Breaking Bell | Wheelin' & Dealin' | 2

0:16It's just after 11 a.m. on a fall day in 1978 at AT &T headquarters in New York City. 63-year-old John DeButz, chairman of AT &T, pours two glasses of scotch. Beside him is 57-year-old Charlie Brown, the second most powerful person in the company after John. John hands Charlie one of the glasses. You know, I forget. You like it on the rocks or neat? Neat's fine, but I don't normally drink this early in the day. Makes me a bit worried. Are we celebrating or something else? John takes a sip and hesitates. He's searching for the right words to explain what's on his mind. Well, you know, I've been with AT &T for more than 30 years, right?

0:55Spent over half my life working in the Bell System. Yep, worked all the way up from the bottom. Climbed the ladder. We all know your story, John. You're an inspiration. Well, I don't think I'm going to make it to 40 years. John sees the color fade from Charlie's face. Oh, what do you mean? Is it your health? Oh, John. No, no, it's not that. I'm in pretty good shape. But I'm going to announce my resignation to the board tomorrow. And I'm going to recommend that they vote you as the new chairman. John, but you still have two more years before your term's up. You can't retire early. AT &T needs you.

1:26I think it needs me to leave. It's becoming clear to me that new leadership is the only thing that'll keep AT &T together. I don't think I'm the guy. John, are you being pushed out? No, no, no, no, Charlie. No one's making me go. I've just, I've been thinking about this for the better part of two years. John, well, I mean, I know it's been a tough period, but you know AT &T better than anyone. You're our biggest champion. And I think that's the problem. Maybe I'm too much of a cheerleader. Maybe I'm too set in my old school ways. But whatever the issue is, Washington has made it clear that they want nothing to do with me.

2:00I've become a liability. Oh, you're not, John. Come on, you've still got two more years in you. That's plenty of time to keep the company together. Imagine, you'll be the man who saved AT &T. John downs his whiskey before putting the glass back on the table. No, Charlie, no, I think I'm done. It's going to be up to you to save Ma Bell. The following evening, John DeButz attended a private dinner with AT &T's board of directors and announced his retirement, effective at the start of 1979. During the same dinner, he also wholeheartedly endorsed Charlie Brown as his successor. Since taking over as chairman in 1972, John felt he had done everything he could do to hold together AT &T's vast corporate empire, despite rising competition and mounting legal challenges.

2:47But now a new regime was about to take over, and it would be up to them to save more than 100 years of tradition.

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4:13from Wondery I'm Lindsey Graham and this is Business Members

4:36Ever since its founding in the late 1870s, AT &T had been the dominant company in the American telecommunications industry. Thanks to its near-total control of regional systems, long-distance calls, and equipment manufacturing, the federal government had deemed AT &T to be a natural monopoly, a business that could provide a low-cost, high-quality service without the need of an open market. But at the start of the 1970s, a new generation of politicians took charge in Washington, and they had a very different attitude to competition. The Federal Communications Commission, or FCC, authorized new startup MCI to dip a toe into the telecommunications market.

5:14Many expected this newcomer to flame out and for AT &T to resume its monopoly. But MCI had ambitious leaders who were prepared to disrupt the industry and attack what they saw as AT &T's unfair advantage. And after initially underestimating the threat from MCI, AT &T Chairman John DeButts eventually fought back. But that only led to a new front in the war, legal action. AT &T was no stranger to defending itself in court, but this time proved different. The argument between AT &T and MCI caught the attention of the Department of Justice, and prosecutors there filed an antitrust suit against AT &T.

5:51So now, AT &T wasn't just taking on a small competitor. It was up against the might of the American government, and it was fighting for its very existence. The company that John DeButts had spent his whole career with could sink on his watch. And for a lifer like John, That would be a grim legacy, and he was prepared to do whatever it took to save AT &T. But to prevent the breakup of the Bell system, he'd need to re-examine his definition of leadership, and he'd need to make the hardest decision of his life. This is the second episode in our four-part series on the breakup of AT &T, Whelan and Dealen.

