by Coll, Steve;
The negotiations had not gone smoothly.
They had begun in September, four months after AT&T’s secret discussion about MCI in Key Largo. Larry Harris, an MCI staff lawyer who had been hired by McGowan to handle the negotiations for the company, had traveled to New York to meet with AT&T’s representatives. Less than a week after the talks began, AT&T told Harris that the company had changed its mind about how it would charge MCI for interconnections. Originally, MCI had planned to “rent” access to AT&T’s local phone network on a monthly basis, and Harris figured the negotiations would center on determining a per-customer price, which MCI would pay AT&T. But that wasn’t what AT&T had in mind. Mark Garlinghouse, AT&T’s general counsel and one of John deButts’ closest advisers, told Harris that AT&T had recently decided on a “capital contribution” plan under which MCI would be required to help pay for the maintenance and upkeep of the nation’s basic phone system—its miles and miles of expensive wires and cables. In the months after Key Largo, and following MCI’s successful $100 million stock offering, deButts had decided that AT&T wasn’t going to let MCI get away with “creamskimming.”
Harris and McGowan were surprised by Garlinghouse’s new plan, but mainly they wanted to hear about the bottom line. Call it renting, or leasing, or capital contribution—what mattered most to MCI was the actual price it had to pay to interconnect with AT&T’s local network. MCI’s entire business plan depended on that price. But the negotiations stalled. The capital contribution plan would be complex, and time was needed for AT&T to work out the details, Garlinghouse said. By Tuesday, January 9, 1973, when the MCI executives met, McGowan felt that his company was at the brink of crisis.
What strategy should they pursue?
“If we wanted to buy, can we finance it?” asked Jack Goeken, referring to AT&T’s alternative offer to actually sell independent lines in its local networks to MCI. Goeken was MCI’s original founder, and his role in the company had been increasingly usurped by McGowan. During recent years, Goeken’s relationship with McGowan had deteriorated.
“No, it would destroy us,” answered another MCI executive.
“Do we have a study of the comparison between leasing and buying?” one of the vice-presidents asked.
“There’s no comparison,” McGowan said with finality. “Leasing is much cheaper. Bell loves anything that involves long negotiations. We should concentrate on our plan—building seven cities in four months, twenty-four cities in twelve months. Here are our only alternatives: we can deal with the local operating companies, and sue; we can deal with AT&T, and sue; we can complain to the FCC; or we can negotiate.”
An antitrust lawsuit against AT&T had been much on McGowan’s mind lately. He had consulted with a number of attorneys about the current negotiations with AT&T. McGowan knew a great deal about antitrust law himself. He knew, particularly, about something called the “essential facilities” doctrine in antitrust law. If one company—say, AT&T—owned exclusive facilities that were essential to the business of another company—say, MCI—then the first company was required to give access to the second company. McGowan carried that doctrine around with him like a concealed weapon, ready to pull it on AT&T whenever his back was against the wall.
“The threat of a suit against Bell has no impact,” said Goeken, antagonizing McGowan.
“I like the threat of a suit against the local companies,” McGowan responded. “It would break the company apart.”
“Litigation takes too long,” Goeken grumbled.
The discussion moved on, and a strategy began to take shape in McGowan’s mind. Finally, he laid it out to his vice presidents.
“The first thing we should pursue is high-pressure negotiations with 195 Broadway,” McGowan said, referring to the site of AT&T’s corporate headquarters in lower Manhattan. “While this goes on, we should prepare an antitrust suit against AT&T, prepare an antitrust suit against the local operating companies, and send briefings to the FCC. And I would add another thing. We should maintain and increase the department of Justice’s knowledge about this.”
McGowan was aware that the Justice department’s Antitrust division, which enforced the country’s antitrust laws, could do more to move along his negotiations with AT&T than anyone else. Even an appearance of interest by Justice lawyers in the negotiations would worry AT&T, making it easier for MCI to get the kind of deal it was after.
MCI’s chairman also had an idea about how best to pursue “high-pressure” negotiations with AT&T corporate headquarters. Perhaps McGowan should put the heat on AT&T himself, eyeball to eyeball with John deButts.
