U S West, Inc. History

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Company History:

The "new" U S West, Inc. was formed in 1995 after the split of its former parent company (also named U S West, Inc.) into two separate companies--one which retained the U S West, Inc. name, and the other which was called MediaOne Group Inc. Prior to the restructuring, both the new U S West and MediaOne had been operating units with increasingly competitive businesses in the telecommunications and data delivery services industry. Though the original U S West was the largest of the Baby Bells resulting from the breakup of AT&T in 1984, after its own split it became the smallest of the Baby Bells or regional holding companies (RHCs) providing local telephone service in the United States. In the late 1990s, U S West concentrated on providing customers in its 14-state western-United States territory, as well outside this area through varied partnerships, with high-speed integrated products and services over copper and fiber-optic networks. These products included a wide range of personal and professional telephone and data delivery services, as well as electronic and traditional Yellow Pages directories.

Birth of the Regional Holding Companies in 1983 and 1984

U S West, Inc. was originally formed in 1983 as part of a consent decree between the U.S. Department of Justice (DOJ) and American Telephone and Telegraph Company (AT&T), which was at that time the world's largest corporation. AT&T had built most of the U.S. phone system, but suffered frequent criticism for allegedly suppressing competition through unfair trade practices. The decree followed a lengthy court battle with the DOJ. AT&T had led the operation of local telephone service in the United States through 22 companies, all of which existed under AT&T's umbrella. The breakup divided the 22 local companies among seven regional holding companies.

U S West was formed from the combination of Mountain States Telephone & Telegraph Co., Northwestern Bell Telephone Co., and Pacific Northwest Bell Telephone Co. Its territory comprised Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, New Mexico, Nebraska, North and South Dakota, Oregon, Utah, Washington, and Wyoming. U S West and the other RHCs were not free to enter any business they chose; the consent decree forbade them to use their monopoly power to their advantage by entering certain businesses, including long-distance telephone service and telephone equipment design and manufacture. Incorporated in 1983, U S West officially began operation January 1, 1984.

From the day of its formation, U S West had built-in disadvantages compared to its sibling RHCs. It was responsible for the largest geographical territory, which covered about 45 percent of the lower 48 states' area. Unfortunately, however, much of its territory was sparsely populated and growing slowly, which limited the return on equipment and services. Furthermore, many miles of wire were needed to reach fewer people than in the other RHCs, although U S West managed to earn a higher income per line than other RHCs at a lower than average cost. Only 4 percent of AT&T's pre-breakup stock was owned by people who lived in U S West's territory, and the company feared investment might dry up. These disadvantages led the new company to react swiftly and aggressively to the AT&T breakup. It chose a name faster than any of the other Bell operating companies, dropping the "Bell" name to remove associations with the past, and calling itself U S West to symbolize its desire to take on new frontiers. To get its name recognized by the public and investors, the company spent $2.5 million on a showy advertising campaign featuring cowboys and the company slogan, "If you don't make dust, you eat dust." U S West appointed Jack A. MacAllister as its president, and CEO and he gave the company a decentralized structure. Its three local phone companies and new subsidiaries were run as separate companies, and the number of employees at U S West headquarters was kept below 200.

Forging a New Frontier, 1985 to 1987

MacAllister quickly moved the company into new business ventures and pushed for relaxed regulation from the states in U S West's territory and from the consent decree governing the AT&T breakup. U S West began investing millions of dollars in commercial real estate, owning a $70-million portfolio by the end of 1985. U S West also moved into financial services, buying a commercial funding company for $10 million and the Kansas City operations of Control Data Corporation's Commercial Credit Company for $65 million.

Like most of the other regional holding companies, U S West began investing in cellular telephone services and directory publishing, two businesses in which they were not restricted to their own territories. U S West bought directory publisher Trans Western Publishing, with operations in Florida and California. The company formed U S West New Vector Group Inc. to manage its cellular operations, and U S West Financial Services to offer leasing and sales financing to its customers. In 1984, profits amounted to $887 million.

By late 1985, U S West had won pricing flexibility for some services from regulators in eight states. The company formed a subsidiary--U S West Information Systems&mdashø direct its computer operations, and the company's New Vector Communications bought the San Diego cellular operations of Communications Industries Inc. Meanwhile, Justice Harold Greene, overseeing the AT&T breakup, turned down the RHC's first request to ease restrictions on diversification into nonregulated areas. Even so, in 1985 U S West posted profits of $925.6 million.

