Historical Document · 1915
Report on the Automatic Telephone Situation in the City of Chicago
Engineering report on the Chicago automatic (AE) telephone system.
Historical Document · 1915
Engineering report on the Chicago automatic (AE) telephone system.
EPORT ON THE Automatic Telephone Situation IN THE CITY OF CHICAGO Submitted to the COMMITTEE ON GAS, OIL AND ELECTRIC LIGHT '^ it'^^^-'- S y^-^ vH'^y bB I lur • V I umfuzriv OF Illinois URBANA, ILLINOIS REPORT ON THE AUTOMATIC TELEPHONE SITUATION IN THE CITY OF CHICAGO Submitted to the COMMITTEE ON GAS, OIL AND ELECTRIC LIGHT THt UBHAHlf OF AUG 1924 (i !Hf UNIVERSITY nc ILLINOIS By KEMPSTER B. MILLER Consulting Engineer BARNARD ^MILLER "O .PRINTERS ' N LA SM.Lt rriBiT 137 3^4 N\ Ul S n. Table of Contents. r^ Pages ^ INTRODUCTION ^ HISTORY OF THE AUTOMATIC TELEPHONE ENTERPRISE IN CHICAGO ^ Ordinance of 1899 "^ . . Early Tunnel Construction 1 2 Ordinance of 1909 2 Early Telephone Operation 2-3 The Illinois Tunnel Company 3 Receivership 3 The Present Automatic Telephone Plant 3-4 Reorganization 4 Proposed Sale 4 Number of Telephones 4-5 COMMERCIAL ASPECTS OF PRESENT AUTOMATIC SYSTEM 5 Failure of First System 5 —Campaign for Business 5-6 Methods of Retaining Subscribers Revenue from Present Clientele Revenue and Expense History 6-8 8-10 10-11 PRESENT USEFULNESS OF AUTOMATIC SYSTEM 11 Amount of Traffic 11-12 Character of Service 12 Nature of Traffic Extent of Duplication 13-15 13 REASONS FOR FINANCIAL FAILURE OP PRESENT ENTERPRISE Relative Advantages of Automatic and Manual Systems 15 15 Disproportion of Automatic and Manual Systems in Chicago 15-16 Lack of Long Distance Lines The Philadelphia Situation 16-17 16 POSSIBLE COURSES OPEN TO THE CITY Forfeiture PROPOSITION I. 17 ; Non-forfeiture 17 18 OWNERSHIP AND OPERATION BY THE CITY City Operation as an Isolated System City Operation with Interconnection Interconnection Fee 18 18-19 19 20 Engineering Features of Interconnection 20-21 Cost of Interconnecting Plant 21-22 22 Quality of Service 22-23 Directory Difficulties .^ \ 1 1-2 Ordinance of 1903 Second System 1 11 Pages 23 Conclusions as to Service Commercial Aspects 23-24 One-Way Four Cent Transfer Fee Two- Way Three Cent Transfer Fee 25-26 26 Two-way Two Cent Transfer Fee Lower Flat Rate Schedule with Two Cent Transfer Fee 27 27-31 Incoming Service with Interconnection Plan 31 Conclusions as to Value of Interconnection 31 31-32 Prospects of Financial Success 32 Conclusion as to Proposition 1 PROPOSITION II. OWNERSHIP BY CITY AND OPERATION BY LI- CENSEE 32 PROPOSITION III. Doubt as to CITY TO DISMANTLE AND DISPOSE OF PLANT.. 32 32-33 Conduits Reproduction Cost Cash Salvage Value 33 34 Possible Uses of Portions of Plant by City SUMMARY OF PROPOSITIONS PROPOSITION IV. I, II . 34-36 AND III 36 NON-FORFEITURE— OPERATION BY THE TUNNEL COMPANY 36 PROPOSITION V. NON-FORFEITURE, PERMITTING SALE TO AMER36-37 ICAN TELEPHONE AND TELEGRAPH COMPANY Purpose of American Telephone and Telegraph Company Possible Usefulness to Chicago Telephone Company 37-38 Salvage Value to Chicago Telephone Company 38-39 Operating Value to Chicago Telephone Company GENERAL CONCLUSIONS APPENDIX A APPENDIX B APPENDIX C APPENDIX D 38 39-41 42-43 44-46 47-52 53-54 55-63 — Hon. Lewis D. Sitts, Oliainnan, and IMoDibois of tlio ( ommitti'O on <!as. Oil and Electiic Lislit. City Hall, 01iica«,'o. Gentlemen: Tn your letter of iiistnictioiis of .Tuly 27, ]fll."), you have asked me for technical advice concerniuii the future ])Ossibi]ities of tlie automatic telephone system now being operated in Chicago by the Illinois Telephone and Telegraph Company, As 1 understand it, tho ]:roblem now before your Committee is to determine a* course of action which, all things considered, will result in the property being; used or otherwise ilisposed of to the best interests of the citizens of Chicago.Tlie question is a broad one, involving legal and equitable considerations as well' as those of a purely technical nature. With the legal aud equitable questions my' Tt is confined to the purely engineering and eeononiiiC,' task is not concerned. phases, and especially to those considerations of quality, extent, and cost of telephone service in Chicago that will aid in determining the action now to be taken with respect to the automatic franchise and property. HISTORY OF THE AUTOMATIC TELEPHONE ENTERPRISE IN CHICAGO. Tn order to grasp the jiresent situation, the ]iriii('i]i:il ('\-(Mits leading up to it must be understood. Ordinance of 1899: The Illinois Telejihone and Telegraiili Company (not the corporation of this name now operating) was organized in 189S, ostensibly for the })urpose of conducting a telephone, telegraph, and signaling business in the City of Chicago in competition with the already established business of the Chicago Telephone Comjiany. The ordinance under which the Company was to operate was ])assed by the City Council on February ;.'