BellSouth Corporation - Company Profile, Information, Business Description, History, Background Information on BellSouth Corporation

1155 Peachtree Street N.E.
Atlanta, Georgia 30309

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Each day, BellSouth connects 34 million customers to the worlds of data, the Internet, video, voice and entertainment, providing worlds of unlimited potential for investors.

History of BellSouth Corporation

BellSouth Corporation is one of the world's largest communications companies, serving close to 34 million customers in the United States and in 18 other countries, with a particularly large market in Latin America. The company provides local telecommunications as well as wireless local and long distance service, long distance access, cable and digital television, Internet access, and other electronic commerce. In addition, BellSouth is a leading advertising and publishing company, putting out many advertising directories, including The Real Yellow Pages ONLINE. The company began as a so-called Baby Bell company with a market in the southeastern United States. Though this region remains a core market for the company, it is in no way a strictly regional entity. Approximately 40 percent of BellSouth's revenues come from providing traditional local telephone service in its region, with the rest coming from other services both in and outside the South.

1980s Origins from Bell Breakup

BellSouth was formed in 1983 as part of the court-ordered breakup of the American Telephone and Telegraph Company (AT&T), at that time the world's largest corporation. AT&T had built most of the U.S. phone system but was frequently accused of suppressing competition through unfair trade practices. It was broken up in keeping with a consent decree to settle a lawsuit brought by the U.S. Department of Justice. AT&T left the operation of local telephone service in the United States to 22 local telephone companies, all operating under AT&T's umbrella. The breakup divided the 22 locals among seven regional holding companies (RHCs). BellSouth was formed from the combination of Southern Bell Telephone and Telegraph Co. and South Central Bell Telephone Co. Its territory was composed of Florida, Georgia, South Carolina, North Carolina, Kentucky, Tennessee, Alabama, Mississippi, and Louisiana. BellSouth and the other RHCs were not free to enter any business they chose. The consent decree prohibited them from using their monopoly power to their advantage and from entering certain businesses, including long-distance telephone service. At that time the new corporation named John L. Clendenin chairman.

BellSouth began as the 12th-largest corporation in the United States, with $11 billion in assets, 13.4 million telephone lines, and 131,500 employees. It was also the most profitable of the seven regionals, with a promising future because it was located in one of the fastest-growing areas of the country. Six of the ten fastest-growing counties in the United States were in BellSouth's territory. Southern and South Central already were prospering, their combined assets having grown 47 percent and their combined net income having grown 65 percent in the four years before the AT&T breakup. Collectively they had spent $15 billion on plant modernization and new facilities in the five years before BellSouth's creation.

AT&T had often used the South as the testing ground for new technologies, which gave BellSouth a lead in high-technology services, such as using telephone lines to monitor gas meters. Shortly before the breakup, Southern Bell began a joint videotex project, which enabled subscribers to use home computers for banking and shopping. BellSouth continued that push into new technologies, starting a mobile phone subsidiary, BellSouth Mobility Inc., in its first year of business. In March 1984 BellSouth Mobility started a cellular telephone system in Chattanooga, Tennessee, in a joint venture with Cellular Radio of Chattanooga, Inc., and Chattanooga-Northwest Georgia Cellular Radio Inc. It then began a $5.2 million cellular system in Memphis, Tennessee. In May 1984 it agreed to develop a $3.3 million cellular network in Baton Rouge, Louisiana, with East Ascension Telephone Co. and Star Telephone Co., and a $4.8 million cellular system in Orlando, Florida. Plans were laid to expand many of these cellular networks even as they were being built. South Central Bell offered fiber optic lines, completing the first direct customer hookup for Amsouth Bancorp late in 1984. Also in 1984 South Central began offering WatchAlert, a system that allowed a security-alarm signal to be transmitted even if a phone line was busy or cut. To promote these technologies to multi-tenant business offices, BellSouth Enterprises, Inc. formed BellSouth Systems Technology in 1984. The subsidiary focused on directory publishing and advertising, mobile communications, and computer systems. BellSouth made $1.26 billion in 1984.

BellSouth, along with five other RHCs, began trading on the London Stock Exchange within its first few months of business, to gain access to European capital. In the rapidly changing telecommunications market, BellSouth could not count on all of its large customers continuing to use it for long-distance access. Advances in technology meant that large companies could bypass the local network and tie directly into the long-distance system through microwave antennas. BellSouth hired market researchers to develop profiles of the company's major customers. It then established special teams to work with the top 200 customers and to encourage them to continue using the BellSouth network for long-distance access. The residential market was split into groups based on income and phone-use patterns, with services pitched to the customer groups that would be most interested in them.

