Global Telecommunications Regulation TCOM 5173

(c) 2004 Charles G. Gray 1

Global Telecommunications Regulation

TCOM 5173

The Breakup of the Bell System

And

The MFJ

4 February 2004Charles G. Gray


The 1949 DOJ Suit• Deferred from 1939/40 due to WWII

• Alleged that AT&T was violating the Sherman Antitrust Act

• Sought to separate WECo from AT&T and break it into three separate companies– “Captive (bottleneck) monopoly” in the DOJ’s eyes– Operating companies could buy from ONLY WECo– Unregulated, WECo could charge a premium for

everything it sold to AT&T


The 1956 Consent Decree• Eisenhower administration cozy with

business

• New AG reviewed all pending cases

• AT&T hired a close friend to lobby the AG

• The Decree (12 January 1956)– AT&T would stay out of the computer business

(such as it was)

– AT&T kept WECo

• Congress held hearings and used the forum to embarrass the Justice Department


The DOJ Reaction

• Stunned at the “settlement”

• Believed AT&T had: – Improperly used its political muscle – Circumvented the legal process– Cheated the American people

• Began a comprehensive file on AT&T’s actions, waiting for the “right time”

• The time arrived in the Fall of 1973


MCI Enters the Picture• June, 1972 – McGowan took MCI public

– Announced network build-out plan to 165 cities

• AT&T “Hi-lo” tariff (effective June 1974)

• McGowan retained numerous prestigious DC law firms to invoke “conflict of interest” if AT&T tried to hire them later

• McGowan influenced Sen. Hart on the Antitrust Committee (Industrial Reorganization Act-did not pass the Senate)


Other Factors in Play

• McGowan “captured” the young liberal lawyers and economists at the DOJ

• Data processing industry was lobbying the FCC for better/faster services– AT&T was holding out to recover “sunk” costs

• McGowan lobbied the Senate to break the local companies away from AT&T

• MCI attorney read a “confidential” AT&T plan to file individual state tariffs


Conflict Escalates• 1973 - deButts speech to the NARUC in Seattle

– The “Unusual Obligation” speech

– AT&T should continue its monopoly “in the public interest”

• deButts to Strassburg: – “No hard feelings”• Strassburg – Chief of FCC CCB

– “Father” of telecommunications competition

– 40 year FCC veteran, Chief of the CCB

– Wrote the SCC decision in 1971

– Wrote the MCI FX decision – 4 Oct 1973

– Determined to “bring AT&T down”


The MCI FX Decision• FCC “approved” without really understanding

– Investigation launched to define approved services

• AT&T sued, Federal Court upheld the FCC

• Appeals court overruled, remanded to the FCC

• AT&T disconnected all MCI FX service– Worked the weekend to pull them all– DeButts later had serious regrets over his action

• 1974 – MCI filed sweeping antitrust suit against AT&T


Other Contributing Factors• AT&T service failures-late 1960’s in NYC• Growth of satellite and microwave service• Emerging “computer age”

– Concern that AT&T couldn’t keep up– Suppression of new technologies

• General view that AT&T “controlled” the FCC– Concept of “continuing surveillance” of AT&T– Strassburg ended “informal coordination” – FCC launched a big investigation of AT&T


AT&T in 1973

Corporate Headquarters

Western Electric

Bell Labs Long Lines

22 Bell Operating Companies


The Bell Operating Companies• Nevada Bell

• Illinois Bell

• Indiana Bell

• Michigan Bell

• New England T&T

• New Jersey Bell

• Northwestern Bell

• Pacific Northwest Bell

• Pacific T&T

• South Central Bell

• Southern Bell

• Southwestern Bell

• Bell Tel of PA

• Chesapeake & Potomac

• C & P of Maryland

• C & P of Virginia

• C & P of W. Virginia

• Diamond State Tel

• Mountain States T&T

• New York Telephone

• Ohio Bell

• Wisconsin Telephone


AT&T and Public Policy

• AT&T viewed MCI as a customer– Followed the state tariffs for providing service

• DOJ viewed MCI as a competitor

• The Bell System viewed their actions as protecting the network

• DOJ viewed it as only protecting the AT&T monopoly

• Public policy was shifting to favor competition


1974 – The Politics• Nixon/Agnew/Ford White House

– Department and agency power increased

• Attorney General Saxbe – Unpredictable, political renegade

• DOJ attorneys advised AT&T they would recommend a suit– AT&T to brief AG prior to decision

• Saxbe announced “I intend to bring an action”– No presidential approval, Treasury and DoD

strongly objected


DOJ Responds to the “Scandal”

