AT and T Divestiture: Restructuring the U.S. Domestic Telephone Industry

On January 8, 1982, the Justice Department and the American Telephone and Telegraph Company announced the settlement of the Government's seven year old antitrust suit against AT&T. Nineteen months later, in August 1983, U.S. District Court Judge Harold Greene gave final approval to the AT& T divestiture agreement. The breakup of AT&T will affect every aspect of the U.S. domestic telephone industry from the yellow pages to the manufacture of telephones. AT&T officially spun off its 22 local operating companies into seven regional phone companies on January 1, 1984. This Info Pack focuses on the Department of Justice settlement with AT&T and how the resulting divestiture will affect the U.S. domestic telephone industry.

Congressional Research Service The Library of Congress Washington, D.C. 20540 U.S. Restructuring the Dacstic Telepboac Industry IP0257A On January 8, 1982, the Justice Department and the American Telephone and Telegraph Company announced the settlement of the Government's seven year old antitrust suit against ATbT. Nineteen months later, in August 1983, U.S. District Court Judge Harold Greene gave final approval to the ATbT divestiture agreement. The breakup of ATbT will affect every aspect of the U.S. domestic telphone industry from the yellow pages to the manufacture of telephones. AT&T officially spun off its 22 local operating companies into seven regional phone companies on January 1, 1984. This Info Pack focuses on the Department of Justice settlement with ATbT and how the resulting divestiture will affect the U.S. domestic telephone industry. Members of Congress desiring more information on this topic should contact CRS at 287-5700. Congressional Reference Division The AT&T Breakup: A World of Confusion By h k r Behr and Michael Isikoff Wuhvyron Polt 4Uff Wrcun For m a t of this century, the telephone has been a simple neceuaity of American life, e~ much taken for granted as the kitchen faucet. That mlatiomhip tietween Americana and their telephone b about to be turned inaide out. On New Year's Day, American Telephone & Telegraph Co., the country's oldest and b i e t monopoly, will be broken up into eight separate billiondollar companies, accelerating a chain re- PART 1 action of confusing changes in telephone service. These change should mean a dazzlii proliferation of new eervices and phone equipment for consumers and busina rapid escalation of bask bcal phone rates. Although rates would have risen without the breakup of the Bell System, it will speed up their ascent. "It's pretty clear that consumera are going to pay a minimum of 50 percent more in their monthly b i in the next 12 monthg-and that's the best case," says Sam Simon,executive director of the Telecommunications Research Action Center. 'In some caws, they're going to pay much more thrn that, dending on when you live. It can 100 pewnt or 200 percent" In the DLtrict, the C b peak9 & P o t o w Telephone b,have pro@ to raise the tlat monthly loclll tebphone charge from $8.83 to $13.08 and the coet of a pay phone call from 16 cents to 25 cents. Lager rat8 requests are pending in wburban Maryland and V i i a . C&P Preaiient Thomae Gibbons predicta that local rates in the Washington metropolitan area will double in the next several yeam. Nationally, the local Bell phone companie%-rbout to be separated from AT&T--are mlring an unprecedented $6.7 billion in higher rates and feea, at least in part to help cover the cats of divestiture. In addition, the Federal Communications Commission has ordered that cawmere an8 businesses pey a newsetofactmafeestoreplace subeidie the local phone companies will no longer receive from Ma Bell. These higher rates and .lea have triggered political fears in Congsees that the country'8 50year-old policy of universal phone service b in jeopardy. k t month, the Hwae passed legislation aimed at preserving that policy and blocking the new acceas feea, adding to the confueion. FCC Chairman Mark F d r dhenowfearatheSenatewill pass similar legislation early next See BELL, A14 CoL 1 g e Painful e BELL,From A% yesr and warns of a "natiod cmmtaophe in the d i n g . "We're going to see the industry turned into an economic Lebanon, It will be an industry ripped apart, faction fghting faction, total chaos," Fowler said. "What we're going to we is a c m b l i q , rapidly deterioratine public telephone netwn~k'in the 19%~if Congress p w s the bill. The hope of divestiture is hht the disruption will more than bg off& 5;. the bnefita of wmpeeition 61a America enters a new mtlon. One benefit should b a Lkme in the coete of lone;.disbee dhg,err! the campetition h t a d m b t w m AT&T and longdistance dv& Q dicta taut long-di~tancemtm in 1980 may be 40 percent bels&i tcpday'e lev& Tbemmdhfitswit!$ethe evolution of the khphom into r awfw bury numbere, and prompt the owner about upcorning appointmrrnt4 urd u u n i w a At~0tberedme)uQarrpPy phom far hrr than $10 epim tbot will be d M d wh do#n b u % e it will ~t&mthnnto tbe murufacturet in How T h a n for repaim. K w ar Will the banefits outweigh the costa and turmoil? Cemhly not at %st, m y eqxvt.9 my, and obsewerr are dearly c o n m e d about the hng-term wtmme. "It wiil be anslss confusion for conm e r s for awhile," mys Fred Goldfor the te Utility "If &re were a way to force AT&T hsk into bwiim, I'd be in &vor of iC aep Sen. &P iR-Ark), c h e i ~ l l ~ aofn h e ┬ženate cmmuaications rubcommittee. Charles L Brown, chairman of : is a major upAT&T, ~ y r 16TRie heaval J t WIM not our ideaw "Wt II would to go thb whole thing was ut tBLa cork back in the bttb,"eeye O h W a d , prcwident d aha ChmmuRiatione Wo~kereof hdea the union h t represents tawme coneePay unployes. That m't tas d m , L admits. . .. In 1969, a ernall Washingtonbased mmpany, MCI Communications Corp., was given permission to compete with AT&T by setting up a microwave tranmission service. Now MCI is a tl.l,billion company, and along with other companies is offering long-distance eewice at rates significantly blow AT&T's. T h e technological change was occurring and it gradually became obvious that the telecomn~unications industry w& not moving as rapidly on that technology as it would if it were competitive," says Bruce Owen, a former Justice Department economist and a key figure in the Bell WP. Mng the 197Q, AT&T tried to 8tifle that mpetition, d i n g legthat would have idation in CoW l y outlawed ito fledgling rivals. AT&?"# powsr, fed by its monopoly wenw from local and long-dietrncd d m , pored a rtark choice for federal policymakm, Owsn wid: Either allow the monopoly to contin% ntuding technological growth in a crucial induntry, or challenge AT&T head on. In 1914, the Justice Deputment chase the oecond came, fdhg a ruit to bed up AT&T. On Sept. 11, 1981, US. Ditrict Judge Harold H. Oreone, presiding over the trial, denied AT&T'r motion to dismire the h u i t . He a n dudd: 'The brtimony and the documentary evidence d d u d by the government demonatmtw that the Bell System hae violated the antih t kan in a number of wpyr over ' a lengthy period of time." On Jan. 8, 1982, before the trial had ended, AT&T and the Jurtica 1966: American Telephone & Telegraph Co. signs a consent decree with the US. government to end a major antitrust suit. The decree bars AT&T from entering any non-regulated, non-telephone activity, such as data processing. 196%The Federal Communications Commission issues its first ruling promoting competition in the telephone industry by allowing customers for the first time to hook up non-Re11 System phones to the telephone networks. 1969: The FCC permits MCI carp to ~In,,nch a~priva(e-line ~ ~ ~ ~ service between St. and creating the first long-distance competition for AT&l.' 1974: The Justice Department files a new antitrust suit against AT&T, accusing it of Step$ Toward trying to keep competitors out of the equipment and long-distance markets. 1978: In the face of increasing competition, AT&T mounts congressional campaign for legislation dubbed "the Bell Billn that would protect AT&T's monopoly in much of the telecommunicatiom market. 1978: ~h~ mtXdshifb against AT&T in Congress VanDeerlin i ~as Rep. Lionel ~ ~ i (D-Calif.), ~ the chnirman of a House subcommittee on telecommullications, introduces legislation tr, 1 1 U.S. ~~d~~~ ~ breek up the ~ ~system. Greene hkes over the A& I'I' antitrust case after presiding judge dies. 1981: MCI Communications Corp., charging AT&T with anticompetitive mnduct, wins $1.8 billion verdict. Appeals court orders new trial on amount of award. 19824anuary: The government and AT&T announce they have reached an agreement settling the antitrust nuit. of 1982-August: the breakup plan, Judge making Creene several approves key. most changes designed to help phone companies. l9834uly: FCC issues plan tu impose d1.9 billion in higher residential phone fees and other chaWS to help h a 1 phone mmpaniei ) divestiture. ~ ~ House moves to bloc1 after The the new charges. ~ 1984--January: ~ l d The former local Bell phone companies are separated from AT&T in the most extensive corporate breakup eve ,. Department stunned Congress and the telecommunications industry by announcing an agreement to break up the Bell System. Their agreement, modified by Judge Greene, is the plan that will take effect Jan. 1. AT&T will keep its long-distance business, Bell Laboratories, its Western Electric manufacturing division and an equipment sales division, ATBiT Information Services. The 22 Bell operating companies have been regrouped as seven large regional telephone companies, separated from AT&T. As part of the Bell System, they bought most of their equipment from Western Eiectric. Now they are expected to buy from a growing number of equipment f i m , stimulating one of the nation's most important industries. In the end, AT&T accepted the dismemberment because it saw new opportunities in leaving its old local phone business behind and emerging as a smaller but still powerful competitor in intermingled businesses of computers and telecommunications. t the By settling its court f ~ hwith Justice Department, AT&T was able to escape from the confines of a 1956 court decree that had blocked AT&T from entering the computer business. Now, AT&T expects to be a key competitor in a fast-growing market for sophisticated computerixed telecommunications equipment. AT&T: Weltare State?' The Bell breakup and the decision to throw open the door to longdistance competition has also o ~ e n e dthe way to the escalation ih local telephone rates and fundamental changes in how customers are charged for phone eervice. Divestiture has wiped out b i i o m of dollars in subsidies that AT&T shifted every year from its long-distance business to the 22 local Bell phone companies. These subsidies Access Charge Fight had helped slow down the increase in local phone rates. The subsidy was a response by AT&T to state regulators, who saw local phone service mta rising faster than long-distance c a t s and compkined that long-disbance profits were excessive. The size of this crosssubsidy is disputed by txperts, but the m n t estimate is $10.7 billion a year. AT&T was able ti make this transfer bec~use,with its national telephone monopoly, it could function more like a federru government than a private corporation, "I've said many times that AT&T was more l i e national government, almost like a welfare state with the power to tax some people way above cost, which they then used to hold down costs to other people," says Alfred E. Kahn, President Carter's anti-inflation advisor who has served as a consultant to the Bell Syatem. The people who benefitted from these "welfare" policies were phone users who rarely made long-distance calls. The people who were t x d to support thoee benefits were long-distance callers, particularly a handful of very large corporations that account for 50 percent of all business long-dietance revenues. The divestiture, taking the local operating companies from AT&T's long-distance arm, forced an end %o the internal subsidies. However, the loss of the subsidies confronts the local companies with a large laas in revenues, and the FCC, Congress and the courts all are involved in a battle over how that loas will be made up in higher for local and longdistanb service, This year, the FCC proposed to replace the subsidies with access charges to be paid by residential and business customers and by h e long-distance companies. Beginning April 3, residential phone users would pay $2 more per month next year, escalating to $6 per month by 1988. Business would pay $6 per phone line next year, but that fee would not increase. These are the "subscriber access charges." The long-distance companies would pay a 'carrier access charge." The money would go to the local phone companies. The philosophy was that, since a long-distance call travels part of the way over a local company's wir5s and through its switches, a local company should get some payment for access--the use of its services. But the proposed new monthly charges--on the w e of a congressional election year-set off a chorus of outrage among House and Senate Democrats. The direction of the emotion comes a m in a Nov. 9 House speech by Rep. Ron Wyden (DOre.): "I cannot believe my colleagues want to let the FCC lay a foundation See BELL, A15,Col. 1 BELL, From A14 for an information aristocracy where the well-to-do have [phone] acces to in-home computen for shopping and banking, while senior citizens will have to fight to avoid being priced out of a phone they can use to call the doctor." The political dilemma was clear. If members of Congress permitted the access charges to stand, they would have to explain them to voters at home. But if access charges on residential and business customers were ruled out, as the House Democrats p r o p e d , where would the local phone companies get new revenue to make up for what they lose with the end of the Bell subsidies? There are only two sources: Higher local phone rates--or higher access charges imposed on the long-distance companies, prompting higher charges for long-distance calls. Technology complicates the decision. A large business can set up microwave antennas or a private phone cable and transmit its long-distance calls directly to a long-distance carrier, bypassing the local phone network. The local phone companies complained that if Congress blocked residential access charges, more and more businesses would bypass their systems rather than pay the higher long-distance rates. And the loss of this local revenue would result in higher rates for the remaining local customers-just what congressional Democrats were trying to avoid. Finally, AT&T warned that if the House bill became law, the company would scrap plans for a 10.5 percent reduction in long-distance rates, eliminating perhaps the most immediate tangible benefit from divestiture for consumers. While that fight is in limbo during the congnyaional holiday recess, state utility commiasions are considering heavy rate increase proposals all over the country. In Texas, Southwestern Bell filed for $691 million in higher rates and fees that would triple phone rates there. Friday, a Texas Public Utility Commission judge granted the company a $653.3 million interim increase, which Southwestern Bell called "insufficient." Pacific Telephone filed for a $1.3 billion increase in Cdiiornia that would double local rates, and so far has received an interim increase of $446 million. Closer to home, C&P asked for $82 million in the District, $134.8 million in Virginia and $218 million in Maryland. C&P's request in the District was trimmed to $41 million. The phone companies' critics see greed at work. T h e operating companies took a look at divestiture and said, 'Ha-Ha, we can rip off the state commissions,' " says Henry Geller, former telecommunications adviser to President Carter. "So they came up with these outrageous rate requests." The local telephone companies put it a different way, saying they 4 rate increases to make up for a loss of revenues from toll calls within state borders. Theae long-distance calls will be carried by AT&T or its competitors after Jan. 1-not the 1wA companies. Paying by the Call? And the local operating companies argue that since they must now stand on their m, as ~eparateutilitit?s, the profits they return to investors mwt be large enough to keep a stxm of-ital flowing in to finance future growth and development. But the s i x of the rate increase requests is only pa& of the controversy. There is a growing debate over the telephone companies' plans to tailor charges to the phone aervices received. Traditionally, a telephone company set one charge for everyone, regardleea of income-one b i c monthly rate paid for an unlimited number of local calls. "When we were ubiquitous, m looked at evethe same way," says W P ' s Gib- bons. The monthly residential charge averaged the coats of providing service for both the heavy phone user and the infrequent caller. I t averaged the relatively low costs of serving a new suburban development or apartment house close lo a phone company switching center with the higher costs of reaching a distant ma1 area. Some phone cllstomers eubaidized others. Many local telephone companies-including C&P-are pushing as rapidly as they can to move customers away from the flat monthly charge in favor of a measured charge based on the number of calls and the length of call% T h e whole idea of divestiture is to get out of the subsidy business, allow competition and allow prices to reflect costs," says Gibbons. Thus, C&P bis pmposed a range of "optional meas~lrdsenice" packages, such as an economy service in the District that would permit customers 60 local cdls a month for the discount rate of $4.51, and then charge an extra 4.9 percent for each additional call. Ahart M f of d l District residents now subscribe to h t - r a t e service allowing an unlimited nwnber of local calls for $8.83 a month, with C&P proposing to raise it to E13.M Thm who want to escape the inmase-ad are willing to cut hack on local calling--can switch to measured service, says C&P. The campaign for measured charges is bitterly attacked by some consumer activists. 'They want tu put a pay phone in everyM y ' s home," complains Sylvia Siegal, founder of California's TURN (Toward Utility Rate Normalization). The campaign for measured service strikes at the basic fairness of a single flat rate for all, she says. Under the current flat-rate system, the subsidy is substantial, phone indsatry estimates indicate: 20 percent of residential phone custeners make 45 percent of the calls. At the bttom of the scale, another 20 percent of residential customers make only 5 percent of the calls. And there is a growing traffic of data transmission by computer firms, who pay a flat rate although they tie up l d lines for 24 hours a day, seven days a week, complains Gibbons. T h a t kind of cost is being s h e d by everybody else," he sap. Telephone industry officih say that measured service and low ratev for a limited number of calla give consumers new ways to economize that were impossible in a flat-rate system There are lot of options that the customer can have and still keep hi rates low," eays C&P spokesman Web Chamberlin. In a year or two, C&P will be asking for permission for time-of-day pricing for local servia-the same approach that permits lower long-distance charges for evening and weekend calls, Gibbons says. That will reduce the number of calls in peak periods, holding down requirements for new switch,ing equipment, he predicts. More and more information will be trammitted between computers over phone lines in the future, says Gibbons, end if C&P can charge meaeured rates for thoee trammisaions, it ehould become a lucrative business that could help keep local residential rates down, he says. 