Bell Labs was not a business

Bell Labs didn’t actually make most of its money directly off of its technology. Its primary source of revenue was just a % of the money from the local operating companies and AT&T itself. It gave technology to Western Electric to manufacture and they in turn gave it to AT&T and the operating companies who then were paid and gave the money back to Bell Labs. The trick is that at no point in this cycle is anybody putting a value on the technology directly. Because of its monopoly status, AT&T would be getting paid regardless of how good its service was. However, the only reason AT&T could maintain that monopoly was because they had a <semi-implicit> agreement with the government that they would continue to improve their services. Alignment requires existential threats.

When each piece of the puzzle was separated and needed to interact via contracts and prices, Bell Labs clearly couldn’t stand on its own as a business. The exact explanation of this is tricky and requires some detailed analysis on data that may not even exist.

According to Peter Drucker’s analysis of the AT&T breakup, it is possible that Bell Labs could have become a business, but that would have required radically reconfiguring from what it had been.

Bell Labs didn’t actually produce products. Once technology was at a point where it was ready to be manufactured at scale, it was handed off to Western Electric. If both organizations weren’t wholly owned subsidiaries of AT&T, Western Electric would both want a cut (reducing Bell Labs’ hypothetical profit margins) and would either need to be paid up-front or convinced to manufacture new things that they would then sell to AT&T.

It wasn’t that Bell Labs wasn’t creating value - it’s just that it was doing it in the context of “The System” of AT&T.

Perhaps one way to look at it is through the lens of Transaction costs. Bell Labs could only exist because it was getting continuous payments for extremely lumpy outputs (presumably some years, the direct value it delivered for AT&T was massive and some years it was near zero. Because of how human brains work, few companies would be willing to sign a contract that traded a consistent cash flow now for an uncertain innovation in the future. There are also some things that cannot be written into contracts - the trifecta relationship between Bell Labs, AT&T, and government regulators was incredibly valuable to AT&T but couldn’t be made explicit and wouldn’t have been possible if Bell Labs were a separate entity.

It’s important to note that Bell Labs was not a business both to build a mental model of the organization and to stare a major problem with trying to build the next Bell Labs straight in the face. Healthy corporate R+D requires a trifecta of conditions and it’s unlikely that those conditions will arise outside of software any time soon. People have implicitly realized this and most ideas to ‘build the next Bell Labs’ involve creating an independent organization. However, building an external organization will require money and People don’t invest in technology, they invest in businesses. The upshot is that any spiritual successor to Bell Labs will need to have a radically different structure than the original.

This note is perhaps a dual to Bell Labs was only profitable in conjunction with AT+T.



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