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  <TITLE>The Rape of Ma Bell - (excerpts from the book)</TITLE>
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<BLOCKQUOTE>
  <P><B><FONT SIZE="+1">From the book </FONT><I><FONT SIZE="+2">The
  Rape of Ma Bell </FONT></I><FONT SIZE="+1">by Constantine Raymond
  Kraus and Alfred W. Duerig</FONT></B></P>
  <P><B>Published by Lyle Stuart Inc., 1988 - hard cover</B></P>
  <P><CENTER><B><HR></B></CENTER></P>
  <P><A HREF="The%20Rape%20of%20Ma%20Bell%20-%20front%20cover.html"><B>Front
  cover (photo)</B></A></P>
  <P><A HREF="The%20Rape%20of%20Ma%20Bell%20-%20back%20cover.html"><B>Back
  cover (photo)</B></A></P>
  <P><A HREF="The%20Rape%20of%20Ma%20Bell%20-%20dust%20cover%20flap.html"><B>Inside
  cover flap (photo)</B></A></P>
  <P>from pages 69 - 109</P>
  <P><CENTER><B><U><FONT SIZE="+3">5</FONT></U></B></CENTER></P>
  <P><CENTER><B><FONT SIZE="+3">The Factory</FONT></B></CENTER></P>
  <BLOCKQUOTE>
    <P>&quot;... high-class service and low-class equipment do not
    coordinate.&quot;</P></BLOCKQUOTE>
</BLOCKQUOTE>

<P>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#151;THEODORE
N. VAIL, 1915</P>

<BLOCKQUOTE>
  <P>Western Electric was an invisible giant.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The general public knew the Bell Laboratories.
  Its name popped up in newspaper articles with regularity&#151;its
  new inventions, its scientists winning Nobel prizes, Washington
  asking it to coordinate vital projects.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;But Western Electric? It was usually
  confused with Western Union or Westinghouse.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;When Vail bought Western Electric in
  1881, it was the largest producer of electrical goods in the
  United States. One hundred years later it had grown to be one
  of the ten largest American manufacturers, employing a quarter
  of a million people and selling $7.7 billion worth of its own
  products and another $2.3 billion in products made by other companies.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;It was AT&amp;T's factory. Western Electric
  took Bell Laboratories' research and development work and turned
  it into product. It mass-produced the most durable telephones
  on the market at half the cost of its closest competitor. It
  also turned out complex microelectronic chips. It was the world's
  first producer of the 64 kilobit chip and later the 256 kilobit
  chip. <BR>
  &nbsp;&nbsp;&nbsp;&nbsp;But the general public, unless an individual
  was in the habit of looking at the bottom of his telephone, hardly
  knew Western Electric existed, much less was aware of its immense
  size and scope.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The reason for this ignorance was twofold.
  One, AT&amp;T owned 100 percent of Western Electric. So it was
  not listed separately on any securities exchange and its earnings
  and balance sheets were integrated with those of the rest of
  the Bell System.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Two, Western Electric didn't sell products
  directly to the public. It sold&#151;with one exception&#151;only
  to AT&amp;T.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Of course, the Bell System was a gigantic
  customer, allowing Western Electric to have enormous production
  runs. Consequently unit prices were low. Also, because it had
  little competition, Western Electric didn't have to worry about
  cutting corners and could concentrate on quality production.
  Every Western Electric item was built to last virtually forever.
  Stories abound of vacuum tubes and relays in continuous service
  for more than sixty years. Electronic hobbyists put Western equipment
  high on their wish lists.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Having AT&amp;T as its market was a mixed
  blessing. Western Electric prospered when the local Bell operating
  companies were growing and modernizing. On the flip side, a recession
  would bring a reduction in the local Bell's growth and Western
  Electric's business fell off dramatically. Unlike other companies
  in similar situations, Western Electric couldn't go looking for
  new customers to make up for the loss. Various government regulations
  precluded that.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;When a local company's growth rate dropped
  from 4 per cent to 2 percent, it was hardly a disaster for it.
  However, that 2 percent reduction represented a 50 percent drop
  in new equipment and cable purchases from Western Electric. The
  only saving grace was that even if a local Bell company had no
  growth at all, substantial facilities were still required to
  take care of telephone movement. In addition there were modernization
  and plant replacement purchases.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;This volatility in sales led to volatility
  in employment at Western Electric. Layoffs were common.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;The other Western Electric customer
  was also a large one. It was Uncle Sam who came knocking in times
  of national emergency.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The course of World War II might have
  been far different without the research of the Bell Laboratories
  and the production of Western Electric. During that war both
  Western and the Laboratories worked almost exclusively for the
  military, leaving ordinary telephone business to get along as
  best it could.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;There was no time for home telephones
  with Western Electric producing more than 50 percent of U.S.
  radar (about 57,000 sets of seventy different types) along with
  30 percent of all its military communications equipment. Western
  was also producing the M-9 gun director, which played such a
  vital role in the war. Later Bell Laboratories developed and
  Western Electric produced the first electronically guided missile,
  the BAT, a homing bomb that was put to effective use against
  enemy shipping.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The end of World War II saw the beginning
  of the Cold War. President Harry S Truman appealed to AT&amp;T
  to take over the Sandia Corporation, a company which had been
  directing the design, manufacture, and storage of nuclear weapons.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The Bell System was initially reluctant
  to take on this assignment since it was so far outside the communications
  field. But government pressure prevailed. Today Sandia, under
  overall AT&amp;T direction and employing some seven thousand
  people, is still handling this work.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;AT&amp;T's involvement with the nation's
  defense did not stop with Sandia. Western Electric engineered
  and installed the DEW (Distant Early Warning) line, BMEWS (Ballistic
  Missile Early Warning System), SAGE (Semi-Automatic Ground Environment
  System), the White Alice over-the-horizon communications system,
  and the Nike family of anti-aircraft missiles.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The government knew that AT&amp;T was
  one contractor that delivered. When national panic set in after
  the Russians launched Sputnik, the world's first artificial satellite,
  in 1957, Washington again turned to the Bell System. The United
  States was behind, national prestige was at stake, and the country
  had to catch up. Bell Laboratories and Western Electric got the
  first communications satellite up in 1960. This was the passive
  reflector Echo balloon. It was followed in 1962 by the active
  Telstar, which contained transmitting and receiving equipment.
<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Then President John F. Kennedy had a
  dream&#151;a man, an American man, on the moon. And not in some
  distant century or even some faraway decade. He wanted fast action.
  He wanted it done in ten years. The U.S. would not only play
  catch-up with the Soviet Union, it would surpass it.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The undertaking, christened the Apollo
  project, was to involve massive planning. In 1962, the government
  asked Bell to direct systems planning for the project. With that
  end in mind the Bellcomm Corporation was formed, drawing largely
  from Western Electric and other Bell System employee pools. The
  rest was history.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;So it was that on July 20, 1969, six
  months ahead of Kennedy's deadline, Neil Armstrong took that
  first small step for man. The Bell System could share the nation's
  pride in that accomplishment.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;There was a tragic footnote to the
  Apollo project, one that might have been avoided if a Bellcomm
  recommendation had been heeded.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;It had to do with using a pure oxygen
  environment in the Apollo capsule. Bellcomm scientists had counseled
  against it. They were worried about fire dangers.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Astronauts Gus Grissom, Ed White, and
  Roger Chaffee died when an Apollo capsule caught fire during
  ground tests on January 27,1967.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;Sometimes big is the only way to get
  things done.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;There is a national mentality&#151;no
  doubt brought on by the excesses of the Jay Goulds, the Cornelius
  Vanderbilts, and the Standard Oils of the last century&#151;that
  big is bad.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;As the song says, it ain't necessarily
  so. Some endeavors are not possible on a basement workshop scale.
  It took AT&amp;T with its Bell Laboratories research and Western
  Electric manufacturing capabilities to design, build, and launch
  the first communications satellites. Telstar alone involved an
  investment of $60 million&#151;in 1962 dollars.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;While they are important to worldwide
  communications, satellites are not the be all and the end all.
  They have inherent limitations. Stationary satellites orbit at
  a height of around 22,300 miles. It takes noticeable time for
  signals to travel up and be returned. Trying to carry on a conversation,
  especially when more than one satellite connection is involved,
  often leads to people interrupting each other during the silent
  periods when the signal is en route.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;So the Bell System poured money, lots
  of money, into an alternative&#151;submarine cable. Again the
  system was geared up. By 1956 it had designed, manufactured,
  and installed the first transatlantic telephone cable. One of
  the most challenging aspects of the project was the more than
  100 amplifiers that needed to be integrated with the cable on
  the ocean's floor. These amplifiers had to be built to last.
  Having to make frequent service calls to replace them at the
  bottom of the Atlantic was obviously not desirable.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;This monumental undertaking cost some
  $50 million and was completely successful. The annual growth
  in the rate of transatlantic calling promptly jumped 25 percent.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;This first cable only had thirty-six
  voice channels and was soon working at capacity. More cables
  were laid across the Atlantic and then the Pacific.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Meanwhile, an ingenious development called
  TASI (Time Assignment Speech Interpolation) was introduced in
  1959. This multimillion dollar invention took advantage of gaps
  in conversation and even pauses between syllables. Other conversations
  got wedged into those gaps. With TASI, transoceanic cables could
  carry 50 percent more calls.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;As big as these projects were in terms
  of cost, brain and manpower, they were dwarfed by another that
  consumed the attention of Bell Laboratories and Western Electric
  for two decades beginning in 1955.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Electronic switching.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Local and long distance dialing connections
  had been made using electromechanical switching systems that
  were expensive, slow, and took up a lot of physical space and
  electrical power.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Electronic switching was to change all
  that. And the key to its development was the concept of &quot;stored
  program control.&quot; With this, an electronic memory, which
  could be easily altered, held the instructions for interconnecting
  calls rather than the masses of wires and relays used in older
  systems. In other words, the brains of the new machine was an
  electronic digital computer.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The project would have been much easier
  if it had been merely a question of developing and putting the
  new system into place. But it also had to work effectively with
  thousands of existing mechanical switching machines, some of
  them more than forty years old.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The first viable electronic central office
  switching system went into service in 1965. It took ten years
  of research, development&#151;some failures&#151;and more than
  $500 million. Without electronic switching, today's service demands
  could never have been met.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Still another large project was started
  in the early 1970s. This was the #4E four-wire electronic switching
  system, a time division switcher used to route long distance
  calls. In a four-wire system the transmitting and receiving paths
  are kept separate in the machine and not combined as they are
  in the more common two-wire switcher.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The 4E has no moving parts. All connections
  are made using solid state electronic components. Development
  cost? $400 million. Each machine's installed cost? $10 million.
