The decline and fall of AT&T: a personal recollection.(The Enduring Lessons of the Breakup of AT&T: A Twenty-Five Year Retrospec

Thank you very much, Chris. I needed a generous introduction because I realized, listening to the very interesting talks this morning, that I hadn't thought about telecommunication policy since 1981. I'm a kind of Rip van Winkle here, invited to give an antiquarian talk.

I was struck by Mr. Weber's very lucid discussion of the history of telecommunications technology. He made a powerful argument that everything that's happened in telecommunications policy has been the result, ultimately, of technological progress, and that the lawyers and the economists and the judges and the legislators and the bureaucrats are corks bobbing on the technological waves. So my talk will be not only antiquated but epiphenomenal. Moreover, it is a talk from memory, and I do not warrant its complete accuracy.

In the fall of 1967 I let the Solicitor General's office to become General Counsel of President Johnson's Task Force on Communications Policy. "General Counsel" was a rather grandiose title for my role--the entire staff of the task force consisted of no more than five or six persons, only one other of whom was a lawyer. The staff was under the direction of a very able young fellow named Alan Novak, a Yale Law School graduate who was a personal assistant to Eugene Rostow. Rostow, the former Dean of the Yale Law School, was the Undersecretary of State for Political Affairs and the chairman of the task force. It was noted at the time that the fact that Rostow had been made chairman of this task force was a testament to his unimportance, because the third-ranking official in the State Department would not be given such a modest and peripheral task if he were really an important official. All I remember of him is his beautiful office in the State Department and that he was the best-tailored man I had ever met. He was elegant and lordly but didn't seem to have anything to say about telecommunications policy. I do remember that his favorite word seemed to be "demarche"--a diplomatic word meaning, actually, just "statement."

A curiosity that didn't strike me until today is that there didn't seem to be anyone between Gene Rostow and Staff Director Novak. You'd think there would be a task force with members and a staff of young people reporting to it. But there was just Rostow, and he took no interest, as far as I could tell at any rate, in the project.

There was a fine economist on our staff whom we called the Director of Research--Leland Johnson--a very good price theorist from Rand who had achieved a measure of academic celebrity for what was called the "Averch-Johnson" effect--the incentive of price-regulated firms to overinvest because their capital costs were not constrained as effectively as their operating costs. Lee Johnson was excellent, and I learned a lot from him about price theory.

The task force had a very broad mandate, and much of what we dealt with had nothing to do with the regulation of AT&T. Cable television was just emerging from its original, very limited role of overcoming topographical obstacles to broadcast transmission, but already dreamers were talking about hundreds of channels and how that plenitude would transform American culture. We also became involved in intense debate over pay television--whether allowing it would erode a sense of community somehow created by free (to the viewer, that is) television. And we spent much time discussing companies that you've probably never heard of called "record carriers," obscure common carriers that handled international telex traffic (telex--another fossil). There were policy issues concerning them and also concerning satellites--communication satellites were just coming on line. But we did talk extensively with and about AT&T, and Bill McGowan, the founder of MCI, came and lobbied us, as of course did AT&T.

We were skeptical about the social value of AT&T's monopoly of telephone service, and about common carrier regulation in general. Even though the 1960s was an era of renewed collectivism--the era of the Great Society programs--the collectivist impulse somehow coexisted with skepticism about public utility and common carrier regulation, which seemed old-fashioned and anticompetitive. That skepticism had arisen in the 1950s, and in the 1960s George Stigler and other distinguished economists published highly critical articles about regulation. This skepticism was magnified when one met the regulators and regulatees. Moreover, hostility toward monopoly was an aspect of the antitrust culture of the 1950s and 1960s, and antitrust was a "liberal" policy that coexisted comfortably with the liberal thrust of the Great Society.

