fones19 Nov 2005
In doing some research on the history of telecommunications/Internet subsidization by the government (yes, this is what I do for fun), I ran into this paper by Adam Thierer at the Cato Institute on the history of the Bell/AT&T monopoly’s development. It’s a decent paper that provides a good tour of the process, but it draws some questionable conclusions.
First we have Thierer’s explanation of why the telecommunications industry is not an inherently natural monopoly, by citing the fact that as soon as Bell’s patents expired, the competition in the industry exploded:
Economies of scale constitute only part of the natural monopoly equation; high barriers to market entry constitute the other half. Yet, despite the large costs associated with telephone service initiation, new competitors were entering the market easily during this period.
Not a fair statement. In the period being discussed (roughly 1894 - 1913), telephone usage was still a relatively localized affair. The automatic exchange technology that would make wider-area telephone communication possible was still being invented and refined during this period. The first trans-atlantic phone call wasn’t even made until 1927. So to assert that thriving competition during this period is evidence that there is no natural monopoly in the telecommunications industy is not accurate, because the infrastructure that proves the critical element of the barrier to entry hadn’t even been developed or conceived of yet.
The lack of competition and subsequent post-Bell-patent competition is evidence only of the restrictive effects of the patents at the time. As technology improved, and the patents expired, competitors were free to expand into unserved markets with a relatively low barrier to entry: telephones and circuits on a local scale. Although around this time Bell only had 40-50% of the market share, it was a solid plurality, and it was the seeds of the eventual evolution into a natural monopoly.
The rapid ascendancy of competition casts doubt on the natural monopoly model of this industry. It appears AT&T’s only claim to monopoly power prior to this period could be attributed to their numerous patents, not superior economies of scale as the natural monopoly theorists believed.
So, this earlier statement is accurate, though it doesn’t cast doubt on the natural monopoly model of the telecommunications industry of the late 20th century. That industry, as we knew it then and know it now, didn’t exist yet, and the market was not nearly saturated.
The essay continues to claim that the Kingsbury Commitment was arranged such that instead of defeating monopoly it simply encouraged oligarchical collusion, and here, he’s spot-on. AT&T was forbidden for buying more independents than it sold, but as long as this buying and selling kept markets segregated and monopolized by either Bell or the independents, no price competition could take place. Bell’s strategic power here cannot be ignored. Although their market domination was not total, they still set the pace. As for how or why this fact does not confirm the edge that they had in their initial investment in a natural monopolistic industry, we’re left with mere wishful thinking:
Hence, AT&T’s short-term deal to steer clear of government regulation, would have long-term gains exactly the opposite of those the government supposedly desired. This was the beginning of the end for telephone competition (see Figure 1). Although it is impossible to say exactly what would have happened if AT&T had not been pressured into the Kingsbury Commitment, it is not outrageous to hypothesize that competition would have continued to flourish.
It’s not outrageous, but it’s not very likely, either.
The treatment of the subsequent periods of nationalization with Vail at the helm are pretty fair. Vail clearly saw the advantages of nationalization as a convenient venue to quash competition and consolidate his monopoly. Vail convinced Wilson that monopoly control over the phone system was inevitable and desirable – the distinction over whether the control was placed in the hands of public or private hands was a mere naunce. The aid of the state to AT&T during this period of nationalization alone was immense:
By the time the industry was returned to private control on August 1, 1919, the regulatory route to competition elimination had paid off handsomely for Vail and AT&T. Of the estimated $50 million in rate increases approved by the postmaster general during nationalization, approximately $42 million, or 84 percent went to AT&T. Additionally, the government cut AT&T a $13 million dollar check at the end of the period to cover any losses they may have incurred, despite the fact that none were evident.
AT&T had the best of both worlds. They could claim to be held in the grasp of strict regulation while their competition was all but quashed – reaping state subsidization all the while.
The last part of the essay tackles the fact that rate regulation essentially solidifed the monopoly of AT&T by allowing the government to enforce rate hikes for urban/business populations in order to subsidize the growth of rural markets. While this makes perfect sense from a progressive/social perspective whose aim would be the improvement in the quality of life for everyone, it represents the danger in pseudo-nationalization as the side effect of a socialist influence in a thoroughly capitalist nation. It’s tough to say whether the collusion between the government and AT&T in consolidating its monopoly was nefarious or in the misguided interest of truly nationalizing what is inherently a natural monopoly to begin with. Regardless, it represents the unpleasant side-effect of half-assing nationalization.
Vail was more prescient than anyone could have possibly realized. The subsidization of the government, unless it’s performed with the strictest supervision of the people’s interest in mind, can only result in a massive injection of privilege and wealth into the private industry, which will invariably use it to its own advantage.
It reminds me of Kevin Carson’s take on colonial liberalization – a different context, but a similar theme:
The faux “free market” rhetoric of the ASI and other neoliberals will be nothing but bullshit until they first deal with initial questions of justice in the starting distribution of property titles. Otherwise, their version of the “free market” really just means a massive looting spree, followed by the proclamation “No coercive intervention in the market starting… NOW!”
That is .. “NOW”, only after the government (read: the taxpayer) has funded and subsidized the industry to the point of total domination and competition-free self-sufficiency. “NOW” we can pretend to be in favor of the “free” market. This is the fallacy of the Cato Institute’s repeated professions of support for “free” market. The “free” market they are campaigning for is one in which the balance of power is tilted in favor of large oligarchies of corporations by decades of government funding and subsidization that continues to this day.
Their unabashed shilling for the interests of monopoly in the name of “free market” liberalization is something I hope to attack in subsequent posts.