By the time Bill McGowan pushed through a revolving glass door into the lobby of 195 Broadway at about 9:30 A.M. on Friday, March 2, 1973, the MCI chairman had worked himself into a lather. He was ready to play hardball with his AT&T counterpart, and he was not going to be overmatched—as the son of a union organizer, McGowan had learned early in life about the use of threats and intimidation in business negotiations. John deButts, AT&T’s patrician southern gentleman, was about to be introduced to a style of negotiation prevalent thirty years earlier in the smoky railroad union halls of Wilkes-Barre.
McGowan was now on AT&T’s turf, however, and the headquarters building at 195 Broadway conjured up a culture far removed from the Dickensian milieu of an Appalachian coal town. The building was patterned after the Parthenon in Athens, and it was referred to as “a temple to the god of the telephone.” There were 198 mammoth, fluted columns surrounding its white granite exterior, and there were forty more Italian marble columns in the lobby. On the roof was a large gold statue of a naked boy wrapped in wire, called “Genius of Electricity.” The lobby interior was modeled after an Egyptian temple, containing a five-foot relief sculpture of Alexander Graham Bell and a marble floor inlaid with two bronze medallions, each eight feet in diameter. The medallions showed Mercury bearing the messages of the gods and were inscribed with the motto, “Universal Service.”
McGowan crossed the lobby to a bank of elevators and rode to the twenty-sixth floor, where the offices of AT&T’s top executives were situated. His relationship with AT&T had taken another turn for the worse since the January 9 MCI strategy session in Washington. At a February 26 press conference, deButts had announced that AT&T would finally break its decades-long policy of nationwide average pricing in order to compete with new companies like MCI. DeButts said that in November, AT&T would implement a new pricing system for its long distance services called “Hi/Lo.” Prices for AT&T private-line services on the same routes serviced by MCI would be substantially reduced, which was precisely what the operating company presidents had urged deButts to do the previous May in Key Largo. With one fell swoop, MCI’s $100-per-month price advantage over AT&T had been eliminated. The timing of the announcement, coming in the midst of crucial negotiations over MCI’s interconnections with the local phone network, had made McGowan furious. When the elevator doors opened and McGowan stepped out, he was seething mad.
John deButts occupied a plush, gold-carpeted suite in the southwest corner of the building. There was an exterior office nearer to the elevators, and behind it was a sprawling sitting room filled with antique English couches and coffee tables. There were floor-to-ceiling windows on two sides of the room, protected by swirling wrought-iron railings.
DeButts greeted McGowan and introduced him to George Cook, an AT&T attorney who would be sitting in on the discussion. The trio moved into the sitting room and took places on the couches. Coffee was poured from a silver service.
“I presume you are familiar with the recent Supreme Court decision in the Otter Tail case,” McGowan began ominously, referring to a government antitrust case that involved a utility accused of anticompetitive practices. “My lawyers are busy reviewing it.”
“I look to my counsel on those things,” deButts replied.
From that contentious opening, the meeting quickly degenerated into confrontation and accusation. DeButts was unprepared for McGowan’s dir
ect attacks, but the military school graduate was not about to back off from a game of brinkmanship once it began.
“My studies of this Hi/Lo filing show that a very large percentage of your customers are going to have their rates reduced by 30 percent,” McGowan said. “That’s going to cost me revenues. The timing is bad.”
“I’m not going to get into a discussion of price levels, but the overall rate adjustments under Hi/Lo are a wash,” deButts said.
“Not on the routes MCI plans to serve,” snapped McGowan.
“You can’t have it both ways,” said the AT&T chairman. “If there’s going to be competition, some of our rates are obviously going to go up, and some are going to come down. You can’t have competition and expect the existing rate structures to continue.”
“But if you’re trying to beat competition with Hi/Lo, the rate filing is premature. We haven’t even started,” McGowan said.
“We can’t wait until competition has taken our business away,” deButts replied forcefully. “We lost 115,000 terminal equipment stations last year to the interconnection industry. Competition is real.”
“We want cost justifications for those rates, and you won’t let us see your costs.”
“There will be cost references in our filing with the FCC.”
“Well,” McGowan said, “we’re going to demand copius data and you had better be prepared to supply it. We’re going to fight Hi/Lo at the FCC, and we have better relations with the FCC than you do. We also have a number of friends in Congress.”
