The Master Switch: The Rise and Fall of Information Empires - Tim Wu (2010)
Part I. The Rise
Chapter 1. The Disruptive Founder
Exactly forty years before Bell’s National Geographic banquet, Alexander Bell was in his laboratory in the attic of a machine shop in Boston, trying once more to coax a voice out of a wire. His efforts had proved mostly futile, and the Bell Company was little more than a typically hopeless start-up.*
Bell was a professor and an amateur inventor, with little taste for business: his expertise and his day job was teaching the deaf. His main investor and the president of the Bell Company was Gardiner Green Hubbard, a patent attorney and prominent critic of the telegraph monopoly Western Union. It is Hubbard who was responsible for Bell’s most valuable asset: its telephone patent, filed even before Bell had a working prototype. Besides Hubbard, the company had one employee, Bell’s assistant, Thomas Watson. That was it.1
If the banquet revealed Bell on the cusp of monopoly, here is the opposite extreme from which it began: a stirring image of Bell and Watson toiling in their small attic laboratory. It is here that the Cycle begins: in a lonely room where one or two men are trying to solve a concrete problem. So many revolutionary innovations start small, with outsiders, amateurs, and idealists in attics or garages. This motif of Bell and Watson alone will reappear throughout this account, at the origins of radio, television, the personal computer, cable, and companies like Google and Apple. The importance of these moments makes it critical to understand the stories of lone inventors.
Over the twentieth century, most innovation theorists and historians became somewhat skeptical of the importance of creation stories like Bell’s. These thinkers came to believe the archetype of the heroic inventor had been over-credited in the search for a compelling narrative. As William Fisher puts it, “Like the romantic ideal of authorship, the image of the inventor has proved distressingly durable.”2 These critics undeniably have a point: even the most startling inventions are usually arrived at, simultaneously, by two or more people. If that’s true, how singular could the genius of the inventor really be?
There could not be a better example than the story of the telephone itself. On the very day that Alexander Bell was registering his invention, another man, Elisha Gray, was also at the patent office filing for the very same breakthrough.* The coincidence takes some of the luster off Bell’s “eureka.” And the more you examine the history, the worse it looks. In 1861, sixteen years before Bell, a German man named Johann Philip Reis presented a primitive telephone to the Physical Society of Frankfurt, claiming that “with the help of the galvanic current, [the inventor] is able to reproduce at a distance the tones of instruments and even, to a certain degree, the human voice.” Germany has long considered Reis the telephone’s inventor. Another man, a small-town Pennsylvania electrician named Daniel Drawbaugh, later claimed that by 1869 he had a working telephone in his house. He produced prototypes and seventy witnesses who testified that they had seen or heard his invention at that time. In litigation before the Supreme Court in 1888, three Justices concluded that “overwhelming evidence” proved that “Drawbaugh produced and exhibited in his shop, as early as 1869, an electrical instrument by which he transmitted speech.…”* 3
There was, it is fair to say, no single inventor of the telephone. And this reality suggests that what we call invention, while not easy, is simply what happens once a technology’s development reaches the point where the next step becomes available to many people. By Bell’s time, others had invented wires and the telegraph, had discovered electricity and the basic principles of acoustics. It lay to Bell to assemble the pieces: no mean feat, but not a superhuman one. In this sense, inventors are often more like craftsmen than miracle workers.
Indeed, the history of science is full of examples of what the writer Malcolm Gladwell terms “simultaneous discovery”—so full that the phenomenon represents the norm rather than the exception. Few today know the name Alfred Russel Wallace, yet he wrote an article proposing the theory of natural selection in 1858, a year before Charles Darwin published The Origin of Species. Leibnitz and Newton developed calculus simultaneously. And in 1610 four others made the same lunar observations as Galileo.4
Is the loner and outsider inventor, then, merely a figment of so much hype, with no particular significance? No, I would argue his significance is enormous; but not for the reasons usually imagined. The inventors we remember are significant not so much as inventors, but as founders of “disruptive” industries, ones that shake up the technological status quo. Through circumstance or luck, they are exactly at the right distance both to imagine the future and to create an independent industry to exploit it.
Let’s focus, first, on the act of invention. The importance of the outsider here owes to his being at the right remove from the prevailing currents of thought about the problem at hand. That distance affords a perspective close enough to understand the problem, yet far enough for greater freedom of thought, freedom from, as it were, the cognitive distortion of what is as opposed to what could be. This innovative distance explains why so many of those who turn an industry upside down are outsiders, even outcasts.
