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AT&T Divestiture

or "Breaking Up Is Hard To Do!"
Events that led up to the demise of the Bell System

"The Bell System as we have known it will exist only in our
memories and in the history books." December 31, 1983

CONTENTS:

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INTRODUCTION

Before 1984, the United States public network utilized practices, procedures, and equipment largely determined by AT&T and the Bell System. The network performed exceedingly well and, for customers, life was simple. With the advent of divestiture in 1984, when AT&T and its operating telephone companies parted company, the Department of Justice's Modification of Final Judgment broke the seamless national network into 164 separate pieces called Local Access and Transport Areas (LATAs) to handle local phone traffic. Through this move the DOJ created two distinct types of service providers local exchange carriers (LECs) and interexchange carriers (IXCs).

The divestiture of AT&T (A.K.A. "Ma Bell") was very costly both to AT&T, the Baby Bells and the consumer.  Litigation costs alone for AT&T up to the January 8, 1982 announcement of divestiture was 360 million dollars along with an additional 15 million dollars of costs to the federal government.  But the costs didn't stop there.  To get an idea of just how costly this was to both the former Bell System companies and the consumer, see this excerpt from the book "The Rape of  Ma Bell."

A judge in Philadelphia by the name of Harold H. Greene took up the case of whether the United States government had legally granted the Bell system monopoly status. The judge decided that the Bell system was illegal and therefore had to be broken up. But how, and what were to be the new rules? The judge spent the rest of his professional life dealing with the can of worms that he created. He would rule over how the Bell System would look in the future, right down to who would got to paint their vans in the old telephone colors and how a microwave tower in the middle of nowhere would be divided to handle telephone traffic. Yet this man knew nothing of telephone business or how it functioned!

As noted on the Bell System History page from a 1983 sign that hung in many Bell System facilities, "There are two giant entities at work in our country, and they both have an amazing influence on our daily lives . . . one has given us radar, sonar, stereo, teletype, the transistor, hearing aids, artificial larynxes, talking movies, and the telephone. The other has given us the Civil War, the Spanish American War, the First World War, the Second World War, the Korean War, the Vietnam War, double-digit inflation, double digit unemployment, the Great Depression, the gasoline crisis, and the Watergate fiasco. Guess which one is now trying to tell the other one how to run its business?"

Once Judge Greene made the judgment that he was the all-knowing supreme being of the Supreme Court, people looked to him for all kinds of decisions. The process was extremely expensive for the consumer, filled the lawyers pockets with money, gave us rates five times higher, and eventually bankrupt companies such as WorldCom (owner of MCI.)

It has been a rocky road for AT&T since divestiture.  Many post-divestiture business plans failed miserably such as the attempt to enter the computer manufacturing business and the purchase of NCR.  Tens of thousands of employees lost their jobs after the demise of the Bell System.  An AT&T document that shows a timeline of events for the ten years that followed the divestiture can be viewed by clicking HERE.

An official announcement to the Bell System employees shortly after the January 8, 1982 ruling by the U.S. Department of Justice (referred to below as the DOJ) took place in the form of a video taped show called "Chronicle News Update - A Historical Decision.  Some highlights of that tape are provided here.

Key dates in the eventual demise of the Bell System:

  • November 20, 1974 - DOJ files antitrust suit charging anticompetitive behavior, and seeking breakup of Bell System.

  • February 4, 1975 - AT&T formally denies all charges.

  • June 21, 1978 - Case reassigned to Judge Harold Greene.

  • September 11, 1978 - Judge Greene lays down new schedule for discovery and trial preparation.

  • November 1, 1978 - DOJ files its first statement of contentions and proof, settling out detailed charges.

  • September 9, 1980 - Judge Greene schedules beginning of trial for January 15, 1981.

  • January 15, 1981 - Trial begins with opening arguments.

  • January 16, 1981 - Judge Greene grants parties' request for recess until February 2, 1981 to work on a "concrete, detailed proposal for settlement.

  • January 30, 1981 - Judge Greene extends recess through March 2, 1981.

  • February 23, 1981 - DOJ advises court it will not be able to approve a final agreement by deadline; settlement talks break off.

  • March 4, 1981 - Trial resumes; testimony begins.

  • March 23, 1981 - Defense Secretary Caspar Weinberger.

  • July 1, 1981 - DOJ rests its case.

  • July 10, 1981 - AT&T files motion for dismissal.

  • July 29, 1981 - DOJ requests 11 month delay to permit Congress to consider amendments to S.898.

  • August 3, 1981 - AT&T begins its defense.

  • August 6, 1981 - DOJ says it will pursue case while Administration seeks passage of amended S.898.

  • August 10, 1981 - DOJ says it would drop case if acceptable legislation enacted.

  • August 17, 1981 - DOJ files reply to AT&T dismissal motion, saying it will pursue case.

  • September 11, 1981 - Judge Greene rules on dismissal, dropping some charges, but permitting bulk of case to go forward.

  • October 26, 1981 - Court sets schedule that will end AT&T testimony by January 20, 1982. Judge Greene indicates a verdict could be handed down by end of July, 1982.

  • December 31, 1981 - DOJ announces that parties have resumed discussions to try to bring the case to a resolution.

  • January 8, 1982 - Antitrust suit dropped after AT&T accepts government's proposal.

  • January 1, 1984 - Bell System no longer exists

Here are some screen shots of the newscast outlining the key points of post divestiture of the Bell System:

Below are more screen shots from video tape showing (left to right) the Chronicle News anchorpersons, Chairman of AT&T, and the Vice President of AT&T at the time of the divestiture announcement.  As with above images, click on the images below to see full-size screen capture of video frame.


Click HERE to see how CNN news announced the breakup.


Timeline of the Legal History of Telecommunications
and the Divestiture of AT&T

1876 - Alexander Graham Bell receives a basic patent on his "talking machine." 

