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It's Ma Bell Against Her Grown-up Babies : Communications: Acquiring McCaw and getting into the cellular business is loaded with downside potential for AT&T.

August 29, 1993|A. MICHAEL NOLL | A. Michael Noll is dean of USC's Annenberg School for Communication. and

The AT&T of the past was the conservative owner of the old Bell System--affectionately known as "Ma Bell." Under Robert Allen's leadership, today's AT&T has become a fast-dealing communications conglomerate with new surprises each year. Wall Street clearly places high value on Allen's changes; this is reflected in the stellar performance of AT&T's stock. But with surprises and predatory practices come the risks and dangers of survival in the competitive jungle.

In an attempt to salvage its own losing computer business, AT&T acquired NCR a few years ago for $6 billion. Although the acquisition stemmed past losses from the sales of AT&T computers, NCR is not yet contributing its fair share to AT&T's profits, and my estimates are that sales of NCR products and systems lost as much as $300 million last year.

After making many small acquisitions and investments in high-technology firms involved in such areas as interactive multimedia, AT&T is again on the prowl big-time. Now, AT&T is about to acquire McCaw Cellular Communications for nearly $13 billion.

The McCaw deal will put AT&T back in the local telephone service business, although over the radio waves of cellular technology rather than over copper wire. Since cellular service is already being provided by the Bell operating companies, AT&T will face its former children in direct competition for the first time.

When the old Bell system broke up, the Bell operating companies were limited to local service, while AT&T retained long-distance service and manufacturing. For the past few years, the Bell companies have been clamoring to be allowed into manufacturing and long-distance, but their pleas have not been successful, mostly because of their local monopoly.

The AT&T acquisition of McCaw, however, might lead to a revisiting of the consent decree that broke up the old Bell system and ultimately to the Bell companies being allowed to compete with AT&T in the lucrative long-distance business.

At the time of divestiture 10 years ago, AT&T was given about $8.5 billion worth of long-distance traffic that was being carried by the Bell companies within their service jurisdictions. This Bell-company traffic became a large proportion of the total long-distance traffic of $14.3 billion that AT&T carried in 1984. Although conducted under the eye of the courts, this "grab" amounted to the deal (or theft) of the century and created a good part of the profits that AT&T is using to finance the acquisitions of NCR and McCaw.

If I were a Bell company, I would be furious that a good proportion of my past revenues and profits were grabbed by AT&T and are now about to be used to finance competition against me, while I was not allowed to compete with AT&T in the long-distance business, even within my own local regulatory jurisdiction. I would certainly retaliate against AT&T by purchasing my central-office switching machines from AT&T's competitors. This potential loss of business is only one downside risk to AT&T.

The McCaw acquisition strongly exposes AT&T to the risks of survival in the competitive jungle, particularly if the Bell companies are allowed back into long-distance service, even within their jurisdictions. If the local companies win back half of this long-distance business, AT&T will lose billions and might well discover that the McCaw acquisition was the mistake of the century.

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