'If you get away from flat-rate pricing you THOMAS GIBBONS ...C4P Resident says rates will double won have all kinds of opportunities," says Gib- bons. The campaign is nationwide. "We don't em how people can argue against paying for what they use," says John Hulse, vice chairman of Pacific Telesis, the .holding company for the former Bell telephone companies in California and Nevada. But there is an argument. The political flareup in the f d days of the Bell System is a reminder that the divestiture plan has really aettled nothing where telephone rates are concerned. It has merely opened a new chapter. Next: What the new industry will look like; will competition work? What Divestiture Will Cost You The following questions and answers are meant to help consumers understand the changes in phone service that take effect Jan. 1. For further information, call C&P at 800-553-5000 or AT&T at 800-555-8111. Q: What do I do with my phone on Jan. 10 1: A: First, check to be sure whether you it nr whether you are currently leasing it from C&P. If it's leased, you have three choices. You can buy it, or continue to leme it, or j-xcar, turn it in. This month you can deal with C&P, but after Jan. 1, be sure to make the arrangments with AT&T, not CCY. The court order that breaks up the Bell System gives C&P's home phone equipment to AT&T on Jan. 1. C&P will pay you $4 if you turn in the phone this year. AT&T doesn't plan to pay for phones next year. Q: Can I do nothing? , A: If you now lease a phone from C&P, and you do nothing, AT&T will take over the lease on Jan. 1. Although you will then owe monthly phone rental payments to AT&T, those charges will be included on your monthly C&P bill. So you can keep making one payment. Q How do I decide whether to buy or lease? A: Owning clearly is far cheaper than leasing in nearly all cases. An exception could be if you own an expensive phone that requires frequent and costly repairs. Until the end of this year, District residents can buy the besic C&P rotary dial phones now in their homes for $18.25 apiece. ('his price and the other examples don't include taxes.) If they continue to rent, the charge per phone is $1.50 a month plus tax. So in just one year, the rental charges will exceed the purchasc price. The same is true in the S ' J ~ I Kalthough ~S, the purchase price is nliehtlv hipher. Ynu can buy your Touch Tone desk. phone fsr $33.00 if you live in the District ur rent it for $2.71 a month at today's rates. Thc purchase price is $41.95 in the suburbs, where the monthly rental is $2.07 nam for Virginia and $2.11 for Maryland. If you buy your current phone from C&P or AT&T, you get a 30 day warranty. Q What if I'm moving to a place that has no phones? A: After Jan. 1, you can rent a phone from AT&T. The charge will be $1.50 a month for a basic dial phone, and $2.85 a month for Touch Tone. This month, C&P will sell you a rebuilt Touch Tone desk phone for $54.95, with a 90-day warranty. After Jan. 1, AT&T will charge $61.95 for a new phone and give a one-year warranty. The Public Phone Store will sell you an I'PT model for $49.95 with a two-year warranty, or a rebuilt ITT model for $39.95 with a 90-day warranty. Radio Shack has a $59.95 model with a one-year warranty, and many retail and appliance stores also carry phones. One of the best buys is a telephone company rental phone. They were "over-engineerednand designed to last'20 years or more, and current models don't have the same durability. Repairs & What if my phone breaks down. A: If you arrange to lea* your old C&P phone from AT&T, AT&T will be responsible for repairing the phone if it breaks, for no charge. Leasii may make sense for shut-ins who would have trouble taking a phone to be repaired. If you lease from AT&T and ' the phone goes on the blink, AT&T will send you a replacement phone by express mail, at no charge. Or you can take it to one of AT&T's 1,500 service centers around the country. If AT&?: comes to your home to fix a leased phone, it will charge for you for time and materials. How much hasn't been announced. & If I buy my old C&P phone, who will repair it? A: AT&T will, but only if it an AT&T or C&P phone covered by warranty. If your warranty has expired, AT&T will charge you for repairs. & How much? A: C&P's current price is $27 for rotary phones, $29 for Touch Tone. In the future, AT&T's charges will vary based on costs for labor and parts. It hasn't announced those prices yet. . Q Where are the AT&T phone centers? A: AT&T will take over the current C&P phone stores on Jan. 1. AT&T hasn't said whether some will be closed and new phone stores opened. Call 800-555-8111. & What if I bought my phone from a store and it isn't a Bell model. Will C&P or AT&T repair it? A: No. These phqnes may be covered by a warranty from the manufacturer or the store that sold them. Checl~the warranty fist. Contact the dealer who sold you the phone. Q: If it isn't covered by warranty? A: Some phone stores won't offer warranties on the cheapest "electronicn phones that come from Hong Kong and Taiwan. These phones use computer chips to create the sound "pulseswsimilar to what you hear when you operate a dial phone. Because they don't stock replacement chips, they won't attempt repairs. Their advice: If these phones break, throw them away. Q All push button phones aren't alike? A: No. The 'pulsew push button phones don't generate a tone and thus can't be used for computerized phone services such as home banking or the long-distance services of AT&T's competitors. And you can't use a handard rotary dial phone for these services,either. B: Where an I get my phone repaired? A: Try the private phone repair shops listed in the Yellow Pages under "Telephone Equipment & Service Systems-Service& Repair." Q: If there's a problem on the line, should I call C&P? A: Not right away. Fint, try to make certain the problem is with the line and not your phone. Q How? A: If the buttons are stuck, or the dial or plastic case is broken, or a cord is split, chances are the problem is in the phone. Check it by unplugging the problem phone from the wall jack and plugging in another phone, either one of yours or a neighbors. If the problem continue., it's probably the line. Q If the problem is in the line? A: C&P will fu it without charge. But if they come to your h o w and decide the problem waa in the phone after all, they will charge you for the service call. And your phone still won't be fued. Q How much will they charge? A: C&P is currently authorized to charge $41.55 per repair visit. Q If I move to an older home or apartment that doesn't have the "plug in" style wall jacks. Will C&P install new jacks? A: Yes, but it will be expensive. C&P is asking for permission to charge for parts and labor, the way other home repair services do. For a "simple" installation of a phone jack, C&P wanta to charge $21 for the first 15 minutes and $11 for each additional quarter-hour. However, m a t consumers should be able to handle simple installations, using the plug-in phone jacks and instruction pamphlets available a t moet phone stores. Long Distance Q What happens to long distance? A: Nothing, at first. You still have e choice of using AT&T or buying long-distance service from one of its discount competitors such as MCI Communications, CTE/Sprint, ITT, Western Union, Skyline and Allnet. The discount services don't make sense unless you make a lot of long-distance calls. Check the details. AT&T currently charges $2.70 for a five-minute call from Washington to New York City during the day. MCI charges $2.15 for the same call for a savings of 55 cents. But MCI also charges customers a monthly fee of up to $10, so you don't save money with MCI unless you make at least 19 Washington-New York calls per month like that one. Q After Jan. 1, do I still have to dial a lot of additional numbers if I use MCI or one of the other services? A: Yes, but over the next three years, that will change. The break-up ruling requires C&P and other local phone companies to make improvements to switching centers to give AT&T's competitors the same highquality, long-distance connection that AT&T receives. They don't have that now, and that's why a m numbers are required and rotary d i d phones can't be used on these servicee. Once the switching improvements are made in your area, you can chooee to have your long distance calls routed automatically through the service you choose. Or you can choose among the various companies each time you make a call by dialing four access numbers. B:When will that change take place? A: Sometime between September 1984 and September 1986, according to the plan. C&P and the longdistance companies will let you know. B: What will happen to long-distance rates? A: Once AT&T and its rivals are equal competitively, federal regulatore will remove the price advantage that the rivals now enjoy. Everyone expects competition to push long-distance charges lower, but future long-diitance charges are impossible to predict now because Congress, the regulators and the courts still are wresting with the iaeue. A New Era of Hot Competition Thousands of companies will grapple for chunks of the old AT&T empire and the outThe game is monopoly. The board is the come will affect how Americans communicate telecommunicationsindustry, one of the fastest in a new age of information. It will decide the growing markets in the world. fate of AT&T, the largest corporation in the For the past 50 years, nearly all the spaces world and a unique American institution. on the board have been occupied hy American The stakes are great for millions of employTelephone & Telegraph Co., whose $66 billion es in the industry and its miliions of shareholdin revenues this year will probably exceed all ers. And the money on the table comes ultimately from the savings and spending of consumers. The separation ot AT&T's former local phone companies from b e rest of the Bell System represents a gamble that consumers will benefit more from cnmpetition than from a PART 2 continuation of AT&T's telephone monopoly. "The whok basis of the antitrust law is that of the 1983 federal tax payments by all of the competition will drive prices down and will businesses in the United States. On Jan. 1, the rules of the game will sud- ultimately benefit the consumer," says U.S. denly change, when a court-ordered split of District Judge Harold H. Creene, who is overATGtT's local and long-distance bushpes seeing the A T W divestiture. "Nobody has See BELL,A12,Col. 1 takes effect. By Caroline E. Mayer and Menill B m W;tahll&?ton Pmt Salt Writers Reproduced with permission of the copyright claimant. BELL, From A l given any p o d reason why that shou!dn't be true in the telephone industry." To decide whether the ATLT breakup is working for consumers one must look first at the iong-distance telephone market. Teday. ATCT is the Goliath of the $40 billion long-distance telephone market. Nearly two-thirds of AT&T's revenues and the bulk of its profits come from long-distance tolls. Lumped together; the Davids in the long-distance market have only 5 percent of the r'evenues and a single one of' them. MCI Cornmunication~ Corp., has 3 ' : percent of the business. ATCT has the rest. - - The contenders in the bng-d~Sk3nCering have been growing s t tremendous speed, taking advantage of rates approved by the Federal Communications Commission that make their long-distance Jervice 20 to 40 percent cheaper than ATBiT's for those who do a large ambunt of long-distance calling. Jan. 1 marks the beginning of a crucial new round in the fight between AT&T and its long-distance competitors. Judge Greene's decision calls for an upgrading of local switching centers between Septembr 1984 and September 1986 in order to give the competitors the same high-quality connection to local phone companies that ATCT nod receives. This would eliminate the main inconveniences the rivals' chtomers now face, such as the need to push 12 additional numbers to make longdistance calls. With increased competition, the long-distance busineas should boom, growing from about $45 billion to $100 billion by 1990, says Stephen Chrust, a financial analyst with Sanford C. Bernstein. If the competition is strong, consumers could benefit from sharply lower long-distance charges, which could fall by 40 percent or more by 1990, says Robert LaBlanc, a telecommunications consultant. But a vital and unknown factor will be the difference between the long-distance r a m charged by AT&?' and its competitors. The discounts now offered by the other long-distance carriers are their weapon against AT&T. But earlier this year, the FCC jolted the long-distance industry with a decision that sharply raised the rates A T W s cornpetitors would have to pay local telephone companies for access to local networks. The FCC's access charge plan, designed to increaee the revenues of local phone companies, would impose a charge of $2 a month next year on residential bills, climbing to $6 by 1988. Businessefi would pay $6 month per phone line. A t the same time, the plan, as currently designed, wo111d sharply raise the rates GTE, MCI,International Telephone & Telegraph Co.'s USTS, Satellite Businms ahatems and other lung-dihtance companies pay the local telephone companies for access to their customers. And that, they say, could put them out of busines~. For thev will be forced to raise their rates to customers, eliminating most of the discounts that enable them to set their prices far below AT&T's. "If the access charges go into effect, then we will not expanding in the business," savs Il'T's Robert Braverman.'They will make the business unprofitable." GTE's "Sprint will try to find other wavs to use our network" says company chairman and chief' executive officer Theodore F. Brophy. MCI's Chairnian -William G. McGowan adds. 'no one will be coming in. It will be AT&T, ourselves and Sprint." 'The ultimate result will be a return to a monopolization of the [long-distance] industry by AT&T, making the coming [divestiture] of AT&T a totally futile and senseless action," the competitors say jointly in a letter to the FCC. Charles L. Brown, AT&T's chairman, says Bell's rivals "have abays complained that they're starving at the same time their business is growing 50 percent to 100 percent a year." However, most Washington telecommunications attorneys and Kew York financial analysts do not believe that these firms are making idle threats this time around. They are convinced that the FCC .will revise its earlier decision and lower the rates these carriers must pay; for failure to do so could wipe out competition-just the opposite of what the FCC had in mind. If the FCC doesn't compromise, it is possible that Congress would force it to. No matter what happens with access charges in the short run, a n a l ~ t sand industry officials are convinced that in the long run AT&T will have to let its 90 percent share of the long-distance market drop to a t least 76 percent-*~ else the company probably will be dragged back in court and charged with violating the antitrust laws by trying to keep its competitors out of the profitable market. Morris Tannenbaum, chairman-designate of AT&T's commwications subsidiary that oversees long-distance Crvice, doesn't dispute that theory, saying it could be in the company's political interests to see its market share fall. For the next few years, Tannenbaum predicts, the competitors will continue to grow very rapidly, with a 60 to 70 percent increase in revenues each year, while AT&T's revenues will grow around 5 percent a year. "Our share of the market will decline," says Brown. In the long run, industry experts all predict that there will be, a t most, no more than a handful of long-distance companies transmitting voiw traffic. 'The market can support four to six long-haul carriers," says LaBlanc, the telecommunications oonsultant. "Unless you can put in your own facilities, you won't be able to exist," he says. The most likely winners in the long-distance game 'are AT&T, MCI, and GTEJSprint, most analysts say. "I'M', SBS and Western Union don't add u p t o a hill of beans in relation to MCI and GTEJSprint," says financial analyst C h t . Chrust is particularly bullish about MC1, which plans fo expand its network to evdry single local calling area by 1986, the only other long-distance company besides AT&T planning to offer nationwide sentice. T h e ambitions of mme of MCI's competitors are not as grand. I T T s Braverman does not plan to follow MCI's 8trategy. "MCI is after the large residential market. We are focusing on the medium-to-large-size business user," ~ h will o provide more revenues per customer. Lscal Service On Jan. 1, AT&T's 22 local operating companies will be spun off from the parent and regrouped into seven new holding companies. And each of these new entities, now freed from the Bell System, no longer 'is content to be just a local telephone company. Untied from Ma Bell's apron strings, these regional companies are eager to test them independence in a host ot new ventures, from business telephone equipment to such diverse businesses as managing real estate, repairing home computers and setting up cable televison networks. They are aiming not just at them own regions, but a t passible ventures all over the country. After being a traditional telephone company for niore than 100 years, the local tirms might appear to be taking a big risk to suddenly branch out into new areas. acknowledges Sam Ginn, vice president of Pacific Telesis, the holding company that will serve California. But, he adds, "we finally decided it was the most risky option" to remain only a telephone company, because that is where the revenues are the most vulnerable. What concerns Ginn and other local telephone officials is the growing inclination, particularly by large corporations, to utilize other technologies, such as microwave, satellites or cable television wire& to bypass the local telephone system and reduce their local phone bills. That could cause local telephone company revenues to drop significantly. Thomas Gibbons, president of Chesapeake (Ir Potomac Telephone Ccs., says 2 percent of its business customers-the largest companies-generate 50 percent of business telephone revenues. "Bypass is happening," and it hurts, s a p Gibbons. PRE-DIVESTITURE ORGANIZATION ASSETS $1 52 BILLION LABORATORIES NyNEx @ Bell Atlantic BELLSOUTH POST-DIVESTITURE ORGANIZATION (JANUARY 1, 1984) ASSETS (ESTIMATED) $34 BllUON A recent s11rvt.y t)y the firm of Touche Ross L Co. showed that in many states over half the companies questioned sait! they pianned nt some point to bypass the telephone network. In Ohio, 63 percent of the respondents said they are using or are planning to use technologies other than the local telephone service to make and long-distance calls. About 45 percent of the California companies surveved say they are planning to bypass their local telephone companies, which could support Pacific Telesis' enthusiasm for diversification. PacTel wants to ring a. cahle television network around Palo Alto and Silicon Vallq. For Bell Atlantic, diversification could ultimately lead to data-processing and long-distance seivice as well as nationwide equipment sales-all in competition with its former parent, AT&T. The new regional companies "will try almost everything," predicts Allan h.1. Stewart, the vice president of marketing for CTE Corp. "In fact, they will try businesses that surprise us." But LaBlanc believes regional companies will have to abandon many of t,heir ambitious plans and stress improved services for their telephone customen, such as using telephone lines to read residential electric and gas meters remotely or by participating in marketing, i n s d lation and billing for direct broadcast satellite systems. Not very long ago, ti telephone was a simple device that the phone company brought to the house after you moved i n Now, 2,000 firms are involved in manufacturing. distributing or servicing a mushrooming ,variety of telecommunications products, making it one of the hottest areas of consumer electronics. According to AT&T's figures, tbe retail market tor new home phones has doubled each year since 1981. I t will probably p a s the $1billion mark this year and reach $1.8 billion next year. The business market, already a t $2.8 billion, is expected to grow to nearly $4 billion next year and to more than $10 b i i o n by 1990, according to a marketing study by Frost & Sullivan. This growing competition is expected to p~oduce"the most vicious price war ever seen in this country," predicts Edwin B. Spievack, president of the North American Telephone Association, the trade group that represents equipment manufacturers and distributors. And while that may spell good-news for consumers, Spievack fears that the price war could do tremendous damage to hib industry: "There is going to be a lot of money lost out there and a lot of wmpaniee aren't going to make it." As is the case with many other industries, equipment firms are chasing the affluent Slpeoale" wnsumers, offering a host of fancy gadgets such as automatic dialem call screening, conference d i n g and in-home intercoms. which up to now have not been widely available to the ordinary consumer. Publicly, at least, few U.S. phone manufacturers say they want any part of the cheap, "disposable" residential phones now being sold. peedxting a lot of comunwr dlssatisfaction w~ththc- quahty of that equipment. That opens the market even wider for foreign firms which have been flooding the United States with import&. For the first nine months of this year, imports of telephone instrumenb climbed to 18.5 million, nearly nine times the total in 1982. The bulk of these phones were from the Far East, geared towards the residential market, according to the international market research firm of Stoll Gasman Inc. While a few companies, including new entrant General Electric Co., are counting on a big payoff from the consumer market, most others are aiming at husiness equipment, moving towards sophisticated products that tie telephones'into computers, word processors and other office-of-the-future equipment. ATBLT is clearly gearing up its equipment towards that direction. "We expect ATCT to nuke e major entry into the data processingloftice automat!on markets, with a product line ranging from teleterminals to personal computers to minicomputers," predicts Probe Research Inc. in its new report, T h e Future of the New AT&T." Analysts expect AT&T will make a major entry into the data-processing market with the unveiling of a desktop personal computer early next year. Among AT&T's strengths, Probe Research says. are its semiconductor manufacturing capabilities. It is producing a state-of-the-art computer memory chip that can store more than 256.000 bits of information-four times the capacity of current chips. Yet, Probe notes, AT&T will first have to overcome some serious corporate weaknesses, including flabby marketing and an inflexible organizational structure that is not known for prompt decision-making. Dick Moley, vice president of marketing for an AT&T competitor, Rolm Corp., says, "We're not terrified by them . . . I think we've d l been underwhelmed." AT&T will hold on to Western Electric, its manufacturing arm, but Western will lose its best and biggest customers when the local operating companies are spun off. Formerly Western's captive customers, these companies will be turning to AT&T's competitors to buy everything from simple telephones to sophisticated electronic gear to rpn their networks. Largely because of that,financial analyst Bradford L. Peery of Sutro & Co, expects that Western will reach only half of its normal rate of profitability, or $430 million, next year. That makes divestiture "an excellant opportunity for ITT: my John W. Guilfoyle, president if I'lT Telecommunications Corp. It is eimilarly a.boon for CTE, TIE, Com-Dial and Northern Telecom, AT&T's major equipment rivals, who are likely to be joined by new companies that will jump a t the opportunity created by divestiture, says Spievack. Another big winner will be International Business Machines Corp, Many industry officials expect a bloody battle between IBM and AT&T, as each tries to enter the other's market, and AT&T's chairman Brown seems to be holding out an olive branch. "We aren't a t the heart of each other's business, and I don't predict the demise of either of us because of a competitive environment," he said in a recent interview. There's plenty of business here for both of us." The Rew ATLT And whet of AT&T? Will divestiture cripple what many regard as a keystone of America's industrial foundation? Its size will be drastically reduced Jan. 1. Its $152 billion in aeRets before divestiture-10 times the value of all taxable commercial property in the District of Columbia-will be valued at $34 billion after the breakup. But ATCT will still be the nation's fourth largest company, behind Exxon Corp., General Motors Corp. and Mobil Oil Corp. AT&T will lose one of its chief assets come Jan. 1 when it surrenders control of local telephone companies: its direct link to 70 million households. Even so, Western Electric will still give it the largest manufacturing capacity in the telecommunications industry. AT&T also will retain Bell Laboratories with its $2 billion annual research budget. Most significantly, AT&T will continue to dominate the long-d~stancebusiness, which will provide nearly twothirds of its revenues and account for the bulk of the $2.1 billion in profits AT&T expects to record next ye&. This deep current of cash will help fmance AT&T's entry into data processing and other unregulated, non. telephone activities-ventures it has u p to .now been barred from entering under an earlier government agree. ment That agreement is lifted with divestiture. "They have the critical mass to hang in there," says M l a n c . Profits from long distance alone "widfeed them until Western Electric finds out how to [c~mpete]." Addltlonally, in an effort to recoup some of its lost revenues, AT&T is making a big push to enter the intemational telecommunications market. 