By approving the use of private microwave networks in 'solution above 890', the U.S. Federal Communications Commission (FCC) likely hoped to push all these private networks into a quiet corner of the market and forget about them. However, it quickly became clear that this was impossible.
New faces and organizations emerged, insisting on changing the existing regulatory framework. They proposed many new ways to use or sell telecommunications services and asserted that the existing companies, having expropriated this area, were hindering their development. In response, the FCC gradually cut away pieces of AT&T's monopoly, allowing competitors into various areas of the telecommunications market.
In response, AT&T took certain measures and made statements aimed at countering or at least diminishing the impact of new competitors: it proposed to publicly discuss their objections to FCC actions, set new rates that reduced potential profits to zero. From the company's perspective, this was a natural reaction to new competitive threats, but from the outside, it signaled the need to take more serious measures to rein in the crafty monopolist. Regulators, insisting on fostering competition in the telecom sector, were not looking to encourage a battle for dominance between companies that would determine the strongest. Instead, they wanted to create and sustain long-term alternatives to AT&T. AT&T's attempts to break free from the tightening snares around it only further ensnared the company.
New threats came both from the edge and from the center of AT&T's network, breaking the company's control over terminal equipment connected to its lines by its customers and over the long-distance lines that tied the U.S. into a single telephone system. Each of these threats began with lawsuits filed by two small and seemingly insignificant companies: Carter Electronics and Microwave Communications, Incorporated (MCI), respectively. However, the FCC not only ruled in favor of the young companies but also chose to interpret their cases in a generalized manner, as a response to the needs of representatives of a new class of competitors that AT&T must accept and respect.
Nevertheless, from the perspective of the legal framework, little has changed since the Hush-a-Phone case in the 1950s. At that time, the FCC firmly rejected applications from competitors far less innocuous than Carter or MCI. The same Communications Act of 1934, which established the FCC, still governed its operations in the 1960s and 70s. Changes in FCC policy arose not from new Congressional actions, but from a shift in political philosophy within the commission itself. This change was largely driven by the emergence of electronic computers. The hybridization of computers and communication networks led to conditions favorable to their own development.
Information Society
For decades, the FCC viewed its primary responsibility as maximizing access and ensuring fair practices within a relatively stable and uniform telecommunications system. However, since the mid-1960s, there has been a growing shift among the commission's staff towards a different understanding of their mission ā they began to focus more on fostering innovation in a dynamic and diverse market. This change can largely be attributed to the emergence of a new, albeit relatively small, information services market.
The information services industry originally had nothing to do with the telecommunications business. It emerged in service bureausācompanies processing data for their clients and then sending them the results; this concept predated modern computers by several decades. For example, IBM offered custom data processing to clients who couldn't afford to rent their own mechanical tabulators since the 1930s. In 1957, as part of an antitrust deal with the U.S. Department of Justice, they spun this business off into a separate division, Service Bureau Corporation, which was already operating on modern electronic computers at that time. Similarly, Automatic Data Processing (ADP) began its journey as a manual data processing business in the late 1940s before transitioning to computers by the late 1950s. However, in the 1960s, the first online information bureaus started to appear, allowing users to interact with a remote computer via terminal over a private leased telephone line. The most well-known among them was the SABRE system, derived from SAGE, which allowed the reservation of tickets on American Airlines using IBM computers.
Just as happened with the early time-sharing systems, when you have multiple users interacting with a single computer, facilitating communication between them remained a very small step. It was this new way of using computers as mailboxes that drew the attention of the FCC.
In 1964, Bunker-Ramo, a company best known as a contractor for the Department of Defense, decided to diversify its information services by acquiring Teleregister. Among the last company's offerings was a service called Telequote, which had been providing stock market information to brokers via telephone lines since 1928. However, Teleregister did not have a license for telecommunications services. For the connection between users and the data center, it relied on Western Union.
The Telequote III terminal from Bunker-Ramo. It could display stock information on demand and provided general market data.
The advanced system from Telequote in the 1960s, Telequote III, allowed users to utilize a terminal with a small CRT screen to 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 place buy and sell orders with each other using terminals. However, Western Union refused to provide its lines for such purposes. They argued that using a computer to relay messages between users would turn what seemed like a private line into a public message transmission service (similar to the telegraph service from WU itself), and thus the FCC should regulate the operations of this service provider (Bunker-Ramo).
