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Federal Internet Law & Policy
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AT&T 1894 - 1921
Era of Competition
Dont be a FOOL; The Law is Not DIY


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

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] [Reference for Business ("In order to have complete telephone service, however, subscribers needed to have one phone from each competing company installed, causing them considerable expense and annoyance at having to locate other subscriber numbers in an assortment of phonebooks. ")] [Fung]

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. [THG ("Because of their cavalier attitude, Bell was not always the favorite company among these customers. They were beginning to lose ground.")]

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]

[Bolter 75 ("Bell's initial response was to rapidly boost its own operations. For instance, Bell's number of telephones served grew by over 1000 percent between 1893 and 1907.")]

Era of Consolidation

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] [Compare Western Union's view of competition as inefficient]

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] [Govt Ownership 1914 at 10 ("Mr. Theodore N. Vail, president alike of the Western Union Telegraph Co. and the associated Bell telephone companies, in his announcement of policy states: 'There is a road to every man's door; there should be a telephone to every man's house. * * * Under common control * * * it must be sufficiently strong to constitute practically one system, intercommunicating, interdependent, universal.' This statement is merely a concurrence in the accepted economic doctrine of the monopolistic tendency of the telephone business. The history of this business clearly establishes the futility of competition as a means of regulating its conduct in the interest of the people.")]

Vail's "One Service" policy echoed Western Union's approach to "Wasteful Competition" - driving to unite the telegraph network under Western Union.

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] [Bolter 75 ("between 1907 and 1910 the Bell System acquired control of 495,000 Independent company telephones.")]


Antitrust I :: Kingsbury Commitment

1904

State legislatures begin to pass laws mandating interconnection [Brooks 114] [Bolter 76 ("during the period 1904 to 1919, some 34 states passed laws which rendered unlawful the Bell System policy of refusing to interconnect its facilities with those of the Independents.")]

SNET " gained relief in 1899, when the Connecticut state legislature, recognizing the essentially monopolistic nature of the telephone business, passed a law erecting barriers to the entrance of new companies. With this provision in place, SNET's growth continued at a dramatic pace throughout the first years of the new century and into the early teens. In 1911 the Connecticut law discouraging the creation of new phone companies was replaced by a Public Utilities Commission, which had the power to regulate rates and services for SNET and other utilities companies." SNET History, Funding Universe

Railroad monopoly busted up. [Fung]

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.

[Bolter 76 ("Wisconsin and New York establish the first state regulatory commissions. Their actions were followed by 28 other states during the next six years.")]


G. C. Selden, Western Union: Bird's Eye View of Its Progress for Nineteen Years, Magazine of Wall Street, Vol 15, page. 319 (1914)


The Big Stone Gap post. (Big Stone Gap, Wise County, Va.), 14 Dec. 1910. Chronicling America: Historic American Newspapers. Lib. of Congress.

1909

AT&T negotiates with Postal Telegraph for a merger. The negotiations break down.

AT&T approaches Western Union, which was experiencing financial difficulties and accepted the offer - AT&T and Western Union merged in 1909. This created an efficiency as both AT&T and Western Union can now share use of long lines, and customers can order telegrams by phone. [Wolff at (fn 106) ("In 1909, the two companies joined together when cash-starved Western Union sold to AT&T its holdings in New York Telephone, and George Gould sold his 30 percent of Western Union to AT&T.")] [Field 250 ("AT&T moved rapidly to modernize hardware by initiating a program of installing automatic multiplexing printers that would take until 1915 to complete. It introduced an innovative rate schedule, offering preferential rates for non-urgent communications that could, for example, be sent overnight. And it brought Western Union compensation policies more directly in alignment with those at AT&T.")] [Selden at 319 ("What was the (financial) trouble? Increasing competition and lack of aggressive management. The property was then in control of the Gould family and they are not and never have been, father or sons, business builders... until in 1908 the net (incomes) seemed headed for the vanishing point and the earnings on the stock, which in 1903 had been 7.3 per cent, dropped like a plumment to 1.7 per cent. Dividends had to come down to a 3 per cent basis and this at last jarred the Goulds into returning to consciousness. In November, 1909, the American Telephone and Telegraph Co. acquired $29,000,000 of the $99,817,000 Western Union stock")] Compare [Govt Ownership 1914 at 9 ("it is understood that before the acquisition of the Western Union Co. by the American Telegraph & Telephone Co. the former contemplated improvements in its system whereby the telephone would be added to the telegraph service, and this attitude on the part of the Western Union Co. was an underlying reason why its property was acquired by the Bell interests.") (Editor: historical evidence suggests that the Post Office Report was most assuredly wrong on this point)]

This placed Postal Telegraph at a competitive disadvantage - as telephone customers were directed to WU, not Postal Telegraph; Postal Telegraph sues; divests its AT&T holdings [Wadsworth] [Richard R. John, Network Nation (2010) at 359 ("Particularly distressing to Mackay was the automatic connection to Western Union of every telephone caller who informed an operator that he wished to send a telegram. If this policy were not countermanded, it would put Postal Telegraph at a competitive disadvantage.")] [Bankers Magazine at 649 (quoting the Postal Telegraph 1910 Annual Report “The Mackay companies will sell its entire holding of stock in the American Telephone & Telegraph Company, that step being in deference to public opinion, which views with suspicion this large holding of stock in a company which has recently purchased the control of the Western Union Telegraph Company.")]

