Pacific Telesis Group
Pacific Telesis Group
Public Company Incorporated: 1983
Sales: $9.72 billion
Stock Exchanges: New York Pacific Midwest London Geneva Zürich Basel
Pacific Telesis Group (PacTel) was incorporated in Nevada in 1983 following the U.S. District Court-ordered divestiture of American Telephone and Telegraph Company (AT&T), effective January 1, 1984. Pacific Telesis Group, established as the western holding company of the massive Bell telephone network, assumed ownership of Pacific Bell and its fully owned subsidiary Nevada Bell. PacTel’s business includes providing local, long-distance, and cellular telephone services, and electronic voice, video, and data communications for residential and business customers, as well as for interexchange companies. At divestiture, the company formed PacTel Publishing to handle directory publishing and PacTel Communications Systems to expand nontelephone operations.
Like all other regional holding companies (RHCs), PacTel faced a competitive marketplace with severe restrictions, to be monitored by the Federal Communications Commission (FCC). New ventures for RHCs had to be established under separate subsidiaries, and sales from any startups could not exceed 10% of total company revenues.
Fortunately for PacTel, Pacific and Nevada Bell had been managed as one company since 1913; unifying its systems was not a problem. PacTel, however, faced other disadvantages that were formidable, though not insurmountable. Due to rapid growth in the 1960s and 1970s, Pacific Bell, then known as Pacific Telephone & Telegraph Co., faced entanglements with consumer groups, the California court system, and the California Public Utilities Commission (CPUC). From 1968 through the early 1980s, Pacific Bell sparred with the CPUC over rate regulation, causing a rift in the company’s relations with AT&T. AT&T significantly curtailed investment in Pacific Telephone, which then borrowed heavily. With company debt and the number of employees high, Pacific Telephone had a reputation that was faltering.
In 1980 AT&T organized a management team to help Pacific Telephone. Donald E. Guinn, head of network services at AT&T, became chairman of Pacific Telephone. Guinn chose John Hülse, a former executive with Northwestern Bell Telephone Company, as chief financial officer. By 1983 Guinn had smoothed Pacific Telephone’s relations with the CPUC and obtained a record $610 million rate increase. Hülse trimmed staff by more than 30,000 and cut capital spending and borrowing. The team also planned to update lagging technology; Pacific Telephone placed sixth out of seven in the Bell pecking order, with only half of its switching systems converted to digital by September 1983.
Within weeks of divestiture, PacTel solicited federal Judge Harold Greene’s permission to sell telecommunications products and services abroad. The request was granted, and the company formed a subsidiary, Pacific Telesis International, to market the company’s know-how in the design, construction, and operation of telephone systems. Sales were aimed primarily at China and Asia. The subsidiary began operations late in 1984.
By April 1984 PacTel offered domestic telecommunications packages to medium and large businesses, including data transmission, facsimile, electronic voice mail, and teleconferencing. As some states relaxed regulations, industry analysts forecast increased competition within local calling areas. The FCC’s solution was to fix monthly access charges paid by long-distance companies to the local carriers. Some states raised rates in residential and rural areas, where service had previously been subsidized by the Bell system’s more active business and urban markets.
The gravest problem for the RHCs was known as bypass—larger businesses could develop their own microwave or satellite-based systems, thus avoiding access charges. One large business seeking FCC permission to connect longdistance calls without accessing the local network was AT&T.
To combat the competition, Pacific Bell lost no time developing its integrated services digital network (ISDN) capabilities as well as increasing installation of fiber optic loops in the San Francisco and Los Angeles areas. The goal of such technologies was to link a range of telecommunication services to customers via computers. With such systems fully operational, Pacific Bell would be able to offer both business and residential subscribers the fastest, most efficient, and least expensive service. All this was contingent, however, on the loosening of federal restrictions. PacTel and Pacific Bell were prohibited from offering enhanced or nonregulated services under FCC rules issued in 1980. Through the granting of waivers in April 1985, however, the FCC effectively overrode its own prohibitions. Although competitors were not very pleased with the decisions, the RHCs certainly were.
