The Deal of the Century

by Coll, Steve;

  “We’re worried about what will happen if October 1 comes and we don’t have any local distribution facilities,” Harris said to Jackson. “Are you going to go the tariff route? Is that what is really going on here?”

  “We’re looking at that possibility,” Jackson said coyly. He pointed out that when McGowan had taken this dispute public in July by testifying before Senator Hart’s antitrust subcommittee, the MCI chairman had said that he wanted to separate control of the local operating companies from 195 Broadway. Maybe AT&T would give McGowan some of what he asked for: by filing state tariffs, AT&T would force MCI to negotiate separately with each of Bell’s twenty-two different operating companies, before fifty different state utility commissions. Jackson and Harris both knew who would be the winner under such an arrangement: AT&T.

  Jackson wouldn’t admit to AT&T’s plans, though, and the meeting ended. When he stepped out of the office, Jackson’s secretary handed Harris a message asking him to call MCI’s Washington headquarters.

  Harris walked back into Jackson’s office. “Can I use your phone?”

  “Certainly,” Jackson said, and he stepped out.

  Harris walked behind Jackson’s desk and picked up the telephone. Lying on the desk was an internal AT&T memo stamped “Company Confidential.” Harris began to read. The memo was addressed “To All Vice-Presidents and Operations People.” It said that in exactly one week, on September 26, AT&T intended to file state utility commission tariffs. The tariffs, if approved by the state regulators, would dictate the terms of future interconnection agreements with MCI. As he placed his call, Harris tried to memorize as much of the memo as possible. When he finished and left the office, Jackson said to him, “I’ll do my best to call you on Friday to tell you how we’re going to offer you local distribution facilities.”

  Harris shook Jackson’s hand politely. The call wouldn’t be necessary.

  At the end of the Key Largo Presidents’ Conference back in May 1972, John deButts had promised his operating company presidents that he would eventually make a comprehensive policy decision about how AT&T would respond to the threat of creamskimming competition from companies such as MCI. The promise became known among AT&T executives, who were furious about such competition, as “the decision to decide.”

  On Thursday, September 20, 1973, the day after Larry Harris’ meeting with C. W. Jackson at 195 Broadway in New York, John deButts announced in Seattle, Washington, that he had finally made up his mind.

  As was his style, deButts did not make the announcement meekly or modestly. When he stepped to the podium in the opulent ballroom of the old Olympic Hotel in downtown Seattle, on the last day of the annual convention sponsored by the National Association of Regulatory Commissioners, the commanding AT&T chairman appeared every inch a corporate regent. He was dressed in a dark suit, with a white handkerchief protruding from his breast pocket, and he carried in his hands a prepared text. His audience, a packed house of nearly 1,000 state utility regulators, AT&T executives, and reporters, rose to their feet to applaud him. DeButts motioned for silence. And then, in a powerful, steady voice tinted by his North Carolina drawl, John deButts delivered the most important and the most costly speech of his long Bell System career.

  “It is a signal honor to have the opportunity to address this convention,” he began. “I do not know how many of my predecessors as chief executive officer of the Bell System have been afforded this privilege. Perhaps only one—and that was back in 1927.

  “When Mr. Walter Gifford came before this organization almost half a century ago in Dallas, he declared his intention to ‘state very briefly the principles that guide the management of the Bell System.’ What he said then has become a classic statement of our business’ purpose.

  “‘The fact,’ Mr. Gifford said, ‘that such a large part of the entire telephone service of the country rests solely upon this company and its associated companies imposes on the management an unusual obligation to see to it that the service shall at all times be adequate, dependable, and satisfactory.’ And he went on to say that in his view, the only sound policy that would fulfill this unusual obligation is ‘to continue to furnish the best possible telephone service at the lowest cost consistent with financial safety.’

  “How valid, and how viable, is that policy today? There is no question in my mind that down through the years it has served our business well. What is more to the point, it has served the public well.

