What Can Possibly Go Wrong? #NetNeutrality

by Colin Berkshire

“Strowger, an undertaker, was motivated to invent the automatic telephone exchange after having difficulties with the local telephone operators, one of whom was the wife of a competitor. He was said to be convinced that she, as one of the manual telephone exchange operators, was sending calls to the undertaker to her husband.” (Wikipedia: https://en.wikipedia.org/wiki/Strowger_switch)

Yes, problems with net neutrality are the reason that telephone switching systems were invented.

What the local telephone company was doing was not illegal. In 1888 there were no net neutrality laws. It was perfectly legal for telephone companies to send calls wherever they chose. If a local switchboard operator wanted to send all calls for an undertaker to her husband’s business then that was just fine.

The practice of discriminatory practices became ever increasingly a problem. Local telephone companies would favor one or a few customers while denying access to their telephone system to others.

The Bell System (the largest telephone company alliance) developed a policy of refusing to switch telephone calls to any customer that had telephone service only with a competitor. This meant that in cities that had several competitive telephone companies a firm would need several telephones…one from each telephone company. This made it largely impractical for small, innovative telephone companies to start up.

Later, this non-net-neutrality practice turned positively evil. The Bell System made a strategic decision to withhold all service from certain cities. (The most famous of these was Saint Louis.) The Bell System just ignored the city entirely. Eventually, some start-up company would decide to enter the market and would build out its plant and equipment, investing huge amounts of money. In some cases, the Bell System would even choose to interconnect with these companies “because the Bell System didn’t otherwise serve the community.” These private companies would build out their networks.

Once the competitor built out their network to between 60% and 80% of the area, the Bell System would enter the market. Bell would cherry pick the high density areas and would build parallel facilities. Then, Bell would price their service at predatorily low prices, often as much as 75% less. Finally, Bell would refuse to interconnect with the competitor since they now served the market.

What Bell realized is that telephone service is highly capital intensive. Cutting just 20% of a competitors revenue would mean they could no longer service their debt. The competitor would become financially non-viable. Then, Bell would continue to drop prices, refused to interconnect, and make a buy-out offer for pennies on the dollar.

The Bell System ultimately became a monopoly because there was no net-neutrality.

This problem became such a serious national policy that the Federal Government stepped in and required:

  1. The Bell System to interconnect to any other telephone company on a non-discriminatory basis.
  2. The Bell System would cease acquiring its competition without the permission of the interstate commerce commission.
  3. The bell System would be prohibited from being in any other industry besides that of a telecommunications common carrier. They would sell Western Union, license their patents on a non-discriminatory basis, and exit all lines of business that they were in (such as motion picture sound systems.)

So it is surprising that we are blundering so badly with public policy on the topic of net-neutrality. We’ve been here before. We know how this ends…badly.

It is sad that those who fail to study history are doomed to repeat it. I fear that the terrible, merciless origin of the Bell System has been forgotten. Our country will pay dearly for that lesson a second time.

Net-neutrality is about much more than what premium price Netflix pays to hook up to the internet. It is about our ability to have a free marketplace.