Authors: Jeremy Rifkin
Bell’s ambition was to create a national long-distance network that could connect every telephone into a single system. He reasoned that telecommunications required the ultimate vertically integrated company to be effective—that is, a single system, centrally controlled and under one roof. In 1885, Bell created the American Telephone and Telegraph Company subsidiary to connect all of the local Bell Telephone companies, and in 1899 he transferred the assets of Bell to the subsidiary—making AT&T synonymous with phone service.
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A phone service connecting every community in the country would promote a continental communications network to manage and service an integrated national economy.
AT&T enjoyed a head start on any potential competitors because of Bell’s ownership of the patents on the telephone. After the patents expired in the early 1890s, competitors swarmed into the market. By 1900 some 3,000 telephone companies were doing business in the United States.
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Despite the robust competition, a number of observers, including elected officials, both in Washington, D.C., and the state houses, were worried over AT&T’s aggressive policy of eliminating its competition. Theodore Newton Vail, AT&T’s president, made clear his intention of controlling the national telephone service and even created a new corporate advertising slogan of “One Policy, One System, Universal Service.” He openly taunted the feds by exclaiming that “effective, aggressive competition, and regulation and control are inconsistent with each other, and cannot be had at the same time.”
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Concerned that AT&T was quickly devouring its competitors—even acquiring a controlling interest in Western Union—in the first decade of the twentieth century, the federal government began considering taking action to break up the giant.
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While fearful that AT&T was becoming a monopoly, federal officials were also beginning to realize that universal phone service was so important in the life of every American and the well-being of American society
that it was more akin to a right than a privilege. Government regulators came to believe that the telephone industry would function more effectively as a single unified entity and thus avoid “duplicative,” “destructive,” and “wasteful” practices. In 1921 the Senate Commerce Committee went on record to state that “telephoning is a natural monopoly.”
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The committee argued that because of the enormous amount of capital required to install a nationwide infrastructure for communications and to achieve economies of scale, it would be difficult, if not impossible, to imagine competing infrastructures across the country. Economists began to talk about phone service as a public good.
Vail sensed a gaping contradiction in the federal government’s approach to the telephone industry and seized on it to strike a deal with Washington. Realizing that the federal government might take action against AT&T, Vail reversed his earlier stance, which called for a deregulated competitive market, and called instead for government regulation, hoping it would make his own company the “natural monopoly” the government was looking for. Writing of the daring new counterintuitive strategy, Harvard business professor Richard H. K. Vietor observed:
Vail chose at this time to put AT&T squarely behind government regulation, as the quid pro quo for avoiding competition. This was the only politically acceptable way for AT&T to monopolize telephony. . . . It seemed a necessary trade-off for the attainment of universal service.
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The maneuver ultimately paid off, but it took a world war for Vail to achieve his dream. In 1918, the U.S. government nationalized the telecommunications industry for national security purposes and put it under the stewardship of Albert S. Burleson, the postmaster general and a long-standing advocate of nationalization of the telephone and telegraph industries. Burleson immediately appointed Vail to manage the telephone industry as part of the war effort. Vail turned around and quickly accepted the terms of a contract written up by his own company, AT&T, laying out the conditions of the government’s new ownership. It was as sweet an arrangement as ever would be made between the federal government and a private company. Among other things:
The federal government . . . agreed to pay to AT&T 4.5 percent of the gross operating revenues of the telephone companies as a service fee; to make provisions for depreciation and obsolescence at the high rate of 5.72 percent per plant; to make provision for the amortization of the intangible capital; to disburse all interest and dividend requirements; and in addition, to keep the properties in as good a condition as before.
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As soon as the ink was dry on the contract, AT&T applied for significant rate increases for service connection charges and received them.
