Breaking The Connection

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The history of telephone communications in the United States is also, in large measure, the history of an extraordinary business organization. On January 8, 1982, that organization announced that within two years it would tear itself apart, and on January 1, 1984, it made good on its promise.

Before its dismemberment, the American Telephone and Telegraph Company, also known as “Ma Bell,” had been by many standards the largest company on earth. In the range of its influence, in assets, and in its impact on the daily lives of ordinary people, it dwarfed not only other companies but also nations. More than half a billion conversations sped daily over its equipment. On it depended the flow of messages that smoothed the lives of husbands and wives, parents and children, businesses and customers, lovers, friends, strangers—anyone here who wanted to talk with anyone there, or vice versa.

The legal term for what occurred on January 1, 1984, is divestiture , but that word seems inadequate as a description of the corporate equivalent of a many-limbed giant ripping off limb after limb, flinging the pieces in all directions, and leaving the landscape littered with big, bleeding hunks of its former self. The new AT&T, often called “Baby Bell,” consisted of two parts with assets worth a piddling thirty-four billion dollars: AT&T Communications, responsible for longdistance services, and AT&T Technologies, an umbrella organization whose subsidiary divisions included AT&T Bell Laboratories, AT&T Network Systems, AT&T Technology Systems, AT&T Information Systems, AT&T Consumer Products, and AT&T International.

Gone were twenty-two local operating companies with combined assets worth approximately $115 billion—three-quarters of the total assets of the Bell System. In the reorganization that accompanied divestiture, the twenty-two local companies were combined into seven regional operating companies. Each of the seven immediately ranked among the largest business enterprises in the United States.

AT&T was bigger than GM, Ford, GE, IBM, Xerox, and Coca-Cola combined.

Divestiture was the result of the largest antitrust suit in history—a suit filed by the United States Justice Department in 1974. The outcome was not wholly to AT&T’s disadvantage: The Justice Department dropped its case, and the company was freed from constraints under which it had operated since 1956, under terms of the consent decree that ended an earlier antitrust suit.

The lifting of those constraints in 1984 set the stage for a corporate battle that promises to be as exciting as any since Cornelius Vanderbilt took on Daniel Drew and Jay Gould in the Erie War more than a century ago—the battle of AT&T and IBM in the market for computer-based data processing services, systems, and equipment. In the world of big business, Baby Bell versus Big Blue is the equivalent of Muhammad AIi versus Joe Frazier. Several years before divestiture, the chairman of AT&T, Charles L. Brown, perhaps trying to prepare the ground for events that he foresaw, shocked some of his own employees when he announced, “There is a new telephone company in town … a high-technology business applying advanced marketing strategies to the satisfaction of highly sophisticated customer requirements.” Brown suggested that the comforting image of Ma Bell might not fit this new company: “Mother,” he concluded, “doesn’t live here anymore.”

Brown was premature; Ma Bell did not pass away until New Year’s Day, 1984. Now that she is gone, we might take a moment to remember her remarkable life. What did she mean to us? How did she get so big and strong? What is her legacy? How will we manage without her?

The size of AT&T before divestiture is the first fact that needs to be grasped. We get a sense of that size, the bigness of the biggest company on earth, if we consider that on the last day of 1983 the company’s assets of $150 billion accounted for 3.5 percent of the total assets of the five hundred companies that Forbes magazine listed as the largest in the country, and exceeded the combined assets of General Motors, Ford, General Electric, IBM, Xerox, and Coca-Cola.

AT&T’s assets included approximately 182,000,000 telephones and more than a billion miles of wire—enough to stretch to the sun and back six times, or around the world some 46,000 times. The company employed nearly a million people and met an annual payroll of nearly $30 billion. In its final year before divestiture it earned $5.75 billion—more than $15,000,000 per day, about $11,000 per minute—on gross revenues of $69.8 billion.

Thanks to its reputation as a preeminently safe stock, the biggest company on earth was also the most popular with small investors. At the time of divestiture more than three million people owned shares of AT&T common stock. An investment in bonds backed by Ma Bell was generally regarded as only slightly more risky than an investment in bonds backed by the United States government.

The size of AT&T reflected the role of the telephone in modern life. And the role of the telephone, the pervasiveness of the telephone, reflected the success of AT&T in carrying out its mission as a business organization. In the words of Charles Brown, that mission was “to link Americans to each other and to the world with direct and almost instantaneous communication.” In a little more than one hundred years the fulfillment of that mission has transformed our lives, our work, and our world.

Inventing the System: Bell’s “Perfect Network”

The story of the invention of the telephone has been told many times (see, for instance, Lincoln Barnett’s “The Voice Heard Round the World,” American Heritage , April 1965). The story of AT&T—an organization that built a system linking virtually all of the world’s telephones—is less familiar. The story is as complex as the technology that supports the system, but we can begin with the simplest unit—a single telephone.

Like any other tool, a telephone functions as an extension of the human body and as a means of overcoming the body’s limits. In the words of the writer John Brooks, the telephone offers “a way of increasing human earshot.” With it, Brooks notes in his excellent history Telephone: The First Hundred Years , “man, instead of being able to make himself heard a few hundred yards away with a shout, can make himself heard … around the world with a whisper.”

To appreciate the telephone, we merely need compare it with its predecessor, the telegraph, which required trained operators and could transmit its message only via code. In the language currently in vogue, the telephone is “user-friendly.”

Familiarity has robbed us of the wonder that the telephone used to inspire. When the emperor of Brazil, Dom Pedro II, saw Alexander Graham Bell demonstrate his invention at the Centennial Exposition in Philadelphia in 1876, he responded as all of us would respond if we could recover our innocence: “My God! It talks!”

The telephone is such a marvel that we run some risk of overstating the case on its behalf. In an essay written in 1976 to mark the centennial of the telephone’s invention, Colin Cherry, professor of telecommunication at Imperial College in London, commented: “Perhaps we ought not to celebrate the telephone at all … but should wait a couple of years more and celebrate instead the telephone exchange . It was the exchange principle that led to the growth of endless new social organizations, because it offered choice of social contacts, on demand, even between strangers … in ways totally new in history.”

