Telephone and Data Systems, Inc.
Telephone and Data Systems, Inc.
Sales: $456.1 million
Stock Exchanges: American
SICs: 4813 Telephone Communications Except Radiotelephone; 4812 Radiotelephone Communications
Telephone and Data Systems, Inc., or TDS, is one of the most highly praised telecommunications enterprises in the United States. While only a fraction the size of General Telephone Corporation and the Baby Bell companies, TDS has consistently grown at twice the rate of its larger counterparts, and it is the ninth largest non-Bell telephone company in the United States. TDS was founded in 1967 by LeRoy T. Carlson. Since that time, the company has grown into a holding company for more than 90 small rural telephone companies. Included in its operations are printing, computer services, paging, and cellular communications subsidiaries serving customers in markets across the United States. The company is divided into seven main operating units, including TDS Telecom, American Paging, and United States Cellular Corporation.
Earlier in his career, Carlson had been a product development director for Acme Steel. In 1950 he acquired the Suttle Equipment Company, a small supplier of business forms, equipment, and other supplies for independent telephone companies. Through his sales efforts, Carlson was well acquainted with many of these small, primarily rural companies and the difficulties they faced. In 1956 a business associate suggested that Carlson consider buying a small telephone company in Calvert City, Kentucky that had 218 customers. When he learned that Southern Bell was about to take over the company, Carlson quickly examined the situation and, over the course of a weekend, bought the company. He subsequently purchased a hodgepodge of other small telephone companies, a directory publisher, and some manufacturing operations, assembling them into a minor conglomerate called Telephones, Inc. The publicly listed common shares of the holding company were sold to Continental Telephone Company in 1964, but Carlson continued to dabble in the market by buying and selling several other small telephone companies.
By 1967 Carlson decided to play a bolder role in the industry. Driven by the rewards of investment in new technologies and economies of scale, he began searching for telephone properties located adjacent to one another. The task was made harder by the fact that the large independents—General, United Telephone, and Continental—had already snapped up many of the best prospects. Carlson and his associates concentrated their search on Wisconsin, where they identified several rural companies that together would provide the critical mass for an efficient operation.
Negotiations were often difficult for Carlson, who was forced to make his pitch to busy owners who were farmers, store keepers, and struggling rural entrepreneurs, but the extraordinary effort paid off. Beginning with the Central State Telephone Company in September 1967, Carlson acquired nine more companies over the next 14 months. He set up an operations group in Madison and a corporate staff in his home town of Chicago. With help from his father-in-law, a corporate attorney, the new company was incorporated on January 1, 1969, as Telephone and Data Systems, Inc. Carlson’s son, Ted Carlson, was a member of the original board.
Certain that the future growth of his company would turn on its reputation, Carlson invested heavily on improvements for his 25,000 customers. TDS eliminated multiparty service, installed new electronic switching systems, and introduced direct distance dialing. It preserved the local flavor of each company and built on their established goodwill by maintaining local managements, who were well known in each community and provided valuable public relations counsel. In 1969 TDS bought out six more companies, five of which were in Wisconsin. Suddenly, TDS was the third largest telephone company in the state and was beginning to encounter mounting, potentially disastrous opposition from General, Continental, and other established holding companies. For these reasons, TDS abruptly shifted its acquisition activity to the Northeast, and during 1970 snapped up five companies in New Hampshire, Vermont, and Maine. In each case, state regulatory commissions noted the company’s good reputation for service improvement.
TDS companies benefitted from centralized purchasing and standardized systems and engineering, but it quickly outgrew the capabilities of its small organization and was obliged to establish specialized subsidiaries to provide management and engineering services. The company also outgrew its financial resources and in 1971 issued more than $4 million in long term debentures. But with the rise of the consumerist movement, TDS found itself increasingly unable to push rate increases past state regulators. These increases made network improvements harder to fund, and made it difficult to float debentures and other investment papers. Carlson personally spearheaded his company’s case in rate proceedings and often produced favorable results, earning a reputation as a formidable negotiator. He also won a favorable arrangement with the Bell System that would provide more equitable distribution of interconnection fees.
