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Theodore N. Vail and the Role of Innovation in the Modern Bell System

Published online by Cambridge University Press:  13 December 2011

Louis Galambos
Louis Galambos
Affiliation:
Louis Galambos is professor of history at Johns Hopkins University.
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Abstract

The record of long–term innovation at the American Telegraph and Telephone Company seems to defy conventional economic and social theories of the firm. The following essay, based on extensive research in the AT&T Archives, argues that CEO Theodore Vail made this possible by transforming the Bell System's orientation to innovation, its structure, and its culture. He also gave the System a cadre of leaders who sustained over the long term Vail's strategy of blending adaptive and formative innovations to promote network efficiency.

Type
Articles
Information
Business History Review , Volume 66 , Issue 1: High-Technology Industries , Spring 1992 , pp. 95 - 126
Copyright
Copyright © The President and Fellows of Harvard College 1992

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References

1 Scherer, Frederic M., Industrial Market Structure and Economic Performance (Boston, Mass., 1980), 407–38Google Scholar. See also Mowery, David C., “Economic Theory and Government Technology Policy,” Policy Sciences 16 (1983): 27–43CrossRefGoogle Scholar; Nelson, Richard R., “The Simple Economics of Basic Scientific Research,” Journal of Political Economy 67 (June 1959): 297–306CrossRefGoogle Scholar; and Arrow, Kenneth J., “Economic Welfare and the Allocation of Resources for Invention,” in National Bureau of Economic Research, The Rate and Direction of Inventive Activity: Economic and Social Factors (Princeton, N.J., 1962), 609–25Google Scholar.

2 This element is stressed in Brock, Gerald W., The Telecommunications Industry: The Dynamics of Market Structure (Cambridge, Mass., 1981)Google Scholar.

3 See Breyer, Stephen, Regulation and Its Reform (Cambridge, Mass., 1982), esp. 36–59Google Scholar.

4 Downs, Anthony, Inside Bureaucracy (Boston, Mass., 1966)Google Scholar; Albro, Martin, Bureaucracy (New York, 1970)CrossRefGoogle Scholar; Crozier, Michel, The Bureaucratic Phenomenon (Chicago, Ill., 1964)Google Scholar.

5 Throughout, I am dating the beginnings of the modern Bell System from 1907. During the period 1876–1906, the Bell interests performed in ways that were markedly different from the corporate behavior after Vail became president of the parent company. There were of course trends in company development that predate 1907, and I discuss some of these later; but in every case that relates to AT&T's technical development, there was a significant break in the trend after 1906.

For a different evaluation of innovation at Bell, see David C. Mowery, “Assessing the Predictions of the Effects of Divestiture on Bell Telephone Laboratories,” draft presented to the Business History Seminar, 22 Feb. 1988, Harvard University Graduate School of Business Administration. See also Kenneth Lipartito, “Innovation in the Telecommunications Industry, 1890–1990: An Overview and Case Study,” Business History Seminar, 16 Dec. 1991.

6 For abundant detail, see vols. 1 through 7, A History of Engineering and Science in the Bell System (Bell Telephone Laboratories, 1975–1985).

7 “Bell System Productivity Study” (done in September 1980 by AT&T's economic analysis section; in AT&T Archives), covers the years 1947–79. The post–Second World War figures for the Bell System are comparable to those for the “communications and public utilities” group in the period 1909–48; see Kendrick, John W., Productivity Trends in the United States (Princeton, N.J., 1961), table 34, p. 137Google Scholar. See also Arthur D. Little, “The Relationship between Market Structure and the Innovation Process” (Jan. 1976), AT&T Archives.

8 See Garnet, Robert W., The Telephone Enterprise: The Evolution of the Bell System's Horizontal Structure, 1876–1909 (Baltimore, Md., 1985), 55–127Google Scholar. See also Wasserman, Neil H., From Invention to Innovation: Long–Distance Telephone Transmission at the Turn of the Century (Baltimore, Md., 1985), 33–125Google Scholar. On Vail's early career in telegraphy and the railway mail service, see Brooks, John, Telephone: The First Hundred Years (New York, 1976), 67–160Google Scholar; Paine, Albert Bigelow, In One Man's Life: Being Chapters from the Personal ir Business Career of Theodore N. Vail (New York, 1921)Google Scholar; and Sobel, Robert, “Theodore N. Vail: The Subtle Serendipidist,” in Sobel, Robert and Sicilia, David, The Entrepreneurs: Explorations within the American Business Tradition (New York, 1974), 194–246Google Scholar.

