The breakup of Ma Bell

by Colin Berkshire

Few people know much about the Bell System or if the breaking it up. Most will describe it as busting up a monopoly, and then they just leave it at that.

The Bell System was a monopoly since the beginning, in 1876. By 1915 the patents it held were expiring and it was huge and tyrannical. Rather than getting broken up it pioneered the idea of “regulation”. The concept was that by regulators limiting profits to a fair and reasonable amount (historically 3% of capital) it would be harmless and even a public benefit.

That strategy worked for the Bell System and the public for decades. But by the 1950s it was again pretty ruthless, leveraging its patents and monopoly to control unrelated industries. (It was at various times the leading provider of theater sound systems, sound tracks on movies, and appliances like fans.) But most significantly, it was driving other telephone companies out of business.

The US government sued variously, and the Bell System spun off its Western Union division, and agreed to get out of all non-regulated businesses. It also agreed to license its patents on reasonable terms, since no possible licensee could possibly be a competitor.

The monopoly grew and grew.

By the late 1950s an interesting thing happened: Certain programs such as nuclear weapons were needed by the country but were a hot potato for congress to approve funding on. Since the Bell System was a monopoly on essential communications, an “arrangement” was made whereby the Bell System would perform certain duties “as a service to our country” and would be allowed to load the costs of those services into the rate base, ever so quietly.

Starting in 1950, all nuclear weapons built in this country were under the management control of the Bell System.

This arrangement worked so well that the Bell System entered more and more fields, from guiding America’s rockets to the moon to designing the Nike Hercules missile defense system.

But this came at a cost. Telephone ratepayers footed the bill for military programs through higher rates. Every time you dialed Long Distance to the east Cost and paid $1 a minute for there call, a portion was siphoned off quietly in the name of national defense and service to the country.

This silent handshake deal continued into the 1960s and 1970s. The government got free stuff and the Bell System was ensured a stable, safe return on its investment…and wouldn’t be prosecuted for being a monopoly.

But then one man, William McGowan had the audacity to begin offering deregulated long distance service. And, while his costs were many times higher than that of the Bell System his prices were much less. So fat had the margins become that inefficient competitors could undercut the Bell System because of the government programs it had undertaken.

The public liked lower prices, and MCI grew, as did other competitors. Those competitors explained that they could offer cheaper prices because the Bell System was a fat monopoly and they were “efficient”. What the Bell System couldn’t say is that its prices were higher because it was funding US Military programs and it was, well, ahem, um, building nuclear bombs with telephone dollars. The Bell System literally couldn’t explain WHY its prices were so high.

In the end, the Bell System appealed to Judge Green by stating vaguely that breaking up the monopoly would be bad because of national security reasons. Judge Harold Greene told the Bell System bluntly: Tell me, specifically, why? The Bell System couldn’t then disclose the vastness of its military operations and the military also couldn’t politically step in and expose the golden goose because the arrangement couldn’t stand the light of day.

Green was unconvinced that breaking up the Monopoly would hurt national defense, and so in 1983 the Bell monopoly was ended.

Bell suddenly had to compete. And, it couldn’t divest itself fast enough of Sandia Laboratories and other military operations.

So the busting of the Bell System was more about nuclear bombs than it really ever was about high telephone rates.