5

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The Biggest Case in History

Ma Bell

American telecommunications from the invention of the telephone through the present day has been dominated by a single firm—AT&T and its predecessors—nicknamed Ma Bell. As we have seen, the company has been challenged by business rivals and government actions from its beginnings in 1876, but AT&T managed to come through all of its travails as the dominant player in telecommunications. Each of these struggles led to important adjustments, but remarkably the company’s leadership adopted strategies that led to its continued primacy. We have examined many of the firm’s past challenges, including the 1949 antitrust suit that initially sought to break up the company but resulted in a settlement, leaving intact the company’s structure consisting of local operating companies, equipment supplier, long-distance operator, and research arm.

Its greatest challenge occurred in 1974 when the Justice Department brought another suit seeking the dismemberment of the Bell system. In this chapter we will examine that case, which AT&T and the Justice Department agreed to settle in 1982. In broad outline AT&T agreed to divest its twenty-two local operating companies and withdraw from the local-loop business. In exchange, the Justice Department agreed to let AT&T keep its manufacturing arm and retain Bell Labs, the research facility, although AT&T agreed to help the seven newly formed regional Bell operating companies (RBOCs) set up Bellcore, their own research facility. Most importantly, from AT&T’s perspective, many of the restrictions on AT&T contained in the 1956 consent decree were lifted. Technically, in fact, the AT&T case was dismissed and the 1956 decree was amended to incorporate the terms to which the parties agreed. By 1984 the divestiture was completed and the stock shares distributed to AT&T’s investors in a remarkably smooth manner. Shareholders were given a variety of choices that they could make in the new AT&T and the seven RBOCs. But if the optimists felt that the terms of the agreement would fundamentally resolve the public policy and business issues in telecommunications, they were sadly mistaken. Judge Harold F. Greene, who presided over the settlement agreement, became virtually a new telecommunications regulatory agency in competition with the F.C.C. and state regulators. Legal battles began almost immediately, calling for resolution by Judge Greene. At the same time AT&T began the continuing process of changing its internal structure and making acquisitions, the most important of which were the NCR Corporation, a major firm, purchased in 1991 for $7.48 billion, and McCaw Cellular Communications, the nation’s largest cellular telephone company, in 1994 for $11.5 billion. But then, irony of ironies, AT&T in 1995 announced that it would voluntarily split itself into three companies. Thus, the United States v. AT&T case did not permanently resolve most of the issues in American telecommunications. Nevertheless, it was one of the most important events in telecommunications history, and its ramifications are still with us. In this chapter we will look at the case in detail.

Before examining the AT&T case, it is important to consider again Coase’s theory of the firm that was discussed in Chapter 1, since AT&T’s structure was a central concern in the case. As that distinguished economist showed, companies frequently experiment to determine whether some things should be made or done internally or whether, at the margin, the product or service should be acquired on the open market.¹ Different firms in the same industry often have different answers because assessments and costs can vary from company to company. But in a world of incomplete information, outcomes do not necessarily accord with intentions and expectations. Further, production costs and technologies change over time. Consequently, Coase’s theory of the firm should not be conceived in a static manner as if once a decision is made to produce something internally, the decision is unchangeable. To the contrary, firms—at least well-run ones—frequently reexamine the internal production versus purchase in the open market issue with respect to many activities. Thus, it is entirely consistent for AT&T management to have concluded that a vertically integrated structure made sound economic sense in 1974, but that it no longer did in 1995.² But it is one thing for firms to experiment with structures in the hope of becoming more efficient and profitable; it is quite another for government bureaucrats and courts, devoid of the company’s accumulated business experience, to restructure firms by complaint and decision. Indeed, as the history of socialist economies illustrates, industrial structures devised by government bureaucrats are generally wrongheaded, if not disastrous.

The Beginnings of the AT&T Case

In the spring of 1968, Antitrust Division chief Donald Turner expressed his dissatisfaction with the settlement of the 1956 Western Electric suit. His comments caused such great activity in AT&T stock that trading had to be stopped temporarily.³ Not only were many Antitrust Division staff members and others (notably some legislators) dissatisfied with what they conceived to be a “sellout” in 1956, but the Antitrust Division had also become active in intervening in F.C.C. proceedings, including Carterfone. Not surprisingly, the Antitrust Division’s intervention was always on the side of more competition, for its task was to protect “competition” through the antitrust laws. But “competition,” as the word has been used in antitrust circles, is inherently ambiguous. One meaning concerns the number of competitors while the other applies to behavior—that is, rivalry in price, quality, and so on. The Antitrust Division chose whatever concept would most effectively help it to bring a case. In the Antitrust Division’s opinion, regulated monopoly undertaken by a large company could never perform well.⁴ To the believers in these views, the fact of good—indeed, excellent—performance, as we saw in Chapter 4, was less important than the sentiment best expressed by economist Almarin Phillips: “There is an aversion to large businesses whether they are efficient or not. Part of AT&T’s problem is that they are big and they do things efficiently and well.… Every time AT&T does something well, there are new antitrust regulations and suits. To the extent AT&T does well, it faces this dilemma.”⁵ Again, as Suzanne Weaver concluded in her excellent study of the Antitrust Division, “the presence of a large firm in an investigation will prompt not simply a search for the anti-competitive efforts but a search that tends to construe even probably harmless things in an anti-competitive light…. [T]he presence of bigness in a case at hand will convince many lawyers that they will find ‘something bad’ about the situation if only they look long and hard enough.”⁶

However, many factors determine whether the Justice Department will bring a novel and difficult case such as AT&T’s. Complex cases consume substantial resources and, of course, a department loss in a big case can be embarrassing. For this reason, it is more likely that an attorney general will agree to bringing a big case when additional factors are present. In United States v. AT&T, although there was dissatisfaction with the 1956 Western Electric consent judgment and the Antitrust Division had consistently taken positions in conflict with AT&T’s before the F.C.C, these factors were probably not enough to push the case. Certainly, Senator Phillip A. Hart’s Industrial Reorganization Act proposals and his specific attacks on AT&T provided valuable support.⁷ Almost every potential and actual SCC and CPE firm appeared before Hart’s subcommittee complaining about AT&T in 1973 and 1974. But while executive-branch administrators do not ignore legislative pressures, they will not move simply because a certain legislator may want them to do so. Often there are legislators who are as vehemently opposed to an action as those who are in favor of it.

