Western Electric was founded in Cleveland (Ohio) in 1869 by serial inventor Elisha Gray and Enos Barton to manufacture electric components, mainly for the Western Union Telegraph Company. The company relocated to Chicago in 1872 and in 1876 Gray invented his own version of the telephone.

In 1877 Thomas Edison developed a better telephone for Western Union. In 1878 Theodore Vail, hired as general manager of the American Bell Telephone Company, filed a lawsuit against Western Union over the patent of the telephone, obtaining Wester Union's technology (the one developed by Edison).

From the very beginning Bell realized that it didn't make sense to sell telephones in pairs: one telephone needs to be connected to all other telephones in service. However his very first customers had to purchase a pair of phones and pay someone to physically lay the wires connecting the two homes. In january 1878 a telegraph office manager, George Coy, in New Haven (Connecticut) opened the first commercial telephone exchange with the first telephone "switchboard". His office connected multiple phone subscribers based on their names via an "operator" for a monthly fee. In february Coy published the first telephone directory, a list of his 50 customers. The concept spread quickly throughout the Northeast. The job of operator was almost exclusively a women's job, as men would not recognize it as a "real" job (just like they didn't recognize typing on a typewriter as a real, manly job). In 1879 a friend of Bell in Lowell (Massachusetts)a, Moses Greeley Parker, came up with the idea of assigning numbers to telephone customers so that one would call, say, "Lowell 3214" instead of "Mrs Jane Smith".

For the record, in 1880 Alexander Bell and Charles Tainter invented the "photo-phone", a device for wireless communication that used light over the air instead of electricity over a wire (not quite a precursor to fiber optics, because fiber-optic communications still require a cable). The receiver was a parabolic mirror connected to a deposit of "lamp black" (soot from oil lamps): this material transformed light into sound, therefore enabling voice communication just like a wireless telephone... a radio.

In 1885 Bell created the American Telephone and Telegraph Company (AT&T) to build and operate the long distance telephone network, and Theodore Vail was appointed president of AT&T. When in 1893 Bell's patent expired, the number of independent telephone companies skyrocketed. Bell had mainly targeted the rich families and the large businesses in the big cities of the East Coast. The independents brought telephone lines to every community of the nation. It was the independents who realized that the telephone was more than a luxury and more than an office tool. A key factor for the multiplication of telephone companies was that the entry point was very low: just about anybody could learn how to do it. In 1907 there were probably more phones operated by the independents than by the former Bell monopoly. Then the venture capitalist changed: in 1909 the famous banker JP Morgan decided to back Bell's efforts to acquire Western Union. Bell went on a buying spree, largely through intimidation (the "purchase or perish" policy that offered the independents the choice between joining the Bell empire or being destroyed by the Bell empire). In 1913 Bell sold Wester Union to avoid antitrust proceedings (the proceedings that had caused the dismantling of Standard Oil in 1909) and agreed to become a neutral provider of telephone service (its long-distance lines could be used by any other telephone company). So the situation reversed itself: the government (a different branch of government) became Bell's main enemy, whereas private capital (Morgan) became its financial supporter. However, in return the government de facto accepted that Bell/AT&T continued to dominate the industry. It remained a sort of gentleman's agreement: the government never forced AT&T to run Bell Labs as a research facility, but AT&T did just that, and did it so well that seven scientists from the Bell Labs would be awarded a Nobel Prize, more than many of the world's prestigious universities. However, the Bell Labs were not encouraged to do research on any "disruptive innovation" but only on "sustaining innovations". For example, the invention of the answering machine was ignored by Bell Labs because it was feared that magnetic tape (the technology of storing voice) would kill the telephone. Later AT&T would be late to adopt the mobile phone (that in fact killed the land line). AT&T considered a milestone the first transcontinental direct-dial phone call (1951) that required 107 relay stations between New York and San Francisco. It was, but obviously it was not disruptive. On the other hand, AT&T accidentally gave the world the transistor and the Unix operating system that turned out to be essential for a new disruptive innovation: computers.

Note that a vital component of the telephone industry was the switchboard operator, the so called "telephone girl". The skills (both physical and psychological) required to handle thousands of calls a day were not trivial. In those days a phone call was made by talking to one such "telephone girl" and telling her the name of the desired party. The girl would often know by memory what connection was required on the switchboard. The early "telephone books" did not contain any phone numbers, only the names of the subscribers. The first commercial telephone exchange was installed in 1878 and manual switching remained in use in many parts of the world until the 1940s. The "telephone girl" was therefore a popular profession for several decades. Almon Brown Strowger inveted the automatic telephone exchange in 1891 to get rid of them: the customer, not the operator, should be able to make the call, or, better, to "dial" the call. A system of telephone dial based on his invention was actually installed in 1892 in Indiana.

