This 100-year-old deal birthed the modern phone system. And it’s all about to end.

December 19, 2013

"A Continent Is Bridged," an illustration by Franklin Booth, drawn for AT&T in 1940 to mark the 25th anniversary of transcontinental telephone service. (Bell Telephone Quarterly)

One hundred years ago Thursday, one man sent a letter that would transform the telephone industry. The letter gave rise to the country's last and most powerful monopoly. And like the Internet of this century, it gave millions of ordinary people the chance to stay in touch more easily than they ever had before.

The letter's author was Nathan C. Kingsbury — a vice president of AT&T many have since forgotten. But his 1913 correspondence rapidly made its way from Kingsbury’s desk to the attorney general's, and soon after, to President Woodrow Wilson's.

Wilson's administration was threatening a legal assault on AT&T. The telephone company had been aggressively buying up its competitors around the country — maybe too many. Perhaps AT&T should be broken up, Wilson mused. Perhaps the government should take control.

Then came Kingsbury's letter. In under 900 words, Kingsbury smoothed everything over. It produced a miraculous result in Wilson and his deputy in the Justice Department.

"I gain the impression more and more from week to week that the businessmen of the country are sincerely desirous of conforming with the law," Wilson gushed, “and it is very gratifying to have the occasion, as in this instance, to deal with them in complete frankness and to be able to show them that all that we desire is an opportunity to cooperate with them.”

The White House’s antitrust concerns were resolved practically overnight. But the letter's impact can still be felt today. By dropping its antitrust case, the Wilson administration effectively gave its blessing to AT&T's dominance of the telephone industry. In exchange for this government-sponsored monopoly, AT&T agreed to operate as a public utility, eventually providing high-quality phone service to the vast majority of Americans regardless of income or geography. Kingsbury's commitments to President Wilson would later be formalized and expanded by Congress into the legal obligations that still bind the modern successors of the old AT&T: Verizon, CenturyLink, and the new AT&T.

But technological changes are rapidly undermining the century-old bargain of the Kingsbury Commitment. Telephone incumbents want to abandon conventional analog phone service in favor of a new generation of Internet-based voice applications. In this new age of telephony, Americans will need to decide whether phone companies owe them the same obligations they demanded in the 20th century.

A businessman’s big chance

Theodore Vail was living a happy kind of self-imposed exile. A decade before Kingsbury’s fateful letter, the 58-year-old former head of AT&T had a wife, lived in Buenos Aires and owned a horse-drawn streetcar company — along with a power plant in nearby Cordoba and a 1,500-acre farm in Vermont.

As an early AT&T executive, Vail had helped to build the company into a telephone behemoth. After rising to the position of AT&T president, he left the telephone business in 1889 for what an early biographer called “the incentives of a life of leisure.”

But while he was living the good life in South America, Vail was still thinking about the potential of the phone company he had left behind. He dreamed of a gigantic communications network, in the hands of one monopolist, that would be as vital to American society as the printing press was for Europe.


An actor portraying Alexander Graham Bell speaking into a early model of the telephone for a 1926 promotional film by AT&T. (Early Office Museum)

Vail’s perspective on monopolies might seem dated, but they made a certain amount of sense at a time when oil, steel and other industries were dominated by single companies, too. In his mind, Vail saw the telephone as a potential platform upon which national or even global interactions could take place. But he believed it could only work if everyone agreed to use a single system — and if the business running it took the public’s interest to heart.

Vail might never have executed on this vision if his wife and son hadn’t suddenly died, leaving him alone to his work. Heartbroken, he responded to calls from financier J.P. Morgan to once again take the reins at AT&T. He returned in 1907 and set about building an empire.

The case for monopoly

In those days, phone customers had two options: AT&T and mostly smaller, independent businesses. Like today, AT&T easily had one of the largest and most robust telephony networks. Unlike now, however, AT&T customers could only call other AT&T customers. This resulted in ridiculous scenarios where the same house might be served by multiple telephones, and where competing companies would deliberately rip up each others’ lines in an effort at sabotage.

And it wasn’t as though AT&T was competing with just a handful of other carriers. There were thousands of them. They’d cropped up when Alexander Graham Bell’s patents on the telephone expired in the mid-1890s. With AT&T’s service still limited in terms of geography and number of subscribers, these independent companies took it upon themselves to start providing equipment and services to people on their own. Like two expanding civilizations, the independents and Bell were bound to meet — and clash — eventually.

