The MacNeil/Lehrer Report; AT&T Breakup

ROBERT MacNEIL: Good evening. A radical reorganization of the nation's telecommunications industry moved closer yesterday when a federal judge accepted in principle a plan to break-up AT&T. In January, the federal government agreed to drop its seven-year antitrust suit against the giant corporation and to let AT&T move into areas like computers from which it had been barred before. In return, AT&T was to strip itself of 22 local operating telephone companies, about two-thirds of its assets, but was allowed to keep its long-distance lines and its research and manufacturing arms. Yesterday, U.S. district judge Harold Greene said he would approve the deal if AT&T and the Justice Department agreed on certain changes in 15 days. If they didn't, the antitrust trial would resume. The changes addressed two major criticisms of the original settlement: that it left local phone companies financially weak and permitted AT&T to move too rapidly into news and information. Tonight, with two principals in the prolonged battle over unleashing Ma Bell, how yesterday's decision affects the future of communications. Jim Lehrer is off tonight. Charlayne Hunter-Gault is in Washington. Charlayne?

CHARLAYNE HUNTER-GAULT: Robin, as you can see by today's headlines, nothing is simple about the AT&T case. The Washington Post headline proclaimed the AT&T plan of break-up is rejected. The New York Times proclaimed "Judge will accept basic AT&T pact but asks changes." In an effort to simplify the 178-page decision, here are some of the highlights of the changes called for in Judge Greene's plan. It permits local phone companies to sell but not manufacture telephone equipment. It also requires AT&T give local phone companies the Yellow Page business. Further, it bars AT&T from offering any electronic publishing service over its telephone lines for seven years. And finally, the judge ruled that he must approve each phase of the divestiture before it is carried out. For some insight into what all this means for AT&T, we go back to New York now where Robin is with AT&T Chairman Charles Brown. Robin?

MacNEIL: Mr. Brown, is AT&T going to accept the deal the judge is offering?

CHARLES BROWN: I think it's necessary first to talk with the Justice Department. There are two parties to this, and we're going to have to see what their attitude is first.

MacNEIL: If you agreed with it but Justice disagreed for some reason, would that blow the deal, so to speak?

Mr. BROWN: Yes, it would. Two parties have to agree to it.

MacNEIL: Do you foresee problems with the Justice Department?

Mr. BROWN: I haven't heard from them at all. The principals have been out of town, but I find it hard to believe that we're not going to be able to surmount this final hurdle.

MacNEIL: The risk is, is it not, as I stated that if you don't agree now the antitrust suit resumes and you would be back in months, possibly years, of litigation?

Mr. BROWN: That's what the judge's order stipulates. Yes.

MacNEIL: Is the pressure on you, therefore, so great as some people have been speculating on Wall Street and financial analysts today that you'd be very much more willing to accept this and go along because the risk of prolonged expenditure on more litigation is so great?

Mr. BROWN: Well, certainly, one of the reasons we signed the consent decree to begin with was the threat of extended litigation no matter who won the trial, the loser would appeal and we'd been in for a long siege. We surely don't want that again.

MacNEIL: Can AT&T negotiate parts of what the judge has required, or do you have to take the whole package?

Mr. BROWN: The judge is pretty clear that this is what he wants as modification. If it isn't signed in 15 days, the deal's off, as you say.

MacNEIL: Now what parts of what he's ordered give AT&T problems?

Mr. BROWN: Well, of course, the situation is relatively simple with respect to the modifications the judge wants. The decree itself is relatively complicated, and we really haven't tried to figure out what happens, for example, if the operating companies have the customer premise equipment as well as the AT&T company. It's a business --

MacNEIL: That means the phones.

Mr. BROWN: Yes, the phones, the PBXs, phones on business and residence properties. We really haven't had a chance to figure out what new matters would obtain here and how we would handle them in the event that Justice agrees with this.

MacNEIL: You mean the phones that currently belong to you that are in people's homes, or belong to those companies, what happens to those phones when the companies become independent, who owns them?

Mr. BROWN: Yes, according to the decree, we own them, but according to the modification of the decree, these companies can get back into that business, and that's a new game.

MacNEIL: Have you been asked to give up anything in this that you haven't already signaled through the long battle over the legislation in the House or with the court that AT&T might be willing to give up? Is this going to cost you anything you hadn't already been prepared to give up?

