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Constructing an Industrial Divide: Western Union, AT&T, and the Federal Government, 1876–1971

Published online by Cambridge University Press:  13 December 2011

David Hochfelder
David Hochfelder
Affiliation:
DAVID HOCHFELDER is assistant editor of the Thomas A. Edison Papers atRutgers University.
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Abstract

An 1879 contract between Western Union and Bell partitioned the electrical communications industry between the telegraph and telephone markets. Historians typically view this contract as the start of both Western Union's decline and Bell's rise, and they have treated these as largely separate processes. This article argues instead that these processes were linked by a porous and shifting boundary between the two industries. Legal, technical, and regulatory factors interacted to shape this boundary over the next century. The 1879 contract failed to keep Bell out of long-distance communications, as Bell used its market power, geographic reach, and technological superiority to penetrate this boundary. Throughout much of the twentieth century, federal regulators and Western Union executives attempted to strengthen this divide through regulatory means. The attempt failed because AT&T controlled key telegraph technologies and had considerable market power. While regulators propped up Western Union as the only competitor to AT&T, by the 1960s it was offering only token competition.

Type
Articles
Information
Business History Review , Volume 76 , Issue 4: entrepreneurs, regulation, and technological innovation in America , Winter 2002 , pp. 705 - 732
Copyright
Copyright © The President and Fellows of Harvard College 2002

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References

1 The Bell Telephone Company was formed in the summer of 1877. The company setup local operating companies by assigning patent rights to territories in exchange for half of the local companies' stock. Following the 1879 agreement with Western Union, the parent company reorganized as the American Bell Company in 1880 and brought its total capital up to $5million. In 1885 the Bell interests established AT&T as the subsidiary of American Bell devoted to establishing the long-distance telephone business. In 1900, AT&T became the parent company of the Bell interests through an exchange of American Bell and AT&T stock and a rechartering of the corporation from Massachusetts to New York. For a good summary, see Brock, Gerald W., The Telecommunications Industry: The Dynamics of Market Structure (Cambridge, 1981), ch. 4.Google Scholar

2 Bell filed his patent application on 17 Feb. 1876, a few hours before Elisha Gray filed his patent caveat on telephony. The crucial claim of Bell's patent was to the transmission of sounds by means of “electrical undulations.” Bell succeeded in transmitting speech about a month later, somewhat differently from the way he had described it in his patent. In January 1877, he filed a new patent for an improved telephone. See Brock, 89'91.

3 Josephson, Matthew, Edison: A Biography (New York, 1959), 141'2Google Scholar; Bruce, Robert V., Bell: Alexander Graham Bell and the Conquest of Solitude (Boston, 1973), 229–30Google Scholar; George David Smith, “Forfeiting the Future,” Audacity (Spring 1996).

4 Bruce, 229–30. Gardiner Hubbard's correspondence in his personal papers and in the AT&T corporate records suggests that he and Western Union negotiated over the course of about a year, from Oct. 1876 to Dec. 1877. See, in particular, Hubbard to Gertrude Hubbard, 16 Oct. 1876 and 15 Sept. 1877, Hubbard Family Papers, Library of Congress; Hubbard to Cornish, 16 Sept. 1877, Box 1053, AT&T Archives, Warren, N.J.; Hubbard to T.B.A. David, 14 Oct. 1877, and Watson to Hubbard, 4 Dec. 1877, both in Loc. 632–04–04, AT&T Archives. However, the Orton and Green letterbooks (in the Western Union Telegraph Collection, National Museum of American History Archives Center, Smithsonian Institution) make no mention of any such negotiations before Feb. 1878.

Green's remarks are in Report of the Committee of the Senate upon the Relations between Labor and Capital, and Testimony Taken by the Committee (Washington, D.C., 1885), 882. Watson first made his remarks to a meeting of the Telephone Pioneers of America in 1913, which AT&T subsequently included in its public relations piece, The Birth and Babyhood of the Telephone, 23.

5 On Orton regarding the telephone as a “toy,” see Prescott, George, Bell's Electric Speaking Telephone: Its Invention, Construction, Application, Modification and History (New York, 1884), 444.Google Scholar See also Garnet, Robert W., The Telephone Enterprise: The Evolution of the Bell System's Horizontal Structure (Baltimore, 1985), 11.Google Scholar Yet Garnet praises Western Union's managers for having “an enlightened appreciation for technical innovation” (p. 45).

During Orton's tenure as president between 1866 and 1878, the company spent about $1million on developing and acquiring telegraph and telephone patents, and his successor Norvin Green estimated that their value to Western Union was twenty to fifty times this amount. See Western Union's annual report for 1869, pp. 15 and 37'40; Orton to James D. Reid, 21 Sept. 1869, Orton Letterbook 6; and Green to Gen. Wager Swayne, 19 Mar. 1881, Green Letterbook 3. For Edison's work on the telephone, see Bruce, 173–4, and Tosiello, Rosario Joseph, The Birth and Early Years of the Bell Telephone System, 1876–1880 (New York, 1979), 223.Google Scholar

6 This “postal telegraph” movement lasted from 1866 to about 1920.Between 1866 and 1890, reformers introduced over seventy bills in Congress to establish a government telegraph service, either to compete with or to acquire Western Union. See Hochfelder, David, “A Comparison of the Postal Telegraph Movement in Great Britain and the United States, 1866–1900,” Enterprise and Society 1 (Dec. 2000): 739–61.CrossRefGoogle Scholar The notion that Orton's dislike for Hubbard led him to reject his offer apparently has two ultimate sources. On 4 Dec. 1877 (Loc. 632–04–04, AT&T Archives), Watson wrote Hubbardthat he had “caused the W. U. a great deal of trouble and they are determined to sit down on him this time.” George Prescott also claimed (p. 444) that in the summer of 1875 Bell briefly conducted telephone experiments in Western Union's headquarters, but when Orton learned that Hubbard, “who was personally obnoxious to him,” was Bell's principal financial backer, Orton stopped Bell's experiments. However, Hubbard's papers show that he and Orton were on friendly terms, despite their professional differences. They even socialized from time to time, and on one occasion Orton invited Hubbard home to dine with him and his wife. See Hubbard to Gertrude Hubbard, 25 Nov. 1877; 16 Dec. 1870; 2 Oct. 1873; and Hubbard to Robert McCurdy, 13 Feb. 1874–all Hubbard Family Papers, Box. 3.

7 Hubbard later admitted that he “doubt[ed] if any instrument of value can be made under [Bell's] patents of 1876,” and that Bell's patents of 1877 contained “the valuable features of the invention.” Hubbard to Cornelius Roosevelt, 21 Jan. 1878, Box 7, Hubbard Family Papers. See also Hubbard to Gertrude Hubbard, 13 and 21 Sept. 1878, Box 3, Hubbard Family Papers. For a general account, see Garnet, 32–3.

8 On Western Union's acquisition of Gold and Stock, see Orton to Anson Stager, 22 Mar. 1871, and Executive Order 124, 15 June 1871, Orton Letterbook 9. See also Israel, Paul, From Machine Shop to Industrial Laboratory: Telegraphy and the Changing Context of American Invention, 1830–1920 (Baltimore, 1992), 125–7.Google Scholar

As late as the summer of 1879, Orton's successor, Norvin Green, insisted that Western Union own “the larger share of the joint Company” to be set up by Bell and Western Union, or at least “an equal partnership in all Telephone inventions, franchises, and properties.” See Green to George Gifford, 8 July 1879, Green Letterbook 2. On the failed agreement of 1878, see Green to Charles A. Cheever, 9 Feb. 1878, Green Letterbook 1. On the failed agreement in the spring of 1879, see “memorandum for Dr. White,” May 1879, Green Letterbook 2.

9 Watson to Hubbard, 4 Dec. 1877, Loc. 632–04–04, AT&T Archives. For a general description of the negotiations of 1878 and 1879, see Garnet, 46–50.

10 For a description of these reasons, see Stone, Alan, Public Service Liberalism: Telecommunications and Transitions in Public Policy (Princeton, 1991), 65–6.Google Scholar

11 “Affidavit of George Gifford,” 19 Sept. 1882, Box 1006, AT&T Archives. Green to Forbes, 3 Sept. 1879, Green Letterbook 2. Historians have typically taken both Gifford's affidavit and Green's letter only as admissions that Western Union was aware that Bell's patents were valid and controlling, and have typically overlooked their assertions of Western Union's strong patent position.

