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Bell System

American telephone service monopoly (1877–1984)

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Since the 1910s, American antitrust regulators had been observing and accusing the Bell System of abusing its monopoly power and had brought legal action multiple times. In 1974 the Antitrust Division of the U.S. Department of Justice brought a lawsuit against Bell claiming violations of the Sherman Antitrust Act. In 1982, anticipating that it could not win, AT&T agreed to a Justice Department-mandated consent decree that settled the lawsuit and ordered it to separate itself from its local phone companies, who would be broken up into seven "Regional Bell Operating Companies" (known as the "Baby Bells"). This ended the existence of the conglomerate in 1984.

Following the breakup, the Baby Bells were independent companies and several of them became large corporations. However, in wake of the Telecommunications Act of 1996 which removed various restrictions placed on the Baby Bells as part of the breakup, many of them, as well the former parent company, later re-merged. As a result, by 2026 most of the assets and geographical service areas of the former Bell System had been re-assembled into two Baby Bells descendants: AT&T and Verizon.

History

In 1877, the American Bell Telephone Company, named after Alexander Graham Bell, opened the first telephone exchange in New Haven, Connecticut. Within a few years local exchange companies were established in every major city in the United States. Use of the Bell System name initially referred to those early telephone franchises and eventually comprised all telephone companies owned by American Telephone & Telegraph, referred to internally as associated companies, regional holding companies, or later Bell operating companies (BOCs).

In 1899, American Telephone & Telegraph (AT&T) acquired the assets of its parent, the American Bell Telephone Company. American Bell had created AT&T to provide long-distance calls between New York and Chicago and beyond. AT&T became the parent of American Bell Telephone Company, and thus the head of the Bell System, because regulatory and tax rules were leaner in New York than in Boston, where American Bell was headquartered. Later, the Bell System and its moniker "Ma Bell" became a term that referred generally to all AT&T companies, of which there were five major divisions:

  • AT&T Long Lines, providing long lines to interconnect local exchanges and long-distance calling services, and international lines including submarine cables
  • Western Electric Company, Bell's equipment manufacturing arm
  • Bell Labs, conducting research and development for AT&T and Western Electric; ownership initially equally split between Western and AT&T
  • Bell operating companies, providing local exchange telephone services
  • AT&T, the American Telephone and Telegraph company, who led the combined enterprise in planning and finance.

In 1913, the federal government challenged the Bell System's growing monopoly over the phone system under AT&T ownership in an anti-trust suit, leading to the Kingsbury Commitment. Under the commitment, AT&T escaped break-up or nationalization in exchange for divesting itself of Western Union and allowing non-competing independent telephone companies to interconnect with its long-distance network. After 1934, the Federal Communications Commission (FCC) assumed regulation of AT&T.

Proliferation of telephone service allowed the company to become the largest corporation in the world until its dismantling by the United States Department of Justice in 1984, at which time the Bell System ceased to exist.

Formation under Bell patent

Receiving a U.S. patent for the invention of the telephone on March 7, 1876, Alexander Graham Bell formed the Bell Telephone Company in 1877, which in 1885 became AT&T.

When Bell's original patent expired 15 years later in 1894, the telephone market opened to competition and 6,000 new telephone companies started while the Bell Telephone company took a significant financial downturn.

On April 30, 1907, Theodore Newton Vail returned as President of AT&T. Vail believed in the superiority of one national telephone system and AT&T adopted the slogan One Policy, One System, Universal Service. This became the company's philosophy for the next 70 years. Under Vail, AT&T began acquiring many of the smaller telephone companies including the Western Union Telegraph Company.

Kingsbury Commitment

In response to the threat of antitrust action from government, AT&T entered into an out-of-court agreement, known as the Kingsbury Commitment with the Department of Justice in 1913. AT&T committed to sell its $30 million in Western Union capital stock, allow competitors to interconnect with its long-distance telephone network, and not acquire other independent companies without permission from the Interstate Commerce Commission.

Nationwide monopoly

The Bell trademark was used from 1921 through 1969 by both the AT&T corporation and the regional operating corporations to co-brand themselves under a single Bell System trademark. For each regional operating company, its name was placed where "name of associated company" appears in this template version of the trademark.

Bell system telephones and related equipment were made by Western Electric, a wholly owned subsidiary of AT&T Co. Member telephone companies paid a fixed fraction of their revenues as a license fee to Bell Labs.

As a result of this vertical monopoly, the Bell System effectively owned most telephone service in the United States by 1940, from local and long-distance service to the telephones. This allowed Bell to prohibit its customers from connecting equipment not made or sold by Bell to the system without paying fees. For example, if a customer desired a style of telephone not leased by the local Bell company, the customer was required to purchase the instrument at cost, furnish it to the telephone company for rewiring, pay a service charge, and a monthly lease fee for using it.

In 1949, the United States Department of Justice alleged in an antitrust lawsuit that AT&T and the Bell System operating companies were using their near-monopoly in telecommunications to attempt to establish unfair advantage in related technologies. The outcome was a 1956 consent decree limiting AT&T to 85% of the United States' national telephone network and certain government contracts, and from continuing to hold interests in Canada and the Caribbean. The Bell System's Canadian operations included the Bell Canada regional operating company and the Northern Electric manufacturing subsidiary of the Bell System's Western Electric equipment manufacturer. Western Electric divested Northern Electric in 1956, but AT&T did not divest itself of Bell Canada until 1975. ITT Inc., then known as International Telephone & Telegraph Co., purchased the Bell System's Caribbean regional operating companies.

The consent decree also forced Bell to make all of its patents royalty-free. This led to substantial increases in innovation, in particular in the electronics and computer sectors. Steven Weber's The Success of Open Source characterizes the consent decree as important in fostering the open source movement.

The Bell System also owned various Caribbean regional operating companies, as well as 54% of Japan's NEC and a post-World War II reconstruction relationship with state-owned Nippon Telegraph and Telephone (NTT) before the 1956 boundaries were emplaced. Before 1956, the Bell System's reach was truly gargantuan. Even during the period from 1956 to 1984, the Bell System's dominant reach into all forms of communications was pervasive within the United States and influential in telecommunication standardization throughout the industrialized world.

The 1984 Bell System divestiture brought an end to the affiliation branded as the Bell System. It resulted from another antitrust lawsuit filed by the U.S. Department of Justice in 1974, alleging illegal practices by the Bell System companies to stifle competition in the telecommunications industry. The parties settled the lawsuit on January 8, 1982, superseding the former restrictions that AT&T and the DOJ had agreed upon in 1956.

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