Two major factors greatly influenced the Justice Department’s decision to bring the case. The first of these stemmed from the department’s ability to capitalize on the new public philosophy that was emerging during the Gerald Ford presidency. The starting point in understanding the change taking place is that the consumer price index (CPI) rose from an annual rate of 1.8 percent between 1950 and 1965 to 4.4 percent from 1965 to 1973, and then it skyrocketed to an annual rate of 9.4 percent from 1973 to the first half of 1980. Not only was inflation conceived as a major problem, but Americans were beginning to appreciate for the first time that they lived in a competitive world economy. The connections between inflation, competitiveness, and deregulation surfaced as a major topic during meetings that led up to President Ford’s “economic summit” in late September 1974. The economists invited to those meetings “agreed that government regulation was a major cause of the high and rising cost of living, and that reforming it was one of the few useful things that could be done to control inflation. The consensus on this point was striking, being shared by economists of every political stripe—a fact not lost on President Ford.”⁸

The cost of infrastructural services—particularly transportation, communications, credit provision, and energy—is incorporated in the prices paid by consumers and every industrial and service sector of the economy. In addition, several of these infrastructural services have experienced other serious economic performance problems, including supply problems (especially in energy); the general deterioration of certain of these industries (most notably rail transportation), and certain wasteful practices under regulation that promoted grossly inefficient resource use (such as rules that prevented regulated truckers from carrying return or full loads). The economists’ answer was deregulation, and telecommunications—even though its economic performance had been the diametric opposite of railroads and other badly performing public services—was linked by association.

But, in addition, pressures in the judicial area virtually forced the Justice Department to pursue action. That is, the numerous private antitrust suits brought against AT&T and pressures exerted by AT&T’s rivals, most importantly by MCI, made it appear as if inaction on the Justice Department’s part would seem like avoidance of its duty. For example, in ITT Corporation’s antitrust suit against GTE’s acquisition of the Hawaiian Telephone Company, other operating companies, and equipment manufacturers, the federal district court criticized the Justice Department for the 1956 Western Electric settlement and subsequent Antitrust Division inaction in the telecommunications field.⁹ That this 1972 decision was largely reversed in 1975 did not diminish the court’s ability to prod the Justice Department in 1973 and 1974.¹⁰

President Ford had ample opportunity to make his views known; that he did not reject the suit implied his approval. Moreover, Antitrust Division staffers asserted that the president was kept informed of the investigation.¹¹ Thus, the AT&T antitrust suit was in accord with the administration’s program and received Ford’s “full approval.”¹²

Although the Antitrust Division was backed by the Ford administration, it also needed support for its view that the F.C.C. and state regulators were incapable of resolving telecommunications issues adequately. To the Antitrust Division, the burgeoning number of private antitrust suits brought against AT&T was evidence of the F.C.C.’s inadequacy, in that AT&T’s rivals were unable to obtain relief through the agency or the PUCs and had to resort instead to private antitrust action. The division argued further that both small and large firms had brought such cases, and that many private controversies had become public ones. The Antitrust Division used these facts together with its view of AT&T’s use of the regulatory process to contest such cases as SCC or Carterfone to justify its conclusion, as stated in Business Week, that “the regulatory process was no longer able to contain AT&T’s power.”¹³ Also, the lengthy records of the earlier regulatory proceedings and private antitrust cases were expected to save the Justice Department considerable time, effort, and money in preparing its case. The advice and materials provided by AT&T’s competitors led Antitrust Division counsel Philip Verveer to proclaim, “We have not wanted for competitors who felt aggrieved and who have educated us in the business.”¹⁴

The firm that provided the most important lessons for the Antitrust Division was MCI, which had brought its carefully prepared antitrust suit against AT&T in March 1974. MCI began its meetings with Antitrust Division officials as early as 1973. While its influence was certainly important in the Justice Department action, much more was involved. The information that MCI would provide and its collaboration in other ways would be of great value, and would save the Justice Department considerable resources in compiling data purporting to show that AT&T had violated the Sherman Act. Further, MCI’s collaboration demonstrated that the Justice Department would have major support in the case—a clear incentive to take action. William McGowan was not exaggerating when he commented, after his 1980 Chicago federal district court verdict against AT&T, that “fully half of the Justice case against AT&T is our case.”¹⁵

The Complaint

The complaint in United States v. AT&T was filed on November 20, 1974, in the District of Columbia federal district court, and the trial began on January 15, 1981. After several postponements, the Justice Department concluded the presentation of its case on July 2, 1981; the defendants began their case on August 3, 1981, and terminated it, unfinished, on December 18. The settlement agreement into which the Antitrust Division and AT&T entered in January 1982 terminated the trial portion of the case. However, AT&T had been scheduled to resume its case after the New Year’s Day holiday and to complete its presentation on or about January 20, 1982. The Justice Department was then scheduled to present its rebuttal case, and the trial was scheduled to end by February 10, 1982.

Given the size of the record, it is likely that if the settlement had not intervened, Judge Greene would not have prepared a decision until late in 1982 or early 1983. An appeal to the court of appeals by one or both sides would have been inevitable as would an attempt to have the Supreme Court consider some of the questions the case raised. Thus, the settlement, modified and approved by Judge Greene on August 11, 1982, occurred almost eight years after the complaint was filed; without a settlement, the case could have taken as many as eleven or twelve to resolve. We should also consider that until the enactment of the Telecommunications Act of 1996, which superseded the settlement, Judge Greene was still being asked to consider problems under his August 11, 1982, order, known as the Modification of Final Judgment in United States v. Western Electric.

The complaint was only fourteen pages long—much shorter than the 1949 United States v. Western Electric complaint. Yet it spawned a volume of paper of legendary proportions. The pretrial phase had included 296 days of depositions and 45,000 pages of material. The trial testimony was recorded on 25,047 transcript pages. The plaintiff called 94 witnesses; the defendants listed 244 witnesses and 55 written testimonies. The Antitrust Division marked 8,103 exhibits totaling about 183,000 pages, but only 2,071 exhibits (totaling about 46,000 pages) were put in evidence. However, AT&T marked 15,477 exhibits of approximately 618,000 pages, of which only 2,521 totaling approximately 98,000 pages were received as evidence when the trial was suspended. In addition, of course, there were numerous motions and other procedural matters as well as court decisions based on the disputes between the parties. Finally, there were 73 stipulation packages, which constituted the basic organizing principle of the case (these are discussed later in more detail).

How did such a relatively small complaint generate such a torrent of paperwork? In general, monopolization cases under Section 2 of the Sherman Act are usually big cases because the stakes are high (a company may, after all, be restructured and divest assets if it loses such a case). Also, the high stakes tend to make monopoly cases intensely contested. In addition, they entail the presentation of numerous facts showing that the defendant has monopoly power or intends to acquire and maintain it. If a company is charged with monopolizing, the courts will conduct an inquiry into the peculiarities and nature of the industry, the defendants’ market position within it, and the specific acts undertaken to acquire or maintain monopoly power. This can involve a written history of the industry and of the defendants’ places within it.