• FCC had concluded that it could not control WECo’s pricing

• Advances in technology made the 1956 decree more embarrassing to DOJ

• Two separate DOJ investigations– One open and “by the rules”– Another, with clandestine meetings with White

House and Senator Hart– Competitors were fearful of testifying


The Basis for the Suit• AT&T was violating the Sherman (1890) and

Clayton (1914) Antitrust Acts

• Concept of “bottleneck monopoly”– Essential Facilities– Intercity LD was bottleneck that lead to

Kingsbury– State regulated BOCs were the bottleneck to IXC

competition in 1973

• AT&Ts PCA requirements

• Precedent in Supreme Court “Otter Tail” case


The DoJ 1974 Suit• Filed 20 November 1974

• Alleged that AT&T:– Monopolized and conspired to monopolize

various telecommunications markets– General terms, expected to be expanded as

investigations followed

• Relief sought: – Divest WECo and divide it up– Divest some or all of the operating companies

• Bell Labs postponed for a later decision


The 1974 Suit in Limbo• February 1975 – Judge Joseph Waddy

assigned to the case (terminally ill w/ cancer)• AT&T filed a motion to require every federal

government department to preserve every document relevant to AT&T

• DOJ called a hearing– AT&T (Saunders) asserted that the FCC had

jurisdiction – not the judge– Judge postponed “discovery” pending resolution

of the jurisdiction question


AT&T’s Response

• deButts declared AT&T’s innocence to the press

• AT&T would never approach the government for a consent decree

• AT&T would prove its case in a court of law

• deButts – belligerent – government should follow tradition of regulated monopoly

• AT&T was a “good corporate citizen”


The Rallying Cry

If it ain’t broke, don’t fix it


AT&T Defensive Efforts

• Sought to have the suit dismissed– Illegal due to the existing “consent decree”– Court lacked jurisdiction since the “relevant

questions” were already before the FCC

• All appeals ultimately failed


The MCI Execunet Gambit• FCC had approved FX service in 1973

– One “open” end, one “closed” end

• AT&T lobbyist demonstrated Execunet to the FCC – to their horror– Two “open” ends, back to back

• MCI had filed a “modular tariff”– FCC staff didn’t understand it, but approved it

anyway

• McGowan had deceived the FCC– Exhausted all of his “political capital” there


The “Bell Bill”• “The Consumer Communications Reform

Act of 1976” (or, “The Bell Bill”)

• Introduced by the (sole) Congressman from Wyoming

• No prior coordination with the House Subcommittee on Communications or the FCC

• AT&T learned about it through the newspaper


Provisions of the “Bell Bill”• AT&T would become the nation’s single

phone monopoly

• MCI and competitors would be forced out

• AT&T would be immunized against any antitrust action

• AT&T could buy out any competitors

• Equipment and service regulation would revert to the states (cancel 1968 Carterfone)

• Competition would effectively die


deButts’ Last Stand• De Butts seen by Congress and competitors as

“blindingly arrogant”• Confrontational style with Congress and FCC• Scared many Congressmen, due to a million

employees who could vote– A “shepherd” was appointed in every congressional district

• To mobilize employees

• Follow the congressman around, attending meetings, etc.

• Rep. Wirth inquired about the cost of AT&T’s lobbying, and deButts lost all credibility– “I doubt that there is a single AT&T person working full-

time on this bill”


Rules for Legislative Success

• Walk softly

• Lose graciously

• Flatter continuously

• Gloat never

• Let the congressman take credit for:– “Forging complex legislation”– “Hammering out a compromise”

• AT&T did none of the above on the “Bell Bill”


The Winds of Deregulation

• Liberals saw competition leading to decentralized ownership and more diverse economy

• Conservatives just wanted the government off of business’s back

• A sweeping force– Airlines - Trucking– Natural Gas - Oil– Banking - Others


The 1978 Van Deerlin Bill

• Intended to completely rewrite the TA of 34• Competition as the main means of controlling

both broadcasting and telecommunications• Relieved AT&T from the 1956 Consent Decree• Required AT&T to divest itself of WECo• Set up fund to subsidize local rates• Mandated compulsory IXC interconnection• Most provisions were exactly opposite those

called for in the CCRA


1978 Political Landscape• The Consumer Communications Reform

Act (CCRA) was dead– But it had induced a strong negative reaction to

AT&T

• The Van Deerlin Bill was dead– Statement of principles and an agenda for

discussion– Nobody ever thought it would become law– No public crisis perceived, therefore no strong

public support


MCI’s Position - 1978

• The DOJ antitrust suit was revived, with the US Supreme Court deciding that the FCC was ineffective, and the courts should decide– Judge Harold Greene was assigned

