The Bell Patents

The story of the telephone industry’s first quarter-century is the story of the Bell patents. Alexander Graham Bell famously filed his telephone patent hours before Elisha Gray filed a competing telephone patent, forming the foundation of what became the AT&T telephone monopoly. The way Brooks tells it—and he gives no hint of having an axe to grind against either AT&T or the patent system—the American Bell company mostly sat back and collected licensing revenues for the 17-year term of its early patents, charging high fees and doing relatively little to improve its technology or aggressively build out its services. What it did do, however, is prosecute hundreds of patent infringement suits against rivals. The book doesn’t go into enough detail to judge how many of those were independent inventions and how many were mere copycats, but it’s clear that at least a handful—including Gray’s—were independent inventions.

The Bell Company is not, in other words, an effective poster child for the patent system. The company’s reaction to the coming of competition in 1894 is interesting:

All through this welter of litigation, and right up to the turn of the century, American Bell chose to compete with the rising independents chiefly in the courts rather than by trying to provide better and cheaper telephone service. But there were now thousands of telephone patents in force other than Berliner’s [a patent that American Bell had unsuccessfully tried to use to perpetuate its monopoly beyond 1894], and in 1897 American Bell for the first time began to lose cases when wwithin a few weeks two other important Bell-held patents—on the switch hook and the automatic switch—were struck down in Chicago. The tide was turning.

Not surprisingly, competition was good for consumers…

Dubious and prolonged litigation could no longer preserve the monopoly against a public outcry for lower rates and better service. As a Bell System financial historian has put it, “where the Bell company enjoyed monopoly privileges, officials of the company were discourteous and dictatorial, and the service was not satisfactory.”

Not only did competition spur the future AT&T to better service and lower prices, but it doesn’t seem to have hurt the company’s bottom line very much:

American Bell’s reaction to competition in the early years was, as we have seen, chiefly to sue and hope for the best. Indeed, hopes seem not to have been very high, since the American Bell directors reacted to the very threat of competition by selling much of their stock; in 1895 the directors as a group owned six thousand shares, less than half the number they had held in 1881. Apprehension, tempered by a certain defiance, seems to have been the mood at the company’s Boston headquarters. Meanwhile, business remained good. American Bell continued in most instances to charge high rates—in general, about $125 to $150 per year for a business plan, $100 for a residence one—and its business continued to grow in a steady, orderly way. After a setback in 1894, net profits and dividends increased each year for the rest of the decade, until, for the year 1899, earnings went over the $5 million mark for the first time and $3.88 million was paid out in dividends. Technical advance was also proceeding in a steady, if leisurely way. During the 1890s virtually the entire Bell plant was made over from single-wire to two-wire circuits, vastly reducing the problem of static. Many additional long-distance lines were put into service, among them New York-Chicago in 1892, Chicago-Nashville in 1895, New York-Omaha and New York-Minneaplis in 1897.

Now, the standard policy argument for patents is that without them, inventors would lack a suitable incentive to invent new technologies. I think this story is at odds with that theory in a couple of important ways. In the first place, it seems exceedingly unlike that, had Bell not invented his telephone in 1876, no other inventors would have been invented in the subsequent 18 years. To the contrary, there was a veritable explosion of interest in telephone technology during this period, at least some of it totally independent of Bell’s work. I don’t think it’s at all crazy to surmise that in a world without a patent system there would have been more telephones in operation in 1894 even if Bell had been deterred from inventing the telephone by the lack of opportunity for a patent monopoly. (And Brooks is clear that getting a patent was a major motivation for Bell from the outset)

But the more damning thing about this, I think, is the story of what happened after the patents expired. The argument for patents is predicated on the idea that copycats would rapidly push prices down to the point where an inventor is unable to recoup his investment. If that theory were accurate, one would expect the coming of competition to have ushered in an era of falling revenues and profits for the American Bell Company. But it appears that nothing of the sort happened. Despite the existence of thousands of competitors, American Bell was able to extract a premium price for its products. Indeed, the threat of losing market share appears to have spurred the company to more rapid expansion in the competitive era than it had undertaken under the patent monopoly.

In short, I think the Bell patent story calls into question the theory that inventions are only profitable if you’re able to get a monopoly on them. In the case of telephones, at least, the demand for telephony products vastly outstripped the supply, and there was plenty of room for a bunch of different companies to make healthy profits. I think it’s pretty clear that the telephony industry would have grown faster or more robustly, or that telephony customers would have been better served, had telephone technology not been eligible for patent protection in the 19th Century.

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