The Antitrust Division named AT&T, Western Electric, and Bell Labs as defendants, charging them with three offenses: monopolization, attempt to monopolize, and conspiracy to monopolize. The other conspirators not made defendants included the local operating companies in which AT&T held shares, such as New Jersey Bell and Pacific Telephone and Telegraph. While there are different elements required than in the monopolizing charge, the attempt and conspiracy charges essentially fell within the claim that AT&T engaged in monopolization under Section 2. Further, the government’s complaint was framed in terms of two elements required to prove monopolization. First, the defendants had to possess monopoly power in the relevant market. “Monopoly power” was defined as the power to control prices or to exclude competition. While this test has no readily apparent meaning and has been treated in a number of ways, the fundamental question is whether “a firm has a substantial degree of power to exclude competitors by reducing price and still be profitable.”¹⁶ The relevant product or service market is based on the notion of reasonable interchangeability. Do products serve the same use so that small reductions in price in one product result in large numbers of buyers turning to it from other products? If this occurs, both products are part of the same product market—they exhibit high cross elasticity of demand.

But the possession of such monopoly power alone is not sufficient to constitute a Sherman Act monopolization offense. One may, for example, attain monopoly power as a result of producing a product that is better than one’s competitor’s. Or, one’s service, distribution, design, and so on may be so superior that all customers turn to it. Attaining a monopoly position in such ways is lawful; indeed, that is what competition is about. And if one attains market dominance as a result of such superior performance, the process of competition has worked well. Consequently, the second element in the offense of monopolization is that the charged firm’s conduct goes beyond normal and honest business conduct. In the AT&T case, the Justice Department considered its burden of proof in the following terms: “Willful acquisition or maintenance of monopoly power does not require a showing of specific intent…. Where the offense alleged is monopolization, the requisite showing is one of a general or deliberate purpose or intent to exercise monopoly power…. It is sufficient to show that a monopoly results as the necessary consequence of a defendant’s conduct or business arrangements.”¹⁷ In other words, the Justice Department sought to ease its burden considerably by abnegating the second element of a monopolization charge. However, the Justice Department still had to show as many situations of purportedly predatory conduct as it could locate.

Only two pages in the complaint actually sketched the actions about which the Antitrust Division complained, yet they did not tell what the government intended to prove. 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 (3) AT&T obstructed the interconnection of customer-provided CPE into the Bell system. Thus, the Justice Department’s case was based on only three factors: the Bell system’s vertical integration and procurement practices, MCI’s rate and interconnection complaints against AT&T, and CPE interconnection cases. Clearly, the second and third factors were viewed as examples of predatory conduct. Based solely on these alleged actions—and without mention of the F.C.C.’s or the PUCs’ involvement in the events described in the complaint—the Justice Department called for AT&T’s dismemberment. It hoped the court would require AT&T to divest all Western Electric stock and that Western, in turn, would be required to divest “assets sufficient to insure competition in the manufacture and sale of telecommunications equipment.”¹⁸ Additionally, the Justice Department called for AT&T to divest some or all of the Bell operating companies, and requested the court to impose unspecified, nonstructural relief. In short, the Justice Department wanted AT&T to serve as little more than a long-distance company with some connection to Bell Labs.

The Answer

That AT&T would vehemently denounce the antitrust suit, and that MCI and the other firms that had brought private actions against AT&T would be delighted with it, are not surprising. The recorded responses of the investment community were largely negative. According to an AT&T survey, newspaper editorials ran three to one against the suit. A Wall Street Journal editorial summarized this generally negative stream of sentiment against the suit:

While the Justice Department can’t promise any consumer benefits that might result from its suit to break up AT&T, it is sure of one thing. This is the largest antitrust action ever filed.

So much for the mentality of modem day trustbusters. As long as they can tackle the biggest of all “big businesses” what is the difference whether the massive expenditure of federal money and effort is likely to cut anyone’s phone bills? What the Justice Department suit attacks is not monopoly but vertical integration.

A study [by] Touche, Ross & Co., the accounting firm, completed for the Federal Communications Commission earlier this year … was something of a disappointment to federal regulators and trustbusters.

Its conclusion was that “the general effects of the interrelationship of Bell Systems companies are a reduction of cost and investment.”… Out of all this we arrive at one question: Where is the problem that justifies risking possible damage to the efficiency of a vital part of the U.S. infrastructure…. If there is a problem that justifies all this we can’t find it.¹⁹

AT&T sought, of course, to capitalize on the sentiment in its favor. After the suit was filed, CEO John de Butts announced that AT&T was not in violation of the law and that the action was undertaken in complete disregard of the interests of the general public. Fragmentation of responsibility, the principal goal of the suit, would lead to deterioration of telephone service. The regulated network manager system, de Butts pointed out, had withstood constant examination by state and federal regulatory agencies, courts, and legislative bodies almost from its inception. Notwithstanding criticism of certain specific activities, the system, on balance, had worked remarkably well. Virtually every household had telephone service, the level of telecommunications technology was the highest in the world, and costs had been kept down by productivity gains at twice the pace of the general economy. Finally, de Butts stated on several occasions that AT&T would not settle the suit.²⁰

