The Breakup of AT&T: How Ma Bell Split Apart and Grew Back Together

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Before 1984 the Bell System controlled American communications from end to end. AT&T ran long distance, owned the local operating companies, built nearly all the equipment through Western Electric, and funded the research at Bell Labs. In 1974 the Department of Justice sued, mainly to pry loose Western Electric. Convinced it would lose, AT&T offered a different bargain: keep the factories and the labs, and give up the local phone companies instead.

This episode follows that gamble and its consequences. The 1982 consent decree took effect on January 1, 1984, creating seven independent Baby Bells and cutting AT&T's book value by about 70 percent. In exchange the company won freedom from a 1956 decree that had barred it from selling computers. The computer push failed, local bills rose while long distance rates fell, broadcasters fled to satellites, and after the Telecommunications Act of 1996 the pieces began merging again.

• Mathematician and investor Edward O. Thorp spotted a price gap between old AT&T shares and the when-issued shares of the new companies. His trade, the largest block trade on the exchange to that point, earned $2.5 million.
• The Baby Bells received the Bell trademark and the lucrative Yellow Pages, while AT&T kept the assets it thought held the future: long distance, manufacturing, and research.
• Long distance profits had quietly subsidized local service. After the split, access charges became a long legal fight that reached internet calling, settled by a 2011 FCC order.
• Western Electric struggled without its captive customers. AT&T eventually spun it off anyway as Lucent, later Alcatel-Lucent and now part of Nokia.
• Southwestern Bell absorbed Pacific Telesis and Ameritech, then bought its former parent in 2005 and took the AT&T name. Bell Atlantic followed a parallel path and became Verizon.