12 Gould's drive at Western Union unfolded in two stages. In 1874 he acquired a small competing telegraph company, the Atlantic and Pacific, and used his access to railroad rights of way to expand it into a major competitor. Western Union bought it out in late 1877, giving Gould a large block of Western Union stock. In May 1879 Gould set up the Central Union Telegraph Company as a small rival; in August, after a significant expansion of its facilities, Gould unveiled it as the American Union. In early 1881, Gould acquired working control of Western Union, replacing William H. Vanderbilt as the shareholder of record. See Grodinsky, Julius, Jay Gould: His Business Career, 1867–1892 (Philadelphia, 1957), 148–62, 269–85Google Scholar; and Klein, Maury, The Life and Legend of Jay Gould (Baltimore, 1986), 195–205, 277–82.Google Scholar

13 Neither Grodinsky nor Klein makes any mention of the telephone or Bell. However, correspondence between American Union and Bell managers showed that both companies realized the value of an alliance. See Hall to Vail, 23 June 1879, Loc. 632–04–04, AT&T Archives; and Tosiello, 460–7. Also, in 1889 Theodore Vail recalled that Gould had bought “two or three of our exchanges” see Vail to J. J. Storrow, 24 Jan. 1889, Box 1094, AT&T Archives. Furthermore, the Bell interests had a long history of association with Gould's telegraph schemes, dating back to 1876; see material in Box 1053, AT&T archives.

14 Green to Gifford, 8 July and 18 Aug. 1879; Green to Sir Hugh Allan, 19 Aug. 1879; Green to W. H. Forbes, 3 Sept. 1879; all in Green Letterbook 2. For a general account, see Bruce, 270–1. For Western Union's equity stakes in telephone exchanges, see Western Union's annual report for 1880, 8–9.

15 In 1881 and 1884, Western Union sold its 33 percent interest in Western Electric and its stake in Southern Bell. Green also unsuccessfully attempted to sell off Western Union's remaining telephone interests to Bell in 1887 in order to fund new telegraph construction. See Western Union's annual report for 1880, pp. 8–9; Green to James Demarest, 22 Mar. 1883, Green Letterbook 5; and Western Union Executive Committee Minutes, 24 Dec. 1902, vol. J, 201. For telephone income from the late 1880s, see the annual statements of the American Speaking Telephone Company, Western Union Telegraph Collection; and Green to Forbes, 6 Apr. 1887, Box 1131, AT&T Archives. On the sale of Western Electric, see Stone, 116–19, and Smith, George David, The Anatomy of a Business Strategy: Bell, Western Electric, and the Origins of the American Telephone Industry (Baltimore, 1985).Google Scholar On Western Union's attempts to sell telephone properties in the 1880s, see Green to Col. E. W. Cole and E. S. Babcock, 20 Aug. 1884, Green Letterbook 6; Green to Forbes, 6 Apr. 1887, Green Letterbook 8.

16 The major source of Western Union's obstructionism seemed to be spite on the part of two directors, Tracy Edson and Hamilton Twombly, who regarded the settlement as far too favorable to Bell. See J. J. Storrow to W. H. Forbes, 27 Feb. and 8 Mar. 1880, Box 1217, AT&T Archives.

17 Record Book, American Speaking Telephone Co., entries for 22 Jan. 1883 and 14 Apr. 1913, Western Union Collection; Forbes to Storrow, 2 Mar. 1883, President's Letterbook 2G, copy in Box 1094; E. R. Hoar to Forbes, 6 Mar. 1883; Charles H. Swan to Hutchinson, 26 Jan. 1901, Box 1094; J. H. Benton to AT&T, 5 Apr. 1905, Box 1094; “Introductory Statement,” n.d., Box 1094: all in AT&T Archives; Federal Communications Commission, “Investigation of the Telephone Industry in the United States,” 76th Cong., 1st sess., H. R. Doc. 340, 1939, 124; “Fight for Millions,” Boston Herald, 14 June 1899, from “Misc. Clippings, Telephone,” Western Union Collection.

18 Oslin, George P., The Story of Telecommunications (Macon, 1992), 259, 262Google Scholar; and transcript of telephone interview of Gen. Robb on 4 Aug. 1933, Box 1014, AT&T Archives.

19 Quote is from Fagen, 57. On Bell's R&D in this period, see Hoddeson, Lillia, “The Emergence of Basic Research in the Bell Telephone System, 1875–1915,” Technology and Culture 22 (July 1981): 512–44CrossRefGoogle Scholar; and Mueller, Milton, “The Switchboard Problem: Scale, Signaling, and Organization in Manual Telephone Switching, 1877–1897,” Technology and Culture 30 (July 1989): 534–60.CrossRefGoogle Scholar

20 Hamilton, B. P., “Early Bell System Telegraph Services,” Bell Laboratories Record, Oct. 1945, 373–6.Google Scholar Forbes to Green, 7 Mar. 1887, and Green to Forbes, 6 Apr. 1887, both in Box 1131; Green to Stockton, 25 Feb., 17 Aug., and 30 Oct. 1888, all in Box 1217; Green to Hudson, 15 Jan. 1891, Loc. 134–03–02; all in AT&T Archives.

