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Corporate Learning and Traffic Management at the Bell System, 1900–1929: Probability Theory and the Evolution of Organizational Capabilities

Published online by Cambridge University Press:  13 December 2011

Paul J. Miranti Jr
Paul J. Miranti Jr
Affiliation:
PAUL J. MIRANTI JR. is professor in the Department of Accounting and InformationSystems at Rutgers Business School.
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Abstract

This study analyzes the evolution of organizational capabilities for assessing market growth and capital budgeting in the traffic management operations of the Bell System from 1900 to 1929. The initial impetus for developing the complex procedures that were integrated into this process was the need to enhance firm competitiveness, particularly in response to the threats to its survival during the financial panic of 1907. The resultant new organizational capabilities, however, also eventually proved vital in successfully guiding the firm's planning for system automation and in demonstrating compliance with regulatory mandates for efficient and economical service. Moreover, this study explains how probability theory became a key element in this managerial transition, thus, providing the Bell System with a powerful analytical tool useful for confronting uncertainty in budgeting and business planning.

Type
Articles
Information
Business History Review , Volume 76 , Issue 4: entrepreneurs, regulation, and technological innovation in America , Winter 2002 , pp. 733 - 765
Copyright
Copyright © The President and Fellows of Harvard College 2002

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References

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7 A more general discussion of the Bell System's involvement with statistics and probabilities in all aspects of their business may be found in Fagen, M. D., ed., A History of Engineering and Science in the Bell System: The Early Years, 1875–1925 (Bell Telephone Laboratories, 1975), 538–44, 859–82 passim, 923–34Google Scholar; and Melman, S., A History of Engineering and Science in the Bell System: Communication Sciences, 1925–1980 (Indianapolis, 1984), ch. 1 passim.Google Scholar Later developments are described in an address in George, Claude S. Jr., History of Management Thought (Englewood Cliffs, N.J., 1968), ch. 1.Google Scholar Scholarship in the history of statistics has in recent years focused on three different sets of issues. Stigler's, Stephen M.The History of Statistics: The Measurement of Uncertainty before 1900 (Cambridge, Mass., 1986)Google Scholar evaluates the evolution of key ideas underlying this body of knowledge. Morgan, Mary S., The History of Econometric Ideas (Cambridge, U.K., 1990)CrossRefGoogle Scholar and Epstein, R. J., A History of Econometrics (Amsterdam, 1987)Google Scholar, explain the rise of quantitative analysis in economic science. Porter, Theodore M., in The Rise of Statistical Thinking, 1820–1900 (Princeton, N.J., 1986)Google Scholar and Trust in Numbers: The Pursuit of Objectivity in Science and Public Life (Princeton, N.J., 1995), addresses the ways that statistical analysis affected the development of social and economic policy thinking in the nineteenth century.

8 See Smith, George David, The Anatomy of a Business Strategy: Bell, Western Electric and the Origins of the American Telephone Industry (Baltimore, 1985)Google Scholar, for a discussion of the evolution of overall corporate strategy.

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10 See ibid., 62–9, for a discussion of formative years of the toll service.

11 Ibid., 72–80.

12 Ibid., ch. 7 passim.

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15 See discussion of value of service in a file entitled “Rates—Basis for Determination—1906,” which includes an unsigned report entitled “Telephone Rates: A Few Suggestions as to How They Should Be Defended,” in file 126–05–03–22, AT&T Archives. See also discussion on relative value of service to business in American Telephone and Telegraph Company Annual Report 1907, 20–1.

16 See American Telephone and Telegraph Annual Report 1901, p. 9, for a discussion of the introduction of schedules of measured service. For early rates, see letter to subscribers of the Telephone Dispatch Company, dated 26 Aug. 1880, from J. N. George, and a report by William Bethell entitled “Statement Respecting Rate Plan for Manhattan,” dated 19 Dec. 1898, in Box 36, AT&T Archives. For a very detailed analysis of the costs of providing measured service, see report entitled “The Effect of Measured Rates on the Cost of Telephone Service,” dated 16 Oct. 1896, by Frederick L. Rhodes, in file 14–01–03, AT&T Archives.

