Internet history: decay, part 1

For about seventy years in a row, AT & T, the parent company of Bell System, had almost no competitors in the US telecommunications industry. The only significant one of her rivals was General Telephone, which later became known as GT & E, and then simply GTE. But at the same time, by the middle of the 20th century, it had only two million telephone lines at its disposal, that is, no more than 5% of the total market. The period of AT & T domination — from the gentlemen’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’s hard to challenge AT & T’s external performance 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 belonged to microwave radio. The cost of a kilometer line during this period fell ten times. The cost reduction responded to consumers who felt a constant decrease in real (taking into account inflation) the value of phone bills. Measure at least as a percentage of households that had their own phone (90% by 1970), at least in terms of signal-to-noise ratio, at least in terms of reliability - the USA could consistently show off the best telephone service in the world. Not once did AT & T give a reason to believe that it rests on the laurels of the existing telephone infrastructure. In its research division, Bell's laboratories, fundamental contributions were made to the development of computers, solid-state electronics, lasers, optical fibers, satellite communications, and others. Only in comparison with the exceptional speed of development of the computer industry, AT & T could be called a slowly developing company. However, by the 1970s, the idea that AT & T was slowing down with 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 Federal Communications Commission (FCC) decided to tweak the system a little - remove one loose thread here, another - there ... However, their attempts to restore order only dissolved more and more threads. By the mid-1970s, they gazed in confusion at the mess they had made. Then the Ministry of Justice and the federal courts intervened with their scissors and closed the matter.
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The main engine of these changes external to the government was a small new company 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 in charge of testing industrial giants like AT & T. On the one hand there was a regulatory law. In the case of AT & T, the FCC, created by the 1934 telecommunications act, served as an observer. On the other hand, there was an antitrust law, which was applied 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 AT & T's 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 1950, AT & T received threats from both directions, but all of them were resolved quite peacefully, with little impact on AT & T’s core business. Neither the FCC nor the Department of Justice argued that AT & T would remain the dominant supplier of telephone equipment and services in the United States.

Hush-a-phone

Consider first the AT & T relationship with the FCC on the example of a small and unusual case of third-party devices. Since the 1920s, a tiny company in Manhattan called Hush-a-Phone Corporation has made a living selling cups that connected to the part of the phone that had to be talked into. The user, speaking directly to this device, could avoid eavesdropping from people nearby, and also block some of the background noise (for example, in the midst of a trading office). However, in the 1940s, AT & T began to put pressure on similar third-party gadgets - that is, on any equipment connected to the Bell System devices, which the Bell System itself did not produce.


Early model Hush-a-Phone connected to a vertical phone

According to AT & T, the humble Hush-a-Phone tip was just such a third-party device, with the result that any subscriber using a similar device with his phone was subject to disconnection for violating 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 the only employee of his company, besides himself, was his secretary), decided to argue with such an approach and sent a complaint to the FCC in December 1948.

The FCC had the authority to set new rules as a legislative power, and to resolve disputes as a judicial power. It was in the latter capacity in 1950 that the commission made a decision considering the complaint of Tuttle. Tattle did not appear before the commission alone; he armed himself with expert witnesses from Cambridge, ready to testify that the acoustic qualities of Hush-a-Phone are superior to those of his alternative - folded hands (the experts were Leo Beranek and Joseph Karl Robnett Liklider, and later they will play a more important role in this story than this little cameo). The position of Hush-a-Phone was based on the fact that the design of its device was better than the only possible alternative, that being a simple device connected to the phone, it could in no way harm the telephone network, and that private users have the right to make their own decisions about using equipment that they find convenient.

