by Mark MacCarthy

Breaking up is hard to do: Why the Bell System breakup isn’t a model for tech

Apr 02, 2018
Technology Industry

Today’s tech companies are not like the old Bell System.

Recent discussions of tech antitrust such as those in the Wall Street Journal and the New York Times  often refer to the breakup of the Bell System in the 1980s as an attractive example of successful antitrust action.  Readers are encouraged to think, well if it worked so well for telephones why not for tech? 

It’s true that many people think the Bell System breakup was a great success, spurring innovation and competition in long distance cell service and internet access.  But even if you think that, it is worth remembering that today’s tech companies are not like the old Bell System. For one thing, they aren’t regulated monopolies providing essential infrastructure services.  For another, it is hard to find natural ways to split up their businesses that might mimic the separation of the telephone system into local and long-distance services that made some technological sense for the Bell System.

Moreover, as Carl Shapiro says, there should be “some showing that breaking these firms up would leave consumers better off in the foreseeable future.” To date there’s been no such demonstration. Under recent Supreme Court rulings such as Verizon v Trinko, the alleged monopoly leveraging that justified the Bell breakup would not be a sufficient basis for a finding of antitrust violation today.

But the Bell System breakup was not an unmixed blessing. It was more disruptive and costly than most people remember – and in the end it didn’t really accomplish its stated economic goal of generating long distance competition for consumers. Do we really want to do that again?

Let’s look at what happened.  In 1982, the Justice Department and the Bell System signed a consent decree breaking up the company into a single long-distance company and seven local telephone companies.  The unified Bell System was a vertically integrated monopoly regulated by state public service commissions and the Federal Communications Commission (FCC) and had built a national and international communications network that was far and away the best in the world.  It’s research arm, Bell Labs, had been a fountain of innovative research for decades producing such breakthroughs as the transistor, the laser, and the silicon solar cell.

The Bell System breakup was not an unmixed blessing

But new technology, primarily microwave transmission facilities, held out the promise that long-distance service could be hived off from the rest of the system and provided competitively.  When the FCC began authorizing alternative long-distance providers in the late 1960s and early 1970s, the Bell System resisted using its control over local telephone companies to handicap the new long-distance providers. The Department of Justice filed an antitrust case in 1974, alleging that these practices violated the antitrust laws.  That was the case that was settled with a breakup agreement in 1982.  

Judge Harold Greene, who oversaw the breakup, espoused an expansive and political view of the antitrust laws that would be totally out of place today. There were, however, separate economic concerns driving the Bell system breakup, namely to foster competition in the provision of long-distance service.  Without separation from its long-distance arm, the Bell System would inevitably crush the nascent long-distance competitors.

To enforce the divestiture, Judge Greene spent a dozen years enforcing line of business restrictions on the Bell System, preventing them from providing information and long-distance service.  These constraints were lifted in the 1996 Telcom Act which authorized competition in all facets of the communications business, local and long distance.

In any case, this effort to create a separate long-distance market failed miserably and was imitated nowhere else in the world.  The fundamental problem was that long-distance was not a separate consumer market.  The industry collectively wasted billions in unnecessary interconnection facilities and flashy marketing campaigns.  Today’s consumers would probably view the commercials urging the public to pick their own long-distance company as faintly ridiculous, as if they were being asked to spend valuable time choosing their bank’s data processing service.  Moreover, the competitive rush into the provision of long distance service created a glut of communications capacity that contributed to the tech and telco crash in the late 1990s.

The fundamental problem was that long-distance was not a separate consumer market

It took 20 years before these separate long-distance companies were folded back into integrated communications companies that provided seamless local and long-distance service as a single product. The sundered parts of the Bell system slowly but surely reassembled themselves and expanded into the provision of cell phone service, internet access, and video. First came horizontal mergers that reunited the local operating companies, followed by a vertical merger that folded an ailing long-distance company back into a former Bell company that took on the historic AT&T name. 

This chart from the Wall Street Journal shows how it all happened. Stephen Colbert’s 2007 take makes the same points – but it’s funnier.

What the Bell System breakup shows is that trying to engineer competition through a breakup can tie up industry resources for a generation and lead to nothing productive in the end. It requires ongoing judicial supervision – not a simple one-time divestiture. And it can destroy economic efficiencies, which can be recovered only slowly and painfully over time.

So, when people say, let’s break up tech the way we did the old Bell System, it is reasonable to ask whether we really want to go down that road again.