  But each one can handle more than a half million calls per hour
  on more than 100,000 connected trunks. The future had arrived.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;These are just some examples of what
  being big can accomplish. Some projects have immediate payoffs.
  After World War II, a plastic sheathing for cables was developed
  to replace the expensive lead covering used previously. This
  saved enough money in the Bell System to pay for the Laboratories'
  entire research budget for five years.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;But other projects took years to pay
  off. The former Bell System could afford to carry the expense
  and go on to new projects. Big could be and was better at Bell.
  But therein lay the seeds of its destruction.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Vertical integration. One company handling
  the research, development, manufacture, engineering, installation,
  operation and maintenance&#151;all the activities necessary to
  make a single phone call. Keeping these functions under one head
  gave ammunition to Bell's enemies. Western Electric's role, in
  particular, was to be a major factor in the demand for divestiture.
  Those gunning for Bell shouted &quot;foul&quot; over the one-supplier,
  one-customer relationship between it and the local Bell operating
  companies. &quot;Unfair advantage&quot; and all that, they yelled
  because the local Bells were &quot;required&quot; to buy from
  Western Electric, thereby eliminating the possibility of any
  competition.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Those frothing at the mouth for Bell's
  blood could make that claim all they wanted&#151;and they did&#151;and
  they could also be dead wrong&#151;which they were.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The truth was the locals were expected
  to buy much of their equipment from Western, but were not required
  to do so. Many outsiders being told this pooh-poohed the distinction
  as a bit of semantic smoke. They contended that any operating
  company purchaser who bought elsewhere was looking forward to
  one fat reprimand, or worse.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;That was just not the case.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Western Electric had to tout and sell
  its products as did any number of other suppliers of similar
  goods. The AT&amp;T staff sometimes issued cautionary advice
  against a non-western Electric item, known as a general trade
  product. However, that wasn't to give Western some kind of extra
  advantage. Rather it was because the staff had not determined
  that the other product was good enough to get the Bell System
  seal of approval or that there would be limited maintenance support
  for these outside items.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Both authors were involved in many purchasing
  decisions for Pennsylvania Bell and know first-hand that Western
  Electric lost out on many occasions. Other companies got contracts
  for central office switching systems. Collins, Raytheon, and
  Nippon Electric sold microwave radio systems to Bell, and a whole
  host of other suppliers sold Bell test equipment and accessories.
  In each case, Western Electric representatives had touted the
  advantages of their products. In these cases, they didn't get
  the contracts. It happened.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Bell of Pennsylvania purchased almost
  none of its digital microwave radio equipment from Western for
  the same reason any other company would have passed it over.
  Western's competitors had better quality and lower-priced products.
  Period. Towards the end of the seventies and the beginning of
  the eighties, the same was true for digital switching equipment.
  Bell of Pennsylvania bought most of that from Northern Telecom.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;No reprimands, harsh or otherwise, were
  ever handed down, nor were there even any suggestions from AT&amp;T
  that this equipment should be bought from Western Electric.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;On the other hand, it was true that local
  Bell companies did buy most of their equipment from Western.
  But for the same reasons they bought outside&#151;on those items
  Western Electric had unbeatable quality and price. Western Electric
  supplied, almost exclusively, copper cable and wire, telephone
  instruments, multiplexing equipment, and most central office
  switching gear.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;In 1972, the breakdown between Western
  and general trade products was 80 percent/20 percent. The Bell
  System spent approximately $1.2 billion that year on outside
  products. This increased gradually in subsequent years.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Top management was well aware that local
  Bell company purchasing decisions were being closely watched.
  John deButts said in 1972, &quot;I must emphasize how important
  it is that the Bell Companies' judgments as to what to buy and
  from whom be able to withstand the most searching public scrutiny
  with respect to their objectivity.&quot;<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Keeping completely objective when it
  came to purchases was emphasized. Western Electric got the business
  when Western was the best. A further indication is that since
  January, 1984, when corporate ties between AT&amp;T and the local
  Bells were slashed, the locals have continued to buy heavily
  from Western.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;An interesting, if somewhat distressing,
  footnote to divestiture shouldn't be overlooked. When Bell was
  intact, Western Electric manufactured replacement and modernization
  parts for systems that had been installed up to fifty years earlier.
  As long as a system remained in service in the Bell System, it
  was essential it work with newer equipment which was coming on
  line. Keeping obsolete equipment working was not profitable for
  Western. It did so because that was part of the obligation of
  a vertically integrated supplier.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Western is no longer a vertically integrated
  supplier for the Baby Bells, so it's hardly reasonable to expect
  the same level of support to continue after divestiture. General
  Motors, after all, doesn't make replacement fenders for 1935
  Chevys just because there are still a few out there. This will
  force the scrapping of some older systems, and this will translate
  into higher consumer costs. Just one more item the American public
  will have to foot the bill for because of divestiture.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Naturally, predivestiture, Western had
  the replacement parts field pretty much to itself&#151;no other
  company was interested&#151;along with the large market for additions
  to central office equipment originally made by Western. In other
  cases, such as telephone instruments and cable, Western had a
  cost advantage over its competitors because of its mass purchases
  of raw materials and enormous production runs. But even more
  than that, Western's winning card was the close association with
  Bell Laboratories. Together they were able to produce quality,
  and quality is hard to beat.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Because it had these markets to itself,
  there was the potential for Western to play price games: to inflate
  the price of items where it had no competition so it could lower
  the price where it had.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;ITT filed an antitrust suit charging
  just that. AT&amp;T eventually settled out of court, agreeing
  to buy more ITT equipment. But Washington decided that where
  there was smoke and lawsuits, there must be fire. So it launched
  numerous investigations, spending millions, searching for evidence
  that Western was involved in unfair trade practices. Apparently
  it was inconceivable to the bureaucratic minds at the FCC that
  the company could actually produce superior products at low costs
  honestly.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Lo and behold, the investigations failed
  to turn up any evidence that Western had, in fact, played such
  games. Nothing. Despite all those millions of dollars spent,
  repeated analyses showed that Western Electric prices were below
  those of its competitors simply because of production efficiencies
  and volume.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;The strengths of the old Bell System
  were to become its Achilles heel. Critics could not believe that
  Western Electric products could cost so little and be so good
  without some sort of chicanery. Bell's top managers, brought
  up and instilled with corporate integrity, were not prepared
  for down-dirty streetfighting or the disaster that was on the
  horizon. Who in their right mind would endanger a national treasure
  such as Western Electric, particularly in combination with the
  Bell Laboratories? Who indeed?<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;John deButts, the AT&amp;T chairman knew
  there was trouble in 1977. He predicted that &quot;the [Federal
  Communications] Commission's policies . . . will force an alteration
  of our research and development priorities . . . to give more
  attention to relatively superficial product differentiation and&#151;
  reluctantly&#151;somewhat less fundamental systemic improvements
  of advantage to our entire customer body.&quot;<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;But in retrospect that prediction seems
  almost laid back and nonchalant. A breeze had started blowing
  and Ma Bell hardly noticed it.</P>
  <P><CENTER><B><U><FONT SIZE="+3">6</FONT></U></B></CENTER></P>
  <P><CENTER><B><FONT SIZE="+3">The Beginning of the Storm</FONT></B></CENTER></P>
  <P>The winds began picking up.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Theodore Vail probably assumed the 1913
  Kingsbury Commitment settled the antitrust bugaboo.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;By letting independent companies plug
  into the Bell System and by agreeing not to buy up any more independents
  without federal approval, it was believed by Bell managers that
  Washington would stop gunning for AT&amp;T under the Sherman
  Act.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;It seemed pretty clear, when reasonable,
  informed people thought it through, that the telephone system
  was a public utility, a natural monopoly much like a gas or electric
  company. Why? Because a natural monopoly exists when the economies
  of scale dictate that one company alone can provide the customer
  with a service or product at a lower unit cost than two or more
  competing companies could. There are enormous underlying structural
  costs in the telephone transmission and switching network&#151;the
  land, buildings, switching systems, power plants, right-of-way,
  conduit, cable, microwave towers, etc. Two companies competing
  means a duplication of all this&#151;and two sets of facilities
  aren't needed to provide service.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Efficiency, then, is another key element
  in natural monopolies. Is it more efficient&#151;and therefore
  more beneficial to the public&#151;to eliminate competition and
  have only one company in the market?<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Economists through the years have accepted
  telephone service as a natural monopoly. In citing the greater
  efficiencies of these monopolies, Harold Koonitz of the University
  of California at Los Angeles and Richard W. Gable of the University
  of Southern California wrote, &quot;If competitive telephone,
  gas, water, electricity, or street-railway lines were allowed
  to build multiple lines down the city streets or across property,
  the result would be a confusing and inefficient mass of duplicating
  facilities. These might not only hamper use of the streets but
  impair the quality of service.&quot;<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;There's no getting around it, the telephone
  system is a natural monopoly. Once that's accepted, what British
  economist John Stuart Mill had to say 140 years ago about introducing
  competition into such a monopoly has to be considered. It was
  his widely accepted contention that when competition is introduced
  into a public utility operation the consumer must pay for the
  sum of the costs of all the competitors. In other words, plain
  and simple, the consumer is being gouged, taken, and ripped-off.
