AT&T’s Successful Spinoffs

The breakup of Ma Bell

Fact checked by Kirsten Rohrs SchmittReviewed by Thomas J. CatalanoFact checked by Kirsten Rohrs SchmittReviewed by Thomas J. Catalano

AT&T (T) has a storied history reaching back to 1885, and it was highly profitable as a legal monopoly. Charges were filed against the firm under the Sherman Antitrust Act in the 1970s. AT&T, also known as Ma Bell, was allowed to keep its long-distance service under a settlement reached in 1982. In 1984, the company’s local telephone service was broken up into seven Baby Bells as part of the agreement.

Key Takeaways

• In 1984, AT&T’s local telephone service was broken up into seven Baby Bells.
• The breakup gave consumers access to more choices and lower prices for long-distance service and phones.
• The breakup may have delayed the availability of high-speed internet service for many consumers.
• AT&T and the Baby Bells had many successes after the breakup.
• By 2018, most of the Bells were together again as a single company called AT&T.

The Lawsuits

AT&T successfully defended itself in several previous antitrust lawsuits. The firm reached agreements with the U.S. government in 1913 and 1956, which allowed it to avoid a breakup during most of the century. However, AT&T had to stay out of other businesses as part of the 1956 agreement. That limited the company’s ability to use bundling to spread its monopoly to other industries.

The final case began in 1974, and it was decided against AT&T in 1982. The Baby Bells were finally spun off from Ma Bell in 1984, and they inherited AT&T’s local phone service business. The parent company held on to its long-distance service and was allowed to move into computers and other industries.

Benefits of the Breakup

The breakup of AT&T produced many immediate benefits for consumers. For many decades, AT&T did not allow users of their service to connect phones manufactured by other firms. They claimed these phones could degrade the quality of the network. AT&T also would not sell its own phones to consumers, so everyone had to rent phones from AT&T. The Baby Bells controlled the direct connections to consumers after the breakup, and they dropped these restrictions. There was soon a thriving market for selling phones to consumers. Phone prices dropped, quality increased, and renting phones faded away.

The other significant benefit of the breakup of AT&T was competition in long-distance phone service. The Baby Bells allowed consumers to choose among long-distance carriers. Companies like MCI and Sprint (S) challenged AT&T in this market. As competition and technology progressed, long-distance charges fell. In 2006, long distance charges for calls within the U.S. were eliminated. However, per-minute charges were still common for calling foreign countries.

Criticism of the Breakup

The strongest criticism of the breakup is that it may have delayed high-speed internet for many consumers. In the early days of the internet, speeds were kept low by the need to use the local phone lines of the Baby Bells. As monopolies within their service areas, the Baby Bells were often slow to upgrade their lines. AT&T was very aggressive in adopting internet technology, and it was highly regarded as an internet service provider in the 1990s. If AT&T had kept control of local phone lines, many consumers might have gained access to high-speed internet connections earlier. Many of the Baby Bells delayed too long, leaving much of the data service market to cable providers and wireless services.

Another criticism of the breakup is that it was simply unnecessary. The main argument here is that cable companies and wireless providers would ultimately have created competition for AT&T. The fact that many of the Baby Bells were later reintegrated into a single company also supports the view that the breakup was unnecessary.

The Aftermath of the Breakup

The Baby Bells proved to be some of the most successful spinoffs in history. AT&T had already paid for the infrastructure, and their businesses were established and producing cash from day one.

The government loosened telecommunications restrictions, and the Baby Bells began to merge and buy out each other to increase their service areas. By 2018, most of the Bells were together again as a single company called AT&T.

As of 2021, AT&T was a telecommunications giant, led by its mobile and fixed telephone services. It also made a big move into the media space, acquiring DirecTV in 2015 and Time Warner in 2018. However, with the growing trend towards “cord-cutting,” as well as the costs associated with servicing the debt from these two acquisitions, they proved to be ill-conceived, and AT&T has since spun off both.

Read the original article on Investopedia.