T207 1st Edition Lecture 3 Outline of Last Lecture I Basic Business Brief Tips II Telegraph History Business Model Outline of Current Lecture III The Telephone Current Lecture The Telephone o At first Western Union didn t see the telephone as a threatening technology Without technological advancement nothing else could really be done with the telegraph o Kronos Effect Dominant industry player wants to keep dominance Tries to buy up other technologies to incorporate into their company o The Patent Exclusive rights for a specified period of time to an inventor Creates incentive for innovation Gives a reason for other inventors to come about Prevents others from attempting to freeride on the innovation Must be non obvious innovation or invention Must have utility Can t be a trickster device o The Telephone Mini Business Model Legal Issues The patent for the telephone was awarded in 1876 o Bell Company acquired this There were simultaneous discoveries o Elisha Gray and other Europeans were also playing around in this area The patent fight o Bell offered to sell patent to Western Union for 100k o Western Union had deployed 56k telephones by 1878 Bell fell into depression and Theodore Vail came along Comes up with game plan for fighting Western Union Western Union still had improvement patents and a massive reserve of money power and influence o Bell sues Western Union for Patent infringement J Gould comes and pulls the rug from underneath Western Union allowing for Bell to win the lawsuit The Customers Bell and Western Union agree to stay out of each other s respective markets Western Union gets a cut of licensing fees because they already laid out and improved upon the telephone Western Union didn t think the telephone would do anything o Just thought it was garbage so they decided to stick with the telegraph Companies had to think outside the box in order to keep up with times and be a relevant market player Started out as a business need but eventually became a part of families o Stages of the Telephone Stage 1 The Patent Period 1880 1893 High prices urban focus 1 for every 255 Americans Dividends vs reinvestment Bell essentially wired only the East Coast where they saw the most money and people o Best market to charge high prices Investors took this technology and instead of reinvesting they wanted dividends Stage 2 Post Patent 1895 1909 Founder s myopia the investors or owners struggle to see how great technology can be o Need someone from outside to see the capability of a business Barriers to entry and cost of entry o Usually involved money o No more patents was something that could keep people out of the industry Independents came into play o AT T didn t even want to set up wires o Farmers had galvanized wire and fences to set up telephone lines Set up party lines for gossip concerts and news In 1907 3 million independent phones were connected to Bell s 2 5 million phones o Note that Bell was still doing a lot as one company to the independents multiple companies In 1911 there was 1 phone for every 12 Americans Stage 3 1909 and On AT T buys out Western Union in 1909 o Ability to have a monopoly in two different industries AT T offers independents interconnectivity if and only if they adopted Bell standards Cross subsidizing o Arguably predatory pricing o Able to change prices based on areas Could get more money out of suburbs Charged less in rural areas so that small independent companies would die off o Business Analysis The competitors The independents The Postal Service The Radio Cars and Transportation The customers Bell sold to big areas and cross country lines Independents sold to rural areas Normal families The Legal Issues Improvement patents Sherman Antitrust Act Cultural Issues Stronger demand for telephones More people were wanting it Technological Issues Bell s inventions were being improved o Monopoly Ambitions by Bell Kingsbury Commitment 1913 was what Bell agreed to Government set rates for phone service Sell western union Stop acquiring independents in many markets Common Carrier non discrimination of customers concerning rates and content Bell also agreed to become a common carrier for the telephone service Regulated by government in a special way Have to give fair rates o Doesn t mean they can t do other things to make rates higher The Graham Act 1921 Concedes monopoly Almost all Independents had been acquired by AT T within a few years AT T didn t allow people to tinker with their phones or even own them This hindered innovation