This comment takes us to the heart of the subject. The telephone is a wonder, but without the telephone exchange—without the telephone system—it would not be a revolutionary wonder. Though he played only a minor role in building the system, Alexander Graham Bell saw clearly, and saw before anyone else, what it would involve. In a letter written in 1878, he spelled out the details with remarkable precision:

“At the present time we have a perfect network of gas-pipes and water-pipes throughout our larger cities. We have main pipes laid under the streets communicating by side pipes with the various dwellings, enabling the members to draw their supplies of gas and water from a common source.

“In a similar manner,” it is conceivable that cables of Telephone wires could be laid underground or suspended overhead communicating by branch wires with private dwellings, counting houses, ships, manufactories, etc., etc., uniting them through the main cable with a central office where the wires could be connected as desired, establishing direct communication between any two places in the city. Such a plan as this, though impracticable at the present moment, will, I firmly believe, be the outcome of the introduction of the Telephone to the public. Not only so, but I believe that in the future wires will unite the head offices of the Telephone Company in different cities and a man in one part of the country may communicate by word of mouth with another in a distant place.”

 

Bell’s vision of a “perfect network” guided the telephone company long after his active involvement with the company had come to an end. His letter focuses attention exactly where it belongs—not on the telephone itself but on the telephone system. It makes little sense, after all, to speak of a single phone; it takes two to talk. But it does make sense to speak of a single system. “The telephone network now interconnecting the continents,” Colin Cherry noted in 1976, “is by far the largest integrated machine in the world.” And in an essay published just before divestiture, in the farewell issue of Bell Telephone Magazine , the historian Theodore H. White commented: “‘System’ is the word to hang onto as we part. … Not the miracles of microwaves, nor the miracles of the transistor, nor the coming miracles of fiberglass carrying photons at the speed of light can compare to the achievement of making one system. …” The story of AT&T is the story of the system.

 
In 1876 Western Union decided against paying one hundred thousand dollars for all rights to the telephone.

No. 174,465: The Most Valuable Patent Ever Issued

The American Telephone and Telegraph Company was incorporated in 1885, but a series of companies and less formal business associations preceded its formation, and the company’s history begins with them.

The first of these associations, established by a written agreement dated February 27, 1875, was so informal that it did not have a name, though historians later came to call it the Bell Patent Association. The agreement provided that two Massachusetts men would each furnish half the money for a young fellow named Alexander Graham Bell to work on inventions related to telegraphy and that the three men would share any resulting patents.

Bell had been born in Edinburgh, Scotland, on March 3, 1847, the second of three sons of Alexander Melville Bell, a distinguished teacher of elocution at the University of Edinburgh. Melville Bell, said to have been the model for Henry Higgins in George Bernard Shaw’s play Pygmalion , was famous as a teacher and lecturer, as the author of textbooks that taught correct pronunciation, and as the inventor of a system called visible speech—a written code that indicated the exact positions of the throat, tongue, and lips during speech and that was useful in teaching the deaf.

After the deaths of Alexander’s brothers from tuberculosis in 1867 and 1870, concern for his only surviving son led Melville Bell to move his family to Canada, where they settled near Brantford, Ontario, in August 1870. In October 1872 Alexander opened his own school of “Vocal Physiology and Mechanics of Speech” in Boston, and the next year he was made professor of vocal physiology at Boston University. Meanwhile, he had begun experiments aimed at the invention of a “harmonic telegraph”—an invention that would have made possible the simultaneous transmission of multiple messages over a single wire and thus would have eliminated the largest problem associated with Samuel F. B. Morse’s telegraph, the fact that each wire could transmit only one message at a time.

Bell’s deaf students included George T. Sanders, the son of a well-to-do leatherand-hides merchant named Thomas Sanders, and Mabel Hubbard, the teenage daughter of a prominent Boston lawyer named Gardiner Greene Hubbard. Both men had capital to invest, and both were interested in Bell’s experiments. Their interest led to the signing of the Bell Patent Association agreement—the seed from which the biggest company on earth sprouted.

Bell conducted his experiments at the electrical shop of Charles Williams, Jr., in Boston, where he was assisted by a brilliant young machinist named Thomas A. Watson (no relation to Thomas J. Watson of IBM). One evening Bell told Watson his idea.

“I have never forgotten his exact words,” Watson recalled later. “‘If,’ he said, ‘I could make a current of electricity vary in intensity, precisely as the air varies in density during the production of a sound, I should be able to transmit speech telegraphically.’”

On June 2, 1875, while Bell and Watson worked on the harmonic telegraph, an accident in the sjiop proved Bell’s concept correct. The sound transmitted accidentally was the twang of a plucked reed, but as Watson wrote later, “The speaking telephone was born at that moment. Bell knew perfectly well that the mechanism that could transmit all the complex vibrations of one sound could do the same for any sound.” That fall Bell worked furiously on the application to patent his invention. He knew that in Chicago Elisha Gray, cofounder of the Western Electric Company (which later became the largest subsidiary of AT&T), was racing to develop his own telephone. On the morning of February 14, 1876, Gardiner Hubbard filed the patent application on Bell’s behalf at the Patent Office in Washington. A few hours later Elisha Gray filed a caveat —a warning to other inventors—staking his claim to the same invention. Those few hours made all the difference.

U.S. Patent No. 174,465, generally considered the most valuable patent ever issued, was granted to Bell on March 7, 1876, four days after his twenty-ninth birthday. Three days after that, on March 10, 1876, came the first transmission of an intelligible sentence via telephone. Preparing to test a new transmitter, Bell spilled a cup filled with acidic water onto his clothes and shouted in dismay, “Mr. Watson, come here, I want you!” Watson commented later, “Perhaps if Mr. Bell had realized that he was about to make a bit of history, he would have been prepared with a more sounding and interesting sentence.”

National Bell Is Born—and Wins Its Monopoly

Events moved quickly from this point. On June 25 Bell gave a triumphant demonstration of the telephone at the Centennial Exposition in Philadelphia. On August 10 the world’s first one-way long-distance telephone call was made; on October 9 the world’s first two-way long-distance telephone call; on November 26 a two-way call between Boston and Salem (16 miles); on December 3 a two-way call between Boston and North Conway, New Hampshire (143 miles).

