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Chapter 2 - Background

2.13 Antitrust, Computer Inquiry II and the Break-up of AT&T - 1973-1984

When John D. deButts became Chairman and CEO of AT&T on April 1, 1972, he, like Vail in 1907, inherited a dispirited organization in need of direction and leadership. The Carterfone and SCC decisions represented virulences infecting the soul of what made AT&T special. And deButts knew so to his very being, for his career had been charted through the operating companies, where competition was abhorrent to the principled calling of pubic service, not an experiment that could be intellectualized away as only someone with Bell Labs and Western Union experience like Romnes could do. Ending any and all tolerance to the changes afoot became a priority for deButts. He wanted to return AT&T to the glory days of Vail where One System, One Policy, Universal Service breathed life into work. Only what deButts did not, and maybe could not, reckon were the times called for a new spirit and practice of public service, one that would prove elusive to the increasingly combative deButts.510

In September 1973, deButts delivered a telling speech entitled An Unusual Obligation to a meeting of the members of the National Association of Regulatory Utility Commissioners (NARUC). In words no one could misunderstand, he rejected competition and committed to fight to the end: to take to the public the case for the common carrier principle and thereby implication to oppose competition, espouse monopoly.511 He knew his speech might, even would, inflame those in government hell bent on change. He could care less. He had all the fight anyone would care to have.

AT&T and deButts got what it wanted when in March 1974, MCI filed an antitrust lawsuit charging twenty-two counts of unlawful activity. MCI had plenty of company, for by 1980, sixty private antitrust lawsuits would be filed against AT&T. Clearly corporations that wanted to compete in telecommunications had had it with the glacial workings of the FCC. Three charges were most common: AT&T’s persistent refusal to allow foreign attachment and required use of PCA’s, refusal to allow interconnection of interexchange competitors, and monopolized purchasing with WE.512

Congress also made itself known. In 1974, Senator Phillip A. Hart, Chairman of the Senate Judiciary Antitrust and Monopoly Subcommittee, held hearings on his Industrial Reorganization Act which would restructure seven U. S. industries, including telecommunications, to make them more competitive. Appearing before this Subcommittee, Clay T. Whitehead, Director of the Office of Telecommunications Policy,513 testified: [t]he antitrust laws should be enforced to ensure that regulatory mechanisms cannot become a haven for escape from competition…..Finally, a restructuring of the communications industry may be necessary if competition and monopoly are to coexist constructively.514

Big Business once again fell under public scrutiny. Only this time, Government bore the stigma of big was bad as well. Failures such as the Vietnam War, President Richard M. Nixon’s impeachment (Watergate), and inescapable inflation – even Wage and Price Controls proved ineffective – all contributed to a social climate suspicious if large organizations and institutions could solve much of anything. Within the Federal Government this had the effect of weakening the authority of political appointments and strengthening the power of permanent staff. In the case of the Justice Department, staff that had harbored resentment towards the 1956 Consent Decree increasingly saw an opportunity to seize the initiative and win in the courts what had been lost in private negotiations by political operatives. The fact that the Justice Department was considering such action had leaked as early as December 1973, when Business Week reported that AT&T had been subpoenaed for documents, and that [m]any in the communications industry are certain that it is a precursor to further action – either an antitrust suit or reopening a 1956 consent decree.515 President Ford further encouraged such action when on October 20 he gave a speech calling for tougher antitrust enforcement.516

On November 20, 1974, the Justice Department began its fourth major assault on AT&T when it filed the antitrust lawsuit: United States v. AT&T Co.517 More extensive than the 1949 suit, the broad complaint charged AT&T had monopolized and conspired to monopolize various telecommunication markets: including customer-provided equipment.518 The relief sought was for AT&T to divest itself of WE, for WE to be divided into multiple companies, and for some or all of the Bell Operating Companies to be split from AT&T Long Lines. The question of Bell Labs was deferred.519 The immediate reactions from the financial community were mostly negative; the Wall Street Journal wrote: Where is the problem that justifies risking possible damage to the efficiency of a vital part of the U. S. infrastructure.520 President deButts wrote shareholders that AT&T was not in violation of the law, the lawsuit was hostile to the public interest, and AT&T would fight it to the end. A Justice Department spokesperson responded: I don’t believe we can promise that winning this suit is going to lower rates – but implying the law must be enforced.521

As the case was being assigned to Judge Joseph C. Waddy, District of Columbia Federal District Court, AT&T prepared its response. The decided strategy had three elements: fight the legality of the suit, employ delaying tactics, and seek redress in Congress.522

