Friday, February 04, 2005

Reading :: Universal Service

Originally posted: Fri, 04 Feb 2005 23:27:26

Universal Service : Competition, Interconnection and Monopoly in the Making of the American Telephone System

by Milton L. Mueller Jr.

Bruno Latour likes to point to examples of translation, in which a term or concept is put into play, is picked up by various actors, and facilitates political-rhetorical interconnections among them. In doing so, the term or concept gains strength, but it does so by losing some coherence or integrity. That is, the term or concept does what it does because it is in some senses a moving target: it has to keep changing in order to ally new actors, while appearing to remain the same.

I recently authored an article on the translation of the term prototyping as it made its way from Scandinavia to North America. (It'll be in TCQ later this year.) But another really striking example is that of universal service, a term that has been used in US telecommunications since the late 1800s but that has meant demonstrably different things. Milton L. Mueller has written a fascinating history of the term. Mueller's not a scholar of the rhetoric of technology -- that is, he doesn't use theories and theorists from that interdisciplinary subfield variously known as "studies of scientific knowledge," "the rhetoric of science and technology," or "the sociology of science." Consequently, he hasn't framed the historical discussion in terms of translation, and I think he misses some of the implications of his study. But nevertheless he does a very good job of tracing the changes in the term.

Mueller makes two basic claims:

1. Universal service, though it is portrayed anachronistically as the principle of providing affordable basic telecommunications services for all (i.e., 100% market penetration), began as a very different concept: the principle of interconnecting competing telephone networks.

2. The consequent misinterpretation of a universal service mandate has resulted in a suboptimal telecommunications system in which healthy competition has been hamstrung. True, vigorous competition among telecommunications companies would serve the public better.

The second point is a policy argument, and I won't evaluate it. The first point, however, is just fascinating from a rhetoric of technology perspective. Mueller gets it mostly right here, I think, but either doesn't understand or doesn't pursue the implications of the shift. To explain what I mean, let me give you a little background -- because this is really a fascinating story.

Phase 1: Universal service as the principle of interconnection

Mueller tells us:

Universal service entered the vocabulary of American telecommunications in 1907. The slogan "one system, one policy, universal service" was coined by Theodore Vail, president of AT&T, and propagated in the company's annual reports from 1907 to 1914. Its appearance came at the peak of a fierce struggle between the Bell System and thousands of independent telephone companies. The idea of universal service served as the linchpin of the Bell System's argument for transforming the telephone industry into a regulated monopoly. (p.4)

Alexander Graham Bell patented the telephone in 1876. Until the patent expired in 1894, the Bell System had an exclusive patent on telephony -- although rival systems cropped up continually, requiring Bell to take continuous patent action. The problem was that on the one hand the technology was very useful and not difficult to manufacture, and on the other hand the infrastructure was relatively difficult to erect. Bell couldn't be everywhere. When the patent expired, an independent telephone movement sprang up almost immediately, in many cases retaining the names of the abortive companies that had been earlier shut down by patent action (p.43; 35). The companies decided to pursue separate, closed systems (p.43), each of which had its own subscriber universe (pp.59-60). The value was perceived to be in the subscriber universe itself -- you bought a brand of phone service because of the other people already on that system. If Person A wasn't on a given system, you couldn't reach them from your own system. (Imagine that your Sprint phone only let you talk to other people with Sprint phones. It's the Friends and Family plan from Hell.)

Consequently, a subscriber in a densely penetrated area might subscribe to two or more networks in order to reach everyone he needed to. I say "he" here because the main target of telephone service in those days was businessmen (p.40). Home phones were rare, so rare that when the 3% temporary Federal Excise Tax was levied on telephone service in 1898 to raise revenue for the Spanish-American War, it was considered a luxury tax. (The war lasted six months, but the Federal Excise Tax is still with us, and it's no longer a luxury tax.) The systems were not only separate, they weren't even colocated: if your business had service with three companies, you had three sets of phone lines coming into your business.

Naturally, the Bell system left vast areas unserved, concentrating on high-density areas and the long-distance service in between. The local exchanges were served by operating companies that Bell licensed when its patents were still enforceable; the licenses bound the operating companies to terms that lasted far beyond the life of the patent. That left Bell the ability to construct long-distance service. And if a licensee tried to break away from the Bell system, Bell could isolate it -- cut off connections to the outside world (pp.38-39).

