Breaking Bell | The Deal | 4

0:15It's December 30th, 1981, at the Department of Justice in Washington, D. In a conference room, Howard Treanance, AT &T's 57-year-old general counsel, reads through a series of documents with a pensive look on his face. A few weeks earlier, Howard approached the Department of Justice with a plan to settle a federal antitrust lawsuit filed against AT &T. The two sides have tried to negotiate similar deals before, but this is the first time that AT &T has put forward a plan that would cause its own breakup. Today is the day that the settlement is supposed to be finalized. Howard pauses, staring at a page he doesn't recognize.

0:53What's this? Howard slides the paper over to Department of Justice lawyer Ron Carr. Appendix B, that's just a clause about competitor firms, infrastructure parity. We've been over this. No, we haven't. Are you sure? I'm almost positive we have. Ron, I promise you we haven't. I would not have missed this. The new regional operating companies will have to completely change their engineering, build their own network from scratch, and we'll have to reconfigure ours. This is crazy. We're leveling the playing field, Howard, making sure that AT &T doesn't have a systemic advantage over competition, given the fact that you already have infrastructure.

1:28No, this won't work, Ron. It's over the top. That's not the way we see it. Who's we? Was this Baxter's idea? Ron avoids eye contact, which tells Howard exactly what he needs to know. Assistant Attorney General William Baxter has added this new detail into the deal. For the last year, Baxter has championed the antitrust case against AT &T. And with this latest intervention, Howard wonders whether Baxter is trying to sabotage the settlement talks. Howard drops the papers on the table. Look, Ron, AT &T cannot accept this. Where's Baxter? I need to talk to him. He's not here. Then where is he? He's skiing.

2:04Park City, Utah. You're telling me that we're on the verge of dismantling the largest company in the United States and the man in charge of the case is skiing? Ron just shrugs. I heard they just got fresh powder. After leaving the meeting at the Department of Justice, Howard Treenins had a foreboding feeling. But it was one he was getting used to. AT &T had come close to making deals with the Department of Justice before, but on every occasion, the DOJ had backed out at the last minute. And each time talks broke down, AT &T stepped closer to its worst case scenario, a legal verdict that would forcibly break it up.

2:42But this time, Howard wasn't going to let the deal collapse. He would force the Department of Justice back to the table by any means necessary, and he'd get this agreement signed, because for AT &T, the alternative was annihilation.

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4:07By the fall of 1981, AT &T was teetering on the edge of an abyss. For over a century, America's biggest company had enjoyed a monopoly over the nation's telephone system. But over the past seven years, AT &T had been locked in a brutal battle to protect themselves from outside competition. To preserve its dominant market share, AT &T had thrown its billion-dollar weight around. It had crushed rivals with its size, tied them up in court, and lobbied Washington hard to get its monopoly protected by law. But none of it was enough. An antitrust lawsuit filed by the Department of Justice refused to go away, and as the case neared its conclusion, the outlook was grim.

4:47All indications were that Judge Harold Green would side with the prosecution, and if he got his way, AT &T would be carved up piece by piece, and nothing would be left at the end. AT &T had one last shot, though. After the election of President Ronald Reagan, the political winds in D.C. had shifted. Government regulation and federal oversight were no longer the flavor of the month, and suddenly, Department of Justice prosecutors were more open to a deal. But AT &T wasn't negotiating from a position of strength. Any agreement would mean significant concessions. Over the last 10 years, AT &T had spent millions trying to hold the century-old bell system together.

5:28But now, Chairman Charlie Brown and General Counsel Howard Treanans were ready to think the unthinkable. They would voluntarily give up their monopoly. In doing so, AT &T would end a long and illustrious chapter of its history. But if they did it right, AT &T would live on as a leaner, stronger company, with its eyes turned to the future rather than the past. This is the fourth episode in our series on the breakup of AT &T, The Deal.

5:59It's mid-October 1981 at the headquarters of AT &T, two months before settlement talks come close to collapse. Inside a boardroom, Howard Treenins watches as AT &T executive Charles Hugel wheels a chalkboard into the room. Howard can't help but smile at the sprawling mess of drawings and diagrams on it. Oh my god, looks like the kind of thing an MIT professor would come up with. Hugel holds up his hands. They're covered in white dust. Yeah, I must have gone through three packets of chalk writing this all out. Well, I appreciate your effort, I think. Is everyone here? Howard and Hugel aren't alone, sitting around the large oak table or other AT &T executives, and all their eyes are fixed on the chalkboard.