The manual switchboards, meanwhile, kept expanding. Mirroring the network of the telegraph, each telephone was connected to a local telephone exchange, and the exchanges were connected together with trunks. Long-distance calls were realized by an operator plugging a jack into a switchboard to talk to an operator located in the exchange of the distant city. At the peak there were more than 100,000 operators just in the USA (one of the main jobs for women).

In 1892 Chicago was connected by telephone to New York. In 1914 it was San Francisco's turn, and in 1915 Bell in person made a phone call from New York to San Francisco during the preparations for the Panama-Pacific Exhibition.

In 1908 Siemens introduced the "dial tone" in Germany. This one an essential step into automating the job of the telephone girl: the dial tone that one heard when lifting the phone from the hook was the equivalent of the voice of the operator asking which number to call. Western Electric's Model 50AL Candlestick of 1919 was the first mass-market "rotary dial phone" (signaling the transition to the phone numbering system as opposed to the original naming system), and Western Electric's Model 102 of 1927 was its first model to use a handset. Now equipment could be designed to truly replace the telephone girl: when the phone is lifted from the hook, a circuit is activated in the local exchange that sends a dial tone to that phone. The customer dials the number and the local exchange receives the pulses corresponding to the numbers. At that point the local exchange has to connect that phone with the phone that is identified by that number, whether within the same exchange or through a distant exchange. This process required a uniform numbering system that identified each telephone set (although one had to wait until 1958 for AT&T to introduce true number calling, i.e. numbers without letters or names), and machines capable of decoding the number, route the call, and disconnect the call when one of the phones is placed again on the hook; and, of course, bill the customer. These machine were deployed progressively during the 1930s and 1940s: the 1XB in 1937, the 5XB in 1948. Unbeknownst to most, in 1937 Alec Reeves invented Pulse Code Modulation (PCM), which would eventually turn telephone calls into digital transmissions just like the Morse code had turned telegraph messages into digital transmissions.

Thanks to direct dialing, customers were able to just dial a phone number instead of waiting for a switchboard operator. Then the need arose for a telephone book that one could consult to find other people's phone numbers (to replace the telephone girl). Telephone girls still existed but they were now the "operators" who would be called by dialing a special number (e.g., zero) to ask for information or to ask to make a collect call.

Another innovation coming from Germany (but way less successful) was the idea of adding the image of the two parties to the telephone call. In 1936 the German Post Office inaugurated a public video-telephone service between Berlin and Leipzig, a system invented by Georg Schubert of Fernseh. In 1939 AT&T demonstrated a similar system of video over telephone at the World's Fair of New York. Nonetheless, the video-phone never took off. (In 1964 AT&T would demonstrate another video-phone, the Picturephone Mod I, at another World's Fair held in New York, and that too would not succeed).

The explosion of long-distance telephone communication drove efforts at Bell Labs to improve the quality and reliability of phone lines, which eventually resulted in the invention of the transistor in 1948 by John Bardeen, William Shockley, and Walter Brattain to replace the unreliable vacuum tube.

In 1951 AT&T began rolling out customer dialing of long distance calls. By 1960 AT&T had created a colossal nation-wide network of switching machines controlled by tones. These electromechanical switches were basically relay-logic computers.

In the mid-1950s the precursors of computer hackers exploited an obvious vulnerability in this system: they built tone generators that could simulate the tones of the system and therefore cheat the system (typically to make calls for free).

Pushbutton dialing, which uses a keypad instead of a dial, was introduced in 1962, and AT&T converted to digital computers in 1963 when it introduced the 101 ESS, a PBX (office telephone switch). The days of the rotary dial were numbered (no pun intended). In 1963 Western Electric introduced the first mass-market touch-tone phone, the Western Electric 1500. Following the sensational experimental satellite Telstar of 1962, the first commercial communications satellite, Intelsat I, built by Hughes Aircraft Company, began operating in 1965.

In 1982 the government forced the largest company in the world, AT&T, to split into seven regional Bell companies (the "Baby Bells"). However, it didn't take long for the monopoly to regenerate itself. In 1988 Edward Whitacre took the helm of one of these regional Bells, Southwestern Bell. In 1997 he acquired the Bells of the West Coast and of the Midwest. In 2006 he acquired South Bell. Meanwhile, in 1997 Bell Atlantic acquired New York's Baby Bell, NYNEX, and in 2000 GTE, changing name to Verizon. In 2005 Verizon also acquired MCI, after the bankruptcy and scandal that broke up another emerging conglomerate, WorldCom (its CEO, Bernard Ebbers, was sentenced to 25 years in prison for fraudulent accounting). Therefore after 2006 there were again two giants of telecommunications: AT&T and Verizon, and AT&T was again the largest telecom in the world.