(), 189!). It gave the Company the right to construct and operate lines of conduits and wires to beused "for the transmission of sound, signals, and intelligence, by means of electricity or otherwise," for a period of thirty years. The maximum rates specified for telephone service were $S5.00 per annum for business telephones; $50.00 per annum for residence telejihones, and $125.00 per annum for telephones available Tt was stipulated that within five years the Company should for public use. have in operation a telejihone exchange "serving two thousand telephones of bona fide subscribers." The penalty prescribed for failure in this respect was a payment to the Citv of $50, 000. 00, and failing to make this payment, the forfeiture of the entire j)roi>erty in the (-ity. The ordinance jirohibited th(- Coni])any or its successors from selling out to* the Chicago Telejihone Comjiany or its successors, or of entering into any contract" which would tend to mak'e competition inojierative, the jienalty in this casebeing forfeiture of the entire property to the City. The City reserved the right to purchase all tlie property of the Company at an appraised value at the ex])iration of the thirty year term, it Ijeing stijiulated that this appraised price should include no value for franchise rights. The compensation required of tiie Comjiany by the City in this ordinance was three the gross income of of the Company during per cent the .second ten years of the thirty-year period, five jier cent during the next five years, and seven j^er cent final five-ye:ir period. during the Early Tunnel Construction: To the onlinary mind this ordinance contemplated only the tarryin;,r on of a telejihone and telegrajili business and Ihe construction of such undergiound conduits as would be suitable for carrying the wires and cables of such a business. Notwithstanding this, the Illinois Telephone and Telegraph Company jiroceeded to construct under the downtown streets of the city a system of tunnels of a different type and larger than are ordinarily required for the disposal of telephone and similar cables. The Company claimed that these tunnels were only cable conduits, and that their unusual size was due to the fact that they had to be built a considerable dejitli below the surface on account of lack of a\i:ilalile sjjace nearer the surface. These tunnels were, in the main, seven and (.iie-lialf feet high and six feet wide, although a few ' very short buiJt. I "samijle" lengths fourteen feet high and twelve feet wide were that by 1903 about twenty miles of these tunnels had am informed been constructed. Ordinance of 1903: At about this time (1903), as a result of a controversy good faitli of the Company was questioned, a second ordinance was asked for and finally granted on July 15, 1903. This ordinance apparently acknowledged that the tunnels already built had been constructed in accordance with the ordinance of 1899, and gave the Company, in addition to the right to carry on a telephone business, the right to engage in the transportation of newspapers, mail matter, packages, parcels or merchandise" in the tunnels already constructed; and demanded the further construction and operation of tunnels up to a total of fifty miles by July 15, 1913. Instead of requiring the installation and operation of a telephone system for two thousand subscribers, as in the 1899 ordinance, this amendatory ordinance of 1903 required one for twenty thousand subscribers. The wording of the ordinance regarding this was: in Avhich the ' ' "If said company, its successors and assigns, shall fail to construct, equip and install a telephone system under the terms of said ordinance of February 20, 1899, adequate for the service of 20,000 subscribers within five years of the going into effect of this ordinance, or if at any time after said five years said company, its successors and assigns, shall not have in operation or shall cease to operate a telephone system serving 20,000 bona fide subscribers, then, and in such case, said companj^, its successors and assigns, shall also forfeit to the City all rights acquired under said ordinance of February 20, 1899, together with its plant and equipment for telephone purposes, and shall be under obligation to furnish the City, without charge, all space in anj' or all of its tunnels and conduits necessary for the carrying on of said telephone business. j ' Of some importance in the present situation are several provisions in this 1903 ordinance relating to the future acquirement by the City of the tunnels and the telephone property. The ordinance provided that at the expiration of the third year period of the first ordinance that is, on February 19, 1929 all the tunnels constructed under either ordinance should become the absolute property of the City of Chicago. It also gave the City the right to purchase the tunnel and transportation facilities at an appraised value in 1923 twenty years from the date of the 1903 grant. The date of the right of the City to purchase