Bell Telephone – Western Union Patent Agreement of 1879

Here is my favorite account of the single most important event in the history of the telephone,

from George David Smith’s article, “The Bell-Western Union Patent Agreement of 1879: A Study in Corporate Imagination.”

In the mid-1870s Western Union was the country’s largest single corporate enterprise. It was a highly sophisticated, well-managed, and innovative monopoly, constantly expanding its business and constantly improving its technology. By virtue of its size and economies of scale and through its ongoing introduction of ever more efficient means for transmitting messages over electrical wire, Western Union was able to sustain high profits, lower its costs, and ward off threats from smaller, less efficient, less profitable competitors.

Yet by 1880, Western Union had forgone an opportunity to take control of one new technological device, the “speaking telephone,” that had demonstrated its promise for rendering electrical communication over short distances more efficiently than the telegraph. Western Union’s failure to develop the telephone, which would ultimately displace the telegraph as the primary mode of telecommunications in the United States, was not merely an oversight. It was a calculated business decision. How can such a monumental failure be explained?

In May 1877, the telephone was brought to market by a small, unincorporated association of four men who held the patent rights to Alexander Graham Bell’s now famous invention – a small, clumsy, rectangular box that could receive and transmit sounds replicating human speech electrically over a grounded iron telegraph wire. The Bell patent holders had few resources, but they were determined to exploit what they thought was a unique and saleable invention.

A few months earlier, they had failed to interest the president of Western Union, William Orlon, in their patents for $100,000; and so, having no other plausible buyer, they were compelled to establish the value of the telephone themselves. They advertised the telephone as a substitute for short-distance, point-to-point telegraph service, and created the Bell Telephone Company to handle the business transactions. By the end of the year, the company succeeded in renting more than 5,500 telephone instruments at annual rates of $40 and $20 for business customers and “social,” or residential, users, respectively.

The success of the Bell telephone, and the potential threat it offered to part of Western Union’s own business, brought that company into the field with its own patent claims by the end of the year. Western Union was determined either to eliminate or to absorb the Bell Company, a small but significant new source of competition. For nearly two years, the Bell interests and Western Union struggled for control of the nascent telephone business and the technology that supported it.

After the first successful commercial telephone exchange switchboard was introduced by a Bell agent in Connecticut in January 1878, the battle lines formed around the emerging local central telephone office, where any one telephone subscriber could be electrically connected to any one of many other subscribers within a fifteen-mile radius. If the Bell Company were left unchallenged, it would have competed for much of the traffic of Western Union’s district telegraph offices-systems which dealt primarily with the multi-point interchange of local business messages via telegraph and messenger, in conjunction with Western Union’s long-distance, nationwide telegraph network.

The competition was vigorous. In financial strength, productive capacity, technical resources, and distribution outlets, Western Union wielded advantages throughout. It acquired an impressive array of patents and controlled the long-distance wires over which Bell’s message traffic had to be transferred, if Bell’s customers wished to transmit anything beyond their immediate neighborhoods.

And yet, on November 10, 1879, Western Union pulled out of the telephone business. In a contract that served as a settlement to a patent infringement suit brought by Bell against Western Union a year earlier, Western Union conveyed, under license, to the Bell Company, all of its eighty-four patents on telephones and telephone hardware (i.e., signaling and switching devices), 56,000 telephones in fifty-five cities, valuable assets in plant and equipment, and agreed to a commitment not to reenter telephony until 1896.

In return for giving up its telephone rights, Western Union would receive from Bell a 20 percent royalty of the rental income from every Bell telephone leased in the United States. Western Union received a number of other concessions from Bell that would help protect its [Western Union’s] control of the more lucrative elements of its telegraph business, including, most importantly, the long-distance transmission of business traffic.

Clearly, the agreement was a strategic disaster for Western Union. By giving up its telephone interests, Western Union lost control of the technology that would ultimately relegate wire telegraph to a secondary and diminishing role in telecommunications. By 1896, when the Bell-Western Union agreement expired, telephones were already generating more revenues than the nation’s telegraph system, and were well on the way to becoming the preferred mode of telecommunication in both the business and the newly emerging residential markets.

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