Organizational Frictions and Increasing Returns to Automation: Lessons from AT&T in the Twentieth Century

AT&T was the largest U.S. firm for most of the 20th century. Telephone operators once comprised over 50% of its workforce, but in the late 1910s it initiated a decades-long process of automating telephone operation with mechanical call switching---a technology first invented in the 1880s. We study what drove AT&T to do so, and why it took one firm nearly a century to automate this one basic function. Interdependencies between operators and nearly every other part of the business were obstacles: the manual switchboard was the fulcrum of a complex system which had developed around it, and automation only began after the firm and automatic technology were adapted to work together. Even then, automatic switching was only profitable for AT&T in larger markets---hence diffusion expanded as costs declined and service areas grew. We show that automation supported AT&T's continued growth, generating a positive feedback loop between scale and automation that reinforced AT&T's high market share in local markets.