AT&T Undergoes Divestiture

Date January 8, 1982

An agreement between AT&T and the federal government brought competition to long-distance telecommunications and freed AT&T from government regulations concerning its expansion into new areas of business.

Locale Washington, D.C.

Key Figures

• William Saxbe (b. 1916), former U.S. senator from Ohio who filed the suit against AT&T
• William F. Baxter (1929-1998), assistant U.S. attorney general in charge of the antitrust division of the Justice Department
• Harold H. Greene (1923-2000), judge on the U.S. District Court for the District of Columbia
• William J. McGowen (b. 1927), venture capitalist and early investor in MCI
• Charles L. Brown (1921-2003), chief executive officer of AT&T who changed the company’s course regarding the wisdom of divesting the operating companies

Summary of Event

On November 20, 1974, the U.S. Department of Justice filed suit against the American Telephone and Telegraph Company (AT&T), alleging that AT&T had monopolized and attempted to monopolize various telecommunications markets. The suit asked that AT&T divest itself of Western Electric, its manufacturing arm, along with some or all of the Bell Operating Companies (BOCs). Although some of the charges against AT&T had been made earlier and had been settled in a consent decree in 1956, they had become relevant again because of technological advances achieved in the 1960’s and early 1970’s, coupled with the appearance of a competitor, MCI Communications Corporation, in the business of supplying long-distance telecommunications service.

MCI had begun as Microwave Communications, Incorporated, a small debt-laden company supplying communications services between Chicago and St. Louis. Soon thereafter, it had solicited and received a capital infusion from William J. McGowen, a venture capitalist. He soon insinuated himself into company leadership and used his position to attack the hitherto impregnable AT&T. The upstart company quickly expanded its horizons and, despite its heavy debt load, was able to make inroads into AT&T’s monopoly position in the field of long-distance communications.

Led by McGowen, MCI quickly became a scourge of “Ma Bell,” filing antitrust suits alleging monopolization while at the same time attempting to extend its services to cover the most lucrative markets. This came to be known as “skimming the cream.” As MCI’s success became evident, other companies joined the fray. Regulated by the Federal Communications Commission (FCC), AT&T was unable to protect itself from such incursions. Its rates were set; it could not offer discounts in response to the lower charges of the new competitors.

At first, the progress of the government’s antitrust case appeared to parallel that of the action against International Business Machines (IBM) Corporation, as the health of the presiding judge, Joseph C. Waddy, steadily deteriorated. The situation quickly changed with the appointment of his replacement, activist Harold H. Greene, who was determined that there be no further unnecessary delays in reaching a settlement preferably one that was court-adjudicated. Scheduling the trial to begin on January 15, 1981, he allowed a brief window of time for appointees in the new administration of President Ronald Reagan to have input in attempting to work out a consent decree along lines suggested by the outgoing negotiators, led by AssistantAttorney General Sanford Litvack. When the two sides were unable to come to an agreement, the trial began.

The new assistant attorney general in charge of the antitrust division, William F. Baxter, was interested in reaching a settlement, but on different grounds. Instead of seeking a piecemeal divestiture, he wanted to split the regulated parts of AT&T from those endeavors that were unregulated. That way, there would be no possibility of “cross-subsidization,” in which the regulated portions might subsidize initiatives in the competitive arena. Any other type of solution would be punitive and, as he stated, “lacking in theory.”

Within a surprisingly short period of time, the government and the telecommunications giant reached a consent agreement that included the divestiture of all the BOCs but not any manufacturing or research facilities. Further, the BOCs were to provide local, and not long-distance, service. In return, the 1956 consent decree prohibition on AT&T against involvement in nontelecommunications endeavors was removed, allowing the company to expand into the computer business. Although the agreement was framed as a modification of the 1956 decree, Judge Greene empowered himself to rule on subsequent changes. The agreement was reached on January 8, 1982, but Greene did not approve it until August, after some modifications had been made.

As a result of the agreement, AT&T was to divest itself of seven distinct corporate entities comprising all of its local operations throughout the United States. These companies (and their areas of operation) were Nynex Corporation (New York and New England), Bell Atlantic Corporation (New Jersey, Pennsylvania, Delaware, Maryland, Virginia, West Virginia, and the District of Columbia), BellSouth Corporation (Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North and South Carolina, and Tennessee), American Information Technologies Corporation, or Ameritech (Illinois, Indiana, Michigan, Ohio, and Wisconsin), Southwestern Bell Corporation (Arkansas, Kansas, Missouri, Oklahoma, and Texas), U.S. West, Incorporated (Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North and South Dakota, Oregon, Utah, Washington, and Wyoming), and Pacific Telesis Group (California and Nevada). Some of these companies adopted names describing the locations of their primary service interests; others were more imaginative and tried to project a forward-looking image. New York and New England Telephone added an “x” to the initial letters of its service area to become Nynex; “telesis” means intelligently managed progress.

Significance

On January 1, 1984, AT&T ceased offering local service. The responsibility for this class of service was transferred to the successor companies listed above. AT&T continued to offer long-distance service, but now consumers had choices of other long-distance carriers. In addition to AT&T, entities such as MCI, Sprint, and Rochester Telephone offered long-distance service. Each user had the option of choosing a primary long-distance provider. No one picking up a telephone receiver would have been able to detect any difference in service. Not every area was directly affected. Other independent operating companies, such as General Telephone and Electronics, Rochester Telephone, and independent Bell companies, continued to serve their territories as before. Their customers would shortly gain similar opportunities to choose among long-distance carriers.

