A Most Peculiar Slap at Ma Bell

It was arguably the toughest week in 40 years for U.S. corporations, their employees and their shareholders. The auto industry, reeling from the gathering disaster in new-car sales, was laying off workers by the tens of thousands; at least 14 auto plants will be closed and more than 200,000 auto production workers, clerks and executives will be out of jobs during part or all of December. Oil companies grappled with new uncertainties about their future as the House Ways and Means Committee approved a tax bill that fairly soon is likely to wipe out the celebrated depletion allowance. Prospects for a quick end to the nationwide coal strike darkened as mine-union leaders raised new objections to a proposed contract that provides well over a 50% raise in wages and benefits over three years. On Wall Street, the Dow Jones average worried its way back down toward the 600 level, as signs of deepening recession mounted every day.

Zeroing In. Astoundingly, with confidence and capital markets quavering, the Government decided that this was the time to file the biggest antitrust suit in history. It called for the breaking up of the American Telephone & Telegraph Co., the world's largest business enterprise in assets ($67 billion), employees (1,005,000),. shareholders (2,930,000) and profits ($2.99 billion last year). Evidently, it is also to be the big coonskin in what President Ford claimed recently would be a major campaign to "zero in on more effective enforcement" of the antitrust laws. Long before the surprise suit is resolved, it is likely to raise serious doubts about just what is the pur pose and direction of the Ford antitrust policy. Inevitably, there was speculation that the suit was politically motivated --the Administration's attempt to show that Big Business was by no means exempt from the sacrifices called for by its anti-inflation drive.

On the New York Stock Exchange, AT&T shares fell 2 points in two days of trading, to 43%, representing a loss of $1.1 billion to Bell stockholders. Washington's move came just as Bell had launched a massive $600 million bond issue; the company was forced to withdraw the offering until the capital markets could quiet down. Many investment analysts echoed Wall Street's Joel Leff: "You don't help by going out and attacking the widest-held and bluest-chip stock in the whole economy. You need to stimulate confidence in capitalism at this time, not stick pins in it."

The Justice Department's spare, 15-page complaint charged AT&T with violating the Sherman Act by monopolizing much of U.S. telecommunications. The trustbusters' main goal: to force A T & T to sell off Western Electric, the wholly owned manufacturing subsidiary that plays a key role in A T & T's unique position in American business.

Under the Communications Act of 1934, AT&T operates as a regulated monopoly. Its 23 regional phone companies own more than 80% of the telephones in the U.S., and it handles well over 90% of all long-distance traffic; in return, AT&T accepts regulation by the Federal Communications Commission and various state agencies, which set phone rates and thus control the company's profit level. Except for some defense work, Western Electric is almost totally engaged in supplying about 90% of the equipment that the Bell System buys.

With sales of some $7 billion, Western Electric ranks twelfth on FORTUNE'S list of the 500 largest industrial corporations. Partly because of economies of scale, Western Electric is able to supply equipment to Bell at a relatively low cost --one reason that AT&T operates profitably despite regulation. The trustbusters, however, would not only split off Western Electric from AT&T but also carve it up into two or three smaller, independent companies, on the theory that others would then be better able to compete for Bell's business.

The Government's second goal is somehow to separate Bell's regional phone companies from its highly profitable Long Lines Division, which generates a big part of A T & T's $24 billion revenues. The trustbusters contend that other companies trying to provide cheaper long-distance service to corporate customers have been blocked by the reluctance of regional Bell companies to let them link up with their local phone networks. If Long Lines were split off, Justice says, other carriers using newer technology, notably microwave transmission, would find it easier to expand. Although they do not explain why, the trustbusters say that they might also ask the courts to force AT&T to give up Bell Laboratories, the company's research facility. .

Barring an out-of-court settlement --and AT&T Chairman John D. deButts vows that Bell "will fight to the end"--it could be ten years before the case is finally decided in the courts. It is unlikely that the trustbusters will get all they want, but if they did, the consequences would be enormous.

Stockholders would probably see their AT&T shares replaced by stock in new companies created out of Bell's regional operating companies, its longdistance operations and Western Electric. Many Wall Streeters would not be surprised if the markets put a higher value on Bell's reorganized parts than they did on the whole. Best postdivestiture bet: Western Electric. Once out from under Bell's regulated umbrella, it could capitalize on its expertise in some areas --computers, for instance--in which the Government now forbids it to compete because of A T & T's special status.

