The Deal of the Century: The Breakup of AT&T

by Steve Coll

The cost of providing basic telephone service to the country was enormous. AT&T had to build, install, maintain, and replace hundreds of thousands of miles of cable and wire, millions of residential telephones and business telephone systems, as well as a sophisticated network of switching stations that directed every call to its proper destination. Just to maintain a system of that magnitude and diversity required huge expenditures by AT&T every year—$7.5 billion in 1971, more money than some large companies would spend in a decade on plants and equipment. And when customers demanded more phone service, as they had throughout the 1960s, AT&T’s capital requirements became astronomical. But if AT&T cheated on its investment, if it failed to spend the necessary money to build new phone lines and switching stations to accommodate new customers, the disastrous results would become quickly apparent. That was exactly what had happened by 1970. Inflation during the 1960s had driven up AT&T’s costs and had squeezed the company’s profits. Rather than raising phone rates to cover inflation, the operating company presidents had decided to cut costs and to stop investing so heavily in the upkeep of the phone system. In the short term, the companies’ profits rose, and the presidents were praised for frugality. But in just a few years, the neglected phone system, unable to accommodate the new demand for telephones, had collapsed under pressure.