1. STRATEGIC MANAGEMENT OF TECHNOLOGY
AT&T: TWENTY YEARS OF CHANGE
FINAL PRESENTATION ANALYSIS REPORT
MAY 2012
AL-MOTAZ BELLAH AL-AGAMAWI1
motaz.agamawi@nileu.edu.eg
Nile University, 6th of October City, Cairo, Egypt
Abstract
In this paper we are conducting a analysis for the AT&T case study from the strategic
management of technology perspective.
Based on our case classification, we can classify the AT&T as Competitive Dynamics, Corporate
Level Issues, Merger & Acquisition, Regulatory issues and Financials. In our analysis we will
focus on the Merger & Acquisition, regulatory, general organization aspect, and knowledge and
learning.
Keywords: Strategy Analysis, Merger and Acquisition, Competitive Dynamics, AT&T, Strategy
Directions, Environment Analysis, SWOT Analysis, Diversification, Horizontal Integration
Introduction
1875 1984 2000
1894 1997
In this report we are going to cover the main important milestones within the 135 years of AT&T
operation. We have divided the 135 years of AT&T operation to five main milestones. For each
of those five milestones we are going to conduct an external environment analysis using porter
five forces analysis model, technology analysis, regulator affect analysis, SWOT analysis,
strategy direction analysis and the applied implementation controls. Each of those milestones can
1
Al-Motaz Bellah Al-Agamawi is the Vice President for Business Development in ISIS, and a M.Sc. Candidate in
Management of Technology in Nile University, Cairo, Egypt.
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2. be considered as a major inflection point within AT&T strategy and overall businesses. By
conducting the analysis for each of the milestones separately we can the effect of the different
elements of the external and internal environment on the top management decisions and the
implication affecting the strategy.
Summary
AT&T started in 1875 when Alexander Graham Bell received funding from two financial
bankers. In 1876, Graham succeeded in his invention of the telephone and patent it. In the next
year the first telephone exchange opened in New Haven under the license from Bell. Then the
company started the implementation of its monopoly strategy. Within three years the telephone
exchanges with license from the company were set up in most major cities and towns in the
United States. It acquired majority interest in the western Electric Company which became the
firm’s manufacturing unit, in addition the American Bell acquired most of its licensee in the
United States (part of its monopoly strategy) which resulted that the company became known as
Ma Bell or Bell system. With new areas getting wired and with the increasing competition, the
number of telephones increased from 285,000 to 3,317,000 during ten years from 1894 to 1904.
AT&T had to agree in 1913 in an agreement known as the Kingsbury commitment, where AT&T
has agreed to connect competitors to its long distance network and sell its shares in Western
union stock (AT&T manufacturing arm). In 1974, the US government filed an antitrust lawsuit
against AT&T believing that a monopoly is still valid for local exchanges but no longer for long
distance, manufacturing and R&D. The lawsuit was settled in 1982 and AT&T agreed to divest
itself of the wholly owned Bell operating companies that provided the local exchange service
(creating the seven baby bells) and the government in return agreed to remove the 1956
constraints. AT&T divestiture took place in 1984, where the bell system was replaced by a new
AT&T and seven operating companies known as the RBOCs (Regional Bell Operating
companies/Baby bells), which means that the last mile would be controlled by the baby bells.
As 1990s progresses telecom and manufacturing business became obstacles to each other as both
business were becoming complex and more global, in addition to the problems at NCR computer
acted as a catalyst for the second divestiture dividing AT&T into three companies (Lucent
technologies(systems and equipment company) , NCR (computer company) , communication
services company (AT&T). In 1994, AT&T acquired the US leader in the wireless business
McCaw cellular communication for 115$ billion, AT&T deal made it one of the fast leading
forces in the growing wireless telecommunications industry and gave the company a direct
access to consumers.
The spinoff of lucent technologies included its telecom network, switching and transmission
equipment business as well as the famous bell labs, this spin off was necessary because of the
absence of synergies across AT&T business and because of the emergence of new competitors.
