The Bell/AT&T Monopoly

Phones of the Bell/AT&T Monopoly

The idea of a communications monopoly began during Bell’s protected patent window (1876 – 1893). By 1885, the telephone was still struggling to gain a foothold, even with Bell’s protected monopoly in place, local folks and businesses who were on the Bell system were only able to call within a system’s local limits.  Western Union’s telegraph, on the other hand, was still the communications method of choice for business and consumers because you could send a telegram to anyone, virtually anywhere in the country, Western Union was wired all over the country and controlled 90% of the nation’s telegraph business, a monopoly in itself.

It was during 1885 that Theodore Vail, the new President of Bell, put in motion two brilliant strategies.  First, The American Bell Telephone Co. launched a new subsidiary with the sole purpose of building a long-distance telephone network across the United States.  The new entity was called American Telephone & Telegraph.  AT&T was established as Bell Telephone’s long-distance division, with their sights set on establishing another fee-based telephone monopoly by building America’s first long distance telephone network.

Vail’s second brilliant strategy was to begin quietly buying up Western Union stock, with the sole purpose of one day gaining control of Western Union.  Imagine having this discussion in a boardroom in 1885 with a group of wealthy men determined to dominate the communications industry. Not knowing for sure whether the telegraph or telephone would become the device of choice, but hedging their bets by conspiring to control both.

I wasn’t there, but let me summarize a hypothetical that makes so much sense, it just might be true.

Vail was an aggressive genius.  He did not believe in the philosophy of a free market with competition.  Vail believed that “a business monopoly, when held in the right hands, was the key to success”.

I think Vail came to the realization in 1885 that he wasn’t 100% sure whether the telephone or the telegraph would one day dominate our communications infrastructure, so he put in motion a strategy to control both.  In fact, the only reason I can think of that the American Bell Telephone Company would launch a new entity and call it American Telephone AND Telegraph, was because in the back of Vail’s mind, one day Bell would provide both.

Knowing full well that the United States anti-trust laws might intervene if he succeeded, Vail focused on building a telephone monopoly first, with long term sights set on quietly buying up Western Union stock.  As you will see, his plan created enormous leverage when the time came to negotiate a settlement.   More on that in a minute…

By 1889, Vail’s vision for Bell/AT&T’s future was not shared by his board, so he resigned and left.  From 1889 to 1907, independent telephone companies gained traction all over the country.  Starting in rural areas that Bell ignored, and growing into major cities, telephone usage grew, rates declined, and Bell was in trouble.

In 1907, JP Morgan and a handful of wealthy investors took control of Bell Telephone and brought Theodore Vail back to run the company and finish the vision he had started.  What happened from 1907 to 1912 is truly remarkable, considering just how much success the independents were having in the years prior. Bell Telephone’s slogan the day Vail arrived, became “One System, One Policy, Universal Service”.  And the multifaceted strategy to create a telephone monopoly began…

Theodore Vail

For the next five years, Bell Telephone became the aggressor.  Buying up small competitive independents in every instance that expanded service and improved the Bell system.

Bell would not let any competitive phone company use any of the Bell system phone lines.  No connectivity at all, local or long distance, so if your neighbor owned a non-Bell telephone, that neighbor could not connect with a Bell customer.

In communities where independent telephone companies were succeeding and genuinely threatening to replace Bell, Bell introduced predatory pricing strategies.  Dropping phone service prices just long enough to run competitors out of business. 

Bell was always able to go lower and stay lower longer than any other provider, and it was always just long enough to put a competitor out of business.  It was not uncommon for Bell to pile up all of the telephones of the failed competitor in the middle of the street and burn them, in a show of dominance and to welcome users to the Bell system.

Bell lobbied every municipality, city and state government in an attempt to convince politicians that the telephone was a natural monopoly.  Or a utility like electricity and water.  That competition simply resulted in a duplication of investment and did not render the duplicated service better for the consumer.  Therefore, the communities and states were justified in denying requests to rival independent telephone companies to deploy additional new telephone lines.

Many local & regional politicians were Bell Telephone stock holders and you can only imagine the conflicts of interest when thousands of independent telephone companies across the country were attempting to compete on equal footing and getting denied at every turn as their success began threatening to bring down the Bell System.

In addition to lobbying at the local level, or aggressively buying up competitors, Vail had a brilliant backup plan.  If he could not acquire a competing system outright, he approached each independent telephone competitor and, in effect, suggested they rule the telephone empire as partners.

He offered the independents membership in the Bell system, but required the adoption of Bell’s standards and Bell’s equipment. He also imposed fees for use of Bell’s long-distance lines, though without making any promise of connecting calls to non-Bell subscribers.