To understand this point we need grasp the difference between two types of innovation: “sustaining” and “disruptive,” the distinction best described by innovation theorist Clayton Christensen. Sustaining innovations are improvements that make the product better, but do not threaten its market. The disruptive innovation, conversely, threatens to displace a product altogether. It is the difference between the electric typewriter, which improved on the typewriter, and the word processor, which supplanted it.5
Another advantage of the outside inventor is less a matter of the imagination than of his being a disinterested party. Distance creates a freedom to develop inventions that might challenge or even destroy the business model of the dominant industry. The outsider is often the only one who can afford to scuttle a perfectly sound ship, to propose an industry that might challenge the business establishment or suggest a whole new business model. Those closer to—often at the trough of—existing industries face a remarkably constant pressure not to invent things that will ruin their employer. The outsider has nothing to lose.
But to be clear, it is not mere distance, but the right distance that matters; there is such a thing as being too far away. It may be that Daniel Drawbaugh actually did invent the telephone seven years before Bell. We may never know; but even if he did, it doesn’t really matter, because he didn’t do anything with it. He was doomed to remain an inventor, not a founder, for he was just too far away from the action to found a disruptive industry. In this sense, Bell’s alliance with Hubbard, a sworn enemy of Western Union, the dominant monopolist, was all-important. For it was Hubbard who made Bell’s invention into an effort to unseat Western Union.
I am not saying, by any means, that invention is solely the province of loners and that everyone else’s inspiration is suppressed. But this isn’t a book about better mousetraps. The Cycle is powered by disruptive innovations that upend once thriving industries, bankrupt the dominant powers, and change the world. Such innovations are exceedingly rare, but they are what makes the Cycle go.
Let’s return to Bell in his Boston laboratory. Doubtless he had some critical assets, including a knowledge of acoustics. His laboratory notebook, which can be read online, suggests a certain diligence. But his greatest advantage was neither of these. It was that everyone else was obsessed with trying to improve the telegraph. By the 1870s inventors and investors understood that there could be such a thing as a telephone, but it seemed a far-off, impractical thing. Serious men knew that what really mattered was better telegraph technology. Inventors were racing to build the “musical telegraph,” a device that could send multiple messages over a single line at the same time. The other holy grail was a device for printing telegrams at home.*
Bell was not immune to the seduction of these goals. One must start somewhere, and he, too, began his experiments in search of a better telegraph; certainly that’s what his backers thought they were paying for. Gardiner Hubbard, his primary investor, was initially skeptical of Bell’s work on the telephone. It “could never be more than a scientific toy,” Hubbard told him. “You had better throw that idea out of your mind and go ahead with your musical telegraph, which if it is successful will make you a millionaire.”6
But when the time came, Hubbard saw the potential in the telephone to destroy his personal enemy, the telegraph company. In contrast, Elisha Gray, Bell’s rival, was forced to keep his telephone research secret from his principal funder, Samuel S. White. In fact, without White’s opposition, there is good reason to think that Gray would have both created a working telephone and patented it long before Bell.7
The initial inability of Hubbard, White, and everyone else to recognize the promise of the telephone represents a pattern that recurs with a frequency embarrassing to the human race. “All knowledge and habit once acquired,” wrote Joseph Schumpeter, the great innovation theorist, “becomes as firmly rooted in ourselves as a railway embankment in the earth.” Schumpeter believed that our minds were, essentially, too lazy to seek out new lines of thought when old ones could serve. “The very nature of fixed habits of thinking, their energy-saving function, is founded upon the fact that they have become subconscious, that they yield their results automatically and are proof against criticism and even against contradiction by individual facts.”8
The men dreaming of a better telegraph were, one might say, mentally warped by the tangible demand for a better telegraph. The demand for a telephone, meanwhile, was purely notional. Nothing, save the hangman’s noose, concentrates the mind like piles of cash, and the obvious rewards awaiting any telegraph improver were a distraction for anyone even inclined to think about telephony, a fact that actually helped Bell. For him the thrill of the new was unbeatably compelling, and Bell knew that in his lab he was closing in on something miraculous. He, nearly alone in the world, was playing with magical powers never seen before.
