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Praise for The Deal of the Century
“Superbly reported and smoothly written.”
—The Washington Post Book World
“Colorful and telling … rich, intricate and convincing … this is a wonderful book. … While undoubtedly an edifying account of a seminal antitrust case, The Deal of the Century also manages to be a moving story.”
—The New York Times Book Review
“Read this book and learn how the world works.”
—Andrew Tobias
“An excellent behind-the-scenes look—exposing warts on both sides of the case—at the legal wranglings between AT&T and the government.”
—Philadelphia Inquirer
“Crafted with color and drama … this solid account of the complex events leading to the 1982 AT&T breakup is hard to put down.”
—Library Journal
“Admirably balanced and consistently engrossing … A near-definitive reconstruction of this consequential conflict.”
—Kirkus Reviews
“In The Deal of the Century, author Steve Coll has done a remarkable thing. He has taken the story of the breakup of the Bell System in January 1984 and made it readable. By telling it through the personalities of the bureaucrats, lawyers, politicians and executives involved, Mr. Coll avoids getting mired in technical and legal jargon … For that alone, the book is worth reading.”
—Wall Street Journal
“This exposé lends welcome clarity to the mass confusion that accompanied the divestment of AT&T … Coll’s penetrating analysis of this shameful courtroom and boardroom drama evidences the fact that both the general public and the judiciary were exploited and duped by all factions … A legion of justifiably angry consumers will applaud this comprehensive, digestible account of the dismantlement of ‘the monopoly that worked.’”
—Booklist
The Deal of the Century
The Breakup of AT&T
Steve Coll
for Susan and Alexandra
Contents
The Shape of AT&T on May 8, 1972
Local Operating Companies
Cast of Characters
THE CASE
1 The Whites of Their Eyes
2 The First Shot
3 The New Trustbusters
4 The Decision to Decide
5 Legacy of a Scandal
6 “I Intend to Bring an Action”
7 Stillborn
8 McGowan’s Gambit
9 DeButts’ Last Stand
10 The Red and Blue Teams
11 Severed Limbs
12 The Answer Man
13 The New Realism
14 Crimson Sky
15 Two Lawyers
16 The Sky Falls
17 Litigating to the Eyeballs
18 Connell’s Deception
19 Saunders and McGowan
20 The Baldrige Proposal
21 The Disengaged Presidency
22 Escalation
23 Baxter’s Finesse
24 A Judicial Temperament
25 Judgment Day
26 The Inter-Intra Split
27 Court of Last Resort
28 Fence with a One-Way Hole
29 The Two-Pager
30 Après Ski
31 January 8
32 “This Case Is History”
AFTERMATH
33 Congress Awakens
34 The Telecommunications Czar
35 An Imperfect World
36 Epilogue
Notes and Sources
Index
Acknowledgments
About the Author
Competition—effective, aggressive competition—means strife, industrial warfare; it means contention; it oftentimes means taking advantage of or resorting to any means that the conscience of the contestants or the degree of the enforcement of the laws will permit.
Theodore Vail
President, American
Telephone & Telegraph
Company
1910
The Shape of American Telephone and Telegraph Co. on May 8, 1972
Local Operating Companies
Bell Telephone Co. of Nevada
Illinois Bell Telephone Co.
Indiana Bell Telephone Co.
Michigan Bell Telephone Co.
New England Telephone and Telegraph Co.
New Jersey Bell Telephone Co.
Northwestern Bell Telephone Co.
Pacific Northwest Bell Telephone Co.
Pacific Telephone & Telegraph Co.
South Central Bell Telephone Co.
Southern Bell Telephone & Telegraph Co.
Southwestern Bell Telephone Co.
The Bell Telephone Co. of Pennsylvania
The Chesapeake & Potomac Telephone Co.
The Chesapeake & Potomac Telephone Co. of Maryland
The Chesapeake & Potomac Telephone Co. of Virginia
The Chesapeake & Potomac Telephone Co. of West Virginia
The Diamond State Telephone Co.
The Mountain States Telephone & Telegraph Co.
The New York Telephone Co.
The Ohio Bell Telephone Co.
Wisconsin Telephone Co.
