may be gone, but its innovations are everywhere
By Michael Riordan
It's 1974. Platform shoes
are the height of urban fashion. Disco is just getting into full stride. The
Watergate scandal has paralyzed the U.S. government. The new Porsche 911 Turbo
helps car lovers at the Paris motor show briefly forget the recent Arab oil
embargo. And the American Telephone & Telegraph Co. is far and away the largest
corporation in the world.
AT&T's US $26 billion in
revenues—the equivalent of $82 billion today—represents 1.4 percent of the U.S.
gross domestic product. The next-largest enterprise, sprawling General Motors
Corp., is a third its size, dwarfed by AT&T's $75 billion in assets, more than
100 million customers, and nearly a million employees.
AT&T was a corporate
Goliath that seemed as immutable as Gibraltar. And yet now, only 30 years later,
the colossus is no more.
Of the many events that
contributed to the company's long decline, a crucial one took place in the
autumn of that year. On 20 November 1974, the U.S. Department of Justice filed
the antitrust suit that would end a decade later with the breakup of AT&T and
its network, the Bell System, into seven regional carriers, the Baby Bells. AT&T
retained its long-distance service, along with Bell Telephone Laboratories Inc.,
its legendary research arm, and the Western Electric Co., its manufacturing
subsidiary. From that point on, the company had plenty of ups and downs. It
started new businesses, spun off divisions, and acquired and sold companies. But
in the end it succumbed. Now AT&T is gone.
The company—still a
telecom giant but more focused on the corporate market—agreed to be acquired by
one of the Baby Bells, SBC Communications Inc. of San Antonio, in a deal valued
at $16 billion. In a few months, AT&T's famous ticker symbol—T, for
telephone—will disappear from the New York Stock Exchange listings, and the
company that grew out of Alexander Graham Bell's original telephone patents will
officially cease to exist.
Should we mourn the loss?
The easy answer is no. Telephone providers abound nowadays. AT&T's services
continue to exist and could be easily replaced if they didn't.
But that easy answer
ignores AT&T's unparalleled history of research and innovation. During the
company's heyday, from 1925 to the mid-1980s, Bell Labs brought us inventions
and discoveries that changed the way we live and broadened our understanding of
the universe. How many companies can make such a claim?
The oft-repeated list of
Bell Labs innovations features many of the milestone developments of the 20th
century, including the transistor, the laser, the solar cell, fiber optics, and
satellite communications. Few doubt that AT&T's R&D machine was among the
greatest ever. But few realize that its innovations, paradoxically, contributed
to the downfall of its parent. And now, through a series of events during the
past three decades, this remarkable R&D engine has run out of steam.
WHEN THE AT&T
MONOPOLY HELD SWAY over U.S. telecommunications, R&D managers at Bell
Labs and Western Electric were assured steady funding that allowed them to look
forward 10 or 20 years—the kind of long view that truly disruptive technologies
need in order to germinate and thrive. That combination of stable funding and
long-term thinking produced core contributions to a wide variety of fields,
including wireless and optical communications, information and control theory,
microelectronics, computer software, systems engineering, audio recording, and
digital imaging. Accumulating more than 30 000 patents, Bell Labs also played
host to a long string of scientific breakthroughs, garnering six Nobel Prizes in
physics and many other awards.
The funding came in large
part from what was essentially a built-in "R&D tax" on telephone service. Every
time we picked up the phone to place a long-distance call half a century ago, a
few pennies of every dollar—a dollar worth far more than it is today—went to
Bell Labs and Western Electric, much of it for long-term R&D on
In 1974, for example, Bell
Labs spent over $500 million on nonmilitary R&D, or about 2 percent of AT&T's
gross revenues. Western Electric spent even more on its internal engineering and
development operations. Thus, more than 4 cents of every dollar received by AT&T
that year went to R&D at Bell Labs and Western Electric.
And it was worth every
penny. This was mission-oriented R&D in an industrial context, with an eye
toward practical applications and their eventual impact on the bottom line.
AT&T's commitment to R&D
stemmed mainly from its pre-World War I experiences in developing high-power
vacuum tubes for use as amplifiers for transcontinental telephone service.
Facing scrappy competition from a hornet's nest of local phone companies after
Bell's original patents had expired, AT&T saw its leadership threatened—even
though it controlled about half the country's telephones.
The company wanted to
expand and offer "universal service" to its customers, aiming to put its phones
in every home and office across the country and connect them with one another.