the telephone property remained as before, in 1929 at the end of the original thirty year grant. In case the City should exercise its right to purchase the tunnels in 1923, the Company w^as to be permitted to secure space for its telephone cables uuder lease from the City at reasonable rates. In 1929, however, when in any event, according to the ordinance, the title to the tunnels passes to the City, the Company was to be required to vacate the tunnels or lease from the City space for its telephone cables. — — — — Ordinances of 1909: The requirement as to serving twent^^ thousand bona subscribers under the terms of the 1903 ordinance should have been met by the Company by July 15, 1908, but on February 1, 1909, the Council, by ordinance, extended this date to October 8, 1909, and on June 28, 1909, the time was again extended to June 1, 1911. As finally ordered, therefore, the date of fulfilling the requirement of the second ordinance as to twenty thousand bona fide fide subscribers was June 1, 1911. Acting under the 1899 ordinance, the Illinois Early Telephone Operation: Telephone and Telegraph Company built an automatic telephone exchange, with a single office located on Fifth avenue near Monroe street. The service of this exchange was confined to substantially the area covered by the then existing This exchange was constructed principally during the years tunnel system. 1903, 1904 and 1905, and is said to have had an ultimate capacity of about ten thousand lines, and to have actually served nearly eight thousand telephones If these figures are correct, it would appear probable that in January, 1905. the Company met the requirement of the first ordinance as to "serving two thousand telephones of bona fide subscribers" by February 20, 1904, the specified date. However this may be, I am able to say from my own knowledge that the service was not popular and the exchange gradually lost most of its patronage. The Illinois Tunnel Company: In order to provide for the financing of the demanded by the ordinance of 1903, the Illinois Tunnel Company was organized on November 9, 1903, and on January 18, 1904, enterprise on the larger scale purchased all of the property, including tunnels, telephone plant and franchise, from the Illinois Telephone and Telegraph Company. During the following years until 1909, very large sums of money were poured into the enterprise for the building of tunnels and developing the transportation business. Fifty-eight miles of the six foot by seven and one-half foot tunnel are said to have been completed by the middle of 1909, and equipped witli steel rails, trolleys and rolling stock for the conduct of a general small package it freight business. During this time the original automatic telephone system, instead of growing to the required twenty thousand subscribers, had dwindled, according to the best of my information, to about three thousand five hundred. From the information available, it seems that few of these subscribers were paying the franchise rates, most of them being on a meter basis with no guarantee as to amount of service. Consequently the income was very small. As a result of this discouraging situation, the Illinois Tunnel Companj^ in 1907, gave the Chicago Telephone Company an option to buy the telephone plant for $2,000,000, subject to the approval of the City Council. This approval the Council refused, but instead passed ordinances which extended the time for fulfilling the requirement as to twenty thousand subscribers to June 1, 1911, as already stated. Receivership: The financial returns of the tunnel transportation system seem to have been scarcely less disappointing. By 1909, approximately $30,000,000 is said to have been invested in the combined properties, and neither the transportation business nor the telephone business was able to pay. As a result, on December 1, 1909, a receivership, composed of two men of highest business standing, was appointed by the United States District Court to conduct the entire operations, both transportaticn and telephone, of the Illinois Tunnel Company. The situation at the beginning of the receivership, so far as the telephone business was concerned, was evidently desperate. As the City had refused to jiermit the sale of the telephone property to the only available purchaser, the receivers were confronted with the alternative of risking the forfeiture of the telephone property on June 1, 1911, or of taking such steps as would secure the fulfillment of an adverse construction of the ordinance requirement. The original equipment was not well adapted for use in so large a system as the one proposed changes in the art of automatic switches had rendered it obsolete for such use. In order to save the property, therefore, the only promise of success lay in the establishment of a complete new automatic telephone system, and this course was decided on. — The Present Automatic Telephone Plant: The work under the receivership of