BABY BELLS

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 Bell South.

BIBLIOGRAPHY

Elstrom, Peter. "Will the Baby Bells Crack Too?" Business Week (June 18, 2001), p. 112–114.

Kushnick, Bruce A. The Unauthorized Biography of the Baby Bells & Info-Scandal. New York: New Networks Institute, 1998.

Stone, Alan. Wrong Number: The Breakup of AT&T. New York: Basic Books, 1989.

Meg Greene Malvasi

See also AT&T; Government Regulation of Business; Telecommunications; Telecommunications Act.