This is the twentieth in my series of posts about the five businessmen the History Channel profiled in a terribly inaccurate and un-historical TV miniseries titled The Men Who Built America. I’m writing these posts in response to several comments and e-mails from TV viewers who have expressed interest in a more accurate version of the story. (Click here to see all Al’s columns on the program and its subjects.)
Post #20: The Race for the Telephone
In the year 1876 the United States celebrated its centennial in an atmosphere of rapid and uneven societal change. On June 25 and 26 of that year Indians killed “General” (actually Colonel) George Armstrong Custer and all his men at the Battle of the Little Bighorn in the Montana Territory. On the 25th, the day the battle started, Alexander Graham Bell demonstrated a working telephone at the Centennial Exhibition in Philadelphia.
The two golden geese of nineteenth century America were transportation and communications, and the telephone was one of the biggest golden eggs of all. The company Bell and his backers formed, which eventually come to be known as AT&T, would be the largest corporation in the world for many years.
It’s a little-known fact that Bell had to compete with two other inventors to be the first to design and patent a workable telephone. Both of Bell’s competitors were well-known, well-connected, and well-financed power players in the late nineteenth century business world. One was Elisha Gray, the other was Thomas Alva Edison.
When the three inventors were working on their respective versions of what would eventually be called the telephone Gray was a full time inventor with a number of valuable patents to his name, most of them for improvements to the telegraph. Edison, like Gray, was best known for telegraph-related inventions at that time. Edison did his research in a six building laboratory complex staffed with trusted associates like Charles Batchelor and John Kruesi.
Edison and Gray were backed by the Western Union company, which by that time was the dominent telegraph company in the nation, and one of the biggest corporations in the world, with a capitalization of $41 million. Andrew Carnegie was a stockholder and William Vanderbilt was a board member. Western Union President William Orton took a personal interest in the telephone, ensuring that Edison and Gray would have no lack of financial support in their efforts.
Bell, by contrast, was a teacher of deaf students, living on a modest salary. He worked on his invention in his spare time, with the help of only a single assistant, a young man named Thomas Watson. Bell’s only financial backing came from the fathers of two of his students (one of whom became Bell’s father-in-law when the pupil married her teacher).
The whole story of the race for the telephone illustrates what a Land of Opportunity nineteenth century America really was. When Carnegie was a poor thirteen-year-old immigrant, working in a sweatshop, he said that if he didn’t prosper in America “it will be my own fault, for anyone can get along in this country.” Clearly he was on to something.
Carnegie certainly wasn’t the only self-made man in the story. Edison was an itinerant telegraph operator in his youth. Batchelor and Kruesi, Edison’s chief lieutenants, both came to the US as fatherless, penniless immigrants. Gray grew up on a farm. Bell and Watson both grew up in humble homes. William Vanderbilt had the privilege of growing up wealthy only because his father Cornelius was a self-made millionaire.
Even William Orton, the multi-millionaire president of Western Union, had grown up in modest circumstances. Orton had to leave home as a teenager to make his living setting type in a newspaper office. Orton went on to work as a schoolteacher and clerk before he was able to go into business for himself.
The line of thinking that eventually allowed Bell and his two backers to found what became the world’s biggest company began when Bell was contemplating the problems his students had in distinguishing between the “B” sound and the “P” sound while lip reading. Here is the observation that eventually led to the invention that changed the world:
If some simple apparatus could be contrived to bring the vibrations of the speaker’s voice to the hand of the lip reader, one half of the ambiguities of lip reading would disappear, and the awkwardness would be avoided of having the lip reader place his hand upon the speaker’s chest or throat.
As he worked on a machine to translate human speech into an electronic signal, Bell eventually hit on the idea of transmitting speech over a wire. Thus what started out as an aid to deaf lip-readers morphed into a communication revolution for the masses.
While Edison and Gray probably knew more about the science of transmitting messages over wires than anyone else in the world, Bell knew more than either of them about acoustics and speech, and once he became interested in the subject he worked diligently to teach himself the basic principles of electricity.