constructing the present automatic telephone system began early in 1910, and was prosecuted vigorously. The i)riucipal portions of the present plant, consisting of eight central offices, having a total switching capacity for 24,500 subscribers' lines and a cable capacity for 40,600 subscribers' lines, was constructed and put into operation in the remarkably short time of about eighteen months. The engineering work seems to have been well done, the best of materials were used, and the plant as a whole was well constructed. The capacity of the plant was well above that required to serve twenty thousand subscribers; in fact, it could have served over thirty thousand had it been jiossible to secure and retain them. It was originally intended under the receivership to confine the telephone system to the downtown area substantially as covered by the tunnel system, and it was expected that the cost of providing for twenty thousand subscribers would be about $3,000,000. It soon became apparent, however, that the requisite number of subscribers could not be secured in so limited an area, and accordingly the plant was extended far beyond the area covered by the tunnels. Extensions were made by means of ordinary telephone conduit and pole lines to reach portions of the South Side as far as Hyde Park and the Stock Yards; a narrow strip on the West Side extendino- beyond Western avenue, and a small area on the North Side as far as North avenue. Principally because of these extensions, the amount actually required to build the plant was very mucli greater than had been estimated. The receivers spent in the construction of the telephone plant aliout $5,000,000, raised mainly by the sale of receivers' certificates and notes. During the entire receivership a vigorous campaign for subscribers was carried on. As I will show in detail later, great difficulty was experienced in securing subscribers and in retaining tliem, in spite of extraordinary efforts and expenditures. Beorganization: On March r!0, 1912, the Chicago Tunnel Company was organized to take over the i)roperty from the receivers as a result of plans made by a reorganization committee of the various bond and stock holders. The title to the property was given to this Company on May 2, 1912, by a master's deed, and the receivership was terminated. Another concern, the Chicago Utilities Companj-, serves as a holding company for the entire enterprise in its present state, owning all the stock of the Chicago Tunnel Company, the Illinois Telephone and Telegraph Company (a new concern), and the Chicago Warehouse and Terminal Company. The Chicago Tunnel Company owns the tunnels, so far as they exist under public streets and alleys, the transportation equipment and the automatic telephone system. It operates directly only the transportation business, the telephone business being carried on by the Illinois Telephone and Telegraph Company, as agents The Chicago Warehouse and Terminal Comfor the Chicago Tunnel Company. pany owns all the tunnels that are under private property, including practically all the transportation outlets to the tunnel system, and also various terminal This ownership, by a separate corporation, of the stations and dock property. tunnel outlets under private property seems likely to create complications of considerable importance whenever the tunnels under public streets are acquired by the Cit3^ Proposed Sale: About fourteen months after tlie termination of the receivership, the Chicago Tunnel Company entered into a tentative agreement to sell the entire automatic telephone property to the American Telephone and Telegraph Company for the sum of $6,r>00,000, provided that the consent of the City of Chicago, and of such other authorities as might be required to This tentative contract was dated July 8, legalize the sale, could be secured. 1913, and was amended by a supplemental agreement dated October 29, 191,T. Under the terms of these two agreements, copies of which are shown in Appendix A, the American Telephone and Telegraph Company was to acquire all of the telephone property and the franchise rights relating to the telephone business of the Chicago Tunnel Company, together with the right to occupy and use, without charge, space in the tunnels sufficient to carry eighteen cables not larger than three inches in diameter, or such number of cables of smaller dimenThe right to carry a smaller numsions as would occupy an equivalent space. ber of cables in branch tunnels or laterals was also given. The American Telephone and Telegraph Company owns a large majority of the stock in the Chicago Telephone Company, and it is to be inferred therefore, that the Chicago Telephone Company will eventually acquire the property if the Council and other proper authorities permit the sale to be made. Number of Telephones: Several attempts have been made, under the direction of the City, to determine the number of telephones working and the numThe count made by