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Monopoly Isn't Always A Bad Thing

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  policy telecom

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Monopoly isn't necessarily bad. In fact, sometimes it can be a good thing. A very good thing!

Most economics classes foster a passionate dislike of monopolies in students. But this dislike is not necessarily deserved. Economics classes teach us about seemingly malevolent monopolies that wreacked havoc on the economy. But most economics courses omit discussion of the largest monopoly ever to have existed — perhaps the most benevolent monopoly of all: the Bell System.

That's right, Ma Bell the monopoly! Technically, the Bell System — headed by American Bell Telephone until 1899 and American Telephone and Telegraph Company (AT&T) from 1899 until 1984 — was not a complete monopoly in the United States and Canada, although it was a geographic monopoly where it had Bell Operating Companies. Many independent telephones have existed from 1877 through the present day, including during the reign of the Bell System. California and Ohio were home to particularly well-known independent phone companies, and GTE (General Telephone and Electronics) was the largest independent (that is, not part of the Bell System) telephone company in the United States.

The Bell System wasn't universally liked, especially when it still existed. The "telephone tax" that helped fund the Vietnam War earned Ma Bell a bad rap. But looking back on it, the Bell System defies almost everything economics courses say about monopolies. Microeconomics dictates that monopolies lead to reduction in consumer surplus, deadweight loss, inefficiency, inferior-quality products, and limited production. The Bell System was the monopoly that broke the rules. Western Electric, their manufacturing arm, was world-renowned for providing excellent-quality products. The vast majority of Western Electric telephones, especially those from the early 1900s through the 1970s, are still in excellent working condition — partly because telephones are extremely simple instruments with no electronic components, and partly because Western Electric was devoted to quality.

Of course, Western Electric didn't do this out of the benevolence of their heart. Until the 1980s, it was illegal to own your own telephone — every telephone you had you rented from the local phone company. Each additional phone had a rental fee, color telephones cost more, and touchtone service (once it became available) cost extra. The phone company owned the telephone wiring in your house too — you couldn't touch that. Telephone repairs were free, however, so it was in AT&T's interest to make sure that the telephones were reliable and would need few repairs. Their products have outlived virtually all other consumer goods produced at the time.

Today, almost everything is made in China and few companies make any real effort to produce quality goods. It's ironic how nowadays buying used means buying quality and buying new is buying inferiority, but it's a testament to just how much American manufacturers devoted themselves to quality, right up until the Information Age.

The Bell System made standards a priority, and this made the system efficient. The Bell System maintained "Bell System Practices", which standardized everything it did. And I mean everything, not just technical standards. One such Bell System Practice is BSP 770-130-301, a 3 page manual on how to sweep floors. BSP 770-130-055 details the proper procedures for scrubbing floors. AT&T was criticized for being a highly structured organization with a large corporate ladder. And it was. But it was the world's largest corporation for nearly a century, and the key to the success of the Bell System was its organization. The 1975 New York Telephone Second Avenue fire is an excellent example. In fact, there's an entire Wikipedia article about it. A 13 hour fire in a New York Telephone central office disrupted service to nearly 200,000 customers. The Bell System responded quickly, directing resources from other telephone companies to New York. Hundreds of Bell System employees across the country went to New York. AT&T diverted a main distribution frame to New York and it was installed in just 4 days. 23 days later service was fully restored. How did they do it? The Bell System Practices are largely to thank. Today, they are a treasure trove of information for telephone companies and telephone collectors, but they enabled service installers and technicians who had never met to install a system quickly and get it running. That's because everything in the Bell System was standardized, and a Bell employee in one part of the country could feel right at home in another, and be productive immediately.

The Bell System made it their goal to provide great service. They were regulated in 1913 with the Kingsbury Commitment, and again in 1934 when the FCC was created. Theodore Vail, who is credited with raising the Bell System, believed that as a natural monopoly, it only made sense that there be one universal provider of telephone service.

The government made sure Ma Bell stayed in line, but Uncle Sam definitely liked her. AT&T played an extensive role in World War II, furnishing communications equipment for the military. In fact, Western Electric ceased telephone production and installation for a brief period due to the war, because copper was a vital resource for the war. Telephone production resumed soon after the war ended, but the government continued to rely heavily on the Bell System, who outfitted much of the communications of the government during the Cold War Era. AUTOVON — the military's telephone network, was a Bell System creation.

