The Deal of the Century

by Coll, Steve;

  Even after the legal fight was temporarily resolved and MCI was formally authorized to sell FX lines, the extra revenue was not enough. In the two years between March 1973 and March 1975, McGowan watched his working capital drain away at a rate of more than $1 million a month. If the company’s negative cash flow continued much longer, MCI would be out of business. McGowan needed a way to bring in new revenues without investing another dime in construction projects, employees, or other start-up costs. And so, in the spring and summer of 1974, just when the FX fight was over and it appeared to AT&T that McGowan finally had everything he had asked for, MCI’s chairman began to explore ways his company might enter the regular long-distance market—where the big money lay.

  Execunet was an ingenious, if dishonest, solution to McGowan’s cash problems. The challenge was to devise a “new service” tariff that would allow MCI to sell the equivalent of regular long-distance service to its customers without alerting staffers in the Common Carrier Bureau to MCI’s real intentions. Those staffers would review any tariff filed by MCI. Late in 1974, McGowan settled on an approach called a “modular tariff.” Essentially, MCI would take all the services it was authorized to sell, roll them up in a single package, and bring them down to the FCC. The company would tell the bureau staff that it wanted to sell to its customers new and different combinations of MCI’s existing services. Then it would ask for approval of this “modular” package. The tariff might be vague, but MCI could argue that it was an innovative marketing technique: it had never been done before. A customer could take any available MCI service, combine it with any other service, and form an altogether new one.

  For example—and MCI did not for a minute intend to lay this example out to bureau staffers—a customer might choose to combine a series of FX lines. Before Execunet, an FX line looked like this:

  Point A was a single office in one city, say, Chicago. Point B was the entire local exchange, all the telephones, in a second city, say, New York. A customer in New York could pick up any phone in his city, dial a local number, and the call would travel to the office in Chicago. But suppose a customer combined two FX lines between Chicago and New York, each with a different open end. Then MCI’s “private-line” system would look like this:

  A customer in Chicago could pick up any phone in his city and dial any number in New York. It would be exactly like a normal long-distance call over AT&T’s switched network, except that the customer would have to dial some extra digits and the call would travel over MCI’s microwave system. And, of course, the customer would be billed by MCI, not AT&T.

  Execunet, as McGowan envisioned it, would extend this model even further. Instead of restricting a customer to calls between cities A and B, MCI would combine FX lines between all the cities in its nationwide network. In effect, MCI would instantly become a national long-distance network in competition with AT&T.

  And if all went well with the tariff filing at the FCC, AT&T wouldn’t know what MCI had done until it was too late.

  The plan worked flawlessly. When they finally sorted it out in the summer of 1975, after the demonstrations by AT&T’s lobbyists, Walter Hinchman and the FCC commissioners realized that they had been duped. When questioned, the bureau staffers who had approved the modular tariff sounded like dazed victims of a confidence scam: they remembered the tariff, and they recalled being confused by it, but they had no inkling of MCI’s larger purpose. Some lawyers in the Common Carrier Bureau felt deeply angry and betrayed by MCI’s manuever. More than anyone, the bureau staffers had protected and nurtured MCI during its treacherous early years in competition with AT&T, and in many ways the fledgling company had been their child. The staffers themselves freely used that metaphor when discussing MCI. Now their trust had been returned with scorn, and the staffers were hurt and humiliated. They felt they had been used and deceived by Bill McGowan.

  Of course, McGowan himself was acting from a simple and powerful instinct of self-preservation. Without revenues from switched long distance, MCI would likely not have survived long enough to build its national network of microwave towers. And not all of the company’s cash crunch during 1973 and 1974 was its own fault; AT&T’s intransigence during the interconnection negotiations and deButts’ ruthless stance in the FX fight had contributed mightily to MCI’s plight. If McGowan had resorted to subterfuge to save his company in such dire circumstances, well, perhaps AT&T was only getting what it deserved. Free-market competition was not the sport of gentlemen.

