Chapter 6. Monopolization

• Pages: 279-351

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CHAPTER VI

MONOPOLIZATION IN TELECOMMUNICATIONS

MARKETS

A. The History of Monopolization Theories in Telecommunications

Industries

1.

The Age of Regulated Monopoly – 1893-1974

In 1893, after Alexander Graham Bell’s patent on his “talking

machine” expired, a large number of independently owned telephone

companies entered the market for telephone service.1 Often, independent

and AT&T service areas were contained within the same city, requiring

consumers to install and pay for service from both companies if they

wanted to place calls throughout the city.2 The independent providers

were initially a strong presence in the market, and, by 1907, they were on

nearly an equal footing with AT&T.3 Yet, AT&T slowly grew its

position in the field, due in part to its consolidated corporate status.

Because the independent companies were small, separate companies,

they were unable to form an integrated nationwide network.4 Unlike

AT&T, they did not have uniform technical requirements, and thus

struggled with compatibility problems when they tried to unite their

regional systems.5

Regulation accompanied the growing proliferation of telephone

service and the increasing dominance of AT&T. In 1879, only

Connecticut and Missouri had passed laws regulating telephone

companies as public utilities.6 By 1920, almost every state had a public

utility commission that regulated telephone service.7

Federal regulation also began in the early 20th century. In 1910,

Congress passed the Mann-Elkins Act, which subjected telephone

1. See DECISION TO DIVEST: MAJOR DOCUMENTS IN U.S. V. AT&T, 1974-

1984 Vols. I, II, & III (Christopher H. Sterling, et al. eds., 1986)

[hereinafter DECISION TO DIVEST].

2. Id.

3. Id.

4. Id.

5. Id. at I-4.

6. Id.

7. Id.

280 Telecom Antitrust Handbook

companies to the regulation of the Interstate Commerce Commission

(ICC) and required rates to be just and reasonable.8 But the ICC only

had jurisdiction over long-distance telephone service, leaving a large

portion of the industry unregulated.9 Further, the Mann-Elkins Act did

not address the structure of the telephone industry, and, as a result,

consolidation and increasing monopolization continued.10

By 1913, AT&T had combined its twenty-four local-exchange

affiliates, a long-lines department, Western Electric, and Bell Labs into a

single corporation, leading to concerns about leveraging and self-

preferential activities.11 AT&T also had obtained patents on nearly all

aspects of telephone equipment, moving into high-volume and lucrative

areas first, and vertically integrating the manufacture and operation of

the telephone.12 In the Pacific Northwest, competitors maintained that

AT&T initially had refused to connect its lines with those of a number of

competing independent companies, lowered its rates to undercut the

independents and then provided poor service when forced to interconnect

its lines.13 AT&T also purchased the Northwestern Long Distance

Company, one of the independents that competed in Washington.14

AT&T’s competitors, frustrated with the lack of any intervention by the

ICC in these developments, asked the Justice Department to investigate.15

On July 24, 1913, the Justice Department filed a federal antitrust suit

against AT&T.16

After some initial witness testimony in the lawsuit and further

investigation by the ICC, Nathan Kingsbury, the president of AT&T, and

then-U.S. Attorney General (later U.S. Supreme Court Justice) James

McReynolds, held a series of meetings in the fall of 1913.17 The

agreement between McReynolds and Kingsbury, memorialized in a

series of letters between the two, came to be known as the Kingsbury

8. Pub. L. No. 61-218, 36 Stat. 539 (1910).

9. DECISION TO DIVEST, supra note 1, at I-5.

10. Id.

11. See Jim Chen, The Legal Process and Political Economy of

Telecommunications Reform, 97 COLUM. L. REV. 835, 838 (1997).

12. See GERALD BROCK, THE TELECOMMUNICATIONS INDUSTRY: DYNAMICS

OF MARKET STRUCTURE 100 (1981).

13. DECISION TO DIVEST, supra note 1, at I-5.

14. Id.

15. See PETER TEMIN & LOUIS GALMBOS, THE FALL OF THE BELL SYSTEM 9

(1987).

16. DECISION TO DIVEST, supra note 1, at I-5.

17. Id.

Monopolization in Telecommunications Markets 281

Commitment.18 Under the Kingsbury Commitment, AT&T agreed not to

acquire competing telephone companies and agreed to submit pending

acquisitions to the Justice Department and ICC for approval and to

interconnect with the independent local exchanges.19 AT&T also agreed

to sell its interest in Western Union.20

The terms of the Kingsbury Commitment proved difficult to

implement. For example, the wording of the document outlawed

practically all acquisitions by AT&T. Therefore, independent service

providers who wanted to leave the industry were unable to do so because

AT&T, often the only company in the position to purchase their

company, was precluded from buying them.21 Moreover, AT&T often

could not conform to the Kingsbury Commitment’s requirement to

interconnect with competitors because the competitors’ equipment was

not compatible with AT&T’s equipment.22 In 1914, only a year after the

Kingsbury Commitment, the Annual Report to Congress by the Attorney

General announced that the Commitment should not be interpreted to

prohibit consolidation of local competitors.23

In 1921, the Willis-Graham Act officially dissolved the Kingsbury

Commitment and opened up the telephone industry to consolidation.24

AT&T continued to consolidate and to grow. In 1934, Congress passed

the Communications Act (the 1934 Act), creating the Federal

Communications Commission (FCC or “Commission”), which had the

comprehensive power to regulate the interstate operations of telephone,

telegraph and radio.25 The Commission initially was created to ensure

universal provision of telephone services while regulating prices.26 The

Commission was not seen initially as a means of promoting competition,

as at the time telephony was considered a natural monopoly. Under that

18. Id.

19. Id.

20. TEMIN & GALMBOS, supra note 15, at 10.

21. DECISION TO DIVEST, supra note 1, at I-6.

22. Id.

23. Id.

24. Pub. L. No. 67-14, 42 Stat. 27 (1921).

25. DECISION TO DIVEST, supra note 1, at I-7.

26. Aimee M. Adler, Notes and Comment, Competition in Telephony:

Perception or Reality? Current Barriers to the Telecommunications Act

of 1996, 7 J.L. & POL’Y 571, 574 (1999).