  And that is wrong.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Because of its wastefulness, Mill argued,
  competition in a public utility should be prohibited for the
  public good. However, the public utility monopoly must be carefully
  and properly regulated to avoid the user being overcharged with
  the regulators keeping in mind that the rate structure should
  be based on the principle of the &quot;greatest good to the greatest
  number.&quot; Those who can afford to pay more should pay more
  so that the lower economic classes may also be served.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;With the Kingsbury Commitment, it
  was believed that Washington had accepted AT&amp;T's status as
  a monopoly, and any future complaints the government had with
  its operation would be resolved through regulation.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;But the commitment was only a lull&#151;granted
  a long one&#151;in the antitrust storm. Washington doesn't stay
  the same. New administrations bring new personalities and new
  attitudes, and few so dramatic as Franklin Delano Roosevelt's
  New Deal.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Up until then, federal regulation of
  the telephone industry had fallen under the umbrella of the Interstate
  Commerce Commission, which was really more interested in railroads
  than anything else. In 1934, Congress created the Federal Communications
  Commission. One of its primary functions was to oversee the interstate
  traffic of the telephone industry.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The first thing the chairman of its telephone
  division, Paul Atlee Walker, a reform-minded Quaker, did was
  start an investigation of all telephone companies that was soon
  narrowed down to only Bell.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;AT&amp;T president Gifford declared,
  &quot;We welcome the investigation; there are no skeletons in
  our closet.&quot; The proceedings were long, exhaustive, and
  Walker was clearly biased against AT&amp;T. When he finally issued
  his &quot;Proposed Report&quot;&#151;largely his work and not
  that of the other FCC commissioners&#151;it was an out-and-out
  attack on the company. He was especially upset over Western Electric's
  role, calling for competitive bidding in the purchase of equipment.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The final report, which came from the
  full commission and not just the fervent Walker, was considerably
  toned down&#151; and virtually overlooked. The country was far
  more concerned with the frightening events taking place in Europe
  in 1939 than it was in who should manufacture telephones.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;After the war, Holmes Baldridge, an attorney
  who had worked with Walker on the investigation, joined the Justice
  Department's antitrust division. Baldridge agreed with his former
  boss that AT&amp;T's relationship with Western Electric was bad
  for the country. He pushed for and convinced Attorney General
  Tom Clark to file an antitrust suit in 1949, calling for the
  separation of Western Electric and Bell Laboratories from the
  rest of the Bell System.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Of course, some people found the suit
  illogical, coming at the same time the government was begging
  the Bell System to take on the management of the U.S. nuclear
  weapons facility in Sandia, N.M.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;As AT&amp;T President Leroy A. Wilson
  pointed out in 1949, &quot;What the government asks in this lawsuit
  is that the courts break up and dissolve the very organizational
  unity and size this vital security job requires. We are concerned
  by the fact that this antitrust suit seeks to terminate the very
  same Western Electric/Bell System relationship which gives our
  organization the unique qualifications to which you refer.&quot;<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Over the next seven years the suit ran
  a rocky and controversial course. Finally in 1956, an agreement
  in the form of a consent decree ended the suit.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;At first glance, the agreement seemed
  to provide a basis for stability in the industry. Bell retained
  Western Electric and Bell Laboratories. In return, the company
  agreed not to branch out into other fields. It had to confine
  its activities to common carrier communications. Further, Western
  Electric would have only one market&#151;the Bell System. And
  lastly, license and technical information developed in the Bell
  Laboratories would become available to any who applied for it.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;These restrictions didn't seem too severe
  and most Bell System managers were pleased with the outcome.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;&quot;We kept Western Electric,&quot;
  Frederick R. Kappel, AT&amp;T's president at the time, said,
  &quot;but at some cost patent-wise. The decree . . . generally
  makes legal an integrated Bell System.&quot;<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The unity of Bell had been preserved,
  although it took a while for the controversy surrounding the
  decree to subside. It was charged, for one thing, that Attorney
  General Brownell and the Eisenhower administration had caved
  in to AT&amp;T pressure. A Congressional investigation was launched,
  but it did not lead to a reversal of the settlement.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;So, all looked rosy for AT&amp;T. Who
  then could have guessed that this victory was actually the first
  inexorable step towards defeat? It would have taken a crystal
  ball to have divined the land mines put in place by the consent
  decree. One was limiting the Bell System to common carrier activities.
  That seemed straightforward enough in 1956. However, with the
  onslaught of the computer revolution the difference between data
  processing (a no-no for Bell under the decree) and data transmission
  (allowable) became less and less distinct. This created problems
  for both Bell and its regulators.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;In fact, the FCC would eventually launch
  three inquiries&#151;Computer Inquiry I, II, and III&#151;to
  establish rules for separating regulated communications from
  unregulated data processing, as the boundaries between them became
  fuzzier with the introduction of new technology. And even after
  all that, few were satisfied with the results.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The problems began around 1960 when the
  concept of computer time-sharing was invented. An early application
  involved the composing of a message at one computer terminal
  and having it printed at another.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Whoa! cried Western Union to the FCC.
  The computer companies offering these services were illegally
  engaging in common carrier communications. Western Union countered
  with a similar service.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Just one second there! screamed the computer
  data-processing firms. Western Union was going beyond its charter
  as a regulated common carrier and was competing unfairly by entering
  the unregulated information-processing business.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Who was right? The FCC didn't know, so
  in 1966 it set out to unravel the situation by establishing some
  rules for separating regulated communications and unregulated
  data processing. This proceeding was later called Computer Inquiry
  I and didn't conclude until 1971. One rule it came up with was
  any service that fell on the borderline between communications
  and processing of data would be considered a &quot;hybrid&quot;
  service. The FCC would then decide, case by case, whether or
  not the service should be regulated.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;It wasn't long before the commission
  was inundated by hybrid cases, many of which turned into long
  and bitter debates between the protagonists on both sides.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;By 1976, the FCC decided it was time
  for some better definitions and rules. And so was born Computer
  Inquiry II. Out of this second inquiry, completed in 1980, came
  the notion of two classes of services&#151;basic and enhanced.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Basic services were defined as the simple
  transmission of information without modification. These could
  be offered by existing common carrier companies such as AT&amp;T,
  GTE, and Western Union.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Enhanced services were defined as those
  that acted on the content or format of transmitted information,
  and they encompassed videotext, protocol conversion, information
  storage, packet switching, and other modifications of transmitted
  data. These could only be offered by companies outside the regulatory
  arena or fully separated subsidiaries of AT&amp;T. It is interesting
  to note&#151;and perhaps to wonder why&#151;only AT&amp;T and
  not other common carriers had the separate subsidiary restriction.
  This ruling forced a costly organizational restructuring on AT&amp;T
  in the midst of its other problems.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Computer II also required that all customer
  premises equipment, including ordinary residence telephones,
  must be sold through separate subsidiaries rather than continuing
  to be included as part of tariffed services. This was to get
  around any bickering over whether a particular type of equipment
  was a communications terminal or a data-processing device.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;So the problem seemed to be settled at
  last. Except the separate subsidiary solution created its own
  set of problems. Certain advanced services such as centralized
  answering and recording couldn't be introduced. The physical
  separation of the equipment providing these services from the
  equipment providing basic telephone service was impossible. AT&amp;T
  had to scrap the combined equipment it had already installed
  in several locations at the cost of several million dollars.
  While the separate subsidiary requirement might have been well-intentioned,
  it ended up costing the public advanced services and a lot of
  money for AT&amp;T. AT&amp;T has estimated the separate subsidiary
  requirements alone were costing it more than $1 billion annually.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Naturally, this led to Computer Inquiry
  III in 1984. One of its results was a 1986 FCC decision essentially
  eliminating the subsidiary requirement and substituting accounting
  rules to prevent subsidization of nonregulated services.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;All of this description of the inquiries
  merely shows that what seemed clear-cut in 1956, wasn't.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Another land mine proved to be the decree's
  preventing Bell from following the natural paths opened up by
  its own technology into other lines of business such as computers.
  At the same time, the decree armed future Bell competitors with
  Bell's own technical information.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Still, what was important in 1956 was
  that the consent decree had reaffirmed the principle that the
  network over which calls are transmitted is a natural monopoly.
  Or at least that's what Bell managers thought. But it was only
  three years later in 1959 that the FCC made the first significant
  break in the natural monopoly principle with its Above 890 ruling.
  This allowed private companies to use available portions of the
  radio frequency spectrum above 890 megahertz for their own communications.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;As it turned out, the ruling itself had
  little impact. Most companies found that using the Bell System
  for their internal communications was cheaper and more reliable
  than constructing and maintaining their own networks.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;But the FCC didn't stop with Above 890.
  In June, 1968, came its Carterfone decision. The Carter Electronics
  Corporation of Texas manufactured a device that could connect
  private two-way radio systems with the telephone system. In other
  words, it wanted to introduce a &quot;foreign&quot; piece of
  equipment into the network. This was something AT&amp;T had always
  fought against, arguing that the integrity of the entire system
  could be damaged by plugging in inferior equipment. The Bell
  System's tariffs had prohibited such interconnection.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Carterfone appealed to the FCC, and the
  FCC told AT&amp;T to revise its tariffs.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;A year later, the FCC went further. In
  August, 1969, it authorized a common carrier, Microwave Communications
  Incorporated (MCI) to construct point-to-point microwave radio
  systems and to sell private line services to individual business
  users. Initially, MCI said it was only interested in providing
  service between Chicago and St. Louis. MCI's chair man, William
  McGowan, specifically stated that his company had no intention
  of going beyond customized point-to-point service. MCI had no
  desire to compete with Bell System's long distance network.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;That's what William McGowan said. So
  the FCC approved MCI's application, apparently believing that
  the company only wished to provide innovative services not available
  from AT&amp;T. But what McGowan said and what McGowan did were
  two very different things. Within a shamefully short time, and
  much to the surprise and consternation of the FCC, MCI without
  any specific authorization starting offering long distance service
  in direct competition with AT&amp;T.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The FCC was a bit upset and ruled that
  MCI's long distance service, called Execunet, was illegal. However,
  the federal appeals court begged to differ, and overruled the
  decision in July, 1977. The local operating companies were then
  required to give MCI connecting links for its long distance calls.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Both Carterfone and MCI, it was to turn
  out, were the first steps toward opening the telephone network
  to unrestricted competition. Why did the FCC want to do that?<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The commission was apparently working
  with five assumptions that were largely fallacious and did not
  take into account technological and economic realities. The FCC,
  after all, was, for the most part, a group of lawyer-bureaucrats,
  not engineers, not scientists, not economists. The assumptions,
  it would seem, were:<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;1) To regulate interstate communications,
  the FCC must<BR>
  regulate all communications.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;2) Competition is preferable to regulated
  monopoly.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;3) Big is inherently bad.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;4) Charges for all services should be
  based on the actual cost of providing those services.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;5) Customers should be encouraged if
  not required to own and maintain their equipment.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;At a fast read, some of these assumptions
  might appear reasonable. However, none of them stand up to informed
  scrutiny. And further, they led to the destruction of the Bell
  System at an insanely high cost to the nation&#151;and not just
  in dollars and cents.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;By making that first assumption, the
  FCC waded into deep and murky constitutional waters. The Communications
  Act of 1934 chartered the FCC to oversee and regulate interstate
  communications. Communications within states (and in a few instances
  in cities and counties) were regulated by local commissions.