In 1986, U S West bought Applied Communications Inc. for nearly $120 million. That same year, the company formed a commercial real estate subsidiary, called Beta West Properties. Its first move was to buy the 54-story office building in Denver in which Mountain States headquarters was located, for $235 million. A strike by 18,000 members of the Communications Workers of America at Mountain States ended after one day.

Decentralization led to the formation of two U S West equipment-marketing subsidiaries, FirstTel Information Systems and Interline Communication Services. The two subsidiaries soon competed with each other, however, and with the sales forces of U S West's three local phone companies. Thus, in late 1986 both companies were merged into a single new subsidiary, U S West Information Systems. U S West took a $52 million loan to pay for the restructuring and dismissed more than 1,000 employees. Though the former two subsidiaries had marketed telecommunications equipment nationwide, the restructuring narrowed the focus to selling equipment within U S West's territory, where the company was best known. U S West's profits for 1986 dropped slightly to $924 million, on revenue of $8.31 billion.

Acknowledged as the most aggressive of the RHCs, in 1986 U S West told Bell Communications Research (Bellcore)--the research consortium jointly owned by the seven RHCs--that it was going to sell its share when its funding commitment ran out in 1990. U S West wanted greater control of the kind of research that the lab did, as well as over who was aware of it. As a result of this U S West pressure, Bellcore changed the rules governing its research, allowing it to do research for a single RHC and keep it secret from the others for up to two years. The changes satisfied U S West, and it decided to stay in Bellcore.

U S West established its own 400-engineer laboratory in Colorado, however, to focus on its own research and development. The decree governing the AT&T breakup forbade any regional Bell from designing or manufacturing its own equipment, but U S West worked on artificial intelligence and voice recognition and response systems with the goal of creating a system to give repair people instructions from a talking computer via telephone.

U S West pushed for deregulation harder than any of the other regionals, often angering state regulators in the process. By the end of 1987, 11 of the 14 states the company served had loosened regulation, allowing the company to freely price new services such as central phone switching, cellular phones, and private lines. Idaho, Nebraska, and North Dakota actually had the least restrictive telecommunications policies in the United States. The moves taken by U S West soon paid off: telephone profits for 1987 fell 1 percent, although total profits rose to $1 billion.

Further Expansion & Diversification, 1988 to 1991

By mid-1988 U S West had invested $192 million in New Vector. New Vector had entered 22 cellular markets and had 51,000 subscribers, but it was losing money. Thus, U S West sold 17 percent of New Vector that year on the stock market, in order to recoup its initial investment. The stock promptly began falling, losing 28 percent of its value in just two months. U S West's growth was falling behind that of the other RHCs, largely because the population and economy of its region was stagnant, while that of most other RHCs was growing.

U S West, along with the other regionals, finally won court permission in 1988 to enter new information services like voice mail and database transmission as long as they did not create or manipulate data themselves. The relaxed restrictions meant more local telephone traffic and increased profits. U S West promptly announced a deal to test-market "Minitel", a French videotex system, in its region. The company also bought 10 percent of French cable company Lyonnaise Communications and announced plans to offer an information-gateway service in Omaha, Nebraska.

Around the same time, U S West also decided to entirely do away with the Bell name, announcing plans to restructure its three local phone companies into one subsidiary, U S West Communications. The company hoped the restructuring would accomplish several goals. First, the company wanted to cut costs by centralizing marketing and distribution. Second, U S West strived to replace a geographic approach to sales with one organized around market segments. Finally, the restructuring sought to put new emphasis on customer service. U S West hoped the name change would increase customer awareness as well, although some analysts feared the move could create resentment among customers already frustrated by the chaos following the AT&T breakup.

Meanwhile, U S West Financial Services, which bought and then leased out expensive items like airplanes and medical equipment, and engaged in mortgage banking and leveraged buyouts, had grown to nearly $105 million in annual revenue and nearly $2 billion in assets. In May 1988, it bought two reinsurance companies for $50 million. Profits for 1988 topped off at $1.13 billion.

The following year, U S West introduced miniature Yellow Pages, which was less than two inches thick and about seven inches long. The company hoped to find a niche among car-phone users and people with limited shelf space. The company's cable division invested in two British cable companies, London South Partnership and Cable London. It then joined British telephone giant STC PLC in bidding on a British cellular-communications license. The company bought Financial Security Assurance Inc. for $345 million to strengthen U S West Financial Services. Profits for 1989 were $1.1 billion.

