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Lecture 15, Telecommunications and Network Policy (Wired)

This lecture will mostly talk about the broadband in US. Main topics include: Birth of American telecommunications and rise of AT&T, economics of the networked information industries, Traditional telephone system (regulated monopoly, universal service, and ‘common carriage’), and competition and break-up of AT&T.

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The rail and telegraph revolution

The rail and telegraph system constructs a continental scale economy and identity, which separates communication from transportation by providing a real time control at a distance. The telegraph system also have significant implications on imperialism, colonialism by providing means of management and control.

Consolidation of telephone system

After the expire of the telephone patent in the 1890s, the telephone system from competitive and disconnected local networks to integrated and rapidly consolidating market under AT&T. This results in the Dual dominance of the telegraph (West Union) and the telephone (AT&T + Local bell) in the country. Such consolidation is created from the economic principle of network effect. Once part of the system have a advantage, the whole system automatically turns into monopoly at some point.

Network effects, also known as network externalities, is the phenomenon that the value of a product or system increases with each additional user. This applies to social media platforms, or certainly the AT&T telephone network. The telephone system is also categorized as economies of scale and scope, that have high fixed cost and low marginal costs. High fixed cost also creates a high barrier to entry.
The carriers also poses high switching costs at that time that makes the cost to leave the network/service/platforms for competitor services is so high. Cost also includes consequential costs like telling everyone your new number. In modern networks, this is also related to “data portability” measuring the difficulties for users to transfer their data.
Monopoly leveraging is the act of using market power in one industry or sector to dominate or control adjacent market sectors (e.g. local and long distance service).

The identified economic effects have created the natural monopoly for AT&T to inevitably turn into monopoly power.

Antitrust act and the Kingsbury commitment (1913)

Due to the monopoly power of AT&T, the Antitrust act forced AT&T to chose from seperation/ public takeover (structural separation), or:

1. divest Western Union (telegraph);
2. allow interconnection of independents;
3. achieve universal service (through system of internal cross-subsidies);
4. practice ‘non-discrimination’ (separation of content and conduit; non-discrimination on basis of source or content) – AT&T is to act as a ‘common carrier’.

This allows AT&T enter the time of “Regulated monopoly” especially categorized as cross-subsidies and universal service: urban to rural, business to consumer, long distance to local. This strengthened the monopoly barrier for future competitors.