purple motes

The evolutionary origin of the iPhone has recently been pushed back another million years.   More specifically, scientists recently found evidence that hominini used tools about 3.4 million years ago.  Dr. Zeresenay Alemseged, Curator of Anthropology at the California Academy of Sciences, explains:

Tool use fundamentally altered the way our early ancestors interacted with nature, allowing them to eat new types of food and exploit new territories. It also led to tool making—a critical step in our evolutionary path that eventually enabled such advanced technologies as airplanes, MRI machines, and iPhones.

In related news, Android-based smartphones outsold iOS-based iPhones by 21% in the second quarter of 2010.  This is a major change from second quarter of 2009.  Evolution continues!

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Like most persons around the world and throughout history, public library users like audiovisual materials.  Videos currently accounts for about 6% of U.S. public library items and 30% of U.S. public library item circulation.  From 1985 to 2004, library video circulation grew much faster than commercial video circulation.   Library video borrowing currently equals about  20% of commercial video rental.

Libraries' video circulation has recently gained greater public attention.  On July 29, 2010, Techmeme featured from Yahoo News a story entitled, "Libraries top Netflix, Redbox when it comes to loaning DVDs."  A day later NPR had the story, "Libraries Top Netflix In DVD Rentals."   The Huffington Post, Gizmodo, the LA Times, the Seattle Weekly, and many other news and information sources ran similar stories that same day.   All these stories seem to be ultimately based on a story in the Hartford Courant on July 26, 2010.  That story was entitled, "Study: Libraries Top The Competition In Lending Movies."

The Hartford Courant's story led off with this statement:

Red boxes, red envelopes and the blue and yellow Blockbuster stores may dominate the movie rental landscape, but according to a recent survey, when Americans want to watch a DVD, they are most likely to turn to their local library.

Some clarifications and comments:

1. Public library video borrowing in 2010 equals about 20% of commercial video rentals, or about 17% of total video borrowing/rentals.  Libraries tend to lag commercial video rental services in video media technology.  Hence library video borrowings likely consist of a higher share of VHS tapes and a lower share of Blu-Ray discs and online streamed movies compared to commercial video rental services.  But even if all library video borrowing were DVDs and only half of commercial video rentals were DVDs, library DVD borrowing would not exceed commercial DVD rentals.
2. The cited OCLC survey shows that public libraries DVD circulation is less than Netflix's DVD rentals.  This OCLC work is entitled "How Libraries Stack Up: 2010."  It is actually a two-page presentation of graphics.  The relevant graphic shows "U.S. public libraries 2.1 million DVDs borrowed [every day]," "Netflix 2.2 million DVDs rented [every day]."[1]  All the stories dropped the decimal part of the Netflix figure and instead describe it as "2 million."  Then they reported that figure as less than public libraries'  "2.1 million" DVDs borrowed.  Thus reporting of the survey figures apparently has been distorted to achieve a sensational headline.[2]
3. All public libraries considered together have about eleven times as many registered borrowers as Netflix has subscribers in mid-2010.  This difference is highly relevant to the comparison of all public libraries to Netflix.   None of the articles mention this highly relevant aspect of that conceptually awkward comparison.
4. Competition isn't the most interesting aspect of the relationship between public libraries and commercial video rental services.  Libraries have co-existed for years with commercial book rental businesses and commercial video rental businesses.  Libraries illustrate that diverse organizational forms and operational models can co-exist long-term.
5. The Hartford Courant's story, "Study: Libraries Top The Competition In Lending Movies,"  and the stories and posts echoing it, do not encourage studying further the issues reported.  With the exception of a few blog posts, none links to the OCLC presentation.  None links to a major source of U.S. library statistics.   None provides enough well-organized data to support non-tendentious analysis and consideration of alternative questions.  Studying and thinking takes effort.  Few persons seem to be interested in doing it.  That's not surprising.

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Data:  Video borrowing from U.S. public libraries compared to commercial video rentals; U.S. library item formats, 1989-2008; U.S. library use, 1989-2008

Notes:

[1] The OCLC graphic is a pie chart.  It consistes of three slices forming the whole pie.  These slices are: "U.S. public libraries 2.1 million DVDs borrowed [every day]," "Netflix 2.2 million DVDs rented [every day]," and "RedBox vending 1.1 million DVDs rented [every day]."  Many other commercial rental sources for DVDs exist,  but are not included in the pie.  Thus the whole pie isn't baked from any conceptually meaningful recipe.  Put differently, the size of public libraries' slice of the pie has no relation to the fact that public libraries account for about 17% of video borrowing and rentals.