  “It has served the public well in terms of the quality, dependability, and availability of service. It has served the public well in terms of the efficiency and economy with which that service is provided. And it has served the public well in terms of continuously advancing technological innovation unmatched, to my knowledge, in any other industry. In short, I think it’s fair to say that what Mr. Gifford called the ‘unusual obligation’ has been well met.”

  There was no applause to confirm deButts’ hearty self-congratulation, so the chairman went on.

  “From what, then, does this ‘unusual obligation’ arise? Almost unique among the nations of the world, this country has entrusted the development and operation of its communications resources to private enterprise. It has endowed these enterprises with the rights and responsibilities of common carriers, each solely privileged to purvey its services within its territory but all strictly accountable through regulation to the public they serve. In short, what gives rise to the unusual obligation that motivates our industry and inspires its accomplishments is what we have come to call the ‘common carrier principle.’

  “If there is no question that this principle has served our country well down through the years, there is no question, either, that not since the days of its inception has this principle been more severely challenged than it is today.

  “Whence comes this challenge?” deButts asked rhetorically. The mood in the Olympic ballroom began to shift. The audience of state regulators knew the answer—they were as angry as deButts about the piecemeal competition that had been licensed by the FCC. The state commissioners considered themselves rivals to their federal counterparts at the FCC, and they resented the recent commission policies that, they believed, threatened to disrupt an effective system of telephone regulation which had been in place for more than fifty years.

  “It comes from entrepreneurs who see opportunities for profit,” deButts said disdainfully, “in serving selected segments of the telecommunications market and who, not unnaturally, want a piece of the action. It comes from newly authorized purveyors of communications services who, unburdened by any obligation to the whole body of customers, address their attention to those it costs least to serve and profits most.

  “Admittedly, the challenge comes from some customers as well. Mostly, these are large businesses who see advantage to themselves in the new pricing arrangements competition will engender, but who have no obligation—and therefore no disposition—to reckon the cost of those new arrangements for the public at large.

  “And the challenge comes, too, from some members of the regulatory community itself,” deButts continued, in a thinly veiled reference to the FCC. “Doubtless some of it reflects a wariness of AT&T’s sheer size and the potential for abuse that goes with it. Some of it may reflect the premise—to my mind insufficiently examined—that in all times and places competition is good and monopolies are bad.

  “That this issue ought to be debated I can hardly deny and the Bell system wouldn’t get very far if it did. All these topics, and more, figure in the current hearings of Senator Hart’s subcommittee on antitrust and monopoly.

  “At issue is the degree to which competition should obtain in a field that has been brought to its current state through the application of basic principles—end-to-end responsibility for service, the systems concept, the common carrier principle itself—that the doctrine of competition for competition’s sake puts in jeopardy and could in time destroy.

  “What concerns me is that, although debate over this issue has
been going on with increasing intensity for some years now, the general public remains to this date very largely unaware of it or of its [the public’s] stake in the outcome.

  “The time has come to alert the public that regulatory decisions have already been taken in its name that, whatever advantages they may afford for some people, cannot help but in the long run hurt most people.

  “The time has come for a thinking-through of the future of telecommunications in this country, a thinking-through sufficiently objective as to at least admit the possibility that there may be sectors of our economy—and telecommunications [is] one of them—where the nation is better served by modes of cooperation than by modes of competition, by working together rather than by working at odds.

  “The time has come, then, for a moratorium on further experiments in economics, a moratorium sufficient to permit a systematic evaluation not merely of whether competition might be feasible in this or that sector of telecommunications but of the more basic question of the long-term impact on the public.”

  It had taken him more than a year, but deButts had not compromised on his decision to decide. The AT&T chairman was calling for nothing less than a public anointment of Ma Bell’s right to exercise its monopoly in the national interest. If Bill McGowan was going to couch the economic self-interest of MCI in arguments about the public good, then so, too, would deButts. But where McGowan had only promises to offer, deButts had the historically superior service and dazzling technological accomplishments of the Bell System to support his position. The trouble was, and John deButts did not appreciate it on that rainy September afternoon in Seattle, the AT&T chairman had chosen an inauspicious moment in American history to launch a political campaign promoting the right of the world’s biggest company to own a telephone monopoly.