Cincinnati Bell Telephone Co.*
Southern New England Bell Telephone Co.*
*Partially owned
Cast of Characters
JUSTICE DEPARTMENT
Kenneth Anderson, trial team lead attorney, 1977–1980
William F. Baxter, antitrust chief, 1981–1983
Ronald Carr, deputy to Baxter in antitrust front office
Keith Clearwaters, antitrust front office attorney
Gerald Connell, trial team lead attorney, 1980–1982
Jim Denvir, trial team attorney
Loren Hershey, antitrust front office staff attorney
Thomas Kauper, antitrust chief, 1972–1976
Peter Kenney, trial team attorney
Richard Levine, antitrust front office attorney
Sanford Litvack, antitrust chief, 1980–1981
Hugh Morrison, antitrust front office section chief
Jonathan Rose, assistant attorney general, office of legal policy
William Saxbe, attorney general, 1974–1975
John Shenefield, antitrust chief, 1977–1980
William French Smith, attorney general, 1981–1985
Philip Verveer, trial team lead attorney, 1974–1977
AMERICAN TELEPHONE & TELEGRAPH COMPANY
Edward Block, senior vice-president, public relations
Charles Brown, chairman, 1979–1986
John Dulany deButts, chairman, 1972–1979
Mark Garlinghouse, general counsel to deButts
Charles Hugel, executive vice-president, strategic planning
C. W. Jackson, business relations director
Harold Levy, staff attorney
Robert McLean, Sidley & Austin attorney
Ian Ross, president, Bell Laboratories
George L. Saunders, Jr., Sidley & Austin, lead trial attorney
Morris Tannenbaum, executive vice-president
Howard Trienens, Sidley & Austin attorney, general counsel to Brown
Michael Yauch, Sidley & Austin attorney
John Zeglis, Sidley & Austin attorney
OTHERS
James Baker, chief of staff to President Reagan, 1981–1985
Malcolm Baldrige, secretary of commer
ce, 1981–
Vincent Biunno, U.S. District Court judge, Newark, New Jersey
Kenneth Cox, senior vice-president, MCI
Jack Goeken, founder of MCI
Harold H. Greene, U.S. District Court judge, Washington, D.C.
Larry Harris, MCI staff attorney
Senator Philip A. Hart, chairman of Senate antitrust subcommittee, early 1970s
Walter Hinchman, FCC Common Carrier Bureau chief, mid-1970s
William McGowan, chairman of MCI
Edwin Meese, counselor to President Reagan, 1981–1985
Kenneth Robinson, Commerce department attorney
Representative Peter Rodino, chairman of House antitrust subcommittee
Bernard Strassburg, FCC Common Carrier Bureau chief, 1964–1973
Joseph C. Waddy, U.S. District Court judge, Washington, D.C.
Caspar Weinberger, secretary of defense, 1981–
Rep. Timothy Wirth, chairman of House telecommunications subcommittee
Bernard Wunder, assistant secretary of commerce, telecommunications
The Case
Chapter 1
The Whites of Their Eyes
One by one, in their rented luxury sedans, the executives of American Telephone & Telegraph Company crossed the Card Sound Bridge and drove east into the morning sun, toward Crocodile Lake. There was a warm, salty breeze wafting from the ocean; palm trees along the road bowed politely to the passing cars. It was Monday, May 8, 1972, the dawn of another dazzling week in the paradisiacal tropics of Key Largo, Florida.
At the stop sign where Card Sound Road meets the Overseas Highway, the cars turned north, along the peninsula, tracing the road as it sliced through a reedy everglade. A few hundred yards to the right lay the Atlantic, its crystal waters washing over the largest living coral reef in the world. Not far to the left was the still, blue deep of Card Sound.
Two miles on, the cars slowed at the security gate of the Ocean Reef Club, a lush and exclusive resort frequented by Jacqueline Kennedy Onassis and President Richard Nixon’s close friend Bebe Rebozo. The AT&T executives were checked for identification and then ushered in. Beyond the gate, the manicured fairways of the club’s several golf courses came into view, and beyond them, the gleaming masts of yachts docked in Ocean Reef’s private harbor.
It would be an idyllic week for golf, or for sailing, but not all the AT&T executives arriving in Key Largo for the company’s semiannual Presidents’ Conference were in a playful mood. Though they were calm and patrician men, well-drilled in the manners and mores of corporate eminence, some of them were girding for a fight. The uncharacteristic outrage and emotion they would display over the next five days had been brewing inside them for months, even years.
Nearly all of AT&T’s key executives had worked for the company for two decades or more, and only a few had ever been employed by anyone else. They were the guardians, many of them strongly believed, of one of the most important public trusts in America, “Ma Bell,” which happened also to be the largest corporation in the world. And now that public trust was under attack, from within and without, and was in danger of being destroyed.
Some of the executives arriving in Key Largo could see parallels between the challenges their company now faced and other assaults on public institutions that were depicted each evening on the television news. That Monday night, for example, as they sat in their hotel rooms, some of the executives watched news reports about antiwar protesters who had forced the closure of the United States Capitol. Later that same evening, President Nixon delivered a somber, nationally televised address announcing that he had ordered massive air strikes against North Vietnamese targets and had also ordered the mining of all North Vietnamese harbors. “At this moment, we must stand together in purpose and resolve,” Nixon urged. Even in those turbulent times, AT&T itself was not often faced with angry demonstrations by student protestors. Nonetheless, some of the company’s top executives felt that it was precisely a lack of “purpose and resolve” that was the cause of AT&T’s problems. The dissenters had come to the Ocean Reef Club to confront AT&T’s new chairman of the board with their views.