former City Electrician ber of "bona tide subscribers." Carroll, in 1911, was inconclusive, in that it was based only upon the directory issued June 15, 1911, and was unsupported by a check against the records of the other departments of the Company. Mr. Carroll found that after duplicate numbers and "dead-head" numbers had been eliminated there remained 21,442 numbers, representing a like number of telephones supposed to be in service at that tiine. In 1912. the l^verett Audit Company made a count of subscribers, based on The incompleteness of "what was shown in the various rocoids of the ('omiiany. these records on June ], 1911, made it impossible to determine the number of subscribers as of that date. Evidence of more than twenty thousand bona fide subscribers was first secured on October 10, 1911, the Everett Audit Company stating that there were then 23,214 subscribers. From the report of this investigation I am not entirely clear as to just what the Everett Audit Company called a "bona fide subscriber." On October 5, 1914, the City Council passed an order, instructing the Commissioner of Public Service to determine whether the Chicago Tunnel Company had "a telephone system in o])eration in the City of Chicago serving 20,000 bona fide telephone subscribers," as required bj^ the terms of the ordinance under which it was operating; and it further directed the Corporation Counsel to proceed in the name of the City of Chicago to forfeit to the City of Chicago the telephone rights and properties of the Chicago Tunnel Company, provided such action was warranted by the report of the Commissioner of Public Service. The investigation made bj' Mr. Montague Ferry, then Commissioner of Public Service, in compliance with this order, seems to show that during the early months of 191") the automatic system in Chicago had 19,276 "working telephone stations (but not subscribers)." Whether the Company has ever had twenty thousand bona fide subscribers depends in part on the accuracy of the Everett Audit Company's investigation, and on the construction that the courts will give to the wording of the franchise, This phase of the particularly as to the definition of "bona fide subscriber." matter seems to be relatively unimportant now, since it is my understanding that the ofiiciaJs of the Chicagoi Tunnel Company have admitted their failure to retain twenty thousand bona fide subscribers. My own investigation, carried on during the past month, has shown me conclusively that the Company has now less than twenty thousand bona fide subscribers, regardless of what interpretaAs already stated, however, the system is tion may be put upon that term. amply capable of serving twenty thousand bona fide subscribers if the Company could secure and retain them. No action has as yet been taken by the City Law Department to bring about the forfeiture of the automatic telephone property to the City. The Corporation Counsel of the previous administration held that, under existing conditions, a forfeiture would not be justified for failure to secure and retain twenty thousand bone fide subscribers, provided the Company constructed and maintained a telephone plant and system sufficient for that number of bona fide subscribers. This view, however, is vigorously contested by other prominent lawyers in fact, this whole matter, relating to the conditions under which a forfeiture would be declared, is one of much difference of opinion among those lawyers who have advised or appeared before the Committee on Gas, Oil and Electric Light. With many of the facts mentioned in this brief history of the enterprise I shall deal at greater length in subsequent portions of this report. — COMMERCIAL ASPECTS OF PRESENT AUTOMATIC SYSTEM. Before dealing in detail wdth the various phases of the problem relating to the future of the automatic system in Chicago, it will be profitable to discuss the commercial situation under Avhich the present automatic system has been operating, and the causes which have led to its failure. Failure of First System: The record of the first automatic system installed under the ordinance of 1S99, which, after reaching a total of nearly eight thousand subscribers in 190"), gradually lost most of its business and finally merged into the present system, may be dismissed wath the comment that it was not conducive to good feeling toward the new enterprise. — Second System Campaign for Business: Whatever may be said as to the conduct of the business of the first automatic system, there is ample evidence to show that the receivers, early in 1910, almost immediatel}' after their appointment, proceeded with great energy to build a plant of sufiicient size to meet the ordinance requirements, and during the construction and afterward made extraordinary efforts to secure at least twentv thousand bona fide subscribers. A general contract, calling for the construction of the plant and the securing of twenty thousand subscribers by June 