The spinoff of NCR was more difficult to digest because it showed that the strategy of the
company has failed, NCR management was left to operate for two years but as the losses
mounted AT&T stepped in causing the performance to decrease more, also the corporate culture
clash resulted in confusion and loss of direction, as NCR lost 5.9 Billion $ forcing AT&T to
inject around 2.8 billion$, hence AT&T lost 10 billion in NCR deal in general.
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3. Establishment Phase Analysis (1875 to 1893)
• No Competition Exist • AT&T was incorporated in 1885
• Monopoly as a wholly owned subsidiary of
• Most telephone exchanges are Bell with objective to build and
under license from Bell operate long distance networks.
Telephone.
Buyer Power,
Low Bargaining
Power
• High Barrier to entry during the • Bell acquire Western Electric
patent life time. company as the first
• Most of the licenses across US manufacturing firm
are granted to Bell Telephoney
It is clear than in this milestone from 1875 to 1893 AT&T was enjoying both the patent
protection and the leadership advantage as the first mover within the telephone industry. Almost
for a period of 18 years AT&T it is clear that AT&T was operating and enjoying a monopoly
over the industry and especially in the United States of America. This is clearly resulted in the
above porter five forces analysis diagram for this phase, which can be summarized as follows;
Competition: very low competition bargaining power or in other words almost no
competition within the US markets. A Monopoly characteristics was existing and this can
be supported by the fact that most of the exchange license within the US was hold by Bell
Telephone company “AT&T”.
New Entrance: High barrier to entry due to the patent and the control of licenses adapted
by Bell Telephone “AT&T” allover different US cities.
Supplier Power: very low supplier bargaining power or almost no existence for suppliers
power. Even Bell Telephone “AT&T” acquired Western Electric company as the first
manufacturing firm.
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4. Substitute: At this period, there was no real of a substitute for Bell Telephone services but
also Bell Telephone company was investing in R&D for long distance through
establishing a subsidiary “AT&T” with an objective to operate long distance calls.
Buyer: low bargaining power of buyers due to the minimum available competitors.
Such analysis indicates that Bell Telephone “AT&T” was controlling the different external
and internal environment elements for a period of 18 years from its establishment.
Patent Expiry Phase Analysis (1894 to 1984)
Just after the expiry of the second patent in 1893 the market dynamics have been changed.
AT&T lost the patent protection luxury and competition starts to appear. Within a period of ten
years from 1894 to 1904 more than 6000 telephone operator companies have been established.
This phase is the longest phase within our analysis it is about 90 years of AT&T operation but
we claim that the nature of those 90 years were very close and that the most important inflection
point was in 1984.
• In 1904, 6000 new telephone • No interconnection between
company we established. different companies
• License to operate telephones
have been opened to all
companies
Buyer Power
Increased from
285K to
3,317,000
• Patent expired in 1894,
eliminating the barrier of entry.
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5. At this phase it was clear that the external environment have changed. Competition appears with
a moderate bargaining power, new entrance have become easier and barrier to entry have started
to be eliminated due to the patent expiry and availability of exchange license to other
competitors and also buyer bargaining power have became higher due to the market expansion
which is clear in the customer base growth from almost 300K to 3M.
In 1907, the company CEO had announced a new strategy “Telephone and its technology would
operate most efficiently as a monopoly providing universal services”. In addition to this new
strategy and FCC- Federal Communication Commission showed interest in providing
competitors the ability to communicate between different network operators. Based on this an
agreement known as Kingsbury commitment have took place. In which AT&T provide
competitors connection to its network.
First Regulatory act have took place within this phase. Through a lawsuit filed in 1949 and the
Settlement reached in 1956 in which AT&T agreed to restrict its activities to the regulated
business of the national telephone system and government work. The restriction did not influence
the rapid development of systems and its steady progress towards its global universal services.
Followed by secondary regulatory acts in which FCC signaled its interest in more competition.
Resulted in allowing competitors to use some of Bell Labs technologies and therefore
competition established in the general long distance services.
As for the technology environment, AT&T was taking the lead and this is clear from the Bell
Telephone laboratories technology production within this period including: Microwave Relay
System which provide alternative to copper wires for long distance, in late 1949. First
Communication, Satellite in 1962 which provide additional alternative for international
communication. Transition to electronic components which allowed more powerful and less
expensive customer and network equipment.