1885 -The American Telephone and Telegraph Company was established as a subsidiary of the American Bell Telephone Company to operate the long distance connections among the rapidly growing local Bell telephone companies. 

1900 - AT&T was reorganized into a holding company, becoming the parent of the Bell companies, and making Western Electric the exclusive manufacturing arm of the Bell System. 

1907 - Following the expiration of Bell's original patents, the industry entered a period of unrestrained competition, and as a result, by 1907, independent telephone companies had almost as many phones in service as the Bell System (about 3,000,000 each). 

1913 - After a series of acquisition wars in which AT&T emerged victorious, in 1910, the Interstate Commerce Commission began the first investigation of AT&T's monopoly activities. As a result, in 1913, AT&T promised the government to allow independent phone companies to interconnect with its toll facilities, and to refrain from acquiring any more competing independent companies. This established the cooperative, non-competing relationship between the Bell System and the approximately 1,500 independent telephone companies, which largely exists today, and consolidated AT&T's monopoly power. 

1934 - AT&T owns four out of every five telephones in the country, its long distance network ties together the country's telephone system and nearly every major city is served by a Bell telephone company. The Communications Act of 1934 is passed by Congress, establishing the Federal Communications Commission, which governs the telephone and broadcast industries. 

1956 - The government and AT&T signed a consent decree, which enjoined AT&T only from engaging in any business other than provision of common carrier communications services -- it was thus excluded from the computer industry in the United States -- and barred Western Electric from any activity other than manufacturing equipment of a type to be used to provide telephone service. AT&T was also required to license Bell patents to any applicant in exchange for royalties. 

1959 - The seeds of competition in the long distance market were sown when several large business users of long distance, dissatisfied with the price and quality of AT&T services, applied to the FCC for permission to build their own private microwave systems. In the Above 890 decision, the Commission found that an adequate number of microwave frequencies were available to serve both common carrier (AT&T was using these frequencies only to transmit television signals) and private networks. The Above 890 decision not only caused AT&T to hasten its development of more efficient microwave systems, but created the first long distance price competition when AT&T, in response, filed its first tariffs for bulk line discounts. Almost ten years later, after numerous AT&T procedural delays, the FCC found that the "Telpak" discount rate tariff was illegal because it was priced well below AT&T's costs. 

1963 - Microwave Communications, Inc. (later re-named MCI) requests permission from the FCC to build a microwave system between St. Louis and Chicago, arguing that it could provide better and cheaper private line service between customer locations in these cities. The Commission approved the application, but not until 1969. 

1969 - The FCC, by a 4-3 vote, grants MCI's application to establish a limited private line microwave long distance system between St. Louis and Chicago, asserting that such service was in the public interest. This decision marked the beginning of a competitive market in long distance services. 

1971 - In its Specialized Common Carrier decision, the FCC firmly establishes a national policy of open entry into private line and specialized common carrier markets. The decision also changed previous pricing practices, allowing for the first time a variety of services at a variety of prices tailored to various needs. The FCC issues a decision in its First Computer Inquiry, drawing a line between data processing (computer-based) services and communications services, which were to continue being regulated, in order to avoid the possibility of underwriting profit-making competitive activities with revenues from regulated telephone company activities. Because of the 1956 consent decree, AT&T was barred from offering data processing services even through a separate subsidiary. In 1973, in a case brought by GTE, the Commission's authority to draw such a line was upheld. 

1972 - MCI begins commercial operation of private line service between St. Louis and Chicago. 

1973 - The FCC permits "value-added networks" (VANS) into the communications market. These carriers lease private lines from other telephone companies, and with the addition of computer enhancements, sell those lines for the express purpose of transmitting data and information service. 

1974 - The Department of Justice files a new, and much more comprehensive, antitrust suit, which charged AT&T with illegal actions designed to perpetuate its monopoly in telephone service and equipment. The suit asks for the divestiture of Western Electric and "some or all of the Bell Operating Companies." For the next several years, the parties argued jurisdictional issues and undertook a lengthy discovery process, delaying the start of the trial until 1981.

From Bell Telephone Magazine - Issue 3 & 4, 1982:

"[1984 was] A trying year for the Bell System. In March, MCI files suit against AT&T in U.S. District Court in Chicago, charging AT&T with "monopolizing the business and data communications market." Bristling at the charge, AT&T files a countersuit, charging MCI with attempting to restrain trade and lessen competition by obstructing or harassing other common carriers. The controversy prompts the FCC in April to begin a broad inquiry into the economic impact of competition, particularly the effect of interconnection and the use of customer-provided equipment. Thanksgiving Week, AT&T learns it is again being sued, this time by the federal government. The Department of Justice files suit against AT&T November 20, charging that the company has unlawfully monopolized the telecommunications markets. It alleges, among other things, that AT&T has attempted to restrict and eliminate competition from other common carriers, private telecommunications systems, and other manufacturers and suppliers of telecommunications equipment, and that AT&T requires the operating companies to purchase Western Electric products. The case is assigned to Joseph E. Waddy, a federal district court judge in Washington, D. C."


1975 -

From Bell Telephone Magazine - Issue 3 & 4, 1982:

"AT&T contends that the suit is without merit and insists that it has broken no antitrust laws. AT&T and Justice lawyers devote the rest of the year to drawing up rules for "discovery," the process by which each party examines the other's key documents and witnesses. AT&T begins to build a staff to provide documents to Justice. Ironically, as AT&T prepares to meet charges that it monopolizes the telecommunications business, the FCC in November accelerates competition by authorizing direct connection to the network of customer-provided equipment registered with the FCC.

AT&T introduces "One Bell System. It works." as the central theme for a long-range information program on the value of the integrated Bell System structure. The need for a more widespread understanding of the Bell System as a whole is at the heart of the information program."

