Universal Service: Competition, Interconnection, and Monopoly in the Making of the American Telephone System, and: Telecommunications Competition : The Last Ten Miles

In telecommunications, all roads lead away from history. In the U.S. case, the long and incestuous relationship between the Bell system and its regulators that created and guarded the firm’s monopoly status continues to influence the now liberalized industry. The volumes reviewed here, part of American Enterprise Institute’s studies in deregulation following the passage of the Telecommunications Act of 1996, place two key issues concerning the current marketplace in historical perspective. Milton Mueller presents the history of “universal service,” which he shows did not, contrary to the current usage of the term, mean “a telephone in every home” or social ubiquity until the 1970s. Ingo Vogelsang and Bridger Mitchell discuss the forces of technological innovation and competition that led to the fall of AT&T and now challenge the last bastion of monopoly control in telecommunications, local telephony or “the last ten miles.” (Their book is mostly nonhistorical, and therefore this review pays more attention to the Mueller volume.) Two years after the passage of the 1996 act, and contrary to its intent, the issue of universal service remains unresolved and local competition remains elusive and difficult. The strength of these two books is that they implicitly “predict” these outcomes by showing how the 1996 act barely undid the historical entrenchment of local monopoly and the complexities surrounding universal service.

Mueller has written a provocative book. Universal service as social ubiquity, that most cherished of American regulation’s purported creatures, is a myth, he shows, that resulted from AT&T’s attempts to preserve its monopoly privilege in the 1970s. AT&T argued that the near universal penetration of telephones was a result of its pledge to regulators when signing the Kingsbury Commitment (to interconnect independent operators in 1913), formalized by the Communications Act of 1934. This, argues Mueller, is specious.

Mueller first examines the late 1890s and the early 1900s, when the Bell system competed with independent telephone companies. By 1920, many areas with competition could boast of telephone penetration levels above fifty per hundred households, compared to the national average of thirty at that time. Mueller falsifies one myth here by showing that penetration rates resulted from competition, not monopoly. He then shows how the accounting practices known as “separations” leading to cross-subsidization of local rates by long distance were not effected until the 1950s, yet penetration rates grew from 1920 to 1950. By the 1970s, the household penetration rate was already 85 percent when these separations, bolstered by an important socially progressive measure known as the Ozark Plan, led to over 25 percent of long-distance revenues being allocated to local telephony. Down comes another myth, that of cross-subsidization leading to higher penetration rates. Third, even the congressional debates leading to the 1934 act did not characterize universal service as social ubiquity, despite a few rhetorical words in the preamble. Myth number three destroyed: universal penetration is not a legislative outcome. It was only in 1973 that AT&T’s CEO John B. Butts, in a speech designed to deflect competitive pressures, “harkened to the earliest years of regulation in the 1920s and invoked the special contract between the regulator and the regulated firm” (p. 163).

Mueller shows that from 1907 onward, when Bell started to refer to universal service under the leadership of Theodore Vail, it did so to argue for a ubiquitous, nonfragmented network and not ubiquitous service penetration. But to bring it about, Bell had to be the only interconnected network, as interconnecting independents would rob Bell of its advantage. Bell prevailed over the legislators and...