Bell’s future father-in-law delivered the application for a US Patent for Bell’s telephone to the patent office on February 14 of 1876, the same day Gray turned in the paperwork for his version. The question of which of them would receive the rights to the invention would eventually be decided in court.
One of the deciding factors that weighed in Bell’s favor in his court case against Gray and Western Union is the fact that Bell was able to demonstrate a working prototype of his phone by early June, long before Gray had produced anything usable. In a letter written in March of 1877, when relations between the two of them were still cordial, Gray admitted to Bell that “I do not, however, claim even the credit of inventing (the telephone), as I do not believe a mere description of an idea that has never been reduced to practice…should be dignified with the name invention.”
In 1879 Bell’s lawyer’s produced the two-year-old letter in court, and Western Union’s lawyers asked Gray if the letter was real. “I’ll swear to it,” said Gray, “and you can swear at it.”
By the time the various lawsuits were all settled Western Union had been selling telephones, in violation of Bell’s patents, for a couple years. Bell, meanwhile, was marketing telephones in violation of patent rights owned by Western Union. Edison had taken Bell’s idea of an analog transmitter and improved on it substantially.
While doing some unrelated research, Edison had discovered that the conductivity of carbon changes in response to even very slight changes in pressure. After he had a chance to study Bell’s telephone, he went to work on an analog transmitter of his own. The telephone transmitter he invented is the soul of simplicity; just a pair of copper wires attached to opposite sides of a properly formed round carbon disk. He called it the “carbon button.”
The carbon button was so superior to Bell’s original transmitter that Bell’s company had to use it in their telephones to have any chance of competing with the phones Western Union was marketing.
To collect carbon for buttons, Edison bought kerosene by the barrel from Rockefeller’s Standard Oil Company, and burned it in banks of smoky oil lamps that burned day and night in a building constructed for the purpose on the campus of his laboratory in Menlo Park, NJ. (Edison and his staff also used carbon from the lamp shack for their early electric light experiments.)
Today Edison’s whole laboratory complex, including the lamp shack, stands on the eighty acre campus of the Henry Ford Museum in Dearborn, MI. The Edison lab is just a couple hundred yards from the bicycle shop where the Wright Brothers invented the airplane. The Ford complex is a history buff’s dream; I recommend it heartily.
In November of 1879 the telephone lawsuits and counter-suits were all resolved. Western Union agreed to get out of the telephone business and turn over all their patents, including the one for Edison’s carbon button, to Bell’s company. In return Western was to receive twenty percent of all Bell’s telephone rental revenues for the next seventeen years.
At some point Bell and his partners voluntarily gave a block of shares in the company to Tom Watson in recognition of his contributions. Once they had firm control of all telephone-related patents, Bell and his three partners brought in new investors to fund the company’s expansion. The reorganization was complete in March of 1879, with Bell owning just over 15% of the shares and Watson owning 5%.
His 15% share in AT&T would have made Bell fabulously wealthy if he had simply held onto the shares while their value, and that of the dividends paid, skyrocketed. If he had been blessed with the foresight of a Carnegie or a Rockefeller he would have seen that the market for his invention was virtually limitless. Being able to talk with someone miles away quickly became one of those “basic human needs” that people discovered they had once the relevant technology was invented.
Unfortunately for Bell, he couldn’t see the future of the device he had invented. As the shares shot upward in the early years he kept selling them, each time thinking that he was wise to cash in before the expected price crash. The price crash never came, of course, and in 1884 Bell finally made up his mind to hold onto his remaining shares.
His ownership position by this time had declined from 15.25% of the company to a mere 2.77%, but the dividend yield on the few shares he still held was $32,380 that year; equivalent to about $800,000 in 2013 dollars. If he’s still been holding all his original shares in ’84 the dividend check for that year would have been five and a half times as large.
Next week’s post will be about John D. Rockefeller, Thomas Scott, and the mob violence that nearly destroyed Scott’s Pennsylvania Railroad.
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