Barely two years after the breakup of the Bell System, Bell Atlantic Corp. believes it's ready to take on American Telephone & Telegraph Co.
Bell Atlantic, owner of telephone companies in the District of Columbia, Virginia, Maryland, West Virginia, Delaware, Pennsylvania and New Jersey, already has diversified more than any of the seven regional telephone companies created by the breakup. But now, the company wants to offer long-distance service, manufacture equipment and process data -- the very activities the regional firms were barred from undertaking so as not to recreate seven AT&Ts.
"I want to be able to give long-distance services, everything AT&T does," said Thomas E. Bolger, chairman of Bell Atlantic. "We need relief right now to allow us to sell and integrate all services for large customers . . . Otherwise, AT&T and IBM will be able to eat our lunch."
At issue is whether consumer rates for basic telephone service will be helped or hurt by the kind of business activities envisioned by Bell Atlantic and the other regional telephone companies.
The telephone companies argue that customers will benefit because successful diversification financed by stockholders will stabilize rates. "It is the stockholder who is paying for it," said Bolger. "Our investments are helping the ratepayer by improving the service or lowering the cost."
Critics, argue, however, that the regional companies would simply seek higher telephone rates to pay for the new business ventures.
Bolger has written Attorney General Edwin Meese III asking for an immediate waiver to offer data processing, long-distance and local phone service to big businesses in one package. Should the waiver be granted, it would have to be approved by U.S. District Judge Harold H. Greene, who presided over the Bell System breakup.
Bolger contends diversification is necessary to ensure growth. "The telephone companies' growth will not be huge -- in order to take advantage of our knowledge and capability, we should diversify into other lines of business and produce earnings equal to or greater than the phone companies'," he said.
Greene, who issued the court decree ordering the breakup of the Bell System, has expressed surprise at the rapid pace of diversification.
"There is a strange gap between the public desire to have good local telephone service at reasonable rates and the almost frenzied efforts of the regional holding companies to diversify," he said at a 1985 hearing on the court's business restrictions.
"No one dreamed at the time the decree was written that the regional companies would be spreading out all over the globe," he said.
In the new world of telephone competition, Bolger serves two masters: shareholders and customers. And the only way to serve both successfully, he says, is to earn enough money outside the basic telephone business to help stabilize costs for the telephone customer.
"All of it is enhancing shareholder value. That's my job or he'll fire me," he said. "If I'm successful, then . . . my cost of capital will be reduced, and if my costs are less it saves the ratepayer money." Strategy Has Supporters
Key members of Congress as well as officials at both the Federal Communications Commission and the Justice Department appear to support the idea of allowing the regional telephone companies to provide new services ranging from data processing to network-based call answering. They also argue that such diversification would help meet foreign competition.
Others, including consumer advocates, are more skeptical.
Walter Bolter, director of the Bethesda Research Institute, a telecommunications consulting firm working for government agencies, said diversification means that local phone rates will continue rising for at least the next five years.
"From the standpoint of local ratepayers, diversification does involve a cash drain -- it's cheaper to get your money from your customer than your creditor," Bolter said.
Bell Atlantic was authorized this year to receive $240 million in local rate increases throughout its region in 1985. The local telephone companies had requested $637 million in rate increases from state regulators. Rates for Chesapeake & Potomac Co. customers in the District rose $31.5 million, and rates for C&P of Maryland customers rose by $28.6 million. Bell Atlantic did not request a rate increase in Virginia this year.
Bell Atlantic said it needed the money to earn its authorized rate of return -- 12.3 percent -- and to cover costs. (The authorized rate of return is the amount state commissions say the company can earn on its investment to pay debt interest and shareholders.)
But Bell Atlantic's phone companies, including those in West Virginia, Delaware, Pennsylvania and New Jersey, earned about 11.1 percent in the first nine months of this year.
During the same period, Bell Atlantic announced that its board of directors had approved a stock buyback of up to $200 million to enhance the value of its stock. Financing of Ventures Discussed
Bell Atlantic officials said the company is financing its diversification efforts through a combination of the sale of common stock and retained earnings -- or what is left over in profits after dividends are paid out to shareholders.
Philip Verveer, an attorney with the Washington law firm of Willkie, Farr & Gallagher, which represents competitors of some regional phone companies, said retained earnings theoretically "aren't supposed to happen.
"This is really spillover and suggests a certain failure in the system," Verveer said.
In 1984, phone companies benefited from a regulatory "one-time free-for-all created in the wake of divestiture," he said.
