Elwar
10-06-2009, 12:54 PM
Essay I wrote for one of my Masters classes in IT (a good example of government monopolies):
AT&T Barriers to Entry
AT&T is one of the largest and most successful telephone companies today and for several decades they were virtually the only telephone company serving the United States. Mainly thanks to the Kingsbury Commitment the stage was set for a monopoly over the telephone business for AT&T that lasted over several decades.
The beginning of AT&T goes back to the beginning of the telephone. In 1875 Alexander Graham Bell was working on an acoustic telegraph and drew up a patent application in Britain. At the time Britain would not issue a patent on something that was already patented in the United States. At the same time, Elisha Gray was working on his own acoustic telegraph using a liquid transmitter. On Valentine's Day of 1876 Elisha Gray submitted a caveat with the U.S. Patent Office that used his liquid transmitter. That same morning, Bell's lawyer filed Bell's application with the U.S. Patent Office. There is considerable debate about who arrived first, with sworn affidavits by a patent examiner (Zenas Fisk Wilber) who claimed that he gave Gray's patent caveat to Bell's lawyer and showed it to Bell himself at a later time, but Bell was given the patent for the telephone on March 7, 1876. On March 10, 1876 Bell succeeded in getting his telephone to work using a liquid transmitter that was very similar to Elisha Gray's design. That day Alexander Graham Bell was able to transmit the first telephone message to his assistant “Mr Watson – Come here – I want to see you”. From there on Bell developed his electromagnetic telephone which became the standard technology for telephones. Soon after, Alexander Graham Bell co-founded The Bell Telephone Company holding a patent which gave his company explicit rights to the telephone. In 1885 a subsidiary of The Bell Company is created with the charter to build and operate the original long distance network. That subsidiary is called the American Telephone & Telegraph Company, known today as AT&T.
In 1894 Alexander Graham Bell's second telephone patent expired, making way for over 6,000 telephone companies to sprout up across the country. Much like current telephone companies, competition brought prices down drastically. Illinois, Indiana, Iowa, Missouri, and Ohio each had over 200 telephone companies competing within their borders. Prices were driven down as urban subscribers had a choice of several competing telephone providers. AT&T's profits began to shrink due to competition. Before the expiration of Bell's patent, AT&T was earning an average of 46 percent return on investment. By 1906, AT&T's return had dropped to 8 percent. AT&T began refusing to allow small local telephone companies from connecting to it's long distance network. After acquiring Western Union AT&T had a substantial dominance over both long distance telephone and telegraph lines and began buying up the small local companies that relied on access to long distance connections. In 1908 AT&T's president, Theodore N. Vail began the campaign of advertising using the slogan “One System, One Policy, Universal Service”. At this point the United States Justice Department started investigating AT&T, looking into their anti-trust practices.
In 1912, Vail sent a letter to his stockholders stating “We are opposed to government ownership because we know that no government-owned system in the world is giving as cheap and efficient service as the American public is getting from all its telephone companies”. But after struggling with low returns on investment, a federal investigation and realizing the government was considering action to break up the growing firm, Vail decided to enter an agreement that would appease governmental concerns. After several meetings between US Attorney General George Wickersham and AT&T VP Nathan Kingsbury an agreement is made where Kingsbury sends a letter outlining the agreement, known as the Kingsbury Commitment, sent on December 19, 1913. This agreement requires that AT&T sell off its ownership of Western Union, allow other telephone companies to secure their subscribers toll service over the lines of the companies in the Bell System, refrain from acquiring additional independent telephone companies and submit any pending acquisitions to the Justice Department and Interstate Commerce Commitment.
The regulatory oversight started facilitating AT&T's take-over of the industry with the public confidence that they were under strict government control, though competition still persisted in many areas. Eventually World War I provided the government with an excuse to force control over the telephone industry. On August 1, 1918 the federal government nationalized the entire telecommunications industry for the sake of national security. Postmaster General Albert Burleson was given control over the telephone and telegraph industry. Burleson appointed Vail as the head of the telephone system. During this time Vail set a standard rate across the country for long distance raising rates around 20 percent in the year under his control. This also set the precedent of subsidizing rural subscribers at the cost of large cities, no matter what subscribers wanted. The rate setting continued after the telecommunications industry was returned to private control and AT&T was set in a favorable government position as regulators continued to stifle competition. After years of evolving rate setting regulations the Federal Communications Commission (FCC) was created with the Communications Act of 1934. AT&T became the defacto monopoly over the telephone industry and the FCC stifled any competition that tried to gain entry into AT&T's business, including forbidding phone companies from using the radio spectrum as a means of communication.
For several decades the technology stayed fairly stagnant, remaining as the system created by Vail in during World War I. It wasn't until 1984 that AT&T and the local Bell companies were split up and shortly thereafter allowing use of the frequency spectrum to communications which allows for the wealth of competition that we enjoy today.
Had the Kingsbury Commitment not taken place and if Theodore Vail had heeded his own advice that “no government-owned system in the world is giving as cheap and efficient service as the American public is getting”, it is interesting to imagine what the past century would have looked like if competition had been allowed to flourish as it is, to an extent, today.
