The Deal of the Century

by Coll, Steve;

  One immediate result was that while discovery was stalled in the government antitrust case, Phil Verveer and his team of attorneys spent much of their time informally gathering evidence and interviewing potential witnesses about the PCA episode. They decided that in addition to the MCI case, the PCA story would become a major part of the government’s prosecution of AT&T.

  Despite such reversals, deButts stuck to his guns throughout the 1970s, and the more intransigent he became about phone equipment competition, the more trouble he created for himself and his company.

  The real problem was that deButts had laid a trap for himself. He was a savvy businessman, and he recognized early in his tenure as chairman that equipment competition, in some form, was inevitable. He recognized, too, that AT&T was hopelessly unprepared to compete. The phone company had never been forced to sell its products in the marketplace: for a century, it had been the marketplace. If phones were soon going to be sold like televisions, bicycles, or soap, AT&T had to make rapid and wholesale changes in its structure and corporate culture. Until deButts arrived, the company didn’t even have a marketing department. Its salesmen didn’t work on commission. More fundamentally, the heart and soul of the phone company—its emphasis on service, its conservatism, its impenetrable bureaucracy—was anathema to the culture of a lean and mean competitive corporation. For a century, AT&T had been organized like a utility, and that meant it had no incentive to pare its costs—in fact, the reverse was true. The phone company’s profit margin, its “rate of return,” was a fixed percentage of its costs decreed by the FCC and state regulators, usually between 10 and 15 percent. If AT&T’s costs, its “rate base,” were $1 billion in a given year, its profits were between $100 and $150 million. Thus, as AT&T’s costs rose, so did the dollar volume of its profits. Competition, which would require lower costs and lower prices, would force the company to alter the fundamental outlook of its employees.

  DeButts did not shy away from this challenge, but he nonetheless felt ambivalent about it. “The service motivation has been bred in the bones of telephone people over the course of a hundred years,” he said in one speech. “To supplant that motivation with a market motivation might make us a no less profitable business and a no less effective one, though by different standards. But we would be a different business surely, and I for one cannot help but feel that we would be the poorer for it, and so would the public we serve.”

  Still, when it came to profits, deButts’ philosophizing gave way to pragmatism. Soon after he arrived, the AT&T chairman aggressively launched what he called a “marketing revolution” within AT&T. From IBM, the country’s premier marketing corporation, he hired away Archie McGill to implement the sweeping changes. On the phone equipment side of its business, the company’s structure was drastically reorganized so that it could better attack various market segments: residential customers, small businesses, large corporations, specialized industries, and so forth. A marketing plan was developed wherein AT&T’s omnipresence in the phone market—the fact that almost everyone in the country owned an AT&T phone system—could be exploited against new competitors. The plan, called a “migration strategy” by McGill, called for AT&T salesmen to lock customers in with the phone company by leasing equipment on long-term contract. In part because of McGill’s aggressive and antagonistic personality, all these changes were highly disruptive and controversial within AT&T. By and large, though, they were effective, and deButts made it clear to his executives that he considered change to be an urgent necessity.

  But the political and legal dilemma deButts had created for himself was obvious. Out of one side of his mouth, he declared that phone equipment competition should be forestalled because it posed a threat to the quality of the switched network. Out of the other, he told AT&T’s employees and executives to do all they could to prepare for competition. DeButts’ use of the PCA strategy to resist equipment competition was seen not only as anticompetitive but as part of a calculated fraud. DeButts wasn’t really worried about harm to the network, his competitors said. All he really was doing was trying to hold off competition for as long as possible so that AT&T could move its new marketing apparatus into place. The new equipment companies contended successfully in court that what deButts was really saying when he talked about “harm to the network” was that AT&T would compete only when it was good and ready.

  AT&T’s untenable position on equipment competition had reached its most exaggerated state by 1976, when deButts was preparing his Bell Bill agenda. Not only were the contradictions in the company’s position utterly obvious, but deButts’ scare stories about harm to the network had been proven unfounded, thus confirming the view of his opponents that the PCA strategy had been, from the beginning, a blatant lie.

