The Master Switch

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by Tim Wu


  Stigler and Klein might be right that block booking cannot, by itself, extend or expand the monopoly power of a particular copyright, and that selling by giant lots can be efficient for a studio supplying thousands of theaters. But what they neglect to consider are the potential consequences for the nature of the product itself.

  Suppose the block sale is undertaken by an oligopoly of the top five producers? That in fact is what happened. There was no explicit agreement among the studios to sell by the block. But the absence of collusion doesn’t change the impact of a practice if all subscribe to it. And so, beyond any effects on receipts, a consequence of the general adoption of block booking may have been to displace from prime venues any films not produced by the major studios—to fill, as it were, the shelf space with industry products, a practice I call parallel exclusion. In fact, this was one reason the Supreme Court mentioned for barring the practice in 1962: that exhibitors “forced by [the studios] to take unwanted films were denied access to films marketed by other distributors.…”38

  Again we must confront the reality that cultural and information industries pose special problems for standard industrial analysis, complicating the rules of supply and demand by virtue of the product’s less tangible forms of value. We might understand perfectly well how block booking and vertical integration reduced the costs of industrial production, while understanding nothing of what these innovations meant for film as a form of expression. Interestingly, when it comes to products like film, such inefficiencies as “higher search costs” might be a good thing, if the result is greater variety in what gets seen and heard. As the film critic Pauline Kael wrote in 1980, “there are certain kinds of business in which the public interest is more of a factor than it is in the manufacture of neckties.”39

  THE TURNING POINT

  Few realize that 1926, before the triumph of the “talkies,” was the turning point for American film. In that year Zukor scored his greatest victory—the one that finally broke the independent theater industry—with his takeover of Balaban and Katz, Chicago’s most powerful independent theater chain, the Midwestern backbone of First National.40 With the fall of Chicago, the fight was essentially over. Zukor now had direct control over more than a thousand theaters, including many of the most important.

  Zukor’s Publix Theater Corporation, a Paramount subsidiary, was now the first true national theater chain. At its height, it claimed total dominance in the South and Midwest, as well as considerable power everywhere else. Every day, 2.5 million customers came through Paramount’s doors. A hobbled First National, meanwhile, retreated to film production before finally selling out to an ascendant Warner Bros. in 1928. By joining Warner Bros., the nation’s last great independent theaters had given up their war with Hollywood and effectively joined the system.41

  In 1927, Zukor and his allies also managed effectively to contain the threat of the FTC investigation.42 In 1926, after heavy lobbying by the film industry, its friend Abram Myers was appointed by Calvin Coolidge to head the commission. Myers’s FTC concluded the block booking investigation and issued a rather weak reprimand of the industry. Variety labeled it a mere “gesture,” and Zukor announced that he would ignore the decree. It was, in any event, reversed by the District of Columbia Court of Appeals in 1932.

  The late 1920s would thus prove little more than a mop-up operation. Paramount, MGM, and Universal hunted down and destroyed most of the independent theaters, producers, and distribution companies. Warner Bros., once a small independent producer, managed to join the ranks of the major studios with the first truly successful sound film, The Jazz Singer. Among the others, only United Artists, formed by D. W. Griffith and a group of movie stars, would survive, going on to play, as we shall see, an important role in the film industry of the 1970s.

  Meanwhile, Thomas Tally, founder of First National Exhibitors Circuit and onetime Zukor rival, abandoned the film industry. His time had passed: together with his son, he established a ranch outside Los Angeles. As for W. W. Hodkinson, he survived as an independent producer until 1929, nurturing the independence of directors like Cecil B. DeMille. Yet he, too, would quit the industry, moving to Central America, where he started an airline; but to his dying day in 1971 he would maintain that Hollywood had made a giant mistake when it followed “that character” Adolph Zukor.43

  The rise of Hollywood and of the Zukor model is another definitive closing turn of the Cycle. In the course of a single decade, film went from one of the most open industries in the United States to one of the most controlled. The flip shows how abruptly industrial structure can change when the underlying commodity is information. For no sooner had the age of the independent theater owners ended than the openness of the film business had, too. And with the rise of the Hollywood studio—our most visible manifestation of mass-produced culture, then as now—began a rule that would last for decades.

  * The new combination, called the Famous Players–Lasky Corporation (Jesse Lasky being the one of eight partners to get a credit), would continue to distribute films under the Paramount Pictures trademark, until the entire firm came to be known as Paramount Pictures.

  Beneath the All-Seeing Eye

  SIX YEARS BEFORE Brave New World, as we have seen, Aldous Huxley could already glimpse where the centralization and mechanization of culture was leading. He foresaw culture’s future dominated by commerce. He also saw the prospect of global standardization. “In 3000 A.D.” wrote Huxley, “one will doubtless be able to travel from Kansas City to Peking in a few hours. But if the civilization of these two places is the same, there will be no object in doing so.”

