The Deal of the Century

by Coll, Steve;

  Wirth then asked in desperation, “Will everyone associated with AT&T just stand up?”

  Everyone in the room stood, laughing nervously.

  Other incidents were less whimsically amusing to the congressmen. An aide to one important senator was approached by an AT&T lobbyist early in 1976 to arrange a meeting between his boss and John deButts. The senator told his aide, “I don’t want to see him,” and the message was passed on to AT&T.

  A few weeks later, the aide received a call from a friend, a fellow Irish Catholic with more than several children. “My job is on the line over setting up this meeting,” the friend said. “My kids’ livelihood is on the line.” Grudgingly, the senator agreed to see deButts, but when the meeting was done, the senator worked harder than before to defeat the Bell Bill.

  DeButts’ lobbying blitzkrieg was ill-chosen for reasons beyond its high visibility and its undertone of political blackmail. Most importantly, the campaign inevitably persuaded only those congressmen who could do deButts the least good. Committed chairmanships were awarded on the basis of seniority, so the most powerful members were those with decades of service and electorally safe seats. Such congressmen were unlikely to be intimidated by AT&T’s implied threat of reprisals at the ballot box; they could win reelection with or without the phone company. A weak congressman, with one or two terms of service and a tenuous grip on his district, might well agree to help the phone company in exchange for the votes of its employees, but he was unlikely to wield any real influence in committee or with his party leaders. So while deButts was able to rack up impressive numbers of cosponsors, it was clear by early summer that they were not the kinds of sponsors who could round up votes to move legislation quickly, if at all. The chairmen of both the House and Senate Communications Subcommittees were quietly opposed to the bill and hoped to smother it by inaction. And when the Bell Bill was formally introduced in the House, AT&T was unable to find anyone on the Communications Subcommittee to sponsor the legislation. The bill was finally submitted by Teno Roncalio, a Wyoming Democrat whose main interests were sheep, cattle, energy, and mining. Years later, Roncalio said that he still didn’t know why AT&T had resorted to choosing “a little, lone congressman from Wyoming to carry their wash.”

  On the morning of September 28, 1976, a few days before Congress’ month-long election recess, the House Communications Subcommittee finally opened hearings on the Bell Bill. No one present in the Rayburn Building hearing room that day, including John deButts, expected that the bill would pass before the close of the Ninety-fourth Congress, only three months away. The hearings had only been called by the subcommittee’s chairman, Lionel Van Deerlin, a California Democrat, because the scores of politically vulnerable Bell Bill cosponsors in the House wanted to assure their shepherds that something was being done before the November election. Without conceding anything substantial to the phone company, the hearings were a way to make deButts and his army of lobbyists feel that they had accomplished something.

  Once the questioning began, though, it became clear that in the congressmen’s minds the real issue had always been not the merits of telephone industry competition but John deButts’ bludgeoning political tactics.

  “Do you have an estimate,” Congressman Wirth began, “of what your lobbying activities for 1976 on this bill have cost?”

  “From the introduction of the bill up until, I think, the end of June, the total cost to the Bell system was something on the order of $600,000,” deButts said.

  “Our estimate was that the one day in front of our committee came close to a hundred thousand dollars.”

  “We have a lot of people in Washington, Congressman, who are not lobbying,” deButts snapped.

  “Like the day the president of Mountain Bell [from Wirth’s home state] came by to visit me with a copy of the bill.”

  “That would be included,” said deButts.

  “There were a lot of people from all over the country visiting other members of Congress with a copy of the bill.”

  “That would be included.”

  “What was your original timetable for this legislation?”

  “We had no timetable, sir.”

  “Have you been pleased with the efforts to date?”

  “Yes, sir.”

  “Have you gotten the kind of support and sponsorship you would like?”

  “I don’t think we have enough,” deButts said, “and I hope we will get more. The key thing here, Congressman, as I see it, is that we get this thing out on the table so that everybody knows what is going on. The problem is, these things are being done to the American public without the American public knowing anything about it. So we want you to know the facts.”

  “I agree with you,” Wirth said sardonically. “A lot of things are done that the American public doesn’t know about. Frankly, can you tell me how many people AT&T has working full time on this legislation?”

  “I have no idea, sir, but it is very few—very few. Full time? I doubt if there is a single person in the Bell System that is working full time on this legislation.”

  With those words, John deButts’ credibility in Congress reached its nadir. No one in the room believed that he was telling the truth—about his lobbyists, about his tactics, about anything.

  The hearing room erupted in laughter.

  The Bell Bill was dead, but deButts’ political fiasco would have lingering repercussions for AT&T. It was as if, with McGowan reeling because of Execunet, deButts had tried to deliver a corkscrew knockout punch. But by swinging too hard, the AT&T chairman had missed everything and had hurled himself out of the ring. By the time he recovered, McGowan was off the ropes again, dancing and jabbing and looking for another edge against John deButts and the Bell System.

