Internet History: Decay, Part 1

For about seventy consecutive years, AT&T, the parent company of Bell System, had almost no competitors in the field of American telecommunications. The only at least significant of its rivals was General Telephone, which later became known as GT&E, and then just GTE. But at the same time, by the middle of the 20th century, she had at her disposal only two million telephone lines, that is, no more than 5% of the total market. The period of AT&T's dominance - from a gentleman’s agreement with the government in 1913 to the moment when the same government dismembered it in 1982 — roughly marks the beginning and end of a strange political era in the United States; a time when citizens were able to believe in the goodwill and effectiveness of a large bureaucratic system.

It is difficult to challenge the external performance of AT&T in this period. From 1955 to 1980, AT&T added nearly one and a half billion kilometers of telephone lines for voice communications, most of which related to microwave radio. The cost per kilometer of the line during this period fell ten times. The decrease in value responded to consumers who felt a constant decrease in the real (taking into account inflation) value of telephone bills. Measure even in the percentage of households that had their own telephone (90% by 1970), even in terms of signal to noise ratio, or reliability, the United States could consistently boast of the best telephony in the world. AT&T has never given reason to believe that it rests on the laurels of the existing telephone infrastructure. In her research unit, Bell’s labs, fundamental contributions were made to the development of computers, solid-state electronics, lasers, optical fiber, satellite communications, and more. Only in comparison with the exceptional speed of development of the computer industry could AT&T be called a slowly developing company. However, by the 1970s, the idea that AT&T was slowing down innovation had gained enough political weight to lead to its temporary separation.

The collapse of cooperation between AT&T and the US government was slow, and took several decades. It began when the US Federal Communications Commission (FCC) decided to tweak the system a little bit - remove one thread that came out here and the other there ... However, their attempts to put things in order only dissolved more and more threads. By the mid-1970s, they were confused about the mess they had created. The Department of Justice and federal courts then intervened with their scissors and closed the matter.

The main engine of these changes external to the government was a small new firm called Microwave Communications, Incorporated. However, before we get to it, let's see how AT&T and the federal government interacted in the happier 1950s.

Status quo

As we saw last time, in the 20th century, two different types of laws were dealt with to test industrial giants such as AT&T. On the one hand, there was a regulatory law. In the case of AT&T, the observer was the FCC, created by the 1934 telecommunications act. On the other hand, there was an antitrust law enforced by the Ministry of Justice. These two branches of the law differed quite significantly. If the FCC can be compared with a lathe that periodically gathers to make small decisions that gradually shape the AT&T behavior, then the antitrust law could be considered a fire ax: it is usually stored in a cabinet, but the results of its application are not particularly thin.

By the 1950s, AT&T received threats from both directions, however, all of them were resolved fairly peacefully, with little impact on AT&T's main business. Neither the FCC nor the Department of Justice argued that AT&T would remain the dominant provider of telephone equipment and services in the United States.

Hush-a-phone

First, let's look at the relationship between AT&T and FCC, using the small and unusual case of third-party devices as an example. Since the 1920s, a tiny Manhattan company called Hush-a-Phone Corporation has made a living by selling a cup that connects to the part of the phone that you need to talk to. The user, speaking directly into this device, could avoid eavesdropping by nearby people and also block some of the background noise (for example, at the height of the trading office). However, in the 1940s, AT&T began to put pressure on such third-party devices - that is, on any equipment connected to devices from the Bell System that the Bell System itself did not produce.


An early Hush-a-Phone connected to a vertical phone

According to AT&T, the modest Hush-a-Phone attachment was just such a third-party device, as a result of which any subscriber using such a device with his phone should be disconnected for violation of the rules of use. As far as we know, this threat has never been realized, but the opportunity itself probably cost Hush-a-Phone a certain amount, especially from retailers who did not want to buy their equipment. Harry Tuttle, the inventor of Hush-a-Phone and the “president” of this business (although his secretary was the only employee of his company, besides himself), decided to argue with this approach and sent a complaint to the FCC in December 1948.