'Our intention is to be a global market leader," Brown said in a recent speech. It will not be easy for the 107-year-dd utility to change its spots and become a competitive high-techndogy telecommunications company. "We're not naive enough to say that this business is going to be a piece of cake," admits James Adams, a vice president of the Western Elepic's Consumer Products division. Being smaller may have important benefltli, however. "For AT&T, being too big meant that all of its elements had to sign on to individual strategies [and] programs, a process that killed many projects of reasonable merit," notes Ivan L. Wolff at Donaldson, Luflrin 8; Jenrette. Even so, adjusting to its new size and the new competitive, unregulated arena will requirea difficult adjustment. "In the short term, they've got some problems," eays John Bain, a first vice president and telecommunications analyst at Lehman Brothers Kuhn Loeb Inc. 'For the past 70 years, they sat down and decided what would be offered to the.public. Now they are at the point where . . . the customers and aot the company are making the decisions." Yet, Bain adds, few companies have such dramattc technological advantages in the new telecommunications world. "They will be big. they will be.good and they will be making money. But they will never be a 100 percent monopoly supplier of anything again." Having foyht long and vigorously against divestityre, ATCT officials say they eagerly await the new era of competition. "It wasn't our idea," says Brwm. "But we're going tu do the k t we can to make it work." Next: The telephone of the future. BREAKUP: On Jan. 1, American Tele&one and Telegraph Co. gives up i t s former local phone companies bul keeps its long-distance network and o h r businesses. notwork? ATBT's rivals wont to continn poying a lot bss that ATBT to maintain cheaper prices. BYPASS: Local phone companies ore thntoraned by ,bypass. Lor* businesses can create communica(ions seems to sund calls and dato rather than going thrwgh the hcal ACCESS: Satellite an$ microwove technology enables phone company: In this example Plant A transmits directly ATBT's rivals to cut into ATBT's long-distance business offering cheaper ~ r v i c eA . key iswe after Jon. 1: How to Plant B. The two plonts also could communicate through a bng-distance service without going through the local much will ATBT and its rivals have to poy local phone companies for transmining long-distance colls over the local mhvork. Technology Changing How We Communicate By Michael Schrage Wnahln&m Pos(B1.ll Wrllcr Roughly 2 billion times every day, people all over the world pick up a telephone a t home or at work and give someone a call. Randomly sample thoee calls and chances are you'll hear, in a diversity of languages, the bits and pieces of people's lives. In the telephone network of the future, the few human operators left won't hear many voicea on the line. Conversation will be transformed by computers into bits of numbers that puke through wirea and off satellites, squeezed in with music, pictures and virtually any other form of information and intelligence you can imagine. The a a telephone network is becoming the highway of the information age. And in the process, the way people communicate, seek information and obtain intelligence CONCLUSION will be radically altered. "An old-time operator patching into a line would hear voices," says Robert Lucky, executive director of communications sciences renearch at American Telephone & Telegraph The Washington Post Company. Co!s Bell Laba "Now, there's data and music and graphica There's more of real life flowing by in more and more quantities. There's more of the essence of lifew The shape of the future ie evident in the Bell System network of today, which already has to transmit much more than voice conversations. Phone lines today cany highquality television pictures and the electrical impulses necessa to make remote electrocardiogram heart d&. oeis poesible. High fidelity music, text, animatlon. eenaory data, light, color, remote control almmads, information from computerized i ata bases, communications between personal o m puters, video games, mmic videae, the n m , See BELL,A14 Col. I Reproduced by the Library of Congress, Congressional Research Service with permission of copyright claimant. BELL, From A1 facsimile copies of documents, numbers, instructions and money all circulate through the network as disembodied bits of information. "Today, you think of the network as something fnr reaching out and touchmg someone verbally," says Lucky. "I'd like to think it's becoming something that puts you in touch with a larger intelligence. Whether human intelligence-singly or in ,goups--or computer intelligence. What we're talking about here is accessing intelligence." This technology revolution was a vital source of pressure leading up to the court-ordered breakup of the Bell System on Jan. 1. The breakup, which permits Bell's former telephone companies to buy from any equipment supplier they choose and encourages consumers to do the same, is certain to lead to even faster technological change. The telephone itself will soon be something far more powerful and expressive than it now is, as today's dividing line between computers and telephones disappears and the two instruments become one. The bumper crop of "smartn telephones that fill the counters of phone stores and the pages of mail order catalogues are a crude forerunner of what lies ahead. T h e feature content of the telephone will dramatically expand," says Allan M. Stewart, a vice president of GTE Corp. Before 1990, phones with memory to stare telephone numbers and dial them automatically; portable phones; home phones with features now reserved for businesses, such as intercom and conference calling, will cost no more than the basic telephone today, says Stewart. Smart Phones Act Like Computers Bit by bit, the telephones of today are becoming digital dinosaurs. Just as the Touch-Tone surpassed the rotary dial phone, new technology will make the Touch-Tone beeps obsolete. "Soon, you won't be dialing anything: asserts Sol Buchsbaum, an executive vice president of Bell Labs. 'Youll be talking to your terminal and telling it what to do. That'll be no problem in 10 years." Buchsbaum says he 'will be disappointed if we don't have a phone with a voice-recognition chip in it within five years." No doubt, future phones will have a speech synthesis chip to go along with the recognition chip so that they can actually tell if you're asking for a m n g number. Perhapa it will speak in a voice or accent you fmd pleasant. The point is that it will be a home appliance that transforms people's expectations of what technology can do for them. The telephone of the future will also be a computer. I t will be as programmable as any state-of-the-art personal computer. In fact, if you're phone isn't also a peraond computer, the chances are your personal computer will also be a phone. "We will make telephones more intelligent" says Lucky. T h e phone is going to look like everything you can possibly imagine. But maybe we're stuck on the word 'telephone' because that's not what it will be when we're through with it. Maybe we need another word, like 'teleterminal.' " By the turn of the century." asserts one Stanford Gniversity computer scientist, "there will be telephones that are smarter than the people using them." That's a technocratic vision of the future, but it reveals just how strongly some people believe that the technology of communications will help reshape thc world. "If you recognize what's going on," says Michael Tyler, chairman of CSP International, an international telecommunications consulting firm, "you'll know that we are in the information age." By 1992, according to one IBM estimate, the global demand for information technology products and services will exceed $1.4 trillion, making it the fastest growing industry in the world. The core of that global growth will be telecommunications. Wire, cable, satellite and virtually every band of the frequency spectrum will be exploited to carry the data of the information age. Telecommunications is the leading area of infrastructure in the world today," says Tyler of CSP. "Telecommunicaticns technology is as fundamental to the information age as the automobile and the highway system have been to us wer the past fifty years." Two mutually reinforcing trends are driving this redefinition of information and the networks that carry it, according to IBM's Stephan H. Haeckel, director of Advanced Market Development for IBM. T h e first trend," he says, is 'the rapidly falling cost of technology." The introduction of the microprocessor a decade ago and the phenomenal costefficiencies of mass produced silicon chips has made computer intelligence cheaper than ever before. m e r e will be more microprocessors made than McDonald's sells hamburgers in 1986," said Bell Labs scientist Arno Penzias, who won a Nobel for physics in 1978. Computer intelligence isn't the only thing getting cheaper. The cost of transmission also is declining becaw of technological breakthroughs in satellite and microwave communications, as well as in optical fibers, which carry information in the form of laser-light impulses. These new technologies allow people to create their own private telecommunications networks that can alternately bypass or complement the mammoth national telecommunications network of AT&T. As the 'threshold of affordabilitywdeclines, says Haeckel, new uses for the technologiesare more easily juatifd. The second trend is subtler but equally important. It is the rate at which all the disparate forms of information-text, image and data-are becoming "digitized," aays HaeckeL That is, all these different kinds of information can be broken into the binary number combinations of ones and zeros that computers are particularly adept at processing. Even the human voice can be split into little digitized packets representing sound and piped down wires or bounced off a satellite in the same way that ordinary data are. This shift in the information flowing through telephones and computers and television screens is doing something critical: it is changing consumers' expectations of what information is and what information technology do. "One of the big questions about divestiture is how it will affect the average American who is not technically inclined," says Bell Labs' Buchsbaum. "How is the technology going to bring synergism to the separate technologies in the home?" The blend of low-cost and digital communications means that formerly incompatible technologies can now talk with one another. It means that your teleterminal could soon become the communications hub of the house-interconnecting appliances, thermostat and all the computers in the home into a little network of its own. Ybu should be able to call up your home and tell your teleterminal to start defrosting the refrigerator. It means your teleterminal, in its phone guise, should be able to store phone numbers, make calls and serve as a VOICE t "INTELLIGENT SWITCH" PICTURE 4 FUTURE PHONE NETWORK The telephone network of the future: With the spread of home computers and computerized telephones in the mxt few years, the k l e p h m network will corry not only voices, but pictures, data, financial information and every other concei~bleform of information. "lnt&qen? phone switches" using computer kchnology permit 41s -= I PICTURE conversion of sounds and pictures into coded numbers that con be unscrambled at the other end of the line and recreokd in h e same or different forms. Thus a person could "speak" to o home computer over a kiephone connection, krstrueting it to turn on the lights or control home appliances. ByoPU MeCrory-The WPsNngonPost computerized "switch" that lets you transfer calls to other lines. It can serve as an electronic mailbox that sends text messages to other teieterminals on the network. You. may have access to "bank at home" service and see "shop at home" catalogues on the teletermind ween and place your order electronically to the company's computer. Computer data banks will proliferate to the point where your teleterminal can retrieve useful nuggets of information-such as stock quotes or the betting line on Sunday's game--or actual computer programs that you would 'offloadn into the memory of your teleterminal for later use. You or your children might choose to play video games against other people or other machines on the net. work, not always knowing with whom or with what you are playing. The teleterminal may also come in portable form. It may fit into a pocket or travel along in a car and use cellular radio technology to link to voice and data networks. The market will take the teleterminal to whatever shapes and sizes and functions that sell. Fundamentally, though, it means that you can communicate with people in ways other than just the sound of your voice. All manner of information-from pictures tr, text to voice to perhaps even tactile sensations-all can be captured by digital transmission. You can "touch a pool of people in different ways," says Bell's Lucky. "You can do the equivalent of writing graffiti or sending junk mail or just browsing through all the messages on the system. It's something new." Technology vs. Regulation Successful new technologies always affect society. The difficulty with the technology of the information age is that it has constantly warred with public policy. Technical innovations were hamstrung by the regulatory structure and AT&T's monopolistic structure. Many experts argue that it was the advance of technology, much more than free market ideology, that thrust the Bell System into the regulatory and legal whirlpools that ultimately shattered it. The irony, perhap, is that Bell's technical brilliance may have sown the seeds of its own deetruction. For example, in the 19509, Bell Labs created the semiconductor technology that made silicon chip computen both paesible and practical. Increasingly, the phone lines were used to permit computers to exchange data Bell began offering special services to its computer usen and gradually sought to enter the computer business itself. In the 19609, the mix of communicating computers and computing communications equipment had backed the Federal Communications Commission into a nasty problem of semantics. Technology had made a M6bius strip of communications and computations-one ran into the other and back again. Drawing a clean regulatory line L -. .~....., ... ,, ,,n the two had become virtually impossible. For example, create a phone that has a built-in pocket calculator, a useful device when talking with accountants, bankers and bill-collectors. You could keep tabs on the numbers as they came up in conversation. Suppose your calculator could pipe its calculations down the phone lines and into the calculator of the person you're chatting with. That calculator, in turn, runs your numbers through a little program and then sends the new-and-improved numbers back. You fiddle with them until you're satisfied, check them by voice, make small talk and hang up. Is that pocket-calculator-phone a telephone, a computer terminal or a computer? If it's all three, when is it which device? Could it follow from this that the FCC should regulate the calculator-and, by extension, the computer industry? In 1970, the FCC thought that might be the case and launched what it ealled a 'computer inquirywto find out. The flip side of that question proved equally troublesome. If the technologies of communications and computations were converging, why shouldn't Bell offer computer peripherals and data processing services in the marketplace? Bell might have cheerfully gone into those new businesses, but a 1956 Justice Department antitrust consent decree prohibited it from offering any unregulated products and services. That meant that if Bell wanted to sell computers, those sales would have to be regulated by the FCC. But if Bell's computers could be regulated, why shouldn't IBM's? To further confuse the situation, new technologies prompted challenges to Bell's traditional monopoly preserve. Satellites and microwave distribution-technologies not imagined by the framers of the 1934 Communications Actshifted the economics of long-distance communications away from the monopolist structure and to the entrepreneur. Moreover, other companies wanted to link their communications products to Bell. The phone company responded the way an organism's imrnunolcgical system responds to unwanted bacterii-with rejection. In 1968, the Carterfone company sued Bell for the right to attach its product to the network. Bell argued that it was responsible for protecting the network's performance and that it alone could determine what "foreign attachments," if any, could be hooked into the lines. Bell's position was ultimately rejected by both the federal courts and the FCC, and the rulings helped accelerate the network's shift from simply carrying voice to carrying an array of information. Thoee battles underscored the belief held by many in the technology industries that Bell was trapped into being a telephone utility rather than an information utility, and innovation suffered as a result. 'One hundred years after the invention of electricity, there was a vibrant and diverse appliances industry in thii country," says Robert E. LaBlanc, a telecommunications consultant and former vice chaiman of Continental Telecom Inc. 'One hundred years after the invention of the telephone, only 50 percent of the households in the Bell System have more than one phone. "If a monopoly like Bell had run the appliance industry, you'd now have something like a couple of lightbulbs in your house, each with a thick cast-iron chandelier thet will never, ever break and with a filament that would never burn out. With the arrival of affordable "smart" phones, "we're going to see a very vibrant market in customer premises equipment after divestiture," said Ldlanc. "I look at divestiture as a good thing for us,* sag Bell Labs's Buchsbaum. "For the very first time, our scientists and engineers are truly free to follow our technologies where they may lead us. It opens vistas we never had before." "It means a whole new series of opportunities for the entrepreneur," says William von Meister, a co-founder of The Source, a personal computer network now owned by Reader's Digest that makes financial information, news, games and other services available for its customem. Von Meister also is chairman of Control Video Corp., a tiny, year-old company that wants to distribute video games and computer software over phone lines and into home computers. "I'm very excited by [divestiture]. The personal computer software market may be $32 billion by 1992-and half of that might be capturable by our kind of 'down-line' distribution." That kind of opportunity, says von Meister, imply might not be there if entrepreneurs or even larger, wellestablished companies, had to deal with an AT&T monopoly extending from longdistance aervice to local t&phone equipment. Cracking that monopoly may be the incentive mcesrsry to produce a cornucopia of technological products and services for the information age. Yet that means it will be the market and consumer demand, not public service,that nil1 be the foundation of the information age. It means the bi gest and most intensive users of telecommunications mvices will reap the lion's share of benefits. That represents a fundamental shift in public pdicy, away from the historic goal of promoting %iversal wa d to basic telecommunicationss e r v i s Will Society Be Divided? Because of this new emphasis on economics rather than service, telecommunications quality could vary from region to region. Some operating companies may prove more adept at introducing the new technologies and services than others. With the industry now driven by the profit motive, many observers believe that there will be a society split between the 'information rich" and the "information poor," with the line between the two drawn by price. "There's no question that there will be a differential between people," says John Legates, managing director of H w a r d University's Program on Informhtion Resources Policy. "What isn't clear to us is whether being information rich or information poor is any more significant than any of the other discriminants." However, others believe that the difference will be as significant as those who are or are not functionally literate in society. If information is the stuff of the information age, they say, then the people and companies who can't afford easy access are at a competitive disadvantage that may prove insurmountable. The problem assumes global proportions. In T h e Ceopolitics of Information," media observer Anthony Smith points out that the Third World countries lag far behind the industrialized world in both teiecommunications and computers. Indeed, most Third World countries do not even have an adequate telecommunications infrastructure and are thus unable to take advantage of the benefits a more advanced communications system can provide. As the rest of the industrialized world comes to rely on information technology for improved eficienciea, says Smith, the gap between the rich and poor nations widens. 