Monumental errors haunt IBM, AT&T

January 02, 2002|By Jay Hancock

CORPORATE bosses make bad choices all the time. But occasionally a top executive makes a decision so historically wrongheaded, so disastrously fateful, that it haunts his successor's successor's successors and harms shareholders and employees for decades.

One error for the ages came in the early 1980s, when IBM honcho John R. Opel allowed an obscure contractor called Microsoft to own the license for the operating system in IBM's new personal computer. By essentially exploiting IBM's brand without paying for it, Microsoft soon eclipsed its business partner, which lost hundreds of billions of dollars in potential sales.

Another epic blunder came around the same time and was related to the IBM goof.

Twenty years ago next week, Charles L. Brown, then boss of the American Telephone and Telegraph Co., caved into pressure from the Justice Department to break up the AT&T monopoly. Brown approved a plan to shed AT&T's local landline operations - soon to be known as Baby Bells - and hang onto long-distance phone service and telephone equipment sales.

It seemed smart. Many people believed that stodgy local phone companies would do poorly on their own and that long-distance and hardware held the most potential for growth and development.

People are now writing AT&T's obituary. The company is selling its cable TV and broadband communications business to Comcast and will soon be left with only its consumer long-distance division and a corporate telecommunications unit.

Many analysts believe it's only a matter of months before the rest of AT&T is absorbed by a competitor. What was once the world's biggest business, born with Alexander Graham Bell's 1876 invention of the telephone, would cease to operate as an independent company.

The road to today from Jan. 8, 1982, when AT&T agreed to the breakup plan, is frightfully bumpy, with numerous switchbacks, blind alleys and unforeseen hazards. But AT&T's predicament can be traced to its breakup strategy, and here's one piece of evidence: The most likely buyer of the AT&T residue is thought to be one or another of the Baby Bells that many thought were endangered 20 years ago.

Although AT&T kept the long-distance and hardware divisions, they turned into cutthroat, low-profit businesses. Even in the company's vaunted Bell Labs division, the engineers tended to stay one step behind rivals, and the marketing people stayed two steps behind.

For two decades AT&T has tried and failed to get back on track.

It went into the computer business by buying NCR, lost millions and then got out. It tried to go into the consumer local-phone trade by leasing lines from Baby Bells but has been stymied.

After blowing opportunities as a cellular pioneer, AT&T built up a wireless phone network through acquisitions and then sold it. It amassed a cable and broadband network through acquisitions and has agreed to sell it. It shed its Lucent hardware and research unit.

Part of AT&T's problem has been political. As Fortune magazine's Stephanie Mehta pointed out last year, by shedding its local phone lines in the breakup, AT&T also became disconnected from local politicians and lost its once heavy clout in Washington.

The Telecommunications Act of 1996 was widely seen as heavily favoring the Baby Bells, and AT&T's 1997 attempt to move into the field itself by buying SBC Communications, a Texas-based Baby Bell, was smothered in the cradle by federal regulators.

There may be a lesson here. The same Justice Department that in 1981 was hounding AT&T was also trying to break up IBM, which likewise was accused of being a monopoly. One reason given for IBM's decision to allocate the personal-computer operating system to Microsoft was IBM's hope that the move would ease harassment by the antitrust dingos.

Maybe it did. On the same day that it announced the AT&T breakup, the Justice Department dropped its antitrust lawsuit against IBM.

Watching all this was Bill Gates, the 26-year-old, soon-to-be-grubby-rich boss of Microsoft. When it was his turn to be attacked by anti-monopoly government lawyers years later, Gates refused to give up until he was able to sign an apparently cosmetic, toothless settlement proposal.

Microsoft seems to have won. But 20 years ago, IBM and AT&T looked like winners, too.

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