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A History of Computer Communications 1968-1988

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Early Histories
Changing Rules of Competition -- AT&T and the FCC

b.8 Monopoly Asserted -- 1918-1934

 

On January 15, 1915, a telephone conversation for all times took place -- one both transcontinental and national.[396] Along with AT&T executives and local politicians, Alexander Graham Bell in New York City, spoke to Thomas Watson in San Francisco. They were joined by Vail, who was recuperating at Jekyll Island, Georgia, and President Wilson at the White House.[397] After confirming the line worked, Bell repeated: “Mr. Watson, please come here. I want you.” Watson, a continent away, humor intact, responded: “It would take a week for me to do that now.” Bell then told all listening that he was using the original instrument over which those famous words had been first communicated. Electrical undulations once thought too weak to travel cross town had now proved their potential to connect the country into one truly indivisible nation.[398]

 

AT&T’s intentions to be the one grand national system had been but momentarily slowed by the Kingsbury Commitment --  the agreement of regulation and not to acquire independents. In his 1914 annual report, the Attorney General clarified his interpretation of the Commitment to allow for the consolidation of local exchange competition into their natural state of monopolies, even if involving a Bell.[399] This qualification gave AT&T the interpretive room to continue consolidating. In 1917, the rule was reinterpreted again; this time to allow AT&T to acquire competitive independents as long as they sold as many stations back to other independents as they were acquiring. (See Exhibit 2.15  AT&T’s Consolidation Quest.)

 

Behavior under the new rule had hardly begun, when the exigencies of World War I prompted the Federal Government to take control of AT&T and all other telecommunication companies on August 1, 1918. In what will be Vail’s last, and maybe greatest, contribution, he managed what appeared going in to be a cold and acrimonious relationship with the Attorney General into one that assured the return of AT&T to its private shareholders -- far from a foregone conclusion since there were many who wanted the government to retain control and management of the telephone system.[400] During the year of oversight, the Federal Government began doing just what AT&T had wanted to do -- consolidate companies into one system. Vail’s prodigious efforts during the War, when he was already an exhausted and ailing man, were more than even a constitution as strong as his could bear, and on April 16, 1920, Vail, the man who made AT&T into what will become the largest corporation in the world, passed away.[401] Edison, in 1912, had said it most succinctly: “Vail was a big man.”[402] Then, just two years later, on August 2, 1922, Graham, the original legendary figure of AT&T, died. What these two historical giants left mankind remained a far cry from the transformative technology it was destined to become, yet even so, they had the genius to understand its potential from the very beginning.

 

By now the logic of consolidation had proved too compelling, not just for AT&T, but for all participants, including those independents who now wanted to sell their companies to Bell. (AT&T had eliminated so many independents in so many key locations, that the competitive threat of another national company was thought impossible, so the independents were brought to the “firesale” condition AT&T had sought all along.) In 1921, Congress passed the Willis-Graham Act giving telephone companies the right to consolidate, subject to prior approval of state authorities and the ICC. -- the ICC had been given authority over mergers and acquisitions. This new authority reflected the changed philosophy of competition which thought consolidation the natural, and inevitable, course of economic development. The Kingsbury Commitment was declared ended, no longer effective.[403] From 1921 to 1934, the ICC approved 271 of 274 acquisitions.[404] (By year-end 1921, AT&T had corporate assets of $1 billion.)

 

Exhibit 2.15  AT&T’s Consolidation Quest

 

Year

Number of stations

Number of stations

Year

Number of stations

Number of stations

 

purchased

sold

 

purchased

sold

(a)

(b)

(c)

(a)

(b)

(c)

1912

135,924

42,645

1925

137,482

45,540

1913

19,187

16,617

1926

15,909

11,419

1914

23,327

1,729

1927

207,540

4,976

1915

34,428

15,188

1928

45,022

1,953

1916

31,290

15,849

1929

64,234

12,120

1917

131,853

10,333

1930

153,959

9,847

1918

104,497

111,757

1931

15,784

348

1919

56,939

70,225

1932

67,062

35

1920

41,085

8,337

1933

1,741

57

1921

157,337

43,960

1934

2,695

116

1922

26,341

7,747

 

 

 

1923

124,611

3,386

Total

1,696,977

443,357

1924

98,730

9,173

 

 

 

 

Source:  Statement prepared by American Telephone & Telegraph Co. and exhibit 2096-D table V, p. 42.

 

 

NOTE:  The foregoing data include (1) for the years 1912 and 1913, purchases and sales of stations (presumably company stations) in connection with purchases of and sales of physical property; (2) for the years 1914 to 1927, inclusive, purchases and sales of company (for 1921, company and service) stations in connection with purchases and sales of "going or completed plant;" (3) for the year1928, purchases and sales of company stations in connection with the purchase or sale of plant involving in any one transaction a consideration of $10,000 or more and each purchase or sale involving an entire company or exchange regardless of amount involved; (4) for the years 1929 to 1934, inclusive, purchases and sales of company stations in connection with the purchase or sale of the entire property of a company, or where an entire exchange is involved, or where telephone plant is purchased or sold involving a consideration exceeding $10,000 and the business handled over such plant is transferred by the selling company to the purchasing company. 