Then, using its new position as a government-owned entity, it began making similar demands on the states. Within five and half months of being “taken over” by the federal government, the company had secured a 20 percent increase in its long-distance rates, a far greater return than it had enjoyed when still wrestling in the competitive free-enterprise marketplace. Even when AT&T was put back in private hands after the war, the rates established by the federal government during its short tenure in government trusteeship remained in effect.
Gerald Brock, professor of telecommunication and of public policy and public administration at George Washington University, summed up what AT&T gained in the process of embracing federal and state government regulation in establishing a national telecommunications infrastructure:
The acceptance of regulation was a risk-reducing decision. It substituted a limited but guaranteed return on capital and management freedom for the uncertainty of the marketplace. It gave the Bell system a powerful weapon to exclude competitors and justification for seeking a monopoly, as well as reducing the chances of outright nationalization or serious antitrust action.
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AT&T remained a virtual monopoly until the 1980s, when, as with Standard Oil, the federal government stepped in and broke it up. By 2011, however, AT&T had climbed back to dominance with a 39.5 percent share of the telecommunications market in the United States. Verizon, AT&T’s main competitor, enjoys 24.7 percent of the market, and together the two companies control 64.2 percent of the telecommunications market in the United States, making them a near oligopoly.
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The telephone provided an agile communications medium for managing far more dispersed economic activity across an urban/suburban landscape. The shift in transport from coal-powered locomotives traveling between fixed points to oil-powered cars, buses, and trucks traveling radially expanded the geographic range of economic activity. The telephone, unlike print and the telegraph, could be everywhere at every moment, coordinating the more voluminous economic activity made possible in the auto era. With the telephone, businesses could supervise new and larger vertically integrated operations with even tighter centralized control in “real time.” The efficiency and productivity gains brought on by the new communications medium were spectacular.
The telephone, of course, required electricity. In 1896, there were about 2,500 electric light companies and nearly 200 municipal power plants operating throughout the United States and an additional 7,500 isolated power plants, with a total capital investment of $500 million—a massive financial outlay.
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Besides producing power for telephone communications, the power plants produced electricity for lighting and to run machinery in the factories and appliances in the home.
The new electrical lighting lit up commercial businesses, allowing for an extension of working hours into the evening, which fed additional economic growth. By 1910, one out of every ten homes in the United States had electricity, and by 1929, most urban homes were connected to the electricity grid.
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Factories were slower to adopt electricity. In 1900, only 5 percent of factories were using electricity.
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That changed quickly with the introduction of the automobile and mass-production assembly lines. Henry Ford was among the first to see the potential of electricity in ramping up automobile production. He would later muse that his ambitious goal of producing an affordable Model T for every working family would have been unrealizable were it not for the electrification of factories and the introduction of electrical motors. He wrote:
The provision of a whole new system of electric generation emancipated industry from the leather belt and line shaft, for it eventually became possible to provide each tool with its own electric motor. . . . The motor enabled machinery to be arranged according to the sequence of the work, and that alone has probably doubled the efficiency of industry. . . . Without high speed tools . . . there could be nothing of what we call modern industry.
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The changeover from steam power to electrification of factories led to a whopping 300 percent increase in productivity in the first half of the twentieth century.
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The electrification of automobile factories unleashed the power of mass production and put millions of people behind the wheel of a car. By 1916, 3.4 million registered autos were on U.S. roads. Fourteen years later, there were 23 million registered cars in the United States.
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The automobile became the key “engine” of economic growth for the whole of the Second Industrial Revolution.
Other critical industries became part of a giant business complex, later referred to as the “Auto Age.” Automobiles consumed “20 percent of the steel, 12 percent of the aluminum, 10 percent of the copper, 51 percent of the lead, 95 percent of the nickel, 35 percent of the zinc, and 60 percent of the rubber used in the U.S.” by 1933.
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One enthusiast, writing in 1932, marveled at the automobile’s impact on the economy, noting that “as a consumer of raw material, the automobile has no equal in the history of the world.”
