Chapter 154 - Abracadabra: Breakup of the Bell System & US-Canadian Relations in 1982
Above: The logos for “Ma Bell” - AT&T - pre-1982 (left) and post-1982 (right).
“I heat up, I can't cool down
You got me spinning
'Round and 'round
'Round and 'round and 'round it goes
Where it stops nobody knows
Every time you call my name
I heat up like a burning flame
Burning flame full of desire
Kiss me baby, let the fire get higher
Abra abracadabra
I wanna reach out and grab ya
Abra abracadabra
Abracadabra” - “Abracadabra” by Steve Miller Band
“The major advances in speed of communication and ability to interact took place more than a century ago. The shift from sailing ships to telegraph was far more radical than that from telephone to email!” - Noam Chomsky
“Canada is like a loft apartment over a really great party.” - Robin Williams
In 1877, the “American Bell Telephone Company”, named after Alexander Graham Bell, opened the first telephone exchange in New Haven, Connecticut. Within a few years, local exchange companies were established in every major city in the United States.
Use of the Bell System name initially referred to those early telephone franchises and eventually comprised all telephone companies owned by American Telephone & Telegraph (AT&T), referred to internally as “regional holding companies”.
For more than a hundred years from its founding until January 1982, Bell/AT&T held a virtual monopoly on all telephone service in the United States. It controlled the entire industry through is five major divisions:
- AT&T Long Lines, providing long lines to interconnect local exchanges and long-distance calling services, and international lines including submarine cables
- Western Electric Company, Bell's equipment manufacturing arm
- Bell Labs, conducting research and development for AT&T and Western Electric; ownership initially equally split between Western and AT&T
- Bell operating companies, providing local exchange telephone services
- AT&T, the American Telephone and Telegraph company, who led the combined enterprise in planning and finance.
The company managed to make it through the progressive era largely unscathed, by signing what came to be known as the “Kingsbury Commitment” in 1913. Signed in response to the federal government finally beginning to hear antitrust arguments against the company, the Commitment enabled AT&T to avoid break-up or nationalization in exchange for divesting itself of Western Union (a major finance company) and allowing non-competing independent telephone companies to interconnect with its long-distance network. Twenty-one years later, in 1934, the Federal Communications Commission (FCC) assumed regulation of AT&T.
The strength of the company’s vertical monopoly was so great that by 1940, the Bell System effectively owned most telephone service in the United States, from local and long-distance service to the telephones themselves. Bell could thus prohibit its customers from connecting equipment not made or sold by Bell to the system without paying harsh fees. For example, if a customer desired a style of telephone not leased by the local Bell company, said customer was required to purchase the instrument at cost, furnish it to the telephone company for rewiring, pay a service charge, and a monthly lease fee for using it.
This sort of cutthroat behavior was detested by the American people, but there wasn’t much that they could do about it. AT&T had built their obscene fortune on just these sort of ruthless tactics, from boardroom takeovers and buyouts to outright intimidation (and even alleged cases of violence in its early days). Meanwhile, the federal government offered only token resistance.
In 1949, the Justice Department argued that Bell was using its near-monopoly to unfairly establish an advantage in related technologies at the expense of potential competitors. Bell Labs, for instance, received credit for inventing the transistor. But if AT&T wanted to enter the fledgling computer industry, then they were going to be challenged on their telephone monopoly.
Ultimately, AT&T agreed to a new “consent decree” in 1956. The decree limited AT&T to 85% of the United States’ national telephone network and certain government contracts. It also forced AT&T to divest itself from its interests in Canada and the Caribbean, where the company previously enjoyed virtual monopolies as well. While Bell Canada and Northern Electric would go on to be highly successful companies in their own right in Canada, AT&T was allowed to continue to dominate the American market.
The consent decree also forced Bell to make all of its patents royalty-free. This led to substantial increases in innovation, in particular in the electronics and computer sectors, and is arguably credited with launching the open-source movement, which would have massive ramifications for the future of computer and networking technological development.
