The Master Switch

by Tim Wu

  Here were the progenitors of MCI and Sprint, and the beginnings of long distance competition. Unfortunately, before it had even gotten under way, all the backers suddenly pulled out for reasons that remain mysterious. According to an FCC investigator’s report decades later, in 1936, the pressure on the Traction Kings had come from J. P. Morgan himself, whose designs on a telephone monopoly were by then already formed. Indeed, as the FCC documented, no rival national long distance network could get financing in the United States or abroad. And so, in the absence of capacity, coordination, and cash, no real challenger to AT&T long lines would appear until the 1970s, some sixty years later. That was J. P. Morgan’s lasting legacy.

  Even putting aside the Morgan factor, however, Vail’s strategy shows how selective openness can be even more treacherous for would-be competitors to navigate than a completely closed system. The option of being invited to dinner very effectively softens the fear of becoming dinner. It is the same logic Microsoft would follow in the 1990s, when its Windows operating system was similarly run as a partially open system. Like AT&T, Microsoft invited its enemies to connect, to take advantage of an open platform, hoping they wouldn’t notice or worry that the platform came with a spring trap. For as with Bell, once having made one’s bargain with Microsoft, there was no going back.

  ANTITRUST

  With “One Company, One System,” Vail made explicit his vision of a communications monopoly. It cannot, however, have pleased Bell’s attorneys to labor under a slogan expressing clear intent to flout the antitrust laws.

  In the 1910s, laws such as the Sherman Act, the broadest antitrust statute, were still fairly recent efforts to contain the trusts that had grown to dominate American industries such as oil, steel, and the railroads. The law prohibited “agreements in restraint of trade” and punished a monopolist who abused its power. The Roosevelt and Taft administrations had made clear the bite of these laws in the early 1900s, culminating in the Justice Department’s 1909 prosecution of Standard Oil and John D. Rockefeller for acts not so different from Bell’s campaign against the Independents. The ensuing verdict would break Standard Oil into thirty-five pieces.

  It was the year before that verdict when Taft administration officials came knocking, to begin what must by then have seemed the inevitable investigation and lawsuit against AT&T over its consolidation of the telephone industry. But from AT&T’s first meeting with Justice, we see for the first time something that will occur again and again in the history of communications, the state’s calculated exercise of discretion over whether to bless or destroy the monopoly power, deciding in effect what industry it will allow to be dominated. Theodore Vail will prove himself a high priest at winning the blessing of the state for monopoly dominance.

  The threat posed by the Justice Department’s case was hardly trivial. Just as Bell came under investigation, Thomas Edison’s movie trust (the subject of a later chapter) was also under federal attack and would be dissolved in 1915. There was every reason to think the same would happen to the Bell system. But also at that very moment, Vail executed his most ingenious and surprising maneuver.

  In a manner nearly unimaginable today, Vail turned to the government, agreed to restrain himself, and asked to be regulated. Bell agreed to operate pursuant to government-set rates, asking in exchange only that any price regulations be “just and fair.” Imagine Microsoft in the 1990s asking the states and the Clinton Justice Department to determine the price of installing Windows, or Google today requesting federal guidelines for its search engine. Having spun much rhetoric about Bell as a public trust, Vail now seemed to be putting his money where his mouth was.

  With this conciliatory if not quite prostrate attitude, AT&T was able to settle the lawsuit in 1913, acceding to a consent decree named the “Kingsbury Commitment” after Bell’s vice president. Under the settlement, Bell made one big concession: it agreed to sell Western Union. It also agreed to permit Independents to retain their independence while enjoying access to its long distance services, and to refrain from acquiring further Independents in over one thousand markets.22

  While the Independents may have regarded the Kingsbury Commitment as salvation—a “gift from Santa Claus Bell,” in the words of one—the deal was not, in fact, all it may initially have seemed. True, by divesting itself of Western Union, Bell was giving up the dream of a complete monopoly over wire communications, but actually the telegraph was fast becoming a dinosaur anyway. True, Independents suddenly could hook up with Bell’s long distance lines, but there is little evidence that many of them actually did. Superficially a victory for openness and competition, in time the Kingsbury Commitment would prove the insidious death knell of both.

  The trick of the Kingsbury Commitment was to make relatively painless concessions that preempted more severe actions, just as an inoculation confers immunity by a exposing one’s system to a much less virulent form of the pathogen. By offering to renounce hegemony in a dying industry and make available a service relatively few could still exploit, Bell spared itself the brunt—and the one truly meaningful remedy—of most antitrust proceedings: a breakup of the firm. With the government satisfied, and even Woodrow Wilson hailing it as an act of business statesmanship, Kingsbury’s greatest achievement was to free Bell to consolidate the industry unmolested.23

  The jujitsu of Vail’s anti-antitrust strategy of the 1910s remains an apt lesson to any aspiring monopolist. The key was earnest profession of a good no one could dispute: making America the best-connected nation on earth by bringing the wonder of the telephone into every American home. Appropriating the most appealing rhetoric of the Independents, and arguing persuasively that the Bell system could get the job done more effectively, Vail turned his monopoly into a patriotic cause.