AT&T Barriers to Entry
AT&T is one of the largest and most successful telephone companies today and for several decades they were virtually the only telephone company serving the United States. Mainly thanks to the Kingsbury Commitment the stage was set for a monopoly over the telephone business for AT&T that lasted over several decades.
The beginning of AT&T goes back to the beginning of the telephone. In 1875 Alexander Graham Bell was working on an acoustic telegraph and drew up a patent application in Britain. At the time Britain would not issue a patent on something that was already patented in the United States. At the same time, Elisha Gray was working on his own acoustic telegraph using a liquid transmitter. On Valentine's Day of 1876 Elisha Gray submitted a caveat with the U.S. Patent Office that used his liquid transmitter. That same morning, Bell's lawyer filed Bell's application with the U.S. Patent Office. There is considerable debate about who arrived first, with sworn affidavits by a patent examiner (Zenas Fisk Wilber) who claimed that he gave Gray's patent caveat to Bell's lawyer and showed it to Bell himself at a later time, but Bell was given the patent for the telephone on March 7, 1876. On March 10, 1876 Bell succeeded in getting his telephone to work using a liquid transmitter that was very similar to Elisha Gray's design. That day Alexander Graham Bell was able to transmit the first telephone message to his assistant “Mr Watson – Come here – I want to see you”. From there on Bell developed his electromagnetic telephone which became the standard technology for telephones. Soon after, Alexander Graham Bell co-founded The Bell Telephone Company holding a patent which gave his company explicit rights to the telephone. In 1885 a subsidiary of The Bell Company is created with the charter to build and operate the original long distance network. That subsidiary is called the American Telephone & Telegraph Company, known today as AT&T.
In 1894 Alexander Graham Bell's second telephone patent expired, making way for over 6,000 telephone companies to sprout up across the country. Much like current telephone companies, competition brought prices down drastically. Illinois, Indiana, Iowa, Missouri, and Ohio each had over 200 telephone companies competing within their borders. Prices were driven down as urban subscribers had a choice of several competing telephone providers. AT&T's profits began to shrink due to competition. Before the expiration of Bell's patent, AT&T was earning an average of 46 percent return on investment. By 1906, AT&T's return had dropped to 8 percent. AT&T began refusing to allow small local telephone companies from connecting to it's long distance network. After acquiring Western Union AT&T had a substantial dominance over both long distance telephone and telegraph lines and began buying up the small local companies that relied on access to long distance connections. In 1908 AT&T's president, Theodore N. Vail began the campaign of advertising using the slogan “One System, One Policy, Universal Service”. At this point the United States Justice Department started investigating AT&T, looking into their anti-trust practices.
In 1912, Vail sent a letter to his stockholders stating “We are opposed to government ownership because we know that no government-owned system in the world is giving as cheap and efficient service as the American public is getting from all its telephone companies”. But after struggling with low returns on investment, a federal investigation and realizing the government was considering action to break up the growing firm, Vail decided to enter an agreement that would appease governmental concerns. After several meetings between US Attorney General George Wickersham and AT&T VP Nathan Kingsbury an agreement is made where Kingsbury sends a letter outlining the agreement, known as the Kingsbury Commitment, sent on December 19, 1913. This agreement requires that AT&T sell off its ownership of Western Union, allow other telephone companies to secure their subscribers toll service over the lines of the companies in the Bell System, refrain from acquiring additional independent telephone companies and submit any pending acquisitions to the Justice Department and Interstate Commerce Commitment.
The regulatory oversight started facilitating AT&T's take-over of the industry with the public confidence that they were under strict government control, though competition still persisted in many areas. Eventually World War I provided the government with an excuse to force control over the telephone industry. On August 1, 1918 the federal government nationalized the entire telecommunications industry for the sake of national security. Postmaster General Albert Burleson was given control over the telephone and telegraph industry. Burleson appointed Vail as the head of the telephone system. During this time Vail set a standard rate across the country for long distance raising rates around 20 percent in the year under his control. This also set the precedent of subsidizing rural subscribers at the cost of large cities, no matter what subscribers wanted. The rate setting continued after the telecommunications industry was returned to private control and AT&T was set in a favorable government position as regulators continued to stifle competition. After years of evolving rate setting regulations the Federal Communications Commission (FCC) was created with the Communications Act of 1934. AT&T became the defacto monopoly over the telephone industry and the FCC stifled any competition that tried to gain entry into AT&T's business, including forbidding phone companies from using the radio spectrum as a means of communication.
For several decades the technology stayed fairly stagnant, remaining as the system created by Vail in during World War I. It wasn't until 1984 that AT&T and the local Bell companies were split up and shortly thereafter allowing use of the frequency spectrum to communications which allows for the wealth of competition that we enjoy today.
Had the Kingsbury Commitment not taken place and if Theodore Vail had heeded his own advice that “no government-owned system in the world is giving as cheap and efficient service as the American public is getting”, it is interesting to imagine what the past century would have looked like if competition had been allowed to flourish as it is, to an extent, today.