  The Execunet ploy did seem to confirm deButts’ original assessment of McGowan and MCI. When the FCC had approved MCI’s application and introduced competition in the private-line business in 1969, deButts and other AT&T officials had argued that such competition was impractical, not only because it threatened to disrupt AT&T’s regulated profit and subsidy structure but because the economies of the telephone business were such that MCI could not survive simply by selling private lines. The telephone business offered a classic example of “economies of scale,” AT&T argued. That is, the enormous cost of constructing a national telecommunications network made sense only if the builder could reap revenues from every telephone installed—return on investment rose as volume of traffic increased. Even if MCI were to capture 50 percent of the private-line market, an unlikely eventuality, the revenue would not be enough to pay for a national microwave network, AT&T argued. Inevitably, MCI would go broke, deButts said, or else it would try to expand its franchise into regular long distance. For him, the FX and Execunet controversies were outrageous confirmation of warnings made some six years before. McGowan, of course, argued otherwise with equal passion. And he intimated that if, by 1975, MCI needed Execunet to stave off bankruptcy, it was only because AT&T’s antitrust violations had sabotaged the company’s earlier plans.

  After Execunet, though, the numbers began to speak for themselves. By the end of the 1970s, as MCI’s annual sales began to approach $2 billion, more than 80 percent of its revenues came from regular long distance. At one point, MCI even stopped taking orders for private lines: they weren’t profitable enough. In just a few years, deButts’ worst fears about intercity telephone competition had been realized. The FCC’s haphazard experiment had become, even in the view of some commission staffers, Frankenstein unleashed.

  That realization, and the accompanying anger and embarrassment in Congress and at the FCC, offered deButts an opening. McGowan had built his company by outflanking AT&T in Washington, and it was McGowan who had shifted the field of battle from business to politics and law. With McGowan’s credibility destroyed and his reservoir of political goodwill drained because of Execunet, perhaps now was the time for AT&T to turn the tables on MCI. The company took McGowan to court, hoping to have Execunet ruled illegal. At the same time, deButts turned his biggest guns on Washington. With one million employees, a strong labor union (the Communications Workers of America), and a lobbying network that reached across the country, the phone company was not without political clout. Perhaps McGowan’s deceit would open Congress’ eyes to the urgent need for a coherent national telecommunications policy. DeButts thought that perhaps Congress, in its wisdom, would solve AT&T’s problems by crushing MCI and exonerating the phone company of any antitrust violations.

  Such was the political agenda that John deButts began to draw up at 195 Broadway in the summer of 1975. He saw no reason to set his sights low. To save the phone company’s monopoly, he intended to use every resource at his disposal. With Execunet, McGowan had abandoned all pretense of fair play. So, too, would deButts.

  Chapter 9

  DeButts’ Last Stand

  John deButts called it the Consumer Communications Reform Act (CCRA) of 1976. Everyone else knew it as the Bell Bill.

  Its formal title notwithstanding, the proposed legislation did not rely on subtlety to make its points. If it passed, long-distance telephone services of all kinds would become “utility” functions to be provided by a single, integrated system. The legislation suggested that since it
was already built, AT&T’s phone system should be selected as the country’s official monopoly; MCI and other embryonic long-distance companies would be forced out of business. To be sure that the resultant hard feelings would not lead to nasty and lengthy court fights, the phone company would be immunized against all antitrust lawsuits and would be authorized to buy up any of its competitors. Regulation of telephones and telephone equipment would revert from the FCC to state utility commissions, thus vacating the FCC’s 1968 Carterfone decision, which had introduced competition in the phone equipment industry. Answering machines and other devices—so-called “foreign attachments” regulated by local utility commissions—would be legal in some states, illegal in others. Competition in the telephone industry would be immediately and permanently choked off.

  Upon learning of its contents, some telephone regulators in Washington considered the Bell Bill to be about as unassuming as Jonathan Swift’s “A Modest Proposal,” wherein the eighteenth-century author had suggested that the Irish solve their population and hunger problems by selling their children to the rich as meat.