6:32It's February 20th, 1975, in a courtroom in Washington, D.C. more than three years before John DeButts announces his early retirement. George Saunders, a trial lawyer representing AT &T, stands by the bench as the judge reads through a series of documents. Today marks one of the first hearings in the federal government's antitrust case against AT &T, and the two sides have come together to sort out some logistical practicalities ahead of the main arguments. George looks at the judge, trying to get a read on his reaction to the documents. Your Honor, is there any need for a clarification on our motion?

7:05George turns around and sees the opposing counsel rising from his seat. Paul Verveer is the Department of Justice prosecutor who's leading the government's antitrust lawsuit, and his face is flushed. Your Honor, is it really necessary that the entire federal government retain every piece of documentation? Well, Your Honor, to be fair, we've reduced our request to only 44 agencies. It's still ridiculous. What does the Food and Drug Administration have to do with this case? Why should they preserve every record pertaining to AT &T? Well, does the FDA use AT &T phones? I'd imagine so. Yes, everyone does.

7:39They don't have a choice. That's the whole point of the case. Well, then, we'd like to make sure they hold any documents related to my client, even if it's just a service. You never know what we might find. Your Honor, this is an absurd delaying tactic. You must see what they're up to. No, Your Honor, our fear is that the government is destroying evidence that could help my client. We ask the court to instruct them to stop. We aren't destroying anything. Your Honor, there's a key principle behind this motion. The whole case is a sham. It was filed by mistake by a bunch of adventuring lawyers looking to break up AT &T for who knows what reason.

8:12We believe that we will find hard evidence proving that government employees went beyond their powers and responsibilities by filing this suit. It's a simple motion. And by trying to block it, the prosecution is preventing us from defending ourselves. Paul straightens his jacket and approaches the bench. Your Honor, we are not saying that AT &T cannot defend itself. That's no, no. We are simply saying that their request will take months, possibly years to comply with. It's wasting the court's time. Well, time is something we have plenty of, but that leads us to a more important point. This case shouldn't be in your court, Your Honor.

8:47I shouldn't be here. You shouldn't be here. He shouldn't be here. It's not your problem to sort out. This is a Federal Communications Commission matter. AT &T is regulated by the FCC, and it's bound by FCC decisions. Now, wait a minute. No, no, this whole thing isn't an antitrust case at all, but a power grab. A power grab by the Department of Justice. After considering George Saunders' motion, the judge came down on his side. In fact, the judge was so taken by George's speech that he postponed the discovery phase of the trial until he could determine whether or not the whole lawsuit belonged in his court or with the FCC.

9:24So while the antitrust case wasn't over, it was now in limbo. But AT &T had little time to celebrate, because rival MCI was about to raise the stakes once again.

9:37In the weeks that followed the antitrust suit being put on hold, work returned to normal at AT &T. For the first time in years, John DeBotts could look to the future with a sense of confidence. With the court case on hold, possibly permanently, the chances of the Bell system being broken up now seemed remote. So rather than fighting for its existence, AT &T could refocus on doing what it did best, delivering telephone services. Standards had slipped over the past few years, and John blamed that on AT &T taking its eye off the ball. But almost as soon as John turned his attention back to improving AT &T's core service, MCI re-emerged as a disruptor.

10:15For the past year, MCI had operated two telecommunication services for businesses, long-distance private lines and foreign exchange lines. Both made use of new technology, microwave beams broadcast between two cities served by MCI. But crucially, MCI's long-distance calls were point-to-point. When a customer purchased an MCI line, it allowed them to speak to a colleague or customer only in one specific city, but not to call anywhere else in the country. But in the spring of 1975, MCI started offering a new service, switched long-distance lines. After dialing a number and a passcode to access their MCI account, a customer then entered the telephone number of whoever they wanted to speak to.

10:58The call went to a local exchange, and there, an operator switched the wires and connected the call to the long-distance MCI line for the required destination city. At the other end, another operator reconnected the call to the local exchange. But crucially, the customer wasn't restricted to calling a single destination city. They could dial anywhere in the country, as long as it was part of MCI's growing national network. This new offering was very similar to the way that AT &T processed long-distance calls, but only AT &T was authorized to operate a switched long-distance service over an open network.