9 Vail seems to have left Bell under unpleasant circumstances. He had apparently objected vigorously to what he thought was the short–sighted business strategy of the Boston investors who then controlled the System. Brooks, Telephone, 84–85.

10 On the competitive era, see Federal Communications Commission, Investigation of the Telephone Industry in the United States (Washington, D.C., 1939), part 1, 129–46Google Scholar; and Brock, The Telecommunications Industry, 109–25. Vail's presidency marked the end of the dominance of the Boston investors in the Bell enterprise.

11 See, for example, Vail's first Annual Report of the Directors of American Telephone & Telegraph Company to the Stockholders for the Year Ending December 31, 1907, 18: “It is not believed that there is any serious objection to such [public] control, provided it is independent, intelligent, considerate, thorough and just, recognizing, as does the Interstate Commerce Commission in its report recently issued, that capital is entitled to its fair return, and good management or enterprise to its reward.” See also T. N. Vail to P. Henry Woodward, 25 Feb. 1908, AT&T Archives: “… I am and always have been strongly in favor of public supervision, provided it is intelligent and reasonable.” (Unless otherwise noted, all manuscript materials cited are in the AT&T Archives.) On the threat of municipal ownership, see Lipartito, Kenneth, The Bell System and Regional Business: The Telephone in the South, 1877–1920 (Baltimore, Md., 1989), 177–85Google Scholar.

12 The agreement was set forth in a letter from AT&T vice–president N. C. Kingsbury (hence the name “Kingsbury Commitment”) to the attorney general, 19 Dec. 1913; in J. C. McReynolds, attorney general, to N. C. Kingsbury, 19 Dec. 1913, the government accepted the terms “without litigation.” See also Woodrow Wilson to James C. McReynolds, 19 Dec. 1913. All reprinted in Annual Report … American Telephone & Telegraph Company … 1913, 24–27.

13 In this regard the business strategy was similar to the ideology of the modem academic professions, all of which assume that progress in the development of their particular body of knowledge will continue forever. The spirit of this ideology was later captured by Vannevar Bush in his famous report, “Science: The Endless Frontier” (U.S. Office of Scientific Research and Development, 1945).

14 The development of the industrial laboratories in the Bell System is described and analyzed in Reich's, Leonard S. excellent book, The Making of American Industrial Research: Science and Business at GE and Bell, 1876–1926 (New York, 1985)Google Scholar.

15 The idea of technological momentum is discussed in Hughes, Thomas P., Networks of Power: Electrification in Western Society, 1880–1930 (Baltimore, Md., 1983)Google Scholar.

16 See, for instance, Reich, Making of American Industrial Research, 151–52. Reich emphasizes more than I do the role of J. P. Morgan in directing the reorientation of AT&T. Vail was clearly Morgan's choice to run AT&T, and during the fiscal crisis that accompanied the change in leadership, Vail stayed in close touch with Morgan. The records in AT&T's archives suggest, however, that Morgan's input was general rather than specific, transitory rather than lasting. In part, this outcome was no doubt a result of the decisive manner in which Vail took hold of the Bell System. On the Vail–Morgan ties, see the following letters from Theodore N. Vail: to John I. Waterbury, 18 July, 13 Aug. 1907; to J. P. Morgan, 11 Nov. 1907, with enclosure; to Charles Steele, 19 Nov. 1907; to Robert Winsor, 12 March 1908; to Messrs. J. S. Morgan & Co., 12 March 1908; to Charles W. Amory, 19 March 1909, with accompanying list. I could not find in the AT&T Archives the letter from Morgan to Vail that Reich cites on p. 151.

