Are Those Who Ignore History Doomed to Repeat It?

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I. Telephone

Wu traces the telephone industry through what he sees as three distinct turns of the Cycle. Although Wu’s arguments invite readers to regard all three as examples of the same phenomenon, closer inspection reveals that each episode reflects a different definition of openness, a different vision of the mechanism by which an industry becomes open or closed, and a more complex picture of how the federal government influences the way technology evolves.

A. The Rise and Fall of Independent Telephony

The first turn of the Cycle began with the rise of Bell’s relatively small, regional competitors—to whom Wu refers as “Independents”—following the expiration of the initial Bell patents in 1894.6 Often overlooked, this important era was largely the result of a mistake in business strategy by the Bell System. Patterning itself after the telegraph system, the telephone system focused on establishing long-distance connections between large financial centers and ignored rural areas, smaller metropolitan areas, and even suburban areas around cities.7 Under this vision, the telephone was exclusively an instrument of commerce. Early Bell System executives never envisioned the extent to which people would want telephones in their own homes for purely social reasons.8

Bell’s strategy created a skeletal network that left wide stretches of virgin territory within which the Independents could operate freely. This led to what Wu regards as the first great era of openness in the telephone industry. The low entry costs allowed local telephone companies competing directly with the Bell System to flourish (p 46). In 1907 and 1908, the Independents had captured more than 50 percent of the national market.9

Wu regards the Independents as being infused with a different ethos than Bell in that they saw the telephone as cheaper, more common, less commercial, and more open (pp 46–47). Although associating the Independents with such values fits nicely into his narrative, doing so elides an important distinction within the Independent movement. One part of the movement was composed of rural cooperatives established by farmers in largely rural areas that reflected the values that Wu suggests.10 The more established wing of the Independent movement, however, consisted of firms backed by successful merchants, bankers, and business leaders who were much more conservative, less driven by a political and social agenda, and primarily interested in profit.11 This latter group of Independents sought not a world of open interconnection, but rather one in which they emerged as the new monopolists.12 They stridently opposed government regulations mandating interconnection.13 Indeed, in most things, their values were not so different from Bell’s. In addition, these two groups’ attitudes toward the Bell System diverged widely. The more commercially oriented Independents’ desire to destroy and replace Bell brooked no compromise.14 The rural cooperatives, in contrast, were simply interested in bringing service to their areas as quickly and cheaply as possible. As a result, they were much more willing to compromise with Bell and were even willing to enter into direct competition with other Independents.15

Wu does a service in calling attention to the rural cooperatives, which have long been deemphasized by histories of the Independent telephone industry. It would be a mistake, however, to replace an exclusive focus on one subgroup of Independents with an exclusive focus on the other. Although some would engage in a search for which of these constituencies represented the true Independents, the data suggest that the Independent movement enjoyed its greatest success where both wings offered their political support.16 Although this more complex perspective does not fit as smoothly with Wu’s narrative, it does provide a more nuanced appreciation for the dynamics of innovation and industrial change.

The bigger question is what caused this burgeoning Independent movement to fade and allowed the industry to collapse back into monopoly. In accordance with a long historical tradition,17 Wu suggests that the Independents were undone by their inability to create their own long-haul long-distance network (p 53). Historians have begun to question this explanation, however. In sharp contrast to telegraphy, the vast majority of telephone traffic was local.18 The long-distance traffic that existed tended to travel no more than fifty to one-hundred miles.19 In such a world, long-haul long-distance was “of little commercial or social importance.”20 Moreover, with respect to short-haul long distance, Bell and the Independents employed the same technology, so neither side had a cost or quality advantage.21 What mattered was not the total number of telephone subscribers nationwide or the ability to contact distant money centers, but rather the density of connections within a particular city or at most within a region.22 For example, residents of Muncie, Indiana, who subscribed to Bell could call Chicago, New York, or Boston. Or they could instead subscribe to the Independent, which would allow them to reach neighboring cities located some ten and twenty miles away.23 The Independents’ regional dominance in the Midwest meant that in those areas they and not Bell enjoyed the strategic benefits of being the incumbent.

Wu offers an alternative explanation, attributing industry reconsolidation to the corporate depredations of AT&T President Theodore Vail, backed by the financial power of J.P. Morgan. These moguls abandoned the Bell System’s initial policy of trying to drive the Independents out of business and instead simply merged into a monopoly by offering to buy the Independents out (pp 49–50, 52).24 According to this account, the antitrust authorities offered only token opposition, allowing the modest concessions embodied in the 1913 Kingsbury Commitment to justify permitting the Bell System to keep its recently acquired companies (pp 55–56). Wu regards the Kingsbury Commitment as sanctioning monopoly, with the ultimate coup de grâce coming with the enactment of the Willis-Graham Act25 in 1921 (p 59). Other commentators have similarly criticized the antitrust authorities for interpreting the Kingsbury Commitment to permit the Bell System to continue to acquire Independent telephone companies so long as it sold an equivalent number of lines to an Independent.26 The only silver lining to the Kingsbury Commitment, according to Wu, was Vail’s acceptance of common-carriage regulation (p 57), and even that claim appears to be suspect.27

If true, this would represent a pattern somewhat consistent with the Cycle. A close review of the historical record reveals that, contrary to what some scholars suggest, the Bell System had not yet come close to reestablishing a monopoly at the time of the Kingsbury Commitment; indeed, Independents still controlled 45 percent of the national market.28 The issue, then, is not the status of the Bell System at the time of the Kingsbury Commitment, but rather what happened afterwards. Again, the historical record is more complex than generally known. Although many scholars evaluating the Kingsbury Commitment’s efficacy have focused on whether the number of Independent lines acquired from Bell exceeded the number of Bell lines acquired by the Independents,29 a more telling measure might be the Commitment’s impact on the absolute number of lines that Bell purchased from the Independents. As shown in Figure 1, the number of total Bell acquisitions plummeted after 1913, suggesting that the Kingsbury Commitment was not as toothless in curbing further Bell takeovers of Independent telephone systems as some would suggest. It was not until 1917 that the pattern of acquisitions would resume, which when the de facto requirement that the Bell System sell as many lines as it acquired discussed above actually emerged.

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