But that required a very-low-distortion amplifier, or repeater, that could allow
AT&T to provide something no other company was offering: coast-to-coast
In 1912, Harold D. Arnold,
a young Ph.D. physicist fresh from the University of Chicago, joined AT&T's
engineering department. He began trying to improve the performance of the
low-power Audion triode tube invented by Lee de Forest several years earlier.
Arnold coated the tube's tungsten cathode with an oxide layer to encourage the
emission of electrons and pumped out excess air molecules from the tube that he
figured were impeding current flow through it. The resulting high-power vacuum
tubes performed splendidly, regenerating voice signals sent over long distances
with minimal distortion.
Using repeaters based on
Arnold's tubes, AT&T created a sensation in 1915 at the Panama-Pacific
International Exposition in San Francisco, where the company demonstrated
transcontinental service for the first time. From AT&T headquarters in New York
City, Alexander Graham Bell once again uttered his famous command into the
mouthpiece, "Mr. Watson, come here. I want you." From San Francisco, his old
assistant bellowed back, "It will take me five days to get there now!"
For the next half century,
AT&T had the U.S. transcontinental telephone market all to itself—an advantage
that helped the company reestablish its monopoly, bringing many of the small
local phone companies under the umbrella of its Bell System. Thus, firmly
convinced of the value of investing in research and development, in 1925, AT&T
managers reorganized most of the company's R&D activities into a single
organization: Bell Telephone Laboratories.
The first Bell Labs
headquarters, in a gracious, sun-filled, 12-story building at 463 West St. in
New York City, looking out across the Hudson River, soon became home to 2000
scientists and engineers. Its founding president, Frank B. Jewett, would later
help lead the United States' R&D efforts during World War II, as president of
the National Academy of Sciences from 1939 to 1947.
AS AN INDUSTRIAL
LABORATORY, Bell Labs was primarily committed to improving AT&T's
telephone operations. But Jewett and Arnold, his first director of research,
wisely supported projects whose results might not necessarily be useful in the
short run. Their commitment to such basic research was quickly rewarded in 1927
by a scientific breakthrough of epic proportions.
Observing electrons as
they sped through a vacuum tube and ricocheted from a nickel crystal, physicist
Clinton J. Davisson recognized that beams of these feisty subatomic particles
seemed to behave like waves! The intriguing hypothesis that matter could have
wavelike properties, proposed by Louis de Broglie, was just then the subject of
heated debate in Europe. Davisson's serendipitous discovery of electron waves
went a long way toward verifying de Broglie's theory—and earned him half of the
1937 Nobel Prize in physics, the first for Bell Labs.
The quantum description of
matter that emerged from that 1920s' ferment soon found practical applications
in the work of other Bell Labs scientists. It became essential to understanding
electrical conduction in semiconductors such as silicon and germanium that
emerged from the World War II U.S. radar program, in which Bell Labs and Western
Electric played key R&D roles. This emerging quantum theory of solids was also
crucial to the postwar invention of the transistor by physicists John Bardeen,
Walter H. Brattain, and William B. Shockley—then working at Bell Labs' new home,
a sprawling suburban campus in Murray Hill, N.J.
But the transistor was
still a long way from becoming the mass-produced gizmo that would reshape—or
create—huge industries, including radio, television, microelectronics, and
aerospace. More than a decade of development—involving silicon purification,
crystal growing, and the diffusion of chemical agents called dopants into
semiconductors—was required before transistors could begin to assume the forms
they are found in today. Much of that work took place not at Bell Labs but at
two Western Electric plants in Pennsylvania, in Allentown and nearby Reading,
where engineers developed the precision manufacturing processes and techniques
needed to mass-produce transistors. The clean room, used today in almost every
aspect of semiconductor manufacturing, was born and raised in Allentown.
scientists in Murray Hill, N.J., may have won the Nobel Prizes and gotten most
of the press, but Allentown and Reading delivered the goods," notes Stuart W.
Leslie, a historian of science at Johns Hopkins University in Baltimore. "Their
research and production engineers, tool-and-die makers, layout operators, and
assembly-line workers figured out how to transform prize-winning research into
devices that were reliable, durable, consistent, and cheap."