The companies received less in rate increases in 1985.
As regulators come to understand the new environment, "the regionals will be left less cash-rich," he said.
Philip Campbell, president of Network Services Inc., the Bell Atlantic corporate entity running the local companies, maintains local phone service is creating losses of $1 billion a year, and that rates for such service would have to rise still another 40 percent to eliminate the subsidies the company says used to exist before the Bell System breakup.
Nevertheless, company officials say the local phone companies are profitable.
After dividends are paid out, "what's left is management's responsibility to decide what increases the value of the company," said one company official.
"The most productive thing might be to put the money right back into the telephone company, to provide for future growth in diversification, increase the dividend or buy back stock."
Analyst Robert LaBlanc, of Robert E. LaBlanc Associates, says the companies, now competing for capital in the public marketplace, have no choice but to try to grow.
Plain old telephone service "has limited horizons," he said, and allowing the companies to diversify into areas they know best will mean "ratepayers will benefit from higher efficiency rates that will in the long run give them lower costs spread over more services and a wider economic base.
"You don't want it all black at one end, saying invest in only regulated businesses; you don't want it all white, saying you can divert money from the ratepayer -- it's a very fine line," he said.
To walk that line, Bell Atlantic has stuck to businesses that enhance the use of the telephone network, with the exception of a real-estate business viewed as a way to hedge inflation.
"We have stayed in telecommunications and information-processing businesses," Bolger said.
At the time of divestiture, Judge Greene set out rules by which the seven regional phone companies could engage in new lines of business, but only with court approval and if the companies set up separate subsidiaries for the businesses.
The companies, which are monitored by the Justice Department, also may not earn more than 10 percent of their overall revenue from competitive businesses. Firms Acquired, Created
Over the last year, Bell Atlantic has launched a separate "Enterprises Group" that includes start-ups and freshly purchased companies. It created Bell Atlantic Properties to buy and lease out buildings and has invested in building a boating marina on the mouth of the Delaware River.
The company also launched Bell Atlanticom Systems Inc., which sells telecommunications equipment, and set up a foreign consulting firm called BAC Networks International.
In addition, Bell Atlantic has spent $350 million purchasing Tri-Continental Leasing Corp., a nationwide office equipment financing firm; purchased Telecommunications Specialists Inc., a telecommunications and office equipment business; acquired a 40 percent interest in A Beeper Co. Assoc., a nationwide paging firm; expanded Bell Atlantic Mobile Systems, its cellular mobile phone service provider; purchased Compu-Shop Inc., a computer servicing company; and acquired MAI Canada, which distributes and services computers in Canada.
Over the last two years, the company also has spent $4.5 billion in upgrading the telephone network so it can improve network efficiencies and provide new, computerized services as soon as it gets a government go-ahead.
It already has begun providing a data transport service in New Jersey with the FCC's permission.
"It would open the door so our network would be able to be used more quickly, cheaply and accurately to help someone with a personal computer access different data bases," Bolger said.
"Diversification is important for positioning us for the future . . . Paramount is to be part of the information services we know so well," he said.
The company also insists it must have the option to ally itself with a network equipment maker so as not to be dependent on its main rival, AT&T, for equipment that might not satisfy customer needs. Tight Management Ship
Meanwhile, the $9 billion company is forging a diversification strategy analysts say looks to be a sensible one, while running one of the tightest management ships of the seven regional companies.
"They've made excellent acquisitions," said James McCabe, vice president at DLJ Securities Inc.
"They are the most aggressive of the seven and the most efficient in their operations."
The company earned $973.1 million ($9.94 a share) in 1984 on revenue of $8.9 billion. Edward Greenberg, a telecommunications analyst with Morgan Stanley & Co. Inc., predicts the company will report net income of $1.09 billion on revenue of $9.15 billion this year.
The company expects new businesses to begin making money this year, but their revenue will not approach the 10 percent of overall revenue the company is allowed to earn from them.
Eileen Polsky, vice president of research at Drexel Burnham Lambert, said Bell Atlantic's strategy has been particularly successful because of its focus on small and medium businesses.
Nevertheless, "The jury is out on everything they are doing," she said.
Both McCabe and Polsky point to a dissappointing record of diversification among independent phone companies.
"GTE with Sprint, US Telecom with US Telephone . . . Both have lost money," Polsky said.
If diversification strategies do not work, rates could rise still more, said Verveer.
"If you don't take steps to insulate the regulated part, misdirected diversification will raise the cost of capital and therefore utility service," he said.