Wasting no time, PacTel stepped up its nonregulated operations. In February 1985 the company established an information systems division to offer integrated telecommunications products—word processors and microcomputers—as well as the wiring, cabling, and service necessary to maintain the systems. Acquisitions made in 1985 included the Byte Shops, an eight-store, California-based computer chain; JWJ Publishing, which published tour guides; and Kensington Datacom, a private British network. PacTel initiated the purchase of Communications Industries, Inc., a cellular and paging company, in the summer of 1985 and completed the acquisition early in 1986. At $431 million, it was the largest purchase to date by any RHC. Having established a presence in Asia the previous year, in December 1985 PacTel announced the formation of Pacific Telesis Japan K.K.
In mid-December 1985 Pacific Bell was involved in a skirmish with AT&T and MCI Communications Corporation over long-distance customers. AT&T allegedly sent thank-you notes to customers who had in fact chosen MCI as their long-distance carrier, and notified Pacific Bell to assign those customers to AT&T. AT&T blamed the mistake on a computer error. MCI asked Pacific Bell to refund customers the $5 changeover fee and the difference between MCI and AT&T long-distance service costs.
In September 1986 PacTel became the first RHC to reach a contract agreement with the Communications Workers of America. The contract, criticized by some as overly generous, included a no-layoff provision and incentive bonuses, a benefit previously reserved for executives. Chairman Donald Guinn, attempting to positively affect management morale as well, hired outside consultants to prod PacTel staff into more active roles. The company ran into trouble with sales pitches, however. The CPUC claimed PacTel deceptively marketed packages of optional services, without telling subscribers they could buy basic services for less. Twenty-five employees sued PacTel, claiming the company forced them to use deceptive sales tactics or lose their jobs. Although PacTel denied the charges, at least two senior marketing executives left, and the company scheduled the retraining of thousands of salespeople in more moderate tactics. In November 1986 PacTel acquired Northern Telecom’s western regional direct-sales operation.
Although credited with smoothing Pacific Bell’s rocky relations with the CPUC, by the end of 1986 Guinn still had some work to do. The CPUC finally responded—negatively—to Pacific Bell’s 1984 request for a $1.4 billion rate increase. In fact Pacific Bell was ordered to plan a refund of $121 million. Guinn offered to freeze residential rates until 1990 in exchange for options in pricing other services. Pacific Bell could then lower interexchange access fees in order to reduce bypass, which was costing PacTel $400 million to $500 million. The CPUC order stood, however. Continuing the effort to diversify, by late 1986 PacTel International operated offices in England, China, Japan, Spain, South Korea, and Thailand, primarily on a consulting basis.
In 1987 Donald Guinn, who had been president, chairman, and chief executive officer of Pacific Telesis, relinquished the presidency to Samuel Ginn. Philip Quigley became the new president and CEO of Pacific Bell, succeeding Theodore Saenger. Both Ginn and Quigley, experienced in nonregulated businesses, were expected to increase diversification efforts.
To this end, PacTel sought and gained approval to offer voice mail services in July of 1987, a decision further eroding the FCC enhanced-services restrictions and leading to a more open national telecommunications policy. Continuing its efforts with ISDN technology, in September PacTel initiated its first 16-month trial in the Silicon Valley area of California. The company anticipated gathering data on the practical means of applying ISDN technology in larger markets.
In September 1987 PacTel added a cellular and personal paging system in Ohio and Michigan. By year-end 1987, Pacific Bell Directory was the largest producer of printed directories in California. By 1988 Pacific Bell was operating six bilingual service centers and offered directories in four languages. Publishing revenues, $521 million in 1989, reached $789 million by 1988.
In the cellular market, PacTel kept apace. In 1984 its cellular division served 15,000 customers; by 1988 the number jumped to 262,000. Revenues climbed from $14 million to $308 million in the same period.
PacTel entered the cable television market in 1988, acquiring a majority interest in East London Telecommunications (Holdings) Ltd. Because the United Kingdom had only four television stations at the time, the market was a favorable one.
The news was not good for PacTel, however. After spending two years and $26 million on a voice and data transmission system called Project Victoria, Pacific Bell abandoned the effort to develop Project Victoria further in mid-1988. Rather than wait for an already delayed FCC decision on whether Pacific Bell would have to market Project Victoria through a separate subsidiary, the company decided to license the technology. PacTel moved ahead in August 1988, reaching an agreement to buy American Businessphones Inc. (ABI).
