by Tim Wu
Before long, Burch had founded the Mesa Telephone Company to wire the entire settlement, and in so doing became one of hundreds of such small telephone companies springing up across the nation under such names as the Swedish-American Telephone Company, the Home Telephone Company, or the People’s Telephone Company.3 His fellows in the cause styled themselves “the Independents.” They were, by their own description, “an uprising of the people,” a social movement dedicated to “American Industrial Independence.”4
Though a very small group, the Independents would mount the first great challenge to the First Bell Monopoly. After the expiration of Bell’s patent in 1894, hundreds of independent firms had cropped up to provide telephone service. The age of the Independents was the “open” phase in American telephony, characterized by a vision very different from Bell’s. While now forgotten or unknown to most, that vision would profoundly change how Americans communicated.
In contrast to the Independents’ clientele, that of the First Bell Monopoly consisted of businesses and rich individuals living in large East Coast cities; Bell was in no hurry to broaden the coverage of its network. In fact, Bell’s business model was altogether too stagnant for Theodore Vail’s taste. Like the Independents, Vail could sense the potential power of a national network, but if he yearned for industrial greatness, Bell’s shareholders were monotonously interested in dividends alone. That conflict came to a head in 1887 after Bell, rather than plowing profits into expansion, announced a particularly fat dividend. Writing that his position at the company had become “embarrassing and unpleasant,” a dispirited Vail retired to South America in search of adventure.5
The Independents, rooted in the farms and small towns of the West, were innovators, but of a conceptual kind, not the technical kind à la Alexander Bell. They saw a different world, in which the telephone was made cheaper and more common, a tool of mass communications, and an aid in daily life. They intuited that the telephone’s paramount value was not as a better version of the telegraph or a more efficient means of commerce, but as the first social technology. As one farmer captured it in 1904, “With a telephone in the house comes a new companionship, new life, new possibilities, new relationships, and attachments for the old farm by both old and young.”6
Typically, the rural telephone systems were giant party lines, allowing a whole community to chat with or listen to one another. Obviously there was no privacy, but there were benefits to communal telephony other than secure person-to-person communications. Farmers would use the telephone lines to carry their own musical performances. The historian Ronald Kline has described the telephone parties that were all the rage in some areas, with groups assembling to hear, as it were, a phoned-in concert. “The opening of the new telephone line at Ten Mile,” reported the Macon Democrat, a Missouri newspaper in 1904, “was celebrated with gramophone, violin, banjo, french harp, guitar and organ Friday night.”7
And so, while the Bell Company may have invented the telephone, it clearly didn’t perceive the full spectrum of its uses. This is such a common affliction that we might name it “founder’s myopia.” Again and again in the development of technology, full appreciation of an invention’s potential importance falls to others—not necessarily technical geniuses themselves—who develop it in ways that the inventor never dreamed of. The phenomenon is hardly mystical: the inventor, after all, is but one person, with his own blind spots, while there are millions, if not billions, of others with eyes to see new uses that had been right under the inventor’s nose. We shall see the story repeated throughout this book. For now, suffice it to say that it was simple farmers in the early 1900s who pioneered the use of the phone line for broadcasting long before the rise of radio broadcasting in the 1920s. Burch’s Mesa Telephone Company offered its customers daily broadcasts of weather, train wrecks, and murders, the interval of programming announced by ten short rings. As Kline writes, “Every evening at a designated time, usually seven p.m., an operator would call all farms on a line and give the time, weather and market reports, newspaper headlines and local news, ‘with a spicing of gossip.’ ”
• • •
In the theory of competition that applies to information industries, as to all others, we speak of barriers to entry: the obstacles that a newcomer must overcome to get into the game. But barriers in an information industry, trafficking as it does in expressive content, can represent more than a restraint on commercial aspirations; they can, depending on how crucially the information medium figures in a society’s communications, also restrain free speech. If we want to define how “open” any industry is, we should start with a number: the cost of entry. By this we simply mean the monetary cost of getting into the business with a reasonable shot at reaching customers. Is it in the neighborhood of $100? $10,000? Or more like $1 billion? Whatever the magnitude, that number, most definitively, is what determines whether an industry is open or closed.
In the first decade of the twenty-first century, for instance, if you wanted to start a competitive mobile phone service, to take on AT&T, Verizon, and the rest, the price of entry—for a spectrum license, towers, and other necessities—was somewhere north of $10 billion. It’s not the sort of expense most of us would take on in the pursuit of a hobby. Entry costs of such magnitude are not atypical. Thus, for most of the twentieth and twenty-first centuries, the phone market has been effectively closed. Starting a completely new phone service based on new wires was financially infeasible, as the costs of entry were enough to daunt even the most deep-pocketed firms, let alone rural cooperatives.
But for a brief time in the 1890s, all this was different. While we don’t know exact present-value costs, they were low enough that farmers like Edmund Burch, as well as small-town entrepreneurs and rural cooperatives, could effectively compete with Bell. In this way, many towns ended up with two telephone systems, during what we call the “dual service” era.