The FCC decided to turn this dispute into an opportunity to address a broader question: how to approach the growing segment of online data access services in comparison to telecommunications regulation? This investigation is now known as the 'computer inquiry.' The final conclusions of the inquiry are currently less significant to us than their impact on the mindset of FCC staff. Long-standing boundaries and definitions seemed to be subject to revision or rejection, and this shake-up prepared the FCC for future challenges. Over the past decades, new communication technologies have periodically emerged. Each developed independently and acquired its own character and regulatory rules: telegraphy, telephony, radio, television. But with the advent of computers, these separate lines of development began converging on an imagined horizon, transforming into an intertwined information society.
Not only the FCC but also the entire intelligentsia anticipated significant changes. Sociologist Daniel Bell wrote about the emerging "post-industrial society," management expert Peter Drucker spoke of "knowledge workers" and the "era of discontinuity." In the late 1960s, books, academic papers, and conferences on the upcoming world, based on information and knowledge rather than material production, flowed abundantly. The authors of these works often referenced the arrival of general-purpose high-speed computers and new methods of data transmission and processing in communication networks, which they would enable in the coming decades.
Some of the new members of the FCC, appointed by Presidents Kennedy and Johnson, were themselves part of these intellectual circles. Kenneth Cox and Nicholas Johnson participated in a symposium at the Brooklyn Institute on the topic of "Computers, Communication, and the Public Interest," the chair of which envisioned a "government or regional communication network connecting video and computer centers at universities with homes and classrooms in the fieldā¦ Citizens would remain learners 'from cradle to grave.'" Johnson later wrote a book about the potential of using computers to transform broadcast television into an interactive medium, titled "Ā«.
Beyond these general intellectual currents guiding telecommunications regulation in new directions, one individual was particularly interested in steering regulation onto a new path and played a key role in changing the FCC's attitude towards developments. Bernard Strasbourg belonged to that layer of the FCC bureaucracy that was one step below the seven commissioners appointed by politicians. The civil servants, of which the FCC was largely comprised, were divided into bureaus based on the technological areas they regulated. The commissioners relied on the legal and technical expertise of the bureaus in establishing rules. The jurisdiction of the public systems communications bureau, to which Strasbourg belonged, related to wired telephone lines and telegraphy, chiefly consisting of AT&T and Western Union.
Strasbourg joined the Bureau of Public Communication Systems during World War II, and by 1963 had risen to chairman, playing a key role in the FCC's attempts to undermine AT&T's dominance in the subsequent decades. His distrust of AT&T stemmed from an antitrust lawsuit filed by the Justice Department against the company in 1949. As we mentioned, the question at that time was whether Western Electric, AT&T's manufacturing subsidiary, inflated prices to allow AT&T to artificially boost its profits. During this investigation, Strasbourg concluded that it was impossible to answer this question, given the state of the telephone equipment market. due to AT&T's actions. There was no market for telephone equipment against which anything could be compared to determine price fairness. He concluded that AT&T was too big and powerful to regulate. Much of his advice to the commission in the following years can be tied to his belief that competition needed to be forcibly introduced into AT&T's world to weaken it to a state that could be regulated.
A Challenge in the Center: MCI
The first serious challenge to AT&T's long-distance lines since their emergence in the early 20th century was posed by an unlikely person for this role. John Goeken was a salesman and a small businessman, whose prudence was overshadowed by his enthusiasm. In his youth, like many of his peers, he became interested in radio equipment. After finishing school, he served in the army in the radio corps, and upon completing his service, he took a job selling radio equipment for General Electric (GE) in Illinois. However, his steady job did not satisfy his entrepreneurial spirit, so he started a side business with a group of friends selling more radios in other parts of Illinois that were outside his territory.
Jack Goeken in the mid-90s, when he was working on a phone for aircraft.
When GE learned about what was happening in 1963 and shut down operations, Goken began searching for new ways to increase revenue. He decided to build a microwave communication line from Chicago to St. Louis and sell access to truck drivers, captains of riverboats, floral delivery vans, and other small businesses that used this route and needed affordable mobile communication. He believed that the private line rental services from AT&T were overly complicated ā too many people worked on them, and they were too complex from an engineering perspective ā and that by saving on the line's construction, he could offer lower prices and better service to users ignored by the large company.