Many other innovations
spewed forth from Bell Labs during the 1950s in the wake of the transistor's
invention, for which Bardeen, Brattain, and Shockley received the 1956 Nobel
Prize in physics. Silicon technology spawned the integrated circuit. It also led
to the solar cell, which provided a durable power source for generations of
satellites in succeeding decades. And electrical engineer John R. Pierce
perfected the wartime traveling-wave radar tube into an efficient microwave
source to make his dream of satellite communications a reality. He played a key
role in the development of Telstar, the satellite that carried an amplification
circuit designed to retransmit signals over enormous distances.
Then, in 1964, using a
huge horn-shaped antenna salvaged from the Telstar project, physicists Arno A.
Penzias and Robert W. Wilson accidentally stumbled across the dim afterglow of
the universe's birth: the remnant microwaves from the big bang. Their discovery
triggered a revolution in cosmology and earned them a 1978 trip along the by
then well-worn path from Bell Labs to Stockholm.
MAGNIFICENT R&D PROGRAM, which helped the company consolidate its
monopoly and dramatically improve phone service for its customers, also
contributed to the company's dissolution, as noted by Christopher Rhoads in a
recent Wall Street Journal article. Consider, for example, the transistor, the
invention that today lies at the heart of all things digital, from DVD players
to satellite transponders. AT&T at first licensed the patent rights to the
invention for a paltry $25 000 and later put them in the public domain as part
of a 1956 consent decree that averted a court breakup of the monopoly.
AT&T leaders recognized
that the transistor was just too important to keep to themselves—and the courts
probably would not have allowed that anyway. But more than that, Bell Labs and
Western Electric actively encouraged the diffusion of their semiconductor
technology by offering a series of workshops during the 1950s that were well
attended by engineers from many other companies. The participants included Jack
Kilby, who would go on to pioneer the integrated circuit at Texas Instruments,
and a handful of engineers from a small Tokyo electronics firm that would parlay
early success with the transistor radio into a decades-long dominance of
consumer electronics: Sony. If the invention of the transistor can be said to
have sparked the information age, it really became a global phenomenon after
those workshops helped stoke the fires.
At the time, Bell Labs
managers generally regarded their company as a quasi-public institution
contributing to the national welfare by enriching the country's science and
technology. Seen in that light, AT&T's vigorous promotion of semiconductor
technology made good sense—especially during a time the company was churning out
profits and didn't feel any competition breathing down its neck.
But such generosity may
have been one of the crucial forces behind its eventual downfall, as smaller,
nimbler, and more legally unfettered firms seized the opportunity to develop and
deploy innovations that would help undermine AT&T's dominance of U.S.
telecommunications. "After its forced breakup in 1984," The Wall Street
Journal's Rhoads wrote, "it was slowly crushed by technologies that drove down
the price of a long-distance call, and more recently by wireless calling and
At the same time Bell Labs
and Western Electric were working on their many innovations, there was a
resistance to rapid change rooted deep within the parent company's culture.
According to Sheldon Hochheiser, former AT&T corporate historian, "a service
ethos and the absence of the countervailing pressures of competition produced a
corporate culture dominated to a great degree by an engineering mentality." That
culture, he adds, "encouraged a value system where managers tended to take the
time to get innovations right, as an engineer would define right."
Thus, AT&T engineers
usually emphasized reliability and robustness of the network over the rapid
introduction of advanced technologies. Often a decade or more passed before new
features, such as long-distance direct dialing and touch-tone phones, would
finally percolate throughout the system. And cellular telephony, first described
in detail by Bell Labs engineers in 1947, never gained widespread commercial
operation as part of the Bell System.
PERHAPS THE MOST
EGREGIOUS EXAMPLE of the company's technological conservatism was the
languid introduction of electronic switching, conceived in the 1930s by Bell
Labs research director Mervin J. Kelly (who later became president). Kelly was
the one who had hired Shockley, directing him to find a solid-state replacement
for the electromechanical relays used in the switches in the Bell System's many
The noisy, clunky relays
opened and closed circuits to establish continuous physical connections between
any two phones. A solid-state switch, on the other hand, would have no moving
parts, making it smaller, faster, quieter, and more reliable. Although
electronic switches based on solid-state components had been developed by 1959,
AT&T didn't introduce the first digital switch into the Bell System until 1976.
And electronic switching was still being gradually rolled out well into the
1980s, when AT&T's monopoly on telephone service came to an abrupt end. The much
more rapid introduction of digital switches by MCI and Sprint probably
contributed to AT&T's downfall.