But these tests were not entirely reassuring. “We could hear each other over the wire,” Watson said about the North Conway call, “but the telegraph line was in such bad shape … that the talking was unsatisfactory to both of us.” Watson began to fear that the telephone “would talk moderately well over a short line, but the apparatus was delicate and … didn’t talk distinctly enough for practical use.” His concern may have stirred some doubt in the mind of Gardiner Hubbard, for, sometime in the fall of 1876, Hubbard offered to sell all rights to the telephone to the Western Union Telegraph Company for one hundred thousand dollars. In a decision that doomed him to obscurity in the annals of business history, William Orton, president of Western Union, rejected the offer.

The year 1877 saw more firsts: the first use of the telephone in news reporting; the first telephone conversation between Boston and New York; the first telephone advertisement; the first telephone rented for business use. On July 9 the Bell Patent Association was superseded by the Bell Telephone Company, a voluntary, unincorporated association, with Gardiner Greene Hubbard as trustee in full charge of business affairs. Two days later, in an event that it would seem callous to omit though it has no demonstrable bearing on the history of the telephone company, Alexander Graham Bell married Hubbard’s daughter, Mabel, and began what seems to have been an exceptionally happy forty-five-year marriage.

Hubbard’s trusteeship lasted only a year, but he made two notable contributions. First, he decided that instead of selling telephones, the company would lease them to licensed parties for a royalty. In this, a fundamental business policy of what came to be the Bell System and a policy on which the unity of the system depended, Hubbard was influenced by his experience as the attorney for the Gordon-McKay Shoe Machinery Company, which leased its shoe-sewing machines to shoemakers and received a royalty for every pair of shoes made on the machines. In essence, the leasing and licensing system meant that instead of selling telephones, the Bell Company would sell service.

Secondly, on May 22, 1878, Hubbard hired Theodore Newton Vail, the thirty-two-year-old superintendent of the Post Office’s Railway Mail Service, to be the general manager of a new company then being formed to handle the business development of the telephone. Vail was to become the most important executive in the history of AT&T and one of the half-dozen or so most important executives in the history of American business. When he began work as general manager on July 1,1878, there were approximately ten thousand Bell telephones in service. When he retired in 1919, there were nearly eight million.

In addition to the hiring of Vail, the year 1878 was marked by the opening of the first central exchange, serving twenty-one subscribers in New Haven, Connecticut, on January 28. A central exchange that connects calls is the heart of the telephone system, since without it every phone would need a line to every other phone, and all of us would have strangled long ago. The first exchange in California was opened at San Francisco on February 17; the first in New York, at Albany on March 18; the first in Massachusetts, at Lowell on April 19; the first in Missouri, at St. Louis on May 1; and so on through the rest of 1878 and for years to come.

Many of these early exchanges were installed not by the Bell Company but by Western Union, which had changed its mind about the commercial potential of the telephone and had decided to challenge Bell’s patents on the basis of the caveat filed by Elisha Gray. With its enormous capital resources, with its own network of wires already crisscrossing the nation, and with Thomas Alva Edison on its payroll to provide technical support, Western Union posed a threat that could not be ignored, and in September 1878 the Bell Company filed suit charging its rival with infringement of its patents.

 

This was a new Bell Telephone Company. It had been formed on June 29, 1878, to license and promote telephone service in all areas of the country except New England. Earlier in the same year, on February 12, the New England Telephone Company had been incorporated, with rights to issue licenses under the Bell patents to telephone-operating companies in New England. With the establishment of these two companies, the unincorporated Bell Telephone Company under the trusteeship of Gardiner Hubbard passed from the scene, and a new group entered the picture—a group of aristocratic capitalists based in Boston who put up the funds to finance expansion.

In one decade AT&T fought six hundred patent infringement suits.

On February 17, 1879, the Bell Telephone Company and the New England Telephone Company were consolidated as the National Bell Telephone Company. A representative of the Boston financiers, Col. William H. Forbes, served as president of this company and its successor, the American Bell Telephone Company, from March 1879 until September 1887. But the major event of his presidency occurred early—in November 1879.

The chief counsel for Western Union in the patent infringement case, George Gifford, had advised his client that it could not win and ought to settle out of court. Accordingly, on November 10, 1879, Western Union acknowledged the validity of Bell’s patents, agreed to get out of the telephone business, and turned over its telephone facilities and equipment, including a network of fifty-six thousand telephones in fifty-five cities, to National Bell. In exchange, National Bell agreed to pay Western Union 20 percent of its receipts from telephone rentals over the life of the Bell patents, and it agreed not to compete in the public message telegraph business in territory occupied by Western Union.

It was an important victory. It gave National Bell a monopoly of telephone business in the United States that would last until the expiration of the fundamental Bell patents in 1893 and 1894. “If Bell had been in Boston I should have invited him to join in one of our old war dances,” wrote Thomas Watson. “But, as he was unavailable, I had to have my dance all by myself, celebrating this great event in my life with a whole day alone in my old haunts—the woods and shores of Swampscott and Marblehead, declaiming to the skies all the poetry I remembered. It was an undignified thing for the Chief Engineer of the Telephone Company to do … but I certainly felt better for it next day.”

With this quote we may pause to bid farewell to Thomas Watson, who resigned from the telephone company in 1881, at the age of twenty-seven, and went on to live a fascinating life, full of odd adventures, and to die at eighty in 1934. We may also bid farewell to Gardiner Greene Hubbard, Thomas Sanders, and Alexander Graham Bell; after 1881 none of them was actively involved in technical work related to telephony or in the management of the telephone company. Sanders lost much of his money in the 189Os and died in 1911. Hubbard was accused of “fiscal irresponsibility” by the Boston financiers, was forced out of the presidency in 1879, and died in 1897. Bell resigned from the board when his father-in-law left and resigned from the company altogether the next year, after various disagreements with Forbes. He went on to live exactly the life that a man of benevolent genius ought to live, working in fields that ranged from the radiation treatment of cancer to aviation.

To the end of his life, when asked his profession, he answered, “Teacher of the deaf.” Yet for all his benevolence, in some ways he seems to have been a difficult man. He kept no telephone in his study because he liked to think in silence. His manner was so formal that almost no one called him by his first name. After his death in August 1922, amid the usual chorus of predictable tributes, his wife wrote in a letter to her son-in-law: “He is big enough to stand as he is, very imperfect, lacking in things that are lovely in other men, but a good big man all the same....”

