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Federal Internet Law & Policy
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AT&T 1894 - 1921

Dont be a FOOL; The Law is Not DIY


"One system, one policy, universal service." -Theodore Vail, AT&T

Antitrust I :: Kingsbury Commitment

In 1894, Bell's telephone patent expired. Until that time, only Bell or Bell licensed companies legally operated as telephone companies in the US.

Bell attempted to enforce the Berlinger patent (for a microphone device, applied for 1877, granted 1891), sends notice of infringement to independent telephone companies. 1897 patent sustained by Supreme Court. Subsequent courts would interpret the patent narrowly, however, limiting its utility, and ending the advantage of the initial patents for Bell. [Brooks 103]

Rise of the Independents: Independent telephone companies sprung up in rural markets where Bell had not yet brought service. The first independant telephone exchange was in Noblesville, Indiana. [Brooks at 65 (Most of these pioneer exchanges were Western Union rather than Bell installations particularly in places distant from Boston, where Western Union had existing telegraph facilities while the Bell company had to start from scratch. Often a Bell exchange would follow quickly on the establishment of a Western Union one, giving American towns their first taste of the curious problem of having two telephone systems, not interconnected.)].

Dual Service: Towns soon saw two competing telephone systems, but the telephone services did not interconnect. Businesses would have to maintain separate phones and directories in order to reach all destinations or be reached by all potential customers. Callers would have to know which network a phone was on. Advertisements would have to indicate network, sometimes listing a phone number for each network. Independents entered markets with promises of lower prices and were able to gain franchises and customers. [Brooks 109 (a good description of the situation - noting the separate competing networks would often segregate customers along class lines - one group would be on one network where another group would be on another network)] [AT&T History Origins ("But the multiplicity of telephone companies produced a new set of problems -- there was no interconnection, subscribers to different telephone companies could not call each other. This situation only began to be resolved after 1913.")] [Mueller at 7 (Approximately 13% of subscribers subscribed to multiple phone services.)] [Economides 51 ("AT&T refused to interconnect with the independents, forcing many businesses to subscribe to two telephone companies with disconnected and incompatible networks, an independent to reach local customers (mainly households) and AT&T to reach supplier.")][Mueller p 51 1997] [Brooks 104]

In 1899, The Atlanta Telephone Company and the Southern Bell Telephone and Telegraph Company both offered service in Atlanta. "The two competing companies did not provide interconnecting service. You could only call other customers service by the same company. This forced most retail businesses to have dual service, listing both telephone numbers on their advertising. Some businesses managed to get the same telephone number on both systems. Others had completely different numbers on the two systems. An ad for Loftis Plumbing shows that they could be reached on Atlanta Telephone's exchange by asking for number 1184. On Southern Bell's system, they were on the Main office, number 1846. Some businesses, such as Williams Lumber had the same telephone number on both systems. This type of competition was very common during this period in cities throughout the United States and Canada." - Atlanta

Competition drove telephone service deployment, which expanded significantly during this time.

1894: AT&T had 240,000 telephones installed. [Mueller p 40] "there were 582,506 instruments under rental from American Bell." [Coon 77] There were 396,674 miles of wire and 11,094 employees. [Coon 77]

"Between 1894 and 1904, over six thousand independent telephone companies went into business in the United States, and the number of telephones boomed from 285,000 to 3,317,000. [AT&T History Origins] [The New AT&T 2005]

1895: Telephone rates: $125 - $150 per year for a business phone; $100 per year for residential service. [Brooks 104]

In order to respond to the Independents, AT&T developed a strategy for re-establishing itself as the telephone monopoly.

