The Master Switch

by Tim Wu

  Whitacre, to his credit, was a man willing to take on a challenge. The task before him was immense. The regional Bell companies were, according to federal policy, supposed to lose business to their competitors. The Bell system was the corporate equivalent of a convicted felon, and the Baby Bells all operated under the direct supervision of both the FCC and Judge Harold Greene, who, now as “telecommunications czar,” would oversee enforcement of the former monopoly’s consent decree with the Justice Department. The punishment for the mother ship’s mischief in the 1970s was a tight web of court-ordered restrictions and requirements cast over the Baby Bells’ operations. FCC rules now obliged them to furnish all customers with a telephone jack to facilitate the attachment of “foreign” telephones and other devices. At their exchanges, the Bells were required to provide competing long distance carriers (MCI or Sprint) access to local callers. The decree—to which, for mysterious reasons, Bell had voluntarily submitted—also barred the Baby Bells outright from certain markets, including “online services.”

  Springing Ma Bell from this regulatory cage would amount to an escape from corporate Alcatraz. For the Baby Bells, survival was the order of the day; a return to monopoly control seemed a fruitless fantasy of those impractical enough to entertain it. If there was any hope of recovering even a bit of that former power, it lay in a painstaking long-term strategy.

  But Whitacre and others with revanchist longings would bide their time. They knew that while Bell was officially a public menace, the old regime retained many loyalists and friends in Congress, federal agencies, and most of all, state and local governments. Southwestern Bell in particular had good working relationships with most of the Texas political class, since Whitacre and his company continued to do as they always had, supporting both parties with generous donations.

  At a conceptual level, the Bells’ lobbyists and policy strategists—mostly at Verizon (once Bell Atlantic, the East Coast Bell, which had long thought of itself as the most intellectual of the Bells)—began to rethink some of the fallen empire’s long-held positions, particularly its attitude toward competition, which had always been regarded as anathema to the company whose credo was “One System, One Policy, Universal Service.” Vail’s writings of the 1910s are filled with denunciations of “the nuisance of duplication.”6 So close to the corporate core were these convictions that AT&T had upheld them as gospel from its beginnings in the 1880s right through the 1980s, by which time the idea of a regulated monopoly had long gone out of fashion. Like a man in a leisure suit, Bell strutted stubbornly into its last decade clad in its outmoded orthodoxy, refusing to abide even a whiff of “competition.” It was on account of such stiff-necked absolutism that the Justice Department brought the lawsuit that led to the breakup.

  But Bell’s brain trust, a shadow cohort who, though scattered, never abandoned the cause of the empire, had an idea. With sympathetic academics, lobbyists, and some of Bell’s best inside and outside lawyers in their ranks, these stalwarts came to understand that Washington’s prevailing enthusiasm for competition and deregulation might actually be made to serve Bell’s contrary interests. Paradoxical as it might seem, the ideology of competition itself could, they imagined, furnish the key for Bell’s prison break. How was this possible for what had become the nation’s most regulated businesses? For an answer, let us examine for a moment the history of competition’s allure in America.

  The perceived value of competition has varied considerably in American history. In the late nineteenth and early twentieth centuries, broadly speaking, many business leaders like Vail, as well as labor leaders and economists, thought that competition, particularly in operating utilities or other economic necessities, was wasteful and destructive. In such sectors, government regulation was deemed prudent to protect businesses serving a vital social function from the excesses of competition, assuring them of, if not monopoly, at least a reasonable degree of market share.

  Competition hardly grew in favor during the 1930s, given the Depression and the New Deal. Private industry on the whole was suspect, as government began to trust more broadly to regulation as a means of achieving better results. It was only beginning in the 1960s and 1970s that this bias toward government control began to shift, inspired by a new generation of libertarian economists, mostly at the University of Chicago, among them Milton Friedman and George Stigler. Such analysts viewed the performance of government-regulated industries—essentially the New Deal paradigm—as disappointing, and they prescribed a dose of both deregulation and more competition as medicine for an economy by then ailing after its postwar expansion. Some went so far as to suggest that nearly any regulation was unnecessary, given a state of healthy competition.7

  While such ideas were considered radical in the 1960s—sometimes dismissed as Goldwater economics—they began in the seventies to be applied experimentally across once regulated industries such as airlines, trucking, and energy. In communications, change began with Nixon, as we saw in the cable chapter, but continued under Jimmy Carter. Under Reagan, deregulation accelerated, and was regarded, along with tax cuts, as the key to economic growth. And so, at the time of the Bell system breakup, nothing could have been quite so anomalous as radically regulating a major industry.