Mr. BROWN: Well, of course, the matter that involved information transfer and the restrictions on AT&T with respect to using its own lines for transmitting information was something we don't particularly care for. The newspaper publishers wanted this and the judge evidently agreed with them, so that wasn't something we particularly wanted to get restricted on. As far as the other items are concerned, the Justice Department felt strongly that the operating companies ought to be out of the business of customer-premise equipment telephones and ought not to be in the Yellow Page business because both of these are competitive businesses and they feel that monopoly-oriented or local telephone service companies ought not to be competitive businesses. The judge feels differently.

MacNEIL: Is that an area where the Justice Department may disagree with the judge?

Mr. BROWN: Well, surely, they're going to have to consider that because that was -- those restrictions on the operating companies were their idea.

MacNEIL: How do you feel about the judge giving himself or taking to himself the power to approve every stage of the divestiture? Do you disagree in any way that he has that power?

Mr. BROWN: No, I think without saying it he would have had that power. An antitrust decree is under the control of the court in all cases anyway, and I don't think that surprises or disturbs us.

MacNEIL: Does it give you any problems, and is it going to slow things down?

Mr. BROWN: No, he has jurisdiction and he's going to take it. That doesn't bother us.

MacNEIL: Is the judge right to be worried as others were worried that under the original proposed settlement the financial health of the local independent companies was going to be in doubt, that they might have to charge rates that would be too high or raise the telephone rates for their customers?

Mr. BROWN: I think that concern has been overdrawn. The Yellow Page revenues, of course, are helpful to the operating companies, and the Justice Department wanted those removed from them. The customer-premise equipment business, that's a very intensive, competitive business, and there's not -- they're not going to be saved if they're in trouble by that business. Otherwise, they're very viable companies. They'll be divested with a good balance sheet. And these are large companies, competent companies with high technology, and I don't worry about their viability.

MacNEIL: Thank you. Charlayne?

HUNTER-GAULT: Now for some reaction from the key player in Congress. He is Tim Wirth, Democrat of Colorado and Chairman of the House Telecommunications Subcommittee. Congressman Wirth recently withdrew a telecommunications bill that was strongly opposed by AT&T. Congressman, in general, what's your reaction to Judge Greene's plan?

Rep. TIM WIRTH: Well, Charlayne, I think within the constraints of what the judge could do, both legally and in terms of him being in a really kind of bargaining or compromising position, he did a remarkably good job for American consumers and for the local operating companies and for some very, very important First Amendment principles that have been of great concern to those of us in the Congress.

HUNTER-GAULT: I'd like to get to some of those specifics you outlined in a moment, but first do you believe that the Justice Department is going to have problems with this in any significant way, enough to hold it up?

Rep. WIRTH: I have no idea. The Justice Department has not consulted with me on that, and I would suspect that they probably won't.

HUNTER-GAULT: I thought you might have heard rumors or --

Rep. WIRTH: No, I haven't heard anything. I haven't heard anything on that.

HUNTER-GAULT: Okay. What then is the big difference between the judge's plan and the earlier settlement that AT&T and the Justice Department had already worked out?

Rep. WIRTH: Well, there are a number of features that I think are really first rate in the decision handed down by Judge Greene. First, the Yellow Pages that Chairman Brown referred to. Now that's a very, very significant revenue stream, one of the most profitable operations in the country, some three billion dollars of revenues passing through Yellow Pages. Under the original settlement agreed to by the Justice Department and AT&T, a Yellow Pages which is fundamentally a local service would have been transferred from the local companies to New Jersey to the parent company, which would have meant a very significant loss of revenues to local companies and would have meant a significant increase in rates. In my own state of Colorado, the Yellow Page transfer alone would have meant that local telephone rates for every customer would have gone up $1.57 a month. Every customer would have paid $1.57 more per month just to transfer Yellow Pages from Mountain Bell to the parent company. That didn't seem to us in the Congress to make any sense, and Judge Greene agreed with that. Secondly --

HUNTER-GAULT: So that now those local rates -- is that the only thing that's going to impact on local rates?

Rep. WIRTH: Well, that's one of the major pieces. There are a number of others that will impact on local rates. The issue was drawn by AT&T at the time of the settlement in January in which AT&T said that -- operating executives from AT&T all over the country said that local rates were going to double or triple as a result of the settlement. We in the Congress looked at that very carefully and really couldn't find any justification for such a sharp increase in rates. Yellow Pages contributes to that, the ability of the local companies, as Chairman Brown said, now to market their terminal equipment. That's not the great saviour, but it certainly is a major revenue contribution to local companies. Third, the judge had in his opinion a very clear definition of the ratio of debt to equity to make sure the local companies don't get left holding a very large or an expensive load of debt. Fourth, providing the local companies with standing in court, so that the local companies do have an independent voice in this divestiture process, and finally, the notion of the judge alone having the final decision, which Chairman Brown, and I think I would agree with him on that exactly, the court probably had that jurisdiction anyway, but now the judge has made that very clear, that he will have the final say, not the Justice Department.