AT&T viewed competition as inefficient:

"Two exchange systems in the same community, each serving the same members, cannot be conceived of as a permancy, nor can the service in either be furnished at any material reduction because of competition, if return on investment and proper maintenance be taken into account. Duplication of plant is a waste to the investor. Duplication of charges is a waste to the user." Theodore Vail, 1907 [Coon. 102] [Brooks 132]

In this context that Theodore Vail came up with his alternative vision: "one system, one policy, universal service." [Copy of the AT&T Advertising Campaign] [AT&T Annual Report 1910] [Iardella 31] [Dept. Commerce 1994] This vision is different from the concept of universal service which we have today. Vail's vision was premised on the idea that the way to get all of the telephones to talk with each other was to get rid of all of the competing, non-interconnected telephone networks. In order to achieve this, AT&T was more than glad to step in as the monopoly (the other solution would have been to require interconnection). [Mueller Mythology Made Law] [Fraser] [Cooper]

The position of the independent telephone companies would become untenable. Their networks did not have the same reach. They did not have access to financing. They did not have access to Western Electric equipment and had to use inferior equipment. Eventually the independent telephone companies would crumble, and AT&T would move in, buy the assets, and acquire new markets (for the crumbing indendents, getting bought out by AT&T was preferable to simply going out of business and losing all assets). [Brands p 3]

1907: AT&T's strategy shifts at this time from expanding its own network and excluding the independents through restricting capital, refusing to sell equipment, and political pressure - to expansion of AT&T through acquisition of independent telephone companies.

1910: AT&T negotiates with the owners of large independant telephone companies concerning acquisition of those companies and the elimination of competing "dual service" companies. [Mueller p 113]

Public Policy Response to AT&T Strategy :: Kingsbury Commitment

1904: State legislatures begin to pass laws mandating interconnection [Brooks 114]

1909: United States Tel. Co. v. Central Union Tel. Co., 171 Fed. 130 (N.D. Ohio 1909), aff'd, 202 Fed. 66 (6th Cir. 1913) describing how at the turn of the century long distance companies would require local telephone operating companies to sign exclusive contracts, forbidding the local networks to interconnect with any other long distance service

1910 - Interstate Commerce Act of 1887 amended by Mann-Elkins Act to bring telephone and telegraph under the jurisdiction of the ICC.

1912:

1913:

Faced with a government investigation for antitrust violations, AT&T entered into negotiations which led to the Kingsburry Committment. The Kingsbury Committment took the form of a letter from AT&T VP Nathan Kingsbury, who negotiated the terms of the agreement, dated Dec. 19, 1913.

Kingsbury Commitment
Notes

December 19, 1913

The Attorney General
Washington, D.C.

Sir:

Wishing to put their affairs beyond fair criticism, and in compliance with your suggestions formulated as a result of a number of interviews between us during the last sixty days, the American Telephone and Telegraph Company, and the other companies in what is know as the Bell System, have determined upon the following course of action:

 
First. The American Telephone and Telegraph Company will dispose promptly of its entire holdings of stock of the Western Union Telegraph Company in such way that the control and management of the latter will be entirely independent of the former, and of any other company in the Bell System. AT&T would divest itself of Western Union ($30 m of stock)

Second. Neither the American Telephone and Telegraph nor any other company in the Bell System will here after acquire, directly or indirectly, through purchase of its physical property or of its securities or otherwise, dominion or control over any other telephone company owning, controlling, or operating any exchange or line which is or may be operated in competition with any exchange or line included in the Bell System, or which constitutes or many constitute a link or portion of any system so operated or which may be so operated in competition with any exchange or line included in the Bell System.

Provided, however, that where control of the properties or securities of any other telephone company heretofore has been acquired and is now held by or in the interest of any company in the Bell System and no physical union or consolidation has been effected, or where binding obligations for the acquisition of the properties or securities of any other telephone company heretofore have been entered into by or in the interest of any company in the Bell System and no physical union or consolidation has been effected, the question as to the course to be pursued in such cases will be submitted to your Department and to the Interstate Commerce Commission for such advice and directions, if any, as either may think proper to give, due regard being had to public convenience and to the rulings of the local tribunals.

AT&T would not acquire additional independant companies
  • Exceptions were made by approval of DOJ and the ICC. Generally, if AT&T bought a new independant company, that had to sell off one they already had. By engaging in this shell game, AT&T could further its regional consolidation. The effect was that instead of having two cities with competitive service, after the swap one city would be an AT&T city and the other would be an independant city.
  • It has been noted that this was not favored by financially struggling independents who wanted to sell out to AT&T instead of losing their entire investment.
  • The provision was eliminated by federal law within seven years.

