structural history of local telephone business

Growth in the U.S. local telephone business has been strongly biased toward the largest companies getting larger.  From 1916 to 1942, only about a third of U.S. households had telephone service.  Hence opportunities for extensive growth in the local telephone business were relatively good.  Nonetheless, AT&T’s share of operating revenue among the 75 largest telephone companies rose from 89% to 93% from 1916 to 1942.  The growth bias toward larger-sized companies was not confined to AT&T.  The total operating revenue of the top 5 companies excluding AT&T, relative  to the total operating revenue of the top 75 companies, excluding AT&T, rose from 43% to 63%.  The number of companies with greater than $50,000 in operating revenue in inflation-adjusted 1942 dollars fell from 224 in 1916 to 73 in 1942.[1]  Roughly speaking, AT&T absorbed about half that revenue concentration, and non-AT&T companies the other half.  The bias towards bigness seems not to have been an effect just of AT&T’s market power.

Large telephone companies had complex corporate structures.  In 1916, AT&T controlled the New York Telephone Company, which controlled the Bell Telephone Company of Pennsylvania, which controlled the Chesapeake & Potomac Telephone Co., which controlled the Chesapeake & Potomac Telephone Co. of Virginia, which controlled the Staunton Mutual Telephone Co.  Large non-AT&T companies had similar corporate complexity.  One of the largest non-AT&T companies in 1942 was the General Telephone Corporation.  It encompassed 12 operating companies formed in 1935, each by consolidating groups of smaller telephone companies.[2]  Complex corporate structure suggests relatively more importance for managerial incentives, financing, input sourcing, and regulatory political economy compared to operating economies in determining business size.

tree roots

Despite the bias toward bigness, a large number of small independent telephone companies have remained in the telephone business.  In 1937, more than 40,000 small local telephone companies accounted for about 1% of total industry operating revenue.[3]  Small telephone companies seemed to have entered the business to serve specific customers that large companies did not serve.  The early telephone business apparently didn’t have cost economies of scale.  Small companies generally grew relatively slowly.  When they failed, larger companies acquired them.

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Data: structural change in the U.S. telephone industry, 1916 to 1942 (Excel version); fuller dataset of telephone operating companies in 1942

Notes:

[1] The statistics for 1942 include many fewer very small telephone companies than do the statistics for 1916.  This is largely an artifact of the data reporting.  Reporting in 1916 and 1942 among telephone companies with greater than $50,000 in annual operating revenue (Class A and Class B companies) was probably universal.  Reporting for smaller companies is much less comprehensive, especially in 1942.   The telephone censuses provide relevant comparative data.

[2] General Telephone subsequently became GTE.  The new Bell Atlantic (a combination of the old Bell Atlantic and Nynex) acquired GTE in 2000, and became Verizon.

[3]  The number of independently owned local telephone business in the U.S. today is probably about 800.   See the NTS Cost Dataset.

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