Baby Bell Verizon Communications Inc. (NYSE: VZ) is all grown up now -- in fact, it's gotten big enough that it's managed to replace its Mom, AT&T Corp. (NYSE: T), in the Dow Jones Industrial Average (DJIA).
The changes were announced today by the Dow Jones Company as it rejiggered some of the index's components. The keepers of the DJIA, the Dow Jones Company (publishers of the Wall Street Journal), apparently decided AT&T had lost its mojo. AT&T was booted off the index along with some other large American industrial icons that have seen better days, including Eastman Kodak and International Paper Co.
Perhaps the change was overdue. Verizon was spun out of AT&T in its forced breakup in 1984, and it is now substantially larger than its parent. In fact, measured in total sales, Verizon is the largest service provider in North America and the second largest service provider in the world, next to Japan's NTT (NYSE: NTT).
The departure of AT&T ends a long tenure among America's industrial elite. AT&T was in the DJIA from Oct. 4, 1916, to Oct. 1, 1928, and then reentered on March 14, 1939, where it's stayed until today.
So what happened? The changes could be interpreted as a reflection of long-term trends in the industry. The RBOC offspring of AT&T, including Verizon and SBC Communications Inc. (NYSE: SBC), have done better since the breakup than AT&T itself.
Persistent drops in long-distance pricing and the advent of competition from Internet communications have pressured large IXCs such as AT&T, whose revenue has been dropping in recent years. The RBOCs, on the other hand, still have a reasonably strong grip on regional access networks, though that is now coming under fire from cable companies.
The changes to the index are meant to "recognize trends within the U.S. stock market, including the continued growth of the financial and health care sectors and the diminishing relative weight of basic materials stocks," said Paul Steiger, managing editor of the Wall Street Journal, in a corporate statement. Both Verizon and SBC, which was added to the index in 1999, were among the seven regional RBOCs carved out of AT&T in the federal government's antitrust ruling in 1984. It seems that Verizon's addition is long overdue, considering that it had nearly $68 billion in revenues in 2003, compared with SBC's $43 billion. In contrast, AT&T had $38 billion in revenue in 2003, which is way down from its $58 billion in revenues it had as recently as 2000, although much of those revenues were lost through sale of its cable assets.
AT&T management did not appear pleased with the change, issuing a heated response in a corporate release today:
- While AT&T and the entire telecommunications industry have reflected the effects of soft demand and overcapacity since early in 2000, AT&T is a Fortune 40 company with $34.5 billion in revenue last year.
The fact remains that AT&T is one of the world's leading communications companies and our unrivaled base of enterprise customers to whom we provide sophisticated networking services -- both domestically and globally -- make AT&T a bellwether of the U.S. economy. Despite ongoing regulatory uncertainty, AT&T has continued to invest in technology innovation and advanced networking while improving our processes and the experience our customers expect from AT&T.
— R. Scott Raynovich, US Editor, Light Reading