When AT&T was providing all services, costs were not equally apportioned. Long-distance service had subsidized local service, and benefits to consumers such as information operators had been supported by cash-generating sources. With the advent of competition in the long-distance market, it was no longer possible to cross-subsidize other services. Everything had to be on a pay-as-you-go basis; the cost of local calls therefore rose relative to other charges. Ironically, the government decree precluded AT&T from continuing a progressive rate structure. Low-income people place more local calls relative to long-distance than do high-income people, and as a result their expenditures rose while those of the more wealthy declined as competition among providers forced long-distance rates to fall.

There were minor growing pains as the seven divested companies were forced to work out various unexpected complications. Nevertheless, compared to some of the difficulties experienced in the late 1970’s by AT&T, and especially taking into account the immensity of the reorganization of the entire telecommunications system, the troubles were small and quickly overcome. Each of the BOCs quickly set out to establish its own identity by concentrating on certain areas. Several became involved in cable television, and all came to have interests in cellular telephony. They were enjoined, however, from such activities within the geographic area of their regulated endeavors. Some of the BOCs invested in foreign telecommunications systems. Bell Atlantic, BellSouth, and Pacific Telesis established office equipment sales and leasing subsidiaries. Of all the BOCs, Southwestern Bell expanded the most broadly. It bought an interest in a local professional basketball team, the San Antonio Spurs, and also became deeply involved in publishing, attempting to expand on its highly profitable Yellow Pages franchise. All the BOCs began to seek ways to escape from some of the strictures imposed on them by the settlement. Pacific Telesis has been the most innovative, planning to split itself into two separate parts, replicating the philosophy behind the 1982 agreement. Many of the unregulated tasks would be transferred to the new entity, while the regulated operations would remain with the slimmed-down operating company.

Perhaps the biggest corporate change took place at AT&T. Freed from the shackles of the 1956 decree, it was able to expand into all aspects of the computer industry. Not only did it begin the manufacture of computers, but it also became involved in software and network design. Despite the intensity of its efforts, however, the company was not able to become the market force that it wished until its daring takeover of NCR Corporation, a leader in the industry, in 1991. Early results indicated that the amalgamation was a success. As the telecommunication needs of the United States and the rest of the world become more sophisticated, technology involving computers will be inexorably involved, making the NCR takeover appear to be a logical move.

The changes in corporate structure since the breakup were matched by the variety of options offered to telephone users. Vigorous competition occurred in pricing and services. Each of the long-distance providers endeavored to persuade callers to use its system. They resorted to various pricing strategies, heavy advertising, and various incentives in the struggle. This price and service competition benefited consumers. On the negative side, many consumers complained of being switched to new companies against their will. Overzealous salespeople were found to be making unauthorized service changes.

The evolution of the telecommunications industry was by no means complete. Increased competition for both local and long-distance service over landlines and satellites grew increasingly intense, and the introduction of cellular phone technology and of Internet communications revolutionized the telecommunications industry during the 1990’s, even as business mergers produced reconsolidation of the industry, to the point that one of the Baby Bells, SBC Communications, eventually purchased its parent company, AT&T, in 2005. The telecommunications industry is still growing and evolving. The direction it will take is uncertain, but it is clear that the historic breakup of AT&T and emergence of competitors set the stage for service far different from and much more flexible than that offered prior to the breakup.

Bibliography

Allen, Robert E. When the Whole Becomes Less than the Sum of Its Parts: The Story Behind the AT&T Breakup. St. Louis, Mo.: Center for the Study of American Business, Washington University, 1996. Brief paper on the effects of the breakup of AT&T.

Cauley, Leslie. End of the Line: The Rise and Fall of AT&T. New York: Free Press, 2005. A complete history of the company, with a focus on the events at the end of the millennium.

Coll, Steve. The Deal of the Century: The Breakup of AT&T. New York: Atheneum, 1986. A popularly oriented bordering on the sensational treatment of the story.

Henck, Fred W., and Bernard Strassburg. A Slippery Slope: The Long Road to the Breakup of AT&T. Westport, Conn.: Greenwood Press, 1988. Offers a very good treatment of the activities of the various regulatory bodies prior to the breakup.

Kahaner, Larry. On the Line: The Men of MCI Who Took on AT&T, Risked Everything, and Won! New York: Warner Books, 1986. A good popular history that provides a fine treatment of the early years of MCI.

Peritz, Rudolph J., Jr. Competition Policy in America, 1888-1992: History, Rhetoric, Law. New York: Oxford University Press, 1996. History of federal government policies relating to antitrust issues. Includes a substantial bibliography and index.

Stone, Alan. Wrong Number: The Breakup of AT&T. New York: Basic Books, 1989. An attempt to explain the rationale for breaking up the company. Stone gives good insights into the intricacies of regulatory politics.

Temin, Peter, and Louis Galambos. The Fall of the Bell System: A Study in Prices and Politics. New York: Cambridge University Press, 1987. The definitive work on the background to the AT&T breakup.