  This arrangement was to be expected under the constitutional
  separation of powers between individual states and the federal
  government.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;But the two hundred years since the Constitution
  was ratified have seen a gradual erosion of the states' authority
  with a concomitant increase of power in the federal government.
  Similarly, over a much shorter period of time, the FCC has been
  usurping the authority of various state regulatory commissions.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;One justification for more federal control
  of telecommunications was the occasional difference in the cost
  of a call depending on whether it crossed a state line. For instance,
  at one time it cost more to call from Camden, New Jersey, to
  Newark, New Jersey, than it did from Camden to New York City,
  even though New York was farther away than Newark. The intrastate
  rate was set by the New Jersey Public Utilities Commission, the
  interstate by the FCC.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;If all rate setting were to be done by
  the FCC, it was argued, such disparities would be eliminated.
  However that argument loses some credibility when it's realized
  that these and other disparities were well on the way to being
  eliminated through public pressure and without FCC intervention.
  One has to wonder whether the FCC began nibbling away at the
  states' powers out of a sense of fair play and concern for the
  public or whether it was just another case of bureaucratic empire
  building.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The FCC didn't send out an announcement
  one day that it was taking over from the states. It was more
  like ice-age glaciers inching down the countryside. Initially
  the FCC's control was largely through setting of depreciation
  rates. These rates affected net corporate earnings which were
  inevitably translated into the rates allowed by the state public
  utilities commissions. But the ante was upped late in 1973 when
  the FCC notified AT&amp;T that state tariffs must be filed with
  the FCC. Following hard and fast on that, in January, 1974, the
  FCC announced that state commissions could take no actions on
  interconnections that were not in accord with federal policy.
  This took 25 percent of local companies' investment out of state
  control.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;States did not seriously challenge these
  rulings or those that followed even though they weakened the
  authority of their own agencies. Perhaps they didn't understand
  what was happening. Only recently has there been an outcry from
  state capitals, then only after the FCC slapped access charges
  onto local telephone bills. The local bills had been the sacrosanct
  domain of the state.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Ironically, the access charge was forced
  onto FCC by divestiture. The local operating companies no longer
  got subsidies for local services from AT&amp;T's profitable Long
  Lines. To offset this loss, local rates had to be increased by
  something called &quot;customer access line charges.&quot; Thus,
  by forcing competition into long distance service, the FCC created
  a problem that it could only solve by, in effect, taking complete
  federal control over telephone rates. AT&amp;T, after all, was
  out there competing for long distance customers with MCI, Sprint,
  and the others as the FCC had deemed desirable. It couldn't be
  expected to subsidize local service any longer.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Which leads to Assumption Number Two.
  &quot;Competition is preferable to regulation.&quot;<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;As a people, Americans are competitive.
  We tend to equate competition with freedom. It's our inalienable
  right to have an equal chance at the gold ring. Regulation, it
  then follows, is linked with oppression. In our open society
  this reasoning is often true. However, most people would agree
  that it is not desirable to have two electric companies serving
  the same community. The duplication of power plants and distribution
  facilities not only wastes money, it's ugly.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;So rather than have unrestricted competition,
  electric companies are given exclusive franchises for their services
  and their rates are regulated by government agencies.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;<A HREF="../Sabotage/Sabotage%20outline.html">Alfred
  E. Kahn</A> of Cornell University and former chairman of the
  New York State Public Service Commission has defined a natural
  monopoly as existing if &quot;the service is such that the consumer
  can be served at least cost or greatest net cost benefit by a
  single firm.&quot;<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;And that's where the controversy lies.
  Is telecommunications a natural monopoly? Will the public be
  best served if it is accepted as such?<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Without going into great detail at this
  point, it can be said that some parts of the telephone business&#151;exchange
  distribution, for instance&#151;are clearly natural monopolies.
  Other parts&#151;equipment manufacture&#151;are not, and should
  be subject to competition. But in areas such as network services
  and terminal equipment, the lines get fuzzier and debate heats
  up.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Up until the late 1960s, the FCC treated
  the industry as a monopoly, subject to regulation. But then,
  without announcing a change in policy, it began substituting
  competition for regulation through its decisions. These actions,
  of fundamental importance to our nation's communications, were
  never explicitly debated and got very little public attention.
  But more incredibly, these decisions were made with little or
  no input from qualified economists or engineers. The lawyers
  and the bureaucrats of the Justice Department and the FCC made
  them without even examining the possibility that a regulated
  monopoly in communications could serve society better than unrestricted
  competition. This wouldn't be much different than throwing all
  the scientists out of NASA and letting a bunch of attorneys try
  to launch the next space probe.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;What's more, competition in the long
  distance field was only possible when funded by the biggest steal
  in United States history. MCI, Sprint, and the others could not
  have competed with AT&amp;T without help. It was economically
  impossible. The actual cost of providing a long distance connection
  through MCI et al., is from two to four times higher than a similar
  call on AT&amp;T's network. But the MCIs were able to undersell
  Bell with the connivance of the FCC. For the commission required
  AT&amp;T to pay the local operating companies and the independents
  $400 million for every $1 billion it earned in long distance
  revenue. What did the FCC require MCI and the others to pay the
  local companies? Next to nothing in comparison.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;But why did MCI and Sprint deserve this
  boodle? Because competition&#151;at whatever cost, it would seem&#151;is
  better than regulation, naturally. Though Gene Kimmelman, director
  of the Consumer Federation of America, disagrees. &quot;Regulation
  has gotten a bum rap,&quot; he said in 1987. &quot;It has provided
  cheap service and innovation.&quot; But go tell that to the FCC.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;Assumption Number Three. Big is bad.
  No one can argue that big can be bad. The muckrakers such as
  Ida Tarbell documented that. Out of the excesses of the oil and
  railroad barons came the Sherman Antitrust Act of 1890 and the
  Clayton Act of 1914.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The antitrust division of the Department
  of Justice got the job of seeking out and prosecuting suspected
  violators of these laws. Over the years, its tendency has been
  to go after the largest and most visible targets.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;There are two sides to every coin, something
  the Department of Justice at times has apparently forgotten.
  There is no doubt that a big corporation has more opportunity
  and capability to be bad than a smaller one. But it doesn't necessarily
  mean it will be. Also a big corporation has far more capability
  to be good. Being big and good can translate into greater efficiencies
  and lower prices, into more basic research. It can also extend
  to outside activities such as support for social welfare, education,
  or the arts.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Why label an enterprise &quot;bad&quot;
  because it's big and therefore has the potential to be bad? If
  that were so then anyone owning a gun could be called a criminal
  because someday, maybe, that person could use the weapon to commit
  a crime.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;During the 1970s, the FCC seemed to accept
  outright the &quot;big is bad&quot; principle and applied it
  to Bell. Not only would the agency stop growth at Bell, it was
  determined to reduce its size. The concept of economy of scale
  apparently was never part of its thinking.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;To prove that Bell was indeed bad, the
  FCC spent millions of taxpayer dollars on several investigations.
  Nothing significant was ever unearthed. One of the authors (Constantine
  Raymond Kraus), after retiring from Bell and setting up a consulting
  firm, was hired by the government to conduct an investigation.
  Specifically, he was asked to determine whether Western Electric
  prices were being set properly and whether the company was adhering
  to approved depreciation accounting practices.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;He searched, but couldn't find anything
  of great import. In fact, the most significant aspect of the
  investigation was that the government never publicized the results.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Touche Ross, a highly respected consulting
  firm, was later hired by the FCC to do a complete review of Western
  Electric. In January, 1974, after a thorough investigation, Western
  Electric got a clean bill of health. Moreover, Touche Ross concluded
  that Western produced equipment efficiently and at lower costs
  than it could if it were not part of the Bell System. It also
  concluded that the relationship between Bell Laboratories and
  Western Electric was ideally suited for large-scale technical
  innovation at the lowest cost to customers.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;And lastly, Touche Ross stated that Western
  Electric and Bell Laboratories should not be separated from the
  Bell System.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;This report was directly opposed to the
  direction the FCC had been taking. In the case of Bell, big wasn't
  bad, Touche Ross was saying. On the contrary, it was good.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The FCC never published the findings
  of Touche Ross. If it had, how could it have justified what was
  to follow?</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;Assumption Number Four. The charge
  for a service should be based on what it costs to provide that
  service. Bell had based its pricing philosophy on John Stuart
  Mill's concept of &quot;the greatest good to the greatest number.&quot;
  The cost of the service did not matter as much as the value of
  the service.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;This meant that a telephone call of given
  distance, duration, and time of day had the same charge as another
  call of similar distance, duration, and time of day even if one
  call actually cost more for the company to provide because of
  the way it was routed. Indeed, one call might represent a large
  profit to the company and the other a loss. Similarly, the monthly
  charge for a particular grade of service in a community was the
  same whether the customer lived next door to the central office
  or five miles away. If the value of service to the customer was
  the same&#151;each one was getting the same service as far as
  they were concerned&#151;then the charge was the same whether
  or not there was a difference in cost to the company.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;This pricing philosophy led to universal
  telephone service in the United States, unheard of anywhere else
  in the world, although Canada came close. Historically, the FCC
  had condoned this pricing system. But its rulings in the 1970s
  clearly indicated it was abandoning the value of service concept
  for cost-based pricing. The Bell System read the writing on the
  wall and frequently argued that cost-basing of rates would undermine
  its system of internal subsidies that made telephone service
  affordable for everyone.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Bell analysts predicted that cost-based
  pricing would lead to a 50 percent reduction in long distance
  rates. Great for businesses and more affluent resident users.