1976 - In its Resale and Shared Use decision, the FCC allows unlimited resale and shared use of private line services and facilities. (Resellers lease bulk rate lines from telephone companies and resell them at a discount.) However, in ordering telephone companies to sell lines for resale, the Commission determined that, when they offer interstate communications, resellers are common carriers and must be regulated. With its efforts to maintain its monopoly losing at the FCC and in the courts, AT&T turns to Congress. The Consumer Communications Reform Act, the first comprehensive attempt to modify the Communications Act since it was enacted in 1934, is introduced. This bill became known as the "Bell Bill". Intensive lobbying by AT&T produces more than 200 co-sponsors for the Bell Bill, which would have restored AT&T's monopoly and stripped the FCC of its regulatory authority over competitive entry in long distance. The legislation was bottled up for months in both Houses of Congress, which explored telephone industry competition issues for the first time in a series of well-publicized hearings. 

From Bell Telephone Magazine - Issue 3 & 4, 1982:

"A watershed year for AT&T and the telecommunications business on three fronts -- regulation, legislation, and litigation.

Regulation: The FCC clears a number of long-standing dockets. Among other things, it rules that AT&T is entitled to a higher interstate rate of return and approves the expansion of the Dataphone® Digital Service.

The deadline for registering telephone equipment for connection to the network is set, postponed, then modified, with staggered deadlines for registering ancillary, data, and basic voice telephone equipment.

In another major decision, the FCC -- completing two years of study -- concludes in its economic impact inquiry that competition has not had, and is not likely to have, significant adverse impact on telephone company revenues
or rates for basic exchange service. Commissioner Benjamin Hooks dissents, and AT&T says it is in "virtually total disagreement" with the FCC's conclusion.

One of the most significant FCC inquiries begins in August. Recognizing that technological advances and changing customer needs have blurred the distinctions between data processing and communications, the FCC decides to re-examine the rules it set in its 1971 Computer Inquiry. The object of this second inquiry -- called Computer Inquiry II (CI-2) -- is, among other things, to find ways to allow common carriers to benefit from new data processing technology. In November, the FCC overrules its Common Carrier Bureau and allows the Bell System to sell the Dataspeed ® 40/4 terminal, which the bureau argued was data processing equipment.

Legislation: The introduction of the Consumer Communications Reform Act (CCRA) in the House and Senate launches a six-year national debate on national telecommunications policy. The measure is promptly labeled "the Bell bill" by detractors. By the time the 94th Congress adjourns, however, there are 192 sponsors of one or another of five versions of CCRA -- 175 in the House and 17 in the Senate.

Litigation: Nearly three years after the filing of the case, Judge Waddy, on October 20, rules that the Justice Department's antitrust suit is proper and that he has jurisdiction. AT&T appeals the decision."



1977 - The U.S. Court of Appeals issues its Execunet decision, which opened the long distance market to full competition by reversing FCC decisions limiting MCI and other specialized carriers to private line services. In subsequent decisions (Execunet II, 1978 and Execunet III, 1981) the court ruled that AT&T and its local telephone companies must permit the other long distance carriers to interconnect to their local networks to start and complete their calls. 

From Bell Telephone Magazine - Issue 3 & 4, 1982:

"Nearly a year after AT&T's appeal, the Supreme Court declines to review the decision of Judge Waddy, whose poor health is now noticeably slowing the case's progress. The FCC's request for comments in CI-2 draws responses from 50 parties, including AT&T and other carriers, the Justice Department, IBM, data processing equipment and services companies, industry associations, and users. Most want data processing to remain free from regulation. AT&T suggests new rules be adopted to allow it and other carriers to provide a full range of innovative communications services.

A new CCRA is introduced in the House on the opening day of the 95th Congress. A Senate version is introduced soon after. Hearings by the House and Senate are held throughout the year. Proposals are made by two industry task forces -- including one on separating telecommunications businesses into competitive and non-competitive sectors."


1978 -

From Bell Telephone Magazine - Issue 3 & 4, 1982:

"AT&T chairman John D. deButts calls it a "year to be proud of," citing the beginning of a national switched data network, a vigorous international sales effort, and the second restructuring of the Bell System in five years. The company begins changing from a services-oriented to a market-oriented organization, separating the residence and business operations into major profit centers.

New congressional voices are heard in the continuing debate over national telecommunications policy.

Representatives Lionel Van Deerlin (D.-California) and Louis Frey (R.-Florida) introduce the Communications Act of 1978, a rewrite rather than a revision of the Communications Act of 1934. Hearings are held across the
country, but Van Deerlin's bill is still in committee at year's end.

The antitrust case is assigned in June to Judge Harold H. Greene because Judge Waddy is seriously ill. Although nearing its fifth year, the case has yet to go to trial. Greene, a 13-year veteran of the bench, is reported determined
to treat the suit "just like any other case, because the parties and the public have a right to expect a federal judge to move things along." Three months later, he issues a pre-trial order that puts lawyers for both sides on a strict schedule designed to get the trial under way by Fall, 1980. To speed up the process, he gives AT&T and Justice deadlines for filing statements detailing what they intend to prove and what witnesses and evidence they'll use to do so.

AT&T and Justice lawyers begin the process of "stipulation," during which each side sorts out the facts they can agree on, leaving only the remainder to be decided in court."



1979 - After the Execunet decision, AT&T files a tariff at the FCC to raise the cost of specialized carriers' interconnection with AT&T's local network by 300%. Those carriers had vastly inferior connections into AT&T's local network (creating poor connections and necessitating dialing multidigit access numbers). They charged that AT&T was attempting to make it too expensive to compete in the long distance market. 