  Chapter 10

  The Red and Blue Teams

  The most important consequence of John deButts’ Bell Bill debacle was that it confirmed, publicly and irrevocably, the suspicions and prejudices of AT&T’s opponents in Congress. As a body, Congress was incapable of tackling an issue as technically complex and historically convoluted as telephone industry competition solely on the merits. Prior to 1976, even the expert staff lawyers on the two communications subcommittees paid scant attention to telephone issues. Like the FCC commissioners, they were far more interested in television issues such as violence and sex on TV, children’s programming, and the concentrated power of the nation’s three major networks. Lacking expertise, the congressmen and their committee lawyers relied on political instinct when judging telephone legislation. In 1976, in the post-Watergate era of Small Is Beautiful, that instinct urged skepticism and even cynicism when considering the motives and legislative proposals of AT&T, the ubiquitous phone monopoly.

  DeButts’ strong-arm lobbying tactics had transformed instinct into conviction. Congressman Tim Wirth, for example, who would ascend within four years to the chairmanship of the House Communications Subcommittee, never forgot that day in the House hearing room when 150 well-dressed Bell executives stood up in unison like so many programmed, corporate androids. Nor would his colleagues on the committee soon forget the Bell shepherds who always seemed to be sitting in their House office building reception areas, clutching copies of a bill that would legally permit AT&T to crush dozens of its competitors.

  The fact was that behind the hyperbole of deButts’ rhetoric there lay compelling arguments for Congress to restrain, or at least investigate, telephone industry competition, which had mushroomed during the preceding decade without any serious consideration of its consequences. Before Execunet, it was McGowan who had been the industry’s proselytizer on Capitol Hill; in 1976, AT&T had the opportunity to right the balance. Not only had that opportunity been wasted, but new political life had been breathed into the procompetition forces. From the phone company’s vantage, this was especially unfortunate because Congress, with its acute sensitivity to the public mood and the public interest, was easily the best arena for AT&T to make its arguments about competition. Th
e two other arenas where McGowan had carried his fight, the FCC and the courts, were much less hospitable. A bureaucracy like the FCC would be unlikely to reverse competition policies it had itself originated, and besides, those policies had been initiated because commission staffers believed that AT&T’s monopoly was out of control. And the courts, unlike Congress, were generally interested more in the rule of law than in the “public interest.”

  Within AT&T’s corporate ranks, there was an even more sophisticated understanding of how the deButts strategy had wasted a crucially important opportunity. A new generation was rising in the company’s management, younger executives who believed that if the phone company continued much longer to cling unyieldingly to its telephone monopoly, it might fall hopelessly behind its burgeoning competitors.

  In the aftermath of the Bell Bill fiasco, staff lawyers on the House Communications Subcommittee began referring to the executives on either side of this emerging generation gap within AT&T as the “red” and “blue” team. The red ream was the deButts generation, and older hard-liners who believed deeply in the service traditions of the Bell System and who were determined to fight as hard as possible against any and all competition. The blue team was the generation led by Charles L. Brown, “Charlie” Brown as he liked to be called, the former president of Illinois Bell who had suggested at the 1972 Key Largo conference that AT&T respond to MCI by “hitting the nails on the head.” Since then, and for unrelated reasons, Brown had risen steadily within the AT&T organization, serving apprenticeships in the financial department at 195 Broadway and finally, in April 1977, being named president of the company under deButts, the chairman. DeButts was not scheduled to retire until 1981, but already it was clear that Brown was a leading candidate to succeed him as chairman of the board.

  To understand the important differences between the red and blue teams, it is first necessary to appreciate the myriad issues upon which they agreed, and the corporate culture they shared. Brown had been a company man literally since his birth. His parents were both mid-level Bell System employees, and Charlie had taken his first job with the phone company at age eighteen, digging ditches in the summertime. Apart from the U.S. Navy during World War II, he had never worked for anyone else. Like deButts, he believed unquestioningly in the mission of the Bell System to provide high quality, universal telephone service at the lowest possible price. He was especially appalled by the advent of long-distance competition because he believed it seriously jeopardized Bell’s public service mandate.

  Unlike deButts, however, Brown was an unassuming, nearly colorless man. Of trim build and only five feet, eight inches tall, with thinning gray hair and clear, gray-blue eyes, he was almost invisible next to chairman deButts, the proud captain of industry in his debonair suits. Brown had married late, at age thirty-seven, and there were those in the company who said that his wife, Ann, was his only close friend. Where deButts was gregarious and emotional, Brown was reticent, dispassionate, cool, rational. DeButts and many of AT&T’s top executives lived lives of corporate privilege in New York City, replete with limousines, servants, and Upper East Side apartments. But when he came to New York from Illinois Bell, Brown moved quickly out of Manhattan to the quiet, isolated university town of Princeton, New Jersey. Though he was trained as an electrical engineer, he fancied himself something of an intellectual, and he liked to attend humanities lectures and classical music concerts on the Princeton campus. The university eventually awarded him an honorary Doctor of Laws degree.

