TIME: Almanac 1993/TIME Almanac 1993.iso/time/caps/83/83capbus.1

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                                                                                November 21, 1983

ECONOMY & BUSINESS

Click! Ma is Ringing Off


The breakup of giant AT&T sets the stage for a
telecommunications upheaval


Time is running out for the largest company on earth. Ending
too is a long era of inexpensive phone service that Americans
have taken for granted. But just on the horizon, heralding its
arrival for the attention-getting power of a jillion jangling
telephones, is a revolution in telecommunications. Propelled
by both marketing and technology, the coming changes will rank
second in importance only to the establishment of the U.S.
telephone system itself, acknowledged as the world's best.

It all starts happening on New Year's Day, just six weeks from
now. Under the banner of promoting competition in the U.S. phone
service, American Telephone & Telegraph, the Bell System, will
die at age 107, shattered in the largest court-mandated breakup
of a company since the split-up of Standard Oil in 1911. In
place of the old Ma Bell will stand the "new" AT&T and seven
regional telephone holding companies, all beginning life as
giants and carrying such unfamiliar names as Nynex, Ameritech,
U.S. West and Pacific Telesis. The eight new companies will
immediately join the ranks of the 50 largest U.S. corporations
in terms of assets.

The breakup will affect all of America's millions of phone users
in ways large and small. Instead of receiving a single monthly
bill for phone service, for example, consumers may now get three
or more:  One for local service, another from one of AT&T's
proliferating competitors for long-distance tolls, and one from
AT&T Information Systems for the lease of the telephone. Many
people who previously rented their phones, though, may now buy
them outright. Next week AT&T will launch the biggest private
direct-mail operation in history. It will send brochures to 70
million customers telling them that under divestiture it will
be taking over ownership of their telephone equipment.
Consumers currently renting phones will be given options to buy
them, continue leasing them, or purchase new equipment from AT&T
or from non-Bell suppliers like Uniden or GTE.

For the moment the clearest thing about the breakup of AT&T is
the confusion. As recently as last week, it was unclear, for
instance, whether local phone companies had the right to offer
phone services like weather and time of day after Jan. 1. The
gigantic physical task of divvying the Bell System's assets
among the new parts, from whole telephone exchanges down to
trucks, repair equipment, paper clips and brooms, is still going
on. Though phone service has not been hampered, companies
trying to do business with Bell report that they sometimes have
trouble finding out who is in charge of an office or division.

Much of the American public seems bewildered about the breakup.
Polls show that only one in five people knows what is about to
happen to their phone system.  Says Cecil Woods, 33, a Chicago
maintenance worker:  "I think it's supposed to be a good thing
for everybody, but I don't quite understand how. I just hope
something good comes of it, and I think it will."

Even among those who are aware that something big is on the way,
there is gnawing concern that telephone service will suffer.
Says Yale Professor Stephen Ross, an expert on
telecommunications:  "We may be trading in a Cadillac for a
Ford."  Frets Senator Barry Goldwater, normally a fan of freer
markets and less government regulation: "We're going to be sorry
that we tampered with a system that was functioning well. I
wish this divestiture had never happened."

Consumers seem apprehensive--and concerned. Colleen Todd, 32,
a writer for a Tulsa ad agency, says, "Ideally, I think breaking
up the monopoly was the thing to do. But realistically, I'm not
sure it was the thing to do. I don't think it's necessarily a
bargain for the consumer."  Says Wilbur E. McCoy, 42, a
machinist from Akron: "From what I hear, it's going to cost me
more money for them to break up a monopoly. To tell you the
truth, I never looked at AT&T as a monopoly, but I guess that's
what it is."  Worries Dorothea White, 86 a widow living alone
in Los Angeles: "I think it'll make my phone bills go up. I
don't really see why they had to break it up. It was a good
system, and it seemed to be working."

Those concerns about higher phone bills have been heard by
vote-sensitive Washington politicians, who are rushing in with
legislation to keep prices down. Last week, despite heavy
opposition from AT&T's lobbyists and the Reagan Administration,
the House passed decisively a proposal to ban a surcharge on
local phone bills that was to be part of an overall
restructuring of phone prices.

To Wall Streeters and communications-industry executives, the
breakup presents countless questions and, particularly for
stockbrokers, the opportunity to make a great deal of money.
Will the new parts of AT&T be equal to the whole?  How well will
the new companies adjust to the world of competition after
decades of guaranteed prices and government regulation?  Will
the corporate culture of the old Bell System, with its emphasis
on service, be lost or weakened?

