Sorry, Wrong Numbers

Two former industry executives peer through the wreckage of the telecom implosion

Reviewed By Steven Cherry

Business schools will spend the next 50 years dissecting the telecommunications and dot-com boom and bust of the decade from 1992 to 2001. But two recent books by industry insiders go a long way toward explaining what will surely be seen as one of the most complex and interesting eras in industrial history.

Author Dick Martin, a former senior executive at AT&T, probably didn't plan to write an early obituary of the company he served for 32 years. Yet Tough Calls: AT&T and the Hard Lessons Learned From the Telecom Wars, published a month before the successful US $16 billion takeover by SBC Communications Inc., in San Antonio, of what remained of the ailing giant, can fairly be called a corporate eulogy, and an entertaining and engaging one at that.

tough calls book cover
TOUGH CALLS: AT&T AND THE HARD LESSONS LEARNED FROM THE TELECOM WARS
By Dick Martin; The American Management Association, New York; 2005, 294 pp., US $25; ISBN 0-8144-7243-5

In Martin's view, AT&T was brought down by the fraud rampant in the telecommunications industry, especially that at WorldCom Inc., Clinton, Mass. The illusion of high profits and low prices at its leading competitor forced AT&T to lower its own prices to such an extent that AT&T couldn't service its large debt load. Had rational prices prevailed, he says, the company might have regained much of its pre-1984-breakup glory.

Telling the story of what happened outside AT&T's halls falls to a smaller but more ambitious book, The Great Telecom Meltdown, by Fred R. Goldstein, an independent consultant and a senior member of the IEEE. Goldstein saw much of the boom years up close at the Network Consulting Practice at BBN Technologies, in Cambridge, Mass.

Meltdown makes no claim of presenting an overall thesis. It's not hard, though, to find one in its tightly packed pages. It goes something like this: with the 1984 breakup of AT&T into the independent regional Bell operating companies (RBOCs) and the U.S. Telecommunications Act of 1996—which was intended to create more competition within the industry—the U.S. Congress, the federal judiciary, and the Federal Communications Commission (FCC) acted to set the regional Bell operating companies against AT&T and a band of nascent competitors. These assorted governmental overseers strove to even the odds to maximize competition, which, they thought, would drive down the price of telephony. But the deck was stacked; it turned out that the regional Bells, with their local monopolies largely intact, held most of the trump cards.

Moreover, the competitive environment that arose was structured with local and long-distance phone calls in mind. Unfortunately, plain old voice telephony was soon to be a declining business. By 1996 or 1997, half of all the traffic traversing the vast telecommunications infrastructure of the United States was data; today, most of it is.

Ironically, Martin asserts in Tough Calls that AT&T foresaw the end of traditional telephony in 1996. The Telecommunications Act that year, which the company had reluctantly lobbied for, allowed AT&T and others to enter the local telephony business. In exchange, the local Bell operating companies would be allowed to enter the long-distance market.

Company executives knew that "the Telecom Act was a death sentence for stand-alone long distance revenue, which accounted for 80 percent of AT&T's revenue and 100 percent of its profits," Martin writes. "AT&T was living on borrowed time."

the great telecom meltdown book cover
THE GREAT TELECOM MELTDOWN
By Fred R. Goldstein; Artech House Inc., Norwood, Mass.; 2005, 209 pp., $79; ISBN 1-5805-3939-4

The company promptly sold off its equipment division, creating Lucent Technologies, because in the new marketplace, few local telcos would buy from a company that had suddenly become their competitor. When C. Michael Armstrong was brought in as CEO in 1997, the pace of AT&T's transformation quickened. He rebuilt the company into a broad telecommunications giant, with the country's largest collection of cable television systems, an enormous number of corporate and residential long-distance customers, and a growing cellular business. It was a risky strategy—largely because of the need to service a monstrous $65 billion debt created by the acquisitions—but it was one that had a good chance of succeeding.

Armstrong's plan, Martin argues, never got a fair shot. "In a desperate effort to maintain growth rates...MCI WorldCom had engaged in the biggest accounting fraud in U.S. history—an $11 billion sleight of hand that allowed it to price below its real costs over a three-and-a-half-year period....[T]he race was fundamentally rigged and took billions of dollars of cash flow out of the industry."

Martin calculates that without WorldCom's fraud and artificially low pricing, AT&T would have earned an additional $1.7 billion a year in bottom-line profits and would have "been able to service its debt while divesting itself of noncore assets." Instead, it was forced to sell off AT&T Broadband, the cable and high-speed Internet division that represented much of the company's future.

"AT&T in the Armstrong years did not represent a failure of strategy," says Martin. "It did not represent a failure of execution. The company was mugged."

In Meltdown, Goldstein joins Martin in pointing to the 1996 Telecommunications Act as the wellspring of both boom and bust. By purporting to create a level playing field for competitors, the act, in conjunction with the fast-growing Internet, loosed a flood of capital that quickly washed through the industry, says Goldstein. But that very flood of money created excess capacity that would contribute to the industry's free fall during the bust at the dawn of the 21st century, a situation Goldstein aptly calls "capital poisoning." Ultimately, the Telecom Act's failure to actually level the playing field brought down nearly everyone—from long-distance companies to equipment manufacturers—except the regional Bell operating companies.

Goldstein says that to understand the Bells' ultimate success, one must consider their unparalleled ability to convince the FCC and state regulators to interpret the Telecom Act and other regulations in their favor. In one telling example, Goldstein describes the relationship between competitive local exchange carriers (CLECs)—such as AT&T and MCI—which were to enter the local telephone business, and the incumbent local exchange carriers (ILECs) already in it, such as Pacific Bell (now part of SBC), and Bell Atlantic (now Verizon).

For decades, the Bells and the many small ILECs that dotted the U.S. landscape had simply completed one another's calls without either paying the other. After the Telecom Act, the CLECs, new to local service, wanted to be treated in the same way. But, Goldstein explains, the incumbents, such as Bell Atlantic, lobbied for and won new rules that required a full accounting of and compensation for call completion, since they completed more calls than they initiated. In response, the CLECs sought business from Internet service providers, which needed local numbers around the country for their dial-up customers to call for free or at a small fixed rate.

This extra business changed the direction of the flow of money through the reciprocal compensation payment system the ILECs had fought for. Suddenly, the CLECs were completing more calls than they were initiating—and getting paid more by the ILECs than the ILECs were receiving from the CLECs. So the Bells lobbied the FCC—successfully—for new rules that would remove calls bound for Internet service providers from these reciprocal compensation rules. "Thus by several means, in several steps, the CLECs' single most profitable business was shut down because the ILECs had the rules changed when they realized who was winning," writes Goldstein.

It was a happy accident that this reviewer read these two books in the same month, for they complement one another nicely. Readers partial to the recently neglected genre of business biography, so popular in the Barbarians at the Gate era of the early 1990s, will find Tough Calls a quick and easy front-seat look at one of the 20th century's saddest, and most interesting, corporate sagas.

Martin's AT&T insider tell-all is amply fleshed out by Meltdown's geeky attention to detail, though the reader is advised to make liberal use of its glossary, index, and chapter endnotes to sort out the alphabet soup of CLECs, ILECs, RBOCs, PBXs, Centrexes, DSLs, and so forth. Amateur and professional historians of the telecommunications industry will find Goldstein's book an invaluable guide for years to come.

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