The Love of Monopoly

by Tim Wu | May 19, 2011

Network Nation: Inventing American Telecommunications
By Richard R. John
(Belknap Press, 520 pp., $39.95)

Once upon a time, some thought it obvious that competition was a bad thing, particularly in communications. As Theodore Vail, the president of AT&T, put it in 1913, “The public as a whole has never benefited” from competition. Monopoly, he said, was the better choice. The reason, he argued, is that “all costs of aggressive, uncontrolled competition are eventually borne, directly or indirectly, by the public.”

Nowadays corporate executives carefully avoid expressing such sentiments. Instead, firms such as AT&T speak of the importance of “vigorous competition” even when it is being eliminated. Anything that might sound like the advocacy of monopoly has fallen into the same category as the advocacy of eugenics. But take a look around. What do you actually see, in so many important markets? The answer, quite obviously, is rule by either a single dominant firm or a small group. This is particularly true in the information and communications industries. Search engines? Google. Social networking? Facebook. Operating systems? Microsoft (mostly). Cell phones? Verizon, AT&T, and Sprint (T-Mobile bracketed). Could it be that Americans actually like communications monopolists? Do we want dominant firms to run our world?

Richard R. John’s splendid book helps to answer that question by telling us just where this American affection for info-monopoly came from. John has produced a detailed study of the granddaddies of it all: AT&T and Western Union, the first great info-monopolists, whose role in communications history is similar to that of the Allosaurus and the T. Rex in the history of the animal kingdom. A work of careful history based on archival research, Network Nation begins with Samuel Morse’s construction of the first electric telegraph line in 1844 and concludes with the establishment of AT&T (or Bell, a term that can be used interchangeably with AT&T) as America’s regulated telephone monopoly. This was the form that dominated long distance communications, mainly unmolested, for nearly seventy years. And in many ways, sometimes unconsciously, the old system of AT&T monopoly still influences the relations between America and its information monopolists.

What makes John’s book particularly relevant is the fact that after the first two juggernauts—Western Union and AT&T—the info-monopoly habit proved tough to quit. It left a legacy that continued through the twentieth century, when, nearly alone among nations, the United States had private monopolies running most of its main communications systems. Beyond AT&T, there were NBC and CBS, the radio networks; and when television was invented, the federal government handed it to those networks and to existing radio-station owners. Cable firms, similarly, were given local private monopolies in exchange for build-outs. Central to this model was a privatepublic bargain. The monopolists, nominally private, were nonetheless subject to federal oversight, and spoke frequently of a sort of public sense of duty, a noblesse oblige of the American corporation.

The big question raised by the history that John tells is: why? Why did the United States allow its national communications markets to be run by expansive monopolists? I ask because the very idea of a state-supported communications monopoly is sharply at odds with the founding principles of the American republic. In fact, you might say that a major point of the American Revolution was to get rid of governmentsupported monopolies with control over commerce and speech. So why did we recreate them?

It is a good question. The English king, of course, was the ultimate symbol of centralized power, but the more direct embodiments of the problem were the various royal monopolies. The (original) Tea Party protest in 1773 was related to taxation, but its deeper cause was a grant of a monopoly over the tea trade to the British East India Company. Given that the American Revolution was in part directed against royal monopolies, it might seem unlikely that America would want commercial monopolies so similar to the British royal monopolies that the revolution was meant to eliminate.

It is also hard to picture a fondness for monopoly in a country where Adam Smith has long been worshiped as a minor deity. Today, anti-monopolists are sometimes portrayed as left-wing economic radicals, but Smith himself made anti-monopolism his creed. He was not exactly an antitrust crusader in the mold of Louis Brandeis, but he emphatically denounced the royal monopolies of his time for their tendency to extract high prices from the public, and argued furthermore that monopoly was the “great enemy to good management.”

A third strand of the American Revolution, developed fully in the twentieth century, was a dedication to free speech. And yet the threat to free speech posed by an information monopolist such as Western Union—whose telegraphs were for a time nearly the exclusive means of transmitting information instantaneously—should be obvious. John is not the only writer to provide evidence of Western Union’s meddling in political affairs with the power of its telegraph system, including systematic invasions of political privacy that make the Watergate operation look like a joke. The American revolutionaries, who were also educated Englishmen, surely knew that some of the most effective censors in British history were not governmental.