I left the task force to join the faculty of the Stanford Law School in the summer of 1968. I think we had pretty much finished--we the staff at any rate--the task force's report. But before it was released to the public it was submitted to the White House and there I think it got diluted in some ways. The report was finally issued in December of 1968, at the very end of the Johnson administration; and then Nixon came in. So I don't know what effect on policy the report had. But the very able engineer on our staff, Walter Hinchman, became the head of the Common Carrier Bureau of the FCC, which was already beginning to turn against AT&T, and Hinchman helped it turn further. What Weber told you in his talk was very pertinent. New technologies had arisen that facilitated competition, such as microwave towers for long-distance telephone service, which were much cheaper than building underground cables.

I also think that AT&T's attitude of never yielding an inch irritated people, including the officials and staff of the FCC. Hush-a-Phone (a rubber cup-like device that one attached to the speaking end of the phone so that other people in the room couldn't hear what you were saying, and that AT&T claimed was a forbidden "foreign attachment" to the telephone network) was the famous example of that absurdity. And so in 1968 the FCC issued the Carterfone decision, which for the first time permitted "foreign" interconnection with AT&T's network (over AT&T's objection)--it was just acoustical coupling, but nevertheless the decision was a portent. The logjam was beginning to break at the FCC, and maybe the task force report (or just the existence of the task force) had some effect in encouraging the FCC in its new course.

I had become interested in telecommunications policy as a result of my work on the task force; the first course I taught at Stanford Law School was on telecommunications policy. I started writing about regulation, and published an article in the first issue of Paul McAvoy's Bell Journal of Regulation on cross-subsidization in regulated industries. Other articles followed. And then in 1973 the AT&T suit was filed, and shortly after that I was asked to give a talk in New York, I think mainly to securities analysts, about the case. I recall saying that the suit seemed like a long shot--a suit to break up such a large and heavily regulated common carrier.

All of AT&T's services were provided by tariffs approved by the FCC, and it seemed unlikely that an antitrust suit would be allowed to disrupt this system of tariffed pricing and limited entry. But of course it turned out that the FCC, which became progressively more hostile to AT&T, was happy to allow the antitrust suit to proceed, and it made sure that it didn't create regulatory obstacles to the suit by approving exclusionary tariffs.

At the end of my talk to the analysts, an AT&T lawyer came up to me--I think it was Harold Levy, who was the senior AT&T lawyer on the case under AT&T's general counsel, Mark Garlinghouse--and asked me whether I might be interested in consulting for AT&T on the case. So I said: sure, why not? I was interested in telecommunications policy and I was pleased at the thought of making some welcome money consulting.

That began what became a pretty heavy involvement in the case for a period of about four years. But oddly, I don't remember a great deal about those four years of consulting. I think the reasons are that most of my work consisted of attending meetings in New York (though I must have written memos before and after the meetings, but I don't remember any of that and I have no copies) and that the meetings were always the same.

There were two major law firms involved on AT&T's side of the case--Dewey Ballantine and Sidley & Austin. George Saunders, then a youngish partner at Sidley and extremely able and colorful, was the principal outside lawyer. He attended all these meetings as did lawyers from AT&T, usually led by Harold Levy. In addition, AT&T formed something called "Administration D," a gigantic in-house paralegal and support apparatus, bursting with engineers and functionaries of all sorts.

The reason the meetings were so repetitious, which is why they're such a blur in my memory, was captured in a joking comment that George Saunders used to make to me about Will Baumol, the principal economic adviser for AT&T on the case--a very distinguished economist then at Princeton, very articulate, and a regular participant in the meetings. George used to say: "You know, Baumol has made a great deal of money by telling AT&T that two plus two is four. If you then take away two, you're back to two. But if you add one, you then have three. And if you double it you've got six. And if you then divide by three...." What he meant was that Baumol (and George and I and others, as well) would explain in these meetings over and over again the very most basic elements of regulatory economics--economies of scale and scope, cream skimming, vertical integration with nonregulated entities (such as Western Electric, the manufacturing arm of the Bell System), limitations on entry, and so forth. The audience--the AT&T lawyers and engineers--was stubbornly unreceptive. They didn't like this stuff, and they didn't understand it. So it had to be repeated to them over and over again.

Print Get the Mag Weekly Updates