AT&T and its seven new sisters will begin answering some of the
questions this week, when they file stock-registration
statements with the Securities and Exchange Commission, along
with volumes of financial projections as big as Manhattan phone
books. What investors think of the new companies' prospects
will start becoming clear later this month, when something like
655 million shares of seven holding companies begin showing up
on the New York Stock Exchange. They will be offered on a "when
issued" basis, meaning they will be traded as if they already
existed, even though the stock certificates will not be
delivered until mid-February.

A total of 3.2 million individuals and organizations own shares
in AT&T, the paradigmatic "widows and orphans" investment,
making it the most widely held security in the world. People
now holding AT&T stock will keep those shares, which will
automatically be equity in the new AT&T. And for every ten of
those shares, they will receive one share in each of the seven
regional companies. Investors with fewer than ten shares will
receive cash for their partial holding.

Just printing the new stock certificates cost $2 million.
Distributing them and dealing with other transfer details of the
new issue require an AT&T staff of 1,400, housed in a three
story building in Jacksonville. Individual investors with ten
to 499 shares will be able to swap stock ownership among the
seven new regional companies through AT&T at a cost of 25 cents
per share until mid-April.

But there will also be plenty of trading on Wall Street. The
New York Stock Exchange is adding a computer to the three it
already uses just to keep up with an anticipated 15
million-share-a-day increase in trading volume.

What should an AT&T investor do?  Buy, sell or hold?
Experienced Wall Streeters advise:  do nothing immediately, just
wait for the chaos to subside. Once it does, investors could
begin trading out of one holding company and into another or
concentrate their investment in the new AT&T. Merrill Lynch,
Dean Witter and several other brokerages have set up mutual or
trust funds made up of stocks from all the new companies. The
accounts, called Humpty Dumptys, in effect put AT&T back
together again for an investor.

The American phone network and the AT&T divestiture are
collections of superlatives. After all, the Bell System has
spread telephones just about everywhere imaginable in America,
from the bottom of the Grand Canyon to the 106th floor of New
York City's World Trade Center. Americans make more than 800
million phone calls a day and have twice as many telephones (183
million) as home toilets (87 million).

The breakup of AT&T has so many possible ramifications that few
people even pretend to understand it thoroughly.  Wall Street
firms have held dozens of investor seminars on the divestiture,
all run by veteran staffers bristling with law degrees and
M.B.A.s.  But at one session last month, "I don't know" was a
tellingly frequent response from, among others, panelist Alfred
Kahn, chairman of the Civil Aeronautics Board under Jimmy
Carter. An expert on the telephone industry, Kahn presided over
the deregulation of U.S. airlines in the late 1970s and is now
a professor of Political Economy at Cornell. Says Ulric Weil,
telecommunications analyst for investment bank Morgan Stanley:
"No honest observer can claim to know where this is all going."
Agrees Peter J. Jadrosich, a vice president of Paine Webber
Jackson & Curtis:  "We believe historical performance may be
nearly irrelevant to predicting future success."

History, in the case of the Bell System, goes back more than a
century, to March 10, 1876. That was the day Alexander Graham
Bell, 29, sent his booming voice over a wire to an assistant:
"Mr. Watson-- come here--I want to see you."  Bell's patent,
which was actually filed before he built a working telephone,
made possible the construction of the American phone network.

It was Theodore N. Vail, though, who invented the Bell System.
Brilliant, sweeping, subtle, an organizing genius with uncanny
foresight, Vail was boss from 1878 to 1877, during which time
he put together all the  pieces of the modern goliath. He built
up an engineering department to develop new phone technology,
and a manufacturing department to build telephone equipment.
All the while he systematically sought to exclude non-Bell phone
companies from his network. But Vail felt thwarted by Boston
financiers more interested in fast profits than his far-reaching
ideas, and so he quit at 42 and went into retirement.

In 1907, after a 20-year absence, bankers summoned Vail back to
save AT&T from financial ruin. The company was a mess. The
original Bell patents had expired. Populists were attacking the
firm over rates, and farmers were organizing their own telephone
companies. The system was becoming technically obsolete;
independents offered dial phones before Bell. Within a decade,
Vail had transformed AT&T into a communications power. By the
time he died in 1920, he had set the foundation for vigorous
growth. Indeed, AT&T by 1929 was the first corporation to
generate annual revenues of more than $1 billion.