On March 10, 1876, Bell, for the first time, managed to transmit speech over some distance. Having spilled acid on himself, he cried out into his telephone device, “Watson, come here, I want you.” When he realized it had worked, he screamed in delight, did an Indian war dance, and shouted, again over the telephone, “God save the Queen!”* 9
THE PLOT TO DESTROY BELL
Eight months on, late on the night of the 1876 presidential election, a man named John Reid was racing from the New York Times offices to the Republican campaign headquarters on Fifth Avenue. In his hand he held a Western Union telegram with the potential to decide who would be the next president of the United States.
While Bell was trying to work the bugs out of his telephone, Western Union, telephony’s first and most dangerous (though for the moment unwitting) rival, had, they reckoned, a much bigger fish to fry: making their man president of the United States. Here we introduce the nation’s first great communications monopolist, whose reign provides history’s first lesson in the power and peril of concentrated control over the flow of information. Western Union’s man was one Rutherford B. Hayes, an obscure Ohio politician described by a contemporary journalist as “a third rate nonentity.” But the firm and its partner newswire, the Associated Press, wanted Hayes in office, for several reasons. Hayes was a close friend of William Henry Smith, a former politician who was now the key political operator at the Associated Press. More generally, since the Civil War, the Republican Party and the telegraph industry had enjoyed a special relationship, in part because much of what were eventually Western Union’s lines were built by the Union army.
So making Hayes president was the goal, but how was the telegram in Reid’s hand key to achieving it?
The media and communications industries are regularly accused of trying to influence politics, but what went on in the 1870s was of a wholly different order from anything we could imagine today. At the time, Western Union was the exclusive owner of the only nationwide telegraph network, and the sizable Associated Press was the unique source for “instant” national or European news. (Its later competitor, the United Press, which would be founded on the U.S. Post Office’s new telegraph lines, did not yet exist.) The Associated Press took advantage of its economies of scale to produce millions of lines of copy a year and, apart from local news, its product was the mainstay of many American newspapers.
With the common law notion of “common carriage” deemed inapplicable, and the latter-day concept of “net neutrality” not yet imagined, Western Union carried Associated Press reports exclusively.10 Working closely with the Republican Party and avowedly Republican papers like The New York Times (the ideal of an unbiased press would not be established for some time, and the minting of the Times’s liberal bona fides would take longer still), they did what they could to throw the election to Hayes. It was easy: the AP ran story after story about what an honest man Hayes was, what a good governor he had been, or just whatever he happened to be doing that day. It omitted any scandals related to Hayes, and it declined to run positive stories about his rivals (James Blaine in the primary, Samuel Tilden in the general). But beyond routine favoritism, late that Election Day Western Union offered the Hayes campaign a secret weapon that would come to light only much later.
Hayes, far from being the front-runner, had gained the Republican nomination only on the seventh ballot. But as the polls closed his persistence appeared a waste of time, for Tilden, the Democrat, held a clear advantage in the popular vote (by a margin of over 250,000) and seemed headed for victory according to most early returns; by some accounts Hayes privately conceded defeat. But late that night, Reid, the New York Times editor, alerted the Republican Party that the Democrats, despite extensive intimidation of Republican supporters, remained unsure of their victory in the South. The GOP sent some telegrams of its own to the Republican governors in the South with special instructions for manipulating state electoral commissions. As a result the Hayes campaign abruptly claimed victory, resulting in an electoral dispute that would make Bush v. Gore seem a garden party. After a few brutal months, the Democrats relented, allowing Hayes the presidency—in exchange, most historians believe, for the removal of federal troops from the South, effectively ending Reconstruction.
The full history of the 1876 election is complex, and the power of the Western Union network was just one factor, to be sure. But while mostly studied by historians and political scientists, the dispute should also be taken as a crucial parable for communications policy makers. More than anything, it showed what kind of political advantage a discriminatory network can confer. When the major channels for moving information are loyal to one party, its effects, while often invisible, can be profound.
It also showed how a single communications monopolist can use its power not just for discrimination, but for outright betrayal of trust, revealing for the first time why what we now call “electronic privacy” might matter. Hayes might never have been president but for the fact that Western Union provided secret access to the telegrams sent by his rivals. Western Union’s role was a blatant instance of malfeasance: despite its explicit promise that “all messages whatsoever” would be kept “strictly private and confidential,” the company regularly betrayed the public trust by turning over private, and strategically actionable, communications to the Hayes campaign.
