AT&T Corp., once a cornerstone of the U.S. telecommunications industry and still one of the world's most recognizable brands, announced yesterday that it will no longer market long-distance service to consumers, a business it has dominated for 100 years.
The decision marks a turning point in the history of Ma Bell, the former monopoly that strung telephone lines across the nation before it was broken up by a federal judge in 1984. Twenty years later, AT&T is fighting for survival in a telecommunications industry roiled by intense competition, technological innovation and cutthroat pricing.
AT&T chief executive David W. Dorman said yesterday that the long-distance giant will focus on business customers, which account for about 70 percent of its revenue. Although AT&T will no longer be marketing to new consumers, it will continue to serve its 35 million current customers, Dorman said.
Consumer groups called AT&T's retreat a serious setback because it will lessen competition, which has driven down rates for consumers. "This is devastating. This takes the most revered name in quality long-distance service and the most aggressive competitor to the [regional] Bell monopolies out of play," said Gene Kimmelman, director of the Washington office of Consumers Union.
The AT&T of today is a sliver of its former self. Once it had 1 million employees and controlled every facet of the telephone system, including the manufacture of handsets and the operation of its local and long-distance networks. The fabled Bell Labs were responsible for some of the biggest breakthroughs in modern science, including the invention of the transistor, the laser and the mobile phone.
Under the breakup, it lost control of the local networks it built and was forced to pay local phone companies more than 40 percent of its revenue to complete its calls. Now AT&T has 60,000 workers. It has spun off its research, manufacturing and wireless businesses.
Even its business customer base is dwindling, although not as rapidly as its consumer operations.
Despite its setbacks, AT&T is still the nation's largest long-distance provider, although its customer base is eroding at a rapid rate, thanks largely to competition from its former corporate siblings. These regional phone companies, such as Verizon Communications Inc. and BellSouth Corp., are permitted to offer long-distance as well as local service.
Dorman said AT&T pulled back from the consumer market now because regulators have abandoned a policy that he said allowed AT&T to compete for customers.
For eight years, the Federal Communications Commission has encouraged competition in the local phone market by allowing companies such as AT&T to lease parts of the local network at deep discounts.
AT&T had taken advantage of the rules to offer a bundle of local and long-distance calling for one flat rate, allowing it to compete with similar offerings from regional giants such as Verizon, SBC Communications Inc. and BellSouth.
But the FCC voted yesterday to approve new rules that will effectively end the discounts.
Packages of local and long-distance service have proved to be enormously popular with consumers: About 40 percent of all households subscribe to some form of bundled service, according to Dorman. But he said AT&T can no longer market such bundles competitively without the regulated access to local networks.
"Those rules are going to change radically, that's why we are taking this action," Dorman said.
FCC officials declined to comment on Dorman's statements, but FCC Chairman Michael K. Powell has said that he thinks consumers are better served by competitors that own local networks rather than companies that lease facilities, as AT&T does.
The FCC is rewriting its regulations after a federal court in the District threw them out in March. Neither the Justice Department nor the FCC chose to appeal that decision to the Supreme Court.
Like Dorman, Kimmelman of Consumers Union blamed the federal regulatory policy for AT&T's decision to all but walk away from the consumer market.
"This is an end to an era of competition. It has been totally undermined by the Bush administration's refusal to go to bat for consumers in the courts and through the regulatory process," Kimmelman said.
Drake Johnstone, a telecommunications analyst with Davenport & Co., said AT&T is trying to cut its losses in the face of the inevitable loss of its consumer base to rivals. "AT&T has come to realize that the consumer franchise is indefensible and, over time, it will disappear," Johnstone said.
Also, the move will allow AT&T to focus on its business customer base, analysts said, possibly preparing the company for a future sale.
Although the regional Bell companies have been able to sign up millions of residential customers, their ability to invade the lucrative business market is widely viewed as a greater challenge. "To the extent AT&T slows the rate of loss in its business franchise and maybe eventually stabilizes it, that may make eventually make them an attractive takeover candidate," Johnstone said.
Yesterday, AT&T reported revenue of $7.6 billion for the second quarter, a decline of 13 percent compared with the same period last year. Revenue in its consumer long-distance unit was $2 billion, down 14.6 percent. The company reported a profit of $108 million (14 cents per share) for the quarter ended June 30, down from $536 million (68 cents) -- a decline of 80 percent.
Shares of AT&T fell 8 cents, or less than 1 percent, to close at $14.24.
Other long-distance companies, including MCI Inc. and Sprint Corp., face similar declines in their consumer long-distance business. MCI chief executive Michael D. Capellas has said repeatedly that his company's future lies with its business customers rather than the residential business that made it a national brand.
The long-distance companies are suffering from the effects of new competitors and technologies that have shaken a once stolid market. Wireless companies may have been the harbinger of the market upheaval when they began luring customers with offers of unlimited long-distance calling. Local and long-distance companies responded with their own packages.
The decision by the regional giants to invade the long-distance market has proved to be devastating for AT&T, MCI and Sprint. SBC claims 18.4 million long-distance customers, Verizon 16 million and BellSouth 4.6 million. MCI, once the nation's second-largest long-distance company, recently said it had 15 million long-distance customers.
And the competition is only getting more intense as consumers explore new technologies that allow them to make phone calls over the Internet.
Although AT&T said it will no longer market traditional telephone service to consumers, it will continue its recently launched CallVantage offering, which allows customers to make calls over high-speed Internet connections. For $34.99 a month, callers can make unlimited local and long-distance calls. Verizon announced a similar offering yesterday.
But AT&T and Verizon are competing in the Internet-based phone business against relatively unknown players such as Vonage and Lingo. For instance, Lingo offers unlimited local and long-distance service for $19.95 a month. Lingo's package not only includes unlimited domestic calling, but subscribers can also call most of Western Europe under the same flat rate.
Internet phone service is not for everyone, largely because it requires users to install it on their own.
Even if AT&T does not seek out new customers, it may be a long time before it loses its last residential consumer.
Michael Pailen, 52, of Northeast Washington, said he is a lifelong AT&T customer because he has always received reliable service. He intends to continue using the company even if it is not actively competing for the business of people like him. "As long as their service doesn't change," Pailen said, "I'll stay with them."
Several Washington area consumers said they were aware of AT&T's legacy as the phone company for everyone, but it doesn't mean much when it comes to choosing service today. "That was years ago. It's been a long time," said Delores Young, 60, of Adams Morgan, who uses Verizon for both local and long distance.
"I use my cell phone for long distance. It doesn't cost 10 cents a minute or whatever. It's just free. It comes with my plan," said Arlanda Jones, 22, of Cheverly. "AT&T is too expensive."