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Innovation's Golden Triangle: Finance, Regulation, and Science at the Bell System, 1877–1940

Published online by Cambridge University Press:  25 January 2016

Paul J. Miranti
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Abstract

This article explains how the Bell System succeeded during the presidency of Theodore N. Vail (1907–1919) in reversing a declining business trend by laying the foundations for sustained technological achievement through the development of an operating model that satisfied corporate imperatives related to finance, regulation, and research. By exploiting the potentials of rate-base regulation, Bell was able to create strong scientific capabilities that supported the growth of what became arguably the world's premier telecommunications system. The legacy of these efforts includes the winning of seven Nobel Prizes by Bell scientists, an achievement unequaled by any other industrial laboratory.

Type
Research Article
Information
Business History Review , Volume 90 , Issue 2 , Summer 2016 , pp. 277 - 299
Copyright
Copyright © The President and Fellows of Harvard College 2016 

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References

1 See the following works by William Lazonick: Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States (Kalamazoo, Mich., 1992); “The Chandlerian Corporation and the Theory of Innovative Enterprise,” Industrial and Corporate Change 19, no. 2 (2010): 317–49CrossRefGoogle Scholar; and “Innovative Business Models and Varieties of Capitalism,” Business History Review 84 (Winter 2010): 675–702 CrossRefGoogle Scholar.

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5 Formed initially as the Bell Patent Association in 1875, the firm experienced several corporate iterations before organizing its activities in 1900 through a holding company, American Telephone and Telegraph Company (AT&T).

6 AT&T received $16.8 million in dividends and interest from its operating subsidiaries in 1906, and $21.1 million in 1907. AT&T, 1907 Annual Report (Boston, 1908), 34.

7 United States Federal Communications Commission, Investigation of the Telephone Industry in the United States (Washington, D.C., 1939) (hereafter, FCC, Telephone Investigation), tables at 128 and 135.

8 Ibid., 135.

9 AT&T, 1908 Annual Report (Boston, 1909), 23.

10 AT&T, 1909 Annual Report (Boston, 1910), 23–24, and AT&T, 1910 Annual Report (New York, 1911), 32–33 and 36.

11 The average subscriber revenue for Bell exchanges in competitive cities decreased from $71.17 in 1894 to $31.32 in 1909; see AT&T, 1909 Annual Report, 26.

12 AT&T, 1907 Annual Report, 5.

13 Reich, American Industrial Research, 142–50; FCC, Telephone Investigation, 180–85.

14 Ibid., 197–98.

15 Reich, American Industrial Research, 144, 149–50.

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19 Fagen, The Early Years, 260, 356, 364.

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25 Ibid., 87–93, 428–40.

26 On southern expansion, see “American Telephone & Telegraph,” Wall Street Journal (hereafter, WSJ), 10 Apr. 1906, 5; on western expansion, see “American Telephone & Telegraph,” WSJ, 25 May 1906, 8.

27 AT&T, 1906 Annual Report (Boston, 1907), 11.

28 This was calculated using annual report information and applying the formula: 360/(Total Annual Revenues/Average Receivables). Average Receivables are approximated by adding current and previous years' receivables and dividing by 2. The firm also did not begin to classify its receivables as short or long term until 1907 at which time short-term accounts receivable amounted to about $30 million.

29 AT&T, 1909 Annual Report, 7–8; Paine, Theodore N. Vail, 237.

30 “American Telephone,” WSJ, 19 May 1907, 7.

31 “American Telephone & Telegraph,” WSJ, 14 Apr. 1905, 5.

32 “American Telephone,” WSJ, 22 Apr. 1907, 6.

33 Chandler Robbins to Henry L. Higginson, 31 Mar. 1906, Box XII 9A, General Files, 1870–1919, H. L. Higginson Collection, Baker Library, Harvard Business School, Boston (hereafter, HLHC).

34 F. K. Sturgis to Henry L. Higginson, 5 Mar. 1906, HLHC.

35 AT&T, 1906 Annual Report, 15.

36 “Telephone Trust Financing: President Vail Says No Further Stock or Bond Issue Necessary,” New York Times (hereafter, NYT), 22 June 1907, 12; AT&T, 1907 Annual Report, 6.

37 See Carosso, The Morgans, 493–95.

38 For Fay's criticisms, see “American Telephone and Telegraph,” WSJ, 27 Mar. 1907, 6.

39 Paine, Theodore N. Vail, 229–30.

40 See “American Telephone,” WSJ, 1 May 1907, 3.

41 Unsigned copy of letter to T. N. Vail, 8 May 1907, in Kidder Peabody Company Letter Books, V. 7 38, Lee Higginson & Company Collection, Baker Library, Harvard Business School, Boston.

42 Paine, Theodore N. Vail, 232–34.

43 Total capital outlays for 1907 amounted to $52.9 million; AT&T, 1907 Annual Report, 4.

44 See T. N. Vail to E. J. Hall and enclosure, 1 May 1907, Theodore Vail Letter Book, AT&T Archives, Warrenville, N.J. (hereafter AT&T).

45 AT&T Executive Committee Minutes, vol. 4, 13 Aug. 1907, for dividend, AT&T; F. P. Fish to Kidder Peabody and Baring Brothers, undated, in F. P. Fish Letter Book, AT&T.

46 “$21,000,000 More Stock: The American Telephone Co. Needs Money to Aid Its Subsidiaries,” NYT, 5 June 1907, 11. The unsubscribed shares were purchased by Robert Fleming of Jardine, Fleming in London; see AT&T Executive Committee Minutes, vol. 4, 2 July 1907, AT&T.