  And therein lay the seminal conflict between two generations of AT&T executives.

  The blue team—the generation led by Charlie Brown—believed that responding to phone equipment competition and MCI’s Execunet deception with equal amounts of public outrage would be a serious mistake. The company’s position on phone equipment was far more difficult to defend in Congress and at the FCC. Besides, even deButts seemed to accept that equipment competition was inevitable. By insisting that long distance and equipment competition were the same, the red team threatened to blow AT&T’s credibility on both issues. Brown and his colleagues argued that since McGowan’s clout in Washington was diminished because of Execunet, AT&T had a golden opportunity to preserve, once and for all, the sanctity of its long distance network. Why jeopardize the opportunity by simultaneously attempting to turn back the clock on equipment competition?

  That, of course, is exactly what deButts chose to do. When he introduced the Bell Bill, he told Congress that AT&T wanted it all: a legal long distance monopoly and a legal monopoly of the multi-billion-dollar phone equipment markets.

  Early in 1976, after the bill was introduced and its congressional opponents were plotting ways to stall it, key lawyers on the House and Senate communications subcommittees began to talk with some well-placed AT&T executives about the bill’s origins. For the first time, they learned about the vociferous debate inside AT&T between the red and blue teams. They were told that the decision to include equipment competition in the bill was made virtually at the last minute by deButts. The chairman had been supported by AT&T’s chief lobbyist, John Fox, who argued that equipment provisions were necessary to enlist the whole-hearted lobbying support of the company’s labor unions, which were involved in Western’s manufacturing operations. The blue team, the congressional lawyers were told, let the equipment competition sections go into the bill for two reasons. First, deButts was the chairman, and there was only so much resistance that other executives could mount against him. Second, and most important, if the bill blew up in AT&T’s face, then at least the red team’s views on equipment competition would finally be discredited. As the Bell Bill fight wore on, and AT&T found itself in more and more trouble because of its lobbying tactics, the congressional lawyers came to believe, on the basis of conversations with top AT&T executives, that the blue team actually was content that the Bell Bill had become a major embarrassment. The deButts era of staunch, arrogant resistance to telephone industry competition had passed, the blue team believed, and perhaps the Bell Bill debacle would force the old generation to step aside. Charlie Brown and his cohorts believed the time had come to compromise, and that was something seemingly beyond deButts’ capacity.

  The congressional lawyers and many of the blue team executives agreed on one thing: If deButts had not chosen to include phone equipment in the Bell Bill, and if AT&T had not resorted to strong-arm lobbying tactics, there was a solid chance in 1976 that Congress would have taken action to control long-distance competition by MCI. And even if it hadn’t, AT&T’s credibility with Congress would have remained intact, and the odds that the two institutions could work successfully together in the future to shape telecommunications policy would have been greatly improved.

  As it h
appened, Congress didn’t pass a single piece of legislation dealing with telephone industry competition until the mid-1980s.

  There was, however, no conspiracy to oust John deButts from the chairmanship of AT&T. He was well-liked and respected by many of the younger, blue team executives. Almost everyone within the top management of the phone company believed that during the early 1970s, a time of business crisis for AT&T, deButts had provided strong leadership. He had solved the two most pressing problems facing AT&T then: poor service and flattening profits. He had aggressively introduced marketing ideas and structures to a bureaucracy that was ill prepared to receive them, and he had stuck with the plan even when it threatened to unravel. And on the competition issues, well, at least there was no doubt about where he stood.

  By the summer of 1977, however, when Appeals Court Judge Skelly Wright ended the Execunet controversy by ruling, in effect, that the FCC was too confused about competition to prevent it anymore, it was clear that an era was passing for AT&T. If it was to survive the rest of the century, the phone company could no longer be led by grand old Bell men like John deButts. Licensed to compete fully in the residential and business long-distance markets, MCI would grow in three short years to a billion-dollar corporation. Equipment competitors—mainly Japanese electronics companies—would take half of Western’s market share in roughly the same period. The red team, the proud, emotional monopolists like deButts, had outlived their usefulness. It was time now for the cool-headed pragmatism of Charlie Brown’s blue team.