HUNTER-GAULT: Right, so that your concerns about local phone rates and the viability of local companies is significantly assuaged by this decision.

Rep. WIRTH: Well, certainly the notion of a doubling or a tripling of rates has been softened or ameliorated by the judge's decision, and that had been a major concern of members of Congress, both that they didn't see any justification for a sharp increase in rates, and we wanted to make sure that those 22 local companies -- Pacific Bell, New York Tel, Mountain Bell, and so on -- were viable, future-looking, very, very good, sound companies for the stockholders of those companies.

HUNTER-GAULT: Some AT&T competitors complained yesterday that AT&T can still, and this is their term, improperly subsidize its competitive activities with funds from consumers who are forced to use AT&T services like long-distance lines and so on. How concerned are you about that?

Rep. WIRTH: Well, we on the subcommittee and the Congress were very, very concerned about that, and that remains a major concern to be addressed.

HUNTER-GAULT: Now, why are you concerned about it?

Rep. WIRTH: Okay. In the divestiture, as Robin pointed out in his opening comments, two-thirds of the assets of AT&T were divested. But two-thirds of the revenues remain in the parent company. So what AT&T did in the settlement agreed to in January was to divest themselves of a major part of the assets, but not a major part of the revenues. The revenues remain in the parent company. That's Bell Long Lines, with some more than $30 billion of revenues per year, and Western Electric and Bell Labs are the three major components of that. The concern of the competitors, and the concern that we had in the Congress, and continue to have, is that there is the, a very real potential for AT&T to subsidize its competitive offerings and Western Electric -- which are totally deregulated -- with revenues that come out of its regulated long-distance services. That's like saying that if another company, another computer company, for example, had a large, regulated entity, they could take the revenues from that regulated entity and use those to subsidize their competitive offerings. That's not fair competition, and one of the themes that we've pursued over and over and over again was to make this as much a competitive marketplace as we could, to replace monopoly and to replace regulation with competition. That remains a goal of the Congress; the judge could not, in his decision, touch that, and that's an agenda we're going to have to come back to in the Congress and look at very carefully.

HUNTER-GAULT: So I gather by what you're saying there is that you feel, in a word, that legislation is still necessary.

Rep. WIRTH: Oh, I think that telecommunications policy still must be set by the Congress, not set by AT&T, not set by the courts, not set by the FCC. It's the responsibility of the Congress to set that policy.

HUNTER-GAULT: All right. Robin?

MacNEIL: Mr. Brown, how do you answer the concern that you might, as you just heard it expressed, subsidize your unregulated operations from the monopoly position on long lines?

Mr. BROWN: Well in the first place, it's not a monopoly position. There are many inter-city purveyors now, and it's no longer a monopoly. The judge himself demolished the line of reasoning that Representative Wirth just quoted by, on page 72 and page 36 he points out that this is just -- there is no monopoly, and the AT&T really does not have an opportunity to cross-subsidize. The judge agrees with the position we've taken there, and the position that a good many people understand now.

MacNEIL: Congressman Wirth?

Rep. WIRTH: Well I -- we would, I think, disagree with the judge's findings on that at this point, Charlie. And you know I've been through this on a number of occasions, Robin. The situation is that AT&T and its non-competitive partner have more than 90% of the long-distance market. The largest single competitor, MCI, last year had about 1% of the total marketplace. To assume that with 90% plus of the market that it's a competitive marketplace I think is stretching the notion of competition a good deal. I would believe that that would -- that about 1% of the market, say MCI's, is not that giant gorilla that's moving in on that marketplace. Rather it really is not a competitive marketplace yet. The market power that AT&T has in that area is still a significant concern if we are going to have an honestly competitive situation.

MacNEIL: What is to guarantee that you don't use revenues, whether you have a monopoly position or not, that you don't use revenues derived from that position in the, say, Western Electric products?