Third. Arrangements will be made promptly under which all other telephone companies may secure for their subscribers toll service over the lines of the companies in the Bell System in the ways and under the conditions following:

(1) Where an independent company desires connection with the toll lines of the Bell System it may secure such connection by supplying standard trunk lines between its exchanges and the toll board of the nearest exchange of the Bell operating company.

(2) When the physical connection has been made by means of standard trunk lines, the employees of the Bell System will make the toll line connections desired, but in order to render efficient service it will be necessary that the entire toll circuit involved in establishing the connection shall be operated by, and under the control of, the employees of the Bell System.

(3) Under the conditions outlined above, any subscriber of any independent company will be given connection with any subscriber of any company in the Bell System, or with any subscriber of any independent company with which the Bell System is connected, who is served by an exchange which is more than fifty miles distant from the exchange in which the call originates.

(4) The subscribers of the independent company having toll connections described above, shall pay for such connections the regular toll charge of the Bell Company, and in addition thereto, except as hereinafter provided, a connection charge of ten cents for each message which originates on its lines and is carried, in whole or in part, over the lines of the Bell System.

The chargers incident to such service shall be made by the Bell Company against the independent company whose subscriber makes the call, and such charges shall be accepted by the independent company as legal and just claims.

(5) Under this arrangement the lines of the Bell System shall be used for the entire distance between the two exchanges thus connected, provided the Bell System has lines connecting the two exchanges. Where the Bell System has no such lines, arrangements can be made for connecting the lines of the Bell System with the lines of some independent company in order to make up the circuit, but such connections will not be made where the Bell System has a through circuit between the two exchanges.

(6) Any business of the kind commonly known and described as "long lines" business offered for transmission over the lines of the American Telephone and Telegraph Company shall be accepted for any distance, that is, on such "long lines" business calls shall be accepted where the point of destination is less than fifty miles from the exchange where the call originates as well as where the point of destination is greater than fifty miles therefrom.

(7) Any business of the kind commonly know and described as "long lines" business offered for transmission over the lines of the American Telephone and Telegraphy Company shall be accepted at the regular toll rate and no connecting charge shall be required. But such calls shall be handled under the same operating rules and conditions as apply to calls over the local toll lines.

AT&T would allow interconnection its long distance network (not its local networks) with independent local networks
  • The effect of this has been suggested to remove the incentive of independant telephone companies from attempting to establish rival long distance services.
  • AT&T imposed an access charge.
  • Independent subscribers could call Bell subscribers; but Bell subscribers could not call indie subscribers.
  • Bell would not interconnect its local exchange with an independant local exchange in dual service markets

Very respectfully yours,

American Telephone and Telegraphy Company,
By N.C. Kingsbury,
Vice President

 

The result of the Commitment was a significant step towards establishing AT&T as a government sanctioned monopoly.

Sterling p. 80; [Mueller p 130] [Brands p 4] [Iardella 9] [letter from AT&T VP Nathan Kingsbury]David F. Weiman & Richard C. Levin, Preying for Monopoly? The Case of Southern Bell Telephone Company, 1894-1912, 102 J. POL. ECON. 103 (1994) (describing predatory strategies of AT&T). [AT&T : History: The Bell System] [Iardella p 11] [Cover of the Kingsbury Commitment

One possible explanation for AT&T's behavior and willingness to agree to the Kingsbury Commitment is that it was also fighting off Progressive pressure to postalize, or nationalize, the telephone service. Those seeking to postalize the telephone service will succeed for a brief period during World War I.

Kingsbury Commitment was superceded by the Willis Graham Act of 1922


Source: Robert Cannon
taken in Brunswick, MD

1921 :: AT&T "Natural" Monopoly

The passage of the Willis Graham Act 1921 marked the closure of the era of telephone competition, as in dependant telephone companies with financial difficulties sought to be acquired by AT&T. In time, telecommunications policy operated with the belief that the telephone network was a natural monopoly (Compare AT&T Antitrust). Telecommunications policy determined that the proper way to regulate the telephone monopoly and determine appropriate rates was through rate-of-return regulation. The Willis Graham Act exempted telephone companies from antitrust laws, permitting consolidation of companies on approval of the ICC.