Vail’s offers were essentially ultimatums. Join the network and share the wealth or face annihilation. Vail’s role models, JP Morgan and John D. Rockefeller had both pioneered the “purchase or perish” model to build Standard Oil and U.S. Steel. 

Of all of Bell’s advantages and strategies, the single greatest advantage was this…Bell Telephone gained access to the Western Union nationwide wired telegraph network through a legal settlement in 1879.  That is a fascinating story in itself, but having access to the Western Union wired infrastructure gave Bell a HUGE head-start in laying telephone wire across the country.  Western Union had 250,000 miles of telegraph wire strung over 100,000 miles of route.

And Bell, with JP Morgan’s help, kept buying Western Union Stock, finally gaining control of Western Union in 1910 by owning as much as 30% of Western Union.  In January, 1913, the Justice Department informed the Bell System that the company was close to violating the Sherman Antitrust Act. The Interstate Commerce Commission had been looking into AT&T acquisitions since 1910.

Vail’s vision of a national Telephone/Telegraph communications monopoly was in jeopardy, but now he was armed with leverage and a brilliant plan. Vail was about to negotiate the single greatest deal in the annals of American business.

Vail may not have known for sure in 1885 which device, the telephone or the telegraph, would present the greatest opportunity to dominate and control the future, but by 1912, it was clear that the telephone provided Vail the path to domination he had envisioned.

In 1913, when the Department of Justice alerted Vail that they were investigating AT&T for monopolistic practices, due to their controlling ownership positions at both AT&T and Western Union, Vail proactively proposed a settlement.  Known today as the Kingsbury Commitment, Vail promised the Federal Government that AT&T would divest of all Western Union stock.  He also promised that AT&T would not acquire any other independent telephone company without first getting permission from the Justice Department.  He also promised to open AT&T long distance lines to competitive independent companies…for a fee.

In a staggering, mind-blowing decision, the U.S government agreed.  Even though, at that very moment in time, Bell/AT&T had quickly and quietly grown to control 83% of all U.S. telephones.  By giving up Western Union, in return for a government-protected telephone monopoly, Vail was able to focus on and build AT&T into the richest company on earth.  Imagine, controlling 83% of all U.S. telephones without rival for 70 years.

Once the Kingsbury agreement was signed with the U.S. Government in 1913, and the threat of competition was eliminated, Bell Telephone set in motion a massive, nationwide strategy that allowed them to control and profit from our phone lines, who we called, where we called and even the telephone unit itself. A 70-year, government protected business monopoly.

Here is what the Bell monopoly was able to control:

Every business & every consumer had to pay Bell for access to a single phone line.  Multiple lines meant multiple fees.

Every business & consumer had to pay Bell for telephone usage.

Bell controlled all of the long-distance service, so all businesses and consumers had to pay Bell a premium for each long-distance call.  The further the distance, the more expensive the call.

Bell owned their own telephone equipment manufacturing company, it was called Western Electric, so Bell manufactured and owned their own equipment. And they would not sell it to anyone. Nor would they allow anyone to use or connect non-Bell equipment to the phone line.  Instead, businesses & consumers paid Bell a monthly (or yearly) fee to lease the Bell equipment in their homes or businesses. No other options. 

For anyone who wonders what a business monopoly looks like through the eyes of the consumer, look no further than the Bell – AT&T monopoly. You will never see a starker contrast to a competitive, free enterprise, free market system.  

Just look at how the telephone began, during the most competitive window in its history, and imagine, like I do, what might have happened if there had been no monopoly and instead, a free and open market, pushing innovation and style.

Look at the Bell telephones that America had to choose from for the 70 years between 1912 & 1982.  Compare that to the 18-year competitive window from 1894 – 1912 when manufacturers all over America were advancing the telephone by producing better quality and more beautiful innovation.  Telephone rates were coming down, service was improving, and consumers could buy the telephone of their choice. The telephones in this collection are evidence that for one brief window in history, at the very beginning, mankind’s most important invention was thriving.  While you celebrate the fantastic, competitive, innovative landscape of the Smartphone today, don’t forget how and where it all started.  I for one, am betting your smartphone would have been even smarter had there been no Bell – AT&T Monopoly. Hope you enjoy the website.


Credits:

Adam D. Thierer – UNNATURAL MONOPOLY: CRITICAL MOMENTS IN THE DEVELOPMENT OF THE BELL SYSTEM MONOPOLY

Tim Wu – How Theodore Vail Built the AT&T Monopoly