J. P Morgan Finds a Man He Trusts and Puts Him in Charge

The victory over Western Union was one of more than six hundred that the Bell Company would win in patent infringement cases over the next decade. In that period the Boston capitalists moved aggressively to take advantage of the monopoly.

A fundamental problem of the business was to manufacture equipment quickly enough to keep pace with demand. In November 1881 American Bell bought a controlling interest in the largest electrical manufacturing company in the United States, the Western Electric Manufacturing Company, of Chicago. Three months later Western Electric officially became the sole supplier of Bell telephones and telephone equipment.

Local telephone exchanges were well established early in the 188Os. The next great problem was to connect the exchanges. By act of the Massachusetts legislature the maximum capitalization allowed to the American Bell Telephone Company was ten million dollars—an amount that fell far short of the amount needed to construct long-distance lines. When the Massachusetts legislature refused to increase the maximum capitalization, a new company was organized in New York, on February 28,1885, under a charter that gave it a large mission: “… the lines of this association … will connect one or more points in each and every city, town or place, in the State of New York with one or more points in each and every other city, town or place in said State, and in the rest of the United States, Canada and Mexico, and also by cable and other appropriate means with the rest of the known world as may hereafter become necessary or desirable....” Thus, the American Telephone and Telegraph Company came into existence as a subsidiary company responsible for long-distance service. For its first fifteen years it was commonly called the Long Distance Company.

Its first president was Theodore N. Vail, who also served as general manager of the parent company, American Bell. The corporate charter, with its vision of a global system, reflected Vail’s ideas. Already he was thinking about the time when the Bell patents would expire. “What we wanted to do,” he said later, “was get possession of the field in such a way that, patent or no patent, we could control it.” But he believed that control would come by building a system that served everyone. His sense of mission brought him into conflict with William Forbes and the other Boston financiers, who did not share Vail’s attachment to an ideal of universal service. They thought that the purpose of the business was to pay dividends, and they saw no reason to spend large sums to bring the telephone to every lonely spot in America. In September 1887, commenting that “my present position in the company … is in some ways embarrassing and unpleasant,” Vail resigned. The financiers had won, or so it seemed.

If Bell was the father of the system, Vail was its Lincoln.

The number of telephones in the country rose from 48,000 in 1880 to 228,000 in 1890, and the number of miles of telephone wire rose from 30,000 to 332,000. Not only had the telephone arrived; it had begun to get on people’s nerves. In a Christmas piece published in the New York World in 1890, Mark Twain wrote, “It is my heart-warm and world-embracing Christmas hope and aspiration that all of us—the high, the low, the rich, the poor, the admired, the despised, the loved, the hated, the civilized, the savage—may eventually be gathered together in a heaven of everlasting rest and peace and bliss—except the inventor of the telephone.” When the nation’s most famous writer took the trouble to make fun of it, no doubt could remain: the telephone had become a force to be reckoned with.

The expiration of the key telephone patents three and four years later brought on a period of chaotic and furious competition. As if in a textbook demonstration of the virtues of free enterprise, independent companies sprang up to serve the rural areas that American Bell had neglected. By 1900 more than a thousand independent local exchanges had been established in Iowa alone, and more than six thousand in the whole country. In addition, thousands of telephones were supported by cooperative, do-it-yourself systems in areas served neither by the Bell Company nor by the independents.

As a result, many towns had two telephone companies and two systems; a few had three. A user who wanted to be in touch with all other users needed to subscribe to all systems. Businesses were compelled to subscribe to all or to cut themselves off from suppliers and customers. Although prices went down, just the way the textbooks of economics say that they should, waste, inconvenience, and confusion increased.

On December 30, 1899, the American Telephone and Telegraph Company replaced American Bell as the parent company in the Bell System. The change had no profound meaning. American Bell had been incorporated in Massachusetts, which required it to seek the approval of the state legislature every time it needed to increase its capitalization. AT&T had been incorporated in New York, where more permissive attitudes prevailed. The obvious step was to make AT&T the parent company, with headquarters in New York.

The competition of the independent telephone companies did not slow the rate at which the Bell System was growing, and it did not reduce the need for funds to finance expansion. This need led to a struggle for control of AT&T that ended the reign of the Boston capitalists who had dominated the company for a quarter of a century. The fight was won by a group backed by America’s supreme financier, J. P. Morgan. On May 1, 1907, to celebrate their victory, Morgan and his allies installed a man they trusted as president of AT&T. The man they trusted was Theodore Vail.

“One Policy, One System, Universal Service”

The alliance of J. P. Morgan, one of the least popular figures in American business history, and Theodore Vail, one of the most highly regarded, requires some explanation. Morgan was a consolidator; he arranged or helped arrange the consolidation of railroad lines to form larger systems, the consolidation of electrical companies to form General Electric, the consolidation of steel companies to form United States Steel, the consolidation of farm machinery companies to form International Harvester, and the consolidation of transatlantic shipping lines to form the International Mercantile Marine. In the early years of the twentieth century he envisioned a consolidation of the telephone and telegraph industries. Vail’s dream of a universal telephone system—the vision that had brought him into conflict with the Boston financiers—did not conflict with J. P. Morgan’s.

If Alexander Graham Bell was the father of the Bell System, its George Washington, Theodore Vail was its Lincoln—the man who came to it in a time of crisis and defined its sense of identity and purpose.

 

After his resignation from the telephone company in 1887, Vail had traveled in Europe, developed a hydroelectric plant in Cordoba, Argentina, and a street railway in Buenos Aires, and had transformed his farm in Vermont into a model establishment that eventually became a state agricultural training school.

When he took over as president of AT&T in 1907, the Bell System had 3,100,000 telephones, compared with nearly 3,000,000 for the independent companies. In its competition with the independents, Bell had engaged not only in such honorable and orthodox business tactics as price-cutting but also in less wholesome ones, such as putting pressure on banks to deny credit to the independents, and putting pressure on politicians to deny franchises or to grant them only with burdensome conditions attached. In addition, Bell had secretly purchased a number of the independent companies. Finally, Bell had refused to allow the independents to connect with its long-distance lines. If it did not exactly say, “The public be damned,” it did say, in effect, that any member of the public who cared to do business with an independent company could forget about making long-distance calls.

