Chapter 3
Data Communications: Market Competition 1969-1972
Modems and Multiplexers
3.3 AT&T and Computer Inquiry I 1969
The Carterfone decision of the Federal Communications
Commission (FCC) in 1968 prompted, or likely forced, AT&T to change
its prohibition on foreign attachments, and file new tariffs that became
effective January 1, 1969. While these new “protective connecting arrangements”
(PCAs) tariffs opened the door for entrepreneurs eyeing the opportunity
to sell dial-up modems against AT&T, the struggle to obtain unobstructed
market competition would take years of effort. At the time, however, the
founders of Vadic, UDS and dozens of other start-ups saw only the opening.
The PCA tariffs for modems were called Data Access Arrangements,
or DAAs. DAAs had two primary functions: first to assure the telephone
network integrity by limiting the signal power of attached modems to a
level that would not exceed the power-level of the network, and second
to maintain exclusive Bell control of all network signaling functions. Installable only by Bell personnel for a modest amount,
and a continuing $2 to $4 per month fee, DAAs were a single circuit board
that came with a separate telephone set having a voice/data switch. All
network connections had to be made manually, and there were no provisions
for either automatic dialing or unattended answering; even though Bell
modems possessed these functions. So while the DAAs made it possible
for independent manufacturers’ to connect their modems to the switched
telephone network, they severely constrained their functionality and
introduced costs over those of Bell modems.
Protests sounded immediately. Why should modems of independent
manufacturers be burdened with extra costs and reduced functionality? Bell
was up to its old tricks again. Only now there were competitors not willing
to let Bell get away with it. What seemed particularly preposterous to
the independent manufacturers selling modems to telephone companies was
that their modems would now have to be re-engineered to work with DAAs.
Where was the logic that made it possible for independent manufacturers
to sell a modem to a telephone company, which could sell it to a customer,
while that very same modem manufacturer could not sell the same modem to
that same customer? In response, AT&T claimed: “If
we provide it, we maintain it and we know it’s going to work right. If
the customer provides it, he might not maintain it, and a short might cause
a voltage surge on the line which might kill somebody.”
As sympathetic as the Common Carrier Bureau (CCB) staff
was, the new AT&T tariffs were already more liberal than anyone would
have thought possible only months earlier, and too much was at risk to
proceed ‘willy-nilly.’ Bernard Strassburg, Chairman of the CCB, remembers
telling those complaining:
"Well,
you may be right, but this is where it is right now, and until we find
a better alternative, this is where it's going to stay, because we're not
going to open up the network to indiscriminate connections for fear that
this would degrade the performance of the network.”
Standing
arm-in-arm with AT&T might have been past
practice, but now the CCB wanted an independent assessment of alternatives
to PCAs, freeing them from their dependence on AT&T’s recommendations.
Seeking the most impartial, technically competent organization, the FCC
contracted with the National Academy of Sciences (NAS) to study the tariffs
and to recommend alternatives. A report was expected in about a year, with
hearings scheduled for September.
During this same period, in February 1969, the FCC received
the Stanford Research Institute report commissioned to analyze the responses
to the Notice of Inquiry. The report was too technical and detailed to
be understood by anyone at the FCC or CCB. So Strassburg once again sought
out Paul Baran, who had since left Rand and started the Institute for
the Future (IF). Baran agreed to interpret the report.
Shortly after taking the assignment, AT&T offered
Baran’s IF a lucrative, and interesting, consulting contract. Needing the
work, Baran notified the FCC of his potential conflict of interest and
ceased being a consultant. Baran remembers:
"I think it was
very useful because they were able to get some inputs in how they are really
perceived.....and that their real problem is going to come from the data
communication entrepreneurs, because now, for the first time, they had
a constituency who might perceived it worth their while going after AT&T.
The old constituency in the past was never big enough, or had enough interest,
to attend hearings or doing anything, but now you have these new entrepreneurs
coming along and that you're probably better off giving in to them and
not threaten the rest of your system."
In May, the FCC issued the Report and Further Notice
of Inquiry to solicit opinions on the SRI study. Respondents' comments
would add little to the FCC's understanding. The CCB now had the task of deciding what actions
they should, and would, take as a result of collecting the comments and
materials through its Inquiry.
In early 1969, Codex used money from its public offering
to fund a promotions campaign for its AE-96 modem. Mindful that if they
could sell 50 modems in the coming year that they would equal all of last
year’s sales, they were both stunned and ecstatic when they received 8,000
inquiries. It seemed as though all they had to do was scale up manufacturing
and begin filling orders. That was until they had experience with customers
using their modem. The AE-96 would not stay working. Carr remembers:
"We used to joke that
we had made something less than 100 AE-96's and shipped several hundred
of them, because they kept coming back and going out and coming back and
going out again."
With each passing month, Carr increasingly bore the
brunt of Jim Cryer’s frustrations. Cryer, Carr’s boss and President, read
the overwhelming interest in the AE-96 as customers ready to buy and didn’t
want to hear Carr’s excuse of 'but it doesn't work' for not meeting sales
objectives. Since it had been Cryer’s decision, or mistake as was becoming
more apparent, to bet the future of Codex on the AE-96, he leaned on his
management to get results, at least as much as his emotions would let him.