Even the concessions forced upon AT&T by the 1956 decree were relatively minor in the grand scheme. They did little to disrupt the behemoth’s profits. At the same time that the company was divesting from its Canadian and Caribbean holdings, it was (for the time) allowed to keep the massive holdings it held, for instance, in Japan’s Nippon Telegraph and Telephone (NTT), among other foreign investments. For several more decades, AT&T was able to argue that the monopoly it held was a “natural” one - on account of its building and maintaining all of the infrastructure necessary for telecommunications.
The rise of cheap microwave communications equipment in the 1960s and 1970s opened a window of opportunity for competitors, however. No longer was the acquisition of expensive rights-of-way necessary for the construction of a long-distance telephone network. In light of this, the FCC permitted MCI (Microwave Communications, Inc) to sell communication services to large businesses. This technical-economic argument against the necessity of AT&T's monopoly position would hold for a mere fifteen years until the beginning of the fiber-optics revolution sounded the end of microwave-based long distance.
Above: An AT&T advertisement from the early 1970s (left); President Mo Udall (D - AZ), a lifelong opponent of monopolies, including AT&T (right).
During this same period, tireless antitrust crusaders and progressives within the Justice Department, the FCC, and other regulatory bodies involved in interstate commerce continued to bring cases against AT&T. This legal battle began in 1972 under President George Romney, continued under the Bush administration, and kicked into high-gear with the election of noted “trust-buster” Mo Udall to the White House in 1976. Though he would grab far more headlines by breaking up the “Seven Sisters” oil companies late in his term in office, it can be argued that Udall’s efforts against AT&T were equally impactful in the development of the burgeoning information age. Though Udall would not serve long enough to see these specific efforts bear fruit, his successor would. Likewise an opponent of monopoly, Robert Kennedy was happy to see efforts on the case continue.
On January 8th, 1982, just under a year into President Kennedy’s first term in office, the US District Court for the District of Columbia settled a ruling in
United States v. AT&T. After nearly a decade of legal wrangling, the progressives finally had their way. And after more than a century of monopoly, AT&T (aka “Ma Bell”) would, in exchange for being allowed to enter the computer business, be broken up into seven independent companies, colloquially known as "Baby Bells".
Above: Map of the seven “baby Bells” created by the breakup of “Ma Bell” in 1982. They were: “US West” (Gray); “Pacific Telesis” (Purple); “Southwestern Bell Corporation” (Yellow); “BellSouth” (Green); “Ameritech” (Pink); “Bell Atlantic” (Red); and “NYNEX” (Blue).
With the American consumer's new ability to purchase phones outright, AT&T and the Bell System lost the considerable revenues which they had previously earned from phone leasing by local Bell companies. Forced to compete with other manufacturers for new phone sales, the aging Western Electric phone designs still marketed through AT&T failed to sell, and Western Electric eventually closed all of its U.S. manufacturing plants. AT&T, reduced in value by about 70%, continued to run all its long-distance services through AT&T Communications (under the new name of AT&T Long Lines), although it lost some market share in the ensuing years to competitors MCI and Sprint.
“Ma Bell’s” loss, which would take until 1984 to fully go into effect, was mostly the American people’s gain.
Immediately following the breakup, competition in the telecommunications industry surged. Companies such as the aforementioned MCI and Sprint challenged the “baby Bells” for market share. Though in the short term, this led to increased local-service costs, these eventually fell as the industry and FCC regulations adjusted to the new reality. Long-distance service costs, meanwhile, plummeted.
The breakup of Ma Bell also changed the way that broadcast networks of both radio (NPR) and television (ABC, CBS, NBC, PBS) distributed their programming to their local affiliate stations. Prior to the breakup, the broadcast networks relied on AT&T Long Lines' infrastructure and leased line networks to achieve this. By the mid-1970s, however, satellites built and launched by companies like RCA Astro Electronics and Western Union started to give Bell a run for their money. After the breakup, the calculus changed. Satellite distribution was cheaper, more efficient, and provided a higher broadcast-quality. The only delay had been on account of some local ground stations lacking the necessary equipment to receive the satellite’s signals. Following the 1982 ruling, satellite distribution quickly became the norm for broadcast radio and tv.