[2] Hartford Courant's story also did not accurately report the OCLC's figure for Redbox rentals.  The OCLC's graphic show 1.1 million Redbox rentals per day, while the Hartford Courant's story reported 1.4 million per day.

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Differentiating telephone services drove telephone service growth in Chicago at the beginning of the twentieth century.  From 1901 to 1906, the total number of telephones in service grew the equivalent of 23% per year.[1]  Within that total, private branch exchange telephones and nickel-in-slot 10-party-line payphones grew 33% and 47% per year respectively.  Private branch exchanges catered to the needs of large organizations, while nickel-in-slot payphones offered cheap, per-call prepaid service.[2]   By August, 1906, these two services accounted for 54% of telephones in use in Chicago.

Plain-old telephone service (POTS) is a term from a later, less dynamic telephone industry.

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Data: Telephones in use in Chicago, 1901-1906, by telephone type (Excel version)

Notes:

[1]  These data are from a special telephone report delivered to the Chicago City Council in 1907.  The report includes extensive economic and operational data on early nineteenth-century telephone service in Chicago.

[2] Here's information on long-term trends in business telephone service, and recent developments in private-branch exchange service.   On nickel-in-slot telephone service in early nineteenth century Chicago, see John, Richard R. (2010) Network nation: inventing American telecommunications (Cambridge, Mass: Belknap Press of Harvard University Press) pp. 295-8.

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Early in the year 1900, local authorities in Springfield, Massachusetts, held a hearing on Hampden Automatic Telephone Company's application to provide automatic telephone service in Springfield.  The Bell System at that time provided operator-switched telephone service in Springfield.   The hearing produced an early battle of experts.  It also displayed general argumentative strategies quite common in modern regulatory proceedings.

Testifying against granting the application for the competing automatic service was Isaiah H. Farnham, "the well-known Bell telephone expert."  Mr. Farnham's arguments:

1. He has studied the 300 relevant patents and has concluded that automatic telephony is not practical.
2. He personally made 100 telephone calls on an automatic telephone system, and he found that more than half the calls were failures (no response or failure to connect to the right customer).
3. The automatic telephone system operating in Aiken, South Carolina, had an even higher rate of failure.
4. The automatic telephone system operating in Augusta, Georgia, had many stations out of order.
5. A person standing on a damp floor would receive an electrical shock from the dial of an automatic telephone.
6. The automatic telephone had no protection against electrical currents from lightning or from telephone wires crossing electric light wires.
7. He found that the automatic telephone system took 11 seconds to make a connection, while the Bell system in Springfield made connections in about 4 seconds.
8. An ordinary person would have difficulty using an automatic telephone in the dark.
9. Because the apparatus is more complicated, a subscriber is more likely to make mistakes with an automatic telephone.
10. It takes longer to correct a mistake with an automatic telephone.
11. The automatic telephone system provides a greater opportunity for central office personnel to eavesdrop on telephone conversations, because, with an automatic system, central office personnel have less work to do.
12. An automatic telephone system costs more to construct, requires more expert knowledge, and has higher depreciation costs, and hence has a greater total cost than an operator-switched telephone service.
13. The "central office of a modern telephone company" (meaning here one that employs operators) serves as a bureau of information.   Automatic telephone service cannot provide information services.
14. Automatic telephones have created public harms: "The fire department have been called out on false alarms over the automatic telephone.  The police have been sent on fruitless errands, and newspapers misled by people, who maliciously used the automatic telephone, knowing that there was no way in which to trace out their identity.  In one place, he said, the fire department has a standing rule not to answer any calls which come over the automatic telephone."

S.L. Powers, an attorney for the New England (Bell) Telephone & Telegraph Company, added other arguments against granting the application:

1. Only 20 companies have installed automatic switching equipment, and the largest automatically switched exchange has only 500 subscribers.
2. New England Telephone pays $3.63 per year per telephone royalties, while the Automatic Company pays $5 per year in royalties.
3. New England Telephone's Springfield service has in the past reduced rates $4 per telephone, and the company has pledged to reduce rates as fast as possible.

