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The Last Monopolist


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The Last Monopolist

Ed Whitacre has built SBC into a telecom profit machine. But now, he's facing up to competition

Wandering through his sprawling ranch just outside San Antonio, Edward E. Whitacre Jr., chairman and CEO of SBC Communications Inc., keeps a watchful eye on the ground. Besides deer, horses, and two zebras, the property also is home to rattlesnakes and cottonmouths. When the 57-year-old comes across one of the deadly critters, he deftly pins it with a stick and smashes its head with a rock. "It's no big deal," he says with a shrug.

But then, not much is to the six-foot-four native Texan known as "Big Ed" by friends and colleagues. Over the past nine years, Whitacre has shown the same kind of grit while transforming what was the smallest Baby Bell into the second largest, just behind Bell Atlantic Corp. And he's not done yet. Now, Whitacre is pushing to complete the $62 billion acquisition of rival Ameritech Corp.--the largest telecom deal ever. If it goes through, SBC will stretch from California through the Southwest to Ohio, with a corner of Connecticut thrown in for good measure. What's more, Whitacre has taken stakes in phone companies in Mexico and South Africa, while Ameritech would add holdings in Canada and several European countries.

What Whitacre is attempting is nothing less than the transformation of a sleepy, regional monopoly into a world-class juggernaut. By acquiring telecom properties, beefing up high-margin services, and then slashing overhead, he is creating the kind of superefficient powerhouse that can slug it out with the likes of MCI WorldCom, AT&T, and British Telecommunications. Today, SBC is the most profitable of all the Bells. With 1998 net income of $4.0 billion on revenues of $29 billion, SBC makes 33% more money than Bell Atlantic, even though the New York-based company has higher revenues. And its stock? Now at 48, it has averaged a scorching 47% annual return over the past two years, vs. 31% for the Standard & Poor's 500-stock index. "I like to be the best," crows Whitacre.

How he has succeeded, though, is not just a study in shrewd dealmaking and ruthless cost-cutting. Whitacre also is one of the industry's last great monopolists. When upstarts tried to invade the Texas market in the mid-1990s, Whitacre got the state legislature to require new entrants to build a phone network to serve every house in a 27-mile square--a financial impossibility that quashed competition. And in June, 1997, he played the industry maverick, launching a legal assault to overturn key elements of the Telecommunications Act of 1996--the deregulation law that Congress, telecom companies, and even SBC had worked for years to pass. "They have raised every argument they can think of to block entry by feasible competitors," says Mark Rosenblum, vice-president for law at AT&T. It has worked: Competitors have swiped only 2.2% of SBC's phone lines, compared with a 3.4% loss at Bell Atlantic.SCRAPPY UPSTARTS. All that is about to change as deregulation unfolds. In the years ahead, Whitacre's coveted local phone markets will come under fire as never before. MCI WorldCom Inc. is starting to lure away SBC's lucrative business customers. By next year, with its purchase of cable giant Tele-Communications Inc., AT&T will be able to attract consumers with a package of local, long-distance, and high-speed Internet access. And then there's a host of scrappy upstarts like Covad Communications Group that are muscling in on SBC's high-margin data services. Analysts estimate SBC could lose 25% of its local phone business by 2003.

Can Whitacre, a monopolist born-and-bred, survive without his monopoly? Few executives have been able to remake their entrenched companies into nimble giants. Around the world, as countries begin to open up their telecom monopolies, the process of deregulation is causing turmoil and upheaval. In Germany, Deutsche Telekom already has lost a third of its market to upstarts. That contributed to the loss of 40,000 jobs over the past few years.

There are early signs that SBC could be a survivor. Of the seven Bells that spun off from AT&T in 1984, only SBC and Bell Atlantic have emerged as serious contenders. "Give SBC credit, they've been executing well," says Rob Frieden, professor of telecommunications at Pennsylvania State University. "The smart monopolist understands that it needs to reshape itself for the day when it doesn't have 100% market share."

