The Deal of the Century

by Coll, Steve;

  In McGowan, they were led by a capitalist proselyte possessed by relentless drive and energy. Just weeks after his meeting with John deButts in New York, McGowan set aside most of the routine company business that was piled on his desk. At home and in his ninth-floor office, he began to work on a document that would define his political platform of telephone industry competition—a platform that could make or break MCI in the months ahead.

  Shortly before noon on July 30, 1973, Bill McGowan trained his squinty eyes on the hefty, typewritten statement lying on the table before him and said to Senator Philip A. Hart, Democrat from Michigan and chairman of the Senate Subcommittee on Antitrust and Monopoly: “As a businessman and competitor, I note three things about how AT&T actions relate to the Industrial Reorganization Act. First, if Bell is violating the antitrust laws, and we have received definite legal opinions that they are, then there should be some way of stopping them.

  “Second, I know that if MCI must—and perhaps we must—avail ourselves of recourse to the courts, we will be playing into AT&T’s strength, that of long-drawn-out legal proceedings.

  “Third and finally, I know that if I have shown the subcommittee that Bell has, in fact, attempted to stifle competition in the telecommunications industry, then this subcommittee will take the necessary actions to ensure free and fair competition.”

  McGowan’s three-pronged political attack on AT&T—in Congress, at the FCC, and through the courts—had begun.

  In Senator Hart’s antitrust subcommittee, McGowan had probably chosen the best place to start. Hart was an aging, charismatic, New Deal Democrat who took a deep interest in antitrust law enforcement. Hart strongly believed that the country’s principal antitrust statutes—the 1890 Sherman Act and the 1914 Clayton Act—had become inadequate in an age of multinational corporations and rapid technological change. With New Jersey Democratic congressman Peter Rodino, Hart had pushed through the first major new antitrust law in several decades, know as Hart-Scott-Rodino, which broadened the investigative powers of the Justice department’s Antitrust division and made it more difficult for large companies to merge. And the senator had not stopped there. During the early 1970s, Hart hired an exceptionally large number of lawyers and economists to staff his prized antitrust subcommittee, and he instructed them to draft sweeping legislation that would restructure by fiat some of America’s largest industries—transportation, computers, oil, and communications. The resultant bill, called the Industrial Reorganization Act, was one of the most radical economic proposals considered by Congress during the 1970s.

  When he introduced the Industrial Reorganization Act on the Senate floor in early 1973, Hart made it clear that he viewed himself as a spiritual and political heir to the swashbuckling trustbusters like Senators John Sherman and Henry Clayton and President Theodore Roosevelt, who had reshaped the American economy at the turn of the century. Hart even quoted Sherman, who had said on the Capitol floor in 1890, “If we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of any of the necessities of life. If we would not submit to an emperor, we should not submit to an autocrat of trade, with power to prevent competition and to fix the price of any commodity.”

  Such flourishing rhetoric conjured up for Hart a glorious era in the history of the U.S. Senate, a time when great populist battles were enjoined against “the greed and conscienceless rapacity of commercial sharks,” as trustbuster Senator James K. Jones had put it on the Senate chamber floor in 1889. But the nostalgia also had a utility in the present: back in his home state of Michigan, Hart found that voters were easily excited in the early 1970s by talk of a “consumer revolution,” and that voters of all kinds were suspicious of the mammoth corporations that dominated the nation’s economic landscape. The country’s liberal middle class could not stomach the methods of students and counterculture radicals who bombed banks and rallied against the “corporate state” during the late 1960s and early 1970s. But when Ralph Nader announced that American cars were unsafe because Detroit’s “Big Three” automakers cared about profits first and people second, voters proved decisively that they shared Nader’s cynicism about big business. The public’s disaffection with large companies reflected the tenor of the times: it was half utopian, half populist, as suggested in the title of the best-selling economic treatise Small Is Beautiful. Senator Hart’s interest in antitrust preceded this sudden consumer awakening, but the movement did offer convenient rhetoric for a subtle repositioning of the senator’s old-style liberal views on antitrust. And in politics, nothing is so infectious as popular rhetoric. Soon, some of Hart’s Democratic colleagues on the antitrust subcommittee, such as Edward M. Kennedy of Massachussetts and John Tunney of California, were adding their voices to Hart’s call for tougher antitrust enforcement.

  From his corner office perch in northwest Washington, Bill McGowan had watched all of this unfold. He cared little for partisan politics, except where it might affect his company. And in the passions of the new trustbusters, he saw an opportunity for MCI. Day after day in the spring of 1973, after the Industrial Reorganization Act was introduced, McGowan prowled the corridors of the Senate office buildings on Capitol Hill. For hours at a time, he educated Hart’s staffers about the telecommunications industry.

