While the Reagan administration, Congress and the federal courts are considering moves that will alter the future shape of American Telephone & Telegraph Co., the Bell System is moving ahead with a massive restructuring program that will alter the relationship between users of the nation's 145 million AT&T telephones and the phone company.
At stake is the transfer of $10 billion to $15 billion of AT&T assets and at least 100,000 of the company's 1.04 million employes to a new AT&T subsidiary, popularly referred to as "Baby Bell." The new company will sell deregulated equipment, ranging from conventional home telephones to sophisticated switchboards or PBXs and, ultimately, "enhanced" or computer and data-processing services.
In total, the ongoing reorganization -- under a mechanism announced by AT&T last August -- may well be, as AT&T Chairman Charles Brown said recently, "more massive than any undertaken in so short of time by any other American industry."
The program was mandated by the Federal Communications Commission's so-called "Computer II" decision last year. The program, which the FCC ordered completed by next March 1, is moving forward despite serious and potentially protracted legal challenges to the commission's order and despite the Justice Department's antitrust suit here that could wipe out the entire basis for the company's restructuring.
"Whatever we plan will require a lot of fine-tuning," said Morris Tannenbaum, AT&T executive vice president and the Bell System executive responsible for planning. "It is a very tenuous time and that is why we are so anxious to have the matter settled. We need to know what the rules of the game are going to be so that we direct our energies to the telecommunications business of the future."
No less complex than the purely internal restructuring is the dramatic effect that the moves will have on U.S. consumers and the 61 million homes and more than eight million businesses served by AT&T. For example, virtually all customers of AT&T and its 23 local operating companies will -- if and when the plan takes effect -- no longer receive simply one montly bill for telephone services.
Instead, residential and business customers will receive two bills, in essence one for equipment and a second for services. Questions about those bills will have to be handled separately by different telephone company offices. "This will be the largest kind of billing system ever built," Tannenbaum said.
Secondly, the barriers between the regulated and unregulated sides of the telephone company's business will mean charges in how the customer makes revisions or even asks questions about home or business telephone services. New options for purchasing rather than leasing telephone equipment also will be made available.
"What we are proposing to do is change those interfaces" between the public and the local AT&T office, Tannenbaum said. "We can't expect customers to know the differences all the time, but we have to permit calls to be directed to the right organization and in a way that meets the requirements for the separate subsidiary."
Although it is not required under the FCC decision, there is even some talk within AT&T that the basic structure of the company -- with AT&T's New York headquarters overseeing the 123 local operating companies -- may change, with a consolidation of those companies possibly in the works. "I wouldn't be surprised to see a continuing evolution in the form of the operating companies," Tannenbaum said.
In addition, despite the fact that the FCC decision does not change the basic structure of AT&T's equipment subsidiary, Western Electric Co., Bell's planners are moving ahead with plans to do just that, in line with a similar legislative proposal now under consideration by the State Commerce Committee. A western Electric restructuring would mean a complete breakup of the company's factory operations, again separating the production of regulated equipment from the manufacture of unregulated products.
Proponents of forcing AT&T either to divest itself totally of its competitive holdings -- such as the Justice Department or others who contend that the competitive problems can be solved by splitting and spinning off the company's stock -- say such internal AT&T moves indicates that the company easily can manage the more dramatic breakup of the company advocated by critics.
Bell System officials say there is no way to overestimate the enormity of the task required under Computer II. But some outside observers say that the costs of the restructuring and the complex changes in AT&T depreciation and rate policies will cloud the company's short-run earnings picture.
Further, many experts say that since the restructuring involves extraordinary changes in AT&T and regulatory policy concerning telephone equipment, the company's earnings may suffer in the short run. Steven Chrust, a market analyst for Sanford C. Bernstein of Co. Inc., predicted last year that once "customer premises equipment," or CPE, "is fully open to competition, AT&T will clearly have to reprice and recost these products.
"The problem is that any course the company pursues toward this end will require price increases in remaining regulated services -- local in particular -- which are sure to be resisted by state regulators," Chrust wrote.
"Moreover, the issue will undoubtedly raise fears about cross-subsidization of services by AT&T -- specifically the raising of prices in regulated services so as to be able to cut prices -- or raise margins -- in unregulated services. This issue is a very distasteful one to state regulators and they are unlikely to deal with it in a totally objective manner," he wrote.