17 See Garnet, The Telephone Enterprise, 21–2, 71.

18 For a more detailed discussion of the strategy and the difficulties of implementing toll development in the South, see Lipartito, Kenneth L., The Bell System and Regional Business: The Telephone in the South (Baltimore, 1989), 117–48.Google Scholar See also letter of T. B. Doolittle to Joseph P. Davis, dated 17 Jan. 1898, in 1897 Annual Report of the Engineering Department in file 250–06–18, AT&T Archives.

19 See report of T. B. Doolittle to Joseph P. Davis, dated 16 Jan. 1900, in 1900 Annual Report of the Engineering Department, 7, in file 250–06–18, AT&T Archives.

20 See letter to John E. Hudson from Joseph P. Davis, dated 30 Jan. 1895, in 1894 Annual Report of the Engineering Department, 146–67, in file 250–06–18, AT&T Archives.

21 See letter of T. B. Doolittle to Joseph P. Davis, dated 23 Jan. 1900, in 1899 Annual Report of the Engineering Department, 1–2, in file 250–06–18, AT&T Archives.

22 See letter of T. B. Doolittle to Joseph P. Davis, dated 7 Jan. 1895, in 1894 Annual Report of the Engineering Department, 155–66, in file 250–06–18, AT&T Archives.

23 See letter from T. B. Doolittle to Joseph P. Davis, dated 23 Jan. 1900, p. 2, in 1899 Annual Report of the Engineering Department, in file 250–06–18, AT&T Archives.

24 See, for example, an unsigned report entitled “Toll Traffic, Boston,” dated April 1901, in file 14–05–03, AT&T Archives. See also reports entitled “Re. Cost of 1000 subscriber Exchange,” dated 13 May 1896, and “Subject: Cost of establishing an Exchange of 100 Subscribers,” dated 17 Apr. 1895, both by T. B. Doolittle in file 01–04–02.

25 See letter of T. B. Doolittle to Joseph P. Davis, dated 16 Jan. 1901, in 1900 Annual Report of the Engineering Department, pp. 2–7, in file 250–06–18, AT&T Archive.

26 See letter of Hammond V. Hayes to F. P. Fish, dated 31 Dec. 1906, in 1906 Annual Report of the Engineering Department, pp. 1–12, in file 250–06–18 at the AT&T Archive.

27 See “Traffic Estimate,” in file 23–01–01 in AT&T Archives.

28 See “Traffic Estimate,” 21–3. The expression at A is the percentage of local office toll calls adjusted for an “acquaintance factor,” which takes into consideration that toll-call potentials are rarely achieved because of the unique communication patterns of differing subscriber groups. The expression at B is the total number of trunk lines necessary to accommodate daily local office trunk volume, assuming that each trunk can carry a maximum of 110 calls per day. Expression C is the margin of safety for local office trunk lines to accommodate peak variations in demand and growth.

29 Ibid., 27–30.

30 See American Telephone and Telegraph Company Annual Report 1905, pp. 12–13, for discussion of reciprocal financing arrangements with affiliated companies. See also AT&T Annual Report 1908, pp. 15–21, for a discussion of the evolution of the firm's financing practices.

31 See AT&T Annual Report 1909, p. 4, for summary of plant addition values.

32 Under this arrangement, the Wilson administration agreed not to pursue antitrust litigation against the Bell System in return for the firm's commitment to give up its ownership of Western Union Telegraph Company, to allow qualified, local competitors to connect to its national grid, and to refrain from future acquisitions without the Justice Department's approval; see Garnet, The Telephone Enterprise, 153–4.