A New Era, the Early 1990s

In 1990, U S West announced it would sell $1.4-billion in commercial real estate owned by BetaWest Properties and instead focus on real estate financing. The company planned to sell the properties over the next five-to-seven years as market conditions permitted and hoped real estate financing would bring sustained profits rather than incur the debt the company had taken on to buy property.

Around that time, U S West and its sibling RHCs launched a major push to escape from federal restrictions dating back to the AT&T breakup. They pooled nearly $21 million for a lobbying effort designed to shift regulation of their activities from Justice Greene to Congress and the Federal Communications Commission (FCC), where they expected a more sympathetic ear. The RHCs warned the decision-makers of the dire consequences of letting the U.S. telecommunications system fall behind that of other countries--a message that found a receptive audience among those fearing a decline in U.S. economic strength. Opponents, including long-distance telephone companies, cable television companies, and newspaper publishers, said the RHCs would use regulatory freedom to raise local rates and use the increased profits to subsidize their entry into new businesses.

The telecommunications market was growing faster in most of the rest of the world than it was in the United States. Partly due to this fact, and partly due to the limits put on its U.S. activities, U S West invested $1.05 billion overseas by 1990--the second highest amount among the RHCs. U S West was the first "RHC" in Eastern Europe, with a 49 percent stake in a Hungarian cellular telephone project. U S West had also become one of the largest cable-television competitors in the world, with franchises in Hong Kong, Britain, and France. U S West's 25 percent stake in the Hong Kong franchise, the world's largest, required it to pay $125 million of the cost of building the cable network. In return, the consortium was to get six years of exclusive access to the market. The deal soured, however, when a Hong Kong company announced plans to beam programming into the country via satellite. In 1990, U S West pulled out of the consortium after the Hong Kong government refused to stop the satellite system.

U S West had also planned on being involved in a $500 million plan to lay fiber-optic cable across the former Soviet Union, although the U.S. government rejected the plan, citing national security concerns. A few months later U S West announced plans to build the first cellular telephone networks in the Soviet Union in Moscow and Leningrad. It also revealed plans to build Czechoslovakia's first cellular network in a joint venture with Bell Atlantic Corporation. Even if successful, the financial rewards from the company's ambitious foreign projects were expected to be years away because of the huge capital outlays needed to build them.

U S West announced it was investing $35 million to develop self-healing telephone networks in five cities. The networks used loops of fiber-optic cable to prevent disruption of service by earthquakes, fires, or other disasters. If a section of the loop broke, signals could be sent the other way around the loop to the telephone switching station. The service was aimed at large businesses, government offices, long-distance carriers, and others that needed to move large amounts of information without interruption. The loops were to serve about 200 large office buildings in Denver, Minneapolis-St. Paul, Phoenix, Portland, Oregon, and Seattle.

After 40 years in the telephone business, MacAllister retired in 1990, and Richard D. McCormick took his place as president and CEO. Business continued as usual, and U S West's directory publishing group established an international headquarters in Brussels, Belgium. The company also bought Cable Management Advertising Control System, a personal-computer-based system that tracked local cable television advertising. It spent a record $2 billion in 1990 to modernize its telephone system. As part of a drive to develop new telephone services, U S West set up an experimental telephone system in Bellingham, Washington, allowing customers to use touch-tone telephones to turn on, turn off, and change various telephone services themselves. New product revenues almost doubled from 1989, jumping to $54 million. The number of cellular subscribers rose 56 percent to 210,000, while paging subscribers hit 161,000. Income for 1990 was $1.2 billion on sales of $9.96 billion.

Over the next few years, U S West struggled to remain at the forefront of the telecommunications revolution, picking winners and occasionally backing operations with unforeseen costs. One of the latter was ISDN (Integrated Services Digital Network) technology, which proved more difficult to market and install than anticipated. But the company's major problems came from within, as its advances in telecommunications became increasingly linked with cable operations. In a related move--one which would later bring about repercussions--U S West paid $2.55 billion for a 25.5 percent stake of Time Warner Entertainment in 1993, as an inroad to provide data, entertainment, and telephone services over Time Warner's vast cable systems, as well as some access to HBO, and Warner Bros. Studios.

