Theodore Vail Chooses Regulation

Readers of history know that government efforts to reduce monopoly power and protect the consumer often fall short.  Some protect competitors rather than  the consumer. Famous  break-ups of large companies like Standard Oil and Alcoa have had little impact on the companies’ success. And regulators tend to be captured by the regulated [1].

So can government intervention be beneficial to a company—and also serve the community? Let me introduce you to Theodore Vail, president of AT&T in its early days. I learned about him from the great management guru Peter Drucker. You be the judge.

Theodore Vail,  AT &T President 

If you were reading the New York Times in 1913—or even Wikipeda’s “History of AT&T” today—you might think that Theodore Vail had succumbed to government pressure: The New York Times wrote about AT&T on Dec. 20, 1913:

“It has voluntarily agreed to adjust its business to the conditions of competition . . . . ” Thus the government “will not proceed with the contemplated suit against  the company as a combination in restrain[t] of trade under the Antitrust Act. “

And from today’s Wikipedia:

“AT&T began purchasing competitors, which attracted the attention of antitrust regulators. To avoid antitrust action,  in a deal with the government, Vail agreed to the Kingsbury Commitment of 1913.”[2]

In other words, it looks like the government was after the rapacious Bell, and its president, Theodore Vail, buckled under.

Not really.

Some Bell System History

In 1893, the Bell System’s patent on the telephone handset (a key patent) had run out,  allowing competing companies to spring up—and many did.[3] To protect its monopoly power, the Bell System (named AT&T soon after) took action. It expanded its equipment manufacturing, kept its products from the independent companies, and, most important, refused  to lease its phone lines to most independents.

But when Vail took over as president in 1907  (the second time, actually) he changed the company’s strategy. First, he started buying up independent phone companies. That stirred up the ire of the government. So he began to seek regulation.

Vail Seeks Regulation

As Peter Drucker tells it in his book The Effective Executive [4], Vail wanted to fend off nationalization of the phone company (the fate of most European telephone companies). More fundamentally, however, Vail wanted his companies to provide quality service. His motto was “one policy, one system, universal service.”

What better way than to insist on regulation? In a sense he used regulation as a means of herding his cats.

Although Congress put regulation of interstate rates under the authority of the Interstate Commerce Commission in 1910, the caliber of  “universal service” depended heavily on state regulation, Vail believed.

And  Vail didn’t just welcome regulation, he improved it. Vail’s goal, says Drucker, was “to rejuvenate the regulatory bodies and to innovate concepts of regulation and of rate-making that would be fair and equitable and would protect the public, while at the same time permitting the Bell System to do its job.”[5]

This was part of his broader aim of assuring the customer (and the government)  that  a big corporation was not ripping them off.

Vail’s Other Strategic Decisions

Vail made some other strategic decisions, too,  Drucker points out.  Perhaps his most effective was to create an independent laboratory, which became Bell Labs. Vail understood, says Drucker, that if a monopoly is going to succeed, it must have a research component. That laboratory  must be “deliberately designed to make the present obsolete, no matter how profitable and efficient [it is now].”[6] Regulation  tends to encourage complacency and drive out new ideas. Bell Labs’ job was to keep the innovations coming, which it did for nearly 50 years.

By the time he wrote The Effective Executive (1967), however, Drucker saw that most of Vail’s strategic decisions were no longer valid. For example, Bell Labs could no longer “provide all its own technological and scientific needs,”  and “new processes of telecommunications  will seriously compete with the telephone.”[7]

Drucker believed that regulation would still be necessary, but the state-based regulation that Vail championed could not handle the complexity of an international system.

Of course, Drucker was both right and wrong. He saw that the telephone industry was going to be different in the years ahead but didn’t foresee how tumultuous telecommunications would become.  Nor could he know that the AT&T monopoly would be  broken up in 1984 after a very long judicial fight.

What Drucker admired was Vail’s ability to set up a system, dependent on regulation, that served his company—and, Drucker would say, his community—for half a century.

What do you think?

This image of AT&T as an octopus appeared in Telephony in 1907. The picture is in the public domain.

Notes (Comments follow the Notes) 

[1] Stigler, George J. 1971. “The Theory of Economic Regulation.” Bell Journal of Economics and Management Science 2 (1971) 3–21.

[2] In the  Kingsbury Commitment,  AT&T promised to divest its  ownership of Western Union, give local companies access to its interstate lines (with some limitations), and not to buy up independents unless it gave up others.

[3] Richard Gabel, “The Early Competitive Era in Telephone Communication, 1893–1920,”  Law and Contemporary Problems 34, no. 2 (1969): 340–59.

[4] Peter Drucker, The Effective Executive (New York: Harper & Row, 1967).

[5] Drucker, 116.

[6] Drucker, 117.

[7] Drucker, 140.