As telecommunications markets became more closely connected, Pacific Telesis entered significant agreements necessary to maintain the smooth transmission of information. In a pact with the state of California, in late August 1988 Pacific Bell upgraded its central-office Centrex system to digital networks.
On the international level PacTel found itself in a skirmish with the Department of Justice (DOJ) and AT&T. PacTel, investigating opportunities in Japan since divestiture, requested a waiver allowing the company to buy an interest of less than 10% in the Japanese company International Digital Communications, Inc. (IDC). Because IDC would neither own nor operate facilities in the United States, the purchase was allowed by the FCC. While PacTel pushed for DOJ approval, AT&T refused to do business with IDC until the waiver issue was resolved. IDC could not afford to start operations without AT&T’s business, because AT&T would be responsible for connecting a large number of customers to IDC. Thus AT&T’s refusal to do business was, in effect, preventing PacTel from doing business with the Japanese company.
Pacific Telesis ended its fifth year of operations as a decided leader of the RHCs in the electronic voice-mail business and was competitive in cellular telephone and ISDN-related services. PacTel’s chances to move ahead in telecommunications came in 1989 in a variety of ventures. PacTel International joined British Aerospace, the United Kingdom’s largest manufacturer; Millikom U.K. Ltd., a cellular service provider; and Matra Communications S.A., a leading French telecommunications equipment provider, in operating a personal communications network in the United Kingdom. PacTel held a 20% interest in the group. PacTel International also gained a cellular license in Germany, through a similar joint venture. Also in 1989, PacTel gained approval of its request to do business with Japan’s International Digital Communications, Inc.
Domestically, through Pacific and Nevada Bell, PacTel was operating 98% of its switches digitally. Optical fiber, a high-quality information transmission medium, made up 30% of Pac-Tel’s interoffice systems by the end of 1989. When an earthquake struck the San Francisco area in October 1989, PacTel ’s systems functioned well as the quake’s extra pull was absorbed by reinforced floors, mechanically braced equipment, and 25 extra feet of fiber-optic cables, previously installed underground in the event of emergency.
Following an October 1989 agreement with the CPUC, Pacific Bell came under an incentive-based regulatory system. Effective in 1990, rates took into account the U.S. rate of inflation as well as Pacific Bell’s productivity. The company was to share profits falling within a 13% to 16.5% rate of return range with its customers. Long-term advantages to Pacific Bell would include improved relations with the CPUC as well as the company’s chance to offer customers affordable enhanced services. Accordingly, Pacific Bell announced the availability of ISDN service in all its major cities in December 1989.
In August 1990 Pacific Telesis restructured, dividing Pacific Bell into four sections. The first group, with regionally appointed vice presidents, was to oversee markets organized geographically into the Sacramento-North Valley, Los Angeles-Ventura County, and Orange-Riverside-San Bernardino County territories. A second group was to direct statewide operations; the third, product and technology support; and the fourth, corporate affairs.
In November 1990, Pacific Bell, along with Southwestern Bell, New York Telephone, and New England Telephone, was fined by the FCC on a charge of supplying incorrect data during 1988 to the National Exchange Carrier Association, an FCC accounting institution responsible for collecting and distributing access fees paid by long-distance carriers for local hook-ups.
The four companies were fined a total of $1 million. Also during 1990, PacTel decided to divest itself of its real estate holdings, setting aside a $60 million reserve to cover expected losses. Other PacTel actions in 1990 included increased investments in its overseas ventures and in upgrading its domestic telephone operations.
As Pacific Telesis entered the 1990s, competition in the telecommunications markets was likely to increase. On one point all telecommunication companies agreed: technological innovations, capably handled, could boost both national and international economies. Pacific Telesis is undeniably in the right place at the right time: the California telecommunications market is projected to be the fourth largest in the world by the year 2000.
Pacific Bell; Pacific Bell Directory; Nevada Bell; PacTel Corporation; Pacific Telesis International; PacTel Cable; PäcTel Cellular; PacTel Paging; PacTel Teletrac.
“How One Baby Bell Struggled to its Feet,” Business Week, September 2, 1983; Levine, Jonathan B., “The Baby Bells’ Weak Sister is Growing into a Bruiser,” Business Week, September 8, 1986; Booker, Ellis, “PacTel’s Bright Prospects,” Telephony, December 19, 1988.
—Frances E. Norton