BABY BELLS

In response to efforts by the U.S. Department
of Justice to split up the company, American
Telephone and Telegraph (AT&T) signed a consent decree
in 1984 divesting itself of seven regional telecommunications
companies. These companies included Bell
Atlantic, Bell South, NYNEX, Pacific Telesis, Southwestern
Bell, Ameritech, and U.S. West, collectively
known as the Baby Bells. The Baby Bells were restricted
from offering long distance services, and were required to
offer customers equal access to all long distance providers.
Passage of the Telecommunications Act of 1996 removed
these impediments. Now any company can offer local or
long distance service. The breakup of AT&T is credited
with reducing long-distance phone rates and fostering
more competition on the local level. For the Baby Bells,
the transition to long distance carriers was relatively
smooth. They managed to provide relatively inexpensive
service and maintain both a trained work force and a loyal
customer base. Despite the inroads they made into the
long distance market, estimated to yield $68 billion in
annual profits, the Baby Bells encountered difficulties in
the closing years of the 1990s. Through various acquisitions
and mergers, four new Baby Bells emerged. Qwest
was formed in 1999 by a merger of U.S.West and Qwest
Communications. Verizon was formed when Bell Atlantic
(which had previously merged with GTE) merged with
NYNEX in 1999, a $21 billion merger, the second largest
in U.S. history; this merger created the nation’s second
largest telecommunications company, behind only AT&T
itself. SBC Communications was formed from a merger
between SBC and Ameritech in 2000. This left Bell South
Communications as the only original Baby Bell. Although
the Baby Bells operate in a regulated industry, matters
were complicated by complaints of price gouging, poor
service, and refusal to work with smaller local and long
distance companies. The companies have frequently resorted
to lawsuits to protect their interests. An analysis of
local Bell phone markets published in U.S. News during
1996 showed the consumer-complaint rate had climbed
20 percent since 1991 and reached a five-year high in
1995. Officials in a number of states are responding to
the service problems by hitting local phone companies
with fines and penalties. At one point, the Baby Bells appeared
ready to jump into the long distance and data businesses
with little threat to their local residential markets.

But competition for customers in local markets was so
great, particularly as the Baby Bells found themselves
contesting with AT&T and other broadband cable companies
such as Comcast and Cox, that business suffered.
During the fourth quarter of 2001, for example, the cable
industry added nearly 923,000 broadband subscribers,
nearly twice as many as the 540,000 customers who opted
for the Bells’ comparable high-speed digital subscriber
line (DSL) Internet service. In addition, the Baby Bells
also faced increasing competition from cable companies
that now offer local telephone services. Finally, they must
come to terms with the problem of wireless communications
that are eroding traditional local phone service.
According to a study published in 2002, approximately 3
percent of Americans have already disconnected their traditional
phone service and rely entirely on cellular phones.
The study predicted the use of wireless phones would
nearly double by 2005. By contrast, the study forecasts
that traditional wireline minutes will drop by 22 percent.
The Baby Bells have tried to meet the challenge by forming
their own wireless companies such as Verizon Wireless,
a joint venture of Verizon and the European mobile
phone company Vodafone, and Cingular, which is a partnership
between SBC and BellSouth.