Internet History: Decay, Part 2

By approving the use of private microwave networks in a “solution over 890”, the US Federal Communications Commission (FCC) may have hoped that it could drive all these private networks into its quiet corner of the market and forget about them. However, it quickly became clear that this was impossible.

New individuals and organizations appeared who insisted on changing the existing regulatory platform. They offered many new ways to use or sell telecommunications services, and stated that existing companies that had expropriated this area were hindering their development. In response, the FCC gradually cut off a piece from the AT&T monopoly, allowing its competitors into various areas of the telecommunications market.

In response, AT&T took certain measures and made statements that should have opposed or at least reduced the influence of new competitors: proposed to publicly discuss their objections to the actions of the FCC, set new tariffs that reduced potential profit to zero. From the point of view of the company, this was a natural reaction to new competitive threats, but from the outside they served as evidence of the need for more serious measures to curb the insidious monopolist. Regulators who insisted on creating competition in the telecom industry were not going to encourage the battle for domination between companies, in which the strongest should win. On the contrary, they wanted to create and support long-term alternatives for AT&T. Attempts by AT&T to break out of the snare pulling around her only further confused the company.

New threats came both from the edge and from the center of the AT&T network, breaking the company's control over terminal equipment connected to its lines by its customers, and over long-distance lines connecting the United States into a single telephone system. Each of the threats began with lawsuits filed by two small and seemingly unimportant companies: Carter Electronics and Microwave Communications, Incorporated (MCI), respectively. However, the FCC not only decided the case in favor of the young companies, but also decided to interpret their affairs in a generalized way, as meeting the needs of representatives of a new class of competitors, which AT&T should accept and respect.

And yet, from the point of view of the legal platform, little has changed since the consideration of the Hush-a-Phone case in the 1950s. At that time, the FCC firmly rejected applications from far more harmless competitors than Carter or MCI. The same communications act of 1934 that the FCC itself created still controlled its work in the 1960s and 70s. FCC policy changes did not come from new Congressional actions, but from a change in political philosophy within the commission itself. And this change, in turn, was caused by the advent of electronic computers. The emerging hybridization of computers and communication networks helped create the conditions for their own development.

Information society

For decades, the FCC has considered maximizing access and fair operation in a relatively stable and uniform telecommunications system as its primary responsibility. However, from the mid-60s, a different view of their mission began to appear among the staff of the commission - they began to concentrate more and more on maximizing innovation in a dynamic and diverse market. For the most part, this change can be attributed to the emergence of a new, albeit relatively small, market for information services.

The information services industry initially had nothing to do with the telecommunications business. She was born in a service bureau - in companies that processed data for her clients, and then sent them the results; this concept was born before modern computers for several decades. For example, IBM from the 1930s offered custom-made data processing to customers who could not afford to rent their own mechanical tabulators. In 1957, as part of an antitrust transaction with the US Department of Justice, they separated this business into a separate unit, the Service Bureau Corporation, which then already worked on modern electronic computers. Similarly, Automatic Data Processing (ADP) began its journey as a manual data processing business in the late 1940s, before moving to computers in the late 1950s. But in the 1960s, the first online information bureaus began to appear, allowing users to interact with a remote computer through the terminal via a private leased telephone line. The most famous of them was the SABER system, a derivative of SAGE, which made it possible to reserve tickets for American Airlines flights using IBM computers.

Just as it happened with the first time-sharing systems, when you have several users communicating with the same computer, a very small step was left before allowing them to communicate with each other. It was this new way of using computers as mailboxes that attracted the attention of the FCC.

In 1964, Bunker-Ramo, the company best known as the contractor of the Department of Defense, decided to diversify its information services by purchasing Teleregister. Among the areas of activity of the latter was a service called Telequote, which provided exchange brokers with information on trading on telephone lines since 1928. However, Teleregister did not have a license for communications services. In relating users and the data center, she relied on Western Union.


Telequote III terminal from Bunker-Ramo. He could show stock information on demand, and provided general market data.

Telequote III's advanced system in the 1960s, Telequote III, allowed users to use a terminal with a tiny CRT screen and request stock prices stored on a remote Telequote computer. In 1965, Bunker-Ramo introduced its next generation, Telequote IV, with an additional feature that allowed brokers to give buy and sell orders to each other through terminals. However, Western Union refused to provide its lines for use for such purposes. She claimed that using a computer to send messages between users would turn a seemingly private line into a public messaging service (similar to a telegraph service from WU itself), which means that the FCC should regulate the work of the operator of this service (Bunker-Ramo).

