Edward E. Whitacre Jr.

The 63-year-old chairman and CEO of SBC Communications on merging with AT&T, landlines versus cell phones, and the evils of regulation (imagine that).

August 2005By Comments

Evan Smith: How do you feel coming out of a legislative session in which SBC sought so much and got so little?

Edward E. Whitacre Jr.: It’s a huge disappointment. Our industry has changed. Technology has changed. We have so many more competitors—cable companies are providing telephone service big-time. And they’re not regulated [by the state]. Nobody tells them every move to make. They don’t report to anybody. I don’t think it’s right to continue to be as regulated as we are when our competitors are not regulated at all.

ES: Why did you fall short?

EW: I’ve asked myself that question thousands of times. There’s some inertia. It’s always easier to defeat something than it is to pass it. And we have worthy adversaries who don’t want to change things. I don’t think they played unfair, but it’s frustrating. We’re on the logical side of this. If you asked the average person on the street, he would agree with us that less regulation is good for the state.

ES: You also asked the Legislature to let you provide video service over your existing wires, which would have put you in competition with those same cable companies. What would the practical effect have been for the average Texan?

EW: More choice. And that would be good, because I’ve been a cable company customer, and I’ve seen my bill go up 5, 6, 7 percent every February. They have no competition, and I don’t think that’s right. While they, in turn, compete against us. They’ve really got the best of both worlds: They’ve got a monopoly, and they’re in our business with no regulation.

ES: Let’s talk about SBC’s merger with AT&T. What’s the rationale of combining the companies?

EW: We’re buying a business that does something totally different than we do. They don’t do what we do, and we don’t do what they do. For instance, we don’t have our own national network. Remember, we just got into our last state, like, two and a half years ago. So we’ve had to lease a network. That’s an asset we oughta have. AT&T has one. Second, we don’t have any voice-over IP capabilities [using the Internet to transmit your voice as you would data]. AT&T has them. We can utilize their platform. And third, we’re not having much success getting into big businesses, and they have a pretty good base of large customers. So there’s an additional source of revenue.

ES: I understand why the merger is good for SBC. But how will my life as an SBC customer be affected?

EW: We’ll finally have a global network. That’s good for our customers because we’ll be able to do more things and do them quicker. We can be more innovative. Maybe we can get customers a better deal—you know, technology at a lower price. It’ll be good all around.

ES: The kind of people who worry about these big mergers—

EW: Have nothing else to do.

ES: Well, the people who have nothing else to do often worry that in the combination of two big companies such as SBC and AT&T, there’s inevitably less competition.

EW: The worry is that we’re going to put the Bell system back together. You hear that a lot. Anybody who says that is just not informed. First of all, the cable companies who are in this business, with broadband networks and long distance and so on, are as big as we are. Also, many of our customers have moved to wireless. We have Cingular, but in Austin alone there are six of our competitors—the T-Mobiles, the Sprints, the Verizons of the world. That’s taking away more and more of our fixed-line business, so we have strong competition for our traditional customers. And there are two hundred smaller companies that provide niche-type products. So there’s going to be less competition after the merger? People aren’t looking at the facts. They’re not looking at the way the world has changed.

ES: I’m curious about the mechanics of the merger to the extent you can talk about them, because I realize they’re not all lined out yet. The combined company will continue to be called SBC?

EW: We really haven’t made that decision, but we have a lot of research going on. SBC is not well known internationally. SBC is certainly not known on the East Coast.

ES: Whereas AT&T is pretty much a global brand. An enterprising reporter might infer from that answer that the combined company could be called AT&T.

EW: Right. Or you might see another possibility—something powered by something else. Intel’s used that pretty well.

ES: The two brands would continue to be visible.

EW: Right.

ES: The headquarters of this company will remain in San Antonio?

EW: You bet.

ES: Remind me why the company relocated from St. Louis to San Antonio twelve years ago.

EW: This is where most of our market was. We were sitting up there in Missouri, which was 16 percent of our business. Texas at that time was 60 percent.

ES: Texas represents what percentage of the business now?

EW: Probably a third.

ES: Is Texas a good place to do business?

EW: It’s not a good place for us to pass legislation, is it?