1, 1911, was let to Mr. Joseph Harris, under approval of the court and of the various bond and stock holders. The original cam])aign was conducted on the basis of securing main line business contracts at $84 per annum and main line residence contracts at $49.80 It soon appeared that the per annum, no party line contracts being offered. necessary number of contracts could not be secured in the downtown district, and accordingly the plant was built into a larger territory. Later in 1911 it became evident that the campaign would fail unless cheaper rates were offered, and the Accordingly, a' four contractor was authorized to solicit party line contracts. party business rate of $39 per annum and a four party residence rate of $30 per annum were added. In addition to this, pay station service was solicited at five cents per call, either with or Avithout a guarantee as to monthly revenue. The receivers, after taking the plant from the contractor in July, 1911, operated under these rates, except that they reduced the pay station rate from five cents to two and one-half cents. Late in 1912, after the close of the receivership, the Company still further u'odified the rates, adding two party business and residence service and lowering The schedule of flat rates then the main line and four party residence rates. put into eifect is the one now supposed to be in force and is as follows: Main Line Business .$84.00 Two Party Business Four Party Business 54.00 39.00 Main Line Residence 4.5.00 Two Party Eesidence 33.00 21.00 Four Party Residence In all cases a discount of twenty-five cents per month is allowed for prompt payment. At this time the Companj' also abolished the pay station rate of two and one-half cents and restored the five cent rate. According to the report of former City Electrician Carroll, the Company i;ad on June 1, 1911, nearly forty thousand contracts with subscribers who had agreed to pay for service when it could be given to them. All of these subscribers were not then in service, and some never were reached by the system. Those subscribers who were connected to the new sj-stem were given free service until May 31, 1911. When, however, in July, 1911, the first bills were sent out covering June and July, the Company was met Avdth a storm of protests and orders to discontinue the service. From this time on the Company has experienced extreme difficulty in obtaining subscribers and no less difficulty in holding them. A careful study of the reasons for this trouble leads directly to the conclusion that the automatic system, under the conditions existing, was not wanted in Chicago that it did not and could not offer sufficient attraction to the public to warrant the payment of the scheduled rates. All the evidence points to the conclusion that, under the contractor's campaign, all ordinary business considerations were sacrificed in the effort to secure and retain "twenty thousand bona fide subscribers." After the receivers took over the plant more care was used in scrutinizing the contracts taken, but during and since the receivership the desire for connected subscribers was so acute, due to ordinance i:)rovisions, that no proper discrimination could be exercised in accepting contracts, and the ordinary methods of dealing with delinquent subscribers could not be resorted to. — Methods of Retaining Subscribers: Those subscribers who paid found, after a short time, that the subscribers' lists were not, and gave no immediate, promise of being, sufficiently comprehensive to justify the retaining of the automatic Following this conclusion, there often came a request for removal. On service. the part of the Company a corps of adjusters was in the field, attempting to inIf the charge for main line duce the subscriber not to abandon the service. telephones appeared too heavy, they were induced to change to party line servcie. If this in turn appeared to burdensome, the subscriber might change to a guarantee pay station, and if the "guarantee" feature proved objectionable, a nonguarantee pay station was forthcoming. In short, if the subscriber had no other fault than his propensity for non-payment, he was welcome as a connected subscriber if not as a paying subscriber. Many rebates were allowed to subspribers to iiuluce them to remaiu on tlie A rebate of $40, covering any excuse which the subscriber subscription list. might advance, might accompany a cash payment of $;>. Also, large discounts were given to a subscriber who made a back payment of several months. To show the extent to which this rebating was carried on in order to retain subscribers, I will quote from the report which the Everett Audit Company rendered to the City on July 17, 1012: "During the eleven months" (June 1, 1911, to May 1, 1912) "covering the examination, the subscribers' accounts credited indicate that two thousand eight hundred thirty (2,830) accounts were rebated in full, covering the charges for services as made during the