Sprint for the (Long) Distance

This story is part of the Strategic History of Sprint series.

This is the third article on strategic decisions throughout the history of Sprint. If you missed the prior ones, you can find the first here and the second here.

My role in corporate strategy at Sprint included managing the incredible resource which was the Corporate Research Center. During (relatively) quiet periods I head down to the “stacks” and would take the time to dig through old company records and annual reports to understand strategic decisions that had been made in the past. Tracking the thinking behind the entry into the Long Distance market was particularly fascinating.

As we discussed in the last article, by the 1970s United Utilities/Telecom had become the 3rd largest telephone company in the country (behind AT&T and GTE) serving millions of customers across the country. However, United didn’t really compete with AT&T, GTE, Continental, Centel or any of the other independent telephone companies out there. Telecom was a natural (and heavily regulated) monopoly with each geography being served by a single provider. That provider had made significant capital investments over the decades to establish the infrastructure needed to provide local service and to connect customers to AT&T Long Lines for long distance calls.

That started to change in the 1970s as the Department of Justice began to pursue an anti-trust lawsuit against AT&T. That lawsuit was filed in 1974 and reached its conclusion in 1982 with AT&T’s agreement to break itself apart and open the long distance market to competition. You might think that companies like GTE and Sprint would be thrilled that the government was going after the industry leader, but you’d be wrong. A regulated monopoly can be a very attractive business. If the government messed with that arrangement for AT&T, it probably wouldn’t be good for Sprint or GTE either.

To understand this drive for change, we actually have to go back to the early 1960s. In 1963 a group of two-way radio salesmen got the idea to build a microwave radio network to connect truckers to their home offices. They called their company Microwave Communications, Inc. or MCI. Although constantly short of cash and weak on execution, those modest ambitions began to grow as the company sought the licenses needed from the Federal Communications Commission (FCC) to operate a microwave network. AT&T brought its lobbying weight to bear to block this potential competitor. In order to gain public and FCC support for their plan, MCI began to position their proposal against AT&T’s monopoly TELPAK private line service, saying that they could provide better and cheaper service for transporting voice and data than AT&T, and provide it to smaller businesses being underserved by Ma Bell.

In 1967 MCI won their first major victory with the FCC, gaining a license to build a microwave network from Chicago to St. Louis and being deemed a common carrier with full rights to connect with other telecom networks. MCI then began the fight to build a nationwide microwave network and become a full-on competitor with AT&T for dedicated private line services to business customers. It is quite possible that, if AT&T had ignored MCI’s original petition to the FCC, the tiny, underfunded, poorly managed company would have quietly vanished from the scene. But AT&T’s heavy-handed attempts to crush this upstart raised red flags in Washington and across the country; red flags that eventually led the Justice Department to begin their anti-trust investigation of Ma Bell.

Switching back to United/Sprint, to me, it is fascinating to hear the story play out in the very words of the company’s leadership. Below I have provided quotes from the letters from United’s Chairman Paul Henson “to our stockholders and employees” in each issue of the company’s Annual Report. Most of these letters had two names attached — Henson and whoever was president at the time, but through this whole journey Paul Henson’s stamp is clearly on the story. For the extended quotes below I will merely preface each with the Annual Report year. Keep in mind that the Annual Report comes out near the beginning of the following year, so, for example, the first quote from the 1973 Annual Report would have been issued early in 1974.

As I worked my way through these Annual Reports it was fascinating to me to see the strategic development process unfold. United had a well established business strategy. They were constantly monitoring the external environment (regulatory, competitive, technology, economy, customer needs, etc.) As the environment started to shift, the company first sought to influence the external environment to maintain a status quo that served them well. When it became apparent that change was inevitable, they began to seriously evaluate external opportunities and threats and internal strengths and weaknesses to determine a new strategy. They pursued a portfolio approach managing investments in various businesses. Some failed quickly and were eliminated. One rose to the top as the future of the company. Company resources were managed to maximize the benefits to all stakeholders. Existing businesses helped fund investment in new ventures and provided the operational and customer base foundation for the success of these startups. See if you hear the same things as me in the “voice” of Paul Henson as you read his annual updates below.

1973: “Hopefully, in 1974 we will see some resolution to the complex and difficult problems that beset the telephone industry with the advent of structured competition. What started out as a well-intentioned attempt by the Federal Communications Commission to introduce limited competition into the telephone industry has turned into a nightmare of polarized industry positions, conflicting regulatory decisions and confused legal actions. The only profit thus far has gone to a few major communications users and to the legal profession, and that largely at the expense of the general rate-paying public.”

