Southern New England Telecommunications Corporation Business Information, Profile, and History

History of Southern New England Telecommunications Corporation

The Southern New England Telecommunications Corporation (SNET) is the primary telecommunications company in Connecticut. SNET provides a variety of services beyond local phone service to the citizens of its New England home state. Founded as a member of the Bell system, the company retained affiliation with AT&T --part owner of SNET--up until the 1980s. After the break-up of the American telephone monopoly, SNET entered various unregulated fields in the telecommunications industry while still deriving the bulk of its revenues from local telephone operations.

In 1877 Alexander Graham Bell gave a promotional speech and demonstration of his new invention, the telephone, in New Haven. On November 3 of that year, a Bell telephone franchise for the area was awarded to George Coy, a manager for the Atlantic and Pacific Telegraph Company who had fought in the Civil War. Just one year afer the genesis of telephone technology, a franchise agreement specifying that the Bell company would own 35 percent of Coy's enterprise was stipulated and was maintained throughout nearly all of the company's history.

Picking up on an idea Bell had mentioned in his speech, Coy improvised a crude telephone switchboard made out of carriage bolts, teapot lids, and wire, which provided connections for eight lines. Telephone wires had previously connected just two points, allowing information to travel between them, but not to any other point. With the new switchboard, the number of locations reached dramatically increased; customers could call any of eight other locations that had joined the system.

After Coy had lined up an investor and a lawyer to incorporate his enterprise as the New Haven District Telephone Company, 21 New Haven residents became patrons of the world's first telephone exchange, capable of handling just two calls simultaneously, on January 28, 1878. Customers used a single, hand held unit which, transfered from ear to mouth, served as both an earpiece and a mouthpiece, respectively. The company charged patrons $1.50 for month-long usage of the system. Within four weeks of the inauguration, the new telephone company had 50 customers, including the town police station, the post office, a country club, and a local college newspaper, the Yale News. The clients were listed in a classified directory, the world's first.

The leaders of the New Haven Bell franchise reorganized the company repeatedly the first few years, seeking to expand territory by raising money and negotiating broader service rights from the Bell organization in Boston. Fierce competition between the Bell network and the Western Union telegraph company had erupted in the telephone industry, holding rates down and increasing the difficulty of selling stock to finance wider operations.

In the late 1870s, Coy and his partner sold a majority interest in their company to businessman Jay Gould, who used the company in his attempt to gain control of Western Union. Western Union conceded the telephone business to Bell in 1879, and Bell, in turn, promised to stay out of the telegraph market. This agreement marked the end of serious competition in the telephone industry until the 1890s, when Bell's original patents expired.

By 1880, with the money provided by its investor, the New Haven telephone company had acquired the right to provide and interconnect telephone service in all of Connecticut and western Massachusetts. Profitable toll lines were installed from Bridgeport to New Haven to Hartford. The company also acquired the telephone operations in Hartford, Bridgeport, and Meriden, to name a few.

Expenses for the fledgling telephone systems were high. Wages for operators--who were mostly women by the mid-1880s since the boys who had previously held the job treated callers rudely--cut into the amount of money available for expansion, as did the cost of telephone poles. Seeking additional funds, the company was reorganized as the Connecticut Telephone Company in 1880. This was financed by a number of Hartford investors, who bought out previous owner Jay Gould.

Within two years the Connecticut Telephone Company was running 24 exchanges interconnected by toll lines, serving 3,634 customers. A subsidiary called Inter State Telephone had opened offices in New York City and Boston, and had commenced construction of a line between those two points, Providence, Rhode Island, and other large urban areas. The company was reorganized yet again as the Southern New England Telephone Company in 1882. Plans were laid for rapid expansion across much of the region.

Two factors put a damper on SNET's ambitious plans for expansion. The widespread introduction of electricity rendered much of the company's equipment obsolete because transmission of electricity interfered with transmission of telephone calls and necessitated the replacement of the old facilities with new, more expensive switchboards and wires. In the same period, the company's New York to Boston line failed and was sold off to the American Telephone and Telegraph company (AT&T). The company decided to limit its operations to Connecticut after selling off the Massachusetts holdings for much-needed capital.