Vail hated competition. He believed that a unified, high-quality network could only be achieved if the entire nation's telephone infrastructure was under the control of a single firm. Preferably his own.

“If there were no Bell System, only disassociated individual companies or groups of companies,” Vail told an audience of railroad commissioners in 1915, “no line over a few hundred miles long would have been built, or if built it could not be operated as satisfactorily … Efficient commercial telephone operation can only be maintained when every operator on the line and the system connected with it is under one control.”


An 1891 map of AT&T's network. (AT&T)

There is some evidence for Vail’s argument. By the 1910s, AT&T had snapped up the Western Union telegraph company. It also owned and operated the long-distance phone lines that connected major cities to one another. As the technology scholar Tim Wu points out in his study of the information industry, "The Master Switch," running the important parts of these two industries exclusively meant being able to combine those operations to create a “powerhouse of distance communications.” Later, AT&T would go on to found Bell Labs, one of the most productive research and engineering institutions the country has ever seen. A hodgepodge of small companies might not have been able to accomplish so much so quickly.

Vail summarized his vision with a slogan he introduced in 1908: "One Policy, One System, Universal Service." That vision didn't leave much room for the independents.

The Kingsbury Commitment

As Vail went about co-opting one small competitor after another in market after market, he attracted unwelcome attention from the federal government. Americans, and American regulators, were beginning to be more skeptical of monopolies.

Antitrust law that had been passed decades earlier was beginning to be enforced. U.S. officials ended a key railway monopoly in 1904. Standard Oil was famously broken up into more than 30 different companies in 1911. The same year, the American Tobacco Company was also deemed an unacceptable monopoly.

But AT&T would become an important exception, in part because it waged one of the nation's first successful public-relations campaigns.

"AT&T constantly gave speeches about how their highest duty was to the public, how the public mattered more than profit, how building the nation's infrastructure was their first duty," Wu said in an interview. "They spoke in the way we might expect the military to speak today."

AT&T was also viewed a little differently from its peers because of its role as a technology leader, not a commodity monopoly. Beginning in the 1910s, people started to associate science and technology with size and speed and centralization, a feeling that only grew with time. A whole artistic movement, futurism, sprung up to articulate the world's fascination with machines and the shrinkage of time and distance they wrought. AT&T fit squarely into this popular conceptual category.

AT&T's charm offensive laid the groundwork for the letter Vail directed Kingsbury to write in 1913. In exchange for being allowed to continue as a private monopoly, which Vail argued was necessary to build a great telephone network, AT&T made several promises to federal regulators. First, AT&T would get out of the telegraph business by divesting from Western Union. Next, it would agree to stop acquiring independent phone companies without the blessing of the government. Finally, for the first time, it would make interconnection between AT&T and rival networks possible — but only for long-distance calls, and Vail’s company would charge a fee for carrying the signal.


The Deal test site in New Jersey that AT&T used to test ship-to-shore radios, c. 1922. (U.S. Army)

The last measure wound up making the independents even more dependent on Ma Bell. But for the time being, Attorney General James C. McReynolds was ebullient.

“Your frank negotiations in respect of these matters compel the belief that what you propose will be carried out in good faith,” McReynolds wrote in response to Kingsbury’s letter. With that, the antitrust investigation was settled. It’s hard to imagine anything in Washington moving so quickly today.

The Kingsbury Commitment spared AT&T the fate of its fellow monopolists — or perhaps more accurately, postponed it by a few crucial decades. More importantly, it set the phone company on the government’s good side, and paved the way for AT&T to become a state-sanctioned monopoly — in both the best and worst senses of the word.

The rise and fall of Ma Bell

Even more important than the explicit commitments in Kingsbury's letter was Vail's implicit promise to run AT&T as a distinctively public-spirited company. During Vail's tenure, AT&T took great strides toward making the slogan of "universal service" a reality for every American. Service was reliable and uniform, and rates were predictable.

While Vail lived, AT&T served as a kind of benevolent autocrat. And even after his death in 1920, the ideals he had articulated continued to influence the company's culture. When Congress passed the Telecommunications Act of 1934, which regulated AT&T as a common carrier, it wasn't so much imposing new obligations on the nation's great telephone monopolist as enshrining into law the vision of public service Vail had trumpeted two decades before.