1974: “The concept and definition of competition in the telephone industry, as postulated by the Federal Communications Commission, has been difficult to understand — at best. … The timing, the allegations and the relief sought by the Justice Department’s antitrust suit against AT&T merely add to the confusion. Disposition of the case against AT&T will be painfully slow, and its impact on United Telecom remains uncertain… Fundamentally, questions relating to competition and interconnection are matters of national policy which must be resolved by the Congress. We are hopeful that the AT&T antitrust suit will serve to hasten the day when Congress will either reaffirm or deny that previous national policies on communications have been and are in the public interest. These policies have given the United States the best telephone service in the world at the lowest relative cost to the public it serves.”

1975: “It became more apparent in 1975 that the threatened erosion of the telephone industry’s integrated approach to providing universal telephone service was becoming a reality. Contrived competition, sponsored by the Federal Communications Commission and introduced without consideration of the economic impact on residential telephone service, established roots in the intercity communications market. … Such unnecessary duplication of established telephone company intercity private line services will be detrimental to the long-term interests of our residential and small business customers who will bear the burden of accelerated increases in price of basic telephone service. Ultimately, the effect could be harmful to the employees and stockholders of United Telecom. … In 1976, United Telecom, with more than 1,500 other telephone companies, will make a determined effort to enlist the support of its employees, the customers it serves, its stockholders and its congressional representatives to amend the Communications Act of 1934. The purpose will be to reaffirm the explicit intent of the original legislation’s national goal of providing ‘…a rapid, efficient, nationwide and worldwide wire and radio communications service with adequate facilities at reasonable charges.’”

1976: “A significant development in 1976 was the recognition by the U.S. Congress that its attention should be focused on reexamining national telecommunications policy. … Exploratory hearings were held in the U.S. House of Representatives in 1976 on the impact of competition in the domestic telecommunications industry. In its testimony, United Telecom stressed the need for Congress to provide definition and direction in the form of a national telecommunications policy.”

1977: “No recap of 1977 would be complete without mention of the industry’s effort to have the United States Congress examine and revise the national telecommunications policy.”

1978: “New emphasis was placed on corporate long-range planning in 1978, with intensive study of our existing markets as well as other service-oriented markets related to United’s present business activities. The planning process is complicated by lack of a clear-cut national telecommunications policy. It is evident, however, that the policy evolving in Congress will call for more competition in both the inter-city and terminal equipment segments of the telephone business. … A revised draft of a bill rewriting the Communications Act of 1934 is to be introduced in the House of Representatives early in 1979. Legislation also may be initiated in the Senate. This provides hope that the formulation of a national telecommunications policy can be completed by 1980.”

1979: “The year 1979 marked both the end of a decade of solid growth for United Telecom and, more important, the beginning of a new chapter in the company’s history. … It was a year of intense planning for United Telecom’s direction in the 1980s. We systematically analyzed both the strategic opportunities presented by changes in the business environment in which the telephone industry operates and the changes needed by United companies to take full advantage of new technologies and markets. … Congressional action on national telecommunications policy could occur in 1980. … United Telecom enters the 1980s with a successful record as a regulated telephone company and established bases in competitive telecommunications and computer services markets. We firmly believe a significant portion of the corporation’s future growth will come from non-regulated, competitive businesses. Our goal for the 1980s is to become as strong in competitive businesses as we are in the regulated telephone industry. … This calls for a major redirection of the corporation’s activities and resources in which we will consolidate our regulated telephone operations, build competitive telecommunications businesses into a major second sector and develop the computer businesses into a third major entity.”

1980: “On a national level, a few faltering steps were taken in 1980 toward what eventually will be a less regulated, more competitive environment for the telecommunications industry. … It is difficult for United Telecom, or any other participant in this rapidly growing industry, to conduct meaningful long-range planning and development activities when the ground rules remain subject to change.”