ES: What about the tax situation?

EW: It’s not great. We’re the biggest taxpayer in the state.

ES: Although it’s said that not having a state income tax is a plus, because you can more easily recruit employees to come to Texas.

EW: Our property taxes probably more than make up for a state income tax.

ES: Will you continue to run the company?

EW: I hope so. I’d like to be a chairman for a while.

ES: When will all of this shake out?

EW: By the end of the year. It takes a lot of approvals: thirty-something states, the European Union, the Justice Department, the FCC. But it’s rolling along. We’ve gotten several foreign country approvals already and about half of the state approvals, so we’re roughly halfway there.

ES: Why is this a good business to be in now?

EW: Why isn’t it yesterday’s business? How do you ensure a healthy future in an industry that’s fast-moving and rapidly changing? It’s not an industry that wildly excites anybody at this point in time, but it’s responsible for a lot of productivity and improvements in this country. And phone service is not going anywhere. Everybody still uses it. It’s a good business. But the exciting part is the broadband of the future, the wireless broadband of the future, the TV of the future, the voice-over IP. So it has some very exciting potential to it.

ES: That potential exists in things that a year to two years ago not only weren’t your core business, they weren’t your business.

EW: But it is the business we’re in. The options we have are to sit here with a phone company and do nothing or to change. And I think we’re real good at change. Seven million people will tell you our broadband is good. Yahoo will tell you we’re a good way to deliver their stuff. Cingular has 50 million customers, so we’re not too bad at wireless.

ES: Is it possible to be just the phone company anymore?

EW: Not as we think of it in the past.

ES: Do you think the landline as we know it has a finite shelf life?

EW: No, I don’t. I think it’ll be around when we’re dead and gone. I think it’ll be strong. There are still 50 million customers out there just with SBC.

ES: But 15 percent of all people out there don’t have landlines, and I’m assuming that those 15 percent are below the age of forty.

EW: It’s certainly skewed that way.

ES: So what do you do about the market of the future?

EW: You offer broadband, because these people want broadband, or you get into the wireless business, as we are. On the other hand, I’ve seen several articles in which people have talked about going back to landlines because cell phones aren’t as reliable. Landlines aren’t going away.

ES: Is there a price point issue with landlines that you need to consider, so it remains a relevant option for some of these people?

EW: We’re already there. In Texas, for nine or ten bucks a month, you can get a landline. It’s a bargain. That’s not even the price of a pizza. And it works 24 hours a day, 365 days a year.

ES: Is the technology on cell phones ever going to be—

EW: It will never be as good.

ES: And for that reason, you don’t worry about the impact of wireless on your landline business.

EW: People like wireless because of the convenience. Thousands of minutes and free long distance and you can call anywhere in the world? That’s unbelievable convenience. And it’s good service. It’s pretty reliable these days, and it’s gotten a lot better. A lot more towers have been built. But if you want it to be perfect, you’re going to have to have a tower every three hundred feet in this country. It takes a lot of investment to make this stuff work. People tend to forget that.

ES: You’ve been doing this for a long time. You went to work for this company, what, forty years ago?

EW: 1963.

ES: Could you have ever imagined at any point the amount of change that you now have to manage?

EW: No, I couldn’t have imagined. I still can’t imagine.

ES: Why did you get in the business to begin with?

EW: I needed a job. I’d worked here one summer as a student engineer, which meant I went out and drove stakes in the ground where poles were supposed to be put—stuff like that. I liked it a lot.

ES: Did you think at that point that you might want to run the company someday?

EW: No, I never really thought about that. I figured I’d probably spend my career in what was once called the plant department and is now called the network—the technical side of the business. It has to do with cables and wire and switching machines and that sort of thing. That’s where I spent my first twenty years.

ES: I’m thinking about another company head who came from the technical side: Gordon Bethune, the former CEO of Continental. He wasn’t one of these guys who ran a cereal company before running an airline. He had been a mechanic. He really knew the guts of the business. You too, apparently.

EW: I don’t have much experience in accounting, but I know the infrastructure pretty well. That’s been incredibly helpful to me over the years.