This setup, however, left competition opportunities for local exchanges, and companies sprang up to fill the gaps. They began building infrastructure particularly in rural areas, and they began forming interconnection agreements with each other in opposition to Bell. In rural areas where not even the independents would go, farmers would set up party lines to keep their communities connected. Soon telephone service became desirable for homes as well as businesses. And the competition began to hurt Bell.

Why was the problem so intractable? Mueller says it was because the principle of economies of scale did not apply. It seems that the more subscribers your company has, the more efficient the overall system will be. Yes, you can achieve economies of density that way -- it is indeed more profitable to serve more subscribers in a high-density urban area (p. 17). But a more general economy of scope or scale doesn't apply because each connection is a distinct service (p.32). The more subscribers you have, the higher your costs mount: you need to erect more poles, string more cable, wire more exchanges, troubleshoot more lines, trim more overhanging branches, hire and manage more operators (particularly in the days before automated switching). Many independents failed to grasp this: they would start by offering service at costs lower than Bell's, they would rapidly expand their subscriber base, and then they would go out of business as they raised their rates to compensate.

The value of telephone service in those early days was not in its rates, then, but in the stable subscriber universe that a service could provide. Bell and the independents both resisted interconnection because it could destroy this advantage (p.51). Instead, they competed to pull subscribers into their own subscriber universes, using leverage such as the strategic shapes of their networks (cf. Hughes).

So what happened to move both parties to interconnection -- that is, to the original sense of universal service, in which any telephone user could reach any other? Mueller says that

the networks competed on the basis of their scope, or the size of their bundle of access units. That kind of competition gave the networks strong incentives to tap new user groups, enter undeveloped areas, lower access prices, and interconnect with noncompeting networks. Caught up in this dynamic, Bell and the independents were propelled into a race to achieve universality. The dramatic expansion of telephone service did not occur because of altruistic motives, grand social visions, or governmental policy, but was literally forced onto the contestants by the dynamics of access competition. (p.54)

Bell had built a nationwide network, but it was a network primarily in and between high-density areas serving businesses. (Remember Bowker's observation that a network is thrown over large areas of space; the interstices simply don't matter. In this case, competitors had made sure that Bell's interstices did matter.) So in its pursuit of national service, Bell had developed in geographically uneven ways, and left gaps in local and regional telecommunications (p.57). Soon Bell had to start filling in those gaps, penetrating markets that the independents already served. From 1898-1907, dual service expanded into the most rural areas: Bell and the independents began to overlap with more and more frequency, and Bell began interconnecting more frequently with noncompeting independents (p.60). At the same time, independents tried to make inroads in areas that had traditionally been Bell's territory (p.60).

"As the other tactics failed," Mueller tells us,

Bell managers saw that its own underdevelopment was the root of the problem of independent competition. Increasingly, they understood that Bell's main competitive advantage was its ability to offer comprehensive service within a given region. Although independent exchanges and telephones often outnumbered Bell in a given territory, Bell still had more exchanges than any individual independent company. With its coordinated business management and superior access to capital, it was in a better position than the independents to expand, interconnect, and integrate the operations of many dispersed exchanges. In effect, Bell began to try to beat the independents at their own game. The "opposition" had bested the Bell System by offering access to a larger number of local and regional points. Now Bell would expand and integrate its operations so that it could offer its customers an even larger bundle of regional connections than the independents. (p.71)

So in the new strategy, "the real source of competitive advantage was comprehensive coverage of a particular region corresponding to the interest of a majority of telephone users. ... the best way to satisfy all possible users was to create a comprehensive, universal network" (p.72). Mueller doesn't quite say: the physical network is an argument, one that worked in a way that previous arguments did not. This notion of universal service was a new argument, a new logic, that turned the old enterprise logic of restricted subscriber universes on its head. More effective than rate cuts, court challenges, strategic service offerings, or advertising, the new argument won out.

It was a little more complicated than that, of course. Local exchange access was still terrifically expensive due to the fact that every connection is a separate service. To deal with this problem, Bell began subsidizing local service through higher long distance rates -- something that it could do, since long distance service was a premium service used by businesses rather than home users, and since Bell still had the best developed long distance infrastructure thanks to its longstanding strategy of becoming a national telecommunications provider. These cross-subsidies blunted the cost of local service and gave Bell enough advantage to expand (p.74). Bell also began to sublicense more frequently and interconnect with more noncompeting independents (p.76).

