Regulation of and Monopolization in Telecom and Media Markets

A. The History of Openness In Telecommunications Regulation
The Age of Regulated Monopoly—1893-1974
Telecommunications has a long history of both regulation and
antitrust litigation. In 1893, after Alexander Graham Bells 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
Bells 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
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
1974-1984 (Christopher H. Ste rling et al. eds., 1986) [her einafter
2. Id.
3. Id.
4. Id.
5. Id. at I-4.
6. Id.
74 Telecom Antitrust Handbook
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&Ts 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&Ts 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
New technologies in the 1950s and 1960s began to challenge
AT&Ts 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. & POLY
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.

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT