Why the former Bell system breakup was wrong

Tools
A. Michael Noll

A. Michael Noll

The Bell system breakup 27 years ago got it all wrong for many reasons.

The U.S. Justice Department, in its 1974 antitrust case against AT&T (NYSE: T), demanded that Western Electric (the manufacturing arm of the Bell System) be divested. But AT&T had always protected Western from past attacks by the government, and did so again. Instead, AT&T (with the agreement of the Justice Department) retained Western and divested all its local telephone companies in 1984 thereby destroying the unity of the network.

Why would AT&T, then under the leadership of Charlie Brown, do such a stupid thing? Apparently AT&T did not understand that Western Electric was losing at least $1 billion a year and no longer was the glue that kept the Bell System together. AT&T also incorrectly believed that some of the local telephone companies were financial losers. And so Charlie Brown committed a colossal blunder--making him the best candidate for the worst leader of AT&T.

Today there are two Bell Systems--AT&T and Verizon (NYSE: VZ)- but each devoid of any manufacturing. Each includes local landline telephone service, nationwide wireless, Internet, and long distance. And neither invests much in basic research. Each also offers television in competition with cable companies. 

Today we understand the integrity of the network, with no boundaries between local service and long distance service. Wireless access has augmented and even displaced wire line access, with both forms of access being offered by today's Bell Systems.

Given where we are today, would it really be that much different if AT&T had divested Western Electric 26 years ago and kept the network intact? About the only difference is that today there is much less regulation of telecommunication in the United States, and one could question whether today's mostly unregulated duopoly is better for consumers than the regulated monopoly of the past.

A. Michael Noll's most recent book is The Evolution of Media, published by Rowman & Littlefield Publishers, Inc. (Lanham, MD), 2007. He is one of the few who correctly predicted that the local telephone companies would be spun off from the Bell System.