approves a controversial charge for access to longdistance lines. The necessary political approval did not appear imminent last week.

Although less obvious to outsiders, the shakeup within AT&T’s employee ranks has been no less dramatic. In the past, critics of AT&T frequently charged that the company was staffed with people having “bell-shaped heads”—that is, workers who performed their tasks with a high degree of perfection but without ever questioning if they were heading along the right avenues. Whether or not the criticism is warranted, many AT&T employees have stayed with the company for their entire working lives. Sageman himself

joined AT&T as a radio telephone technician after his Second World War tour of duty with the U.S. Navy. He also acknowledges that, because of its monopoly power in the past, marketing has been an area of weakness at the company. But now, he says, that has changed. “Our management recognizes very clearly that everybody in the business has to be a successful marketing person.” While there have been no staff purges, that policy likely means that the AT&T of the future will be run by fewer lifers.

AT&T Chairman Charles Brown has acknowledged that Bell Canada’s Northern Telecom Inc. is one firm his marketing people will be watching closely. Although AT&T owned as much as 80 per cent of the precursor of Bell Canada in the early part of the century and both later maintained research ties, the relationship was severed in 1975. Since then, Bell Canada has pursued the U.S. market. Operating out of Tennessee,

Northern’s U.S. subsidiary now employs approximately 15,000 people in both marketing and manufacturing of telecommunications equipment.

The AT&T breakup has created a whole new set of possibilities for the Canadian company. In the past most of its U.S. efforts concentrated on selling call switching systems for offices. But now that the local phone

companies have lost their ties to Western Electric, they present a potential—and lucrative—market for Northern’s large-scale telephone exchange switching equipment.

AT&T’s new marketing effort is evident in the newly created AT&T subsidiary that Sageman heads. The new international division marks the first major push outside the United States by AT&T since the 1920s. One of its first moves has been to challenge Northern on its home turf. Last week, with only 20 staff members and a half-completed office, AT&T Canada Inc. officially began business.

On the surface, at least, the Canadian operation shares all the birthmarks of its slimmed-down parent. The president is not a long-term AT&T employee but Roger Moore, who left a marketing position with the International Business Machines Corp. only two years ago. AT&T Canada is ambitious. By the end of the year Moore hopes to double his staff and get AT&T residential telephones into the Canadian retail market. Moore also intends to target the Canadian branches of U.S. firms for office installations and to convince the phone companies operating in the Prairies to buy its large-scale systems. Like its parent, AT&T Canada seems to be feeling its way. Both Sageman and Moore are vague about their plans.

For its part, Northern Telecom appears largely unruffled by its former partner’s arrival in Canada. After all, AT&T Canada faces hurdles that are not a problem for Northern. The weak Canadian dollar has already hurt AT&T pricing on one potential deal. On top of that, tariffs on the goods it brings into Canada are double those affixed to Northern equipment entering the United States. But Northern does have some concerns. Assistant Vice-President Richard Wertheim worries that AT&T “is competing to take jobs away from Canadian manufacturing.” Sageman denies the charge, and he says that Canadian manufacturing may be possible—though, again, he offers no specifics.

Arguably, Wall Street analysts are watching the confusing changeover more than any other group. While AT&T stock lost much of its glamor in recent years as the residential telephone market became increasingly saturated, it still maintained its image as a safe bet for small investors. Since the breakup its shareholders have received holdings not only in the slimmed-down AT&T but in the regional companies as well. The new shares have traded since November, but there is no doubt that, until the rates issue, AT&T data processing plans and the performance of the new companies become more clear, many cautious investors will hang onto their holdings—even if uneasily. Said Michael Kassen, a portfolio manager for the Boston-based Fidelity Select Fund: “If I held 100 shares as an individual investor, I’d be in exactly the same position I am in now—unbelievably confused.”