Bell System Breakup
Back in the 1970s I worked for the Bell System. That was a turbulent time in the company’s history because it was the introduction of competition. Here’s the real story you never heard – in two parts.
The Bell System resisted competition, of course. The basic problem was that senior Bell management knew that competition was the death of the current, comfortable system. You see, nobody could manufacture and install telephone equipment that was better or less costly than Bell. Let me say again” Bell could manufacture and install equipment at a lower cost than anybody. Bell management had the numbers and studies and we knew it was true.
But the problem was that Bell expended substantial amounts of resources on the military. Systems like designing and overseeing the manufacture of all of the nuclear weapons in America rested solely with the Bell System through its Sandia Laboratories. Bell designed most of the radar systems used throughout the military. The NASA moon launch utilities communications systems designed by Bell. All tactical command and guidance systems were designed by Bell. Most of the radar and computer systems developed at White Sands Missile Range was designed and provided by Bell. NORAD, SAGE, and Nike-Hercules and the Nike-Ajax command guidance system had Western Electric as the lead contractors. The nation’s air traffic control systems including the Model 300 switching system that was essentially the air traffic control console at all airports was provided by Bell.
The world’s largest stockpile of binary biotoxins was kept just outside Boulder Colorado by the Western Electric company. While the United States government was prohibited by treaty from developing, producing, and stockpiling such chemical warfare agents, private corporations such as the Bell System were not covered by those treaties. If Western Electric deemed it necessary to produce such things to protect company assets then that was their own business.
Must of these “services” provided by Bell at no charge to the federal government. For example, the management and operation of Sandia National Laboratories (which designs and oversees the production and maintenance of all nuclear weapons) was provided as a “no fee” contract by the Bell System “as a service to our country.”
This arrangement was necessary because it effectively bypassed the need for Congress to authorize and fund such controversial programs. The military budget was under constant pressure because of the Vietnam war and offloading these projects to the Bell System simplified everything.
So, while Western Electric did manufacture telephone equipment better and cheaper than any competitor, that model 500 telephone that cost $8 to manufacture would be sold to the Bell operating companies for $120 or more. The “cushion” in that markup was funding America’s defense. Every time you installed an extension phone or made a long distance call you were funding some military project and taking pressure off Congress from having to authorize and fund these programs.
The problem here is obvious: Bell, burdened with supporting America’s national defense was now forced to compete against private competitors that did not have this overhead. A competitor that could make the same model 500 phone for $45 and could sell it for $90 could undercut Bell by a substantial amount. This was a structural problem Bell could never overcome.
For decades, Bell was allowed to serve America’s defense in this fashion, loading the cost of these programs into the selling price of equipment provided by Western Electric. The state regulatory agencies would dutifully regulate the prices and rate of return allowable by the Bell Operating companies…but they were powerless at preventing Bell from purchasing equipment from Western Electric at whatever price Western happened to charge.
As you can see, the state regulatory agencies really lost sight of the entire picture. The entire game was over at Western Electric.
The competition could consistently sell equipment to consumers and businesses at prices less than what Bell charged. Their market share grew. And, the public increasingly became aware of how much they were being gouged by Bell. There was just nothing that Bell could do about it despite a lower cost of actual production.
A fascinating reading is a book titled “A History of Engineering and Science in the Bell System.” There are two versions of this book: the ever present “Switching Technology” version and the much more interesting version with the subtitle “National Service in War and Peace.” If you ever wondered what the extent was of Western Electric in the provision of services for the National Defense, then this is a must-read. Even still, this book does not discuss secret programs such as the chemical stockpile outside of Boulder Colorado.
So some extent, Bell management simply sent out the vague message that it was essential to our nation that competition be controlled. They couldn’t come out and explain to state regulators what was going on because while not classified, the Bell relationship to national defense was thoroughly masked. But the message was clear: our nation needed competition to be halted.
I know that some cities took this to heart. In Portland and other cities, when a customer would purchase a competitive PBX, special markings would be put on the central office cross connects. The connections would be made, un, well, lets say “poorly” and salt water would sometimes be brushed onto the connections. This would corrode the connection and after some time would cause every sort of intermittent problem ranging from squealing and noise to random disconnects.
Interconnected PBX systems needed to be connected to the Bell System network through “protective couplers.” These protective couplers were to protect the Bell System network from harm that might be caused by the competitor’s equipment. These couplers were designed to make competitor’s systems highly incompatible. For example, instead of providing a tip and ring phone line, they provided a 6-wire interface that had no ringing signal and that caused a 50% drop in volume levels. The protective interfaces required another expensive interface simply to re-create a tip and ring phone line…and even then it was impossible to restore the volume levels. The protective couplers were hideously designed, were physically large, and they were complicated.
One state regulatory body asked exactly what sort of harm the Bell System feared competitor’s systems might cause. Bell responded that their greatest fear was that somebody might cross-wire 120 volt household wiring to a phone line and not only would equipment be damaged, but installers could be electrocuted. This state regulator demanded just a few examples where these hazards had been experienced and documented. This request ended up in the department where I worked. After tirelessly working this problem, all we could respond with was that such hazards were uncommon, thankfully, due to the protection that the protective couplers provided.
Finally, in 1976 the FCC had had enough of these incompatible, complex, and expensive protective couplers and FCC Part 68 was developed which provided testing standards and which allowed tested equipment to directly connect to the Bell network. Bell was very active in the development of those standards and our considerable expertise resulted in comprehensive regulations.
Some years later, the FCC turned the table and decided that even Bell System equipment needed to meet FCC Part 68 standards. Most of our equipment couldn’t meet those standards, because they were designed to set a very, very high bar. After some panicked negotiation, the phase-in date for the Bell System having to meet Part 68 was pushed way, way out and all existing systems were grandfathered.
At this point, Bell competition was game on. Bell was losing businesses left and right and competitive long distance carriers were cutting out the heart of the Bell System.
End of part 1 – part 2 coming soon.