Goken's concept did not fit within the then-current FCC rules ā the āabove 890ā ruling allowed private companies to build microwave systems for their own use. Yielding to pressure from small businesses that couldn't afford to build their own systems entirely, a rule was released in 1966 allowing multiple enterprises to use one private microwave system. However, it still did not grant them the right to provide communication services for a fee to third parties.
Moreover, the reason AT&T's rates seemed excessive was not due to lavish spending but rather to the regulation of average prices. AT&T charged for servicing private lines based on the distance of calls and the number of lines, regardless of whether they ran along the heavily populated route of Chicago ā St. Louis or along a quiet road with low traffic. . Regulators and phone companies intentionally designed such a structure to level the playing field for areas with different population densities. Thus, MCI sought to capitalize on the difference in tariffs ā to benefit from the disparity between market and regulated prices on heavily trafficked routes to secure guaranteed profits. AT&T referred to this as cream skimming, and this term would become foundational in their rhetoric in future debates.
It is unknown whether Goken initially knew about these facts or chose to ignore them with a clear conscience. In any case, he eagerly embraced this idea, operating on a modest budget primarily funded through credit cards. Together with his partners, who had equally modest means, they dared to form a company and challenge the omnipotent AT&T, naming it Microwave Communications, Inc. Goken traveled across the country seeking investors with deeper pockets, but with little success. However, he was more successful in advocating for his company MCI's stance before the FCC.
The first hearings in the case began in 1967. Strasburg was intrigued. He saw MCI as an opportunity to achieve his goal of weakening AT&T, further opening the market for private communication lines. However, he hesitated at first. Goken did not impress him as a serious and effective businessman. He worried that MCI might not be the best possible test case. His decision was pushed along by an economist from the University of New Hampshire named Manley Irwin. Irwin regularly worked as a consultant in the Bureau of Public Systems Communications and helped formulate the terms of 'computer investigation.' He convinced Strasburg that the emerging market for online information services, revealed by this investigation, needed companies like MCI with new offerings; that AT&T itself would never be able to realize the full potential of the emerging information society. Later, Strasburg recalled that 'the negative consequences of the computer investigation confirmed MCI's claims that its entry into the specialized long-distance communication market would serve the interests of society.'
With the blessing of the Bureau of Public Systems Communications, MCI easily passed the preliminary hearings and then squeezed through with this approval at the full commission hearing in 1968, where the votes were divided along party lines, 4 to 3. All Democrats (including Cox and Johnson) voted in favor of approving MCI's license. The Republicans, led by Chairman Rosel Hyde, voted against.
The Republicans did not want to disrupt the well-balanced regulatory system with a scheme devised by individuals with questionable technical and entrepreneurial credentials. They pointed out that this decision, although seemingly limited to one company and one route, would have significant consequences that would transform the telecommunications market. Strasbourg and others who supported the project viewed the MCI case as an experiment that would test whether a business could successfully compete with AT&T in the private communications services market. However, in reality, it set a precedent, and after its approval, dozens of other companies would immediately rush to submit their own applications. The Republicans believed that reversing the experiment would be impossible. Furthermore, MCI and similar new entrants were unlikely to survive with a small collection of scattered and unrelated lines, such as the route from Chicago to St. Louis. They would require connections with AT&T and compel the FCC to make new changes to the regulatory framework.
And this collapse, predicted by Hyde and other Republicans, indeed occurred ā within two years of the decision on MCI, thirty-one other companies submitted a total of 1,713 applications for microwave lines totaling 65,000 kilometers. The FCC could not hold separate hearings for each application, so the commission grouped them all together as a single list of cases for hearing concerning companies providing specialized communication services. In May 1971, when Hyde left the commission, a unanimous decision was made to fully open the market to competition.
Meanwhile, MCI, still struggling with financial issues, found a new wealthy investor to improve its situation ā William C. McGowan. McGowan was practically the opposite of Goken, a seasoned and authoritative businessman with a Harvard degree who had built successful consulting and venture capital businesses in New York. Over several years, McGowan essentially took control of MCI and ousted Goken from the company. He envisioned the future of the company very differently. He had no plans to mess around with river shipping or flower delivery, languishing on the periphery of the telecommunications market where AT&T wouldn't grant him any attention. He wanted to go straight into the heart of the regulated network and compete directly in all forms of long-distance communication.