Today Western Union’s name remains familiar, but the company that survives is the shriveled rump of what was in 1876 among the most powerful corporations on earth. But power is never entirely secure in any tyranny. Western Union, despite its size, had come under episodic attack from speculators, putting into question whether it was really a “natural” monopoly. And in two years’ time Bell’s three-man company, though embryonic, would pose an even more devastating threat to the firm’s rule over American communications.
In antiquity, Kronos, the second ruler of the universe according to Greek mythology, had a problem. The Delphic oracle having warned him that one of his children would dethrone him, he was more than troubled to hear his wife was pregnant. He waited for her to give birth, then took the child and ate it. His wife got pregnant again and again, so he had to eat his own more than once.
And so derives the Kronos Effect: the efforts undertaken by a dominant company to consume its potential successors in their infancy. Understanding this effect is critical to understanding the Cycle, and for that matter, the history of information technology. It may sometimes seem that invention and technological advance are a natural, orderly process, but this is an illusion. Whatever technological reality we live with is the result of tooth-and-claw industrial combat. And the battles are more decisive than those in which the dominant power attempts to co-opt the technologies that could destroy it, Goliath attempting to seize the slingshot.
Western Union, despite its great size and scale, was vulnerable to the same force as every other business: disruptive innovation. No sooner had the firm realized the potential of the Bell company’s technology to overthrow the telegraph monopoly than it went into Kronos mode, attempting to kill or devour Bell. It did not happen instantaneously. At the very beginning, in 1877, the Bell Company probably seemed more a source of comic relief than a threat to Western Union. Bell’s very first advertisement for the telephone, in May 1877, betrays a distinct lack of confidence in the product:
The proprietors of the Telephone … are now prepared to furnish Telephones for the transmission of articulate speech through instruments not more than twenty miles apart. Conversation can be easily carried on after slight practice and with the occasional repetition of a word or sentence. On first listening to the Telephone … the articulation seems to be indistinct; but after a few trials the ear becomes accustomed to the peculiar sound.11
Bell’s first telephone simply did not work very well. The Bell Company’s most valuable asset would remain, for some time, the principal patent, for actual telephones were more like toys than devices adults could depend on. Finding investors, let alone customers, was such tough going that at one point, according to most accounts, Hubbard, acting as Bell’s president, offered Western Union all of Bell’s patents for $100,000. William Orton, president of Western Union, refused, in one of history’s less prudent exercises of business judgment.12
In a year, however, as Bell began to pick up customers, Western Union realized its mistake. In 1878 it reversed course and proceeded full steam into the phone business. Against tiny Bell, Western Union brought overwhelming advantages: capital, an existing nationwide network of wires, and a close relationship with newspapers, hotels, and politicians. “With all the bulk of its great wealth and prestige,” as the historian Herbert N. Casson wrote in 1910, “it swept down upon Bell and his little bodyguard.” The decision, once taken, was implemented quickly. Ignoring Bell’s shoddy equipment, Western Union commissioned a promising young inventor named Thomas Edison to design a better telephone. Edison’s version would prove a major advance over Bell’s, including a much more sensitive transmitter that didn’t require one to shout. For that reason, depending on how you define “invention,” there is a strong case to be made for giving Bell and Edison, at a minimum, joint credit.
By the end of 1878 Western Union had deployed 56,000 telephones, rendering Bell a bit player.13 For a brief moment, the telephone industry came under domination by Western Union’s subsidiary, the American Speaking Telephone Company. In an 1880 Scientific American article we see a drawing of an AST exchange in New York, staffed by boys with Edison phones. In some alternate universe, AST, rather than Ma Bell, would go on to rule communications by wire.
We can stop here to imagine that future. The telephone could easily have been born as what Harvard professor Jonathan Zittrain calls a tethered technology: that is, a technology tied directly to its owner, and limited in what it might do.14 Western Union’s telephone network was designed not to pose any threat to the telegraph business. In an oft-exampled way, a dominant power must disable or neuter its own inventions to avoid cannibalizing its core business. In the 1980s and 1990s, General Motors, famously, was fully equipped to take over the electric car market, but was restrained by disinclination to create a rival to the internal combustion engine, its main business.