  “AT&T is an outrageous monopoly,” McGowan told the young, liberal lawyers and economists, many of whom had been educated on the radicalized college campuses of the 1960s. “They’re holding back technology. Maybe this system made sense thirty years ago, but today they’re hurting my company and a lot of others. And they’re doing it in complicity with the FCC. It’s crazy!”

  McGowan wanted the subcommittee to hold hearings on the Industrial Reorganization Act so that MCI would have a public forum at which to launch its political attack against AT&T. But some of the subcommittee staffers wondered if it was the right time to hold such hearings. Senator Hart’s bill was highly controversial; it was the kind of symbolic legislative proposal introduced by congressmen when they want to influence, or reflect, the public mood. Hart’s staff knew that the Industrial Reorganization Act was unlikely to become law—it was too bold, too far-reaching. But if the proposal received the right kind of publicity, it could have an important influence, as a sort of threat, on the behavior of federal law enforcement and regulatory agencies and large corporations. Thus it was important that the Act not be perceived as wild or quixotic. It might be better to work on the bill behind the scenes for a while, compromising with other senators and lining up support. McGowan, however, would not give up. He kept coming back to the subcommittee’s office until hearings on antitrust problems in the communications industry were at last scheduled. He helped the staff line up other witnesses who were having trouble with AT&T. And he contributed questions that the senators could ask AT&T executives when they were called to testify.

  “The notion is,” Senator Hart said in a challenging tone when McGowan had finished reading his lengthy statement to the subcommittee that July 30, “that we have lost leadership in the telephone business. AT&T has indicated to me that they dispute your statement, and they say, as I have always assumed, that this country ranks first [in the world] with respect to communications.

  “Now, are you telling us that it is in the narrower field that you are directly involved in, the specialized communications, that we run second or worse, or are you speaking of it in the sense of ‘communications’?”

  “I speak of it in the broader sense,” McGowan replied, homing in on an argument that neatly transformed the self-interested needs of MCI into an appeal for national honor. “AT&T operates under a philosophy that not only should they supply all communications services but that communications services should be provided by a universal plan. They are extremely reluctant ever to have anything designed to deviate from that plan.

  “Now, part of this you can understand in that they do not wish their plan to become obsolete, because they have some $60 billion invested
in it.

  “Now, that universal plan supplies satisfactory telephone service. That’s a basic monopoly and, obviously, we get what we pay for. The average family in the United States, as you know, has invested $800 each in that system, so they should get pretty good service.

  “So as far as telephone service—yes, they can supply that. But once you start leaving that one area of monopoly service, then you start getting to the point where we are in trouble and we are going to get more and more in trouble. The data processing industries, for example, have been before the FCC and have stated that unless they get better, more adaptable communications, their industries will be hurt bad.”

  MCI’s private-line services, of course, were technically the same as AT&T’s and did nothing to improve the quality of communications for high-tech data processors, but McGowan nonetheless went on: “And I can see the United States falling further and further behind. We are not making the progress necessary.”

  One of Senator Hart’s staff members, Gerald Hellerman, intervened. “Are you recommending the separation of the local operating companies, setting them free, as it were?”

  The question floated to McGowan like a slow-pitched soft-ball, and he drove it hard. “I am recommending that somehow the Bell System be structured so that they cannot use the dual control they exercise over Long Lines and the operating companies when it comes to competitive business. We believe the local telephone company wants to serve us. We can be a very big customer of that local phone company. We are more than willing to pay a good rate of return for interconnections. But … it would seem to me,” McGowan finished “that if AT&T was no longer in a position to use the local phone companies to protect Long Lines, then they would no longer have the incentive to try to stop the local telephone companies from serving us.”

  “Does it take years for Bell’s management to change its policies or decisions?” Hellerman asked, already aware of the answer, prompting McGowan to supply it.

  “Obviously it does. Everybody in the industry tells me that it does. Bell has even admitted that it does.… We just don’t have years, and the customer doesn’t have years, and I don’t see why it should take years.”

  “Do you find this is apt to change now? I am thinking of some of the statements made by John deButts, the chairman of AT&T, on competition, about how they are going to compete and direct more energy toward specialized common carriers.”

  “Yes,” McGowan replied, “they are directing a significant amount of energy toward the specialized carriers. I would prefer that they direct a little less energy in that direction.”

  It was an amusing quip, but it was also a kind of smoke screen. It was true that MCI needed to negotiate fair interconnection agreements with AT&T in order to put its microwave system into profitable service. But it was also true in July 1973, when McGowan testified to the senators, that MCI’s problems involved more than just stalled negotiations with the phone company. MCI’s ambitious construction plans were becoming expensive—too expensive. McGowan had even decided recently to cut back on some of the building, and he was faced with the prospect of employee layoffs in order to save some of MCI’s dwindling cash. A difficult time was ahead for his company. The more McGowan blamed his problems on AT&T before the Hart subcommittee and at other political forums, the easier it would be for himself, his employees, his investors, and his customers to survive the approaching hard times. If he kept punching furiously, perhaps no one would notice how badly McGowan himself was bleeding.