Bill McGowan in his prime
The stakes and consequences of the initial experiment with MCI continued to escalate. The FCC, aiming to ensure MCI's success, now found itself deeply involved in this business, as McGowan's demands kept growing. He claimed (as expected) that MCI would not survive as a small collection of unconnected routes, demanding a large number of communication rights on the AT&T network; for example, the right to connect to the so-called 'external switch', which would allow the MCI network to directly connect to the local AT&T switches where MCI's lines ended.
AT&T's response to the new specialized telecommunications operators did not help the company. In response to the invasion of competitors, it implemented reduced rates on routes with high traffic, abandoning the average prices set by regulators. If it believed this would satisfy the FCC by demonstrating a competitive spirit, it misunderstood the FCC's objectives. Strasbourg and his allies were not trying to help consumers by lowering communication prices ā at least not directly. They aimed to assist new companies in entering the market by diminishing AT&T's power. Therefore, AT&T's new competitive rates were perceived by the FCC and other observers, particularly from the Department of Justice, as retaliatory and aimed at competitors, as they threatened the financial stability of new market entrants like MCI.
The new aggressive president of AT&T, John DeBats, also did not improve his position, responding with aggressive rhetoric to the incursion of competitors. In a speech given in 1973 before the national association of regulatory commission members, he criticized the FCC, calling for a "moratorium on further economic experiments." This uncompromising stance infuriated Strasbourg and further convinced him of the need to rein in AT&T. The FCC readily ordered that MCI be granted the network access it requested in 1974.
The escalation of the conflict with McGowan reached its peak with the launch of Execunet the following year. This service was marketed as a new type of paid service for sharing private lines among small businesses, but gradually both the FCC and AT&T realized that Execunet was actually one of the competing long-distance telephone networks. It allowed a customer in one city to pick up the phone, dial a number, and reach any customer in another city (taking advantage of an "external switch," with the fee for the service depending on the distance and duration of the call. And no dedicated lines from point A to point B.
Execunet connected MCI customers with any AT&T user in any large city.
And then, at last, the FCC dug in its heels. It intended to use MCI as a club against AT&T's total dominance, but this blow was too strong. However, by this time, AT&T had other allies in the courts and the Department of Justice, and it continued to develop this case. Once the dissolution of AT&T's monopoly had begun, it was already difficult to stop.
Problems on the Periphery: Carterfone
In the course of developing the MCI case, another threat appeared on the horizon. The similarities between the stories of Carterfone and MCI are striking. In both cases, an aspiring entrepreneurāwhose business instinct was less developed than his cleverness and perseveranceāsuccessfully stood up against the largest corporation in the U.S. However, both of these individualsāJack Goken and our new hero, Tom Carterāwere soon ousted from their own companies by more cunning entrepreneurs, and faded into oblivion. Both started as heroes but ended up as pawns.
Tom Carter was born in 1924 in Mabank, Texas. He also became interested in radio in his youth, joined the army at 19, and, like Goken, became a radio technician. In the last years of World War II, he serviced a broadcasting station in Juneau, providing news and entertainment to troops at remote outposts throughout Alaska. After the war, he returned to Texas and founded Carter Electronics Corporation in Dallas, which serviced a two-way radio station that he rented out to other companiesāflorists with delivery vans and oil drillers with operators on rigs. Carter constantly received requests from clients to find a way to directly connect their mobile radios to the telephone network, so they wouldn't have to relay messages to people in town through the base station operator.
Carter designed a device for this purpose, which he named the Carterfone. It consisted of a black plastic diamond-shaped casing with a complex lid into which a telephone handset with a microphone and speaker was inserted. Both parts were connected to the receiving/transmitting station. To link someone in the field with someone on the phone, the base station operator had to make a manual call, but then he could put the handset on a stand, allowing both sides to talk without interruption. The radio's transmit/receive mode switch was voice-activated, sending speech when the person on the phone spoke, and then receiving it when the person in the field spoke. He began selling this device in 1959, and all manufacturing took place in a small brick building in Dallas, where retirees assembled Carterfone on simple wooden tables.
When the handset was placed on the stand, it activated the device via a button on top.
Carter's invention was not original. Bell had its own radio/telephone service, which the company first offered to customers in St. Louis in 1946. Twenty years later, it served 30,000 customers. However, there was plenty of room for competitors like CarterāAT&T offered this service to roughly a third of the U.S., and waiting for it could take many years. Moreover, Carter provided much cheaper rates if (a significant drawback) the buyer already had access to the radio tower: $248 one-time compared to $50-$60 per month for a mobile phone from Bell.
