On GM, Ed Whitacre & Old Telephony

I recently had the occasion to speak with two former colleagues from my days at ATT some 25 years ago. One was a recent reconnection after a lapse of nearly all those years, while the other was the most recent in a continuing series of lunch meetings.

To provide some context, I left ATT when it was at the height of internal confusion over the divestiture of the operating companies. By 1983, the Reagan Justice Department had accepted the Modified Final Judgement of what was formally known as Computer Inquiry II.

Computer Inquiry I, dating from around 1956, resulted in the Bell System, via its Western Electric unit, being prohibited from entering the data processing business.

The second inquiry, known internally as CI II, involved the determination of the terms under which ATT would be allowed to sell, rather than simply continue leasing, customer premises equipment, known in shorthand as CPE. Practically speaking, this referred to on-premises telephone switching equipment, handsets, modems, etc.

This became important to ATT because, by the late 1970s, vendors such as Rolm and Mitel were causing serious damage by selling CPE, which could be financially preferable for customers to perpetual leases from ATT.

In the event, the Justice Department requested ATT to spin off Western Electric, in order to prevent market foreclosure. It was thought that, since ATT owned nearly all of the single, regulated monopoly telephone network in the US, allowing it to own Western would give it unfair price advantages over other vendors. There would be non-price and price discrimination in favor of Western. Certainly, there had been the former for a very long time.

To make this a shorter post, I'll simply provide some highlights, based upon facts and supplemented my own knowledge, and that of my colleagues, both then, and since.

Rather than accept the DOJ's request, ATT's then-chairman, Charlie Brown, under heavy influence from the Long Lines senior management, chose instead to offer to divest the entire group of 28 operating telephone companies.

Brown and every one of his predecessors had risen from the operating companies. Long Lines, the Bell System unit which provided inter-company long distance lines and services, had never run the entire company. Because of regulatory accounting and various internal tariffs and subsidies, long distance appeared to make a considerable portion of the profits of the regulated ATT. Thus, Long Lines executives were frustrated, and saw CI II as an opportunity to exact some revenge.

As it was explained to me as early as the mid-1980s, Long Lines executives saw the operating companies as hopelessly outdated distribution outlets saddled with twisted pair copper wire connections to each household, capable of a meagre 64KPS of capacity. They lusted after a broadband connection, but knew that replacing all the copper would be financially untenable. And an omnipotent ATT would never be allowed to buy cable companies.

But an ATT shorn of the Telcos might.

The story was, according to several sources, that Brown was heavily influenced to reject DOJ's request, and offer the entire operating company network, instead, in order to gain access to the burgeoning world of data communications traffic and devices. Thus, CI I would be effectively mooted. The Long Lines executives cleverly maneuvered the head of the relatively new Business Marketing units, a former IBM VP, Archie McGill, to pressure Brown from another angle, arguing for relief from CI I, to sell data processing and communications equipment.

The resulting deal Brown struck with Washington had more unintended and unforeseen consequences than anyone ever imagined.

Shortly after the divestiture, I was told, Brown was given an analytic presentation by one of the then most-respected US management consulting firms. Essentially, he was told, he had exchanged a slow-growing business, voice communications, in which ATT had immense share and strength, for access to a much faster-growing (15% pa) data-oriented business in which ATT had almost no presence, and for which its management was totally unfit and unprepared.

The apocryphal story had it that Brown cancelled the rest of his agenda for the day and went golfing to try to digest the shocking news he'd been handed. Sadly, the analysis reportedly given Brown that day proved to be only too accurate.

As things evolved, what had been Western Electric, rechristened Lucent, was, in fact, spun off by 1996. It took a few years, but eventually, ATT learned a rather obvious lesson. Western's primary customers had always been the operating companies.

Guess who no longer liked the idea of buying from a company now contributing to the financial strength of their largest competitor, ATT? Yes, the operating companies.

Since the operating companies had been more managerial fiefdoms than true economically-justified entities, they rapidly re-constituted into a very few regional ATT look-alikes. In time, after numerous mergers, only two emerged- Verizon and Southwestern Bell. Both had, as rapidly as possible, focused on cellular communications and broadband services, putting them into direct competition with their old owner, ATT.

In all of this, however, there loomed large a business and financial fact. Old-style circuit-switched telephony depended upon regulatory tariffs. These were set, as with most utilities, like power companies, based upon assets.

In effect, those portions of your telephone service which were subject to regulation were priced to provide the telephone company a target rate of return on assets. That's why the old Western Electric built gold-plated, everlasting switchgear. That's why the telephone companies capitalized unbelievably large amounts of labor to install said switchgear as asset value.

