Mr. BROOKS. After achieving its 1982 consent decree to break up AT&T, the Justice Department completely reversed course in 1985, and advocated that Judge Greene lift virtually all the line-of-business restrictions established just 3 years before. In your view—all of you-what was behind this change in thinking?

We'll start with you, Mr. Zeglis.

Mr. ZEGLIS. Mr. Chairman, I don't know. We considered it an institutional apostasy at the time. I do know how it played out in legal theory. Beginning in late 1986, early 1987, the then head of the Antitrust Division at the Justice Department began to propound a theory that a bottleneck monopoly's leveraging of its advantage into a competitive market was not an important issue for consideration under the antitrust law, at least not where the monopolist using its leverage didn't acquire total monopoly power in the competitive market where competitors were displaced by the leveraging.

This wasn't the law of the case, as far as we can tell it isn't now the law of the land, and it has so far been rejected by the district court. As to the why, I don't know.

Mr. BROOKS. What do you think, Mr. McGowan?

Mr. MCGOWAN. I did check, and near the date that the opinion was issued, there was a full moon, Mr. Chairman.

[Laughter.]

Mr. MCGOWAN. I think there was a touch of insanity that swept over the Department of Justice then, Mr. Chairman. The Department subsequently has corrected its opinion about the condition we have in this industry and now correctly sees for the foreseeable future the Bell companies will maintain a natural monopoly. I can't explain the Department's earlier position. However, it manifests itself, as you know, in some legislative proposals during the same short period of time, and that activity also came to a halt. I have no other information.

Mr. BROOKS. Mr. Esrey.

Mr. ESREY. Mr. Chairman, I think I can shed a similar amount of light on the subject. I cannot explain it. I'm not a lawyer. I'm a businessman, but, for the most part, the facts have not changed. So I am baffled also.

Mr. BROOKS. Now Mr. Zeglis, last Friday, July 28, Judge Greene ruled that AT&T could enter the lucrative electronic publishing business at the end of the month. How in the face of the lifting of restrictions in your favor can you object to Bell operating companies similarly being able to enter and own various electronic publishing services?

Mr. ZEGLIS. Mr. Chairman, we see it as a fundamentally different situation. The electronic publishing restriction was the one line-ofbusiness injunction on AT&T in this decree and it was placed there out of some concern that in 1984 our long distance network was still a bottleneck to people who wanted to do electronic publishing. We didn't agree but that was the holding of the court.

We are now 5 years from divestiture and the facts and the court's findings are, correctly, that we don't have that kind of monopoly bottleneck control in long distance. We couldn't leverage our long distance network in favor of our information services if we

wanted to because the discriminated against parties would just go over to Mr. McGowan and get their long distance service from him. We don't have a leveragable monopoly; therefore, the restrictions don't belong on us. It is a very different situation when you get to the local telephone companies who do, as we have been saying, continue to have that monopoly bottleneck control over distribution of the services to customers.

an

Mr. BROOKS. Mr. McGowan, would you-
Mr. MCGOWAN. Yes, I'd like to comment.

It is obvious that the restriction on AT&T was meant to be only

interim restriction because, under its terms, it was due to expire this August.

We did not object to lifting the restrictions for the same reason stated by my colleague: That AT&T does not have monopoly control over transmission of information services as such.

As a matter of fact the one facet of information services over which they did have monopoly control over was the Yellow Pages and

Mr. BROOKS. What?

Mr. MCGOWAN. Yellow Pages.

Mr. BROOKS. Oh, that's wonderful.

Mr. MCGOWAN. I would have liked to have had that myself.

Mr. BROOKS. How much do they make on the Yellow Pages, Mac? Mr. McGowan. Fifty-five percent, pretax profit on revenue and no investment is what I call a solid deal.

Mr. BROOKS. Ooooh.

[Laughter.]

Mr. MCGOWAN. But the judge was concerned about the profitability of the Bell operating companies because they were called, if you remember, "Baby Bells," a term coined on Wall Street.