17 On this new policy, see the following letters from T. N. Vail: to E. M. Barton, 16 Aug. 1906; to E. C. Bradley, 23 Aug. 1907; and to N. C. Kingsbury, 25 Feb. 1908. To protect its all–important position in long distance, AT&T did not extend this policy to include loading coils and repeaters. T. N. Vail to H. B. Thayer, 24 June 1909. AT&T used sublicense agreements—contracts between licensees and independent firms in their territory—to achieve the same objective; see FCC, Investigation of the Telephone Industry, 153–55.

18 See, for example, the following letters, all sent by T. N. Vail: to F. A. Pickernell, 8 July 1907; to H. M. Watson et al., 11 Oct. 1907; to L. G. Richardson, 17 March 1908; to George B. Fiske, 2 July 1908; to E. C. Bradley, 25 May and 1 June 1909. See also Annual Report … American Telephone and Telegraph Company … 1909 [hereafter, Annual Report], 12. FCC, Investigation of the Telephone Industry, 137–41.

19 See, for instance, T. N. Vail to Edward B. Field, 16 Nov. 1907. See also T. N. Vail, “Testimony in Western Union Telegraph Company et al., v. American Bell Telephone Company,” Circuit Court of the United States, District of Massachusetts (copy in AT&T Archives; the testimony took place on 1 April 1908), 1549.

20 Annual Report … 1908, 5–6.

21 T. N. Vail to E. M. Barton, 16 Aug. 1907.

22 Annual Report … 1907, 8.

23 Ibid., 1909, 18.

24 Vail, “Testimony in Western Union,” 1556.

25 See T. N. Vail to Edward B. Field, 26 Nov. 1907; and Garnet, The Telephone Enterprise, 66–69, 136–37.

26 See, for instance, the remarks in Annual Report … 1903, 6–7; and Annual Report … 1905, 7–9.

27 The difference between adaptive and innovative strategies is developed in Lazonick, William, Business Organization and the Myth of the Market Economy (New York, 1991), esp. 213–27Google Scholar. I have used several of Lazonick's highly original ideas, but I have twisted them to fit my own analysis of the Bell scenario. My apologies to their author.

28 Annual Report … 1908, 16–18.

29 Ibid., 1909, 19.

30 Ibid., 1910, 27.

31 Ibid., 1912, 22. See also T. N. Vail to E. C. Bradley, 6 Aug. 1912; and T. N. Vail to Mr. Scott, 24 July 1912. In the latter, Vail pointed out the value of AT&T's “large experimental and developing departments.…” Comparing “the state of the art…even five years ago,…with the present, the gain in every respect—efficiency and economy of operation and possible distance of transmission—has been enormous, all the result of the central organization and the engineering and experimental departments.”

32 Both Reich, Making of American Industrial Research, 159–64, and Hoddeson, Lillian, “The Emergence of Basic Research in the Bell Telephone System, 1875–1915,” Technology and Culture 21 (1981): 529–37Google Scholar, stress the importance of this achievement and the work done to accomplish it.

33 Annual Report … 1914, 18–20; 1915, 22–25. See also T. N. Vail, “Some Observations on Modern Tendencies, “ in Views on Public Questions: A Collection of Papers and Addresses of Theodore Newton Vail, 1907–1917 (privately printed, 1917), esp. 251–54. Theodore N. Vail to John A. Moon, 30 Dec. 1918 (“Wire System: Discussion of Electrical Intelligence”), AT&T Archives.

34 Annual Report … 1914, 18–20; 1915, 22–25. See also Vail, Theodore N., Policy of Bell System (New York, June 1919)Google Scholar.

35 Reich, Making of American Industrial Research, 151, emphasizes this cutback. On the effort to economize, see T. N. Vail to E. J. Hall [and other Bell company presidents], 1 May 1907.