The Bell System's demise began as early as the 1950s. The Hush-A-Phone and Carterfone decisions in the 1950s and 1960s were a significant blow to the exclusive control AT&T demanded over all telephone infrastructure (the decisions allowed for attachment of instruments to a telephone handset). AT&T fought bitterly against MCI's plea to enter the long-distance market but MCI eventually prevailed. Competition was good, the FCC ruled. MCI operated microwave long-distance links between major U.S. cities. At first, customers would dial a local 7-digit number, enter their customer number, then the area code and number they wanted to call. But for many, it was worth it. Long distance cost an arm and a leg, and MCI's rates were sometimes half as much as Bell's.

The real reason MCI was able to provide cheap long-distance services was that the Bell System cared too much about its customers (what?). AT&T kept long-distance inordinately expensive for most of the 20th century in order to subsidize local phone service, which was unprofitable — AT&T actually lost money providing telephone service. The Bell System saw the telephone as a public good, and believed that price should not be an acceptable barrier to telephone service. They kept the cost of local phone service low so that many consumers would get telephone service. And indeed, their plan worked — telephone service expanded rapidly in America between the Great Depression until the Cold War. But Ma Bell couldn't just give customers a free ride. How could they afford to allow the telephone to proliferate as much as it did? By taxing businesses, of course.

Ma Bell didn't actually tax businesses. But phone service cost about twice as much for businesses as it did for homes. AT&T was also able to price discriminate — businesses made many long-distance calls, and their demand was very inelastic. People, on the other hand, rarely made long-distance calls, and were very sensitive to price. So the Bell System kept local phone service cheap but made long-distance artificially extremely expensive. AT&T could not afford competition with MCI, because they would have to raise the cost of telephone service in order to make long-distance cheaper. The Bell System believed that their monopoly power allowed them to provide service to the greatest number of people. And it had, which was why MCI was a disaster for AT&T. They believed it was unfair for MCI to enter the long-distance market. MCI didn't need to subsidize local phone companies who were providing phone service for a loss. MCI was faced with the actual cost of service, whereas AT&T was faced with the cost of subsidizing 23 telephone companies in the United States in order to expand telephone service. MCI had an unfair advantage. But the FCC didn't care about "the greater good", and AT&T was forced to compete.

In the 1974, the Justice Department filed the largest antitrust suit in history against AT&T. It would go on for nearly 10 years, and it brought the Justice Department and the world's largest corporation head to head in court. AT&T fought heavily, providing over a billion pages of testimony to the government. Harold Greene, a federal judge, was assigned to the case in 1978. He didn't like the Bell System, and did everything he could to break it up. Ironically, the Pentagon and the Defense Department testified on behalf of AT&T, as they relied heavily on the Bell System for communications. If the Bell System was broken up into multiple companies, they would need to deal with many entities instead of one, none of which would be able to provide the same class of service. In the end, AT&T, fearing that it would lose, settled with the Justice Department in 1982, resulting in the Modification of Final Judgment (MFJ of 1982) which ordered the Breakup of the Bell System, or Bell System Divestiture, in the largest corporate reorganization in history. AT&T was forced to divest the 23 local phone companies it owned into 7 Regional Bell Operating Companies (RBOCs), or "Baby Bells", which would become known as incumbent local exchange carriers (as opposed to competitive local exchange carriers - phone companies that entered the game after Divestiture to compete with the Baby Bells). AT&T would, in exchange, be allowed to enter the computer business (the government had prohibited it from doing so prior).

The late 1980s and 1990s marked a new era in telephone history. For the first time, consumers would be allowed to own their own telephone. Many purchased their existing phones from AT&T, although some continued to rent, which would ensure free repair in the unlikely event of malfunction. More importantly, however, was the change in rates. AT&T, free of its obligation to provide local phone service, was able to cut long-distance rates dramatically, since it no longer had to subsidize the 23 local Bell companies. On the flip side of the coin, the phone companies no longer got huge checks from AT&T anymore. Long-distance rates dropped significantly, but the cost of local phone service went up 40%! This was the price that America paid for competition.