In a series of famous essays, Vail put forth the idea that
fatter profits are not the be-all and end-all of a corporation.
Service counts more, he write, and the Bell System could
deliver it best by being a regulated monopoly that struck a
balance between public and private interests. In a 1908
advertising campaign.  Vail sounded the theme that prevailed
until the current divesture:  "One system, one policy, universal
service."

Monopoly, to Vail, meant that AT&T would have U.S. telephone
service mostly to itself, in exchange for submitting its rates
to federal and state regulatory authorities for approval.
Non-Bell phone companies, which handled about half the phones
in the U.S. at that time, did not like that idea. Neither did
the Federal Government. It questioned Bell at every turn. As
far back as 1913, when European phone systems were being
nationalized, the Postmaster General advocated Government
ownership of the phone system. But a privately controlled
monopoly seemed to be the most efficient way to run a national
phone system, and Vail's concept won out.

AT&T's quasi-monopoly, however, was always an uncomfortable
arrangement. The company wanted to get into related fields
like computers when they began developing; other firms were
eager to enter the phone business; and the Government was
worried by the size and power of the telephone giant. In a
far-reaching decision, the FCC in 1968 allowed a Texas firm to
sell a device called a Carterfone, which connected mobile radios
to AT&T lines. It was the first time any non-Bell product had
ever won the right to be wired into the Bell System and was the
first electronic breach in the monopoly.

One by one, other bars to competition began to fall. By the end
of the 1960s certain forms of long-distance telecommunications
other than Bell's were approved by the FCC. Still, Bell
supplied 79.5% of the U.S. telephone service. That was too
much, said antitrust enthusiasts. On Nov. 20, 2974 the Justice
Department filed a suit to break off Western Electric, the
telephone company's manufacturing division, from the rest of
AT&T.

The Justice Department's suit dragged on endlessly in court like
the Jundyce and Jarndyce case in Dickens' Bleak House. The
first judge in the case died and was replaced in 1978 by Judge
Harold Greene, a refugee from Nazi Germany who had helped draw
up the Civil Rights Act of 1964 while working in the Justice
Department. Greene conducted more than 18 months of hearings,
pretrial discovery and major filing by the parties. Not until
January 1981 did the trial begin.

By then, the feeling was growing among officials of both AT&T
and the Government that the  time had come to settle the case.
AT&T wanted to catch up with the communications revolution
that was increasingly blurring the lines between computers and
telephones, but it was unable to get into that business because
of its status as a regulated monopoly. Competitors were itching
to get closer to phone users, but AT&T's monopoly kept them from
doing much more than chipping away at that market. The new
Reagan Administration wanted to settle the longstanding case.
In a stunning move on Jan. 8, 1982, the Justice Department and
AT&T struck a deal to break up the Bell System.

Greene did not immediately accept their deal. Meticulously, he
read 8,000 pages of comments and interviewed 600 witnesses.
Among those who spoke out in opposition to the breakup was
Defense Secretary Caspar Weinberger, who said that dealing with
an array of companies could threaten national defense and drive
up communications costs. Greene also reviewed 25,000 pages of
trial transcripts. Many months passed, with Greene raising
objections along the way, continually shaping and modifying the
parts that were now to be independent. In August 1983, Greene
gave final approval to the divestiture agreement.

Whether the company was guilty of antitrust-law violations has
never been proved, although some suits by competitors have yet
to be resolved. Some Wall Streeters think AT&T gave in too
easily and in fact could have struck some sort of compromise
short of total breakup. But all that is now academic. As AT&T
Chairman Charles Brown says of divestiture:  "The ship has left
the dock."

The AT&T vessel that is lifting anchor has $155 billion in
assets. It is bigger than GM, Mobile and Exxon combined. With
nearly a million employees, it is the second largest employer
in America, behind only the U.S. Government. Its annual
spending of $17 billion equals about 4% of all U.S. capital
investment. Its Bell Laboratories, incubator of the transistor,
the laser and Direct Distance Dialing, is the world's foremost
industrial research organization. Western Electric makes 80%
of all the telephone equipment used in America, including most
of AT&T's 827 million miles of copper wire.