  But it would also increase local rates by 100 to 500 percent,
  socking it to the poor who would be forced to discontinue their
  service.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Bell argued but the FCC wasn't listening.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The FCC push for cost-based pricing meant
  that individual segments of AT&amp;T's operations would have
  to be analyzed more closely. This meant that Bell's ranks of
  these analysts, known as cost study engineers, swelled from less
  than 100 in 1972 to nearly ten times that a decade later. The
  additional cost in salaries alone&#151;forget about office space
  and paperclips&#151;approached $50 million a year.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The emphasis on cost-basing led to the
  development of something called &quot;functional accounting,&quot;
  a complex computerized procedure that was supposed to relate
  every cost the Bell System incurred, no matter how small, to
  the activity causing it.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;It cost almost a billion dollars to develop
  this functional accounting system. It cost even more to operate
  it. But not a penny of this in any way improved customer service.
  All it did was increase accounting costs in an effort to appease
  the irrational demands of the FCC.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;In the end there was no pleasing the
  FCC. AT&amp;T thought it could meet the commission's cost-basing
  demand, at least part way, by charging more per mile for transmission
  over lightly used routes than over denser ones. The FCC shot
  down this Hi/Lo tariff filing in January, 1974.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Over the years the FCC seldom gave AT&amp;T
  any guidance on pricing procedures. One tariff filed by AT&amp;T,
  for TELPAK service, languished in the bowels of the FCC for twenty
  years without being approved or disapproved.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;Assumption Five: Customers should
  own and maintain their telephone equipment.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Let's say a person, Mr. B., wants toast
  and blueberry jelly for breakfast. (Bear with us, this does have
  something to do with telephones.) So Mr. B. goes to Sears, pays
  $24.95, and takes his two-slice toaster home. He's paid his electric
  bill, so he plugs the toaster into the outlet, pops in his bread
  and within minutes, voila! Toast.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;In the past, if Mr. B. wanted to call
  Aunt Gladys in Peoria, he had to contact the telephone company,
  which gave him end-to-end service. It hooked him into the system
  and it &quot;lent&quot; him a telephone. Then Mr. B. could call
  his beloved aunt.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;To the FCC, this wasn't right. Why could
  Mr. B. own his toaster but couldn't own his phone? Why shouldn't
  Mr. B. be allowed to buy a telephone and plug into the telephone
  system and get the &quot;juice&quot; to run his phone just as
  he plugged into the electric lines?<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Any engineer could have explained why
  not. It's really very simple.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Say that toaster from Sears, unlikely
  and as improbable as this may be, was a faulty toaster. And Mr.
  B. unknowingly plugs it in. Zappo. He blows a fuse or his circuit
  breaker shuts off, or, even worse, he injures himself or his
  property. That's the extent of it. His bad toaster shorting out
  Mr. B.'s electricity isn't going to affect the house down the
  block or the rest of the electric company's system. That's because
  Mr. B. receives electric energy but feeds nothing back into the
  distribution network. It's a one-way, incoming proposition.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;That's not how the telephone system works.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Let's say Mr. B. covets the buffalo-shaped
  telephone on sale at Cheapo Charlie's. He buys it for $9.95 and
  brings it home. When he plugs it in, he's interconnecting with
  one large computer. And his little buffalo is a computer terminal.
  This is a two-way street. Mr. B. is receiving input from the
  system and also transmitting into it. When his crummy buffalo
  telephone gives up the ghost, that not only affects his being
  able to call out but also keeps poor Aunt Gladys from calling
  him, affecting her service.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Worse yet, equipment that is faulty or
  improperly operated can cause malfunctions and overloads in the
  central office switching equipment and that can affect everyone.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Despite all this, the FCC never could
  tell the difference between a toaster and a telephone.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Former FCC Chairman Mark Fowler once
  set forth two profound thoughts. One was that standards are unnecessary
  in the telephone industry. The marketplace, he said, would determine
  the standards. Of course, one may wonder how the uninformed lay
  customer is supposed to know what the standards should be. But
  if that thought makes little sense, consider the chairman's second
  one, that out of the chaos of competition would emerge the cheapest
  and best service for the customer. With any understanding of
  the telephone network, it is clear that the only thing to emerge
  from the chaos of competition will be chaos.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;But it was based on such fallacious thinking
  that the FCC decisions paving the way for competition were apparently
  made. The rulings were many, separate, and often quite narrow.
  Nonetheless, they brought on the complete restructuring of our
  telecommunications network.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Perhaps what happened would be easier
  to accept if there were any evidence of the use of legitimate
  analysis, master planning, or any kind of overall strategy.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;But the evidence there points to one
  disturbing conclusion.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The FCC was winging it.</P>
  <P><CENTER><B><U><FONT SIZE="+3">7</FONT></U></B></CENTER></P>
  <P><CENTER><B><FONT SIZE="+3">The Tempest</FONT></B></CENTER></P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;While the FCC was merrily slipsliding
  down its twisted road to competition during the sixties and seventies,
  some of the longtime antitrust division lawyers at the Department
  of Justice were still smarting over Attorney General Brownell's
  consent decree of 1956.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;There had been an unpleasant taste in
  their mouths, a taste of the department selling out to big business,
  that they had never quite gotten rid of.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;They didn't believe the FCC could regulate
  AT&amp;T any more. With an influx of young, liberal attorneys,
  hot off the radical campuses of the sixties, new life was breathed
  into the Department of Justice's old case against AT&amp;T. Some
  may have seen the case as a chance to make headlines and boost
  careers. Others no doubt truly believed they were riding to the
  rescue of a public being victimized by a &quot;predatory monopoly.&quot;<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Investigations were again launched, after
  a good deal of intensive lobbying by MCI's president William
  McGowan, not exactly a disinterested observer. The Justice Department,
  for the third time, felt it had a solid case against the Bell
  System. It would charge that AT&amp;T had tried to monopolize
  the long distance market by denying interconnection or making
  it hard for competitors to interconnect. That it had smothered
  equipment competition by forcing the local Bell companies to
  buy from Western Electric.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;In some respects AT&amp;T had been its
  own worst enemy. For instance, when the FCC decided that non-Western
  Electric customer premises equipment could be used as long as
  Bell provided protective interfaces, or couplers, Bell didn't
  rush to make these devices available.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;There was a certain arrogance at AT&amp;T,
  based partially on the belief that the federal government, when
  push came to shove, would not destroy a system that worked as
  well as Bell's.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The Department of Justice saw things
  differently and got its case together.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;But this was 1974, and this was Watergate,
  and the Department of Justice was leaderless. (Had it not been,
  the department's lawyers might not have had the autonomy to carry
  on the investigations as they did.)<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;John Mitchell was out as attorney general.
  His successor, Elliot Richardson, had resigned in October, 1973,
  rather than fire Special Prosecutor Archibald Cox. And then for
  a while Nixon had too many other things on his mind to find a
  replacement for Richardson, so the department lay becalmed in
  the water. Then he named former Ohio Senator William Saxbe to
  the post.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Saxbe, it's been reported, wanted to
  clean up the image of Justice, which had been so tarnished during
  the Nixon years. What better way than don the white hat and haul
  some Big Bad Guy into court with a highly visible case. Saxbe
  decided to go ahead against AT&amp;T.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;There is some dispute as to whether Saxbe
  consulted Gerald Ford, who by then had replaced Nixon. What is
  known is that on Wednesday, November 20, 1974, while Ford was
  in Japan, the Department of Justice filed an antitrust suit against
  AT&amp;T calling for a breakup of the gigantic company, and more
  specifically, for the separation of Western Electric and Bell
  Laboratories from the parent firm.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;There is no such thing as a &quot;speedy&quot;
  trial in antitrust litigation. The federal government had gone
  after IBM, the country's largest computer company, six years
  earlier, and that case wasn't even close to the courtroom.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The size of the suit brought by Justice
  against AT&amp;T was mind-boggling. It's believed that the 1974
  filing was the largest such action on record and it didn't reach
  the courtroom for six and half years. It's estimated that seven
  billion&#151;billion!&#151;pages of material were examined of
  which one billion&#151;billion!&#151;were copied and entered
  as evidence.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;AT&amp;T created a complete facility
  in Orlando, Florida, just to collect and organize the paperwork.
  More than one thousand people were assigned to this job. Another
  three thousand AT&amp;T employees worked full time on the defense,
  and thousands of others spent varying amounts of time, often
  during evenings and weekends, on the case.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;It's impossible to say what all this
  activity actually cost, but the government and AT&amp;T have
  admitted to direct charges of more than $400 million. That's
  direct, not total costs. A company with fifteen hundred employees
  was created solely to handle the splitting and transfer of stock
  in AT&amp;T and the divested companies. An outfit named the American
  Banknote Company received more than five million dollars just
  to print the certificates.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Take one guess who in the end paid that
  bill. The taxpayers&#151;which most Americans are&#151;picked
  up the government's check and the telephone users&#151;which
  most Americans are&#151;AT&amp;T's. But then again, who can complain?
