By Kristen Beckman
Originally published Feb. 12, 2001, in RCR Wireless News
How it came to pass that AT&T let its cellular licenses slip away during its 1984 divestiture is the stuff of wireless industry urban legend. Some say AT&T was less-than-concerned about giving up its cellular business, believing industry forecasts that at the time predicted limited growth for the nascent industry. Others say AT&T let the licenses go as a strategic move designed to shore itself up for impending competition in other areas. Still others contend AT&T wanted to keep cellular in its fold, but believed it would not be allowed to do so.
Whatever its reason, AT&T appeared to put up little fight in the early 1980s to keep its position in the cellular industry-an industry it was instrumental in pioneering. AT&T engineers had largely developed cellular technology, and the company was a catalyst for convincing the Federal Communications Commission to free up spectrum for the new service. It had an experimental license in one market and was on its way to launching one of the first cellular markets in the country.
But there was no mention of cellular in the consent decree that settled the antitrust case between AT&T and the government, according to Michael Altschul, who was responsible for part of the government’s case as part of the trial staff of the Antitrust Division at the Department of Justice. Altschul is now general counsel at the Cellular Telecommunications & Internet Association.
“The lawsuit was based on prior conduct,” said Altschul. “Wireless wasn’t a part of the government’s case.
“There was absolutely no mention of cellular,” he said.
Altschul recalled the press conference called to announce the settlement agreement. A reporter asked executives at the company what was to become of the cellular business. Altschul said a huddle between AT&T executives and their key deputies produced the answer.
Cellular would go to the Bell companies.
History of the breakup
Unwilling to tamper with a reliable and well-run telephone system, the U.S. government allowed AT&T to operate as a monopoly for more than a century after it was founded by Alexander Graham Bell and two financial investors in 1875. The company dominated the local exchange market via the Bell System and controlled the long-distance market. AT&T also had a strong presence in telecom manufacturing by way of Western Electric.
“It was a vertically integrated monopoly from top to bottom,” said Charles Kennedy, who was one of the attorneys who represented AT&T during divestiture litigation. Kennedy is now a partner in the Northern Virginia and Washington D.C. office of Morrison & Foerster L.L.P.
AT&T had largely withstood a few notable government challenges to its monopoly. A 1949 antitrust suit seeking a separation of Western Electric from the Bell System resulted in a consent decree in 1956 that required AT&T to restrict its activities to “the regulated business of the national telephone system and government work,” according to the company.
Technology advances, however, were making competition in the long-distance market technically feasible, although still not allowed.
By the 1970s, AT&T was experiencing the first real threat to its monopoly. The FCC recently had ruled that customer devices could be attached to telephones in AT&T’s network, but its most formidable threat came from an enterprising company called Microwave Communications Inc. MCI had built a microwave transmission link between Chicago and St. Louis, and the company wanted to use the link to provide private line communications services to trucking companies between the two cities.
MCI eventually won the right to provide unrestricted competition in the long-distance arena. The company also won a key lawsuit against AT&T in 1980, which accused AT&T of illegally trying to drive MCI out of business. MCI was awarded $1.8 billion in the case. The judgement was reduced to $113 million on appeal.
The genesis of competition in the long-distance market, along with grumblings from manufacturers that AT&T compelled its local operating companies to buy equipment from its Western Electric subsidiary, gave rise to a government movement to challenge AT&T’s monopoly. The government filed an antitrust lawsuit against the company in 1974.
The lawsuit spanned eight years, during which the case was assigned to Judge Harold Greene. In January 1982, AT&T and Justice negotiated a settlement that called for AT&T to divest itself of its wholly owned Bell operating companies. Judge Greene approved the deal.
“It was voluntary, but as a practical matter, we were under the gun,” said Kennedy. “We knew the judge was going to rule against us.
“There had been discussion of AT&T keeping the Bell operating companies and giving up Western Electric, but it was clear the judge was going to make AT&T give up the operating companies,” he said.
“One thing I remember is that it was bitter,” said Kennedy. “People at the Bell System thought they had the public trust. They were like the military-they thought they were serving the public. They thought competition would do nothing but harm.
“It was not a friendly fight.”
Breaking up is hard to do
With the negotiation finally settled, all that was left was to physically divide the company.
“It was an incredibly detailed project,” said Steven Titch, who was an associate editor for Electronic News covering communications at the time of divestiture. “People said they were counting paperclips.
“There was a massive amount of paperwork,” said Titch, who is now a freelance writer and the editor of Titchonline.com, a telecom analysis and information Web site.
On Jan. 1, 1984, divestiture officially occurred, and America woke up to a telecom market forever altered.