Western Union’s version of the telephone would have remained a feeder business for the telegraph, and another tool for discrimination. Most likely we would have seen a telephone system that was primarily local, used to call in telegraph messages for nationwide communications, and as such always a complement to the telegraph, not a substitute for it. Alexander Bell would be as obscure as the inventors of cable or broadcast television, to name two other initially suppressed inventions—but let us not get ahead of ourselves. For now it is enough to imagine how the retardation of telephony in an alternative run-through of history might have altered the narrative. It might even have affected the development of American economic supremacy, if other nations better grasped the importance of the telephone.
In 1878 the future so described was likelier than not. For months, Bell suffered under the onslaught of Western Union. As if mourning his company, Alexander Bell became a bedridden invalid, in the grip of such a depression that he checked himself in to Massachusetts General Hospital.15
CYCLES OF BIRTH AND DEATH
The struggle between Bell and Western Union over the fate of the telephone was, in retrospect, a match to the death. The victor would go on to prosper, while the loser would wilt away and die. This is how the Cycle turns. No thinker of the twentieth century better understood that such winner-take-all contests were the very soul of the capitalist system than did the economist Joseph Schumpeter, the “prophet of innovation.”
Schumpeter’s presence in the history of economics seems designed to displease everyone. His prose, his personality, and his ideas were infuriatingly provocative and confounding, and quite deliberately so. He bragged of sexual exploits at faculty meetings, and while living in the United States during World War II, he voiced support for Germany, supposedly out of dislike for Russians.
Nonetheless, Schumpeter is the source of a very simple economic theory that has proved itself particularly virulent. At the most basic level, Schumpeter believed that innovation and economic growth are one and the same. Countries that innovated would grow wealthier; those that did not would stagnate. And in Schumpeter’s vision innovation was no benignly gradual process, but a merciless cycle of industrial destruction and birth, as implacable as the way of all flesh. This dynamic was, to Schumpeter, the essence of capitalism.16
He described innovation as a perennial state of unrest: a “process of industrial mutation … that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” In the age of carts, what mattered was not a cheaper cart, but the Mack truck that runs the cart over. Bell’s telephone was a quintessentially Schumpeterian innovation: it promised not improvement of the telegraph industry, but rather its annihilation.
To understand Schumpeter we need to reckon with his very peculiar idea of “competition.” He had no patience for what he deemed Adam Smith’s fantasy of price warfare, growth through undercutting your competitor and improving the market’s overall efficiency thereby. “In capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts,” argued Schumpeter, but rather, “the competition from the new commodity, the new technology, the new source of supply, the new type of organization.” It is a vision to out-Darwin Darwin: “competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.” Schumpeter termed this process “creative destruction.” As he put it, “Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”*
Schumpeter’s cycle of industrial life and death is an inspiration for this book. His thesis is that in the natural course of things, the new only rarely supplements the old; it usually destroys it. The old, however, doesn’t, as it were, simply give up but rather tries to forestall death or co-opt its usurper—à la Kronos—with important implications. In particular Schumpeter’s theory did not account for the power of law or the government to stave off industrial death, and (for our particular purposes) arrest the Cycle. As we shall see in future chapters, allying itself with the state, a dominant industrial force can turn a potentially destructive technology into a tool for perpetuating domination and delaying death.
But before describing such corporate contortions, let us return to the sorrows of Mr. Bell.
