How Patent Expiry Unleashed Telephone Competition (1894-1906)

The expiration of Bell's two fundamental telephone patents in 1893 and 1894 ended a 17-year legal monopoly. What followed was a decade of competition that reshaped American telephony.

Within a year of the first patent's expiry, 80 independent telephone companies entered the market, capturing 5 percent of subscribers. By 1900, the number of independents had surpassed 3,000. Industry historian Gerald W. Brock recorded 199 new commercial telephone systems launched in 1895, 297 in 1896, 254 in 1897, 334 in 1898, 380 in 1899, and 508 in 1900.

Independent companies did not merely nibble at the edges. By 1902 they controlled 44 percent of all telephones, up from 19 percent in 1897. That share reached 49 percent by 1907. Of the 1,157 larger urban centers in 1898, 451 had both a Bell company and a competing independent, while 137 were served exclusively by an independent. Only 414 cities were served exclusively by Bell. Nationally, independents outnumbered Bell companies 3,123 to 865.

Service expanded dramatically. Bell had 270,000 telephones in 1894, concentrated in city centers. By 1907 the industry had six million telephones, with service available practically anywhere in the country, Brock wrote. Daily telephone calls per 1,000 people rose from 37 in 1895 to 391.4 by 1910. Telephones per 1,000 people jumped from 4.8 in 1895 to 82 by 1910.

Bell responded with price cuts, long-distance expansion, patent lawsuits, and mergers. These moves slowed the loss of market share but did not stop it, Brock wrote. New competitors continued to enter and expand through 1907.

Competitors succeeded despite Bell's head start. The Bell system had accumulated capital, a customer base, and political connections during its patent monopoly. James J. Storrow, a close adviser to Bell management, wrote to Bell president John E. Hudson in 1891 that the company "has had a monopoly more profitable and more controlling than any ever given by any patent." Public frustration with Bell's pricing and service quality created a receptive market for alternatives.

Gabriel Kolko, in The Triumph of Conservatism, argued that the dominant tendency in the American economy at the turn of the century was toward growing competition, not monopoly. "The essential characteristic of the telephone industry in the first decade of this century was its competition and rapid change," Kolko wrote.

The competitive era was not a free market. Patents, licenses, and other state interventions still distorted the industry. Yet the historical record shows that when legal barriers were removed, competitors emerged in large numbers and forced the incumbent to improve service and lower prices.

The era ended not by market failure but by political design. AT&T and allied politicians argued that competition was "duplicative," "destructive," and "wasteful." In 1921 a House committee declared that "there is nothing to be gained by local competition in the telephone business." Economists testified that telephony was a "natural monopoly." The federal government responded by establishing and regulating a telephone monopoly. Thomas DiLorenzo wrote that "there is nothing at all 'natural' about the telephone monopoly enjoyed by AT&T for so many decades; it was purely a creation of government intervention."