In 1981, Judge John J. Sirica was walking down the hallway of the federal courthouse in Washington, D.C. The judge’s reaction to seeing the corridor crammed with boxes, as related by author Steve Coll, was to quip, “I’m glad I only had Watergate.”

The boxes were stacked outside the courtroom of U.S. District Judge Harold Greene and were filled with cost studies regarding telephone services and equipment. Greene was in the midst of trying what was then the largest antitrust case in U.S. history and possibly the most significant event in the history of American telecommunications: United States v. American Telephone and Telegraph Co. (AT&T).

AT&T was founded in 1885 as a subsidiary of Alexander Graham Bell’s American Bell Telephone Company. On December 30, 1899, AT&T acquired Bell Telephone and became the parent company. By the 1970s, it had grown to become the largest company in the world. The company was composed of several entities: Western Electric, which manufactured telephone equipment; Bell Laboratories, the company’s research and development arm; Long Lines, the provider of long-distance phone service; and twenty-four local operating companies (twenty-two of which AT&T owned in full), each covering a region, state, or large metropolitan area to provide local phone service nationwide. Referred to colloquially as “Ma Bell” beginning in the 1960s, AT&T completely dominated the telecommunications industry in the United States.

The company was a monopoly, to be sure, but considered itself a natural monopoly—the provider of a service for which the operating costs were so high that only a single company could do it efficiently. Moreover, AT&T’s leadership had long taken the position that it was only able to serve all consumers by maintaining a series of cross-subsidies—that is, subsidies funded by AT&T’s more profitable services to support its less profitable ones. By charging above-cost rates for long-distance service, service in urban areas, and business services, AT&T could keep prices low for local telephone service, service in rural areas, and residential services, respectively. This framework, AT&T asserted, was only feasible if it retained sole control over the markets, because a competitor free to target the sectors subjected to above-cost rates would drive those rates down, rendering subsidies infeasible and driving prices up for critical services. AT&T believed, therefore, that despite its size and market control it had not violated the antitrust laws.

Nevertheless, in 1949, the Department of Justice (DOJ) filed a Sherman Antitrust Act complaint against AT&T in New Jersey federal court. The crux of the suit was that the company had engaged in anticompetitive practices in the manufacture and sale of phone equipment by Western Electric. The government sought to force AT&T to divest its interest in Western, but the parties settled the case in 1956 with a far less drastic remedy. The consent decree AT&T signed included no divestiture of assets; the Federal Communications Commission (FCC) had informed DOJ that it did not deem divestiture of Western necessary. Instead, the company was prohibited from engaging in any new business other than the provision of common carrier communications services. One consequence of the agreement was that AT&T was forbidden to enter the computer business—a concession the company’s management did not see as very significant at the time. The decree also required Bell Labs to license its patents to third parties upon payment of reasonable royalties. The lack of structural change created by the 1956 settlement contributed to DOJ’s decision to file new antitrust charges against AT&T eighteen years later.

In the late 1960s, embryonic challenges to AT&T’s dominance appeared in the form of two FCC decisions. In 1968, the FCC issued its Carterphone decision, invalidating AT&T’s long-standing policy of disallowing the connection of phones not manufactured by Western Electric to its network. Now customers were free to purchase their phones from other manufacturers. A year later, the FCC permitted Microwave Communications, Inc. (MCI) to provide “private line” service between St. Louis and Chicago. A company with offices in both cities could pay a flat monthly rate to connect them by phone without using AT&T’s long-distance service. MCI still needed to connect to AT&T’s local exchanges in those cities, a concession AT&T had to allow under the “essential facilities” doctrine in antitrust law, which requires a company owning a facility essential to another business (sometimes called a “bottleneck”) to permit access to the facility in exchange for financial compensation.

MCI soon expanded its reach, filing an application in 1974 to provide a long-distance service, called Execunet, which individual consumers could use by dialing an access code. The FCC rejected the application on the grounds that Execunet was essentially a regular long-distance service—which the FCC had not authorized MCI to provide—and not a private-line service as MCI had asserted. In a 1977 decision known as Execunet I, however, the U.S. Court of Appeals for the District of Columbia Circuit reversed, holding that the FCC must allow MCI and other companies to compete with AT&T in the market for regular long-distance service. Later, in Execunet II, the court of appeals once again overruled the FCC, holding that AT&T could not refuse to interconnect its lines with MCI’s long-distance facilities.

In AT&T’s view, opening the long-distance market to competition was a serious threat to its business model—and, in particular, to the cross-subsidies that kept rates low for local callers, consumers in rural areas, and residential customers. AT&T management believed that its domination of the long-distance market was what allowed the company to provide essential public services at a reasonable price. If it were forced to lower its long-distance rates to compete effectively, a rise in local rates would be the natural consequence. This dilemma helped to determine the ultimate outcome of United States v. AT&T.