In contrast to the complaint, AT&T’s formal answer was twenty-three pages long and replete with details. But, more importantly, instead of starting with recent times, as the complaint did, the AT&T answer briefly traced the history of the industry from the telephone’s invention to the suit. The purpose of the history was to show why and how the regulated network manager system had evolved. In contrast to the Justice Department’s portrayal of AT&T, the company showed that other models of government-business relationships in the telephone industry were tried in the past and found wanting. Accordingly, the regulated network manager system evolved, not all at once but gradually, in response to public service goals. AT&T then showed how it had been under constant scrutiny (much of this hostile) since well before the enactment of the 1934 Communications Act. The F.C.C. was invited by Congress to request new powers and enforcement tools if existing ones were found to be inadequate. Yet with minor exceptions, the agency concluded that it already had sufficient power to regulate AT&T and the other public service companies. But, AT&T questioned, was this because the F.C.C. was under AT&T’s influence or because it had given up in response to the futility of adequately regulating the public service firms? The question was, of course, a vital one in that a major underpinning of the Justice Department case was the inadequacy of regulation and, therefore, the need to dissolve AT&T. Not only had AT&T’s component telephone companies been adequately regulated, but Western Electric and Bell Labs as well. In view of the numerous contests that AT&T and its constituent companies lost by 1974 at the federal and state levels, there was almost a mythical quality to the notion of inadequate regulation. The proof of adequate regulation could be found in the high quality of telephone service, in AT&T’s modest profit rates, and in the fact that the “interstate rates of the Bell System are substantially at the level of 20 years ago, and rates for local service have increased at only about one-third of the rate of increases of prices in the economy generally.”²¹ In short, then, AT&T claimed it had not behaved like a monopolist; that is, its monopoly position in long distance and many local markets came about not from predatory practices, but for the same reason that the tiny Tatum Telephone Company was the local monopolist in Tatum, Texas. The gradual evolution of the telephone industry was in the direction of single market providers. It noted, too, that the F.C.C. had demonstrated in many decisions that it, and not AT&T, had the power to exclude or license new competitors. The F.C.C. and the PUCs had the power to control rates through a variety of regulatory techniques. For these reasons, AT&T lacked monopoly power in the antitrust sense regardless of its size. Further, AT&T asserted that the court lacked jurisdiction over the matter because a comprehensive regulatory scheme inconsistent with antitrust primacy governed telecommunications. (While the F.C.C. had modified the old regulated network manager system in favor of what is termed here contrived competition, it was still a comprehensive system. No matter how ad hoc F.C.C. regulation had become, the numerous SCC, satellite, interconnection, long-distance, rate, technical, and other decisions showed that F.C.C. regulation was so comprehensive that there was no room for antitrust enforcement.) Finally, AT&T’s answer argued that the matter had already been tried and settled by the parties. Since AT&T had fully complied with the terms of the 1956 consent decree, the Justice Department could not bring another suit on the same cause of action.

And the Case Drags On

The matter was initially assigned to Judge Joseph C. Waddy, who had never previously presided over an antitrust case. Almost immediately each side made massive document requests while, at the same time, resisting the other side’s request as unreasonable. Judge Waddy at the outset was concerned with two interrelated issues. First, what specifically did the Justice Department claim that AT&T had done wrong? Second, did not the comprehensive F.C.C.–state PUC jurisdiction over telecommunications preclude Justice Department prosecution under the antitrust laws? Both sides anxiously awaited Judge Waddy’s first decision to see if it could provide clues about his predisposition in the case. On November 24, 1976, he issued his first opinion on the threshold issues, concluding that AT&T was not immune from Sherman Act prosecution. Accordingly, he ordered the parties to proceed with pretrial procedures.²² Notwithstanding this adverse ruling, it was nevertheless apparent from his statements that Judge Waddy was skeptical that the Justice Department could prove its case.

As the discovery process, rampant with disputes, progressed in 1978, Judge Waddy became terminally ill with cancer. The case was reassigned to Judge Harold F. Greene, who had been sworn in as a federal district court judge on June 22. Greene was uniformly regarded as a resolutely fair trial judge and an excellent judicial administrator.

Judge Greene had the immediate task of getting the proceedings moving. Almost four years had elapsed since the complaint was filed, yet little progress had been made. Greene wanted to avoid another United States v. IBM scenario, which began in January 1969 and was still far from completion. As a group studying big antitrust cases for the National Commission for the Review of Antitrust Laws and Procedures reported in January 1979 on the IBM case: “The number of non-substantive issues generated during discovery and trial is also prodigious. As of November 27, 1978, Judge Edelstein had issued 59 opinions, 127 memorandum endorsements, 21 pretrial orders, 13 amended pretrial orders and 63 stipulations and orders.”²³ The advisory panel also discussed Judge Waddy’s handling of the United States v. AT&T case, pointing out that virtually no discovery had taken place since the complaint was filed. While the report was filed after Judge Greene took charge, he undoubtedly knew of the existence of President Carter’s National Commission for the Review of Antitrust Laws and Procedures, of which delay was a major topic of investigation. However, we cannot assume that delay is simply a defense tactic. The issues raised in procedural matters are often important ones, especially if they concern the government’s potential for abuse—a subject about which Greene would be sensitive. Once a case is brought, the government lawyers involved are much like those in the private sector—they do not necessarily seek justice but rather to win and score heavily over their opponents. Judge Greene would have the difficult task of balancing fairness to the defendants with moving the case at a quicker pace.

One of Greene’s first acts was to issue an order on July 6, 1978, directing the parties to file status memoranda on all issues preliminary to the trial. Then, on September 11, 1978, after reviewing prior proceedings, Judge Greene issued his first important decision in the case.²⁴ The decision was organized into four subjects. First there was the question of jurisdiction. The second was one of AT&T’s principal defenses: that the United States government to a large extent compelled the conduct of which it now complained. But the Justice Department, in addition to disputing this contention, also argued that the government was not a monolith and that the Justice Department could not be prevented from complaining about conduct in which the F.C.C. and other agencies implicitly or explicitly concurred. The third was that the plaintiff sought access to documents produced in private antitrust suits brought against AT&T. And fourth, Judge Greene used the decision to plot the future course of action in the case. Once again the court rejected the argument that regulation was sufficiently pervasive to preempt completely the antitrust laws. In any event, there was no reason for this question to prevent discovery proceedings. If after discovery the court was wrong about jurisdiction with respect to some of the defendants’ conduct, those issues would be referred to the F.C.C. Judge Greene, in deciding the second issue, first observed that one of AT&T’s most important arguments was that its conduct largely resulted from government directives and policies. Moreover, AT&T claimed that its structure and practices benefited the United States government. Noting that AT&T’s argument was plausible, that the United States as a plaintiff was the entire executive branch (except the independent regulatory agencies of which the F.C.C. was one), and that any relief would be national in impact and scope, Greene rejected the plaintiffs argument. Therefore, AT&T could subpoena documents from the entire executive branch, not just the Justice Department. While he could not order the production of documents from the F.C.C. because of its nominal independence from the executive branch, Greene promised to assist AT&T in securing documents from it—if the defendant would pare down its request.

The third major issue concerned documents produced by AT&T in private antitrust suits. At stake were approximately 2.5 million pages of AT&T documents that were in the records of the MCI cases and others. Judge Greene, noting that it would be too time consuming for the Department of Justice to duplicate the document-selection process when it was already available, held for the government on the issue.