 

The foregoing data do not include (1) purchases and sales between Bell System companies; (2) purchases and sales by Bell-controlled companies from or to companies other that Bell associated companies: (3) corrections of reports of previous years and transactions reported in year following that in which consummated.

 

In addition to the formal change in the institutional rules of regulation due to the Willis-Graham Act, the informal constraints, those arising from the interactions of the participants, also saw change. In 1921, AT&T bought 157,337 stations from Independents while selling them only 43,960 stations. The Independents voiced alarmed over such aggressive behavior, and to head off any adverse reactions, AT&T sent F. B. McKinnon, President of the United States Independent Telephone Association, a letter on June 22, 1922 stating AT&T’s acquisition philosophy -- no acquisitions or consolidations would be made unless demanded for the convenience of the public or, in essence, in the interests of AT&T.[405] Known as the “Hall Memorandum,” it pacified the Independents, while probably not changing AT&T’s behavior, but it did indicate that AT&T wanted to maintain friendly relations.

 

In 1924, AT&T once again reorganized its research and development activities and created Bell Laboratories; owned equally by AT&T and WE. (Bell Labs would become the most important and prolific corporate research laboratory of its time.[406]) This restructuring also produced the AT&T organization that would persist until the 1980’s. (See Exhibit 2.16  AT&T Organization Chart.)

 

Exhibit 2.16  AT&T Organization Chart

 

 

On December 31, 1927, AT&T radically changed its license contract. It sold all telephone instruments to the licensees and reduced its license fee from now 4 to 2 percent.[407] The purchase price to the licensees was $38.2 million, $14.4 million greater than AT&T’s depreciated book value -- the original purchase price had been $46.5 million. (At the time, AT&T’s total plant and equipment totalled over $200 million.[408]) Virtually all the telephones sold were ones that had transmitters and receivers incompatible with those of the new, standard telephone instruments AT&T had put into production by 1927 -- the desk model had a one-handle design. The licensees had bought assets that were soon obsolete, reinforcing the culture of wanting no changes in the periphery of the network, i.e., telephone instruments. Furthermore, instrument concerns and responsibilities had been shifted to the licensees, with AT&T undoubtedly preferring not to deal with instrument issues, since if conflict emerged, they would have to assume the compromising role of mediator.

 

AT&T was having its way. So much so in fact, that in 1927, President Walter S. Gifford, who became President in 1925, seemed to modify Vail’s “One Policy, One System, Universal Service," when he stated the goal of the Bell System was: “to furnish the best possible service at the lowest possible cost consistent with financial safety.”[409] How prescient, however, for it would be the “Great Depression” of 1929-1936 that would instigate the next convulsive twist in the history of telecommunications in the United States.

 

The FCC and AT&T Regulation 1934-1946

 

President Franklin Delanor Roosevelt and the “New Deal” Congress were elected into office in 1932 with the mandate to use the power of government to escape the grips of the Great Depression. Corporate capitalism was seen to have run its course, and a new means of creating economic growth was needed. One way was for the Federal Government to exercise its power and pass legislation regulating certain "public service" industries -- those where the polity had retained, or was thought needed to have, institutional presence. A Congressional Investigative Committee reported in 1934 on the telephone and telecommunications industries that “at the present time there is little, if any, Federal regulation of the rates, practices, and charges of the several branches of the communications industry.”[410] It went on:

 

“The importance of the (telephone) industry calls for actual and not nominal regulation. Telephone business is a monopoly -- it is supposed to be regulated. Thus far regulation, particularly by the Federal Government, has been nominal largely because Congress has not made appropriations sufficient to enable the Interstate Commerce Commission to give effect to existing statutes.”[411]

 

By early February, various bills to create a new regulatory commission for communications had been proposed in both Houses of Congress.[412] After President Roosevelt went public with support for such legislation on February 26, bills were introduced in both Houses the following day. President Gifford of AT&T immediately objected to provisions giving the Federal Communication Commision (FCC) power to void or modify contracts by carriers (“goes almost the whole way toward substituting public management in place of public regulation”), to approve all equipment or service exchanges among parent and subsidiaries, and to require carriers to solicit competitive bids for all equipment and service purchases (“revolutionary”).[413] After months of negotiations and behind-door intrigue, the proposal for a Congressional study of communications, read AT&T, was dropped and AT&T stopped protesting. On July 11, Congress passed the Communications Act of 1934 (the Act).[414] The two principle objectives were: lower costs, and "universal service" -- a phone for everyone.[415]

 

The Act did not require extended debate, after all Congress was simply trying to take the historical record of communications regulation and vest it in a dedicated administrative agency. In fact, the agency was not new, but simply an enlarged Federal Radio Commission (FRC); created by the Radio Act of 1927. In essence, the Act took the language and concepts first codified in the ICA of 1887, and as changed over time, merged them with the Radio Act, and gave them to a renamed, and slightly changed, agency -- the Federal Communications Commission (FCC): (“..for the purpose of securing a more effective execution of this policy by centralizing authority heretofore granted by law to several agencies..”). Thus did the metaphor of transportation become formally embedded in the language of telecommunications regulation. No longer would communications regulation have to be squeezed into the busy agenda of the ICC.

