The Deal of the Century

by Coll, Steve;

  Their hopes were frustrated: Greene retained firm control over the terms of the settlement for the next four years, dictating numerous changes, and, by 1986, there was still no reason to believe that he would ever let go of U.S. v. AT&T.

  Under the Tunney Act, Greene’s first job was to receive public comment and then approve or reject the actual document negotiated between Justice and AT&T during the three weeks prior to the January 8, 1982, announcement. (Although the document was called by the parties the “Modified Final Judgment,” or “MFJ,” Greene refused to refer to it that way because the name was derived from the maneuverings before Judge Biunno in New Jersey, which Greene never accepted as legal.) The process, which lasted more than seven months, was laborious and contentious. Present and potential competitors in the equipment and long-distance markets, state regulators, the FCC, consumer activists, corporate-sponsored “telecommunications users” groups, newspaper publishers, and assorted other specially interested parties all filed voluminous comments, mainly in the form of legal briefs, with Judge Greene. It was a field day for Washington communications lawyers; any attorney of passing acquaintance with the 1934 Communications Act and the history of U.S. v. AT&T could hang out a shingle and find a client who wanted to put his two cents in to Judge Greene, and of course the lawyers themselves made off with more than loose change. Once the comments had been filed, Justice and AT&T were given an opportunity to respond, and they each weighed in with hefty briefs urging the judge to abide by the original terms of the deal. There were hearings, and letters back and forth between the parties, and by summer Judge Greene’s snug chambers on the second floor of the district courthouse were overflowing with the paper residue of legal pandemonium.

  Like the surviving AT&T itself, those who filed comments objecting to this or that portion of the inter-intra settlement were simply out to obtain from the Bell System’s misfortune the best deal possible for themselves. Phone equipment and long-distance companies wanted guarantees that the newly liberated AT&T would not crush them in the free market. State regulators argued that the divested operating companies should not be confined to the provision of unprofitable, monopolized local phone service, but rather should be free to compete with the new AT&T in phone equipment and other competitive markets; if the operating companies could make money in such ways, the regulators would not have to raise local phone rates precipitously. Consumer activists, similarly, were concerned about the financial health of the local companies, and they also sought assurances that universal telephone service to the poor and elderly would be preserved in the newly cutthroat and competitive communications industry. Corporate telecommunications users were worried that in the coming subsidy-free world of cost-based pricing, the burden of maintaining the expensive telephone infrastructure would be shifted to business, and there was threatening talk of corporations “bypassing” the phone network with their own private microwave and satellite communications systems if the cost of local business phone service became too high.

  But amid all this self-interested clamor, there was one voice whose shrill and demanding tone rose clearly above the rest—the American Newspaper Publishers Association (ANPA). Perhaps because of its members’ long exposure to the rhetoric of politicians, the ANPA was surpassingly adept at couching its patently selfish demands in the appealing language of the public interest. The publishers were scared stiff by the prospect of a deregulated AT&T. It was their opinion that the future of the newspaper industry lay in what they called “electronic publishing”—videotext services, links between newspapers and cable television, computerized information banks, and so on. AT&T was anxious to enter these markets, and it had been working for some time to develop prototype services. But the ANPA argued that because AT&T owned some of the means of transmission of electronic publications—the long-distance phone lines—it would be unfair to allow it also to sell electronic services. Then AT&T would own both the product and some means by which publishers would transmit competitive services. Justice argued vigorously in its reply comments that the “essential facilities bottleneck” had been broken by the proposed divestiture of the operating companies and that the new AT&T should be allowed to compete freely with the publishers. It was essentially an issue about whether Greene should intervene in the terms of future competition between some of the country’s largest corporations—AT&T, Gannett, Post-Newsweek, Knight-Ridder, and others. But the publishers never condescended to debate the competitive issues; instead, they tried with long-winded speeches to elevate the dispute to the lofty province of constitutional law. The First Amendment was imperiled, they said, because AT&T might begin to monopolize the electronic publishing industry and thus restrict the diversity of information available to all Americans. It was a dishonest, even cynical argument, the Justice department believed, but since the publishers had direct, daily access to tens of millions of readers, it was pressed effectively.

  And over the objections of both Justice and AT&T, Greene gave in. In August 1982, he imposed a seven-year ban on electronic publishing by AT&T over its own transmission facilities. The unexpected decision deeply angered the Antitrust front office, which regarded it as a blatantly political maneuver by the judge that unnecessarily restricted the new AT&T. As a government lawyer put it later, “That prohibition on information services was an important stroke for Greene. That decision had the consequence of gaining for the divestiture almost complete editorial support in the United States. Almost every newspaper in the country came out in favor of the deal, despite the fact that there was no real popular support for it.”