  By the late 1930s every one of the twentieth century’s new information industries was fixed in its centralized imperial form. The glories of the new arrangements were evident. Hollywood film was in its golden age, turning out classics like The Wizard of Oz and Gone with the Wind. NBC and CBS, with help from New York’s advertising agencies, had perfected the concept of “entertainment that sells,” symbolized by the soap opera and other sponsored programs, like Texaco Star Theater. And the Bell system had become the paragon of a communications monopolist, best captured in the Bell slogan: “The System Is the Solution.”

  It was also a fact that each of the new media had at least some sense of public duty encoded, as it were, in its DNA. Bell served as a common carrier offering universal service. The networks ran their “sustaining” programs and news departments, under the watch of the FCC. And Hollywood, while a business, had also been motivated by the concept of film as an art form, and had created itself to produce better entertainment than the Edison Trust had seen fit to offer, more like what was available on the stage.1

  Yet amid these glories of progress—perhaps even necessary to achieve them—there had also been created with respect to freedom of expression one of the least hospitable environments in American history. The 1920s, that heyday for small inventors and alternative voices, were decidedly over. “The times are not propitious for the recognition of great, rebellious, or unorthodox talent,” wrote Lawrence Lessing in 1956. “Large impersonal forces are loose in the world, in this country as in more tyrannous parts of the globe, sweeping aside the individual of high merit in pursuit of some new, corporate, collective and conformist destiny.”2

  We turn now to what information empires mean for speech and innovation. Most who study these topics are obsessed with government’s role in censorship and providing incentives to innovate. But the state’s role, while significant, cannot compare to the power of industry to censor expression or squelch invention.

  While the accomplishments we owe to the structures of the 1930s are undeniable, it is essential to understand what was repressed, blocked, or censored by the new system, if we are to understand what was—and is—really at stake.

  CHAPTER 7

  The Foreign Attachment

  Henry Tuttle was, for much of his life, president of the Hush-A-Phone Corporation, manufacturer of a telephone silencer. Apart from Tuttle, Hush-A
-Phone Inc. employed his secretary. The two of them worked alone out of a small office near Union Square in New York City. Hush-A-Phone’s signature product was shaped like a scoop, and it fit around the speaking end of a receiver, so that no one could hear what the user was saying on the telephone. The company motto emblazoned on its letterhead stated the promise succinctly: “Makes your phone private as a booth.”1

  Advertisements for the cup ran frequently, usually in classified sections. This one from the October 14, 1940, edition of The New York Times is typical:

  PHONE TALK ANNOYS? HUSH-A-PHONE PREVENTS.

  DEMONSTRATION EITHER TYPE PHONE.

  HUSH-A-PHONE CORP., CHELSEA, 3–7202.

  If the Hush-A-Phone never became a household necessity, Tuttle did a decent business, and by 1950 he would claim to have sold 125,000 units. But one day late in the 1940s, Henry Tuttle received alarming news. AT&T had launched a crackdown on the Hush-A-Phone and similar products, like the Jordaphone, a creaky precursor of the modern speakerphone, whose manufacturer had likewise been put on notice. Bell repairmen began warning customers that Hush-A-Phone use was a violation of a federal tariff and that, failing to cease and desist, they risked termination of their telephone service.2

  Leo Beranek and the Hush-A-Phone

  Was AT&T merely blowing smoke? Not at all: the company was referring to a special rule that was part of their covenant with the federal government. It stated: No equipment, apparatus, circuit or device not furnished by the telephone company shall be attached to or connected with the facilities furnished by the telephone company, whether physically, by induction, or otherwise.

  Tuttle hired an attorney, who petitioned the FCC for a modification of the rule and an injunction against AT&T’s threats. In 1950 the FCC decided to hold a trial (officially a “public hearing”) in Washington, D.C., to consider whether AT&T, the nation’s regulated monopolist, could punish its customers for placing a plastic cup over their telephone mouthpiece.

  The story of the Hush-A-Phone and its struggle with AT&T, for all its absurdist undertones, offers a window on the mind-set of the monopoly at its height, as well as a picture of the challenges facing even the least innovative innovator at that moment. As such, the case is an object lesson in the advantages and disadvantages of monopoly. For while it may seem a minor matter, the Hush-A-Phone affair raised fundamental questions about innovation in the age of information monopoly.

  AT&T’s crackdown wasn’t the only challenge Tuttle faced in the 1940s. Over the years, as the telephone had assumed its “modern” design, the Hush-A-Phone, first conceived in the 1920s, was obliged to adapt. Tuttle sought solutions to his hurdles in academia, specifically at the Massachusetts Institute of Technology and Harvard University. In 1945, he queried Leo Beranek, then a young acoustics expert at MIT. The men would meet in New York, and Beranek, thinking the problem an interesting one, agreed to design an improved telephone silencer.