6:41Howard nods. Yeah, looks like it. So before we begin, I want to make it perfectly clear that this is our last resort, right? An ace up our sleeve that we will pull out if needed. When do you think that might be? Is there a timeline? No, not yet. But the current settlement talks are going nowhere. There's a reason why we're calling them Quagmire 2. The DOJ says they want to negotiate in good faith, but I just can't help but think they're stalling. So how much longer do we wait? I mean, the trial could be over in a matter of months. Judge Green, I'm aware of the situation, and that's why we're here.

7:13Let's just go over the backup plan. I want to make sure we're all ready if and when the time comes. Hugel turns to the chalkboard and writes across the top. Howard squints as he reads the words out loud. The inter-intra split. Well, that's snappy. Well, I kind of thought it was. But anyways, the inter-interest split is the total separation of our regional operating companies from our long-distance network. We would cease to control the local exchanges and divest them into independent companies. AT &T would not share connections or facilities with them. So we're sacrificing the regionals to save the rest of the company.

7:47Correct. Yeah. If we can persuade the DOJ to go along with this, we'll get to keep Long Lines, Western Electric, and Bell Laboratories all under AT &T control. Speaking of Bell Labs, I believe we finally figured out a technical way to manage that part of the business while remaining financially reasonable. But we still need to iron out some details. If we take this to DOJ with any loopholes whatsoever, I'm sure they'll tear it apart. Well, how much more time do you need? A few weeks, maybe a month? And you're sure that's the last hurdle? Well, conceptually, yeah. But I can only imagine that if we enact this plan, plenty of people are going to be up in arms.

8:20We should be ready for a backlash. I'm well aware of that, Charles, but let's hope we just never have to use this plan. God, it'd be the end of the bell system forever. As the meeting in AT &T's boardroom broke up, Howard Treanans reminded all those attending that everything they discussed was confidential. The inter-intra split was a fail-safe. It'd only be enacted when every other option had failed, because the inter-intra split would voluntarily give up a major part of AT &T, and it would upend American telecommunications entirely. But Howard Trenans also knew that if things got any more desperate, he'd have no choice but to play this trump card.

9:04The inter-intra-split plan had been originally conceived a year earlier when AT &T had suffered a series of setbacks in Washington and in court. AT &T Chairman Charlie Brown and General Counsel Howard Trenans had begun contemplating a nuclear option, an audacious plan to resolve their legal impasse by blowing up the American phone network. They knew that pressing this nuclear button would cause AT &T's own destruction, but they also hoped that the company could rise from the ashes. AT &T Vice President Charles Hugel was asked to head up the secret scheme. And over the next year, Hugel worked quietly in the background until he was ready to unveil his plan to AT &T's executive team.

9:44Under Hugel's proposal, AT &T's regional and long-distance services would be separated from each other. The inter-exchanges that managed local calls were run by 22 regional subsidiaries, including Cincinnati Bell, Pacific Bell, and New England Telephone. In previous negotiations with the Department of Justice, AT &T had considered divesting two or three of these regional subsidiaries. But according to Hugel's plan, all 22 would be offloaded. In return, AT &T would retain control of its Western Electric Manufacturing Division. It would keep hold of research arm Bell Labs, and it would also retain the intra-exchanges that facilitated long-distance calls.

10:23As a result, Hugel named this plan the inter-intra split. It was, by any measure, a stunning act of corporate self-immolation. Chairman Charlie Brown and Chief Counsel Howard Treenins knew that to get it past the board and other AT &T stakeholders, they needed to get something in return beyond the company's survival. So they thought laterally. The Department of Justice was determined to end AT &T's monopoly on the telecom industry. But that left open the possibility of a sideways move into a different market, something that could spark new growth and replace the lost income. And at the start of the 1980s, one technology was growing faster than any other, computing.

11:04Over the past few decades, computers had evolved from huge mainframes the size of a room into small electronic devices that fit on a desktop. Businesses were employing computer technology in their everyday systems, and enthusiasts were buying the first home computers for recreational use. Companies like IBM, Microsoft, and Apple were making money at the frontier of this new technology, and AT &T didn't want to be left out. But AT &T was legally barred from making money from computers. More than 30 years earlier, in 1949, the Department of Justice had made an early attempt to curb AT &T's monopoly of American telecommunications.

11:43At that time, prosecutors sued AT &T with the aim of divesting the company of its equipment division, Western Electric. After stalling for seven years, AT &T eventually cut a deal known as the 1956 Consent Decree. According to the terms of this agreement, AT &T was allowed to keep Western Electric, but in return, it pledged not to enter the computer industry. At the time, the consent degree seemed like a resounding victory for AT &T. They were allowed to retain its monopoly of America's phone system, and all it had to do was give up the opportunity of a theoretical profit in what was then a still embryonic technology.