The FCC decided to turn this debate into an opportunity to answer a more general question: how to relate to the growing segment of online data access services compared to telecommunications regulation? Now this investigation is known as a "computer investigation." The final conclusions of the investigation at the moment are not so important for us as their impact on the mentality of FCC employees. Long-standing boundaries and definitions appear to be subject to review or rejection, and this shake-up prepared the FCC's mood for future challenges. Over the previous decades, new communication technologies have appeared from time to time. Each of them developed independently and acquired its own character and its own regulation rules: telegraphy, telephony, radio, television.

Not only the FCC, but the entire intelligentsia as a whole expected a big change. Sociologist Daniel Bell wrote about the emerging “post-industrial society,” management expert Peter Drucker talked about “knowledge workers” and the “age of discontinuity.” Books, scientific papers, and conferences on the theme of the coming world, based on information and knowledge, and not on material production, flowed like water in the second half of the 1960s. The authors of these works often referred to the emergence of high-speed general-purpose computers and new ways of transferring and processing data in communication networks, which they will make possible in the coming decades.

Some of the new FCC commissioners appointed by Presidents Kennedy and Johnson have themselves been spinning in these intellectual circles. Kenneth Cox and Nicholas Johnson attended the Brooklyn Institute Symposium on Computers, Communications, and the Public Interest, whose chair was a “state or regional communications network connecting video and computer centers in universities with homes and classrooms on the ground ... Citizens can remain students “from the cradle to the grave”. ” Johnson will later write a book on the possibilities of using computers to transform broadcast television into an interactive environment, entitled " How to Answer Your TV ."

Outside of these general intellectual flows that directed the regulation of communications in new directions, one person was particularly interested in directing regulation to a new course, and played a major role in changing the attitude of the FCC to what was happening. Bernard Strasbourg belonged to that layer of the FCC bureaucracy that was a notch below the seven members of the commission appointed by politicians. The civil servants, of whom most of the FCC consisted, were divided into bureaus based on their technological areas. The members of the commission relied on the legal and technical experience of the bureau in establishing rules. The area of ​​responsibility of the public communications bureau, to which Strasbourg belonged, was related to wire telephone lines and telegraphs, and mainly consisted of AT&T and Western Union.

Strasbourg joined the bureau of public communications systems during World War II, and by 1963 had grown to the chair, playing a major role in the FCC's efforts to undermine AT&T dominance in the following decades. His distrust of AT&T came from an antitrust lawsuit filed by the Department of Justice against the company in 1949. As we mentioned, the question then was whether Western Electric, the AT&T manufacturing unit, was inflating prices to allow AT&T to artificially inflate its profits. During this study, Strasbourg was convinced that this question could not be answered, given the monopsony prevailing in the telephone equipment market.the fault of AT&T. There was no market for telephone equipment with which to compare anything to determine fair prices. He decided that AT&T was too big and powerful to regulate. Most of his commission advice in the coming years can be tied to his belief that competition must be forced into the AT&T world in order to weaken it to a state that can be regulated.

Call Center: MCI

The first serious challenge to AT&T long-distance lines since their appearance in the beginning of the 20th century was thrown by a person unlikely for this role. John Goeken was a salesman and small entrepreneur whose prudence was inferior to his enthusiasm. In his youth, like many of his peers, he became interested in radio equipment. After graduating from school, he went to serve in the army in a radio mask, and after completing his service, he got a job selling radio equipment for General Electric (GE) in Illinois. However, his regular job did not satisfy his passion for entrepreneurship, so he opened a side business, with a group of friends selling more radio in other parts of Illinois that were outside of his territory.


Jack Goken in the mid-90s when he was working on an airplane phone

When in 1963, GE learned about what was happening and covered the shop, Goken began to look for new ways to increase revenue. He decided to build a microwave line from Chicago to St. Louis, and sell radio access to truckers, riverboat captains, flower delivery vans, and other small businessmen who took the road and needed low-cost mobile communications. He believed that AT&T private line rental services were too sophisticated - too many people worked on them, and too engineering-complex - and that if he saved on the construction of the line, he would be able to offer lower prices and better service for users who were ignored by a large company.

