When the telephone was first invented, not everyone appreciated its importance. In fact, Western Union was at first offered the patent to this invention--but refused it. As Bell started to commercialize this invention, others began to see its potential. However, Theodore Vail, the President of American Telegraph & Telephone (AT&T), sought to avoid competition by establishing a new principle: that of a natural monopoly. He argued that it would be unwise to allow competition in the deployment of telephone networks, and permit a number of independent telephone systems to develop in the same city, each competing with each other: both for customers and for space to string their wires. The idea he proposed--that of a natural monopoly or public utility--was that there should be only one telephone company and that, since it would be a monopoly, it would be regulated by the government in order to protect the consumer.

Thus, although the actual service would be provided by a private company, the rates and practices in the industry would be regulated by the government. The company would apply to the government, who would then set rates for services and rules as to how the industry could function. This idea was accepted by the government.

On the federal level, the Interstate Commerce Commission and the Post Office Department (for the telegraph) first handled this, but in 1934 the Federal Communications Commission was established, and--among other things--was assigned the task of regulating telephone service at the national level. On the state level, public utility commissions (PUCs) were established to regulate state and local telephone service. The idea basically was to avoid duplication of effort, to encourage the orderly growth of the industry, and--through regulation--to protect the consumer.

As time went on, AT&T became not only the major industry player in the United States, but in fact, the largest company in the world. It was the only telephone company in most areas, and in those few areas where other telephone companies had come to exist, problems were often experienced with the interconnection of services, with equipment, and with other matters as well.

Through its monopoly control, AT&T came to dominate the three major areas of telephone service: local service, long distance service, and equipment. AT&T did not sell its telephones; it rented them. Both the long distance, or Long Lines, division of AT&T and the local telephone companies bought all their equipment from the AT&T subsidiary, Western Electric; they did not purchase equipment from any other manufacturers. AT&T did not allow its customers to attach devices to its network, such as extension phones, answering machines, or paging devices. Everything had to be rented from AT&T. As the electronics industry developed after World War II, people were still not allowed to attach these devices physically to the telephone network, but had to use a technology known as the induction coil to transfer signals to and from the telephone network electromagnetically.

In 1949, the government sued Western Electric and AT&T charging that they had monopolized the manufacture and sale of telephones and equipment (Civil Action No. 17-49). What the government sought was the divestiture by AT&T of Western Electric, the termination of the exclusive relationship Western Electric enjoyed with AT&T, and the total separation of telephone manufacturing from the provision of telephone service, among other things. However, there was little court activity on this matter between 1949 and 1956 when a consent decree was approved by the court. This decree did not include the divestiture of Western Electric. Instead, an injunction was issued which barred AT&T from engaging in any business other than the provision of common carrier communication services, and required Western Electric and AT&T to license their patents to anyone who wanted them upon the payment of appropriate royalties. Thus, there were substantial differences between what the government had sought in its 1949 complaint and what was actually provided by the consent decree (CA 82-0192, Transcript 1-24-56). The 1956 settlement would, at least, allow others to manufacture telephone equipment which they could actually sell to businesses and residential customers who could attach this equipment to AT&T's telephone network.

In 1959, the antitrust's subcommittee of the House Judiciary Committee held hearings on the 1956 consent decree (Report of the Antitrust Subcommittee of the House Committee on the Judiciary on the Consent Decree Program of the Department of Justice, 86 Cong. First Sess., Jan. 30, 1956). The Subcommittee's investigations revealed that AT&T was very active behind the scenes in trying to get the government to suspend its 1949 suit. When Eisenhower was elected president (the first Republican to become president in twenty years), AT&T renewed its efforts. As a result of AT&T's continuing lobbying of the Defense Department, the Secretary of Defense wrote a letter to the Attorney General asking him to end the 1949 litigation without requiring AT&T's divestiture of Western Electric. The Subcommittee, in its 1959 report, concluded that the Attorney General

manifested a willingness to have the Justice Department consider a token settlement and forego a decree consistent with the public interest--an attitude denoting partiality toward the defendants incompatible with the duties of this public office. (Subcommittee Report, 55)

The Subcommittee also uncovered the fact that AT&T had actually prepared the letter that the Secretary of Defense sent to the Attorney General.

As far back as 1935, the FCC had begun an investigation of the telephone industry. The results were released in 1939. The massive study of more than eight thousand pages which it published found that long distance rates were too high. As a result, the FCC had worked with many state utility commissions to get the local Bell companies to lower their rates.