The monopoly behavior and the regulator influence have affected the corporate culture.
Management sow profits as a way to support and extend monopoly. They followed a cost control
strategy. Customers taken for granted and this is clear when it comes to sales team management,
Sales representative, received straight salaries and were warned not to oversell. All this resulted
in managers who were averse to risk.
Baby Bells Phase Analysis (1984 to 1997)
Federal Communication Commission- FCC have filed in 1974 an Anti-trust lawsuit based on the
Monopoly for the local exchanges by AT&T. The lawsuit were settled in 1982 by which AT&T
agreed to divest itself from the wholly owned Bell Operating Companies by creating Baby Bells.
The divest took place in 1984. Based on this divest, AT&T retained $34 Billion of the $149
Billion in assets and 373,000 of the 1,009,000 employees. In the following diagram we are
provide a SWOT analysis for AT&T just after the divest occurs:
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6. Based on the divest the company strategy have been changed following an acquisition strategy to
reach a horizontal diversified product and services portfolio. The first acquisition wave started in
the early 90’s through: 1991- Hostile Acquisition of the Computer maker NCR. NCR deal was
for $7.4 Billion. The deal objectives was targeting the convergence between communication and
computers. In 1992- Acquisition of the US wireless business, McCaw. McCaw deal was for
$11.5 Billion. The deal position AT&T as a leading force in the fast growing wireless
communication and gave the company direct access to consumer for the first time in decade.
A few years after the early 90’s wave of acquisitions, AT&T gone through the second divesture
but this time voluntarily. AT&T have been divided into 3 Companies; System and Equipment
company, Named Lucent Technologies. Computer Company, named NCR and Communication
and Services Company, named AT&T. The rationale behind the second divest was as follows:
NCR lost from 1993 to 1996, $5.9 billion, in additional to forcing AT&T to inject $2.8 billion to
cover losses. The spin-off valued NCR at $3.96 Billion which means that AT&T had lost $10
Billion. Lucent Technologies have been established due to the change in market dynamics in the
wireless communication sector. Attachment of Lucent to AT&T was affecting Lucent
performance as competitors was seeing that by placing orders to AT&T, AT&T is having insight
into competitors plans and could use the profits from equipment contracts against them. So the
new company Lucent Technologies had of $20 Billion and 125,000 Employees. Also Lucent
Technologies has a higher market potential after separating from AT&T.
Armstrong Phase Analysis (1997 to 2000)
Armstrong the newly appointed CEO in 1997, join AT&T with a new vision, “Transforming
AT&T from a long distance company to an “any distance” company. From a company that
handles mostly voice call to a company that connect you to information in any form that is
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7. useful to you– voice, data and video. From a primarily domestic company to a truly global
company”.
New strategy have been formulated to meet the CEO vision including; Implementing a vision of
a Global Company through integrating cables, wireless and long distance. Implement refocused
strategy through, cost-cutting measure to make AT&T the low-cost provider, cutting the
workforce in its long distance business by 15000 to 18000 over two years and initiating series of
Joint ventures and acquisition to broaden the companies scope to areas including data
networking, digital voice encryption, broadband cable and video telephone.
Based on this vision and strategy the second wave of acquisitions have took place. In 1998-
Acquisition of Teleport Communication Group for $11.5 Billion, such deal was attractive
because it provide network that is an alternative to regional bells., in which AT&T will save tens
of millions of dollars. In 1999- Acquisition of Telecommunication Inc. the second largest cable
company in the US for $55 Billion. In 2000- Acquisition of MediaOne the large cable company
for $56 Billion.
After MediaOne Acquisition, FCC gave AT&T 3 choices; either to divest 25% stake of
MediaOne in Time Warner or sell Liberty Media Group, a minority stake in Rainbow Media
Holding and MediaOne’s Programming Networks or sell 9.7 million cable subscribers, which
was more than half of the company’s current subscribers. The three options was by fare affecting
the Armstrong strategy and diluting the value of the acquisitions.