ENTER VAIL
In 1878, Theodore Vail was an ambitious and driven thirty-three-year-old working at the U.S. Post Office. He was very good at his job—he pioneered a more efficient form of railroad mail, and he supervised more than thirty-five hundred men—but he was obviously bored. And so when Gardiner Hubbard, Bell’s founding father, legal counsel, and first president, showed him the Bell prototype, Vail spied the chance of a lifetime. He was in precisely the position of anyone who leaves a steady job for the promise held out by some start-up. “I can scarce believe that a man of your sound judgment,” wrote his boss, “should throw it up for a damned old Yankee notion called a telephone!” It would have seemed imprudent, in a time when Americans did not change jobs as regularly as they do today, to leave a secure situation and hitch one’s wagon to what seemed a novelty item, and a rather buggy one. Yet something in Vail’s nature allowed him to see the grand potential of the telephone, and the lure was irresistible to him.17
We must try to understand Theodore Vail, for his basic character type recurs in other “Defining Moguls,” the men who drive the Cycle and populate this book. Schumpeter theorized that men like Vail were rare, a special breed, with unusual talents and ambitions. Their motivation was not money, but rather “the dream and the will to found a private kingdom”; “the will to conquer: the impulse to fight, to prove oneself superior to others”; and finally the “joy of creating.” Vail was that type. As his biographer put it, “he always had a taste for conquest … here was a new world to subjugate.”18
When Vail arrived at Bell, Hubbard soon recognized where his potential lay and made him general manager of the company. In that role Vail, like a man who tastes combat for the first time, discovered his natural aptitude for industrial warfare. He applied himself vigorously, reorganizing the firm and putting the fight in Bell’s employees, agents, and partners. In internal letters he called on the Bell side to give their all; for this battle, he believed, was the very test of their manhood. “We have organized and introduced the business,” he declared, “and we do not propose to have it taken from us by any corporation.” To an agent who was wavering, Vail wrote, “we must organize companies with sufficient vitality to carry on a fight,” for “it is simply useless to get a company started that will succumb to the first bit of opposition it may encounter.”19
Vail’s efforts surely helped morale, and some have credited them with preventing Bell’s premature capitulation. But in truth the key to the fight was with Hubbard. Bell was overmatched in every area—finances, resources, technology—except one: the law, where it held its one all-important patent. And so, as the firm’s eponymous founder lay in the hospital, Hubbard, an experienced patent attorney himself, retained a team of legal talent to launch Bell’s only realistic chance of survival: a hard-hitting lawsuit for patent infringement. The papers were filed in September 1878. If Western Union was a figurative Goliath, the lawsuit was David’s one slingshot stone.
The importance of Bell’s lawsuit shows the central role that patent plays in the Cycle, and it is a role somewhat different than is usually understood by legal scholars. Patents are, by tradition, justified as rewards for invention. Owning a patent on the lightbulb, or a cure for baldness, means that only you (or your licensee) can profit from its sale. The attendant gains are meant to encourage investment in invention. But in the hands of an outside inventor, a patent serves a different function: as sort of corporate shield that can prevent a large industrial power from killing you off or seizing control of your company and the industry. In that oblique sense, a strong patent can sow the seeds of creative destruction.
The Bell patent is an example, perhaps the definitive example, of such a seeding patent. Had it not existed, there would never have been a telephone industry independent of the telegraph.
Yet it was hardly a foregone conclusion that Bell’s patent would be its salvation. The validity of the license was somewhat in question: Elisha Gray, remember, had filed a similar patent, arguing, not without foundation, that Alexander Bell had stolen from his design the features that made the telephone actually work. Western Union, meanwhile, held various patents of its own relating to communication over wires, as well as to all of Edison’s improvements to the telephone, which rights Bell was probably infringing. Western Union had the further advantage of the deep pockets required to wage a long legal battle. They could well have starved Bell out of existence or forced Bell to license its patent—also an effective death sentence, albeit at least a compensated one.
So how did puny Bell prevail against the mighty Western Union? If the story were a film or novel, one would have to charge the author with abuse of deus ex machina. For right at Bell’s darkest hour it was saved by an unlikely and unexpected cavalry charge. Western Union came under attack from the financier Jay Gould, “King of the Robber Barons,” who had been quietly acquring stock and preparing a hostile takeover. Now fighting for its own independence, Western Union was forced to look upon its tussle over the telephone as a lesser skirmish, one it no longer had the luxury of fighting.
Thanks to Jay Gould’s blindsiding attack, and good old-fashioned corporate ineptitude on its own part, Western Union broke down and gave up on its imperial plans. Instead of dominating a business it could have bought for $100,000, the company entered into negotiations with Vail, who struck a tough bargain. Western agreed to abandon telephony forever, in exchange for 20 percent of rental income on the Edison telephone and a promise from Bell never to enter the telegraph market or offer competition to the Associated Press.20
Historians and business school professors have ever since puzzled over how a behemoth like Western Union could have submitted to such a raw deal so easily. One is tempted to fall back on the cliché “the harder they fall,” but there were plenty of factors that made a difference.