The FCC had the power to both establish new rules as the legislature and resolve disputes as the judiciary. It was in the latter capacity in 1950 that the commission made a decision, considering the complaint of Tuttle. Tuttle was not alone before the commission; he was armed with expert witnesses from Cambridge, ready to testify that the acoustic qualities of the Hush-a-Phone are superior to those of his alternative - a handful of folded hands (experts were Leo Beranek and Joseph Karl Robnett Liklider, and in the future they will play a much more important role in this story than this little cameo). The position of Hush-a-Phone was based on the facts that the design of her device was better than the only possible alternative, that, being a simple device connected to the phone, it could not harm the telephone network,

From a modern point of view, these arguments seem incontrovertible, and the AT&T position is absurd; What right does the company have to prohibit private individuals from connecting anything to the telephone in their own home or office? Should Apple Have the Right to Prohibit You from Putting iPhone on a Case? However, AT&T had a plan not to specifically press on Hush-a-Phone, but to protect the general principle of banning third-party devices. Several convincing arguments related both to the economic side of the matter and to the public interest spoke in favor of this principle. To begin with, using a separate telephone was not a private affair, as it could connect to millions of other subscribers' phones, and anything that would degrade call quality could potentially affect any of them. In addition, it’s worth remembering that at that time such telephone companies, like AT&T, they owned the entire physical telephone network. Their possessions extended from central switches to wires and telephones themselves, which users rented. Therefore, from the point of view of private property, it seemed reasonable that the telephone company should have the right to control what is happening with its equipment. For decades, AT&T has invested millions of dollars in developing the most sophisticated machine known to mankind. How can every petty marketer with a crazy idea claim their right to profit from these achievements? Finally, it’s worth considering that AT&T itself offered a variety of devices to choose from, from signal lights to shoulder mounts, which were also rented (usually by enterprises), and the fee for which fell into AT&T chests, which helped to provide low prices for basic services provided to ordinary subscribers. Redirecting these revenues into the pockets of private entrepreneurs would violate this redistribution system.

No matter how you relate to these arguments, they convinced the commission - the FCC unanimously concluded that AT&T has the right to control everything that happens to the network, including devices that connect to the handset. However, in 1956, a federal appeals court rejected the FCC decision. The judge ruled that if the Hush-a-Phone degrades the voice quality, but only those subscribers who use it and AT&T have no reason to prevent this private decision. AT&T also has neither the ability nor the intention to prohibit users from muffling their voices in other ways. “To say that the telephone subscriber can get the result in question by collecting a handful and talking into it,” the judge wrote, “but can’t do this with a device that leaves his hand free for to write with her or to do whatever he pleases, will be neither fair nor reasonable. " And although the judges apparently did not like the impudence of AT&T in this case, their verdict was narrow - they did not completely cancel the entire ban on third-party devices, and only confirmed the right of subscribers to use Hush-a-Phone as they wish (in any case, Hush-a-Phone didn’t live for a long time - in the 1960s this device had to be recycled due to changes in the design of the handsets, but for Tuttle, who at that time should have been over 60 or over 70, it was already too much) . AT&T has adjusted its tariffs to indicate that the ban on third-party devices that are connected to the phone by electric or inductive means is maintained. However, this was the first sign

Decree of consent

Meanwhile, in the same year that the Hush-a-Phone Court of Appeal was being held, the Department of Justice terminated AT&T's antitrust investigation. This investigation originates in the same place as the FCC itself. He was facilitated by two main facts: 1) Western Electric, an industrial giant in itself, controlled 90% of the telephone equipment market and was the only supplier of such equipment for the Bell System, from telephone exchanges leased to end users, to coaxial cables and microwave towers used to transfer calls from one end of the country to another. And 2) the entire regulatory apparatus, which restrained the AT&T monopoly, relied on the limitation of its profit as a percentage of its investment.