AT&T’s formal response detailed the history of regulation, dating back to the Kingsbury Commitment. It then argued that the suit was illegal under res judicata – the 1956 Consent Decree precluded a suit of divestiture, for the Justice Department in that Consent Decree had approved AT&T’s structure. Fundamentally, the court lacked jurisdiction because the same issues were before the FCC.523 Rejecting the first argument, Judge Waddy then requested comment from the FCC on the issue of jurisdiction. Over a year later, on the last day of 1975, the FCC filed its brief: the Communications Act does not explicitly authorize the Commission to alter AT&T’s corporate structure.524 Furthermore, there was no general reason why antitrust policy should be deemed inapplicable as a matter of law. The FCC had passed primary jurisdiction to the Justice Department – exactly the opposite of the Carterfone case. Judge Waddy concurred with an opinion of his own on November 24, 1976 – AT&T was subject to antitrust, not immunized by regulation. However, the Judge also made it known to AT&T counsel that he thought their claims weak. AT&T appealed the case, seeking better ruling, and delaying action.

A year earlier, in November 1975, when deButts learned that preparations were complete to seek legislation to obviate the uncertain course of the courts, he responded that it: may be the most important public affairs effort we have ever undertaken.525 Introduced in both houses of Congress as a bill amending the Communications Act of 1934, it carried the formal title of the Consumer Communications Reform Act (CCRA).Known otherwise as the Bell bill.526 It aimed to return telecommunications and AT&T to the nostalgic state existing before the Carterfone case et al. Heavy-handed and showing no room for compromise, it nevertheless received respectable support. Only in the mistakes of introduction, it alienated powerful enemies, like the head of the House Subcommittee on Communications, Lionel Van Deerlin. Van Deerlin announced hearings on competition in telecommunications, effectively derailing the CCRA.

The FCC was not to be left behind, outdistanced by the Justice Department. They had changed the institutional rules and they wanted to have their say in their enforcement, even if it meant structural questions. To increase its authority it needed to assert its rights, to clarify questions of regulatory authority left open in Computer Inquiry I. By late 1975, it had become clear that computers and communications were converging, and faster than anyone had thought. In 1969, ten percent of computers could communicate over the telephone network – as data communications. In 1976, forty-five percent could – and there were nine times as many computers.527 Furthermore, AT&T had just announced a new interactive computer terminal, the Dataspeed 40/4 – Should the FCC tariff it? Hybrid services, and other open questions, needed better rules defining what was subject to regulations, and what was not. So a Notice of Inquiry and Proposed Rulemaking was initiated on July 29, 1976, and formally released on August 9. It is Computer Inquiry II. It will take three years, until 1979, before the FCC is ready to propose its Tentative Decision.

In November 1977, the Supreme Court declined to review Judge Waddy’s decision asserting jurisdictional authority, thus ending AT&T’s appeals process. The Judge then order AT&T and the DOJ to begin the discovery process – the collection from the other of documents and material needed to prove their respective cases. In February 1978, he ruled that they could not share discovery efforts with those having filed private antitrust suits – a ruling benefiting AT&T. It would be Judge Waddy’s last significant ruling, for by the summer of 1978, poor health forced reassignment of all his cases. The AT&T case became the responsibility of a newly appointed District Judge, Harold H. Greene. Judge Greene was an active Judge, in contrast to Judge Waddy, and in September he issued orders with a trial date of September 1980. With time it would slip to January 15, 1981; still light speed compared to the pace under Judge Waddy. He also reversed Waddy’s rule that information could not be shared with those having filed private antitrust suits, a decision AT&T would appeal – in June 1979 the Supreme Court denied review, thus sustaining Greene’s decision.

In February 1979, Charles L. Brown succeeded deButts as Chairman and CEO of AT&T. He had seen enough of combativeness and knew it was time to accept the new terms of engagement. One of his first acts was to announce a management philosophy acknowledging and accepting competition – A New Realism: I am a competitor – and I look forward with anticipation and confidence to the excitement of the marketplace.528 Part of his confidence came from having led a reorganization of AT&T in 1978, one that redid the reorganization of 1973 – the first since 1909. The Vail organization had centered around functions, the deButts organization around services, and the new Brown organization would around customer groups.529 In segmenting its structure to focus on the differing needs of customer groups, such as businesses and consumers, AT&T abandoned the public utility notion that all customers are to be treated as equals. The reorganization also reflected the tremendous stresses acting on AT&T’s internal organization as a consequence of the uncertainties of its mission and competitive environment(s).