  Think of all the social benefits that came out of this action&#151;the
  salaries and fat fees for the army of lawyers, the thriving business
  for printers and paper manufacturers, the scads of extra tickets
  sold by the airlines who flew witnesses to and from hearings,
  to name a few.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Finally the years of preparation and
  legal skirmishes were over and it was time to enter the courtroom.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The case had been assigned to federal
  Judge Joseph Waddy. AT&amp;T attorneys were hopeful. Judge Waddy
  appeared initially unimpressed by the government's case. But
  fate intervened, as if in some Greek tragedy, and Judge Waddy
  died of cancer. His cases were divided among other judges, and
  AT&amp;T found itself facing Harold H. Greene, and its lawyers
  lost a bit of their hope.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Greene was new to the federal bench,
  but he had a strong, liberal background. The judge, whose family
  had fled the persecutions of Hitler's Germany, had worked under
  Bobby Kennedy in the Justice Department and had been instrumental
  in writing the Civil Rights Act of 1964 and the Voting Rights
  Act of 1965. He had been on the lowly District of Columbia municipal
  court for years before the Carter administration called him up
  to the federal bench.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;When Greene got the AT&amp;T case, he
  told lawyers from both sides he wanted to demonstrate that antitrust
  laws were enforceable, that business couldn't endrun them by
  pulling interminable legal ploys out of the huddle and keeping
  the cases tied up in court forever.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;It was not an auspicious beginning for
  AT&amp;T. Would Greene be showing that antitrust laws were enforceable
  if he decided for AT&amp;T? Was he telegraphing from the start
  that AT&amp;T didn't have a prayer?<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;During pretrial, both sides not only
  expended vast amounts of time and money assembling evidence,
  they looked for ways to settle out of court that would be acceptable
  to both AT&amp;T and the Justice Department. Legislative solutions
  were considered. Several abortive attempts were made, some even
  initiated and strongly supported by AT&amp;T, but they were all
  stalled in Congress. In early 1981, it looked as if one bill,
  S-898, actually had a chance for passage.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Both AT&amp;T and Justice agreed that
  if Congress passed a suitable bill, it would be desirable to
  drop the antitrust suit. Judge Greene was petitioned to delay
  the trial to see what Congress would do with S-898. Greene refused.
  The best guess was he was angered by Justice's on-again, off-again
  approach to the case.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;As it turned out, the bill was amended
  so many times that by the time it was finally passed by the Senate
  in October of 1981, it was no longer acceptable to AT&amp;T.
  It didn't matter. S-898 never got out of the House.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Meanwhile, back at the White House.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The U.S. vs. AT&amp;T, it should be remembered,
  was filed, went to trial, and was finally resolved under the
  administrations of two pro-business Republican presidents. Either
  man, as president and head of the executive branch under which
  the Justice Department falls, had the authority to stop the action.
  Future historians might scratch their heads over their failure
  to do so unless they keep in mind some extenuating circumstances.
  Both presidents, at the crucial times, were deeply occupied with
  other matters.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Late 1974, when the suit was filed, was
  a critical time for the office of the presidency and for the
  nation. As a result of the Watergate scandal, Richard Nixon became
  the first president in U.S. history to resign from office. One
  of Gerald Ford's first exercises of executive authority was to
  grant Nixon a full pardon. While Ford might have intended to
  put the Watergate affair behind and get the nation on to more
  pressing matters, he only managed to generate a storm of public
  protest and anger. This pardon may have well cost Ford election
  two years later.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Many Americans were infuriated by Ford's
  action, seeing it as interfering with due process of law. Once
  the AT&amp;T suit was filed, Ford undoubtedly felt little inclined
  to incur additional wrath by squelching the case.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;But what of Ronald Reagan? He was a man,
  who as candidate running for his first term, had used AT&amp;T's
  good service and low rates as examples of what private enterprise
  could accomplish. He often contrasted the reductions in telephone
  rates over the years with rising cost of a first-class stamp
  to illustrate his theme that big government was harmful to the
  nation. And he'd add, &quot;Of course, the government is suing
  the phone company.&quot;<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Surely Reagan was against breaking up
  the Bell System.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Again, circumstances intervened. First,
  the case went to trial in January, 1981, within a week of Reagan's
  inauguration. The first months of any new administration are
  filled with confusion and high priorities. But there was more
  than usual transition chaos involved in this case. For one thing,
  both the newly appointed attorney general, William French Smith,
  and his deputy, Edward Schmults, had to disqualify themselves
  from participating in the case because they had been once closely
  involved with the Bell System.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;It was not until late February that the
  next person in Justice's chain of command was appointed. He was
  Assistant Attorney General William F. Baxter.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Now here the plot thickens&#151;and gets
  preposterously muddied. Baxter was a conservative, free-market
  advocate who had been known to call the U.S. Supreme Court &quot;whacko,&quot;
  and who held that the Justice Department &quot;penalized [big
  companies] because of their size.&quot; In 1977 he had said,
  &quot;I think the telephone company is telling us the truth when
  it says that if more competition emerges in the specialized carrier
  areas in long lines, telephone rates are going to have to go
  up on the local loops at the expense of business use of long
  lines communications.&quot; This indicated he was aware of the
  adverse effects of competition.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;But more importantly Baxter had also
  written that the AT&amp;T case was &quot;the one good thing the
  antitrust division has done in the last thirty years.&quot;<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;It's believed the Reagan administration
  was unaware of this quirk in Baxter's thinking.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;To complicate matters even further, Baxter
  and the new Secretary of Defense, Caspar Weinberger, had a falling
  out caused by a misunderstanding.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Weinberger was one of at least three
  Reagan cabinet members&#151;Malcolm Baldrige of the Commerce
  Department and John Block of Agriculture were two others&#151;who
  strongly opposed the breakup of AT&amp;T. Weinberger, not knowing
  that William French Smith had withdrawn from handling anything
  involved with the case, sent the Attorney General a strong letter
  urging that the suit be dropped. Along with it was a letter from
  the Joint Chiefs of Staff discussing military reasons why dismantling
  AT&amp;T would be disastrous to the nation's defense. Some of
  the information in that letter was classified. Since Baxter had
  just been appointed, he had not yet received his security clearance.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Weinberger's letter, therefore, was put
  into a safe pending Baxter's clearance. When the Justice Department
  did not drop the suit, Weinberger thought his letter had been
  read and ignored. He testified before a closed hearing of the
  Senate Armed Services Committee about his call for dropping the
  suit and added that he had written the letter to the Justice
  Department.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;As it happened the <I>Wall Street Journal</I>
  got hold of the secret testimony and ran a story on it. Baxter
  was angered and held a press conference in which he announced,
  &quot;I do not intend to fold up my tent and go away because
  the Department of Defense expressed concern.&quot; He added that
  he thought the case had a &quot;sound theoretical core, and I
  intend to litigate it to the eyeballs.&quot; Ronald Reagan, who
  favored a management style of consensus, had disagreement in
  his ranks. Perhaps he favored dismissal but wanted agreement
  among his subordinates. Perhaps he feared dismissal at that point,
  with all the baggage the case carried with it, would look as
  if someone was being paid off and he didn't want his own Watergate
  before his chair in the Oval Office was even warm. Maybe ...
  maybe Reagan will explain when he gets around to writing his
  memoirs. What is known is the case went forward. By this time,
  John deButts was no longer chairman of AT&amp;T. The more unobtrusive,
  soft-spoken Charles Brown had taken his place. He was to be the
  leader of the defense with Baxter leading the prosecution and
  Greene in the role of judge and jury. The phalanxes of courtroom
  lawyers were headed by George Saunders for AT&amp;T and Gerry
  Council for the government. And the cast would not be complete
  without mentioning the hundreds of witnesses who were called
  and cross-examined by both sides. The case went to trial in January,
  1981, with the government presenting its arguments first. The
  testimony was enough to fill a small library. At the heart of
  the government's case was the claim that AT&amp;T had engaged
  in anticompetitive practices, specifically by stonewalling on
  interconnections with MCI and others, and trying to restrict
  connections of non-Western Electric equipment. And it threw in
  for good measure the contention that the FCC was incapable of
  regulating AT&amp;T as the company was then structured. AT&amp;T
  argued that all its prices, services, and actions had been monitored
  and regulated by the FCC and the various state commissions and
  that AT&amp;T had leaned over backwards to comply with all the
  directives of these regulatory bodies. Therefore, how could the
  company be in violation of the law? Furthermore, it argued that
  the FCC, not the Justice Department, had the expertise and the
  Congressional mandate to regulate the telecommunications industry.
  At the close of this phase of the trial, which lasted several
  months, AT&amp;T made a motion for dismissal. Judge Greene denied
  the request in September saying, &quot;The testimony and the
  documentary evidence adduced by the government demonstrate that
  the Bell System had violated the antitrust laws in a number of
  ways over a lengthy period of time . . . the burden is on the
  defense to refute the factual showings.&quot; Judge Greene's
  statement was interpreted by many as meaning he had already reached
  his decision&#151;&quot;guilty as charged.&quot; It was becoming
  more and more necessary for AT&amp;T to find some out-of-court
  settlement. As George Saunders was later to observe, &quot;We
  were confronted by a judge who wasn't hearing our side of the
  case. That was the concern.&quot; Judge Greene, some observers
  felt, was acting like a prosecutor in his questioning of Bell
  witnesses. Further, he had made it clear he believed that competition
  in the telecommunications industry would result in the cheapest
  and best service. At the beginning of 1982, the settlement came.
  On January 8, an agreement hammered out between the Department
  of Justice and AT&amp;T was announced&#151;the Bell System would
  be dismembered. The queen was dead. Long live the queen.</P>
  <P><CENTER><B><U><FONT SIZE="+3">8</FONT></U></B></CENTER></P>
  <P><CENTER><B><FONT SIZE="+3">The Death Knell</FONT></B></CENTER></P>
  <BLOCKQUOTE>
    <P>&quot;I fear that the breakup of AT&amp;T is potentially the
    worst thing to happen to our national interests in telecommunications
    that will ever occur.&quot;</P>
    <BLOCKQUOTE>
      <BLOCKQUOTE>
        <P>&#151;BARRY GOLDWATER, <BR>
        &nbsp;&nbsp;&nbsp;&nbsp;U.S. Senator from Arizona, 1983<BR>
        </P></BLOCKQUOTE>
    </BLOCKQUOTE>
  </BLOCKQUOTE>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;It contained only three thousand words,
  that little document that broke up the largest corporation in
  the world. Three thousand words and it was remarkably simple
  considering the complexity of the underlying issues and the tons
  of paper which went into evidence.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The settlement was an alteration of the
  1956 consent decree and was formally called the Modification
  of Final Judgment (MFJ).<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Basically it had nine provisions.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;1) The 1956 consent decree was voided.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;2) The Bell operating companies were
  to be totally separated from AT&amp;T along with appropriate
  facilities and personnel. The companies were allowed some degree
  of consolidation&#151;the number went from the then 22 to the
  present seven.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;3) The operating companies were required
  to establish a single point of contact for national emergencies.