36 Reich, Making of American Industrial Research, 151–53; also J. J. Carty to E. J. Hall, 17 July 1907.

37 Hammond V. Hayes to F. P. Fish, 31 Dec. 1906.

38 See, for instance, H. B. Thayer, Memorandum for T. N. Vail, 27 May 1909; J. J. Carty, Memorandum for Mr. Thayer. 9 Oct. 1909; H. B. Thayer to George E. McFarland, 11 Nov. 1913; H. B. Thayer to W. T. Gentry, 1 June 1914. Some degree of centralization also took place in legal and rate–making matters; see T. N. Vail to H. M. Watson [and other Bell company presidents], 30 April 1908. By 1916, after a year's study in the field, AT&T's comptroller reported; “We have a strong centralized administration of engineering.…” Charles G. DuBois to U. N. Bethell, 26 May 1916.

39 T. N. Vail to William A. Childs, 25 Feb. 1908. See also T. N. Vail to B. E. Sunny, 6 April 1909 The “harmonizing” in operations was done less aggressively than in matters involving technology, but gradually System–wide standards for operations were devised and implemented.

40 The Bell System's three–column structure is discussed in Garnet, The Telephone Enterprise, 135–46. The functional organization replaced a territorial structure. See also Smith, George David, The Anatomy of a Business Strategy: Bell, Western Electric, and the Origins of the American Telephone Industry (Baltimore, Md., 1985), 135–38Google Scholar; and FCC, Investigation of the Telephone Industry, 185–204.

41 T. N. Vail to E. C. Bradley, 6 Aug. 1912; see also T. N. Vail to Mr. Scott, 24 July 1912.

42 The protracted controversy over this aspect of the license contract and its resolution by 1918 are described in FCC, Investigation of the Telephone Industry, 149–51.

43 Several recent studies of corporate R& D have stressed this political dimension—that is, the need for effective R&D spokespeople within the firm—of the process of innovation. See, for instance, Hounshell, David A. and Smith, John K., Science and Corporate Strategy: Du Pont R&D, 1902–1980 (New York, 1988)Google Scholar; Graham, Margaret B. W., RCA and the VideoDisc: The Business of Research (New York, 1986)Google Scholar; Reich, Making of American Industrial Research.

44 As quoted in Wasserman, From Invention to Innovation, 19. For Hayes's career, see Roger B. Hill and Thomas Shaw, “Hammond V. Hayes: 1860–1947,” Bell Telephone Magazine, Autumn 1947, 151–73. On AT&T's relationship with MIT, see also Noble, David F., America by Design: Science, Technology and the Rise of Corporate Capitalism (New York, 1977)Google Scholar.

45 Hammond V. Hayes to F. P. Fish, 31 Dec. 1906.

46 “Organization. Engineering Department. American Telephone and Telegraph Company, January, 1905.”

47 AT&T continued to support some university theoretical work; see T. N. Vail to Richard C. Maclavrin, 18 Feb. 1913; Harold Pender to J. J. Carty, 18 June 1913; Charles G. DuBois to J. J. Carty, 28 July 1913; and Nicholas Murray Butler to T. N. Vail, 27 Feb. 1914. But Carty decisively opted for internalizing the R&D function; see J. J. Carty to T. N. Vail, 27 July 1915, enclosing “Industrial Research Laboratories in Universities.” Thayer ultimately terminated the MIT work in 1924; H. B. Thayer to Everett Morss, 11 Dec. 1924.

48 J. J. Carty, Memorandum for H. B. Thayer, 8 April 1909; H. B. Thayer, Memorandum for T. N. Vail, 27 May 1909.

49 J. J. Carty, Memorandum for H. B. Thayer, 8 April 1909.

50 See Chandler, Alfred D. Jr, Strategy and Structure: Chapters in the History of the Industrial Enterprise (Cambridge, Mass., 1962), 52–113Google Scholar.

51 See Western Electric Company, Manufacturing and Engineering Conference, Chicago, Illinois, 24–28 May 1915 (the pages in this report are not numbered consecutively, so I have not used page numbers). The R&D organization in WECo was about four times the size of AT&T's Engineering Department.

52 Ibid. Also see Hounshell and Smith, Science and Corporate Strategy, for numerous examples of this type of organizational tension.

