A short history of the telephone industry and regulation

Alexander Graham Bell patented the telephone in 1876, and formed Bell Telephone which licensed local telephone exchanges in major US cities. AT&T was formed in 1885 to connect the local Bell companies. Their logo read "The Bell System: AT&T and Associated Companies."

The network grew rapidly with the slogan "one system, one policy, universal service." In 1913 AT&T agreed to become a regulated monopoly. Their monopoly would be allowed, but they had to connect competing local companies and let the Federal Communication Commission (FCC) approve their prices and policies. We rented our phones from AT&T, and no other equipment could be attached to the network for fear of "breaking" it.

Competition began creeping in 1956, when the courts overruled an FCC ban on Tom Carter's Hush-a-Phone, a device which snapped on to a telephone and made it possible for the user to speak in a whisper. That was perhaps the first step in the dissolution of telephone monopoly.

The Hush-a-Phone decision paved the way for 110 and 300 bit per second acoustically-coupled computer terminals, like the one shown here.

Mr. Carter returned to court with his Carterfone, a device for patching radio calls into the telephone network. The 1968 Carterfone decision allowed the direct connection of devices to the AT&T network, creating an opportunity for many competitors. Where do you think we would be today, if all telephones, modems, FAX machines and answering machines were sold by one company?

The FCC also decided to permit a startup company called MCI to set up microwave links along the highway between Chicago and Saint Louis.

On January 1, 1984, a court forced AT&T to give up its 22 local Bell companies, establishing seven Regional Bell Operating Companies (RBOC). A few local companies that were not wholly-owned subsidiaries of AT&T remained independent, but the RBOCs were very powerful and covered the US.

Since that time, mergers have reduced the number of RBOCs to four: Verizon (originally Bell Atlantic and Nynex), Qwest (Qwest Communications International took over US West), BellSouth and SBC (originally Southwestern Bell and Pacific Telesys). The AT&T logo has evolved to reflect changing market conditions.

AT&T also spun off their equipment manufacturing and research operations. They became a long distance carrier with a new logo.

AT&T had competition in long distance from companies like MCI and Sprint, but the RBOCs could only offer local service.

The Telecommunications Act of 1996 required RBOCs to allow competitors access to their local lines at regulated wholesale rates. In return, RBOCs could offer long distance service if they demonstrated there was local competition in their market.

In February 2004, the FCC ruled that electric power companies could use their wiring for Internet service, including voice over IP (VOIP). They also ruled that Pulver.Com and other companies providing computer-to-computer VOIP service should not be subject to the same regulations as telephone companies. (This ruling did not apply to companies that operate gateways between the Internet and the telephone network).

Like the Carterfone case, this may turn out to be a watershed event in the erosion of local telephone monopolies. Others fear that it may strengthen the telephone companies. It is too soon to tell.

Regulated telephone companies must provide:
  • Enhanced 911 emergency service
  • Assistance to law enforcement agencies (providing wiretap access)
  • Fees to subsidize universal service
On January 30, 2005, AT&T agreed to be sold to an RBOC, Southwestern Bell (which had bought Pacific Bell earlier). This acquisition was finalized in October, 2005. Then SBC assumed the name "AT&T" and introduce a new logo. The new AT&T then absorbed Bellsouth. Confused? Watch this video.

It is interesting to note the political change since 1997, when Reed Hundt, then the FCC chairman, said Southwestern Bell acquiring AT&T would be "unthinkable" since it would thwart competition. Since that time, SBC purchased AT&T, Verizon purchased MCI, Sprint purchased Nextel, and the new AT&T purchased Bellsouth.

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Other nations have also introduced private ownership and competition in the telephone industry.

Until 1984 AT&T was a regulated monopoly in the US, but it was privately owned. In other nations, the telephone company was usually a government owned and operated monopoly. By 2001, most of those incumbent telephone operators had been privatized.

Only two percent of world telecommunication revenue is generated by companies that are fully owned by the government. In spite of privatization and the introduction of competition, the initial incumbent telephone companies remain very powerful, accounting for 85% of telephone company revenue.

This is the case in the US also. The RBOCs remain dominant, although they are under threat from wireless operators, cable companies, VOIP providers, etc. Like incumbents in every nation, they use their influence and the courts to maintain their power.

At the time of the AT&T breakup, nearly all telephone companies were monopolies. There has been a steady trend toward increased competition. Although only 37% of nations had competition for long distance calling in 2001, the Internet was competitive in 86% of nations.
Mobile phones have grown rapidly since their introduction, and there is competition in the majority of nations.

The four global figures shown above are from the 2002 World Telecommunication Development Report, an excellent annual report published by the International Telecommunication Union.