Being an engineer, this was difficult. And when results were not forthcoming,
he felt betrayed and ever more isolated as he watched the ramped up operating
expenses depleting the dwindling cash remaining from the Initial Public
Offering. Crisis invaded every conversation and decision, suffocating any
joy from their work.
Solving the cash crisis meant solving the AE-96 problem.
No one understood the problem, much less the solution. Holsinger was stumped.
Kohlenberg, bereft of ideas, turned in frustration to G. Dave Forney, who
worked exclusively on R&D development contracts, and asked him to drop
what he was doing to help. Forney, who had joined Codex in 1965 at the
suggestion of Gallager, earned his Ph.D. from MIT in information theory
and had virtually no modem experience.
A frustrated Holsinger identified the problem of the
AE-96 as “phase jitter” -- a problem he thought he had solved at DRC. Phase
jitter, while endemic to telephone lines, remained largely unrecognized
for it had no affect on voice communications or the slower speed modems
of the day. Since telephone lines were not controlled for phase,
every circuit could differ as to being either in phase or not. Phase
fluctuations -- hence jitter -- caused modems that seemed equalized to
the circuit’s characteristics to lose equalization. Since the AE-96s
could neither detect nor correct phase problems, if phase jitter occurred,
they ceased working.
Forney quickly, and cleverly, conceived of how to detect
and correct phase jitter errors enough of the time to stabilize the performance
of the AE-96. With Forney’s innovation, AE-96’s once equalized to a circuit
could adapt to subsequent phase jitter. The required electronics forced
the addition of another printed circuit board that had to be hung under
the lid of the modem for lack of space. Named the Threshold Decision Computer
(TDC) for marketing reasons, it pulled out as if from a drawer and had
a red light that flashed every time it corrected an error. Carr recalls:
"Well, it worked. In fact, I remember going
to Air France in Paris, which was the first transatlantic installation
of 9600 bit per second traffic, and they used to run it with the drawer
out all the time because it somehow gave them comfort to see this red light
blinking, and I'd stand there watching the red light blinking and I said
to myself -- this was a machine that I had now observed going out and coming
back because the equalizer wasn't converging, and they were telling me
how happy they were with it, and how wonderful it was, and how much money
it was saving them, and I was standing there, shaking my head and looking
at this light blinking on and off, and saying: "I really don't believe
I'm here." You talk about pioneering days, it was really pretty bizarre."
John Pugh, Director of Product Marketing since January
1969 when recruited from 3C by his former and now current boss, Carr, wanted
to include the TDC with every AE-96 without charge, arguing that the modem
did not work without it. But Cryer, facing a survival-threatening cash
crisis, insisted it be sold as an extra. So the TDC, which made for a stable
and working AE-96, sold for $2,000 and shipped with every modem.
Next, working AE-96s made obvious the problem that commercial
customers did not have peripherals that communicated at 9600 bps. Recalling
their days at 3C when they sold minicomputers to multiplex many incoming
communication lines to host computers, Carr and Pugh turned to the idea
of using a multiplexer. If Codex had a small, inexpensive multiplexer to
multiplex and demultiplex eight 1200 bps lines, or four 2400 bps lines,
onto one 9600 bps line, then the AE-96 would provide the transmission speeds
customers wanted. As if by magic, a multiplexer of eight or four lines
solved another problem thought to stand in the way of success. The added
expense of the multiplexers, as well as the premium paid for the AE-96s,
were recovered easily through reduced telephone line costs, for in the
case of eight-line multiplexers and AE-96s, only one telephone line would
be needed, not eight.
Carr and Pugh contacted ADS seeking to buy multiplexers
they could resell, thus becoming an OEM to ADS
– an original equipment manufacturer (OEM) sells product that others
resell, either with or without attribution. ADS had absolutely no interest
in a OEM arrangement, strained as they were to engineer all the products
in their development queue. Carr and Pugh then began arguing their case
to Cryer and the engineers. Relieved to have at least reason for optimism,
Cryer authorized an internal development effort to develop a multiplexer.
(See Appendix 3. Codex Marketing literature.)
Having persuaded Cryer of the logic of multiplexers,
Carr next pressed his case for a 4800 bps modem. Only this time his reasoning
fell on deaf ears, for building a product already being sold did not conform
to the Codex credo of creating technically challenging products. But Carr
refused to give up; every day his salesmen complained of having sold customers
on upgrading to higher-speed modems, only to have them buy perceived less
risky 4800 bps modems, often from Milgo, a competitor of growing concern
to Carr. Certain he was right, Carr pressed Cryer at every opportunity: "A,
it will work. B, I can sell it, and it would be nice if we had some money
coming into the place!" Yet as hard as he lobbied and fought
for a 4800, Cryer remained unyielding.
By November, Holsinger no longer could repress his inner
calling to start his own company, and he resigned from Codex. The man who
first proved a 9600 bps modem possible had seen his knowledge and expertise
institutionalized as Codex’s growing engineering department. Lacking challenges
and sensing a boring future engineering slower speed modems, as being argued
for by Carr and Pugh, Holsinger concluded he could do the same in a company
of his own. In 1970, using the profits from the sale of his Codex stock,
Holsinger, the entrepreneur, joined a long list of start-ups founding Intertel.