• The MCI antitrust suit was nearing trial

• MCI was now a billion dollar company

• DOJ intended to “ride on the shoulders” of the MCI antitrust case


The AT&T Red and Blue Teams• The Red Team

– Personified by deButts (retired in 1979)

– “The phone company is always right”

– Equipment competition would bring down the network

– Long distance competition was inefficient

• The Blue Team– Led by “Charlie” Brown

– Saw the coming of competition and wanted to prepare for it

• Completely opposite viewpoints of moving the business forward


Judge Harold Greene

• A Jew, born in Germany, escaped the Nazis in 1939

• Served in the US Army (MI)

• Top of his class at Georgetown Law School

• Civil Rights Division under R. Kennedy

• Strong belief in America’s system of checks and balances

• Intent on moving the AT&T case forward expeditiously


Early Attempts to Settle

• 1979-1980 - DOJ lead attorney Anderson’s offer to AT&T– Unknown to the “front office”– “the menu” - undated, on plain paper

• Brown willing to negotiate– Trienens, lead attorney for AT&T negotiated

• Anderson resigned prior to completion of negotiations


First Settlement Criteria• The “Crown Jewels”

– Pacific Bell

• The “Bellwether” approach– Southern New England Telephone– Cincinnati Bell

• The “United Fruit” approach– WECo to spin off one third of itself into a new

company to fully compete– Divest Pacific Bell, Cincinnati Bell, SNET


Change of Players

• New Chief of Antitrust appointed by Carter– Sanford Litvack– Unwilling to consider a settlement

• Internal bickering and turf wars between DOJ attorneys

• Litvack refused to speak to Trienens about the “menu”

• Brown and Trienens completely baffled


The MCI Antitrust Case• 13 June 1980 – “Black Friday” to AT&T• MCI awarded $1.8B in damages

– Reversed on appeal/new trial in 1985 to $300M

• Annual interest alone of $162M while the case was on appeal– First year MCI had ever showed a “profit”

• Half of the DOJ antitrust case paralleled the MCI case

• Severe psychological blow to AT&T management and employees alike


Another “Bell Bill” (1980) • Comprehensive rewrite of CA 34

– Cleared by the House Communications Subcommittee

– “Blessed” by AT&T

• End computer restrictions from 1956 Consent decree

• Make WECo a fully separated subsidiary

• Rodino, (House Antitrust Subcommittee) killed it in his committee


The Crimson Sky Deal• Trial date set for 15 January 1981

• AT&T and DOJ began meeting 22 Dec 80– Devised rules for IXC interconnection– General framework decided by 5 January– Presented as generally agreed by both parties

• Facing threat of a new administration

• The “Piggyback Problem”

• Requested trial delay for three months– Judge Greene denied the request


The Trial Begins• Gerry Connell newly named as the DOJ

lead attorney– Read from his notes (poorly)– Enumerated dates and episodes– Monotonous, plodding opening statement

• Saunders, attorney for AT&T– Polished orator, quoted Voltaire – Spoke for six hours without notes– Concentrated on the MCI case, and the FX and

Execunet decisions


The Trial on Hold• Judge Greene queried the status of the

“Crimson Sky” proposed settlement– Settlement was substantial– Major provisions agreed by both sides– Approved by working-level lawyers

• The Reagan administration was still an uncertainty

• Judge Green recessed the trial until 4 March


Politics and Bureaucrats• Reagan’s nominations for AG and Asst AG

recused due to conflict of interest– William French Smith– Edward Schmults

• William Baxter headed the Antitrust Division• Litvak decided that the “equal access” part of

the agreement would never work• Trienens believed that settlement was

imminent• Litvak told Trienens that it was all off


Political Opposition to the Suit

• Reagan commented against it while campaigning

• Others– William French Smith (AG designate)– Edwin Meese (Counselor)– Malcolm Baldridge (Commerce)– Caspar Weinberger (Defense)

• DCA strongly opposed the breakup of AT&T

• Threat to national security

• JCS – classified (secret) letter


Trial Testimony• Connell was an expert in dealing with Judge

Green• DOJ brought numerous witnesses

– Characterized AT&T (and IBM) as dancing elephants

• Connell (DOJ) concentrated on mundane particulars and indisputable facts

• Saunders (AT&T) concentrated on regulation, politics and the history of the industry


The Baldridge Proposal• Secretary of Commerce

– NTIA chief Wunder• Former Congressman – worked on many unsuccessful telecom bills