'Technology advances are by nature international." says Harvard's Legates. "Everyone will be subject to the same market demands. It's simply a matter of time." Technology has forced a massive reevaluation of laws and policies governing telecommunications not just in the United Stab but in virtually every industrialized country. West Germany, England, France and Japan all are in the throes of creating new structures for theu telecommunications industries. T h e underlying phenomena are global phenomenanew technologies," says Legates,"and what we're seeing are dierent national approaches to it. In this country, it was divestiture." Clearly, though, there is no stopping technology. Regulation or no, imwation continues. "Nobody in college told me that my real world would change exponentially every few years," says Bell Lah' Lucky. "You never really learn to live with it-it would be nice to take a break. 'You know,when I came to Bell in 1961, we had a different vision of the future. We were working on the Picturephone and that kind of Buck Rogers stuff. Instead of the world of pictures, we're going to get the information age." Economy & Business COVER STORY Click! Ma Is Ringing Off The breakup ofgiant A T & Tsets the stagefor a telecommunications upheaval ime is running out for the largest company on earth. Ending too is a long era of inexpensive phone service that Americans have taken for granted. But just on the horizon, heralding its arrival with the attention-getting power of a jillion jangling telephones, is a revolution in telecommunications. Propelled by both marketing and technology, the coming changes will rank second in importance only to the establishment of the US. telephone system itself,acknowledged as the world's best. It all starts happening on New Year's Day, just six weeks from now. Under the banner of promoting competition in the US. phone service, American Telephone & Telegraph, the Bcll System, will die at ngc 107, shattered in the largest courtmandated breakup of a company since the rph-up of Standard Oil in 1911. In place of the old Ma Bcll will stand the "new" A T & T and seven regional telephone holding companies, all beginning life as giants and w i n g such unfamiliar names as Nynex, Ameritech, US West and Pacific Telesis. The eight new companies will immediately join the ranks of the 50 largest US.corporations in terms of assets. T The breakup will affect all of America's millions of phone users in ways large and small. I.nsGad of receiving a s i d e monthly bill for phone service, for example, consumersmay now get three or more: one for local service, another fkom one of A T & T's proliferating competitors for long-distance tolls, and one from A T & T Information Systems for the lease of the telephone. Many people %ho previously rented their phones, though, may now buy them outright. Next week A T & T will launch the biggest private direct-mail o p eration in history. It will send brochures to 70 million customers telling them that under divestiture it wiU be taking over ownm h i p of their telephone equipment. Consumm currently renting phones will be given options to buy them, continue leasing them, or purchase new equipment fium A T & T or b m non-Bell suppliers like Uniden or GTE. For the moment the clearest thing about the breakup of A T & T is the confurim. As recently as last week, it was unclear, for instance, whether local phone combenies had the rkht to offer hone scr6ces like weather and time of day after Jan. 1.The &tic ~hvsicaltask of d i w - Bell System's assets among the new 1 downthetfium whole telephone exchanees o trucks, repair &quipmerit, paper ing parts, I clips and bmms, is still going on. Though phone bervice has not been hampered, companies trying to do business with Bell report that they sometimes have trouble finding out who is in charge of an o5ce or division. Much of the American public seems bewildered about the breakup. Polls show that only one in five people knows what is about to happen to their phone system. Says Cecil Woods, 33, a Chicago maintenance worker. "I think it's supposed to bea good thing for everybody, but I don't quite understand how. I just hope something good comes of it, and I think it will." Even among those who are aware that something big is on the way, there is gnawing concern that telephone service will d e r . Says Yale Professor Stephen Ross, an expert on telecommunications: "We may be trading in a Cadillac for a Ford." Frets Senator Bany Goldwater, normally a fan of freer markets and less government rermlation: "We're going 6 be sorry thatwe tampered with a system that was functioninn well. I wish TIME. NOVEMBER 21.1983 this divestiture had never happened." looked at A T & T as a monopoly, but I Consumers seem apprehensi-d BUCSS that's what it is." Worries Dorothea concerned.Colleen Todd, 32, a writer for a White, 86, a widow living alone in Los AnTulsa ad agency, says, "Ideally, I think ples: "I think it'll make my phone bills go breaking up the monopoly was the thing to up. I don't really see why they had to break do. But realistically,I'm not sure it was the it up. It was a good system, and it seemed thing to do. I don't think it's necessarily a to be working." bargain for the consumer." Says Wilbur E. Those concerns about higher phone McCoy, 42, a machinist from Akron: bills have been heard by vote-sensitive "From what I hear, it's going to cost me Washington politicians, who are rushing more money for them to break up a mo- in with legislation to keep prices down. nopoly. To tell you the truth, I never Last week, despite heavy opposition from A T & T's lobbyists and the Reagan AdT h . c a r p r n y r s r y m b o l o f ~ m d q n d ministration, the House passed decisively a proposal to ban a surcharge on local phone b i i that was to be part of an overall restructuring of phone prices. To Wall Stretters and communications-industry executives, the breakup presents countless questions and, particularly for stockbrokers, the opportunity to make a great deal of mopey. Wi the new parts of A T & T be equal to the whole? How well will the new companies adjust to the world of competition afier decades of guaranteed prices and government regulation? Will the corporate culture of the old Bell System, with its emphasis on service, be lost or weakened? A T & T and its seven new sisters will begin answering some of the questions this week, when they file stock-registration statements with the Securities and Exchange Commission, along with volumes of 6nancial projections as big as Manhat. tan hone books. What investors think of the new companies' prospects will start becorninn clear later this month, when something Cke 655 million shares ofseven holding companies begin showing up on the New York Stock Exchange. They will bc offered on a "when issued" basis, meaning they will be traded as ifthey already exist. ed, even though the stock certificates will not be delivered until mid-February. A total of 3.2 million individuals and organizations own shares in A T & T, the uaradinmatic "widows and orphans" inkestm&t, making it the most \;id& held security in the world. People now holding A T & T stock will keep those shares, which will automatically be equity in the new A T & T. And for every ten of those shares, they will receive one share in each of the seven regional companies. Investors with fewer than ten shares will receive cash for their partialholding. ust printing the new stock certificates cost $2 million. Distributing them and dealing with other transfer details of the new issue require an A T & T staffof 1.400. housed in a thrastory building in Jackkvillc. Individual investorswithten to 499 shareswill be able to swap stock ownership among the seven new regional companies through A T & T at a cost of 2Se per share until mid-April. But there will also be plenty of trading on Wall Street. The New York Stock Exchange is adding a computer to the three it already usesjust to keep up with an anticipated 15 million-share-a-day increase in trading volume. What should an A T & T investor'do? Buy, sell or hold? Experienced Wall Streeters advise: do nothing immediately, just wait for the chaos to subside. Once it does, investors could begin trading out of one holding company and into another or concentrate their investment in the new A T & T. Memll Lynch. Dean Witter and several other brokerages have set up mutual or t w t funds made up of stocks from all the new companies. The acwuiits, called Humpty Dumptys, in effect put A T & T J back together again for an investor. The American phone network and the A T & T divestiture are collections of superlatives. Aner all, the Bell System has spread telephones just about everywhere imaginable in America, from the bottom of the Grand Canyon to the 106th floor of New York City's World Trade Center. Americans make more than 800 million phone calls a day and have twice as many telephones (183 million) as home toilets (87 W o n ) . The breakup of A T & T has so many possible ramifications that few people even pretend to understand it thoroughly. Wall Street firms have held dozens of investor seminars on the divestiture, all run by veteran staffers bristling with law degrees and M.B.A.s. But at one session last month, "I don't know" was a tellingly frequent response from,amongothers,panelist Alfred Kahn, chairman of the Civil Aeronautics Board under Jimmy Cam. An expert on the telephone industry, Kahn presided over the deregulation of US. airlines in the late 1970sand is now a professor of political economy at Cornell. Says Ulric We& telecommunicationsanalyst for investment bank Morgan Stanley: "No honest observer can claim to know where this is all going." Agrees Peter J. Jadrosich, a vice president of Paine Web ber Jackson & Cunis: "We believe historical performance may be nearly imlevant to predicting future success." History, in the case of the Bell System. goes back more than a century, to March 10, 1876. That was the day Alexander Graham &U, 29, sent his booming voice over a wire to an assistant: "Mr. Watson-come here-I want to set you.'' Bell's patent, which was actually filed before he built a working telephone, made sounded the theme that pnvailed until the current divestiture: "One system, one poky, uniWI3d SCMCC." Monopoly, to Vail, meant that A T & T would have US.telephone service moatly to itself, in exchange for s u b mitting its rates to federal and state regulatory authorities for approval. Non-Bell phone companies, which handled about half the phones in the that time, did not like that idea. Neither did the Federal Government. It questioned Bell at every turn. As far back as 1913, when European phone systems were being nationalized, the Postmaster General adv* cated Government ownership of the phone system. But a privately controlled monopoly seemed to be the most e5cient way to run a national phone system, and n 1907, after a 20-year absence, bank- Vail's concept won out. A T & T's quasi-monopoly, however, e n summoned Vail back to save A T & T from financial ruin. The was always an uncomfortable arran8ecompany was a me#. The original ment. The company wanted to get into reBell patents had expired. Populists were lated fields like computers when they beattacking the firm over rates,and farmers gan developing; other finns were eager to were ornanitjnrr their own telephone com- enter the phone businas; and the Governpanies. The system was becoming techni- ment was wonitd by the size and power of cally obsolete; independents offered dial the telephone giant. In a far-reaching dephones before Bell. Within a decade, Vail cision, the FCC in 1968 allowed a Texas had transformed A T & T into a cornrnu- finn to sell a device called a Cartdone, nications power. By the time he died in which connected mobile radios to A T & T 1920, he had set the foundation for vigor- lines. It was the k t time any non-Bell ous growth. Indeed, A T & T by 1929 was product had ever won the right to be wired the h t corporation to generate annual into the Bell System and was the first electronic breach in the monopoly. revenues of more than $1 billion. One by one, other ban to competition In a series of famous essays, Vail put forth the idea that fatter profits are not began to fall. By the end of h e 1960s certhe be-all and end-alt of a corporation. tain forms of long4istance telcwmmuniService counts more, he wrote, and the cations other than Bell's were approved &I1 System could deliver it best by being by the FCC. Still, Bell supplied 79.5% of a regulated monowly that struck a bal- US. telephone s e ~ c e .That was too ance between public and private interests. much, said antitrust enthusiasts. On Nov. In a 1908 advertising campaign, Vail 20, 1974, the Justice Department filed a possible the constnrtion of the American phone network. It was Theodore N. Vail, though,who invented the Bell System. Brilliant, sweeping, subtle, an organking genius with uncanny foresight, Vail was boss from 1878 to 1887, during which time he put together all the pieces of the modern goliath. He built up an engineering department to develop new phone tcchnoloey, and a manufacturing department to build telephone equipment. All the while he systematically sought to exclude nonBell phone companies from network. But Vail felt thwarted by Boston financiers more interested in fast profits than his far-reaching ideas, and so he quit at 42 and went into retirement. TIME. NOVEMBER suit to break off Western Electric, the telephone company's manufacturing division,fnnn the rest of A T & T. The Justice Department's suit dragged on endlessly in court like the Jamdyce and Jamdyce case in Dickens' Bleak House. The first judge in the case died and was replaced in 1978 by Judge Harold Greene, a refugee from Nazi Germany who had helped draw up the Civil Rights Act of 1964 while working in the Justice Department. Greene conducted more than 18 months of hearings, pretrial discovery and major filiags by the parties. Not until January 1981 did the trial begin. By then, the feeling was growins among officials of both A T & T and the Govemment that the time had come tc settle the case. A T & T wanted to catch up with the communications revolution that was increasingly blurring the lined between computers and telephones, but il was unable to get into that business b cause of its status as a regulated m o n o p ly. Competitors were itching to get close1 to phone users, but A T & T's monopoly kept them from doing much more than chipping away at that market. The new Reagan Administration wanted to settle the longstandingcase. In a stunningmovc on Jan. 8, 1982, the Justice Departmenl and A T & T struck a deal to break up the Bell System. Grccne did not immediately' accepi their deal. Meticulously, he read 8,00( pages of comments and interviewed 60( witnesses. Among those who spoke out ir opposition to the breakup was Defensc Secretary Caspar Weinberger, who saic that dealing with an array of compania could threaten national defense and drivc up communicationscosts. Greene also re 1 viewed 25.000 mger of trial uanscripta TIME. NOVEMBER 21.1983 Many months passed, with Grcene r;9ising objections along the way, continually shaping and modifying the puts that were now to be independent. In A u m t 1983, Greene gave final approvsl to the divestitureagreement. STE,its nearest competitor. Moreover, it wiU be a powerhouse of money, research dent and manufacturing muscle. Bell Labs and Western Electric will remain prts of the new entity. To the average citizen, the most familiar gar%of the shrunken h n will hether the company was guilty be A T & T Communications. Essentially of antitrust-law violations has Bell's former Long Lines Division, it w i l l never been proved, although provide long-distance service as well as some suits by competitors the familiar WATs (Wide Area Telephone have yet to be resolved. Some Wall Service) lines and 800 Area Code calling. Stmeters think A T & T gave in too w i l y These will account for more than half and in fact could have struck some son of the new company's revenues, perhaps S35 compromise short of total breakup. But all biion. But more jazzy things are in store, as that is now academic. As A T & T Chairman Charles Brown says of divestiture: seen in some of A T & T's sci-fi television ads. Those stress the more nlamorous un"The ship has left the dock." The A T & T vessel that is lifting an- regulated activities of inforrhrion systems s tcleconferencchor has S 155 billion in assets. It is bigger for b u s i n ~ r v i c e like than GM, Mobil and Exxon combined. & and data processing. In those areas With nearly a million emgoyees, it is the A T & T now will be free to square off with IBM, Burroughs and Honeywell. second largest employer in Ameriw., At its Western Electric facilities, hind only the U.S.Government. Its asmua1 spending of S17 billion equals about 4% A T & T will make telephone equipmenl for sale to consumersand all kinds of exotof all US. capital investment. Its &U Laboratories, incubator of the transistor, ic electronic whizmos like powerful memthe laser and Direct Distance Dialing, h ory c h i p for computers. Through A T & 'I the world's foremost iildustrial research International, the company has ahead) organization. Western Electric makc struck a deal with N.V.Philips' Gloeilam. 80% of all the telephone equipment tlsed penfabrieken of The Netherlands tc in America, including most of A T & T's sell switching equipment throughout,thc world. Says Gerrit Jcclof, head of Philips 827 million miles of copper wire. After Jan. 1, each of the eight brob Telecommunications Division: "It was a dingnagian pieces of the old A T 8r T will natural marriage between two of the mos sell conventional regulated telephone desirable partners in the world." The nea ervjces but will also be free to venture subsidary will pit A T & T against GTE into certain nonregulated s~mrnunica. and PTT in the European market, which il abandoned in 1925 to concentrate on thc tions fields. The parts: ~ k Ymfl a A T & T. With a b u t $35 bil. U.S.telephone system. A T & T and Phil it will be far smaller thar ips could pry open an unusually tougi lion the old A T & T. Yet the firm wili still t.c market long closed to outside supplier: u b b as Mobil, and twlce as large a! because of dominance by stateomec -. W ~~~ I 1 Economy & Business post, telephone and telegraph services. Regional holding compmies. The 92 local Bell telephone operating companies will continue much as before, collecting revenues from Yellow Pages (around $3.6 billion at present). mailing bills to customers under the familiar names of Michigan Bell. New York Telephone, or whatever, and providing phone service in all states except Alaska and Hawaii, which have independent firms. But the 22 will be stitched together into huge new holding companies that are roughly equal in numbers of telephones and potential revenues. The holding companies, with small staffs at the top, will be free to tread where no phone company has ever gone, into almost any nonregulated business, except manufacturing te!ephones or certain kinds of information processing. Some have chosen to use the Bell name and logo, a privilege that Greene denied the parent A T & T, while others have attempted to get away from the dowdy image of the "telephone company." he new Bell companies: Nynex of New York City will cover New York and parts of six New England states; Bell Atlantic of Philadelphia will serve New Jersey, Pennsylvania, Delaware, Maryland, Virginia, West Virginia and the District of Columbia; BellSouth of Atlanta will have customers in Georgia, North Carolina, South Carolina, Florida, Alabama, Kentucky, Louisi- ana, Mississippi and Tennessee; Ameritech of Chicago will reach the heartland states of Indiana. Michigan, Illinois, Ohio and Wisconsin; Southwestern Bell of St. Louis will join Arkansas, Kansas, Texas, Missouri and Oklahoma; U S West of Denver will cover the largest geographical area, 14 states in the Midwest, Rocky Mountains and Northwest; and Pacific Telesis of San Francisco will oversee California and Nevada. Who got the choicest cuts in the carving up of the Bell System is a matter of intense debate among industry analysts. Some feel that A T & T waked off with what was really important in the network, leaving only one-third of the revenue-generating capability to the operating compa- bachelor's degree in electrical engineering at the University "Hi, I'm Charlie Br~wn" of Vuginia, Brown worked two summers as a n A T & T ditchdigger and cable layer, making $13 a week. ARer joinhe decision was the most dBcult Charles Lee Brown had ing the Navy during World War I1 and serving a s a radioT ever confronted durinaa 37-vear career with the tele~hone man in the Pacific Fleet, he became an equipment maintecompany. Yet on the nighithe A T & T chairman madcup his mind not to fight the JusticeDepartment's plan to break up the Bell System, he squelched all second thoughtsand slept soundly. "If1 worried aRera decision," hesays, "I'd be a basket case, and I don't do that." Armed with such self-assurance, Brown. 