"Thus," Chrust concluded, "we can't help but be pessimistic about the effects on AT&T's earnings of the move to competitive markets, particularly during the transitional period when the bulk of the restructuring must take place."
These moves are the product of an evolution of public policy and AT&T thinking that has taken place over the past decade. During the late 1960s and early part of the 1970s, the company was able to use a slogan, "One Bell System That Works," stressing the company's integration as a model of efficiency.
"Over a period of decades we have run the business in a way to look for economies of scale and that has led us to integrate the business as thoroughly as one can imagine," Tannenbaum noted. Despite FCC decisions opening AT&T's historic monopoly over long-distance calling and facets of the equipment business to competition from companies as diverse and now as successful as MCI Communications Corp. and Rolm Corp., the company publicly and privately decried competition as a threat to the stability of the nation's telephone system.
Those cries from AT&T management are far less shrill today, even though AT&T antagonists -- the most vocal are the long-distance competitors -- cite an array of problems getting service and across to AT&T's local subscriber network. In fact, current contract negotiations between long-distance companies and AT&T have virtually collapsed, with the competitors charging in a letter to the FCC staff that AT&T "has walked away from the negotiating table on key issues of costs and rates."
But the introduction of competition, which has only slowly eroded AT&T's monopoly in those two areas, also has prompted AT&T and a growing chorus of policy makers, to support a variety of proposals that would free AT&T from a 1956 consent decree with the government and permit the company to compete in highly lucrative areas such as the data processing and home information markets.
The FCC's decision in the Second Computer Inquiry, freeing AT&T from many of those limitations, is the first clear manifestation of that policy. "In the history of that agency, no decision has had so profound an effect on industry structure"' Brown said recentlyl.
On the other hand, perhaps no previous FCC decision has set off such a massive legal challenge. Virtually every real and potential AT&T competitor is involved in challenging that decision, and in challenging a subsequent AT&T petition now before a New Jersey federal court that seeks a judicial ruling on the modificiation of that consent decree's ruling implicit in the FCC's decision.
The arguments against AT&T restructuring under Computer II go to the heart of what Tannenbaum says the plan is based on -- a careful reconstruction of the company's programs designed to make sure that the company does not use money it receives from telephone customers to help subsidize its new competitive services.
AT&T has a long history of anticompetitive conduct and of using its monopoly reveunues to cross-subsidize equipment and services encountering competition to the detriment of competitiors"' said A. G. W. Biddle, president of the Computer and Communications Industry Association, a trade group that is the lead appeals court challenger to the Computer II decision. "The smaller companies obviously entitled to meaningful safeguards against any AT&T intrusion now into unregulated makets."
Tannenbaum says the barriers in the Computer II decision are adequate and that Bell is doing everything it can to make those lines clear. "We have to provide enough separation so that there won't be cross subsidy or even the appearance of a cross subsidy", he said.
Further complicating the picture are two AT&T requests before the FCC to revise the ground rules for the new structure. One is a "waiver" petition concerning a series of "custom calling" answering services that AT&T wants local operating companies to introduce in a regulated environment.
Secondly, AT&T wants the FCC to modify one piece of its decision that does not "detariff" or deregulate equipment already in a customer's hands, while new equipment will be completely deregulated."We don't know how to manage that situation," Tannenbaum said.
The final technical question that hangs over the restructuring relates to how AT&T accounts for assets that will be switched to the new separate subsidiary. The capitalization plan for the subsidiary is to be in the FCC's hands 120 days before the new company goes into business or by Nov. 1.
How the Reagan administration reacts to these questions is another puzzle. Commerce Secretary Malcolm Baldrige already has stated that the administration does not support the Justice Department's judicial divestiture proposal. On the other hand, William Baxter, assistant attorney general for antitrust, says the establishment of the separate subsidiary is "largely cosmetic."
"As long as common ownership prevails, the parent and affiliate have every incentive to favor each other through subtle yet effective behavior that realistically cannot be policed by the FCC," Baxter said in a letter to the Office of Management and Budget.
These policy uncertainties, Tannenbaum said, "make life very interesting. But there is one other factor and that's simply that the marketplace doesn't stand still. We are increasingly convinced that in the most highly competitive parts of our business there is a national marketplace.
"We really expect something like Computer II to emerge. If the Congress doesn't find another way to do it, the Congress is likely to do it. Our determination has been to have a good enough picture of where the business is going that we'll proceed with our planing whatever actions" comeout of Washington.