12:21But by 1981, computing was a rapidly growing industry, and the consent degree was a pair of handcuffs that stopped AT &T from taking advantage. So to win over support for the radical inter-interest split within AT &T, Charlie Brown and Howard Treanans added an extra element to the plan. In exchange for giving up its entire slate of regional subsidiaries, the 1956 consent decree would be ripped up, freeing the company to compete in computing. The board approved the inter-interest split in theory, but only if all other avenues broke down. So in the fall of 1981, with the inter-interest split now a secret backup plan, Howard Treanans tried to speed up the ongoing settlement talks with the Department of Justice.

13:04But those talks had already been named Quagmire 2 by AT &T negotiators because of the slow pace. The Department of Justice delayed meetings and offered few compromises. Prosecutors insisted that the complete breakup of AT &T was the only acceptable outcome. So after weeks of gridlock and no movement in the DOJ negotiating position, Howard concluded that Quagmire 2 was going nowhere. The only way he'd get his talks to move on before the antitrust case finished was to play his strongest card, putting the radical inter-interest split on the table. But just as Howard contemplated using this nuclear option, a lifeline emerged from Washington.

13:44For the past two years, Congress had been debating the Telecommunications Competition and Deregulation Act. This draft legislation was a political attempt to solve the AT &T impasse by prescribing in federal law exactly what AT &T was allowed to do. The bill came down on AT &T's side, allowing the company to keep operating with only minimal divestiture of a few parts of the business. Most importantly, if the Telecommunications Act became law, Judge Harold Green would be compelled to dismiss the federal antitrust case without breaking up AT &T. But ever since it had been introduced, this Telecommunications Act had been bogged down in the Senate.

14:23That changed, though, in October 1981, when the bill finally came up for a vote and it passed through the Senate by an overwhelming margin and moving on to the House of Representatives. Colorado Congressman Tim Wirth was given the responsibility of navigating the bill through the House. As a Democrat, Wirth wasn't a natural ally for big businesses like AT &T. But Howard Treanans hoped that he could persuade Wirth to put the prolonged antitrust case to bed. He met with Wirth and massaged his ego. He suggested that helping to resolve the AT &T dispute would make Worth a hero in Washington. His profile would be raised, and that could only be a good thing for a 42-year-old still at the beginning of his political career.

15:04But despite Howard's charm offensive, Congressman Worth was not in the deal-making mood. On December 10, 1981, he published his amended version of the Telecommunications Act, and it was substantially different to the version passed by the Senate. Worth had added harsh regulations that would severely impact AT &T's ability to do business. He called for strong rules on equal access to phone infrastructure, and he wanted to guarantee that AT &T would source 30 % of its equipment outside of its own Western Electric manufacturing arm. In short, Worth had transformed a bill that favored AT &T into one that sought to crush it.

15:41AT &T reacted quickly. On the evening that Congressman Worth made his revised bill public, AT &T executives met in New York City. There, they decided it was time to pull out their fail-safe option. They'd held back the inter-intra split for two months in the hope that the Quagmire 2 negotiations or the Telecommunications Act paid off. But now there was unanimous agreement that AT &T was out of time. And in just 12 hours, AT &T would set the ball rolling on a plan that would end in its own breakup.

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17:57It's December 11th, 1981 at the Madison Hotel in Washington, D.C. one day after the heavily revised Telecommunications Act debuted in the House of Representatives. Inside one of the hotel's suites, AT &T General Counsel Howard Treenins enters a side room with two plates of food. Howard sets them on a table and takes a seat opposite the adversary he's been up against for the last year, Assistant Attorney General William Baxter. Howard pushes one of the plates over to Baxter. All right, here you go. Two of Madison Hotel's finest turkey clubs. I gotta say, meeting here is a nice change of pace. But exactly why are we meeting today?

18:34I presume the telecom bill has he spooked? Well, I admit it doesn't help our cause, but it won't matter what Congress decides if we come to an agreement ourselves. You're still willing to make a deal, right, Bill? Baxter ignores the question and pulls off the pickle speared to his sandwich. Howard presses on. You know we've been calling these negotiations quagmire too, right? Because they just don't seem to be going anywhere. Well, it's a complex issue, Howard. Then let me make it simple for you. Baxter looks up, intrigued. Yeah? Yeah. What if I were to tell you that AT &T is prepared to divest its regional operating companies?

