Popular Science Monthly/Volume 71/August 1907/Notes on the Development of Telephone Service IX

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XIII. The Parent Bell Companies

IT will be recalled that in the circular announcement sent out early in May, 1877, the essential text of which was reproduced in Chapter IV., the owners of the Bell patents style themselves 'the proprietors of the telephone.' These 'proprietors' in the beginning were Alexander Graham Bell, of Boston; Gardiner Greene Hubbard, of Cambridge, and Thomas Sanders, of Haverhill, each of whom held a one third interest. Then these gentlemen arranged to secure the services of Thomas A. Watson, who as a young mechanician and electrician in the Williams' shop had assisted in many of the early experiments, had made some of the early telegraph and telephone apparatus, and was familiar with Graham Bell's hopes and plans concerning the transmission of speech. In return for devoting all his time to the promotion of telephone interests, Mr. Watson received in lieu of cash payments a one tenth interest in the Bell patents. This reimbursement for services to be rendered had little tangible value at that time, but three years later could easily have been sold for more than a hundred thousand dollars. Under this arrangement Bell, Hubbard and Sanders each held a three tenths interest and Watson held one tenth.

The appearance of that first telephone circular combined with the appointment of active special agents, working on a liberal commission basis, gradually created a demand for telephones for use on private lines and for experimental purposes, and it soon became evident that quite a sum of money would have to be expended in manufacturing and delivering these instruments. But so little faith had capitalists in the future of the telephone, that it is said that Mr. Hubbard found it very difficult to raise sufficient funds to float the telephone. Thus, with a view to simplifying the conditions under which the necessary funds could be secured and the interests of the proprietors protected, on July 9, 1877, Mr. Hubbard was made trustee of the patents and empowered to exploit them for the best interests of all concerned. In turn he formed an association or partnership arrangement, "for the purpose of manufacturing and introducing said telephones into general use throughout the United States." This association was composed of only seven members during its entire life, and its affairs were managed in behalf of these seven beneficiaries by officials of their selection. The title of the organization was the Bell Telephone Association; it was not incorporated and had no capital stock, but on August 1, 1877, beneficiary certificates were issued as follows:

Gardiner Greene Hubbard 1,387 shares.
Gertrude Hubbard (Mr. H.'s daughter) 100 "
Charles Eustis Hubbard (Mr. H.'s brother) 10 "
Alexander Graham Bell 10 "
Mabel Hubbard (Mrs. A. G.) Bell 1,497 "
Thomas Sanders 1,497 "
Thomas A. Watson 499 "
Total 5,000 shares.

The active career of the association dates from August 1; Mr. Hubbard served as trustee, Mr. Sanders as treasurer, Mr. Watson as electrician, and an office was opened in room 13 in the Sears building in Boston.

Two days after the patents and property had been assigned to Mr. Hubbard as trustee, that is on Wednesday, July 11, 1877, Graham Bell and Mabel Hubbard were united in marriage at the home of her parents in Cambridge, and his wedding gift to his beautiful bride was his entire three tenths interest in the telephone patents. Thus it was to Mrs. Bell that the certificates of the association and the shares of the parent company's stock were issued when those incorporated bodies were organized and when they gave stock certificates in exchange for certificates previously issued.

Shortly after the wedding the bridal couple left for England and a tour on the Continent and did not return to this country until August, 1878. In London on October 31, 1877, Graham Bell delivered his often-quoted lecture before the Society of Telegraph Engineers, in which he detailed the researches made by himself and many others in the effort to solve the problem of telephonic transmission of sounds and speech, beginning with those of Dr. Page in 1837.

From the date of his departure to England, Graham Bell was in no way connected with the exploiting or the financing or the management of the telephone in the United States. He was the consulting electrician of the early companies, and earnestly strove to solve the technical problems brought to his notice. But while he held very liberal views on the question of local organization, he did not believe in cheap construction, nor in the use of temporary expedients that could only bring the system into disrepute and hamper and delay the introduction of good telephone service.

