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Chapter 2 - Background

2.8 Monopoly Asserted -- 1918-1934

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 purchased Number of stations sold
1912 135,924 42,645
1913 19,187 16,617
1914 23,327 1,729
1915 34,428 15,188
1916 31,290 15,849
1917 131,853 10,333
1918 104,497 111,757
1919 56,939 70,225
1920 41,085 8,337
1921 157,337 43,960
1922 26,341 7,747
1923 124,611 3,386
1924 98,730 9,173
1925 137,482 45,540
1926 15,909 11,419
1927 207,540 4,976
1928 45,022 1,953
1929 64,234 12,120
1930 153,959 9,847
1931 15,784 348
1932 67,062 35
1933 1,741 57
1934 2,695 116
Total 1,696,977 443,357

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

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.
  • [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 theybegan 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 pgs9

  • [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

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