19:07Well, we've talked about that before. No, no, not all 22 of them we haven't. Baxter's eyebrows shoot up. You'd give up your entire local operation. We would, but we want something in return. All right, what's that? AT &T retains its long-distance service, Bell Labs and Western Electric, and we want to change the consent decree so we can enter the computer industry. Baxter leans back in his chair. Well, I'll admit you've got my attention. I'm not opposed to the computer thing. Truth be told, seems like a pretty good idea, given the way things are moving in that sector. But how would we make this happen in reality?

19:42Well, we'd need to modify the consent decree. Yeah. Where was it filed? New Jersey. Baxter inhales sharply, and Howard nods. Yeah, yeah, I know. I know what you're thinking. That's out of Judge Green's jurisdiction. He's made clear that he doesn't want outside interference, but we can ask the New Jersey judge to transfer control of the consent decree to Green. And then Green gets to sign off on the deal and dismiss the federal case at the same time. I thought you said you were going to make this simple, Howard. Sounds like quite the tangled web you're spinning, isn't it? No, no, no. Webs are designed to trap things, Bill.

20:16This proposal is the opposite. It's a way to break free. This meeting between Howard Treanins and Assistant Attorney General William Baxter marked a significant shift in the antitrust case. For the first time, AT &T had proposed a plan in which it would voluntarily give up part of its telecom business. But Howard was not getting his hopes up just yet, because he knew from bitter experience that the Department of Justice was an unreliable negotiating partner.

20:47In the days that followed, prosecutors at the Department of Justice agreed to work up a two-page draft agreement based on AT &T's new proposal. The papers in the Quagmire 2 talks had ballooned to 100 pages, and AT &T and the Department of Justice still had not come to an agreement. In contrast, the two-page limit imposed on the inter-interest split signaled that both sides wanted this new settlement to move forward quickly. But writing a simple agreement to dismantle the world's largest telecom company was easier said than done. Lawyers at the Department of Justice wrote multiple drafts, but each came unstuck over the complicated issue of infrastructure.

21:25According to the terms of the inter-intra split, AT &T's 22 regional subsidiaries would be separated from AT &T, and that separation was absolute. There would be no sharing of personnel or systems, and the regional subsidiaries would be cut off from the AT &T exchanges that they currently use. AT &T thought that this was an important part of the deal. If they were being forced to give up their local telephone businesses, they weren't going to accept giving these new regional companies free access to their facilities. So going forward, the newly independent regional companies had a choice. They could build their own telephone lines, exchanges, and equipment, but that would come at a huge cost, or, as AT &T expected, the regional companies could pay fees to access the existing AT &T infrastructure.

22:11But that would leave the supposedly independent local companies dependent on AT &T technology, and that scenario did not sit well with the Department of Justice. Eventually, the lawyers came up with a draft that summarized the inter-intra split into three pages. It confirmed the core terms. AT &T would give up its local service but retain long-distance lines, Western Electric and Bell Labs. It also confirmed that the consent decree of 1956 would be nullified, giving AT &T the green light to enter the computer industry. But in order to resolve their lingering doubts about infrastructure, the Justice Department included two appendices that added another 11 pages to the draft.

22:50Assistant Attorney General William Baxter was the driving force behind Appendix B, which set down that the newly independent regional operating companies were compelled to build their own switches, lines, and exchanges. They were prohibited from simply paying to access AT &T's existing systems. According to Baxter's thinking, building a new level of infrastructure would ensure that every telecom company would be responsible for its own equipment. It would level the playing field and ensure that AT &T couldn't dictate terms to the local companies. But AT &T General Counsel Howard Treanans and Chairman Charlie Brown had grave reservations over Baxter's intervention.

23:26To them, forcing the regional companies to build their own infrastructure was an absurd demand that would place unsustainable financial pressure on these newly independent companies. It also caused huge headaches for AT &T engineers who would need to devise different ways of integrating this brand new infrastructure for long-distance calls. But when Howard questioned the content of Appendix B, no one in the Department of Justice was willing to listen. It soon became clear why Assistant Attorney General Baxter was vacationing on the ski slopes of Park City, Utah, and no one dared to disturb him.

24:00So with yet another settlement threatening to fall apart, Howard spent the first few days of 1982 trying to get the inter-interest split back on track. Howard phoned Utah several times a day to speak to Baxter, asking the Assistant Attorney General to clarify his reasoning. But Baxter was called so many times that he lost his temper and threatened to withdraw from the negotiations completely. But Howard's pestering did reveal an opening in Baxter's seemingly intransigent stance. In his conversations with the Assistant Attorney General, Howard discovered that Appendix B arose from a genuine worry.