  In this ambience, the Bell partisans got thinking. If government regulation was an evil to be suffered only in the absence of competition, it followed that evident competition should render that evil unnecessary. If the most regulated company in the nation could somehow show that competition had indeed taken root in the telecommunications sector, there was a chance the Bells might yet shed most of their shackles.

  THE 1996 WAR OF ALL AGAINST ALL

  The election of Bill Clinton did not turn back the deregulatory wave. Clinton would find himself forced to agree that “the era of big government is over,” a sentiment that applied to the federal regulatory regime as well as the welfare state. In few places was this free-market vibe as strongly felt as at the FCC and among those paid to lobby the commission. Al Gore, the administration’s point man on tech policy, believed as deeply in the power of competition as had the figures in Nixon’s administration. For their part, in speech after speech, FCC officials touted a free market as the best means of achieving the social goals of communications policy. Gore’s friend and FCC chairman Reed Hundt was a competition apostle as well. Speaking of a “national commitment to open markets, competition and deregulation” was boilerplate in the 1990s—as Reed explained, “competition in the communications markets will yield lower prices and more choices for consumers, rapid technological innovation and a stronger economy.”8

  Promoting competition wasn’t a bad idea by any means. What didn’t necessarily follow, however, was that the existence of competition in the most abstract sense could obviate all need for regulation—particularly regulation designed to prevent anticompetitive behavior! And how do we know when “competition” really is competition? The willingness of some to see an appearance of burgeoning competition as a reasonable substitute for regulation looked like an opportunity to the Bells, and so they changed their religion. Embracing the process of “competition” that was under way, the Bells prepared to make their comeback as a dominant player in a nominally open industry.

  It was a perfect wedding of a new government ideology and a new corporate calculus when the Bells, AT&T, and the rest of the industry signed on to the Telecommunications Act of 1996.9 The most sweeping legislative overhaul of the business since the Communications Act of 1934 was founded on the principle of “competition everywhere.” The idea was to remove barriers to entry in all segments of the industry, a goal that the Bell companies (Bell Atlantic, Bell South, Pacific Telesis, Verizon, and the rest), the long distance firms (AT&T as well as MCI), and the cable companies all pledged to uphold. The Act was designed to encourage cable companies to enter the phone business, phone companies to offer TV service, long distance firms to build local networks, and so on. Officially, it was meant to create a Hobbesian struggle
of all against all.

  The law was hailed in 1996 as a sort of ultimate victory over the Bell monopoly and the dawn of a new age; in retrospect, the measure was hopelessly naïve. Its centerpiece was a complex regime whereby the Bell companies allowed their competitors to lease Bell’s infrastructure to offer the same local telephone service as the regional Bells. Creating competition over the existing facilities might have worked in another industry, and it actually did seem to work in other countries. But somehow forgotten was the Bell company’s hundred-year track record of annihilating or assimilating dependent competitors. The Bells were corporate America’s reigning champs in the rope-a-dope game of keeping up appearances in the front office while quietly pummeling their rivals in the parking lot.

  While not keen to share their toys under the Act’s so-called unbundling rules, the Bells immediately understood that the deal was a win for them. What mattered most was one critical fact: the 1996 law superseded the consent decree that had ended the Bell antitrust lawsuit. With that decree abrogated, the Bells were now under the supervision of the FCC, as opposed to the hawk-eyed taskmaster Judge Greene. It was for them the catbird seat: there was no rival they couldn’t handle, except for the federal courts and the Department of Justice.