62, has for nearly two years calmly dealt with criticism, fears and confusion among customers, employees, shareholders and Congressmen while presiding over the most extensive reorganization in US. corporate history. Says Belton Johnson, a Texas ranch owner and a .director of A T & T: "Charlie Brown's done an amazing job. Nobody could have done it better." A graceful, gray-haired man with a n easygoing smile, Brown is as unpretentious as a telephone repairman, perhaps becauss he has ked a few phones in his time. "Hi, I'm Charlie Brown," he introduces himsev. Throughout all the congressional ,hbargaining sessions with the Government and marathon staff meetings surrounding the divestiture, he has kept a self-cffacone arduous 1 ing sense of humor. day, an employee accidentally trod on Brown's foot in an elevator at AT& T 5 Manhattan headquarters. "Oh, that's O.K.," Brown said. "Everybody's stepping on me nowadays." Brown admits that his deal with the Government was a retreat from A T & T's longtime resistance to a breakup. "Divestiture was not our idea," he says, "and we think it b wrong from the standpoint of the country's interests." But the alternative seemed bleaker: " T i e was not on our side. The Government's cleterminatioo to restructure the Bell Sy+ tem would have gone on for years, draining our energy and preventing us from planning our own future." Rather than cling to the past, Brown was eager to get on with the "exciting" task of bwlding the new A T & T. ,ven so,the breakup is almost like a divorce in the family for Brown. A nat~veof Richmond, he is a Bell brat. E3.k mother had been a Be11 operator before getting m a ~ i dand , hls father spezt 37 years w t h the company, eventually ming to distnct traEc manager in Richmond. WMc earning a nance man for A T & T in Hartford, Conn., in 1946. Showing more versatility than flash, Brown climbed up A T & T's corporate telephone poie step by step, going through 23jobs in nine cities. He became president of Illinois Bell Telephone in 1969 and earned a place in A T & T lore by making service calls during a repairmen's strike. After becoming chief financial officer of the parent company, he developed innovative ways to nduce A T & T's debt. As president, he began pushing A T & T forward rapidly in such a d v a n d fields as fiber optics and electronic voice recognition. In 1979 he became chairman, succeeding the colorful and quotable John deButts, who was a company spokesman in A T & T commercials. Brown's image has been bland by comparison. While respected for his intelligence and technical expertise, he has never been a great wm.&unicat-or. His speeches to groups of employee or Wall Street anaiysts-can have a narcotic effect. Asked to explain his formula for success, he admits that "it isn't my charisma." A T & T insiders say he hides his emotions and signals distress only by growing ominously silent. On balance, that stolid style has been a n asset. Says Rawleigh Warner Jr., chairman of Mobil and a n A T & T director."He's equitable, and he doesn't lose his cool. There arc no lugb or lows, just steadiness." Brown, who lives in Princeton, N J.,with his second wife, Ann Lee, works off much of his tension by playing tennis and at least two rounds of golf each week. His handicap: 11. One of the few ways to get a rise out of Brown is to suggest that A T & T is a monopoly-mddled giant without the agility needed to wmpete in free markets. "If we're not competent," he says, "I wonder why the competitors are trying to get Congress and the Federal Communications Commission to restrict us in various ways. We must be making a mark somewhere, or the competition wouldn't be so frightened." After spending nwdy four decades in a company shackled by Govevment regulation, Brown is eager to show what an unbound A T & T can do. He is sure that the competition will soon be saykg in awe, "Good grief, Charlie Brown!" fees for local directory assistance, phone-line installation and pay telephones. The Federal Cornmunications Commission has proi b e d one way of helping local companies make up for part of the loss of the long-distance subsidy. It has called for customers to pay local phone companies for access to longdistance lines. The monthly access charge would start at $2 and could rise to $6 or $7 by 1989.Businesses would pay 56 at the beginning. But the proposal is running into trouble. Legislation proposed by Colorado's Democratic Congressman Timothy Wirth and Oregon's Republican Senator Bob Packwood would eliminate the charge to private individuals and small businessmen and shift it back to A T & T and other long-distance phone companies. Theodore Brophy, chairman of GTE, calls the access charge "an unmanageable economic burden on those who make minimum use of long-distance service." Wirth's bill passed the House last week, but Senate action is not expected until next year. In any case, the FCC last monthdelayed the fees until April 3 togive itself more time to study A T & T's arguments in favor of the surcharge. When the long-distance subsidy stops, A T & T will find itself with an additional S3.3 billion a year, and has proposed giving some of that money back to consume n by cutting the cost of long-distance calls by 10.5%. Critics point out that this would add up to a reduction of only $1.75 billion, or about half the amount A T & T is getting. Says John Bryant, a Congressman from Texas, in a medley of metaphors: "They're trying to have their cake and eat it too. That put the last nail in the coffin of A T & T as a truthteller." Judge Greene will conduct a hearing into the entire matter next week. The latest House action disturbs many industry officials, including Archie McGill, a former IBM vice president, onetime head of A T & T Information Systems and now president of Rothschild Ventures. Says he: "It's a real tragedy that Congress is poking its nose in at this point. The game plan is in place. To shake it up for two bucks a month is just not rational." The $2 surcharge is not the only rate increase in the works. Local phone com- TIME. NOVEMBER 21.1983 panies have been madly filing for price hikes with state public service commissions. A total of $6.7 billion in increases has been requested this year. The outlook for those applications is uncertain, and public service commissions are expected to be tough with the phone companies. By asking for so much so soon, some of the operating companies have expended goodwill even before getting started. Judge Grtene has accused them of using divestiture as an excuse to request more money, and called some of the requests "unjustified." One of the biggest questions facing the new A T & T is how well it will do in the world of competition. For most of its 107 years, the phone company has been shielded from rivals by its controlled monopoly status. Wall Street analysts and industry experts disagree on how successful A T & T will be. In general, the new A T & T is expected to excel at its traditional business of long-distance telephone service. But it may run into trouble when it tries to take on other markets. Says ITT Chairman Rand Araskog: "A T & T has to learn all Dver to compete. It has definitely lagged behind technology and the competition." The most interesting competitive skirmish to come out of the telephone divestiture will be the head-on confrontation between A T & T and IBM. A T & T, which is now free to enter the computer market in full force, has the size and resources to match IBM. The phone cornpany has been making computers largely for its own use for a generation; most telephone calls are switched by computers developed by A T & T for the Bell System. For legal reasons, though, they were called microprocessors. Says Vice Chairman James Olson: "We can now call them computers without looking over our shoulder." A T & T will have a desktop business computer ready early next year. The machine will probably be built around a super chip that has more than 256,000 bytes of random access memory. Says Robert Casale, head of marketing and sales for A T & T Information Svstems: "We will be selling the leading edge oftechnology. Nobody can touch us." Another bruising market battle ,will be over long-distance service, where a host of companies are trying to take business away from A T & T. The most aggressive has been MCI Communications, based in Washington. which since 1969 has been permitted by the FCC to offer long-distance service in competition with A T & T.Under Chairman William McGowan, 54. MCI has grown to more than 1 million subscribers (vs. A T & T's 70 million) and to $1.1 billion in sales. 71 A5 nies. Says Cornell's Kahn.. "AT & T won by losing." Others believe the local companies have bright futures and good potential in their markets,although there are darbtr as to just how eager their top maaegn, mostly old telephonecompany men mth decadesof doing thingsthe Bell way, am to enter the new world of competition. Just how well the newly independent parts fare is critical to the question of how much phone bills will rise after the splk If the regionals make money, attract inv& tors, improve efficiency and keep casts Qwn, phone b i i stand a better chuse of staying rrasonable. If they do not, prenae to collect m m y &om phone usen f a lost revenues will incnasc. B i are destined to go up anyway, though, at least at tint. Some c h a r m say consumer groups like Boaton's Fair Shue, may go up by 50% to 10096 during the next twelve to 36 months. But total phone bill8 are not likely to increase by that much Chairman Charla Brown estimated they will increase by on1y 8 % to 10% a y a r f a the next five yean, slightly more than the average rate of increase since 1940. Most industry watchers agree on one thing: telephone service has been too cheap, for too long, with costs spread UIIevenly. Says Lee Selwyn, president ofnornics and Technology Inc. of Bostm, a telecommunications consultant: "People were simply not aware of how cheap amvice really was." Thomas Bolger, the new chairnua of Bell Atlantic, is fond of pointing out tbat the prica of other commonplace products like a Chevrolet have increase4 about 1,000% since 1940,while the averagc hsic monthly U.S telephone rate has goac up from 53.67 to just S 11.38 during that penod,or by 210%. A privateline toadwelling 66 xst of phone services they use. At the m e time, they will not pay as much for Executive Jack MacAllker, while it costs those they do not use. That has seldom, if ever, been the S3Q to install and maintain the connection. Even if that basic monthly bid doubles, to #se. Through a complex system of cross S16, it is "still only about the price of a tank ~ubsidies,brilliant in concept but wompome in practice, one type of phone serofgasoline," he says. vice has helped pay for another. That kept he level of telephone b i i aRer di- phone costs dawn and within almost evvestiture will depend on whether eryone's reach, but led to price inequities. the user is an individual or a busi- A phone line in San Francisco that fost ness, how many local and long- Pacific Telephone 529 to install and distance calls are made, over what dis- maintain monthly was bided to the custance and for how long. The entire tomer at $7. The difference was made up philosophical underpinning of pricing by higher prices for other services, like phone services M changing, a departure heavy t o b for calls from one end of the much in line with the national thrust to- Bay Area to the other. Similar subsidies ward deregulation in many other fields. allowed the dime for a pay phone call In essence, Americans are going to begin in New York City; the true cost is more e paying more and mon of the full and true ~ i k 28e. Without some congressional action, a big chunk of the cross-subsidy system is going to disappear, putting fierce upward pressure on b i i for local phone services. Regional phone companies stand to lose about 53.3 billion in revenues that they received from A T & T's longdistance tolls when they were still under Ma Bell's roof. Currently, about 37e from each dollar in revenues from longdistance charges is plowed hack into the local companies. To compensate for the loss, the regional phone firms are going to have to get money from somewhere. That means phone subscribers in general can expect w e r prices for almost all aspectsof local service, foes that in the past were bundled in packages and, for the most part, never seen by users. Rates will certainly go up for local services like calls to the grocery down thestreet or to the pharmacy. Higher rates are in store for calls to distant points within states, along with sharp escalations in in Great Falls, Mont., costs about 58 "for access to the world." aays U S West Chief T TIME. NOVEMBER 21.19 MCI and the other new competitors n the long-distance market, GTE's Sprint ind ITT's Longer Distance, have been ible to offer sharply discounted longtistance rates. The h s connect only narkets with heavy phone traffic,where :he big profits are, using the most modem quipment, leavrng to A T & T the small:r, less profitable areas. But some potenial customers considered the lowcost :ompetitors inconvenient because sus:omen have to punch in up to eleven extra numbers to make a call. An MCI cus:omer making a longdistance call has to hit as many as 22 digits. kgbhg next Fall, though, aU longdistance lincs will be ,n an mual footing. Whether a customer s using A T & T, MCI, Sprint or Longer Distance, the person will use the same dialing procedure. A T & T's Western Electric division will face very stXcompetition. It will be entering a market with such powerful :ompetitors as Canada's Northern Tele a m , Rolm, GTE and IlT. En 1982,WestE r n did 90% of its $12.6 billion in business with the Bell companies. Now those companies will be frac to buy their equipment &omanyone, at the beso price. They are, in fact, doing that already. This year three Bell companies reached deals with TIE/Cornrnunications of Connecticut for S 125 million worth of switchboards. fiber optics, the superline lines increasmgly used as an efficient and versatile new way to carry telephone signals. Ameritech, BellSouth and the other holding companies are planning major efforts in AMPS, for Advanced Mobile Phone Service, a Bell Labs invention that currently is the hottest telecommunications innovation around. The system is expected to increase radiotelephone use in cars greatly. Buick became the first automaker to offer such a phone as an option on some 1984 models. The cost is about $3,000, but prices are bound to come down. The seven holding companies are likely to develop in very different directions once they leave Ma Bell. BellSouth is favored by a good economic climate in the Sunbelt. Ameritcch has a vast and important industrial base,but in a declining area. Pacific Telesis has battled long and hard with ratemakers reluctant to permit higher charges, so it feels tested and ready for anything. Says Chairman Guinn: "Divestiture doesn't pose any problems that are more difficult than the ones we've already faced." Both the new A T & T and the seven operating firms are preparing for the new era of competition by looking for ways to cut costs and changing some old company habits. Managers everywhere are searching for places to slash payrolls. Some companies arc turning to extensive early retirements, although layoffs have also occurred. That goes against a long tradition of Bell paternalism To many A T & T emolovees who were kept on wvrolls h& the ~ e ~ r e s s iofo ithc i930s, "the President" was not Franklin D. Roosevelt but A T & T President Walter Gifford. Some 16,000 Bell employees already have taken early-retirement inducements, and 8,000 more are expected to do so by year's end. That could cut payrolls by $500 million a year. Pacific Telesis expects 1,400to 1,800 people to accept early retirement. Throughout the Bell System, families are being uprooted as employees shiR between the various entities. In some cases former colleagues are becomimcommtitors. ~ e r 6 a p sthe most important long-range impact of the A T & T breakup will be to s p a d up the already breathtaking developmenu in telecommunications. With more competition from more companies be even faster. Says "The technological revolution is amving fast in the phone business. Look at that instrument on m) desk. It looks like a phone, but it's really a computer. By pressing buttons, I instrucl a computer to do things it's programrnd to do." One of the signs of that techno logical revolution is the way major cor. I w orations and state agencies are literal11 1setti- up theG own phone coml pani-. By building microwave dish antennas and aiming them at communicatiom satellites, they can legally bypass public phone systems. That w c a n t l y cuts into the revenue of A T & T and all other phone companies.Says Gideon Gartner, r telecommunications re=her "The daneer to A T & T of bypass cannot be ovektimated." The Port Authority of New York and New Jeracy, workin&with Western Union and Merrill Lynch, is building a gigantic $84 million Teleport on New York City's Staten Island. Its 17 earth stations will be beamed at all domestic and some international satellites and will feed communications into the World Trade Cen- 1 1 estern Electric sales could be cut in half next year, acwrding to one particularly grim Wall Street view. That is nonunse, says Charles Meetsma, general manager of the division's p u t in Allentown, Pa. Says he: "We're aware that many persons deride Western Electric's ability to compete. But to them I say, 'You haven't seen anything yet.' " With its Bell Labs providing research for ingenious new products, Western Electric is c o d dent that it d ldo well. The new regional p h companies will be kept busy at first just providing local telephone service, where they will not face competition. It will be a while before they realize big earnings from any activities other than the plain old telephone business. Says Pacific Telesis C h a i i McCowrr 'The nvdutknla m h k- tut" Donald G u b . "Our first priority is to keep the core businas-the Bell operat- : ing company-healthy. That's the place where most of ow money comes from." Nonetheless, the holding companies are trying to stir up investor interest by stressing glamour, growth and marketing in a rush of ads, and in talks before firancia1 aqalysts. Typical is Ameritech, -* '?-? which uxs the snappy slogan "A company you'll be hearing from." Says Chairman William L. Weiss, W. "The future of our industry lies in exotic services. It lies in the explosion of information services." While most of those new businessa have yet to be determined, some local phone companies have shown where they are heading. Ameritech intends to go into W ' I - - I TIME, NOVEMBER 21.1983 ter, skirting the phone company u New York City. Citicorp. the largest U S. bank, is installing its own $100 miliion system in Wall Street's bancial district, which will take most of its communications out of the phone system. Even Salt Lakc City's Mormon Church is getting into the act. Its private microwave link to Brigham Young University 45 miles distant in Provo, Utah, has replaced an A T & T system and is costing Mountain Bell %2,00Q wnnually in lost revenues. Metropolitan phone companies are vulnerable to bypassing because so much 3f their business comes from so few cwtomen. About 24% of the revenues of New York Telephone k t year same kom just 1% of business customem .