53 Hoddeson, “Emergence of Basic Research,” 534.

54 See H. S. Sheppard, Memorandum for Mr. Gilford (with enclosure from J. J. Carty), 1 June 1921; Hoddeson, “Emergence of Basic Research,” 515–16, 531–40; Reich, Making of American Industrial Research, 160–76. The competitive aspects of Bell's technological innovations are laid out especially in J. J. Carty, Memorandum for H. B. Thayer, 8 April 1909.

55 On automatic switching, see Kenneth Lipartito's excellent analysis in “Innovation in the Telecommunications Industry, 1890–1990,” esp. 19–52. On the French phone, see H. B. Thayer to J. Epps Brown, 23 Feb. 1915. A somewhat similar situation arose in regard to certain private branch exchanges; see H. B. Thayer to P. L. Spalding, 21 April 1913, and H. B. Thayer to W. T. Gentry, 21 Oct. 1914.

56 See also Reich, Making of American Industrial Research, 246–47. These aspects of corporate innovation may well explain some of the anomalies in the empirical data discussed in Scherer, Industrial Market Structure and Economic Performance, 433–38.

57 F. B. Jewett, “Development of New Apparatus for Manufacture,” in Western Electric Company, Manufacturing and Engineering Conference, 1915. See also the remarks of E. B. Craft on cutting costs.

58 See, for example, Annual Report … 1911, 24, and 1912, 25. See also Theodore N. Vail to John A. Moon, 30 Dec. 1918 (“Wire System”), 10. Carty was an advocate of basic research, but he meant by that expression research into the basic scientific concepts needed to solve specific technological problems. The research and development efforts were all tightly focused.

58 Since I am not counting Alexander Cochran's temporary appointment (1900–1901), the reference is to John E. Hudson (1889–1900) and Frederick P. Fish (1901–7).

60 T. N. Vail to Major Higginson, 18 June 1919.

61 Doig, Jameson W. and Hargrove, Erwin C., Leadership and Innovation: A Biographical Perspective on Entrepreneurs in Government (Baltimore, Md., 1987)Google Scholar, stresses similar aspects of successful entrepreneurship in public life; see esp. 8, and John Milton Cooper, Jr.'s interesting essay on “Gifford Pinchot Creates a Forest Service,” 63–95.

62 T. N. Vail's letters: to William A. Childs, 25 Feb. 1908; to H. J. Pettengill, 31 Jan. 1908; to L. G. Richardson, 17 March 1908; to George E. McFarland, 16 March 1909; to B. E. Sunny, 3 June 1909; to H. M. Watson, 31 Aug. 1909; to Major Higginson, 18 June 1919; Annual Report … 1911, 28–29.

63 Annual Report … 1912, 17–19; as Vail explained, “Perfect service is only to be found when fidelity and loyalty are reciprocal in employer and employee” (19). Annual Report … 1914, 29–32.

64 Western Electric News 8 (July 1919): 10–15; (Nov. 1919): 29. At this time, hardly any Bell System employees were unionized, and one of the goals of these programs may have been to prevent the development of independent unions.

65 See, for instance, H. B. Thayer's thirteen–page letter to George McFarland, 24 Dec. 1913.

66 T. N. Vail to John Waterbury, 13 Aug. 1907; Connie Jean Conway, “Theodore Vail's Public Relations Philosophy,” Bell Telephone Magazine, Winter 1958–59, 44.

67 “Notes of Certain Talks at Presidents’ Conference Held in New York,” 8–10 Dec. 1919; H. B. Thayer to M. B. Jones, 3 June 1920; “Yama Farms Conference,” 4–9 June 1921.

68 Western Electric News 1 (March 1912): 9–10; 2 (Aug. 1913): 26–27 [the subject was “The Telephone Induction Coil and How It Is Used”]; 4 (April 1915): 1–6; ibid., 28; 5 (Nov. 1916): 5; 2 (April 1913): 25.

69 These remarks were by R. L. Jones at Western Electric Company, Manufacturing and Engineering Conference, 1915.

70 P. J. Gilman in ibid.

71 See, for example, J. J. Carty to H. B. Thayer, Oct. 1920; L. F. Morehouse to G. A. Campbell, 7 Dec. 1922; J. J. Carty to H. B. Thayer, 21 Nov. 1924.

