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

by Steve Coll

The reason Baxter liked the case had nothing to do with its factual merits, or with the history of John deButts, MCI, and telephone industry competition. Rather, Baxter was enamored of the government’s relief theory in the case—which sought complete separation of the regulated local operating companies from relatively unregulated Western, Bell Labs, the Long Lines—because it was a flawless example of the free-market economic model Baxter believed in. Baxter argued that no one company should be able to integrate regulated and unregulated divisions of its business, because then it could use the “safe” profits from its regulated side to subsidize the prices of its unregulated products. Such “cross subsidies,” Baxter wrote, skewed the otherwise pristine mechanisms of a free-market economy. Of course, the role of subsidies in the telephone industry was so complex as to be inscrutable, and in some cases the subsidies were designed to achieve social goals such as low-cost local phone service. But Baxter believed that unfettered competition was the only efficient way to achieve such social ends.