early U.S. telephone competition

The expiration of Bell telephone patents in 1894 and 1895 unleashed vigorous competition in the early U.S. telephone industry.  On Jan. 1, 1894, telephones in the U.S. numbered 266 thousand, and the Bell System operated 89% of them.  On Jan. 1, 1908, the number of telephones had increased to 6.1 million, and the Bell System telephone share had fallen to 50%.   On an inflation-adjusted basis, Bell System telephone-service revenue per telephone fell about 50%.  That decrease probably was mainly due to price reductions.[1]  From 1894 to 1907, the growth of the telephone industry, the fall in Bell System telephone share, and the reduction in service prices all are associated with intense competition to provide telephone service.  That competition propelled the U.S. to world leadership in telephone industry development.

In its 1909 Annual Report, AT&T argued that competition among telephone companies is pointless.  AT&T declared:

Competition certainly had no effect on Bell revenue, was of no benefit to the public, compelled all to pay two subscriptions instead of one for complete service, besides all the other disadvantages of dual exchange systems [two separate telephone systems serving the same area][2]

The report included a chart comparing a group of cities with competition between Bell and independents and a group of “comparable cities” with only Bell service.  The chart displayed the reduction in Bell revenue per telephone and the growth in telephones per hundred persons from Jan. 1, 1894 to Jan. 1, 1909.  The trajectories of revenue reduction and telephone growth were similar for both groups of cities.  AT&T interpreted the chart to support its claim that competition had no effect.

chart showing early development of telephone competition, from AT&T Annual Report, 1909
AT&T’s comparison of fixed groups of cities obscures the spatial dimension of competition.  AT&T did not specify what cities were included in each group.  They must have been subsets of the cities that had telephone service on Jan. 1, 1894.  The set of cities and towns that had telephone service on Jan. 1, 1909 was much larger.  A central dimension of competition was competition to extend service to unserved areas.  These charts do not show the effects of that dimension of competition.  International comparisons of teledensity indicate that U.S. local telephone competition effectively extended telephone service to unserved areas.

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Data: AT&T / Bell System telephone network, telephone use, and service revenue statistics, 1891 to 1937 (Excel version)

Notes:

[1] Exchange conversations per phone fell about 25% from 1893 to 1907, while toll conversations per phone fell little.  In areas with flat-rate local service, the number of exchange conversations per phone did not affect revenue.  The 1909 AT&T report (p. 29), describing similar data, declared “reduction of operating expenses of about one-half bought about a reduction in cost to the public of exchange service of over one-half.”

[2] AT&T Annual Report, 1909, p. 25.

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