Mr. BROWN: Well, for example, if we have a call between New York and Philadelphia, and there are a number of other people who have long-distance facilities between New York and Philadelphia, if we keep the prices high enough to subsidize somebody else, some other part of our business, these competitors will merely price under us and take the business. Competition drives prices towards cost, and competition is there. I suggest that perhaps the judge used some pretty good logic on this.

MacNEIL: Congressman Wirth, do you feel -- your bill was withdrawn after it was strongly opposed by AT&T -- some people like the New York Times accused AT&T of managing to kill the bill -- do you feel that AT&T has been forced to, as it were through the back door by the judge, accept a lot of what was in your bill?

Rep. WIRTH: I wouldn't say it was by the back door. I think that virtue will out, and the system worked. A combination of the Congress being able to raise the issues in as high profile as they were raised in the debate over the legislation. It went from a very obscure issue to what U.S. News and World Report called one of the hottest bills on the Hill, and it was being discussed and talked about all across the country -- both because of the attention it got and because of the heavy lobbying surrounding it. So I think that that high profile, along with the action in the court and Judge Greene's very close attention to this, did solve a lot of the problems that existed in the settlement that was agreed to in January.

MacNEIL: Do you feel that this is true, that AT&T has been forced, if not by the back door, in effect to accept a lot of the things that you didn't like in the congressman's bill?

Mr. BROWN: Well no, the congressman's bill, of course, contained a great many things that the judge rejected out of hand. He rejected this business about a monopoly cross-subsidizing something else. He rejected the idea of a need for a separate subsidiary for long-distance business. He rejected the idea in Congressman Wirth's bill that the operating companies should be divested first and then we bargain for the assets. He rejected the idea that there ought to be some other evaluation of assets than the book value. He rejected the idea of restriction of the Bell Labs so that they had to make their patent information available to everybody. He rejected the idea that the AT&T had to piece out competitors' lines. He rejected the idea that AT&T only would be restricted from bypassing the local companies. He rejected more in Representative Wirth's bill than he accepted.

MacNEIL: Well, thank you. Charlayne?

HUNTER-GAULT: Congressman, you mentioned a few moments ago consumers in this thing, and you talked about the fact that rates are probably going to be improved as a result of this plan. Do you have other concerns now about consumers, outside of the plan?

Rep. WIRTH: Well, I think ultimately, as we become a more and more competitive marketplace, the consumers are going to have a real concern about how competitive that marketplace really is. There is, as you can tell from the earlier discussion, a fundamental disagreement about how competitive this market is. I think the subcommittee in the Congress would, and most of the expert testimony that we got from everybody but AT&T, would suggest that when you have 90% of the marketplace it's not competitive.

HUNTER-GAULT: All right. Well, what about --

Rep. WIRTH: And that can ultimately cost the consumer in terms of higher long-distance rates used to subsidize competitive offerings, and in turn, the offerings available to the consumer in the marketplace are fewer if AT&T is able to drive people out of that market.

HUNTER-GAULT: All right. How about the provision that the judge stipulated that if the local companies are handling the billing for AT&T, they have to advise the customers that there are alternatives to AT&T long-distance. Is that going to help?

Rep. WIRTH: I think that's consistent with the idea of more competition, and letting people know what the options are that are available. And that, again, is one of the fundamental goals. I would stress again that within the context of what he could do, I think the judge did a very, very fine job. Now, addressing some of these other issues is really beyond that, and that is up to the Congress to address -- what do we do about the basic nature of competition in this society, how do we reform what goes on at the FCC and deregulate that and replace it with competition -- those remain concerns that ultimately redound to the benefit of the consumer.

HUNTER-GAULT: Mr. Brown, what's going to happen to the people who now have AT&T phones when this plan goes into effect? I mean, will AT&T at that point be able to charge any price that they choose?

Mr. BROWN: No, there's no change in regulation, Charlayne, based on this court decree. The regulators still are in control.

HUNTER-GAULT: Is that a concern for you, Congressman? When the people -- when this plan goes into effect, the people who already have AT&T phones may or may not be asked to pay higher rates.

Rep. WIRTH: Well, what we had hoped in the legislation was that all of those existing phones, the phone that you had would stay with the local phone company, under the judge's decree. It all went under the settlement, in fact, it all moved to the parent company. I think that the subcomittee didn't think that made a lot of sense, and the full committee didn't think that that made a lot of sense, but that's -- you know there are a lot of compromises that get made along the line. And we all understand that, I mean that's -- you have to get from here to there.

HUNTER-GAULT: Well, do you think that AT&T will increase dramatically the rates on those phones?

