The Eighties Club
The Politics and Pop Culture of the 1980s
24. Ma Bell Breaks Up

Copyright 2000     Jason Manning     All Rights Reserved
An old AT&T ad
It was a battle of giants, with the federal government taking on American Telephone & Telegraph, the world's largest corporation with assets valued at $125 billion, which made it bigger than U.S. Steel, General Motors and Exxon combined.  The second largest employer in the nation -- the federal government was the first -- AT&T employed over one million people.  It had three million stockholders, the most of any American company.  It made a daily profit of $15 million, using 1.7 million miles of wires, cable and circuitry to handle 600 million calls a day.  AT&T was a federally regulated "authorized" monopoly, providing 80 percent of U.S. telephone service, but in 1974 the Justice Department filed an antitrust suit against Ma Bell, accusing it of forcing operating companies to purchase equipment from its Western Electric subsidiary, of undercutting competitors' prices, and of obstructing a 1968 Federal Communications Commission (FCC) ruling that customers could connect non-Bell equipment to phone lines.
Those expecting a trial of epic proportions -- many believed it would go on for one or two years -- were disappointed when U.S. District Court Judge Harold Greene decided on January 16, 1981 to recess until February 2, allowing the two sides to negotiate an out-of-court settlement.  AT&T's competitors, such as MCI and Southern Pacific Communications, suspected the Carter administration of rushing to cut a deal to make sure none of the credit went to the incoming Reaganites.  The proposed settlement would have allowed Ma Bell to enter the burgeoning data-processing and computer markets -- a concession that would void a 1956 decree restricting AT&T to telecommunications -- in return for its spinning off parts of Western Electric (its equipment manufacturing arm) and several of the 22 regional Bell telephone companies.
Initially, Reagan's Justice Department urged the White House to reject the settlement.  Assistant Attorney General William Baxter, head of the department's antitrust division, wanted to pursue the suit against Ma Bell.  But in January 1982 Baxter announced that another out-of-court settlement had been reached.  This time AT&T agreed to sell its regional local-service companies while retaining its Long Line service, Bell Labs, and Western Electric.  This amounted to a divestiture of two-thirds of its total assets.  On the same day, the government dropped its 12-year antitrust suit against computer giant International Business Machines (IBM).  Critics charged that this demonstrated the Reagan administration's commitment to freeing corporations from government oversight.  But that wasn't such a bad idea, according to economist Lester C. Thurow.  America needed healthy corporate giants like AT&T and IBM to compete effectively in the new global economy.  For the first time, said Thurow, American corporations faced foreign equals like Mitsubishi, Wang and Philips. "Bigness is not always badness," he concluded.
While the government seemed to get most of what it wanted out of the deal, former FCC chairman Richard Wiley called the settlement "a brilliant masterstroke on the company's part."  Stock market analysts predicted greater profits for a slimmed-down AT&T no longer encumbered with the high-cost, low-profit local companies. Stockholders kept their original number of shares in the parent corporation and received one share in each of the seven new regional companies for every ten AT&T shares owned.  The expectation was that the breakup would result in lower long-distance costs and sharply higher local phone service prices.  AT&T had charged higher prices for long distance service to keep local service costs down by as much as 50 percent of what they would have been otherwise.  This subsidization allowed a customer to pay $7 for a $29 phone line installation in San Francisco, and 10 cents rather than a quarter for a New York City pay-phone call.  Few doubted that the divestiture, the largest in history, would have far-reaching consequences, both for Ma Bell and her customers.
AT&T's potential rivals in the field of data processing were concerned because Ma Bell already owned a lot of high tech electronics equipment.  Its subsidiary, Bell Labs, was the world's foremost research and development operation, responsible for the development of the transistor, the laser, the semiconductor and the microchip.  Its scientists had won seven Nobel Prizes.  In short, AT&T was quite capable of competing in the high tech communications world with firms like IBM, RCA and GTE.  But the principal concern of telephone subscribers was whether local service quality would suffer while costs soared when the breakup took place in January 1984. Michigan's public service commission feared that up to 250,000 Michigan residents would not be able to afford service.  Universal telephone service had been the achieved goal of the federally regulated AT&T monopoly.  This now seemed to be in jeopardy.
