It was January 1982. Despite a nasty recession, the personal computer revolution was in full swing. The Apple II had been on the market for five years. IBM launched its PC in 1981, and Compaq released its fully IBM compatible Portable model shortly thereafter. The ARPANET was expanding to computer science departments all across the country. Former General Electric spokesperson Ronald Reagan was President.
Now AT&T and the United States Department of Justice held a press conference to make an important announcement.
[partner id="arstechnica"]"Today really signals the beginning of the end of an institution: the 107-year-old Bell system," declared AT&T CEO Charles Brown, who appeared to be fighting back tears. "And the start of a new era in telecommunications for the whole country."
After fighting a federal antitrust suit for six years, AT&T agreed to divest itself of its seven regional Bell carriers, retaining only its long distance system, and winning the right to go into the computer business. For the first time in six decades, residential, business, and long distance telephone service became a competitive industry. Was this a good thing? As the breakup went into effect, not everybody was sure.
"Whether the break of American Telephone & Telegraph Company will be remembered decades from now as one of the more spectacular fiascoes of American industrial history, or whether it will be recalled as a seminal event in the emergence of a great global information age, or whether it will be forgotten altogether, is a matter that was impossible to predict intelligently in 1985," wrote the journalist and historian Steven Coll at the time.
As the reconstituted AT&T makes its bid to buy T-Mobile, another interesting question presents itself. Why did the United States of America, supposedly the land of free market competition, accept the near total dominance of AT&T over telephone service for about 60 years? Historians have been debating this question for almost as long. They often disagree on the answers.
But if you accept their observations and arguments as mostly compatible pieces of a larger story, what stands out is a corporation that, at crucial moments, did just about everything right. In the early 20th century, the Bell system got there before its competitors. It learned how to fight or game the emergent regulatory system better than its rivals. AT&T publicly framed its purposes better than its critics. It used advertising not just to promote itself, but to sanctify its mission. And the corporation mastered the art of backing away from its darker ambitions at strategic public moments.
Sometimes Bell was just lucky. But almost as often, the quality of service that the emergent monopoly created approximated its message—that AT&T was about creating telephone access for everybody.
The master narrative of the early Bell system is about struggles over patents. On February 17, 1876 Alexander Graham Bell filed a patent for a method of electronically transmitting speech "by causing electrical undulations, similar in form to the vibrations of the air accompanying the said vocal or other sounds, substantially as set forth."
Just hours after that, an electrician named Elisha Gray submitted a preliminary application, or "caveat," mentioning his own work. Historians quarrel over whether Bell pinched his ideas from Gray. But the bottom line is that Bell got there first, paperwork-wise and intellectual property-wise. Bell's patent was granted on March 3.
This gave him a head start on telephony, but not that much. Gray worked for Western Union, the dominant telegraph company in the US. Western took Gray's innovations and added others developed by Thomas Edison, particularly the carbon transmitter. The company enjoyed one big advantage over Bell's early operation. It already had a network infrastructure deployed across the country.
But the organization that ran the Bell system cleverly copied the Morse franchise telegraph model established 30 years earlier. The outfit leased equipment to local exchanges, who paid a portion of their stock over to Bell for the right to use its patented technologies and methods. Using this model, New England telephone launched its first Bell franchise in 1878. Both companies rushed to establish exchanges as far west as San Francisco.
Western Union resorted to vicious tactics in its fight with Bell. It refused to install telegraph lines in locations where Bell had set up franchises. This prevented Bell from making inroads into commercial regions that relied on Western Union telegraphy. But Bell's relative newness proved to be a big advantage in its fight with Western Union, which had formidable enemies. The infamous "Robber Barron" Jay Gould was plotting a hostile takeover of the company. Gould's main weapon was a hastily built rival telegraph startup that also owned local phone exchanges.
Overwhelmed by the Gould assault and facing patent lawsuits from Bell, Western Union settled. The telegraph company sold its 55-city telephone network to Bell, plus its patent rights, in exchange for 20 percent of Bell's telephone rental revenue.