As already stated, following the organization of the Bell Telephone Association, the exploitation of the telephone was systematically pushed throughout the United States. This involved far greater labor and outlay than would now seem necessary to introduce so valuable a public utility. For the openly expressed skepticism of capital had to be overcome, the groundwork of a new industry had to be laid, plans for the granting of territorial rights under equitable conditions had to be formulated, methods had to be devised for the establishment of central telephone exchanges, then equitable conditions planned for connecting neighboring exchanges with toll lines, and, finally, the invention of accessory telephone equipment and its economical manufacture and reasonable marketing. To-day there are many who believe they can tell far better how to plan these things than the parent Bell is now doing. But in the pioneer days there was no wealth in the treasury or in prospect, and there were none who were competent to advise intelligently on technical telephone questions, or to share practical telephone experience, while there were many very intelligent men who did not hesitate to discourage the movement in every way; for they could not perceive how speech transmission could have any commercial value. Yet, notwithstanding all these discouraging conditions, a careful study of the plans under which licenses were granted for operating exchanges and for toll lines interconnecting exchanges, shows a far-sighted conception of the ultimate growth and interrelation of exchanges that wins heartiest admiration.

Mr. Hubbard made many visits to various cities and endeavored to interest capital in the new invention, and he loaned telephones to men of influence in the hope that daily use would lead them to perceive the future value of the invention. But scarcely one of the men, who should have foreseen the growth of the telephone industry and who might have assisted in establishing it under favorable conditions, gave him any encouragement. So he was compelled to turn to men who had little money, but much energy combined with a strong faith in their own abilities to succeed. Thus, as a rule, it was men of this type, rather than the financier, who helped to lay the foundations of exchange telephone service in many localities.

In the beginning the parent company had seriously considered the advisability of forming a second organization to build, equip and operate telephone exchanges in all our cities. Though this plan was strongly advocated by men whose faith in the greatness of Alexander Graham Bell's invention and in the ultimate success of the telephone had never faltered, four good and sufficient reasons soon showed how impracticable it would be to carry the plan through on a satisfactory basis:

First. The more the plan was analyzed the greater appeared the actual cash investment that would be required to establish exchanges in all the cities in the United States, until the total amount that would be required aggregated more than a hundred millions, a sum almost fabulous in 1877, yet actually necessary if this new and untried industry was to be properly built up.

Second. For one company to undertake to build exchanges in all the cities in the United States, and interconnect the same with toll lines, would necessarily involve much delay in building, and compel many communities to wait several years before receiving telephone service.

Third. The absence on the part of capitalists of faith in the intrinsic value of this incomparable invention precluded the possibility of financing any large telephone exchange system embracing the principal cities in one state only, to say nothing of a proposition of such magnitude as to include the leading cities throughout the country.

Fourth. Local interest supported by local investments was absolutely essential to insure even the small growth that was then considered satisfactory.

How great this lack of faith was, and how often Alexander Graham Bell, Gardiner Greene Hubbard and Thomas Sanders and their early associates met with rebuffs when inviting capital to join with them in promoting the establishment of telephone exchanges in 1877, and how widely capitalists were misled into believing that the telephone had 'no commercial value,' by the very men who should have been the first to grasp the possibilities in so revolutionizing an invention, may be shown in two quotations.

In November, 1876, after Sir William Thomson's glowing description of the successful telephone experiments at the Centennial had aroused the interest of scientists everywhere, a prominent electrician, who later claimed to have invented the telephone, wrote to his attorney on November 1, 1877:

As to Bell's talking telegraph, it only creates interest in scientific circles, and as a scientific toy it is beautiful, but of no commercial value. We can already do more with a wire in a given time than by talking, so its commercial value will be limited.

And the editor of Engineering, of London, then the leading engineering publication of the world, in calling attention to 'the extreme simplicity of receiver and transmitter,' stated in the issue of December 12, 1876, that the instruments were

so simple indeed that were it not for the high authority of Sir William Thomson, one might be pardoned at entertaining some doubts of their capability of producing such marvelous results.

Only those familiar with the situation can realize how great and how unreasoning was this lack of faith on the part, not only of capital, but of scientists, mechanicians, merchants. But here is an excerpt from an editorial written at the close of 1883, by a journalist thoroughly conversant with the telephone situation from the beginning:

The issuance of Bell's patent, on March 7, 1876, attracted little or no attention in the telegraphic world. The inventor was practically unknown in electrical circles, and his invention was looked upon, if indeed any notice at all was taken of it as utterly valueless. In fact, we believe that not a single person could have been found, however well versed in telegraphy or electricity, who would have given a hundred dollars for the patent within three months after its issue
. . . We very much doubt if it could now be purchased for $25,000,000. It is probably by far the most valuable single patent which has ever been issued.

During the winter of 1876 and the spring of 1877, there appeared in the daily papers a number of references to Graham Bell's statements concerning the general use of the telephone, the central telephone exchange system, aerial and underground cables, the long-distance service, etc. Lack of space prevents the citation of all, but the general tenor of his remarks are shown in the following excerpts.

