All major companies had tie-lines bypassing the Bell System PSTN (Public Switched Telephone Network) by the 1970s. Sprint was selling “bypass” where you could dial a local 7-digit number, then an authorization code, and then your long distance number for a fraction of what Bell charges. And, MCI was also in the game. MCI was a newcomer and an opportunist run by a lawyer, Bill McGowan. McGowan was a hoot, and even inside the Bell System we loved to read about his latest shenanigans. He was so creative and so able to twist up the facts that he was both successful and immensely entertaining. He was of the same caliber person as Herb Kelleher, founder of Southwestern Airlines. Both enjoyed life fully.
The basic problem was this: Sprint and MCI could sell long distance for half what the Bell System charged and make a profit. They would argue that this was because the Bell System was a big, fat monopoly and they were efficient, well run companies. The greater the price difference between Bell’s rates and those of Sprint and MCI the more terrible that it made the Bell System look. It went without question that the public was better served by these new, efficient companies.
But there was a dark secret. It was a terrible, horrible secret that was right out in the open if only anybody could see it right in their faces…
The truth was that the Bell System could install and operate long distance facilities at about half the cost of either MCI or Sprint. The Bell System was remarkably efficient at what it did. But…
Long Distance prices were so high because they were funding America’s nuclear weapons program and, in the 1970s, America’s biological warfare program. Let me says this again: Most of the cost of designing, testing, building, inspecting, and managing America’s arsenal of nuclear weapons was funded by the Bell System, through the long distance monopoly. (This was done through Sandia Laboratories which was run “as a public service to our nation” and without profit (eg, it actually lost money) as well as through other Bell subsidiaries.
In fact, this military involvement by the Bell System was part of the vast industrial military complex that president Eisenhower warned the public of in his farewell speech. The Nike Hercules missile system was designed by Bell Laboratories and built by Western Electric as the general contractor. The SAGE and NORAD systems were Bell System products. Putting a man on the moon would not have been possible without BellCom, another Bell System military subsidiary.
Bell had been tacitly allowed to gouge the American public on long distance in exchange for funding these military programs. Congress was relieved of the difficult task of including these in the Federal budget because Bell was picking up the tab. So, of course, there was little interest in disrupting the monopoly.
So back to our story of Sprint and MCI and cheap long distance…
So here was MCI and Sprint with long distance networks that were 2x the cost to install as the Bell System’s and that were priced at ½ of Bell’s rates. It was untenable. The basic reason for this wasn’t great efficiency of Sprint & MCI. It was because Sprint wasn’t in the business of building nuclear bombs.
And, the Bell System couldn’t exactly come out and complain. The public largely didn’t know that phoning grandma was funding the military, and Bell couldn’t disclose this or else risk enraging the public. Congress could only shrug their shoulders. They couldn’t easily relieve the Bell System from their duties so that long distance prices could drop. And, Sprint and MCI were also afraid to point out Bell’s military connections for fear that they would be shut down in order to preserve the status quo.
This brought out another pricing distortion that became untenable: Regulators started to realize that tie-lines actually cost more to install and manage than the long-distance network, but that the savings was largely because the military funding was being bypassed. Increasingly, corporations were pushing the cost of biological weapons and nuclear bombs onto households and not carrying their own fair share.
It was an impossible situation for the Bell System, and there was no way out. And, it all started because of two things: tie-lines and the Southern Pacific Railway.