 

So if a communications monopoly does not sound very American, how did it become our lot? And not just as an aberration, but in a form lasting for a plurality of American history? If you are hoping for a neat theory, in the manner of Guns, Germs, and Steel: The Fates of Human Societies, or for the story of the great man who did it all, in the manner of Theodore Rex, you have come to the wrong book. John does not provide a simple answer, because in his view the matter is not simple. Spending time with original sources can make you realize that history is always (if you are honest) composed of a bewildering number of factors not easily reduced to narrative. John has a near-allergy to conspiracy theories, grand sagas, and tales of great men.

It is not surprising, then, to find that he is the type of historian who is more fond of debunking myths than of creating them. He writes, for example, that “in no sense was the telegraph a ‘Victorian Internet,’” a pointed reference to the popular book by Tom Standage that for many contemporary thinkers provides all they think they need to know on the subject. John also undermines some of what I had thought was the established wisdom surrounding the rise of the Bell empire. Unlike most writers in this field, John does not appear to be a strident defender or opponent of the Bell company, a condition that is extraordinarily rare.

What Network Nation does deliver is a nuanced answer to the basic question, why monopoly? That answer is, roughly: because America tried the alternatives, and at the time a state-supported, socially conscious monopoly was best. Or so it appeared at the time. Ideology be damned, Bell’s phones worked better. So quasi-royal monopoly it was.

Monopoly, the best answer? Really? To get a feel for how this might have been a plausible conclusion, it is important to take a look at the years between 1894 and 1921—the period when the Bell monopoly took its final form, as a stateguaranteed monopoly. (John’s book also spends considerable time on the telegraph.) This is the first time that the United States gave vigorous telephone competition a try (the second was from roughly 1984 to 2006), and it forms a pivotal moment in the history of American communications. Alexander Bell’s patent had expired, and thousands of small firms, calling themselves “the Independents,” collectively took a run at the Bell telephone monopoly. Suddenly non-Bell operating companies numbered in the thousands, ranging from big city operating companies to tiny farmers’ cooperatives, with everything in between.

In 1900, with thousands of start-ups bearing down on Bell, the stage was set for a familiar American story of corporate upheaval. But this time the big old dinosaur won: Gulliver crushed the Lilliputians. By the mid-1910s, Bell, after wavering for a while, was firmly in charge again, and by 1921 Congress had effectively ratified the Bell monopoly by actually banning most competition in telephony. So what exactly happened?

Competition’s failure in the 1910s has interested many telephone historians. Did it die or was it murdered? Those sympathetic to Bell suggest that the competitors of the 1900s died a natural death. Telephony was a natural monopoly—that is, a business more efficiently operated by a single company than by many companies. One universal network is just more efficient than two or three (or four, as in the case of today’s cell phones). Monopoly was inevitable. That is why it happened.

Tied to this theory, and popular among Bell’s loyalists, was the sense that Bell won because it was possessed of greater virtue than its opponents, and was therefore destined to succeed. The Independents, according to this account, were not serious about telephones, but speculators interested in a quick buck. Bell, on the other hand, was wholly dedicated to the “Great Cause” of a universal telephone service. Lacking any real dedication to telephony, the exit of the Independents was, again, inevitable.

The counter-narrative to this story is not a story of competition fading, but of an industrial massacre perpetuated by a firm bent on making telephones its empire, aided by a government hoodwinked by Bell’s charm and promises. In this account, J.P. Morgan Sr. plays a mainly silent but essential role. It was he who gained control of AT&T in 1907 with the goal of making it a monopoly, along the lines of the railroad. Appointing the charismatic Theodore Vail to head Bell, Morgan used his power over capital to deprive AT&T’s opponents of the funds they needed to compete. Meanwhile, in the field, Vail ordered prices to be set low enough (we call it predatory pricing) to make competing with Bell a suicide mission, and then bought out the failing firms for cheap. Monopoly, then, was an act of men, not God.

 

John’s account is slightly different from both these versions. Generally he describes the failure of competition not so much as a failure of a theory, but rather as the more concrete failure of the men running the competitors, many of whom turned out to be incompetent or unlucky. His story is more like a blow-by-blow account of why Germany lost World War II than a grand theory of why democracy is better than fascism. John argues that the Independents, second to market, needed to capture a major city to seriously challenge Bell. The turning point was the struggle for Chicago, the only city that Bell’s competitors ever seriously contested. Unfortunately, Illinois Telephone and Telegraph, Bell’s challenger, was run by bunglers who eventually offered Bell an agreement not to compete. The loss of Chicago sealed the Independents’ fate. The Wall Street Journal, writing in 1907, concluded that it was now “almost impossible” for a competitor to take on the Bell Empire.