And finally, in 1907, we hear Theodore Vail beginning to promote the idea of "one system, one policy, universal service" (p.96). Universal service was opposed to dual service, the old logic of nonconnecting, competing telephone services (p.92). As Vail articulated it, universal service was a coherent business strategy -- not a temporary ploy for advantage, nor an altruistic vision of ideal service (pp. 96-97). It had four components:

- Network externality. "The value of telephone service grew as the number of subscribers grew." And "his emphasis on the value of unfragmented telephone access reveals a profound understanding of the growing interdependence and impersonality of industrial society" (p.97) -- a condition that still holds today, with some changes.

- Centralization of control. "Universal intercommunication required centralized control and coordination. Service should be provided by, or under the control of, a single firm" (p.98). This condition, arguably, does not hold today.

- The imperfection of competition in telephony. "Competition between telephone networks is always imperfect competition" (p.99). That is, separate networks will always be heterogeneous: they will always offer some significant difference in quality or features. "Consequently, competition requires either a duplicate subscription ... or restricted access" (p.99). Today this doesn't hold: even when using the same physical network, companies offer a heterogeneous slate of services (ex: SBC's Call Notes, which is essentially a voice mail system for local users).

- Regulation as the alternative to competition. Vail made clear that he would accept government regulation of rates and services in exchange for a private monopoly (pp.99-100).

"What set the Bell policy apart," Mueller summarizes,

was its commitment to interconnect all telephone users into one big, centrally managed, nationally integrated system. The real debate was between competition and monopoly, between unification and fragmentation. Vail's doctrine of universal service represented an extremely powerful case for the latter. (p.101)

In the wake of the articulation of this policy, Bell liberalized its policy on interconnecting with other telecommunications companies. And the result worked. Municipalities felt the contradiction between the desire to maintain competition on one hand and the impulse to unify the system on the other (p.114). Interconnection, which in theory favored independents by giving them access to the vast Bell system, in fact destroyed them (p.117). As Bell's network became longer and stronger, it walked the knife edge, trying to provide universal service as a regulated monopoly while evading government ownership (p.129). The result was the Kingsbury Commitment of 1913, which AT&T used to forestall the application of the Sherman Antitrust Act. The Kingsbury Commitment is widely seen as a landmark, but Mueller says it's merely a feint: "the commitment had no impact whatsoever on toll interconnection" (p.130). Whatever it was, it kept antitrust activity from AT&T as it consolidated its new position as provider of universal service. Mueller adds that AT&T didn't accomplish this in the face of fierce opposition: in fact, the voters, city councils, and statewide referenda wanted universal service rather than dual service; they preferred a regulated monopoly (p.134). The new enterprise logic had proven to be a successful argument. And by the mid-1920s, universal service had been achieved -- in its original meaning, that is (p.150).

Phase 2: Universal service as total market penetration

Then Bell settled into a long life as a regulated monopoly. Bell didn't allow any non-Bell equipment to attach to its network, a policy so draconian that even the Hush-a-Phone -- a plastic cup that attached to the receiver to keep conversations quiet in busy offices -- was considered a threat to network integrity. (AT&T finally lost the Hush-a-Phone case in the DC Appelate court in 1956, and it did in fact become a threat to AT&T's network, since it lay the groundwork for attaching fax machines, answering machines, and other devices to the network.) But that monopoly was threatened in the 1970s, due to a strategic business decision that AT&T had made before Vail ever articulated the principle of universal service.

AT&T had blunted the high costs of local service by cross-subsidizing it through revenues from the long-distance side. As long as AT&T controlled long distance, this arrangement worked brilliantly. But in 1959, Microwave Communications, Inc (MCI) began offering new long distance services. And these services severely undercut AT&T's prices because the independent long distance companies had no incentive to levy the charges that AT&T had to levy in order to cross-subsidize local service. Their long distance connected directly to Bell's subsidized local service. With long distance competition, Bell's advantage in local service was translated into a severe disadvantage.