  There is a long-running debate in the field of antitrust theory as to what should matter when judging the conduct of a monopolist. Robert Bork, the onetime federal judge and notoriously rejected Supreme Court candidate, is famous for arguing that the corporation’s intent, whether malign or beneficent, should be irrelevant.24 Yet as Bork himself knew, for most of the history of antitrust, attitude is everything, even if market efficiencies are supposed to matter most.

  This was something Vail seemed to understand intuitively: that antitrust, perhaps all law, is ultimately pliable by perceptions of right and wrong, good and evil. He understood that the public and government would rise up against unfairness and greed, though not necessarily against size in and of itself. Had Goliath not cursed David by his gods, David might have kept his sling in his pocket. Vail heralded AT&T as the coming of enlightened monopoly, a public utility of the future. He promised to do no evil. And the government bought it.

  TO BE A COMMON CARRIER AND FRIEND OF THE STATE

  From his handling of Bell’s antitrust problems emerges a central tenet of Vail’s thinking: the enlightened monopoly should do good as it does well, serving the public in close cooperation with the state. Vail’s view of his firm as the handmaid of government, the telephone as a public utility, is at once the most sympathetic and scariest element of his vision. Vail saw no harm in, and indeed believed in, giants, so long as they be friendly giants. He believed power should be beneficently concentrated, and that with great power came great responsibility.

  Vail’s most meaningful concession—in principle if not in practice—was agreeing to serve as a common carrier.* That pledge, in contrast to Western Union’s original modus operandi, meant that Bell would refrain from picking winners in other sectors of the economy or public life—any area that privileged access to the growing reach of communications could influence. Despite being a monopoly, Bell was committing itself to noninterference and making itself equally open to all users of its service—that is, universal in the sense its initial claim of being universal had belied.† This is the essence of common carriage, a concept that may seem esoteric, but is as fundamental to free communications over wires and frequencies as the First Amendment is to free expression. The phrase
itself is old, dating to fifteenth-century England and born of the need to reconcile the fact that in England, private entities were running what in most countries were public functions, such as roads, ferries, and so on.

  Bell’s dedication to common carriage was a promise to serve any customer willing to pay, charge fixed rates, and carry his or her traffic without discrimination. It made Bell’s telephone service offer rather what a taxi service is meant to provide in most cities—a meaningful similarity, since the concept has its origins in transport.

  At the heart of common carriage is the idea that certain businesses are either so intimately connected, even essential, to the public good, or so inherently powerful—imagine the water or electric utilities—that they must be compelled to conduct their affairs in a nondiscriminatory way. As a simple example, if a man operates the only ferry over to town, that simple boatman is in a position of great power over other sectors of the economy, even the sovereign authorities. If, for example, he decided to charge one butcher more than another to carry his goods, this operator could bankrupt the one who didn’t enjoy his favor. The boatman is thus deemed to bear responsibilities beyond those of most ordinary businesses.

  The big question—now often the multi-billion-dollar question—is how to decide, as a matter of policy, what businesses should be considered common carriers with special duties to the public (as Bell positioned itself), which companies should be run by government (as the Post Office has been since Franklin founded it), and which should be “ordinary services” left mostly to forces of the free market.* In the Anglo-American common law tradition, one asks how essential or necessary the service is—how much other industries depend on it. Those industries that supply the means of trade in information, goods, or cash are more obviously vital even than, say, a country’s sole producer of sugar.

  Practically, this focus has led to four basic industries being identified as “public callings”: telecommunications, banking, energy, and transportation. Each plays a certain essential role in the workings of the nation and the economy, and thus these are the industries that have attracted regulation as common carriers, or infrastructure.

  Vail himself offers as apt a description as anyone of the common law orthodoxy:

  For the protection of the community, of individual life and health, there are some necessities that should be provided for all at the expense of all, such as roads, pure water, and sanitary systems for concentrated population, and reasonably comprehensive mail service. The determination between services that should be operated by the government and those which should be left to private enterprise under proper control should be governed by the degree of necessity to the community as a whole as distinct from personal or individual advantage.25

  So if we regard the Kingsbury Commitment as having sanctioned the most lucrative monopoly in history, it also made good on the essential goals of common carriage. Bell did, eventually, wire every home in the United States, and it provided decades of reliable service. But it should also be obvious to anyone—one need by no means be a raving libertarian—that there are some substantial dangers implicit in aligning the immense power of the state with the greatest of information monopolists.*

  Vail died in 1920 at age seventy-four, shortly after resigning as AT&T’s president, but by that time his life’s work was done. The Bell system had uncontested domination of American telephony, and long distance communication was unified according to his vision. In 1921, Congress passed the Graham Act, recognizing AT&T’s monopoly and removing any remaining obstacles to integration. The idea of an open, competitive system had lost out to AT&T’s conception of an enlightened, licensed, and regulated monopoly. In this form, AT&T would remain in charge until the 1980s, and in not substantially different form it would return in the new millennium. As Milton Mueller writes, Vail had completed the “political and ideological victory of the regulated monopoly paradigm, advanced under the banner of universal service.”26 Vail’s biographer adds, “the great work he created remains, never to come to an end so long as men buy and sell in the market place and social life endures.”