I respect John’s method, but it does not always give you a clear sense of why things happened as they did. Still, a powerful point emerges from his account: a truly competitive market is only sometimes a natural or sustainable state of affairs. His book suggests that the idea that the nation will always end up with a competitive market without public intervention is a libertarian fantasy. In that sense, whatever its attractions, the choice between monopoly and competition may be a false choice. As John’s book shows, in many markets, it is non-intervention that yields monopoly.

As early as 1907, the future president Warren G. Harding declared that “the telephone is and ought to remain a natural monopoly regulated by some competent authority.” So much for competition. But that did not settle matters: the next big question is why the United States did not proceed to nationalize AT&T or Western Union—or, in the jargon, to “postalize” its communications service. That may sound un-American, but it is important to remember that at the time the primary nationwide communications system was still the post office. It is easy to see how many saw the telegraph and the telephone as merely “next-generation” versions of the post. That is how most European nations saw things—even Britain, which at the time was in certain ways more laissez-faire than the United States.

What few people other than specialists know, however, is that the United States did nationalize its telegraph and telephone industries for a while. In 1918, by executive order, Woodrow Wilson put both the telegraph and the telephone under the control of the Post Office Department. The purported reason was military necessity, but at the time, as John relates, it was widely seen as a permanent nationalization, and as such widely supported by the public. Postmaster General Albert S. Burleson believed strongly in the superiority of government administration, and here was his chance to prove it.

It is interesting to wonder what might have happened if AT&T had remained part of the post office. It might have put the United States on a far more British path in matters of media policy. AT&T was then a major power in radio, and the first “radio network” might have looked a lot more like the BBC or NPR than NBC. We might never have had radio or television advertisements, if that is possible to believe. Over the long term, a state-run AT&T would have also changed the history of the computer and the Internet.

But we will never know, because the experiment was short. Nationalization soon proved unpopular among various groups. The postmaster general, in one of his few important acts, unwisely raised both long distance and local rates. Meanwhile, Bell employees went on strike during the period of post office rule—a fact that is significant because it demolished the idea that public administration was inherently more reliable than corporate administration. Republicans, labor, and consumers were all unhappy, and in 1919 Wilson gave AT&T back to its shareholders. Americans’ experiment with a mild form of socialism lasted less than a year.

Competition and nationalization were both tried, and each was considered a failure. That left, almost as a default condition, regulated monopoly, and a Bell company eager to prove that in fact its rule was the most efficient of all possibilities. In truth, Bell was efficient and well run, and over time the federal government began to agree so thoroughly with AT&T that it passed legislation barring anyone but Bell from selling telephone service—effectively a grant of a crown monopoly to Bell. For decades, only outsiders complained. And that is how federally supported communications monopolies became an American tradition.

Richard John would probably caution us not to take too much of what happened a hundred years ago as directly relevant for today. Still, one message that comes crashing through the pages of his book is the impression that, in matters of economics, Americans ultimately care a lot less about ideology than about convenience. If a monopoly delivers the goods, so be it. Indeed, when you look at the array of information monopolists or dominant firms today, you cannot deny that for the most part these are firms that deliver. Google’s search, Facebook’s seamless connection of everything in your life, Amazon’s bookstore: these firms offer incontrovertibly great services. That fact, more than any theory, may best explain the American affection for monopolists. They do sometimes work better. Whether there is such a thing as a natural monopoly we can leave to economists, but there is certainly such a thing as a popular monopoly.

If we accept this truth—that monopolists can be extremely popular with the American public—it forces an important reorientation in how we think about the economy and its regulation. Today we like to pretend that we live in a state of Adam Smith-like competition even when all the evidence is to the contrary. The consequence of this delusion is a refusal to demand that the monopolists in our midst accept even the most basic of duties to the public as a virtue of their position. We should, instead, accept that the American economy yields monopolies. The important question is what we ask of them and how long they last.

Tim Wu is the author, most recently, of The Master Switch: The Rise and Fall of Information Empires (Knopf). This article originally ran in the June 9, 2011, issue of the magazine.

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