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This Month in Business History: The Breakup of the Bell System

January 24, 2022 • Sam Grabel

Forty years ago this month, the federal government settled a lawsuit with American Telephone & Telegraph Company (AT&T), prompting the breakup of one of the largest and most powerful monopolies of the 19th and 20th centuries. The shift gave rise to many local providers—which, in an ironic twist of fate, began to merge into larger, more powerful regional providers and finally into once-again national networks, albeit controlled by several major players rather than just one. Regardless of its long-term effects, the results of the January 8, 1982, settlement forever changed the way that we communicate in the United States and how we view the modern tech monopoly.

Becoming a Monopoly

Before we get into the how and why of the breakup of what was then known as the Bell System, let’s go over a little bit of historical context, starting with the invention of the telephone. The U.S. Patent Office awarded the first patent for the telephone to Alexander Graham Bell in March 1876, though historians have debated for years whether credit for the invention should go to Graybar founder Elisha Gray instead. (Bell and Gray filed similar patents at the same time, and Bell narrowly beat Gray through a story of intrigue and alleged bribery.)

Bell’s father-in-law, Gardiner Greene Hubbard, formed the Bell Telephone company the following year. The American Bell Telephone Company came just a few years later. Finally, in 1885, the American Telephone & Telegraph Company (AT&T) was formally incorporated to provide long-distance service across the United States. Soon, all of American Bell’s capitalization was transferred to AT&T. AT&T became the parent company under which the Bell system housed many of its arms, including research and development (Bell Labs), local and long-distance telecommunications, telegraph (Western Union) and manufacturing (Western Electric).

AT&T was truly a vertically integrated organization which, for many years, flexed its considerable might to bully and acquire smaller regional companies. As AT&T worked to consolidate its control over the nationwide telephone system throughout the 20th century, it became the target of several monopoly and antitrust lawsuits. In 1913, under threat by the Justice Department, AT&T agreed to sell its controlling stake in Western Union and seek government approval before acquiring more independent phone companies. Other major milestones included the Eisenhower administration’s 1956 decision to drop an antitrust suit against the behemoth and allow it to keep Western Electric (its manufacturing arm) in return for staying out of the computer business. Over the next 20 years, AT&T continued to grow its telephone business, ultimately reaching 90 percent of households in the U.S.

Divestiture and ‘Baby Bells’

However, this détente did not last. Steve Coll, author of The Deal Of The Century: The Breakup Of AT&T, told NPR in a 2019 interview: “As the computer age blossomed and computers increasingly interacted with the phone system to create new opportunities for consumers, the monopoly seemed like an obstacle to innovation, an obstacle to the future.” By 1974, there was again trouble in paradise—this time in the form of a Justice Department lawsuit to break up the organization once and for all.

In January 1982, in order to bring the nearly eight-year suit to an end, AT&T agreed to break up its local business into seven smaller regional operating companies known as “Baby Bells.” The divestiture process took two years. When it ended in 1984, AT&T retained only long-distance, Bell Labs and Western Electric.

The regional companies that resulted from the breakup went through a series of mergers and consolidations over the next 25 years. One major landmark during this period was the passage of the 1996 Telecommunications Act, which aimed to spur competition by removing regulatory barriers of entry into any communications market for any company. This expanded the ability of local service providers to compete in long-distance markets, removing the safeguards that were in place to keep each Baby Bell in its own fiefdom. One year later, Bell Atlantic—a Baby Bell that served much of the Eastern Seaboard—expanded into New England via a merger with NYNEX (New York/New England Exchange).

Further consolidation continued throughout the late ’90s and early ’00s. The proliferation of wireless as a new and widely adopted technology caused an arms race as companies competed to expand areas of service. The results can be seen today in the handful of national powerhouses that offer a wide variety of telecommunications services, including landlines, wireless, cable, and fiber-optic internet and television.

Modern Regulatory Relevance

In many ways, the industry has come full circle. Instead of one major company that controls most of the market, there are a few heavy hitters, with smaller regional and local players providing service in between. But this is not to say that the breakup of the Bell System has had no lasting effects—the 1982 deal set a precedent that some experts have cited as a potential avenue of exploration with regard to breaking up major tech giants like Google and Meta.

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