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 :: Mann Elkins Act

1911

1912 :: Progressive Woodrow Wilson Elected President

1913 :: Kingsbury Commitment :: The Third Way

Faced with intense pressures to either nationalize or break-up AT&T, AT&T entered into negotiations with the government 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.

Since 1842, Congress had debated whether telegraph service should be "government owned postal service" or "private industry." It had to fit in one bucket or the other, but neither bucket was satisfactory in remedying the harms caused by the Western Union and now AT&T monopolies. See [Govt Ownership 1914 at 10 (In the mind of many including the post office, if something were by nature a monopoly, then it should be government run - there was no other option. "all of the economists who have given this subject their attention is upon the question whether the monopoly should be public or private. The decision of this question must rest upon which is better for the public welfare.")] After 70 years of logger-headed Congressional debates, the caldron of the Progressive Movement forged a third solution: government regulated monopolies. This would be followed by the emergency of an expert federal agency with delegated authority who job it was to implement these remedies and mitigate the harms of these communications corporations.

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

 

[Sterling 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] [Fung] [Bolter 76] [FEDERAL OWNERSHIP HALTS.; But Lewis of Maryland Makes a Move to Keep Up the Fight. NYTimes Dec. 21, 1913] [VAIL'S VIEW OF IT.; Western Union Goes Back Improved, Says A.T. and T. President. NYTimes, page 2 Dec. 20, 1913]

Kingsbury Commitment was superceded by the Willis Graham Act of 1922

Western Union: AT&T agreed to divest itself of Western Union - although AT&T would continue to offer messaging services of its own.

What was a good policy move for AT&T may not have been such a good move for Western Union. AT&T's control of Western Union had been good for telegraph. AT&T implemented innovations, improved the service, and reduced prices. Western Union was close to its peak service. [Selden at 320 ("American Tel. & Tel. had control of the property about four years. During that time millions were spent upon Western Union. A modern plant was built up, capable of transacting business efficiently and earning a great deal of money. Dividents were kept down to the 3 per cent basis so as to leave money for buidling up the property.")]

With divestiture, Western Union would be cut off from AT&T technical leadership and financial strength; Western Union was returned to being a service provider of a disrupted and diminishing communications medium: the telegraph. Western Union as a corporation was also not significantly diversified at that time, with telegraph serving as its primary revenue source. Western Union would feel growing market pressure from telephone long distance service as well as the Post Office's introduction of affordable air mail service. [Field 250 ("In retrospect, this can be seen as another policy error, perhaps well intentioned, but an error nonetheless. Two decades later, the newly formed Federal Communications Commission would find itself with regulatory responsibility for a relatively undiversified firm in a dying industry."")]

Western Union would see telegraph service descend on a glide plane, with a recovery during World War II. In 1947, Western Union sought relief from the Post Roads Act, which mandated a reduced government telegraph rate, in order to increase rates and increase revenue; Congress agreed, Western Union raised its telegraph rates and, surprising to Western Union leadership, experienced a further decline in telegraph revenue. Western Union would miss another potential opportunity in the 1960s to enter the data networks market. AT&T was restrained from information services due to the 1950s Modified Final Judgment but Western Union was not. ARPANet and others were busy inventing data network but Western Union, which was well position, lacked initiative and missed the opportunity.

AT&T would again acquire the remnants of Western Union in 1990 [AT&T to Acquire Some Western Union Assets, Lost Angeles Times July 4, 1990] [Western Union sells business services unit to AT&T, UPI Dec. 31, 1990 ("In the AT&T transaction, Western Union sold the assets used to provide 'EasyLink' electronic mail service and its packet and telex services and provided for the transfer of business services' employees and customer base to AT&T. The sale did not include Western Union Priority Services, which had been part of the business services unit. The priority services business remains with Western Union and will be operated as a separate unit, providing the 'Mailgram,' 'Priority Letter' and 'Custom Letter' services.")]

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]

Telephone Service disrupts telegraph service Average daily telephone connections of the associated Bell telephone companies Number of messages trans mitted annually by the Western Union Telegraph Co.
19005,817,51463,167,783
190513,912,55167,477,320
190616,940,00071,847,082
190718,624,00074,804,551
190818,962,39762,371,287
190920,342,43568,053,439
191022,294,01075,135,405
[Govt Ownership 1914 at 9 (population during this time grew 18% annually. "The use of the telephone in all walks of life is steadily increasing, while the use of the telegraph is relatively stationary, and therefore decreasing.")]

1911

1912

1913

1914

1915:

1917: World War I and the Nationalization of Communications

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]

Theodore Vail retires.

1919: Southern Bell bought out The Atlantic Telephone Company. [Atlanta Telephone History ]

1920: Theodore Vail dies. [THG]

1921 :: Era of Consoilidation, continued

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