From Bell Telephone Magazine - Issue 3 & 4, 1982:

"In a 'tentative decision' released in July, the FCC says it will 'adopt a flexible regulatory scheme' in CI-2. In brief, the FCC says it will allow common carriers to set up separate subsidiaries to sell detariffed enhanced 'nonvoice' services. AT&T endorses the concept but is concerned about specifics.

AT&T vice chairman James E. Olson cautiously notes that 'controversy seems to be giving way to consensus' on telecommunications legislation, helped in large part by President Carter's call for action. By the end of the year, after another series of House and Senate hearings, a new House bill is introduced, sponsored by 15 members of the telecommunications subcommittee. The bill, H.R. 6121, deals strictly with common carrier issues, no longer touching on the broadcast or CATV industry as other bills
did.



1980 - The FCC issues a second Computer II decision that completely deregulated all data processing services. The decision also totally deregulated customer premises equipment and removed it from the rate base. Further, the decision allowed AT&T and GTE (the country's second largest telephone company) to sell customer premises equipment, but only through a separated subsidiary with separate accounting systems. The FCC allows the resale of public switched network services like MTS (regular long distance service) and WATS, establishing a market that today accounts for a growing share of competitive long distance service.

From Bell Telephone Magazine - Issue 3 & 4, 1982:

"April 7, four years after it began CI-2, the FCC announces one of the most momentous decisions in its history -- the detariffing of all new customer premises equipment and of all enhanced communications services.

AT&T and GTE are required to set up separate subsidiaries. The decision is made public in a 31/2-hour meeting. The FCC sets the detariffing date as March 1, 1982. (Later, the subsidiary requirement will be modified to apply only to Bell, and the detariffing date will be extended to January 1, 1983.)

The FCC's decision sparks legislative efforts to forge new telecommunications policy, but both House and Senate bills become snagged after preliminary approvals by the respective subcommittees.

The bills die at the end of the 96th Congress. In the Senate, committee leaderships pass from the Democrats to the Republicans; in the House, the failure of Representative Van Deerlin to be re-elected means a change in
the influential telecommunications subcommittee.

Throughout the year, lawyers for Justice and AT&T file outlines of their cases in preparation for trial. Meanwhile, in June, the MCI antitrust suit filed against AT&T in 1974 comes to a conclusion.

A jury awards MC1600 million dollars, a figure automatically trebled to 1.8 billion dollars because antitrust violations are involved. (AT&T is still awaiting a decision from the Seventh Circuit Court on an appeal of that verdict.)"



1981 - On January 15, the U.S. v. AT&T antitrust trial begins, and is immediately recessed amid speculation that a settlement is imminent. However, negotiations between the Department of Justice and AT&T broke down and the trial resumed on March 4. At the conclusion of the government's case, AT&T moved to dismiss the suit, but U.S. District Judge Harold Greene, concluding that "the testimony and the documentary evidence adduced by the government demonstrate that the Bell System has violated the antitrust laws in a number of ways over a lengthy period of time," continued the trial. Late in the fall, H.R. 5158 is introduced in the House, once again promoting competition as a cornerstone of national communications policy by providing for separate subsidiaries for AT&T's competitive activities, and offering a system for deregulating communications markets when they became fully competitive. 

From Bell Telephone Magazine - Issue 3 & 4, 1982:

"Justice's antitrust suit finally begins to move along. After years of developing evidence and filing pre-trial briefs, lawyers for AT&T and Justice
say on January 5 that they have agreed on the "concept" of a settlement, the first public hint of a possible conclusion to the long and trying case. When Justice and AT&T can't agree on the details for settling the case, the first witness is called. This is March 4, 61/2years after the suit began.

William F. Baxter, newly appointed as assistant attorney general in charge of the Justice Department's antitrust division, vows in his first press conference to litigate the case "to the eyeballs," which quells rumors that Justice, under President Reagan, might seek a compromise to end the case quickly. Baxter runs into opposition from the Defense and the Commerce departments, however, and asks for an ll-month recess to permit Congress to address the issue. Judge Greene refuses and Justice rests its case.

Judge Greene also refuses AT&T's motion to dismiss the case. Justice, he says, has shown "that the Bell System has violated the antitrust laws in a number of ways over a lengthy period of time." AT&T begins its defense, but
three months later, on New Year's Eve, Judge Greene is told the two parties have begun negotiating out-of court. Despite the time the antitrust suit is consuming, the Bell System continues planning and implementing organizational changes to comply with the FCC's Computer Inquiry II decision.

On the legislative front, the Senate in October passes S. 898, the Telecommunications Competition and Deregulation Act of 1981, which AT&T chairman C.L. Brown calls "the most significant milestone yet in the effort to forge legislation." The bill is sent to the House, where Representative Timothy E. Wirth (D.- Colorado) introduces a new bill, H.R. 5158, which is substantially different from S. 898."