"The Western Union agreement eliminated Bell's strongest competitor and provided additional defense against the entry of other competitors," writes the historian Gerald W. Brock. "It left Bell close to the position of a textbook pure monopolist until 1894," the year that the Bell patents expired.
As Brock notes, the Western Union settlement and Bell's head start on patents gave it the time to erect entry barriers for the independent companies that would emerge after 1894. It first reorganized itself as American Bell, and then as American Telephone and Telegraph in 1899. The corporation could now amass a new barrage of telephone equipment patents. It could establish franchises in all the best locations. And the telco could begin the crucial process of vertical integration—merging device manufacturing and telephone service.
The first Bell historians made much of the firm's early advantage when it came to long-distance service. But most telephone users in the Gilded Age didn't subscribe for long-distance connectivity—the telegraph met that need. Instead consumers sought the ability to make phone calls within their own cities and towns.
As we've already pointed out, early Bell system managers saw businessmen, retailers, and professionals as the network's main clientele. "The telephone, like the telegraph, post office and the railroad, is only upon extraordinary occasions used or needed by the poor," declared early Bell manager Charles Fay. "It is demanded, and daily depended upon, and should be liberally paid for by the capitalist, mercantile, and manufacturing classes."
In fact, these managers frowned upon subscribers using the telephone as a social instrument. Nothing irritated phone company executives more than the use of the word "hello" in initial telephone conversation. In 1910, Bell's Telephone Engineer magazine sponsored a contest for the best essay on proper telephone etiquette. AT&T had the prize article distributed to telephone directories. Here's what it said about the h-word:
"Would you rush into an office or up to the door of a residence and blurt out 'Hello! Hello! Who am I talking to?' No, one should open conversations with phrases such as 'Mr. Wood, of Curtis and Sons, wishes to talk with Mr. White...' without any unnecessary and undignified 'Hellos."
No aspect of telephone use escaped the interest of AT&T's etiquette police. "Speak directly into the mouthpiece," explained a California franchise's instruction manual, "keeping mustache out of the opening."
But the capitalists and mercantile subscribers who Bell coveted weren't interested in good telephone etiquette. They wanted affordable fixed monthly rates. When Bell franchises sprung "measured service" on them instead—essentially pay by-the-call-plans—they organized boycotts, user strikes, and legislative campaigns to get their city councils to regulate telephone service.
Bell fought these elite consumer crusades in the legislatures and the courts. The battle over rate caps in Indiana was particularly nasty. The Hoosier State ruled that telephone operators could charge their subscribers no more than $3 a month for a regular rental. The Bell operating company took the law to the Indiana Supreme Court. But the judges ruled it constitutional.
Retaliation came quickly. American Bell shut down about a third of its Indiana exchanges, then filed patent infringement suits against an independent firm that came in to try to fill the gap. The legislature saw that Bell had boxed the state in, and withdrew the cap in 1889.
Other states noted what happened to Indiana and declined the rate cap route, but Bell also took a lesson from the Indiana war and its battles in New York and Chicago. The network had to find ways win the hearts not just of consumers, but of city councils and state legislatures. As the political need to frame telephone service as a social good grew, the perspective of operators began to change. No longer would the business elite be the primary market.
"The popularization of the telephone began around 1900," writes the historian Richard A. John. "At its core, it consisted of reenvisioning the telephone as a mass service for the entire population rather than a specialty service for an exclusive clientele."
For Bell, this popularization was not driven by competition with independent telephone companies. It came from the need to respond to government regulation. "Government intervention, and even the threat of government intervention, was an engine of innovation," John adds.
This trend played itself out most conspicuously in Chicago that year. The visionary behind the Chicago story was one Angus Hibbard, who ran that city's Chicago Bell Exchange through 1911. Shortly before Hibbard quit his job, Chicago had almost as many phone lines as there were in France.
