NYNEX CORPORATION History

Company History:

NYNEX Corporation is one of seven regional telephone holding companies in the United States, each handling local telephone service in its region. NYNEX also publishes telephone directories, sells computers, and offers cellular telephone and other communications services. The company had been one of the more troubled of the seven, emeshed in several scandals and facing frequent criticism about its lack of speed in modernizing its infrastructure.

NYNEX was formed in 1984 as part of the breakup of the American Telephone and Telegraph Company (AT & T). AT & T was broken up in keeping with the terms of a consent decree following an antitrust suit by the U.S. Department of Justice. AT & T agreed to divest itself of 22 local telephone companies that were then grouped into seven regional holding companies (RHCs).

NYNEX was formed from New York Telephone Company and New England Telephone and Telegraph Company, two of the oldest telephone companies in the United States. The new company operated in New York, Rhode Island, Massachusetts, Vermont, New Hampshire, Maine, and in part of Connecticut. NYNEX split revenues from long-distance calls between northern New Jersey and the New York City area with Bell Atlantic, another of the seven holding companies. NYNEX began with nearly 12.6 million telephones and $10 billion in assets, making it one of the largest corporations in the United States on its first day of business. It was forbidden, however, from expanding into new information services by the terms of the consent decree and by U.S. Justice Harold Greene, who was overseeing the AT & T breakup.

NYNEX's territory included a higher-than-average income base and many information-age companies that make heavy use of telecommunications. The NYNEX region contained ten million business telephone lines, the largest number of the seven regionals. Business lines are more profitable than residential lines because they are used heavily during the day, when maximum rates are in effect. The Northeast, however, had an aging population and an older-than-average telephone infrastructure. New York Telephone was the first to use fiber-optic cables, laying a ring around Manhattan, but other parts of the NYNEX system badly needed modernization. New York Telephone derived 25% of its revenue from 1% of its customers, leaving it vulnerable to sudden economic shifts. The New York and New England companies were not the highest earners in the Bell System, yet amassed a combined profit of $973 million in 1982, on sales of $9.7 billion.

NYNEX, along with five other RHCs, began trading on the London Stock Exchange within its first few months of business. This provided access to European capital. NYNEX quickly began pushing for permission to enter new businesses relating to local telephone service. It frequently faced opposition from the Federal Communications Commission (FCC), the U.S. Department of Justice, and Justice Greene. In August 1984 the Justice Department came down against several NYNEX proposals, asserting that they would lessen telecommunications competition. In 1984 NYNEX earned $986 million.

In March 1985 NYNEX Business Information Systems, a subsidiary, signed a three-year contract to sell Wang computers and information processing products to business in the Northeast. It continued its push into foreign markets, announcing an agreement with Nippon Telephone and Telegraph to exchange information and resources. It also signed an agreement with an NEC Corporation subsidiary to market an information management service. To aid sales of telecommunications equipment and computer services, the company formed NYNEX Credit Company, providing financial services to other NYNEX companies. Profits reached $1.1 billion in 1985.

Despite the fact that it spent $1.9 billion in 1985 on network construction, frequent criticism was leveled at the company for modernizing its equipment more slowly than any of the other RHCs. While other regionals modernized equipment, NYNEX led in nonphone acquisitions. In 1986 NYNEX bought LIN Broadcasting Corporation's New York City radiopaging operations for $118 million, and the company also bought IBM's chain of 80 computer stores in 33 states, gaining some top IBM executives in the deal. Industry observers estimated the price to be around $150 million. Combined with the 16 Datago computer stores that NYNEX was operating, the new NYNEX Business Centers Co. represented the third-largest chain of company-owned--not franchised--computer stores in the United States. IBM had never made money from the stores, and some criticized NYNEX's move, saying it also would lose money on the chain. Pacific Telesis, another RHC, announced a major expansion of its computer retail stores in southern California to compete with NYNEX's growing presence in that region. In 1985 NYNEX announced a joint agreement with Citicorp and RCA Corporation to form a videotex company, a field several other RHCs also were entering. Videotex is one or more data bases, such as airline schedules and reservation services, that can be entered by means of a personal computer.

New York Telephone received a $155.6 million rate increase from the New York State Public Service Commission in 1986. The previous year New England Telephone had a $35 million rate increase turned down in Massachusetts. NYNEX faced its first significant strike when 37,600 members of the Communications Workers of America walked off the job for eight days over a three-year contract. Profits in 1986 were $1.22 billion.

