TELECOM Digest OnLine - Sorted: Re: Bell Divestiture

Re: Bell Divestiture

Fred R. Goldstein (fgoldstein@withheld_on_request)
Sun, 19 Jun 2005 14:53:27 -0400

Hi Pat,

If you could mung my address for me (fred goldstein @ withheld will
do) it'd be appreciated. Thanks.

At 18 Jun 2005 13:50:37 -0700, wrote,

> rb> There were precisely *two* possible reasons for a price reduction:

>> 1) pressure from competition.
>> 2) enough 'pent up demand' that the price reduction brought in 'more
>> than enough additional volume' to make up for the reduction in
>> profitability.

> Neither of those make sense. There was not significant competition
> before divesture except from other modes (ie writing a letter,
> telegram). If you say the Bell System had no interest in the
> customer, then it would not have lowered rates to meet that "pent up
> demand", rather just put in more lines and made all the more money.

Wrong. Monopolies sometimes do lower prices to make more money.

We covered this in Economics 102 (intro to microec) so it's not
exactly rocket science! This is because there is a demand curve which
causes sales volume to rise as the price goes down. So there's a
point, the profit maximization point, at which the total profit, well,
is the maximum. Pricing higher causes demand to fall faster than
profit margins rise. If monopoly phone calls were ten bucks a minute,
there's be less profit, not more. So well-run unregulated monopolies
seek out that point. Sometimes that price is called "incremental
willingness to pay".

A competitive industry has a lower price, because supply-demand
equilibrium is met when price equals "economic cost", which includes a
fair rate of return on capital. Lack of competition allows the higher
profit-maximization point to be used for pricing. Regulation was
supposed to hold the price to that which retursn a fair rate of
return, as a substitute for competition.

>> There were numerous big-city locations where you _could_not_get_ RBOC
>> phone lines in quantity, when you wanted them. 'Rationing' _was_ in
>> effect. For a variety of reasons -- lack of field workers to do
>> physical interconnects, lack of C.O. capacity, among the big ones.

> Would you name those big city locations and the time frames for which
> rationing was in effect?

I was there. I was doing traffic engineering for AOLnet in 1996,
during the America On Hold debacle. There were numerous cities where
we had pending orders for *dozens* of PRIs (23 modems apiece) that the
Bells couldn't fill. A particularly extreme case was Virginia Beach.
We were more than a dozen PRIs behind, service stank, and Bell
Atlantic wanted six months to a year to provision more circuits. They
said that it would take that long to get additional PRI ports from
Lucent, since Lucent was overwhelmed with demand too. That was,
however, just one case. It was bad in lots of places. Things stayed
bad into 1997, but by 1998 they started using more CLECs and things
got better.

>> Home computers didn't *exist* until the mid 1970s. The Altair 8800
>> plans ran in PE's Jan 1975 issue. The APPLE-II didn't exist until
>> late 1977.

> But businesses and schools were heavy users of time sharing by the mid
> 1960s -- using dial-up Teletypes. Businesses were also getting dial
> up dataphone services between computers.

The volume of dial-up was still a lot lower then than when it was a
big consumer item.

>> The mid-90's debacle _was_ Internet driven.

> That was after divesture and the Bell System no longer existed at
> that point.

Going to my point -- the Telecom Act of 1996 prevented a total
meltdown of the network because it allowed CLECs to take over the
high-volume dial-in traffic *just in time*.

>> The Bell system, like any regulated monopoly was _guaranteed_ a
>> certain minimum rate-of-return on investments.

> Regulated monopolies were NOT _guaranteed_ a minimum rate of return.
> If they were Western Union would not have gone broke nor would the
> railroads. In some locations of the Bell System and even today,
> regulators mandate below-cost services for social reasons or deny rate
> increases.

Common argument, but academic. Mr. Bonomi was technically wrong to
say that there was a guarantee. There wasn't. On the other hand there
is and was no guarantee that Lisa won't get bonked on the head by a
meteorite as she walks across the supermarket parking lot. The
supermarket doesn't make a guarantee, but it's certainly not a likely
problem. Bell rates of return were targets, not guarantees, but it
took really, really bad mismanagement to miss them on the low side by

Now pricing was irrational, by design. Many services were priced
below cost. That was factored into the high prices for other things.
Rate of return was computed per the Uniform System of Accounts, which
took all revenue on one hand, all expenses on the other, and compared
the difference to the rate base. There was no linkage of specific
costs to specific prices. Economically inefficient, but politically

>> Very, *very* rarely was 'how' that money was spent questioned.

> *NO*, <that> is _not_ true.

> As Pat pointed out, Ma Bell was under constant scrutiny by the news
> media and govt and advocates. Shareholder gadflies made a point of
> disrupting stockholders' meetings every year. Activists filed
> constant lawsuits against the system.

Noise, a minor annoyance, and with rare exceptions never a real
problem to the Bell managers.

>> Can you name a feature/capability introduced by the Bell System after
>> 1970 that was not present in third-party-provided, customer-owned, PBX
>> equipment first? The only one I can think of is the "picturephone".

> I guess to really answer that claim one would have to list the latest
> PBX offerings of the Bell System of 1970, their cost, and the
> competition's offerings.

> How many third party PBXs were available in 1970?

