As buzzards appear to roost in the skies above any natural disaster, American Telephone & Telegraph Co. seems to have spawned a growing cottage industry of cirtics or potential competitors predicting doom for the giant corporation.
Already, there are lots of tidbits for these people to chew on.Ma Bell, from at least her own point of view, has found the going rough in recent times.
There was a doubled-barreled dose of headaches for AT&T last week from two portions of its nation wide domain as the country's principal telephone service monopoly.
In Texas,, the Bell System's public image suffered new damage when a jury in San Antonio awarded $3 million in libel damages, based on allegations that South western Bell ruined the reputations of two men in the wake of a company investigation. There were charges that the AT&T subsidiary was engaged in influence-buying and in providing local regulators with incorrect data.
Not only will AT&T suffer monetary loss if the damagees are upheld in response to a Southwestern Bell appeal, but AT&T also has had legal expenses associated with the case, and the allegations helped create an atmosphere in the state that established, for the first time, a public utilities commission that has slashed Bell rate proposals.
California's long-established and respected utilities commission, meanwhile, ordered Pacific Telephone & Telegraph Co. (ownedd 90 per cent by AT&T) to refund more than $200 million to its customers and reduce rates by more than $60 million a year. The agency's decision was related to tax benefits that public utilities have experienced on investments in new plant and equipment as well as accelerated depreciation of such equipment.
As an AT&T spokesman noted last week, the California decision is in apparent conflict with the views of the U.S. Internal Revenue Service, which has said such tax benefits were designed to spur plant expansion and modernization. But the majority of the state agency said Pacific Telephone customers should be the ones to benefit from the tax breaks in the form of lower monthly rates.
On top of these current developments, AT&T's a year-long lobbying attempt in Congress to win support for legislation that would insulate established telephone companies from some forms of new competition appears to have been unsuccessful.
The so-called "Bell bill," or Consumer Communications Reform Act, is dormant in the Senate. In the House, much to the chagrin of some communications [WORDS ILLEGIBLE] AT&T's effort has been broadened to include a [WORDS ILLEGIBLE] entire Communications Act of 1934. Under that act [WORD ILLEGIBLE] Federal Communications Commission regulates not only interstate telephone service but also the broadcasting industry.
And AT&T remains locked in an apparently long [WORD ILLEGIBLE] battle with the federal government, which three years ago [WORD ILLEGIBLE] brought a civil action naming AT&T, the 23 Bell System operating subsidiaries (including Chesapeake & Potomac Telephone, based in Washington), manufacturing affiliate Western Electric and research arm Bell Telephone Laboratories. The Justice Department wants this combination broken up; AT&T sees it as a threat of "dismemberment" that would ruin national communications services - generally regarded as the world's best, even by many Bell System critics.
AT&T also is involved in more than two dozen private antitrust actions, some involving large American companies.
All the while, AT&T has been rolling up profits at an unprecedented rate of more than $1 billion a quarter for a full year, an achievement not matched in the history of private enterprise.
On the surface, one might expect such a record to be applauded. In fact, it is a minefield. Consumers and regulatory authorities have a hard time swallowing higher monthly telephone bills when they read newspaper reports about such profitability. Moreover, in terms of AT&T's total system, the profits are not abnormally high.
Although ranked as the nation's largest utility, for example, it ranks 26th in terms of profits as a percentage of equity investment in the company (10.5 per cent in 1976). In terms of growth in profits over the past decade, AT&T is 14th (5.07 per cent a year). Total return to investors last year (stock price appreciation plus dividends) was 19th, according to Fortune magazine.
Despite the quarterly results in 1977 and the record performance last year - profits of $3.8 billion ($6.05 a share) on revenues of $33 billion ($6.05 a share) on revenues of $33 billion - AT&T's stock price has not moved much this year. After hitting an 11-year high at the end of 1976, Telephone has been trading in a narrow range of $60-$66.
In this environment, a $750 paper-back book about AT&T's many problems is beginning to attract some attention.
Published earlier this year by two financial analysts in Millburn, N.J., Victor Schnee and Walter J. Gorkiewicz, The Future of AT&T is a scathing, 454-page denunciation of the Bell System.
In addition, the Schnee-Gorkiewicz team and their New Jersey company, Probe Research, Inc., have started a new quarterly journal to keep up with Ma Bell's difficulties. The periodical is being sold for $340 a year.
Gorkiewicz and last week that about 1,000 copies of the expensive paper-back have been sold to investment houses, institutional investors, government agencies, federal officials and others interested in the future of what is currently the nation's largest corporation in terms of assets ($87 billion), employees (927,000) and stockholders (more than 3.5 million).