And even though Bell Labs
and Western Electric developed most of the underlying silicon technology
required for the integrated circuit, which eventually became the guts of the
electronic central-office switch, AT&T wasn't in on its creation. The upstarts
Fairchild Semiconductor and Texas Instruments, focused as they were on
miniaturizing electronics for their military and aerospace customers, led the
way instead. Here again, AT&T engineers probably contributed to the lapse by
insisting on high-performance discrete components built for 40-year lifetimes in
the Bell System. There was no great drive for miniaturization in the system,
acknowledged Ian Ross, the president of Bell Labs at the time of the breakup.
"The weight of the central offices was not a big concern," Ross said.
contributing to the technological inertia was the billions of dollars already
sunk into the Bell System. Any responsible corporate manager would prefer to
amortize such investments before introducing newer, better devices, especially
when no real competitors existed. As the historian Hochheiser notes, the
"absence of competition allowed the Bell System's managers the freedom to take
an extremely long view."
THAT ABILITY TO
TAKE THE LONG VIEW was a boon to Bell Labs researchers, who could
follow their own instincts and explore what especially intrigued them, rather
than what might bolster AT&T's bottom line during the next few years. "The only
pressure at Bell Labs was to do work that was good enough to be published or
patented," recalls Morris Tanenbaum, who developed the first silicon transistor
in 1954 [see "The Lost History of the Transistor," IEEE Spectrum, May 2004] and
rose to the upper echelons of Bell Labs management in the 1970s.
With ample offices and
well-equipped lab space, lush green surroundings, classy cafeterias, and an
extensive library, the Bell Labs campus in Murray Hill became a magnet for some
of the best scientists and engineers in the world. Given broad research freedom,
they rewarded their far-sighted employer with a remarkable series of
technological firsts, right up to and beyond the 1984 breakup of AT&T.
Take researchers Izuo
Hayashi and Morton Panish, for example. In 1970 they developed the first
semiconductor lasers able to function at room temperature—a prerequisite for use
in CD and DVD players, printers, bar-code scanners, and fiber-optic networks. At
about the same time, Willard Boyle and George Smith invented the charge-coupled
device, or CCD, which is now the heart and soul of digital imaging, with
millions produced annually for digital cameras. Meanwhile, Bell Labs researchers
created the Unix operating system and the C programming language and its
offshoots [see sidebar,—key computer-engineering developments that helped other
companies such as Sun Microsystems flourish.
And the world-class
science continued well into the 1980s. Arriving at Bell Labs in 1978, physicist
Steven Chu got to spend six months figuring out what excited him the most and
was told to settle for nothing less than "starting a new field." He says he felt
he was among the elect, "with no obligation to do anything except the research
we loved best." Chu rewarded his employer's confidence with the development of a
laser method to cool atoms. That research, which earned him a share of the 1997
Nobel Prize in physics, is now allowing others to explore the quantum behavior
of atoms and molecules.
Over the past two decades,
however, basic and applied research have increasingly parted company at AT&T.
Many of Bell Labs' best scientists have left since the 1984 breakup. Then came
the 1996 spin-off of Lucent Technologies Inc., which inherited most of Bell
Labs. The exodus of top talent continued and accelerated after the collapse of
Lucent's stock in the past few years and a highly publicized scandal over
fabrication of data by physicist Jan Hendrik Schön. The departing scientists
have joined the legions of Bell Labs alumni already in academic
positions—including Chu, who just replaced another AT&T alumnus, Charles Shank,
as the director of the Lawrence Berkeley National Laboratory in California.
The Bell Labs budget has
suffered, too, as R&D funding at Lucent has plummeted in the past few years. In
2003, with R&D expenditures of $1.49 billion (down from $2.31 billion in 2002),
it was outspent by 56 companies around the world. Having recently returned to
profitability in large part by cutting back on research, Lucent will be lucky to
remain in the top 100.
IN RETROSPECT, IT
SEEMS UNREASONABLE to expect that a publicly held corporation can
devote so much money to long-term research when facing the ruthless forces of
the marketplace. AT&T added tremendous value to society, but as a condition of
its regulated monopoly status, the company was not allowed to commercialize new
technology that was not directly related to telephony.
Nor could AT&T charge
customers for the technology except through its fees for telephone equipment and
services. When it was a regulated monopoly, the company could build into those
charges a pittance devoted to risky future-oriented research, such as setting up
a solid-state physics department in the postwar years. But as ordinary
corporations competing for customer dollars after the breakup and later
spin-off, AT&T and Lucent could afford no such luxury.