21 Forbes to Stockton, 5 Apr. 1888, Loc. 632–04–04, AT&T Archives. Theodore Vail reminisced in 1906 that as far back as 1879 or 1880 he favored “the ultimate absorption of the [telegraph] business” by demanding half of Western Union's stock “for the privilege of continuing in business as one of our subordinate companies.” Vail to Frederick Fish, 14 Apr. 1906, as quoted in FCC, Investigation of the Telephone Industry in the United States, 207. The FCC concluded in the same report(p. 232) that Thomas Lockwood also favored a dominant position for Bell in the telegraph industry as early as 1888.

22 Edward J. Hall to Hudson, 12, 15, and 24 Dec. 1892: all in Loc. 124–03–02, AT&T Archives.

23 Bell's assessments of the Van Rysselberghe system are in Box 1048, AT&T Archives. Lockwood's reminiscences are from Pickernell, Frank, “The Introduction of the Composite System,” Proceedings of the Telephone Pioneers of America (1916): 69–73.Google Scholar See also Dunbar, F. W., The Present and Probable Future Relations between the Telegraph and Telephone (1895), 8.Google Scholar In the 1890s AT&T also investigated several printing telegraph systems; see reports on these systems in Boxes 1264 and 1307 and Loc. 632–02–06, AT&T Archives. For Bell's work on long-distance telephony at this time, see Wasserman, Neil, From Invention to Innovation: Long Distance Telephone Transmission at the Turn of the Century (Baltimore, 1985).Google Scholar

24 AT&T's attorney John C. Tomlinson told Theodore Vail that it promised to succeed because both telegraph companies were “pocketed corporations. Both Mr. Mackay and Mr. Gould have social aspirations and are willing to retire from the control of these corporations,” especially if AT&T could have guaranteed them a 25 percent profiton their stock. The merger fell through, apparently because Clarence Mackay of the Postal had been led to believe that he would control AT&T, instead of the other way round, and George Gould was not yet willing to part with his Western Union stock. See Tomlinson to Vail, 18 May and 2 June 1903, Box 1142, AT&T Archives; and FCC, Investigation of the Telephone Industry, 87–90.

25 The quote is from Bullock, H. A., “Reorganizing the Wires,” Boston Evening Transcript, 15 Apr. 1911, 3.Google Scholar

26 Acquisition of Western Union's telephone holdings was an important motivation for AT&T. See Stone, 180–4; and Keys, C. M., “The Rulers of the Wires,” World's Work, 19 Mar. 1910, 127.Google Scholar On the benefits to AT&T, see “Possible Advantages,” and supplementary report to memorandum from McKay to Gallaher, 8 Mar.1933, 10–11, Western Union Telegraph Collection.

27 See Western Union's annual reports between 1910 and 1914, and Oslin, 266. Boxes 10 and 59 in the AT&T Archives contain a great deal of material on joint telephone-telegraph arrangements with respect to offices and wire plant.

28 Garnet (pp. 152–4) gives a good summary. For information on the relation between AT&T and Postal in this period, see material in Boxes 9 and 10, AT&T Archives.

29 AT&T's disengagement from Western Union did not slacken Vail's desire to establish an integrated telephone and telegraph system. As late as 1918 he called for a “regulated monopoly” of all “electric transmission of intelligence requiring a nation-wide universal system, whether messages or conversations.” See AT&T's annual report for 1918, 53–7. In his official history of Bell Laboratories, Fagen (pp. 742–3) claims that AT&T control of Western Union marked “a turning point as regards development and promotion of non-voice communications services,” and that it provided the “impetus” for its development of TWX. On the importance of railroad rights of way for AT&T's future telegraph business, see the 1935 testimony of Frank C. Page, reproduced in hearings before the Senate Committee on Interstate Commerce on S. Res. 95, “To Authorize a Complete Study of the Telegraph Industry,” 76th Cong., 1st sess., 22 and 23 May 1939, 37. On printer technology, see “Relationship of AT&T Co. to Telegraph Business,” internal memo, Chester McKay to Mr. Gallaher, 8 Mar. 1933, 9–10, and supplementary report to memo from McKay to Gallaher, 8 Mar. 1933, both in Box 81, Western Union Telegraph Collection.