Harold Greene broke up the Bell System on the misguided belief that monopoly is inherently evil. We are still paying for his mistake. Everybody lost as a result of Divestiture —

In a single stroke, Judge Greene mercilessly destroyed the world's best telephone system. 1984 was indeed a sad and ominous year, though not for the reasons George Orwell predicted.

The government didn't win. The Pentagon lost its unified, first-class communications partner.

The employees didn't win. The Bell System employed nearly 1 million people. 24,000 Bell System employees were laid off, and another 330,000 employees — about a third of the Bell workforce — were forced to switch companies due to the massive reorganization. Mothers and daughters who had worked side by side for years now found themselves working for separate companies in different places. Employees who had worked together for years found themselves saying goodbye.

AT&T didn't win. It lost more than a century of American progress, innovation, and ingenuity, and the system Theodore Vail had built from the ground up nearly 80 years ago — a system that worked and served the American people well.

The consumers didn't win. The cost of telephone service went up 40%!

The Rape of Ma Bell, a book condemning Divestiture, recounts the story of one man who wanted to have a telephone installed in his shed. In the Bell System days, that meant a single call to 611 and within a day or two, the job would be done. But now, things are a different, as Eric learned. (Others learned too, as most dial 0 operators worked for the local phone company whereas 411 operators now worked for AT&T, a completely separate corporate entity). He called the phone company, asking to have a phone installed. But the local phone company couldn't help him anymore — they no longer were in the business of selling telephones. So he found an AT&T phone shop and found just the phone he wanted. He asked them to run the necessary wiring for it. But AT&T was not in the business of wiring - the local phone company would have to do that. Another call to the phone company, who said he would need to hire an electrician to run conduit first. When he was all done, he was dismayed to find the plug didn't match. Back to AT&T, and then back to the phone company. The authors recount: "Eric's final score: three weeks of waiting, calls to Bell, calls to the electrician, visits to the AT&T phone center - and more than $300 out of pocket. Eric's score before [Divestiture]? - one telephone call, two or three days waiting - and less than $50."

Uncle Sam broke up Ma Bell and we all paid for his sins — correction, we're paying for his sins; it's unlikely the world will ever recover from such a tragic event. Don't be mistaken from the moral of this story: there are no monopolies worth saving nowadays like the Bell System. It's too late to learn from this lesson, yet it's still a lesson worth learning. The Bell System was truly an exceptional monopoly that brought America into times of prosperity. We were all better for it, and we are worse for its passing.

AT&T was allowed to keep Bell Labs and Western Electric. But business was bad for the post-divestiture AT&T. In the 1990s, it sold off Western Electric and Bell Labs, fulfilling what the government had wanted to do many decades earlier. But even that wasn't enough to save AT&T. In 2006, one of the Baby Bells, Southwestern Bell Corporation (SBC), bought AT&T - its former "parent". The old AT&T was dead.

SBC renamed itself AT&T, now that it had the rights to do so. But apart from its name and stock ticker, it bears little resemblance to the old AT&T, the one that headed the Bell System for 85 years. The "new" AT&T is just another greedy phony phone company that cares little about its customers and provides services of mediocre quality. Gone are the days of good customer service (heck, gone are the days of any customer service). Gone are the days of quality products from Western Electric (which continues only by trademark and makes vacuum tubes and high-quality stereo systems). Gone are the days of world-class research and development — most of America's greatest inventions in the 20th century were thanks to Bell Labs, which received generous funding from AT&T to conduct not just telephone R&D, but also general research that would benefit the public.

It is unlikely we will ever know a company as great as the old AT&T, a system as great as the Bell System. There is no way to undo what has been undone. The good days are gone. The new AT&T and the FCC are working hard to kill telephone service, as they would rather have us using Internet or wireless based communications exclusively. The telephone is, for better or worse, fading in importance, largely thanks to Divestiture. I don't believe its days are numbered, but its glory days are over.

Want to learn more about this devastating event? Watch this documentary about the Bell System Divestiture.

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