The problem was as follows. A suspicious person could easily imagine the existence of a conspiracy within the Bell System aimed at taking advantage of these facts. Western Electric could inflate prices for the remainder of the Bell System (for example, asking for $ 5 for a cable of a certain length when its fair price was $ 4), while increasing its investment in dollar terms, and with it the absolute profit of the company. Suppose, for example, that the Indiana Regulatory Commission has set a maximum return on investment of 7% for Indiana Bell. Suppose Western Electric requested $ 10,000,000 for new equipment in 1934. Then the company will be able to get $ 700,000 in profits - however, if the honest price for this equipment was $ 8,000,000, then it would have to get only $ 560,000.

Congress, worried about the deployment of such a fraudulent scheme, has investigated the relationship between Western Electric and operating companies included in the original FCC mandate. The study took five years and spread over 700 pages, which described in detail the history of the Bell System, its corporate, technological and financial structure, and all its operations, both foreign and domestic. Regarding the initial question, the authors of the study found that, in fact, it is impossible to determine whether the prices set by Western Electric were honest or not - there was not a single comparable example with them. However, they recommended that forced competition be established in the telephony market to guarantee fair practices and stimulate efficiency gains.


The seven members of the FCC Commission in 1937. Damn handsome men.

However, by the time the report was completed, in 1939, a war loomed on the horizon. At such a time, no one wanted to interfere in the country's backbone communications network. However, ten years later, the Truman Department of Justice renewed suspicions regarding the relationship between Western Electric and the rest of the Bell System. Instead of voluminous and vague reports, these suspicions turned into a much more active form of antitrust lawsuit. In it, AT&T was required not only to tear away Western Electric, but also to divide it into three different companies, thus creating a competitive telephone equipment market by court order.

AT&T had at least two reasons to worry. First, the Truman administration has shown its aggressive nature in enforcing antitrust laws. In 1949 alone, besides the AT&T trial, the Department of Justice and the Federal Trade Commission filed lawsuits against Eastman Kodak, a large grocery chain of A&P, Bausch and Lomb, American Can Company, Yellow Cab Company and many others. Secondly, there was a precedent for the US vs Pullman Company court. The Pullman Company, like AT&T, had a service unit serving sleeping rail cars, and a production unit that assembled them. And, as in the case of AT&T, the prevalence of the Pullman service and the fact that it served only cars made in Pullman could not appear on the production side of competitors. And just like AT&T, despite the suspicious relationship between the companies, Pullman did not show any evidence of price abuse, nor did she have dissatisfied customers. And yet, in 1943, a federal court ruled that Pullman violated antitrust law and was required to share production and service.

But in the end, AT&T escaped dismemberment and never appeared in court. After many years in limbo, in 1956 she agreed to enter into an agreement with the new Eisenhower administration to end the proceedings. A change in the government's approach to this issue, in particular, was facilitated by a change in administration. Republicans were much more loyal to big business than Democrats who advocated a " new course“However, changes in economic conditions should not be ignored - the constant economic growth caused by the war has refuted the popular arguments of the“ new course ”supporters that the predominance of large business in the economy inevitably leads to recessions, stifling competition and preventing prices from falling. Finally, The growing scale of the Cold War with the Soviet Union also played a role.AT&T served the military and navy during World War II, and continued to work with their successor, the US Department of Defense. In the year that the antitrust lawsuit was filed, Western Electric began work at the Sandia Nuclear Weapons Laboratory.in Albuquerque (New Mexico). Without this laboratory, the United States could not develop and create new nuclear weapons, and without nuclear weapons they could not pose a significant threat to the USSR in Eastern Europe. Therefore, the Ministry of Defense did not want to weaken AT&T, and its lobbyists stood in front of the administration for their contractor.

The terms of the agreement obliged AT&T to limit its work in the regulated telecommunications business. The Ministry of Justice made several exceptions, mainly for work for the government - it was not going to ban companies from working in Sandia laboratories. The government also required AT&T to issue licenses and provide technical advice on all existing and future patents at a reasonable price to any local company. Given the variety of innovations that Bell's forged laboratories have made, such a relaxation in licensing will help fuel the development of American high-tech companies for several decades in a row. Both of these requirements seriously affected the formation of computer networks in the United States, but they did not change the role of AT & T as the actual exclusive provider of local telecommunications services. The fire ax was temporarily returned to his closet. But very soon, a new threat will come from an unexpected part of the FCC. The lathe, always working so smoothly and gradually, suddenly starts to bite deeper.

