A tale of two networks: Interconnection in early telephony and the commercial Internet

This thesis compares the competitive period in early telephony (1894--1921) with the commercial Internet today (1995--present). Early telephony and the commercial Internet are two of only a few real-world examples of unregulated and competitive telecommunications markets. However, these two industries evolved quite differently. Competing firms in early telephony generally preferred not to interconnect their networks. When firms did interconnect, they did so on collusive terms that did not promote competition. Firms in early telephony behaved consistently with firms in other competitive telecommunications markets, such as the pre-Internet online services industry (1979--1994) and the emerging market for Instant Messaging services (1996--present). In contrast, the commercial Internet is characterized by universal connectivity and competition among many Internet Service Providers. This thesis seeks to uncover why firms in these two industries behaved so differently.;A comparative analysis of the two industries shows that (1) competitive forces in telecommunications markets will not necessarily drive firms to interconnect their network voluntarily as there are other options open to them, and (2) government can (and did) play an important role in shaping the commercial development of telecommunications markets. These results have implications for telecommunications law and policy. A common view is that the regulation of network interconnection is only needed to create competition in markets dominated by a single firm. Such regulation, some believe, is not needed if the market is competitive. My findings suggest caution in accepting this view. History shows that firms will not necessarily interconnect and compete. However, the case of the commercial Internet suggests that governments can take measures short of direct regulation to promote competition and interconnection in telecommunications.