For much of its history, AT&T and its Bell System functioned as a legally sanctioned, regulated monopoly. The fundamental principle, formulated by AT&T president Theodore Vail in 1907, was that the telephone by the nature of its technology would operate most efficiently as a monopoly providing universal service. Vail wrote in that year's AT&T Annual Report that government regulation, "provided it is independent, intelligent, considerate, thorough and just," was an appropriate and acceptable substitute for the competitive marketplace.
The United States government accepted this principle, initially in a 1913 agreement known as the Kingsbury Commitment. As part of this agreement, AT&T agreed to connect non-competing independent telephone companies to its network and divest its controlling interest in Western Union telegraph. At several later points, as political philosophy evolved, federal administrations investigated the telephone monopoly in light of general antitrust law and alleged company abuses. One notable result was an anti-trust suit filed in 1949, which led in 1956 to a consent decree signed by AT&T and Department of Justice, and filed in court, whereby AT&T agreed to restrict its activities to the regulated business of the national telephone system and government work.
Over the years AT&T's Bell System provided what was by all accounts the best telephone system in the world. The system made steady progress towards its goal of universal service, which came in the twenties and thirties to mean everyone should have a telephone. The percentage of American households with telephone service reached fifty percent in 1945, seventy percent in 1955, and ninety percent in 1969. Much of the leadership came by application of science and technology developed at AT&T's Bell Telephone Laboratories subsidiary.
In the late 1940s, new technologies appeared that provided alternatives to copper wires for long-distance telephone transmission. AT&T opened its first microwave relay system between the cities of New York and Boston in 1948, and over the succeeding three decades added considerable microwave capacity to its nationwide long-distance network. In 1962, AT&T placed the first commercial communications satellite, Telstar I, in orbit, offering an additional alternative especially suited to international communications. Technological changes elsewhere in the system offered parallel alternatives. The transition from electromechanical to electronic components permitted new, more powerful, and eventually less expensive customer premises and network equipment. Another result of these new technologies was to lower the technological barriers to entry by would-be competitors to the Bell System. Slowly, over several decades, the Federal Communications Commission (FCC), the regulatory agency which oversees telecommunications in the United States, allowed some competition using these technologies at the edges of the network. By the mid-1970s, competition had advanced to general long-distance service.
The changes in telecommunications during these years eventually led to an antitrust suit by the U.S. government against AT&T. The suit began in 1974 and was settled in January 1982 when AT&T agreed to divest itself of the wholly owned Bell operating companies that provided local exchange service. This would, the government believed, separate those parts of AT&T (the local exchanges) where the natural monopoly argument was still seen as valid from those parts (long distance, manufacturing, research and development), where competition was appropriate. In return, the U.S. Department of Justice agreed to lift the constraints of the 1956 decree. Divestiture took place on January 1, 1984, and the Bell System was dead. In its place was a new AT&T and seven regional Bell operating companies (collectively, the RBOCs.)