A Brief History of AT&T – Part 2

by Colin Berkshire

AT&T today exists through the strangest of history.

What is known today as AT&T is really the corporate entity of Bell South, one of the operating companies that spun off from AT&T. And, that company is the merger of several of the spun off companies. Plus, it is the acquisition of Mc Caw cellular. The corporate entity that was AT&T and Bell Labs literally doesn’t exist any longer. It’s a twisted story.

Once upon a time AT&T was a holding company that few of the public knew much about. It owned a number of regional phone companies like Bell South. And, it owned a manufacturing company called Western Electric. And, it owned the finest R&D laboratory on earth: Bell Laboratories.

The AT&T business worked like this: The local Bell System operating companies were heavily regulated by state regulators. Those regulators allowed only a fixed return on investment and they demanded the best quality of service for customers. Because top-quality service required a large investment, the Bell companies were very good at acquiring capital, ensuring their investors a very safe and steady return on investment. This met the needs of the regulators and the public and the investors. Bell System bonds were considered to be as safe as US Treasury bonds. Really.

The secret part was that the Bell operating companies ONLY purchased equipment from Western Electric. It was the best quality equipment that could possibly be managed. And, it had to be the best quality of equipment because it cost three times as much as competitors charged for their slightly inferior quality products. The fact that the cost was three times (or five times) as much as the competitors was justified because it was a little bit better. Who can put a price on ensuring that a dialtone is available even during a snowstorm when the power had been out in a city for days. (Central Offices had enough battery backup to last for 1~2 days, and then would have one, two, or even three backup generators which often ran on different fuel sources.) So the secret was the Bell companies bought overpriced, top quality equipment from a captive supplier.

Why? Because that captive supplier was then enormously profitable. It was unregulated, and it accounted to nobody except AT&T. The Bell operating companies were prohibited from even knowing the finances of Western Electric.

Some of that money went to fund Bell Laboratories. The transistor was invented. The Big Bang was discovered. And NORAD (North American Defense Command) was created. ((WTF?))

Yes, the design of America’s nuclear weapons was done at Sandia Laboratories, which was managed and funded by Western Electric. NORAD, the hugely complex incoming missile radar system was designed and manufactured by Western Electric. A major part of the Bell System was as a military contractor. ((How did thaaat happen?))

Funding nuclear weapons research is very expensive and very controversial…especially in the volatile 1960s. So the entire problem was bypassed by having the design and development of nuclear weapons done “as a service to America” by Western Electric, the phone company. When America signed a treaty that it would not manufacture or maintain biochemical weapons it could honor its obligations under that treaty while knowing that Western Electric–a private company–chose to manufacture and maintain the largest stockpile of biochemical weapons in Boulder Colorado. That was not a government project, the US was not in violation of any treaty. Yet, it was an immediately available “resource.”

Congress need not be very involved, and they would have little ability to provide oversight. Better yet: they could claim ignorance to their temperamental voters. It was a mutually beneficial relationship.

The reason that phone service was so expensive in the 1960s through 1980s was because a lot of the money went to funding defense projects…via AT&T.  It was not because AT&T was an inefficient monopoly.

In return, the President of the United States wrote directives to government agencies that AT&T provided substantial service to the American Citizens and it should not be scrutinized very closely. That is, nobody was to look into the structure of the Bell System and especially into Western Electric.

The important point is that AT&T’s early DNA included being very cozy with the US government, and having lots and lots of strings to pull. These skills would prove essential later in its life.

See: A Brief History Part 1