Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (6 page)

Roosevelt's answer to the lack of enforcement authority and gap in price-fixing capability given to the Interstate Commerce Commission was administrative oversight. As he said to Congress in his State of the Union Address of 1904, “The Government must in increasing degree supervise and regulate the workings of the railways engaged in interstate commerce; and such increased supervision is the only alternative to an increase of the present evils on one hand or a still more radical policy on the other.”
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The legislation he championed, the Hepburn Act of 1906, gave the ICC the
power to set maximum rates and to forbid rebating. Because some railroads gave preferential rates to commodities in which they had a financial interest, the Hepburn Act also included a clause prohibiting railroads from hauling commodities they produced or owned, or in which they had a financial interest. Later, the Mann-Elkins Act of 1910 added to the ICC's arsenal the power to block proposed changes in shipping rates.
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The ICC was supposed to be an independent entity, operating separately from the legislature, administering technical matters in rates and facilities with a high degree of autonomy. The idea was that such an agency could better respond to changes in the relevant conditions with flexibility, precision, and expertise; no broad legislative wording could accomplish this same goal as well. In the end, the regulation of railroads accomplished less than many had hoped. As the first regulatory agency, the ICC also became the first victim of regulatory capture: it was completely overrun by the industry it purported to regulate.

According to an article by Samuel Huntington (“The Marasmus of the ICC”) published in the
Yale Law Journal
in 1952, the decade after the passage of the 1906 act was a golden era for the ICC; by the start of World War I, the Commission had eliminated the worst of the railroads’ discriminatory practices. But the railroads were nationalized during the war, and afterward they decided that “the path of wisdom was to accept regulation and to learn to live with the Commission.” The shippers (the traditional enemies of the carriers) grew lax, less interested, less politically active. Farms were being wiped out by urbanization. And neither President Harding nor President Coolidge was interested in restrictive regulations. So the Commission looked for support in the only place it could find it: from the railroad industry itself. The railroad management group had all the information the Commission needed; it supported the growth of the Commission's agenda and defended the Commission against executive intrusions. As Huntington put it, “The attitude of the railroads towards the Commission since 1935 can only be described as one of satisfaction, approbation, and confidence. At times the railroads have been almost effusive in their praise of the Commission.” Huntington charged that to shore up the railroad industry's support for its operations the ICC had permitted the railroads to raise rates, refused to investigate railroads, facilitated the reduction of competition, favored
railroads over motor carriers, and generally acted in a passive, dilatory manner. Huntington recommended flatly that “the Interstate Commerce Commission … be abolished as an independent agency.”
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Coziness, mutual dependence, and stark asymmetry of information—the railways had all the data—had caused the ICC to deteriorate, and by the 1970s, it was on the way out: Congress passed several laws aimed at deregulating the shipping industry, which diminished the Commission's authority. In 1995, the ICC was abolished and its functions were transferred to the Surface Transportation Board within the Department of Transportation—not itself a model of disinterested civil oversight.
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Nonetheless, the idea of regulation by expert commission provided the rationale for the Federal Communications Commission (FCC), created in 1934 on the model of the ICC.
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The ICC also established a central organizing principle for constraining the power of a private company serving public interests in basic transport and communications: common carriage.

“Common carriage” is an old idea. It is a label attached to private basic transportation and communication businesses that are “affected with the public interest.” For hundreds of years, operators of ports, bridges, ferries, and the like operating through a license with the sovereign have historically had a duty to serve all comers and serve them equally. As long as companies in the business of providing basic transport and communications—such as taxi and telephone companies—portrayed themselves as serving the public, and as long as they were clearly in the business of taking parcels or conversations from Point A to Point B, they were obliged to serve all comers fairly and equally. By the 1870s, state legislatures making rules about railroad carriers had picked up on the traditional principle that industries “clothed with public interest”—companies that provided basic, essential transport and communications facilities—were subject to government oversight. The Interstate Commerce Act of 1887 gave the Interstate Commerce Commission explicit jurisdiction over “common carriers”: if a shipping line or a railroad was ceded a natural monopoly, it had to offer to all comers equal service and submit its rates to the Commission for approval.
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Such nondiscrimination rules were applied to American telegraphy providers from the mid-nineteenth century on, and to telephony providers
when they started business in the late nineteenth century. Regardless of whether the telegraph or telephone system was too small to have any chance of dominating a market, it was still obliged to serve every customer on equal, reasonable terms. It was a private business with public effects. It was conduit, not content. Common-carriage regimes give us confidence that we can trust private providers of essential communication services not to discriminate or censor; this framework facilitates competition (the free market has a field on which to operate), forwards personal and commercial freedoms—and lowers barriers to businesses by eliminating one-off negotiations for each transaction. The tradeoff for the carrier is that it avoids liability for the content of the packages (or messages) that it carries.

