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

One thing that struck me early on was that AT&T did not match my impression of a private company. It reminded me of the government; I had been in the government for several years before becoming an academic. AT&T was very bureaucratic. And, remarkably, it didn't seem to have any interest in customers. It didn't like competition; that was clear. But more fundamentally, there didn't seem to be any entrepreneurial spirit. I didn't know much about private companies, but this was certainly not what I expected.

AT&T believed for example that nobody should be permitted to interconnect with the network except GT&E and a couple of other small vassal-like telephone companies that were also permitted to interconnect with it. In particular there must be no interconnection by MCI, AT&T's bete noir, and no attachment of terminal equipment by customers (that is, no "foreign attachments"). That was AT&T's absolute line of defense: not one step backwards, as Stalin said when the Germans were approaching Stalingrad.

We told AT&T that it would have to be able to give reasons for its position to a court. We heard three reasons, or at least that's all that I remember. The first was that if someone bought his own piece of terminal equipment, attached it to the network, and sent a powerful electric current through it, a telephone lineman working many miles away might be electrocuted. I don't know whether that was even a theoretical possibility. When we asked whether there had ever been an accident of that sort, the AT&T engineers said no. But it could always happen; there could always be a first time. As far as I know, there's still never been such an accident, because the power that goes through the phone lines is very low. A big surge would just blow a fuse rather than cause death by electrocution. So that argument was a loser.

The next argument they pushed on us involved the Department of Defense. The Department had asked AT&T to harden its microwave towers and underground cables, at AT&T's own expense, against a nuclear attack (to win that nuclear war, we would need survivable communications!). The Department had also (I think, though my memory is hazy on this point) pressed AT&T to build another underwater cable, so that Soviet submarines would have greater difficulty interrupting our global communications. And so AT&T said: look, MCI is not hardening its microwave towers. It has these flimsy towers and when the bomb goes off they're going to be blown down. And it would be unfair therefore to allow MCI to compete with AT&T because MCI wouldn't incur these tremendous expenses.

I thought this a dubious point. It seemed strange that a military measure should be financed by telephone ratepayers rather than by federal taxpayers. But worse than that, the argument had the odor of conspiracy between AT&T and the Defense Department: AT&T would finance a military defense measure so it wouldn't be in the Defense Department's budget and in exchange the Defense Department would support AT&T's monopoly. Military officials testified (and argued inside government, as they did in trying to get the antitrust case against AT&T dropped) that AT&T was an integral part of the defense community and must not have its willingness to invest in defense measures undermined because it would be competing with companies that didn't incur any of that expense (AT&T might have been content with the alternative of the FCC's requiring MCI to harden its facilities, because MCI couldn't have afforded to do that).

AT&T's third argument, and the one it pressed hardest on us, was related to the electrocution argument; it was that you couldn't trust customers, whether businesses or individuals, to maintain their terminal equipment. It was essential that they be required to lease it from Western Electric. Then AT&T would replace it when it malfunctioned or wore out. If you let customers attach their own equipment, they'd buy lousy equipment, not maintain it, and when it broke down, blame the telephone network, and then AT&T would have to spend a lot of time and money trying to figure out whether it was an equipment failure or a network failure. The company didn't want that expense.

So I said to the AT&T lawyers and engineers at one of our meetings: By the same token, shouldn't manufacturers of television sets refuse to sell the set but instead lease it only, so that they wouldn't have to worry about customers who kept it too long or didn't maintain it? And they said: Yes, probably the television-set manufacturers should do that. And then I said: Well, taking that a step further, wouldn't it make sense for clothing manufacturers to refuse to sell clothing but instead just lease it? Suppose a shirt lasts three years on average before it frays or the buttons fall off--the manufacturer would lease the shirt to you for three years, at the end of which time you'd return the shirt and receive a fresh one. At this point the AT&T engineers realized they were being teased, and they said: No, that wouldn't make sense. But they couldn't articulate a reason why, with television sets or telephone equipment, leasing was the way to go but not with clothing.

So I began to think that while the government's case still looked like a long shot, the AT&T people didn't seem to have any good reasons that they could give in support of their position.