Mr. BROOKS. Don't believe it.

Mr. MCGOWAN. That is an oxymoron like jumbo shrimp. [Laughter.]

Mr. MCGOWAN. But, as I said, there was concern about the profitability of the Bell operating companies, so the judge suggested that AT&T give the Yellow Pages to the Bell operating companies. Here is a judge concerned about the viability of the Bell operating companies. We know that because he suggested the course quite strongly, and he was in a position to force his wishes in this case, so the suggestion was accepted and the Yellow Pages were transferred to the regional Bell operating companies. It is worth noting that the regional Bell operating companies did not place the Yellow Pages in their telephone companies. They placed them in the parent company, the holding company, the one that's unregulated.

The judge sent those Yellow Pages over there so the revenues could be used to help support local telephone service.

As a matter of fact, one of the regional Bell companies-Bell Atlantic-did put the Yellow Pages in its local companies, in C&P, and as soon as it saw a month later what the other companies had done, it followed suit. The regional companies now have those Yellow Pages.

As I pointed out, AT&T lost whatever little control they had of information services and they should be free to reenter this field, and we did not object to it. This is a good opportunity to emphasize the opposite point: That where you do have a situation of bottleneck control, then we have to be extremely careful.

The judge in my opinion ruled correctly the other day.

Mr. BROOKS. Mr. Esrey.

Mr. ESREY. The Huber Report stated that 99.9 percent of all telephone calls had to pass through the local exchange company's facilities or bottleneck. Mr. McGowan, in his written testimony, stated that in their case over 99 percent of the calls have to go through a local exchange company.

If the local exchange companies were allowed into the creation or ownership of content, they would be competing against other information providers that have to go through the local exchange bottleneck. That is not the case with AT&T. They have no local exchange bottleneck and that is the difference. That is why we did not oppose AT&T being allowed into this business and why there was very little opposition from anyone.

Mr. BROOKS. Mr. McGowan and Mr. Esrey, is your position that the modified final judgment should always be the means by which the telecommunications industry should be run? That's the end of it? That's where it ought to be run forever?

Mr. McGOWAN. One of the benefits of using the antitrust settlement as a backbone for operating the industry is that it does escape what have been quite dramatic mood swings, one might call them, of the Federal Communications Commission with respect to their attitude toward competition and how you regulate an industry.

In the past 10 years or so the Commission seems to have occasionally decided that everything should be run through the invisible hand of competition, even though there is a part of the industry, local telephone service, that it is impossible to operate in the competitive world.

I think the consent decree proved to be a strong stabilizing rudder, if you will, during that period of time, so I think it has served greatly. This subcommittee took up the same subject in the 1970's when there was a footloose bill going through Congress called the Consumer Communication Reform Act.

Fortunately consumer groups correctly accused it of violating the truth in labeling law, and this subcommittee, through its hearings, identified serious antitrust concerns with the bill.

Now, do I believe the consent decree should be the means of running the telecommunications industry forever? No. If you look at the history of consent decrees, the average consent decree has been alive and operative for 25 years. Now is 25 years the right amount of time? It just turns out to be an arithmetic average if you look at how long consent decrees have stayed in existence.

I'm sure those of us on the panel would love to be in a position where we could say it is no longer necessary to have those restrictions on our industry because there are alternatives to the local telephone monopoly.

Technology has not provided a means to avoid the monopoly. We don't see it in the future. It doesn't seem to be in the plans right

now.

I for one, and I suspect others here on this same panel would follow me to make the same point, believe that if the regional companies would divest themselves of their local monopolies by spinning stock off to their stockholders, for example, we would withdraw objections to competing with them in long distance or information services. I want to make the point that we are not objecting to their entry into these areas because of their size. We are not objecting because of any special talent or knowledge they might have. Our objection has to do with their ownership of the bottleneck local telephone companies. If they would divest themselves of those companies, I'd welcome them if they wanted to compete in our industry and I am sure other people would. We have nothing against the Bell people, and we do not object because of history or anything like that. We object because of a serious structural problem.