The Armstrong strategy can be assessed from different angles including; Investment of $115
Billion in cable systems was not successful. By the year 2001 AT&T was only able to upgrade
65% of the cable lines, which matched only 1/5 of AT&T 60 million customer base. AT&T was
spending $1200 to add a phone subscriber although new technologies lowered the cost to $700 in
2001. AT&T did not succeed in striking a deal with other cable providers to lease their lines,
which was necessary to broaden AT&T cable telephone customer base. When it comes to AT&T
core long Distance Business it was another failure. Long Distance business, was shrinking and
many analysts expects the price to drop nearly to zero. Long distance business made up 80% of
the revenues in 1997 was projected to decrease to 35% by 2002. The Company had not
succeeded with the competition with Baby Bell in the local phone service competition. When it
comes to the acquisitions we can clearly find another big failure. Acquisition of TCI and Media
one, left the company with $64 Billion in debt, making AT&T as the most indebted companies.
For WorldNet it was another failure. Internet Service provider WorldNet in few month attract 1
Million Customer and it was growing faster than AOL, when sales began to slow AT&T chose
not to make investment. By 2000 WorldNet subscriber base was 2 Million compared to 21
million for AOL. All this lead to a huge drop of AT&T performance, the company revenue
totaling $16.97 Billion, with an increase of 3.7% only. In the 3rd Quarter of the year 2000,
earning of 38 cents per share were down 24% compared to same period a year ago.
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8. Corrective Actions Phase Analysis (Year 2000)
In the year 2000, only two areas of Growth were expected including; AT&T wireless which
expected to Grow by 30% in 2000 and AT&T high speed services which was sold under the
brand Excite@Home, and it was gaining customers. As a result the third divesture of AT&T took
place resulting in splitting the company into four parts including AT&T Broadband, AT&T
Wireless, AT&T Business Services and AT&T Consumer Services. Two main reasons were
behind the strategic decision of splitting the company. The First was, individual companies will
have more flexibility in raising money for repaying debt. The second, boost company’s stock
price by separating various divisions into more easily understood stand-alone businesses.
Summary of AT&T Merger and Acquisition
Over ten years, AT&T had wasted about $50 billion and destroyed even more in shareholder
value, all in the hope of creating shareholder value through growth. The first AT&T attempt
arose from a widely shared view that computer systems and telephone networks were going to
converge. In 1991, AT&T acquires NCR, at the time the world’s fifth-largest computer maker,
for $7.4 billion. AT&T lost another $2 billion trying to make the acquisition work. AT&T finally
abandoned this growth vision in 1996, selling NCR for $3.4 billion. In 1994, the company
bought McCaw Cellular, at the time the largest national wireless carrier in the United States, for
$11.6 billion, eventually spending $15 billion in total on its own wireless business. When Wall
Street analysts subsequently complained that they were unable to properly value the combined
higher-growth wireless business within the lower-growth wireline company, AT&T decided to
create a separately traded stock for the wireless business in 2000. This valued the business at
$10.6 billion, about two-thirds of the investment AT&T had made in the venture. In 1998, it
embarked upon a strategy to enter and reinvent the local telephony business with broadband
technology. Acquiring TCI and MediaOne for a combined price of $112 billion made AT&T
Broadband the largest cable operator in the United States. Then, more quickly than anyone could
have foreseen, the difficulties in implementation and integration proved insurmountable. In 2000,
AT&T agreed to sell its cable assets to Comcast for $72 billion.
M&A Acquisition Conclusion Summary
We could cite many cases of companies’ similar attempts to create new-growth platforms after
the core business had matured. They follow an all-too-similar pattern. When the core business
approaches maturity and investors demand new growth, executives develop seemingly sensible
strategies to generate it (Raynor, 2003). Merger and acquisition has many benefits but the most
important is wise evaluation for the decision and the clear strategy and motive behind such
attempt. Going through the process just and only for the sake of growth cause failure in many
cases, other parameters as increasing competency, fostering innovation capabilities, capitalizing
on market share and increasing efficiency and decreasing costs must be included among other to
increase the success probability of mergers and acquisitions.
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