33 See AT&T Annual Report 1908, 23.

34 See AT&T Annual Report 1909, 24.

35 See AT&T Annual Report 1910, 51–4.

36 See AT&T Annual Report 1908, 23.

37 For a full discussion of Vail's career, see John, Richard R., “Recasting the Information Infrastructure,” in Chandler, Alfred D. and Contrada, James W., eds., A Nation Transformed by Information: How Information Shaped the United States from Colonial Times to the Present (New York, 2000), 55–105.Google Scholar

38 See AT&T Annual Report 1909, 23–4; and AT&T Annual Report 1910, 32–3, 36. Vail's policies are extensively analyzed in Mueller, Milton L. Jr, Universal Service: Competition, Interconnection, and Monopoly in the Making of the American Telephone System (Cambridge, Mass., 1997).Google Scholar For a critique of Mueller's analysis of Vail, see John, Richard R., “The odore N. Vail and the Civic Origins of Universal Service,” Business and Economic History 28 (Winter 1999): 71–81.Google Scholar

39 See AT&T Annual Report 1911, 8–10. A return on investment of 8 percent in a regulated environment was deemed adequate except in the case of projects of extraordinary risk; see AT&T Annual Report, 1911, p. 22. Vail's views on these matters did not change much with the passage of time; see, for example, his position late in his career in a letter he wrote to Congressman John A. Moon, chair of the House Committee on the Post Office and Post Roads, dated 30 Dec. 1918, in Box 91, file 452 in the papers of J. P. Morgan Jr. in the Morgan Archives in New York City.

40 The establishment of the functional reorganization is discussed in Garnet, The Telephone Enterprise, pp. 135–52.

41 See Andrews, S. L., “The Work of the Chief Statistician's Division with Special Reference to Certain Economic Studies Bearing Upon the Business Outlook,” in General Accounting Conference (New York, 1921)Google Scholar, for a brief history of the Statistics Division, which may be found in file 185–03–01, AT&T Archives.

42 See Garnet, The Telephone Enterprise, 134.

43 A general discussion of the firm's financing policies may be found in Stehman, J. Warren, The Financial History of the American Telephone and Telegraph Company (Boston, 1925).Google Scholar

44 Malcolm Rorty left AT&T in 1923 to serve as vice president of the International Telephone and Telegraph Company.

45 See letter of Joseph P. Davis to Frederick P. Fish, dated 28 Aug. 1902, and attachment attributed to W. F. Patten and Malcolm Rorty entitled “Note on Development Plan,” in file 137–09–01–14, AT&T Archives.

46 Attachment attributed to Patten and Rorty, p. 12.

47 Ibid., pp. 3–7.

48 For a general discussion of Carty's approach to commercial survey work while at New York Telephone, see Davis, R. A., “Methods for Making Development Studies and What They Are Expected to Accomplish,” in New England Telephone and Telegraph, Commercial Conferences (Boston, 1909–1910), pp. 109–20Google Scholar, in file 185–03–02, AT&T Archives.

49 Ibid., p. 110.

50 See Helmle, W. C., “The Relation Between Rents and Incomes and the Distribution of Rental Values,” in Bell System Technical Journal, 1 (Nov. 1922): 84–5Google Scholar; see Ibid., p. 89, for discussion of U.S. Bureau of Labor Statistics 1903 report.

51 Davis, “Method for Making Development Studies,” 111–13, 114–15

52 Ibid., 113, 115–16.

53 See Stone, E. L. Jr, “Commercial Surveys,” in Traffic Engineering Conference (New York, 1922), 123–32Google Scholar, in file 185–09–03, AT&T Archives.

54 Ibid., 123.

55 Ibid., 127.

56 See Andrews, S. L., “The Work of the Chief Statistician's Division with Special Reference to Certain Economic Studies Bearing Upon the Business Outlook,” in General Accounting Conference (New York, May 1921)Google Scholar, in file 185–03–01, AT&T Archives.

57 Ibid., 3–16.

58 Ibid., 13–29.

59 Ibid., 10–13. See also Richardson, A. H., “Discussion of Graphic Methods of Presenting Telephone Information,” in General Accounting Conference (New York, May 1921)Google Scholar, in file 185–03–01, AT&T Archives.

60 See Helmle, “The Relation between Rents and Incomes,” 82–90.

61 Ibid., 90–8.

62 Ibid., 79–104.

63 For a general discussion of fundamental plans, see Rice, D. M., “Application of Fundamental Plans,” in Plant and Engineering Conference (Shawnee, Pa., May 1923), vol. 2, 543–53, in file 185–07–03, AT&T Archives.Google Scholar

64 For the origins of the provisional plan, see letter of H. B. Thayer to N. C. Kingsbury, 6 Apr. 1912, and attached report attributed to Edgar S. Bloom, entitled “The Provisional Estimate,” in file 125–07–03–24, AT&T Archives.

