Global Telecommunications
Regulation
TCOM 5173
The Breakup of the Bell System
And
The MFJ
4 February 2004
Charles G. Gray
(c) 2004 Charles G. Gray
1
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
(c) 2004 Charles G. Gray
2
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
(c) 2004 Charles G. Gray
3
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
(c) 2004 Charles G. Gray
4
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)
(c) 2004 Charles G. Gray
5
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
(c) 2004 Charles G. Gray
6
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”
(c) 2004 Charles G. Gray
7
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
(c) 2004 Charles G. Gray
8
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
(c) 2004 Charles G. Gray
9
AT&T in 1973
Corporate
Headquarters
Western
Electric
Bell Labs
Long
Lines
22 Bell Operating Companies
(c) 2004 Charles G. Gray
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The Bell Operating Companies
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•
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•
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•
•
•
•
•
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
(c) 2004 Charles G. Gray
11
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
(c) 2004 Charles G. Gray
12
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
(c) 2004 Charles G. Gray
13
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
(c) 2004 Charles G. Gray
14
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
(c) 2004 Charles G. Gray
15
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
(c) 2004 Charles G. Gray
16
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
(c) 2004 Charles G. Gray
17
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”
(c) 2004 Charles G. Gray
18
The Rallying Cry
If it ain’t broke,
don’t fix it
(c) 2004 Charles G. Gray
19
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
(c) 2004 Charles G. Gray
20
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
(c) 2004 Charles G. Gray
21
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
(c) 2004 Charles G. Gray
22
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
(c) 2004 Charles G. Gray
23
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 fulltime on this bill”
(c) 2004 Charles G. Gray
24
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”
(c) 2004 Charles G. Gray
25
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
– Natural Gas
– Banking
- Trucking
- Oil
- Others
(c) 2004 Charles G. Gray
26
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
(c) 2004 Charles G. Gray
27
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
(c) 2004 Charles G. Gray
28
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
(c) 2004 Charles G. Gray
29
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
(c) 2004 Charles G. Gray
30
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
(c) 2004 Charles G. Gray
31
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
(c) 2004 Charles G. Gray
32
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
(c) 2004 Charles G. Gray
33
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
(c) 2004 Charles G. Gray
34
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
(c) 2004 Charles G. Gray
35
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
(c) 2004 Charles G. Gray
36
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
(c) 2004 Charles G. Gray
37
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
(c) 2004 Charles G. Gray
38
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
(c) 2004 Charles G. Gray
39
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
(c) 2004 Charles G. Gray
40
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
(c) 2004 Charles G. Gray
41
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
(c) 2004 Charles G. Gray
42
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
– Agriculture
– FEMA
- Defense
- Energy
- AG not included (on purpose)
(c) 2004 Charles G. Gray
43
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
(c) 2004 Charles G. Gray
44
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
(c) 2004 Charles G. Gray
45
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”
(c) 2004 Charles G. Gray
46
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
(c) 2004 Charles G. Gray
47
The Trial Continues
• Hundreds of witnesses
– AT&T brought in “celebrities”, movie stars, excabinet 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
(c) 2004 Charles G. Gray
48
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
(c) 2004 Charles G. Gray
49
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
(c) 2004 Charles G. Gray
50
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
(c) 2004 Charles G. Gray
51
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
(c) 2004 Charles G. Gray
52
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
(c) 2004 Charles G. Gray
53
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
(c) 2004 Charles G. Gray
54
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
(c) 2004 Charles G. Gray
55
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
(c) 2004 Charles G. Gray
56
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”
(c) 2004 Charles G. Gray
57
The Biggest “Cutover” Ever
Where were you on
1/1/84?
(c) 2004 Charles G. Gray
58