In 1983, the average line management talent of ATT was basically involved in internal allocation fights, regulatory affairs management, and some small but ineffective amount of competitive activity. The truth was that what ATT and its units did was take a regulatory-provided pot of money and divide it up, using somewhat initially arbitrary, but thereafter consistent rules, among the various operating companies, Long Lines and Western Electric. From that pot of gold, funding for Bell Laboratories was also provided.

My point in relating this history is to provide some background for the world of then-middle and -senior ATT and operating company management. Folks like, well, Ed Whitacre. And some of my former colleagues who hung in at ATT and gradually moved up the ranks amidst the ongoing confusion as the newly-deregulated firm went through amazing changes.

Changes like the huge purchase of McCaw Cellular by Bob Allen, then CEO of ATT. Unfortunately for Bob, they bought high, only to, much later, spin off the unit for a smaller market value.

Then there was the spin off of Lucent, and its subsequent troubles, as it lost captive markets and came face to face with its high cost structures in the face of lethal price competition from European telecoms vendors such as Ericsson.

ATT also tried to create a credit card, the ATT Universal Card. That, too, went nowhere. I had actually interviewed with Allen's strategy executive around the time that the company was busy launching the product. When, with my financial services background, Dick Bodman suggested that I let him send me over to that unit, I politely declined. Having been heavily involved in Chase Manhattan's own credit card business on several occasions, I didn't see ATT as either really understanding the business, nor being able to benefit from it in the long term. Within a year, ATT sold the operation to Citibank.

The final straw came when, after Allen's ouster, Hughes Electronics' CEO Michael Armstrong was recruited at CEO. He immediately set about re-establishing ATT's end-to-end connectivity via a combination of broadband cable and fixed wireless. He bought TCI from John Malone and then looked to Bell Labs for a promised "last mile" solution which would eschew copper wire and opt for a wireless solution.

Suffice to say, Armstrong misunderstood the difference between operations standards for a voice network and the existing cable systems for which he put ATT into heavy debt.

In time, the strategy failed to produce in time and/or at cost to avoid looming debt payments. Armstrong was forced to break the company up. Like Lewis Carroll's famed Cheshire Cat, soon only the ATT name remained, and even that became the property of Southwestern Bell, which bought what remained of the "old" communications firm once known as ATT.

What struck me as I lunched with my old friend earlier this week was one now-glaring fact. The many well-compensated executives who remained with ATT for significant portions of the years after 1983 effectively destroyed their company. For that matter, most of the operating company executives have done little better. There doesn't seem to be a stampede from other businesses or consultancies to recruit senior managers from any of the old ATT components to contribute in other business environments.

The nearby price chart for the remaining Bell System components, sans Lucent and its spinoffs, and the S&P500 Index, displays how dismally the old telephone companies have performed. It's difficult to interpret ATT, since it is likely SBC, the surviving entity. Thus, the true size of the failure of the 'new' ATT is easily displayed. But both of these "survivors" have underperformed the index since the tickers can be tracked back to the early 1983 divestiture.

The only true core competence remaining with the "new" ATT of 1983 was long distance, and that business proved all too vulnerable to MCI's and Sprint's price competition. ATT proved less than adept at sustaining profitable consumer or business telephone products businesses, and it was forced to buy someone else's cellular business, despite having originated the concept in its then-owned Bell Labs.

I marveled at how some of my former colleagues had chosen to stay at ATT, and inevitably climbed upwards in a shrinking pond by dealing with mostly internal issues. Customer satisfaction had never been a major part of ATT's management ethic, and that didn't seem to change after the divestiture.

For that matter, it wasn't really a high point with Verizon or SBC, either.

You seldom hear of a former Bell Operating Company or ATT senior executive succeeding elsewhere. Aside from being steeped in the ways of old-fashioned circuit-switched voice communications technology or internal fighting over tariff-provided revenue streams, they didn't prove to be especially good at managing in truly competitive environments.

Thus my dismay at Ed Whitacre's choice to head GM. If anyone has little practical experience meeting customer needs, it would be a former regional telephone operating company senior executive. The bulk of the efforts of those companies' CEOs for over a decade had been merging with one another to restore the once-realized, then eliminated, through divestiture, genuine economies of operating a nationwide circuit-switched telephone network.

As I reflect on the crazy outcomes of the now over 25 years' old breakup of the old Bell System, nothing in the ensuing activities of any of those who remained engaged in those businesses would seem to have the slightest relevance to resurrecting a failed designer, producer and marketer of big ticket consumer goods.