Between 1971 and 1973, TDS added 19 more companies in the Northeast and Midwest as well as in Oregon, Idaho, North Carolina, Alabama, and Mississippi. The geographical diversity of TDS was further enhanced in 1974 and 1975 when eight more companies were added in Virginia, Pennsylvania, and Tennessee, bringing TDS its one-hundred-thousandth customer. By that time, even with 503 employees, it became impossible to properly administer the growing TDS system. In July of 1974 the company reorganized into groups comprising the Wisconsin, Northeast, Southeast, and Mid-Central regions, and an “Assigned” group for companies outside those regions. In 1976 TDS created a computer services subsidiary to implement centralized, automated bill processing. The company also acquired Carlson’s old Suttle equipment company, and transferred its operations from Lawrenceville, Illinois, to Waunakee, north of Madison, Wisconsin.
LeRoy Carlson was active in regulatory policy proceedings and emerged as a strong opponent of the Justice Department’s attempts to break up the Bell System. He argued that the task of providing affordable telephone service to everyone in the United States could be completed only through subsidies from American Telephone and Telegraph Company’s (AT&T) long distance revenues. The position of AT&T and other monopoly providers, however, gradually eroded. Even TDS began to experience competition in its key systems and PBX sales from companies that were not obligated to do business in unprofitable areas. Nevertheless, TDS finished 1978 as the twelfth largest telephone company in the United States, serving 173,500 customers. It operated 52 telephone companies and recorded $33.7 million in revenue, ten times the figure it recorded in 1969.
That year, TDS switched the focus of its expansion from acquiring individual companies to taking over franchises from other independents. TDS acquired several companies from United and Continental, including Tennessee Telephone, a company with 15 exchanges serving 39,000 customers. These acquisitions helped TDS to amass more than 250,000 customers in 22 states by 1983. They also necessitated the creation of a new Tennessee operating division. As great as the company’s strides had been, it remained a regulated company earning a prescribed rate of return. To achieve greater rates of growth, TDS needed to expand into a range of unregulated services. Such a move required additional financing. Having gained a listing on the American Stock Exchange in 1981, TDS distributed four million new common shares, raising $25 million dollars.
TDS became involved with paging services in Wisconsin in 1972. After battling to win the right to serve more populous adjacent communities where it did not provide telephone service, TDS built up a highly profitable paging service territory that included Madison, Green Bay, Milwaukee, and all the areas in between. Spurred on by the Bell companies’ reluctance to develop paging systems, TDS later won the right to offer paging services in Chicago, Miami, San Antonio, and Tucson, and established a special subsidiary called American Paging to operate these franchises.
Another area TDS developed was cable television. The company acquired its first cable franchise in April of 1975, when it took over the Calhoun City Telephone Company in Mississippi. Additional systems were added later as TDS acquired other telephone companies that also operated cable franchises. By 1978 it had become apparent that cable television companies could develop the capability to displace telephone companies by offering switched voice connections, as well as television service, over their coaxial networks. TDS quickly applied for licenses and cross-ownership waivers to set up cable television systems within its other existing telephone service territories.
In many cases, TDS’s staff lacked the experience to properly administer these new ventures. A separate cable television operation was thus established. Carlson, who turned 65 in 1981, relinquished his post as president to his son Ted, who bolstered the company’s engineering group by hiring experienced cable television and radio systems managers. He also expanded the managerial hierarchy to accommodate the company’s growing range of interests. Cable operations were centralized in 1984 under the newly created TDS Cable Communications Company. By the next year, the company operated 16 cable systems serving more than 30,000 homes. Meanwhile, a new, much more promising technology was emerging.
Cellular telephones were first tested by Illinois Bell in 1979. But while the Bell companies were slow to develop cellular service, hundreds of other companies—including TDS—saw tremendous new opportunities for the technology. The company quickly planned to establish a series of cellular communications networks, beginning with an application to serve Indianapolis. The Federal Communications Commission, which granted cellular licenses, was overwhelmed by the tremendous number of applications it received and a myriad of challenges to its rulings. To speed the process, the FCC asked the hundreds of applicants to work out their own partnership agreements before applying for a license. TDS eventually abandoned its bid for Indianapolis in favor of a five percent stake in the Los Angeles market. TDS spent a quarter million dollars on its first filing, developing detailed business and engineering plans, but later applications brought the average cost to below $10,000.
Unable to handle its growing cellular activities, TDS established a new subsidiary called United States Cellular Corporation on December 23, 1983. The small company was frequently steamrollered by larger companies. The arrogance of these companies raised the ire of LeRoy Carlson, who fought tenaciously for United States Cellular, and often prevailed. Through an industry-wide agreement, the company was awarded licenses for cellular networks in Knoxville and Tulsa. TDS made the development of its cellular unit a major priority in March 1985, when it decided to sell its cable television holdings and devote its full attention to United States Cellular Corporation. The cellular market promised considerably higher growth and rates of return than cable, and it also posed a greater threat to wireline services than cable. TDS generated $41 million from the sale of its cable systems, the last of which was disposed of in November 1986.
