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Weekly UpdatesVI. MARKET CAPITALIZATION
In 1981, the market capitalization for AT&T was $48 billion ($99.6 billion adjusted for inflation to 2008 dollars). (24) The combined figure for AT&T and GTE was $111 billion adjusted for inflation to 2008 dollars. In 2008, the AT&T capitalization was $225 billion; for Verizon, $103 billion; for Quest, $8 billion; for Agere, $4 billion; and for Lucent-Alcatel, $13.69 billion, of which Lucent accounts for $5.5 billion. Thus, the total AT&T family's market capitalization was $353 billion in 2008, an increase of 222% from 1981. In comparison, the Bell Canada market capitalization was $2.9 billion in 1981 ($6.8 billion adjusted for inflation to 2008 dollars) and Bell Canada's 2008 private-equity buyout paid $51.7 billion for Bell Canada, a 660% increase--three times as high as the increase for the AT&T successor family.
VII. OWNERSHIP
AT&T was the quintessential widow-and-orphan stock. In 1984, it had 3 million stockholders. Insider ownership was trivial then and remains so today. However, institutional ownership of the combined AT&T successor firms doubled in 25 years to 76.2%, while personal ownership declined considerably (Table 1).
Bell Canada went through an even greater transformation. In 2008, it was acquired by institutional investors and taken private. (26) The main investor is the Ontario Teachers' Pension Fund, but several major U.S. equity firms play a significant role. (27) This follows general trends toward institutional ownership. It also reflects the fact that the telecommunications sector has become a more volatile investment. This applies equally across the border.
VIII. TELECOMMUNICATIONS EQUIPMENT
AT&T was also involved in telecommunications hardware manufacturing and remained so after the divestiture. Indeed, the company's vertical integration into manufacturing, and its desire to expand into computers, was one of the major reasons for the divestiture. This, however, proved to be a flawed analysis and execution. On the consumer side, AT&T could not withstand imports from Asia and lost in the marketplace (Graph 3). On the network equipment side, the regulatory battles with the successor regional Bell companies led them to resist buying from their vertically integrated rival. Partly in consequence, AT&T's market share steadily decreased (Graph 4) in most business lines from over 60% to about 40%, and the company was forced to divest itself, this time voluntarily, from the equipment sector. AT&T's market share in midrange computers, workstations, and semiconductors also collapsed in this fast-moving segment (Graphs 5 and 6), and was also spun off. Thus, the hardware side proved to be AT&T's biggest misjudgment, and the expectations by policymakers of unleashing innovation in the telecommunications sector through the divestiture did not materialize. There were, of course, major innovations, but they were part of an overall trend in electronics and took place as much in Finland, Japan, and Korea, without divestiture, as they did in the United States.
In Canada, Northern Telecom (renamed Nortel Networks) zoomed forward after 1984 and became the world's third-largest telecommunications equipment maker. For a while, the company accounted for a third of the total valuation of the Toronto Stock Exchange. However, with the bursting of the Internet bubble, its stock price dropped from C$124 to C$0.47. (28) The company retrenched radically and cut employment from 96,000 to 35,000 jobs. Like AT&T's equipment successor firm Lucent, Nortel was caught in serious accounting misstatements which brought down its CEOs. Unlike Lucent, Nortel survived.
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IX. RESEARCH AND DEVELOPMENT
AT&T operated a celebrated research organization--Bell Labs--that focused on information technology (IT) research. Initially, the number of researchers increased after the divestiture, as the successor companies established their research and development (R&D) operations, but this soon changed. After several rounds of restructuring, Bell Labs, with 2000 researchers, was virtually gone and the regional companies greatly reduced their activities (Graph 7).
In Canada, Bell Canada and Nortel ran a research institution, Bell Northern Research, which later folded into Nortel. It was significantly reduced in size, but was still active in R&D, with over 1,000 researchers.
