Ma Bell, Age 97, Dies

AT&T president Theodore Vail, at far right, celebrates the inauguration of transcontinental telephone service, in 1915.

(Courtesy of AT&T)

It was 25 years ago today that the break-up of AT&T, “Ma Bell,” occurred, one of the most momentous events in the history of American business.

Boy, talk about the creative destruction of capitalism. In 1885 the American Telephone & Telegraph Company was formed as a subsidiary of the Bell Telephone Company of Boston, to begin constructing long-distance lines. In 1899, because of highly restrictive Massachusetts incorporation laws, AT&T, which was incorporated in New York State, bought the assets of the Bell Company and set up a subsidiary to handle local telephone service in the Boston area.

Nearly a century later, in 1982, AT&T, by then the country’s largest corporation in terms of assets, divested itself of 70 percent of those assets, becoming, once again, only a long-distance company; seven newly independent companies, the so-called Baby Bells, would handle local telephone service around the country. Two decades later, in 2005, after numerous missteps on the part of AT&T, one of those Baby Bells, the SBC Corporation, bought what was left of it and assumed its AT&T name and its legendary stock ticker symbol, T.

So a corporate subsidiary bought the company that had created it and a century later was bought by one of its own former subsidiaries. Got that?

American Telephone and Telegraph had its origins in Alexander Graham Bell’s invention of the telephone, for which he received a patent in 1876. The telephone had a great practical advantage over the telegraph, which had been in operation since the 1840s. The latter required skilled operators at both ends of the line, while anyone could work a phone. Within a few years the Bell Company had 150,000 subscribers and the business was growing exponentially. Bell licensed local telephone exchanges to use its technology (charging $20 a year per installed phone) and later began taking an ownership interest in these locals.

As the telephone rapidly became a business necessity, the demand to be able to call long distance to other cities grew. (It took far longer to become a common household amenity; it would be 1946 before half the households in America had a phone.) AT&T connected New York and Boston in 1884 and reached Chicago by 1892. It would reach San Francisco by 1915, by which time most parts of the country were linked by phone.

By 1900 AT&T had assets of $120 million while all the independent phone companies combined had only $55 million. By the simple expedient of not allowing the independents to connect with AT&T, the big company was able to increasingly gain control of the independents, because they couldn’t offer long distance service without AT&T’s long lines. Thus a company with a monopoly of long distance telephone service was able to become a monopoly of all telephone service.

But like most monopolies it wasn’t popular. It often acted in highhanded ways and offered poor service. Theodore Vail, who had been the original president of AT&T but had quit when the financiers controlling the Bell Company wanted to maximize quick profits at the expense of long-term growth, was brought back in when J. P. Morgan and others took control in 1907.

Vail worked hard to improve service and to improve the corporate image, requiring, for instance, that all employees be polite when dealing with customers, while continuing to gain control of more and more of the telephone systems in the United States. But though AT&T had become a relatively benevolent behemoth (it even allowed independent phone companies to hook up to it after 1913), pressure mounted to convert the private, quasi-monopoly of AT&T into a complete public monopoly run by the post office, like most European phone services.

In 1918, under cover of wartime necessity, the forces pushing for “postalization” got their way, and all phone and telegraph companies were taken over by the post office. Vail had warned of the consequences, noting that while AT&T was effectively a monopoly, “all monopolies should be regulated. Government ownership would be an unregulated monopoly.” He was right, and the government immediately began acting that way. It hired AT&T to run the system, content to just set prices. But while postalization was supposed to reduce prices, the government quickly raised them, even imposing a service connection fee, which AT&T had never done.

Public support for the takeover evaporated as prices rose, and within a year after the war ended the telephone and telegraph companies were back in private hands. Over the next 50 years AT&T, as a regulated monopoly, ran the best phone service in the world and became one of the world’s largest companies. Known, with some degree of affection, as “Ma Bell,” its stock—a guaranteed steady dividend payer, thanks to its monopoly—was the most widely held in the country. But while it provided the best phone service in the world, it was, like all monopolies, uninnovative with regard to phone service (basic research was another matter) and uninterested in lowering prices beyond the point that maximized profits.

As the electronic revolution that came out of World War II technology began to accelerate, however, AT&T’s monopoly began to fray. It is ironic, to say the least, that one of the fundamental contributions to that revolution, the transistor, came out of Bell Laboratories, AT&T’s research arm. Microwave transmission, an outgrowth of radar technology, offered a low-cost way to enter the long-distance telephone market without duplicating AT&T’s vast capital investment in land lines. And in 1969 MCI won permission from the FCC to compete with AT&T, using microwave transmission.

That proved to be the camel’s nose under the tent of the AT&T monopoly, which was soon broken. As competition entered the telephone market, prices declined sharply, and usage rose just as sharply. Because prices fell so much, the government stopped collecting data on long distance calls in 1985, but overseas calls are a measure of how much telephone use has increased in the last 35 years. In 1970, 23.4 million overseas calls originated in the United States. By 1980 it was 200 million. In 1997 it was 4.2 billion. Today it is up again by another order of magnitude.

In 1982 AT&T, in order to compete freely in the now hyper-competitive long distance market, agreed to give up control of the local telephone companies. They were still natural monopolies at the time, but that didn’t last long. Cell phone subscriptions numbered only 11 million worldwide in 1990. In 2003 they were 1.341 billion. Today the number is over 2 billion. Phone service via the Internet and TV cable companies is also surging.

AT&T, its corporate culture having evolved in the day when it had the phone business to itself, proved unable to effectively compete in the new telephonic world, although, to be sure, it was not helped by often ham-handed judicial and political interference. It is by no means clear what that world will look like 25—or even 5—years hence, as technological change is only accelerating. But the big winners, it seems clear, will be the customers. Phone service, once a luxury, is now trivially cheap, and it keeps getting cheaper all the time.

—John Steele Gordon writes “The Business of America” for American Heritage magazine. His most recent book is An Empire of Wealth: The Epic History of American Economic Power (HarperCollins).