In 1985 BellSouth signed a four-year contract to buy telecommunications equipment from Canada's Northern Telecom Inc. In the same year the Georgia Public Service Commission approved a $27 million rate increase for Southern Bell. The FCC ended its requirement that all Bell operating companies sell cellular telephones through a separate subsidiary. BellSouth earned $1.42 billion in 1985.

In February 1986 BellSouth Enterprises increased its presence in the lucrative cellular telephone market when it bought 15 percent of Mobile Communications Corp. of America for $107.5 million. The following year BellSouth Enterprises bought almost all the assets of Universal Communications Systems Inc. for $79.1 million.

By 1986 the national Yellow Pages market had reached $6.8 billion, and BellSouth was expanding its Yellow Pages services out of its area of operation in search of greater profits. In February 1986 the company bought L.M. Berry & Co., a large, independent Yellow Pages publisher whose 1985 revenues topped $780 million. That acquisition made BellSouth a world leader in the profitable directory publishing business and the largest Yellow Pages publisher in the United States. The company, however, faced stiff competition for the Yellow Pages market from other companies, particularly Southwestern Bell, which was also trying to expand Yellow Pages services.

In 1987 BellSouth began offering an information gateway service that let customers access databases using a personal computer. By dialing a number in the Atlanta area, customers could get stock quotes and make airline reservations. Customers with cellular phones could also dial a number to get local traffic reports. BellSouth continued foreign expansion by buying an Australian telephone answering machine company.

BellSouth and the other regional holding companies were dealt a major legal setback in 1987 when Justice Harold Greene, who was overseeing the breakup of AT&T, ruled that the companies still could not enter the long-distance telephone business in the United States, offer advanced information services, or manufacture phone equipment. Greene ruled that removing the restrictions would impede competition and violate antitrust laws. BellSouth and the other regionals appealed. Greene's ruling, however, prevented the regionals from transmitting only information they collected themselves. The regionals could not own or develop their own databases, but they were allowed to transmit third parties' databases. BellSouth was, therefore, able to sign an agreement with Telenet Corporation to link some of its local and national communications networks.

Still, BellSouth hoped to increase the use of online information services and increase the revenue from its local network. In 1987 BellSouth's government systems division won a $25 million contract from the U.S. Army to modernize telecommunications systems at six installations in Alaska, Arizona, Colorado, and Texas.

Growth in the Late 1980s

By 1988 BellSouth was the fastest growing regional holding company, with an impressive use of new technologies and services and the addition of 600,000 new telephone lines to the network every year. That growth allowed BellSouth to install new switches and fiber-optic cables without having to tear out old equipment before it was fully depreciated. Of all the RHCs in 1988, BellSouth had the largest sales at $13.6 billion, the most assets at $28.5 billion, and highest profits at $1.7 billion. Part of the growth came from the Southeast's rapid expansion. The area's population had grown 4.3 percent since 1984, adding 4.5 percent to annual phone-line growth. The growth also came partly because BellSouth's network was the most technologically advanced in the United States, with 95.3 percent of its switching offices using electronic controls and nearly 98 percent of its major trunk lines using high-capacity fiber-optic cable. Profits were enhanced by the fact that BellSouth had avoided the ill-fated diversification pursued by most other RHCs, sticking instead to telephone-related businesses. Moreover, while most other RHCs suffered demoralizing employee strikes over health care costs in 1988, BellSouth had kept down health care costs and avoided confrontation. In 1989 Fortune magazine labeled the company "the most admired utility" for these reasons.

In 1988 BellSouth spent $3.2 billion on advanced digital switching and transmissions systems to improve communications and lay the groundwork for new telecommunications services. CEO Clendenin wanted to use BellSouth's advanced network to transmit a great variety of voice, data, and television programs into millions of homes for far less money than the cost of using conventional copper lines. BellSouth was the first RHC to bring fiber-optic cables directly to homes, hoping to use them to transmit security and energy-management information and cable television, in addition to voices.

BellSouth won a $55 million telephone-switch contract from the U.S. government in late 1987. The following year, however, amid accusations that it had improperly obtained information from a government employee in the process of bidding on the contract, BellSouth withdrew its bid, and the government awarded the contract to AT&T.

