TELECOM Digest OnLine - Sorted: Re: The Day the Bell System Died

Re: The Day the Bell System Died

Fred Goldstein (
Fri, 07 Jan 2005 22:38:45 -0500

At 1/7/2005 09:42 PM, Pat wrote,

> [TELECOM Digest Editor's Note: Well, readers, why *did* she have
> to die? It is easy enough to do 'Monday morning quarterbacking'
> now some 23 years after the fact and examine all the things which
> went right with divestiture as well as the things which went wrong,
> but what do YOU think? PAT]

Divestiture was the high point in telecom history. The old Bell
System was too powerful, too resistant to progress. It was good at
one thing -- proving Plain Old Telephone Service to residential
subscribers at low rates. And it was pretty good at being a steady
money-earner, paying a good dividend. But as technology was
advancing, as solid-state electronics was shortening product cycles,
the Bell System's monopoly ways were impeding progress. By vertically
integrating everything including manufacturing, it was an island of a
planned, command economy, a miniature Soviet, here in the United
States, cleverly masquerading as capitalism.

Divestiture was the result o f a case brought against Western Electric
in 1949 and revived, years after the 1956 Final Judgment, over three
decades later. The original case sought divestiture of Western
Electric, which would have opened up telecom-equipment manufacturing;
instead, it was settled by closing off Western Electric from
participating in competitive markets. The revived case came in an era
when the "natural monopoly" in long distance had cracked.

The result of divestiture was a flourishing of competition in long
distance, as AT&T was no longer able to control the bottlenecks. It
led to competition in equipment manufacturing, particularly benefiting
Nortel in the CO space, but also creating an opening for SONET
(invented by Bellcore right after divestiture) and many competitive
transmission vendors, who brought down the cost of distance with
rapidly-improving fiber optics.

But some of the changes attributed to divestiture were actually
coincidental. The FCC's wonderful Computer II decision, which took
effect in 1983, forced the LECs to separate competitive from monopoly
operations. That is what took PBXs and other terminal gear off of
tariff, fully opening up the PBX and telephone set market and, by also
strictly separating content from carriage, creating the regulatory
framework necessary for the public Internet to develop. The FCC's MTS
and WATS decisions ended the old monopolistic separations system and
replaced them with a multi-carrier system of access charges. That
change ended up being synchronized to divestiture, 1/1/84, but it was
an FCC case separate from divestiture.

The Internet was opened to the public in the early 1990s. The
newly-hatched ISP industry created huge demand for bandwidth, which
was unfortunately exaggerated by promoters (pronounced: "Worldcom"),
the "analysts" who pimped for them, and the vulture capitalists who
hoped to pounce on a quick profit. Divestiture was more important
than the Telecom Act of 1996 in fueling the late 1990s telecom boom,
which led to the meltdown of 2000-2002. But that doesn't make either
the divestiture or the Telecom Act bad. It means that many people who
didn't understand how competition worked -- the telecom industry --
and people who didn't understand how monopolies worked -- money people
-- had a very bad date. And only now, years later, are they figuring
out how to get along on new terms.

Shameless plug time: I tell this story in some detail in my new book,
The Great Telecom Meltdown, which will be out in a few weeks. It's
published by Artech House . I've been
reading Telecom Digest since 1982 and perhaps that helped me write the
book. Pat's down for a review copy.

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