%ii systems lrlturdy constfucted as $32 mdlion in revenues from the A T & T operating the bypass hmr..drstned as much axlap~riies. he promise, and the peril, of teleyhctne bypass i s typical of the new em in telecommunications. The between parties, sometimes machines, no matter how or where. The new competition, plus new technology that allows more information to be carried more efficiently, will lead to a bountiful array of new w s for telephones and telephone lines bee box). Says James Martin, author of The Wired Society: "Deregulation of the US. telecommunications industry will stimulate our imaginations. It will briefly raise the cost of telephone service, but in the end we'll all profit from a revamping of the system." With any luck, as a result of deregulation, - the world's best telephone system could become even better. - - - B y h S. D.Mott Be11 System, in the end, was done In by the m h of technology. The system's structure could not contain or protect itself agaimt better and cheaper ways of allowing people to nach out and touch someone,. %w&e crumbled between voice and Oat& mmnsmission, between d ~ mestic and international calling points, krwen tab, submarine cable and satel- R W d by CInm vm Voart/W.w Y a k , wfth lite. Wiiat counted was communication o n w b v s u r rmllion phones sold this year will be cordless. The walkaround phones now have a range of about 700 feet from the k s e unit, but they are expected to become more powerful as wple have to forget the mtlcjnz af &it, rmg, &%I'& md technology develops. Uniden, Mum, A T & T, ITT and Cokten," says Randail Tobm. pra;dcnt ?f A T & T bra are the major sellers of wrdless models. Cellular phones rely on low-power transmitters in desigConsumer Products The phone &at 3 wiKj'.ik;~ easy T W C ~6f most consumers is about ti, *undergoa dramtic +tmxi,Com- nated cells, or districts, to relay signals from passing automobiles equipped with the mobile phones. Last month Amerition It ulll no longer be just an ~ ~ e to call n Uncle t Fred in Fredonia The phone: of the htm wd.! be mars m e tech Mobile Communications introduced in Chicago the first bide, do a host of dflerent tasksand be panaf a wmplcx, far- commercial cellular mobile radio service. Bell Atlantic's MOr bile Systems expects to launch cellular service early next year reachmg informahon network. Says H a 9 Matrcs, d m c t ~of AT& T's Home Commbinicatms Eabomtory "The tele- in Washington, Baltimore and Philadelphia. By 1990 1.5 milphone will be the cornerstone of a mrni~ji~cadm s ~ s t e miB lion cellular phones could be operating in the U.S. The productscurrently on the market, though, are nothing the home." .;f LC &%a- wmpartxi with what is about to arrive. A T & T is working on A T & T is already offering two new ~e11~sr;ls silicon chips that wiil recognize individual voiceprints. That dard telephone that show the: way ahr phone LS g13r.g instruments have key pa& and &pky the care and rfPile or way the phone could screen incorningcalls or allow a person ta 66P on calculator-styk windows. The Touch-a-matic 1400 ($160)a n store up to 16 phone numbers. The $680 Genesis Telesystem, which A T & T Chairiman Charles L. Brown uses at home, can forward calls to another number, remcmber 75 alphabetized names and numbers and restrict outgoing calls. With more and more homes empty during the day because both pareas% are at work and children at scha@!, telephone manufactwen k-,lievc a variety of emergency and remote f ~ & ~ 4 $ will be hot sellers. A T & T offers tt &realert system hkbp, smoke ahms @ phones that will dial two nnmbps when smoke is detected ($199 an s y t c q 529 a link). A pocket-size nz&i& transmitter (549) alerts a urnit 6199) that dlak up to two numbers if a pa- See r%a~rm~ * tient nee& immediate atrcntwn OuK Western's bnsaphone (S255) laiWIdtOZ3 <wi*iizmpseitures, sound levels and e?ectriml systems If 3 KRXE'S ternperature rises above sr drops belwiv a. g r w t !we1 when & householder is away, perhaps ~.XLLSS aP a Swr; vr ;a p,wfreezi~gc M , the device wibl a u r o m d c d * serri a r a g e to one of four emergency numbera, T ~ i h m x n ' sEaergy Control System, attached ei, a phone, aIbw, ow x r s ro irxa apphances cn and off whiae away from borne Cordless phoces, priced around $ X i bn; ~ r n an e the market three yean ago h~1982 sales rcxhed 9 ir&hoia m b , and lndusuy observers expect that a b x t one-thud of the 19 + ' location and set off some operation like turning off the stove. The phone could even become a substitute for an apartment or house key. A microphone at the door would transmit the voice pattern to a phone. If it recognizes the voice pattern, the phone would then activate a mechanism to unlock the door. Telephones and video screens in the future will work closely together. A T & T already sells a Sceptre videotex terminal ($900) for shopping and marketing. Sevkral manufacturers are working on a flat-screen terminal that would display bank balances and s h o p ping guides-or the image of a conversation partner. "The telephone will be a computer terminal as you now understand it," says Tobias. The telephone linked to a computer screen will become enormously flexible as an information-retrieval system. Viewers will be able to look at an index on a screen and touch it or point to it to gtt more detailed information. For example, the viewer could point to the word Beirut in a world-news index, and the screen would project a full report on the subject. "People may see all this as new," says Mattes, "but we will simply be malung available to a wider public services that already exist." Itwasin 1946thatCartoonistChesterGouldgaveDickTracy a two-way wrist radio. A similar device may not be far off. Say; Tobias: "Except for the long-life battery needed to power if ihe technology for the Dick Tracy watch phone is here." TIME, NOVEMBER 21.1983 By Merrill Brown NEW YORK, Nov. 16-American Telephone & Telegraph Co. today moved closer to the Largest transfer of corporate assets in history as it issued reports on the financial health of the Bell System companies after the Jan. 1 breakup. The reports, eagerly awaited by the investment community, showed that, in terms of assets, the "new" AT&T would rank as the nation's fourth largest industrial company, behind only Exxon, General Motors and Mobil Oil, while each of the seven regional companies it will spin off would be among the nation's 20 largest. And AT&T would remain the nation's m a t profitable company'We take comfort and pride in the fact that on [Jan. 1, 19841 our investors will own assets which, by every test, are as sound as the assets they owned in 1983," Robert E. Allerr, AT&T executive vice president and chief financial officer, told re. porters here. AT&T, blessed with a powerful long-distance business, is expecting revenue of about $56.5 billion next year, 80 percent of its projected 1983 total. In addition to its long-distance service, it is retaining its Bell Labs research facility and its Western Electric manufacturing arm. By contrast, the seven AT&T WarhlnpLon Pol; BWI Wrlur "You've never seen that kind of volatility before," Peery said. In what AT&T officials said they hoped would be the first and only time they would project results, the company said the combined dividends of the divested system would total $5.46 a share next year, just above the $5.40 figure for this year. The dividend figure for AT&T itself is predicted to be $1.365 in the 1981 first quarter, just over the current $1.35. local operating companies are expected to have revenue of $59.5 billion and profits of $6.58 billion in 1984, compared with AT&T's projected profit of $2.11 billion, although AT&T will retain assets of $34 billion, while the local companies will have total assets of $117 billion. "What it means is that AT&T will be an extremely leveraged entity," said Bradford L. Peery of Sutro & Co. Inc., a San Francisco brokerage house. "It's not the stable long-term investment it's been in the past. Small changes in margins will result in signficant changes in profitability, a whole new way of looking a t AT&T. The Washington Post Company Reproduced with permission of the copyright claimant. a,03 of the data to repeat their warnings about the consequences of congressional action to modify t .he. Federal Communications Comrmsseon'a accese charge decision on the way phone companies compensate each other for Connections to local networks. The AT&T @datioas msume that the MX plan will go into effect on April 1. The total access Eharge planwhich the company values at mme $20 b i l l i o n 4 widely thought to be the remaining major mystery of the divestiture. Most analysts suggested today that AT&T"e asamptiorrs are unlikely to hold up in light of tbe Scc AT&T, W,Cd. 1 WASH1NGTON POST NOV. 17,1983 01983 While the long-distance business is growing dramatically, AT&T is almost certain to see increasing erosion of its 90 percent-plus share of that $40 billion market as the competition intensifies in the coming years. Of the seven regional companies, Nynex, with projected 1984 sales of $9.8 billion, would rank the highest by that measure. Bell South would have the highest profits-projected at $3.3 billion in 1984-and the largest asset base, with holdings about $20.8 billion. Bell South also has the lowest debt-to-equity ratio at 43.1 percent, while Pacific Telesis reported the highest at 46.5 percent. Company officials used the release The surviving ATBT will, however, be extraordinarily dependent on its long-distance business, to be known as AT&T Communications, which will provide the company with about $35 billion of its revenue. ependent Units AT&T Stresses Health ATBT,From D l In preparation for initial trading between hot and cold is lukewarm," said Ivan Wolff of Donaldson, Lufcongressional move against the ac- Monday-on a "when-issued" ba- kin bi Jenrette Inc. "If they wanted sis--of the stock of the seven regioncess feea to impress stockholders they would 'It is very unlikely that what is on al companies and the 'newn A'I'KL'r, have come in at $9.25 to $9.50 a and the subsequent decisions stockthe books is going to go i n b effect," share. (Total earnings of all the cursaid John Bain of Lehman Brothers holden will be asked to make, scores rent AT&T entities was estimated at of Wall Street analysk I~egan to Kuhn Loeb Inc. 68.70 a share.] Rut they also wanted Release of the data today held up scrutinize the reports in order to to impress regulators." trading of AT&T stock on the New issue recommendations. For the most part, several key an-. York Stock Exchange for nearly an hour and half. The stock closed a t alysts said they would stick with ini63'/a, up XI, and was the most ac- tial recommendations to hold onto tive, with almost 2.7 million shares or buy A'r&T stock. "I think they're k i n g conservative and we're still changing hands. recommending A'I'&Tstrongly," said The publication of the financial Edward M. Greenherg, an analyst documents w p expected for months with Sanford C. Bernstein & Co. Inc. as AT&T moved closer to the day'Even if you take their numbers, the Jan. 1-when it relinquishes its local stock is worth at least $70 a share phone business under the terms of today. Over a time horizon, some the antitrust settlement with the time next year the combined pieces Justice Department. AT&T paid should sell for about $80 a share." $2.5 million in printing cmts for the Further, the general consensus basic documents and stock prospeetus, and will spend another $1.4 mil- from analysts seemed topoint to the lion mailing them to the company's fact that AT&T's figures today are largely conservative. ;"l'hc average 3.2 million stockholders. AT&T Describes Spin-offs as 'Sound' 2 Q 0 2* Y) LU z 8. z *. IiJ z " 4 w fiw 8ad a, r, r, 9 8 z *. I - " 2 4 Answers About the Phone Legislation Q: So the FCC proposed to b t what people pay for local service to replace part of that subsidy? A: Yes. When you make a longdistance call, it travels over a local phone comp~nv'alines to a switching station and .n out over long-distance lines--or satellite. Now, a long-distance company bills you for the entire call, but has to pay the local company something for the handling the conversation. Q: How much is the access charge worth? A: It would transfer about $5.5 biiion a year from local phone users to local phone companies initially, more in later years. Q: What if the local companies don't get the access charge money? A: The companiee would have to raise what they charge long-distance companies to use local lines and switches. Q: What's wrong with that? A: That would create a strong incentive for companies that make lob of long-distance calls to bypass the local system. AT&T, MCI Communications Inc., and the other longdistance carriers could take a corporate customer's long-distance calls and transfer them directly to their long-distance networks without using local lines. The access fees were intended to deal with that problem: since highvolume phone users would pay a lot more for local senrice-whether they usxi it or not-there would be less incentive for them to bypass the local network, the FCC reasoned. The Telephone Bill And Your Phone Bill By Peter Behr Wuhlngton Post Staff Wrller After a steaming debate, the House passed a bill Thursday that would block an increase in telephone rates proposed by the Federal Communications Commission that is set to go into effect April 3. The FCC's plan was intended to help local operating companies when the Bell System is broken up Jan. 1. Here are some questions and answers about the rate dispute: QUESTION: How does the House action Thursday affect my phone bill? ANSWER: If the bill were passed by the Senate and signed by President Reagan it would prevent the FCC from raising local phone bills on April 3 as planned. Q: How big would those increases be? A: Residential rates would go up $2 a month initially, rising to $5 in 1987. Businesses would pay an additional $6 monthly for each phone line. Q: If the FCC's fees do take effect, where does the money go? A: To local telephone companies. (After Jan. 1 the local Bell companies will be combined into seven operating companies split off from AT&T, which will continue to provide long-distance service.) Q: Why does the FCC want to impose the fees? A: The telephone industry and the FCC say that the local bills paid by telephone customers have not covered the full cost of local service-that AT&T traditionally shifted some of the profit from long distance back to help pay for local service. The FCC wants to end the subsidy, tying rates to their t,w costs. The access charges are supposed to accomplish that. See PHONES,W,Col. 1 Q: Bypass could hurt the local companies a lot? A: Perhaps. There aren't solid estimates, but the local companies would probably set up separate links for big customera, bypassing their own local phone linea, seys William Albertini, director of investor relations for Bell Atlantic, the regional company that will take over the Chesapeake and Potomac Telephone Companies in this area. Q: If they lose revenue from big customers, how would the local companies make that up? - A: By raising local phone rates even more, AT&T says. Like other utilities, local phone companies are entitled to provide their stockholders with a "just and reasonable" return on their investment. State regulators will permit local phone rates to rise high enough to achieve what they believe that return should be. So local rates would rise. Q: But isn't that exactly what the House was trying to prevent Thursday? A: Yes. The fight is over how much that increase should be, and who should pay it in the first place. That and some political maneuvering. US. Judge Harold Greene, who is presiding over the Bell breakup, noted that half of the country's residential telephone users "make only nominal use of long distance and 15 percent make no use at all." A flat fixed fee on ail consumers penalizes those who don't use long distance much, Greene says, and House Democrats agree, by and large. Q: What do the Democrats want to do? A: The bill approved by the House Thursday-championed by Democrats and fought by Republicanswould require long-distance companies and customers-not local-rab payers40 contribute to the casts of the phone lines and facilities that are used jointly for local and long-distance service. The cost of long-distance service would be about $1.4 bil. lion a year more under the House bill than under the FCC plan. The bill would establish a federal fund to help low income telephone users and would impose charges on bypassers who rely on the locd telephone system as a backup to private phone systems. - - Limit on 1984 Rise in Local Phone Bills Clears House Over Opposition by A T&T - - - By JEANNESADDLPB Stoff Reporrcrof THEWAU S m m JOUINAL WASHINGTON-The House passed by voice vote legislation that woukl limit ib creases in local telephone bills next year. frustrating American Telephone & Teb graph Co.'s effort to kill the measure. The bill, the first major telephone legisla tion approved by the House in nearly 51 years, gained support as lawmakers antick paled voter reaction to a predicted douM& of local telephone rates in an electka year. The final vote came after a Republicam substitute bill put forward by Rep. Thoma Tauke of Iowa was rejected on a party-line vote of 264-142. That bill would have delayed for one year the Federal Communicatm Commission's plan to charge residential aed small-business telephone customers for occw to long-distance lines. The biU that 6. nally passed would eliminate thon charges. Rep. John Dingell, the Michigan Demo crat who heads the Commerce Committee, and Rep. Timothy Wirth (D., Colol, whm subcommittee authored the bill, led the figM for the measure, which will increase costs tc some large businesses but limit the rn dicted increases for smaller telephone usm Congressmen concede, however, that ue surner telephone costs still are likely to & crease because of rate increases that mrj be granted by states. "We are distressed," saM Kenneth I, Whalen, executive vice president of ATLT, "that the American consumer will be deeply hurt becaw Congressmen Dingell Pad Wlrth have engineered this bill In their cb thusiaun to embarrass the FCC for politlcrl reasons and to simply continue their against AT&T. They claim the bill is rp posed to protect the consumer. Instead, tb~ consumer will pay the price of bypass in r very few years. But the congressmen doal care; by then, tbe 1984 elections will k over." Mr. Whalen\added that the bill woulr hurt the Bell operating companies mon than it does AT&T. At stake is whether extra charges tr longdistance service will continue to pay fa some local telephone costs, as they do c r @ 1983 Dow Jones & Company, Inc. Reproduced with permission of the copyright claimant. pntly, or whether each local customer will ~y those charges, following a plan develqed by the FCC and supported by AT&T. rhe FCC has set the new pricing system to ake effect April 3, about three months after he Jan. 1 govenunent-mandated breakup of iT&T's Bell Telephone system. AT&T has argued that the House mea. wre, which would maintain part of the cur. rent system, would keep the cost of all long iistance service overpriced, the company dso conlends that large businesses would be tncouraged to build private telephone net. works, thus taking revenue away from the public phone system. But members of both the House and Sen. ate have argued that legislation is necessar) m the wake of the ATLT breakup to protecl residential customers and small businesses ath only one telephone line. They contend 3 e W ' s access-charge order, along wiU )ther expected telephone cost increases would overburden smaller customers and fa vor businesses that make a lot of long-dis tance calls. After the divestiture. AT&T will offel mly long-distance service, and its othel units will focus on equipment and re search. "ATdrT has been spending millions of do1 lars of late to oppose this bill. Why?," Rep Dingell asked as debate on the lepslatiol began. "AT&T wants to reach out and toucl everybody in their wallet." After defeating the Tauke substitute, tht H o w rejected 210-122 a similar amendmen! ~fferedby GOP Rep. Matthew Nnaldo o New Jersey. The amendment would have barred new access charges before Jan. 1 1985. The FCC could then i m p a charge o 8s much as $1 a month in 1985 and as mucl as $4 a month by 1992. The amendment alsc would prohibit access charges for poor cus tomers, or for local telephone cornpanic with fewer than 50,000 customem In onc state. The Tauke proposal also would hav modified the FCC's plan by allowing acces charges to be phased in after the oneyea delay. One of the Democrats, Rep. E d w a ~ Mass.), called the vote "a dec Markey (D., don on whether to side Mth AT&T's mill lo^ dollar campaign against the measure, o consumer and labor groups." Mr. Tauk a d his proposal would ensure a strong telc phone system "for the next generation." Under the FCC plan, access charge would be $2 a h e a month for nsidentir customers in 1% and would increw to $6 Une monthly by 1990. The H o w measur the Democrats favor would continue e m charges against long-distance service an expand a system of assessments the con mission established against businesses thr build private telephone networks. The overall cost of longdistance servlc would be about S1.4 bllllon greater under th House legislation than under tbe FCC plar md ATPT has sald it won't go t h w wit \s ts ~hxnl~t?d 51.75 billion reduction in long. ually becomes law. MCI Communications Corp., AT&T's wincipal long-distance rival, supports the { o w measure because it wouldn't increase he competitors' cost of doing business as luickly as the commission plan. GTE a r p . 3 Sprint long-distance unit is backing ~nlythe Senate bill. The ultimate fate of the House measure s tied to whether the Senate passes its verdon of legislation on the telephone contro rersy. That bill, approved by the Senate bmmerce Committee, would delay impxiion of the controversial access charges for wo years, and would require the FCC to re:onsider its decision. The Senate is schedlled to consider the bill early next year. Any bill might also be subject to presilential veto, because the Reagan adrninis.ration sald earlier this week that it opposes a e House bill. On Fees to Bell Firms During Interim Period % o WALL STREETJOURNAL Staff R C P O ~ Q T WASHINGTON-American Telephone & relegraph Co. yesterday announced Its planI for dealing with the three-month delay of the! scheduled start of access charges. Under the plan, the company said, ilt would pay local Bell companies about asi much for interstate calling as it does cur rently between their Jan. 1 divestiture andI April 3, when the delayed start of the accesri charges takes hold. Shortly after AT&T announced the plan however, the House voted to do away wit! 1 many of the access fees entirely, so It is un certain whether either the interim plan 01r the delayed access fees will take effect. In papers filed in fderal coun here AT&T said it agreed to pay the seven re gional companies rates designed to givcD them a return on their investment of about 11.5%. ATPT said Ulls is more than it woulci have paid under the access c h a m tariff,S that the Federal Communication Commis;. slon has delayed from its odginal target date of Jan. 1. But it sald the rates woulc3 make up for only "a portlon" of the subC scriber access fees that the local companleS will lose durlng the three-month delay of thle new charges. Those fees from business and resldentiad phone users were expected to net the locad companies (3.3 billton annually. AT&T ddn't say how much of the lors would k mad e UP. The arrangement falls short of the corrIpensation previously sought by the Bell A1tlantic companies, one of the regional compa1. nles that will be divested under the AT&'r antitrust consent decree. It sought rates thait would generate a return of l2.15%, a b oIt~ what it would earn under the delayed access charges. In the coun papers. ATBT said the rate 1It will charge the local companies to lease polrtions of its facilities also will be reduced tD 11.5% from 12.75%. - - Threat Held Some Regulators, Analysts See States Holding Line By Michael I s h f j Wmhlnglon PC& Staff Writer The threat of sharply higher telephone rates stemming from the breakup of the h l l System is already proving to be exaggerated, according to some federal regulators and phone industry analysts. The reason: State regulators, holding their fingers to the political winds, have been getting tougher with local phone companies. Despite record rate requests filed earlier this year by Bell operating companies, state utility commissions have actually been allowing smaller increnses in 1983 than in either of the past two years, industry f w show. "The states are doing their job just as we expected them to do," says Jack Smith, chief of the Federal Communications Commission's common carrier bureau "When we see what rates are at the end of the year, they're not going to be nearly as outrageous as everybody thought they were going to be"" Consumer advocates a d other critics say such comments blithely ignore the future impact of some of the FCC's own actions, particularly its controvenial access charge order which, starting April 3, is scheduled to add $2 a month to every consumer's phone bill. In their view, nothing less than the country's hishrie policy of "univepsal telephone servicewis in jeopardy-one main reason they are pushing legislation that would prevent the $2 fee from t.aking .effect. The telephone measure, bitterly opposed by AT&T, is scheduled for House floor action this week. But while the debate over phone r a t e intensifies in Congress, evidence of more stringent regulation at the state level continues to accumulate. During the fimt li) months of this year, local telephone companies were allowed $1.4 billion in rate increases by state regulatory commissions, which was only 38 percent of the $3.7 billion total they requested. That represents a nationwide phone company batting average significantly below that of recent years. In 1982, for example, state commissions approved 65 percent of phone company requests, for a total of. $2.8 billion in rate increases. In 1981, ebte annmkions sbo approved 55 percent, for a total of $3.2 billion in rate hikes. 