In brief, the message in the Schnee Gorkiewicz publications is that AT&T is in far worse financial shape than investors learn from the company's public pronouncements or the assessments of traditional Wall Street financial analysts. "There has been an incredible lack of knowledge" about AT&T at investment firms, in Congress, at the FCC and within the company itself, Gorkiewicz stated.
"Despite the transcendant importance of AT&T to the telecommunications industry and the economy, we found serious voids in the information available on the company," the authors stated in an introduction to their book, which they said was prepared without financial support from any party with an interest in the telecommunications industry.
After what Schnee and Gorkiewicz said was more than three years of research, a great deal of which was spent digesting massive documents already on the public record, they reached the following conclusions:
Risks facing AT&T are increasing.
A long-term trend of higher risk probably will accelerate because of factors in the overall environment for telecommunications companies.
Financial risks for AT&T today exceed the risks generally perceived by even "very sophisticated investors."
In detailing their assessment, Schnee and Gorkiewicz said technology actually is a threat to AT&T because claims about Bell System accomplishments have been overstated. They look to the future and see a long era of slow growth in basic telephone business and alleged overstatements of data communication revenue growth by AT&T. They raise questions about accounting policies, including extended depreciation for equipment that could become technologically obsolete.
Perhaps the greatest risk is the emergence of competition, they argue. In the wake of FCC decisions starting in 1968, competition both for telephone equipment and service has been increasing.
While still miniscule in terms of its impact on AT&T, the new wave of competition has "emeshed the company in a number of long term disputes" and brought into active dispute the "question of whether or not the Bell System in fact exhibits economies of scale which justify its monopolistic position," Schnee and Gorkiewicz state.
AT&T is not in the strongest possible financial position to respond to change, they add. In particular, the authors contend that the Bell System now depends on tax deferral and tax credit financing. In 1969, such tax benefits accounted for 2 per cent of the company's financing of spending for plant and equipment; by 1975, the share had increased to 22 per cent. In 1975, AT&T's federal income taxes actually paid were down to 2.6 per cent of pretax income when the statutory federal rate was 48 per cent.
Because of tax benefits, AT&T paid $129 million in taxes to the federal government in 1975 on pretax income of $5 billion compared with nearly $1.9 billion of taxes on a pretax income of $3.85 billion back in 1969. The gorwth in cash flow from AT&T's tax benefits shows an opposite pattern, from $11 million of deferred taxes in 1969 to $1.4 billion in 1975 and from $91 million of investment tax credits in 1969 to $667 million in 1975.
Last year, AT&T's actual federal tax payment was up to $582 million and deferred taxes amounted to $1.39 billion.
The report's authors said AT&T's actual federal tax payment was up to $582 million and deferred taxes amounted to $1.39 billion.
The report's authors said AT&T's use of tax-benefit financing could influence regulatory agencies adversely, partly because of the company's claims to a heavy tax burden. Last week's California rate decision would appear to bear out that warning.
AT&T has responded to some of the book's critique of the company in a "book review," published in two of the firm's own publications in July. In the review, AT&T vice president William G. Sharwell said the Schnee-Gorkiewicz study contains few original concepts. "And it is clear" that the authors gave prominent attention to anti-Bell arguments in FCC files while giving "short shrift" to pro-Bell statements, Sharwell wrote.
In particular, Sharwell took issue with the authors' reliance on an FCC staff study of AT&T, which was highly critical of the company but which the full commission subsequently toned down considerably in finding that the company basically was a well-run utility with some serious problems.
"It does not take three and a half years of study to conclude that the risks are changing for AT&T - mostly because the nature of the industry is changing. This is public information," the Bell System officer wrote.
But he saw a future for the book, nevertheless. "It will be quoted by those who for any reason wish to reflect the Bell System adversely. As a fair and balanced analysis, this work has only a modicum to offer," Sharwell concluded.
Schnee, a former Justice Department attorney and management consultant, and Gorkiewicz, a physicist and research scientist who specializes in telecommunications, are not fazed by AT&T's denunciation.
Both men, associated with the New York-based securities firm of Purcell, Graham & Co., Inc., say they plan to devote almost all their attention to AT&T from now on. They have lined up banks, insurance companies, foreign investors and other institutional investors as clients for their research. Income from such clients has supported their operations to date, Gorkiewicz said.
"Our book was intended to be as comprehensive and authoritative as possible and stick to the major issues. Obviously, some people in the Bell System do not like some of our conclusions," they said in an editorial reply in the current (second) issue of their new periodical. "Rather than instinctively attacking us and our book, they should stop to consider why we reached some of the negative, as well as positive, conclusions in the book."