The monopoly period was characterized by steady but slow growth in the number of telephone subscribers, growth that was largely confined to cities because "as a rational, profit maximizing firm, Bell invested its scarce capital in its most profitable markets." 3 After the Bell patents expired, both non-Bell manufacturers and service providers began to enter the market throughout rural America. These providers became known as the independent telephone industry.
These changes in the industry heralded a dramatic period of growth. In 1893 Bell provided roughly 266,000 telephones in the United States, but just 10 years later thousands of independent telephone companies were serving more than a million subscribers, nearly equaling the number the Bell system served. Moreover, the independents grew despite the Bell system's persistent efforts to discourage their expansion by refusing to interconnect with them or sell them equipment, and by engaging in a public relations battle to discredit them with the public and the financial community. 4
This growth was propelled by falling rates caused by competition and by rapid expansion into areas that the Bell system had previously ignored. Many of the independent providers were marginal operations that employed cheaply built and poorly maintained facilities and suffered from a shortage of capital and managerial skills. However, others that started off with the latest technology, such as automatic switching (which the Bell system initially opposed), met or surpassed Bell's quality. 5
This period, often referred to as the competitive era in U.S. telephony, ended with the Bell system's acquisition of many independents and the state public utility commissions' increasing regulations. Interestingly, the U.S. experience during the competitive era is invoked by proponents of competition and monopoly alike as evidence supporting the best policy for developing countries. The proponents of competition point to falling prices and rapid expansion, whereas the proponents of monopoly point to financial scams and other abuses of subscribers that occurred during the period.
Warren J. Stehman, writing about this period while it was still fresh, stated: 6
Our conclusions regarding the effects of competition are four. First, where the Bell Company enjoyed monopoly privileges, the officials of the company were discourteous and dictatorial and the service was not satisfactory, and competition improved this service and increased the use of the telephone. Second, the Independent companies, for the most part, were concerned, not to improve service for the public good, but rather to make money by corporate manipulations. This led to misrepresentation, fraud, bribery, and injury to investors. Third, most of the larger Independent companies were heavily overcapitalized, and their plants were poorly built. They offered service at low rates, made inadequate allowance for maintenance and depreciation, and paid dividends out of capital for a few years, and then were compelled to raise their rates or go into the hands of receivers. Finally, while some communities gained, because the increased energy stimulated by competition overbalanced its wastes, other communities lost. The net result to the country as a whole was probably a gain, since potential competition had far-reaching effects in improving service and in keeping down rates in communities not entered by the Independents.While I tend to support Stehman's position, my purpose here is not to join the debate between the pro-competition and pro-monopoly camps. Rather, it is to point out that one development during the period, local initiatives to construct and maintain farmer lines, played a positive role and supports the concepts advanced by Bruce in his papers.
As David Gabel explained, the Bell system typically served only two subscribers per mile of pole line in rural areas, but 40 or more subscribers per mile in urban areas Because the costs per mile of pole line were largely fixed, the investment cost per subscriber tended to be higher in rural areas. These higher costs, coupled with the strong demand for service in urban areas, discouraged the Bell system from serving rural areas during the monopoly years.
However, when the Bell patents expired, farmers and entrepreneurs frequently took the initiative in providing telephone service by relying almost exclusively on local capital and labor. In legal and financial terms, there were five ways the entities were organized to provide service: purely private systems, privately owned commercial systems, commercial stock companies, mutual stock companies, and purely mutual lines. 7 The purely private systems often consisted of a single line owned and shared by a small group of people and operated on an intercom-like basis. The privately owned commercial systems and the commercial stock companies were both profit- seeking entities, although in rural areas they were frequently owned by local people. The mutual stock companies limited the sale of shares of their stock to those desiring telephone service, and profits were returned to the subscribers in the form of lower rates. The purely mutual lines were organized informally with members acting as owner-patrons: rather than paying fixed charges for service, they paid a prorated share of capital expenditures and maintenance and improvements fees. Farmer lines were typically organized as purely private or mutually owned systems.