Judge Greene’s most innovative effort concerned the fourth issue. His basic strategy in administering the AT&T case involved several considerations, the most important of which was that the case would be tried without a jury. By allowing nearly all evidence and testimony within a broad range of tolerance into the record, Greene avoided the pitfalls involved in deciding issues of inclusion and exclusion, many of which could lead to appeals. Greene would, after all, be able to evaluate the quality of evidence based on his legal skills and experience. At the same time, he assured AT&T that it would be able to obtain the evidence it needed for its defense. Although a record replete with the testimony and exhibits of both sides would help to guarantee fairness, it would also cause interminable delay.

Judge Greene’s next task, then, was to outline procedures that would bring order and speed to this morass of documents without injuring his commitment to fairness. Although modified somewhat, the basic contours of Greene’s original plan governed the administration of the case.

Thus, Pretrial Order No. 12 asked the parties to file four successive Statements of Contention and Proof (SCPs) over an eighteen-month period. The plaintiffs first SCP was to show (1) the government’s legal and factual contentions, (2) a list of witnesses and the documentary evidence that would support each contention, and (3) the extent to which the evidence was in plaintiffs hands or where it could be found. The defendants’ first SCP was to be organized in a manner similar to plaintiffs. After the filing of the first SCPs, a magistrate was to conduct a conference designed to simplify the issues, arrive at stipulations of uncontroverted facts, and reduce further unnecessary discovery. At the conclusion of the first pretrial conference, then, the parties would have a list of stipulations to which they both agreed and another of contentions about which they differed. It was hoped that the second SCPs would further narrow and simplify the issues and that the second pretrial conference would increase the number of stipulations and reduce the number of contentions. In this way, considerably less need for testimony and exhibits would exist when the trial began. However, Judge Greene allowed sufficient flexibility in the procedure to enlarge existing contentions or to add new ones in the second SCP. Therefore, the magistrate was instructed to be more stringent in applications for new contentions. The discovery process was scheduled to terminate on April 1, 1980.

Although Greene’s pretrial process did not work exactly as planned, it marked a good beginning to what would lead to an orderly trial. The plaintiff’s 530-page first SCP was filed on November 1, 1978, and outlined the nature of the telecommunications industry and its technology and participants. The document also described the structure of the Bell system and AT&T’s role in it, and it stated the major themes of the Justice Department’s case as well as the purported factual support. The themes included were (1) the alleged exclusionary acts that resulted from vertical integration, (2) the abuse of monopoly power to thwart competition—so-called predatory acts—and (3) the inability of state and federal regulation to control the acts of the defendants. The markets examined were broadly telecommunications transmission and equipment, and a discussion of the applicable law was followed by another of the relief necessary to remedy the violations of the law.

The defendants’ first SCP, a 490-page document, was structured somewhat differently in keeping with its theory of the case. It began with a more detailed discussion of the technology of telecommunications, showing that the vertical and horizontal structures of the Bell system were due more to the technology of telecommunications than to any intent to monopolize the industry. The defendants also described the development of telephone regulation and the reasons for its increasing pervasiveness, including the widespread adoption of the natural-monopoly idea and the growth of federal regulation. Seeking to show that the regulated network manager system worked well, the historical exposition included, as well, material on the remarkable performance of the Bell system, such as the accomplishments of Bell Labs—topics that the Justice Department largely viewed as irrelevant. The lengthiest portion of the document consisted of rebuttals of the government’s charges. Finally, AT&T argued its affirmative defenses and the proposed remedy, and an appendix described how it intended to prove its case. The second SCPs were briefer than anticipated, but the third SCPs were more comprehensive than the first set, largely because of the judge’s insistence that the case should be organized into a set of episodes. By September 1980, the case had been organized into eighty-two separate episodes, many with subparts. The case had moved to a higher level. Both episode lists had much in common; for example, episodes one through seven as well as nine dealt with the technology of telecommunications as well as the history of government-industry relations through the Carterfone decision. Most of that material was a part of AT&T’s defense that its structure and performance were to a large extent attributable to a combination of the nature of telecommunications technology and government regulation. The heart of the government’s case was embodied in the episodes concerning specialized common carriers, most critically MCI, and various AT&T tariff offerings.

These were the most important and detailed episodes in the government’s case. The government’s most important witnesses included MCI’s William McGowan, whose testimony covered approximately six hundred transcript pages, and other MCI officials who testified on FX, CCSA, Execunet, and other matters of controversy between MCI and AT&T. Its principal expert witness was Professor William H. Melody (a frequent expert for MCI), whose five-hundred-page testimony argued that the various AT&T tariffs were not compensatory. Through these testimonies and exhibits, the Justice Department hoped to show that the F.C.C., although well intentioned, was unable to control the monopolist AT&T.

It is crucial to appreciate the importance of these episodes to the government’s case, for not only did MCI furnish the Justice Department with 1.5 million pages of materials from its first antitrust suit against AT&T, but it provided the work of its attorneys as well. In the words of the Court of Appeals, District of Columbia Circuit: “MCI furnished the Government the documents, depositions, and exhibits that MCI had discovered from AT&T. MCI also furnished certain documents pertaining to a ’database’ consisting of computerized abstracts of documents, deposition transcripts and exhibits received from AT&T during discovery. MCI’s counsel had prepared the database.”²⁵ Considering the importance of the MCI episodes to the Justice Department, it is instructive to note the disposition of MCI’s principal private antitrust suit against AT&T. In January 1983—approximately one year after the Justice Department and AT&T reached a settlement and four months after Judge Greene’s basic decision on that settlement—the Seventh Circuit court of appeals reversed most of the trial court’s findings in MCI v. AT&T and explicitly rejected Dr. Melody’s testimony and the cost concepts he advanced. The Seventh Circuit found that each of AT&T’s private-line tariffs was compensatory.²⁶ The court upheld the jury’s finding on the FX and CCSA issues only by permitting the jury to interpret the F.C.C.’s complex SCC decision.

However, even though the SCC portion of the government’s case was the most elaborate, the other parts of the case were important as well. The cumulative effect of the many episodes used to show AT&T’s alleged abuse of its monopoly position was intended to prove regulators’ failure in controlling AT&T’s destructive conduct. Usually these episodes involved a representative of a company supposedly abused by AT&T, who purported to show that the company’s product or service was remarkable and innovative and that AT&T’s conduct harmed that company. AT&T had to justify its conduct in the highly complex world of telecommunications; for example, it had to show technical reasons for not purchasing certain equipment from independent manufacturers or for not interconnecting with particular CPE. From Greene’s decision on the motion to dismiss, it is clear that these episodes made a major impression on the court and that AT&T would endure a difficult burden in its defense. Nonetheless, the defendants’ third statement and the Stipulation/Contention Package indicated that AT&T had a plausible and convincing justification for each such incident.²⁷ The government’s presentation of evidence began on January 15, 1981, following an unsuccessful attempt to settle. At the conclusion of the plaintiffs case, AT&T filed a 553-page memorandum in support of its motion to dismiss the complaint on the ground that the Antitrust Division had failed to state a cause of action. Because the defendant takes no risks in making such a motion at the close of the plaintiffs case, it is not an uncommon action. Also, the defendant may obtain a better sense of the points the court considers most important as well as its general views on the case, and thus adjust its examination of witnesses accordingly. Generally such motions are rarely granted at the close of the plaintiffs case, and they are deferred for consideration at the conclusion of trials.