From a modern point of view, these arguments seem irrefutable, and the position of AT & T is absurd; What right does the company have to prohibit individuals from attaching anything to the phone in their own home or office? Should Apple have the right to forbid you from placing the iPhone in a case? However, AT & T had a plan not to specifically put pressure on Hush-a-Phone, but to protect the general principle of prohibiting third-party devices. This principle was supported by several convincing arguments related both to the economic side of the matter and to public interests. To begin with, using a separate telephone was not a private matter, since it could connect with millions of other subscribers, and everything that worsened the quality of the call could potentially affect any of them. In addition, it is worth remembering that at that time such telephone companies as AT & T owned physical telephone networks entirely. Their possessions extended from the central switches to the wires and telephone sets 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 happens to its equipment. For many decades, AT & T has invested millions of dollars in the development of the most complex machines known to mankind. How can every petty shopkeeper with a crazy idea claim his right to make a profit from these achievements? Finally, it is worth thinking about the fact that AT & T itself offered a variety of gadgets to choose from, from signal lights to shoulder mounts, which were also rented (usually by businesses), and payment for which fell into AT & T chests, which helped to ensure low prices for basic services provided to simple subscribers. Redirecting these revenues to the pockets of private entrepreneurs would violate this system of redistribution.

No matter how you feel about 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 appellate court rejected the decision of the FCC. The judge ruled that if Hush-a-Phone also impairs voice quality, but only those subscribers who use it and AT & T have no reason to interfere with this private decision. AT & T also has neither the ability nor the intent to prohibit users from muting their voices in other ways. “To say that the telephone subscriber can get the result in question by putting a hand in a handful and talking into it,” the judge wrote, “but he cannot do it with the help of a device that leaves his hand free to write with it or what he pleases is neither fair nor reasonable. ” And although the judges apparently did not like AT & T’s impudence in this case, their verdict was narrow - they didn’t lift the entire ban on third-party gadgets, and only confirmed the subscribers ’right to use Hush-a-Phone at will ( Hush-a-Phone did not last long - in the 1960s, this device needed to be re-processed due to changes in the design of the tubes, and for Tattle, who at that time was already over 60 or 70, it was too) . AT & T has adjusted its tariffs to indicate that the ban on third-party devices that are connected to the phone electrically or inductively is retained. However, this was the first sign that other parts of the federal government would not necessarily be as soft on AT & T as the regulators from the FCC.

Decree of consent

Meanwhile, in the same year that the Hush-a-Phone Court of Appeals was being held, the Department of Justice discontinued AT & T’s antitrust investigation. This investigation originates at the same place as the FCC itself. He was promoted 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 stations that were leased to end users, to coaxial cables and microwave towers used to transfer calls from one edge of the country to another. And 2) the entire regulatory apparatus, which kept AT & T’s monopoly, relied on limiting its profits as a percentage of its capital investments.

The problem was as follows. A suspicious person could easily imagine the existence within the Bell System of a conspiracy to take 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 company's absolute profit. Suppose, for example, that the Indiana Regulatory Commission appointed a maximum return on invested capital for Indiana Bell at 7%. Suppose that Western Electric requested $ 10,000,000 for 1934 for new equipment. Then the company will be able to get $ 700,000 profit - however, if the fair price for this equipment would be $ 8,000,000, then it would have to receive only $ 560,000.

Congress, concerned about the deployment of such a fraudulent scheme, conducted an investigation into the relationship between Western Electric and the operating companies included in the original FCC mandate. The study took five years and stretched 700 pages in which the history of the Bell System, its corporate, technological and financial structure, and all its operations, both foreign and domestic, were described in detail. With regards to the initial question, the authors of the study found that, in fact, it is impossible to determine whether the prices assigned by Western Electric were fair or not - there was not a single comparable example. Nevertheless, they recommended the introduction of compulsory competition in the telephony market in order to guarantee fair practices and stimulate efficiency gains.


Seven members of the FCC commission in 1937. Damn handsome.

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

AT & T had at least two reasons to worry. Firstly, the Truman administration showed its aggressive nature in the imposition of 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 & P, Bausch and Lomb, a large grocery store chain, American Can Company, Yellow Cab Company and many others. Secondly, there was a precedent of the court of the United States against the Pullman Company. The Pullman Company, like AT & T, had a service unit serving sleeping railway cars and a manufacturing 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 the cars made in Pullman could not appear on the competitor’s production side. And just like AT & T, despite the suspicious relationship between the companies, Pullman showed no evidence of price abuse, nor was there any dissatisfied customers. And, nevertheless, in 1943, a federal court ruled that Pullman violated antitrust law and was obliged to separate production and maintenance.