11:34With their latest offering, MCI had moved beyond what its license from the FCC allowed. And when John DeButts discovered this, he saw an opportunity to take his rival down. MCI had spent the last few years complaining that AT &T was playing the system and using its power to unfairly smother competition. But now the tables had turned. As far as John was concerned, MCI was the one cheating the system. So in early May 1975, John sent an army of lobbyists to Washington with orders to seek out influential politicians, reporters, and members of the FCC. AT &T's advocates gave each one a piece of paper with an MCI access code and a Chicago telephone number on it and asked them to dial.

12:16Since MCI didn't operate a direct line between Washington and Chicago, there should have been no way to connect the call. But instead, anyone who tried the number could hear a series of clicks as switchboard operators connected the lines, and when a person on the other end of the phone picked up, they confirmed that they were located in Chicago. This was proof that MCI was providing a switched, long-distance service. The FCC commissioners were surprised. They had no idea that MCI was operating this type of call. So at John's urging, the FCC launched an investigation. But a few weeks later, the commissioners concluded that MCI had been granted permission to operate such a service, but only because the paperwork submitted was obtuse and unclear.

12:58The previous year, MCI had sent a proposal to the FCC asking for permission to adapt its foreign exchange lines and operate what MCI called Execunet. Under this new plan, MCI would sell point-to-point phone lines to customers, just as it had for the last year. But unlike before, this new model allowed customers to share their lines with each other. A customer based in St. Louis might have a line running to Phoenix, but it might share it with another customer in return for using that customer's line to Oklahoma City. And when multiple customers joined their lines together in a bundle, It created a web of long-distance phone lines running between 16 cities, from New York in the east to Los Angeles in the west.

13:40MCI operators could switch between them as required, connecting a customer with any other city in the MCI network. But the paperwork that MCI submitted to the FCC presented the change as only a new pricing model, so the FCC had approved it with little oversight. They'd assumed that Execunet was just a marketing tool, but in reality, it was a major overhaul that brought MCI's long-distance services into direct competition with AT &T. Once it became clear what MCI had done, John DeButts kicked up an even greater fuss and complained to the FCC, saying that the Execunet proposal was a deliberate and dishonest misrepresentation of MCI's long-distance switched calls.

14:20The FCC agreed to review its original decision, and after concluding that MCI had duped its commissioners, the FCC reversed its decision and retrospectively rejected Execunet. MCI was told to stop selling its switch-long-distance service immediately. But Execunet had proven very popular with customers, and MCI didn't want to pull the plug. So MCI lawyers got a court order that allowed Execunet to keep functioning pending legal action. If AT &T was going to kill off Execunet, he'd have to go through another legal battle. With the prospect of another drawn-out fight in the courts, John DeButz was growing impatient.

14:58He suspected that as soon as the Execunet matter was resolved, MCI would test the regulations again with a different service, and that MCI would continue to push the boundaries of what it was allowed to do. John could adopt a defensive posture and try to block each MCI challenge one at a time, or he could lean in and get aggressive. If MCI was going to keep testing the regulations, John would have to rewrite the rulebook to leave no gray areas that MCI could exploit. So in early 1976, AT &T lobbyists returned to Washington with a new mission, to whip up support for a new law that would stamp AT &T's preeminent position into the statute books.

15:36AT &T-friendly congressmen set to work drafting the Consumer Communications Reform Act, a bill that called for a single institution to control all long-distance telephone services and prevent any third parties from connecting to the infrastructure. Since AT &T had the vast majority of the business, it was clear that there was only one realistic option to be the single controlling entity proposed by the bill. Essentially, this new law would turn the clocks back a decade or two, restoring federal backing for AT &T's natural monopoly. It would end competition within the long-distance market, obliterate MCI, and ensure AT &T's continued dominance of American telecommunications.

16:15And this Consumer Communications Reform Act quickly earned a nickname, the Bell Bill. And with such an important piece of legislation in play, John DeBotts would not rely solely on his lobbyists to push it through. He would court America's political elite himself, but he'd soon discovered that his presence wasn't a help. The chairman of AT &T was now a hindrance.

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18:41It's the spring of 1976 at the St. Regis Bar in Washington, D.C., a few weeks after the Bell Bill was introduced to Congress. John DeButt sips on a dry martini and leans back in one of the bar's red velvet chairs. He's been here for a while, and he's on his third drink. But John knows that business is about to wrap up for the day on Capitol Hill, and he's sure to bump into some thirsty congressmen if he waits long enough. Sure enough, a man in his 60s with slick back hair and spectacles walks in. John recognizes him as a senator from the Midwest and gives him a wave. Hey, Senator, over here. Want a drink?