After Jan. 1, each of the eight brobdingnagian pieces of the old
AT&T will sell conventional regulated telephone services but
will also be free to venture into certain nonregulated
communications fields. The parts:

The "new" AT&T. With about $35 billion in assets, it will be
far smaller than the old AT&T. Yet the firm will still be as
big as Mobile, and twice as large as GTE, its nearest
competitor. Moreover, it will be a powerhouse of money,
research talent and manufacturing muscle. Bell Labs and Western
Electric will remain part of the new entity.

To the average citizen, the most familiar part of the shrunken
firm will be AT&T Communications. Essentially Bell's former
Long Lines Division, it will provide long-distance service as
well as the familiar WATS (Wide Area Telephone Service) lines
and 800 Area Code calling. These will account for more than
half of the new company's revenues, perhaps $35 billion.

But more jazzy things are in store, as seen in some of AT&T's
sci-fi television ads. Those stress the more glamorous
unregulated activities of information systems for
business--services like teleconferencing and data processing.
In those areas AT&T now will be free to square off with IBM,
Burroughs and Honeywell.

At its Western Electric facilities, AT&T will make telephone
equipment for sale to consumers and all kinds of exotic
electronic whizmos like powerful memory chips for computers.
Through AT&T International, the company has already struck a
deal with N.V. Philips' Gloeilampenfabrieken of the Netherlands
to sell switching equipment throughout the world. Says Gerrit
Jeelof, head of Phillips' Telecommunications Division:  "It was
a natural marriage between two of the most desirable partners
in the world."  The new subsidiary will pit AT&T against GTE and
ITT in the European market, which it abandoned in 1925 to
concentrate on the U.S. telephone system. AT&T and Philips
could pry open an unusually tough market long closed to outside
suppliers because of dominance by state-owned post, telephone
and telegraph services.

Regional holding companies. The 22 local Bell telephone
operating companies will continue much as before, collecting
revenues from Yellow Pages (around $3.6 billion at present),
mailing bills to customers under the familiar names of Michigan
Bell, New York Telephone, or whatever, and providing phone
service in all states except Alaska and Hawaii, which have
independent firms. But the 22 will be stitched together into
huge new holding companies that are roughly equal in numbers of
telephones and potential revenues. The holding companies, with
small staffs at the top, will be free to tread where no phone
company has ever gone, into almost any nonregulated business,
except manufacturing telephones or certain kinds of information
processing. Some have chosen to use the Bell name and logo, a
privilege that Greene denied the parent AT&T, while others have
attempted to get away from the dowdy image of the "telephone
company."

The new Bell companies: Nynex of New York City will cover New
York and parts of six New England states; Bell Atlantic of
Philadelphia will serve New Jersey, Pennsylvania, Delaware,
Maryland, Virginia, West Virginia and the District of Columbia;
BellSouth of Atlanta will have customers in Georgia, North
Carolina, South Carolina, Florida, Alabama, Kentucky, Louisiana,
Mississippi and Tennessee; Ameritech of Chicago will reach the
heartland states of Indiana, Michigan, Illinois, Ohio and
Wisconsin; Southwestern Bell of St. Louis will join Arkansas,
Kansas, Texas, Missouri and Oklahoma; US West of Denver will
cover the largest geographical area, 14 states in the Midwest,
Rocky Mountains and Northwest; and Pacific Telesis of San
Francisco will oversee California and Nevada.

Who got the choicest cuts in the carving up of the Bell System
is a matter of intense debate among industry and analysts. Some
feel that AT&T walked off with what was really important in the
network, leaving only one-third of the revenue-generating
capability to the operating companies. Says Cornell's Kahn:
"AT&T won by losing." Others believe the local companies have
bright futures and good potential in their markets, although
there are doubts as to just how eager their top managers, mostly
old telephone-company men with decades of doing things the Bell
way, are to enter the new world of competition.

Just how well the newly independent parts fare is critical to
the question of how much phone bills will rise after the split.
If the regionals make money, attract investors, improve
efficiency and keep costs down, phone bills stand a better
chance of staying reasonable. If they do not, pressure to
collect money from phone users for lost revenues will increase.

Bills are destined to go up anyway though, at least at first.
Some charges, say consumer groups like Boston's Fair Share, may
go up by 50% to 100% during the next twelve to 36 months. But
total phone bills are not likely to increase by that much.
Chairman Charles Brown estimates they will increase by only 8%
to 10% a year for the next five years, slightly more than the
average rate of increase since 1940.

