Lecture 3Outline of Last Lecture I. Basic Business Brief TipsII. Telegraph: History & Business ModelOutline of Current Lecture III. The TelephoneCurrent Lecture- The Telephoneo At first Western Union didn’t see the telephone as a threatening technology Without technological advancement nothing else could really be done with the telegrapho Kronos Effect Dominant industry player wants to keep dominance Tries to buy up other technologies to incorporate into their companyo 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 deviceo The Telephone: Mini Business Model Legal Issues- The patent for the telephone was awarded in 1876o Bell Company acquired this- There were simultaneous discoverieso Elisha Gray and other Europeans were also “playing” around in this area- The patent fighto Bell offered to sell patent to Western Union for $100ko 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 influenceo 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 CustomersT207 1st Edition- 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 anythingo 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 familieso 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 peopleo 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 beo Need someone from outside to see the capability of a business- Barriers to entry and cost of entryo Usually involved moneyo No more patents was something that could keep people out of the industry- Independents came into playo AT&T didn’t even want to set up wireso 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 phoneso 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 1909o Ability to have a monopoly in two different industries- AT&T offers independents interconnectivity if and only if they adopted Bell standards- Cross-subsidizingo Arguably predatory pricingo 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 offo 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 improvedo 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 rateso 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