Ma Bell's Disconnect

The Deal of the Century: The Breakup of AT&T, by Steve Coll, New York: Atheneum, 400 pages, $18.95

Communism doesn't make it at all. Not for me. Cause it's complete government control. The capitalist system is the best, cause we can barter, we can go somewhere else. Communism is one big phone company.
—Lenny Bruce

The dismemberment of American Telephone and Telegraph, in its previous life the world's largest private corporation, has allowed us our closest peek at a curious asymmetry: a monopolist is despicable, unless it happens to be a posthumous monopolist. Where once the domineering Mother Bell could evoke wild, anticapitalist passion, today she is fondly recalled as a kindly and now sorrowful grammie, cruelly crated off to the home by some bratty kids in Washington.

Why Steve Coll's book about AT&T's breakup opts for this hip paradigm in its waning few pages is a mystery. No matter. In an informed and finely polished narrative of perhaps the most-fascinating business litigation in U.S. history, Coll wisely squanders very little of his appreciable journalistic talents on pop economic analysis. Hence, despite his dubious conclusions regarding the new competition in telephony, his book serves as a valued contribution to our understanding of business, the courts, and government regulation.

In the early 1970s, while solemnly pledging to respect the Bell system's unquestioned monopoly position in basic phone-to-phone local and long-distance dialing, Microwave Communications, Inc. (MCI) had a bug that it could make money by constructing long-distance "private lines" between Chicago and St. Louis. These linked offices within the same company (hence "private") via microwave signals relayed by stations hopscotching the Illinois grain fields. Look Ma (Bell), no lines: Just good, clean competitive phone service.

But ringing a profit, decided MCI's entrepreneurial chieftain, Bill McGowan, would take more. And so his next step was to schnooker the federal bureaucracy in a paper shuffle par excellence. In literally tricking the Federal Communications Commission into approval of competitive long-distance dialing, MCI initiated the battle of the star networks.

Yet the all-American economic battleground is, of course, the antitrust courtroom, and both McGowan and the Justice Department were soon there to wage real war. AT&T had, allegedly, used its monopoly over local telephone service to keep "creamskimmers" such as MCI out of the long-distance and terminal equipment markets. MCI was to win $1.8 billion on its claim from a Chicago jury (a retrial deflated it to $300 million), and Litton was to clean up on its phone equipment competition case. But it was the Justice Department suit, filed in 1974 under Attorney General William Saxbe, that history would put its chips on.

Coll's impression is that the massive actions, which sought to divest AT&T entirely of Western Electric (which was producing virtually 100 percent of the nation's telephone hardware) and of its local operating companies, was a child of the '60s. The spark that would come to short-out the behemoth Bell grid was produced by the Kennedyesque sentiments of a young Antitrust Division liberal, attorney Philip Verveer. ("Socially Important Work in the Company of Good People" was not his favorite Twilight Zone script but, in fact, the motto encased on his work desk.)

"There was nothing subtle about the young, committed lawyer's assessment of AT&T," writes Coll. "The phone company was morally wrong, it was evil, and it was up to Verveer to serve the public interest by enforcing the antitrust laws against it. This was not just a job—it was a calling." This calling was definitely long-distance, for an antitrust action to divvy up $130 billion in assets is generally known as a cradle-to-grave income maintenance scheme for needy citizens afflicted with the degree.

Whatever the sentimentalities, the Justice Department was deadly serious. Before this was well known, a Bell attorney made the mistake of sauntering down to Washington to chat up a settlement à la injunctive relief ("We'll promise not to misbehave if you'll just sort of forget about all this bothersome legal stuff"). The government's antitrust lawyer responded warmly: "I'll tell you one thing. This is going to be a severed limbs case. We're going to have severed limbs, AT&T limbs, on the table dripping blood. That's the way this case is going to be settled. We're not going to settle this thing with injunctive relief."

And Coll's explanation of left-wing prudishness over the rough and tumble of high-speed oligopolistic rivalry does not do justice to Justice. As the author explains in some detail (largely in recounting Bell's alibis for its anticompetitive mischief), not a soul within the capital's Beltway really had the faintest idea how one regulates a 19th-century monopoly doing business in 21st-century telecommunications.