Another Break-Up, 1994 and 1995

The Time Warner venture soured when the conglomerate announced its intention to acquire Turner Broadcasting System Inc., which U S West considered a violation of their partnership pact. To stop the acquisition, U S West went to court, initiating a long, dirty fight that Time Warner counterattacked, stating that U S West had engaged in "anticompetitive practices, deception," and the squelching of several deals with other telecommunications companies.

The Time Warner legal mess intensified in 1995, as what one executive dubbed in the Wall Street Journal as "the world's most expensive divorce." Time Warner's latest salvo alleged that U S West was secretly dealing with rival and former parent AT&T, but industry analysts were already predicting that Time Warner would have to give U S West what it wanted--control of its cable systems--rather than risk the consequences.

U S West triumphed in one legal skirmish, when the Justice Dept. decided to allow the company to provide long-distance services outside its Northwest territory as long as any new services were offered over their own lines and in conjunction with local services. The ruling, the Telecommunications Act of 1996, was a victory--though a small one--and was immediately blasted by SBC Communications Inc., a regional phone company based in San Antonio, Texas. SBC Communications filed suit stating that the restrictions were so tight that the victory was hollow, and the ruling was in essence "anticompetitive and unlawful" against U S West, giving AT&T blanket protection from RHC competitors. Parts of the agreement were later struck down.

On the U S West homefront, its own telecommunications and cable divisions were continually at odds, competing against each other for both customers and technology. Caught in the middle and unable to side one way or the other, if became clear that the embattled parent company could not continue along its current path. The warranted action seemed to be the permanent separation of the contentious siblings, and the talk turned from "what if" to "when." The two companies' expansion came back to haunt U S West in the worst way, for both companies were not only leaders in their industries but found themselves on the very same track for the future of integrated communications and programming.

When U S West Inc. shareholders approved a plan to create two separate classes of common stock--one for the telecom company (U S West Communications) and one for the cable/media division (U S Media Group), each operating unit set out to make its mark before the eventual split of the company itself. U S West's CEO and president, Sol Trujillo, began an aggressive campaign to make the breakup as painless as possible and to bulk up the Communications division. He moved quickly to bring in an "all-star team" and immediately began a turnaround. The U S West Media Group, meanwhile, went on a purchasing spree, spending some $13 billion over the next two years to acquire additional cable systems. Chairman McCormick prepared himself to be out of a job, although he and three other top-level executives eventually received hefty severance packages and McCormick remained a board member.

Differentiation Through Integration: 1996 and Beyond

Trujillo's mission, to "differentiate through integration," was vital to the reemergence of U S West Communications as a "one-stop shop" for telecommunications. The goal was to offer customers a myriad of services all woven together with one number, one bill, and from one company--U S West Communications. One such innovation was Access2 Advanced PCS, a new wireless phone service that made home, business, and mobile phones all work together, with all calls ringing to the same voice mailbox and able to ring on any or all of the phones. The Access2 rollout was a success, and within six months was beating out its nearest competitor by a two-to-one margin. Within two years of the U S West breakup announcement, Trujillo had brought total shareholder return to 48.5 percent for U S West Communications, while cost dropped by about 20 percent to make the company the lowest of the Baby Bells. Service improved by 65 percent (the company had been known to be lax in this area), new products revenue jumped to $1.1 billion, and an addition of 683,000 access lines brought the company's total number of lines to approximately 17 million.

As U S West continued to bet on the future, one of its most recent endeavors was the rollout of DSL (digital subscriber line) technology in mid-1998, to as many as 10 million customers in 46 cities. In a heated battle, cable and telecom companies were vying for the same market, to offer customers super-fast data delivery on the Internet--from either cable modems or supercharged copper phone wires. With a potential market of some 55 million expanding by over 20 percent annually, the race for customers was broad, with heavy-hitters like Microsoft, Intel, and Compaq working with Baby Bells to further the technology. The good news was that everyone wanted to make World Wide Web access quicker, but the bad news was DSL's cost was still too expensive for anyone but big business, and available only in limited areas nationwide. For DSL to be the next widespread technological wonder, the costs for both implementation and access had to be slashed--which put installers like U S West at risk. With high initial outputs and a waiting period for markets to mature and repay original costs, lowering initial prices was not a good option.

U S West Communications also made slippery moves into widespread long-distance data and phone services through agreements with Williams Communications and Qwest, who together provided over 34,000 miles of fiber-optic networking outside U S West's territory. The latter deal paid U S West an undisclosed sum for steering customers to Qwest for long-distance phone services--a practice which ran around the perimeter of the Telecommunications Act of 1996. Using a little-known loophole that stated Baby Bells could not offer long-distance services in their own territories unless they opened up their local monopolies to rivals, but could sell the services of an unaffiliated party, U S West Communications boldly went where no other Baby Bell had tread.