So when Congress (spurred primarily by the secret rebates, predatory pricing, and collusive activities of the railroads) added telephone systems to the Interstate Commerce Commission's responsibilities in 1910, it simply treated telephone and telegraph companies like railroads, declaring them all to be common carriers. Both railroads and telephones had been given access to extensive public lands and had benefited from the power of the state to condemn property for their use; in exchange, they had to offer their services without discrimination to all comers, and their rates would be set by the ICC.
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Congress knew that, in the telephone system, it was dealing with an essential basic business; by 1910, millions of Americans had already installed telephones.
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And it was also dealing, indirectly, with J. P. Morgan, who had gained financial control of the Bell System by 1907 and was buying up independent phone companies by the dozens; the Bell System's corporate goal under Morgan became to obtain control of all profitable lines.
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(Morgan knew a good natural monopoly when he saw one.)

Classifications like “common carriage” and legal obligations not to discriminate against particular uses of the phone network have historically been difficult to enforce. The company providing the conduit always wants to find ways to make more profit and drive out competition and will seek to collaborate with other service and content providers to do so. Morgan lost no time in ignoring the Mann-Elkins Act. A year earlier, in 1909, American Telephone & Telegraph had bought thirty thousand shares of Western Union stock, effectively gaining working control of the company that itself
controlled 90 percent of the telegraph services market.
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In 1911 and 1912, Western Union's tiny competitor, the Postal Telegraph Company (with a 10 percent market share) complained that Western Union was charging unreasonable and discriminatory prices to carry Postal-originated messages to their final destination.
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But AT&T was doing even more than that.

On April 1, 1912, a
New York Times
reporter confirmed Postal's complaints that callers to the Bell Telephone Companies asking for Postal services were instead referred to Western Union. Across the United States, patrons trying to reach Postal experienced long delays and, in some cases, outright blocking by Bell operators. Operators routinely told patrons that the company they really wanted was Western Union, and that “Western Union would give faster service and the toll would be charged on the monthly telephone bill.” Postal asserted that this was illegal discrimination: “The law requires a telephone company to treat both telegraph companies impartially and give equal service to both. … What, then, is to be said of a telephone monopoly that is using its monopolistic power to divert the legitimate business of the Postal Company to the monopoly's ally, the Western Union?” Postal demanded that Western Union be separated from Bell Telephone.
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By 1914, following public uproar and additional complaints, AT&T had disposed of Western Union in order to avoid monopoly charges.
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Fast-forward to the present day: all the stages of the railroad story are repeated today in the context of Internet access: rebates are being offered by the carriers to giant “shippers” of content in the form of preferential fast lanes; the carriers have thoroughly consolidated and vertically integrated (just as the railroads had interests in commodities prior to the Hepburn Act and AT&T controlled Western Union); the efficiencies of consolidation have not led to lower prices for consumers; the lobbyists for Comcast and AT&T (our era's railroad lawyers) are making generous contributions to legislators; and inequality between the access of the rich and the access of the poor is growing.

Where it is not sufficiently profitable from a carrier's perspective to provide service, it won't. The rich are paying more for services, the poor can't afford the services at all, and the government is left trying to pick up
the tab so that all Americans have access—which is more expensive for everyone.

Like the ICC in the early years of the twentieth century, the FCC is now subject to the concentrated influence of a determined industry and is laboring under enormous information asymmetries; like J. P. Morgan, the carriers treat government as (at most) a peer and will litigate unceasingly in support of their claim that any form of regulation will destroy their incentive to invest in infrastructure and innovation.

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Regulatory Pendulum

THE LONG TWILIGHT STRUGGLE

CABLE STARTED OUT AS A DISRUPTIVE BUSINESS
. The first cable systems were mom-and-pop operations consisting of wire strung from antennas on hillsides providing three or four channels of broadcast television to towns that were too remote to pick up a signal. In the 1950s, these so-called community antenna television systems, or CATVs, were springing up everywhere.
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None of them was being regulated by the Federal Communications Commission, which had virtually no information about CATV. But in the summer of 1951 a lawyer running the Telephone Service System Facilities Branch of the Common Carrier Bureau of the FCC, E. Stratford Smith, was sent out to Pottsville, Pennsylvania, to interview a man named Martin Malarkey about how CATV worked and how it should be treated as a regulatory matter.
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Was this new thing Malarkey was running, a service called the Trans-Video Corporation, a common-carriage system like a telephone or a broadcast service receiving signals and delivering them to homes?

In
Blue Skies: A History of Cable Television
, the communications professor Patrick R. Parsons reports that when Smith got back to Washington, he wrote a memo saying that Trans-Video could be treated as a common carrier, but the FCC deferred any action on the recommendation.
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Smith eventually left the FCC to become counsel to the National Community Television Association (the ancestor of today's National Cable & Telecommunications Association), formerly the National Cable Television Association, which Malarkey had founded in the wake of Smith's visit. In the process of moving from regulator to member of a regulated industry, Smith also changed his opinion: no cable operator has ever wanted to be classified as a regulated common carrier.
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At first, over-the-air broadcasters ignored CATV, considering it a niche market that helped spread their signals farther. But as cable distributors began to sell their own ads, the broadcasters began to realize that cable's growth could undermine their profits. Cable-system technology had improved by the mid-1960s, making twelve-channel systems standard.
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Cable owners used the additional channel territory to rebroadcast signals from distant markets and began exploring non-network, cable-only channels. Television-station owners argued that the cable operators’ importation of distant signals reduced their audiences, while the owners whose signals were being imported complained that those signals had not been paid for.
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