1982 - On January 8, faced with the reality of having to finish the antitrust trial before a judge who had clear doubts of its innocence, and with the increasing prospect of legislation mandating competition in communications markets (but not divestiture), AT&T agrees to a settlement of the antitrust suit proposed by the Justice Department. The settlement would require the breakup of the Bell System, the same relief the government had sought from the beginning of the antitrust case in 1974. Under the proposed settlement, AT&T retained its long distance services, Western Electric, and Bell Laboratories, and gave up its 22 local monopoly telephone companies. AT&T was barred from "electronic publishing" over its own lines, and a maximum amount of AT&T debt that could be assumed by each operating company was established. The settlement proposal required the local telephone companies -- by September 1986 -- to provide access to all long distance carriers "equal in type, quality and price" to that provided by AT&T, and prohibited the local companies from manufacturing telephone equipment. Publishing of the highly profitable Yellow Pages was to have been awarded to AT&T. The proposal, however, was subject to approval by Judge Greene after a period of public comments. After announcement of the divestiture agreement, H.R. 5158 is modified to allow the local telephone companies to market customer premises equipment and publish the Yellow Pages. Consideration of the legislation was ended in mid-July, while it was being debated in the full Energy and Commerce Committee, because of inordinate delays and dilatory tactics by AT&T's few supporters on the Committee. In August, after a nine-month review of the divestiture agreement, Judge Greene enters a Modified Final Judgment (MFJ) in settlement of the antitrust case. While substantially accepting the terms agreed to by AT&T and the Department of Justice, Greene, in order to strengthen the financial viability of the local telephone companies, permits them to market customer premises telephone equipment and to publish the Yellow Pages. The FCC extends its Competitive Carrier deregulation of the interstate telephone industry, ruling that it will rely on market forces instead of regulation to control the rates of all carriers except AT&T, under a policy known as "forbearance." In December, the FCC announces the first of several decisions on access charges -- the prices charged to the competitive long distance carriers by local telephone companies for hooking into the local network -- in the post-divestiture environment. The access charge decision proposed a radical change in the way the fixed costs of the local telephone network were paid. The previous system had been designed so that the cost of equipment used by local and long distance carriers for long distance service -- wires, poles, switches, etc. -- would be shared by long distance and local service. The access charge order shifted almost all of those costs onto telephone subscribers, who pay a flat monthly fee whether or not they make any long distance calls. At the same time, three years before equal access for all long distance carriers, giving them the same connections as AT&T, was to be implemented, and with little improvement in the connections long distance carriers were getting from AT&T, the Commission orders a doubling of the ENFIA rate the other carriers were paying to AT&T and local Bell companies. 

From Bell Telephone Magazine - Issue 3 & 4, 1982:

"Fateful Friday, as some financial analysts tag January 8, is the 129th scheduled day of the trial. AT&T's Brown and Justice's Baxter announce a resolution of the suit at a joint press conference at the National Press Club in Washington, D.C. AT&T agrees to divest the 22 Bell operating companies, representing two-thirds of AT&T's assets and accounting for a third of its 6.9 billion dollars in net 1981 income.

On the grounds that their 23-page agreement is a modification of the 1956 Consent Decree, Justice and AT&T file for approval in Federal District Court in Newark, New Jersey, which handled the 1956 Decree. The 1982 agreement is referred to as the Modification of Final Judgment (MFJ).

Judge Vincent Biunno of the New Jersey court approves the settlement, but Judge Greene refuses to close the 1974 antitrust suit, claiming he still holds jurisdiction. In a complicated series of legal moves, Judge Greene is given complete authority to approve or reject the agreement, and Judge Biunno's approval is "vacated."

Judge Greene contends that the agreement deserves the full public scrutiny provided by the Tunney Act, which governs antitrust settlement procedures. The public is given 60 days to comment after Justice publishes a comprehensive description of the Decree in newspapers across the country. The 60-day period for comment begins February 19; a second round of comments is provided for and ends June 14.

Meanwhile, the announcement of an agreement has stirred congressional waters. On March 22, Representative Wirth introduces more restrictions on the Bell System in H.R. 5158, weeks after top AT&T and Bell System officers strongly criticize the bill. The amended bill is approved 15-0 by the House telecommunications subcommittee and sent to the full House energy and commerce committee for consideration.

AT&T quickly responds. In an unprecedented move, it urges share owners and employees to write and visit their congressional representatives to oppose the bill, and runs full-page ads denouncing the bill in newspapers across the country. Congressional offices are reported swamped with anti-legislation mail. On July 20, Wirth withdraws H.R. 5158 for the rest of the year.

After months of reviewing the 4,000 pages of public comments, briefs, and the responses of the parties in the case, Judge Greene on August 11 issues a 178-page opinion on the Modification of Final Judgment. He characterizes it as "plainly in the public interest" but wants 10 changes. He wants, among other things, to allow the operating companies to provide new customer premises equipment and printed Yellow Pages and to prohibit the remaining AT&T from offering electronic publishing services over its own transmission facilities for at least seven years.

Eight days later, AT&T and Justice, in separate actions, notify the judge that they will accept his recommendations. Justice is uncomfortable with the change that allows the divested companies to provide new customer premises equipment, but says it will agree to the Order even if the judge doesn't change his mind. Judge Greene doesn't. On August 24, two hours after he receives a revised MFJ signed by AT&T and the Department of Justice, Judge Greene approves the agreement.

In the 2,834 days since the suit was filed, AT&T has spent more than 380 million dollars and employed more than two thousand people to meet the demands of the court and the Justice Department and to prepare its defense. The approval of the MFJ is the culmination of years of debate on national telecommunications policy. It sparks the beginning of the most massive structural change in any company in the nation's history."


1983 - Throughout the year, many of the local telephone companies petition state regulatory commissions for massive, unjustified rate increases. While publicly implying that they were needed because of the costs associated with divestiture, the companies' filings indicated no such reasons. In the pre-divestiture confusion, many of those requests were granted, and implemented after the divestiture in 1984. In response to these extraordinary requests for local rate increases, by the soon-to-be-divested Bell Operating Companies, in November the House passes H.R. 4102, which prohibited the FCC from imposing access charges on residential subscribers and continued the discount for specialized carriers' access. 

1984 -Bowing to pressure from the House and a highly critical letter from 35 members of the Senate, the FCC agrees to reconsider its access charge decision, and, at the same time, rescinds the proposed increase in ENFIA rates. On January 1, the divestiture went into effect, with AT&T providing long-distance services and equipment manufacture and sales, and seven regional holding companies, comprising local telephone companies with separate, "unregulated" subsidiaries for competitive activities, providing local telephone service. In July, equal access is introduced for the first time in Charlestown, West Virginia, by the newly divested Bell Atlantic Corporation. This permits telephone subscribers to call MCI and other non-AT&T long-distance companies by dialing "1+". On September 1, each of the seven Regional Companies begins offering equal access in a small number of locations under the terms of "Appendix B" of the MFJ.