19:16It's on me. Uh, I'll pay my own way, John. I can't be seen taking your money. Oh, come on, take a seat. John waves his arm to catch the attention of a server, but the senator remains standing. John, let's just cut to the chase. I think I know what you want. You want my support for the bell bill. I believe it's referred to as the Consumer Communications Reform Act, but yeah, I would absolutely love to have your support. We have the opportunity to completely change the way Americans communicate with each other. I think you can probably cut the crap, John. You're just trying to hold on to your monopoly.

19:46Monopoly? Why is that word thrown around like some kind of an insult? I'm simply looking out for the public good. If we continue to allow competition in the telecom industry, it will completely derail the infrastructure. Standards will plummet, and if I'm being honest with you... Well, actually, John, may I be honest with you? Of course. Do you know how annoying you are? John frowns, caught off guard. The senator continues. I mean it, John. You're like a broken record going on about the public good. Your goons repeating their talking points in every congressional district. No one is buying it.

20:16We all see through the act. Um, Senator, my people are just educating the good folks on Capitol Hill on the destruction that could happen if we continue to allow unfettered competition. John, the United States is a capitalist country. Competition is our backbone. The last thing I want is some state-sanctioned monopoly. We are not the Soviet Union. No, no, we're not. We're the United States of America, a democracy. And how are your poll numbers these days? November might be here sooner than you think. Jimny Christmas, John. Now you turn to blackmail? Well, you said it yourself. Competition is the backbone of America.

20:51Maybe it's time for you to face some competition. Someone who represents the interests of the AT &T customers in your state. John DeButts was prepared to do whatever it took to make the politicians in Washington play ball. First, he used charm, and if that didn't work, he used threats. But although AT &T had plenty of backers, many congressmen did not like being pushed around by the boss of a multi-billion dollar company, and they were prepared to flex their political muscle to knock John down a peg or two.

21:24The AT &T name was powerful enough to get the bell bill debated in Congress, but securing enough votes to see it pass was a different matter. If John DeButz was going to steer the Consumer Communications Reform Act through both chambers of Congress, he needed a majority of congressmen to fall in line behind him. And for that, John set about creating the biggest lobbying campaign that AT &T had employed to date. Unlike a traditional corporation, AT &T was a complex web of businesses and subsidiaries that stretched right across the country. So as well as initiating a lobbying operation from AT &T headquarters in New York City, John also had AT &T regional operating companies campaign for the Bell Bill in their localities.

22:05This national network of lobbyists soon became known in AT &T as their shepherds. And these shepherds followed congressmen wherever they went. In Washington, offices were overwhelmed with pamphlets and literature urging senators and representatives to back the bell bill. They were inundated with messages and requests for meetings. And at one committee meeting, one of the congressional members asked the watching spectators to stand if they worked for or represented AT &T. Every single person in the gallery rose to their feet. And thanks to AT &T's regional lobbyists across the country, Congress members got no respite when they left the Capitol and returned to their home states.

22:44AT &T Shepherds tried to take over local meetings about unrelated topics and steer the conversation onto the bell bill. They followed congressmen to restaurants and bars, even to their homes. It was a relentless, full-court press. And when the bell bill was introduced into Congress in April 1976, it had a strong start. John's Shepherds had steered many congressmen their way. 175 representatives signed on as co-sponsors, already close to the number John needed to get the bill passed. 17 senators were already on board, too. But not everyone was convinced, and some Congress members pushed back. They refused to take meetings with AT &T advocates.

23:22They were offended when the Shepherds threatened to fund the campaigns of rival candidates. They resented what they saw as AT &T bullying tactics, describing their lobbying campaign as exactly the kind of unfair practice that occurs when a business becomes too powerful. This opposition to the bill came to a head in September, when the subcommittee met to examine the details of the bill and called John to testify at an open hearing. The questions he faced were hostile. The committee members took John to task for AT &T's ceaseless lobbying and attempts to manipulate Congress. After John left the committee room, he had hoped that the bill would be sent back to Congress for a final vote, but it wasn't.