Undoubtedly, one of the greatest inventions of the 19th century was the telephone, and
it is safe to say that the world would not be the same without it.
That’s why today we’ll be exploring the company that built the American telephone
system and that remains the world’s largest telecom business to this day, AT&T.
This video is brought to you by Tab for a Cause, a free browser extension that donates
money to charity with every new tab open without costing you a single dime.
While there is some controversy over the true inventor of the telephone, it is Alexander
Graham Bell that was awarded the patent and it was his company that would go on to spread
it across America. The phone came to life on March 10, 1876 and
the first phrase ever whispered down the wires was “Mr. Watson, come here. I want to see
you”, spoken by Bell to his assistant. Just a year later, he had already found several
financiers to back his invention, including J. P. Morgan, and thus in 1877 they set up
the Bell Telephone Company and then the New England Telephone company in 1878.
Their model was to license the telephone to local operating companies around Chicago,
Boston and New York. Bell himself was much more focussed on his
work as an inventor and by 1879, he had sold his share in both companies to a group from
Boston, who consolidated the two parts into the National Bell Telephone Company.
If all these different names sound confusing, well, I see your point, but the real history
of AT&T is all about whether it’s one company or many.
If you look at the largest telecom businesses in the world, you’ll see that most of them
were state-run telephone operators. China Mobile, Deutsche Telekom, Telefonica;
all these and others started out as government entities that were originally run by the post
office. But the US never had a state run phone operator,
partly because it goes against the nature of American values, but also because, for
America, the telephone service was a business first and utility second.
So, why did the Bell company license out the operating service rather than building it’s
own networks and having complete control? It’s not like they had any rivals and they
did own the patent. In short, it was simply a matter of time and
capital. Bell’s patents weren’t indefinite, so
the Bell company had a limited time to cover as much area as possible, before competitors
could pop up. By licensing, it could avoid spending the
millions of dollars necessary to set up the telephone service in a new area.
Instead, it gave 5- to 10-year contracts to independent operators, who would pay the Bell
company $20 per phone per year and then also give it the right to buy the operator's property
once the contract was over. It was actually a pretty sweet deal: the company
didn’t have to invest a single dime in telephone lines and would get a fixed income, with which
to buy out the operator in less than a decade. But Bell had a more important place to spend
its money, so in the end the company only bought about a 30-50% stake in most operators.
So what was this other project Bell was investing in?
Well, part of the deal with the operators was that they could expand in their own territory,
but could not link up with other operators, regardless of whether they were a part of
the Bell system. This meant that there was no effective way
to make long-distance calls, and this is what the Bell company was interested in.
It was the only company rich enough to build its own network of long-distance telephone
lines, and although in doing so it ended up with a ton of debt, it now had a complete
monopoly on the long-distance phone service. The Bell company set up a subsidiary to manage
this new network in 1885, and it called it the American Telephone and Telegraph Company,
or AT&T for short. Over time, the long-distance network would
become the backbone of the Bell company. Even after all of Bell’s patents had expired,
AT&T were the only company that could provide service across the whole nation.
Of course, local independent operators started popping up left and right and by 1907, they
actually ran just over half of America’s telephones.
By that point, around 20% of American homes had a telephone, so there was a lot of demand
for the service. But while you could use your local operator
to call your boss or shout complaints at the mayor, but the only way to make calls outside
the city, was through AT&T. Of course, this early network wasn’t particularly
good: the service quality was downright abysmal, not to mention the customer support.
Because of this public relations crisis and AT&T’s immense debt, J. P. Morgan was able
to take control of the company and to instate his own man, Theodore Newton Vail, as president.
He set about restoring AT&T’s image, and also decided to invest heavily in research
and development, setting up the now-famous Bell Laboratories in 1925.
Bell Labs, by the way, is now owned by Nokia and it’s been one of the world’s leading
scientific institutes for almost a century. It is responsible for 8 Nobel Prize winning
works, including the creation of the transistor, the “C” programming language, and the
discovery of cosmic background radiation, one of the key pieces of evidence for the
Big Bang Theory. But back to AT&T.
By the start of the Second World War, they had $5 billion in assets, which was light
years ahead of any other competitor. Thanks to aggressive acquisition tactics,
they controlled a huge majority of US phones and ran 98% of long distance lines.
They played a big part in the war effort, thanks to the research done through Bell Labs
and Western Electric, an early phone manufacturer who they had purchased in 1881.