year. On the other hand, there are ten thousand three hundred sixty-three (10,;>6o) which were partly These rebated, including allowances of every kind except cash discounts. two figures total thirteen thousand one hundred ninety-three (13,193), representing the number of accounts which show partial or full rebates with relation to telephone service." This financial leniency to subscribers may account for some of the Company's losses, although it may be that stricter financial methods would have The produced less actual revenue by driving away the weaker subscribers. method employed certainly kept more subscribers than the Company otherwise would have retained. Certainly every one who wanted an automatic telephone was encouraged to have one, even without paying for it. In order to throw light on the attitude of the Chicago public toward the automatic system here, I have taken great pains to analyze the subscription list, particularly with a view to determining the methods which have been employed in retaining subscribers. It was, of course, impossible to look up the historj^ of every subscriber, and in lieu thereof I have chosen one hundred names from the directory of November, 1911, the first directory issued after the new system had been fairly well started on its commercial career. In order that these names should be those of representative subscribers, the method of choosing them was Informato take the first city subscriber listed on each page of the directory. tion was drawn from all available records kept by the Company, including the correspondence file. As showing how the classification of the subscribers taken changed from a better class to a poorer class after the first bills were rendered by the Company, my analysis just referred to shows that of the subscribers taken before July 1, 1911, 83% were for main line telephones, 13% for party line telephones and 4% for pay stations. Of those taken after July 1, 1911, 24% were for main lines, 44% for party lines and 32% for pay stations. Of the 100 subscribers analyzed, 45 subsequently changed to a cheaper class of service, 55 remaining in Of the 55 who did not change to a cheaper class of service, their original class. many either discontinued or refused to pay their bills. Of the original 100 subscribers analyzed, the service of 62 has been discontinued, 38 remaining in service to the present time, some of these, however, paying irregularly or not at all, or for a cheaper grade of service. Of the 62 who have discontinued service, the following causes for discontinuance are assigned: "Abandonment" Non-payment " 60%- T4% * ' ' Does not want Building wrecked " ' ' ' ' Miscellaneous ' 1 1 %r 5% 10% Anal^vzing the condition of these 100 original subscribers as of tlie date of December 1, 1911, it was found that 85 were on a rental basis, 13 had pay stations and 2 had already discontinued. Of the 85 who were on a rental basis, 63 were in arrears. Beginning with December 1, 1911, a new set of books was opened, and after that date 84 of the subscribers were on a rental basis, 14 on a pay station basis and 2 discontinued. Of the 84 subscribers on a rental basis, 20 made payments regularly, 40 made irregular and incomplete payments and 24 made no payments at all. Of the 40 rental basis subscribers who paid irregularly, 34 re- 8 ceived rebates and 6 did not. bates and 22 did not. Of the 24 non-paying subscribers, 2 received re- Revenue from Present Clientele: It is by such practices as have just been outlined that the present clientele of the automatic telephone system has been built up. It is not surprising, therefore, to find that the present list of subscribers, while containing the names of many first-class individuals, firms and corporations, also contains the names of many who have little or no regard for the payment of their automatic telephone bills, and also many whose contracts are on such a basis that they cannot be profitable to the Company. The extent to which this is true is shown in Table I, the basic information for which was taken from the Company's books for the mouth of July, 1915. This table includes all stations that are supposed to be on a regular monthly rental basis, and excludes something like six thousand pay stations, from which the revenue is supposed to be collected directly. I have not been able to make an accurate check of the classification of telephones given in this table, but my investigation, as of a later period, checks fairly well as to the total number of stations and their classification when corrections ure made for the difference in time. From this table it appears that, if the Company were collecting its regularly prescribed rental rates from the number of subscribers listed, it would have had, for July, a gross revenue from exchange rentals of $36,974.34; whereas its actual revenue from this class of service was <on\y .