The Master Switch: The Rise and Fall of Information Empires

by Tim Wu

The Independents, rooted in the farms and small towns of the West, were innovators, but of a conceptual kind, not the technical kind à la Alexander Bell. They saw a different world, in which the telephone was made cheaper and more common, a tool of mass communications, and an aid in daily life. They intuited that the telephone’s paramount value was not as a better version of the telegraph or a more efficient means of commerce, but as the first social technology. As one farmer captured it in 1904, “With a telephone in the house comes a new companionship, new life, new possibilities, new relationships, and attachments for the old farm by both old and young.

Typically, the rural telephone systems were giant party lines, allowing a whole community to chat with or listen to one another. Obviously there was no privacy, but there were benefits to communal telephony other than secure person-to-person

Farmers would use the telephone lines to carry their own musical performances. The

And so, while the Bell Company may have invented the telephone, it clearly didn’t perceive the full spectrum of its uses.

This is such a common affliction that we might name it “founder’s myopia.” Again and again in the development of technology, full appreciation of an invention’s potential importance falls to others—not necessarily technical geniuses themselves

For now, suffice it to say that it was simple farmers in the early 1900s who pioneered the use of the phone line for broadcasting long before the rise of radio broadcasting in the 1920s. Burch’s Mesa Telephone Company offered its customers daily broadcasts of weather, train wrecks, and murders, the interval of programming announced by ten short rings. As Kline writes, “Every evening at a designated time, usually seven p.m., an operator would call all farms on a line and give the time, weather and market reports, newspaper headlines and local news, ‘with a spicing

But for a brief time in the 1890s, all this was different. While we don’t know exact present-value costs, they were low enough that farmers like Edmund Burch, as well as small-town entrepreneurs and rural cooperatives, could effectively compete with Bell. In this way, many towns ended up with two telephone systems, during what we call the “dual service” era.

farmers like Burch in New Mexico could nail wires to farm fences, creating what they called “squirrel lines,” and attach phones at the ends. It was telephony in the Green Acres style. These simple logistics, taken together with the absence of licensing costs, made things easy for motivated self-starters.

a larger network meant a slower switching system, prone to bottlenecks and breakdowns. That weakness allowed the Independents room to start with just a few customers.

In some places Bell had never even offered phone service, allowing the

Relying on its profits in stronger markets, Bell would dramatically undercut the rates of local independent telephone companies in any contested area, a tactic known as predatory pricing. Sabotage of equipment was not unheard of, and it was practiced by both sides.

According to one account, Bell would rip out wires and phones, and “in truly medieval fashion, pile the instruments in the street and burn them, as a horrible example for the future.”*

“The days of prosperity of the Bell companies are gone, never to return. The public has learned to appreciate good telephone service and courteous treatment, and will not again submit to the extortions and antiquated methods of the Boston trust.

By 1907, Paul Latzke would publish a small book called A Fight with an Octopus, in which he revealed the Independents had 3 million phones to Bell’s 2.5 million, and total dominance in the West.

He and a group of other financiers aimed to gain control of the Bell company, wishing not only to reestablish its former dominance but to build the greatest wire monopoly the world had ever seen. And he wanted Vail in charge. Vail knew that this man was to be taken seriously—for this seasonal resident of Jekyll Island was none other than J. P. Morgan, one of the greatest monopolists of that era or any other.13

They also accepted the other lesson of the railroads: without a single master, systemic chaos would undercut efficiency. Vail thought the “opposition” phone companies would stoop to any cut rate, and cut-rate service, just to be in the game. Using the formidable capacity of the Morgans to absorb loss, he undercut the price cutters.15

But he certainly concurred in his enthusiasm for monopoly as the optimal business model. Indeed, as we shall see over and over again, the shift from an open industrial phase to a closed market usually begins when capital interests spy the potential for vastly increased profit through monopoly, or when they demand greater security for their investments. Vail’s access to Morgan’s capital made his vision of the Bell system possible, but it also came with significant strings attached.

In 1909, at Morgan’s direction and using his money, Vail seized a controlling interest in Western Union,

AT&T now controlled all instantaneous long distance communications in the United States.

Part of Bell’s new strategy was to abandon a tactic that had done so much in the 1890s to decimate the Independents: refusal of network connection. Vail’s approach was now more subtle and complex: he used connectivity as a carrot rather than a stick; and it proved, together with merger and acquisition, an irresistible way to dominate the market.

Vail’s agreements offered the Independents membership in the Bell system, but they required the adoption of Bell’s standards and Bell’s equipment and imposed special fees for use of Bell’s long distance lines,

John D. Rockefeller had pioneered the “purchase or perish” model to build Standard Oil.

“You cannot serve two masters. You must choose between the people and a greedy corporation.”19 But even the relatively strong found resistance unsustainable and were forced to join. As for the relatively weak, they might simply be bought outright, sometimes through agents of Morgan who kept secret their affiliation with Bell.

Did the Independents ever have a chance? Not without their own long distance network. Without long lines the Independents were limited in what, ultimately, they could offer the customer.

Here were the progenitors of MCI and Sprint, and the beginnings of long distance competition. Unfortunately, before it had even gotten under way, all the backers suddenly pulled out for reasons that remain mysterious. According to an FCC investigator’s report decades later, in 1936, the pressure on the Traction Kings had come from J. P. Morgan himself, whose designs on a telephone monopoly were by then already formed.