  More than two years ahead of schedule, John deButts told AT&T’s board of directors that he intended to retire. Some AT&T executives suggested afterwards that the members of the board had pressured deButts to make that decision. DeButts denied it. Even if it was true, it made little difference. At a private dinner with the board at a Manhattan hotel in the fall of 1978, deButts wholeheartedly recommended that Charles L. Brown be named to succeed him. DeButts knew that a new era for the Bell System had begun. He didn’t know, though, that it would be its last.

  Chapter 11

  Severed Limbs

  While the government antitrust suit was in deep freeze during the mid-1970s, the telecommunications industry had changed radically and permanently. Competition in the equipment and long-distance markets, once a stifled promise, was now an established fact. But despite this transformation, the commitment of Phil Verveer and his cadre of Justice lawyers to carry on their “socially important work” remained unabated.

  Indeed, as the long period of stagnation neared its end in 1977, their enthusiasm was waxing. Since 1975, when attorney George Saunders had stopped the case dead in its tracks, Verveer had informally continued to develop and organize evidence to support the government’s contentions. Two young law students working for Verveer—Tom Casey and Bill Barrett—had spent months traveling around the country interviewing potential witnesses. Casey and Barrett were so fond of Verveer that at times it appeared to other Justice lawyers that they were his disciples. Casey described himself as a “Kennedy-McGovern liberal,” and like Verveer he had been a campus activist in college. Barrett was a Vietnam combat veteran and free-market conservative who believed strongly in the principles of antitrust law. All three of them were extraordinarily close, and while Barrett sometimes liked to bait his friends over their liberal politics, he nonetheless was fiercely loyal to the shared “mission,” as they aptly described it, to break up AT&T.

  From the start, the Verveer team had been somewhat isolated from the rest of the lawyers in the Antitrust division, but after the stay on discovery ordered by Judge Waddy in February 1975, the situation became extreme. They rarely talked to other Justice lawyers about their work, and even their supervisor, section chief Hugh Morrison, was kept largely in the dark. This was not a deliberate strategy pursued by Verveer; it was a byproduct of the intense camaraderie that developed among the AT&T team. They were like a club: they had their own coded language, their own jokes, their own separate sensibility. They had no desire to participate in Justice’s internal politics and thus advance themselves within the bureaucracy—theirs was a higher calling. And as long as the case was relatively inactive, Verveer’s supervisors were content to let him run things entirely on his own. For nearly three years, there were no important strategic decisions to be made.

  As it became clear in 1977 that the case was about to be reactivated—that AT&T’s arguments that the government case belonged at the FCC, not in federal court, were not going to succeed—everything changed.

  For one thing, Verveer’s team found itself under the watchful eye of a new supervisor. Hugh Morrison had been promoted to the Antitrust front office as a deputy assistant attorney general, second in command to the Antitrust chief. When that happened, Verveer and his team were moved from the old Evening Star building into the main Justice building at 10th and Constitution. There they were to be supervised by Ken Anderson, chief of the Special Regulated Industries section.

  By the summer of 1977, Verveer was gone, Anderson was running the case, and the government’s entire approach to U.S. v. AT&T had been drastically altered.