But in the end, AT & T escaped dismemberment and never went to 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 administration contributed to the change in the government’s approach to this issue. Republicans were much more loyal to big business than Democrats who promoted the " new course ." However, one should not ignore the changes in economic conditions - the constant growth of the economy caused by the war refuted the popular arguments of the supporters of the “new course” that the predominance of large business in the economy inevitably leads to recessions, suppressing competition and not letting prices fall. Finally, the growing scale of the Cold War with the Soviet Union also played a role. AT & T roughly served the navy during World War II, and continued to work with their successor, the US Department of Defense. In particular, in the same year when an 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 create a significant threat to the USSR in Eastern Europe. Therefore, the Ministry of Defense had no desire to weaken AT & T, and its lobbyists stood up to 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 did not intend to prohibit the company from working in Sandia Laboratories. The government also demanded that AT & T issue licenses and provide technical advice on all existing and future patents for a reasonable price to any local companies. Given the variety of innovations that have been forged in Bell's laboratories, such an easing in the field of licensing will help fuel the development of American high-tech companies for several decades in a row. Both of these requirements have seriously affected the formation of computer networks in the United States, but they did not change the role of AT & T as the actual monopoly provider of local telecommunications services. The fire ax was temporarily returned to its closet. But very soon a new threat will come from an unexpected part of the FCC. The lathe, always so smoothly and gradually working, suddenly starts to bite deeper.

First thread

AT & T has long been offering private communications services that allowed a customer (usually a large company or a government unit) to rent one or more phone lines for exclusive use. For many organizations that felt the need for 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 engineers set up a private radio line for the power company in 1953.

The proliferation of microwave relay towers in the 1950s reduced the cost of entry into the business for long-distance telephony operators so much that it became more profitable 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 to prohibit competition in the telecommunications industry, unless the existing operator could not or did not want to provide equivalent service to customers. Otherwise, the FCC would encourage inefficient waste of resources and disrupt 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 made it impossible to open a private microwave link for everyone. While AT & T wanted and could offer private phone lines, other operators did not have the right to enter this business.

Then the alliance of stakeholders decided to challenge this precedent. Almost all of them were large corporations that had their own funds for building and maintaining their own networks. Among the most prominent were the oil industry (represented by the American Petroleum Institute, API). Industry pipelines snaked across entire continents, wells were scattered across huge and remote fields, research vessels and drilling sites were scattered around the globe, so industry representatives wanted to organize their own communication systems that specifically meet their needs. Companies such as Sinclair and Humble Oil wanted to use microwave networks to track pipeline status, remote control of oil rigs engines, and communications with offshore towers, and did not want to wait for permission from AT & T. But the oil industry was not alone. Virtually all forms of large business, from railways and cargo carriers to retailers and automakers, sent petitions to the FCC asking them to allow 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 practically only the communication operators themselves were against private microwave networks, the decision on this issue was easy to accept. Even the Justice Department, believing that AT & T somehow inflated them during the signing of the last agreement, favored private microwave networks. And it became a habit - in the next twenty years, the Department of Justice constantly snatched at the FCC, hindering AT & T's actions over and over again and speaking out for new market participants.

The strongest counter-argument to AT & T, to which it was constantly returning, was that newcomers would necessarily upset the delicate balance that exists in the regulatory system by trying to skim the cream off. That is, large businesses go to create their own networks on 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 they are most expensive to build. As a result, everyone will be paid by regular subscribers, for whom it’s possible to maintain a low level of tariffs only at the expense of very profitable long-distance telecommunications services, for which large companies will not pay.

However, the FCC in 1959 in the so-called. “Solution above 890” [i.e., in the frequency range above 890 MHz / approx. perev.] decided that every newcomer to the business can create their own private long-distance communications network. It was a turning point in federal politics.He questioned the fundamental assumption that AT & T should work as a redistributive mechanism, setting tariffs to rich customers in order to offer low cost telephone service to users from small cities, rural areas and poor areas. However, the FCC still continued to believe that it would be able to eat both the fish and not climb into the pond. She assured herself that this change was immaterial. It only influenced a small percentage of AT & T traffic, and did not affect the essence of the public service philosophy that governed telephony regulation for decades. After all, the FCC just cut one protruding thread. Indeed, the “over 890” decision itself had small implications. 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)