These tactics had a predictable consequence: by 1906, Bell was being attacked as a “ruthless, grinding, oppressive monopoly.” The next year, in his first annual report as president of AT&T, Vail began by addressing the subject of public relations, and he addressed it in revolutionary terms, proposing that the greatest possible profit might not be the primary goal of a major enterprise. The public was not an enemy to be squeezed but a constituency to be served. Secrecy did not serve it. “Take the public into confidence,” Vail said, “and you win the confidence of the public.” Besides, he added a few years later, “If we don’t tell the truth about ourselves, some one else will.” What if the public demanded regulation? No executive of the telephone company had ever responded to the least whisper in support of regulation with anything short of violent indignation. Vail saw “no serious objection,” provided regulation was “independent, intelligent, considerate, thorough, and just.”

In 1908 Vail set down in six words the principles that would guide the company under his leadership: “One Policy, One System, Universal Service.” Later this formulation was reduced to four words: “Our business is service.” On one level this seems merely a slogan, and skeptics outside AT&T have mocked it as such. Slogan or not, over the years the phrase sank deeply into the minds of Bell employees, and it seems to have made a difference in the way many of them felt about their company and their work.

In his attitude toward the independent companies, Vail did not at first break with his predecessors. He saw telephony as a natural monopoly, as a business where competition would produce nothing but waste and inefficiency. He continued to purchase independent companies whenever possible, and he continued to refuse to connect the independents with Bell’s lines. Moreover, in 1910 he purchased 30 percent of the Western Union Telegraph Company—the same giant that had all but destroyed the fledgling Bell company in 1878–79—and took over as its president. J. P. Morgan’s dream of a consolidation of the telephone and telegraph industries—and Theodore Vail’s dream of a unified system that provided the public with universal service—seemed on the verge of becoming a reality.

Vail believed that a monopoly in communications best served the public interest. But the public did not believe it, and the government did not believe it. In January 1913 the attorney general of the United States, George W. Wickersham, advised AT&T that its planned acquisitions of certain independent companies seemed to him to violate the Sherman Antitrust Act. In the same month, the Interstate Commerce Commission launched an investigation to find out if AT&T was trying to monopolize communications in the United States.

Vail felt pressure not only from the government but also, and perhaps more important, from a subtle contradiction in his own business philosophy. In the best of all possible worlds, Vail thought, a single organization would run a single system that served everyone. But in the imperfect world where Vail strove to realize his vision, this unity did not exist. Vail believed in a single system, and this belief implied a refusal to connect with systems run by independent companies. But he also believed in universal service, and refusal to connect denied service to people who wanted it.

In the face of this contradiction—in the face of the stubborn refusal of the real world to yield to his vision of the best of all possible worlds—Vail made a large compromise. In a letter dated December 13, 1913, from Nathan C. Kingsbury, a vice-president at AT&T, to James McReynolds, Wickersham’s successor as attorney general, AT&T agreed to dispose of its holdings in Western Union, to stop purchasing independent telephone companies except with the approval of the Interstate Commerce Commission, and to make arrangements under which all other telephone companies “promptly… may secure for their subscribers toll service over the lines of the companies in the Bell System.”

“All monopolies should be regulated,” Vail said.

The Kingsbury Commitment, as it came to be called, implied the abandonment of AT&T’s efforts to unify the telephone and telegraph industries in a great national monopoly as well as the abandonment of its efforts to monopolize the telephone industry by buying the independents or by using its control of long-distance service to drive them out of business. In essence, though he might not have agreed with it, Vail bowed to the public’s perception of the public good. But this apparent submission affirmed a principle. If Vail’s successors said, on the one hand, “Our business is service,” they also said, in the words of Charles Brown just before divestiture, that their business was “to discern the expectations of the public and then conform the business to those expectations.” More than anything else, Vail bequeathed to his successors two ideas: an idea of service and an idea of what makes up the right relation of the corporation to the public. The two ideas may seem simple enough, but they were big enough to shape the destiny of the biggest company on earth in the twentieth century.

When the Post Office Tried to Run the Phone Company

The breadth of Vail’s vision makes him seem more like a philosopher-king than a businessman running a business, but he was a businessman, and a formidable one. Before he took charge, the operating companies in the Bell System had functioned, in the words of one historian, as “quasi-autonomous fiefdoms.” Vail put an end to that. He required the operating companies to submit five-year and twentyfive-year financial plans. He insisted that the companies coordinate their business policies and adhere to uniform technical standards. He established a unified research and development operation, the predecessor of the current Bell Laboratories. He built a strong central staff of managerial generalists, men in his own mold, capable of guiding the business on the basis of something more than an exclusive concern for profit.

World War I—the first war in which the field telephone played an important role—made heavy demands on the resources of the Bell System. Suddenly it became clear that in addition to its other uses, the telephone was a vital part of the nation’s defense. When war came, fourteen thousand Bell employees served abroad in volunteer battalions in the Army Signal Corps. The year 1917 witnessed the first use of radiotelephone in antisubmarine operations and in air-to-ground and ground-to-air communications.

The strain of war led to a push for nationalization of the telephone and telegraph companies—a push supported by both the secretary of war and the secretary of the navy. In the last week of July 1918, acting on powers granted to him by a joint resolution of Congress, President Woodrow Wilson took control of “each and every telegraph and telephone system, and every part thereof, within the jurisdiction of the United States, including all equipment thereof and appurtenances thereto.” For approximately the next year, in a fascinating experiment, the Post Office ran the telephone company.

As we have seen, Vail did not object to regulation by the government. But government ownership was another matter. “All monopolies should be regulated,” Vail said. “Government ownership would be an unregulated monopoly.” For years state regulatory commissions had stopped Bell from imposing a service connection charge on new subscribers; a month after the government took over, the postmaster general established connection charges ranging from five to fifteen dollars. Long-distance rates were increased by approximately 20 percent in January 1919, and local rates went up two months later. Even so, under government management the company operated at a deficit of thirteen million dollars. The public was not enchanted, and in the summer of 1919 Congress passed a resolution calling for the immediate return of the telephone and telegraph systems to private ownership.

