Michigan Bell Telephone Co. History

Company History:

Michigan Bell, a wholly owned subsidiary of Ameritech Corp., is the primary supplier of local telephone service in Michigan. The company, in business since the turn of the century, was controlled by the American Telegraph and Telephone Co. until the break-up of the telecommunications giant in 1984. Since 1993, all of the company's merchandise and services have been marketed under the Ameritech brand name, although the Michigan Bell name continues to be used for corporate filings. In addition to providing local and intra-regional toll telephone service to 82 percent of Michigan residents, Michigan Bell now offers a diverse set of services including data transmission, radio and television transmission, voice mail, and billing services.

The honor for owning the first telephone in Michigan goes to a Grand Rapids plaster company whose president was a close personal friend of Alexander Graham Bell. Bell sent his friend a pair of prototype telephones and a public demonstration of the scientific marvel was held on August 4, 1877. The following month, the first commercial telephone line was installed between a Detroit drugstore and its laboratory almost two miles away. By October, a set of telephones were connecting the units of the Detroit police department.

Given that Bell had produced the first working model of the telephone only one year earlier, public acceptance of the new technology occurred with amazing rapidity. The Bell Telephone Company was officially incorporated in Boston on July 9, 1877 and by October of that year they had granted a license to the Michigan Telephone and Telegraph Construction Company to operate phone lines in the Detroit area. These early telephones had to be directly connected to each other by wires strung across rooftops as the system of telephone exchanges had not yet been perfected. In addition to poor sound quality, the early Bell phones had only one transmitter/receiver and people had a difficult time adjusting to the new style of conversation. "After speaking, transfer the telephone from the mouth to the ear very promptly," instructed one Bell telephone ad,"When replying to communication from another, do not speak too promptly ... much trouble is caused from both parties speaking at the same time. When you are not speaking, you should be listening." These difficulties were to be overcome fairly quickly but much to Bell Telephone's distress, it was the giant Western Union Telegraph Company that would be responsible for the introduction of both the first telephone exchanges as well as a technically superior telephone apparatus.

Although the Bell company, by then renamed The American Bell Telephone Company, staunchly maintained that Western Union was violating their patent, in 1878 the giant telegraph company entered the telephone business by constructing a series of local telephone exchanges in their telegraph offices across the nation. The first Michigan exchange was opened in August of that year in the Detroit office of the American District Telegraph Company and a second exchange was opened the following year in Grand Rapids. An enraged American Bell sued Western Union over the patent infringement and in the fall of 1879 an agreement was reached between the two companies whereby Western Union gave up all its telephone patents and facilities in exchange for 20 percent of telephone rental receipts over the seventeen year life of the Bell patents. With the issue of competition out of the way at least until the patents expired, Bell set to work expanding its telephone system.

A large number of local telephone companies were founded in Michigan over the next two years, each operating under an American Bell license that allowed the company to control all lines within a 15 mile radius of its central office. By 1880, Bell-licensed telephone exchanges were in operation in almost all major lower Michigan towns from Cadillac in the north to Port Huron and Grand Rapids in the east and west. During the next few years the challenge would be to connect these local exchanges. Not only were there serious technical difficulties in extending telephone lines beyond the 15--20 mile limit, but the distribution of fees between the local licensees was also problematic. The Michigan Bell Telephone Company was founded in 1881 as a holding company that would control a number of smaller licensees and facilitate interconnection. This company would soon merge with the largest of the local concerns, the Detroit based Telephone and Telegraph Construction Company, which become the Michigan Telephone Company. By 1885 Detroit had long distance connections to all major towns within a 100 mile radius including Saginaw, Flint, Lansing, Ann Arbor and Toledo, Ohio.

In 1894 Alexander Graham Bell's telephone patent expired and a whole new era of telephone competition was inaugurated. While in certain areas of the East Coast the American Bell Telephone Company managed to maintain control of most telephone services, in the Midwest a large number of hastily formed independent telephone companies made major inroads into Bell's market. Michigan was one of the centers of this growth in non-affiliated companies and at the turn of the century many Michigan cities including Detroit and Grand Rapids had two or three competing telephone systems. Bell steadfastly refused to let these independents connect to their lines so that customers had to choose between companies and could not communicate by phone outside of their system. Businesses were forced to subscribe to both companies if they wanted to be available to the full range of the citizenry. By 1898 the Michigan Independent Telephone Association could boast that their members operated 16,000 telephones in the state against 14,000 for American Bell.

The Bell System, now under the aegis of the American Telephone and Telegraph Corporation, responded to this new competition by consolidating its Michigan holdings into a single entity. The Michigan State Telephone Company was incorporated in 1904 as the successor to the Michigan Bell Telephone Company (in 1924 it would resume this earlier name), but now with control over all Bell telephone exchanges in the state of Michigan. The Bell System found itself in an awkward position during the first two decades of the century. Not only was Bell faced with an onslaught of competing companies but its refusal to allow the independents to connect to AT&T long distance lines had given rise to an anti-trust investigation by the federal Department of Justice. Forced to move cautiously for fear of generating public and government animosity, Michigan Bell bought only one small telephone company during this period. Public attitude towards the company would reverse itself, however, following a brief government takeover during World War I.