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The mass production of automobiles kicked the oil industry into overdrive. New oil fields were opening up weekly in America and gasoline stations became an omnipresent part of the American landscape. By the late 1930s, oil had surpassed coal as the primary energy source in America. Texas oil wells became synonymous with American power around the world as the United States became the leading oil-producing country. The
British statesmen Ernest Bevin once quipped that “the kingdom of heaven may run on righteousness, but the kingdom of earth runs on oil.”
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Like the laying down of tracks for rail transport, building roads and mass producing automobiles were expensive undertakings. While road systems were financed by the government in America and everywhere else, the automobile industry—at least in the United States—was financed wholly by private capital. At first, dozens of small car companies came on the scene. Before long, however, the sheer costs involved in creating the large, vertically integrated enterprises necessary for the mass production and distribution of autos narrowed the field to half a dozen automobile giants led by the Big Three—Ford, General Motors, and Chrysler—which remain market leaders to this day.
And, like the railroads, the auto industry realized early on that effective supervision of the many diverse activities that come together in the production and sale of automobiles needed rationalized central management and top-down bureaucratic control to succeed. Nor could the scale of operations be financed by a single individual or family. Every major automobile manufacturer in the United States eventually became a publicly traded corporation.
Putting the economy on wheels also radically changed the spatial orientation of society. Steam-powered printing and coal-powered rail transport encouraged urbanization. Print communication and freight traveling by rail to fixed endpoint destinations largely defined where commercial and residential life clustered. Smaller cities grew into bigger metropolises and new towns were spawned along rail links. Businesses dependent on print communications and freight by rail naturally chose to locate close to the communication/energy hubs.
The coming of the automobile and the construction of a national road system that could carry passengers and freight into rural areas outside the reach of railroad connectivity spawned suburban development in the first half of the twentieth century. The construction of the interstate highway system from the 1950s to the 1980s—the biggest and most costly public works project in history—led to a frenzy of suburban commercial and residential development along the interstate exits. Factories began to relocate away from dense urban centers—which had high real estate and labor costs—to rural areas, transferring deliveries from rail to trucking. The workforce followed. Sixty-five million homes, most in new suburban developments, were built in the United States since 1945, and 48,000 strip malls and shopping centers have been erected as the nation’s population scattered into thousands of suburban enclaves.
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The dispersal of commercial and residential housing was accompanied by the spread of electrical infrastructure and telephone wires and, later, radio and television transmission into new suburban communities.
The dramatic growth of the suburbs and the increasingly complex logistics that came with organizing and integrating economic activity across
tens of thousands of communities led to even more centralized command and control in the hands of fewer industry leaders in each sector as they struggled to capture ever larger vertically integrated economies of scale. By the time the Second Industrial Revolution peaked and crashed in July 2008, when the price of crude oil hit a record $147 a barrel on world markets, the concentration of economic power in the hands of a small number of corporate players in each industry had similarly peaked. Three energy companies—ExxonMobil, Chevron, and Conoco Phillips—are among the four largest U.S. companies and control much of the domestic oil market. I already mentioned that AT&T and Verizon together control a 64 percent share of the telecommunication industry. In a study published in 2010, the federal government found that in most states one electricity company controlled 25 to 50 percent of ownership; overall, just 38 companies—5 percent of the 699 companies identified—control 40 percent of the nation’s electricity generation.
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Four automobile companies—General Motors, Ford, Chrysler, and Toyota—control 60 percent of the automobile market.
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Five media companies—News Corp., Google, Garnett, Yahoo, and Viacom—control 54 percent of the U.S. media market.
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In the arcade, food, and entertainment industry, CEC (Chuck E. Cheese’s) Entertainment, Dave & Busters, Sega Entertainment, and Namco Bandai Holdings control 96 percent of the market share. In the household appliances manufacturing industry, the top four companies—Whirlpool, AB Electrolux, General Electric, and LG Electronics—control 90 percent of the market.
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Similar concentration patterns can be found across every other major sector of the U.S. economy.