The option of being invited to dinner very effectively softens the fear of becoming dinner. It is the same logic Microsoft would follow in the 1990s, when its Windows operating system was similarly run as a partially open system. Like AT&T, Microsoft invited its enemies to connect, to take advantage of an open platform, hoping they wouldn’t notice or worry that the platform came with a spring trap. For as with Bell, once having made one’s bargain with Microsoft, there was no going back.

Theodore Vail will prove himself a high priest at winning the blessing of the state for monopoly dominance.

In a manner nearly unimaginable today, Vail turned to the government, agreed to restrain himself, and asked to be regulated. Bell agreed to operate pursuant to government-set rates, asking in exchange only that any price regulations be “just and fair.

True, Independents suddenly could hook up with Bell’s long distance lines, but there is little evidence that many of them actually did. Superficially a victory for openness and competition, in time the Kingsbury Commitment would prove the insidious death knell of both.

The trick of the Kingsbury Commitment was to make relatively painless concessions that preempted more severe actions, just as an inoculation confers immunity by a exposing one’s system to a much less virulent form of the pathogen.

The key was earnest profession of a good no one could dispute: making America the best-connected nation on earth by bringing the wonder of the telephone into every American home.

This was something Vail seemed to understand intuitively: that antitrust, perhaps all law, is ultimately pliable by perceptions of right and wrong, good and evil. He understood that the public and government would rise up against unfairness and greed, though not necessarily against size in and of itself.

From his handling of Bell’s antitrust problems emerges a central tenet of Vail’s thinking: the enlightened monopoly should do good as it does well, serving the public in close cooperation with the state. Vail’s view of his firm as the handmaid of government, the telephone as a public utility, is at once the most sympathetic and scariest element of his vision.

Vail’s most meaningful concession—in principle if not in practice—was agreeing to serve as a common carrier.*

Bell’s dedication to common carriage was a promise to serve any customer willing to pay, charge fixed rates, and carry his or her traffic without discrimination.

As a simple example, if a man operates the only ferry over to town, that simple boatman is in a position of great power over other sectors of the economy, even the sovereign authorities.

The big question—now often the multi-billion-dollar question—is how to decide, as a matter of policy, what businesses should be considered common carriers with special duties to the public (as Bell positioned itself), which companies should be run by government (as the Post Office has been since Franklin founded it), and which should be “ordinary services” left mostly to forces of the free market.*

Practically, this focus has led to four basic industries being identified as “public callings”: telecommunications, banking, energy, and transportation. Each plays a certain essential role in the workings of the nation and the economy, and thus these are the industries that have attracted regulation as common carriers, or infrastructure.

In 1921, Congress passed the Graham Act, recognizing AT&T’s monopoly and removing any remaining obstacles to integration. The idea of an open, competitive system had lost out to AT&T’s conception of an

How about the inventors of film technology? In France, a man named Louis Lumière invented a working camera and projector in 1895,

Edison immediately entered the market with the “Vitascope,” essentially the Phantoscope by a different name. Eventually Jenkins had little choice but to sell his own patent interest in the first motion picture projector—for $2,500. “It’s the same old story,” he would say, years later; “the inventor gets the experience, and the capitalist gets the invention.

Motion Pictures Patent Company, in the offices of which we first meet Zukor. The Film Trust, as it would be more commonly known, comprised the largest film producers (Edison, Biograph, and others) and the leading manufacturer of film stock, Eastman Kodak. In the name of avoiding “ruinous” competition, this cartel pooled sixteen key patents, blocked most film imports, and fixed prices at every step of filmmaking and exhibition.

We have seen how important outsiders are to industrial innovation: they alone have the will or interest to challenge the dominant industry. And we have seen the power of considerations beyond wealth or security—factors outside the motivations of the ideal rational economic actor—in inspiring action to transform an industry. Laemmle’s instinctive loathing of the Trust’s domination, his desire to be free, would have a deep and lasting effect on American film.

In 1910, the Trust began to consolidate the film exchanges by systematically buying them out, acquiring, according to Upton Sinclair, 119 of the 120 major exchanges.13

The name Fox continues to loom large in American media, whether as Twentieth Century-Fox, or Fox News, or Fox Broadcasting. And here is the proverbial source of the Nile: an angry rebel with socialist leanings who refused to knuckle under.

Laemmle had promised prospective coconspirators “the best Films” even while his break with the Trust cost him his access to the only films available. However improbable, the only conceivable options were to violate the Trust’s ban on imports, or to create their own competing supply. The former—Zukor’s course—held its own limitations, and so, not without misgivings, Laemmle and Fox became film producers. Thus was the Hollywood studio born, not out of choice, let alone glamour, but of brutal necessity.

without a license was to violate patents owned by the Trust. Beginning in 1910, the Trust commenced a scorched-earth legal campaign meant to make an example of Laemmle. Over three years, their lawyers would sue him 289 times. Laemmle

The safest refuge was Los Angeles, from which it was only a hop-skip-and-jump to the Mexican border and escape from injunctions and subpoenas.”20 Whatever it stands for today, Hollywood was once a place for industry outlaws on the lam.

If detectives showed up, they could pile actors, scenery and cameras into a car and disappear across the border for a few days.21 Less romantically, Tino Balio points out that

The Trust’s rules controlled not just costs, but the very nature of what film, as a creative medium, could be.