  There is a striking similarity between what followed the 1996 Act and what followed the Kingsbury Commitment of 1913. Both government interventions had sought to introduce permanent competition into the telephone market, and each was hailed at the time as an enormous victory over the Bell system. In fact, each would pave the way for a new age of Bell ascendancy. The difference was this: the old AT&T had pledged to operate as a public trust, and was as good as its word. The new AT&T had no such aspirations.

  THE CAMPAIGN

  Eliminating competition is rarely accomplished in a single grand stroke. The would-be monopolist does not round up rivals for a wholesale massacre; there are no corporate killing fields. Instead, the corporation seeking dominance behaves rather like a pest exterminator, setting poison bait traps, killing what he can see, and methodically decimating his foes by making their life a living hell. The monopolist’s tools are lawyers and local statutes; his tactics are delays and court challenges, all deployed with an eye toward unraveling firms with lesser resources.

  The 1996 Act enabled the Bells to blow the trumpet of competition while simultaneously eliminating all actual competitors. There were plenty: since the breakup, scores of new “competitive” phone and Internet companies had launched, hoping to take a piece of the Bells’ billions in revenue for themselves. In part they were drawn by the more general tech boom and economic expansion of the 1990s, when it was easy to get funding. But the real rush began in 1996, after which telecommunications would account for an unprecedented share of GDP growth.

  Each of the Bells did its bit to eliminate local challengers. Verizon, for its part, handled competitors in the Northeast, and managed to finally silence MCI, Bell’s bête noire, forever. But the undisputed heavyweight champion was Ed Whitacre’s Southwestern Bell, now renamed SBC. As Network World reported as early as 1997, “SBC, more than any other [Bell Company], uses a phalanx of lawyers and millions of dollars in lobbying efforts in a deliberate effort to thwart meaningful competition in its markets.”10 From the late 1990s into the following decade, SBC masterfully waged a war of attrition.

  SBC’s ground war was a guerrilla-style campaign devised to nullify concessions made in the 1996 Act. It would ultimately be copied by all the Bells, until in state capitals and in thousands of tiny local jurisdictions across the country, death would be inflicted by a thousand cuts to make the competition regret they’d ever thought of taking on a Bell. But it began in Texas, where, by 2003, SBC had nearly a hundred registered lobbyists working in Austin—as against the 181 members of the legislature.11 Avowedly opposed as they had been to regulation, SBC and the others had long known that pressing for it on the local level was a handy tool against any challengers. When competitors had started cropping up in the early 1990s, SBC persuaded the Texas legislature to add some useful provisions to the Public Utility Regulatory Act of 1995 (PURA 95)—among the tweaks to the final bill, a hefty price on market entry. To offer service to a single customer, a would-be telephone company had to build physical lines reaching 60 percent of homes and businesses in a twenty-seven-mile radius. It was roughly like requiring that one build roads to every house in the area just to open a gas station.

  There were other tactics beyond the legislative. To reach customers over SBC’s lines, for instance, would-be competitors often needed to rent space in the local “central office,” where the lines terminated. SBC was required to offer a lease, but the law didn’t specify a rate. So in the late 1990s, when a 10×10 space in upstate New York was going for $10,000 a year, for instance, SBC would charge $500,000 for that much space in Texas. The aim of obtaining a more reasonable rent would oblige a competitor to file a lawsuit, and appeals—again, just to get started.

  The industry trade magazines were full of similar stories of dirty pool in the late 1990s. By one account, SBC lawyers were dispatched to threaten an elementary school for choosing a rival phone company. In another case, SBC left the windows open in a space they operated where a competitor’s switching equipment was housed; pigeons came in to roost, until eventually their excrement caused system failure. On other occasions, Bell simply flouted interconnect agreements until the competitors were forced to sue—just like the good old days! In such cases, the FCC would sometimes fine SBC and the other Bells, but to little effect. Over time the government would file a series of lawsuits under the Sherman Act, petitions superficially similar to MCI’s case against AT&T in the 1970s, charging them with violating the spirit of FCC regulations by using its monopoly powers to destroy newly created competitors. The Baby Bell apples had not fallen far from the tree.