The Boston Sunday Herald, of October 22, 1876, declared that
the future possibilities of the telephone can scarcely be overestimated. The economic and other advantages thus opened to the contemplation of the thoughtful are too self-evident to be descanted upon.

On February 13, 1877, the Boston Globe in reporting Graham Bell's lecture before the Essex Institute, at Salem, said:

We have the pleasure of presenting to our readers this morning, the first despatch ever sent to a newspaper by the newly invented telephone. . . . Professor Bell closed his lecture by briefly stating the practical uses to which he was confident the telephone could be applied.

On Wednesday evening, April 25, 1877, Graham Bell delivered a lecture in Huntington Hall, Lowell, and the next day's Lowell Citizen contained a report of the lecture reading in part as follows:

At about half-past nine o'clock Prof. Bell spoke of the possibilities of the future regarding the telephone. He predicted that private houses would be connected with stores and offices and shops, and orders for the day's dinner as well as important business of every kind could be transmitted without leaving the room. In the future merchants would be enabled to order goods from Xew York, Boston or other cities by word of mouth, instead of telegraphing or taking a long journey.

That the editor of the Citizen was impressed with Alexander Graham Bell's enthusiastic presentation of his subject, and realized that this uplifting faith in the future of his invention must be based on an accurate knowledge of what it might accomplish once its function was fully comprehended, is evident in the leading editorial. And this editorial is remarkable in that it is the first of all editorial references to 'a central telephone office,' and the first of all favorable comments on the probable success of exchange telephone service. In part the editorial reads:

Professor Bell believes that in the near future a central telephone office will be established in all our cities, with which the police, the fire department, most business houses and many private residences will have connections. When this is done any person having the connection can call the police, report a fire, order a dinner or chat with a neighbor without leaving the room.

Graham Bell also lectured in New Haven on April 27, in Manchester on May 8, in Springfield on May 12, and then he went to New York and delivered three lectures in Chickering Hall. The third lecture was delivered on Saturday evening. May 19, 1877. Therein he referred to the convenience that long-distance service between Boston and New York would be to the business man, touched upon the use of the telephone booth not then devised, and upon the value of the central exchange as a public convenience, stating as one illustration:

It is a rainy morning, and Mrs. Smith does not want to get wet. She calls on the central office to connect her with Mr. Jones, the butcher. It is done. So with offices and houses, or workshops, and many other places.

Reports of other lectures could be cited, but a sufficient number have been shown to illustrate how clear was Graham Bell's conception of the usefulness and economical advantages of telephone exchange systems and long-distance telephone service before either one existed. And by reason of his cheery optimism and his logical, convincing arguments that the establishment of telephone exchanges in every city would necessarily follow, and that telephone service would become an indispensable feature in business and social life, his associates gained greater courage to push the exploitation of the telephone.

After considering the several plans presented for the future conduct and expansion of the new business, it was decided to adopt the plan of interesting local capital and cooperation in the establishing of local exchanges and to issue to these local organizations short-term licenses covering a period of only five or ten years. With this end in view agents w^ere appointed to solicit customers in given territory on a commission basis ranging from 25 to 50 per cent.

Where the intention was to construct and operate a local plant the exclusive right to operate under all Bell patents was granted with the proviso that the parent company, if it so desired, could purchase the property of the local company at cost, or at an appraised valuation at the expiration of the license. Then it was arranged that the telephones should never be sold during the life of the patent, but leased, the technical title of ownership being reserved to avoid legal complications, and also to secure territorial rights in the event of default of payment of the agreed royalties by the local companies. Thus the parent Bell company never granted to any operating company any right or interest in its patents nor the right to manufacture or sell telephones.

Within a year this method of locally introducing the telephone met with a cordial reception on the part of many with a speculative bent of mind, if not by permanent investors, and thereafter it became a comparatively easy task to interest local capital in local exchanges having a license covering a period of only five or possibly ten years. The royalty required of the local licensee, amounting to $7 a year for each instrument, was not in the beginning considered exorbitant by local owners familiar with the heavy yet legitimate payments necessary in protecting the licensees from infringing competition, for necessary subsidiary patents, as well as for experiments, the patent risk, and the endless litigation. And when the hard times of 188-i came, and again in 1885, the parent company made many concessions and introduced a sliding scale of rentals that materially lessened these royalty payments.