Goken’s concept did not fit into the then FCC rules - the decision “over 890” gave private companies the right to build microwave systems for their own use. Yielding to the pressure of a small business that did not have the means to create its own system in its entirety, a rule came out in 1966 that allowed several enterprises to use one private microwave system. However, it still did not give them the right to provide communication services for money to third parties.

Moreover, the reason AT&T tariffs seemed excessive was not to be spent on a large scale, but to regulate average prices. AT&T took money for servicing private lines according to the distance of calls and the number of lines, regardless of whether they walked along the densely populated Chicago-St. Louis route, or along a dead road with little traffic along the Great Plains. Regulators and telephone companies have deliberately designed such a structure to equalize conditions for regions with different population densities. Thus, MCI offered to play the game on the difference in tariffs - to take advantage of the difference between the market and the regulated price on routes with a large load to extract guaranteed profits. AT&T called it cream skimming, and the term will be the basis of their rhetoric in future debates.

It is not known whether Goken initially knew about these facts, or decided to ignore them with a pure heart. In any case, he gladly seized on this idea, having a modest budget, organized mainly through the use of credit cards. He and his partners of equally modest capabilities decided to form a company and challenge the omnipotent AT&T, and they called it Microwave Communications, Inc. Goken flew across the country in search of investors with his pockets deeper, but with little success. However, he was able to successfully defend the point of view of his company MCI before the FCC commission.

The first hearings on the case began in 1967. Strasbourg was intrigued. He saw at MCI the opportunity to achieve his goal of weakening AT&T, further opening up the market for private communications. However, at first he hesitated. Goken did not impress him as a serious and effective businessman. He was worried that MCI might not be the best test option possible. The decision was pushed by an economist from the University of New Hampshire named Manley Irwin. Irwin regularly worked as a consultant in the bureau of public communication systems, and helped formulate the terms “computer investigation”. He convinced Strasbourg that the nascent online information services market, opened by this investigation, needed companies like MCI with new offers; what is AT & T can never realize the full potential of the emerging information society. Later, Strasbourg recalled that "the negative consequences of a computer investigation confirmed the statements of MCI that its entry into the specialized long-distance communications market would serve the public interest."

With the blessing of the MCI Public Communications Bureau, the initial hearing was easily held, and then squeezed with this approval to the full commission hearing in 1968, where the votes were divided in batches as 4 to 3. All Democrats (including Cox and Johnson) voted to approve the MCI license . Republicans, led by chairman, Rosel Hyde, voted against.

The Republicans did not want to upset the well-balanced regulatory system with the help of a scheme invented by the traders of controversial technical and entrepreneurial qualities. They pointed out that this decision, albeit seemingly limited to one company and one route, will have significant consequences that will transform the telecommunications market. Strasbourg and others who supported the project considered the MCI case an experiment that would test whether the business could successfully operate in parallel with AT&T in the private communications market. However, in reality, this was a precedent, and after its approval, dozens of other companies will immediately run to submit their own applications. Republicans thought it would be impossible to reverse the experiment. Moreover, MCI and similar new entrants are unlikely to stay afloat with a small set of scattered and unconnected lines, such as the route from Chicago to St. Louis. They will require liaison with AT&T and force the FCC to make new regulatory changes.

And this collapse, predicted by Hyde and other Republicans, really happened - within two years after the decision on MCI thirty-one other companies sent a total of 1,713 applications for microwave links with a total length of 65,000 kilometers. The FCC did not have the opportunity to hold separate hearings for each of the applications, so the commission brought them all together in a single list of cases for a hearing on companies providing specialized communications services. In May 1971, when Hyde left the commission, a unanimous decision was made to completely open the market to competition.

Meanwhile, MCI, while still having money problems, found a new wealthy investor to get things right - William C. McGowan. McGowan was almost the opposite of Goken, a sophisticated and reputable businessman with a Harvard degree who created successful consulting and venture capital ventures in New York. For several years, McGowan, in fact, gained control of the MCI and ousted Goken from the company. He presented the future of the company in a completely different way. He had no plans to fiddle with river shipping or flower delivery, vegetating on the periphery of the telecommunications market, where AT&T would not have worthy of his attention. He wanted to go right into the heart of a regulated network, and directly compete in all forms of long distance communications.


Bill McGowan in adulthood

The stakes and consequences of the initial MCI experiment continued to gain momentum. FCC, determined to succeed by MCI, now found itself harnessed to the business as Magkovan’s demands grew steadily. He, claiming (as expected) that the MCI would not survive as a small collection of unconnected routes, he demanded a large number of rights to communicate over the AT&T network; for example, the right to connect with the so-called "External switch", which would allow the MCI network to directly connect to local AT&T switches where the MCI lines ended.