Most industry watchers agree on one thing:  telephone service
has been too cheap, for too long, with costs spread unevenly.
Says Lee Selwyn, president of Economics and Technology Inc. of
Boston, a telecommunications consultant:  "People were simply
not aware of how cheap service really was."

Thomas Bolger, the new chairman of Bell Atlantic, is fond of
pointing out that the prices of other commonplace products like
a Chevrolet have increased about 1,000% since 1940, while the
average basic monthly U.S. telephone rate has gone up from $3.67
to just $11.38 during that period, or by 210%. A private line
to a dwelling in Great Falls, Mont., costs about $8 "for access
to the world," says U.S. West Chief Executive Jack MacAllister,
while it costs $30 to install and maintain the connection. Even
if that basic monthly bill doubles, to $16, it is "still only
about the price of a tank of gasoline," he says."

The level of telephone bills after divestiture will depend on
whether the user is an individual or a business, how many local
and long distance calls are made, over what distance and for how
long. The entire philosophical underpinning of pricing phone
services is changing, a departure much in line with the national
thrust toward deregulation in many other fields. In essence,
Americans are going to begin paying more and more of the full
and true cost of phone services they use. At the same time,
they will not pay as much for those they do not use.

That has seldom, if ever, been the case. Through a complex
system of cross subsidies, brilliant in concept but worrisome
in practice, one type of phone service has helped pay for
another. That kept phone costs down and within almost
everyone's reach, but led to price inequities. A phone line in
San Francisco that cost Pacific Telephone $29 to install and
maintain monthly was bill to the customer at $7. The difference
was made up by higher prices for other services, like heavy
tolls for calls from one end of the Bay Area to the other.
Similar subsidies allowed the dime for a pay phone call in New
York City; the true cost is more like 28 cents.

Without some congressional action, a big chunk of the
cross-subsidy system is going to disappear, putting fierce
upward pressure on bills for local phone services. Regional
phone companies stand to lose about $3.3 billion in revenues
that they received from AT&T's long-distance tolls when they
were still under Ma Bell's roof. Currently, about 37 cents from
each dollar in revenues from long-distance charges is plowed
back into the local companies.

To compensate for the loss, the regional phone firms are going
to have to get money from somewhere. That means phone
subscribers in general can expect higher prices for almost all
aspects of local service, fees that in the past were bundled in
packages and, for the most part, never seen by users. Rates
will certainly go up for local services like calls to the
grocery down the street or to the pharmacy. Higher rates are
in store for calls to distant points within states, along with
sharp escalations in fees for local directory assistance,
phone-line installation and pay telephones.

The Federal Communications Commission has proposed one way of
helping local companies make up for part of the loss of the
long-distance subsidy. It has called for customers to pay local
phone companies for access to long-distance lines. The monthly
access charge would start at $2 and could rise to $6 or $7 by
1989. Businesses would pay $67 at the beginning. But the
proposal is running into trouble. Legislation proposed by
Colorado's Democratic Congressman Timothy Wirth and Oregon's
Republican Senator Bob Packwood would eliminate the charge to
private individuals and small businessmen and shift it back to
AT&T and other long-distance phone companies. Theodore Brophy,
chairman of GTE, calls the access charge "an unmanageable
economic burden on those who make minimum use of long-distance
service."

Wirth's bill passed the House last week, but Senate action is
not expected until next year. In any case, the FCC last month
delayed the fees until April 3 to give itself more time to study
AT&T's arguments in favor of the surcharge.

When the long-distance subsidy stops, AT&T will find itself with
an additional $3.3 billion a year, and has proposed giving some
of that money back to consumers by cutting the cost of
long-distance calls by 10.%5. Critics point out that this would
add up to a reduction of only $1.75 billion, or about half the
amount AT&T is getting. Says John Bryant, a Congressman from
Texas, in a medley of metaphors: "They're trying to have their
cake and eat it too. That put the last nail in the coffin of
AT&T as a truthteller."  Judge Greene will conduct a hearing
into the entire matter next week.

The latest House action disturbs many industry officials,
including Archie McGill, a former IBM vice president, onetime
head of AT&T Information Systems and now president of Rothschild
Ventures. Says he:  "It's a real tragedy that Congress is
poking its nose in at this point. The game plan is in place.
To shake it up for two bucks a month is just not rational."