Even from the first it was perceived that a long-term license would not be equitable to both parties, owing to the new conditions that were arising and would necessarily continue to arise from month to month. With growth and development would come a broadening experience of great value to both operating and parent company, and a lessening of timidity on the part of capital. It was this fear on the part of investors that rendered necessary the issuance of separate licenses for neighboring cities or adjoining territory, or for towns widely separated. Yet it was obvious that the near future was certain to bring changed conditions that would strongly emphasize the necessity for merging several exchanges or even all lines and exchanges within a state under one management and governed by one policy.

Thus it came about that during the four years, 1878-81, local telephone exchanges were established in many towns by individuals or small companies, on the understanding that the local owners were to furnish all the capital required to properly start and develop the industry, while, in return, the parent company would supply the telephones as fast as required, and would protect and defend the exclusive rights to operate under the Bell patents.

Early in 1877, Mr. Frederic A. Gower was appointed 'general agent for the Bell telephone' for all of New England. He assisted Graham Bell in a number of lectures, delivered a number of lectures, and visited nearly all the larger cities in his territory in the effort to secure local capital and cooperation in establishing telephone exchanges. Then he tendered his resignation to take effect on January 1, 1878, in order that he might spend much time in introducing the telephone in European cities. Thus, to take up and systematically continue the work that Mr. Gower had been so actively engaged in, a second organization was formed that may properly be referred to as a subparent company, as it enjoyed equal rights with the first company within a limited territory.

This second company was incorporated on February 12, 1878, under the general laws of the Commonwealth of Massachusetts, with an authorized capitalization of $200,000, all of which was issued in return for $50,000 in cash and for certain patent rights and other privileges valued at $150,000. Exclusive rights 'to use, license others to use, and to manufacture telephones in the New England States,' were granted to it, and during its brief existence it endeavored to thoroughly develop its allotted territory. It secured the right to erect poles and wires in a number of cities and aided in the organization of a number of local telephone companies. Though named the New England Telephone Company it was never in any way related to the later and now well-known New England Telephone & Telegraph Company of Boston.

The stockholders in the New England Telephone Company were practically the same persons who composed the membership of the original parent company, the Bell Telephone Association. The officials were: President, Gardiner Greene Hubbard; treasurer, Thomas Sanders; general agent, George L. Bradley; clerk, Thomas B. Bailey. Incidentally it is worthy of note that since its organization Mr. Bailey has been the purchasing agent of the American Bell Telephone Company. On July 27, 1878, Mr. Hubbard resigned the presidency and Mr. Sanders was elected in Mr. Hubbard's place, while Mr. Bradley succeeded Mr. Sanders as treasurer. Until February 15, 1879, the New England Company occupied room 43 in the Sears building in Boston, when it moved to room 52 Mutual Life Insurance building.

Meanwhile Mr. Hubbard found it difficult to borrow the funds necessary to carry on operations outside of New England. Friendly bankers had loaned generous amounts, but when further advancements became imperatively necessary, they asked for a more tangible form of collateral than certificates issued by an unincorporated association, and it was suggested that the stock certificates of a conservatively incorporated and wisely managed company might be acceptable as security, if offered at a low valuation. So, on July 30, 1878, the second of the parent companies was incorporated under the laws of Massachusetts to transact a general telephone business in all of the United States outside of the New England States. It was capitalized at $450,000, and that amount of stock was issued in return for a cash payment of $50,000 and all the rights and privileges held by its predecessor, the Bell Telephone Association. Its officials were: Trustee, Gardiner Greene Hubbard; treasurer, Thomas Sanders; electrician, Graham Bell, and superintendent, Thomas A. Watson. At first its headquarters were at the Williams factory, 109 Court Street, Boston, but in August, shortly after its organization, it moved to New York City and occupied rooms at 66 and 68 Reade Street. It bore the name: Bell Telephone Company.

The interest awakened in the development of the telephone industry through the activity of these three organizations and their agents created a volume of business, the character of which necessitated the formation of a broader organization, and resulted in the birth of the third parent company, the National Bell Telephone Company, as detailed in Chapter V. The company was organized on March 10, and its charter issued on March 13, 1879. It was formed through the amalgamation of the New England and the Bell Telephone Companies, and succeeded to all the property and patent rights and privileges of both these companies. The new company was capitalized at $850,000, and this amount of stock was issued in return for telephone exchange and manufacturing property representing a cash investment of $306,900, for $6,500 cash in treasury, and for all the stock of the Bell Telephone Company, $450,000, and of the New England Company, $200,000, valued at $536,600. Within five months after its organization, the headquarters of the National Company was moved from Reade Street, New York, to 95 Milk Street, Boston.