We the customers are the
ultimate losers. A vigorous, forward-looking society needs mechanisms like this
to set aside funds for its long-term technological future. Letting governments
serve the purpose is an imperfect alternative at best, fraught with the
difficulty of making wise choices. The peer-review process widely used to select
projects may be able to direct public funds to worthwhile research, but it
usually favors established scientists and often overlooks bright young
researchers—such as Chu—with bold but risky ideas.
AT&T, Bell Labs, and
Western Electric effectively diverted a tiny fraction of our everyday
expenses—and from all corners of the U.S. economy—into long-term R&D projects in
an industrial setting that could, and often did, make major improvements in our
lives. Today we are eating up the technological capital they built during those
amazingly productive years. Are we doing anything to replace it?
MICHAEL RIORDAN teaches the history of physics and technology
at Stanford University and the University of California, Santa Cruz.
account of the transistor's invention and development can be found in
Crystal Fire: The
Birth of the Information Age, by Michael Riordan and Lillian Hoddeson
(W.W. Norton & Co., 1997).
The major events that led
to AT&T's demise are discussed in The Fall of the Bell System: A Study in
Prices and Politics, by Peter Temin with Louis Galambos (Cambridge
University Press, 1987).
A timeline with AT&T's
innovation milestones is available at
The above article was
INNOVATION MACHINE: Technicians attach the 77-kilogram Telstar 1
satellite to a launching rocket for its journey into orbit in 1962.
performs an acoustic experiment at Bell Labs' anechoic chamber, a room devoid of
echoes and reverberations.
researchers in Murray Hill, N.J., invented the transistor, but a Western
Electric plant in Allentown, Pa., developed most of the precision manufacturing
processes needed to mass-produce it.
LUCENT TECHNOLOGIES/BELL LABS (3
MAKING LIGHT WORK:
Ali Javan, William Bennett, and Donald Herriott [from left] adjust the
helium-neon laser they developed in 1960. The device, which generated a
continuous visible laser beam, found applications in science and industry.
In its 80 years, Bell Labs
has garnered six prizes in physics
1937—WAVE NATURE OF
By firing an electron beam
at a nickel crystal, Clinton J. Davisson showed that the ricocheting electrons
diffracted just like electromagnetic waves. His demonstration of the electron's
wave nature eventually led to solid-state physics. George P. Thomson shared the
together the right way and you can make them amplify and switch signals. The
invention of the transistor by John Bardeen, Walter H. Brattain, and William B.
Shockley made all digital devices possible.
How do electrons behave
inside metal alloys and noncrystalline materials like glass? Philip W. Anderson
came up with a quantum mechanical model, work that earned him a Nobel prize,
shared with Nevill F. Mott and John H. van Vleck. It found practical
applications with the development of memory chips and other solid-state devices.
Probing the sky with a
radio antenna originally developed for satellite communications, Arno A. Penzias
and Robert W. Wilson detected a faint microwave echo of the universe's birth.
Their discovery provided key support for the big bang theory.
By shining converging
laser beams at a group of atoms, Steven Chu was able to slow the atoms and
reduce their temperature almost to absolute zero. This "optical molasses" effect
led to atomic lasers and to improved atomic clocks and navigation devices. Chu
shared the prize with Claude Cohen-Tannoudji and William D. Phillips.
QUANTUM HALL EFFECT
Using a powerful magnetic
field, Horst L. Störmer, Robert B. Laughlin, and Daniel C. Tsui put electrons
into a quantum state with liquidlike properties. The phenomenon, called the
"fractional quantum Hall effect," is shedding light on the behavior of electrons
and other elementary particles.
A FAMOUS VISITOR:
Frank B. Jewett [right], soon to be Bell Labs' first president, shows high-power
vacuum tubes to Joseph J. Thomson, who discovered the electron.
was another Bell Labs brainchild
Today, Unix, in all of its
variants, descendants, and imitators, is easily the most influential operating
system in the world. MS-DOS, the foundation on which Windows was built, started
out as a poor man's Unix. Apple's Mac OS X, as well, comes from a version of
Unix created at the University of California, Berkeley. And, of course, Unix was
the model for Linux. But despite its importance, Unix's 1969 origin at Bell Labs
began with an outright failure, a system called Multics.