  The trouble was that, unlike Swift, deButts was not indulging in satire. Indeed, the AT&T chairman was deadly serious about the bill, so serious that in the six months after its introduction in early 1976, he spent millions of dollars lobbying for its passage and secured endorsements from fully 40 percent of the House of Representatives—although a general “endorsement,” as deButts would discover, was far easier to obtain than a vote.

  “We have decided the time has come to call the public’s attention to its stake in the matter,” deButts said. “Were the telephone companies deprived of … revenues from their more discretionary services, they would face the necessity of increasing the average customer’s bill for basic service as much as 75 percent.”

  In response to deButts’ round of speeches, Bill McGowan sounded rather shrill. He knew perfectly well what AT&T’s chairman was up to, but he also knew that his own stature as a political mud-slinger was undermined by the controversy over Execunet. “After a decade of failing to prove any of its points to the federal government, the courts, and the marketplace, Bell now has gone to Congress in a do-or-die effort to deprive the communications consumer of the recognized benefits of competition,” McGowan declared desperately. DeButts’ speech-making about the Bell Bill amounted to a “bare-faced lie,” McGowan said. But the irony of the MCI chairman’s accusation was not lost on congressmen and staffers familiar with the recent chicanery at the FCC. For six years, McGowan had controlled his own—and AT&T’s—destiny in Washington, but this time around, he would have to sit on the sidelines. If the Bell Bill was destined to pass, McGowan could not prevent it.

  Fortunately for MCI, the heroics of its chairman would not be required. This time, McGowan would not have to outsmart John deButts. When it came to legislative politics, AT&T’s chairman was perfectly capable of defeating himself.

  If a large corporation wants a special favor from Congress—a tax break, say, or a federal price subsidy, or a monopoly—there are a variety of strategies it can pursue to achieve its goal.

  The most common and effective method, in the jargon of Capitol Hill, is to “attach a rider.” The company persuades a congressman or senator, usually one who represents an area where the company has a large manufacturing plant employing thousands of voters, to “attach” quietly a special-interest bill as an amendment to completely unrelated and preferably popular legislation, such as a famine relief appropriation or an increase in social security benefits. Once attached, the fates of the two proposals become linked: if the president wants to veto the special corporate tax break, he will find himself in the embarrassing predicament of having also to veto the famine relief money. If the corporation and its congressman make their move at the end of a legislative session, when there is little time to detach amendments and when other congressmen are frantically trying to attach their own pet riders, the chances for success are excellent.

  If the legislation sought is complex, however, the corporation may have to fall back on a committee strategy. Congressional committees are the body’s “working groups,” with specific jurisdictions: tax writing, energy issues, defense, and so on. The committees are relatively small and are dominated by strong personalities and Byzantine partisan politics. It is relatively simple for a large company to focus its lobbying on the one or two committees that have legislative jurisdiction over the company’s industry. With a savvy understanding of the committee members’ needs, ambitions, and weaknesses, a large corporation can quickly become a de facto committee member, helping to write legislation, plotting vote strategies, and worrying over election results.

  Such winning political strategies depend on subtlety, finesse, and years of experience. More than anything, they require a certain blithe invisibility on the part of the corporation: it is crucially important, long-time Capitol lobbyists know, to let the congressman take credit for “hammering out a compromise,” or “forging complex legislation,” or however else he wants to describe to voters his role in the pork barrel giveaway. To have its way in Congress, a large corporation must walk softly, lose graciously, flatter continuously, and gloat never.

  All of which goes a long way toward explaining why the Bell Bill quickly ran into trouble in 1976, despite the millions of dollars spent by AT&T, despite the long days of grassroots lobbying by phone company executives and employees, and despite the thunderous “public interest” rhetoric from John deButts.

