Are Those Who Ignore History Doomed to Repeat It?

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B. The Breakup of AT&T

The event marking the second turn of the Cycle in the telephone industry is the breakup of AT&T (p 194–95). On a superficial level, splitting the Bell System into a long-distance company (AT&T), seven local telephone companies (Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, SBC, and US West), and an equipment company (Lucent Technologies) would appear a likely candidate for a return to openness.

On closer inspection, however, the parallels between these episodes become less clear. As an initial matter, the type of openness implicated by the breakup of AT&T is very different from the type of openness at issue during the era of Independent telephony. Openness during that period was the direct result of the emergence of direct competition in local telephone service (p 48). Thus, the type of interconnection at issue was fundamentally horizontal.

The judicial proceedings ordering the breakup of AT&T, in contrast, abandoned all hope of inducing direct competition between multiple local telephone service providers.45 Instead, the breakup was designed to promote competition in complementary services, such as long distance, customer premises equipment, and data processing services (the last of which were direct precursors to the modern Internet) (pp 189–91). Providers of these complementary services did not want to replace AT&T’s local telephone network and provide service instead of AT&T. They wanted to access AT&T’s local telephone network so they could provide services in addition to those provided by AT&T. In short, they sought to offer complements to the local telephone network, not substitutes. The type of interconnection these firms sought was thus not horizontal, but rather vertical. Wu’s other work recognizes that horizontal and vertical interconnection raise very different concerns,46 but glosses over this key distinction when treating the Independent telephone era and the breakup of AT&T as part of the same Cycle. As a general matter, horizontal practices raise significantly greater economic concern than vertical ones. In addition, horizontal and vertical remedies are targeted toward very different policy outcomes. The former is designed to break up a monopoly. The latter intends to leave the monopoly in place and simply insist that it be shared.

The differences between horizontal and vertical relationships make it difficult to regard the first two historical episodes in the telephone industry as being of a piece. Another difficulty arises from the mechanism through which the market opened. In the case of Independent telephony, the market opened through competitive entry. In the case of the breakup of AT&T, Wu sees the government as the key driver, led by the White House (p 187), backed by the Federal Communications Commission (FCC) (pp 188–91), and finished by the antitrust courts (p 193). Given the Reagan administration’s emphasis on deregulation and competitive markets, Wu suggests that the government must have regarded AT&T’s efforts to preserve its monopoly as “blasphemy” (p 193).

Again, a broader look at the history yields a story with more interesting twists and turns. The atmosphere surrounding monopoly and deregulation was quite complex. On the one hand, deregulation enjoyed widespread intellectual and political support, perhaps best demonstrated by the deregulation of the airline industry during the Carter administration in 1978 under the leadership of Senator Ted Kennedy and Stephen Breyer, who was then serving as chief counsel to the Senate Judiciary Committee. On the other hand, the decision to proceed with the breakup of AT&T must be viewed side by side with the Reagan administration’s other signature antitrust policy decision: the termination of the longstanding case against IBM. The fact that the administration reached different opinions in the IBM case and the AT&T case suggests it was applying a nuanced, context-sensitive vision of competition policy rather than mechanically pursing an ideology.47

Equally interesting is the inconsistency of the government’s support for openness. Although the FCC would eventually support liberalizing markets for long-distance services and customer-premises equipment, it initially refused to do so and instead sided with AT&T, until the courts overturned its decisions and forced it to reverse course.48 As discussed below, this episode is more properly regarded as supporting Wu’s ambivalence about whether government is part of the problem or part of the solution rather than as an example where the government played a positive role in helping open a technology.49

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