  If the late 1990s and early 2000s departed from the 1970s in invigorating the promotion of competition, they also marked a different mood in the federal courts regarding assertiveness in enforcing the antitrust laws. Once competition, however nominal, was supposed to exist, there was little appetite on the bench for acts of interference in a “free market.” Verizon Communications v. Trinko is the most instructive example. Broadly and on good evidence, Verizon was accused of interfering with competitors, and the matter went all the way to the Supreme Court. Justice Antonin Scalia, writing for the majority, held that violations of the Telecommunications Act did not create an antitrust problem; a conclusion opposite the one the courts reached in the 1970s, when AT&T was tormenting MCI. The decision reaffirmed that moving the Bells out of the line of antitrust fire was by far the most decisive result of the 1996 law.12

  As Whitacre and the other Bells prosecuted the ground war by frustrating and sabotaging competitors, their lobbyists and lawyers launched an air campaign against the new Telecommunications Act itself. The Bells challenged nearly every aspect of the line sharing provisions in federal court. The Bells won some and lost some, but that wasn’t the point, really. What mattered was tying up would-be competitors in years of complex and expensive federal litigation, thrusting their business model into a permanent state of uncertainty. At some level, the lawsuits were an end in themselves.

  Engaging in complex litigation did not distract the Bells from their accustomed pursuit of influence. In 2000, Verizon appointed as its general counsel William Barr, the former U.S. attorney general and onetime CIA operative; his style was distinctive. On one occasion, angered by an anti-Bell vote cast by a FCC commissioner, Barr cooly allowed “I want his balls in a jar.”

  In 2000, George W. Bush became president, and within a few years most of the Bells’ wishes came true. Unlike the Nixon and Reagan administrations, which had been serious about competition in communications, the Bush administration tended to agree that competition didn’t necessarily require that there be any extant competitors. Within two years, a new FCC gutted the sharing rules,* and a market that since 1996 had been competitive in name only was
now rushing headlong toward monopoly once more.13 Indeed, with the sharing provisions gone, most of the firms that hadn’t already entered bankruptcy were effectively doomed.

  In the next few years, one after another of the Bells’ would-be rivals withered and died, and all the while Bell representatives murmured about the challenges of surviving in a competitive industry. Indeed, the only companies that would manage to survive as challengers in telephony were the cable firms, who had wires of their own running into every home, and whom the Act of 1996 had freed to become an intermodal competitor, the only kind the Bells couldn’t destroy. Nevertheless, within a decade after the Telecommunications Act of 1996, history had repeated itself, and the Bells once again ruled the telephone system unperturbed. The idea of inducing “fierce” competition over Bell’s proprietary wires, like the fledgling companies that had taken the bait, was utterly dead.

  Wiping out the competition was only half the dream, however, and during this time the Bells were reaching, none too discreetly, for something even bigger than collective control: the reconstitution of the great Bell system itself. In this, too, Whitacre was the ringleader. In 1990, he had controlled only Southwestern Bell, the smallest of the eight fragments of Bell’s breakup. In 1997, he bought the regional Bell companies that served California, Nevada, and the states of the Midwest: the Pacific Telesis Group. Finally, in 2006 he added Bell South. And so, after a decade of consolidation, his new Bell system covered most of the country.

  Whitacre’s greatest symbolic victory, however, had actually come two years earlier, in 2005, when he bought AT&T, beating out Verizon, his only rival in becoming the Bell of Bells. The main stated purpose of the 1984 breakup had, after all, been to segregate the long distance company AT&T from the local carriers. With SBC’s acquisition of the former flagship, a deal quickly approved by all levels of relevant parties in the Bush administration, the centerpiece of the breakup was no more. “The existence of separate local and long distance companies,” wrote AT&T to the FCC in 2005, “no longer benefits consumers.”14 That was about the same time that Verizon bought out MCI, and like late Rome, the Bell system now existed as an eastern and a western empire—Verizon and AT&T (whose 24-karat name and logo Whitacre’s company assumed)—but that was the only division; the vertical disintegration was abolished, and with it the second major era of openness and competition in telephony was over. That second era had lasted from 1984 to 2005, not even as long as the first age of competition, from 1894 to 1920.