  As he sat in the rear of the Olympic ballroom watching John deButts exhort the state regulators to rise up in support of AT&T’s “unusual obligation,” Bernie Strassburg felt like a specter at a wedding feast. A bespectacled and modest man with thinning gray hair, Strassburg was not inclined to become emotional about his professional life. But when deButts finished his speech, and the crowd stomped and cheered in celebration of the AT&T chairman’s bold pronouncements and challenges, Strassburg felt a profound anger and sadness welling inside him.

  A clearly elated and exhilarated John deButts strode from the podium to the back of the ballroom, where he spotted Strassburg sitting alone. DeButts approached him and extended his hand. “Bernie, no hard feelings,” the AT&T chairman said.

  Dumbfounded, Strassburg shook deButts’ hand.

  As time passed, the image remained fixed in Strassburg’s mind: John deButts, one of the most powerful businessmen in America, having just delivered a blistering, personal attack on the FCC policies that Strassburg had for years developed and defended, had tried to dismiss the whole thing with a glib handshake. Maybe deButts meant what he said—that it was nothing personal—but on Strassburg the gesture had the opposite effect. To him, it was a clear example of deButts’ overweening arrogance. It was as if the AT&T chairman was saying, “Only you, Bernie Strassburg, chief of the FCC’s Common Carrier Bureau, are responsible for introducing this idea of competition into the telephone industry. Except for a few rip-off artists like McGowan, nobody else thinks it’s a good idea. What this whole debate about competition comes down to, Bernie, is you, a myopic, restless federal bureaucrat, meddling with something you don’t understand, on the one side, and me, the righteous chairman of a sacred American institution, on the other.” Perhaps Strassburg was overreacting, but deButts’ attitude appalled him. Competition was not some wild, radical idea—it was the American way. How could deButts fail to understand that at least some competition was inevitable in a dynamic, technology-driven industry like telecommunications? Did he really believe that the Bell System was like a sacred holy land?

  Of course, Strassburg was feeling defensive because there was some truth to the views he attributed to John deButts. It was true that the FCC’s Common Carrier Bureau, and specifically Bernie Strassburg, was the source of recent policy experiments in telephone industry competition. The bureau, which was the staff-level division of the FCC responsible for regulation of the telephone industry, had recommended that MCI’s private line application be approved, and it had also introduced competition in the phone equipment business by recommending the 1968 Carterfone decision. Technically, the seven presidentially appointed FCC commissioners had voted to approve the bureau’s recommendations, and it was their votes that gave the proposals the force of law. But in reality, the commissioners almost always went along with what the Common Carrier Bureau advised. To the politically appointed commissioners, regulating the telephone industry was dull, complex, and uncontroversial work. Much more exciting, especially during the late 1960s and early 1970s, was regulation of the broadcasting industry and arbitration of its controversial issues—violence on TV, sex on TV, children’s programming, and so on. The FCC commissioners devoted to it the vast majority of their time and resources, fancying themselves as influential social critics of that new, pervasive technology. Conversely, everyone in the telephone industry knew that when it came to telecommunications policy, the commissioners preferred to rely almost entirely on the recommendations of the Common Carrier Bureau. Thus the bureau had become a kind of obscure, miniature regulatory agency, unknown to the public and largely unaccountable to Congress or the president.

  Bernie Strassburg was the unassuming overlord of this domain. He had been the Common Carrier chief since 1963, and he had been a staff lawyer in the bureau for twenty-one years before that. The autonomous power he wielded had not gone to his head; he viewed government service as a serious and noble career, not, as was often the case with Washington lawyers, as a stepping-stone to lucrative private practice. As an American Jew in law school during the late 1930s and early 1940s, Strassburg had not enjoyed a wide array of career opportunities, and the federal government seemed an attractive choice. It was an exciting time for a liberal to join the government—Franklin Roosevelt’s New Deal was in full bloom, and new federal bureaucracies were sprouting everywhere, each of them charged with improving, through regulation, one aspect of the quality of American life.