Hibbard's strategy was not to put a phone in the hands of every consumer. Rather the idea was to make sure that everyone had access to some kind of service. So he inaugurated a series of kinder and gentler measured service plans that subscribers could voluntarily opt for. The previous exchange manager had tried to force consumers to go from fixed to measured packages, with a minimum number of required calls. This caused an enormous uproar. Hibbard instead launched flexible measured services plans that made phone service cheaper for the occasional user.
Second, Hibbard fought "deadhead" telephone use, such as customers in drug stores using the store phone for free. He tackled the problem by pioneering nickle-in-the-slot coin operated telephones. In 1906 there were almost 40,000 of them in the city, putting the telephone "within easy reach of a broad cross-section of Chicago's middle class." By November 1907, a Bell nickel phone enabled its user to reach anyone with a telephone in the 191-mile expanse of Chicago.
This revolution, however, was more than just about getting rid of flat rate plans that Bell managers thought were excessive. "The popularization of the telephone was one element in a cultural agenda launched by a rising generation of business leaders to broaden the ambit of corporations that dominated the channels of communication," John concludes. "Henceforth, Chicago Telephone was no longer a mere 'private enterprise' like a textile mill or a department store. Rather, it was now a socially responsible 'public utility' that had a social obligation to provide access to the facilities for telephone service to the entire population."
At the same time, thousands of independent telephone companies sprang up to compete with Bell Exchanges. They brought many more subscribers into the system. But they arrived too late to supplant Bell, which by early 20th century had won over city councils across the country. The independents were never able to gain a foothold in crucial markets like New York and Chicago. Their venture in the latter city captured 20,000 subscribers, in stark contrast to Bell's 200,000 or so serviced telephones. Independents often focused on business subscribers, and failed to appreciate the importance of the nickel-in-the-slot machines.
Unable to create a comprehensive parallel long-distance network, the independents found themselves stranded as AT&T expanded its system through acquisitions. For example, the independent Home Telephone Company of Clarksville, Tennessee linked to other indie exchanges through the Long Distance Telephone and Telegraph Company. But when AT&T bought Long Distance, it cut connectivity for Home Telephone off.
As a consequence of AT&T's independent exchange buying spree, the telephone market share enjoyed by non-Bell affiliates dropped from 49 to 42 percent between 1907 through 1912. Alarmed at their gradual disappearance via the acquisition process, they began calling for anti-trust action from the government. When AT&T tried to buy out a huge chunk of Chicago's independent exchange system, President Woodrow Wilson's Attorney General warned that this would violate the Sherman Anti-Trust Act.
It was at this point that AT&T demonstrated its skill at strategic retreat. In a letter sent to the Department of Justice by AT&T Vice President Nathan Kingsbury, the corporation promised to sell its share of Western Union, give the independents access to its networks, and refrain from buying them.
Independents hailed the agreement as an antitrust win, but in reality, the "Kingsbury Commitment" represented a "hiatus in the march toward monopoly rather than a victory for the competitive principle," argues the historian Milton L. Mueller Jr.
Ironically, as a consequence of the interconnection "victory," the independents became more and more dependent on Bell standards, and even Bell equipment sold via its subsidiary, Western Electric. In 1921, Congress passed the Willis-Graham Act, which waived telephone exchange mergers from antitrust scrutiny, if regulators approved the buyout. Six years later, AT&T acquired independent exchanges equal to 207,540 telephones.
By 1932, Bell controlled 79 percent of the national telecommunications market as a result of its acquisition binge. A quarter century later, little had changed. "AT&T was still the controlling firm with approximately 80 percent of the telephones and the only long-distance network," notes historian Brock.
But AT&T didn't just conquer the 20th-century via clever marketing, mergers, and strategic deals with the government. In an era profoundly distrustful of corporations, it justified its expansion as a bid to offer "universal service" to the country. "One policy, one system, universal service," became AT&T's motto. Rather than breaking up the system, the government would regulate it as a "natural monopoly."