At some point during this four-year period I was asked to help organize a meeting for AT&T at which leading economists would come and talk about the case with the AT&T legal team. AT&T was already busy assembling a huge stable of economists as potential witnesses. I think it may have been part of the AT&Ters' generally favorable attitude toward monopolization. They thought (I conjecture) that maybe they could monopolize the economics industry and leave no expert witnesses for the Justice Department! So we had this session, in Princeton, and a number of very good economists attended. George Stigler was one of them, and George, kind of out of the blue, said to the AT&T people: Of course you're going to lose the case; the only question is what kind of relief you may be able to negotiate. I don't remember the reason he gave, but I think it was something along the lines of: you are so big, you are a monopoly, they're going to have to find that you violated the Sherman Act. The AT&T people were really taken aback by this--they knew that George was a very distinguished economist and also a very conservative one. So I think they began thinking: Yes, we could lose it. They also started getting negative signals from Judge Greene, who was presiding over the case in the federal district court.

My work for AT&T came to a rather abrupt end, I think around 1978. By this time, I was a member of the company's informal steering committee for the case. The steering committee held a meeting chaired by the company's general counsel, Mark Garlinghouse, who I later learned, to my surprise, had actually wanted to open AT&T up to competition. That was not the impression he gave at our meetings, but apparently behind the scenes he was losing faith. At this meeting--there were probably about a dozen people there, mainly, I think, lawyers--Garlinghouse passed out a one-page document outlining AT&T's strategy in the case. It said that the strategy was to delay the litigation--to stretch it out as long as possible. Garlinghouse asked who agreed that this was the correct strategy. Everyone agreed except me. And I said (I'm not sure why; I haven't seen the document since that day thirty or so years ago, because we were told to turn it in before we left the meeting, but there must have been something in it beyond just touting the benefits of dragging their heels) that I didn't think we should adopt this strategy, because this was not an ordinary private litigation. This was a Department of Justice lawsuit and I feared that we could be accused of obstruction of justice by adopting a deliberate policy of delay. That was not a popular suggestion! George Saunders told me later that Garlinghouse had wanted to fire me, but that George had dissuaded him. Nevertheless, there was very little demand for my services after that, which was fine because I had other things to do and also I was worried about that obstruction of justice issue. I didn't want to be implicated.

My last involvement with the case came in 1981, shortly before I became a judge. I was summoned to meet with Charles Brown, the CEO of AT&T, and another person--probably the president of AT&T, but I have forgotten. Brown told me that AT&T was thinking of making a deal with the government whereby it would divest itself of the local operating companies and in exchange would be relieved from the 1956 consent decree that had forbidden it to go into the computer business. He asked me what I thought of such a deal and he reminded me--though this is something that had been said for a long time, and as far I know was true--that Western Electric's electronic switching systems, installed throughout the Bell network, were based on the most sophisticated computer technology in the world. He said we (AT&T) have this sophisticated computer technology, the computer industry is booming, and so we think we can--if freed from this incubus (my word I'm sure, not his) of the 1956 decree--be tremendously successful in the computer industry, and so giving up the local companies would be a fair swap. I replied: I don't think that will work for you, because what I've noticed over the years is that AT&T does not have a marketing culture. I remembered from discussions during the consulting meetings I mentioned how derisive the AT&T people had been about customers wanting colored telephones. They thought that was ridiculous. Why on earth would anyone want a colored telephone? I also remember that I had heard of great dissatisfaction with AT&T on the part of its business customers, because if they went to AT&T and explained that they needed a system say for connecting up their offices, AT&T would say fine, we've studied your needs, this is your system. And they'd reply: Well, that's fine, but we'd like to see some alternatives, or we'd like to see something changed here or changed there. And AT&T would say: No, we've studied your needs, this is your system. That was the attitude; they did not respect their customers. And this morning we heard about the instabilities that can afflict a business in which you can't predict your demand. AT&T did a lot of innovation, but they wanted every new thing to be introduced gradually, they wanted uniformity not variety, single not multiple products, and they didn't want customers buffeting them with demands.

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