Operationalizing A New Realism, Brown quickly tried to reach accommodation with the FCC, Congress, and those having filed private antitrust lawsuits. He met with little success. At the FCC, he sought advise on how to structure acceptable tariffs, only to be told that he did not understand how the process worked. AT&T proposed tariffs and the FCC either accepted or rejected them; it was not the role of the FCC tell AT&T what to do. With Congress, Brown knew he had to tread lightly and that there was an inherent inconsistency in AT&T’s position: wanting to retain regulation of the network with exemption from antitrust, yet also wanting to be able to compete in unregulated markets. Brown learned that legislation was not going to be as AT&T hoped, and might not happen at all. As for private antitrust suits, he did make some progress, but not enough to change the fact that AT&T was under siege.

In May, the FCC released its tentative decision for Computer Inquiry II. A key objective had been to better define Hybrid Services; services with both computer and communication components. Computer Inquiry II distinguished between voice, basic nonvoice, and enhanced nonvoice services. Voice services were to be regulated; basic nonvoice services, unregulated; and dominant carriers could offer basic nonvoice services, but only through separate subsidiaries. The services of the separate subsidiaries were not to be regulated, even if a common carrier offered them. AT&T objected to separate subsidiaries, arguing the advantages of economic synergies would be lost. The Justice Department objected to the very concept of the FCC trying to expand its authority under the Communication Act to include structural issues – arguing the Act gave them no such authority. The FCC took these and other comments under advisement.530

Legislative action, on hold due to hearings meant in part to diffuse the strong-arm tactics of AT&T, warmed up in 1978, when Representatives Van Deerlin and Louis Frey, Democrat and Republican, floated some preliminary ideas.531 Still little happened. In 1979, the Senate had multiple bills in progress. The whole process horribly bogged down. In the summer, Senator Ernest F. Hollings (D., S.C.), chairman of the Senate Commerce Communications Subcommittee warned: It would be a shame if legislation is impossible to enact, and then adding neither he nor subcommittee members will suffer no personal tragedy if there is no legislation.532 (Legislation would remain undecided until 1985, when effectively ended; playing at best a foil for FCC or court action.)

In September 1979, AT&T received encouraging news in the Litton Systems, Inc. v. AT&T antitrust lawsuit. Litton had sued AT&T in 1976 claiming predatory and anticompetitive conduct and conspiracy to maintain an unlawful monopoly in customer-premises equipment.533 Litton argued that the PCA represented yet another example of AT&T s monopolistic practices. The court sought expert testimony from Magistrate, Ken Sinclair, Jr. who counseled: “This action should be dismissed on grounds of implied immunity from the antitrust laws.”534 He went on to add:

The continued pursuit of this action constitutes a contemplated retroactive application of the antitrust laws to conduct previously gauged by regulatory standards which are predicated on concepts of public interest inconsistent with the pure competitive model enforced by the Sherman Act.This conflict, and the comprehensive regulation embodied by federal and state programs, require that the action be terminated.535

Two months later, a court hearing another private antitrust suit against AT&T, filed this time by Essential Communications, Inc., reached exactly the opposite conclusion – neither the Communications Act or state regulatory laws provide a basis for an implied exemption.536 The courts were as confused as everyone else.

On May 2, 1980, the FCC issued its Final Decision for Computer Inquiry II. It had simplified its Tentative Decision by distinguishing between only two categories of service: basic transmission or enhanced. Enhanced services where those that included computer processing on the content, code, protocol and other aspects of the subscriber’s information.537 The common carriers AT&T and GTE could offer unregulated, enhanced services, but only through separate subsidiaries; GTE would appeal and receive exemption. The commission debated whether the telephone itself should be treated different than other CPE, but in the end decided against the distinction. All CPE, approximately $4 billion, had to be transferred to a new subsidiary by March 1, 1982.538 The FCC also asserted its authority as described in the Tentative Decision to interpret the 1956 Consent Decree, and advised AT&T that it would support it in its dispute with the Justice Department. Thirty-four participants in the Computer Inquiry II process filed notices of appeal with the courts.539

Simply filing an appeal did not satisfy the Department of Justice. Believing the FCC did not have the authority to change the terms of the 1956 Consent Decree, the Department of Justice filed suit in the United States District Court, District of New Jersey, the court that had originally ruled in the 1956 Consent Decree, wanting to prevent AT&T from competing in unregulated markets. Siding with the Department of Justice were all those corporations not wanting AT&T as a new competitor, while AT&T supported the FCC. Two different courts were now deliberating the legality of the FCC’s Final Decision.