Perhaps Western Union’s leadership, without the benefit of Schumpeter’s work (he was just about to be born), never fully understood that the telephone was not just a new and promising market but an existential threat. Such things can be difficult to see. Who, in the 1960s, would have imagined the computer industry would one day threaten the music industry? While it may seem obvious to us, Western Union might not have fully realized that the telephone would actually replace, not just complement, the telegraph. Recall that telephone technology was at the time both primitive and a luxury. For that reason, it is possible that Western Union thought it wasn’t such a big deal to let Bell establish a phone service, imagining it was simply letting Bell run a complementary but unrelated monopoly.
Horace Coons, the communications chronicler, writing in 1939, lends some support to this idea. He attributes Western Union’s retreat to its realization that staying in telephony would likely mean competing with Bell on an ongoing basis. As he wrote, “no one in the communications field was fond of the idea of competition. They had all experienced competition and they did not like it.… Both the telephone and the telegraph monopolies offered magnificent opportunities, [but] were not worth very much unless they were opportunities to be monopolies.”21
For the purposes of our story, however, it is more significant to contemplate the counterfactual outcome. We all recognize how much a nation is shaped by its literal wars, yet a nation’s large-scale industrial wars also inform its identity to a degree we don’t always acknowledge. An America that had entered the twentieth century with Western Union as its single wire monopolist—a decidedly different arrangement from the one that came to be and one that would shape not just our telephone communications, but, as we shall see, radio and television broadcasting and ultimately the Internet—would likely have been, culturally, politically, economically, in innumerable ways great and small, an America significantly different from the one we know.
Instead, Bell, now grandly styled the National Bell Telephone Company, was left with the telephone market and began to lay the foundations of what is called the First Bell Monopoly. It was, however, far from what we’d recognize today as the telephone system. The First Bell Monopoly was a service for the rich, operating mainly in major cities in the East, with limited long distance capacity. The idea of a mass telephone service connecting everyone to everyone else was still decades away.
Meanwhile, in 1884, the Bell Company put Vail in charge of a new subsidiary meant to build its “long lines.” Vail named the subsidiary the American Telephone and Telegraph Company—AT&T for short—a name that, one way or another, has figured centrally in the story of American communications ever since.
* I use “the Bell Company,” “Bell,” and “AT&T” interchangeably in this book. The Bell Company was the name of the company founded by Alexander Bell and his financiers in 1877. The American Telephone and Telegraph Company (AT&T) was created in 1884, as a subsidiary of Bell to provide long distance services. In 1903, after a reorganization, AT&T became a holding company for what were by then dozens of “Bell Companies,” with names like Northeastern Bell and Atlantic Bell, that offered local service. That basic structure lasted until the breakup of 1984.
* Consequently, many books have been dedicated to the question of who actually invented the telephone. and the majority seem to side against Bell, though of course to do so furnishes a revisionist the more interesting conclusion. Most damning to Bell is the fact that his telephone, in its specifications, is almost identical to the one described in Gray’s patent. On the other hand, Bell was demonstrably first to have constructed a phone that was functional, if not yet presentable enough to patent. A final bit of evidence against Bell: the testimony of a patent examiner, Zenas F. Wilbur, who admitted to accepting a $100 bribe to show Gray’s design to one of Alexander Bell’s lawyers. (New York Times, May 22, 1886.)
* Unfortunately for Drawbaugh, four Justices found his testimony and that of his seventy witnesses not credible and dismissed his case. The dissenting Justices accused the majority of siding with Bell, essentially owing to his fame. “It is perfectly natural for the world to take the part of the man who has already achieved eminence.… It is regarded as incredible that so great a discovery should have been made by the plain mechanic, and not by the eminent scientist and inventor.”
* In this yearning for “home telegraphs” was the first intimation of what would one day flower as email and text messages.
* This second statement has been omitted from most American histories of the telephone.
* All this may make Schumpeter sound like a hero to free market libertarians, but he is not so easily domesticated. His most famous work, Capitalism, Socialism, and Democracy, published in 1942, reads, in part, as a repudiation of the market and a lauding of socialism. He praises Marx and asks, “Can capitalism survive?” His answer: “No. I do not think it can.” It may seem paradoxical that an icon of capitalism should be praising Marx and predicting the success of socialism. As with the end of Shakespeare’s The Taming of the Shrew, a plain reading of the text has caused Schumpeter’s fans much discomfort. Whether Schumpeter’s true purpose was to praise or to bury capitalism, or to leave his main point so perversely ambiguous, is an indication of the maddening nature of the man.