1. CIT 307 Online Data Communications History of Telephony Module 9 Kevin Siminski, Instructor

2. The History of the Telephone Industry 1876 to the Present Why Study History? Is that Important? – It is important! It is always a good idea to know where you have been to know where you are going at this point in time. – It allows you to look at the steps and missteps in hopes of avoidance or progress. – It places the study of telecom into a context that makes it easier to operate in the environment

3. General Comments The Telephone – The most ubiquitous electric/electronic instrument in the world – Changed the way people interact The Patent – Broadly covered the entire subject of transmitting speech electrically – Filed March 10, 1876 ahead of Elisha Gray – A very important event that has shaped the culture of the industry to this day. – Tried to sell the patent to Western Union in late 1876. WU refused to buy it. – The question of whether Bell was the true inventor of the telephone is perhaps the single most litigated fact in U.S. history. Bell patents were defended in some 600 cases. Bell never lost a case.

4. History March 10, I876 - The Bell patent 1894 – Bell’s patents expire 1894 – 1924 – about 50% of cities over 5,000 people had two telephone systems not interconnected. 1905 – Bell had 1.2 million and the independents about 2 million subscribers – Independents had lower pricing, better service with automatic dialing

5. History 1878- the public switched telephone network was born – Started with the deployment of the switchboard in 1878. – 1878 saw the first White House phone 1879 - Bell consolidation in the National Bell Company, which became the American Bell company. Bell wins its patent infringement suit against Western Union in the United States Supreme Court. 1880 – reorganized in to the Bell System – regional operating companies for local service, long distance company for toll and a manufacturing arm for equipment.

6. History 1881- take over of Western Electric, which remained the manufacturing arm of Bell through 1984. 1885 – CEO Vail forms long distance company: AT&T

7. ATT v. The Independents Had no access to ATT long distance network Can’t match WECO’s pricing Bell money allowed pricing below market to gain market share. Bell buys controlling interest in many independents.

8. History 1899 – American Bell becomes AT&T. Moves to NY for better access to financial markets. AE, SC, Kellog formed to serve independent telco’s as WECO served Bell.

9. History 1903 - J.P Morgan gains control of Bell System, buys independents, forms Regional Bell Operating Companies – the structure for the next 70 years 1907 – investors persuaded Theodore Vail to come out of retirement

10. History Theodore Vail – CEO (general manager in those days) of Bell from 1878 to 1888. – Left in a huff – problems with investors who wanted nothing but profits. – Intent on establishing a natural monopoly – Committed to a nation-wide long distance company – Established Bell Laboratories – Independents were deterrents to anti-trust

11. History Theodore Vail.. Cont’d – ATT slogan: One Policy, One System, Universal Service – "Effective, aggressive competition, and regulation and control are inconsistent with each other, and cannot be had at the same time."

12. History 1913 – Kingsbury Commitment - a plan whereby – AT&T would sell off its $30 million in Western Union stock, – agree not to acquire any other independent companies, and – allow other competitors to interconnect with the Bell System.

13. History Kingsbury Interconnection – Kept the independents from developing a competing long distance network – No calls from Bell to the independent –only from independent to Bell – Costly – 10 cents per call Kingsbury no-buy clause – Swapped instead of bought – created geographic monopoloes

14. History On August 1, 1918, in the midst of World War I, the federal government nationalized the entire telecommunications industry for national security reasons. Returned to private control 8/1/1919 – Vail appointed as manager of ATT – Vail applied for rate increases – ATT received 4.5% of revenues for services – High service connection charges were put into place for the first time – long-distance rates had increased by 20 percent. – Vail's vision of a single, universal service provider was being adopted and implemented by the government through discriminatory rate structuring.

15. History Rate Averaging – The year of government nationalization was the nail in the coffin of competition – Rate regulation led to rate averaging – low cost in urban – high cost in rural – cost averaged. (Cross-subsidization) – Vail's vision of a single, universal service provider was being adopted and implemented by the government through discriminatory rate structuring.

16. History Rate Regulation – rate regulation in the pursuit of universal service objectives virtually demands a single monopolistic provider in order to be truly effective – the initiation of extensive federal rate regulation is important because it propelled state regulatory commissions to follow suit by greatly extending the scope of their authority – by averaging rates geographically to artificially suppress rural rates, policymakers and regulators created a serious disincentive to local telephone competition – AT&T's motto was adopted as the nation's de facto regulatory policy

17. History 1921 - Willis-Graham Act – Superseded the Kingsbury Commitment – Allowed consolidation of all remaining dual service systems – Gave Congressional approval to the elimination of competition – Established the concept of geographic monopoly as long as regulated by ICC and PUC.

18. History 1934 – Communications Act – – The commission (FCC) was created, "for the purpose of regulating interstate and foreign commerce in communication by wire and radio so as to make available, so far as possible, to all the people of the United States a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges."

19. History The FCC – the power to regulate rates to ensure they were "just and reasonable" – the power to restrict entry into the marketplace. potential competitors were, and still are required to obtain from the FCC a "certificate of public convenience and necessity." – The intent of the licensing process was again to prevent "wasteful duplication" and "unneeded competition." – it served as a front to guard the interests of the regulated monopoly and the FCC's social agenda.

20. History 1938 - AT&T controls 83% of U S telephones, 91% of telephone plant and 98% of long distance lines.

21. History 1938 – crossbar switching 1950 – dial tone; 1961 direct distance dialing 1956 – ATT & WECO agree not to enter computer and business machine fields in exchange for leaving the Bell System in tact 1955 – General Telephone formed

22. History 1963 – digital transmission schemes: the T1 1965 – first computerized central office switch (No. 1 ESS) 1968 – non-Bell equipment attached to ATT system 1969 – MCI

23. History January 1, 1984, the Western Electric Company, then older than the telephone itself, ceased to exist. – On that day of court ordered divestiture, the Bell System was broken into seven regional operating companies (the Baby Bells) and a more compact AT&T. AT&T retained the long-distance part of the business, its venerable research organization (Bell Laboratories), and its manufacturing operations (which could no longer have exclusive supply arrangements with the operating companies

24. RBOCs Pacific Telesis Southwestern Bell US West Ameritech Bell South Bell Atlantic Nynex

25. RBOC Summary The RBOCs – provide local exchange services – sell customer premises equipment – restrained from providing interexchange service, manufacturing telephone equipment, information services, and, except with court approval, engaging in other unregulated non-telecommunications businesses ("line- of-business restrictions," )

26. The divestiture Separation of local exchange service from industry segments vertically linked to the local exchange network This separation resulted in AT&T divesting of its power over the local exchange market, and creating in seven RBOCs forbidden from entering manufacturing, long-distance, and other related markets

27. Results The natural monopoly in local exchange services remained intact LATAs -term in the U.S. for a geographic area covered by one or more local telephone companies (LECs) – A connection between two local exchanges within the LATA is referred to as intraLATA. – A connection between a carrier in one LATA to a carrier in another LATA is referred to as interLATA. – InterLATA is long-distance service.. - LATA = Local Access and Transport Area

28. History 1990 – the Internet and digital communications 1996 – The Telecom Act of 1996 http://www.privateline.com/index.html