Mr. BROOKS. Mr. Esrey.

Mr. ESREY. In my opinion, Mr. Chairman, it's not the MFJ that is important, it's the principles on which it stands which have to be examined. The MFJ was created largely because of the Bell operating company local exchange bottleneck issue and it's the bottleneck issue that has to be looked at to answer your question.

As long as the bottleneck still exists as the means through which all competitors have to go to reach the end customer, the MFJ stands a purpose.

Now there are areas where there's been quite a relaxation of the MFJ. In the information services area, the local exchange carriers can now provide all types of information services except content. We supported that relaxation.

There are other cases where the local exchange carriers would like to provide cellular service between two areas homing on the same switch, and they can't do so. I think that's ridiculous. I think they ought to be allowed to do that as long as they get the interLATA services from an interLATA provider. Then they ought to be able to do that and not have to wait a year to get a waiver. So I think that there are areas where we have to go back and look at the underlying facts of the bottleneck. We should be flexible where the bottleneck is not an issue, and, where the bottleneck is an issue, the MFJ should stand-whether for 5 years or 100 yearsuntil the bottleneck is changed.

Mr. BROOKS. I have one other question for you.

Now the Bell operating companies warn that because of the consent decree's restrictions, America is fast falling behind the Japanese and the Europeans in the type and quality of information services, telecommunications equipment. They even blame the restrictions as an important cause of the national trade deficit. How do you respond to these charges? Mr. Zeglis.

Mr. ZEGLIS. Mr. Chairman, we are not a particularly good one to ask about information services since we don't take a position on that in the district court and don't oppose its relaxation where that's found appropriate by the court under the decree's antitrust standards.

As to whether we are falling behind, Mr. Chairman, the decree does contain, and I am speaking somewhat to your last question, its own provisions for relieving the injunctions as their basis wears away or as facts and conditions change to make them inappropriate.

As some of my colleagues here said, the terms of the decree itself say that when there is no longer a bottleneck we don't need any injunctions.

The decree also gives the judge continuing jurisdiction to examine whether it is standing in the way of services getting to the American people, and it was on that basis that we urged him to take a hard look at this information services issue you just posed; and indeed, he took the hard look and modified the information services to provide for these gateways and other facilitators to bring more information services to the American people.

Beyond that, I think I'll pass the microphone.

Mr. BROOKS. Mr. McGowan.

Mr. McGOWAN. I believe that is true. I have heard some of the Bell operating companies try to imply that while we were once leaders in telecommunications, this country is now falling behind and is in danger of not only losing leadership but being placed at a severe disadvantage.

It is obviously not true. If you take any measure of telecommunication services, whether you are talking about the number of households, you are talking about quality of service, you're talking about technological advances, you're talking about quality of switches, we are clearly still the leader and show no indication whatsoever of losing that position.

As a matter of fact, we are probably advancing that leadership. It is certainly true that a few countries have dramatically improved their telecommunication infrastructure because they have found that it is a terrible disadvantage in world competitiveness if you do not have a satisfactory infrastructure. It is a big advantage if you have an advanced one. The United States has an advanced telecommunications infrastructure and is showing dramatic advancement in equipment and the availability of communications services.

There is no country that has the viable approach that we have in this country. For example, France tried an experiment where they gave away terminals called Minitel. You sometimes hear this referenced by the other side, arguing in their favor. At that time they had no intention to start using paper phone directories. You can't get a directory in France. They don't have the kind of forests we have or the paper availability, so they decided to experiment with a substitute for paper phone directories and gave away free a lowcost terminal called Minitel.

They also made some other information services available through it to the general public. Much as has been the case here in the United States on a few experiments where the public is given some simple information services, they were used for a while and then interest quickly faded and the public didn't use them very much.

As a matter of fact, within 6 months two-thirds of the terminals costing billions of dollars are not used at all.