Life in the Bell System

This story first appeared October 1997 in the Telecommunications magazine. Reprinted here by permission (thanks Susan!) A Telecommunications’ Advisory Board member and an employee of Bell Telephone Co. for 17 years offers a revealing portrait of Ma Bell in the decades before divestiture. Alan B. Kamman

 

In 1952, the telecommunication -- sorry, telephone -- climate was monolithic. The Bell system ruled, and they ruled from the top. The rule from the top was based on revenues, and the leaders knew how to apply the screws. Since AT&T had majority ownership of 22 companies and minority investments in two more, plus Bell Canada, they controlled their access to the securities market. Twenty-five percent of all money raised through the sale of bonds or stock in the United States each year was raised by this conglomerate.

Approximately every six weeks, one of the companies was permitted to float a bond offering. The pecking order was determined by profitability, i.e., what flowed out of each company directly to Mother AT&T’s coffers. Profitable companies went to the well first; slack companies went last. Under this system, the strong got stronger and the weak collected a huge number of complaints to their respective utility commissions because they never had the funds to complete their construction programs.

AT&T had another trick which the FCC either ignored or never realized. All service rates -- hence, all revenues -- were controlled by individual state regulatory commissions. Most were reasonable but not generous; others were downright nasty. Therefore, if a commission dictated a return not to exceed 6 percent, that is what flowed through to AT&T’s consolidated income statements. The loophole was that the manufacturing arm of the Bell system, Western Electric, was subject to no controls. In the eyes of the commissions, they provided products, not services.

Every company owned by AT&T was required to purchase all major items through Western Electric. Eventually, when competition entered the communications field, Western Electric was seen to be charging outlandish prices -- sometimes as much as 25 percent more for comparable switches, cables, and telephone instruments produced by other manufacturers.

Here is how the loophole worked. A company, for example, New York Telephone, would order its capital equipment through Western at the current -- actually inflated -- prices. This would go on the books as capital equipment, upon which it could earn its 6 percent. Since Western’s prices were higher than normal, New York Telephone would earn 6 percent on the difference. In effect, with a larger “rate base,” as it was called, New York Telephone could increase rates to subscribers to bring in the extra money to earn 6 percent on that base. So more money appeared on New York Telephone’s bottom line and, hence, on AT&T’s income statements.

Meanwhile, since Western was unregulated, all that premium revenue produced by inflated prices fell directly to its unregulated bottom line and was recorded by AT&T. That’s a major reason why AT&T’s rate of return always exceeded the composite average of its subsidiaries.

There were other budget manipulations. Construction budgets were simple to forecast. Telephone growth was at such a steady state 40 years ago, mathematical formulas produced almost perfect results for at least five years in advance. The projections were based on data such as U.S. census figures and telephones per household.

Once the number of new telephones was forecast, a series of infallible formulas was used for calculations, such as miles of cable needed and switches and telephone instruments to be purchased. The bottom line was the millions of dollars needed over a set period of years to keep up with customer growth. Remember, these were the days before computer communications such as e-mail, the Internet, and wireless. They were the days of simple telephone lines, instruments, and switchboards. No complications here.

AT&T exercised total control. As mentioned, an operating company could not raise money for their construction budget unless given permission by Mother. AT&T would either approve the budget or tell the company to reduce it.

How did a company reduce a budget which was so accurately put together? One way only: reduce the basic telephone growth forecasts so that the bottom line was smaller and the whole structure held together -- and the companies had to do this if AT&T gave the order. There was only one problem. The number of new subscribers that had been accurately forecast in the first place didn’t realize that they shouldn’t apply for telephone service and went ahead and did so. The result was that a number of the less profitable -- and out-of-favor -- companies had long lists of angry potential customers awaiting service. Years after the most profitable companies went to single-party service, these companies still offered party-line service and served their subscribers from disintegrating plants with antiquated switches.