By 1987 United States Cellular Corporation was highly influential in the cellular industry. The company applied for more than 70 additional licenses and won franchises in Peoría, Des Moines, and Poughkeepsie. The same year, TDS diluted its control of United States Cellular Corporation by issuing additional shares in the unit to Coditel, a Belgian cable television company. It planned to sell an additional block of shares to the public. However, the sale had to be postponed until May of 1988, after the Black Monday stock market collapse. More than three million shares were distributed, reducing TDS’s interest in United States Cellular Corporation to just over 80 percent. In 1988 United States Cellular Corporation was active in 31 regions, including Wichita, Atlantic City, and Columbia, Missouri. Meanwhile, TDS greatly expanded its American Paging business, and was serving 127,600 customers in 31 major metropolitan areas, including San Francisco, St. Louis, and Pittsburgh.
When LeRoy Carlson turned 70 in 1986, he relinquished the title of chief executive officer to his son Ted. The elder Carlson retained his position as chairman of the board, and remains active in the development of the company’s strategies.
The TDS Telecom wireline division resolved to register an annual growth rate of seven percent in access lines, through internal growth and acquisitions. As existing systems provided only about four percent growth, TDS continued on the acquisition trail. Between 1989 and 1992, TDS Telecom brought the number of telephone companies it operated up to 88. Over the previous 20 years, however, TDS and companies such as Rochester Telephone and Century Telephone had purchased so many independent companies that the number of remaining prospects had dwindled considerably. TDS Telecom was forced to look for new companies in areas well outside its established operating territories. Still, the geographical remoteness of some companies did not preclude them from the taking advantage of the centralized purchasing, engineering, and billing services that had made TDS’s existing companies able to operate so much more efficiently.
Again, to fund the company’s expansion, TDS issued more shares, diluting the existing shareholder base by 24 percent over just 18 months. Because financial demands were even greater in the cellular market, the number of United States Cellular Corporation shares grew by 61 percent over the same period. Meanwhile, TDS held its ownership in United States Cellular Corporation at 82.3 percent, which meant that it took on four-fifths of all the new shares in United States Cellular Corporation that were issued. Due to the high start-up costs associated with cellular systems, the investments had a profound effect on TDS’s earnings growth. Once these investments were made, however, the way was clear for a steady return from United States Cellular. This growth was first realized in 1992, when United States Cellular Corporation registered a 58 percent increase in the number of subscribers, to 182,500. The number of subscribers rose above 260,000 in 1993.
The same year, the company’s American Paging group registered 36 percent growth, serving 321,000 customers. The division’s strength was due mainly to excellent marketing and customer retention efforts, as well as the introduction of enhanced-function paging systems. In 1993 American Paging served more than 433,000 units. Within TDS’s core wireline business, TDS Telecom, the customer base grew by nearly six percent to 321,700 access lines in 1992. TDS Telecom acquired five additional telephone companies during 1992, bringing the total number of TDS telephone companies to 90. In 1993 the customer base rose to 350,600 and the number of telephone companies to 92. This made TDS the ninth largest non-Bell local telephone company in the country, with a presence in 28 states. The consolidated customer units of TDS topped one million in 1993.
TDS maintained a reputation for superior customer service and the technological upgrade of rural and small town systems. This stemmed from the company’s commitment to the rural economies it served, and its dedication to ensuring that the telecommunications infrastructure contributed to the growth of these markets. This philosophy has remained intact ever since LeRoy Carlson first organized TDS, and it served to dissuade potential competitors from any attempt at raiding its markets.
TDS Telecommunications Corporation; American Paging, Inc.; United States Cellular Corporation (82.3%); TDS Computing Services, Inc.; American Communications Consultants, Inc.; Suttle Press, Inc.; Answer Madison Telemessaging Center, Inc.
August, K. C, TDS: The First Twenty Years, Madison, WI: Telephone and Data Systems, Inc., 1989.
“Company Watch,” Financial World, September 15, 1992, pp. 12–13.
“TDS,” Telephone News, April 14, 1985, p. 8; September 9, 1989, p. 1.