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January 30, 2013

How AT&T Became a Monopoly
By Larry Satkowiak

    Larry Satkowiak

The Theodore Roosevelt administration is known for its campaign against big business, but it also had to decide how it would deal with a technology deemed to be the essential service of its time: the telephone. It didn’t help that J. P. Morgan, the famed financier, had gained control of AT&T by 1907 and had publicly announced that major consolidation was on the horizon. During this time, there were a large number of telephone companies across the United States and substantial competition. AT&T had about half of the national market and independent companies held the rest. Morgan needed a tough-minded businessman who shared his vision for a national monopoly to take the helm at the new AT&T. And that man was Theodore Vail.

Vail knew that he had one technological advantage over his competitors by having long-distance service. He also knew this advantage would not be sufficient because the signal was too weak, so he set his sights on improving the quality of his service. He moved all AT&T research to a single location in New York and set them to solving the problem in 1910. Morgan, in the meantime, purchased the dominant communications company of the time—Western Union—and placed it under Vail’s control. When AT&T refused to let independent phone carriers attach to its long distance service, the federal government sued on antitrust grounds in 1912. Morgan was outraged, but died in 1913, clearing the way for Vail to make a deal.

The resulting agreement, known as the “Kingsbury Commitment,” settled the case for AT&T; its terms included a promise to sell its controlling interest in Western Union, an agreement not to acquire other independent telephone companies and to allow competitors to connect with the Bell system. As an unseen consequence, the courts allowed AT&T to exchange stock with their competitors, and after a short time, this resulted in just two interests controlling the telephone system: a system of geographically dominant local carriers and one long-distance carrier. They worked together for their mutual benefit, so the agreement that the government made actually eliminated the remaining competition and encouraged the formation of one of the largest monopolies in the United States.

In 1918, the entire telephone system was nationalized for security reasons and the federal government compensated the company with an annual rate of return exceeding 10%. After control of the company was returned to AT&T in 1919, the federal government still controlled rates and it continued to provide a handsome return to the company. In 1934, the FCC established rules for the company, but largely protected the monopoly. Radio could have provided competition, but the FCC’s frequency allocation and the idea of a natural monopoly was firmly entrenched by that time. AT&T was forced to break up the monopoly in 1984, and the current AT&T (formerly Southwestern Bell) now competes directly with the cable industry.

As I looked at this history, I noticed that many commentators have remarked on the government’s social policy of universal coverage and others have talked about rate regulation. That the government collected large taxes from consumers to support this system goes almost unnoticed, as does the short-sighted result of choking innovation. The telephone remained little-changed until the mid-1990s when the cable industry began looking at digital technology and entered the market. Many people today do not remember the charges on a phone bill before cable brought innovation and competition to a stale industry. Cable innovation broke down the barriers and challenged the status quo.

Growing up in the 1960s, I remember seeing a demonstration of a video-phone. While it was possible to do, it was not possible to deliver in a world where there was no incentive. The mid-1990s was the beginning of the third generation of cable led by some amazing innovations, such as the cable modem, that finally turned my childhood dream into reality. A hundred years after the Kingsbury Commitment, I am able to “Skype” my grandchildren in Tacoma on my broadband connection provided by Comcast. The cable industry remains one of the best examples of the American free enterprise system, and we should not forget that the consumer is the ultimate beneficiary. 

(Larry Satkowiak is president and CEO of The Cable Center, the nonprofit educational arm of the cable industry. The Center preserves cable’s enduring contributions to society, strengthens relationships between cable and academia and unites the industry around the advancement of exceptional customer service. www.cablecenter.org)


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