The remainder of the 1880s proved bleak for SNET. Few new telephones were added and the company's earnings were severely limited by the need for expensive upgrading of equipment. A severe blizzard in 1888 brought down many of the company's lines and poles; these too had to be replaced. During the 1890s, however, the country's economy began to grow rapidly, and happier days returned to SNET. The company's telephones nearly tripled, topping 15,000, as rates were reduced and an advertising campaign began. SNET was able to pay off much of its debt and resume paying a dividend to shareholders.

Competition resumed in the telephone industry after the Bell company's basic patents expired and independent phone providers sprung up to challenge SNET's market share. The company gained relief in 1899, when the Connecticut state legislature, recognizing the essentially monopolistic nature of the telephone business, passed a law erecting barriers to the entrance of new companies. With this provision in place, SNET's growth continued at a dramatic pace throughout the first years of the new century and into the early teens. In 1911 the Connecticut law discouraging the creation of new phone companies was replaced by a Public Utilities Commission, which had the power to regulate rates and services for SNET and other utilities companies.

As the United States geared up for entry into World War I, Connecticut's industries--largely centered on the manufacture of munitions, guns, and other military hardware--expanded rapidly, increasing the need for telephone services. When the war began SNET suffered shortages of materials and employees as resources were diverted into the military effort. Operator positions were particularly hard to staff. The company also sent 50 men to the Army Signal Corps. Even more limiting, telephone service was restricted as the federal government, in 1918, assumed control of all telephone and telegraph companies until a peace treaty was signed to bring the war to an end. The government raised telephone rates in an effort to cover the costs of operation, before giving up its attempt to run the industry one year later and returning the companies to their previous owners. At the war's end, SNET was left with a large backlog of requests for service.

SNET's business picked up in the 1920s as the company began converting to dial service, eliminating the need for calls to pass through an operator. SNET's expansion was halted only by the stock market crash of 1929 and the ensuing Great Depression.

During the 1930s, SNET sustained a net loss of telephones in service for the first time that century. The company avoided laying off employees by reducing work schedules and stepping up sales efforts. In 1938 SNET suffered a major setback when Connecticut was struck by a hurricane which wiped out nearly one third of the region's phones. With help from other Bell system companies, SNET was able to reconnect all of its customers within 23 days. On a positive note, the company was able to increase its emergency planning and provisions in the wake of the storm.

Three years after this disaster, SNET's operations were curtailed again when the United States entered World War II and new federal restrictions on telephone operations--only four-party lines were permitted for residential use--ensued. At the end of war 60,000 customers were waiting for private service. Nearly 750 SNET employees had left their jobs to join the military. Wartime inflation, coupled with high income taxes, left the company in a severely weakened financial state at the war's end. In 1947 SNET applied for and received its first rate increase in 20 years, which allowed the telecommunications company to recover some financial stability.

During the postwar years the U.S. economy grew rapidly. By 1945 SNET had half a million phones in its network; 11 years later that number had doubled. The company began a process of implementing technological advances to speed and improve service. By 1953 SNET had completed conversion to dial service; newly installed equipment in the small town of Cornwall, Connecticut, became the first large Bell system to make the switch completely. Three years later SNET began utilizing a new generation of faster switching machines as well. One setback did occur in 1955, when the company suffered the consequences of catastrophic floods in the valleys of rural Connecticut. Although only ten percent of the system's phones were affected by the deluge, several of the company's offices and switching equipment centers were completely washed out. SNET workmen restored one complex switching device by hosing off the mud and drying each of its many parts with hair driers.

Throughout the 1960s, SNET's operations continued to be profitable. However, an ominous note was sounded in 1968, when the federal government ruled that the country's phone companies must surrender a portion of their monopoly on the industry by connecting their lines to a non-Bell device which allowed private mobile telephone systems to be set up. Gradually the Bell system's monopoly on the nation's phones was weakening.

By 1970 SNET had put 2 million phones on line. The company began a concerted effort to centralize service for greater efficiency and savings. Directory assistance operators were located in 22 separate facilities, which were combined into eight in the course of the decade. In addition, long distance service was simplified and calls for repairs were handled more effectively.