President Wilson's nationalization of the entire telephone system in 1918 was officially justified on the grounds of national defense, but was also clearly the result of growing public animosity towards the monopolistic practices of big business at that time. Governmental control of the more then ten million telephones then in operation was, however, an unmitigated disaster. Local phone rates rose sharply while revenues fell. By the time the federal government returned the telephone system to private ownership in 1919, revenues on the 261,000 telephones in the Michigan Bell system had fallen from $8 million to just under $5 million. After much public brow-beating over the failure of nationalization, by 1921 Congress was ready to pass the Graham Act, which formally exempted telephony from the Sherman Antitrust Act as far as consolidation of competing companies was concerned. At the same time, AT&T was ordered to allow independent companies to connect to Bell System lines, thus putting an end to the era of the multi-company town. AT&T lost no time in buying up its competitors. Between 1922 and 1932 Michigan Bell purchased 17 independent companies. By the end of this spurt of acquisitions 527,000 of the 623,000 telephones in Michigan were operated by Michigan Bell. This approximately 80 percent market share would remain virtually unchanged through the rest of the 20th century.

Of all of the Bell regional operating companies, Michigan Bell was the hardest hit by the Great Depression. Coming at the end of the largest period of growth for the company since its founding, the stock market crash and subsequent economic collapse saw Michigan Bell's earnings per share drop from $9.00 to only $1.30 in 1933. Business closings had caused 200,000 customers to cancel service and uncollectible accounts rose to almost $1 million. It was not until 1939 that revenues and the number of telephones in service would climb back to pre-depression levels.

Although the Graham Act was intended to resolve many of AT&T's conflicts with the federal administration, the 1930s was a period of growing animosity between Bell System's operating companies and the state commissions that regulated them. Many state regulators complained that the license and equipment fees that parent AT&T charged to its operating companies were unreasonably high. Since local service rates were based on the operating companies' costs and earnings, it was claimed that these inflated fees were enriching AT&T stockholders at the expense of the local rate payers.

In Michigan, this issue became centered around inequities related to intrastate toll rates. The Michigan Public Service Commission balked at the inequity and ordered Michigan Bell to reduce its rates. Bell appealed to the Michigan Supreme Court but eventually lost its case and was forced to lower intrastate toll rates. This battle was to be repeated in the 1940s at a time when the Bell System throughout the country was seeking rate hikes after freezes during World War II. In 1944, the Michigan Public Service Commission made the unprecedented decision to order Michigan Bell to refund retroactively $3.5 million of its 1944 local service revenues. Although this decision was eventually overturned in court, extended litigation over the calculation of rates would continue into the 1950s. In 1952, the Public Service Commission finally prevailed when the Michigan Supreme Court ordered Bell to refund over $13 million in past revenues. Although squabbles between the company and the Commission over the setting of rates would persist into the 1960s and 1970s, serious debate about the nature of this regulation would not reappear until the early 1990s.

The 1960s and 1970s were a time of prosperity and growth for Michigan Bell. The number of telephones in operation which had reached a million by 1942 and two million ten years later, underwent the fastest rate of growth in Michigan Bell's history during this period. From 1960 to 1980, about 200,000 new telephones were added to the Michigan Bell system each year. Technological advances including electronic switching and direct distance dialing, which had first been introduced in Birmingham, Michigan in 1956, became important tools in dealing with the tremendous number of calls being placed. Although prevented by the FCC from straying too far away from telephony, Michigan Bell also entered the data communications field with private-line voice and teletype services. By 1983 annual revenues had surpassed $2 billion.

While Michigan Bell thrived, in 1974 parent AT&T became the object of a federal antitrust suit brought on in part by accusations of unfair trade practices in its dealings with competitor MCI. In 1982, after ten years of litigation and political wrangling, AT&T's virtual monopoly of the American telephone system was ordered dissolved. The consent decree, to take effect on January 1, 1984, mandated that the company divest itself of the principal assets of its Bell System operating companies, which were to be controlled instead by seven regional holding companies. Each region was to be divided into Local Access and Transfer Areas (LATAs) generally centered on a city or community and the Regional Holding Companies were to control all intra-LATA telecommunications services. AT&T was to retain control of all inter-LATA long distance services as well as telecommunications equipment manufacture and distribution. Michigan Bell, along with Bell operating companies from Wisconsin, Ohio, Illinois, and Indiana, became subsidiaries of the American Information Technologies Corporation (Ameritech) Regional Holding Company. The divestiture shook the telecommunications industry. Investors were uncertain how the newly formed holding companies would perform without the financial security of the giant corporation behind them.

