Genius on Hold Page #2

that they were not going to

out-compete the independents

in most of these places.

As a young man,

Theodore Vail goes to work

for a telegraph company.

That decision

will change the course

of American history.

Vail meets a man

named Gardiner Hubbard,

Alexander Graham Bell's

father-in-law.

Hubbard hire Vail

to run his new company,

called

American Bell Telephone.

By 1907,

J.P. Morgan,

with London and

New York backers,

are in a state of panic.

Bell Telephone is suffering

from a poor public image,

low staff morale,

poor service,

and serious debt

and technological problems.

Vail had left the company

by this time,

but he is brought back.

Vail was very surprised

at how Bell

was basically losing

this struggle,

or, at least,

not assured of winning it.

So, Vail was brought back

in 1907,

um, by some of

the Morgan interests

who injected capital

into the AT&T,

and he, again, said

we need to rethink this whole

business of competition

in telephony.

We need to move towards

what he called

"One system, one policy,

universal service."

And by that, Vail meant

uh, fundamentally,

a monopoly,

a regulated

telephone monopoly

in which the independents,

uh, they'd be allowed to exist

on the margins,

but they would be

no competition

at the local exchange level,

and all of these

phone companies

would be interconnected,

and Bell would fundamentally

control the interconnections

among all of these systems.

They would

be the ones

who really were

the gatekeepers

for the national flow

of telephone traffic.

And in order

to achieve this monopoly,

Vail said, basically,

"Let's make a deal

to the government."

Theodore Vail convinces

President Woodrow Wilson,

and Congress,

that no collection

of independent companies

could ever give the public

the kind of service

Bell could provide.

AT&T's extensive campaign

for One Policy, One System,

Universal Service

was a thinly veiled front

for complete control

of the telephone system

under one roof.

It is a goal

which is only achievable

with government intervention.

Vail knows the public

will never go

for a Bell monopoly,

so he invites

government regulation.

He knows this will

annihilate competitors.

He will not only

get his monopoly,

he will get

monopoly profits.

Congress passes

the Kingsbury Commitment

in 1913,

which will weed out

most competitors to Bell.

AT&T Long Lines

was responsible

for interconnecting

all these companies.

Therefore, AT&T controlled

all the little monopolies

that were sanctioned by

the Kingsbury Commitment.

While the act

had been intended

to stimulate competition,

instead, it has

the opposite effect.

Theodore Vail writes

in the AT&T annual report

that government regulation,

provided it is independent,

intelligent, considerate,

thorough, and just,

was an acceptable substitute

for a competitive marketplace.

Vail convinces Congress

that the telephone

is a natural monopoly.

The whole theory

of natural monopoly

didn't really apply properly

to the telephone industry.

Nevertheless, uh...

It was rationalized,

after the fact,

as a natural monopoly,

and for about forty years,

you know, utility economists

would sort of say,

oh, of course it's a monopoly,

it's a natural monopoly

under natural monopoly theory,

but if you looked

at the the theory,

and you looked

at the actual economics

of the telephone,

it wasn't.

There was no correlation

between the economics

of the telephone exchange

and the natural monopoly

theory.

Congress passes an act

which seals the fate

of all independent

telephone companies

in America.

After World War I,

people at the federal level

in particular,

as part of the sort of

the progressive viewpoint

of the time,

were convinced

that we needed this

regulated monopoly system,

and then they passed

the Willis-Graham Act in 1921,

which basically legitimized

telephone monopoly.

It said you're exempt

from the anti-trust laws.

Uh, it doesn't matter

if you're a monopoly,

we're not

going to prosecute you.

We, in fact, want you

to be a monopoly.

Once the phone system

is nationalized,

AT&T wastes no time in

applying for rate increases.

Within five and a half months,

long distance rates increase

by twenty percent.

AT&T makes over

fifty million dollars

in just seven months.

AT&T, American Telephone

and Telegraph,

was the parent company

of four different companies.

One was the Bell

operating companies

that would put in the lines

to everybody's homes

and businesses.

There was AT&T Long Lines,

who interconnected

those various exchange areas,

and then there was

Western Electric,

who manufactured the equipment

for AT&T,

and then Bell Labs,

who was the research

and development arm

for AT&T.

Bell telephone had a...

a-a-a tariff that said

you could not hook up

the Bell lines,

you can't find it

in the books anymore,

Bell lines without

their explicit permission.

And they were emphatic

about that.

If anyone uses

a telephone line in America,

it belongs to Bell.

Three decades later,

Walter Shaw,

while working at Bell Labs,

will challenge Bell's

universal process.

He has a secret.

When he returns home

each night,

he draws.

Not landscapes

or portraits,

he draws schematic diagrams

of inventions

he plans to build.

Later, he will go

to his office

with his home projects

under his arm

to impress his bosses.

And they are impressed.

Bell Labs was created

in 1925

to service

research and development

technology

for AT&T.

Bell will not only provide

communication services

to America,

but it will become

one of the leading innovators

in science, technology,

and military engineering

around the world.

Bell Labs provides

key personnel

in all areas

of communications science,

radar,

and weapons technology.

And they provide

the scientists and engineers

responsible, in part,

for the development

of the atomic bomb.

It would not be

an overstatement

to say that Bell Labs

became the darling

of the U.S.

Defense Department.

While at home working

on one of his drawings,

Walter Shaw invents

the first ever

voice-activated

speaker phone.

He doesn't show Bell

right away.

Instead, he actually builds

the prototype himself.

Meanwhile, Bell promotes Shaw

to the position

of senior engineer.

What Walter Shaw

will soon learn

is that the

U.S. Attorney General

under President Truman

has filed a lawsuit

against his employer

for anti-trust violations.

What was happening

at that time

was a realization

that so much technology

was really bundled up

in the Bell system,

and we were afraid

that all kinds

of new technologies

that could be competitive,

and could be out there

in the marketplace,

and could be innovative,

that might actually

undermine the control

of AT&T,

we started to become concerned

that, uh, those

were gonna get bottled up

in-in the Bell system.

Oh, he used to

always say...

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