In 1986 NYNEX began a serious push to enter the international long-distance market by seeking to form a $300 million to $400 million joint venture to lay a transatlantic fiber-optic cable. NYNEX wanted to enter the deal by buying British Tel-Optik Ltd. for $10 million. In 1987 with U.S. President Ronald Reagan's administration calling for expansion of competition in the telecommunications industry, the Justice Department asked Justice Greene to lift the restrictions on the RHCs. In May 1987 the FCC approved NYNEX's plan, but Greene said he feared that the NYNEX plan would cause anti-trust problems. The case dragged on, and in July 1988, NYNEX's partner, Britain's Cable and Wireless PLC, scrapped the agreement because of the delay.

In 1987 NYNEX bought Business Intelligence Services Ltd., a London-based banking software, consulting, and financial services company with branches in 13 countries, for $107 million. It also signed a three-year, $400 million Contract with Northern Telecom to supply equipment to New England and New York Telephone. In November 1987 the company announced plans to begin selling its white pages telephone directories on computer discs. Net income for 1987 was $1.27 billion.

NYNEX's image was tarnished in 1988 when it had to dismiss or suspend ten mid-level managers for engaging in unfair hiring and promotion and for taking bribes from contractors. In 1988, as other RHCs pulled back from nonphone investments, NYNEX poured more money into computer operations, in an effort to make its stores profitable. In May 1988 NYNEX bought the professional services and software products operations of AGS Computers Inc. for $275 million. With an eye on increasing cellular telephone revenue, NYNEX started an experiment in Boston in which it installed credit-card-operated cellular telephones in taxis. New York Telephone won a contract to build a private fiber-optic network connecting thousands of traders at major securities firms in Manhattan. In November 1988 the FCC issued a long-awaited ruling allowing RHCs to restructure their phone networks to help spread computerized services.

By 1988 New York, the state that generates by far the largest amount of NYNEX's revenue, instituted a program in which it split excess profits with consumers, which meant state regulators would allow the company to earn higher profits. NYNEX had the second-highest profit growth of the RHCs and the highest total return to stockholders. Company profits reached $1.3 billion in 1988.

In February 1989 Delbert Staley retired. He had been NYNEX's chairman and chief executive officer since the company began operating. William C. Ferguson succeeded him. Later that year Ferguson faced a divisive four-month strike by 60,000 union employees over company plans to cut health-care spending. The strike severely damaged the morale of workers and management at a time when the company needed to improve the efficiency of its work force. In 1989 NYNEX had the highest revenue per phone line of any of the seven RHCs, but also the highest costs and lowest profit margins. For 1989 NYNEX had a 13% return on equity versus a 17.5% return for Pacific Telesis. The economy was slowing in New York and New England, and the antiquated New York Telephone network badly needed modernization. Partly because the NYNEX system was outdated, small companies sprang up in Manhattan with their own loops that bypassed the NYNEX system. In 1989 NYNEX won a bid for a 50% interest in a new company to own, operate, and modernize the phone system of Gibraltar. The other 50% was owned by the Gibraltar government, and NYNEX beat Spanish, British, and Japanese phone companies to get the contract.

The State of New York and the U.S. government launched investigations of NYNEX's unregulated purchasing subsidiary, NYNEX Material Enterprises Co., to see if it had overcharged New York Telephone and New England Telephone for a variety of products and services, with the telephone companies then passing the higher charges on to subscribers. The subsidiary bought equipment in bulk to save money, but former employees testified that it also routinely marked up prices. NYNEX refunded $45 million to subscribers at the end of 1988, but New York state regulators claimed that was not enough. New York Telephone hoped for a $440 million rate increase for 1991. At the same time it hoped for rate increases with a cap on its prices rather a cap on its profits, so its profits could increase as it became more efficient. The investigation threatened those goals. Asset write-offs in the fourth quarter of 1989 created the first quarterly loss for a regional holding company, and profits for the year fell to $808 million. Leading business publications pronounced the company the most disappointing of the regional holding companies. Ferguson tried to rebuild NYNEX by cutting costs, earning customers' trust and providing top products and services.

In 1989 regulators told New York Telephone to provide limited types of connections to competitors in exchange for the lifting of some pricing restrictions on its private-line services. NYNEX agreed to design a private fiber-optic network for IBM, connecting 12 of its Westchester County, New York, offices. NYNEX Mobile Communications sold its New York radio paging operations to PageAmerica for $37.5 million in November 1989 in order to focus its energy on cellular telephone service.

Cellular phone service represented an area of tremendous growth for NYNEX as such service was no longer considered an expensive toy but was reckoned instead to be a not-so-expensive necessity. NYNEX Mobile Communications increased its cellular customer base by 68% in 1989. NYNEX had grown from 36,000 cellular subscribers in 1985 to 213,000 in 1989, and its system was becoming overloaded. In August 1990 NYNEX Mobile Communications announced plans to build an ambitious new cellular system that would service 10 to 20 times as many subscribers as the system then in place. The system, using technology invented by San Diego-based Qualcomm, allowed cellular phone conversations to share radio waves by combining them with special codes. The decision was controversial because the Qualcomm system, also chosen by Ameritech Mobile Communications, was incompatible with another system chosen by the Cellular Telecommunications Industry Association to be the next cellular technology. AT & T agreed to manufacture a switch for NYNEX system-Qualcomm. NYNEX also introduced a cellular telephone with voice recognition--a user pressed a button, announced the name of the party to be called, and the phone dialed that party.

NYNEX continued to sell its expertise overseas. By 1990 it had signed telecommunications consulting contracts in the United Kingdom, France, Taiwan, Australia, South Korea, and Singapore. It was also working on the British cable television system. With local phone service growing only at about 5% a year, Eugene A. Sekulow, president of subsidiary NYNEX International, said NYNEX aimed to earn 20% of its revenue abroad by the year 2000. Many foreign telecommunications markets were growing faster than that of the United States, and Justice Greene had limited jurisdiction over what RHCs did outside of the United States. At the same time, many foreign governments were privatizing what had been nationalized telephone systems, presenting unprecedented opportunity for U.S. telecommunications companies. NYNEX had brought in Sekulow, a former president of RCA International, to build a management team specifically designed to take advantage of those opportunities.

NYNEX Information Resources Company produced more than 300 white pages directories and Yellow Pages directories every year, with total circulation topping 30 million. This subsidiary had sales of $818 million in 1989.

NYNEX profits declined to $808 million in 1989, from $1.3 billion in 1988, partly because of a worsening economy in the Northeast, particularly in New York. It began cutting the work force at its telephone operations. New York Telephone proposed an $831 million rate increase for 1991, but the New York state attorney general instead told the company to cut costs and reform its business practices. Late in 1990 New York regulators approved a $250 million rate increase.

NYNEX had been involved in another scandal in 1990 when it was alleged that NYNEX purchasing officials held a series of parties with prostitutes for about 20 NYNEX suppliers, hurting the company's image at a time when it was trying to push through large rate increases. Because of this incident and the Materiel Enterprises problems, some New York regulators considered forcing NYNEX to divest itself of New York Telephone. In September 1990 NYNEX merged Materiel Enterprises with NYNEX Service Company to form Telesector Resources and split its ownership between New York Telephone and New England Telephone. Then in November 1990 NYNEX fired 28 employees of New York Telephone's Buildings Department and disciplined 28 more during an investigation into alleged kickbacks, bribery, and bid-rigging for building maintenance contracts. At the same time, New York authorities were calling for the FCC to reopen the investigation of NYNEX it had launched after reports of overcharges.

NYNEX continued to modernize its phone system, spending about $4.5 billion in 1989 and 1990 combined. By the end of 1990 more than 50% of its customers used quick and efficient digital switches. It had about 480,000 miles of fiber-optic cable in place, compared with 207,000 in 1987.

Principal Subsidiaries: New England Telephone and Telegraph Company; New York Telephone Company; NYNEX Business Information Systems Company; NYNEX Credit Company; NYNEX Information Resources Company; NYNEX Information Solutions Group, Inc.; NYNEX Mobile Communications Company; NYNEX Properties Company; NYNEX Service Company; NYNEX Systems Marketing Company; AGS Computers Inc.; The BIS Group Limited; The Data Group Corporation; Telco Research Corporation; Vista Concepts Inc.; NYNEX International Company; NYNEX Government Affairs; Telesector Resources.

Further Reading:

• Arenson, Karen W., "At NYNEX, X Is the Unknown," The New York Times, October 27, 1983.
• Coy, Peter, and Mark Lewyn, "The Tangle of Problems Hanging Up NYNEX," Business Week, February 19, 1988.

Source: International Directory of Company Histories, Vol. 5. St. James Press, 1992.

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