Back in the 1960s,
multimillion-dollar dinosaurs such as the IBM 360 bestrode the computing
landscape. Powerful as they were, mainframes were single-user machines until
time-sharing systems were developed. Multics was to be one of them. Developed
jointly by Bell Labs, GE, and MIT, the creators of Multics had an ambitious
goal. They were to design a system that would meet "almost all of the present
and near-future requirements of a large computer utility," according to a 1965
Four years later, a
commercially viable system was still a distant goal. Bell Labs withdrew from the
project, but a core group of researchers there, led by Kenneth Thompson [seated
in photo above] and Dennis Ritchie [standing] continued their research on
operating systems. Thompson devised the file system that lies at the heart of
Unix. (He also wrote a game called Space Travel that spurred the development of
the operating system itself by showing what resources a program needed to be
able to run.)
By the late 1960s,
minicomputers were scurrying about the computer world, and the post-Multics
group was allowed to buy a Digital Equipment Corp. PDP-11 (a bargain at only US
$65 000). The first PDP-11 version of Unix was a wonder, a mere 16 kilobytes in
size, with 8 KB of memory for additional software. The first Unix application
would be a word-processing program to be used by AT&T's patent-writing group.
The experiment was a success; other AT&T divisions began using Unix, and the new
operating system was off and running. When AT&T published the code and made it
available for noncommercial use, UC Berkeley; Carnegie Mellon, in Pittsburgh;
and other schools created even richer systems. A generation of software
developers would grow up with Unix in one form or another.
Soon, Thompson decided to
write a Fortran compiler for the new operating system. What he came up with,
though, was a new programming language, similar to the Basic Combined
Programming Language, or BCPL, that had been written for Multics. He dubbed it
"B." By 1971 it had evolved to become the C language. Today, most major software
projects are written in C or its descendant, C++, which itself was invented at
Bell Labs, by Bjarne Stroustrup in the early 1980s.
LUCENT TECHNOLOGIES/BELL LABS
We Offer Personalized One-On-One
Call Us Today at (651) 787-DIAL (3425)
"Breaking Up Is Hard
Events that led up to
the demise of the Bell System
System as we have known it will exist only in our
memories and in the history books." December 31, 1983
Time Line - "Chronicle News Update"
the Legal History of
and the Divestiture of AT&T
-"The Road Map to Divestiture"
Reorganization" - Legal Document - Civil Action No. 82-0192, December 16,
The Road Ahead - An excellent series of articles
published in the Bell Telephone Magazines at the time of divestiture
explaining how the FCC and DOJ rulings will affect the employees, the
customers and the resulting companies created by the breakup of Ma Bell.
Standing way back
from the legal nuts and bolts -
of a book conceived but never published by Dennis Sandow of Millington, NJ.
How the Bell System
Looks to the Public
Harris, from the Bell Telephone Magazine, Autumn 1978 issue
WHITHER DIRECTORY AND VIDEOTEX OPERATIONS?
- Of the 10 modifications Judge Harold H. Greene mandated in the agreement
between AT&T and the Department of Justice, one that has called for a great
deal of corporate adjustment is the provision setting forth conditions under
which printed Yellow Pages, White Pages directories, and electronic
information services may be provided. To read the entire article, click
Dear Reader: We Stopped the Presses
- The divestiture announcement just made it
into the Bell Telephone Magazine's last issue for 1981 which was to be printed
in January 1982.
pages on this site:
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 my
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
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:
20, 1974 - DOJ files antitrust suit charging anticompetitive
behavior, and seeking breakup of Bell System.
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
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
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
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
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.
to see how CNN news announced the breakup.
the Legal History of
and the Divestiture of AT&T
1876 - Alexander Graham Bell receives a basic patent on his "talking
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
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
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
- 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
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.
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
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
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
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."
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
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
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
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.)"
- 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
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."
- 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
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
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
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
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
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
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
- 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.
- 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)
- 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.
- 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. Here is a
link to the
whole work. (Or search Google - there are 463 links listed.) The part
I committed to memory, and can still recite 25 years later - goes like
"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
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
- 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
- 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
It's old news now that AT&T and SBC are merging but it
remains to be seen how successful this marriage will be.
And yet another merger. This time between
AT&T & Bell South. Who will AT&T gobble up next?
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
||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 with AT&T. See
divestiture, the Bell System had this motto:
IS SO IMPORTANT AND NO SERVICE IS
SO URGENT THAT WE
CANNOT TAKE TIME TO
PERFORM OUR WORK SAFELY. –
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.