  Despite the contrasting sensibilities of their leaders, the red and blue teams had no quarrel about the most important challenge facing AT&T in the mid-1970s: MCI. Both sides agreed that long-distance competition was impractical and undesirable, both from the phone company’s point of view and from the public’s. They also agreed that Bill McGowan was a conniving menace. Nor did they differ about the urgent need to alert the public to its stake in the debate over competition. In the aftermath of Execunet, Brown and his blue team had supported the idea of congressional legislation that would declare intercity telephone service to be a natural monopoly and hence revoke McGowan’s franchise to do business.

  But deButts, as he had from the day he took over the company, insisted on going further.

  The question was, should AT&T adopt the same hard-line stance toward phone equipment competition that it took toward long distance competition? The issue was not a trivial one, and its resolution would help determine not just the fate of the Bell Bill but the viability of AT&T’s political and legal arguments at the FCC and in antitrust court.

  Back in 1968, when the FCC introduced phone equipment competition with its Carterfone decision, the commission told AT&T that it would have to let customers plug whatever equipment they liked into the AT&T switched network. AT&T argued then, and deButts continued to argue afterwards, that this ruling would have grave consequences for the phone system. Unlike the phone company’s response to long-distance competition, AT&T did not object to Carterfone on economic grounds. That is, it was impossible to argue seriously that ownership of phone equipment was a natural monopoly or that competition would jeopardize the system of cross-subsidies, which kept the price of basic, local phone service artificially low. Telephones were readily interchangeable. True, if Western Electric was forced to compete (for the first time in its history) with other telephone manufacturers, it would inevitably lose its monopolistic control over the equipment industry. And true, some of Western’s profits helped subsidize the price of local consumer telephone service. But the role of Western in the subsidy structure was far less significant than the role of Long Lines. And besides, the benefits to ordinary consumers of equipment competition were easily discernible. New computer technologies had rapidly advanced the potential uses and capabilities of telephones by introducing such features as memory, data communications, conference calling, and many others. The most efficient way to introduce these accelerating technologies was by competition. It seemed a simple enough idea.

  Even H. I. Romnes, deButts’ predecessor and the AT&T chairman at the time of Carterfone, seemed prepared to accept phone equipment competition. But when deButts took over, he reversed Romnes’ procompetition decisions within months and made plans to fight equipment competition just as hard as he would battle MCI.

  The argument advanced publicly by deButts, beginning with his Seattle speech in September 1973, was that equipment competition would lead to irreversible technical harm to the phone network. DeButts said, “The national, switched phone network is an interdependent, sensitive, highly sophisticated system. To work well, the system depends on technically compatible components. The phone network is not made of cans and string. It consists of intricate electrical switches and terminals, precisely configured, rigorously tested, and built to exact specifications. If consumers can plug anything they want into the network—any old piece of junk made who knows where—the system will break down. A faulty telephone in one house could conceivably disrupt service to an entire city. A system such as a switched phone network is only as good as its weakest component.” To emphasize his point, deButts even referred to competitors’ equipment as “foreign attachments.” He said repeatedly that Bell was unwilling to see its century-old network destroyed because of the FCC’s underpublicized equipment competition policies. And because it lacked Bell’s scientific expertise and resources, the FCC had no way to counter deButts’ claims effectively.

  And the FCC was not really in a position to argue with deButts. Certainly, the commission had no desire to destroy the phone network. Common sense, though, suggested that there were ways to alleviate deButts’ concerns. One way would be for the FCC to set up a “registration” program, wherein new phone equipment manufacturers would submit their products to the commission to be sure they met certain technical standards. DeButts didn’t like that idea—the commission wouldn’t get the job done, he said. So AT&T’s chairman suggested another method, called “protective coupling arrangements” or “PCAs.” Each of
the phone company’s competitors would be required to attach to its products a protective device, manufactured and sold only by AT&T. The device would ensure that the competitors’ products did no harm to the network. The phone equipment competitors were outraged, naturally. Many of them complained that AT&T was remarkably slow about providing the protective couplers to its competitors. More than a few sued AT&T for antitrust violations and won significant settlements. By 1976, when he was preparing for the Bell Bill fight, deButts’ views on phone equipment competition had been completely discredited. Despite rapid proliferation of “foreign attachments,” no harm to the network had occurred; AT&T had not a single example to back up its chairman’s earlier predictions. By the end of the decade, the FCC had finally established a registration program, and use of the PCAs was discontinued.

  The consequences of deButts’ PCA strategy were serious. The chairman’s views about harm to the switched network were sincerely held, and a number of Bell Laboratories’ scientists had joined him in arguing for PCAs. Phone equipment competition was charting unknown technological waters. Since no one could be sure where it would lead, Bell’s engineers were understandably proprietary about the phone network they had designed. They did not want it jeopardized by experimentation. But since deButts’ fears went unrealized, the PCAs seemed to be nothing more than a blatantly anticompetitive strategy pursued by an avowed monopolist.