Despite its early entry into cellular systems, BellSouth lost several cellular phone deals to rival RHCs. Cellular service was an area in which the regionals were allowed to compete outside of their local territory, and the lost deals meant lost opportunities to expand BellSouth's reach in a rapidly growing telecommunications market. In 1988 BellSouth reversed the trend, buying Mobile Communications Corp. outright for $710 million in stock. The acquisition made BellSouth the third-largest U.S. cellular telephone company, with 345,000 subscribers. It also brought BellSouth into the paging services business. When the Republican and Democratic conventions of 1988 were both held in BellSouth's market area, the company displayed its latest technology at both conventions, hoping to influence government officials to ease restrictions. Profits in 1988 were $1.67 billion.

The year 1989 began with a disappointment when Bell Atlantic beat out BellSouth in the competition for a $220 million, ten-year contract to build an advanced phone system to link government agencies in the Washington, D.C., area. Nevertheless, business was flourishing for BellSouth and for telecommunications in general. Telecommunications was a bigger business than computers or aerospace in 1989, and telephone use was growing three times faster than the population. Industry observers agreed that BellSouth, along with the other regionals, was running and selling basic local phone service better than it had as part of AT&T.

In 1989 BellSouth bought the 60 percent of Air Call Communications that it did not already own for $34.5 million. At the time, BellSouth wanted to offer electronic Yellow Pages, but the idea was rejected in 1989 by Justice Greene, who ruled it would violate the consent decree that broke up AT&T. BellSouth moved toward further expansion of its cellular network when it formed a consortium with two British companies--General Electric Company plc and Plessey Company plc&mdashø bid on one of the mobile-telephone network licenses being offered by the British government. BellSouth then agreed to merge its cellular properties with LIN Broadcasting Corp., which would have created the second-largest cellular network in the United States. Rival McCaw Cellular Communications Inc., the largest cellular firm in the United States, however, raised its offer for LIN and ended up buying the company after a long battle. McCaw paid BellSouth $66.5 million in merger termination fees and other expenses.

BellSouth's local phone earnings, along with those of the other regional holding companies, were regulated by state commissions that allowed only a certain rate of return, about 12 percent to 15 percent by 1989. When earnings exceeded those rates, BellSouth had to give refunds. BellSouth pushed for incentive-based rate plans that would allow the company to keep a percentage of profits it earned above the allowed rate of return. It argued that the incentives would make the company more efficient and lead to better service. Three BellSouth states--Alabama, Florida, and Kentucky--passed such laws, but regulatory commissions then cut the rates BellSouth could earn. The rate cuts were expected to cost BellSouth $690 million in the early 1990s.

Continuing its interest in advancing technology, in 1990 BellSouth won FCC permission to test a wireless telephone system at the University of Georgia in Athens with the Sony Corporation. As part of a cost-cutting program, the company offered an early retirement incentive to nearly 3,000 executives.

By 1990 BellSouth had invested $550 million in overseas operations and was the only regional offering mobile communications on four continents. Telephone services that had been nationalized in many countries were being privatized, presenting huge business opportunities. BellSouth pushed its services in the Caribbean and Latin America. It had cellular telephone interests in Argentina, Uruguay, France, Britain, Switzerland, and Mexico; paging interests in Australia, Britain, and Switzerland; and it started a joint venture in India to create telecommunications software products and services. The Australian company, Link Telecommunications, boasted that country's largest independent paging and telephone-answering services. In August 1990 BellSouth announced plans to develop a digital cellular phone system in New Zealand by mid-1992. BellSouth executives scrambled to learn foreign business practices. In Argentina they billed customers every ten days to keep pace with that country's steep inflation.

Competition in the Mid-1990s

Until 1992, regulations stemming from the AT&T breakup had kept BellSouth and the other Baby Bells from expanding into a broader range of information services. However, a federal court ruling in February 1992 allowed the Bell offspring to begin offering new services, such as special fax retrieval systems and interactive video and data networks for businesses. The ruling set off a surge of competition, with the big telecommunications companies vying for new territory and new information services. Of the Baby Bells, BellSouth was widely referred to as the most conservative, being unwilling to offer new, untested technology. By 1994, many other companies had moved into BellSouth's southern territory, with MCI stringing fiber optic cable in Atlanta itself, and U S West spending $300 million to upgrade its cable and multimedia networks in Georgia, for example. BellSouth moved cautiously to repel the onslaught.