“What do you want us to do?” deButts asked. “Sit on our hands?”
As the debate moved on, deButts conceded that he would have liked to have filed Hi/Lo earlier, but that his staff had been unable to prepare the supporting documentation quickly enough. DeButts cited other examples of how the “one-family historical approach” of AT&T’s management, which had been in place for nearly a century, made it difficult for AT&T to respond quickly to competitors and their complaints.
“That’s completely understandable,” McGowan said at one point, “as well as completely illegal. There is this historical practice in the Bell system where everyone in the operating companies, and in Long Lines, and corporate headquarters, thinks of themselves and act as one unit.” McGowan tried to cite as many examples as he could muster of how that attitude was hurting MCI. He mentioned that MCI intended to offer an expanded private-line service known in the industry as “FX,” which involved greater access to AT&T’s switched phone network than the services MCI was now offering to customers.
DeButts pounced on McGowan when he mentioned FX service. “That’s a good example. In no way do we think it’s fair for MCI to compete in the switched telephone business. That is just wrong.”
“What hat are you wearing when you say that?” McGowan asked acidly. “The hat of a local phone company, or the hat of Long Lines?”
“I am speaking for the Bell System,” deButts said.
McGowan actually began to shout at deButts. “That’s a perfect example of what I was talking about with your antitrust problem! Here you are obviously using common control between Long Lines and the operating companies to prohibit competition, when the facts clearly indicate that the local operating company is simply being asked to install a business phone! And we’re trying to install our private line to that phone in direct competition with Long Lines!… My antitrust lawyers have told me that your operating companies have to treat me just like Long Lines. There can be no distinction.”
DeButts looked calmly at McGowan, nonplussed. “That sounds like a major shift from what the FCC decided. You started as an experimental company, became regional, then specialized, and before you are even in service on your new routes you seem to be attempting to push out the limits of the FCC decision.”
“I have plenty of money,” McGowan told deButts moments later. “I can spend it on litigation, or I can spend it on construction. I would prefer to spend it on construction.”
“I’ve heard threats like that before,” deButts said angrily. “I won’t be coerced. If you have any specific grievances I’ll be happy to have them looked into. As far as the local loops are concerned, it’s our policy to treat them with the same dispatch we do for all our customers. We will do what we have to, but you will find that we won’t be coerced by threats of lawsuits.”
There was nothing left to discuss. After an awkward attempt by all three men to find a subject unrelated to business that might end the meeting on a cordial note, McGowan took his leave. When the elevator doors closed, deButts turned to George Cook and told him to brief four other top AT&T executives immediately about the meeting. “Nothing about MCI can be treated as business as usual,” deButts said prophetically.
Shortly after he left 195 Broadway, an agitated Bill McGowan privately dictated a long memo about his impressions of the meeting with deButts. Afraid that the memo might fall into the wrong hands, he used a transparent code to identify himself (“W”), deButts (“B”), and Cook (“G”), and he referred to himself in the third person. The meeting had marked a turning point in McGowan’s ambitious strategy for MCI. In deButts, McGowan had seen a man as determined and intransigent as himself. There was little doubt in the MCI chairman’s mind, however, that he could eventually bring the largest corporation in the world to its knees.
“On the one hand,” McGowan dictated, “they piously state a willingness to be fair and are willing to believe it themselves, while at the same time they interpret their mandate to compete hard by actions which they know result in a denial of their position on fairness. It is a little analogous to the pleadings of the defendants during war crimes trials. B is absolutely comfortable in living behind sloganism philosophy.… W stated that the specific actions by B in the last number of months have convinced him that W’s staff is possibly right—that is, the only way to respond to the willingness of B to compete in the marketplace, and to B’s insistence on competing through unfair means, would be for W to compete with all the tools available to him.
“It would be incorrect to be encouraged by the potential impact of antitrust action, although it might receive a very favorable reaction at 195 Broadway simply by having them spend more time being advised by counsel. B asked at one time—he seemed to be clearly defenseless if not obviously absolutely guilty—as to what should he do. W replied that the first thing he should do is to get competent antitrust counsel and lecture, in great detail, every person in all the operating companies and elsewhere who deals with us as to the realities of life. They should be extremely sensitive and overly pure in their response to us. He seemed, by his reaction and the note-taking of G, to accept this. If nothing else, we probably insured the unacknowledged gratitude of fifty lawyers.”