Whitacre already is changing his ways. In a turnabout, he is starting to lay out the welcome mat for his competitors. That's partly because he has to: Two recent court decisions went against SBC, forcing the company to be more accommodating to its rivals. "Whitacre came out with both guns blazing," says Federal Communications Commission Chairman William Kennard. "When he realized that wouldn't work, he put his guns away." What's more, Whitacre needs regulators' support for the most critical pieces of his strategy--buying Ameritech and getting the ability to offer long distance in his territories.

To move into long distance, Whitacre must convince regulators that his markets are open to competition. So SBC is helping rivals connect to its network and get electronic access to its customers' records. "It has been a sea change," says Royce Holland, CEO of Allegiance Telecom Inc. in Dallas, a local-telephone competitor. "The evil empire has become all about brotherhood and cooperation." The cooperative stance could help Whitacre enter long distance in Texas and California by the end of this year.

Whitacre knows SBC needs to get bigger to withstand the assault of giants like MCI WorldCom and AT&T. That's why, after buying Pacific Telesis Group in 1997 and Southern New England Telephone Co. in 1998, he's planning to acquire Chicago-based Ameritech. The deal would add $17.2 billion in sales and 21 million phone lines. With the combined companies, Whitacre has promised to sell local service in 30 markets outside his home territories--among the first targets are Seattle, Miami, and Boston.

Make no mistake, though: Whitacre isn't talking about a namby-pamby merger of equals like the one Bell Atlantic and GTE Corp. are planning. He doesn't share power with anyone. The day after the Pacific Telesis deal closed, SBC took away PacTel CEO Philip J. Quigley's corporate jet and closed down its executive lunch room. Already, Whitacre has made it clear that he'll be the one calling the shots if the Ameritech acquisition goes through. "That was decided in a minute," says Ameritech CEO Richard C. Notebaert. "He who pays the premium is chairman."

The Ameritech deal, though, is no sure bet. Long-distance opponents such as AT&T and Sprint Corp. are lobbying fiercely to block the acquisition--even launching TV ad campaigns showing a fat Texan, his feet up on a desk, lighting a cigar and holding a red-hot branding iron shaped like a dollar sign. "SBC will impose its view on Ameritech, and historically that's been anticompetitive," says Richard Devlin, Sprint's general counsel. "We're against that." But Whitacre is likely to get his way. The Justice Dept. signed off on the deal on Mar. 23. And while the Federal Communications Commission may delay or attach conditions to the deal, it's unlikely to block it outright. "There's a lot of hand-wringing and angst at the FCC over the merger, but it's going to get done," says analyst Scott C. Clelland of Legg Mason's Precursor Group.

That will put Whitacre in the telecom big leagues. In the U.S., SBC will be squaring off against MCI WorldCom, AT&T, and the proposed Bell Atlantic-GTE. Overseas, it will be bulked up enough to take on the likes of British Telecom and Japan's Nippon Telegraph & Telephone Corp. With its stake in Telefonos de Mexico and Ameritech's slice of Bell Canada, SBC looks like it will emerge as a North American powerhouse. That's because once it's in long distance, SBC will be able to capitalize on the fact that 50% of all international calls to Mexico originate in SBC's states, mostly Texas or California. "[SBC] is likely to be one of the top players in the world," says analyst Mel J. Marten of Edward Jones.RAILROAD TOWN. Whitacre has jumped onto telecom's fast track without straying far from home. He grew up in a tiny Texas railroad town called Ennis, 40 miles south of Dallas. Known as Edward in his youth, he showed a competitive streak early on. After he got a new football uniform in grade school, he gave friend Robert Sanders his old outfit so the two could go out to a gravelly yard and "butt heads," recalls Sanders. On his high school football team, he was known as a bruising defensive lineman who could overpower opponents. After he and high school chum Bill R. Ranton cleaned the band hall, the friends would play one-on-one basketball, and Whitacre would usually clean up with his "deadly 15-foot jumper," says Ranton.

Ennis also taught Whitacre about hard work. Most men in town, including Whitacre's father, worked for the Southern Pacific Railroad, doing everything from loading baggage to driving the diesel engines. In high school, Edward spent summers hauling freight and doing other odd jobs. But his dad, who had labored his entire life as an engineer, wanted something better for his son. "This is not for you," his father boomed in his deep voice as Whitacre neared graduation in 1959. "You go to school." So Whitacre went to Texas Tech University, becoming the first in his family to get a college education.