  They were allowed, if they wanted, to share a central staff to
  work on common problems.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;4) Western Electric and Bell Telephone
  Laboratories could stay part of AT&amp;T.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;5) The license contract&#151;the fixed
  percentage the local companies paid to AT&amp;T for Bell Laboratories
  and other services&#151;and the Western Electric supply contract
  were terminated.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;6) Exchange service and interexchange
  service were separated. An exchange was loosely defined as a
  region containing not more than one Standard Metropolitan Statistical
  Area. To avoid confusion with prior telephone company usage of
  &quot;exchange,&quot; which took in a much smaller area, the
  term LATA&#151;Local Access and Transport Area&#151;was coined
  for this larger area. Service within LATAs would be the province
  of the local operating companies.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;7) The local companies (which predictably
  came to be called the Baby Bells) could not provide information
  services, such as cable television, or manufacture equipment.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;8) The local companies had to provide
  equal access to their networks for all interexchange carriers
  (AT&amp;T, MCI, Sprint, <I>et a.l.</I>) who wished to connect
  to them.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;9) Within six months of Judge Greene's
  approval, AT&amp;T had to provide a detailed Plan of Reorganization
  (POR), spelling out precisely how the provisions of the settlement
  would be implemented. These provisions were to be put into effect
  no later than eighteen months after Judge Greene's approval of
  them.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;So why did AT&amp;T agree to settle?
  Why didn't it brazen the suit out, as IBM did. (Ironically, on
  the same day the AT&amp;T settlement was announced, IBM's antitrust
  suit was dismissed.) Why didn't AT&amp;T go the full run of the
  trial in hopes of getting Judge Greene to see the merits of its
  case? Or even if the judge ruled against the company, there was
  the hope of getting the judgment overturned on appeal. And there
  was always the possibility the Reagan administration or a subsequent
  one would have eventually folded the Justice Department's tents
  and dismissed the case.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;As it was, many Bell managers thought
  first reports of the settlement announcement were somebody's
  idea of a joke. There was total disbelief. Why come so far and
  then give up?<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;There were all sorts of explanations.
  One was Charles Brown's statement that pursuing the case would
  be long, costly and debilitating with far worse consequences
  to the company than the negotiated settlement. It should be remembered
  that Bell wasn't just fighting the Justice Department. The government's
  antitrust case was one of many. Private companies&#151;notably
  MCI&#151;had also sued AT&amp;T for alleged anticompetitive or
  predatory behavior. MCI had already, in 1980, won a judgment
  of $1.8 billion, the largest such award to date. Later this judgment
  was partially reversed on appeal.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;All in all, there were forty to fifty
  similar suits in varying stages of investigation, litigation,
  and appeal. Settlement of the government's case was expected
  to lead to a resolution of these other actions.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Brown also had internal factors to consider.
  The ten years of being under the cloud of the antitrust suit
  had taken a toll on the day-to-day operations of the entire Bell
  System. Rules and regulations were changing rapidly, complicating
  every manager's job. It was an all-pervasive presence, hanging
  over everyone's head and diverting attention from the day-to-day
  job of furnishing top quality telephone service. Few decisions
  were being made without considering what influence they might
  have on THE LAWSUIT. It's nearly impossible to provide top quality
  service under such circumstances.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Then, too, AT&amp;T was not getting support
  from where it might have expected some. For instance, the labor
  unions representing more than half a million Bell System employees
  took no stand to protect their members' jobs.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;And so Brown succumbed.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;That's more or less the official view
  of events. However, one of the authors (Constantine Kraus) has
  a somewhat different perspective.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;It came as a result of a luncheon conversation
  he had with John deButts at New York's Union League. It was 1979,
  a little less than a year after deButts retired.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;DeButts had to give in, he told Kraus.
  It was all settled. The Bell Laboratories, Western Electric,
  and AT&amp;T would stay together. The Long Lines subsidy of the
  local companies would cease and be replaced by an access charge
  to customers. And Charles Brown had gotten the chairmanship of
  AT&amp;T with the proviso he would not fight Washington. It was
  all wrapped up, all settled.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;It was 1979, a little more than a year
  before the U.S. v. AT&amp;T went to trial.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;AT&amp;T was willing to take a loss,
  as long as that loss was on its terms.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Be that as it may, the official version
  of events was correct in one respect. Bell System management,
  distracted by the eroding effects of the FCC decisions and the
  suit, couldn't help but let other aspects of the business suffer.
  In particular, Bell Laboratories.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;In the past AT&amp;T top management had
  spent considerable time and energy overseeing the Laboratories'
  activities. The future was born there. But in the seventies,
  that time and energy had to be mobilized to meet the threats
  and assaults of the legislative, legal, and regulatory challenges.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;It stands to reason that these distractions
  impeded progress. Without them, Picturephone service might have
  been introduced successfully. The network might have been completely
  digitized five or ten years sooner. Any number of new customer
  services might have been developed and made available. U.S. telecommunications
  was undoubtedly set back a number of years. This country has
  lost its place as the industry's world leader. We're now playing
  catchup with Europe and Japan.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;It didn't have to be that way.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The pressures of the pre-divestiture
  years were not confined to Bell's top management. Employees at
  all levels were wracked by the uncertainty hanging over the system&#151;and
  therefore hanging over their careers. Thousands had chosen to
  work for AT&amp;T because of its stability and dedication to
  service. Suddenly the rules were changed. They were working for
  a rapidly changing organization with an uncertain future, where
  profit was sure to ride roughshod over service.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;In many other industries, employees disturbed
  over their company's future start to send out resumes. But despite
  the perceived turmoil at Bell, tradition won out. Employees had
  signed on with Bell for life and the concept of jumping ship
  and getting a job somewhere else was still foreign. Most employees
  stayed with the company.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Still it wasn't easy. After the settlement
  it sometimes felt as if not only the rules had changed, so had
  the entire game. Bell Telephone Laboratories, Western Electric,
  AT&amp;T, and Bell operating company employees had spent whole
  careers working together. Organizational lines weren't hard and
  fast, transfers between the different corporate entities were
  common and even expected as part of career development, and interorganizational
  secrets were almost nonexistent.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The one million employees had been united
  in an enterprise of which they were proud&#151;providing what
  was undisputably the world's best telephone service while at
  the same time producing a constant flow of inventions to advance
  the communications art.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Then bingo! It was all changed. The environment
  of cooperation and easy access was gone. Employees were branded
  &quot;Western Electric&quot; or &quot;Bell Operating Company,&quot;
  and they had to remember exactly for whom they worked.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;In some buildings shared by two Bell
  entities, lines were literally drawn on floors to separate personnel
  and equipment&#151;which in many cases were almost functionally
  inseparable. AT&amp;T and operating company people who had once
  communicated freely had to get passes to visit each other. And
  it was verboten to talk about anything that might give an unfair
  advantage to potential competitors.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Bell employees were not just concerned
  about their personal futures in this tumult. They were even more
  frustrated because the dramatic changes in telecommunications
  policy and Bell's reaction to them violated every tradition of
  the business they had known. Moreover, they violated common sense.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Not too surprisingly, morale at Bell
  plummeted. A private survey conducted in 1981 indicated that
  morale there was among the lowest of any major corporation&#151;a
  stark contrast to past surveys. While top management gave the
  situation much attention prior to divestiture, there's no evidence
  matters improved before the breakup.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Many employees felt the company they
  knew, their Ma Bell, had been brutalized and raped in front of
  them and they had been powerless to save her.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;But that didn't stop them from taking
  on the challenge and mandate of complying with the settlement
  provisions, with much of the same spirit they had previously
  displayed in times of national emergency or disaster.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;While a vast majority of managers vehemently
  disagreed with having to dismantle what had been so carefully
  built, they accomplished, on schedule, a corporate divorce and
  asset distribution that many thought impossible.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;As Michael Wines said in the <I>National
  Journal</I> in 1982, &quot;. . . a Dutchman named Jan Asscher
  poised his chisel in 1908 over a 1 1/4 pound rock, lifted his
  jeweler's hammer, and deftly delivered a blow. When he finished,
  the object of his attack&#151;the Cullinan diamond&#151;had been
  reduced to 105 perfectly faceted, glittering gems. . . . The
  object is too cleave Ma Bell into at least two corporate giants.
  . . . The question now is whether the breakup will produce new
  corporate gems or a pile of considerably less valuable shards.&quot;<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;If the jeweler's hammer was to be forced
  into their hands, the Bell employees would become Jan Asscher.