The research output of private-sector firms dropped with the decline of corporate research or its redirection to commercial development (Graph 8). Even in the commercial sphere, the R&D output declined. From 2000 to 2006, the number of patents granted by the U.S. Patent and Trademark Office to Lucent (AT&T's equipment successor) dropped from 106 per year to 52. It was similar with Nortel, whose patent yield fell from 69 to 30 in the same period. (33)
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X. CONCLUSION
Looking at the empirical evidence, one can find only a few instances of the hoped-for benefits of the AT&T divestiture. Twenty-five years later, market concentration in the United States has returned to high levels, with the difference being a structure of a national duopoly of vertically integrated firms rather than a monopoly. This was not different from Canada. On the local level, competition in the United States is essentially the same as in Canada, and mostly based on cable TV operators, resellers, and VoIP companies. As the Canadian experience shows, a divestiture was unnecessary for any of this competition. Meanwhile, the market value of AT&T and its successors has only risen by one-third of Bell Canada's, and the revenues of all of AT&T's successor companies combined rose only half as much as Bell Canada's, even though their prices rose slightly higher than those in Canada. Moreover, AT&T's R&D sector was decimated, while Canada has preserved some reduced in-house research. Employment in Canada rose, while it remained stagnant in the United States. Business users have benefited from lower prices than in Canada, as did low-use residents. In-between those two rate categories, Canadian rates are more favorable. On the other hand, wireless prices in the United States are considerably more favorable, though this is not based on the divestiture.
The AT&T divestiture created not a competitive market, but an oligopoly at best. The reason was not an ineffective or captured policymaking by lawmakers and legislators, but rather the fundamental economics of telecommunications and networks. These exhibit high fixed costs, low marginal costs, and high network effects. Together, they provide advantages to large providers. For a time, these advantages were offset by the accumulated inefficiencies of monopoly. But in time, and after internal cost-cutting, the large firms' economies of scale reasserted themselves. Thus, the previously lucrative long-distance business turned into a commodity business as prices dropped to the low marginal costs. Long-distance companies hemorrhaged; AT&T was running out of money, WorldCom was convicted of massive investor fraud, and Sprint struggled to remain in business. The regional Bell Operating Companies, meanwhile, consolidated among themselves and absorbed the ailing long-distance carriers as soon as the law permitted. Similarly, the advantages of offering bundles of services--economies of scope--became a major advantage for the established companies. This was not only true for the telecommunications incumbents, but also for the large cable television operators which experienced a similar consolidation.
Did the divestiture of AT&T make a difference? In comparison to Bell Canada, one finds few advantages. AT&T's shareholders and employees did worse than those in Canada, but that could be expected as a squeezing of the monopoly rents. But what about the public? As mentioned, prices rose a bit more than in Canada, research fell, wireless introduction was slower, and the household penetration of broadband was lower by 28%. (36) On the other hand, there is more investment in the United States in the infrastructure, especially in fiber-access lines. According to the OECD, total 2006 investment per capita in the United States is $195 and $145 in Canada. (37) But overall, the United States has lost its leadership role in the past twenty-five years. In 1983, the United States was far ahead in the telecommunications world. Today it remains one of the top 15 in the telecommunications industry--good, but not a leader. For example, when it comes to the number of access paths to the home, the United States is twenty-fifth in an OECD ranking. This is the price of a policy preference for process over progress that imposed huge direct costs on all participants and even greater costs in terms of delay.
Although this Article reaches a skeptical conclusion on the success of the AT&T divestiture, the author supports the concept of a divestiture, just not the one that was undertaken. AT&T had become too dominant in a vital sector of the country. One company controlled one-third of the entire media, information, and communications sector of the world's largest economy. This would suggest that a better solution would have been to simply reduce the size of the giant, perhaps by cutting it up into maybe 4 large regional firms--each vertically integrated and free to enter all lines of business. Competition would have been opened through regulation and antitrust proceedings. No structural divestiture was necessary. Thus, perhaps the reason for the AT&T divestiture's failure was that it tried too hard to be perfect and conceptual, and to follow legal and economic theories that did not take into account either the extraordinary dynamism of the sector, or the extraordinary resiliency of the legal teams sent to battle by competitors to block each other. If there is a tragedy in AT&T's demise, it is that it died for nothing.
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