The wisdom of letting AT&T continue as a private-sector entity became clear as foreign phone companies that had been nationalized struggled to keep up. In a 2001 study of 33 countries, the Technology Policy Institute’s Scott Wallsten discovered that states with publicly owned phone companies led “to worse telephone penetration and higher prices, even controlling for per capita income and year and country fixed effects.”

France was among the worst off, in part because the government feared cannibalizing telegraph revenues with newfangled phone service. In 1914, France was able to say that it had 0.8 telephones for every 100 people. Meanwhile, countries like Denmark, Sweden and Norway that combined private ownership with loose regulation boasted more than three phones per 100 people. The United States, in part because it was a first-mover, boasted 9.5 phones for every 100 Americans in 1914.


Women working at a Bell System international telephone switchboard sometime during WWII. (U.S. National Archives)

There were other advantages to letting one company control 80 percent of the U.S. telecom market. For example, it made implementing 911 fantastically painless. After Lyndon Johnson’s White House published a 1967 report recommending that a single telephone number be used nationwide to connect to police services, AT&T went ahead and announced in January 1968 that dialing 911 would do just that.

In fact, the relationship between AT&T and the government was so close that for virtually the entire Cold War, it was the phone company that managed the country's nuclear weapons laboratories. That partnership with the Defense Department, according to Wu, was what helped avert a Justice Department antitrust investigation in the 1950s. If this was the period in which Americans believed most in the power of "big," AT&T was among the foremost beneficiaries of it.

Yet not even Bell could stave off competitors forever. The drawback to running a monopoly is that you get complacent.

“As soon as [Vail] died and you had people who were just looking at profits and nothing else — it all flattened out,” said Daniel Berninger, a former Bell Labs employee who helped develop VoIP technology and is now an independent network consultant.

The small indignities of grappling with a large, unresponsive corporation were taking their toll on the public. They culminated in a memorable TV character played by the comedian Lily Tomlin, who repeatedly skewered “the phone company” as Ernestine the insensitive operator.

“The next time you complain about your phone service, why don't you try using two Dixie cups with a string? We don’t care,” Ernestine said in an amazing 1976 sketch on "Saturday Night Live." “We don’t have to.”

The end of Ma Bell

Meanwhile, technological change was threatening to upend AT&T's dominance of telecommunications. A young firm called MCI — short for Microwave Communications, Inc. — wanted to use the relatively new technology of microwave radio communications to offer long-distance calling in competition with AT&T's own long-distance service.

The FCC officially approved MCI's entry into the long distance market in 1969. That was a particular threat to the incumbent because AT&T, with the blessing of regulators, had gotten in the habit of using high-margin long distance service to help subsidize the costs of providing cheap local service to every American. Too much competition in long distance could unravel the complex system of cross-subsidies that AT&T had constructed over decades.

Then in 1974, the other shoe dropped. The Justice Department filed an antitrust lawsuit against AT&T. After a legal battle lasting close to a decade, AT&T was forced to spin off its local phone service into seven independent "Baby Bells."

The divestiture was probably going to happen sooner or later. AT&T was granted its regulated monopoly status at a particular time in U.S. commercial and technological history, a time when the resources and logistical prowess of an integrated monopoly could allow for rapid progress. But according to Jon Gertner, author of "The Idea Factory: Bell Labs and the Great Age of American Innovation," by the 1970s the monopoly setup had likely exhausted its — ahem — utility.

“Some people I interviewed talked of a kind of drift at Bell Labs,” Gertner said in an inteview. “The great problems had been solved — that we had kind of created a universal connectivity and now we really have to focus on the economics of phone service.

“The economics they helped create turned out to be their own undoing."

Just as the well of interesting technical challenges was running dry in the telephone industry, the growing internationalization of business led Americans to rethink their corporate values. Shareholder welfare displaced the concern for public service. Inefficiency was unacceptable; and in the 1960s and 1970s, AT&T was definitely inefficient.

"It had almost as many employees as the federal government," said Wu. He describes it as "an enormous empire, surviving off federally set prices. It was too bloated, old and immobile."

The Kingsbury Commitment is dying

The old Bell monopoly may be gone. But the values that underpinned the system still remain. Today, the idea that every American deserves access to basic phone service is enshrined in regulation; phone companies are required to spend billions of dollars annually maintaining their copper infrastructure even as the number of households using that network shrinks a little more every year.