Theodore Vail retired as president of AT&T on June 18,1919, and died in April 1920. In general, the American public listens skeptically to the pronouncements of business leaders, especially when those pronouncements proclaim an interest in the public good. Nevertheless, Vail seems to have believed sincerely what he said on many occasions: that the telephone company existed only to serve the public, that it derived its only legitimacy from its dedication to service, and that the primary duty of the executives who led it was to ensure that it conformed to the public’s best sense of what the public interest required. Theodore Vail’s gift to his successors was like Abraham Lincoln’s gift to the nation—a definition of purpose, a set of guiding principles—and something more: a largeness of spirit to inspire, sustain, rebuke, challenge, and befriend.

Through the 1920s with Radio-Telephone, Movies, and TV

By 1920 there were 13,300,000 telephones in America. The average daily number of local calls had gone from 237,000 in 1880 to 7,600,000 in 1900 to 50,200,000 in 1920, while the book value of plant and equip ment in the Bell System had risen frorr $15,700,000 in 1880 to $181,000,000 in 1900 to $1.36 billion.

The growth of the system would not have been possible without constant technological innovation. One early problem was the proliferation of telephone poles and overhead wires, vulnerable to violent weather. The solution was the development of dry-core leadsheath cables that made underground wires practical. Another problem was static caused by electric light and electric trolley systems as well as by natural electricity. The solution was to replace one-wire circuits that used the earth itself as a conductor with two-wire circuits insulated from the earth. That meant rewiring the entire system, and that was exactly what was done, between 1890 and 1900.

As volume increased, the reliance on manual switching of calls became a matter of considerable concern. The larger the number of subscribers, the greater the cost of serving each one. One early manager commented that so far as he could see, all he had to do was to get enough subscribers and the company would go broke. This time the solution came from a source outside the Bell System—a Kansas City undertaker, Almon B. Strowger, who in 1891 invented an automatic switchboard that initially could handle ninety-nine telephones and soon was improved so that it could handle more.

 

The technological problems associated with the development of longdistance telephony were enormous. One major advance occurred in 1900, when Professor Michael I. Pupin, of Columbia University, showed that loading coils placed at frequent intervals in a telephone circuit would improve transmission. Before 1900, one-quarter of all capital invested in the telephone system had been spent on copper for wires; in addition to improving transmission, the Pupin coil cut in half the diameter of the wire needed for long-distance lines and thus cut those costs in half.

By 1925 AT&T’s stations served 60 percent of all radio owners.

The Pupin coil reduced attenuation, but it did not amplify sound. A threeelement vacuum tube, or Audion, invented by Dr. Lee De Forest in 1906-07 provided the basis for solving this problem. De Forest was an independent inventor, not employed by Bell. Building on his work, a young engineer at AT&T, H. D. Arnold, developed a high-volume vacuum tube that could be used in telephone repeaters to amplify sound.

Together the Pupin coil and the vacuum tube repeater made possible the first transcontinental telephone line. The last pole went up at Wendover, Utah, on the Nevada-Utah state line, on June 17, 1914, and a successful test was conducted at the end of July. On January 25, 1915, thirty-nine years after the first telephone conversation, the transcontinental line was formally opened, with Alexander Graham Bell, now sixty-seven, at one end in New York, and Thomas A. Watson, now sixty, at the other end in San Francisco.

A new technology, radiotelephony, made quick strides in this period. In 1907 Lee De Forest had transmitted voice without wires between two buildings in New York City. By 1909 researchers at AT&T were following his lead. Their work led to the first transatlantic radiotelephone transmission on October 21,1915, when a Bell engineer at the Eiffel Tower in Paris heard a few words addressed to him by an engineer in Arlington, Virginia. In the Bell tradition of uninspired messages on great occasions, the first words to wing across the Atlantic were “Hello, Shreeve! Hello, Shreeve! … And now, Shreeve, good night.”

The twenties were dizzy years for AT&T, with the company deeply involved in pioneer work in the new communications media: radio, television, and sound motion pictures.

Much attention was devoted to the development of regular transatlantic telephone service by radio. After a test in 1926, commercial service between New York and London opened on January 7, 1927. By the end of 1929 service had been extended to most of the major cities in Europe, as well as to Spanish Morocco.

Radio offered possibilities that went far beyond telephony, and AT&T was eager to explore them. On July 25,1922, the company launched a pioneer radio station, WBAY (later WEAF), which broadcast from the Long Lines Building on Walker Street in New York. Bell’s network of telephone wires enabled it to establish the first radio network, which in June of 1923 carried the first nationwide radio address by an American President (Warren G. Harding on “The World Court”). Within two-and-a-half years, a national network of seventeen stations owned or licensed by AT&T served more than 60 percent of all radio sets in the United States.

By 1924 Bell was involved in a variety of patent infringement suits and in suits relating to the availability of telephone lines for broadcasting. In March of that year Harry B. Thayer, president of AT&T, made a statement to the press designed to clarify the company’s position on the issues posed by its broadcasting activities. He declared that AT&T “has not attempted and does not desire a monopoly of broadcasting.” The actions that showed that the company meant what it said occurred not under Thayer but under his successor, Walter S. Gifford, who took over as president in January 1925 and served in that position until December 1949. Gifford pursued a policy of cutting back on secondary ventures and refocusing attention on the company’s basic business—the telephone. In 1925 Bell sold all plants outside the United States to the International Telephone & Telegraph Company; three years later it let go of the Graybar Electric Company, a Western Electric subsidiary that sold nontelephonic electrical and power equipment.

 

In addition, Gifford pulled AT&T out of radio broadcasting, selling WElAF to RCA for one million dollars. AT&T’s involvement in radio had been “experimental,” Gifford wrote in the annual report, and “the further the experiment was carried, the more evident it became that the objective of a broadcasting station was quite different from that of a telephone system.”

Mysteriously, at virtually the same time that he withdrew AT&T from the radio business, Gifford allowed the company to become deeply involved in the development of sound motion pictures. By 1925 engineers at AT&T had produced a machine that made it possible to synchronize moving pictures with sound, and in 1929 the company reported that 90 percent of talking pictures were made using sound equipment from Western Electric. Three years later a senior official boasted that “we are the second largest financial interest in the motion picture industry.” For reasons that remain unclear, it was not until the mid-193Os that Gifford applied to films the same principle that he had applied to radio broadcasting a decade earlier and moved Bell out of the field.

