Entrepreneurial Capitalism and Innovation:
A History of Computer Communications 1968-1988
By James Pelkey

Chapter 1
Data Communications: Emergence 1956-1968
Modems and Multiplexers

1.2   Carterfone, ATT and the FCC 1948- 1967

Few believed Thomas Carter had a chance. An easy-going Texan, inventor and modest entrepreneur, Carter had been hassled by AT&T ever since he began selling the Carterfone in 1959. Even more seriously, AT&T threatened to suspend telephone service on lines using Carterfones; all this fuss over a modest device making voice connections between mobile radios and the telephone network possible. [14] (See Exhibit 1.1 - Carterfone) So that people on oilrigs or in remote locations might talk to their superiors or family; yet a product that AT&T did not sell, nor would they tariff – permit to be attached to the public telephone switched network (PTSN). [15]  

Exhibit 1.1 - Carterfone

One of the many advantages AT&T enjoyed, as a regulated monopoly, was the right to prevent products made or sold by others from being attached to “their” telephone network. Non-AT&T products were considered “foreign attachments.” This is important to the history of modems, for while AT&T did allow lease-line modems obtained from competition to be attached to lines they leased, AT&T would not let competitor dial-up modems, modems that by definition were attached to the PTSN, be used by their customers; virtually any person or organization using a telephone. This posed a very big problem for companies like Carter Electronics wanting to offer customers solutions that necessitated use of the PTSN.

Since AT&T would neither agree to re-sell the Carterfone or tariff it, Carterfone became a foreign attachment no customers could use legally. Carter’s lawyers advised him he had no recourse against the regulated AT&T but to file an anti-trust lawsuit. So on November 29, 1965, he did: Thomas F. Carter and Carter Electronics Corporation v. American Telephone & Telegraph Company et al.

To understand why no one, including his friends, thought Carter, had a chance requires a skip back in time to the Hush-A-Phone, a foreign attachment seemingly as innocuous as a Carterfone.

On December 22, 1948, the Hush-A-Phone Corporation (HAPC) filed an antitrust suit against AT&T; charging AT&T prohibited telephone subscribers from using its product: the Hush-A-Phone. Available since 1929, the Hush-A-Phone was simply a plastic cup that fit over the telephone microphone to increase the privacy of telephone conversations and to reduce extraneous noise. As harmless as it would seem, AT&T and the Bell operating companies viewed the Foreign Attachment Tariff Restrictions as banning not only electrical interconnections, but attachments of any kind. [16] In place since 1913, the Tariff read:

“No equipment, apparatus, circuit or device not furnished by the Telephone Company shall be attached to or connected with the facilities furnished by the Telephone Company, whether physically, by induction or otherwise, except as provided in this tariff.” [17]

The Federal Communications Commission (FCC), the agency that regulates AT&T, held the HAPC hearings in 1950. AT&T argued, among other things, that the Hush-A-Phone distorted speech, and any one in this country might be called by, or might call, someone using a Hush-A-Phone and, consequently, they are going to get a lousy telephone call. That's harm. They're not getting what they paid for. Six years later, the FCC ruled in favor of AT&T, accepting the logic of inducing a bad phone call and displaying an unwillingness to challenge the prohibition on foreign attachments. HAPC then took the unusual step for the day and appealed the decision to the U.S. Court of Appeals. [18]

On December 21, 1955, the Court ruled in favor of HAPC. Reasoning that the same effect of the Hush-A-Phone plastic cup could be created by cupping one’s hands around the microphone, Judge David Bazelon wrote the tariff was:

“unwarranted interference with the telephone subscriber’s right reasonably to use his telephone in ways which are privately beneficial without being publicly detrimental. Prescribing what changes should be made in the tariffs to render them “just, fair, and reasonable” and determining what orders may be required to prohibit violation of subscribers’ rights thereunder are functions entrusted to the Commission.” [19]

Neither the FCC nor AT&T appealed to the U. S. Supreme Court, treating the Appeal Court’s decision as essentially “no big deal.” [20] AT&T filed a new tariff that permitted foreign attachments as long as they did not “endanger telephone employees, property or service.” [21] They also tariffed the Hush-A-Phone. [22] Only the world did not change for other competitors wanting to sell products, such as dial-up modems, to customers connected to the PTSN. Those manufacturers had to get AT&T to either resell their product or agree to tariff it because it did not endanger. If AT&T wouldn’t, that competitor was compelled to file an anti-trust lawsuit.

A year later, an even more important signal that AT&T could ban foreign attachments played out. The Eisenhower Administration ended an antitrust suit that had been filed against AT&T in 1949 by the Truman Administration. That suit had attempted to divest AT&T of Western Electric (WE), its manufacturing and product operations. The intent had been to end AT&T’s monopoly over telephone equipment. In 1956, AT&T’s rights were affirmed and the antitrust suit dropped. Between the HAPC case and the termination of the antitrust suit, AT&T, with the help of the FCC, government and courts, had steeled itself against change and innovation.

Carter clearly faced an uphill battle. One quickly put on hold when the United States District Court, Northern District of Texas, referred the case to the FCC under the doctrine of primary jurisdiction. The Court wanted guidance as to the legality of the tariff permitting telephone companies to suspend, or terminate, service if foreign attachments were connected to telephone company facilities. [23] At the FCC, the Carterfone case was referred to the Common Carrier Bureau (CCB), the organizational arm responsible for AT&T tariffing. There it joined a long list of other important issues. [24] Hearings were scheduled for the following year, in April 1967. [25] The glacial movement of law was about to encounter the suddenness of technological change.

[14] Stone, pp146-152

[15] The proof of the value of his product was that by 1966, he had sold nearly 3,500 Carterfones. See Slippery Slope

[16] Slomin

[17] Tariff FCC No. 132

[18] An expert witness of HAPC was Dr. J.C.R. Licklider, a person who will be prominent in this history.

[19] HAPC Case

[20] Strassburg, Slippery Slope p. 37

[21] TBD

[22] Hush-A-Phone Corp. v. American Tel. & Tel. Co. No. 9189, FTC, Feb. 6, 1957

[23] It was referred to the FCC because there was no Texas PUC. Given the nature of the case, it is certain to have found its way to the FCC, although under different conditions.

[24] The CCB already had an extremely busy agenda, including: the first ever general rate inquiry of AT&T, begun in 1965; the Telpak tariff controversy, initiated in 1961 (this issue alone will take twenty years to resolve); a request by Microwave Communications, Inc. (MCI) for a license to offer common carrier services between St. Louis and Chicago in competition with AT&T, filed in 1963; the just launched domestic satellite inquiry.

[25] See a Slippery Slope for a much more detailed discussion of these issues and more.