'The state commissions have been sensing the political situation and have been very atringent in what they've been giving out," said Mark Luftig, analyt for Salomon Brothers Inc. in New York. T h e y can't afford to lw credibility. They can't look like they're giving away the store." Fears of a doubling or even trip& in local telephone r a m were first heard earlier this year after a spate of staggeringly large See PHONE, C7 PHONE, From G1 rate requests were filed by many of the Bell operating companies. In California, Pacific Telephone asked for $1.24 billion. In Texas, Southwestern Bell requested a record $1.7 billion. In New York, New York Telephone asked for $947 million. These filings-unprecedented for telephone rate cases--were quickly linked by most analysts to the confusion and uncertainty surrounding the impending divestiture by AT&T. As of Jan. 1,1984, the Bell System's 22 local phone companies are to be spun off from its Corporate parent and reorganized into seven regional operating companies. Fearing the imminent loss of the protection of Ma Bell, and facing the prospect of entering the financial markets as independents for the first time, the local companies began racing to their state regulatoty commissions with reauesta far in excess of their real nee& according to some state regulators "The telephone companies were trying to get away with everything they could and take advantage of the confusionw (over divestiture), said Paul Rodgers, director of the National W i t i o n of Regulatory Utility Commissioners. Whatevm the phone companies' motivation, fitate commissions haven't PENDING M E REQUESTS bees kqing. In the p& fs 9th alone, Ceorgie's c m m k b n disallowed 77 percent of a $15&milli r e q e fM by Southern Bell, while M i c h i chopped a $451 mill'i request by M i i Bell dmvn to $182 millioa. In Teme, Southwe&n~ Bell's drequest is atill pending, but the datT of the public utility awnmiseion has reconuaeadedthat nearly half of it be denied. The extent to whicb thee actions are a guide to the hrkve is a subject of intense debate, however. Eric J. sChneidclRind,*chsinnanthe Sourcc.hdad-brnrPon !&hian Public Utility Commission, aquea that a number of FCC actions will literally few state wmmissions to approve hiher r a w next year no matter how much &tom, feel preaRverltohddthemdown. For openers,the FCC hna stripped states of their power to set depreciation schedules and mandated faster sprite-olfe of phone company equipment, thus adding to the rate baee. In addition, Schmidewind mya, the accem charge dceisMn iteelf will effectively require stab to match the new $2 monthly fea with tlpeir own acmm fees on the local level. G e n d Tdsphaw, of California (l~mBdl Co.) $3 18.7 millEon Cdifomia .. soadh Cantml Wl $217.4 miltion Akboma . . Illin& WI $247.5 million llhois SanhCsnhdBe(l $279.7 nrilliar Temesraa TEN LARGEST GENERAL RATE C A ~ PENMNG S ' "A lot of these incream we won't even have the authority to disallow," he mya. 'It's totally inaccurate to say the pattern of the past [year] will exist in the future." Moreover, consumer advocates argue that to rely on the protection of state regulators is a historic$y risky proposition. To be sure, some state wmmisaions have hundreds gf professionally trained economists, accountants and auditors capable of analyzing sophisticated phone wmpany reqmts. In New York, for instance, the Public Service Commission has a budget of $29 million and a staff of 625, including its own Communications Division, Office of Research and Office of Accounting and Finance. Yet for every New York there is a Vermont-a state with a three-member Public Service Board (two of whom are part-time) end an 11-; member staff, including a single 'telecommunications analyst" assigned to telephone rate requests. That is not particularly surprising because, during the energy crim of recent years, state commissions tended to beef up their electric utility staffs without making comparable increases in the number of their telephone analysts. "The majority of statee don't have the kind of commissions that can analyze theee requests," s a p Robert Nichols, legislative counsel for Consumera Union. "They've tended in the past to rubber stamp a local request. The usual telephone rate faster," although he acknawldgea that talk of a doubling or tripling in rates ie a 'political football." Telephone rat. "are going to rise faster," adds NiclwIs, although he acknowledgee that the talk of a doubling or tripling in rates "gets thrown around like a political football" The important point, many experb say, is that the deeisiolls on p h bills won't be made at h i h levels in Waehington, but in the trench befare state commhiiona And while many of these m m i a e i have beefed up their staf?i and expertise in recent yeam, they still have a lohg way to go to handle the new demands impoeed on them by divestiture, says Wally French, president of Regulatory Remuch Amociates, a New Jersey wnaulting firm. 'It's going to be a c m h course for many state commissionqwhe says. game ia for the local Bell company to come in and ask for significantly more than what they really want and then the state cuts that ih half and everybody's happy." In the f d analysis, the precise impact on phone rates remains highly uncertain, m e t analysts acknowledge. Under the FCC's access charge order, historically underpriced local rates are suppoeed to gradually tine while long distance rata come down. Since about two-thirds of the average residential phone bill of a b u t $37.50 per month ie attributable to long dietance service, that could mean an overall reduction for moat mnsumere. Yet lees aMuent customers-who make fewer long 'diitance callewill be hardeat hit by increasing local rates. The w l t s a p Nicklea, m that telephone rates "are going to rise onths play aJ to April 1 stunned rsm industry elready in tumult over the Impending The Federal Communications breakup of AT&T, still scheduled CommiRsion yesterday delayed for for Jan. 1. An AT&% spokesman three months its co~~troversial plm yesterday called the action "unbeto impose access charges for long- lievable" and d the company was distance telephone service, including "asbunded that it [the FCC] would a $2 monthly fee on consumer bills have taken this action a t this late that has drawn opposition in Con- date." But the action wm quick!y hailed gThe commission also delayed until by congressional opponenb of the April 1 action on the American Tele- a c c m charge plan who have been phone and Telegraph &.'s proposal working feverishly to pass legislation for a $1.75 billion reduction in long- to hold down l d phone rates. distance rates that would reduce the The access charge has been under price of the average long-distance attack in Congress and from conphone call by 10.5 percent. sumer gmups ever since it was final?'he decision late yesterday to ly appnwed by the commission in delay the access charges from Jan. 1 July. By Michael Isikoff Waaklngim Post Skff writar commission voted to suspend the plan in order to evaluate more than 43,000 pages of tariff filings and 160,000 in backup documents given to the agency earlier this month by AT&T and other telephone companies requesting new rates under the plan. "We're fast readers, but we f w d that there were some fairly contmversial issues in there and w e wanted b give the staif more time t~ get them done," said Jack Smith, chief of the FCC's common carrier bureau "This was a complete restructuring of the way AT&T charges its customers and other carriers." Still, there was widespread spxulation that the FCC was acting to cool mounting political peesure to modify its decision. Hours earlier, the House Commerce Committee had begun debate on major telephone legi&tion that would block some parts of the plan amid cries from consumer groups and state regulators that trslephone rates could m r e than double next year from the c o m b i d effRcts of divestiture and the access chs.?ges. Proponents of the legislation said yesterday that the three-month delay immediately makes their job m i e r since tb ey were under pressure t~ pass a bill before Congress goes home for the year in November. Under the legislation, sponsored by Rep. Timo1:hy E. Wirth (D-Colo.), Under the plan, consumers would pay a fee starting a t $2 a month, and businesees would pay $6. In addition, longdistance carriers would have to pay a whole now set of fees to interconnect with local operating companies. The FCC had intended to eliminate bngstanding *pricing distortions" in the telecommunications marketplace-principally, the subsidy paid by long-distance users to keep l a d rates artificially Low and affordable. But critics contended that it would force local rates so high that it would jeopardize the concept of "universal telephone service." FCC officials said yesterday the the $2-a-month access fee for longdistance service would be blocked permanently. In addition, it would create a "universal service fund" to cushion the impact of higher rates by providing subsidies to rural phone companies and the poor. But FCC officials insisted yesterday that their decision had nothing to do with the congreesional debate over the $2 fee, but rather with the mountains of paperwork related to another aspect of the p l a n - a new schedule of f e e and charges that long-distance carriers, such as the new AT&T Communications Corp. and MCI Communications Corp., will have to pay the new local Bell operating companies. Reprodriced with permission of t h e c o p y r i g h t claimant. On the Line - Drive in Congress to Hold Down Phone-Rate Rises Stirs Big ate Over Tekcommuni~ationsPolicy By J m SADOLEO sl4/fRcporler of THC WALL S ~ c JOVIUIAL r WASHINGTON-Margaret Kelly of Madson, wis.. uses her telephone for business and pleasure; the 77-yearold Mrs. Kelly's "business" is making calls to arrange her c h w ' s monthly dinner for senior citizens. For pleasure, she frequently calls her friends. Now, Mrs. Kelly faces a proposed phone bill increase of about 80% to $21.40 a month. "If the rates go way up, I guess 1 could cut out the visiting and go to the 60calls-amonth (economy-rate) plan," she says. "but I wouldn't like it." Mrs. Kelly's frustration is shared by many consumers as they become aware of the widely predicted doubling or tripling of many local telephone bills after the restructuring of telephone services following the scheduled Jan. 1 breakup of American Tele phone & Telegraph Co. Polls show that mast telephone consume n don't yet realize how their phone service will change-and how much their overall bills probably will rise. But when they find out, many irate telephone users are respond. ing like Helen HiR of Monons. WIJ.: "I write to whatever congressman comes on the radio and TV and appears to be on the cons u m ~ r s 'side." Thousands of Letten Thousands of such letters-and the thousands more that are anticipated when phone users learn of the scheduled changes-are moving lawmakers to consider legislation that would hold down part of the expected Increase In local telephone bills. The leglslative proposals have set off a flerce lobbying battle with AT&T and deregulators lined up against supporters of congressional Intervention, including not only consumer group but also, surprisingly, some of ATPT's competitors. But what some in Congress saw as a sirnple attempt to protect constituents has led to a complicated debate over the future of tele communlcations. The debate pits the need for a universal public telephone network against private industry's race toward new systems capable of data and video transmission as well as telephone service. That competitive new era will brhg advanced tech. nologies and a system in whlch each user bears the full cost of his service. "Two extremes have divided those of us In Congress studying the problem," says Democratic Rep. Edward Markey of M a s w chusetts, a member of the House Telecom. munlcations Subctrnmlttet. "We know that we can't turn back the clock to some nonexlstent golden age of the phone system, and yet we have to ensure that the future comes at a price that's reasonable for the nation's residential consumers to pay." Industry experts m d consumer adve cater alike say average telephone usen will gab lower long-distanec rates next year and additi~na)benefits letcr Irsm the new !tach. nologies. But critics charge that local (ustomers are being forced to pay too much of the bill for the changes, which they say fa. vor large corporations that are heavy users of long distance. Today, the House Energy and Commerce Committee will begin considering legislation .to revise some scheduled phone charges. A bill pending in the Senate would delay the charges for two years. FCC Decision Congress can't do anything about the a g proximately $6 billion to $8 billion of rateincrease requests that local phone companies have put before state regulatory agencies. So both chambers are focusing on the Federal Communications Commission decision. also to raise local rates by having residential and business telephone users pay for access to long-distance services. Currently, access charges are included in long-distance rates. But that system will be unworkable after Jan. 1, when AT&T's Bell System is split into independent local phone companies and AT&T retains only long-distance service. The FCC reasons that bec a w the access charge represents the cost of the line between homes and the telephone company, local to e n should pay for it. In 1984, access &$s. whether or not UP e n make long-distance calls, will be $2 a month for residential customers and could increase to between $5 and $8 monthly by 1990, depending on inflation. Business customers will pay up to S6 monthly for each line next year. "The $2 access charge isn't going to c a w anyone to stop using the telephone," an AT&T spokesman says. "The break-up of the Bell System is leu than 90 days away; if Congress wanted to adopt the attitude that competition is not the answer, they should have done so 10 years ago." Deregulators say local rates won't go up as much as local companies have proposed because state reg. ulatory agencies probably will approve smaller increases. And the FCC argues that by removing extra charges from long-distance services and allowing companies to compete, the cost of long-distance calls should decline by about 15% next year, and eventually by 35% to 40%. Opponents argue that the bypars threat is exaggerated. In a recent study, Congreao's General Accountlng Office agreed. saying that the FCC doesn't have the research on hand to prove Its point. Critics also argue that the K C went too far in shifting costs to local customers. Not only will the planned $2 access charge for residential users increase phone bills, they contend, but other FCC changes plus huge local-rate increases could threaten the availability of phone service for many low-income, elderly and rural consumers. Each of the decisim to increase phone charges "deals with a very legitimate problem," says Eric Schneidewind, the chairman of the Michigan Public Service Commission. "But taken together and happening all at once, they're a disaster. There was no thought given to how doing all these things at once would affect the nation's universal telephone service." Michigan Forecasts The Michigan commission estimates that next year between $9 and $12 will be added to the state's average local bill of $10.62. ammission officials say that with Michigan's high unemployment rate, the increase may cause 10% to 15% of telephone customen to cancel their sewice. But Michigan Bell says anyone with a phone now should be able to afford one next year. Consumer advocates say higher local rates won't be offset by the drop in long-distance charges b e c a w most residential customers don't make enough long-distance Calls. Samuel A. Simon, the executive director of the Telecommunications Research and Action Center, a citizens' lobbying group, says the biggest winners will be the 1% to 5% of the largest users of long-die tance services-mainly big corporationsthat account for 30% to 50% of long-distance revenues. "The real question here is whether longdistance customers will make any contribution to the fixed cost of the local lines that they use." says Rep. Tlmothy Wirth, the Colorado Democrat who heads the House Telecommunications Subcommittee. Mr. Wirth draffed much of the telephone legisla. Bypass Systems tlon that has been passed by that panel, and The real impetus for access charges is is to be considered by its parent Energy and the FCC's fear that if long-dlstance service Commerce Committee this week. remained over-priced, large companies would bulld their own telephone and data networks. New York City's Teleport facility on Staten Island ls an example of such a se called bypass system. If such system be. come common, the FCC says, the public telephone network will lose revenue and do. terlorate. "You can't make the decision to open up the system to competition and then tell flrms the local telephone company will Q 1983 Dow Jones & C o m ~ a n y .Inc. charge them more than they'd pay else Reproduced with permission of whfre," ~dlmAlbert Halprln, the author of the copyright claimant. the FCC a:cess-charge order and now a prtVat@cclrJulm.1. "You guar;tntM %at they'll lceve tk.? sptsn." 