Research engineers at AT&T also contributed to early developments in the history of television. In 1925, to the delight of press associations, AT&T’s Long Lines Department introduced the first commercial telephotograph service. The transmission of pictures in motion was the obvious next step. On April 7, 1927, came the first public demonstration of long-distance television transmission in the United States, with Herbert Hoover, then secretary of commerce, at one end of the wire in Washington and Walter Gifford of AT&T at the receiving end in New York. Next came the first public demonstration of color television in the United States, at the Bell Laboratories in June 1929. With the economy booming, a shrewd investor might have bet that television would sweep the nation by the end of the next decade. But history had other ideas.

The Justice Department Makes Its Move

T&T maintained its $9 dividend throughout the Depression. In order to fulfill what it seems to have viewed as a moral obligation to its shareholders, the company held the dividend at $9 for four consecutive years, 1932 through 1935, when earnings fell considerably below that figure. In the process, the company reduced its retained surplus by 60 percent, from $234,000,000 to $93,000,000.

The policy of maintaining the dividend did not please labor, since it meant that labor rather than capital bore the brunt of the Depression. At the worst point in the crisis, Western Electric had laid off nearly 80 percent of its work force, and AT&T as a whole had reduced its payroll by 20 percent.

The thirties also brought a major change in federal regulation of the telephone industry. On July, 1934, under the Communications Act signed by President Franklin D. Roosevelt, the Federal Communications Commission replaced the Interstate Commerce Commission as the agency with jurisdiction over telecommunications. It promptly launched an investigation of AT&T that produced what one investigator described as “probably the most complete factual information on the operations of an important American business enterprise in existence.” The final report raised questions about the adequacy of regulation, but it was released only two and a half months before the start of World War II, and it did not seize the nation’s attention.

After waiting eighteen years, the Justice Department struck hard.

“The science underlying electrical communications is at the very heart of modern war,” Walter Gifford wrote to AT&T’s stockholders shortly after Japan’s attack on Pearl Harbor. The research and development, engineering, manufacturing, and human resources of the Bell System were vital to the war effort. Western Electric worked around the clock to supply hardware for the conflict. In three and a half years it fulfilled sixteen hundred government contracts, twenty thousand purchase orders, and ten thousand modification orders. It produced half of all radar sets manufactured in the United States for use in the war. In the words of Henry M. Boettinger, a former assistant vice-president of AT&T and the author of a fine history entitled The Telephone Book , Bell’s areas of military involvement included “radios of every size for tanks, planes and artillery; radar systems; ultrahigh frequency and microwave techniques; flight trainers; submarine detection; artillery and mine fuses; military and naval fire-control systems; metallurgy for improved gun barrels; telephone and teletypewriter apparatus suitable for desert, jungle and Arctic; and a host of devices and components for other industries....”

AT&T’s role in the national defense—specifically, its role as a leader in the development of the technology that underlies sophisticated military systems—did not end with World War II.

 

In 1949, at the request of the United States Atomic Energy Commission, Western Electric took over the management of the Sandia Laboratory, which the government had established at Sandia Base, an airfield near Albuquerque, New Mexico, shortly after the bombings of Hiroshima and Nagasaki. Sandia’s mission was to design and produce a stockpile of atomic weapons for the nation, but when he took over as chairman of the Atomic Energy Commission in 1948, David E. Lilienthal found to his astonishment that the “substantial stockpile of atom bombs that we and the top military assumed was there, in readiness, did not exist.” Under the management of Western Electric (provided at cost), this situation quickly changed; within a month an AEC representative reported that “Sandia Laboratories are no longer experimenting with atomic weapons, they are producing them.” Under a series of five-year contracts, AT&T has continued to manage the laboratory to this day.

AT&T also played a major role in the postwar development of guided antiaircraft missiles and in the development of the nation’s air-defense radar system.

The space age opened new frontiers for the company. A communications satellite designed by Bell scientists, Telstar, was launched in 1962, and the first earthto-moon telephone call was completed in July 1969, less than one century after Alexander Graham Bell spilled acid over his clothes and completed the first roomto-room telephone call.

As if atomic weapons, guided missiles, radar defense systems, and communications satellites were not enough, AT&T continued to run the Bell System, which kept growing explosively. The number of telephones in the nation (including the phones of independent companies) rose from 13 million in 1920 to 20 million in 1930, 22 million in 1940, 43 million in 1950, 74 million in 1960, 120 million in 1970, and 180 million in 1980. The average daily number of local telephone calls rose from 50 million in 1920 to 96 million in 1940,273 million in 1960, and 717 million in 1980; while the average daily number of toll calls rose from 2 million in 1920 to 3 million in 1940, 12 million in 1960, and 70 million in 1980. The book value of plant and equipment in the Bell System rose from $1.36 billion in 1920 to $4.89 billion in 1940, $24.7 billion in 1960, and $135.5 billion in 1980.

The size of the company made it a target, but even more than that, its monopolistic tendencies—or what regulators tended to construe as its monopolistic tendencies—opened it to attack. It took thirty-five years and two long lawsuits, but in the end the government cut Ma Bell down to size.

The first lawsuit, filed by the United States attorney general in January 1949, alleged that AT&T had violated the Sherman Antitrust Act and asked that its giant manufacturing arm, the Western Electric Company, be separated from the Bell System. The suit was settled in January 1956 by a consent decree that spelled out terms that both the government and AT&T declared to be acceptable. AT&T agreed to confine its activities to common-carrier communication services and government projects, to manufacture only products needed by Bell companies and by the government, to make all its existing patents available to anyone without charge, and to make all future patents available on reasonable terms. In exchange for these concessions, the government allowed the company to keep Western Electric. The general view was that the company had won a victory.