"It is contended that if there is to be no competition, there should be public control," wrote AT&T Chair Theodore Vail in 1907:
A pathbreaking corporate advertising campaign accompanied this assertion. Magazine advertisements framed AT&T's network as something akin to the postal system, "making a neighborhood of a nation," and even a crucial component of American democracy. "People of every walk of life, in every state in the Union, are represented in the ownership of the Bell Telephone System," another ad explained. "People from every class..."
During the First World War, the United States took over the nation's telecommunications system. By 1919, AT&T executives had negotiated their release, and "freely attributed the success of their negotiations to the previous ten years of AT&T advertising," writes the historian Roland Marchand.
And in 1935, when the "seemingly inevitable" government challenge finally arrived:
For the next 50 years, AT&T would consistently repeat the same cycle to avoid being broken up by the government—innovate, acquire, strategically retreat, then move forward again with a redefined mission. When the public reacted badly to the network's attempt to take over broadcast radio, AT&T backed off in exchange for a monopoly on wireline service between radio stations. When the government again raised the spectre of a breakup after the Second World War, AT&T agreed to get out of the computer software business, leasing innovations like the Unix operating system to universities for a nominal fee.
When the antitrust hammer finally came down on AT&T in the early 1980s, it was in part because the pace of technology had overtaken the company. Even before the breakup, the FCC demanded that the corporation stop denying consumers and developers the right to freely connect devices to its network. Bell now stood in the way of too many innovators, prominently among them microwave upstart MCI, whose visionary Bill McGowan promised and delivered cheaper long distance service.
But while divested AT&T focused on long-distance service and wireless, a huge wave of mergers followed the Telecommunications Act of 1996. Former AT&T subsidiary Southwestern Bell renamed itself SBC and merged with Pacific Telesis, providing service to seven states, including California and Texas. Next SBC and BellSouth launched Cingular Wireless, the second biggest mobile carrier. In 2005 SBC and AT&T announced their own merger—the marriage dubbed AT&T Inc.
And in 2006, AT&T acquired BellSouth. "AT&T will combine its wireless and wireline Internet Protocol (IP) networks to speed convergence of new voice, data and video services and to lead the industry's shift to next-generation, IP-based technologies," the acquisition statement promised.
Now here we are again, the latest version of AT&T asking for a merger with T-Mobile that will effectively turn the nation's wireless broadband system into a duopoly. At least one prominent scholar of the Bell system has sounded a worried note.
"Bottom line: this is one step too far back to the days of a single telephone company," warns Milton Mueller. "If you support a competitive industry where one can reasonably expect the public and legislators to rely on market forces as the primary industry regulator, this merger has to be stopped. On the other hand, if you welcome the growing pressures for regulating carriers and making them the policemen and chokepoints for network control, a bigger AT&T is just what the doctor ordered."
And what is the doctor promising in exchange for this regulatory approval? Once again: Universal Service.
"The proposed merger with T-Mobile will result in AT&T’s ability to expand deployment of its high-speed 4G LTE network to an additional 55 million Americans," an AT&T fact sheet on the merger contends, "representing an increase from 80 percent to 97 percent network coverage of the U.S. population."
Yesterday, the Department of Justice moved to block AT&T's acquisition of T-Mobile, and FCC Chairman Julius Genachowski has made it clear that he's not a fan of the merger, either. But should it go through despite regulators' opposition, historians will need to decide whether the 1984 breakup of AT&T represented the end to the monopoly era, or just another hiatus.
- Gerald W. Brock, The Telecommunications Industry: The Dyanamics of Market Structure
- Claude Fischer, America Calling: A Social History of the Telephone to 1940
- Richard A. John, Network Nation: Inventing American Telecommunications
- Roland Marchand, Making America Corporate
- Milton Mueller, Jr., Universal Service: Competition, Interconnection, and Monopoly in the Making
