While many researchers spend their time scrutinizing how companies get their edge or why they boom, Professor Kathryn Rudie Harrigan's research explores the very opposite: the dynamics of decline.
Harrigan's unique forte is uncovering the root of the decline of once-mighty businesses. She's written two essential books on the subject, spanning three decades, and her analysis has covered industries from vacuum tubes to baby food. Her research feels especially poignant today with the downshifting of growth in seemingly untouchable companies like Apple, Amazon, and Meta. But her latest publication goes back to the early 1990s — looking for relevant lessons in the downturn of telecommunications giant AT&T.
Her latest paper, “Geographic fragmentation and declining dominance: Yet another story of AT&T's decline in the post-divestiture era,” published in the Journal of Evolutionary Economics, was developed from the doctoral thesis of her co-author, Lalit Manral, after Harrigan served as an adviser on his dissertation committee.
AT&T has interested researchers for years because the company's fall was so remarkable. In the 1980s, AT&T was considered a natural monopoly in America's telecommunications industry. Competition appeared only after the US Department of Justice brought an antitrust suit against the monolithic company, resulting in a 1982 consent decree that broke it into seven Regional Bell Operating Companies offering local telephone service while the emerging AT&T offered only long-distance services. Then, in 1984, the Modification of Final Judgment deregulated the long-distance industry, transforming it from a carefully regulated public utility to an open, competitive industry.
Many researchers have analyzed this historic disruption, but Harrigan and Manral's research looks at AT&T from a new perspective, observing how the geography, rather than the technology, reshaped the company's market share. “This is different from some of the traditional ways of looking at economics,” Harrigan says. “This is more like historical economics — you have to look at competitive dynamics over time.”
Geographic Fragmentation
According to the research by Harrigan and Manral, AT&T's market share ultimately suffered because of the “geographic fragmentation” of the telecommunications industry. Even after the consent decree narrowed the corporation's diversified offerings to only the long-distance market, AT&T proceeded to offer this single service on a nationwide scale, remaining a massive corporation. But in 1984, when the government deregulated the industry and allowed new competitors to form, companies like MCI, Sprint, and WorldCom were able to strategically enter the industry through smaller, geographically specific markets of their choosing — allowing the companies to cherry-pick the most dynamic, promising markets in metro areas.
A large, established incumbent corporation like AT&T usually would have an advantage in keeping new companies from entering its market thanks to extant, long-term “demand-side” investments in areas such as marketing and advertising. Typically, disruptors prevail only when they introduce new technologies that improve or streamline the customer experience. But in this case, the unusual regulatory dynamic caused the industry to fragment along geographical lines, rather than requiring that challengers enter the industry with new technological offerings. It turned each region into its own specialized market, making AT&T uniquely vulnerable.
In the newly fragmented landscape, AT&T's demand-side investments were not effective in creating barriers to entry for new competitors. Instead, advertising costs became a stressor for the behemoth. In 1985, nationwide advertising cost AT&T $500 million, while MCI and Sprint each spent $50 million that year, focusing only on their ideal markets. Not only did they spend less on advertising, but the payoff was better as well: Both companies acquired more subscribers that year and increased their revenue per subscriber, enjoying a higher profit margin per subscriber, according to the new study.
From 1984 to 1996, AT&T's share of total long-distance revenues dropped from 90.96 percent to 47.9 percent. Meanwhile, MCI took the largest market share, growing from 4.5 percent to about 20 percent in just the second half of that span, between 1990 and 1996. “When you only have to enter a piece of the total market in a particular geography, it's not as expensive to buy your way into a selected market,” Harrigan says.
The Schumpeterian Wheel
The circumstances of AT&T's decline may be the result of specific legislative action, but it's a classic example of what Harrigan calls the Schumpeterian Wheel — an idea she teaches in her corporate strategy course at Columbia Business School. “Schumpeter's argument is that no advantage lasts forever,” Harrigan says.
This concept should be a warning for companies today, especially those in technology. Harrigan sees this cycle reflected in the technology sector throughout the past three decades, from Sharp's dominance with LCD televisions to Blackberry's claim on the smartphone industry. Today, decreasing demand forecasts a shift in tech giants' prospects. “The life cycles of these companies are getting shorter and shorter, with a shorter window of opportunity to make what we call 'super-normal profits,'” or the profits that exceed the basic needs of the company, Harrigan says.
The new research reinforces that “the decline of dominance is more nuanced” than our existing frameworks encompassed. And while geographical fragmentation is a new axis through which to examine decline, it's just one of many elements that can lower the barrier to entry for potential competitors.
“We're in the throes of a slowdown in some of the techs,” Harrigan says. “We have to examine what's on the minds of the consumers right now, but it may be that by the time that things pick up again, the products and services that were considered really important in 2019 will be in their end game.”
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