Chapter 1
Data Communications: Emergence 1956-1968
Modems and Multiplexers
1.10 Carterfone, Computer Inquiry I and Deregulation 1967-1968
In April 1967 the Carterfone hearings began. Since Carter
was attacking the tariff prohibiting foreign attachments, the hearing
was treated as a Complaint Proceeding with the involved parties arguing
their case before an administrative law judge or Hearing Examiner, in
this case, Chester F. Naumowicz, Jr.
Bernard Strassburg, Chairman of the Common Carrier Bureau
(CCB), now convinced of the importance of computers and the need to encourage
innovation and competition in telephone equipment, directed the CCB staff
to argue before the Hearing Examiner that:
"there was sufficient evidence to demonstrate
that the tariff was inherently unsound and should be declared unlawful,
as unjust and unreasonable, and therefore unlawful."
The CCB then recommend the tariff be replaced with:
"tariff provision that 'clearly and affirmatively states...that customer-provided
equipment, apparatus, circuits, or devices may be attached or connected
to the telephones furnished by the telephone company in the message
toll telephone service for any purpose that is privately beneficial
to the customer and not publicly detrimental."
The hearings were over in just seven days. The parties
now had to wait for Examiner Naumowicz’s decision.
Although the AT&T lawyers had argued in the Carterfone
case as they had in the past, this philosophy no longer went unquestioned
within AT&T. The change began when H. I. Romnes became Chairman and
Chief Executive Officer in early 1967. Romnes did not fully agree with
AT&T’s long-standing policy opposing foreign attachments and stated
publicly shortly after taking office that AT&T’s responsibility for
the network could be maintained with the use of “suitable interfaces
or buffer devices to keep the attached equipment from affecting other
users of the network.” He also assembled a high-level Tariff
Review Committee to conceive alternative interconnection tariffs
that would protect the network.
In August 1967, Examiner Naumowicz issued his initial
decision. Ignoring the CCB’s argument for a broad policy change, he ruled
narrowly that harm from use of the Carterfone had not been proven: ”We
here consider on a specific device and the evidence as to what, if any,
effect it will have on the system.”
By that fall, responses to the FCC’s Notice of Inquiry began
arriving. A sensitive nerve had been struck. An already burdened CCB
saw thousands of pages of input and exhibits piling up. As CCB staffers
began leafing through the materials, two subjects kept coming up again
and again: the prohibition on foreign attachments was unduly restrictive,
and telephone rate structures were designed for voice, not data, communications.
Equally clear, the CCB had neither the resources nor expertise to make
sense of the responses from fifty-five corporations. In early 1968, CCB
contracted with the Stanford Research Institute, International (SRI),
a think tank and consulting firm on the West Coast, to do the analysis.
The SRI report, however, not expected until March 1969, would be upstaged
by intervening events.
On June 26, 1968, the FCC, in a surprising and unanimous
decision, accepted the CCB’s recommendation and ruled that the tariff
restrictions in Carterfone case:
"are, and have since their inception been,
unreasonable, unlawful, and unreasonably discriminatory under the Communications
Act of 1934."
The Commission then concluded:
".......The carriers may submit new tariffs
which will protect the telephone system against harmful devices, and
they may specify technical standards if they wish."
AT&T responded:
"We have had the whole subject of connection
of customer-owned devices in our network under intensive review for some
time. Our intent is to be as responsive as possible to evolving communication
needs through making our network available to expanding uses. At the
same time, safeguards are essential to assure that other users of the
network are not adversely affected."[90]
In August, Datamation, a leading trade journal,
reported the FCC decision as:
FCC CARTERFONE DECISION UNSETTLES CARRIERS, ENCOURAGES
MODEM MAKERS. - Datamation August 1968
"The FCC dropped one shoe June 26 when it decided
that Ma Bell's foreign attachment restrictions are unnecessary, and
unfair to users; last month, computer users and foreign attachment
manufacturers were waiting for the other shoe to fall.
Experts familiar with the arcane world of communications
utility regulation agreed that the next move was up to the carriers.
As one lawyer put it: 'the commission has blasted a gapping hole in
the tariff wall, leaving the carriers dangerously exposed. At this
moment, any user could hang any foreign attachment on his telephone
line and not worry too much about getting arrested.
He added, however, that the user would be hurting
himself as well as the telephone company. 'The carriers lost largely
because they couldn't prove that foreign attachments were harmful.
Almost certainly, they will now be looking doubly hard for such evidence
in the hope of persuading a judge to overturn the commission's ruling.
The ruling, if it stands, breaks the market for modems
wide open, and provides a major opportunity for independent manufacturers
in areas like touch-tone keyboards and picture-phone type units. There
are no authoritative figures on the number of Western Electric's modems
in the dial-up network, but one manufacturer says that's where 90%
of the business is. Among data set suppliers are General Electric,
which announced an extensive line late last year, Automatic Electric,
Milgo, Rixon, Collins Radio, and Ultronic."
In a press conference held in August, AT&T Board
Chairman Romnes and President Ben Gilmer proposed a "newd ata access
arrangement," under which independently manufactured terminals could
be coupled electrically, inductively, or acoustically to the public telephone
system through a "protective device” and a “network controller.”
The data communications user would pay to have the protective device
installed, and a pay monthly rent.
In September 1968, the FCC asserted its decision: devices
that were privately beneficial without
being publicly detrimental could be connected to the interstate
telephone system.
That Fall, Strassburg wrote
"
A decision by the Commission to relax the restrictions on the customer's
use of foreign attachments would expand the opportunity for wider participation
in not only the computer equipment market, but in the communications
equipment market generally."
In November 1968, AT&T filed new tariffs that far
exceeded the expectations of the FCC. Customers would be allowed to directly
connect terminal equipment to the public switched network provided they
used an AT&T supplied protective connecting arrangement (PCA). (See Exhibit 1.4 - AT&T Carterfone
Tariff.) Strassburg later testified: "AT&T went well
beyond the requirements of Carterfone." The FCC ruled the new tariffs would
become effective January 1, 1969.
Exhibit
1.4 - AT&T Carterfone Tariff