E.A. Keith, an "electrical expert" from Chicago, offered testimony on behalf of the Automatic Company.  According to a news report, "Mr. Keith's testimony differed materially from that offered by Mr. Farnham, and in certain points appeared to be exactly contradictory."  Mr. Keith declared:

1. An automatic telephone required, from an experienced user, one second per number dialed.  Hence only three seconds were required to call anyone in an exchange of 999 lines or less.
2. An automatic systems was being implemented in Chicago.
3. All the automatic exchanges in operation have been installed within the past three years and have better equipment than the automatic telephone system patented in 1891.
4. Automatic telephone switches can serve party lines, but the company does not plan to implement party lines because they provide inferior service.
5. The Bell System has experts in the central offices.  Their opportunity to overhear telephone conversations is as great as that of any automatic company personnel.
6. Secret service is practically assured with an automatic system where metallic circuits are used.
7. There's little chance of wires getting crossed.
8. Both the Bell System and the automatic system can be abusively used.[1]

The Bell System implemented automatic switching slowly compared to other telephone companies.  By 1920, two decades after this hearing, only 2% of telephones in the Bell System were automatically switched.[2]  Public hearings in which Bell System leaders argued against potential automatic-switching competitors probably helped to convince Bell System leaders' of the inferiority of automatic switching long past when that inferiority was otherwise plausible.[3]

Just as liars risk becoming confused about true and false, those battling with arguments before regulators may lose the capacity to discern their real interests.

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Notes:

[1] The quotations and the argument points are from "Arguments For and Against Automatic Telephony," Electrical World and Engineer (New York), v. 35, n. 10 (Mar. 10, 1900).

[2] In 1929, 26% of Bell System telephones were automatically switched,  while the automatic shares in Austria, Netherlands, and Germany were 71%, 52%, and 40%, respectively.  Sweden, a early leader in teledensity, also lagged in implementing automatic switching.  Sweden's share of automatically switched telephones was only 6% at the end of the 1920s.  For the non-U.S. figures (and mis-statement of the U.S. figure), see Lipartito, Kenneth (1994) "Component Innovation: The Case of Automatic Telephone Switching, 1891–1920," Industrial and Corporate Change, v. 3, n. 2, pp. 327, 351.

[3] Id., p. 328, states that in 1910 in large U.S. cities, automatic switching would have cut Bell System costs $5 to $8 per line out of a total cost per line of $22.  On other reasons for the Bell System's slow adoption of automatic switching, see id.  Here are statistics on U.S. telephone network technology from 1915 to 1987.

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In 1934, the U.S. Communications Act established a class of common carriers subject to only a subset of common-carrier (Title II) regulation.  This class of common carriers, called "connecting carriers", included:

any carrier engaged in interstate or foreign communication solely through physical connection with the facilities of another carrier not directly or indirectly controlling or controlled by, or under direct or indirect common control with such carrier[1]

Connecting carriers were subject to only Sections 201 to 205 of Title II of the Communications Act.[2]   These Title II provisions authorize the U.S. Federal Communications Commission (FCC) to require telephone company interconnection, to prohibit anti-competitive practices, and to ensure that telephone rates are just and reasonable.  Connecting carriers were exempted from Title II regulation outside of regulation associated with these core concerns about interconnection, competition, and consumer protection.

Telephone companies classified as connecting carriers were a significant component of the U.S. telephone industry in 1934.  When it was established, the FCC carefully reviewed a poorly maintained list of 6,500 telephone companies that it received from the Interstate Commerce Commission.[3]  The FCC collected relevant facts, established classificatory rules, and, when necessary, held hearings.[4]  In its 2'nd Report to Congress in 1936, the FCC reported on its classificatory determinations:

Approximately 250 companies from the three classes [size classes based on gross revenue] are fully subject to the act; a very large number of companies are subject to sections 201-205 only [connecting carriers]; and a substantial number of companies are outside the jurisdiction of the Commission.[5]

From its beginnings, the U.S. telephone industry has had a large number of telephone companies.  Connecting-carrier classification limited the burden of Title II regulation on many telephone companies.  The classification scheme also allowed the FCC to focus its regulatory efforts under Title II on key concerns and on the telephone companies most relevant to the FCC's national regulatory responsibilities.