Judge Greene, however, took the opportunity in his forty-page decision to make a strong statement indicating that the court would support major portions of the government’s case. Greene’s general attitude may be surmised in this 1983 statement: “It is antithetical to our political and economic system for this key industry to be within the control of one company.”²⁸

AT&T had lost on nearly every point decided by Judge Greene in the motion to dismiss. Although AT&T sought to downplay the decision, it knew that the decision indicated a high probability of losing the case at the trial-court level. Indeed, AT&T responded by enlarging its witness list in an attempt to counterargue parts of the decision. But, at the same time, other important events occurred. Most notable was Judge Vincent Biunno’s September 3, 1981, Western Electric decision, construing the 1956 judgment in AT&T’s favor so that it could offer enhanced telecommunications services through a separate subsidiary in keeping with the F.C.C.’s proposals. This placed the prospect of a negotiated settlement in a new light, for AT&T’s leadership realized that the old public philosophy was shattered and that the company could adjust to a new one.

Toward a Settlement

Any compromise settlement must, of course, involve perceived gains and losses on the part of both sides. From the Justice Department’s perspective, many factors favored settlement. First, much of what it sought in the 1974 complaint had been accomplished or was in the process of being achieved in other proceedings. The Execunet decision and its aftereffects had opened up the long-distance market to at least a form of competition. F.C.C. proceedings were opening up the CPE market to easy entry. A divorce of AT&T from the operating companies would do the same for the switching and transmission equipment markets. Because so much had already been settled, the Justice Department had greater room for flexibility in arranging a settlement without invoking the ire of AT&T’s rivals. The AT&T ease was so unique that it would have little precedent value. Notwithstanding the Justice Department’s victory in Judge Greene’s denial of AT&T’s motion to dismiss, there was much to lose from a lengthy prolongation of the matter, including appeals. At the conclusion of the trial, the record would have been so immense that much time necessarily would elapse before a final decision would be announced by Judge Greene. The inevitable appeal to the court of appeals would add years to the case as well, and it was far from certain that the Justice Department would win at the court of appeals level. An appeal to the Supreme Court would extend the time still further. The uncertain status of the telecommunications industry during these critical years could not help AT&T or its opponents plan effectively for the future. Nor could it help the Justice Department politically. Congress and members of the executive branch were already preparing a variety of remedies, and as different as these were, all could be implemented considerably more quickly than antitrust relief. Finally, even if the Justice Department won the case on its merits, it is far from certain that drastic relief involving divestiture would have been upheld. In summary, then, the Justice Department had many reasons to attempt to settle the dispute.

AT&T, too, had to consider the various trade-offs of litigation and settlement. In addition to the enormous resources consumed in litigation, prolonging the matter through the Supreme Court stage would limit the company’s ability to engage in long-range planning. The company certainly did not want to put resources in a division that it may have had to divest. Again, such uncertainty enhanced risk and, therefore, probably made it more difficult and costly for the company to borrow funds, especially in the form of long-term bonds. Moreover, the ultimate outcome of AT&T’s attempt to modify the 1956 consent decree was equally uncertain in that the Justice Department challenged AT&T on this interrelated matter as well. From AT&T’s perspective, settlement considerations required the company to come to grips with the kind of structure that would be the least-worse alternative. AT&T also appreciated that Judge Greene would have to approve the terms of a settlement and that its many enemies in Congress and the private sector would closely scrutinize and exert influence on its terms. The AT&T top leadership had, indeed, been preparing for changes in light of the shift in public philosophy toward competition in regulated industries and the gradual demise of the public service philosophy.²⁹

Based on its past record, AT&T could be reasonably confident of its ability to do well in the new competitive environment. Its 1978 Annual Report stated: “A key reason for this confidence lies in the unique resource of Bell Laboratories. For a high technology business such as ours to continue to innovate, it must be fueled by constant research that extends the boundaries of scientific knowledge and translates it into useful technology. … In short, Bell Labora tories assures the Bell System of being on the leading edge of new technology.”³⁰ Thus, AT&T was far more reluctant to give up the research, development, and implementation of new technology—Bell Labs and Western Electric—than it was to give up long-distance or local-operating transmission. But if AT&T had to choose between keeping long distance or the local operating companies, its judgment was to keep the former because long distance had been far more susceptible to technological progressiveness and declining costs than had local service. Moreover, more that 90 percent of AT&T’s construction budget was being absorbed by the local operating companies. Finally, some states, most importantly California, were adamantly resisting applications for rate increases. AT&T’s strategic choice was, therefore, strongly in favor of retaining long distance at the expense of local service.

Prior to the enactment of the Antitrust Procedures and Penalties Act—the so-called Tunney Act—in 1974, only the parties to the suit had to agree for a consent decree to be entered. The Tunney Act arose in large part because of congressional suspicion about the 1956 Western Electric consent decree and the settlement terms of an antitrust suit against ITT during the Nixon administration. Under the procedures set up by the act, the Justice Department is required to submit for industry and public comment a copy of the proposed decree and a public impact statement that analyzes the decree and its probable impact. After public comments, the court is required to hold a hearing on the decree, making findings about whether the decree is in the public interest and what its probable effects will be. Since the court has the power to “take such other action in the public interest as the court may deem appropriate,” the parties must consider what the court will do in reaching their final terms of agreement.

Although settlement was discussed almost from the outset of the case, the first serious attempt to settle occurred at the end of 1980 and the beginning of 1981. During the waning days of the Carter administration, both sides requested that the trial, then scheduled to begin on January 15, 1981, be postponed pending settlement negotiations. The parties stated that they had a framework for negotiations but that many complex and controversial features still needed to be resolved. Judge Greene, claiming not to understand why the parties waited so long to begin serious negotiations, turned down their request. Greene noted that the unresolved issues, which might derail the settlement, and the time required contributed most to his decision. In addition, incumbent assistant attorney general Sanford Litvack had not consulted with the incoming Reagan administration officials about the settlement plans. However, only one week later the parties reported that they had worked intensively on settlement and that a complete, detailed agreement had been prepared, in which there remained no complex or controversial issues to be resolved. Judge Greene described the agreement as “essentially complete,” but noted that the new administration still had not been consulted about the terms.³¹ After both sides planned to remedy this problem quickly, Judge Greene agreed to interrupt the trial proceedings until February 2, 1981, at which time the attorneys for both sides were to report back to the court. If at this time they were agreeable to the filing of a formal consent decree within thirty days, the court would delay the case further. However, if they could not agree to this by February 2, the trial would proceed.

