Chapter V. Monopolization In Telecom And Media Markets

• Pages: 245-298

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CHAPTER V

MONOPOLIZATION IN TELECOM AND MEDIA

MARKETS

A. The History of Telecommunications Regulation

1. The Age of Regulated Monopoly—1893-1974

Telecommunications has a long history of both regulation and

antitrust litigation. 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 services.1 Often,

independent and AT&T-operated 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 routed throughout the city.2

Initially, the independent providers had a strong presence in the market,

and, by 1907, they were on nearly equal footing with AT&T.3 Because

the independent companies were small, separate companies, they were

unable to create 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 integrate their regional

systems.5

Regulation accompanied the growing proliferation of telephone

service and the increasing dominance of AT&T. By 1920, almost every

state had a public utility commission to regulate telephone service.6

Federal regulation also began with the passage of the Mann-Elkins Act in

1910, which subjected telephone companies to the regulation of the

Interstate Commerce Commission (ICC) and required just and reasonable

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.

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rates.7 But the ICC only had jurisdiction over long-distance telephone

service, leaving a large portion of the industry unregulated.8 Further, the

Mann-Elkins Act did not address the structure of the telephone industry,

and, as a result, consolidation continued.9

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 AT&T’s ability to leverage

market power and engage in self-preferential activities.10 AT&T also

obtained patents on nearly all aspects of telephone equipment, and was

the first to enter high-volume and lucrative product markets, then

vertically integrating the manufacture and operation of the telephone.11

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

asked the Department of Justice (DOJ) to investigate.12 On July 24, 1913,

the DOJ filed a federal antitrust suit against AT&T.13

In the fall of 1913, after initial witness testimony and further

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

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

McReynolds, held a series of meetings.14 The resulting agreement

between McReynolds and Kingsbury, memorialized in a series of letters

between the two, came to be known as the Kingsbury Commitment.15

Under the Kingsbury Commitment, AT&T agreed not to acquire

competing telephone companies, to submit pending acquisitions to the

DOJ and ICC for approval, and to interconnect with the independent

local exchanges.16 AT&T also agreed to sell its interest in Western

Union.17 In practice, however, the terms of the Kingsbury Commitment

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

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

9. Id.

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

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

11. See GERALD BROCK, THE TELECOMMUNICATIONS INDUSTRY: DYNAMICS

OF MARKET STRUCTURE 100 (1981).

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

(1987).

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

14. Id.

15. Id.

16. Id.

17. TEMIN & GALMBOS, supra note 12, at 10.

Monopolization 247

proved difficult to implement,18 and it was officially dissolved in 1921

by the Willis-Graham Act.19

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.20 The

Commission was initially created to ensure universal provision of

telephone services at regulated prices.21 At the time, telephony was

considered a natural monopoly, and the economic understanding was that

injecting artificial competition into the industry would create

inefficiencies. The Commission, therefore, was not seen as a means of

promoting competition.22

Nonetheless, the Commission began to investigate AT&T, and in

1938 it produced a report alleging that AT&T engaged in monopolistic

practices.23 With the United States’ entry into World War II, however, no

action was taken on these findings, and AT&T continued to expand its

services to meet the increased demand brought on by war.24

In 1949, the DOJ revisited the FCC investigation and, building on

those findings, conducted its own review.25 The DOJ investigation

culminated in a lawsuit against AT&T in United States District Court for

the District of New Jersey for Sherman Act violations.26 The case settled

in a consent decree in 1956 that kept AT&T’s structure intact but limited

the lines of businesses the company could enter.27

New technologies in the 1950s and 1960s began to challenge

AT&T’s control of communications. Data transmission introduced a new

function for telephone lines, but AT&T, limited by the terms of the 1956

consent decree, could not take advantage of this opportunity.

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

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

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

21. Aimee M. Adler, Competition in Telephony: Perception or Reality?

Current Barriers to the Telecommunications Act of 1996, 7 J.L. & POL’Y

571, 574 (1999).

22. Robert Friedrich, Regulatory and Antitrust Implications of Emerging

Competition in the Local Access Telecommunications: How Congress

and the FCC Can Encourage Competition and Technological Progress in

Communications, 80 CORNELL L. REV. 646, 659 (1995).

23. DECISION TO DIVEST, supra note 1, at I-8.

24. Id.

25. Id.

26. Id.

27. Id.