The $2 surcharge is not the only rate increase in the works.
Local phone companies have been madly filing for price hikes
with state public service commissions. A total of $6.7 billion
in increases has been requested this year. The outlook for
those applications is uncertain, and public service commissions
are expected to be tough with the phone companies.

By asking for so much so soon, some of the operating companies
have expended goodwill even before getting started. Judge
Greene has accused them of using divestiture as an excuse to
request more money, and call some of the requests "unjustified."

One of the biggest questions facing the new AT&T is how well it
will do in the world of competition. For most of its 107 years,
the phone company has been shielded from rivals by its
controlled monopoly status. Wall Street analysts and industry
experts disagree on how successful AT&T will be. In general,
the new AT&T is expected to excel at its traditional business
of long-distance telephone service. But it may run into trouble
when it tries to take on other markets. Says ITT Chairman Rand
Araskog:  "AT&T has to learn all over to compete. It has
definitely lagged behind technology and the competition."

The most interesting competitive skirmish to come out of the
telephone divestiture will be the head-on confrontation between
AT&T and IBM. AT&T, which is now free to enter the computer
market in full force, has the size and resources to match IBM.
The phone company has been making computers largely for its own
use for a generation; most telephone calls are switched by
computers developed by AT&T for the Bell System. For legal
reasons, though, they were called microprocessors. Says Vice
Chairman James Olson:  "We can now call them computers without
looking over our shoulder."  AT&T will have a desktop business
computer ready early next year. The machine will probably be
built around a super chip that has more than 256,000 bytes of
random access memory. Says Robert Casale, head of marketing
and sales for AT&T Information Systems:  "We will be selling
the leading edge of technology. Nobody can touch us."

Another bruising market battle will be over long-distance
service, where a host of companies are trying to take business
away from AT&T. The most aggressive has been MCI
Communications, based in Washington, which since 1969 has been
permitted by the FCC to offer long-distance service in
competition with AT&T. Under Chairman William McGowan, 54, MCI
has grown to more than 1 million subscribers (vs. AT&T's 70
million) and to $1.1 billion in sales.

Mci and the other new competitors in the long-distance market,
GTE's Spring and ITT's Longer Distance, have been able to offer
sharply discounted long-distance rates. The firms connect only
markets with heavy phone traffic, where the big profits are,
using the most modern equipment, leaving to AT&T the smaller,
less profitable area. But some potential customers considered
the low-cost competitors inconvenient because customers have to
punch in up to eleven extra numbers to make a call. An MCI
customer making a long-distance call has to hit as many as 22
digits. Beginning next fall, though, all long-distance lines
will be on an equal footing. Whether a customer is using AT&T,
MCI, Spring or Longer Distance, the person will use the same
dialing procedure.

AT&T's Western Electric division will face very stiff
competition. It will be entering a market with such powerful
competitors as Canada's Northern Telecom, Rolm, GTE and ITT.
In 1982, Western did 90% of its $12.6 billion in business with
the Bell companies. Now those companies will be free to buy
their equipment form anyone, at the best price. They are, in
fact, doing that already. This year three Bell companies
reached deals with TIE/Communications of Connecticut for $125
million worth of switchboards.

Western Electric sales could be cut in half next year, according
to one particularly grim  Wall Street view. That is nonsense,
says Charles Meetsma, general manager of the division's plant
in Allentown, Pa. Says he:  "We're aware that many persons
deride Western Electric's ability to compete. But to them I say
`You haven't seen anything yet.'"  With its Bell Labs providing
research for ingenious new products, Western Electric is
confident that it will do well.

The new regional phone companies will be kept busy at first
just providing local telephone service, where they will not
face competition. It will be a while before they realize big
earnings from any activities other than the plain old telephone
business. Says Pacific Telesis Chairman Donald Guinn:  "Our
first priority is to keep the core business--the Bell operating
company--healthy. That's the place where most of our money
comes from."

Nonetheless, the holding companies are trying to stir up
investor interest by stressing glamour, growth and marketing in
a rush of ads, and in talks before financial analysts. Typical
is Ameritech, which uses the snappy slogan "A company you'll be
hearing from."  Says Chairman William L. Weiss, 54:  "The future
of our industry lies in exotic services. It lies in the
explosion of information services."