“It was such a huge change in people’s lives,” said Kevin Sullivan, who supervised the AT&T case for the Justice Department for two years beginning in April 1984. “They had always dealt with the phone company-AT&T. Your phone was provided by AT&T. Your local and long-distance service was provided by AT&T. It was a revolutionary change.”
During his tenure at the Justice Department, Sullivan was responsible for fielding complaints related to the divestiture and was in charge of enforcing the consent decree.
“In two years we managed to process 200 separate waivers,” said Sullivan, who is now a partner in King & Spalding’s Washington D.C., office.
“One thing that was interesting was we were receiving a number of complaints by the alternative cellular providers,” he said. “There was a very real concern in every market that the second entrant would be disadvantaged because the first carrier to launch would get all the best customers.
“There was nothing we could do under the consent decree,” he said.
Because the case ended in a consent decree, the court supervised the breakup of Ma Bell. Anytime the Bell companies wanted to offer a new type of service, they had to seek a waiver from Judge Greene. The advent of new technologies continually blurred the lines between what was allowed and what wasn’t.
“It was peculiar, having one judge running the industry,” said Kennedy. “It was an enormous burden.”
On the day of divestiture, AT&T said goodbye to the famous Bell logo and name. The company retained only $34 billion of the $149.5 billion in assets it had the day before. It also shed 636,000 employees, some of whom were cellular employees sent to the Bell System.
“They were very casual about the cellular business,” said Kennedy. “No one thought there was any future in this cellular stuff.”
“I was just shocked,” said Joey Wolff, who was director of marketing for AMPS, AT&T’s cellular division. Wolff is now a partner in Solomon Wolff Associates, an independent marketing research company specializing in high-tech and communications issues.
“We were working so hard on getting the spectrum freed up and the technology ready, we weren’t all that aware of the divestiture proceedings,” she said. “It took over our lives, and it had so much potential.”
The new company, minus its local exchange assets and out of the cellular business, turned its focus toward defending its market share in the long-distance market and dabbling in other promising markets, notably computers.
“AT&T came away very well-positioned,” said Titch. “They had long-distance, manufacturing and the ability to enter computers.
“It was a very sharp agreement on AT&T’s part,” he said “It was a divide-and-conquer strategy.”
Having rid itself of the restrictions of the 1956 consent decree, AT&T was free to pursue the computer market. The company purchased computer maker NCR for $7.3 billion in 1991, but the company was never successful in the computer industry.
In 1994, AT&T regained its place in the cellular industry, purchasing nonwireline carrier McCaw Cellular Communications Inc. for $11.5 billion, a deal that gave AT&T direct access once again to consumers.
The next year, AT&T announced a major restructuring that split the company three ways-AT&T, the carrier; Lucent Technologies Inc., the equipment company; and NCR, the computer company. According to AT&T, it was the largest voluntary breakup in the history of American business.
Meanwhile, the seven regional Bell companies had prospered apart from AT&T, armed with the famous Bell logo, a profitable and stable local exchange business and the right to newly licensed cellular spectrum, which held more promise than anybody realized at the time. While its former parent learned how to compete in the long-distance arena, the Bell companies faced fierce competition on the wireless front.
The Telecom Act of 1996 further changed the market for AT&T and the Bell companies, allowing them to peek over the wall that had separated them for 12 years. AT&T was already competing with the Baby Bells in the wireless arena and the prospect of further competition in the long-distance and local markets loomed.
Consolidation swept through the ranks of the Bell companies during the second half of the 1990s, driven in part by a growing trend toward national coverage and service offerings.
The wave of consolidation hinted at a resurrection of half of Ma Bell. The original seven regional Bell operating companies were reduced to five when Bell Atlantic Corp. acquired Nynex Corp. and SBC Communications Inc. acquired Pacific Telesis. Later, SBC acquired Ameritech Corp. and Bell Atlantic acquired GTE Corp. All the while, independent wireless carriers were being acquired and alliances between wireless carriers were being formed as the industry shifted its focus from a local business to a national business.
What might have been
CTIA’s Altschul said the wireless industry might have developed differently had divestiture not occurred.
“AT&T had designed the system as a national business to be controlled centrally in Chicago,” he said. “Had that been the model, the industry would have started out as a national service rather than a regional, market-by-market offering.”
Perhaps the biggest impact of divestiture on the wireless industry was the competition it fostered.
“The divestiture created the telecom industry, in a way,” said Kennedy. “If the phone companies had a monopoly or a virtual monopoly over wireless technology, they would not have encouraged it. They would have seen it as competing with itself.
“It’s fair to say, even though I defended the monopoly vigorously, that hardly any of the innovations that we see at telephone companies today would have happened with the monopoly,” he said. “It’s hard to imagine what the world would have looked like without divestiture.”