Robert said "after 1970", not "in"; Carterfone had just taken effect,
and the PBX market hadn't developed yet. AT&T/WECo hurried the
Dimension analog PBXs to market in 1976 or so in response to the
newfangled computer-controlled digital PBXs from Northern Telecom and
Rolm, both out in 1975, as well as the somewhat more primitive PBXs
from Farinon (Harris) DTS, Tele-Resources, and others that had been
out even sooner. Bell PBXs were never market leaders. (Disclaimer: In
1977, I co-authored on a book called "Dimension PBX and Alternatives."
I researched a bunch of systems, comparing feature lists, capacities,
architecture, etc.)

> The Eng & Sci history of the Bell System describes a multitude of PBX
> systems and features.

Astonishingly primitive compared to what competition wrought.

Fred Goldstein k1io fgoldstein "at"
ionary Consulting

[TELECOM Digest Editor's Note: My first 'home computer' was in 1978
when I bought an OSI-C1P (Ohio Scientific) with all of 4K memory.
However, from sometime around 1970-71 when I was working at the
Standard Oil Credit Card Office in Chicago I had an IBM terminal on
my desk. I knew very little about the thing, except that it was
intended to eventually replace the punch cards which were around
everywhere. By 'everywhere' I mean that there were shopping carts
like used in a grocery store, and women would push these carts around
the room all day, every day, taking 'trays' (metal containers with
four or five hundred cards) off your desk, put them in the shopping
cart with others that had been gathered up, leave you a few new
'trays' of several hundred cards each in their place, then come back in
a couple hours and repeat the process. As we examined and made correc-
tions to the cards, we were to keep them in _exactly_ the same order
(within the tray) as they had been given to us.

I got the OSI computer from a neighbor who decided instead to get an
Atari computer. We had a mutual friend who had just purchased a Tandy
Model 1 computer. I sent away in the mail to a company which had new
chips for the OSI, increasing its memory to 8 K, and installed it
myself. About the same time, I got my Z-19 terminal from the
Zenith/Heathkit people with a 150/300 baud Hayes modem, and I used
that to get on line with Usenet, while the OSI was used for other
things. That would have been in 1978. The Apple ][ came out that
year as I recall, followed by the Apple ][+, which is what the Chicago
Public Library had for its BBS. And Apple licensed Microsoft Basic
for its machines, but gave it a new name 'Applesoft DOS' instead.
I thought it was sort of expensive (my salary from the Library was not
that good) so I waited on getting one.

Sometime in 1977 or early 1978 the Bell and Howell Company of Skokie,
Illinois cut a deal with Apple Computer to buy up a huge number of
'special issue' computers. Instead of the cream-colored cases used
for Apples, they were in charcoal color and had the insignia 'Bell
and Howell Computers' on them. People knew of them under the street
name 'Black Apples', and they had all of _48K_ memory in them, but
Bell and Howell decided to get out of that business and sold them all
at a substantial loss, so I got one of those instead, and started
my own BBS instead, in 1979, about six months after the library
had started its (A)pple BBS.

Chicago is where the BBS concept got started. Randy Seuss and Ward
Christianson started the very first one. (In yesterday's Digest,
Robert Bonomi mentioned how Randy had such hassles with Illinois Bell
getting the lines he needed). Bell and Howell computers _were_ Apple
][+ machines except for the lable on the front of them, and many of
them, such as mine, had not only a 300 baud modem card on a slot
inside, but an 'expanded memory' card as well, to go in another slot
inside, and a 'clock card' plus a couple of floppy disk driver
cards. I would guess that by 1980 there were a dozen or more BBS's
operating, all in Chicago or nearby suburbs, and almost none anywhere
else in the world. The Library had their BBS (BELmont 5-3200) based on
Bill Blue's *People's Message System* as did a guy in Downers Grove,
IL. Rogers Park ABBS (973-ABBS [2227]) used some other kind of
software for Apple as I did with my original BBS called 'First Choice'
(SHEldrake-3-0001). But I soon decided to work with a different BBS
'skeleton' to make 'Lake Shore Modem Magazine' on my other phone line
SHEldrake-3-0002 instead, and Lake Shore Modem Magazine went on line
in July, 1981. Tim had his Tandy Model 4 operating "Think BBS" (based
on the old IBM slogan) and Randy Suess kept plugging along with his
CBBS, until he eventually decided to go 'multi-user' with his Chinet
system, which was when all the trouble with the telephone company got
started, in 1984 I think. Ward and Randy were not only first with the
BBS concept, I think they were first with the multi-user concept also
(regards home or residential service). There was a guy in Oak Park,
Illinois using his Tandy Model-4 to run a FIDO multi-user node around
that same time, but I never did much care for the FIDO people; they
all seemed so prissy and authoritarian, IMO. I did maintain a user
group out of his node for six months or so, but the FIDO bosses
decided to ex-communicate his entire system, so that was good enough
for me: I had been off and on using Usenet (via Portal) for a couple
years at that point and decided to give up on FIDO and use Usenet
exclusively instead, and I did that mostly with my Zenith Z-19
terminal and modem. From Randy Suess one day I got a bunch of other
very good working terminals and modems as well; that was around
1983. I finally shut down my BBS (Lakeshore Modem Magazine) on
December 31, 1985 for good. PAT]

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