• Concern over trade deficits (mostly Japan)• Cabinet Council on Commerce and Trade• “Task Force on Telecommunications Policy”

established by Meese (Counselor to the President)– Commerce - Defense

– Agriculture - Energy

– FEMA - AG not included (on purpose)


Basis for the Proposal

• Perception of President Reagan’s position

• National defense and security– The Defense Communication System

• Trade deficits

• No evident objection from key members of Congress

• Opinion that the public did not care, and would not respond


The Reagan Meeting• Task force was sure of Reagan’s approval

to drop the case

• Baxter rebutted strongly– Shortcomings of the legislative solution that

Commerce had proposed– DOJ had been excluded from the task force– Importance of unity and due process within the

administration

• No decision – President went to lunch


Judge Greene’s Warning• Baldridge proposal was leaked to the press

– “I don’t propose to act on the basis of press reports . . .”

• Saw the government’s case as “respectable”

• Highly disturbed by even a hint of outside political interference

• Greene intended to decide the case on its merits “under the existing antitrust laws”


More Bad News for AT&T

• Litton PCA case decided in favor of Litton

• AT&T had demanded the use of PCAs as a condition for connecting “foreign attachments”

• Court awarded $276.6M in damages

• Served notice on the Administration that any dismissal of US vs. AT&T would have to be rigorously explained to Congress and the public


The Trial Continues

• Hundreds of witnesses– AT&T brought in “celebrities”, movie stars, ex-

cabinet members, senators, business leaders

• Legal maneuvering on both sides

• AT&T perceived that it was losing

• Judge Greene zeroed in on the procurement practices of the operating companies– “Familial attitude” of Bell employees stifled

competition


The Wirth Report• November 1981 – “Telecommunications in

Transition: The Status of Competition in the Telecommunications Industry”– Scuttled any hope that AT&T had of a

legislative solution– More restrictions needed on AT&T

• Cross-subsidies between AT&T units continued to be a major problem

• Drove AT&T to propose the “inter-intra” split


AT&T’s Three Alternatives

• Presented to the Board of Directors– Continue to fight, in court, in Congress, at the

FCC• No Surrender

– S.898 “Quagmire II” negotiations• DOJ/Baxter had gained the upper hand

– Inter-intra split• Divest the (less profitable) operating companies

• National security was a major concern

• “Sweet revenge” on MCI


The Inter-intra Split• ENFIA (Exchange Network Facilities for

Interstate Access) Tariff– MCI’s line rental pegged at $235/month– Represented about half of MCI’s cost of providing

service

• AT&T was paying far more ($500-600) under the “separations” process

• Under the split, everybody would pay the same

• The operating companies operated mostly at a loss without the separations payments


AT&T Decides• Charlie Brown decided better to end the

case on AT&T’s terms rather than those dictated by the DOJ

• Wanted desperately to be rid of the computer business restraints of the 1956 Consent Decree


The “Two Pager”

• AT&T (Brown) requested a two-page summary of a proposed settlement from DOJ– “Modification of Final Judgment”– Actually, 3 pages, with 2 appendices (16 total)

• Major problems with equal access provisions• AT&T accepted the 21 Dec 81 draft “in

principle”• Last-minute snags overcome by intense

negotiations


The Divestiture Agreement

• AT&T would spin off 22 operating companies– Included all equipment, people, operating

systems, etc. to keep the network running

• Operating companies restricted to providing local regulated service ONLY

• Equal access was to be provided to all IXCs


Political Ploys and Judicial Gyrations

• The 1956 Consent Decree rested in a NJ Court – not in DC

• Papers submitted simultaneously in New Jersey, the District of Columbia, and Philadelphia

• Greene, in St. Martin on vacation, directed to mark as “lodged” and not “filed”

• NJ judge Biunno surprised all by dismissing the AT&T case and transferring all to Judge Greene


The Tunney Act

• Mandated public disclosure of all steps leading up to the settlement of a major case

• Judge could reject an agreement if it was “not in the public interest”

• Judge Greene demanded a “Competitive Impact Statement” from the DOJ”– Comments to be received for 60 days– Court would consider all comments, and

perhaps hold hearings


Creating the New Order• Like converting a 747 to several 727s while flying• Billions of dollars in assets and hundreds of

thousands of people had to be shifted• Six study groups named to prepare for the

transition– Decision to create 7 holding companies, all with

relatively equal finances and customers

• A major factor in the success was the values and traditions of the employees themselves– “Make the network work – whatever happens”


The Biggest “Cutover” Ever

Where were you on

1/1/84?

Global Telecommunications Regulation TCOM 5173

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