Michigan Bell annual reports began this new corporate era with a tone of concern. Revenues dropped slightly in the first year of post divestiture operation as the company lost significant revenues from the transfer of equipment leasing services to AT&T. In addition, network access fees, which were designed to compensate the company for the use of its facilities by AT&T and other long distance carriers, did not yet make up for lost toll revenues. The Consent Decree stipulated that the Regional Holding Companies could provide only a limited range of services beyond traditional regulated telephone service. The challenge to Ameritech and its subsidiaries was to expand their market base within these regulations. One of the first successes for Michigan Bell was its Centrex service, which provided a number of telephone features such as call waiting and call transfer directly from Bell exchanges and thereby eliminated expensive telephone equipment. It soon became apparent that not only would the reborn Baby Bells survive on their own, they would thrive. Ameritech common stock price, which sold at about $12 a share during its first year of trading, doubled within less than two years and had reached $34 a share by the end of the decade.

After the initial challenges of divestiture, Michigan Bell revenues began to climb once again. Substantial gains were made in the business sector where new services increased both the number of lines in use and the charges per line. As parent Ameritech became both more diversified in its services and more confident of its direction, the division of its operations on a regional basis no longer seemed justifiable. In 1993, Ameritech undertook a major reorganization that assigned customers to business units based on the nature of the services provided rather than geographic location. At the same time, the company began a major campaign to increase awareness of the Ameritech brand name by replacing all references to the regional Bell companies with the Ameritech name. Bills, company trucks, hard hats and all company literature would now all bear the Ameritech logo. Michigan Bell and its sister companies continued to exist as distinct entities only for the purposes of regulation and stock-related filings.

Ameritech corporate policy was shaped by two main forces through the 1980s. As the company expanded its services, it ran up against, and sought to extend, the strict limitations that had been imposed by the AT&T divestiture Consent Decree. On the state level, Ameritech was regulated by five separate state commissions each with its own agenda, and all still operating under the tradition of rate setting based on a percentage of earnings that had been established at the turn of the century. Michigan Bell was the first of Ameritech's subsidiaries to make substantial headway with state regulators.

Indeed, with a newly elected, business-friendly Republican government, and an economy that was struggling to recover from an extended recession, Michigan Bell felt that it was in a position to push for a new basis for telephone regulation. In 1991, the Michigan government passed the Michigan Telecommunications Act that substantially reduced the Public Service Commission's authority over the introduction and pricing of many telecommunication services. The new regulation was founded primarily on price caps rather than rates of return, freeing up company earnings for reinvestment in infrastructure and allowing the company to introduce a more flexible and competitive pricing structure. In this new regulatory environment, Michigan Bell was also free to introduce new services including interactive video and cable television provided the company could get permission from the Federal authorities to extend the provisions of the Consent Decree. The Michigan Telecommunications Act would become the model for similar regulatory schemes in the four other states in which Ameritech operated.

The United States District Court that had issued the original Consent Decree granted several waivers to the Regional Holding Companies during the late 1980s, permitting them to engage in the transmission of information services on a limited basis. In 1993, after a series of appeals, the waiver was extended to include the generation as well as the transmission of information. In 1995 four communities in Wayne County, Michigan, became the first potential customers of a new Ameritech Video Network when they signed an agreement, pending Federal approval, to obtain cable television services from Ameritech. Ameritech also continued to press the court for a lifting of the ban on the regional Bells entry into the long distance market.

While four of the other Regional Holding Companies took legal action to remove the prohibition, Ameritech began negotiations with the Justice Department to reach an agreement on the matter. In 1995, the Justice Department recommended that Ameritech be granted the right to provide limited long distance service in Detroit and Chicago on a trial basis in exchange for facilitating competition in the local exchange market. The door to local telephone competition in Michigan was opened for the first time in 1995 when the Michigan Public Service Commission authorized a small Michigan firm to compete with Ameritech in the Ann Arbor and Detroit areas. Although the details and pace of these changes remained under negotiation in late 1995, it seemed clear that as Michigan Bell entered the 21st century, Michigan telephone service was poised to once again enter a period of competition that had been unknown since the first growth in telephone service a century earlier.

Further Reading:

• "Ameritech gets first real competition in local service," Detroit Free Press, February 24, 1995.
• Bodwin, Amy, "Ameritech hopes name rings a bell," Crain's Detroit Business, August 30, 1993, p. 1.
• Brooks, John, Telephone: The First Hundred Years, New York: Harper and Row, 1975.
• Castine, John and Hiawatha Bray, "A New Line for Ameritech: Deal Would Allow Company to Provide Cable TV Service," Detroit Free Press, June 29, 1995, p. 1G.
  History of the Telephone in Michigan, Detroit: Michigan Bell Telephone Co., 1969.
• Kelly, Kevin, "Call Ameritech a baby bellwether," Business Week, April 17, 1995, p. 90.
  Michigan Bell Telephone Company Annual Reports, Detroit: Michigan Bell Telephone Co., 1984-1994.
• Tell, Lawrence J. "Footloose and Fancy Free: The Bell Operating Companies Are Doing Splendidly," Barron's, November 12, 1984, p. 8--9.

Source: International Directory of Company Histories, Vol. 14. St. James Press, 1996.