But the old rules may not survive the current decade. New technologies are already supplanting the networks the Kingsbury Commitment was designed to address. Soon, voice calling may be just another Internet application, which could free it from most of the regulations that bind conventional telephone service. Without those legal obligations, incumbent telephone companies could abuse their still-dominant position to undermine values we've taken for granted for a century.

Traditional phone lines send electrical signals over copper wires. With distance, these signals degrade, and expensive equipment is needed to boost the transmission. In a process called the Internet Protocol transition, the whole country’s telephone system is being gradually migrated onto more efficient Internet-based networks.

For phone companies, that translates into huge potential savings. As old copper networks get phased out, carriers will at some point be allowed to abandon their aging infrastructure, along with the costs of their upkeep.

But that transition could also have a dark side, which was foreshadowed by events in the aftermath of Superstorm Sandy in 2012. On Fire Island, N.Y., the strip of land running parallel to Long Island whose several hundred residents were hit hard by the storm, the copper wires making up the telephone network were destroyed. Citing the costs of repairing the old copper network, Verizon decided to install a technology called Voice Link, which effectively turns landline phones into cellphones. But consumer advocates cried foul amid complaints of shoddy service — arguing that if the Fire Island project moved forward, it would give the phone company a precedent to abandon subscribers in places that were hard to serve.


The Bell Labs complex in Holmdel, N.J., in 2012. (Lee Beaumont)

Verizon ultimately backed down in the face of public pressure, including from Sen. Chuck Schumer (D-N.Y.). But the episode highlighted to public interest groups the potential pitfalls of the IP transition.

"If there's a lesson we need to learn from Fire Island, it's that this is not so simple," Public Knowledge's Harold Feld said a month after Verizon reversed course. "Whatever the market has said [about the benefits of the IP transition], the actual customers on Fire Island hated it."

Verizon is now installing fiber optic cables in the area that will not only restore wired phone service, but also add high-speed Internet. Tom Maguire, Verizon's head of national operations support, told Bloomberg that Fire Island was a "very unique" case involving a rural community and a high demand for telecom access.

Both Voice Link and the new fiber operate on the same idea — turning phone calls into data — but they provide two very different examples of a future that isn't addressed by current regulation. Complicating matters further, the Federal Communications Commission, which oversees the behavior of phone companies on the copper network, has much less authority to regulate broadband, the platform on which phone calls will soon be traveling over. By making voice an Internet application, carriers stand a better chance of escaping oversight.

The Fire Island episode underscores another important change over the last century. In Vail's day, telephone incumbents were obsessively focused on the vision of operating telephone companies as public-spirited monopolies. Today, telecom executives are much more steeped in the ethos of the competitive market, where firms maximize their own profits without worrying too much about the public interest.

Incumbent telecom companies are no longer so committed to the spirit of public service that made Vail such a notable monopolist. And they're increasingly finding ways to free themselves from the legal restrictions that kept AT&T in line after Vail passed. The former was a kind of intrinsic motivation, while the latter a kind of extrinsic motivation.

It’s unclear which kind the future needs more of. Left to their own devices, will phone companies make sure as many Americans have access to basic phone service as they do now? Will the 911 experience improve, or worsen? Will the poor continue to receive phone service at a discount, or will they have to start paying more than they can afford for it? Will phone companies be allowed to cram bogus fees on consumers' phone bills? Will they commit to investing in new communications technologies that benefit the public interest?

“This is the dilemma for [the FCC],” Berninger said. “What happens to all those rules? My argument is, there's a bunch of things that require extrinsic motivation over here—” he gestured to a notepad indicating the 20th century “—that do not require it here. Do we know exactly which ones are which? Not really. We can guess.”

The Network Compact


(Rick Wilking/Reuters)

"The most important question is whether the phone companies still have a special duty to the public," said Wu. "The spirit of the Kingsbury Commitment was, you get special advantages, you get to monopolize this industry — but you're supposed to behave yourself."

The new chairman of the FCC, Tom Wheeler, is in a perfect position to establish a Kingsbury Commitment for a new century. He’s hinted as much, describing a concept he calls “the network compact.”

“There has been for a century a set of values that represent the relationship between those that operate networks and those that use networks,” Wheeler told a House subcommittee last week. “Those values must be preserved, regardless of the technology used for the network.”

As a man whose aim is to promote competition rather than end it, Wheeler is no Theodore Vail. But Wheeler is the man with the best shot at saving Vail's vision of universal access to telecommunications.

Brian Fung covers technology for The Washington Post.
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Brian Fung · December 19, 2013