AT&T's reaction to new specialized telecommunications operators did not help the company. In response to the invasion of competitors, she introduced lower tariffs on routes with heavy traffic, abandoning the average prices set by regulators. If she believed that she would satisfy the FCC in this way, demonstrating a rival spirit, then she misunderstood the purpose of the FCC. Strasbourg and its associates did not try to help consumers by lowering communications prices — at least not directly. They tried to help new companies enter the market, weakening AT&T’s power. Therefore, the new competitive AT&T tariffs were perceived by the FCC and other observers, especially from the Department of Justice, as vengeful and directed against competitors, as they threatened the financial stability of new market participants such as MCI.

AT&T's new belligerent president, John Debates, also did not improve his position by responding with aggressive rhetoric to rival invasions. In a 1973 speech delivered to the National Association of Regulatory Commissioners, he criticized the FCC, calling for a “moratorium on further economic experiments.” Such uncompromisingness angered Strasbourg and further convinced him of the need to restrain AT&T. The FCC readily ordered MCI to provide the network access it requested in 1974.

The aggravation of the conflict with McGowan reached its peak with the release of Execunet, which occurred next year. This service was advertised as a new type of paid service for sharing private lines between small enterprises, but gradually FCC and AT&T realized that Execunet was actually one of the competing long-distance telephone networks. It allowed a client in one city to pick up a phone, dial a number and get through to any client in another city (taking advantage of the “external switch”, and the service charge depended on the range and duration of the call. And no dedicated lines from point A to point B.


Execunet connected MCI clients to any AT&T user in any major city

And then, finally, the FCC got into a mess. She was about to use the MCI as a club against the full dominance of AT&T, but the blow was too strong. However, by this time AT&T had other allies in the courts and the Department of Justice, and she continued to develop this business. Once it began to break up the AT&T monopoly, it was already difficult to stop.

Peripheral Issues: Carterfone

In the process of rolling out the MCI case, another threat has appeared on the horizon. The similarities between the stories of Carterfone and MCI are striking. In both cases, a novice entrepreneur - whose business intuition was less developed than his ingenuity and stamina - successfully opposed the largest US corporation. However, both of these people - Jack Goken and our new hero, Tom Carter - were soon eliminated from their own companies by more cunning entrepreneurs, and disappeared into oblivion. Both started as heroes, and ended with pawns.

Tom Carter was born in 1924 in Mabanka (Texas). He also became interested in radio in his youth, joined the army at 19, and, like Goken, became a radio engineer. In recent years, World War II, he served the broadcast station in Juneau, providing news and entertainment to troops at distant outposts throughout Alaska. After the war, he returned to Texas and founded the Carter Electronics Corporation in Dallas, which operated a two-way radio station that he leased to other florist companies with delivery vans; oil producers with operators on the towers. Carter constantly received requests from customers to come up with a way to directly connect their walkie-talkies to the telephone network so that they would not have to send messages to people in the city through the base station operator.

Carter has developed a tool called Carterfone for this purpose. It consisted of a black plastic rhombus with a complex-shaped cover, into which a telephone receiver with a microphone and speaker was inserted. Both parts were connected to the reception / transmission station. To connect someone in the field with someone on the phone, the base station operator needed to make a call manually, but then he could put the receiver on the stand, after which the two sides could talk without interference. The radio reception and transmission switch was activated from the voice, and sent a speech when a person spoke on the phone, and then received it when a person spoke in the field. He began selling this device in 1959, and the entire production was in a small brick building in Dallas, where senior citizens assembled Carterfone on simple wooden tables.


When the receiver was placed on the stand, it activated the device with the button on top.

Carter's invention was not original. Bell had his own radio / telephone service, which the firm first offered to customers in St. Louis in 1946. Twenty years later, it served 30,000 customers. However, for competitors such as Carter, there was enough space - AT&T offered this service in about a third of the United States, and it could be queued for many years. In addition, Carter offered much cheaper tariffs if (a serious drawback) the buyer already had access to the radio tower: $ 248 one-time compared to $ 50- $ 60 a month for a mobile phone from Bell.