The telecommunications industry would erupt in a flurry of competitive activity, at least theoretically. A number of small firms with big ideas about innovations in the fast-growing fields of computer-data-transmission hardware and microwave relay reckon that they would have more room to grow if Bell were broken up. But the firms that would be likely to profit most from any dismemberment of A T & T are industry giants: ITT, General Telephone & Electronics, Hughes Aircraft, IBM and other computer makers, as well as some big European and Japanese suppliers.

The trustbusters argue that increased competition could eventually bring down communication costs. That contention is hotly disputed by Bell's de-Butts, who protests that the Justice suit "could lead to fragmentation of responsibility for the nation's telephone network. If that happens, telephone service would deteriorate and cost much, much more." That, essentially, is the "single system" argument. It holds that "vertical integration," with everything from manufacture of phones to collection of bills in the hands of a central management, is the most efficient way to operate a complex telephone system. Many outside observers agree. Says Wall Street

Communications Analyst Carl Glick: "AT&T provides the very cheapest service possible. Justice gets so wrapped up in its rhetoric about the advantages of competition that it loses sight of the economic implications of its moves."

Curiously, the trustbusters have doubts about whether or not a Bell breakup would improve the economics or quality of communications service. They do not seriously quarrel with Bell's argument that the industry as presently structured has produced the world's best telephone service, and at fairly reasonable costs. They also concede that Bell profits have not been inordinate, in fact have remained relatively static in terms of return on invested capital. Bell's return has remained in the 7% to 7.6% range for more than ten years.

Friendly Tip. Legally, Justice has a strong case for its claim that Bell over the years has unfairly obstructed the interconnection with the AT&T system of non-Western Electric terminal equipment, telephones, satellites, mobile telephones, microwave facilities and data-transmission gear. But the trustbusters' chances of forcing Bell to give up Western Electric are uncertain. They did not succeed in doing so the last time they took on A T & T, in a suit filed during the Truman Administration in 1949 That suit was finally resolved by the Eisenhower Administration. During an informal meeting with A T & T's general counsel at the Greenbrier in White Sulphur Springs, W. Va., Ike's Attorney General, Herbert Brownell, offered what the AT&T man described as a "friendly tip" on how to negotiate a settlement. Soon after, the Government approved a consent decree that allowed Bell to keep Western Electric in return for a wrist-slap promise not to let it compete for business outside of A T & T.

The 1956 consent decree, which suggests Government approval of Bell's ownership of Western Electric, casts a long shadow. In any case, antitrust officials concede privately that they are so uncertain about the possible economic impact if they succeed in their suit that they are undecided as to how hard they should press for their maximum demands. Says one Antitrust Division spokesman: "We're leaving enough room to avoid any possibility of financial destruction of the company or destruction of the national telephone system."

At the very least, Justice's wariness raises questions about why it moved against Bell at a time when the economy is so shaky. Part of the answer may he in the play of personalities in a new and still largely undefined Administration. Career trustbusters have long chafed to overturn the Eisenhower Administration consent decree, which they view as an affront to the Antitrust Division. In August 1973, some lower-level Justice staffers dusted off the Bell files and mounted an investigation. After 15 months and two changes of Attorneys

General, the case landed on the desk of William B. Saxbe, the present Attorney General. Saxbe raised no objections to the Bell project, which seemed to fit in with his and Ford's position on using increased antitrust vigilance in the war on inflation. Saxbe cleared the suit with the President three weeks ago, then gave his trustbusters the green light to file it.

Setting the Stage. The Bell action does not foreshadow a broad antitrust drive against corporations in concentrated industries. Justice's hard-pressed, 370-member antitrust staff is scarcely able to handle the few big league cases it already has underway: the Bell case, the six-year-old suit to break up IBM, and investigations of price hikes by oil and sugar firms.

Whatever its outcome, the Bell suit will surely set the stage for a renewed debate about the proper aims of modern antitrust policy. Not even the Justice Department accuses A T & T of behaving in the ruthless style of the freewheeling monopolies that were broken up under the Sherman Act 60 years ago. As the lingering notion that "bigness is badness" has faded, the nation has tolerated increasing concentration in many industries. The question that overlies virtually every antitrust effort today is how to weigh the admitted advantages of competition against the economics of scale in any given field. Businessmen argue forcefully that at a time when the U.S. faces increasing competition from government-backed rivals overseas, American corporations need size and financial muscle to survive and prosper. While AT&T does not face competition in the usual business sense, the trustbusters will be hard put to prove their case that surgery on the company would be in the national interest.

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