65 For a discussion of planning horizons, see Renshaw, E. N., “Comparative Cost Studies and Estimates,” in Building and Equipment Conference (New York, 1923)Google Scholar, ch. 7, which may be found in file 185–03–02–02, AT&T Archives.

66 The roles and responsibilities of both traffic and plant engineers are described by Farnham, W. E., in “The Relationship between the Work of the Traffic Engineer and the Equipment Engineer,” in Building and Equipment Conference (New York, 1923)Google Scholar, ch. 6, which may be found in file 185–03–02–02 at the AT&T Archives.

67 For a discussion of rate plans, see Bratney, F. N., “Rate Plan Studies and Their Relation to Methods of Planning for the Future,” in Plant and Engineering Conference (Shawnee, Pa., May 1923), vol. 2, 581–93Google Scholar, in file 185–07–03, AT&T Archives.

68 See “Provisional Estimate,” 1–6. For an example of how provisional estimate information was used in evaluation, see letter of H. B. Thayer to P. L. Spalding of New England Telephone and Telegraph Company, dated 12 Aug. 1913, in file 126–05–03–12, AT&T Archives.

69 Fagen, A History of Engineering and Science in the Bell System, 539.

70 See letter of M. C. Rorty to Joseph P. Davis and attachment dated 22 Oct. 1903, in Box 1360, AT&T Archives. See also memo entitled “Great Debate On Probability Formula for Traffic Engineering in 1920,” by R. I. Wilkinson, dated 19 Mar. 1965, in file 85–09–03 in AT&T Archives.

71 The binomial trunking formula and its use are discussed in Bell Telephone Laboratories, Inc, Probability and Statistics Fundamentals–Application to Traffic and Design Problems, ch. 9, 7–9, AT&T Archives.

72 See letter of M. C. Rorty to Joseph P. Davis, dated 22 Oct. 1903, in Box 1360, AT&T Archives.

73 See “History of Development of Panel Machine Switching System,” p. 3, in file 85–06–02, AT&T Archives.

74 George A. Campbell had received his doctorate from Harvard University in physics in 1903 after having been recruited to AT&T by chief engineer Hammond V. Hayes in 1897. For his work on the loading coil, see Wasserman, Neil, From Invention to Innovation: Long Distance Transmission at the Turn of the Century (Baltimore, 1985)Google Scholar, chs. 2–5 passim. See also under the entry “George Ashley Campbell” in The National Cyclopedia of American Biography. Campbell's knowledge of probabilities was doubtless extended through his study of statistical mechanics in Europe under Ludwig Boltzmann as well as his study of mathematics under Felix Klein and Henri Poincaré; Wasserman, From Invention to Innovation, p. 30. In 1905, both Molina and Frank B. Jewett, future head of the Bell Laboratories, served in Campbell's electrical department in AT&T's Engineering Department; see organization chart in Fagen, A History of Engineering and Science in the Bell System, 45.

75 See Wilkinson, “Great Debate on Probability Formulas for Traffic Engineering,” p. 1. See also transcript of interview with E. C. Molinaon 5 Dec. 1962, 25–8, in file 106–10–03, AT&T Archives.

76 See Bell Telephone Laboratories, Inc., Probability and Statistics Fundamentals, ch. 9, 10–17; and Fry, Probability and Its Engineering Uses, 232–5, 237–40.

77 See R. I. Wilkinson, “Great Debate on Probability Formulas for Traffic Engineering,” 1.

78 State regulation of the telephone industry had grown rapidly since 1906. By 1911, twenty-eight states were monitoring the industry; see AT&T Annual Report, 1911, p. 11; by 1915, all but four states had organized oversight commissions, see AT&T Annual Report, 1915, p. 28.

