Despite its many successes, there were many criticisms of the predivestiture regulated monopoly (and this report is certainly not calling for a return to the Bell System structure). For instance, until government actions forced a change, the Bell System prohibited the attachment of third-party equipment on customer premises, which many viewed as stifling innovation. Monopoly status also meant that there were few pressures on the Bell System for rapid innovation in its services, and a number of innovative technologies developed by Bell Labs either were not adopted or were adopted very slowly.

Divestiture and Its Effects

The Bell System ended in 1983. Divestiture resulted in the separation of the local Bell System operating companies (which provided local telephone service to large regions of the United States) from the long-distance parts of the network (known as long-lines communications) and ended the license fee arrangement through which the regional operating companies supported Bell Labs. At the time of the separation, Western Electric (the equipment manufacturing part of the Bell System) was assigned to the part of the company that would be called AT&T), along with most of the research and development resources of Bell Labs. The regional Bell operating companies (RBOCs), the providers of local phone service, formed an R&D consortium called Bellcore (Bell Communications Research, later renamed Telcordia Technologies) and agreed to fund Bellcore to do the majority of the R&D needed to support them— at least for an initial period on the order of 5 to 7 years. Subsequently the RBOCs sold Bellcore to SAIC, causing the new lab to seek support outside the RBOCs and subsequently make radical changes in the scope and direction of its research program.

As a result of divestiture, the fundamental split in the Bell System propelled AT&T (and its R&D arm Bell Labs) into a competitive landscape for the first time, with aggressive competitors such as MCI and Sprint seeking to compete for long-distance services—for both residential and business customers. Thus although a tax on telecommunications revenue remained as a source for funding R&D at Bell Labs, the prospects for increased competition, lower telecommunications prices, and decreasing telecommunications revenues for AT&T, as well as the regulatory pressures to lose market share to new competitors, led to the beginning of the reduction in the long-term, unfettered, fundamental research done at Bell Labs. Additionally, divestiture marked the beginning of a process of transforming the telecommunications industry in the United States from a vertically organized structure (where one body, the Bell System, had control over every aspect of the telecommunications process, from components, to boards, to systems, to services, to operations) to a horizontally organized structure (where multiple competitors existed at every level of the hierarchy and where no single entity had full responsibility for the network architecture, end-to-end network operations, or long-term fundamental research that would enable the creation of an evolutionary path into the future).

Subsequent Splits and Spin-offs and Research Cutbacks

The second stage of the breakup of the Bell System occurred at the end of 1995 when the existing AT&T (which had acquired the computer services company NCR several years earlier) made the decision to divest both the computer operations part of the business (selling it back to NCR) and the equipment manufacturing part of the business (with the creation of Lucent Technologies) in order to compete more actively in the areas of wireless and cable



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