Rep. WIRTH: On those phones? Well, I think overall the cost of basic telephone service to consumers is going to go up, as Chairman Brown has said over and over and over again, and that goes up as you have, going closer to costs, and with inflation. But I think we're not going to see now the dramatic increase in rates that was originally projected by AT&T at the time of the settlement in January, and that's a very -- that's very salutory for 230 million Americans.

HUNTER-GAULT: The newspaper publishers were very happy about the decision to keep the electronic publishing out from -- away from AT&T for the next seven years. Is that a good thing for consumers, you think?

Rep. WIRTH: Well, I think ultimately, again, that is. That's much more than a newspaper versus AT&T amendment, and it has been couched, I think, by a number of groups as only being a confrontation between the publishers and AT&T. That's not the case. It's a fundamental First Amendment diversity of information issue, and that's why it's very important that the American public have access to diverse sources of information, and that not one source, whether it's the government or AT&T or anybody, can dictate what kinds of information are going out to the American public.

HUNTER-GAULT: How do you feel about that, Mr. Brown?

Mr. BROWN: Well, as I told the Newspaper Publishers' Association, this is almost a non-issue with us. It's not the heart of our business. They got what they wanted. They can generally convince the congressmen to give them what they want, and this is a non-issue as far as I'm concerned.

HUNTER-GAULT: All right. Thank you.

Rep. WIRTH: I might add, Charlayne, just on that, it was not an issue that the newspaper publishers brought to the Congress, it's an issue which I took to the newspaper publishers as a fundamental First Amendment issue. It's not one that's generated out of the publishing world; it's not a confrontation between AT&T and the publishers. It's a fundamental confirmation of what the First Amendment's all about.

HUNTER-GAULT: Well, we'll leave you happy on that point. Robin?

MacNEIL: Yes, well let's pursue it for a moment. Mr. Brown, do you regard this as a permanent ban on AT&T getting into the dissemination of news and information over its own lines, or just a wait for seven years to let other people move into that area?

Mr. BROWN: Well, in the first place, we never intended to do this at all, and that's the reason I class it as a non-issue. The judge says that it's desirable to keep us out of certain things for seven years, and then he'll review it again, and that's all right with us. I don't think this business will ever get into news dissemination. It's not our business. We really have no interest in it.

MacNEIL: Do you regard it as a permanent ban, Mr. Wirth?

Rep. WIRTH: Well it is a permanent ban for the local operating companies. We should distinguish; in the settlement the local operating companies are precluded forever, until the laws change, from getting into information services, and infringing on that First Amendment question. Judge Greene's decision focuses only on the parent AT&T and precludes them for seven years, and then the judge has to make an affirmative statement that they should not be precluded after that. So we'll wait and see what happens in seven years. If the long-distance market in seven years is as competitive as AT&T believes it's going to be, and as the judge suggests it's going to be, then it looks like that ban would be lifted. If it doesn't turn out to be competitive, and it turns out that our analysis is correct, then I would suspect that the ban would remain after that seven-year period of time.

MacNEIL: On this business of competition, Mr. Brown, the judge said in his finding, "There is evidence which suggests that AT&T's pattern during the past 30 years has been to shift from one anticompetitive activity to another as the regulations were changed and as the technology changed," with the implication left that this might be the case in the future. What is your comment on what he said?

Mr. BROWN: Well, I certainly don't agree with this; I think he's quoting what the government tried to prove, and I believe as you read further down here he puts the word "alleged" in there, which is entirely appropriate and judicial for a case which was never decided. The judge also says, on page 57, precisely, that men and women who have guided the Bell System over the years have not tended to do things which would impose any power on the public of America.

MacNEIL: Mr. Wirth, is this going to lead you to introduce some new legislation?

Rep. WIRTH: Well, we're going to look very carefully, with aggressive oversight, in September and October, on the responsibilities of the Federal Communication Commission with the Justice Department, and then, you know, there's an election in November and we'll see what the makeup of the Congress is at that point, what the makeup of the subcommittee is. I remain, and I think the subcommittee as it now exists, is very concerned long-term about the competitive issues I was talking about, about the need for replacing regulation and monopoly with competition wherever that is possible.

MacNEIL: We have to leave it there. Congressman, thank you for joining us tonight in Washington. Mr. Brown, thank you. Good night, Charlayne.

HUNTER-GAULT: Good night, Robin.

MacNEIL: That's all for tonight. We will be back tomorrow night. I'm Robert MacNeil. Good night.