  Thousands of managers worked long hours for two years on a task
  most found odious. But if it was to be done, they wanted to do
  it right. As Charles Brown put it. &quot;What had to be done
  by our people was done with dispatch, with courage, and with
  'class.' &quot;<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;And so it was, on December 31, 1983,
  the books were closed on the Bell System and Ma Bell, as the
  world had known her, breathed her last.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Divestiture was complete.</P>
  <P><CENTER><HR></CENTER></P>
  <P>from pages 179 - 184</P>
  <P><CENTER><B><U><FONT SIZE="+3">15</FONT></U></B></CENTER></P>
  <P><CENTER><B><FONT SIZE="+3">A Conspiracy <BR>
  of Silence</FONT></B></CENTER></P>
  <BLOCKQUOTE>
    <P><CENTER><B><FONT SIZE="-1">PANEL WARNS OF TELEPHONE INTERCONNECTION
    DANGERS</FONT></B></CENTER></P>
    <P>&nbsp;&nbsp;&nbsp;&nbsp;A National Academy of Sciences panel
    yesterday warned that uncontrolled use of customer-owned telephone
    equipment could harm the nation's telecommunications system.<BR>
    &nbsp;&nbsp;&nbsp;&nbsp; In a recently completed nine-month technical
    study, the group recommended that standards for such connections
    be set and strictly enforced to protect telephone service.</P>
    <BLOCKQUOTE>
      <BLOCKQUOTE>
        <BLOCKQUOTE>
          <BLOCKQUOTE>
            <P>&#151;Washington <I>Post</I><BR>
            &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;July 6,1970</P></BLOCKQUOTE>
        </BLOCKQUOTE>
      </BLOCKQUOTE>
    </BLOCKQUOTE>
    <P><CENTER><BR>
    <B><FONT SIZE="-1">WEINBERGER WANTS BELL ANTITRUST SUIT DROPPED</FONT></B></CENTER></P>
    <P>&nbsp;&nbsp;&nbsp;&nbsp;WASHINGTON&#151;Secretary of Defense
    Caspar Weinberger yesterday asked the Justice Department to drop
    its antitrust suit against AT&amp;T.<BR>
    &nbsp;&nbsp;&nbsp;&nbsp;In a letter to Attorney General William
    French Smith, Weinberger said the breakup of the Bell System
    would greatly jeopardize national security.<BR>
    &nbsp;&nbsp;&nbsp;&nbsp;The Defense Department maintains dismantling
    the Bell System, as called for in the suit, would seriously harm
    U.S. defense communications.</P>
    <BLOCKQUOTE>
      <BLOCKQUOTE>
        <BLOCKQUOTE>
          <P>&#151;Louisville <I>Courier-Journal</I><BR>
          &nbsp;&nbsp;&nbsp;&nbsp;February 22,1981</P></BLOCKQUOTE>
      </BLOCKQUOTE>
    </BLOCKQUOTE>
    <P><CENTER><BR>
    <B><FONT SIZE="-1">COMMERCE SECRETARY SAYS BELL BREAKUP WILL<BR>
    BRING BIG TRADE DEFICIT</FONT></B></CENTER></P>
    <P>&nbsp;&nbsp;&nbsp;&nbsp;WASHINGTON&#151;Secretary of Commerce
    Malcolm Baldrige yesterday said the breakup of the Bell System
    would lead to an annual trade deficit in telecommunications equipment
    exceeding $1 billion.<BR>
    &nbsp;&nbsp;&nbsp;&nbsp;In urging the dismissal of the federal
    suit against AT&amp;T, he added that Japan would be the main
    beneficiary if AT&amp;T were dismantled.</P>
    <BLOCKQUOTE>
      <BLOCKQUOTE>
        <BLOCKQUOTE>
          <P>&#151;San Francisco <I>Chronicle</I><BR>
          &nbsp;&nbsp;&nbsp;&nbsp;May 15,1981</P></BLOCKQUOTE>
      </BLOCKQUOTE>
    </BLOCKQUOTE>
  </BLOCKQUOTE>
  <P><BR>
  &quot;All I know is what I read in the newspapers,&quot; humorist
  Will Rogers once said. He wouldn't have known any of the above
  information, because the stories never ran.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Have a television evangelist fall from
  grace in a motel room and it's front page, bannered across the
  top, hot stuff. Let a presidential candidate get caught with
  his pants down&#151;figuratively, of course&#151;on some Bahamian
  yacht, and the wire services are blasting details around the
  world. Watergate, Abscarn, Irangate, presidential intestines,
  all big news and covered ad nauseum in newspapers, magazines,
  and on the nightly network news.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The nation's press devoted seemingly
  endless pages and hours of coverage to the possible mishandling
  of $15 million in funds intended for Nicaraguan &quot;contras,&quot;
  and yet there was hardly a whisper or a trickle of ink expended
  on a loss of several thousand times that as a result of the calamitous
  butchering of the Bell System.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;If Will Rogers were alive today he might
  do well to ask why he wasn't allowed to know about the economic
  and technical blunders that led to telephone network competition
  and to the breakup of the Bell System. Why was this whole horrendous
  process practically kept a secret for more than twenty years?
  Where was the press? Why wasn't it pouncing on this multi-billion
  dollar ripoff of the public? Why wasn't it analyzing, dissecting,
  explaining? Where were the review-and-opinion pieces presenting
  the various sides of the issues?<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;One can only wonder if there wasn't some
  kind of conspiracy, a conspiracy of silence. For that is what
  there was&#151;a harmful, negligent silence.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;Unfortunately the public never learns.
  Despite frequent, spectacular revelations of government corruption,
  venality, and wrongdoing, the American people cling strongly
  to their naive belief that their government leaders are inherently
  honest and intelligent.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;The average John Q. doesn't want to entertain
  the thought that his &quot;public servants&quot; might have stolen
  billions of dollars from his own pocket so that a few wealthy
  entrepreneurs could line theirs. That a long succession of ill-conceived
  and stupid actions might have jeopardized our national defense,
  damaged our balance of trade, and crippled one of our nation's
  proudest resources&#151;its telephone system.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;All this would be inconceivable to John
  Q. unless&#151;unless the media got on the story.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;&quot;Things don't get corrected until
  they're publicized&quot; David Nyhan said in the Boston <I>Globe</I>
  in 1987. They don't even get noticed. The public depends on the
  press to alert it to crimes and malfeasance. The country is too
  large for information to be disseminated by word of mouth, over
  the back fence. Should the media ignore the Bell System's arguments
  about the high costs and penalties of contrived competition and
  divestiture, naturally the public will too.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp; Significant events such as Judge Richey's
  ruling in favor of AT&amp;T were either buried behind the obituaries
  or ignored altogether. And there were no in-depth explanations
  of how MCI was able to undercut AT&amp;T's prices on long distance
  service at the expense of the public and what the real cost to
  the public was.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;What happened? Was the press caught napping?
  Was there some sort of incredible lapse in editorial judgment&#151;the
  ongoing story was too dry, too complicated, too unimportant?
  It wasn't &quot;sexy&quot; enough? Or were there other factors
  involved?<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;One can only speculate.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;For instance, it's a given that newspapers,
  magazines, television, and radio depend for their existence on
  advertisements&#151;ads pay the way and make the profit. Keeping
  that in mind, it should also be remembered that competition in
  the telephone industry meant many new advertisers. All of a sudden
  there were MCI, Sprint, the Baby Bells, AT&amp;T, equipment manufacturers&#151;foreign
  and domestic&#151;all competing for the market and competing
  for advertising space. It was surely the ad salesperson's dream
  come true.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp; It just can't be disputed there are
  far more pages of telecommunications advertising in the media
  now than before divestiture&#151;the individual Bell companies,
  when part of AT&amp;T, did little other than local advertising.
  Now all of them are in there touting their wares nationally.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;While the media can insist there's a
  firm, impenetrable barrier between newsroom and ad department,
  and editorial content is kept separate, one can only wonder.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;And then, if this silence didn't arise
  out of greed and coveting more advertising lines, might it have
  had something to do with the media's well-known liberal tendencies?
  Did the nation's journalists simplistically assume that big is
  bad, and all large monopolistic corporations natural enemies?
  That any informational release from a Big (shudder) Business
  should be tossed in the circular file cabinet as so much propaganda?<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Or maybe the press didn't oppose the
  Bell breakup because of its own business interests. After all,
  most publishers foresee a bright future for Videotext type services.
  These have the capability of displaying and printing news and
  other information of public interest in the home and already
  have been extensively tested in various locations. Knight-Ridder
  publications and AT&amp;T conducted one such trial in Coral Gables,
  Florida, in the early 1980s. Despite this collaboration, many
  publishers are afraid AT&amp;T will get into this market as the
  producer of information as well as its transmitter.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;It's been argued that AT&amp;T's being
  allowed to extend its monopoly privileges into electronic publishing
  could have serious deleterious effects on First Amendment rights,
  that AT&amp;T would then be in the position of limiting and controlling
  information. Thus, anything that would damage the Bell monopoly
  would work to the advantage of the publishers.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;But, of course, this argument is no longer
  debatable since Judge Greene has barred AT&amp;T from entering
  the publishing field, at least for several years. In view of
  that, one again might wonder if it was a coincidence that Judge
  Greene and divestiture got very little opposition from the press.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Of course, AT&amp;T didn't do very much
  to get more favorable press. Direct appeals to the public through
  advertising were scarce. The company did get cranked up one time,
  when it was lobbying for Congressional passage of the Consumer
  Communications Reform Act in 1976. But AT&amp;T's Chairman deButts
  approached the lobbying effort with a heavy hand and an insistence
  that almost all terminal equipment competition be eliminated.
  As a result, the effort backfired, and created more antagonism
  in Congress than support. The press apparently had little desire
  to be associated with what was clearly a lost cause. There was
  no outpouring of editorials supporting the Act.</P>
  <P>&nbsp;&nbsp;&nbsp;&nbsp;Before the Bell System was broken
  up,<I> The New York Times</I> ran a poll that revealed 80 percent
  of consumers were satisfied with their phone service. No other
  business received such a high satisfaction rating. But despite
  liking the service received from the Bell System, there was no
  outcry against divestiture. If as little as one percent of the
  public had protested with letters to the editor or to their lawmakers,
  they could not have been ignored.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;But there was no such protest. Obviously
  the public had no idea what divestiture was sure to bring&#151;poorer
  and more costly service. What has happened could not have been
  perpetrated without a conspiracy of silence by the press that
  was supported actively or passively by the FCC, the Justice Department,
  state regulatory commissions, and indirectly even by AT&amp;T.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;Not that everyone was silent. There were
  individuals, author Constantine Kraus included, who tried over
  the years to alert the public to what was happening. Articles
  were submitted to leading publications, columnists, and government
  leaders. But nothing came of them. One exception was an article,
  &quot;Social Consciousness in Communications Engineering,&quot;
  that did see the light of day in the<I> Institute of Electrical
  and Electronic Engineers Communications</I> magazine, in May,
  1976. The article correctly predicted the outcome of the emerging
  telecommunications policies of the government and accurately
  forecast how the public would be affected. It explained why long
  distance competition amounts to stealing from the poor to benefit
  the rich, and why competition in public utility operations forces
  the consumer to pay for the sum of the costs of all competitors.<BR>
  &nbsp;&nbsp;&nbsp;&nbsp;If our esteemed government representatives
  read the article, they disregarded it, just as they disregarded
  the economic truths revealed in it.</P>
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