  Many of Bell’s opponents regarded the phone company’s heavy-handed legislative strategy as a manifestation of John deButts’ blinding arrogance. After Execunet, deButts seemed to assume that anyone who understood what had happened at the FCC would share his outrage about it. In fact, many congressmen and their staffs felt ambivalent about Execunet. Perhaps McGowan had been underhanded, but if the result was more competition then no real harm had been done, they thought.

  DeButts simply did not understand the tenor of his times, or if he understood it he failed to come to grips with it. Deregulation was a Capitol Hill buzzword, and the idea was fast gathering force among both Democrats and Republicans. Liberals wanted to deregulate because competition would lead to decentralized ownership and a more diverse economy; conservatives just wanted the government off business’s back. Together, they were an unstoppable coalition: airline, trucking, natural gas, oil, banking, and other industries were all deregulated by Congress during the late 1970s and early 1980s. DeButts saw this tidal wave coming, but he seemed to believe that where the telephone industry was concerned, he could restrain it singlehandedly and, indeed, reverse the flow. In an era when Congress was legislating competition in one industry after another, deButts insisted on nothing less than the right to swallow his competitors and preside over an officially sanctioned monopoly.

  “You’re all right when you get hired,” an AT&T employee once observed, “but as the years go by, your head becomes more and more Bell-shaped.” DeButts, a privileged man raised in the Old South, may have had little personal capacity to finesse his opponents in Congress. But it was really the institution he ran—its traditions, its size, and its power—that shaped his reaction to Execunet in 1976. When push came to shove, the phone company had always gotten its way with the federal government. DeButts believed that was because AT&T provided the best phone service in the world at the lowest possible price. With his back against the wall over Execunet, deButts asked, not illogically, “Why would Congress want to mess up the world’s best phone system?”

  The trouble lay with the way deButts phrased his question. Typical of AT&T’s style, the Bell Bill did not say, in effect, “This competition thing has gotten out of hand over at the FCC. Why don’t we sit down with you fellows in Congress and work out something that will best serve the American public, something we can all live with?”

  No, the Bell Bill said something more along the lines of, “You bastards in Washington have made a mistake: you’ve gotten the phone company mad. N
ow we’re going to come down to Congress and take what’s ours. Either you’re with us or against us. We’re taking no prisoners.”

  DeButts’ political strategy did have one thing to recommend it: it scared the daylights out of a lot of congressmen. More than two hundred of them signed on as cosponsors of CCRA in early 1976, and of those, probably less than ten fully understood the recent history of competition in the telephone industry.

  The congressmen had good reason to be frightened. With a million employees spread around the country and a sizable political war chest at its disposal, the phone company was able to raise a terrible sound and fury about the Bell Bill. Its attack on Congress resembled a charge by Ayatollah Khomeini’s Iranian army, for what it lacked in strategic planning, it made up for with waves of human flesh. Bell lobbyists, who became known on Capitol Hill as “shepherds” for the hovering attention they paid to their congressional flock, were flown into Washington by the planeload. They were unusual lobbyists. They shunned Italian pinstripes and fancy Washington bistros, and few of them were lawyers. The vast majority were employed not at AT&T’s headquarters at 195 Broadway but by the local operating companies around the country. Unlike any other corporation, the phone company had employees in every congressional district, and this omnipresence became the key to the Bell Bill lobbying strategy.

  A shepherd was selected from each congressman’s home district. Often, the shepherd knew the congressman socially from the local Rotary or Kiwanis Club, where the congressman came to speak and raise campaign contributions. When the shepherd came to Washington, he brought with him a variety of AT&T employees from the home district—union members, middle managers, top executives—and then he spent weeks following the congressman around, talking with his staff, attending his committee meetings, and even fetching deli sandwiches when the legislator was hungry. Once during the Bell Bill fight, Representative Tim Wirth, a Democrat from Colorado and then a majority member of the House Communications Subcommittee, found himself at a crowded hearing where an AT&T executive was testifying. Wirth asked the executive to identify any of his colleagues who were in the room. After five minutes of introductions, only one small corner had been identified.