Click on cartoon above to view full-size. (Contributed to this web site by Diane)


The following is an article from the Southern Bell Magazine dated January, 1983. It gives some historical insight into how the divestiture was to happen:

Restructuring Plan (as of January 1983)

The Road Map to Divestiture 

Last month another major phase in the largest corporate restructuring in American history was completed. 

AT&T submitted to the Federal District Court in Washington, D.C., and the Department of Justice its comprehensive plan for the reorganization of the Bell System

The 471-page filing details how the company proposes to divest, as of Jan. 1, 1984, the assets, work force and stock ownership of the Bell System's 22 operating companies in compliance with the consent decree agreed to by AT&T and the Department of Justice and approved by the court on Aug. 24, 1982. 

Because dividing Bell System assets is a major portion of the work needed to implement restructuring, AT&T also submitted a "Bell System Asset Assignment Detail Work Plan." The Work Plan sets forth instructions, including inventory forms, that will be used to carry out the separation of all operating company facilities and books of accounts. These procedures are being field-tested by the operating companies to make preliminary assignments. However these assignments are subject to any modifications in the proposed Local Access and Transport Area (LATA) boundaries or the reorganization plan. 

Under the terms of the decree, the operating companies will provide exchange and local access service and may provide printed directory advertising and new customer premises equipment. 

AT&T will provide interexchange long distance telephone service and other products and services. AT&T will also assume responsibility for embedded customer premises equipment (CPE) , which is equipment on customers' premises or in operating company inventory. By the time divestiture occurs, AT&T will already be in the new CPE and enhanced services businesses through its subsidiary, American Bell Inc., as required by the Federal Communications Commission's Second Computer Inquiry order. 

The Bell System reorganization plan must be approved by the court. The plan is also subject to review and comment by state regulators, consumer groups, competitors and other interested parties. 

Final court action is expected this spring. The court has adopted a timetable that allows for 110 days for public comment and response. While awaiting approval, the Bell System will continue to press ahead with the reorganization process. 

Although the consent decree allows up to 18 months from its effective date of Aug. 24, 1982, to complete divestiture, divestiture has been planned for Jan. 1, 1984, because "the problems of financing in this time of uncertainty are already acute, and it is critical to the companies' efficient accounting, auditing and financial reporting that the divestiture not occur in the middle of a reporting period." The plan allows for a one-year period following divestiture - a so-called "true-up" time - during which asset and personnel assignments can be corrected, if necessary.


The Divestiture Process 

The first step of the divestiture process is the internal reorganization of the operating companies. Operating company facilities, employees and books of accounts for those parts of the business relating to exchange services and printed directories, which will remain with the operating companies, will be separated from those parts of the business associated with the provision of customer premises equipment and interexchange service, which will become the responsibility of AT&T. Based on this separation, each operating company will create two wholly owned subsidiaries. InterLATA facilities, personnel and other assets will be assigned to an interexchange subsidiary, while customer premises equipment, related facilities, personnel and other assets will be assigned to a CPE subsidiary. 

Each operating company will then transfer to AT&T, by means of a dividend, the stock it holds in the newly created subsidiaries. As a result, the operating companies will no longer own any interexchange or CPE operations, and AT&T will have separated its exchange holdings from its interexchange and CPE holdings. 

The transfer of these operations will involve a shift of about 10 to 20 percent of operating company employees. 

Assuming approval of the reorganization plan by U.S. District Court Judge Harold Greene in April or May, all the new companies will be incorporated in May or June. These new companies include the interexchange and customer equipment subsidiaries to be established by the operating companies, the seven regional holding companies with AT&T as the sole stockholder of each regional company, the Central Organization and the cellular mobile service company. 

On Dec. 31, 1983, actual divestiture will begin. The operating companies will transfer the interexchange and CPE subsidiaries to AT&T AT&T will transfer its ownership in operating company exchange, exchange access and directory operations, as well as the Central Organization and cellular services subsidiaries, to the seven regional holding companies on divestiture day. 

AT&T will then distribute the common stock in the holding companies to AT&T share owners. 

The outcome of the divestiture process will be the creation of the seven regional holding companies, each of which will own the operating companies in its region. The divested companies will provide exchange telecommunications and local access service within their respective Local Access and Transport Areas, printed directories and, if they choose, new customer premises equipment. Each of the regional companies will also own one-seventh of the Central Organization, as well as the stock of one regional cellular services company. (For more information about the Southern/South Central holding company, see the article beginning on page 26.) 

The remaining AT&T will consist of eight organizations. AT&T Corporate Headquarters will continue to be responsible for setting overall corporate strategy and the allocation of resources among AT&T lines of business. An interexchange entity will consist of the Long Lines organization and those operating company operations related to interLATA and international services, including the necessary operator services. An embedded base organization will manage equipment on customer premises or in company inventories that will be assigned to AT&T upon , divestiture. The other remaining AT&T organizations will be AT&T International, Western Electric, Bell Laboratories, American Bell Inc., and 195 Broadway Corp.


The "Bell" Name 

The plan also proposes guidelines for the use of "Bell" in corporate names. AT&T and the operating companies will not use any common corporate name, but each may use "Bell" in their corporate names, so that the operating companies and their holding companies could use such existing names as Southern Bell and Illinois Bell, as well as such new names as Northeastern Bell or Midwestern Bell.

Similarly, AT&T could use such existing names as Bell System or American Bell, as well as such new names as Bell Intercity or American Bell Manufacturing. The Department of Justice has agreed that Bell Laboratories would not have to change its name. 

Although not required by the consent decree, AT&T plans to assign its title to the Bell logo and certain other trademarks to the Central Organization for use within the United States in connection with exchange services, printed directories and any other activities the operating companies undertake. The Central Organization will license the use of these trademarks to the operating companies. 