37 "I've been saytng for years that" lone distance users pay too much of the local cost. "and the industry loved that position, until somebody-the FCC-offered them the chance to pay none of it," Mr. Wirth says. "That only makes sense if you wan1 to load some of your legitimate costs onto small iocal customers." BUS' Provisions The House bill proposes to eliminate about $1.9 billion of access charges for residential telephone users but to let stand $1.6 billion in business access charges. Under the measure, longdistance rates would still d e cline somewhat, its supporters say. because the bill expands an FCC system of charges against businesses that build private tele phone networks. The measure also would require "lifeline" telephone service for the poor, though it doesn't require states to adopt income limits for such services. A more cautious proposal passed by the Senate Commerce Committee would put a twwyear moratorium on the FCC accesscharge order and tell the commissioners to reconsider their decision and to report to Congress by March 1985. Like the House bill, the Senate version would affect only the resdential charge. ATBT has characterized both bills as attempts to create "chaos out of order" and has wsponded with a hsge lobbying effort against the proposals. FCC Chairman Mark Fowler also opposes congressional action. He says the agency's decision will let states require basic "lifeline" service and establishes a general Eiid to subsidize telephone companies high-cost rural areas. Many c&ume.r groups have embraced the House proposal. "It's a pretty darn good compromise," says Eugene Kimmelman of Congress Watch, a Ralph Nader group. "It cuts in half the extra costs that are now placed on long-distance service, and it provides local-service subsidies only for those who need them. In a different era, this b~ll would have been considered a major victory for industry. We're willing :o view it as a victory for consumers. too, because we don't want to stop technology." Switch in Positions More su~rislnply.MCI Communications Corp.. the nation's second-largest longclls. tance telephone company, says it will s u p port the Senate bill, and GTE Corp.. the third-largest, is backing the House measure. The two companies have abandoned what had been the industry's united opposition to congressional action. GTE's change of heart was good news to Sen. Bob Packwood, the chairman of the Senate Commerce Committee and the Senate's main proponent of leg~slationto reverse the access-charge order. "I think the members of my committee came to see that not everybody in the industry is zgainst our bill," rhe Oregon Republican says. "It's pretty much AT&T and the Bell companies out there alone now." The competing long-distance companies, ( M E acquired the Sprint long-distance sfltern last Junei changed sides after realiltng that the FCC order will increase their costs next year substantially more than they had expected. The companies are asking the FCC to change its mind, and MCI has asked a federal appeals ,court to reverse the agency's o~der. Difficult Issues But it is those kinds of disputes, along Mth complicated telecommunications policy issues, that Congress is finding intractable. Another difficult problem is determining which states' local telephone companres will qualib for subsidies from the FCC's so. called universal-service fund, established to help companies in high-cost rural areas. Some Northeastern states fear that under the FCC's plan, money would go to fastgrowing states and not just to high-cost rural a.reas. Congress knows that these issues mean little to people who will get higher local telephone bills no matter what's done in Wash. ington. And consumer advocates say the av. erage telephone user won't soon reap all the benefits of the changing telecommunications system. "The benefits are that long-distance rates are being pressured down and that eventu. ally consumers will be able to buy little computerized devices for their phones that will let them do their banking or shopping from home." Congress Watch's Mr. Kim. melrnan says. "The dilemma is that in the shon run, the price of moving toward competition in the system will fall more heavily on the average consumer." P Be Chicken Congress is taking on AT&Tin a last-ditch effort to check rapidly rising phone rates. hanging the way Amaiunr pry for telephone aervice w u never going to be C m y . Now Conhas turned the already bewildering revolution intoa l i t i d battle myd. than w h y a d n the coufiordered breakup sf ATBT, a bipartisan coalition of hwmrkm is valiantly struggling to w e midentid customers $2 on their monthly phone b i k v e n thougb they simultaneously face r whopping 57.24 billion in proposed local-rateincreaacs. The 11th-hour effort h u rallied consumer groups against the Federal Communications Commiuion, pitted ATBT againat its competitom and amountc to what Alfred Kahn, fonner federal regulator, calls "a national game of chicken with the world's beat telephone rystcm." The complex controversy actually h u leu to do wlth the breakup of ATBT than with the increased competition in the long. distance market that began years ago. Ever dnce the FCC allowed competitors into the longdistance deld, it hu been incrmingly uneconomical for ATBT to continue its ractice of subaidiring local telephone sewfrom long-distance revenues Beginning Jan. I-the n m e dry Ma Bell KpatlltU from its corporate children-the FCC will change the way local service is paid for. Long-distance rate will drop, but charges for basic local service will rise precipitously as local companies scramble to make up lost funds (chart). To help defray mme local coats, the FCC plans to charge residential CuMomem an additional $2 each month- fk and business customers up to S b f o r 1 0 4 "access" to long-distance lines, whether or not they make long-distancecalls. Gradually, residential customers would assume more of the burden, and sheir fees a u l d rise to as high as $12 a month by 1990. Congress can do little to stop the rise in basic local rates but it can halt the FCC's access c h a r g m n d lawmakela u e scrambling to get on the bandwagon. "They're seeing something that's real-a sharp increase in phone rates," says Rep. Timothy Wirth, a Colorado Democrat who waged the fight virtually alone last year and who now cames a sheet in his coat pocket to sign up eager cosponsors. Wirth's bill would repurl the rtaidential accese charge a l t e gether, levy higher charges on business customers and long-distance carrien and ~ r u c ; H& - - Larry k n m S - ~ c w s w r l ~ establish a 5400 million "universal service fund" to keep down costs of residential service. A similiar bill in the Senate would delay residential access charges for two years. "It will be a dynamite issue in 1984," says Bob Packwood, chairman of the Senate Commerce Committee, who h o w to bring a bill to the Senate floor later this month. Widom': Consumer groups are fueling the congressional efforts, charging that access fees are unfair to those who make no long-distancecalls and may force some lowincome residents to forgo telephone service. "We have retired widows whose only income is from thecoal mines, and that wasn't that much," says Jack Bentley, manager of the independent Delta County Telephone Co, in Paonia, Colo. "When you start addingS2, $3, 54extraamonth, it will comeout of what they pay to eat." The California Public Utility Commission has challenged the FCC's right to impose the access charge. ATkT long-distance competitors-including MCI, GTE and ITT-also oppose the FCC plan because of a provision setting the f m long-distance carriers must pay tolocal companies. Those f m , they say, are overly favorable to AT&T and would cost them as much as SbOO million next year. They, too, are likely to file suit against the plan unless the FCC recansiders. AT&T, meanwhile, has thrown its prodigious lobbying power against any efforts lo tinker with thcFCCforniuli~,Noting pointedly that he s p k e for the company's "3 million shareholders, our 1 million employ- lican. "Members ure going to fall all over consumers get their firht postdivmtiture phone bill, it may be in u h many us four themseivatozap the phonecompany." ecs and our half million retired people," For consumers, the real zap will come in parts-for basic local service (provided by .+T&Tchairman Charles Brown last week basic locakrvice rata. The seven Bell Sys- the local company), for equipment rental pleaded with Congress not toconfusedives- tem companies that will emerge from the (available from several sources), for ATkT titure further. AT&T will repeat that ma. breakup-as well u smaller. indewndent long-distance charges and for a discount sage in a mashive organized letter-writing phone ;ompanits-have a stiggeriig array long-distance service such as MCI. Begin. canlpaign to lawmakers and a $1.5 million of rate increases pendine before state utility ning later next year, customers can contract national advertising campaign beginning commissions, some dbubling or tripling with their local phone company tobeserved this week. More onrinously, ATkToftlcials rates in the next few years. State regulators by asingle "primary" long-distancewrvice, last week threatened to "reassess" their pro- may scale back many of those requests, but But ATkT last week announced plans to posed 10.5 percepe -:duction in long-dis- they are under increasing pressure to let charge 75 cents for long-distance directory. tance rates-and , saps even raise long- rates rise to keep local compmia afloat. assistance calls next year. Customers can distance charges-if the FCC's access plan The local companies, in turn, are under save by buying their own phone, but there, is overturned. pressure to let rates reflect the actual cost of too, they face a bewildering array of opChanging the access-charge formula providing service, usually for the first time. tions, from purchasing their current phone8 clearly has its danggs. Both AT&T and That change would hit customers particu- fcr as little as $15 to buying fancier new FCC officials warn that business customers larly hard in states where regulators have equipment for $200 or more from any of may drop out of the public telephone net- kept r a t e artificially low. "The cost to pro. some 17,000 retailers. work if they are forced to bear more of the vide flat-rate service in California is $29. We Wcltw'. Just how consumers' total telecosts. Already, companies such as Citibank charge $7," says Gary M c k of Califor- phone tabs will change depends on their calling habits. Given ATkT's proposed 10.5 percent cut in long-distance rates, customers who make more than $20 worth of long-distancecalls will save money on longdistance bills next year, even with the $2 access charge. Poor and rural customers won't necessarily lose out on the savings, some experts say, since studies show they make a disporportionately high number of long-distance calls-perhaps to save the traveling expenses. Those customers who make few local calls may well save on local r a t a as well by opting for "measured sewice" plans. Even now, some companies offer discount "lifeline" services that provide residents with unlimited incoming calls for as little as $2.50 per month, with a nominal charge for each outgoing call. For those customers, the &as charge may indrwd be the steepest rix in their phone b i d next year. Whether the coming revolution will improve the quality of phone service remains an o p m question. Neal Swearingen, an E.F. Huttonvicepresident, saysthat under divatiture, I dcompanies as well as ATBT arc Consumers haw only just begun tojfght the incrarrrs: 'A dynamite issue i n 1984' free to diversify into new areas such as p r c ~ viding mobile phone service, intraoffice sysand Heinz USA, and even some govmment nia's Pacific Telephone B Telegraph Co., tems or computer-switching n e t w o r M of which will help boost profits. "Comagencies, have built their own direct micro. soon to bscome Pacific Telesis. wave links to long-distance switches, byTelephone users in rural areas could be petitive environments have traditionally passing the local telephone companies. Big particularly q u e u e d by new pricing sys- meant better products and better services," businesses make up the lion's share of tele- tems now being developed by many com- he says. "It's going to get worse," counters phone revenue-5 percmt ofSouthwatern pania. Some are considering irnplement- Charla R o b b i i of International Dau Bell's business customers, for example, pro- ing "measured" r a t e for local calls that Corp.,who sayst b t forbusinasathat may vide 55 percent of its revenues-and as more would differ depending on the duration, have a half dozen types of phone d c e a of them leave the traditional telephone net- time of dav and distance. Illinois Bell (soon "there'sacoordination issue. You can't pick a 5 up the phone and call one person. The old work, local companies will have to spread to be part-of ~ m e r i t c c h )has their costs over an even smaller n u m b of percent rate infor urban custom- t i m a are over." On balance, most experts ers-and a 23 percent hike for rural r a i - a p e w i t h Kahn, now at Cornell Univmity, users, forcing residential rates still higher. Zap? Congressional reformers counter dents. Surprisingly, there have been only who says that "the gross present system of that the Wirth bill would partially recoup scattered protests. "I don't think that most subsidization has to go" and that there uc such losses by charging business "bypass- people really r&ze what this means at the more efficient ways to handle those few ers" a separate fee. FCC officials, mean- bottom lint" says Dennis Verkler of the customen who might be hurt in the transiwhile, say their plan would waive access Illinois Farm Bureau. "And they probably tion. Even Kahnadmits, however, that in 20 yean "there is a real possibility we will my. charges in hardship cases-and both sidm won't until they get their first bill." Indeed,in arecent New YorkTimesKBS 'What the hell did wedo? " predict a furious battle in the coming months. "AT&T is going to havemoretrou- pi1 only 29 percent of Americans said they ble on this one than ~thas had in the past," had read or heard enough to know how says Rep. Dick Cheney, a Wyoming Repub- divestiture would laect them. Even when NEWSWEEWOCTOBER 17.1983 Fee Is Put Off BvJ Senate Panel By Michael Isikoff Washlngta, Port WfW r I W The Senate C o m m a Cornmisharply divided over how to deal with expected shlrgea in telephone rates after the breakup of the Bell System, tentatively voted yesterday to delay for one year the Federal Communications C o d s recent order requiring residential telephone users to pay a monthly "access chargewfor Iongdistsnae 8ervil.y. The panel, however, was unable to agree cw more comprehensive legislation prepared by its chairman, Sen. Robert Packwood (R-Ch.), that would have barred the access charge permanently and attempted to guarantee universal lowcost service for all telephone users. The committee will reconsider the issue next week. An angry Packwood, who found himself outmaneuvered at the last minute by his own comllraunications subcommittee chairman, $en. Barry Coldwater (R-Arii), and abandoned by a majority of his panel, strongly opposed the one-year moratorium as inadequate, and charged that tbe FCC could circumvent it easily. "This is not going to help the rum1 areas," added Sen. Ted Stevens (R-Alaska), who a h opposed the moratorium. We've knocked out the concept of universal telephone mNicem The committee's amion u n d e d tbe amfusion and uncertainty surrounding telecommunications issues in the face of next January's owrtordered divestiture by American Telepholle & Telegraph Co. According to some estimate, ts)ephone bills in some states cwld triple. In July the FCC approved longdistaa~earsll charges of $2 a month for residential ueen, and $6 a month for b u s i i The drargea are to grow steadily for residential users and am eqmcted to reach between $10 and $12 a month by 1990. 0 1 9 8 3 The Washington P o s t Company R e p r o d u c e d with p e r m i s s i o n o f the copyright claimant. T h e ~ ~ t c s i n b ~ t Q e l l d t B e ~ - aan&g pricing subidy-..amndy estimated at 811 billion a year* which kqilistobce mteo b v e kept local charges artificially low. With rising fears over the cmbined impact of divestiture and the access charge, Bdh bows of Congrese began considering legislation this SUIPImer that w d d preserve the subsidy an8 otherwise ensure that the p r , elderly and hlnral residents would not be priced out of telepkoae service. $200 million "unl companies and use their own systersl%The fund then wouM be used b subsidize local t e k p h companies h t have espciaily high cats, such as ~ i n r u r d o r m m ~ a s e a a Similar legislation hss k e n spasolled in the Nowe by Rep. Timothy E W i (D-Cth), chairaarm of the House tel-htiom subcommittee, which is scheduled to take it up next wee&. AT&T and o h telc+txxrm-tioaa firm ouch as MCI ConmWtiQBs have lobbied sgainse the bills Yesterday's d m dmvd, mover, that there was little aonsensw on w h t W d be done. Sen. Frmk Lauknbrsrg (D-NJ.) argued ehat the industry is changing t a rapidiy for Chnpas t~ act in m y compmke~sive way right now. We're xnoving along pell-mell into c h herre: he said in arguing against Paclmods propoaaL In addition, Goldwater, who conducted the communications subcommaietee beerinlps on the B a c M bi4 swikM gears on M&, tent out a brief Iletter to d committee membem saying he oppoeed the bill, anel then failed to show up at yesterday's meeting to erplain why. Committee murce said ehet e0Mwat.m'~adom m y have had more to do with peAonal pique at Paclorrood than substantive diffemncss on the legisiation it- &. Lautenberg then offerd-ad the ammibe by a 9 k, 6 vote tentatively paamd-4~wrre tim. ited amendment, which delays the aooaes on residential wm until Jan. 1, 1985, but @ye8 in plece the charge on b u s h a use= Oppoaents euch as SWem s i 4 that the cmnmke's 'breathing timewwillbelittle momthaneix months becew, after that, congreesional dclibemtions wid be intermpted by two political mventione a d a presidential election. states have filed for rate hikes totaling 6 billion dollars. Examples: m In Texas, Southwestern Bell Telephone Company has asked for a 1.7billion-dollar increase that would boost the average monthly phone bill from $10 to $30 a month. California regulators are considering a 1.3-billion-dollar rate increase for Pacific Telephone & Telegraph. If the The breakup of Ma Bell will hike is granted, phone bills would rise bring with it sharply higher from $7 a month to $18. charges to userti-more than Chesapeake & Potomac Telephone some people can afford. Company of Maryland is seeking a 218rnillioa-dollar rise in its rates that would Govenunent efforts to spur competi- raise the average monthly bill to tion in the telecommunications indus- $21.30. try are producing an unwanted side Behind the spate of requests for effect: Sharply higher telephone bills higher rates are efforts by local telefor users of the nation's 108 million phone companies to recover some 9 billion dollars in revenue they will lose phone lines. Consumers nationwide are facing an- at the end of 1983 when their ties with nual increases of 40 to 50 percent in AThT are severed as part of a courtthe cost of telephone service over the ordered settlement of an antitrust case next two years. In some areas, rates against the giant monopoly. Phone-industry analysts explain that could jump more than 300 percent. By 1988, experts say, the average AT&T, under pressure from state reguAmerican family could be paying as lators, has used earnings from long-dismuch as $50 a month for telephone tance lines to subsidize the cost of local service, up from $10 today, in addition service. With the loss of those subsidies, they add, consumers will be forced for to long-distance charges. The rapid escalation in the cost of the first time to pay for the actual cost telephone service stems from govern- of service. In the future, consumers may be ment moves to deregulate the telephone industry and the forced breakup charged for each phone call according of American Telephone & Telegraph to the time of day, distance and length Company, a corporate giant that has of the call, instead of a flat monthly dominated the telecommunications in- rate for local service. This would benefit consumers who make few calls, dustry for more than a century. Consumers will feel the first impact on Jan. 1,1984. That's the date set by the Federal Communications Commission, Playing Catch-Up in a July 27 ruling, allowing local telephone companies to charge residential In yeam past, local phone rater, customers $2 a mcnth to connect to may have looked like a bargain to long-distance lines-even if no long-dismany people, because rate intance calls are made. creases did not keep pace with Exception for Centrex. Business cusjumps in werell consumer prices. tomers will pay $6 a month per line for 1977=100 the same service. But companies using LotrlCornunm Centrex, a system which provides multiple long-distance lines, will pay only IF* $2 a month for each line. Companies that purchase private long-distance services and those that use data transmission will pay a separate monthly access fee of about $25 for each of those lines. The FCC action amended an earlier ruling that would have allowed higher charges for residences, lower ones for business. It came less than a week after Since 1901, however, local legislation was introduced in the House phone bills have risen faster and Senate to slow rate increases. than t h e consumer price InHearings on the bills began July 28. dex* trend that's certain t o Analysts point out, however, that any accelerate with the breakup of legislation to emerge probably will ATBT. merely soften, not prevent, future inuarwausqua creases in the cost of telephone service. Already, local phone companies in 20 ' Tzg7 while increasing the cost to those who use the phone extensively. Even so, some officials fear that the rapid run-up in local rates threatens the concept of universal phone senice, and could force 10 to 15 percent of the nation's low-income families to drop telephone servire. "There are going to be a lot of people who won't be able to afford basic phone service," says A1 Erwin, head of the Texas Public Utility Commission. Hard hit, too, will be customers of small, independent telephone companies serving rural areas and small cities such as Monroe, Wis.; Moncks Corner, S.C., and New Braunfels, Tex. Some independent phone companies now charging $6 a month or less for residential service have not had a rate increase in more than a decade because of hefty profits from toll calls. Says Jack Herington, government-affairsdirector of the 1,432-memberLnited States Independent Telephone Association: "Rates will probably double in the next four or five years for most of the rural companies. There'll be 200 or 300 percent increases in places that hwen't had a rate increase in the last 15 years." Heavy users leaving. Rate increases already are driving off some large customers of local phone companies as more businesses and big users of telephone service establish their own communications networks. In Indianapolis, a private microwave system links 15 public-school buildings, thus depriving the local phone company of $700,000 a year in revenue. South Central Bell Telephone is losing an estimated $300,000 a year because Southern Railwa): has installed a private microwave system for direct communications between offices in Alabama, Georgia and Kentucky. It's the threat of such competition that lies behind rate-hike requests. William Melody, a former FCC official who teaches communications in Vancouver, B.C., asserts that the phone companies are "milking local service to pay for the costs of upgrading local networks for data transmission." Faced with the loss of revenue resulting from the government success in breaking up AT&T and encouraging competition, local telephone companies contend that they have no alternative but to boost rates. Their efforts, however, are expected to arouse heated opposition in the coming months as Congress and state regulators feel the heat from consumers who believe that low-cost telephone service is a necessity, not the luxury it 0 threatens to become. By RO IALD A TA IZOR