Question

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5. In 1983 the Bell Telephone System was broken up resulting in the creation of seven regional telephone companies. The "Baby Bells," as they were called, were freed from many of the regulatory constraints under which the Bell System operated, and at the same time had a great deal of money. The managements of these young giants were determined to be more than the staid old-line telephone companies they'd been in the past. They were quite vocal in declaring their intentions to undertake ventures in any number of new fields, despite the fact that virtually all of their experience was in the regulated environment of the old telephone system. Many stockholders were alarmed and concerned by these statements. Comment on what their concerns may have been.

Answer 1

The Bell System operated in a regulated environment but in a near monopoly situation. The firm didn't have any competition. Entire consumer base belonged to the company and revenue sources were nearly guaranteed. Of course there was regulation that prevented abnormal income, but the situation the Bell system was in resulted into:

• state of stable and assured revenues
• Monopoly in the telecom industry
• No competition, no threat
• Stable modest return
• Almost no risk

The shareholders in Bell System would have been attracted by these features before investing in the Bell System. Now suddenly Bell System is disintegrated into smaller regional companies:

• Free from many regulations
• But now exposed to competition from each other
• Exposed to competition from private participation
• Revenue base was now fragmented
• These companies wanted to undertake ventures they didn't have much experience in, before
• They wanted to undertake projects with significantly higher risk profile
• Thus the risk return profile of the companies changed

This change in the risk return profile of the business alarmed the shareholders.