When the settlement terms were revealed, they surprised many observers. First, AT&T would have been required to divest Pacific Telephone and Telegraph and its minority interests in Cincinnati Bell and Southern New England Telephone. AT&T would have given up difficult problems in the case of PT&T, and its minority shareholdings in two companies that, though parts of the Bell system, it did not control. By the divestiture of these local operating companies, the Justice Department would have arranged the creation of independent firms whose behavior on interconnection and other issues could readily be compared with the Bell local operating companies. If the Bell companies were found wanting in some respect, the F.C.C. could use the three former Bell-system companies operating independently as models of appropriate behavior. Further, the 1956 consent decree would have been vacated, allowing AT&T to enter noncommunications businesses. However, consistent with the F.C.C.’s decision in the Computer II case, a fully separated subsidiary would provide CPE and enhanced services. The Long Lines Department and the interstate long-distance network would have been placed under the control of a different, folly separate subsidiary. Finally, AT&T would have been required to spin off parts of Western Electric to create an equipment competitor. But for several reasons, importantly the very different settlement ideas of William Baxter, President Reagan’s antitrust chief, the attempt failed.

The Settlement of 1982

Baxter’s strong criticism of the proposed 1981 settlement would form the basis of the Justice Department’s future negotiating position. Baxter held that AT&T should be divided into two piles of assets: the regulated side would be composed of those involved in local loops, and the competitive side would include equipment, enhanced services, data processing, and long distance. “We are well into the morn of the day when long lines should not be regulated at all. … [Long distance should be] put over on the competitive pile. The local loops would be on the other.”³² Others in the Reagan administration, most importantly the Defense Department, rejected any breakup of the Bell system because of its potentially adverse impact on defense procurement and for other reasons. In addition, Congress was actively considering telecommunications legislation that would reshape the industry. At the same time, the F.C.C. and the Justice Department were involved in judicial proceedings concerning proposed modifications of the 1956 Western Electric consent decree. The AT&T case, in a phrase, was becoming a political football over which the parties to the case were losing control. When AT&T’s board of directors met promptly at 10:30 A.M. on December 16, 1981, Chief Executive Officer Charles Brown scrapped his prepared statement and instead described the Baxter divestiture plan that had been under discussion between Baxter and AT&T general counsel Howard Trienens. After Brown had been thoroughly questioned by the others present, the board authorized him to enter divestiture talks with the Justice Department. Baxter and his staff began preparing an agreement based on regulated and unregulated divisions of the company. Baxter did not care whether AT&T kept the local operating companies or the competitive parts of the business, as long as it did not keep both. AT&T received a first draft of the proposed consent decree on December 21. After Brown reviewed the original proposal, a modified proposed decree little different from the first one was prepared. At most, half a dozen Justice Department employees, AT&T’s directors, and perhaps ten of its employees knew of the momentous events that were taking place.

As the agreement took shape, the lawyers turned their attention to the legal vehicle that was to embrace what they did. As we have seen, AT&T wanted to eliminate the restrictions in the 1956 consent decree. Both sides wanted to consolidate the New Jersey and District of Columbia cases before one judge—Judge Greene. Therefore, they concluded that the agreement should be a modification of the 1956 consent decree. Judge Biunno was asked to transfer the matter to Judge Greene’s court but not to examine the substance of the agreement. Little known is that Judge Biunno did, in fact, approve the decree before transferring it to Judge Greene, who conducted his own review. Further, both sides argued that the Tunney Act did not apply to modifications of decrees but, expecting to lose on that issue, they followed the Tunney Act procedures.

At the heart of the settlement was the requirement that AT&T would spin off the Bell operating companies and submit a plan that would restructure the BOCs into viable entities. AT&T would no longer be in the local-exchange business (except for its minority ownership in Cincinnati Bell and Southern New England Telephone, which the settlement did not affect). Also, AT&T would retain control of Bell Labs and Western Electric and continue to operate its intercity long-distance network. The company would furnish all CPE, including that provided by the local Bell companies, but license and supply contracts then in effect between Western Electric and the local operating companies would be canceled. The new operating companies would, thus, be free to choose their own suppliers. Because the local operating companies would be suddenly divorced from Bell Labs—their principal resource for scientific and technological information and research—AT&T agreed to provide the new operating companies, on a priority basis, with research, development, and support services until September 1987. Finally, AT&T promised that it would not acquire the stock of any spun-off Bell operating company.

The settlement also specified the obligations of the new Bell operating companies. Foremost among these was to provide each long-distance carrier and information-service provider (that is, a company that transforms and communicates information) access into local loops equal in type, quality, and price to that provided to AT&T and its affiliates. For example, if a person dialed “1” to access AT&T’s long-distance service, each new Bell operating company would have to make arrangements to treat the other long-distance carriers equally. The new operating companies would offer their customers a choice of which long-distance carrier they wanted that would be accessed by dialing “1.” Similarly, each BOC was forbidden to discriminate in treatment between AT&T and other suppliers of various services, CPE, and switching and transmission equipment.

However, the most controversial aspects of the settlement followed from Baxter’s rigorous distinction between regulated and unregulated businesses. The new operating companies (with a few exceptions relating to emergencies) were forbidden to manufacture or distribute CPE or other telecommunications products. For the same reason, they were excluded from the interexchange long-distance and information-service businesses. More generally, the BOCs were expected not to provide any other product or service, except local telephone service and local access, “that is not a natural monopoly service actually regulated by tariff.”³³ Among the most important nonregulated services were the Yellow Pages.

Although the parties to the settlement formed a united front once they entered into the agreement, virtually every other interest criticized some aspect of it. These criticisms were quite varied; for example, some deplored the breakup while others felt that the breakup did not go far enough. The criticism continued in the formal comments authorized under the Tunney Act. More than six hundred individuals and organizations filed comments comprising approximately 8,750 pages.

