Lessons from the Telecommunications Industry for Space Commercialization

The switchboard in Santa Fe, New Mexico, 1921.

The switchboard in Santa Fe, New Mexico, 1921.

Everyone agrees, or almost everyone since there are a few pretenders to this title and each have their champions, that Alexander Graham Bell invented the telephone in 1876 in Boston, Massachusetts. A year later he organized the Bell Patent Association to lease equipment to users. What became known as the American Telephone and Telegraph Company expanded over time, operating the full system to which subscribers paid a fee for use as well as equipment rental built at its laboratory, Western Electric Company. By 1895 the Bell system had grown to over 300,000 phones, this was nothing compared to expansion in the next ten years, to 2,284,587 phones in 1905.

In the early twentieth century AT&T began buying out the competition and consolidating various telephone providers into an ever larger network. Company president Theodore Vail aggressively pursued this corporate strategy epitomizing it by the slogan, “One Policy, One System, Universal Service.” During World War I the United States Post Office took control of all telegraph and telephone services for one year and then gave the telephone and telegraph services; at the end of the war returning these corporate assets to private control, but with the caveat that AT&T accepted close monitoring and tight regulation as a public trust under the ICC.

In 1934, the Federal Commerce Commission replaced the ICC and regulated the telegraph and telephone services. The FCC was given the power to act in public interest over the telephone service setting up AT&T as a government sanctioned monopoly. Not without misgivings, elected officials embraced the AT&T monopoly. The argument for it rested on the concept of “natural monopoly,” a workable approach when a single firm dominates the market and that economies of scale are necessary to ensure effective service. Telecommunications represented a classic case of one firm being viewed as capable of serving consumers at lower costs than two or more firms. As economist Adam D. Thierer commented:

For example, telephone service traditionally has required laying an extensive cable network, constructing numerous call switching stations, and creating a variety of support services, before service could actually be initiated. Obviously, with such high entry costs, new firms can find it difficult to gain a toehold in the industry. Those problems are compounded by the fact that once a single firm overcomes the initial costs, their average cost of doing business drops rapidly relative to newcomers.

This proved a compelling argument for Congress: “There is nothing to be gained by local competition in the telephone business.” State and national regulatory agencies actively sought to reduce competition for AT&T during the interwar period, calling it “wasteful duplication.

The Communications Act of 1934 transferred the control of telephone regulations from the ICC to the newly-established the Federal Communications Commission (FCC). The FCC regulated rate changes, consolidations, connections, and the licensing of new companies. Even so, AT&T continued to operate as a monopoly until the 1970s when the FCC suspected AT&T was violating antitrust law. In 1974 United States vs. AT&T was filed by the Department of Justice, and in 1982 a settlement was reached in which the Bell system divided into several separate businesses.

At the time of divesture, the Bell System was comprised of American Telephone & Telegraph, its twenty two operating companies, Western Electric, and Bell Laboratories serving 84 percent of the nation’s telephone subscribers while the other 16 percent was served by 2,100 independents. AT&T had a little over $5 billion in assets, 685,000 stockholders, and an annual income of slightly more than $1 billion. All of Bell Systems resources—24,000 buildings; 177,000 motor vehicles; 1,000,000 employees; 142,000,000 telephones; and 1,700,000,000,000 miles of cable, microwave radio and satellite circuits—had to be evenly distributed through nine viable corporate operations. Throughout the history of the land telephone, AT&T and Bell systems has given the United States an underground system of wire placement, metallic circuits, switch boards, long distance communications between distant cities and above all transcontinental telephone lines.

The service provided to the American customer, and the costs incurred for this service, prompted the breakup and the creation of the so-called “Baby Bells” in the 1980s: Bell South, Bell Atlantic, Nynex, Ameritech, SBC, U.S. West Communications, and Pacific Telesis. Much of this was a positive development. The Bell conglomerate was less innovative, less committed to customer service, and more costly to consumers than other systems. This changed with the Bell cartel’s breakup, at least for a time.

By the latter part of the 1990s, especially with the advancing capabilities of telecommunications available to sever consumer, various telephone, cable TV, and other service providers began to merge, create joint ventures, and enlarge market share. Every time that happened, the serviced might become more transparent and convenient to the user but the costs for their use increased. Many have questioned the beneficial nature of these more recent changes, and some of have advocated for a stricter regulatory environment. There is no resolution at present to this conundrum.

This brings to the fore the issue of satellite telecommunications and the role of the U.S. government in helping to bring it about, facilitate it, and regulate it from the 1960s to the present. With the dawn of the space age AT&T sought to extend its telecommunications monopoly into space by gaining approval to build its own communications satellites and operate as an approved monopoly. The Eisenhower administration has been warm to this approach, approving the development of Telstar, launched in 1962, as a corporate activity. At the same time, the Kennedy administration had a different approach to satellite communication. It sponsored the Communications Satellite Act of 1962.

The Goldstone deep space communication complex. Satellite dishes like these may one day provide the capability for a Mars communications system.

The Goldstone deep space communication complex. Satellite dishes like these may one day provide the capability for a Mars communications network.

Key to this was the public-private Comsat Corporation chartered to oversee the operation of communication satellites. Some free market advocates believed then and since that the federal government’s intervention in this arena was heavy-handed and in some instances punitive. AT&T was quite willing to develop this technology without government involvement. They have questioned why should AT&T not have been allowed to do so? The approach that a public-private entity would oversee space communications worked for a number of years, but has been superseded by a new business arrangement. There is still considerable regulation—especially for launch, orbital slots, and frequencies—but the result has been more open than anything ever since in earlier era.

In terms of lessons learned for space commercialization there are several issues to be addressed. The government’s role in providing patents is a given, but the granting of monopoly status and chartering special corporations with protections of a wide nature did not serve to foster an effective system that led to further enhancement of business opportunities. Will the government encourage private entrepreneurs to construct, own, operate, and use lunar communications networks, Mars communications networks, and Deep Space Networks? This is a fundamental challenge for the future: Recent experience (Iridium, GPS) suggests that the cost of establishing certain space communications networks exceeds likely revenues. In such an environment is the public-private partnership, with both sides investing, the best way forward?

Bottom Line: Following the invention of the telephone in 1876, the federal government could have owned and operated telephone service—it did so during World War I—or it could have allowed a totally open market. Instead it established phone companies as regulated monopolies under the FCC, with monopolistic privileges only removed in 1980. In essence the following structure emerged:

  • Provided patents, granted monopoly status, and chartered corporations.
  • S. Attorney General allowed AT&T to control telephone service as a regulated monopoly (1913).
  • AT&T established Bell Laboratories (1925); Bell Labs developed the first orbiting communication satellite (Telstar 1, 1962).
  • Congress created Comsat, a public-private corporation with monopoly status, to promote satellite communications (1962).
  • Comsat represented the U.S. in the formation of Intelsat and became its managing company.

Might the U.S. government foster a private space communications system that could serve the needs of all users on a commercial basis, rather than having NASA own its on TRDSS satellites? What is the future of space communications? Will the government encourage private entrepreneurs to construct, own, operate, and use lunar communications networks, Mars communications networks, deep space networks? A major challenge: recent experience  suggests that the cost of establishing certain space communications networks exceeds likely revenues.

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