In order to remain relevant (and profitable) Bell attempted to pivot toward the computer industry. Experts predicted that Bell Labs, which had been so instrumental to the development of early electronics, would be a strong competitor to IBM and Texas Instruments, among others. Unfortunately for Bell, however, years of unchallenged monopoly had made them complacent. Though Bell Labs continued to produce strong R&D concepts, its manufacturing arm, Western Electric, was no longer profitable without being able to strong-arm customers into paying leasing fees for their telephones.
Though AT&T would eventually reinvent itself around its core business of long-distance telecommunications, it would forever be a shell of its former self, paving the way for other names to rise in the burgeoning information age.
…
Above: Prime Minister Flora MacDonald of Canada (left); the flag of Canada, since 1963 (right).
Since first winning a term as Prime Minister of Canada in her own right in the federal election of February 1980, Flora MacDonald had, in many ways, proven herself to be a trendsetter in North American politics. The first female PM of the Great White North, she was also the second female head of government of any G7 country (after Margaret Thatcher of the United Kingdom).
MacDonald was born June 3rd, 1926 in North Sydney, Nova Scotia, the daughter of Mary Isabel Royle and George Frederick MacDonald. She was of Scottish ancestry. Her grandfather had been a clipper ship captain who sailed around Africa and South America. Her father was in charge of North Sydney’s Western Union trans-Atlantic telegraph terminus.
In her youth, MacDonald trained as a secretary at Empire Business College and found work as a bank teller at the Bank of Nova Scotia. She used her savings to travel to Britain in 1950. There, she got involved with a group of Scottish nationalists who stole the Stone of Scone from Westminster Abbey and brought it to Scotland.
After hitchhiking through Europe, she returned to Canada and became involved in politics, working on Nova Scotia Progressive Conservative leader Robert Stanfield's campaign which won an upset victory in the 1956 provincial election. After working for a brief time as a secretary in the office of Prime Minister John Diefenbaker, she eventually returned to Stanfield’s staff and became a close political ally of his, as well as something of his protege.
Despite, or perhaps because of Stanfield’s soft-spoken, even-tempered personality, he became the definitive face of Canadian politics in the 1970s. A moderate in the “blue Tory” vs. “red Tory” debate threatening to consume the Progressive Conservatives at that time, Stanfield was, by virtue of his diligence and good nature, perhaps just the man to lead Canada from a time of uncertainty after Pierre Trudeau’s assassination under John Turner into one of cautious optimism about the future. Indeed, much of Flora MacDonald’s political ideology developed at the elbow of Stanfield’s pragmatism.
But although Stanfield (a monolingual, Anglo-Canadian from the Maritimes) managed to dampen the Quebec separatist movement with a new constitution and special recognition for some of that province’s “unique cultural identity”, he was unable to resolve perhaps the other biggest issue facing his nation throughout his time in office: trade with the United States.
Ever since its founding, Canada has felt a natural mistrust and resentment toward its much larger, more economically developed neighbor to the south. Indeed, although Canada and the US share one of the closest relationships in the world, with friendly relations, a strong economic partnership, and a close military alliance (as well as sharing the longest undefended border in the world), the relationship is also decidedly one-sided. Though larger in land area, Canada has always had approximately one tenth the population of the United States. Early Canadian politicians cut their teeth on a “National Policy” of high tariffs on American goods in order to protect fledgling Canadian industry. Canada also relied heavily on its original metropole - the United Kingdom for economic support.
Though the US-Canada relationship warmed significantly as allies during the World Wars, in the Cold War world, Canada struggled once again to find its own identity and sense of sovereignty, rejecting “domination” by the Americans. As many Canadians summed it up, “they produce all our tv shows and movies. We cut the lumber, mine the minerals, and drill the oil, sell it to them, then buy it back for many times the cost in the form of fancy toys - cars, computers, and so on.” Many Canadians wound up feeling like they’d become nothing more than an especially autonomous 51st state.
Thus, although Stanfield had managed to stabilize the Canadian economy, and pleased the oil-rich Prairie provinces (especially Alberta) by rejecting Liberal Party calls for a nationalized Canadian oil industry, he had failed (in the eyes of some) to adequately protect “Canadian national economic interests'' from predatory Americans with deep pockets. The relative economic stability of the mid-seventies fell to recession by the end of 1981, due in no small part to depressed oil prices in the US and throughout the West - the same “oil glut” that was helping to slash inflation back in the States. Meanwhile, Canadian manufacturing suffered, as American firms regained their footing.