Both the Justice Department and AT&T sought to complete the arrangements called for in the settlement as quickly as possible and to do so without undue shock to the component parts of the new system or subscribers. In February 1982, AT&T took the first step in reconstructing the twenty-two operating companies into more economically viable entities by reorganizing them into seven larger regional operation firms. In this way, smaller BOCs like Diamond State Telephone, which covered Delaware, would be better able to withstand the shock of divestiture. Each of the regional companies, which in fact constituted the firms eventually spun off, had local operations that were greater than GTE’s. GTE was then the second largest integrated telephone company. The new regional Bell operating companies (RBOCs) would become:

On August 11, 1982, Judge Greene rendered his opinion and order agreeing to accept the Modification of Final Judgment subject to certain modifications that applied to both the new operating companies and AT&T.³⁴ First, RBOCs would continue to provide the printed Yellow Pages. Second, they could lease or sell CPE to their customers but they could not manufacture them. In this way, Greene argued, they would not favor their manufacturing subsidiaries—thus solving the vertical integration problem. Third, the new RBOCs could enter other business markets if they were able to show that monopoly power would not be used to impede competition in the markets. Under this provision Judge Greene had been deluged by the operating companies with requests to enter new lines of business. Fourth, while the new RBOCs were prohibited from offering information and enhanced services, AT&T was precluded from engaging in electronic publishing over its own transmission facilities for seven years. Many of these changes were deviations from the rigorous division into competitive and regulated activities that Baxter had devised. Further, they reveal Greene’s concern that without such opportunities and benefits, the RBOCs might not have become viable entities. Apparently concerned also about the possible adverse impact of the decree on the universal service goal, Greene did not object to a subsidy flow from the long-distance user to the local subscriber.

However, Greene would soon realize that he had not replaced the F.C.C. as a decision-making body and that the settlement would not resolve many of the controversies and problems within the industry. In December 1982, the F.C.C. adopted its long-debated access-charge rule (not to be confused with equal access), under which each local subscriber would be charged a flat fee to link into the toll network. The flat fee was intended to help local telephone companies avoid having to raise business subscriber rates. Traditionally, business rates had subsidized residential rates, but now the reduced costs of bypass technologies afforded more firms the opportunity to bypass local loops if they considered local rates unacceptable. The access-charge solution was expected to eliminate the incentive to bypass by shifting charges to residential subscribers.

Yet access charges would be only one of numerous controversies into which Judge Greene would be drawn as a result of his obligation to supervise the enforcement of the decree. Nevertheless, on August 24, 1982, when the Justice Department and AT&T signed a revised agreement incorporating the changes that Greene required, they undoubtedly believed that the agreement would solve more problems than it would create.

AT&T’s plan for reorganization would become effective within the eighteen months following the entry of the approved Modification of Final Judgment. The new operating companies were to have sufficient facilities, personnel, systems, and rights to technical information to allow them to provide good performance—an obligation that AT&T fulfilled in exemplary fashion. In December 1982, AT&T filed its 471-page Plan of Reorganization. Under the plan, the former twenty-two BOCs were reorganized into the seven RBOCs. Approximately 75 percent of AT&T’s assets were assigned to the RBOCs. Further, all Bell-system territory in the continental United States was divided into 161 geographical areas called Local Access and Transport Areas, or LATAs. The LATAs were generally centered around a city or other identifiable community of interest, and each one marked the boundaries within which operating-company subsidiaries of the RBOCs could provide telephone service. Thus, an operating company could provide local service and intra-LATA long distance, but inter-LATA long distance would be provided by AT&T and the other long-distance carriers, such as MCI (which argued that the LATAs were too large). For example, because one LATA in Ohio included Cleveland, Akron, and Lorain, a longdistance call from Cleveland to Akron would be handled by the Ohio Bell subsidiary of Ameritech, but a call from Cleveland to Columbus would be served by an interexchange carrier. Certain exceptions permitting RBOCs to cross LATA lines (such as the New York City-suburban New Jersey corridor) were allowed. The plan also required each new RBOC to provide all interexchange carriers equal access by September 1, 1986, as well as information access. Finally, for the seven RBOCs, AT&T set up a central services organization called Bellcore, which the RBOCs jointly owned. Bellcore’s function was to provide the RBOCs and their subsidiaries with technical assistance, such as network planning, engineering, and software development. Patterned after Bell Labs, the new company would also provide consulting services and serve as a central contact point for coordinating the efforts of the RBOCs in meeting national security requirements.

On July 8, 1983, Judge Greene issued a decision largely accepting the plan of reorganization but requiring certain changes. First, he expanded the patent-licensing powers of the RBOCs. Second, AT&T would no longer be permitted to use the logo or name “Bell” (except in the case of Bell Telephone Laboratories). According to Greene, the continued use of “Bell” by AT&T would have caused such confusion that an Illinois Bell subscriber, for example, would have assumed that AT&T “is the natural or ‘official’ long distance company to be used in conjunction with the local services provided by the several Bell Operating Companies.”35 Symbolically, though, Greene’s decision on this point was appropriate—it marked the end of a long period in telecommunications history (even if it didn’t mark the end of controversy within the industry). In early August, AT&T, with some reluctance, and the Justice Department agreed to Greene’s modifications of the reorganization plan. In November, AT&T sent to its shareholders a prospectus detailing the stock distribution plan (seven RBOC shares for every ten AT&T shares held). And at midnight on the last day of 1983, the Bell system that had been gradually constructed for more than a century broke up.

We noted in Chapter 1 F.A. Hayek’s observations on the extraordinary difficulties in predicting changes in the marketplace. No field illustrates his wisdom more than telecommunications. Contemporary giants like Intel Corporation and Microsoft Corporation were comparatively small firms in 1984, while Netscape Communications was not even conceived then. All became major players in telecommunications a little more than a decade after the breakup. While computers played a role in telecommunications long before 1984, few, if any, saw the extraordinary ways in which the technologies would soon converge. Words and phrases like “Internet,” “World Wide Web,” and “Gopher,” which have become extremely important in telecommunications, were unknown in 1984. Even before the breakup, cellular radio was introduced in October 1983 by an Ameritech subsidiary, but the growth of wireless services in the next decade and beyond was barely perceived. The RBOCs would themselves become involved in numerous businesses throughout the world. In addition, by 1997 the seven RBOCs would become five, as Bell Atlantic merged with Nynex, and Southwestern Bell (now SBC Communications) acquired Pacific Telesis. Events overtook the decree, which was largely abrogated by the Telecommunications Act of 1996. The AT&T breakup was crucially important, nevertheless, in two respects: first, because it restructured the dominant player in telecommunications and, second, because it occurred on the eve of dramatic changes in telecommunications.