Although purely private systems without a central office connection often provided the earliest form of telephone service in more remote areas, farmer lines were often connected to the telephone switch serving a nearby community. In one early effort the farmers of California's Ahwahnee Valley banded together to construct a farmer line. C.W. Meyers described this initiative as follows: 8
It was decided to build a first class metallic line, each member to bear an equal portion of the cost of construction and each to do an equal portion of the labor of erection. A competent man was chosen as manager or superintendent of construction and was authorized to call upon members when he was ready for their labor. In case that any of these could not be present, he was authorized to employ other help on the basis of $2.50 per day, and collect the amount from the party failing to respond. This was, of course, to equalize the work, and each member performed his proportion of the labor or provided or paid for a substitute.Claude S. Fischer reported that in Tennessee in 1910 the Liberty Telephone Company required $25, a telephone, a pole, and some labor to join, and then assessed a flat annual fee of $7 for service. 9
As David Gabel wrote, although these farmer lines (or roadline companies, as he calls them) did not initially connect to a switchboard, they eventually connected to the telephone companies in nearby villages. "The village companies, in turn, were often established by doctors who wanted to enhance their ability to contact and be contacted by other doctors and patients." 10 The village companies were frequently financed by a few professionals and entrepreneurs who understood the commercial value associated with improving the infrastructure, but the farmer lines relied almost exclusively on subscriber contributions.
Roy Alden Atwood explained that rural lines in Iowa were most often constructed by the farmers themselves, whether they were independent systems or connected to a switch in a nearby town. He attributed this to the unwillingness of town commercial systems to absorb the expense of extending a line into the country. He noted that groups of farmers desiring telephone service would construct and maintain their own lines and contract with the town exchange for the necessary exchange or switching services. Such initiatives were facilitated by the availability of telephone equipment not only from independent manufacturers, but also through mail order catalogs distributed by such firms as Sears and Roebuck and Montgomery Ward.
Atwood went on to report that this arrangement benefited both sides for two reasons: 11
First, the farmer often had the materials and tools necessary to construct his own line and so could establish his service with a minimum of time and expense. Second, farmers closer to the lines could maintain and repair them more quickly than linemen from town.However, Atwood reported that the arrangement also had problems, including farmers who were ill-prepared to handle the electrical rather than the physical aspects of the line, farmers who used cheap wire and poles (or, according to other reports, even ordinary barbed wire and fence posts), difficulties in identifying sources of problems between the farmers and the telephone people in town, and difficulties in establishing rates for interconnecting the lines with the network in town and beyond (i.e., toll calling).
Despite these problems, Atwood noted that small mutually owned and operated farmer or rural telephone systems came to make up a significant portion of the Iowa telephone business. Iowa was, in turn, a national leader in rural and independent telephony during the early years of the century. According to Atwood, "Iowa had more phones on farms and in rural residences than any other state in the nation by 1917." 12 Moreover, at least one knowledgeable observer attributed the faster growth rates of telephone service in the United States compared to Europe at the turn of century to the benefits of these competitive/entrepreneurial activities at the local level.
Admittedly, well-documented abuses of the subscribing and investing public by various enterprises occurred during the early period of telephony in the United States. However, the more flagrant abuses such as pure financial scams typically were associated with larger and/or out-of-area commercial institutions rather than the local private, commercial, or mutually owned groups. Common sense suggests that people are less likely to take unfair advantage of people they have grown up and live with in a small community, and that local people, as potential investors of cash or labor, are more apt to be informed of the character and other qualifications of local entrepreneurs. In any event, these abuses largely preceded the development of regulatory structures to control the exploitation of investors and telephone subscribers.
The remaining problems of lack of training, poor construction and maintenance, and difficulties in negotiating interconnection arrangements with the existing provider seem far from insurmountable. First of all, the traditional local loop is perhaps the electrically simplest portion of a modern telephone network, and maintaining it does not require skills beyond those likely to be available in many villages. In addition, modern central office-based testing equipment and routines are much better able to test local loops centrally and detect problems before they cause interruptions of service or customer complaints. Secondly, the TO or franchiser could establish and enforce reasonable standards for construction and even provide technical advice during both construction and operation of the business. Thirdly, the regulatory institution in the country could impose reasonable terms and conditions for interconnection of the locally constructed access lines with the TO and mediate any disputes over such arrangements.