While its recent pacts rankled AT&T and others, U S West kept on going, finally settling its grievances with Time Warner by merging with its Road Runner Group. Yet the biggest news of 1998 was the actual split of U S West Inc. into two separate companies--U S West Media Group was renamed MediaOne Group Inc. ("UMG" on the NYSE), and U S West Communications Group became known simply as the "new" U S West, Inc. The split also brought U S West Dex, the company's Yellow Pages and electronic directory business, which had been part of the Media Group, over to the new U S West. This brought $4.75 billion in assets and $3.9 billion in debt.

The breakup further heralded an unusual stance in the merger-mania and consolidation of the industry, with many of its rivals having gone in the opposite direction--like SBC Communications' acquisition of Pacific Telesis and its proposed purchase of Ameritech. After building itself up into a major power, the former U S West was now two smaller and valuable--yet vulnerable--companies. Though terms of the separation made a takeover prohibitively expensive over the next two years for tax reasons, it would then be open season if Trujillo and Chuck Lillis (CEO at MediaOne) failed to pump up their respective companies.

As the century came to a close, the new U S West was making technological leaps at nearly the speed of its highly-charged DSLs, announcing variations such as ADSL (asymmetrical digital subscriber line) and VDSL (very-high-speed digital subscriber line) and offering its own Internet service and enhanced capabilities to customers both within its 14-state territory and beyond. With additional pacts with Cisco Systems, Intermedia, Digital, HP, Microsoft, Novell, Oracle, and Sun Microsystems, U S West was engaged to create a "Next-Generation National Data Network" to bring the latest technology to widespread use. It appeared that time and technology would tell whether the nation's smallest Baby Bell could keep its stance in an ever-consolidating telecommunications industry.

Principal Subsidiaries: U S West Business Resources, Inc.; U S West Communication Services Inc.; U S West Federal Services Inc.; U S West Advanced Technologies Inc.; U S West Long Distance Inc.; U S West !NTERPRISE Networking; U S West Information Technologies.

Further Reading:

• Arenson, Karen W., "U S West: Building an Image," New York Times, November 11, 1983.
• Burrows, Peter, and Ron Grover, "U S West Scouts a New Frontier," Business Week, May 18, 1998.
• Cauley, Leslie, "Technology & Telecommunications: Baby Bells Square Off Against AT&T on Callings Cards, U S West Agreement," Wall Street Journal, October 27, 1995, p. B3.
• Cauley, Leslie and Albert R. Karr, "U S West Clears Hurdle to Long-Distance Market ..." Wall Street Journal, October 12, 1995, p. A3.
• Crockett, Roger O., et al, "Warp Speed Ahead," Business Week, February 16, 1998, pp. 80-83.
• du Bois, Martin, "U S West's Belgian Multimedia Venture Irritates Tense Dutch, French Relations," Wall Street Journal, October 13, 1995.
• Ewing, Terzah and Stephanie N. Mehta, "Williams Re-Enters Wholesale Market for Long-Distance with U S West Pact," Wall Street Journal, January 6, 1998.
• Gonzalez, Erika, "A Faster Internet Access," Rocky Mountain News, May 5, 1998, p. 1B.
• Ivey, Mark, "U S West: A Trailblazer That's Getting Left Behind," Business Week, June 6, 1988.
• Keller, John and Stephanie Mehta, "U S West Strikes Marketing Alliance with Qwest in Bold Move Skirting Rules," Wall Street Journal, May 7, 1998.
• Mehta, Stephanie, "U S West is Set to Offer TV Programming and Internet Access Over Phone Lines," Wall Street Journal, April 20, 1998, p. B5.
• Rosenbush, Steve, "For U S West, Size Isn't Everything," USA Today, June 5, 1998.
• Shapiro, Eben, and Leslie Cauley, "Time Warner Faces Expensive Terms to End Media Venture with U S West," Wall Street Journal, October 13, 1995, p. A4.
• "Time Warner Allegations are Denied by U S West," Wall Street Journal, November 1, 1995, p. A6.
• "U S West Earnings Rise 5.8%," Rocky Mountain News, April 25, 1998.

Source: International Directory of Company Histories, Vol. 25. St. James Press, 1999.

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