"This law exempted telephone companies from the antitrust laws in order to make it possible for them to "unify the service" by merging competing telephone exchanges. In so doing, it provided the legal foundation for the first generation universal service policy." - Milton Mueller, "Universal service" and the new Telecommunications Act: Mythology Made Law 1997

Note that Prof. Milton Mueller rejects both the argument of natural monopoly and of the AT&T monopoly occurring as a result of predatory actions. Instead, Mueller argues that AT&T's monopoly was established pursuant to Vail's concept of "universal service," that the only way to overcome fragmented non interconnecting competing telephone services was to eliminate the competition and establish one company as the one universal, fully interconnected, network.

Willis-Graham Act, 61 Cong. Rec. 1988 (1921) "There are monopolies which ought to exist in the interest of economy and good service in the public welfare, monopolies which must be promoted instead of being forbidden. The telephone business is one of these. Legitimate consolidation will promote economy. It will promote service. It is foolish to talk about competition in the transmission of intelligence by telephone. It is silly to believe that there can be real competition either in service or in charges… The thing that the American Congress ought to do is to.. regulate those monopolies so as to get reasonable prices and good service for the people…  "

Willis Graham Act is said to supercede the Kingsbury Accord.

AT&T finally realized its dream of becoming the official blessed monopoly by the 1930s. [Mueller 1997] [Fraser] (See AT&T for more on the history of AT&T that led it to becoming a government sanctioned monopoly) It has been argued that a different motive of AT&T for becoming a government sanctioned monopoly was to avoid Progressive Era pressures to nationalize the telecommunications network; a government sanctioned and regulated monopoly was a compromise.

Reasons justifying the AT&T Monopoly

Timeline

1895: Chicago to Nashville LD line goes into service [Brooks 105]

1897

1898: Bell elected as a Regent of the Smithsonian Institution [LOC Bell Family Papers]

1899

1900

1902

1903

1904

1906

1907

[Picture of AT&T Long Distance operators, Kansas City, 1920. Note that the supervisor is on roller skates]

1908: over 6m telephones in the USA [Iardella 30]

1909:

1911:

1912

1913

Harold Arnold in Western Electric Research Branch develops high-vacuum electronic amplifying tube [Brooks p 11] [Porticus WE] [The New AT&T 2005]

1914

1915:

1917:

1919 First Dial Phones were introduced into the Bell System in Norfolk VA. The last manual phone was converted to dial in 1978. [AT&T: History: Milestones] [Picture of an 1921 AT&T Dial Phone] [Iardella 31] This led to the introduction of the dial tone. The replacement of calls being set up by operators with automatic dial systems, dial phones, and dial tone may have been precipitated by a telephone-operator strike. See Telephone Unions. [Engber]

Perry County Tel. & Tel. Co. v. Public Serv. Comm'n, 265 Pa. 275, 108 A. 659, 660-61 (1919) ("[D]uplication of facilities merely results in the placing of an additional burden upon the public by forcing patrons to maintain two systems where one would serve the purpose as effectually and at less cost… It is useless to argue that the cost of such duplicate system [of telephone companies] is paid by investors, and the risk of financial failure is theres, since the burden of finally paying the carrying charges and income to the investors is imposed upon the public with the result that a higher charge on the part of each competing company becomes necessary, due to the division of the patronage of the public. ")

Johnson Country Home Tel. Co., 8 Mo. P.S.C.R. 637, 643-44 (1919).("Competition between public service corporations was in vogue for many years as the proper method of securing the best results for the public from the corporations engaged in serving the public. The consensus of modern opinion, however, is that competition has failed to bring the result desired, considering the situation as a whole. Nearly all of the states in this country have adopted laws providing for the regulation of public service corporations as to rates and service by public officers. It is the purpose of such laws to require public service corporations to give adequate service at reasonable rates, rather than depend upon competition to bring such results. ")  

"For many years, all long distance calls began with a call to an operator sitting at a toll (long-distance) switchboard. Until the 1920s, that operator wrote down the calling information provided by the customer, and then told the customer that he or she would be called back once the party was on the line. The operator then passed the information to another operator, who would look up the route that the call should take, and then build up the circuit one link at a time by connecting to operators at switchboards along the route. A typical call took seven minutes to set up. Once operators established a circuit, it was dedicated to that conversation until the end of the call." [AT&T: History of Network Switching]

1922, continued

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