79 Data from Waterson, K. W., “Traffic Management,” 1–10 passim and attachments, in AT&T General Traffic Conference (New York, 1920)Google Scholar, in file 185–09–01, AT&T Archives.

80 Ibid., 2.

81 See “History of Development of the Panel Machine Switching System,” 8–13, in file 85–06–02, AT&T Archives.

82 Ibid., 6–8.

83 The firm also formed the Bell Telephone Securities Company in 1921 to promote wider public ownership of its investment securities, which up to that time remained largely concentrated in the hands of investors in New England and New York. The spearhead of this new effort was the AT&T Securities Plan, which sought to float new security issues for regional Bell affiliates aimed at consumers in these territories. In this latter case, the objectives involved raising capital but also building political support. See “The Work of the Bell Telephone Securities Company,” in the Bell Telephone Quarterly Vol 1 (April 1922): 13–21; and AT&T Annual Report 1923, 16.

84 The importance of Molina's contribution is discussed in Schneckloth, H. H., “Some Basic Concepts for Translators and Identifiers Used in Telephone Switching Systems,” Bell System Technical Journal 30 (1951): 588–625.CrossRefGoogle Scholar

85 Some applications of the Poisson in the Newark testing are described in Molina, Edward C., “The Theory of Probabilities Applied to Telephone Trunking Problems,” Bell System Technical Journal 1 (1922): 69–81.CrossRefGoogle Scholar

86 “History of Panel Machine Switching System,” 16–19.

87 Fagen, History of Engineering and Science in the Bell System: The Early Years, 550.

88 Waterson, K. W., “Review of Traffic Results for 1925 and Opportunities for Further Improvement,” in Plant and Engineering Conference, 1925 (Shawnee, Pa., 1925), 31.Google Scholar

89 Ibid., 36, fig. 4.

90 Ibid., 72, fig. 26.

91 Ibid.

92 See R. I. Wilkinson, “The Great Debate over Probability Formulas for Traffic Engineering,” 1–4.

93 See letter of J. J. Carty to Frank B. Jewett, 19 Sept. 1921, in file 85–09–03, AT&T Archives.

94 See letter of H. B. Simpson to W. E. Farnham, dated 6 Dec. 1920, and Wilkinson “Great Debate over Traffic Formulas,” 3, both in file 85–09–03, AT&T Archives.

95 See R. I. Wilkinson, “Some Recent Developments in Trunking Theory–Case 38931,” dated 9 Mar. 1965, in file 85–09–03, AT&T Archives.

96 Molina's correspondence in the Engineering Department may be found in file 39–04–01, AT&T Archives.

97 See, for example, Molina, E. C.and Crowell, R. P., “Deviation of Random Samples from Average Conditions and Significance to Traffic Men,” in Bell System Technical Journal 3 (1924): 88–99.CrossRefGoogle Scholar

98 See, for example, transmittal sheet from E. C. Molina to Paul H. Burns, dated 17 June 1929, and memo entitled “Probability Studies, New York Rate Case, B-1.14”; transmittal sheet from E. C. Molina to E. L. Blackman, dated 14 May 1928; and memo entitled “Instruction Course in Probabilities, New York Rate Case A-1.14,” which may be found in file 481–02–01, AT&T Archives.

99 See memo from R. I. Wilkinson to W. S. Hayward, dated 3 May 1965, “Technical Developments in the Traffic Studies Area of Bell Telephone Laboratories, 1924–1965” and appendices, in file 85–06–02, AT&T Archives.

100 See transmittal sheet from E. C. Molina to Paul H. Burns, dated 17 June 1929, and memo entitled “Probability Studies, New York Rate Case B-1.14”; and transmittal sheet from E. C. Molina to E. L. Blackman, dated 14 May 1928, and memo entitled “Instruction Course in Probabilities, New York Rate Case A-1.14,” in file 481–02–01, AT&T Archives.

101 See Campbell, George A., “Mathematics in Industrial Research,” Bell System Technical Journal 3 (1925): 550–7CrossRefGoogle Scholar; and Fry, Thornton B., “Industrial Mathematics,” Bell System Technical Journal 20 (1941): 255–92.CrossRefGoogle Scholar