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How the Telephone Conquered the World. Episode Five: From the US Free Market to Conservative Britain

How the British government tried to regulate and nationalise the telegraph and telephone, and the results of their efforts

The history of the invention of telephony reads like a captivating detective novel, but even more intriguing are the events that contributed to the worldwide adoption of this technology. In this series of columns on IQ.HSE, Anton Basov, HSE Faculty of Computer Science editor, discusses how telephones have become an integral part of our everyday life. The fifth episode of the series chronicles the early experiences of the telegraph and telephone in Great Britain, shedding light on the challenges they faced, and explores the adverse impact of excessive government regulation and nationalisation on the evolution of telecommunications.

In the previous episode, we left off at the point where Alexander Bell and his legal team successfully defended his claim to the priority of telephone invention. After enduring six hundred lawsuits and the intervention of both the Supreme Court and the US Congress, patent No. 174465 ultimately remained in Bell's possession, making it the most expensive patent in history.

Alexander Bell had already retired from business. In 1880, following several reorganisations, the company adopted the name American Bell Telephone Company (ABTC). As of March 1, 1880, there were 138 telephone exchanges in the USA, either operational or about to be opened. One year later, their number had risen to 408, followed by 592 by the end of 1881, and 1,070 by December 1882. This rapid rate of expansion meant that two new telephone exchanges opened nearly every day. As of December 31, 1883, there were 1,325 telephone exchanges in operation across the USA, catering to a total of 123,625 subscribers.

However, it would be inaccurate to say that the process of telephone adoption in the USA was without its challenges. It was influenced by various factors, including the financial crisis of 1885, the expiration of Bell's patent in 1893, and the government's attempts to regulate the telephone industry, which actually contributed to the monopolist status of Bell's company, known by that time as the American Telephone and Telegraph Company (AT&T). Nevertheless, despite these challenges, North America emerged as the region where the telephone achieved the highest level of adoption. Now, let's turn our attention to the situation in Europe, beginning with Great Britain.

The Telegraph in Europe

To gain a better understanding of the development of telephony in Europe, let us look at the precursor of the telephone—the telegraph. Right from the beginning, the approaches to its development in the Old and New Worlds diverged.

In the USA, a state monopoly on the telegraph had never existed, leading to an organic market development where companies competed among themselves. As a result, each of them had a motivation to provide higher-quality services at more competitive prices.

In contrast, in Europe, the telegraph had been employed for public service purposes from its inception. The reasons for this approach varied from one country to another. In the Netherlands, the business sector had little use for the telegraph, making its operation unprofitable. In the German principalities, the telegraph was integrated into the state railways. Meanwhile, the French government sought to maintain control over all information flows, leading to the prohibition of private telegraph lines as early as in the 1830s,when the telegraph was still optical. Upon the advent of the telephone, European governments treated it in accordance with their established practices for managing telegraph services.

In August 1879, Bell's Telephone Company Ltd. opened its first telephone exchange in London. Thomas Edison established the Edison Telephone Company of London Ltd. in September of the same year. In 1880, the competitors made the decision to merge and form the United Telephone Company (UTC) to maximise the application of both companies' most advanced technical solutions.

A cascade of new developments followed the merger. First, the Postmaster General filed a lawsuit against the UTC, claiming that the company had violated the 1869 Telegraph Act. This legislation effectively nationalised all telegraph companies in the United Kingdom and instituted a government monopoly over telegraph services. On December 20, 1880, the court ruled in favour of the Ministry of Posts. Now the telephone, as well as every organised system of communication by means of wires according to any preconcerted system of signals, fell under the jurisdiction of the Postmaster General.

However, the General Post Office (GPO) was already grappling with an unprofitable telegraph system; following nationalisation, tariff reductions had been so significant that the telegraph service started to rely on government subsidies. GPO was not inclined to take on the responsibility of developing telephone communication in addition to its existing challenges and made an offer to the UTC: the company should abstain from contesting the court decision in return for a license from GPO to continue its operations.

The terms of the agreement were rather stringent: the license remained in effect for 31 years, expiring in 1922, with the GPO receiving 10 percent of the company's gross income. Additionally, the company was prohibited from installing intercity lines and establishing public call offices. In London, the license authorised the licensee to operate an exchange system within a five-mile radius of the city, and in other locations within a two-mile radius of a central point.

The prohibition on intercity lines and public call offices is readily understandable: GPO was concerned that telephone communication might compete with the already unprofitable telegraph service, and thus telephony was confined to the limits of individual cities.

The UTC secured a license for the network in London, while other cities were given over to subsidiary companies, which were required to obtain both a license from the GPO and permission from the UTC to use the patents.

In 1882, there was a modification to the licensing terms. The new Postmaster General, Henry Fawcett, was an advocate for open competition in telephony, therefore he removed some of the constraints, including those related to the service area radius, long-distance lines, and call offices. He announced that licenses would be granted to all applicants, as long as they agreed to supply telephone equipment to the General Post Office. As a result, of more than 70 licenses applied for, only 8 were granted on account of the impossibility of complying with this condition.

This new condition could only imply one thing: the GPO had plans to develop its own telephone network. The Post Office began establishing its own telephone exchanges in 1884, despite objections from the Treasury, which believed that the government should not compete with private companies.

What a telephone conversation looked like in 1884. Excerpt from the film Topsy-Turvy

The relaxation of restrictions in 1889 enabled the consolidation of twelve UTC subsidiaries into a newly formed National Telephone Company (NTC). However, oversight from the Post Offcie and municipal authorities continued to hinder the company's ability to implement its most advanced technical solutions. Hence, when the UTC sought permission to install underground cables, their requests were denied on three separate occasions, in 1884, 1885, and 1888. Similarly, the newly established NTC was unable to obtain approval for installing underground cables, despite making four requests.

Although hampered by these regulatory measures, the telephony landscape in Great Britain continued to progress: by 1892, the NTC had equipped more than four hundred cities with telephone networks. Yet, frequent changes in the rules of the game led to persistently high prices and poor connection quality. The topic of nationalising all telephone networks was brought up for discussion.

In 1897, the General Post Office forcibly purchased all intercity lines from the NTC, and in 1899, it restricted the company from installing new exchanges in areas where it had no presence, while empowering municipalities to establish their own local telephone systems. Out of the 1,300 municipalities eligible to apply for a license, only six eventually established their own networks, with one of them promptly selling its network to the NTC.

As a consequence, following the expiration of the company's new license in 1911, the GPO took over the NTC system, acquiring it at a price of 12.5 million pounds, significantly below its actual market value.

As for improved service quality that the proponents of nationalisation had hoped for ... Here is a funny fact reported by Electrical Industries (as quoted by AT&T in its advertisement): 'There is a certain amount of satisfaction in the fact that Mr. Winston Churchill got so angry over the freaks of the telephone the other day that he flung his receiver on the floor. As a member of the Government which purchased the telephone system, he deserves all the torture that Post Office working can inflict.'

Author: Anton Basov, November 22, 2023