47 “$21,000,000 More Stock,” 11.

48 AT&T, 1907 Annual Report, 8–9.

49 Paine, Theodore N. Vail, 233.

50 AT&T, 1907 Annual Report, 6–7.

51 Ibid.

52 “American Telephone & Tel. Co.,” WSJ, 1 Mar. 1910, 6.

53 AT&T, 1911 Annual Report (New York, 1912), 20.

54 Milton L. Mueller Jr., Universal Service: Competition, Interconnection, and Monopoly in the Making of the American Telephone System (Cambridge, Mass., 1997); John, Richard R., “Theodore Vail and the Civic Origins of Universal Service,” Business and Economic History 28 (Winter 1999): 71–81 Google Scholar; Richard R. John, Network Nation: Inventing American Telecommunications (Cambridge, Mass., 2010), 340–41, 343–51, 360, 397–401.

55 On standardization, see Robert W. Garnet, The Telephone Enterprise: The Evolution of the Bell System's Horizontal Structure, 1876–1909 (Baltimore, 1985), chap. 9.

56 Fagen, The Early Years, 742–54.

57 John, Network Nation, 349–50. A night letter is a telegram sent after the close of the business day when system utilization is lower and thus transmission rates are cheaper.

58 See “Vail's Traffic Plan for New England,” WSJ, 19 Feb. 1913, 16; and “President Vail Discusses New England Railroad Problem,” WSJ, 20 Feb. 1913, 6.

59 AT&T, 1913 Annual Report (New York, 1914), 22.

60 See, for example, Vail's ideas about these matters at AT&T, 1910 Annual Report, 32–61; and AT&T, 1913 Annual Report, 15–17, 18–21.

61 See FCC, Telephone Investigation, 195–96.

62 See George W. Wickersham to Charles A. Prouty, chairman of the Interstate Commerce Commission, 7 Jan. 1913, quoted in AT&T, 1912 Annual Report (New York, 1913), 29–36.

63 For Justice Department discussions with U.S. Steel, see “Confer on Trust Suits,” NYT, 14 Nov. 1913, 6; for New Haven, see “Finishing New Haven Bill,” NYT, 17 Oct. 1913, 14.

64 John Brooks, The Telephone: The First Hundred Years (New York, 1975), 148.

65 Louis D. Brandeis, Other People's Money and How the Bankers Use It (New York, 1914); Arthur S. Link, Wilson: The Road to the White House (Princeton, 1956), 479–85.

66 Lipartito, “Rethinking the Invention Factory,” 132–59.

67 Alexander J. Field, A Great Leap Forward: 1930s Depression and U.S. Economic Growth (New Haven, 2011), 32.

68 Southwestern Bell Telephone Co. v. Public Service Commission, 262 U.S. 276 (1923).

69 Smith v. Illinois Bell Telephone Co., 282 U.S. 133 (1930).

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71 FCC, Telephone Investigation, 196.

72 Ibid., 196–205.

73 Ibid., 234–35.

74 M. D. Fagen, ed., A History of Engineering and Science in the Bell System: National Service in War and Peace (1925–1975) (New York, 1978), 5–9.

75 Ibid., 8–11.

76 Gertner, Idea Factory, 159–61.

77 On both Nike and DEW programs, see Fagen, National Service in War and Peace, chap. 7.

78 Gertner, Idea Factory, chaps. 5–6.

79 S. Millman, ed., A History of Engineering and Science in the Bell System: Communication Sciences (1925–1980) (Indianapolis, 1984), chap. 1.

80 Gertner, Idea Factory, 173–74.

81 Ibid., chap. 11.

82 Peter Temin, with Louis Galambos, The Fall of the Bell System (New York, 1987), 15, 279–81.

83 Gertner, Idea Factory, chap. 13.

84 Jeremy Bernstein, Three Degrees above Zero: Bell Laboratories in the Information Age (New York, 1987), 189–232.

85 S. Millman, ed., A History of Engineering and Science in the Bell System: The Physical Sciences (1925–1980) (Murray Hill, N.J., 1987), chap. 7, sect. 1.2.

86 Millman, Communication Sciences, chaps. 1 and 10.

87 Gertner, Idea Factory, 261, 341.

88 Ibid., 231–35; Millman, Communication Sciences, chap. 9.

89 Ibid., chap. 7; E. F. O'Neill, ed., A History of Engineering and Science in the Bell System: Transmission Technology (1925–1975) (Indianapolis, 1985), chap. 20.

90 Baud rate represents the number of individual characters transmitted each second through a digital medium. The higher the rate the greater amount of information transferred per unit of time.

91 Gertner, Idea Factory, 286–97. See also Louis E. Frenzel, Principles of Electronic Communication Systems, 3rd ed. (New York, 2008).

92 Störmer, H. L., “Nobel Lecture: The Fractional Quantum Hall Effect,” Review of Modern Physics 71, no. 4 (1999): 875 CrossRefGoogle Scholar.

93 Gertner, Idea Factory, 331, 355.

94 Temin, Fall of the Bell System, 190.

95 Economic Recovery Tax Act of 1981, Pub. L. 97–34, 95 Stat. 172 (1981).

96 Temin, Fall of the Bell System, 318–35.

97 U.S. Securities and Exchange Commission, electronic filing of form 425 by Nokia Corporation, 16 Apr. 2015, Subject Company, Alcatel-Lucent, Commission File: NO 60 1–11130 at http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000924613&type=&dateb=&owner=exclude&start=80&count=40.