The Economics of Innovation in the Telecommunications Industry

By John R. McNamara | Go to book overview

CHAPTER 3
The Origins of the AT&T Divestiture

In the 1950s important telecommunications regulatory issues began to take form. The telephone terminal equipment market was structured in a manner similar to that of the telephone service market. AT&T, the dominant force in the service market, purchased essentially all of its terminal equipment from its subsidiary, the Western Electric Company. Telephones owned by the Bell System were installed in businesses and homes, and all maintenance was performed by Bell System employees. General Telephone, the next largest U.S. telephone company, had a similar manufacturing arrangement with its subsidiary, the Automatic Electric Company. The market for terminal equipment for the remaining independent telephone companies was too small to encourage independent terminal equipment manufacturers to enter the business. AT&T argued that the mandate for a safe, reliable, high-quality national telephone service required that no "foreign equipment" connections to the telephone network be permitted. Federal and state regulators, generally accepting the argument that the telecommunications system was a natural monopoly, tended to support AT&T's determination to provide all customer telephone equipment without exception.

Occasionally a firm would market a product to be used in conjunction with conventional telephones, and when this happened, AT&T responded with threatened or actual legal action. Since 1921, the Hush-A-Phone Company had been marketing a simple cuplike device to be attached to a telephone set, thus providing privacy to the speaker. Over the years AT&T had informed users of the Hush-A-Phone that the device violated

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