Under the wise and liberal guidance of President William H. Forbes, the practical progressive policy of the National developed a volume of business so large and of so varied a character as to make clear the need of a still broader parent organization able ultimately to assist in carrying the financial burdens of any or all of its operating companies, and to extend substantial encouragement for extended development. Then the successful outcome of the bitter contest with its competitive opponent, the Western Union Telegraph interests with a total of seven thousand established telegraph offices, had drawn to the National company the thoughtful interest of capital seeking productive fields for investment, and soon investors began to overrun the telephone field.

Thus, after a very strenuous life of fifteen months, the National was absorbed by the fourth of the parent companies, the American Bell Telephone Company. This fourth organization was granted a special charter by the commonwealth of Massachusetts, on March 19, 1880, which was slightly amended as of May 21, 1883, in so far as it relates to the holding of stock in the operating companies. The American company desired to have an authorized capitalization of $15,000,000, but the legislature limited the amount to $10,000,000.

At a special meeting of the stockholders of the National Bell Telephone Company, held on Monday evening, March 29, 1880, it was voted unanimously to sell all the property of the company to the American and to transfer the same as of May 1, in return for payment in the form of six shares of the capital stock of the American Bell for each share of the National. This was a reasonable price to pay, as shares of the National had sold as high as $960, according to a statement in the Boston Herald, though the par value was only $100, while the last sale of 500 shares had brought $600 a share in December, 1879.

Two days later the National stockholders received a printed notification reading in part:

The American Bell Telephone Company has been organized with a capital of $7,350,000, divided into 73,500 shares of $100 each. This new company has voted to purchase all the property and assets of the National Bell Telephone Company for the sum of $6,500,000, payable in stock at par (05,000 shares) and to offer the remaining 8,500 ($850,000) at par to the stockholders of the National Bell Telephone Company as of date of April 1, 1880.

Of the 65,000 shares transferred to the National Company in return for all its property, patents, etc., 51,000 shares, or $5,100,000 were distributed among the national stockholders according to their respective holdings; 1,145 shares were used to take up the convertible notes issued; 1,500 shares were sold by the trustees in open market-for $332,935.75, and 1,050 shares were held by the trustees to use in liquidating future claims.

The new company occupied offices at 95 Milk Street, Boston, and at the first meeting the following officers and directors were elected:

W. H. Forbes, President. T. A. Watson, General Inspector.
T. N. Vail, General Manager. A. Graham Bell, Consulting
W. R. Driver, Treasurer. Francis Blake, Electricians.
O. E. Madden, Superintendent of Agencies. J. P. Davis, Engineer.
William H. Forbes. Francis Blake, Jr. Alexander Cochrane.
Charles S. Bradley. Richard S. Fay. George L. Bradley.
Gardiner Greene Hubbard. William G. Saltonstall. C. P. Bowditch.
Thomas Sanders. Charles Eustis Hubbard.

The successful launching of the American Bell Telephone Company, notwithstanding that the three earlier companies had never paid a dividend, was a splendid tribute to the intelligent persistence displayed by the pioneer advocates in promoting so serviceable a public utility, as well as to their executive and financial ability. And the magnitude of the task of merging all these interests into one comprehensive organization may be more clearly realized in the brief statement that in its consummation there were involved about five million dollars in cash, and a million in property and patents. In 1880, six millions was a sum relatively many times greater to financiers, when million-dollar corporations were more scarce, than at the present time, when a hundred millions may be a fair and a necessary capitalization.

In his annual report for the first fiscal year, ending February 28, 1881, President Forbes of the parent company said:

After two years passed in a struggle for existence, and a third largely devoted to the settlement of disputes inherited from that contest, the owners of the telephone patents, at the beginning of their fourth year, for the first time find themselves free from all serious complications, with nothing to prevent the company from directing its whole working force to the development of the business, and with a well-defined policy for its future operations, which seems to be working well in all parts of the country. . . .

A large amount of work has been done in the electrical and experimental department, both in examining new inventions and testing telephones and apparatus, and in studying the question of overhead and underground cables, and the improvement of telephones and lines, for both short and long-distance service. This work is expensive, but it is of the first importance to our company, and must be continued.

Much of the electrical and legal work of these first years of the company, and, indeed, some of our expenses incurred in studying and classifying the business, are substantially for the establishment of the property, and might be charged to construction and capitalized, but the directors have preferred the more conservative policy of charging everything to operating which could reasonably be put there, although the result upon the books appears less favorable, in consequence, than the business prospects might warrant us in exhibiting.