 

The FCC consists of commissioners appointed by the President and responsible to Congress.[416]  The commissioners are supported by a number of bureaus that develop, recommend and perfect regulation on behalf of the commissioners who approve their actions by vote. The Common Carrier Bureau (CCB) is the bureau responsible for telephone, or "common carrier," regulation -- Title II regulation in the Act. A common carrier is "any person engaged as common carrier for hire, in interstate or foreign communications by wire or radio or in interstate or foreign radio transmission of energy" (excluding radio broadcasting)."[417] All FCC decisions are subject to appellate review, and the courts can reverse any decision when it thinks the FCC has exceeded the authority granted to it under the Act.

 

Key provisions of the Act are:

 

             "(a) Entry and exit authority (Section 214 Authority);

              (b) Tariff filing and reasonable rate requirements;

              (c) Nondiscrimination in providing service and interconnection to other carriers upon reasonable request;

              (d) Financial reporting, record keeping, and regulatory accounting requirements;

              (e) Complaint procedures."[418]

 

Legislation had proceeded quickly for many of the thorniest issues had been slated for three FCC investigations: intercompany transactions which might affect services and charges,[419] the relationships between and among telephone and telegraph companies, and exclusive contracts by telegraph companies to furnish service in public places.

 

The first investigation was known as the Special Telephone Investigation (STI) and was led by the newly appointed Commissioner with telephone experience -- Paul A. Walker. Walker chose to conduct the investigation as a Congressional investigation, and did not allow AT&T to introduce their own, or to cross-examine any, witnesses.[420] After nearly two years of hearings and fact collecting, the STI was concluded in June 1937. Then in 1938, in an unusual move, Walker issued a “Proposed Report,” one very critical of AT&T and recommending such actions as direct regulation of WE’s prices, and competitive bidding all purchases. The frosty relations between Walker, and to a lesser extent the FCC, and AT&T had just turned considerably colder. AT&T tried to counter Walker’s Proposed Report with a point-by-point public rebuttal, and behind the scenes lobbying with the other Commissioners. The FCC issued its “Report on the Investigation of the Telephone Industry in the United States” in June 1939; it became known as the “Walker Report.” It had white-washed the more controversial points and proved to be a dud -- no legislation, the ostensible objective, resulted. Neither did it gain much press, as the building drama of World War II had absorbed the public’s attention.

 


[396] Paine, pp. 259-265

[397] Oslin, pp. 268-269

[398] Quoting from Asmann, p. 154: “In addition to the technological breakthrough this was a backbreaking undertaking much like that for the telegraph line of 1861. To cite just one statistic, it was estimated that each lineman who worked on the four-hundred mile stretch across Nevada took one million steps.”

[399] However, “the consolidated company will make connections with all long distance interstates lines and thereby preserve competition in interstate communication.” Lawrence p. 10

[400] See Paine Chapters XLVIII and LI

[401] Brooks quote of page 154

[402] Brooks, p. 145

[403] FCC, p. 142

[404] Stone, p. 48

[405] FCC, pp. 142-143

[406] "By undertaking industrial research they [AT&T] began to pursue a continuous means of creating and controlling technological discontinuity -- for discontinuity presented them with both their greatest threats and opportunities. “ Reich, p.242

[407] FCC, pp. 151-153 Two comments: technically WE bought some of the telephone instruments, and the fee had been reduce from 4.5 to 4 percent in 1918.

[408] FCC, p. 48

[409] Paul R. Lawrence and Davis Dyer, “Renewing American Industry,” The Free Press, 1983, Chapter 8, p. 215

[410] FCC, p. 571

[411] Ibid.

[412] For an excellent summary review of the events leading up to the FCA, see Paglin pp. 44-48. A more thorough study is found in “Where Water Falls,” By Senator Dill 1970.

[413] Paglin, p. 47

[414]Licensing and regulation of radio broadcasting stations occupied much more time than did common carrier communications.

[415]The Federal Government could only regulate interstate service. The States were responsible for intrastate service.

[416]See Telecommunication and the Law pgs 1-26

[417]FCA

[418]Telecommunication and the Law pgs 9

[419] Paglin, p. 47: “It was designed particularly to develop the facts with respect to intercompany transactions and to the relation of holding companies to operating companies. State regulation of communication companies had been greatly handicapped because the State commissions had been unable to get information of the type which the Commission was here directed to obtain.”

[420] Stone, p. 62