  Indeed, with the newspapers well appeased by the summer of 1982, the breakup of the phone company proceeded without much fanfare or discord until divestiture was finally implemented on January 1, 1984. Concern about the financial health of the new operating companies was dissipated when, after the months of comments and hearings, Greene ordered some changes to the terms of the Modified Final Judgment. He proposed that the operating companies retain possession of the Yellow Pages, which accounted for $2 billion in annual revenues, and he also suggested that they be allowed to sell, though not manufacture, telephone equipment in competition with AT&T. Justice and AT&T agreed to Greene’s changes just two weeks after they were proposed. Ever since the deal was announced, AT&T had endured much criticism that it was “selling out” the operating companies by not allowing them to keep the Yellow Pages or sell equipment, but actually it was Baxter who, for ideological reasons, was adamant about restricting the local companies’ franchises as much as possible. When Greene suggested his changes, Baxter said, “Basically, we came out where I wanted to come out. Regulated utilities shouldn’t be fooling around in competitive markets. But the judge gave us 99 percent—perhaps that’s overstating it—he gave us a great preponderance of what we wanted.” A few days later, Baxter met with Trienens in Washington and the two wrote Greene’s changes into the consent decree. On August 24, 1982, the revised decree was filed with Greene and approved, and U.S. v. AT&T was finally dismissed.

  In December, after nearly a year of committee meetings at its Basking Ridge, New Jersey, facility, AT&T filed its plan of reorganization with Greene for approval. The company had decided to consolidate its twenty-two local operating companies into seven “basic operating companies,” which would take with them about 75 percent of the Bell System’s assets, between 60 and 70 percent of its employees, and about half of its revenues. The new companies were organized by geographical region and were roughly equal in size. After many more months of speeches, public comment filings, and hearings, Greene approved the AT&T divestiture plan with only one major change—AT&T would have to give up use of its familiar Bell name to the new companies. AT&T accepted this final indignity without appealing Greene’s decision.

  When the judge’s restructuring by fiat of the telephone industry had reached the peak of its activity, the Wall Street Journal editorialized, “Judges in our republic were not meant to make decisions like this. Courts are not equipped to
be administrators, nor are they supposed to make policy decisions that are the responsibility of executives and legislatures subject to electoral accountability.… Judge Greene’s decisions add an unfortunate precedent for judicial intrusion into industrial structure: even if his changes are by and large intelligent, some judges might not be as sensible as he.” Some months earlier, Charlie Brown and Howard Trienens might have chuckled sorely at the irony of the editorial, especially the part about “the responsibility of executives and legislatures subject to electoral accountability,” but in the midst of such an all-consuming task as breaking apart a company with over $150 billion in assets, the AT&T executives allowed little time for sour grapes.

  Not so at the Commerce department, where Malcolm Baldrige’s staff could only watch bitterly as Judge Greene stepped forcefully into the policy-making vacuum left by Congress, the Reagan administration, and the FCC. And the more Greene did, the more resentment of him took on a personal tone. Ken Robinson, the NTIA lawyer who had developed the “menu” settlement in 1979 and had worked on the ill-fated Baldrige dismissal proposal during the summer of 1981, said in 1984, “The case became a real ego-builder for Greene. Look at the average menu of district court judges—you’ll get a lot of ambulance chasers and half-wit public defenders. The AT&T case fills up your courtroom with people who make half a million dollars a year and up. You get to hobnob with Charlie Brown, you get lawyers flying down from New York in the corporate jet. Important people are hanging on your every remark. You get invited to all these prestigious antitrust conferences. It’s very ego gratifying. I mean, geez, he gets his picture in Fortune magazine. How many of the other 772 federal district judges get their pictures in Fortune? Only the ones that get locked up.”

  Confronted by such criticism, the diminutive, mild-mannered Greene only shrugged, offered one of his affectionate and self-effacing smiles, and began his familiar speech about how he didn’t file the case, he didn’t settle it. He was only an arbiter—parties brought disputes before him, he examined them and ruled according to his own best judgment and the law. FCC officials said they couldn’t regulate the phone company. Reagan and other presidents chose to prosecute U.S. v. AT&T to its end. Congress never passed a law about phone competition. What was a judge supposed to do, other than his job?

  Indeed, ostensible public humility such as Judge Greene’s was to be a prevailing ethic in the post-divestiture telephone industry. On May 17, 1983, AT&T announced that it was selling its twenty-six-story corporate headquarters at 195 Broadway, the “temple to the god of the telephone,” in favor of a new $200 million postmodern high-rise in midtown Manhattan.

  The company said that it would take down the gold “Genius of Electricity” statue from the top of 195 Broadway and put it in the lobby of its new building as a kind of museum piece. For sentimental reasons, AT&T also decided to keep the two eight-foot bronze medallions that were laid in the floor of its old headquarters lobby, which depicted Mercury bearing the messages of the gods with the motto, “Universal Service.”