  Of course, if the MCI chairman had known what move AT&T was going to make next, he might have relaxed a little.

  After months of stoic resistance to McGowan’s coaxing, John deButts was about to step boldly into politics. It was a decision that would play right into the MCI chairman’s hands.

  Chapter 4

  The Decision to Decide

  At 2:30 P.M. on Wednesday, September 19, 1973, Larry Harris arrived at 195 Broadway for a meeting with C. W. Jackson, AT&T’s business relations director. The negotiations, which would finalize MCI’s arrangement to interconnect its private line system with AT&T’s local exchanges, had dragged on for a year now. Harris was hoping for a breakthrough.

  He had no idea that John deButts was about to declare war formally on MCI.

  A few weeks after Bill McGowan’s combative face-off with deButts the previous March, MCI had signed, under protest, an “interim” interconnection contract with AT&T. The contract set the access prices that MCI would pay to the Bell operating companies, and it also set certain restrictions on the services MCI could offer its customers. The interim agreement was necessary because after McGowan’s meeting with deButts, it had been clear that no quick solution to the problem of MCI’s interconnection demands was about to be reached. MCI needed some agreement—it was about to launch its private line network, and without a contract the network could not reach the phones of MCI’s customers. So a temporary arrangement had been drawn up and signed by both parties. While it was in effect, Harris and Jackson were supposed to negotiate a long-term interconnection deal.

  The negotiations had been unsuccessful. And on October 1, which was less than two weeks away, the interim contract was going to expire.

  “We’re probably not going to extend the contract,” Jackson told Harris as the meeting got under way. “But don’t worry. We’ll continue to provide you local facilities even if the contract lapses and the new arrangements haven’t gone into effect.”

  “What new arrangements?” Harris asked. The MCI lawyer had been trying for months to negotiate such arrangements. Had AT&T somehow decided to take matters into its own hands?

  “I’m not in a position to tell you what it is now,” Jackson replied. “But I’ll try to let you know by Friday, and certainly by Monday or Tuesday.”

  Harris pressed Jackson—he had an idea about what AT&T might be considering. It was legally possible for AT&T to dictate unilaterally the terms of an interconnection agreement with MCI. Rather than sitting down at the bargaining table to hammer out a contract, as the two sides had been trying to do over the last year, AT&T could simply draw up the terms it wanted, in the form of a tariff, and submit them to state or federal regulators for approval. This was actually how AT&T handled most of its business and legal arrangements. Long-distance prices, telephone equipment prices, and proposed new telecommunications services were all submitted in advance by AT&T to the FCC, which had regulatory jurisdiction over interstate communications. Local prices and services pertaining to activity within a single state, such as the basic monthly phone charges paid by residential and business telephone users, were filed as tariffs with state utility commissions. Each state had its own system for approving local telephone tariffs, but most of them used a politically appointed commission, which regulated the phone company as well as other utilities such as electric companies, gas companies, and railroads.

  Because the negotiations were going badly, Harris suspected that AT&T might try to submit its dispute with MCI to the state regulators. And he knew that if that happened, MCI would be in serious trouble. Over the years, AT&T, through its local operating companies, had cultivated very friendly relations with its state regulators. State utility commissioners did not have large staffs to investigate the local prices and services proposed by AT&T. Nor were the commissioners themselves very sophisticated when it came to new telecommunications technologies like microwave private line systems. The state regulators cared about two things: keeping the cost of local phone service low and ensuring the Bell operating companies fair profit margins. The first objective was a political necessity; if local telephone users became outraged about high prices for basic service, the state commissioners would immediately feel the heat. Consumer groups would threaten electoral reprisals against the governor who had appointed the state commissioners, and the regulators themselves would face mobs of angry consumers protesting that their “lifelines,” their telephones, were becoming unaffordable. The state commissioners knew that revenues from
AT&T’s long-distance services, which were used mainly by businesses, subsidized the costs of maintaining the nation’s local telephone networks. So when the FCC had authorized long-distance competition by approving MCI’s microwave application in 1969, the state commissioners had rallied to AT&T’s side, arguing that competition in the phone business was not in the public’s interest. If AT&T’s long-distance revenues were eroded, or if AT&T was forced to drop its long-distance prices to compete with companies like MCI, the cost of local phone service would rise dramatically. The state commissioners would have no alternative but to raise local phone rates too, and they would then find themselves in the midst of serious political controversy.