Why was market entry cheaper? To begin with, telephony was at the time a decidedly low-tech affair, as evident from Burch’s reliance on simple galvanized wire. In cities, you could generally just run wire aloft on poles, avoiding the costs of burrowing to reach homes. And in the countryside, it was even simpler: farmers like Burch in New Mexico could nail wires to farm fences, creating what they called “squirrel lines,” and attach phones at the ends. It was telephony in the Green Acres style. These simple logistics, taken together with the absence of licensing costs, made things easy for motivated self-starters.
The economics of switching also made it possible for independent phone systems to compete with Bell. In today’s automated world, the larger the network, the better it is, because you can reach more people in more places. But when human operators (“What number, please?”—the “telephone girls” to whom we shall return in another chapter) were needed to physically connect one phone line to another, a larger network meant a slower switching system, prone to bottlenecks and breakdowns. That weakness allowed the Independents room to start with just a few customers. In some places Bell had never even offered phone service, allowing the Independents the advantage of being first to market.
Bell’s initial response to the Independents was simply to ignore or dismiss them. The trade journal Telephony reprinted stories of farmer telephones in its humor section, an attitude Bell could afford to share as long as the farmer lines and the Independents operated in communities Bell didn’t want to serve. But as the Independents built more lines, and formed their own associations, they gradually grew to threaten Bell’s control over the American telephone, until, by the turn of the century, the Bell companies undertook a campaign against forces they now called “the Opposition.” It would be a rough campaign by any standard of industrial warfare. AT&T as a matter of course refused to make any connections between the Bell system and the Independents, but it would go much further to protect its monopoly. Relying on its profits in stronger markets, Bell would dramatically undercut the rates of local independent telephone companies in any contested area,
a tactic known as predatory pricing. Sabotage of equipment was not unheard of, and it was practiced by both sides. Paul Latzke, a supporter of the Independents, wrote, “there has been wholesale bribery, systematic wrecking, and, at times, violence, almost anarchy.”8 According to one account, Bell would rip out wires and phones, and “in truly medieval fashion, pile the instruments in the street and burn them, as a horrible example for the future.”* 9
With a tendency toward moralizing bombast, the Independents complained to anyone who would listen. As one Independent wrote in Sound Waves, a “monthly magazine devoted to the interests of independent Telephony,” “those who have watched the peculiar and heathen ways of the Bell monopoly know that it is, without doubt or question, the most conscienceless organization in the United States, compared to which the gigantic Standard Oil trust is a mere kindergarten of devious financial and industrial devices.”10
However “devious,” the Bell strategy was ultimately ineffective. No amount of unwiring could alter the fact that the Independents were meeting a demand for cheaper telephone service. By the early 1900s, Bell’s dominance was beginning to erode, the company soon to be pinned like Gulliver by hundreds of Lilliputians. As the Independents grew profitable and more secure, even their rhetoric brightened with a new confidence: “The days of prosperity of the Bell companies are gone, never to return. The public has learned to appreciate good telephone service and courteous treatment, and will not again submit to the extortions and antiquated methods of the Boston trust.”11 By 1907, Paul Latzke would publish a small book called A Fight with an Octopus, in which he revealed the Independents had 3 million phones to Bell’s 2.5 million, and total dominance in the West. Latzke further predicted that the “final battle” would take place in New York City: “The Bell people have made Manhattan Island their Gibraltar. Its defense will be a spectacle well worth watching … the greatest industrial battle of the age.”12
FROM REPUBLIC TO EMPIRE
Sometime in the early 1900s, Vail, then living in Buenos Aires, was invited to Jekyll Island, South Carolina, to play cards with a man known to him only by reputation. During his visit, or shortly afterward, the man told Vail of a plan, then secret. He and a group of other financiers aimed to gain control of the Bell company, wishing not only to reestablish its former dominance but to build the greatest wire monopoly the world had ever seen. And he wanted Vail in charge. Vail knew that this man was to be taken seriously—for this seasonal resident of Jekyll Island was none other than J. P. Morgan, one of the greatest monopolists of that era or any other.13
In 1907, after gaining Vail’s assent, Morgan set his plan in motion. In a lightning-fast series of financial maneuvers, he took control of Bell, forcing out the Boston owners. Vail’s title would be president of American Telephone and Telegraph (AT&T), now the holding company for the entire Bell system. Rather like Steve Jobs’s storied coming back to Apple, Vail’s return to Bell, at age sixty-two, would change everything.