It wasn't clear early on whether the tuition was money well spent. During the summer after his junior year, Whitacre still was trying to figure out how to make a living. One day he stopped into the local phone company, then called Southwestern Bell Corp., to ask for a job. Even after a manager told him there wasn't any work, Whitacre refused to leave. "I need a job real bad," he said, offering to do anything. He got his wish: He started out at the company he would later head by hammering in fence posts and measuring telephone wire.

Paying his dues returned dividends later on in the executive suite. In 1985, it was Whitacre's confidence and broad industry knowledge that persuaded then-senior executive Robert G. Pope to put the young manager in charge of a group of unregulated businesses, including the wireless operations. Shortly after his promotion, Whitacre was asked to give his first presentation at an annual meeting of officers. Fresh from an operation to soothe a painful disk in his neck and wearing a bulky bandage, Whitacre did it without a hitch. "A guy willing to do that, well, he'll succeed in anything he wants to do," says Pope.

And he did. In the late 1980s, then-CEO Zane Barnes was so impressed by how Whitacre had guided SBC's Kansas unit through the breakup of the Bell system that he made him a candidate to run the entire company. Whitacre held a variety of corporate jobs, including director of regulatory affairs and CFO. In 1989, as Barnes prepared to retire, SBC directors debated whether to elevate Whitacre or executive John Hayes to the top post. Hayes was a favorite of Barnes's and a "little overconfident," recalls longtime director Admiral Bobby R. Inman. Many board members preferred Whitacre's knack for working with people and his toughness. "He was very straightforward," Inman says.

Once he got the top job, Whitacre wasted no time. The first week he took over as CEO in January, 1990, he started pushing regulators to back off his company, recalls Randall D. Barron, then SBC's Missouri chief. Whitacre asked then-Missouri Governor John Ashcroft for a meeting, and the pair got together the next day. Almost before the governor could finish congratulating Whitacre, the newly minted CEO said SBC couldn't keep returning a portion of its profits to customers if the company had to compete with new, unregulated phone companies. "He sure didn't pull any punches," Barron remembers Ashcroft saying. The governor talked to his regulators, who eased off SBC in Missouri.

Gaining influence with key government officials has been critical to Whitacre's success. In 1992, he set out to get laws passed in Texas to slow the advance of rivals and reduce state control over phone rates. SBC failed in 1993 to get such laws on the books, which only fired up Whitacre more. "We're going to win next time around," he vowed. By the 1995 legislative session, SBC had an army of 110 lobbyists, who pushed lawmakers to pass a bill halting competition, albeit temporarily.

Even today, SBC is a fierce lobbying machine. In Texas, it donated $896,751 to federal lawmakers in 1997-98, according to the Center for Responsive Politics in Washington. That's second only to utility company Enron Corp. Legislators joke about how tough the company is: "You have to get up in the morning and sprinkle meat tenderizer on these people," cracks Dallas Democratic Representative Steven D. Wolens.

While he guarded his monopoly, Whitacre was preparing for the future with a boldness atypical of Ma Bell's conservative ranks. In February, 1996, SBC executives held a retreat in the resort town of Ojai, Calif., 100 miles north of Los Angeles, to discuss how to compete in a more open industry. Whitacre tossed out the idea that SBC had to get bigger to survive. His lieutenants thought he meant buying one of the small, independent phone companies. But leave it to a Texan to think oversized: Whitacre said he wanted to buy another Baby Bell, something that had never been done before. "Let's make the big jump," he said. Within two weeks, Whitacre was negotiating to buy San Francisco-based Pacific Telesis.