From AT&T's point of view, Carterfone was a “third-party device,” a device developed by third parties connected to the company’s network, which it forbade to do. In the early case of the Hush-a-Phone, the courts forced AT&T to allow the use of simple mechanical devices, but Carterfone did not fall into this category because it connected acoustically to the network - that is, it sent and received sound over the telephone line. Due to the small scale of Carter’s operation, AT&T noticed it two years later, and then began to warn Carterfone sellers that their customers risk being disconnected from the phone - the same threats that were made to Hush-a-Phone ten years ago. With similar tactics, AT&T drove Carter out of one market after another. Unable to reach an agreement with competitors, Carter decided to sue them in 1965.

Large companies from Dallas did not want to get down to business, so Carter ended up in Walter Steel's small office, where only three employees worked. One of them, Ray Bezin, later described a portrait of a man who arrived at their office:

He considered himself handsome, this was evident from combing his white hair on the side, the whiteness of which was enhanced by hair dye, but his suit was made of thick fabrics and cowboy boots created a different image. He was self-taught, easily handled any electronics, radio or telephone equipment. The businessman from him was so-so. Strict attitude to the family and strict wife. However, he tried to look like a cool and successful entrepreneur, although, in fact, he was bankrupt.

Preliminary hearings at the FCC took place in 1967. AT&T and its allies (mostly other small telephone companies and state regulatory agencies) argued that Carterfone was not just a device, but a cross-talk equipment that illegally connected AT&T networks to local mobile radio networks . This violated the company's responsibility for communication within the system.

But, as in the case of MCI, the public communications bureau decided in favor of Carter. Again, faith in the approach of the world of digital information services, simultaneously interconnected and diverse, played. How could one exclusive service provider anticipate and satisfy all market needs for terminals and other equipment for all possible applications?

The final decision of the commission, issued on June 26, 1968, was the agreement with the bureau, and the decree that the AT&T rule regarding third-party equipment was not only illegal, but also illegal from the moment it was created - in connection with which Carter could count on compensation. According to the FCC, AT&T was not able to correctly separate potentially harmful devices (which, for example, can send erroneous control signals to the network) and harmless devices like Carterfone. AT&T was obliged to immediately authorize the use of Carterfone and to develop technical standards for the secure communication of third-party devices.

Shortly after this decision, Carter tried to capitalize on this success by setting up a business with two partners, including one of his lawyers, and formed Carterfone Corporation. Having ousted Carter from the company, his partners earned millions in sales to the British giant Cable and Wireless. Carterfone has disappeared; the company continued to sell teletypes and computer terminals.

Carter’s story had an interesting epilogue. In 1974, he went into business with Jack Goken, setting up a flower delivery company at the request of Florist Transworld Delivery. It was in such a market — telecommunications to support small businesses — that both entrepreneurs wanted to work from the beginning. However, Carter soon left the company and moved back to his native place, southeast of Dallas, where in the mid-80s he managed a small radiotelephone company Carter Mobilefone. He worked in it until his death in 1991.

Decay

The FCC, like Carter and Goken, gave rise to forces that she could neither control nor fully understand. By the mid-1970s, Congress, the Department of Justice, and the courts had eliminated the FCC from disputes over the future of AT&T. The culmination of the great collapse of AT&T, of course, occurred in 1984, at the time of its separation. However, we ran ahead in our history.

The world of computer networks did not feel all the consequences of the victory of MCI and the appearance of competition on the long-distance communication market until the 1990s, when private information networks began to develop. Terminal hardware solutions played faster. Now everyone could produce acoustic modems and connect them to the Bell system, hiding behind the Carterfone decision, making them cheaper and more common.

However, the most important consequences of the breakdown of AT&T are related to a more general picture, and not to the particular moments of individual decisions. Many of those who predicted the information age in the early stages imagined a single American computer communications network under the auspices of AT&T, or perhaps the federal government itself. Instead, computer networks developed in parts, fragmented, and provided connectivity only within themselves. No single corporation controlled various subnets, as was the case with Bell and local companies; they did not relate to each other as chief and subordinate, but as equals.

However, here we run ahead. To continue our story, we need to return to the mid-1960s, during the advent of the first computer networks.

What else to read:

• Ray G. Bessing, Who Broke Up AT&T? (2000)
• Philip L. Cantelon, The History of MCI: The Early Years (1993)
• Peter Temin with Louis Galambos, The Fall of the Bell System: A Study in Prices and Politics (1987)
• Richard HK Vietor, Contrived Competition: Regulation and Deregulation in America (1994)