Telephone companies that the FCC classified as connecting carriers were not required to file statistical reports with the FCC.  Nonetheless, some connecting carriers, apparently recognizing the value of the FCC's compilation of industry data, voluntarily filed reports with the FCC.  In 1942, connecting carriers voluntarily filing statistical reports with the FCC accounted for 37% of the revenue of all non-Bell-System telephone companies that filed reports.  Connecting carriers included telephone companies that were among the largest non-Bell-System companies.  For example, Associated Telephone Co., a California-based operating company under General Telephone, later to become GTE, was classified as a connecting carrier.  Associated Telephone in 1942 was the third-largest non-Bell-System telephone operating company.  It had annual operating revenue equivalent to about $88 million in 2009 dollars.[6]

Limited Title II regulation for connecting carriers was a stable, relatively uncontroversial regulatory structure.  In 1910, the Mann-Elkins Act extended federal Interstate Commerce Commission jurisdiction to telephone companies engaged in sending messages interstate.  About that year, individual states rapidly enacted laws authorizing state commissions to regulate telephone companies.  Subsequent changes in judicial interpretations of the Commerce Clause allowed federal telephone regulation of intrastate messages and all other aspects of the telephone business.  Despite this significant change in constitutional law, neither Congress nor the FCC changed the limited Title II regulation of connecting carriers.  A number of connecting carriers continued to file voluntarily statistical reports at the FCC at least through 1951.[7] While some minor proceedings at the FCC have addressed the definition of connecting carriers, limited Title II regulation for connecting carriers has largely been a well-understood, well-settled, regulatory certainty at the FCC for the past seventy-six years.

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Data:  connecting carriers voluntarily filing statistical reports in 1942; years in which state commission regulation of telephone companies was established (Excel version)

Notes:

[1] Communications Act of 1934, Sess. 2, ch. 652, 48 Stat. 1064, Section 2(b)(2).  In Section 3(u), a "connecting carrier" is specified to be a carrier described under Section 2(b)(2).  Here's the original text of the Communications Act of 1934 (starts at pdf page 1090).

[2] For a recent proposal to limit Title II regulation, see FCC, Framework for Broadband Internet Service, GN Docket No. 10-127, Notice of Inquiry (June 17, 2010), Section II.B.2.

[3] The FCC's 2'nd Report to Congress observed:

When the Federal Communications Commission was organized July 11, 1934, it received from the Interstate Commerce Commission a mailing list of some 6,500 telephone companies. It was soon ascertained that many of these companies had long since gone out of existence.

See p. 23.

[4] On the collection of facts, see id., and FCC, 1'st Report to Congress, p. 14.  The early FCC order Classification of Telephone Companies, 3 FCC 37 (1935), established the classificatory rules. For only about 25 companies did disputes arise.  The disputes mainly concerned questions of corporate control.  See FCC, 2'nd Report, p. 23.

[5] Id.

[6] Associated Telephone's operating revenue in 1942 was $6.7 million, much more than the operating revenue threshold for the largest class of telephone companies (Class A telephone companies, which were defined to be telephone companies with more than $100,000 in operating revenue). Using the increase in the Consumer Price Index from 1942 to 2009 (13.2) gives the equivalent 2009 dollars.

[7] After 1951, the FCC's annual Statistics of the Communications Industry did not indicate any connecting carriers filing statistical reports.

Offer Comments

The expiration of Bell telephone patents in 1894 and 1895 unleashed vigorous competition in the early U.S. telephone industry.  On Jan. 1, 1894, telephones in the U.S. numbered 266 thousand, and the Bell System operated 89% of them.  On Jan. 1, 1908, the number of telephones had increased to 6.1 million, and the Bell System telephone share had fallen to 50%.   On an inflation-adjusted basis, Bell System telephone-service revenue per telephone fell about 50%.  That decrease probably was mainly due to price reductions.[1]  From 1894 to 1907, the growth of the telephone industry, the fall in Bell System telephone share, and the reduction in service prices all are associated with intense competition to provide telephone service.  That competition propelled the U.S. to world leadership in telephone industry development.