After the acquisition was completed, Whitacre quickly showed he had no tolerance for the polite, gentlemanly ways of the old telecom world. CEO Quigley was stripped of his responsibilities the day after the merger closed and bumped to a largely ceremonial role as vice-chairman. Within six months, a third of the top 30 PacTel managers were gone. "It was like people were vaporized," says one former PacTel executive. SBC points out that it has added 4,000 rank-and-file jobs in California.SAVVY APPROACH. Whitacre will need such whit-leather ways in the months ahead. Besides acquiring Ameritech, his top priority is getting into the $80 billion long-distance business. To do that, he must prove to regulators that SBC is allowing rivals into its turf. The Texas Public Utility Commission, which says SBC has met 10 of 14 items on its checklist, is currently testing the links between SBC's network and those of competitors such as Allegiance Telecom.

In the meantime, Whitacre is not standing on the sidelines. He watched as Ameritech and US West Inc. failed in bids to partner with the Denver-based upstart, long-distance carrier Qwest Communications International Inc. The FCC nixed those deals because it ruled that the Bells were getting into long distance without opening up their local markets.

In a little-noticed move, Whitacre used a savvier approach. On Feb. 8, SBC announced a partnership with the communications division of Williams Cos., based in Tulsa. In the deal, Williams agreed to carry SBC's long-distance traffic at favorable prices after SBC wins regulatory approval to enter the long-distance market. But Whitacre's plan goes deeper. As SBC's dealmaking team was putting the final touches on the partnership, Whitacre stepped in to demand a piece of Williams. Seated at a simple metal-frame table in a conference room at the San Antonio airport, Whitacre told Williams CEO Keith E. Bailey that SBC wanted ownership. By buying a stake rather than simply leasing network services, he felt SBC would get top-notch products from Williams--from digital phone lines to Internet transmission software. In exchange, SBC would supply $500 million in much-needed capital and take a 10% interest in Williams. Within an hour, "we had stacked hands" on the deal, Bailey recalls.

Getting into long distance is about far more than SBC selling long-distance voice calls to its local customers. It wants a chunk of the fast-growing long-distance data market. When nationwide retailers, for example, collect cash register totals from their stores scattered throughout the country, SBC can't carry that traffic. "Because of regulation, they continue to be frozen out of a big portion of the data market," says analyst Guy W. Woodlief of Prudential Securities Inc.

SBC, however, is still socking in local data revenues: $620 million in the fourth quarter alone, up 27% from the previous year. Whitacre has made it a priority to get an even bigger slice of the market. Last year, SBC's California chief Edward A. Mueller planned to roll out high-speed Digital Subscriber Lines in the Golden State by April, 1999. But Whitacre had other ideas. In December, without briefing any of his staff, he told Wall Street analysts that SBC would sell DSL service within weeks. "He went from catching up to pushing it--real quick," says Michael Turner, executive vice-president of corporate planning.

Whitacre needs to push SBC in the wireless market, too. Last year, AT&T launched its Digital One Rate, which allows customers to pay a fixed monthly fee for a bucket of minutes without any extra roaming or long-distance charges. The simple plan has helped AT&T attract more than 850,000 customers so far, cutting into the business of other carriers like SBC. "That changed things in the wireless industry for good," says analyst Woodlief. "You have to have a nationwide footprint in order to have a good product for high-end users."

Problem is, SBC has huge gaps in its wireless network. The Ameritech acquisition will help: Together, the two companies have wireless service in eight of the nation's top 10 markets. But it still will have holes, notably in the Southeast and Northeast. That, analysts say, means that SBC has to consider acquiring a wireless player or at least wireless licenses in key metropolitan areas. Whitacre isn't convinced. While he won't rule out an acquisition, he points out that only 4% of SBC subscribers roam outside of its region.

Even for the kind of industry giant Whitacre is building, it will take billions of dollars and flawless execution to compete globally. Whitacre has been able to squeeze $1 billion a year in cost savings from the Pac-Bell merger and he expects to save an additional $1.2 billion annually from the Ameritech deal. While that's efficient, it's not as formidable as the $2.5 billion that rival MCI WorldCom has saved.

True, telecom adversaries from MCI-WorldCom to British Telecom are sure to provide gale-force competition. But for an outdoorsman who is used to killing rattlesnakes on the windswept plains of Texas, weathering a storm might be, as Whitacre says, no big deal.By Roger O. Crockett in San Antonio, with bureau reportsReturn to top


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