When The AT&T Monopoly Held Sway over U.S. telecommunications, R&D managers at Bell Labs and Western Electric were assured steady funding that allowed them to look forward 10 or 20 years—the kind of long view that truly disruptive technologies need in order to germinate and thrive. That combination of stable funding and long-term thinking produced core contributions to a wide variety of fields, including wireless and optical communications, information and control theory, microelectronics, computer software, systems engineering, audio recording, and digital imaging [see photos, "Innovation Machine" and "Making Light Work"]. Accumulating more than 30 000 patents, Bell Labs also played host to a long string of scientific breakthroughs, garnering six Nobel Prizes in physics [see sidebar, "Bell's Nobels"] and many other awards.

The funding came in large part from what was essentially a built-in "R&D tax" on telephone service. Every time we picked up the phone to place a long-distance call half a century ago, a few pennies of every dollar—a dollar worth far more than it is today—went to Bell Labs and Western Electric, much of it for long-term R&D on telecommunications improvements.

In 1974, for example, Bell Labs spent over $500 million on nonmilitary R&D, or about 2 percent of AT&T's gross revenues. Western Electric spent even more on its internal engineering and development operations. Thus, more than 4 cents of every dollar received by AT&T that year went to R&D at Bell Labs and Western Electric.

And it was worth every penny. This was mission-oriented R&D in an industrial context, with an eye toward practical applications and their eventual impact on the bottom line.

AT&T's commitment to R&D stemmed mainly from its pre-World War I experiences in developing high-power vacuum tubes for use as amplifiers for transcontinental telephone service. Facing scrappy competition from a hornet's nest of local phone companies after Bell's original patents had expired, AT&T saw its leadership threatened—even though it controlled about half the country's telephones.

The company wanted to expand and offer "universal service" to its customers, aiming to put its phones in every home and office across the country and connect them with one another. But that required a very-low-distortion amplifier, or repeater, that could allow AT&T to provide something no other company was offering: coast-to-coast telephone calls.

In 1912, Harold D. Arnold, a young Ph.D. physicist fresh from the University of Chicago, joined AT&T's engineering department. He began trying to improve the performance of the low-power Audion triode tube invented by Lee de Forest several years earlier. Arnold coated the tube's tungsten cathode with an oxide layer to encourage the emission of electrons and pumped out excess air molecules from the tube that he figured were impeding current flow through it. The resulting high-power vacuum tubes performed splendidly, regenerating voice signals sent over long distances with minimal distortion [see photo, "A Famous Visitor"].

Using repeaters based on Arnold's tubes, AT&T created a sensation in 1915 at the Panama-Pacific International Exposition in San Francisco, where the company demonstrated transcontinental service for the first time. From AT&T headquarters in New York City, Alexander Graham Bell once again uttered his famous command into the mouthpiece, "Mr. Watson, come here. I want you." From San Francisco, his old assistant bellowed back, "It will take me five days to get there now!"

For the next half century, AT&T had the U.S. transcontinental telephone market all to itself—an advantage that helped the company reestablish its monopoly, bringing many of the small local phone companies under the umbrella of its Bell System. Thus, firmly convinced of the value of investing in research and development, in 1925, AT&T managers reorganized most of the company's R&D activities into a single organization: Bell Telephone Laboratories.

The first Bell Labs headquarters, in a gracious, sun-filled, 12-story building at 463 West St. in New York City, looking out across the Hudson River, soon became home to 2000 scientists and engineers. Its founding president, Frank B. Jewett, would later help lead the United States' R&D efforts during World War II, as president of the National Academy of Sciences from 1939 to 1947.