They were not the only courts caught up in the battle to redefine the playing field of communications. The number of private antitrust suits seemed would never end – peaking in 1981 at sixty.(See Exhibit 2.21 Number of Active Antitrust Cases Pending Against AT&T.) As the courts began rendering decisions, AT&T kept coming up the loser. The momentum of public opinion, at least as represented by court decisions, clearly favored competition. Such was not lost on AT&T and Brown, for in the annual report for 1979, published just before the FCC issued its Final Decision, Brown wrote: Our third concern is the need – in an era of rapidly developing competition – to free the Bell System from the constraints of the 1956 Consent Decree. No longer does it make sense to deny the Bell System the opportunity to compete in unregulated markets.540

Exhibit 2.20 Number of Active Antitrust Cases Pending Against AT&T

Year Number of cases
1960 1
1961 2
1962 3
1963 3
1964 5
1965 8
1966 9
1967 14
1968 15
1969 13
1970 21
1971 26
1972 31
1973 29
1974 38
1975 47
1976 47
1977 50
1978 54
1979 50
1980 51
1981 60
1982 59

Source: Alan Stone, Wrong Number: The Breakup of AT&T (New York: Basic Books, Inc., 1989) 154. (Antitrust at a Glance (AT&T Report) (December 15, 1982), in AT&T Archives.)

Just as AT&T read unmistakable signs, so did the Justice Department. In September 1980, Judge Greene, intent on starting the United States v. AT&T Co. trial on January 15, 1981 made it clear to the Justice Department that he did not think much of their case, and had had it with what he considered their delaying tactics. A flurry of activity followed, not because of what he had said, but because Ronald Reagan swept into the Presidency that Fall in a landslide victory – with a mandate. With a new President would come a new Administration, and new personnel in charge of antitrust. If the outgoing Carter Justice Department was going to have their way, an out-of-court settlement needed to be agreed to before they left office – coincidentally just before the scheduled trial date. Intensive negotiations ensued, and in December, the opposing parties approached Judge Greene, requesting a postponement of the trial to concentrate on reaching an agreement. Judge Greene encouraged their efforts, yet refused to lift the incentive of avoiding trial. A week later, they again asked Judge Greene to postpone the trial, claiming they were near agreement. This time, he gave some, not delaying opening statements, but deferring case presentations to February 2.

In February 1981, William F. Baxter became the new Assistant Attorney General for Antitrust. A Stanford law professor, with strong ideals, and a considered view of economics and competition. On taking office his two superiors recused themselves from involvement in the AT&T case for conflict of interest reasons. Baxter thus became the chief Justice Department official on the case – reporting to the White House. The results, however, will be very different than the recusal of the Attorney General in 1886. Baxter decided to handle the case himself, to be free of what had happened before him, and the constraints implied. He saw the case as one of extending what the FCC had started – to separate from AT&T that which was meant to be regulated, from that better controlled by the forces of market competition.541 On his first meeting with the chief negotiator of AT&T, Howard Trienans, the chief counsel to AT&T – who had come not from within AT&T, but an outside law firm, and thus somewhat similarly unencumbered by past practices to see a new solution. Baxter said past negotiations were ended, and that his position was that AT&T should divest the Operating Companies and go about its business competing with the Long Lines, Bell Labs, and WE. Period.

On September 3, Judge Vincent Biunno of the New Jersey District Court ruled the FCC’s Final Decision that AT&T could compete in unregulated markets, but only as separate subsidiaries, was a legal modification of the 1956 Consent Decree. AT&T immediately filed an appeal.

By December, AT&T, motivated to a decision by Congressional activity to pass communication legislation – legislation that might be much worse than Baxter’s offer – agreed and a jointly released press statement on December 31 announced talks that might lead to the settlement of pending litigation.542 Baxter then went to work securing Administration support for the agreement; agreement not to be presumed. On January 8, the Justice Department and AT&T, Baxter and Brown, signed a decree ending the antitrust suit.543 Then in an intricate series of legal maneuvers, the case was to be moved from the New Jersey District Court to Judge Greene’s court and the settlement would revise the 1956 Consent Decree and settle the case.544 Or it was suppose to be moved, only Judge Biunno accepted the agreement instead of referring it to Judge Greene, which meant it could be appealed and thus not final.

