Universal Service: Competition, Interconnection and Monopoly in the Making of the American Telephone System

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Universal Service: Competition, Interconnection and Monopoly in the Making of the American Telephone System Syracuse University SURFACE Books Document Types 2013 Universal Service: Competition, Interconnection and Monopoly in the Making of the American Telephone System Milton Mueller Syracuse University Follow this and additional works at: https://surface.syr.edu/books Part of the Business Commons, Communications Law Commons, and the Industrial Organization Commons Recommended Citation Mueller, Milton, "Universal Service: Competition, Interconnection and Monopoly in the Making of the American Telephone System" (2013). Books. 18. https://surface.syr.edu/books/18 This Book is brought to you for free and open access by the Document Types at SURFACE. It has been accepted for inclusion in Books by an authorized administrator of SURFACE. For more information, please contact [email protected]. UNIVERSAL SERVICE Competition, Interconnection and Monopoly in the Making of the American Telephone System Milton L. Mueller First published 1997, MIT/AEI Press. Digital version published 2013 © Milton Mueller 1 TABLE OF CONTENTS INTRODUCTION .............................................................................................................. 4 UNIVERSAL SERVICE: A CONCEPT IN SEARCH OF A HISTORY .......................... 7 A THEORY OF ACCESS COMPETITION .................................................................... 14 Natural Monopoly Theory and the Telephone ............................................................. 14 Communications Access Networks as Radically Heterogeneous ................................. 20 Access Competition ...................................................................................................... 22 Access Competition and Appropriability...................................................................... 26 Demand-Side Economies of Scope ............................................................................... 27 Interconnection of Competing Networks ...................................................................... 30 PROLOGUE: TELEPHONE DEVELOPMENT BEFORE COMPETITION ................. 32 A Legacy of Suppression ............................................................................................. 33 Rate Wars ...................................................................................................................... 34 One System, One Policy… .......................................................................................... 36 ACCESS COMPETITION BEGINS: LEGAL AND ECONOMIC RATIONALES FOR NON-CONNECTION................................................................................................................... 41 Bell policy on interconnection ...................................................................................... 42 Interconnection and common carrier law ..................................................................... 43 Independent opposition to interconnection ................................................................. 47 Access competition as property rights doctrine .......................................................... 48 Phase 1: Filling the gaps, 1894-1898 ............................................................................ 51 Phase 2: System overlap, 1898-1907 ............................................................................ 57 Dual service at the inter-exchange level ....................................................................... 89 UNIVERSAL SERVICE: VAIL’S ANSWER TO DUAL SERVICE ............................. 93 Dual service: The public debate .................................................................................... 93 Vail’s doctrine of universal service .............................................................................. 98 THE POWER OF INTERCONNECTION, 1908-1913.................................................. 106 The Development of regional independent operating companies............................... 107 Bell’s war on independent connectivity ...................................................................... 109 Interconnection in law and public policy .................................................................... 114 Case Studies in the Application of Interconnection Laws .......................................... 123 SAVING DUAL SERVICE? THE KINGSBURY COMMITMENT ............................ 127 The Kingsbury Commitment and Toll Interconnection .............................................. 128 The Ban on Acquisitions ............................................................................................. 130 THE SUBTLE POLITICS & ECONOMICS OF UNIFICATION, 1914-1921 ............. 132 Consolidation in Buffalo, New York .......................................................................... 133 Consolidation in Southern California ......................................................................... 135 Consolidation in the State of Kentucky ...................................................................... 139 Analysis of Consolidations ......................................................................................... 141 Completing the Transition .......................................................................................... 143 THE LEGACY OF ACCESS COMPETITION ............................................................. 145 The Geographic Scope of the Telephone Network by 1920 ....................................... 145 Telephone Penetration by 1920 .................................................................................. 146 UNIVERSAL SERVICE REINCARNATED ................................................................ 154 2 The Second-generation Universal Service Concept ................................................... 154 Universal service and the problem of separating the rate base ................................... 156 The Communications Act of 1934 .............................................................................. 159 Cross-subsidies and local telephone service ............................................................... 161 The retroactive redefinition of universal service ........................................................ 166 UNIVERSAL SERVICE IN THE 1990S ....................................................................... 169 Life imitates art ........................................................................................................... 170 Critique of the Prevailing View .................................................................................. 172 The appropriability problem in network economics ................................................... 173 Why Vail’s universal service is still relevant ............................................................. 176 Interconnection of competing networks...................................................................... 180 CONCLUSION ............................................................................................................... 185 3 1 INTRODUCTION THIS BOOK IS AN ATTEMPT to change the way we think about competition, universal service, and interconnection in telecommunications. It does so by revisiting a critical period in the development of American telecommunications: the period of unbridled competition between the Bell system and independent telephone companies in the early 1900s. Universal service as a term and a concept originated during that period. Since then, it has been one of the key touchstones of U.S. telecommunications policy. Although the meaning of the term has changed, its essential connotation is not hard to grasp: universal service means a telephone network that covers all of the country, is technologically integrated, and connects as many citizens as possible. The importance of rapid, widespread telecommunications to government, business, and society can scarcely be overstated. Telecommunications makes it possible to administer a national economy and maintain social bonds across great distances. Because communications infrastructure coordinates and unifies a country in countless ways, the universal service concept spans the realms of economic and social policy. In recent decades policymakers have come to believe that universal telephone service was an historical achievement of regulated monopoly. Superficially, the fit between telephone monopolies and universal service objectives seemed a natural one. Monopoly organization simplified the process of standardization and so provided the basis for uniform nationwide connectivity. The absence of competition also made it easier for regulators to make telephone companies' rates conform to social policy goals. The use of long-distance revenues to subsidize local service, a practice common to telephone monopolies worldwide, found ready justification in the idea of making access to basic telephone service affordable to larger numbers of people. 4 The alleged historical link between the universality of the telephone and a monopolistic industry structure has set the stage for a momentous policy debate in contemporary telecommunications. The natural monopoly paradigm is eroding everywhere. Competition is spreading throughout the sector on a global basis. If, as the traditionalists claim, universal service was the raison d’etre of regulated monopoly, what will become of it as competition proceeds to revolutionize the industry? Are competition and universal service compatible? The importance and pervasiveness of that question has led to worldwide adoption of a peculiarly American phrase. A slogan coined by AT&T President
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