ES: Do you spend a lot of time these days trying to get up to speed on the new technology?

EW: Yeah, I do. I think I know how it works. At least I can comprehend it.

ES: It’s safe to say that you can program a VCR.

EW: I can. I can also put songs on an iPod. And I can send e-mail. I could program a computer at one time, but no more.

ES: Did anybody in your family do anything remotely like this?

EW: No. My dad was a locomotive engineer for Southern Pacific; he worked there for almost fifty years before he died.

ES: A company man.

EW: Yeah. He and all his brothers and his daddy worked for the railroad.

ES: Did you have any interest in doing that yourself?

EW: No, not really. I’d been around it all my life. I didn’t dislike it, and I don’t. I’m on the Burlington Northern board, and I like it a lot. But my daddy, in particular, didn’t want me to do that. He thought I could do something else and maybe come out better. My mother certainly didn’t want me to do it, so it just worked out.

ES: What are you going to do next?

EW: When you look ahead five years, where do you want the company to be? Where does your focus have to be? We have to have size and scale, because it’s such a capital-intensive business. We have to be right on the cutting edge of technology; I want this company to serve all its customers in the telecommunications business and serve them well. By that I mean video, broadband, wireless, local long distance, Internet, whatever you want to talk about. From then on, it’s about execution. We have to execute well for employees, customers, and investors.

ES: Any hurdles to get over?

EW: There have always been hurdles. There have been hurdles for 42 years. Today, the particular hurdles relate to regulation. I’m not saying there shouldn’t be any regulation, because there should be regulation to protect consumers. But you shouldn’t tell a company what to charge or what products to put out or how you can conduct yourself in business when your opponents, who are bigger than you are, don’t have that.

ES: Just to be sure I understand this: How will the world that SBC serves be made better by SBC going unregulated or going less regulated?

EW: Well, I think we can’t compete. We’re very limited in what we can do in terms of investment because we’re unsure of how regulators will react. Let me give you maybe the classic example. In 1996 the FCC declared that for competition to start in this particularly expensive area of our business, we had to sell our competitors our network at below our cost. So they would come and rent the line from me and go sell it to you, using my infrastructure, and they’d sell it cheaper than I could sell it. They had no funding costs! They could just hire a marketing company, answer the phone, put your phone in, and start collecting money and pay me—for illustrative purposes—ten bucks a month and charge twenty. It was like GM selling a car to Ford at below their cost, and Ford puts Ford’s name on it and sells it. Didn’t have any overhead, didn’t have any workforce, didn’t have any anything. We were forced to do that, and we lost literally millions of customers to that very flawed scheme. Well, all of a sudden we look around and say, “Why should we be spending any money in this business? Because the government’s just going to take it away from us.” The deal was supposed to be, this would give them a jump start and then they would go build their own infrastructure and begin to use it. But guess what? They didn’t.

ES: Why would they? They’re getting a better deal from you.
EW:They’re getting a hell of a deal.

EW: This is the question I have: Would the rest of us be getting a hell of a deal if that regulation was lifted? I get how SBC benefits in not having to give its infrastructure to its competitors at below cost, but how do individual customers benefit?

EW: Who’s going to bring you new services? Who’s going to bring you innovations out there? Who’s going to package this stuff? Who’s going to do all this stuff if we don’t do it?

ES: But would there be a price consequence to customers, up or down, if regulations were lifted?

EW: Prices would probably go down.

ES: Because?

EW: Because you’d be able to do things that you can’t now do. I mean, voice-over IP—you could put that out there big-time. The Internet’s not taxed, while we’re taxed to beat hell, and we pass that on to our customers. With voice-over IP, that tax goes away unless Congress decides to tax the Internet. You’d have an instant price reduction of 15 to 20 percent.

ES: But I bet Congress is going to look around and go, “Hmmm. The Internet’s not taxed. The phone company is using it. You know what we oughta do? Tax the Internet!”

EW: Congress has passed several resolutions saying, “We’re not going to tax the Internet because we’ll stifle innovation.” There may even be a law to that effect. But none of this matters if we don’t do broadband. Am I going to do it if I have to share it with my competitor? Hell no. So that’s the dilemma we face.

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