1981: “United Telecom had a very good year in 1981. Our company successfully broadened its scope of operations and strengthened its competitive position while recording a solid earnings performance. … Our strategic direction for the decade of the ’80s became more evident in a series of 1981 developments. … Our major development efforts in 1982 will be working toward our long-term objective of providing enhanced voice and digital services via an intercity network. We will build this network on the capabilities and facilities of UNINET and ISACOMM. … Completion of this network will give us the capability of offering selected enhanced services for the office and the home, both inside and outside the areas now served by our telephone companies. The enhanced services market is large and growing. We are confident our corporate resources and capabilities equip us to serve this market successfully. … Early in 1982, we created a fourth operating group to concentrate our management and capital resources in further developing our network capabilities. William T. Esrey, who had been executive vice president and chief financial officer of United Telecom, was named president of the new operating group. … The momentous announcement in early 1982 of an agreement to settle the government’s antitrust suit against American Telephone and Telegraph Company will have significant impact on national telecommunications policy.”

1982: “United Telecom had a difficult year in 1982 — preparing for the fundamental changes unfolding in the telecommunications industry while coping with a recession which slowed or reversed historical growth patterns. … Our major new thrust in 1982 was the formation of a fourth operating group, United Telecom Communications, Inc. This action followed the January acquisition of Insurance Systems of America and its controlling interest in ISACOMM, a satellite communications company. United Telecom Communications links ISACOMM with the packet switching services of UNINET to offer a broad range of digital voice and data services.”

1983: “Our foundation business is, and will continue to be, providing local network services. We intend to protect and enhance our investment in the local exchange telephone network, strengthening our position as a low-cost provider and adding the innovative services our customers want. … We also have initiated a major venture thrust in integrated intercity services. Our current emphasis is on value-added network services and video teleconferencing. We intend to make the necessary major investments over the next decade to build these intercity services into another profitable core business. … Our December 31, 1983, agreement to acquire U.S. Telephone, a rapidly growing participant in the long distance telephone market, further demonstrates our commitment to developing a full service intercity communications capability. We’re confident we have the market knowledge, the resources and the skills required to succeed.”

1984: “As anticipated, 1984 was a memorable year for the telecommunications industry and an eventful year for United Telecom. … We have continued to prepare United Telecom for the future. Our core telephone business remains very strong and is well positioned for the future. Still, we recognize that the opportunities for future earnings gains from telephone operations are limited. … With the deregulation of the mature telephone industry, our future investment in these properties will grow more slowly. While we will protect and maintain our position as the low-cost provider of local network services, introduce new services and meet competition head-on, we cannot expect to match our historical earnings growth rates in telephone operations. … Our primary development thrust remains in integrated intercity communications services. Our greatest challenges and our greatest opportunities lie in developing this business as United Telecom’s second core business. … Great strides were made in 1984. We acquired U.S. Telephone, a major long distance company, and integrated its operations with those of ISACOMM and UNINET. We now have a full spectrum of services to offer our customers. … We also established a common identity for these companies as we pulled our intercity operations together in a single organization. Beginning in January 1985, we offered our services under the name of US Telecom. … Beyond that, we initiated action in 1984 to build a 23,000-mile nationwide digital communications network that will give US Telecom a service capability second to none. In many respects we exceeded our own expectations. … Because of the scope and timing of our network construction plans, which call for spending in excess of $700 million in both 1985 and 1986, we are seeking a partner or partners to join us in developing our network. … We’ve had a full year of experience in the new telecommunications operating environment which came with the January 1984 break-up of the Bell System. The course to a fully deregulated environment remains uncertain, yet manageable.”

1985: “The year 1985 confirmed United Telecom’s commitment to grow and to become a leader in the markets it serves. We see a bright future in telecommunications services. In 1985, we invested $1.1 billion to strengthen and increase our stake in that future. More than half of that investment went into our core telephone business, where we have earned an industry leadership position. From that solid base, we’re rapidly building a second core business in intercity communications. As highlighted in this report, we are building the nation’s most advanced telecommunications network — on schedule and below budget. … Our network strategy was a key element in our ability to form a strong partnership. We announced our intention to form a partnership with GTE in January 1986 after several months of negotiations. It will combine our US Telecom long distance and data communications businesses with those of GTE Sprint and GTE Telenet to form US Sprint Communications Company. Our network strategy and our strong position in the corporate marketplace match well with Sprint’s size and strength in the residential and small business marketplace.”