McGowan’s last remark was the most severe underestimation he had ever made.
Chapter 3
The New Trustbusters
McGowan’s attempt to intimidate John deButts had done little to shake loose MCI’s mired interconnection negotiations with AT&T, but the confrontational New York meeting had at least accomplished one thing: it had crystallized in McGowan’s mind the strategy he would pursue for MCI over the next ten years.
The idea, which McGowan had been mulling over since the day he sunk his money into the company, was remarkably bold. If MCI were to realize McGowan’s vast ambitions, if it were to become a national telecommunications network with billions of dollars in annual revenues, the company would have to do nothing less than tear down the existing order in America’s telephone industry and reconstruct a new system based on competition, diversity, and decentralized ownership. If MCI simply tried to nibble around AT&T’s edges, stealing a few customers in Chicago, a few in St. Louis, and so on, McGowan would never survive. Any telecommunications network—even a system of microwave towers connecting densely populated cities and supported by AT&T’s local exchanges—would be too expensive to build and maintain if it relied, in the long run, on a narrow and specialized market such as point-to-p
oint private lines. To slay a dragon as large and powerful as AT&T, McGowan would have to stop whacking the beast on its armored scales. Instead, he would have to risk everything in a daring lunge at its underbelly.
First of all, that meant he had to lure the giant monopoly onto a new field of battle: politics. And second, it meant that he must ruthlessly attack the delicate coalition in Washington that allowed AT&T to control the telephone industry. That coalition argued that one centrally managed, closely regulated phone network provided the best way to serve the nation’s communications needs. McGowan would have to change their minds.
In Washington, of course, the MCI chairman was perfectly situated to launch his political attack, and that was precisely why he had located his company’s headquarters in the nation’s capital. There were three governmental institutions that had to be persuaded to join McGowan’s private industrial revolution against AT&T: Congress, the Federal Communications Commission, and the courts. No two of them would suffice—to rip apart AT&T’s decades-old monopoly, McGowan would need the support, or at least the acquiescence, of all three. Congress was responsible for the broad policy decisions that shaped the industry, and it also legislated, through the 1934 Communications Act, the specific laws that governed its structure and operations. The FCC regulated the day-to-day business of the telephone network. All of the long-distance rates AT&T proposed to charge customers, which were known in the industry as “tariffs,” had to be filed in advance and approved by the FCC. So, too, did any new communications services that AT&T or MCI might want to offer the public. And finally, the courts would have to serve as McGowan’s enforcer, arbitrating the many disputes engendered by his various assaults on the world’s largest corporation.
To undertake this strategy, McGowan needed lawyers—an army of them. He needed lawyers to lobby Congress, lawyers to work with the FCC, lawyers to prepare his antitrust cases, and lawyers to advise him about how all his other lawyers were doing. And not just any lawyers would do: he needed specialists, insider Washington lawyers who knew FCC and congressional staffers by their first names; who dined at Washington power restaurants such as The Palm or Duke Ziebert’s and waved to all the lawyers at the other tables; and who might, if the need arose, be able to resolve a crucial problem on the seventeenth fairway at exclusive Burning Tree Country Club, rather than in a courtroom. Early on, McGowan had worked assiduously to assemble such an army. When attorney Kenneth Cox, an FCC commissioner who had voted to approve MCI’s application in 1969, left the commission for political reasons in 1971, McGowan hired him as a senior vice-president at MCI and assigned him to cultivate good relations with the FCC. He also spread his legal business around among Washington’s top communications law firms, thereby creating conflicts of interest for the firms should AT&T ever try to retain them in a fight against MCI. McGowan held regular, early morning meetings with his lawyers at MCI’s 17th and M Streets headquarters, where he briefed them on his plans and strategies and listened to their advice. Some of the attorneys jokingly referred to the meetings as “MCI prayer breakfasts,” because of the young company’s often precarious financial condition in the early 1970s. But as long as they were on retainer, the lawyers adopted the posture of true believers.