Above: A political cartoon from the turn of the 20th Century, depicting British and American capital investment in Canada. Though the investment helped to develop Canada’s economy, many Canadians feared what foreign influence might do to their national sovereignty.
In the 1980 campaign, free trade became a major issue.
Generally speaking, both parties took up their historical positions. Allan MacEachen and the Liberals supported free trade while MacDonald and the Tories opposed it. In one of the campaign’s tensest moments, during a debate between the two, MacDonald accused MacEachen of “insufficient patriotism” because of his opposition to tariffs on American goods. MacEachen, shocked by the attack, famously retorted that he was “plenty Canadian, thank you very much”, but the damage had been done. Combined with her moderate stance on other issues and her campaign message of change, MacDonald managed to eke out a win, even as the PC party lost seats in parliament. Once sworn in, MacDonald then continued the recent trend of tense relations between the Canadian leadership and their US counterparts.
American President John F. Kennedy distrusted Canadian PM John Diefenbaker for “flip-flopping” during the Cuban Missile Crisis and other Cold War flashpoints. George Romney detested Lester Pearson, Pierre Trudeau, and John Turner for their opposition to the War in Cambodia. While George Bush and Robert Stanfield enjoyed a fairly close working relationship, Stanfield could not say the same of Mo Udall, virtually his opposite in every way personally and politically. Nonetheless, Robert Kennedy held high hopes for his rapport with MacDonald when he entered the White House in 1981.
One of his first foreign visits had, of course, been to Ottawa to meet with MacDonald personally. The two got on well enough (MacDonald was famed for her skill as a diplomat and she found Kennedy charming, contrary to the “ruthless bastard” she’d been warned about by advisors), but after RFK left Canada, later that year, Lindy Boggs, the US Trade Representative, received a much frostier reception.
Naturally, as her predecessors had for decades before her, Boggs favored a free trade agreement between the two countries. Eliminating tariffs on exports between them, free trade, she argued, would boost the economies of both nations, raising everyone’s standard of living across North America. This position stood in opposition to that of MacDonald and her Tory government, however.
From MacDonald’s perspective, the only industries which would benefit to any large degree from such an agreement were the resource-extraction and export industries - lumber, mining, petroleum, etc. Canadian manufacturing, especially in developing fields like high tech, needed to be sheltered from overwhelming (and cheaper) American competitors. While Boggs and MacDonald’s economic team eventually managed to work out a few bilateral agreements to reduce tariffs on certain, specific industries (mostly resource extraction and automobiles, a field in which Canada lacked a strong industry of its own), a true free trade agreement remained elusive. It would continue to do so for several more years.
During that time, however, America’s economy took off. A surge in aggregate demand caused by the Long-Ullman Tax Reform and lowering interest rates by the Federal Reserve at the tail end of 1981 let loose the American eagle to soar once more. Meanwhile, the Canadian beaver continued its struggle.
Growth remained sluggish or even nonexistent in some years. Wages stagnated. Labor disputes led to frequent strikes that helped paint MacDonald as a “weak” and “indecisive” leader, even if these were unfair labels. Despite whatever gains MacDonald made for her country internationally, domestically, she became increasingly unpopular. The “good feelings” of togetherness and nationalism fostered throughout Canada during the Stanfield years evaporated under MacDonald. Quebecois separatism returned as a major political force, mostly in response to the recession. The Prairies and Maritimes loved MacDonald for her defense of traditional Canadian industries, but the average Canadian felt that she was “old fashioned” and “out of touch” with the needs of the moment.
On the eve of the 1984 elections, the Liberal Party, now under former cabinet minister Jean Chrétien (a young, Francophone man of the Trudeau-school of Liberal politics) seemed ready to ascend to power for the first time in almost a decade.
Above: Jean Chrétien in a Liberal Party campaign ad from 1984.
Next Time on Blue Skies in Camelot: Another Changing of the Guard in Moscow
Glad you enjoyed. 