1987: “For United Telecom, 1987 was a year of achievement, challenge, and disappointment. Although there was much to be encouraged about, the financial performance of US Sprint fell short of expectations. … Without minimizing the disappointment or underestimating the challenge ahead, we are convinced that 1987 will be remembered as the year we positioned United Telecom for a truly rewarding future. The price we paid in 1987 to achieve that positioning with US Sprint was higher than we expected. However, it was not higher than we believe is warranted by the potential for substantial, long-term earnings growth. … Every day we are moving closer to realizing our vision of US Sprint. The nation’s only all-digital, all-fiber-optic network is the springboard for US Sprint’s rapid ascension in the long-distance business.”

1988: “The year 1988 should go on record as a watershed year in United Telecom’s 89-year history. It was a year of extraordinary change and great progress. … Achieving one milestone after another, United Telecom has moved to the forefront of the dynamic telecommunications industry. The most significant events included: Our purchase of a controlling interest in US Sprint from GTE. As of January, 1989, United Telecom owns 80.1 percent of US Sprint. … Beyond such milestones, 1988 was a year when we started to see the positive results of our long-term strategy. … US Sprint’s abrupt turnaround in the last half of 1988 was widely recognized in the financial community and reflected in a healthy stock price gain. United Telecom’s common stock had a year end close of $46 3/8 compared to a 1987 close of $24 5/8… an increase of nearly 90 percent. … US Sprint’s long and sometimes tortuous road to profitability never altered our vision of the future. … When we decided to enter the long distance business near the beginning of this decade, we recognized it was a bold stroke. We knew entering this highly competitive market was a huge undertaking for a company our size. But we are convinced now, more than ever, that we were the right company, with the right strategy, at the right time. … US Sprint has changed the nature and the direction of this corporation. We have made, and kept, our major promises at US Sprint. We have financed, built and moved millions of customers to the world’s most technologically advanced network. … Clearly we are re-emerging as a growth company. We’re not focused on our size, and we hope we never are. The real payoff is what the increased ownership of US Sprint allows us to do for our customers, our shareholders and our employees. … United Telecom never has been a ‘me, too’ organization. Our aim is to rise above the competition. Our goal is to become the best telecommunications company in the world. We made considerable progress toward that goal in 1988. And we expect to continue on that path in the coming year.”

1989: “Our mission is straightforward — to be the best telecommunications company in the world — to rise above the competition and become the standard against which all others in the industry are measured. Our strong financial results for 1989 are one key measure of our progress. … Reflecting the importance of US Sprint to the success of our company, we will ask shareholders to approve changing our name from United Telecom to Sprint Corporation when we exercise our option to purchase the remaining 19.9 percent interest in US Sprint from GTE. We believe all our companies will benefit from association with the widely recognized and respected Sprint name.”

That, to me, wraps up an exciting and even emotional journey from a well managed but not overly aggressive regulated monopoly utility company to the dynamic, innovative, and fiercely competitive machine that many of us came to know and love as Sprint.

But before I close this article, I think it very meaningful to quote from one other letter in that 1989 Annual Report. This one was from Bill Esrey who had taken over the CEO role and was about to take over the Chairman role from Paul Henson:

“As we enter a new decade with confidence in our powerful local and long-distance divisions and our bold strategic plans, it’s appropriate to pause and thank the man who had the foresight and courage to help us bring vision into reality… Paul Henson, who is retiring as our chairman of the board on April 17. When Paul arrived in 1959 at what was then United Utilities, the corporate staff consisted of the late Carl A. Scupin, president; Henson, his vice president; a clerk and two secretaries. United’s annual revenues were $38.2 million that year. Although the company then served about 450,000 telephones, only 44 percent had local dial service [the other 56 percent needed to be connected by a switchboard operator] and only 10 percent had direct toll dialing [the ability to dial long distance without an operator’s help]. Today, 31 years after Paul’s arrival, United serves nearly 4 million local access lines, 81 percent of which have digital switching. With US Sprint, combined annual revenues have surged to more than $7.5 billion and assets are approaching $10 billion. … Although Paul Henson embodies that most rare combination of business savvy and human warmth, he is much more than that. In a true sense of the word, he’s a visionary… and a gentleman. He never has been one to take singular credit for collective achievement, but one wonders where this corporation would be without three decades of leadership marked by his unending quest for quality and innovation. His courage is only exceeded by his patience. In a world driven by short-term financial concerns, he held to long-term convictions, integrity and perseverance. … Skeptics found it hard to believe that a relatively small Midwestern company could successfully take on the mammoth long-distance market… and do it on the basis of quality. It took a willful, yet humble man to set the course for this company to become a global force for positive change in telecommunications.”

It remains an amazing story!