Since 1973, officials of MCI Communications Corp. have been telling anybody who will listen that the Bell System should be broken up. Now that the breakup is close to reality, MCI should be facing a gleeful Wall Street.
But the investment community apparently is uneasy about the dramatic change and intense uncertainty brought about by the pact.
Announcement of the agreement between the Justice Department and American Telephone & Telegraph Co., under which the company will sell 22 local operating companies in exchange for an end to a government antitrust suit, has caused considerable concern on Wall Street. MCI's over-the-counter stock has fallen from about $32 (ask) a share to as low as $26 1/8. It closed Friday at $29 3/8 a share.
"The perception was that something that is good for Bell must be bad for us," said MCI Chairman William McGowan. " . . . the uncertainty is not gone because people don't have their hands on this. But considering the scope of this, it hasn't been a bad reaction."
Some on Wall Street suggest that with AT&T jettisoning its operating companies and keeping its more profitable long distance and equipment arms, MCI might have trouble continuing to offer rates as much as 50 percent less than those of AT&T.
"AT&T is going to have to pay for all the things they cost the local phone company, just like we do," he said. "I don't understand how something is magically going to happen to make those people more efficient, to make them lower cost operators."
He also says the company, even in the long distance business, is going to have to organize an entire sales and marketing operation, while at the same time maintaining a large corporate headquarters staff. "Are all those people going to give up their corporate jets?" he asked with a smirk.
And McGowan challenges the notion that the sleek new AT&T will dominate the telecommunications business any more than it will the computer field it is now free to enter.
"AT&T is going to put a lot of its energies into the computer business and it is not going to find what it thinks," McGowan said. "They think the vaunted reputation of Bell Labs is going to make them an overnight success. They're going to find that Bell Labs and Western Electric (AT&T's manufacturing arm) combined would have to be classified in our industry as a mediocre organization."
McGowan noted that some industry experts say that AT&T lost about 50 percent of new telecommunications equipment sales in 1981. "They've been living on their reputations for years," he said.
"Why should they all of a sudden be fantastic in the data processing business?" he asked. "What did they show in the communications business? Not a lot when it comes to equipment innovation. I'm not denying the work of Bell Labs; I'm just saying I never see it come out the other end."
McGowan also suggested that the new AT&T will face resistance and less than cozy relationships with a number of its current operating company subsidiaries. "People in the East don't realize" that some Bell operating companies, like Mountain and Pacific Bell, "don't much care for AT&T," he said. "They are not well thought of by many of those people and are considered arrogant and heavy handed."
McGowan said he thinks the many operating company people are likely to be bitter about their former employer. "When second class citizens are free, they don't like the guys who made them second class. Bell won't be able to dictate their rules any more," he said.
His company, he noted, will no longer be in competition with the local telephone company. "Our major problem will be gone," he said. "Our relationships and the tone of our relationships are bound to improve. A significant number of our employes were Bell people and they have relationships. Time will cure a lot of the personal animosity." ut McGowan said the process leading to AT&T's divestiture of 22 local phone companies will not be speedy and that his firm and other competitors have a variety of concerns that need to be addressed. For example, MCI would "bitterly oppose" the establishment by AT&T of a single holding company to run the new local operating firms. "Letting those companies band together could have as ill an effect on long distance competition as Bell's structure does today," he said.
The answers to those kinds of questions will come from the court and are unlikely to get clarification from Congress, he predicted. It will be difficult, in light of the uncertainty surrounding particulars of the settlement, to pass legislation during this Congress, McGowan said, even though Rep. Timothy Wirth (D-Colo.), chairman of the House telecommunications subcommittee, believes the divestiture makes enactment of new communications law imperative.
For the moment, MCI is proceeding with a $400 million capital improvement program. McGowan said the expansion program, adding miles of new plant to the microwave system, would intensify when the settlement is clarified. "There is going to be a very competitive long distance market out there," he said.
One of the few issues on which AT&T and MCI agree is the question of the impact of divestiture on local rates. Challenging a view expressed by many economists and other experts, both believe that local rates will not rise sharply as a result of the decree.
MCI, with little support from legislators or others in the telephone industry, has long challenged the notion that long distance revenues are used to subsidize local service, keeping residential rates down. In fact, the Department of Justice, in the antitrust case against AT&T, suggested that local revenues subsidize AT&T's competitive ventures, like equipment and other services.
McGowan noted that some phone systems in rural settings get subsidies from both the federal government, in the form of direct loans, and to a certain extent from long-distance revenues. But the solutions to the rural problem are simple, he said.
For example, if the Yellow Pages, a valuable industry property kept within AT&T under the settlement, were put out for competitive bid and the revenues given to the local companies, the subsidy could be made up, he suggested. "AT&T has never considered their interests," McGowan said of the rural, independent phone companies. "I would suspect that a lot of them are going to recognize that it's in their interests to negotiate with companies like MCI."
McGowan, whose company is awaiting an imminent appeals court decision on a jury's $1.8 billion antitrust verdict against AT&T, has moved MCI from near bankruptcy six years ago to the point where it made $21 million in 1981 and is nearly doubling sales each year. That advance has taken place in a combative, litigous setting that even the breakup of AT&T won't mute. Even today, a second MCI suit against AT&T awaits trial.
The feelings run deep between the two firms, although McGowan in recent discussions plainly relishes seeing AT&T virtually admit that its antitrust problems are so severe that it must pull apart its telephone system.
"They're venal, arrogant," he said, noting that former AT&T Chairman John de Butts, nearly a decade ago, called competition with MCI and others a " 'war we're going to win.' "