$15,686.05, or about 42% of what it should be. Considering the details of this table, it will be seen that instead of billing its 1,683 main line business stations at the $7 rate, the Company is actually Looking at this another billing for 641 stations at an average rate of $6.93. way, the total revenue for 1,683 main line business stations is only $4,444.50, an average of $2.64 per station, instead of a total of $11,'<'S1, which the prescribed rate of $7 would produce. Similar analysis of the other items shows equally undesirable results. Of the total number of stations in service, iucludiug pay stations, only 35% are billed for service. Most of the stations listed as pay stations are, in fact, regular business or residence subscribers" stations operated as pay stations without guarantee. This is shown by the fact that an abnormally large proportion (30%) of the total stations in service are listed as pay stations. The condition with respect to these pay stations, of which there are 6,041, The revenue actually collected from these during the month of is even worse. July was $1,229.18, or an average of twenty cents per telephone. At an outside figure this will not pay one-half of the interest on the investment pertaining to these stations, to say nothing of maintenance, operating and collection expenses, depreciation and overhead charge. The total operating revenue statement for the month of July, from all classes of service, is as follows: for Subscribers' Rentals as per Table I Revenue from Pay Stations $15,686.05 1,229.18 Total Exchange Service Revenue Less Cash Discounts and Rebates $16,915.23 667.73 Net Exchange Service Revenue Revenue Less Commissions Non-operating Revenue .$16,247.50 266.16 23.50 Toll Service Total Operating Revenue $16,537.16 On the basis that the Company had 19,881 stations in service during that month, this is a gross revenue of only eighty-three cents per station per month, including both exchange and toll service. This is not sufficient revenue to pay operating expenses and otlier costs, even in a village exchange. Owing to its inability to collect from many of its subscribers, the Company does not handle its item of ''Uncollectible" in the ordinary manner. The "Total Operating Revenue" is treated in accordance with standard practice, being the sum of the total amount billed, less cash discounts and rebates, plus the pay = <=> o o I- o c -r c o c OOOO'MOO'XIOOICOS^M i;: c M «^ o-~ rH C-] LC uO ci ^q TT r-J I—' t~-' 50 C00 UT 00 0-. rH >r ,-M -r i- t- Iff o -r Iff. to OC Iff 00 oc -M i --. C-. '^ «oiffOOT-<i«ocoLff-i I c-t in > ^ d V CO CC5 O 'M t- -f- -M ,-( 31OC0O5 O 1^ O03<MiHl0 ^'Mcsri o^iff;c':'iA~ 5^ ~;t/j O tT Qi -^ CD ^OOJ .-lOTO-J-OO 'f^ C*I "-I Iff ^- O CO ^ I- o C? O o O "^ ""' ^ "5 ^1 ^ ^o 00 00 CO oo d CO CO th TflffClO O t> -r rH 05 ^ th CO ^ c* '^ T^ Iff . o 11 ;> — <fi Cr- 05 0-- r-( t> ""1 ""! Iff '^1 Iff 00* ':d Iff Iff r* t-H -!f CO f 0-] .Ol «» j 5C «3 ,- o ** 0) 0, c M C C 0,5 J * 2 5 =« •5; . <1^ . • •^MfQ--" a- K' „ •S i'i * .5 i'i 5 pa K >2£h So,4§c',^^>-d:e§k ' station, toll and other revenue items. It must be remembered, however, that Company is only billing for about 42% of the service it is rendering. What Company actually collects during any month is called the "Net Operating Revenue" for that month, and the difference between this and the "Total Operating Revenue" it places on the books as "Uncollectible." Were the Com-' the the billing handled in the ordinary manner, the item of "Uncollectible" would appear each month se\eral times as large as the "Net Operating Rev- ])any's enue. ' Revenue and Expense History: The revenue and expense accounts of the four years show an uninterrupted history of monthly deficits. During one month only did the revenue exceed the actual running expenses, and this by only $136.21. The Company, therefore, has not been able to pay even its operating expenses, to say nothing of making any provision for ilepreciation, for the payment of interest on the bonds, or any profits to its in- Company for the past vestors. The revenue and expense accounts from August, 1911, to and including July, 1915, are shown by months in the tables of Appendix B. These I have condensed from the Company's books, changing the titles of some of the revenue accounts in order to make them more nearly descriptive of what they represent. It is perhaps easier to follow the history of the Company's revenue and expense accounts by observing the graphical charts herewith presented. The upper irregular line on Chart No. 1 represents the monthly total operating revenue. Owing to changes in the books of the Company, it is difficult to state on just what basis this total operating revenue was figvired during the earlier periods, but presumably it was substantially the amount billed, plus the amount collected from the pay stations and toll service. The lower irregular line on Chart No. 1 shows the revenue actually' collected during each month. The amount which the Company failed to collect would be represented in each case by the vertical di