First thread

AT&T has long offered private communication services that allow a client (usually a large company or government unit) to rent one or more telephone lines for exclusive use. To many organizations that needed active internal negotiations — television networks, large oil companies, railroad operators, and the US Department of Defense — this option seemed more convenient, economical, and safer than using a public network.


Bell's engineers set up a private radiotelephone line for an energy company in 1953.

The proliferation of microwave relay towers in the 1950s reduced the cost of entering a business for long-distance telephony operators so much that it became easier for many organizations to build their own networks rather than rent a network from AT&T. The political philosophy of the FCC, established by many of its rules, was a ban on competition in the field of telecommunications, unless the existing operator could or did not want to provide an equivalent service for customers. Otherwise, the FCC would encourage inefficient spending of resources and upset the carefully balanced tariff regulation and averaging system that kept AT&T in check while maximizing the level of service for society. The established precedent did not make it possible to open a private microwave connection for everyone. Bye AT &

Then the stakeholder alliance decided to challenge this precedent. Almost all of them were large corporations that had their own funds to build and maintain their own networks. Among the most prominent was the oil industry (represented by the American Petroleum Institute, API). Industry pipelines snaked across entire continents, wells were scattered across vast and remote fields, research vessels and drilling sites were scattered all over the globe, so industry representatives wanted to organize their own communication systems that specifically met their needs. Companies like Sinclair and Humble Oil wanted to use microwave networks to monitor pipeline statuses, remotely monitor drilling rig motors, communicate with marine rigs, and did not want to wait for permission from AT&T. But the oil industry was not alone. Almost all forms of large business, from railways and freight carriers to retailers and car manufacturers, sent petitions to the FCC asking for permission to set up private microwave systems.

In the face of such pressure, the FCC opened a hearing in November 1956 to decide whether to open a new frequency band for such networks (around 890 MHz). Considering that almost only telecom operators themselves opposed private microwave networks, it was easy to make a decision on this issue. Even the Department of Justice, believing that AT&T somehow inflated them at the time of signing the latest agreement, spoke out in favor of private microwave networks. And it became a habit - in the next twenty years, the Ministry of Justice constantly poked its nose into the affairs of the FCC, over and over again hindering the actions of AT&T and advocating for new market participants.

AT&T’s strongest counterargument, to which she constantly returned, was that newcomers would necessarily upset the delicate balance existing in the regulatory system by trying to skim the cream. That is, large businesses come to create their own networks along routes where the cost of laying is low and traffic is high (the most profitable routes for AT&T), and then rent private lines from AT&T where it is most expensive to build them. As a result, ordinary subscribers will pay for everything, the low level of tariffs for which it turns out to be maintained only at the expense of very profitable long-distance telecommunication services, for which large companies will not pay.

However, the FCC in 1959 in the so-called “Solution over 890” [that is, over a frequency range above 890 MHz / approx. trans.] decided that each newcomer to the business can create their own private long-distance communication network. This was a turning point in federal politics. He called into question the fundamental assumption that AT&T should work as a redistributive mechanism that charges rich customers in order to offer low-cost telephone services to users from small towns, rural areas and poor areas. However, the FCC still continued to believe that it could eat the fish and not get into the pond. She convinced herself that this change was not significant. It affected only a small percentage of AT&T traffic, and did not affect the essence of the philosophy of public service, which has managed telephony regulation for decades. After all, the FCC just cut one protruding thread. Indeed, the decision “over 890” in itself had small consequences. However, it launched a chain of events that led to a real revolution in the structure of American telecommunications.

What else to read

• Fred W. Henck and Bernard Strassburg, A Slippery Slope (1988)
• Alan Stone, Wrong Number (1989)
• Peter Temin with Louis Galambos, The Fall of the Bell System (1987)
• Tim Wu, The Master Switch (2010)