While most of those new businesses have yet to be determined,
some local phone companies have shown where they are heading.
Ameritech intends to go into fiber optics, the superfine lines
increasingly used as an efficient and versatile new way to carry
telephone signals. Ameritech, BellSouth and the other holding
companies are planning major efforts in AMPS, for Advanced
Mobile Phone Service, a Bell Labs invention that currently is
the hottest telecommunications innovation around. The system
is expected to increase radiotelephone use in cars greatly.
Buick became the first automaker to offer such a phone as an
option on some 1984 models. The cost is about $3,000, but
prices are bound to come down.

The seven holding companies are likely to develop in very
different directions once they leave Ma Bell. BellSouth is
favored by a good economic climate in the Sunbelt. Ameritech
has a vast and important industrial base, but in a declining
area. Pacific Telesis has battled long and hard with ratemakers
reluctant to permit higher charges, so it feels tested and ready
for anything. Says Chairman Guinn: "Divestiture doesn't pose
any problems that are more difficult than the ones we've already
faced."

Both the new AT&T and the seven operating firms are preparing
for the new era of competition by looking for ways to cut costs
and changing some old company habits. Managers everywhere are
searching for places to slash payrolls. Some companies are
turning to extensive early retirements, although layoffs have
already occurred. That goes against a long tradition of Bell
paternalism. To many AT&T employees who were kept on payrolls
during the Depression of the 1930's "the President" was not
Franklin D. Roosevelt but AT&T President Walter Gifford.

Some 16,000 Bell employees already have taken early-retirement
inducements, and 8,000 more are expected to do so by year's end.
That could cut payrolls by $500 million a year. Pacific
Telesis expects 1,400 to 1,800 people to accept early
retirement. Throughout the Bell System, families are being
uprooted as employees shift between the various entities. In
some cases former colleagues are becoming competitors.

Perhaps the most important long-range impact of the AT&T
breakup will be to speed up the already breathtaking
developments in telecommunications. With more competition from
more companies, progress is likely to be even faster. Says
MCI's McGowan:  "The technological revolution is arriving fast
in the phone business. Look at that instrument on my desk. It
looks like a phone, but it's really a computer. By pressing
buttons, I instruct a computer to do things it's programmed to
do."

One of the signs of that technological revolution is the way
major corporations and state agencies are literally setting up
their own phone companies. By guiding microwave dish antennas
and aiming them at communications satellites, they can legally
bypass public phone systems. That significantly cuts into the
revenue of AT&T and all other phone companies. Says Gideon
Gartner, a telecommunications researcher:  "The danger to AT&T
of bypass cannot be overestimated."

The Port Authority of New York and New Jersey, working with
Western Union and Merrill Lynch, is building a gigantic $84
million Teleport on New York City's Staten Island. Its 17
earth stations will be beamed at all domestic and some
international satellites and will feed communications into the
World Trade Center skirting the phone company in New York City.
Citicorp, the largest U.S. bank, is installing its own $100
million system in Wall Street's financial district, which will
take most of its communications out of the phone system. Even
Salt Lake City's Mormon Church is getting into the act. Its
private microwave link to Brigham Young University 45 miles
distant in Provo, Utah, has replaced an AT&T system and is
costing Mountain Bell $42,000 annually in lost revenues.

Metropolitan phone companies are vulnerable to bypassing because
so much of their business comes from so few customers. About
24% of the revenues of New York Telephone last year came from
just 1% of business customers. All the bypass systems already
constructed have drained as much as $32 million in revenues from
the AT&T operating companies.

The promise, and the peril, of telephone bypass is typical of
the new era in telecommunications. The Bell System, in the end,
was done in by the rush of technology. The system's structure
could not contain or protect itself against better and cheaper
ways of allowing people to reach out and touch someone.
Boundaries crumbled between voice and data transmission, between
domestic and international calling points between telex,
submarine cable and satellite. What counted was communication
between parties, sometimes machines, no matter how or where.

The new competition, plus new technology that allows more
information to be carried more efficiently, will lead to a
bountiful array of new uses for telephones and telephone lines.
Says James Martin, authority of The Wired Society:
"Deregulation of the U.S. telecommunications industry will
stimulate our imaginations. It will briefly raise the cost of
telephone service, but in the end we'll all profit from a
revamping of the system."  With any luck, as a result of
deregulation, the world's best telephone system could become
even better.

--By John S. DeMott. Reported by Bruce van Voorst/New York,
with other bureaus