In both Houses of Congress legislation began emerging seeking to change the terms of the agreement to better assure that local telephone rates remained low and the principle of universal service remained intact. Concerned elected officials still saw long distance telephone service as a monopoly, a monopoly needing to be regulated, in part, so that subsidies could continue to flow from interstate to intrastate revenues, and thus help sustain low local rates. The Justice Department, AT&T, and now an angry Judge Greene, who saw his authority abused by the New Jersey court, all wanted their agreement to be made fina,l and not complicated by legislative action. AT&T began a publicity campaign inciting public protest over legislation, which proved successful, and the three parties succeeded in having court authority transferred to Judge Greene’s court. Judge Greene then inserted ten modifications, all of which were accepted, and the settlement was finalized on August 24, 1982. One of the ten amendments to the agreement was that the Operating Companies could provide CPE, they just couldn’t become manufacturers. They would have to buy it from competitive firms, one of whom would be AT&T.

On January 1, 1984, AT&T divested twenty-three Operating Companies which were aggregated into seven Regional Bell Operating Companies, or RBOCs. The RBOCs remained regulated, while AT&T – Long Lines, Bell Labs, and WE – was unregulated, free to enter competitive markets, such as computers. (AT&T did begin to sell computers, even buying the existing competitor, National Cash Register. Then in 1995, what antitrust never succeeded in doing, market competition accomplished. AT&T spun-off both WE and Bell Labs; to be left as the Long Lines, and all the other business it had entered.)

The institutional response to the convergence of computers and communications, first noticed in 1965, took nineteen years to complete Meanwhile, the dynamics of market competition in the computer market-structure had given rise to three generations of computers, with the IBM personal computer introduced in August 1981 soon to end the dominance of mainframe computers that began with the IBM 360 Series in 1964. As these institutional dynamics were working, communications technologies did not hibernate, but kept advancing, and by the time of the AT&T divestiture on January 1, 1984, one such technology, packet switching, was about to cause a technological discontinuity that will end the communication paradigm of circuit switching that had its roots in the first commercialization of Graham’s and Bell’s telephone. That story that will occupy the rest of this book.

  • [510]

    Temin, Chapter 3

  • [511]

    Temin, p. 96

  • [512]

    Ibid, pp. 191-192

  • [513]

    Administratively part of the Administration.

  • [514]

    Stone, p. 283

  • [515]

    Stone, p. 283

  • [516]

    Ibid., p. 284

  • [517]

    The first three assaults were: the Kingsbury Commitment, the Special Telephone Investigation, andUnited States v. Western Electric.

  • [518]

    Stone, p. 288 : The charges included that (1) Western Electric supplied the telecommunications equipment needs of the Bell system, thereby eliminating competition from other manufacturers and suppliers; (2) AT&T obstructed the interconnection of SCCs and other carriers; and AT&T obstructed the interconnection of customer-provided CPE into the Bell system.

  • [519]

    Temin, p. 111

  • [520]

    Stone, p. 289

  • [521]

    Brooks, p. 316

  • [522]

    Stone, p. 292

  • [523]

    Temin, pp. 114-115; Stone, pp. 289-291

  • [524]

    Temin, pp. 114-115

  • [525]

    Temin, p. 118

  • [526]

    Temin, p. 118 The CCRA was introduced in Congress by Teno Roncalio, Wyoming’s sole representative.One informal story about these events suggests that his sponsorship was an accident.Congressman Roncalio did not get many bills from his constituents in Wyoming, and he was always on the lookout for good causes.He was talking to someone at a Washington cocktail party in the spring of 1976 and asked if this person had a bill.It was no secret by then that AT&T was interested in a legislative solution to its regulatory dilemmas, and Roncalio’s respondent turned out to have a draft bill, which he gave to the congressman.Roncalio, in turn, submitted it to Congress the next day, and AT&T’s legislative staff read about it in the newspapers.R. L. McGuire and Michael Baudhuin, interview, November 16, 1984.

  • [527]

    Stone, p. 260

  • [528]

    Temin, p. 175

  • [529]

    Ibid., p. 162

  • [530]

    Temin, pp. 191-194

  • [531]

    Henck, p. 209

  • [532]

    Ibid., p. 210

  • [533]

    Henck, pp. 193-194

  • [534]

    Henck,p. 194

  • [535]

    Henck, p. 194

  • [536]


  • [537]

    Second Computer Inquiry, Final Decision, 77 FCC 2d 384 Also Stone, pp. 266-270

  • [538]

    Temin, pp. 191-200

  • [539]

    Second Computer Inquiry, Final Decision, 77 FCC 2d 384

  • [540]

    Stone, p. 318

  • [541]

    Temin, p. 219 The reader is encouraged to read Temin for a far better reconstruction of this period.

  • [542]

    Henck, p. 228

  • [543]

    On the same day, the Justice Department withdrew its case against IBM. Baxter saw one way to introduce competition for IBM was to let AT&T compete in the computer market.

  • [544]

    Temin, p. 275