72 See Aitken, Hugh G. J., The Continuous Wave: Technology and American Radio, 1900–1932 (Princeton, N.J., 1985)CrossRefGoogle Scholar; and Reich, Making of American Industrial Research, 218–38.

73 Neither M. D. Fagen, ed., A History of Engineering and Science in the Bell System: The Early Years (1875–1925) (1975), 52–56, nor Reich, Making of American Industrial Research, 182–84, nor Hoddeson, “Emergence of Basic Research,” 541–42, discusses in any detail the managerial decision to organize the labs in this manner. For some insight into the problems that had arisen in handling R&D costs and the impact this seems to have had on the decision, see N. T. Guernsey to W. S. Gifford, 14 Dec. 1921; A. H. Griswold to E. S. Bloom, 25 Aug. 1922; C. G. DuBois to E. S. Bloom, 18 July 1923; and E. S. Bloom to H. B. Thayer, 24 March 1923.

74 See H. B. Thayer to Henry S. Howe, 19 Dec. 1924. Thayer emphasized “the desirability of providing for a succession from within the organization.” He said, “Since the election of Mr. Jewett on Tuesday, I can say that in our headquarters' organization there is either a younger or an older man technically qualified and experienced, who could carry on, at least temporarily, the work of any department if that department's chief were removed.” He might have said, too, a man steeped in the values of The odore N. Vail.

75 Gifford, in fact, narrowed the focus of the Bell System, a change in policy that Thayer had started by selling Western Electric's international operations. Thayer and Gifford thus stressed economies of scale and system while curtailing efforts to achieve economies of scope. For example, Gifford took AT&T out of radio broadcasting and motion pictures, two businesses in which the firm had established strong technical positions.

76 See Peter Temin, with Galambos, Louis, The Fall of the Bell System: A Study in Prices and Politics (New York, 1987)Google Scholar, for an analysis of that crisis. See also Auw, Alvin von, Heritage and Destiny: Reflections on the Bell System in Transition (New York, 1983)Google Scholar; and Coll, Steve, The Deal of the Century: The Breakup of AT&T (New York, 1986)Google Scholar.

77 Richard S. Rosenbloom and Michael A. Cusumano find some of the same characteristics among contemporary executives who are successful in managing innovation: “Technological Pioneering and Competitive Advantage: The Birth of the VCR Industry,” California Management Review 29 (Summer 1987): 51–76CrossRefGoogle Scholar.

78 Western Electric Company, Manufacturing and Engineering Conference, 1915. On the tension between innovation and efficiency, see Lawrence, Paul R. and Dyer, Davis, Renewing American Industry: Organizing for Efficiency and Innovation (New York, 1983), esp. 1–16, 238–90Google Scholar; and Galambos, Louis, “What Have CEOs Been Doing?” Journal of Economic History 48 (June 1988): 243–58CrossRefGoogle Scholar. On the balance between adaptive and formative innovations, I have benefited from Margaret Graham, B. W. and Pruitt, Bettye H., R&D for Industry: A Century of Technical Innovation at Alcoa (New York, 1990)Google Scholar.

79 Lazonick, Business Organizations and the Myth of the Market Economy.

80 Doig and Hargrove, Leadership and Innovation, breaks new ground in studying public bureaucratic behavior from a Schumpeterian perspective—hence moving the analysis of public administration closer to the position outlined here.

81 This transition is discussed in Galambos, Louis and Pratt, Joseph, The Rise of the Corporate Commonwealth: United States Business and Public Policy in the 20th Century (New York, 1988), esp. 28–36, 71–99Google Scholar.

82 Abramowitz, Moses and David, Paul A., “Reinterpreting Economic Growth: Parables and Realities,” American Economic Review 63 (May 1973): 428–39Google Scholar; Abramowitz, Moses, Thinking about Growth: And Other Essays on Economic Growth and Welfare (New York, 1989)CrossRefGoogle Scholar.

83 See Galambos, “What Have CEOs Been Doing?”