The war effort paid off for them too, since it caused a big jump in long distance calls,
which continued even after the fighting was over.
After the war came the space race, where Bell Labs was once again a major player, this time
with satellite technology. Their communications satellite Telstar 1 was
the first to relay television and telephone calls through space, as well as giving the
first transatlantic live feed. They worked hand in hand with NASA, but despite
their heavily involvement with the government on research and development, there were some
big question marks over their business practices, especially around how they controlled the
telecoms market. An agreement was signed in 1956 that limited
AT&T to the telephone business alone and that also required it to license its patents to
anyone who was interested. In 1968, a further ruling by the FCC forced
AT&T to allow third parties to connect to their network, in an aim to stop their monopoly
over the long-distance telephone lines. This eventually lead to the creation of the
answering machine, the fax machine and the modem so, see, the FCC wasn’t always bad.
But even after giving away access like that, AT&T still had huge power over the network,
and so the government fought a long and bitter battle in the courts that would take 8 years
to settle. Finally, in 1982, United States v. AT&T ended
with the breakup of the AT&T network, or Bell System as it was called, on antitrust grounds.
A total of seven independent companies were carved out of the former AT&T, leaving it
a shell of its former self. These new companies came to be known as the
Baby Bells. Two of them went on to become Verizon.
Another one, called Southwestern Bell Corporation, eventually bought up three of the other Baby
Bells and the weakened AT&T itself. In the end, although most of the Baby Bells
ended up back together, the breakup did give them a unique opportunity.
You see, the 1956 agreement that made AT&T stick to telephone business had prevented
them from entering the computer market. So, after 1982, while AT&T did lose power
over regional networks, they kept the long distance operations and, most importantly,
could finally take a bite at computers...no pun intended.
Of course, it wasn’t easy and the next 20 years saw the company constantly changing
strategies in order to keep up with the lightning pace of development happening in the computer
industry. Its long distance operations were slowly eroded,
partly through new legislation, but also thanks to the development of fibre optics, which,
coincidentally, was inspired by Alexander Graham Bell’s photophone that had transmitted
a voice message using light, all the way back in 1880.
By 2005, when Southwestern Bell Corporation finally bought its former parent for $16 billion,
AT&T was like roadkill picked apart by buzzards. Only their consumer and business services
had remained; their Wireless, Broadband and telephone systems were gone, not to mention
Bell Labs. So, the AT&T we know today is really the work
of SBC, simply rebranded under this more famous name.
Today, the company’s new direction is wireless. Through a series of acquisitions, AT&T became
the second largest cellular provider in the US, just barely behind Verizon.
In 2015 they also acquired DirecTV, a satellite television service providing some of the biggest
channels such as ESPN, HBO, and numerous major news networks.
They spent almost $50 billion to get it, but of course the real elephant in the room is
AT&T’s planned acquisition of Time Warner. It’s not very clear whether US regulators
are gonna approve it, but if they do, the combined company would be the second largest
broadband provider in the US. On top of that it would also have ownership
of Warner Bros, DC Comics, CNN and a bunch of other major properties.
Naturally, monopoly concerns have been raised by pretty much everyone, but this time around
AT&T have definitely learnt their lesson. Since 2015, they have spent close to $30 million
on political donations and today they have over a hundred registered lobbyists.
It’s pretty obvious that AT&T really want this deal to go through, but for now we’ll
just have to wait and see what happens. Now, before you click off this video and open
a new tab, I want you to check out Tab for a Cause.
It’s a free browser extension that modifies your new tab page so that every time you open
a new tab, you raise between a tenth and a third of cent for your favorite charity.
That might not seem much, but it actually adds up.
In fact, so far Tab for a Cause has raised almost $400,000 for charity.
This week they’re focusing on Puerto Rico, which as you know was hit very badly by Hurricane
Maria and will likely remain without power for months to come.
With Tab for a Cause you can help the recovery of Puerto Rico, and numerous other charities
across the world, by simply browsing the web as you’ve always done.
When it comes to charity, every little bit helps, and collectively we can make a big
difference. That’s why I want you to visit the link
in the description and to download their free browser extension.
I’d love to hear which charities you’ll be supporting, so do let me know on Reddit,
Twitter or Facebook. Thanks for watching, and a big thank you to
all our patrons for supporting us, and as always: stay smart.