In his ruling on the settlement, Judge Green ordered AT&T to assist the seven new regional phone companies in recovering the $2.6 billion cost of providing access to long distance carriers if they were unable to recoup that expenditure in ten years.  (The judge also forced the corporation to divest itself of the Bell name and logo; the loss of the 123-year-old nickname seemed to distress AT&T more than anything else.)  Congress held hearings and considered subsidies for low-income telephone customers.  Rep. Timothy Wirth (D-Colo.) proposed a surcharge on long distance calls with the revenue going into a national telecommunications fund to offset local service costs. The FCC decided that all residential users would pay a two dollar monthly access charge, and business users a six dollar monthly charge, to subsidize the new regionals.  Pacific Telesis sought a $1.3 billion increase in local rates, while Southwestern Bell asked regulators to approve a $1.2 billion increase which would triple phone bills.  Some analysts predicted a 500 percent increase in some charges over the next ten years.  Anxious customers awaited the 1984 breakup with understandable trepidation.
Long distance carriers competed for customers with a dizzying array of come-ons -- free call time for signing up and credit for purchasing an array of products and services.  The FCC freed AT&T's long distance rivals from rate regulation, while AT&T remained regulated.  AT&T was required to provide nationwide service while the newcomers could choose to operate only in the most profitable areas, and paid only a fraction of what AT&T paid local telephone companies for access to their customers.  But even though its rates remained generally higher, AT&T was still the preferred service for a majority of long distance callers.  (Its share of the long distance market was expected to decline from 94 to 65 percent.)  In the early years, the newcomers had substantial quality problems.  Connections were often poor and sometimes could not be established at all. Some carriers were accused of using the old "bait and switch," quoting one subscription rate but charging another.  And customers were overcharged to the tune of $100 million a year for uncompleted calls.  On September 1, 1986 some 95 million telephone subscribers were required to choose one long distance supplier.  Those who did not vote -- about 30 percent -- were assigned a carrier.  AT&T spent $200 million while MCI and GTE Sprint each spent about $75 million in huge publicity campaigns prior to the service election.  AT&T remained the preferred supplier.
The debate as to whether the breakup was beneficial to the consumer continued throughout the 1980s.  Subscribers were faced with a greater choice in services and products.  But they were inundated with marketing ploys by competing suppliers, and generally paid more to use the telephone.  A deeply ingrained suspicion of monopolies and faith in free market concepts had their price.

A Telecommunications Revolution
The breakup of Ma Bell marked the beginning of a telecommuni-cations revolution thanks to innovations such as fiber optics and microprocessors.  Future profits for companies like AT&T depended on providing new information services.  In 1983 about 180,000 cellular mobile phones were in service; that number was expected to grow to 1.5 million by the end of the Eighties.  More than 18 million subscribers to the new paging services was expected by 1990.  Telephone circuitry would be used to deliver electronic mail.  The New York Stock Exchange, the Mormon Churc h, major corporations and some state agencies established their own phone services, using microwave antennas and communication satellites.  New telephone tech-nology provided features like call forwarding, remote retrieval of stored calls, and cordless phones.


REFERENCES

The Economist, 6 June 1981, 16 January 1982, 8 January 1983, 29 October 1983

Newsweek, 19 January 1981, 16 March 1981, 18 January 1982

Time, 2 February 1981, 25 January 1981, 18 July 1983, 21 November 1983, 11 June 1984, 25 August 1986

U.S. News & World Report,.24 October 1983, 11 June 1984

Facts on File, 1981

The Biggest Company on Earth: A Profile of AT&T
Sonny Kleinfield (New York: Rinehart and Winston, 1981)