AT&T breakup

The Event Forced fragmentation of a telephone company’s monopoly

Date Settlement made on January 8, 1982

AT&T, a government-regulated monopoly providing local and long-distance telephone service in the United States, settled a long-running government antitrust suit by agreeing to divide itself into seven independently owned regional local telephone companies and an unregulated national long-distance company. The new national company would also be free to enter emerging communications and computer markets.

By the mid-1970s, American Telephone and Telegraph (AT&T) was the sole provider of telephone service and equipment for most consumers in the United States. Early in the twentieth century, the company had eliminated its independent competitors in the telephone industry by refusing to offer long-distance service or equipment to the local independent phone companies, which at the time collectively controlled one-half of the US market. As a result, the independent companies were either destroyed or acquired by AT&T (also known as the Bell system).

In the wake of this development, which was mitigated only slightly by federal antitrust prosecution, state and federal laws were passed to regulate the telephone industry. This regulation limited the prices AT&T could charge for local and long-distance service, but it also largely protected the company from new competition. Beginning in 1934, the Federal Communications Commission (FCC) was created to oversee the federal regulations.

When the FCC began to encourage competition for the long-distance market in the 1970s, AT&T responded by delaying and often refusing to interconnect competitors’ equipment and long-distance calls with its own system, effectively preventing customers from placing and receiving phone calls using any equipment or any services other than those of AT&T. In response, in 1974, the Antitrust Division of the US Department of Justice once again sued AT&T for violating antitrust laws. AT&T fought the case tooth and nail. For four years, the company filed motion after motion, claiming that it was either exempt from the antitrust laws or subject to the exclusive jurisdiction of the FCC and not the courts. All of these attempts to end the case were unsuccessful. Finally, in 1978, the parties began discovery, the pre-trial exchange of documents and the taking of statements under oath from witnesses.

In 1981, the most important antitrust trial since the Standard Oil case of 1911 finally began. By 1982, most observers believed that the government was on the verge of winning a dramatic victory. Seeing the handwriting on the wall, AT&T settled the case, agreeing to a voluntary breakup. Under the settlement, the company would have eighteen months to spin off all regulated local phone services into seven new, independent companies dubbed the “Baby Bells.” The Baby Bells would be prohibited from entering the long-distance telephone business until such time as they could demonstrate that they faced significant competition for local phone service.

The new AT&T would be a much smaller company, consisting of the long-distance, equipment, and research portions of the old Bell system. It would be allowed, however, to enter new unregulated markets without prior court approval. In 1984, the Baby Bells were created through a multibillion-dollar stock sale to the public, and the new American telecommunications system was born. Judge Harold Greene of the U.S. District Court for the District of Columbia, the judge who presided over the trial, also oversaw the administration of the settlement agreement and arbitrated the many disputes that arose for the next twelve years, until the U.S. Congress eventually passed the Telecommunication Act of 1996, setting new rules governing both regulation and competition in the telecommunications industry.

Impact

The breakup of AT&T into the seven Baby Bells and a new, unregulated AT&T changed everything about the American telephone industry. It reintroduced competition into the industry, although little new competition was created for local telephone service until the introduction of cell phones and the beginning of Internet phone service. Perhaps more important, the breakup meant that the nation’s telecommunications infrastructure was in multiple hands. Beginning in the 1980s, a customer in one region seeking to place a long-distance call to another region necessarily sent signals through multiple companies’ equipment. As a result, standards had to be adopted and maintained that allowed the various companies effectively to interconnect their systems.

Subsequent Events

Over the years following the breakup, many of the Baby Bells were allowed to merge and reenter the long-distance communications market. Ironically, the competition from these matured Baby Bells proved to be more than AT&T could take. In 2005, it was announced that one of the most powerful Baby Bells, SBC Communications, would purchase AT&T for $16 billion. Because the latter company had the more recognizable name, SBC renamed itself AT&T after the merger was completed.

Bibliography

The AT&T Breakup: 20 Years of Confusion. Available at http://consumeraffairs.com/news04/att20.html.

Benjamin, Stuart Minor, et al. Telecommunications Law and Policy. 2d ed. Durham, N.C.: Carolina Academic Press, 2006.

Cole, Barry G. After the Breakup: Assessing the New Post-AT&T Divestiture Era. Columbia UP, 1991.

Forest, Herbert E. After the AT&T Settlement: The New Telecommunications Era. New York: Practising Law Institute, 1982.

National Association of Attorneys General. The AT&T Settlement: Terms Effects Prospects. New York: Law & Business, 1982.