As technology developed during the last few decades, a number of large businesses found it cheaper to obtain their own long distance links for telephone service, and eventually became interested in providing use of some of these links to the general public--in competition with AT&T. As a result of this, the facts about the 1956 consent decree which were revealed by the House Antitrust Subcommittee, and pressures from businesses and consumer groups, the government filed a new antitrust suit in 1974 against AT&T, Western Electric, and the Bell Labs. In this action, the government sought AT&T's divestiture of the Bell operating companies (the local telephone service providers), as well as the divestiture and disillusion of Western Electric. The government indicated that it brought the 1974 suit because the 1956 consent decree had not prevented AT&T from restraining competition in telephone equipment manufacture, nor protected against antitrust violations in long distance telephone service. AT&T pursued various legal actions to derail this suit, but pretrial action began in 1978, and a new settlement was proposed in 1982. That year the court, under Judge Harold Green, held a hearing on the settlement and released what was officially called "A Modification of Final Judgment." In this 1982 consent decree, AT&T was required to divest itself of its 22 operating companies, the local service providers. AT&T would only be allowed to provide long distance service and would have to face competition from other long distance carriers, such as MCI and Sprint. Local telephone service was now to be provided by seven regional Bell operating companies (RBOCs). As far as long distance service was concerned, the customer at first had to dial a local number and connect with the competition's computer in order to use rival long distance services. Eventually, however, you were able to connect to these services simply by dialing 1, the area code, and then the number one was trying to reach--just as one did with AT&T.

As long distance service was disassociated from local service and competition emerged in the long distance field (AT&T still has a very large market share), long distance rates tended to decrease. However, local rates tended to increase. In addition, while it was cheaper to call between certain cities such as New York, Washington, and Los Angeles, service to rural locations and some less populated towns were more expensive.

It is expensive to maintain local telephone service with all the wiring and plant that must be maintained. Long distance service, on the other hand, is much less expensive to provide. Most of it is now carried by microwave and other technologies which are less expensive to operate. When AT&T had control of most telephone services, it was able to subsidize local operations by transferring to them some of the money earned from long distance services. Long distance services to less populated areas were also subsidized by service on more highly utilized routes. Some revenue from business service was also used to subsidize the rates of residential customers. Now that long distance service is offered by a separate company than local service, and on a more competitive basis, such subsidization has been discontinued. This is one of the reasons for the increase in the cost of local telephone service, even as long distance rates decrease--at least between major population areas. In addition, while businesses have been able to reduce their per unit costs, residential customers have not usually been able to do so. In fact, most residential customers throughout the United States have seen the cost of telephone service increase--rather than decrease--as had been the assumption with regard to the introduction of competition. And so, a number of public policy issues emerge with regard to subsidization, supposed competition, and telephone rates. Should some telephone service subsidize other service? Communication is so vital to our daily lives, to our ability to compete in business, and to our access to the political process. What attempts, therefore, should be made to ensure that telephone and other communication services are provided everywhere, and at reasonable rates? Or, on the other hand, should communication service be offered strictly on the basis of cost and the ability to pay--even if some areas, people, or businesses may be excluded?

One of the principles maintained thus far in the provision of telephone service has been that of universal service. That is, the idea that telephone service should be available to everyone for purchase. Of course, just because service is available has not meant that everyone can afford it, so that even today not all homes have telephone service, and in poor or remote areas--such as Indian reservations--the figure can go as low as 25 percent.

The concept of universal service has thus far only been applied to basic telephone service (often referred to as plain old telephone service, or POTS). There is no mandate to provide broadband communication services--such as interactive multimedia or video--on a universal basis. Thus, one of the early broadband multimedia services, ISDN (Integrated Service Digital Network), is still only available in certain areas.

A school or university which is located near a major commercial center may have access to such services, while another school or university not so located may not. What implication does this have for the equality of educational opportunity? As more information and video services emerge, will these only be available in certain locations? And will the rates charged for them be so high as to preclude access by smaller businesses and poorer residential customers and educational institutions? This is particularly important in the Information Age, when economic opportunities depend directly on computer and telecommunication skills.

Today, some competition has now been introduced in in-state long distance service. Moreover, since the seven regional Bell operating companies (RBOCs) have been doing extremely well financially, other companies are interested in getting into these local markets. In fact, many long distance, cable, and other companies are anxious to do this. The Telecommunications Act of 1996 is supposed to allow this. However, the reality of the situation is that the RBOCs are so entrenched and powerful that little progress has been made so far. In all of this, an important public policy issue arises: Should communication services for educational institutions, libraries, and medical purposes be provided at a discounted rate by the communication companies? The 1996 Act provides some provisions for this.