MEASUREMENT PLANS GONE AWRY

AT&T was a leader in measuring service and productivity. When I was a district plant superintendent, I received 52 reports per month measuring the performance of my 300 employees and 250,000 subscribers. Each report contained, on average, 200 individual statistics. They were excellent reports. While sitting at my desk, I could identify a problem at the generic district level and trace it directly down to an individual foreman. I once compared the process to cutting a watermelon vertically, horizontally, and diagonally. The massive number of resulting pieces could be separated, one could be picked out, and the Bell system could measure it.

Problems started when AT&T decided that too much emphasis was being given to the bottom line. After all, productivity measurements were not directly related to dollars, but if these indices improved, it was natural to assume that the company would be more profitable. Similarly, if service indices improved, the customers would obviously be happier. Excellent reasoning; poor execution. Ask the subscribers in New York City in the early 1960s. Here is what happened.

Productivity measurements were based on an arbitrary line repeated from previous page item called “work units.” These were assigned according to installed equipment. For example, if a central office had 100 frames of crossbar switches (that’s really dating myself), it might receive 100,000 work units. If it had an equivalent amount of the older panel switches, it might receive 150,000 work units, since that equipment was more difficult to maintain. These units were then divided by the total monthly hours of the staff who maintained the equipment. The productivity index would then be work units/hours-switching, work units/hours-outside plant, work units/hours-repair, and so on.

It doesn’t take a rocket scientist to look at those ratios and figure out that since work units were fixed, the only way to increase the productivity index was to reduce the hours. Once these measurements became a factor in salary increases and promotions, those hours really came down. Retired or promoted employees were often not replaced and overtime was kept under strict control. This resulted in the neglect of routine maintenance, because the reduced staff only had time to fix service-affecting problems.

The telephone switch is a magnificent machine. It can run for months without any care whatsoever. But like an automobile that is driven but never has an oil change, lube job, or tire check, it is going to develop major problems and the cost to repair those defects will be vastly more expensive than standard routine maintenance would have been. That’s what happened in New York’s financial district. Failures were so prevalent and repair service so lacking that one firm took out a two-page advertisement in The New York Times listing 4000 customers and apologizing for the poor service caused by New York Telephone.

Under the onslaught, New York Telephone, which had one of the highest productivity indices in the Bell system, went down like water over Niagara Falls. Thousands of plant department employees were temporarily transferred from operating companies throughout the country to solve the switching and transmission problems in Manhattan. Western Electric diverted switching equipment and cable destined for other operating companies and sent all of it to New York. It took six months for New York Telephone to solve the problem, but not before it incurred the most expensive bailout in the history of the Bell System, all because of management’s perceived need to achieve higher and higher productivity indices.

There is a positive footnote. It was the monolithic character of AT&T and its rule from the top that insisted on standardization nationwide. Bell System Practices (instruction books on every conceivable part of the business) were identical for all operating companies. Since everyone ordered from Western Electric, everything inside and outside every plant was identical. All the tools used by the work force were the same, as were the trucks. Even the position of all the items in the trucks was specified. So when disaster struck, as many workmen and foremen as needed could be moved to the scene and go to work with no additional training other than being given a street map.

HEADS IN THE SAND

During the Bell system’s heyday, long before divestiture, the pecking order was clear. Bell Laboratories could do no wrong, and the New Products Division at Western Electric, which took the Labs’ developments and turned them into usable products for subscribers, ranked a close second in terms of infallibility -- at least in their own eyes. Enter the Princess telephone.

Prior to the Princess, clunky desk telephones prevailed. The Princess was designed to be a “bedroom telephone.” It was smaller and sleeker than what was known as the “500 set.” It also was lighter in weight. When Western completed design of the Princess, it operated two field trials, one of which was in Pennsylvania. At the time, I was the company’s marketing director, responsible for reporting trial results to Western Electric and the Bell Telephone Laboratories.

Customer comments were highly critical. Western Electric had designed the small, oval-shaped base with all the internal equipment on the left side. According to Western, the right side was empty so new equipment that would make the Princess more versatile could be added at a later date. The uneven distribution of weight caused the set to move around the table as a subscriber tried to dial. The subscriber needed one hand to hold the base in place and the other to dial, while squeezing the handset between neck and shoulder. We reported these adverse trial results to Bell Telephone Laboratories every month of the trial.