From AT&T's perspective, Carterfone was an "unauthorized device," a product developed by third parties that connected to the company's network, which it prohibited. In an early case involving Hush-a-Phone, courts forced AT&T to allow the use of simple mechanical devices; however, Carterfone did not fall into this category because it connected to the network acousticallyāmeaning it sent and received sound over the phone line. Due to the small scale of Carter's operation, AT&T noticed it two years later, after which it began warning Carterfone sellers that their customers risked being disconnected from the phoneāsimilar threats that had been made to Hush-a-Phone ten years earlier. With such tactics, AT&T pushed Carter out of one market after another. Unable to reach an agreement with competitors, Carter decided to sue them in 1965.
Major firms in Dallas were unwilling to take the case, so Carter ended up in a small office of Walter Steele, where only three employees worked. One of them, Ray Bezin, later described the portrait of the person who arrived at their office:
He considered himself charming, which was evident from how he styled his white hair to the side, the whiteness enhanced by hair dye; however, his heavy fabric suit and cowboy boots created a different image. He was self-taught and easily handled any electronics, radio, or telephone equipment. As a businessman, he was rather lacking. Strict with family and a stern wife. However, he tried to appear as a cool and successful entrepreneur even though, in reality, he was a bankrupt.
Preliminary hearings of the case at the FCC took place in 1967. AT&T, along with its allies (mostly other small telephone companies and state regulatory agencies), argued that Carterfone was not just a device but equipment for cross-connection that illegally linked AT&T's networks to local mobile radio networks. This violated the company's responsibility for communication within the system.
However, as was the case with MCI, the Bureau of Public Systems Communication decided in favor of Carter. Once again, belief in the impending era of interconnected and diverse digital information services played a role. How could a single monopolistic service provider foresee and meet all market needs for terminals and other equipment for every possible application?
The commission's final decision, issued on June 26, 1968, sided with the Bureau, ruling that AT&T's policy regarding third-party equipment was not only illegal but had been so since its inception, allowing Carter to seek compensation. According to the FCC, AT&T failed to properly differentiate between potentially harmful devices (which could, for example, send erroneous control signals over the network) and harmless devices like the Carterfone. AT&T was required to immediately allow the use of the Carterfone and develop technical standards for safe communication with third-party devices.
Shortly after this decision, Carter sought to capitalize on his success by starting a business with two partners, one of whom was his attorney, forming the Carterfone Corporation. By ousting Carter from the company, his partners made millions selling to the British giant Cable and Wireless. Carterfone disappeared; the company continued to sell teletypes and computer terminals.
Carter's story had an intriguing epilogue. In 1974, he went into business with Jack Goken, founding the flower delivery service Florist Transworld Delivery. This was the marketātelecommunications to support small businessesāthat both entrepreneurs initially wanted to work in. However, Carter soon left the company and moved back to his hometown, southeast of Dallas, where he managed a small radio telephone company, Carter Mobilefone, in the mid-1980s. He continued working there until his death in 1991.
The Breakup
The FCC, like Carter and Goken, gave rise to forces that it could neither control nor fully understand. By the mid-1970s, Congress, the Department of Justice, and the courts had removed the FCC from disputes regarding the future of AT&T. The climax of the great breakup of AT&T, of course, occurred in 1984, at the time of its divestiture. However, we have jumped ahead in our story.
The world of computer networks did not fully feel the repercussions of MCI's victory and the emergence of competition in long-distance communication until the 1990s when private information networks began to develop. The solutions related to terminal equipment advanced faster. Now anyone could produce acoustic modems and connect them to Bell's system, citing the Carterfone case, resulting in them becoming cheaper and more widespread.
However, the most significant consequences of the breakup of AT&T relate to a broader picture rather than individual moments of specific decisions. Many who predicted the information age in its early stages envisioned a single American network of computer communications under the aegis of AT&T, or perhaps the federal government itself. Instead, computer networks developed in parts, fragmentarily, providing connections only within themselves. No single corporation controlled the various subnetworks, as had been the case with Bell and local companies; they related to each other not as boss and subordinate but as equals.
However, here we are getting ahead of ourselves. To continue our story, we need to go back to the mid-1960s, during the emergence 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 H. K. Vietor, Contrived Competition: Regulation and Deregulation in America (1994)
Source: habr.com