The Justice Department waited eighteen years before it renewed its attack, but when it struck, it struck vigorously. In a suit filed in November 1974 under the Sherman Antitrust Act, it charged AT&T, Western Electric, and Bell Laboratories with conspiracy to monopolize the telecommunications industry. All of the Bell operating companies were named as co-conspirators. As noted earlier, this suit ended in 1982 with a consent decree that freed AT&T from the constraints of the 1956 consent decree and, in exchange for this unshackling, obliged the company to tear itself apart. In what may have been the cruelest blow, AT&T was severed not only from its operating companies but from its heritage—prohibited from using the name Bell and forced to abandon the ubiquitous bell-shaped symbol that has identified it to the public for decades.

“Mother Doesn’t Live Here Anymore”

What would Theodore Vail have thought of divestiture? It is difficult to believe that he would have felt much enthusiasm. Yet the man who presided over the process, Charles Brown, took pains to argue that he had not betrayed Vail’s vision:

“Clearly [divestiture] represented the most significant discontinuity in the history of this enterprise. However, in my view, it did not represent a significant discontinuity in the basic philosophy that has guided this business for most of its history. That philosophy, first stated by the organizational patriarch of the Bell System, Theodore Newton Vail, is that the major task of management is to conform the business to the desires of the public. As Vail stated it, the qualities that created the Bell System were self-interest subordinated to the public spirit.... It was that philosophy that led Theodore Vail to embrace regulation as a substitute for competition, so as to permit the development of an efficient nationwide communications system. And it was the same philosophy that led me, threequarters of a century later, to embrace competition as a substitute for regulation —this time in response to the public’s desire for diversity in communications services and suppliers.”

Whether or not we accept Brown’s argument, his statement provides striking testimony to the persistence of Vail’s influence. It is as if the chief executive sought Vail’s blessing at the very moment when he dismantled the organization that Vail had built and passed on to his successors. Beyond that, Brown’s statement seemed to suggest that in the eyes of its chief executive the organization itself did not matter as long as it lived up to an ideal—“self-interest subordinated to the public spirit”—that gave it its right to exist and its sense of unique worth. To prove that it deserved to live, the company had to commit suicide.

We began by saying that the history of AT&T is not the history of telephony but the history of the telephone system. Now we must add that the history of the system is the history of an idea—an idea that employees of AT&T refer to simply, but always in capitals, as the “Spirit of Service.”

Out of all the assets of the Bell System —the hundreds of millions of telephones and billions of miles of wire—the Spirit of Service may be the asset hit hardest by divestiture. Though many outsiders have found it difficult to believe, a fair number of Bell employees seem to have accepted the notion that the corporation existed to fulfill a public trust. Some of them—perhaps a majority—seem actually to have found this idea inspiring. If wires and cable were the skeleton of the Bell System, the Spirit of Service was its soul. The suit to break up AT&T struck a blow to the soul because it suggested that the public, as represented by the Justice Department, was willing to dispense with a system that embodied the best efforts of generations of Bell employees. In the special commemorative issue of Bell Telephone Magazine that AT&T published a few months before divestiture, Charles Brown said farewell to the men and women of the Bell System in carefully measured tones, but he gave space to a retired vice-president, Alvin von Auw, for a very different statement.

In flat contradiction to Brown’s assertion that AT&T had consented to divestiture “in response to the public’s desire for diversity in communi! cations services and suppliers,” von Auw contends that “when AT&T at last abdicated its role as the biggest company on earth,” it did so “in the absence of any evidence of urgent public concern about its size.” Moreover, it did so at a time when “populist agitation over ‘undue concentrations of economic power’ ! was at its lowest ebb in decades.”

When something goes wrong now, no one accepts responsibility.
 

In that case, what toppled I the corporate Goliath? Von Auw places the blame—or the credit, if you prefer—partly on the “judicial indisposition to credit the Bell System’s professions of concern for the public interest,” partly on the “possibility that the public may not be ready to grant to any private institution the exercise of so priestly a function as stewardship of a public trust,” and partly on the “parties to technopolitics” —that is, the regulators, attorneys, politicians, consumer advocates, and academic experts who “[make] a specialty out of gigging AT&T.”

Von Auw appears to have chosen his tone with the purpose of giving voice to the anger, frustration, bewilderment, bitterness, and pain of the men and women of the Bell System. Those people “would be less than human,” he declares, if they did not feel that they had been “somewhat abused” by the process that led to divestiture. The public ought not to be surprised, then, if some Bell employees have given way to a “feeling of resentment that the institution to which they have given their entire lives, an institution that embodies the earnest and sometimes inspired work of hundreds of thousands of people over the course of a hundred years, should have been undone by a coterie of envious bureaucrats, free-market zealots and glib politicians, not many of whom will be around to face the consequences.”

If there is any reason to welcome divestiture, von Auw concludes, it is that the executives of the new AT&T will be “relieved of the obligation of attempting to convince the public that there is any private institution on earth that honestly and actually pursues the objectives the Bell System professes.” At last those executives “will no longer need to ponder what the public interest may require of them.”

The reader must decide to what extent the words of aggrieved former officials of the Bell System deserve attention. Some people might prefer a history of AT&T that was written without reference to the motives of the employees, to anything as hazy as the Spirit of Service. But that would surely be a mistake. No one can predict the long-term consequences of divestiture, but one consequence seems clear: It dealt a large blow to the Spirit of Service. Already we are beginning to hear complaints that today, when something goes wrong with a telephone, no one accepts responsibility: The regional operating company refers the customer to AT&T, and AT&T, in turn, refers the customer to the operating company. Perhaps a spirit cannot survive division.

Charles Brown’s claim that the public’s desires prompted divestiture is not persuasive. Probably the public does not care whether the telephone system is run by one company or many, so long as the phones continue to work and the prices continue to seem reasonable. The decision to break up AT&T was made not by the public, but by government officials acting as representatives of the public and guardians, we must hope, of the public interest.

Theodore Vail’s guiding principles—“One Policy, One System, Universal Service”—have gone the way of gas lamps and trolley cars. No one can say today how history will judge divestiture, but after a little more than a year, a feeling of uneasiness clearly seems to be growing. A few years ago, if someone had asked, “Should we break up the Bell System?” ordinary people might have answered with ordinary common sense, “If it ain’t broke, don’t fix it.” That suggests a couple of good questions for historians: Was the Bell System broken in the late 1970s? And if it wasn’t, why did we fix it?

Bell Labs: Extraordinary Subsidiary