Despite the increase in telecommunications competition, many DOJ lawyers had been waiting since the 1960s for another opportunity to pursue antitrust claims against AT&T. The relative ease with which the company settled the 1949 lawsuit via the 1956 consent decree had caused a firestorm of public criticism. A House of Representatives subcommittee conducted hearings on the issue which damaged the reputation of DOJ’s Antitrust Division. Pressure to investigate AT&T again also came from MCI, which in 1974 brought an antitrust suit against AT&T for monetary damages but could not seek to change AT&T’s structure as the federal government could. (MCI eventually won $1.8 billion in damages, the most ever in a private antitrust suit, but the award was later reduced substantially.) Furthermore, the FCC had only limited jurisdiction over device pricing, and thus stated in the early 1970s that it was incapable of effective regulation of Western Electric’s pricing policies.

William Saxbe, who had been appointed attorney general of the United States in January 1974, was anxious to restore public confidence in the DOJ, which was at a low ebb after the Watergate scandal. When the Antitrust Division recommended filing suit against AT&T, Saxbe was eager to proceed, and the suit was filed in the U.S. District Court for the District of Columbia on November 20, 1974. The government’s complaint alleged a variety of anticompetitive practices with respect to phone services and equipment in violation of section 2 of the Sherman Act. Despite the FCC’s 1968 Carterphone decision, competition in the equipment market was not unfettered. While competitors could sell phones to be connected to AT&T’s network, AT&T insisted that protective coupling devices, which it supplied, be attached to those phones. Other companies alleged that AT&T had been slow to supply the couplers, harming their businesses. Companies such as MCI also complained that AT&T’s ownership of the local operating companies was unreasonably restraining competition in the long-distance market, because long-distance calls relied for their origination and termination on the very same lines that carried local calls to the calls’ participants. Although AT&T had to allow competitors to connect to its local exchanges, the local operating companies did not have to treat those competitors on an equal basis to Long Lines; instead, they could charge them higher prices for those connections.

To remedy these alleged antitrust violations, the DOJ sought divestiture of both Western Electric and the local operating companies—in other words, a massive reduction in the size of AT&T. In explaining its reasons for filing suit, the DOJ asserted that the 1956 consent decree was inadequate to prevent unreasonable restraint of competition in the telephone equipment and telephone service markets.

The legal proceedings played out over several years. The discovery process, which promised to be lengthy in any event, was paused for two and a half years while the parties litigated disputes related to jurisdiction and discovery. Discovery did not begin in earnest until September 1978, when the district court issued an opinion disposing of the remaining legal issues and setting forth a plan for the pretrial process. The trial itself began on January 15, 1981, before Judge Greene. Greene, then in his late fifties, had been a federal judge for three years; President Jimmy Carter appointed him in 1978 to replace Judge Sirica of Watergate fame after the latter assumed senior status.[1]

After opening statements in January followed by a recess during which unsuccessful settlement discussions took place, the government put on its evidence throughout March 1981. Much of the phone equipment part of the case had been obviated in 1979; the FCC had established a device registration program, ensuring that new phone manufacturers met quality standards and making the protective couplers unnecessary. The DOJ examined witnesses on the subject anyway in the hopes of showing a pattern of anticompetitive behavior by AT&T. Moreover, the government claimed that the local operating companies were still restraining trade in the equipment market by treating Western Electric too favorably compared to outside suppliers.

Before long, both sides were feeling pressure to settle the case. Ronald Reagan had entered the White House in January 1981, just days after the trial began. Many senior members of his administration opposed the lawsuit, including Secretary of Defense Caspar Weinberger. AT&T’s lawyers submitted into evidence a Department of Defense position paper asserting that the breakup of AT&T would threaten the nation’s defense communications system and harm national security. (Judge Greene was angered by what he viewed as the executive branch meddling with the case.) Secretary of Commerce Malcolm Baldridge knew that the Senate was working on amendments to the Communications Act of 1934 and felt that Congress, and not the federal courts, should be responsible for making policy regarding competition in telecommunications. Department of Commerce officials also believed that a fully intact AT&T was needed to remedy the country’s growing trade deficit as Japan’s telecommunications industry flourished. A task force representing several Cabinet departments—including Defense and Commerce but not Justice—formally recommended that Reagan order the case dropped. Ultimately, though, the decision was left to former law professor William Baxter, who had been recruited by the Reagan Administration to run DOJ’s Antitrust Division. Baxter believed that the case should proceed, given the risk that AT&T could, in the future, use the steady profits from its rate-regulated local phone service to cross-subsidize its unregulated operations (chiefly its device business), giving it an unfair advantage in the unregulated markets and harming competition. The antitrust chief also had the backing of Reagan’s new attorney general, William French Smith, mainly because Smith felt that other cabinet departments had intruded upon DOJ’s domain and he wanted to protect his department’s independence.

On the other side of the courtroom, AT&T’s lawyers believed that Judge Greene viewed the case in a light unfavorable to their client. After four months, the government rested its case, and AT&T immediately filed a motion to dismiss accompanied by a brief of more than 550 pages. Greene then recessed the trial until the beginning of August. (During the recess, lawyers from both sides met for a picnic at a park in Washington, D.C., which Greene attended. The day’s festivities included a softball game which Greene, despite the parties’ request, declined to umpire.) On September 11, several weeks into the defense’s presentation of its case, Judge Greene issued his decision on the motion to dismiss. Denying AT&T’s motion, Greene wrote in the conclusion of his opinion: “The testimony and the documentary evidence adduced by the government demonstrate that the Bell System has violated the antitrust laws in a number of ways over a lengthy period of time. The evidence sustains the government’s basic contentions, and the burden is on the defendants to refute the factual showings made in the government’s case.”