  Anderson, to begin with, was an unusual man. Short, stocky, profane, and pugnacious, he seemed more like a retired boxer than a lawyer—he was like Jake La Motta with a sense of humor. He had grown up in Connecticut, where his parents, Swedish Lutherans, were caretakers on a wealthy lawyer’s estate. For a while, Anderson’s father drove a Coca-Cola truck to earn money. With the help of a hockey scholarship and donations from an anonymous benefactor (Anderson never learned the benefactor’s identity, but he always assumed it was the rich lawyer in Connecticut), Anderson attended Gettysburg College in Pennsylvania. He did well, graduating Phi Beta Kappa, and he won another scholarship to attend law school at Cornell University. Even after he got his law degree, Anderson wasn’t sure what he wanted to do, and for a while he worked in construction jobs. Finally he took a position as a lawyer in the Federal Trade Commission’s New York field office. “That place was a bag of shit,” Anderson said later with typical succinctness, and so he transferred to the Justice department in Washington. There he made a name for himself by winning the Otter Tail utility case, a government antitrust suit similar in some ways to the one against AT&T (Bill McGowan had threateningly mentioned the Otter Tail victory to John deButts when the two met at 195 Broadway in March 1973). Afterwards, Anderson was promoted to section chief in the Antitrust division.

  Anderson’s approach to life and to the practice of law was somewhat unorthodox. Though he worked in the heart of the city, he lived on a farm in rural Virginia, and on summer weekends he liked to ride around on his big tractor under the hot sun, and then pull off his shirt and bale some hay with a pitchfork. When the day was done, he would tromp into town in his muddy work boots and buy himself a six-pack of Budweiser beer. He was a health food enthusiast, and when he rode into Washington on the train he often carried a large paper sack full of raw vegetables. He kept the sack on a shelf in his Justice department office, and during important meetings he would wander over, pull out a carrot stick or a piece of cauliflower, and take a large, loud bite.

  His friends in the Antitrust division called him a “gutter-fighting litigator.” Those who were uncomfortable with his methods called him a “loose cannon.” And while it was hard not to like Ken Anderson—he was funny and surprisingly compassionate—he was a man who was unlikely to see eye-to-eye with Phil Verveer. To Anderson, there was only one thing that was important about any case: winning. He cared little about politics, or moral philosophy, or “socially important work.” What moved him was the taste and smell of a good fight. His speech was littered with wild profanity and violent metaphors, as in, “I want to see those motherfuckers bleed all over the table.” And since he looked on the practice of law as a kind of bloodsport, he did not lie awake at night worrying about whether his case was fair, or thorough, or well considered, or well rounded. What mattered to Anderson was the kill, not the efficacy of the chase. The cases he
had tried during his career were uniformly complex, but Anderson had embraced litigating tactics distinctive for their expediency. He had no patience for drawn-out discovery of opponents’ documents or for lengthy deposition programs. Such strategies, Anderson believed, tended to bog a case down and obscure its main issues. In Otter Tail, Anderson had used an innovative method that served as a substitute for the typical discovery program. Rather than “discovering” their own evidence, both sides “stipulated” to facts, entered them in the record, and then launched quickly into their arguments. The result had been a swift and sudden victory for Anderson.

  Anderson’s superiors in the Antitrust front office hoped to apply similar methods to the AT&T case. The division’s other major antitrust suit at the time, against IBM, was being managed in the usual way—protracted discovery, numerous depositions, exchanges of millions of documents—and it had become a kind of legal black hole, as well as a serious embarrassment to the Justice department. The more lawyers Justice threw at the IBM case, the more hopeless it became. The suit had been filed on the last day of the Johnson administration in 1969, and eight years later, it was still not even close to trial. The department, and especially its Carter-appointed Antitrust chief, John Shenefield, was determined that U.S. v. AT&T not become a similar debacle. In Anderson’s fondness for bloody expediency, they saw a solution.

  In an odd and uncharacteristic way, Ken Anderson was intimidated by Phil Verveer when the AT&T team moved into his section on the seventh floor of the main Justice building. It was impossible not to be impressed with Verveer’s character, to see the strength and moral commitment that so attracted the younger lawyers to him. And Verveer was not a self-righteous puritan: he was a self-contained man, principled but not priggish, articulate but not preachy. He commanded respect, and Anderson sensed this. “There’s not anybody in this town who’s a more honest guy,” Anderson said later of Verveer. “And he is very, very dedicated. When you see him, you get a sense of him being almost priestlike—a highly moralistic sort of guy, somewhat self-effacing. He’s aggressive in his own way, but he’s not a rock’ em sock’ em kinda guy.”