Whatever "natural monopoly" had prevailed for long-distance transmission was disconnected by the advent (in the 1940s!) of microwave, and the tie-in of telephone manufacture with telephone signal distribution had never been clear. Add to this the increasingly constraining effect upon AT&T of its 1956 consent decree that banned it from entering the computer market. Bell was becoming more and more a twisted, contorted, Gulliver-sized traveler in a regulatory time warp.

Yet AT&T's blustering chairman of 1972–79, John deButts, would end up marching Bell off the deregulatory cliff. In Coll's portrait, deButts is almost likable in his True Believer devotion to Bell's mission of monopoly.

While policymakers in Washington were pushing phone competition in principle, and as MCI's McGowan was pressing it in the flesh, an angry deButts counterattacked in a memorable 1973 speech. He spoke of Bell's "unusual obligation" and its commitment to the "common carrier principle." This system was threatened by "newly authorized purveyors of communications services who, unburdened by any obligation to the whole body of customers, address their attention to those it costs least to serve and profits most." At this, his audience—the National Association of Regulatory Commissions—cheered madly.

At bottom, the old AT&T monopoly had become an economic dinosaur that was grabbing stereotypical fixed-income types (local dialers, all) as hostages in a calculated campaign to stave off marketplace extinction. Its every predation and inefficiency was ascribed to its "universal service" mandate or pinned on knuckleheaded bureaucrats; Justice's chief trial lawyer was to note before the court: "Bell's argument…in a nutshell, is regulation is never having to say you're sorry."

The prosecutors at Justice were liberals, but they were right. They smelled an odious monopoly leveraging its protected status in some markets to create power over fresh turf where all comers could—and should—compete. The suit was filed in late 1974; it was ruthlessly pushed to trial in early 1981 by the no-nonsense Judge Harold Greene (a Justice Department alumnus, having served as a trusted aide to Bobby Kennedy); it was settled after 11 months in court by Justice's antitrust chief William Baxter, an impressive scholar whom Coll curiously brands an "ideologue" and an "eccentric" for refusing government pleas for a political wimp-out to AT&T.

But the settlement was only possible due to fresh blood at Bell. The new leadership featured CEO Charles Brown, a man who saw that honest competition could, at some point, become preferable to Mel Brooksian regulation. With go-go competitors, the federal courts, state utility regulators, and Congress all taking free shots, Brown wrote off $360 million in legal briefs and settled U.S. v. AT&T with the world's largest divestment. By consent decree, Bell would keep Long Lines, Western Electric, and Bell Labs but would spin off the 22 local operating companies (since squeezed into seven), for a corporate garage sale of $100 billion in assets—three-quarters of Ma Bell. And, now the firm was free to log on to the computer market.

For Coll to describe as complex a regulatory history, with accompanying mammoth litigation, in clear style is commendable; to do so with a fast, happy read is to perform an "unusual obligation." Yet, Coll depreciates his product with off-the-wall charges that the bust-up of Bell was a bonehead idea after all. His frontispiece advertises that "the public lost by winning, and it lost big."

But Coll's evidence on this question, one which he turns to only in his last 15 pages, is an opinion survey suggesting the public was stressed-out over rising local rates. Baring a hidden tax—higher business costs from inflated long-distance charges—is unsurprisingly unpopular. And as The Economist has recently answered Coll's "if it ain't broke, why fix it?" refrain: "The days of the plain-old-telephone-service that Ma Bell so brilliantly provided in America are going the way of the cleft and hammer. The silicon chip and…computers have long since erased for business users the distinction between data processing and telecommunications. Within a few years, even home telephones could have high IQs…Those countries that…delay these changes will put their businesses at a competitive disadvantage."

Happily, the phone monopoly has been shaved by two-thirds. It would be mega message units (even on MCI), but someone should pass the news on to Mr. Bruce, who once pondered the following disputation:

"I want a phone put in Monday at 9:30."

"You'll have it by the end of the week."

"I want it at 9:30!"

"Alright, schmuck! Go to the May Company for a phone."

"That's right, I'm screwed. Where am I going to go?"

Now, Lenny, you can go to May Company, K-Mart, or buy it from a mail-order quack. It ain't perfect, baby, but it's competition—and it keeps working until it gets it right.

Thomas Hazlett teaches economics at the University of California, Davis.