Greene stressed that his opinion did not mean that the government had won its case and that the defense would have a full opportunity to disprove the allegations against it. Nevertheless, AT&T’s attorneys were discouraged, to say the least. Faced with what they believed to be a significant risk of a loss at trial, the company’s executives, who had already been contemplating a settlement out of court, began to think even more seriously about the prospect.

Above all else, AT&T’s management did not want to risk losing Western Electric, which it saw as a crucial part of the company’s future, together with Bell Labs. The local operating companies, heavily subsidized by long-distance profits, were profitable, but far less so. If the local companies lost their cross-subsidies and had to price at or above operating costs, which were high, they would become even less valuable to their parent company. To their predecessors, consenting to any breakup of AT&T was unthinkable, but a new generation of executives began to believe that if things had to change, divestment of the local operating companies was the best course of action. This view was spearheaded by William Baxter, who had directed prosecutors to continue pressing the case precisely because he saw cross-subsidies as a major antitrust problem.

AT&T’s hopes for a legislative solution that would not require it to divest—something it had pursued in Congress for years—were raised when the Senate passed the Telecommunications Competition and Deregulation Act in October 1981. But strong opposition from Congressman Tim Wirth of Colorado, the chair of the House Telecommunications Subcommittee, promised to derail the bill. A more stringent bill Wirth introduced, combined with a report his office issued in November, deflated the company’s hopes and convinced its leaders to push for settlement of the government’s lawsuit. The executives also saw a settlement as a potential avenue for getting out from under the 1956 consent decree, under which it could not sell computer equipment or services. Having that ban lifted was essential for AT&T, which was unable to compete with companies like Xerox and IBM in the exploding and lucrative computer market.

The parties agreed on these terms—AT&T’s divestment of its local operating companies accompanied by a modification of the 1956 consent decree to allow AT&T to enter the lucrative computer market—in January 1982. When the agreement was announced to the press, most reported it as a victory for AT&T and a loss for the Justice Department. AT&T had kept its most profitable assets, divested itself of its least profitable ones, and escaped from the confines of the 1956 decree. The local operating companies, which lost their cross-subsidies, and local telephone users, who would now have to pay higher rates, were viewed as the main casualties of the deal.

Judge Greene retained control over the proceedings under the Tunney Act, a federal law requiring court approval to ensure that antitrust consent decrees were in the public interest. (The parties had engaged in elaborate legal maneuvering to have the case dismissed right away and avoid formal application of the Tunney Act, but were unsuccessful.) After a review process of several months, which included the solicitation of public comment, Greene approved the deal with numerous modifications, the most significant of which was arguably a seven-year ban on electronic publishing by AT&T over its own transmission facilities, a provision the judge added over DOJ’s opposition. United States v. AT&T was dismissed on August 24, 1982, and the divestment of AT&T’s local operating companies was implemented on January 1, 1984. Those companies, which were consolidated into seven regional operating companies (nicknamed “Baby Bells”), were permitted to keep the Bell name as a result of a decision by Judge Greene.

Rumors of the demise of the regional operating companies was premature, as they did well on their own, as a result not only of higher local phone rates but also the high prices they charged AT&T and other long-distance companies for local interconnection. Moreover, several of Judge Greene’s modifications to the consent decree were favorable to the regional operators, such as allowing them to maintain the profitable Yellow Pages. Consumers, however, in addition to paying more for phone service, reported less satisfaction with the quality of their service and with customer service in the years after the breakup. 

Not long after having been split from their parent company, the Baby Bells experienced reconsolidation in the 1990s and early twenty-first century. Bell Atlantic merged with New York and New England Exchange. After acquiring telephone company GTE, the entity became known as Verizon in 2000. Verizon later purchased MCI. Southwestern Bell Communications (SBC) bought two other Baby Bells, Ameritech and Pacific Telesis, and eventually became large enough that it purchased AT&T for $16 billion in 2005. SBC then adopted the AT&T name and branding and purchased BellSouth the following year. The only other Baby Bell, U.S. West, is now part of Lumen Technologies, another large telecommunications provider.

The breakup of AT&T played a foundational role in forming the telecommunications landscape that exists in the United States today. No longer dominated by a unified entity, the ever-expanding and competitive marketplace contains several large corporations. AT&T is still among the largest, and Verizon, the other conglomeration of former Baby Bells, is one of its main competitors. There are, in addition, hundreds of smaller communications providers across the country. Consolidation in the form of mergers and acquisitions still takes place with regularity in the industry. The Department of Justice scrutinizes these deals to ensure that they comply with the antitrust laws, however, and occasionally moves to block one, such as AT&T’s bid to acquire T-Mobile in 2011. United States v. AT&T continues to stand as a monumental event in telecommunications history, ending the reign of “Ma Bell” and opening the door to the fierce competition that now exists.