In its 1909 Annual Report, AT&T argued that competition among telephone companies is pointless.  AT&T declared:

Competition certainly had no effect on Bell revenue, was of no benefit to the public, compelled all to pay two subscriptions instead of one for complete service, besides all the other disadvantages of dual exchange systems [two separate telephone systems serving the same area][2]

The report included a chart comparing a group of cities with competition between Bell and independents and a group of "comparable cities" with only Bell service.  The chart displayed the reduction in Bell revenue per telephone and the growth in telephones per hundred persons from Jan. 1, 1894 to Jan. 1, 1909.  The trajectories of revenue reduction and telephone growth were similar for both groups of cities.  AT&T interpreted the chart to support its claim that competition had no effect.

AT&T's comparison of fixed groups of cities obscures the spatial dimension of competition.  AT&T did not specify what cities were included in each group.  They must have been subsets of the cities that had telephone service on Jan. 1, 1894.  The set of cities and towns that had telephone service on Jan. 1, 1909 was much larger.  A central dimension of competition was competition to extend service to unserved areas.  These charts do not show the effects of that dimension of competition.  International comparisons of teledensity indicate that U.S. local telephone competition effectively extended telephone service to unserved areas.

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Data: AT&T / Bell System telephone network, telephone use, and service revenue statistics, 1891 to 1937 (Excel version)

Notes:

[1] Exchange conversations per phone fell about 25% from 1893 to 1907, while toll conversations per phone fell little.  In areas with flat-rate local service, the number of exchange conversations per phone did not affect revenue.  The 1909 AT&T report (p. 29), describing similar data, declared "reduction of operating expenses of about one-half bought about a reduction in cost to the public of exchange service of over one-half."

[2] AT&T Annual Report, 1909, p. 25.

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From 1988 to 2007, U.S. local wireline telephone companies went from strong growth to rapid decline in the number of telephone subscriber loops.  Loop counts peaked about 2000.  On both sides of this peak, small telephone companies had greater loop growth than large telephone companies.

A constant across these twenty years was telephone company mergers and name-changes.  The thirteen largest telephone holding companies in 1988 had all become parts of differently named holding companies by 2007.

The key challenge for telephone companies has been to develop wireless and broadband businesses.  Company mergers and acquisitions can be beneficial.  Names are important and interesting.  But in current circumstances of revolutionary technological and economic change, telephone company change has to go much deeper than mergers and corporate name changes.

Data: U.S. local wireline telephone holding companies, 1988-2007 (Excel version)

Offer Comments

The break-up of AT&T in 1984 is a well-recognized, major structural change in the U.S. telephone industry.  In the 1984 divestiture, AT&T's local telephone business was separated into seven independent Regional Bell Operating Companies (RBOCs).  By year-end 2006, recombinations of RBOCs had left as AT&T successor companies the new AT&T, Verizon, and Qwest.  AT&T, Verizon, and Qwest served 46%, 32%, and 9% of subscriber lines served by the 35 largest local exchange telephone companies at year-end 2006.

A less appreciated structural change is that telephone line share and industry concentration has increased among non-AT&T local telephone companies.  From 1916 to 1942 among the 35 largest local telephone companies, the share of telephones that non-AT&T companies served fell from 13% to 8%.  However, that trend subsequently reversed. From 1942 to 2006, the telephone line share of non-AT&T companies rose back to 13%.[1]  This increase in non-AT&T share occurred despite an AT&T successor acquiring the local telephone business of Southern New England Telephone.[2]  AT&T successor companies' spinning off rural exchanges and less reduction in rural telephone line counts helps to explain the five percentage point growth in non-AT&T telephone share.

Concentration has increased among non-AT&T local telephone companies.  The telephone share of the top-5 non-AT&T local telephone companies among the top-35 non-AT&T local telephone companies rose from 47% to 63% to 78% from 1916 to 1942 to 2006.  The five largest non-AT&T local telephone companies at year-end 2006 were Embarq, Windstream, CenturyTel, Citizens Communications, and Cincinnati Bell, with 35%, 16%, 11%, 11%, and 4% of non-AT&T top-35 subscriber lines, respectively.

On July 1, 2009, CenturyTel acquired Embarq.  In April, 2010, CenturyTel announced that it was acquiring Qwest.  Non-AT&T local telephone companies have been a small but vibrant part of the U.S. telephone industry.