AT&T will cease all future use of these trademarks within the U.S., including use in connection with customer equipment, and will develop its own separate logo and graphics for use by AT&T affiliates. AT&T will market its products and services with its own distinctive trademarks under the name American Bell, for example, referring to them as "genuine Bell products or services." 

In the event that these arrangements are not approved, the Bell seal and Bell names will be retained by AT&T. 

With divestiture of the operating companies, a number of contracts and agreements long in place will cease. Among them is the division of revenues process by which revenues from interstate services are turned over to the operating companies to compensate them for the cost of providing local exchange services used to complete intercity calls. To replace these revenues, the operating companies will file tariffs for access charges with their state regulatory commissions in 1983. (See related article on page 20.) 

Existing license contracts and cost sharing agreements between AT&T and the operating companies will also terminate. as will the Business Information Systems Agreement providing Bell Labs-developed data processing and business information systems.


The Transfer of Personnel 

Assignment of personnel to either AT&T or the operating companies generally will be based on the principle that employees follow their work. This is expected to minimize job relocations and employee inconvenience. 

The initial assignment of personnel is scheduled for completion in October, 1983. Generally, operating company employees whose job functions involve providing intraLATA or printed directory services will be assigned to an operating company entity. Those whose jobs involve the provision of interLATA services or customer premises equipment will go to an AT&T unit. (For more in-depth information about who will go where, read the article beginning on page 12.) 

In April, 1982, AT&T, the operating companies and the three unions signed an agreement that sets forth binding employee assurances during the transition period for employees who are covered by collective bargaining agreements and who are reassigned as part of a corporate reorganization. The assurances provide for no loss of employment, wages or service credit for a seven year period following transfer, among other guarantees. Employees reassigned after divestiture will not lose benefits, security or employment rights.


The Transfer of Assets 

In general, the division of Bell System assets will be based on the principle of sole or predominant use. For example, transmission, switching and plant facilities - including cables, poles, buildings, motor vehicles, office equipment and furniture - will be assigned to an operating company or to AT&T according to which entity uses them most. Applying this principle, assets used exclusively or predominantly for local exchange, or intraLATA, service will go to the operating companies, while those used exclusively or predominantly for interexchange, or interLATA, services or to provide customer premises equipment will go to AT&T (See related story on page 10.) 

An inventory of all assets will be conducted before they are assigned to either organization. Existing plant records will be used wherever possible to avoid actually counting items. The inventory process is scheduled to be completed by October, 1983. The federal court must also approve Bell System plans, filed last October, that define 161 "exchange areas," or Local Access and Transport Areas, in which the divested companies propose to provide exchange and local access service. 

Upon approval of the Bell System LATA proposal, roughly 75 percent of all Bell System physical assets will go to the operating companies for the provision of intraLATA services.


Stock Ownership Provisions 

After the regional companies are incorporated, the operating companies and the regional holding companies will hold regional stockholder meetings in October or November of 1983 with their sole share owner, AT&T, to seek approval or authorization of the transactions called for in the reorganization plan. At about the same time, the regional Boards of directors of the regional holding companies will announce their quarterly dividends for the first quarter of 1984. 

The regions will also file applications to list their stock on the New York Stock Exchange and other exchanges they choose. (For information about what will happen to existing AT&T stock, see the article on page 18.) 

Trading on a "when-issued" basis possibly will begin in November or December, 1983. This type of trading allows an investor to buy or sell regional company stock before actual certificates of the regional companies are available. Because of the large volume of certificates that will need to be issued, the initial distribution of certificates of the regional companies is expected in February, 1984. At that time, normal trading will begin.


Obligations Following Divestiture 

The consent decree imposes a number of obligations on the operating companies after reorganization is complete. The operating companies must provide equal access to interexchange carriers. They must file cost-justified access tariffs for service provided over their facilities. And they must report to the Justice Department within six months after divestiture on their plans for meeting decree obligations, including non-discriminatory treatment of interexchange carriers. 

An attachment entitled "Current Planning for Equal Access," which was submitted with the reorganization plan last month, summarizes the general plans of the operating companies. AT&T has pledged to assist the operating companies in preparing to meet their obligations.

 

 

Standing way back from the legal nuts and bolts
 - An outline of a book conceived but never published by Dennis Sandow of Millington, NJ.



The Bell System was taken apart because of the convergence of 4 simple ideas/inventions.
 

  1. The FCC is charged with regulating both radio/TV broadcasting and communications common carriers.  In 1964, we got a new President, and allegedly, he reminded the FCC that he owned a TV station (Lyndon Johnson, KTBC, Austin, Tx).  The FCC therefore did what bureaucrats do - it began to focus its resources elsewhere - on the communications common carrier side of its responsibilities.
     
  2. The RJ-11 phone jack was invented (late 60s?) to make life easier for the installer.  The collateral damage was that it gave the user the physical capability to SAFELY "plug in his own phone" (without any screwdriver or training).  This led manufacturers and retailers to gang up to force Bell to de-monopolize and de-regulate premise equipment and open up the market to competition.  (See "Carterphone Decision" - early 1970s)
     
  3. The BSOC-6 and ENFIA tariffs.  The other common carriers (say MCI) got started by devising services (say Execunet) that exploited the subsidies in the Bell system price structure.  (AT&T Long Distance customers paid a high price for toll calls, because part of that revenue was a built-in subsidy to keep exchange rates low.)  Because Execunet customers connected using Bell (subsidized) exchange service, and because MCI only had to charge for LD to cover its actual transmission costs (with no add-on for exchange subsidy), they could undercut Bell prices, and take customers from Bell.  Bell responded with two tariffs in the late '70s.  The BSOC-6 tariff (Bell System Operating Companies joint tariff #6) raised the price for exchange connections for private line service, to cover the actual costs.  In effect, the other carriers would be covering the subsidy themselves when they ordered these connections.  This would have made MCI and others less able to undercut Bell prices (and would have driven the floundering Western Union Telegraph out of business.)  The ENFIA tariff (Exchange Network Facilities for Interstate Access) did the same thing for dial services. This led the other common carriers, and large businesses (who could shop for price), to gang up to force Bell to maintain the status quo.
     
