rospects and recommend strategic alternatives. Tough Calls Project Pegasus The consultants' mandate was to consider all options with no precon- ceptions; nothing was sacred. They explored a number of alternative strategies, but in the end one factor dominated their thinking: The consumer long-distance industry was in the middle of a severe struc- tural decline from which it was unlikely to recover. There was really only one strategic alternative: to separate the consumer long-distance business from the rest of AT&T somehow SO that it could be valued for what it was-a depleting oil well. By the consultants' analysis, no long-distance company had found a way to alter the industry's funda- mentals, although they had chosen different strategies. While AT&T had carefully managed its customer losses to maximize its profitabil- ity, MCI and Sprint had sacrificed margins to gain market share. AT&T's consumer margins were about six times MCI's. But even the consumer unit's then-projected revenue decline of 3 to 5 percent masked deeper problems. Direct-dial long distance had actually been declining 16 to 18 percent in each of the previous two or three years. That revenue decline had been offset by increases in the cost of operator-assisted and calling card calls, as well as by a slew of special fees such as the $3 minimum charge. But now consumers were resisting the extra charges. Wireless phones were replacing not only calling card calls but even long distance calls placed from home. And the FCC had forced the company to abandon its minimum charge. Furthermore, the consultants extrapolated the impact of the Bell companies' entry into the long-distance business from AT&T's experi- ence in areas where the local phone company was already allowed to offer a bundle of local and long-distance calling. Using the company's most optimistic views of the timing of Bell entry, they projected that the unit would lose about 30 percent of its market share in five years. When the project was reviewed with the AT&T board at Chicago's Ritz