And that was exactly what John Dulany deButts, the new chairman, wanted. He had taken over the company only six weeks before, and he, too, was dissatisfied with its state of affairs. Indeed, he believed that AT&T had reached one of the lowest ebbs in its century of existence, and he was determined to turn things around—quickly. The Key Largo conference was an important part of his plan. For too long, deButts felt, the presidents of AT&T’s basic operating companies—the local phone companies across the country such as New York Telephone, Pacific Bell, Illinois Bell, Mountain States Bell, and so on—had been stifling their ideas and complaints, unable to convey them to AT&T’s centralized corporate management headquartered in New York City. That was one reason why morale among AT&T’s one million employees was disintegrating into malaise and dissension. By inviting the presidents to Key Largo, and by encouraging them to air their opinions with impunity in an atmosphere of free exchange, deButts hoped both to reassure the presidents that their views were being heard and to gain new insights about how to meet the challenges facing his company.
And he knew the challenges were plentiful. The most visible of them, and the most vexatious to AT&T’s chairman, was a precipitous and unprecedented decline in the quality of AT&T’s basic phone service to the public—what deButts liked to call “pots,” or “plain old telephone service.” By 1970, two years before deButts ascended to the chairmanship, the decline had reached crisis proportions in a number of major cities, including New York. The basic problem was one of supply and demand: too much demand for new phone service and not enough AT&T facilities to accommodate all the new customers. The result had been horrendous delays and breakdowns, especially in Manhattan, the nation’s media and financial capital. Television networks, banks, securities underwriters, and publishing companies—all of which wielded great influence over how AT&T was perceived by investors and the public—had experienced long, aggravating delays in obtaining new phone service and in having their phone systems repaired. These peeved and powerful customers lashed back at AT&T, publicly criticizing, even ridiculing the giant monopoly for its apparent arrogance and incompetence. Such criticism fueled the public’s own growing suspicions in the late 1960s about the motivations and priorities of large corporations generally. Ma Bell quickly became a favorite object of jokes and political satire. Lily Tomlin, the “Laugh In” comedienne, had developed a popular routine around an insolent telephone operator which seemed to capture perfectly the widespread unrest over deteriorating phone service.
John deButts also knew that, like most business crises, AT&T’s telephone service emergency in Manhattan and elsewhere had been caused by the company’s own shortsightedness. The cost of providing basic telephone service to the country was enormous. AT&T had to build, install, maintain, and replace hundreds of thousands of miles of cable and wire, millions of residential telephones and business telephone systems, as well as a sophisticated network of switching stations that directed every call to its proper destination. Just to maintain a system of that magnitude and diversity required huge expenditures by AT&T every year—$7.5 billion in 1971, more money than some large companies would spend in a decade on plants and equipment. And when customers demanded more phone service, as they had throughout the 1960s, AT&T’s capital requirements became astronomical. But if AT&T cheated on its investment, if it failed to spend the necessary money to build new phone lines and switching stations to accommodate new customers, the disastrous results would become quickly apparent. That was exactly what had happened by 1970. Inflation during the 1960s had driven up AT&T’s costs and had squeezed the company’s profits. Rather than raising phone rates to cover inflation, the operating company presidents had decided to cut costs and to stop investing so heavily in the upkeep of the phone system. In the short term, the companies’ profits rose, and the presidents were praised for frugality. But in just
a few years, the neglected phone system, unable to accommodate the new demand for telephones, had collapsed under pressure.
So that was John deButts’ first priority as he arrived at the Ocean Reef Club on May 8, 1972—to restore plain old telephone service and to redeem the Bell System’s good name with the public. DeButts did not intend to approach this task with the cool detachment of a corporate turnaround artist; he regarded AT&T’s service crisis as a kind of personal embarrassment. An imposing, broad-shouldered figure at six feet, two inches tall and weighing two hundred pounds, deButts seemed to embody the spirit of the Bell System. Reared in a comfortable, Old South railway family, he had taken his first job with AT&T more than thirty years before, immediately after he graduated as a captain from the Virginia Military Institute. Now in his fifties, deButts still retained the bearing of a military man. He exuded leadership, power, and privilege. He was a self-styled captain of industry, dressing in dark, conservative suits, flashing the obligatory gold cufflinks and watch. When he met a man, he shook his hand firmly and looked him in the eye; when he spoke, deButts’ southern drawl carried the authority of a general’s wartime orders.
On his way up AT&T’s long executive ladder, deButts had worked in twenty-two different jobs and had seen every corner of the company’s vast telecommunications empire. He had worked in the basic operating companies, starting as a traffic manager with the Chesapeake and Potomac Telephone Company in Virginia and rising eventually to the presidency of Illinois Bell. He had seen the Western Electric Company, AT&T’s multibillion-dollar manufacturing subsidiary, which in May 1972 made virtually every telephone used in America, as well as nearly all the cable, wire, and switching systems that comprised the phone network. He had been involved, too, with the prestigious Bell Laboratories, AT&T’s research and development arm, which by the end of the 1970s would hold more than 19,000 patents and which had been responsible since the early 1900s for such seminal technological advances as radio telephony, vacuum tube amplifiers, cable television, early digital computers, transistors, silicon chips, and lasers. For a time, he had headed AT&T’s “government relations” office, the company’s powerful lobbying operation in Washington. And most recently he had served apprenticeships in the New York-based Long Lines department, which was responsible for long distance service, and in the company’s financial department, which had the unenviable task of raising billions of dollars in debt and equity financing on the public markets each year.