SNET underwent perhaps the most sweeping change of its history in the early 1980s, when the federal government sued its corporate parent, AT&T, to break up that entity's monopoly on the telephone business. In the agreement that AT&T reached with the government in January of 1982, the company was ordered to spin off its local phone companies to share-holders. AT&T was allowed to retain other activities, such as manufacturing equipment and providing long distance services. The local phone companies were prohibited from engaging in any other business other than local exchange services until January of 1984. Because SNET was only 22 percent owned by AT&T at the time of the agreement, however, the subsidiary was allowed to continue long distance operations and maintain both the telephone equipment distribution arm and the yellow pages directory holdings. In effect, SNET was not prohibited from entering new businesses, but was allowed to conduct any of the activities open to AT&T.

Having received advance notice of the break-up decree provisions, SNET had been preparing for its debut as an independent company since February of 1982. The company firmed up its bottom line and streamlined management, allowing more than a fifth of the executives to retire or leave. Engaging the help of a consultant firm and an investment banking house, SNET laid plans for the future, hoping to exploit the high number of corporate headquarters located in its service area by selling communications systems and computers to big, national companies.

On January 1, 1983, SNET entered the unregulated telecommunications market by establishing the Sonecor Systems division, a subsidiary that distributed telecommunications equipment made by a number of different manufacturers. SNET announced the move with a multi-million dollar advertising campaign designed to position the company as an aggressive player in the telecommunications field. The company also rearranged its marketing staff to better promote the new products and services. Sonecor planned to offer communications consulting services and to open retail communications systems stores for small businesses. SNET also set up its own credit branch to help clients pay for the new services.

Looking to future technological breakthroughs, SNET anticipated entry into the high-speed computer data transmission field and the cellular mobile phone industry. The company announced a partnership with railroad holding company CSX in August of 1983, to build a network of fiber optic communications cables, called LightNet, in 20 eastern states. SNET would use the railroad company's rights-of-way. SNET's entry into high-potential, unregulated fields came as income from the core local telephone businesses was slowing. With 2.5 million phones in service, the company's revenues reached $1.1 billion in 1982, but earnings declined by 14 percent to $92 million. An $89 million rate increase on local telephone service in the following year, approved by Connecticut's utilities regulators, along with the contributions of the newly diversified operations, helped the company produce a strong financial showing in 1983. SNET's stock price was up sharply as well.

By January 1, 1984, the reorganization of the nation's telephone industry was complete and the other companies spun off from AT&T were allowed to enter the deregulated industries SNET had tapped into for one whole year, virtually alone. This circumstance heightened already intense competition in the growing telecommunications industry. In February of 1984, AT&T announced the sale of its SNET stake; within three months, AT&T's shares had been dispersed, ending a corporate affiliation that had lasted more than 100 years. A year later, as speculation rose that the company would be acquired, SNET took steps to protect itself from becoming the object of a hostile takeover.

SNET rearranged its corporate structure in 1986, forming a holding company to manage the various divisions and changing its overall name to Southern New England Telecommunications, for the purpose of better reflecting the diversified nature of its activities. Two years later, the company entered the fast-growing mobile phone market, forming an alliance with NYNEX--a former Bell company in the New York area--to offer cellular phone service. In 1989 the company withdrew from the fiber optic network, selling its share in LightNet to Williams Communications for $365 million. At the end of the decade, SNET's income had more than doubled its 1980 level, reaching $189.1 million.

In March of 1991--amidst a severe recession--SNET received its first rate increase in ten years. A month later, SNET announced plans to enter the radio paging field by establishing a subsidiary called SNET Paging, Inc. The new company would offer paging services in Connecticut, Rhode Island, and Boston. Despite these measures and a program to cut staff through voluntary departures, SNET ended the year with lowered profits for the second year in a row. Although SNET had moved quickly and aggressively in the early 1980s to diversify its activities into more lucrative areas, the company had yet to reap the benefits. Because the company's welfare was so closely tied to the state's economy, SNET's fortunes depended largely on a general economic recovery in the Northeast. Until that time, SNET's long history of solid management was ready to help the company thrive once again.

Principal Subsidiaries: Southern New England Telephone; SNET Systems, Inc.; SNET Cellular, Inc.; SNET MobileCom, Inc.; SNET Diversified Group, Inc.; SNET Real Estate, Inc.; SNET Credit, Inc.; SNET Paging, Inc.