In their position of infinite infallibility, the Labs disregarded the complaints and gave Western Electric the green light to manufacture the Princess sets as designed. Tens of thousands of sets went out to subscribers, and the result was thousands of disgruntled customers and thousands of calls to individual operating company repair service facilities.

North Electric Company, which was producing a similar but better designed set, ran full-page ads reminding subscribers that Bell’s Princess was a two-piece set for three-handed people!

Finally, because of sheer customer pressure, Western produced a counterweight to be mounted on the right side of each set and thousands of repairmen made scheduled visits to retrofit the tens of thousands of Princess sets installed in the marketplace. Millions of dollars were expended because the infallible Laboratories rejected their own test results.

BELL GUYS ARE GOOD GUYS

So much for a few of the skeletons in Ma Bell’s closet. The Bell system always stressed excellent service to their subscribers. For years they used the slogan “Service is our only product,” and they meant it. About 30 of the 52 monthly reports I received measured service to the subscriber. Some companies were better than others, and I was fortunate to be associated with one of the best, Bell of Pennsylvania. It also was profitable and had good relations with its utility commissions in Pennsylvania and Delaware. Therefore, it was popular with Mother and received its share of capital funding.

When I was a district plant superintendent in Philadelphia, there were some dangerous sections of the city. The urban gang syndrome had just begun, led by the infamous Green Street Counts, and Bell repairmen would not go into some parts of the city after dark unless accompanied by a policeman.

On one hot, humid summer night, troublemakers ran amok, smashing windows, spray-painting cars, and putting graffiti on walls. The next morning, with trepidation, the Bell employees approached their work place, which was located in the middle of the disturbed zone. There was no building damage and only one huge graffiti message sprayed across the wall. It read, “Bell guys are good guys.”

Alan B. Kamman is the managing director of the Global Group in St. Helena, Calif. Immediately after graduating from college, Kamman went to work for the Bell Telephone Company of Pennsylvania as a student engineer in the Plant Department. He rose through the company ranks, eventually becoming the district plant superintendent before transferring to the corporate staff where he held various posts in marketing, computer specialization, and finance. When he left the system, he was at the division level in charge of Bell of Pennsylvania’s expense budget.

Excerpts from "THE EIGHTIES: Cracks in the Bell System" article that appeared in "30 YEARS: A Brief Story of the Communications Industry - June 1997 -- Special 30th Anniversary Issue: June 1967 - June 1997"

The seventies had prepared the industry for sweeping change, and sweeping change is what we got. In 1980, Intelsat V relayed 12,000 phone calls and two color TV channels. IBM introduced the personal computer in 1981. Other computer innovators offered the first laptop computer and an interesting array of software programs.

During this period, regulatory changes were prominent in the news. Eight years after the initiation of the lawsuit against AT&T, an agreement was finally reached. The 1982 consent decree sounded the death knell for AT&T's long-standing and well-defended monopoly status. It formed the basis for restructuring AT&T and its ultimate divestiture of the 22 Bell operating companies.

Over the next two years, debate would center on the exact nature of the proposed new rules and structures, the transfer of equipment, and other crucial issues. In July 1983, U.S. District Court Judge Harold Greene gave exclusive rights to use the Bell name and logo to AT&T's operating companies. (AT&T had wanted to be able to use the Bell name in its long-distance business.) Throughout that year, the FCC and public and private interest groups analyzed and debated the effects of divestiture on all aspects of service delivery, tariffs, and rates, in preparation for January 1, 1984, the date that the Modified Final Judgement (MFJ) of the consent decree would be implemented and take effect.

The 1984 MFJ-the culmination of years of work aimed toward dismantling AT&T's monopoly-has been viewed by common consensus as the most important event in the recent history of telecommunication and the decade of the eighties. When the government first filed an action against Western Electric and AT&T in the District Court of New Jersey in 1949, few would have anticipated that the final resolution of charges of monopoly and restraint of trade in the manufacturing, sale, and installation of telephones and telephone equipment would really require nearly 40 years to complete. Thus, the year 1984 finally spelled divestiture for Ma Bell and heralded the birth of the seven "Baby Bells".