In 1995 the company invested $500 million in a joint venture with Disney and two other partners to produce innovative entertainment programs carried by phone as well as cable lines. This was BellSouth's first step into the media and entertainment world. The company also built a trial interactive multimedia network in 1995, limiting it to the Atlanta suburb of Chamblee. Chamblee residents were able to download video games and movies and do home shopping over special high-capacity phone wires. Furthermore, in partnership with Sprint and GTE, BellSouth pioneered a North Carolina Information Superhighway. This was a high-speed network that allowed hospitals, schools, and businesses to transmit data and video across the state, so that patient records, for example, including x rays, could be zapped in seconds from one institution to another. While BellSouth spent money to expand into these new service areas, it also moved to cut costs, aggressively trimming its workforce. Some 10,200 BellSouth workers were laid off between 1993 and 1995.

In 1997, BellSouth got a new CEO, Duane Ackerman, who girded the company to face even more competition, as relaxed regulations finally permitted other phone companies to offer local phone service in BellSouth's territory. The company expected to lose as much as 20 percent of its local telephone business, as other companies vied to get a piece of the booming southern market. Yet BellSouth was still in good shape. Its revenues from overseas markets had blossomed to $1.2 billion in 1996, a significant boost to its profits. Moreover, the competition in the local phone market finally undid some of the regulation that the company had long lobbied to overturn. While the old system had required BellSouth to return a portion of its profits to its customers, the law changed in 1996 to let the company respond more nimbly to the competitors flocking into its territory.

New competition was not entirely bad for business. Even as BellSouth lost individual accounts, it picked up money by selling wholesale access to its lines to the new competitors, who did not want to build networks of their own. BellSouth was also a keen marketer. Among all the Baby Bells, it offered the only 24-hour, seven-day customer service, and it also trumpeted its brand name reputation for reliability by spending heavily on television and print advertising. The company sold both wireless and regular telephone service to customers in the South through 250 stores or kiosks that it owned, many of them situated inside chain stores such as Office Depot, Radio Shack, and Circuit City.

BellSouth continued to flourish in spite of the rapid changes in the communications industry and the sharpening battle for customers in its prime market. Its business strategy had three parts: to provide premium local service in the Southeast, to maintain its substantial wireless communications business across the rest of the country, and to continue to expand into the booming Latin American communications market. Growth was steady and profitable in the late 1990s, with revenues rising steadily from $16.8 billion in 1994 to over $23 billion in 1998. Net income rose as well, and the company had record cash flow from operations in 1998.

The communications industry was again changing drastically in the late 1990s, as companies consolidated. By May 1998, there were only four Baby Bells left, and BellSouth, which had long been the biggest of the regional phone companies, was now the second smallest. After the acquisition of Ameritech by San Antonio, Texas-based SBC Communications, industry analysts generally predicted that more mergers would follow until only three or four companies were left. BellSouth had suddenly become a much smaller company, as its competitors became so much bigger. Nevertheless, it continued to grow, both in revenues and services offered, with strong sales of its data, wireless, and regular phone services leading to an almost 40 percent earnings increase for the last quarter of 1998.

Principal Subsidiaries: BellSouth Enterprises; BellSouth Communications Group; BellSouth Telecommunications, Inc.

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Further Reference

"BellSouth's Earnings Increase 38%, Helped by Gain, Sales Growth," Wall Street Journal, January 26, 1999, p. A8.Gannes, Stuart, "BellSouth Is on a Ringing Streak," Fortune, October 9, 1989.Greising, David, and Kathy Rebello, "Is BellSouth Really 'Ready to Get It On'?," Business Week, May 8, 1995, pp. 80--82.Hayes, John R., "Focused," Forbes, May 19, 1997, pp. 124--26.Kanell, Michael E., "Once-Largest of Baby Bells Faces Tougher Road if SBC's Plans Go Through," Knight-Ridder/Tribune Business News, May 11, 1998.Lazo, Shirley A., "Long-Awaited Call from BellSouth," Barron's, October 2, 1995, p. 46.Le Carnevale, Mary, "BellSouth to Drop 8,000 Employees; More Cuts at Phone Firms Are Likely," Wall Street Journal, November 9, 1992, p. A4.Mason, Charles, "Is the Bloom off the BellSouth Rose?," Telephony, October 21, 1991, pp. 18--24.Ramirez, Anthony, "BellSouth Taps Experience for Move into New Services," New York Times, February 6, 1992, p. D4.Schmidt, William E., "BellSouth Eager for Kickoff," New York Times, November 15, 1983.Ward, Judy, "Belle of the Brawl," Financial World, June 6, 1995, p. 49.

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