  Tuttle was lucky; though not well known at the time, Beranek would soon emerge as one of his field’s great authorities, going on to design the acoustics for the United Nations complex and Lincoln Center in New York, and for the Tokyo Opera City Concert Hall, as well as writing the classic textbook Acoustics. Rather more relevant to the Hush-A-Phone challenge, during World War II Beranek had worked with a team of scientists at Harvard on the problem of communications in the din of airborne cockpits. In both cases, as Beranek understood, the key to intelligibility was the middle-range frequencies. The silencer he designed for Tuttle would sacrifice the lower-range sounds—creating a slight boominess—in exchange for privacy and external silence. Once he’d developed a prototype according to these specifications, he applied for a U.S. patent and sent his plans over to Tuttle, who enthusiastically dispatched a contract under which Beranek would be paid twenty cents per unit.

  Tuttle and Beranek didn’t exactly consider themselves a threat to the Bell system. Indeed, once when I asked him if he ever viewed himself as a Bell competitor, Beranek just looked at me as if I were crazy. Rather, their modest aim as independent, outside inventors was a minor improvement to the telephone handset, and an ungainly one at that. So why was AT&T determined to run Hush-A-Phone out of business?

  Caught in this seemingly trivial battle over a bauxite cup is a debate over the merits of two alternative models of innovation: centralized and decentralized. Representing the decentralized model was Hush-A-Phone, with Beranek operating, in effect, as Tuttle’s system of innovation—a lone inventor of sorts, qualified in acoustics but unaffiliated with Bell. Representing the centralized model was AT&T’s already quasimythical Bell Labs, the entity established to ensure that AT&T, and AT&T alone, moved the phone system along its path into the future.

  THE GREAT BELL LABS

  In early 1934, Clarence Hickman, a Bell Labs engineer, had a secret machine, about six feet tall, standing in his office. It was a device without equal in the world, decades ahead of its time. If you called and there was no answer on the phone line to which Hickman’s invention was connected, the machine would beep and a recording device would come on allowing the caller to leave a message.3

  The genius at the heart of Hickman’s secret proto–answering machine was not so much the concept—perceptive of social change as that was—but rather the technical principle that made it work and that would, eventually, transform the world: magnetic recording tape. Recall that before magnetic storage there was no way to store sound other than by pressing a record or making a piano roll. The new technology would not only usher in audiocassettes and videotapes, but when used with the silicon chip, make computer storage a reality. Indeed, from the 1980s onward, firms from Microsoft to Google, and by implication the whole world, would become utterly dependent on magnetic storage, otherwise known as the hard drive.

  If any entity could have come up with advanced recording technology by the early 1930s it was Bell Labs. Founded in 1925 for the express purpose of improving telephony, they made good on their mission (saving AT&T billions with inventions as simple as plastic insulation for telephone wires) and then some: by the 1920s the laboratories had effectively developed a mind of their own, carrying their work beyond better telephones and into basic research to become the world’s preeminent corporate-sponsored scientific body. It was a scientific Valhalla, hiring the best men (and later women) they could find and leaving them more or less free to pursue what interested them.

  When scientists are given such freedom, they can do amazing things, and soon Bell’s were doing cutting-edge work in fields as diverse as quantum physics and information theory. It was a Bell Labs employee named Clinton Davisson who would win a Nobel Prize in 1937 for demonstrating the wave nature of matter, an insight more typically credited to Einstein than to a telephone company employee. In total, Bell would collect seven Nobel Prizes, more than any other corporate laboratory, including one awarded in 1956 for its most famous invention, the transistor, which made the computer possible. Other, more obscure Bell creations are nevertheless dear to geeks, including Unix and the C programming language.

  In short, Bell Labs has been a great force for good. It is, frankly, just the kind of phenomenon that makes one side with Theodore Vail about the blessings of a monopoly. For while AT&T was never formally required to run Bell Labs as a research laboratory, it did so out of exactly the sort of noblesse oblige that Vail espoused. AT&T ran Bell Labs not just for its corporate good but for the greater good as well. This is not to be naïve about the corporate profit motive: Bell Labs contributed to AT&T’s bottom line far more than plastic wire insulation. Nevertheless, it’s hard to see how funding theoretical quantum physics research would be of any immediate benefit to shareholder value. More to the point, it is hard to imagine a phone company today hiring someone to be their quantum physicist, with no rules and no boss.

  For, in part, the privileges AT&T enjoyed as a government-sanctioned monopoly with government-set prices were understood as being offset by this contribution to basic scientific research, an acti
vity with proportionately more direct government funding in most other countries. Put another way, in the United States, the higher consumer prices resulting from monopoly amounted, in effect, to a tax on Americans used to fund basic research. This unusual insinuation of a corporation between the government and its goal of advancing American science goes a long way to explain how AT&T, as it matured, became in effect almost a branch of government, charged with top-secret work in the national interest.4

  For all the undeniable glory of Bell Labs, there emerge little cracks in the resplendent façade of corporatism for the public good. For however many its breakthroughs, there was one way in which the institution was very different from a university: when the interests of AT&T were at odds with the advancement of knowledge, there was no question as to which good prevailed. And so, interspersed between Bell Labs’ public triumphs were its secret discoveries, the skeletons in the imperial closet of AT&T.

 

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