  Throughout most of Strassburg’s long career, the FCC’s Common Carrier Bureau had an informal, friendly relationship with AT&T. Long distance and telephone equipment prices were regulated through direct, staff-level negotiation, persuasion, and compromise. If AT&T proposed prices that the bureau lawyers thought were too high, they would call in AT&T’s lawyers, sit down, and work things out face-to-face. The New Deal lawyers in the bureau were suspicious of AT&T’s monopoly, but they had to acknowledge that in its slow, steady way, the phone company was one of the world’s most efficient utilities, and they regarded the nation’s phone network as a natural monopoly. As Bell’s technology advanced after World War II, long distance prices fell and service continually improved.

  For reasons far beyond Bernie Strassburg’s control, the Common Carrier Bureau’s quiet methods of regulation, known in the phone industry as “continuing surveillance,” broke down during the 1960s. Rapid technological advances in fields such as satellites and microwaves began to raise questions about how well the Bell System would keep up in an emerging “information age.” More important was the political furor that erupted during the late 1960s, when AT&T’s service crises in New York and elsewhere, together with the popular suspicions of the period about big corporations, led to an outcry in Congress that the FCC was not doing its job, that the commission was merely AT&T’s servant. Such accusations provoked strong reactions in liberal bureau lawyers like Strassburg, who of course believed that the FCC was a strong and independent agency. To prove he was right, Strassburg put an end to the informal negotiations with the phone company, and the bureau launched wide-ranging investigations into AT&T’s conduct. At the same time, companies like MCI were clamoring for a chance to offer what they called “new and innovative” ser
vices in competition with AT&T. And while Strassburg still believed that the phone network was a natural monopoly, he saw in limited competition a powerful opportunity to control AT&T and to vindicate the independence of his bureau.

  Even at that moment in September 1973, when John deButts so angered Bernie Strassburg by shaking his hand and saying “No hard feelings,” Strassburg would have been the first to admit that he had no clear vision of where his bureau’s pro-competition policies were leading. He might even have agreed with deButts, in a less confrontational setting, that it was time to take a long, hard look at the implications of telephone industry competition. But by making that speech about AT&T’s “unusual obligation,” by trying to use sympathetic state regulators in a play to thwart FCC policies, deButts had changed, in Strassburg’s mind, the whole equation of AT&T’s relationship with the Common Carrier Bureau. Strassburg believed that deButts had declared, in effect, that AT&T was above the law.

  And as he left Seattle on September 20, Strassburg decided he was going to do everything in his power to stop deButts from getting away with it.

  What occurred in Washington, D.C., during the last week of September and the first weeks of October 1973, in the aftermath of John deButts’ Seattle speech, would later become the center of a multibillion-dollar legal controversy. Millions of dollars would be spent by the U.S. government, by MCI, and by AT&T in an attempt to determine precisely whether MCI was authorized to sell “FX” and “CSSA” services to its customers. Several careers would be made and broken over the issue, and more than a few lawyers would become very rich resolving it. But at the time it occurred, the controversy was perceived as just another skirmish in the ever-widening war between Bill McGowan and the phone company.

  To be sure, McGowan and his bankers considered the problem to be a serious one. MCI was scheduled to unveil its nationwide microwave network in October, but there was a serious question about whether the company would last long enough to see the system up and running. McGowan was in default on the line of bank credit he had secured to construct the system, and his bankers were pressuring him to expand the catalog of long-distance services that MCI could offer its customers. Revenues from point-to-point private lines had not been enough to cover the cost of MCI’s ambitious network. Layoffs of many of the hundreds of employees who had been hired by MCI in the previous nine months appeared, by the end of September, to be inevitable.