  4. Net-1000.  Since the mid 1970's, AT&T wanted to branch out from pure communications into "value added" network services.  The mechanism was to be an intelligent network, capable of doing data-processing on-the-network.  Since all other data-processing services (GE timeshare) and DP equipment vendors (IBM, Univac, DEC) etc. were not price-regulated, AT&T wanted to provide this service not subject to FCC regulation.  Because of Bell's huge network of lines and other scale economies, it might have been able to undercut the traditional DP vendors.  This led the DP vendors to gang up to keep Bell out.   The FCC's Computer II decision did deregulate the DP services, with strict organizational firewalls that were incorporated into the MFJ.  This computer network service was designed and built under the (not so secret) code name ACS (Advanced Communications Service), and went public in July, 1983 under the name Net-1000.

All these pressure groups were applying pressure through the FCC, the DoJ, and Congress.  Somewhere, something had to give.  See Charlie Brown article.

-----------------------------------------

I had nothing to do with #1 or #2 above, but was intimately involved with #3 and #4. 
------------------------------------------

In 1978, I was the AT&T Case Manager for the BSOC-6 tariff filing.  I managed the effort to put together the 36-volume (3-foot of bookshelf) Tariff Filing for the FCC, and then coordinated the responses to the complaints by others.
 

  • The Communications Act of 1933 states that "to be lawful, rates must be just and reasonable".  So an intervenor had only to argue that the new rates for exchange service connections were "unreasonable", and therefore "unlawful".  What a can of worms.
     
  • During that era, I discovered a book/poem "The Incredible Bread Machine".  I used it a lot in presentations to help AT&T people understand what was going on with the DOJ case and the FCC tariff issues.  (Search Google - there are 463 links listed.)  The part I committed to memory, and can still recite 25 years later - goes like this:

"The Rule of Law, in complex times,
has proved itself deficient.
We much prefer the Rule of Men,
it's vastly more efficient!"
 

"Now let me state the present rules,"
the lawyer then went on,
"These very simple guidelines,
you can rely upon:"
 

"You're gouging on your prices if
you charge more than the rest.
But it's unfair competition if
you think you can charge less!"
 

"A second point that we would make
to help avoid confusion...
Don't try to charge the same amount,
that would be Collusion!"
 

"You must compete. But not too much,
for if you do you see,
then the market would be yours -
and that's Monopoly!"
 

Price too high? Or Price too low?
Now, which charge did they make?
Well, they weren't loathe to charging both,
with Public Good at stake!
 

In fact, they went one better!
They charged "Monopoly!"
No muss, no fuss, oh, woe is us!
Egad, they charged ALL THREE!
 

----------------------------------------------------

From 1980-85, I was the Director of Operations for the Net-1000 service.  We built a network of 7 computer centers across the country (with plans to grow to 80.)  

TIMELINE ITEM.  On July 1, 1983.  American Bell was formed.  It was a non-regulated subsidiary destined to handle all of AT&T's deregulated services.
 

  • In July, 1983, American Bell had only one product.  Net-1000 was ready to market, but under Computer II, it had to be marketed through a de-regulated subsidiary.  So American Bell was rolled out "early".
     
  • As the first deregulated subsidiary (of the mostly-regulated AT&T and its operating companies), we got to introduce the new corporate logo of AT&T - the globe with a bunch of horizontal blue lines on a white background.  It was variously called :
    • The American BALL
    • The Death Star (See Star Wars)
       
  • Six months later (1/1/84), divestiture went into effect.  The RBOCs were formed, and all the premise equipment and installers and trucks were transferred from the RBOCs to AT&T.  At that time, (our little) American Bell became the container for all the de-regulated premise equipment business.  American Bell grew from 1000 to 100,000 employees overnight.
     
  • Net-1000 got lost in the shuffle.  The senior management of the (1/1/84) American Bell were customer-premise types, and didn't know what to do with the network product.  It was abandoned and died within a year.  What a shame - it was such an important contributor to divestiture.

It's old news now that AT&T and SBC are merging but it remains to be seen how successful this marriage will be.


 

Obituaries:

  • U.S. District Judge Harold H. Greene, who oversaw the breakup of AT&T as a jurist and played a key role in shaping two of the nation's landmark civil rights laws as a government attorney, died of a cerebral hemorrhage at his home at age 76 on January 29, 2000.
     

  • Another public figure in the destruction of the Bell System was Law Professor William F. Baxter.  He died at home in Los Altos on November 27, 1998 at the age of 69, from the effects of emphysema and Parkinson's.

Charles L. Brown, retired AT&T chairman, died on November 12, 2003 from a long illness. He was 82 and had lived in Princeton, N.J., since 1975.  He was chairman for seven of his 40 years wtih AT&T.  See NEWS STORY.

 

 

Full Articles from Newsweek and Time Covering the Breakup of AT&T:

 

   

1982 Newsweek           1983 Time

Before divestiture, the Bell System had this motto:

NO JOB IS SO IMPORTANT AND NO SERVICE IS
SO URGENT THAT WE CANNOT TAKE TIME TO
PERFORM OUR WORK SAFELY. – BELL SYSTEM

Then divestiture forced AT&T to "downsize" their workforce
and (tongue in cheek) "downsize" the motto to read:

NO JOB AND NO SERVICE SO WE CANNOT WORK.AT&T

 

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