So Bell had to do some translating too. By the early 1970s, AT&T's representatives and advocates had reinterpreted universal service as the obligation to provide basic telephone service to as many people as possible (i.e., complete market penetration) -- and reinterpreted cross-subsidies as a way to keep local service low so that this altruistic goal could be achieved. The preamble of the Communications Act of 1934 -- which had nothing to do with either definition of universal service -- was anachronistically represented as the origin of the concept (p.164). Mueller puts it forcefully:

During the crisis of the Bell System in the mid-1970s, universal service was redefined as an industry-government commitment to put a telephone in every home. That second-generation universal service policy invented a mandate from the 1934 Communications Act and claimed credit for making telephone service available and affordable to nearly all Americans. Both claims, as we have seen, are myths. (p.166)

As a way to preserve the monopoly, the gambit failed: AT&T was broken up as a result of the Modified Final Judgment in the government's antitrust case against AT&T (1982). But at the same time, the translation of universal service took hold, picked up and embraced by lawmakers and citizens alike. "Although AT&T's political objectives did eventually fail, its historical revisionism was an overwhelming success" (p.164). A success, however, without any solid legal backing. Until the next translation.

Phase 3: Universal service as universally obtainable slates of services

"In a weirdly posthumous political victory, the mythology of universal service created by the old order had become the law of the land" (p.166). The second articulation of universal service was picked up and enshrined in the Telecommunications Act of 1996, "clearly articulated" (p.167), and made concrete enough that regulations could be based on it. It was operationalized in Section 254, Subsection b. But in this third phase, universal service expanded even beyond the definition that AT&T had articulated in the 1970s:

The language makes it clear that universal service obligations need no longer be confined to traditional telephone service. Universal service is to be an "evolving level of telecommunications services," and the definition must take into account advances in telecommunications and information technology. The FCC must include, at a minimum, any telecommunications service to which a substantial majority of residential customers subscribe. It must also revise and update the definition periodically. (p.167)

Notice that this destabilizes the industry significantly. In the old days, telephone service was relatively homogeneous. Quality and subscriber universe might vary, but the basic service was the same in any network: voice telephony (p.173). Today, you can choose from a wide slate of services, including call waiting, caller ID, dial-up Internet, ISDN, DSL, voicemail, and on and on. Rival companies regularly roll out new services as a way to keep ahead of competitors. The Telecommunications Act of 1996 essentially says that any of these services can be considered part of basic service once they achieve a certain level of market penetration. A telecomm company has to keep up with competitors, not just because of market pressures, but because it has to be prepared for popular features to be mandated. Services can't be unbundled; rival networks can't pursue niche markets wholeheartedly. (Some of the current debate over the classification of internet services has a lot to do with how this law should be applied to those cases.)

Beyond this requirement, telecommunications companies must provide "quality services" at "just, reasonable, and affordable rates" (p.167). Affordability was a post-hoc rationale, Mueller reminds us, which was "enshrined" in law (p.168).

Finally, we see some really interesting fallout of this articulation in the current state of telecommunications. Since interconnection is mandated by law, no company can gain competitive advantage by being a bottleneck for local service (p.177). Local exchange carriers cannot prohibit or limit the resale of their services (p.178). Interconnection has to be open and nondiscriminatory (pp. 178-179), resulting in service that is transparent -- when you pick up a phone, your service will be the same no matter what company (or companies) effect the call. (This makes "slamming" possible: the illegal practice of switching a consumer's telephone service without her knowledge. "Slamming" is usually detected only when the new bill comes in.) Most importantly, the new articulation of universal service requires deep interconnections and interpenetrations among rival companies. In the current environment, workers at telecommunications companies are mostly massed at the company's borders, working closely with their counterparts in other companies; the integrity of the boundaries between companies is not strong.

I've gone over several points in Mueller's book, which is very good. But I can't seem to summon the sense of indignation that he has. That's largely because these sorts of translations are to be expected, and they happen more broadly and gradually than he sometimes presents them. For instance, yes, the Telecommunications Act of 1996 enshrines a version of universal service in law. But that meaning was already being enacted in state laws. For instance, Texas articulated universal service as a policy goal in 1993, based on even earlier policy actions. The translation worked because of a general shift in the perception of telecommunications services; it was not just an anachronistic concept that took on a life of its own, it was an evolving argument.

Despite some slow spots, this is a fascinating book. If you're at all interested in the telecommunications industry, or if you have a lay knowledge and interest in the rhetoric of technology, check it out.

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