Regulation of and Monopolization in Telecom and Media Markets

• Pages: 73-156

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CHAPTER II

REGULATION OF AND MONOPOLIZATION IN

TELECOM AND MEDIA MARKETS

A. The History of Openness In 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 Initially,

the independent providers had a strong presence in the market, and, by

1907, they were on nearly equal footing with AT&T, the successor to

Bell’s original telephone company.2 In fact, independent and AT&T-

operated service areas often 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. 3 In addition,

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 1-3 DECISION TO DIVEST: MAJOR DOCUMENTS IN U.S. V. AT&T,

1974-1984 (Christopher H. Ste rling et al. eds., 1986) [her einafter

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,

which was increasingly consolidating.9

By 1913, AT&T had combined its operations, including 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 these high-volume and

lucrative product markets with a complete vertically integrated telephone

product. 11 AT&T’s competitors, frustrated with the lack of structural

intervention by the ICC, asked the U.S. Department of Justice (DOJ) to

investigate.12 On July 24, 1913, the DOJ filed a federal antitrust suit

against AT&T to break up its telephone service monopoly.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 U.S. 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 (i) not to acquire

competing telephone companies, (ii) to submit pending acquisitions to

the DOJ and ICC for approval, and (iii) 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 proved difficult to implement, 18 and it was officially

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 (198 7).

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

14. Id.

15. Id.

16. Id.

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

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

Regulation & Monopolization 75

dissolved in 1921 by the Willis-Graham Act19 which allowed AT&T to

resume competitor acquisitions with oversight from the ICC.

In 1934, Congress passed the Communications Act (the 1934 Act),

creating the Federal Communications Commission (FCC or

Commission), which had 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 envisioned as a means of promoting

competition among its regulated industries.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 Afterward,

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 the United States District Court for the

District of New Jersey in 1949, alleging violations of the Sherman Act.26

The case settled through a consent decree in 1956 that kept AT&T’s

structure intact but limited the lines of business the company could

enter.27

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

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

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

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.