  What to make of Vail’s legacy? Outside official Bell histories, Vail remains a controversial figure for being such a staunch and vocal monopolist. A man who takes a highly diverse and competitive industry and eradicates all competitors is an unlikely hero beyond his own company. Even among the hardest of the hard-grabbing moguls, he has few peers. And so the temptation to paint him as a villain is strong.

  Yet if there is ever a logic and a benefit to dictatorship, industrial or otherwise, the verdict on the particular regime must, as Plato suggested, inevitably depend on how one holds dominion. In this way the implacable megalomaniac Vail might well be redeemed by his sense of great power’s great responsibilities and his avowed dedication to the public good, to which he always gave far more than lip service. He never pretended that Bell had no choice in how the business was run; he simply insisted that the non-free-market arrangement yielded higher dividends for all. He accepted the duties of common carriage, as well as regulated prices, but in return for monopoly’s security and peace of mind. Proportionately, he probably delivered less profit for shareholders than Wall Street might expect today. Vail was acutely aware of how important the telephone network would be to the nation, and there is no evidence that he ever put AT&T’s profitability ahead of its obligation to serve. He presents us therefore with a challenging figure: an unabashed monopolist, but a benign one, who lived up to his own ideals of enlightened despotism. The fault in this arrangement therefore lay not so much with Theodore Vail as with the men who would succeed him.

  * There is a difference between creative destruction and merely destructive destruction.

  * Technically, Congress declared telephony and the telegraph a common carrier in the Mann Elkins Act of 1910. But more important was Vail’s embrace of the role.

  † The alternative phrase for a common carrier is a “public calling,” and the latter may capture more of the original meaning.

  * Opponents of regulation in the twentieth century pushed the idea that only true monopolies ought to be considered public callings or common carriers. On the other hand, in the original English view, an industry need not be monopolized to be essential.

  * The technical term for such a system is “corporatism”; in its extreme manifestations it is called “facism.”

  CHAPTER 4

  The Time Is Not Ripe for Feature Films

  In 1912, a small mustachioed man named Adolph Zukor sat patiently outside the office of the most powerful figure in American film: Jeremiah Kennedy, president of the Edison Motion Picture Patents Company of New Jersey. A Jewish immigrant whose accent indicated the Hungarian village he had left behind at age sixteen, Zukor was the owner of a small movie theater in New York’s Union Square, and he had already demonstrated a remarkable power of determination in being granted this meeting. He had an ambitious plan to change American film, but he needed a license from Kennedy’s Edison Company to execute it. He would find himself waiting alone outside that office for three hours.1

  At the time, neither New York nor anyplace else in America was the global capital of the film industry. That was Paris, from which two firms, Pathé-Frères and Gaumont, ruled the world, with the Pathé studios alone distributing twice as many films in the United States as all American studios combined. From 1908 up until the Great War, French dominance gave birth to the first “feature”-length films (longer than twenty minutes), the invention of the newsreel, and the enduring genres of comedy, chase, and melodrama. French directors were the first to put famous stage actors before the camera and enlist well-known composers to write scores. The grandest theater in the world was the Palais Gaumont on rue Caunlaincourt, which sat 3,400 even before it was expanded to accommodate 6,000.2

  Meanwhile, despite a substantial role in inventing motion picture technology, the United States was a cinematic backwater. Film was popular, but it remained a novelty, shown in combination with liv
e comedy routines, dancing monkeys, and other vaudeville acts. What American films existed were short—many no longer than a few minutes—with rudimentary plots and no recognizable performers.

  French-style film had not yet crossed the Atlantic, and Zukor’s plan was to bring the European experience to the United States. It was not as obvious a vision as it might seem: The American theaters, called “nickelodeons,” though wildly popular, had a reputation for unpleasantness. As a 1910 article in Moving Picture World described the experience:

  I would have been more comfortable on board a cattle train than where I sat. There were five hundred smells combined in one. One young lady fainted and had to be carried out of the theater. I can forgive that, all right, as people with sensitive noses should not go slumming. But what is hardest to swallow is that the tastes of this seething mass of human cattle are the tastes that have dominated.3

  But Zukor saw no reason that the medium should be an affair for the “seething masses” alone. In 1912, the immigrant who’d made a tidy sum as a furrier saw a perfect pilot project to elevate the U.S. market: Queen Elizabeth,* a film starring the French actress Sarah Bernhardt, who was exceptionally popular in the United States. So certain was Zukor of this opportunity that he had laid out a small fortune, $18,000, for the American rights to the film. Certain, and grandiose: as he later told journalists, “We believe that we are doing a sort of missionary work for the higher art—that we are aiding in the cultivation of a taste for better things.”4

  But why the meeting with Kennedy of the Edison Company? While it may sound odd today, to screen Queen Elizabeth, even in his own theater, Zukor needed a license from the Edison Company. Edison was the leader of the “Film Trust,” a cartel of ten firms that, at the time, owned every important American patent on motion picture technology. Using the power of its patents to decide the availability of films to theaters, the Trust was the de facto arbiter of what films would be shown in the United States.