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Data: holding companies for U.S. local telephone operating businesses, 1916, 1942 and 2006 (Excel version).

Notes:

[1] Data availability for 2006 limits the comparison to top-35 companies. For 1916 and 1942, the figures are for shares of telephones.  Telephone counts are not available after 1984.  For 2006, the figures are for share of subscriber lines (loops).  One subscriber line can serve more than one telephone.  However, the difference between shares of telephones and shares of subscriber lines is unlikely to affect significantly observed trends.  Compared to the above shares of telephones, corresponding shares of operating revenue are a few percentage points higher.   But the trends are similar.

[2] SBC Communications, formerly Southwestern Bell Telephone, acquired SNET on Oct. 26, 1998.  SBC subsequently became part of the new AT&T.

Offer Comments

Growth in the U.S. local telephone business has been strongly biased toward the largest companies getting larger.  From 1916 to 1942, only about a third of U.S. households had telephone service.  Hence opportunities for extensive growth in the local telephone business were relatively good.  Nonetheless, AT&T's share of operating revenue among the 75 largest telephone companies rose from 89% to 93% from 1916 to 1942.  The growth bias toward larger-sized companies was not confined to AT&T.  The total operating revenue of the top 5 companies excluding AT&T, relative  to the total operating revenue of the top 75 companies, excluding AT&T, rose from 43% to 63%.  The number of companies with greater than $50,000 in operating revenue in inflation-adjusted 1942 dollars fell from 224 in 1916 to 73 in 1942.[1]  Roughly speaking, AT&T absorbed about half that revenue concentration, and non-AT&T companies the other half.  The bias towards bigness seems not to have been an effect just of AT&T's market power.

Large telephone companies had complex corporate structures.  In 1916, AT&T controlled the New York Telephone Company, which controlled the Bell Telephone Company of Pennsylvania, which controlled the Chesapeake & Potomac Telephone Co., which controlled the Chesapeake & Potomac Telephone Co. of Virginia, which controlled the Staunton Mutual Telephone Co.  Large non-AT&T companies had similar corporate complexity.  One of the largest non-AT&T companies in 1942 was the General Telephone Corporation.  It encompassed 12 operating companies formed in 1935, each by consolidating groups of smaller telephone companies.[2]  Complex corporate structure suggests relatively more importance for managerial incentives, financing, input sourcing, and regulatory political economy compared to operating economies in determining business size.

Despite the bias toward bigness, a large number of small independent telephone companies have remained in the telephone business.  In 1937, more than 40,000 small local telephone companies accounted for about 1% of total industry operating revenue.[3]  Small telephone companies seemed to have entered the business to serve specific customers that large companies did not serve.  The early telephone business apparently didn't have cost economies of scale.  Small companies generally grew relatively slowly.  When they failed, larger companies acquired them.

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Data: structural change in the U.S. telephone industry, 1916 to 1942 (Excel version); fuller dataset of telephone operating companies in 1942

Notes:

[1] The statistics for 1942 include many fewer very small telephone companies than do the statistics for 1916.  This is largely an artifact of the data reporting.  Reporting in 1916 and 1942 among telephone companies with greater than $50,000 in annual operating revenue (Class A and Class B companies) was probably universal.  Reporting for smaller companies is much less comprehensive, especially in 1942.   The telephone censuses provide relevant comparative data.

[2] General Telephone subsequently became GTE.  The new Bell Atlantic (a combination of the old Bell Atlantic and Nynex) acquired GTE in 2000, and became Verizon.

[3]  The number of independently owned local telephone business in the U.S. today is probably about 800.   See the NTS Cost Dataset.

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At my neighborhood CVS, for a mere $19.99 you can buy two text messengers designed for kids ages 6 and over.  The messengers include some smart phone capabilities: a data organizer that holds e-mail addresses, phone numbers, postal addresses, and memos; a calculator; an alarm clock; and the capability to be password-locked.  These devices offer unlimited messaging for the monthly flat rate of zero.

Nurturing new customers is a sensible business strategy.  But producing this product probably wouldn't be a wise move for phone companies.  In fact, the product is offered under the brand Discovery Kids.  Discovery Communications is a media content and entertainment company.

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