30 For financial figures, see Western Union's annual reports for 1914, 1929, and 1930; and Glasser, Carrie, “Some Problems in the Development of the Communications Industry,” American Economic Review 35 (Sept. 1945): 592, 597, 599Google Scholar. For the 1929 and 1933 revenue figures, see testimony of Frank C. Page, 38. Quotes are from Oslin, 319–20, and statement of FCC chairman James Lawrence Fly in “Study of the Telegraph Industry,” Hearings before the Committee on Interstate Commerce, U.S. Senate, 77th Cong., 1st sess., 19–29 May 1941, 85.

31 For instance, a twenty-word telegram and a twenty-word reply between New York and San Francisco cost just over $4, but a three-minute station-to-station telephone call cost slightly less. For business customers, Bell's TWX service allowed users to hold a three-minute, two-way printed “conversation” consisting of about 180 words for the same price as a 24-word telegram at full rates between the East and West Coasts. Figures are from Fly's statement (pp. 10–11) and supplementary report to memo from McKay to Gallaher.

32 Stevenson to Thayer, 31 Aug. 1921, Box 6, AT&T Archives. In 1938 Bell's telegraph revenue totaled about $24 million. Although Bell's telegraph business accounted for only 2 percent of its total revenues, its telegraph income surpassed Postal's total revenues by World War II. See Herring, James M., “Public Versus Private Ownership and Operation of the Communication Utilities,” Annals of the American Academy of Political and Social Science 201 (Jan. 1939): 99.CrossRefGoogle Scholar Carlton refused to buy out his vendor of teletype equipment for $1 million in the early 1920s because he did not want Western Union to expand into equipment manufacturing. In October 1930, AT&T bought the Teletype Corp. for $30 million. In that year alone, Western Union bought $10 million of equipment from the company. See Oslin, 304–5, 320; and supplementary report to memo from McKay to Gallaher, 8 Mar. 1933, 14–15.

33 See Goldin, Hyman Howard, “The Domestic Telegraph Industry and the Public Interest: A Study in Public Utility Regulation” (Ph.D. diss., Harvard University, 1950), 226–36Google Scholar; M. C. Rorty to Walter Gifford, 18 Mar. 1921, Box 61, AT&T Archives.

34 “Relationship of AT&T Co. to Telegraph Business,” pp. 5–6. Danielian, Noobar, AT&T: The Story of Industrial Conquest (New York, 1939), 166.Google Scholar

35 “Relationship of AT&T Co. to Telegraph Business,” 10–11; Herring, James M. and Gross, Gerald C., Telecommunications: Economics and Regulation (New York, 1936), 193Google Scholar; Danielian, 165. Gross was chief of the international section of the FCC.

36 Fly's statement, p. 20.

37 President's Communications Policy Board, Telecommunications: A Program for Progress (Washington, D.C., March 1951), 95.Google Scholar “A Special Report to the Stockholders and Employees of the Western Union Telegraph Company on the Future of the Record Communications Industry,” 20 Oct. 1949, Box 76, AT&T Archives. “Comments of George L. Best Regarding The Western Union Telegraph Company's Statement to the President's Communications Policy Board on November 27, 1950,” Box 76, AT&T Archives.

38 On Western Union's dependence on the FCC, see Goldin, 24; and “Western Union Hums-With Data,” Business Week, 20 Feb. 1965, 151; T. A. Wise, “Western Union, by Grace of FCC and A.T.&T.,” Fortune, March 1959, 114–19, 217–28.

39 President's Task Force on Communications Policy, Final Report (Washington, D.C., 1968), 44.Google Scholar For figures on Western Union's modernization program, see the corporation's annual reports from 1948 to 1977. For AT&T's position on McFall's proposal to separate the voice and “non-voice” industries, see “Historical Background,” 10 Jan. 1969, Box 76, AT&T Archives.

40 “Losing a Satellite Will Cost Western Union Plenty,” Business Week, 20 Feb. 1984, 77. Western Union chairman Robert Flanagan described his efforts to save the company in the early 1980s as trying to “turn an elephant around in a bathtub” see “How Western Union Went from Bad to Worse,” Business Week, 28 Jan. 1985, 110.