With Vail again in place, there began a great transition in telephony from an open, competitive phase to the Second Bell Monopoly, Bell’s true imperial age of dominance in wire communications, which would last for most of the twentieth century. It was during this transition that the orthodoxy of centralized power in communications took its mature form. In exile, Vail had never ceased nursing dreams of empire, but now with Morgan’s undreamed-of support, he was free to think big, even by his own outsized standards. The new slogan he was able to announce upon his arrival said it all:
ONE SYSTEM, ONE POLICY, UNIVERSAL SERVICE
The terminology is important to understand: it meant “unrivaled,” not “for all.” This was not “universal” as in, say, universal health care, but more nearly in the sense of the universal church. It was, as the historian Milton Mueller explains, universal service as an alternative to options, and as such it was a call for the elimination of all heretical hookups and the grand unification of telephony.14
To Vail and Morgan, building redundant phone lines between any two points was as senselessly wasteful as building twenty duplicate rail tracks between two cities, as sometimes happened in the nineteenth century. Why have twenty lines of varying standards where there could instead be one track of highest quality? They also accepted the other lesson of the railroads: without a single master, systemic chaos would undercut efficiency. Vail thought the “opposition” phone companies would stoop to any cut rate, and cut-rate service, just to be in the game. Using the formidable capacity of the Morgans to absorb loss, he undercut the price cutters.15
Vail’s philosophy is well expounded in AT&T’s annual reports, spirited and personal meditations on both AT&T and the responsibilities of a powerful public corporation. It was in these early years that Vail created what would remain the Bell ideology until the system’s twentieth-century breakup. And interestingly, Vail had much ideological affinity with his foes, the Independents. He saw the merits in an ever expanding system, and he truly believed in the telephone as a “public utility” ultimately meant to serve every American. His reports, though obviously intended for general consumption beyond the ranks of shareholders, do nevertheless portray an earnest and sincere vision of the public good. Where he disagreed with the Independents was simply over the fact of their existence.16
As for J. P. Morgan, he was a mostly silent partner, and his name only rarely shows up in histories of the telephone. Yet Morgan’s financing was absolutely crucial to the realization of Vail’s vision and Bell’s resurrection as a monopoly. Whether Morgan shared any of Vail’s sentiments about the public duties of a corporation we cannot know. But he certainly concurred in his enthusiasm for monopoly as the optimal business model. Indeed, as we shall see over and over again, the shift from an open industrial phase to a closed market usually begins when capital interests spy the potential for vastly increased profit through monopoly, or when they demand greater security for their investments. Vail’s access to Morgan’s capital made his vision of the Bell system possible, but it also came with significant strings attached.
THE TAKEOVER
In 1909, at Morgan’s direction and using his money, Vail seized a controlling interest in Western Union, Bell’s childhood tormentor, making himself president of both. AT&T now controlled all instantaneous long distance communications in the United States. As the so-called long lines—those connecting one locality with another—were the scarcest part of the communications infrastructure at the time, to possess them exclusively was the greatest power. A combined AT&T and Western Union now shared customers, offices, and operations, creating a true monopoly in distance communications.17
With the support of Morgan, Vail began to take a softer line against the Independents, who were local. Where the old Bell had followed a scorched-earth policy, Vail now sought integration and consolidation. Former rivals were invited not to die but to join him—to rule over communications together, we might say, as father and son.
Part of Bell’s new strategy was to abandon a tactic that had done so much in the 1890s to decimate the Independents: refusal of network connection. Vail’s approach was now more subtle and complex: he used connectivity as a carrot rather than a stick; and it proved, together with merger and acquisition, an irresistible way to dominate the market. The story holds a powerful lesson for any independent business facing a much superior foe, a lesson as important in the 2010s as in the 1910s.
Vail’s agreements offered the Independents membership in the Bell system, but they required the adoption of Bell’s standards and Bell’s equipment and imposed special fees for use of Bell’s long distance lines, though with no promise of connecting a call to any non-Bell subscriber.18 Vail’s offers were, then, essentially the ultimatums that Genghis Khan made famous: join the network and share the wealth, or face annihilation. But Vail needn’t have looked so far back for a role model; in his own time, John D. Rockefeller had pioneered the “purchase or perish” model to build Standard Oil.
The Independents tried to warn one anothe
r off the connection agreements with Bell. As one wrote in a bulletin: “You cannot serve two masters. You must choose between the people and a greedy corporation.”19 But even the relatively strong found resistance unsustainable and were forced to join. As for the relatively weak, they might simply be bought outright, sometimes through agents of Morgan who kept secret their affiliation with Bell. In 1911, Edmund Burch’s Mesa Telephone Company was one of those to give up and sell out to the Bell company. What happened to Burch himself is a mystery, but his lines, and the mesa itself, were abandoned by the 1920s.20
Did the Independents ever have a chance? Not without their own long distance network. Without long lines the Independents were limited in what, ultimately, they could offer the customer. It was the AT&T long lines that connected Bell telephones, and they made the difference between a national network and a neighborhood of virtual cans and strings.
The Independents weren’t stupid. There were some Independent long distance companies, though none individually or in any simple combination formed a network with the reach of AT&T’s long lines. There were also efforts to build alternative nationwide long distance networks as early as 1899. That year, a group of financiers from Philadelphia known as the “Traction Kings” allied with others to form the “Telephone, Telegraph, and Cable Company of America.” It announced that “the main object of this company will be the extension and perfection of long distance telephone service throughout the country, and in a secondary way the lessening of the rates.”21