AT&T: 20 Years of Change

AT&T20 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.

The Early Days (1876-1894):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.

The Early Days (1876-1894):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 .

The Early Days (1876-1894):Threats

Threat of Potential Substitutes: Threat of Substitute Products: The only potential substitute was the

Telegraph, provided by Western Union.

The Early Days (1876-1894):Strengths

American Bell was the only company that have the technology and allowed legally to use it.

The product was extremely differentiated.

The Early Days (1876-1894):Weaknesses

The patent would expire in 1894.

The telephone network still needed lots of investment in order to increase coverage.

The Early Days (1876-1894):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.

The Early Days (1876-1894):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.

The Early Days (1894-1904):

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.

The Early Days (1894-1904):

Stromberg-Carlson (1894)

Kellogg SwitchBoard and Supply Company (1897)

Automatic Electric Company (1901)

Brown Telephone Company (1899) Sprint Nextel

The Early Days (1894-1904):Opportunities

Economic Factors: The market was still rapidly growing.

The long distance market was still untouched.

Technological Factors: Networks were not interconnected, meaning that subscribers to

different telephone companies could not call each other.

The Early Days (1894-1904):Threats

Legal Factors: The end of the patent protection.

The company’s growth had been capped by the laws of Capitalization of Massachusetts.

Market Analysis: 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.

The Early Days (1894-1904):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.

The Early Days (1894-1904):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 and Long Distance Voice Communications.

The Early Days (1894-1904):Strategic Implementation

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.

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One System, One Policy,

Universal Service.

Theodore Vail’s Vision (1907):

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.

Theodore Vail’s Vision (1907):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.

Theodore Vail’s Vision (1907):Strategic Implementation

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.

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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 Duels (1934-1982):

The FCC Duels (1934-1982):

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.

The FCC Duels (1934-1982):Opportunities

Economic Factors: Demand was still high.

The penetration of telephone service into American households increased from 50 percent in 1945 to 90 percent in 1969.

Technological Factors: The transition to electronic components allowed more powerful and

less expensive customer and network equipment.

Rapid Development kept the market growing.

The FCC Duels (1934-1982):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.

The FCC Duels (1934-1982):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.

The FCC Duels (1934-1982):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.

The FCC Duels (1934-1982):Strategic Implementation

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.

The FCC Duels (1934-1982):

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.

The Divestiture (1984):

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.

The Divestiture (1984):Business Definition

Markets: Households, Business, and Government.

Functions served: Communication among distant entities.

Technologies Utilized: Improved Telephony and Automatic Switching.

Products/Services: Long Distance Voice Communications.

The Divestiture (1984):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.

The Divestiture (1984):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.

The Divestiture (1984):Threats

Market Analysis: 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).

The Divestiture (1984):Strengths

The company still owned great technology, provided by the famous Bell Labs.

The company could still rely on personnel strength.

The Divestiture (1984):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.

The Divestiture (1984):Strategic Implementation

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.

The Divestiture (1984):Strategic Implementation

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.

The Divestiture (1984):Strategic Implementation

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.

The Telecommunications Act (1996):Opportunities The Wireless Communications industry, as well as the computer

industry, had been fiercely growing and becoming global.

The Telecommunications Act (1996):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.

The Telecommunications Act (1996):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.

The Telecommunications Act (1996):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.

The Telecommunications Act (1996):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.

The Telecommunications Act (1996):Strategic Implementation 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.

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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):

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.

Michael Armstrong (1997-2000):Threats

Market Analysis: 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.

Michael Armstrong (1997-2000):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.

Michael Armstrong (1997-2000):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.

Michael Armstrong (1997-2000):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.

Michael Armstrong (1997-2000):Business Definition

Markets: Households, Business, and Government.

Functions served: Voice, Data, and Video Communications.

Technologies Utilized: VOIP, Video Over IP, Internet Technologies.

Products/Services: Internet Services, Voice Services, Media Services.

Michael Armstrong (1997-2000):Strategic Implementation

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.

Michael Armstrong (1997-2000):Strategic Implementation

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.

Michael Armstrong (1997-2000):Strategic Implementation

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.

Michael Armstrong (1997-2000):Strategic Implementation

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.

Michael Armstrong (1997-2000):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.

Michael Armstrong (1997-2000):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)

Michael Armstrong (1997-2000):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.

Michael Armstrong (1997-2000):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.

Michael Armstrong (1997-2000):Failing Strategy

Questions