  Chapter 35

  An Imperfect World

  Whether the breakup of American Telephone & Telegraph Company will be remembered decades from now as one of the more spectacular fiascoes of American industrial history, or whether it will be recalled as a seminal event in the emergence of a great, global “information age,” or whether it will be forgotten altogether, is a matter that was impossible to predict intelligently in 1985—which is not to say that politicians, journalists, authors, Wall Street analysts, and other salaried pundits nobly refrained from offering their forecasts on the question. Indeed, during the first year or two after the breakup, the rapidly changing communications industry provoked a furious commerce in the marketplace of ideas, or “analysis,” as it is described in the current corporate vernacular. So urgent was the discourse that a virtually brand new profession, the “telecommunications consultant,” was born to accommodate it, to explain what had happened and what was likely to follow. Naturally, the most sought after of these consultants—Walter Hinchman, the former FCC Common Carrier Bureau chief; Richard Wiley, former FCC chairman; Richard Levine, of Bill Baxter’s Antitrust front office; and numerous others—were the very people who created the chaos in the industry that gave rise to the need for their analysis. Similarly, Washington, D.C.’s, “telecommunications bar” boomed like a Nevada silver town as thousands of attorneys young and old flocked to practice a rapidly expanding discipline of law that had not been substantial enough five years before the breakup to have its own “division” at the D.C. Bar Association, but which by 1984 was doubling in size almost every year. As in war, the only clear winners during the first months after divestiture were those who possessed the means to turn carnage into profit.

  Also, as in war, the clear losers early on were those in whose name the battle was fought—ordinary American telephone users. In nearly every state between 1982 and 1985, the price of basic residential telephone service increased significantly, while the quality of service declined. The cost of installing and repairing telephone equipment also rose dramatically—as much as tenfold in some areas—and the higher prices were compounded by widespread confusion over which of the newly formed telephone companies was responsible for phone equipment. For a century, consumers had enjoyed the convenience of “one-stop shopping” for nearly all telephone services; suddenly they were confronted by a pluralistic new industry in which even the largest companies seemed confused about which role they were supposed to play. The newly formed “basic operating companies” could “provide” phone equipment, but they did not lease or repair the phones already in consumers’ homes; that was the province of the surviving AT&T, which retained title to the nation’s “embedded” phone equipment base. When a consumer’s phone service broke down his instinct was to call the local operating company for help, as he had always done. But if it turned out that the problem was in the phone equipment, not the local telephone lines, then the operating company would not make repairs, though it would charge a plumber’s ransom for the house call. The consumer would then have either to buy a new phone or take his broken one to AT&T for expensive servicing. There was even more aggravating confusion about telephone bills. In many areas, the new operating companies provided AT&T with a billing service for long-distance calls, but not for phone equipment leasing. Charges for long-distance calls made over AT&T lines showed up on the monthly bill from the basic operating company, but fees for phone leasing, which used to appear on the same bill, now arrived separately. So, of course, did bills from alternative long-distance carriers such as MCI and Sprint.

  Widespread disillusionment among consumers during what Justice lawyers liked to call the “transitional” period from a monopolistic to a competitive phone industry was entirely predictable. Before the breakup, a New York Times poll found that more than 80 percent of American telephone customers were happy with their service—according to the Commerce department, that was the highest customer satisfaction rate of any business in the country. Justice lawyers anticipated that there would be some confusion during the first months after divestiture was announced, but no one was prepared for the deep and sustained negative reaction that lasted through 1985. A poll taken by Lou Harris and Associates three years after the January 8, 1982, press conference found that 64 percent of Americans still thought the breakup was a bad idea, 25 percent thought it was a good idea, and 11 percent were not sure. Less empirical but more affecting evidence of disenchantment arrived almost daily at Judge Greene’s chambers and at the Justice and Commerce departments’ offices in Washington in the form of sometimes vile and threatening hate mail from angry consumers around the country; the letters were not offset by any expressing enthusiasm for the decision to destroy the Bell System.

  It may yet be, as liberal and conservative deregulation enthusiasts continue to insist, that the long-run benefits of phone industry competition, such as lower long-distance prices and faster introduction of technological innovation, will quell
consumers’ anger and that the currently profound confusion about telephone service will dissipate as the industry begins to stabilize. But long-distance prices have yet to drop significantly amid tepid competition, and besides, well over half of all long-distance revenues are generated by businesses, not residential consumers. And while confusion may tend to dissolve with time, the quality of service cannot and will never be restored to what it was during the now fondly-remembered days of matriarchal Ma Bell’s reign.

  There would be something corrupt yet poetically inevitable, something reassuringly symmetrical, about the raw deal handed to consumers in the breakup if it was also true that in the first years following divestiture, Fortune 500 corporate giants such as AT&T and MCI were the clear “winners.” Certainly both remain, for the time being, profitable companies with optimistic outlooks. Yet in the circumstances of the deal between Justice and AT&T, and in the long, tangled history of corporate warfare that preceded it, there lies a haunting specter. And yet almost everything that has happened in the telephone industry since January 8, 1982, has contributed to its growing plausibility. Simply stated, the specter is this: that in the uncompromising battle that began between William McGowan and John deButts at their meeting on March 2, 1973, each man planted the seeds of his company’s final destruction.