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

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

This history is organized by three co-evolving market sectors and also standards making.
An overview of the schema is presented in the Introduction.

Ch. 1: Emergence
Ch. 3: Competition
Ch. 5: Market Order
Ch. 11: Adaptation

Ch. 2: Vision
Ch. 4: Arpanet
Ch. 6: Diffusion
Ch. 7: Emergence
Ch 8: Completion
Ch. 10: Market Order

Ch. 9: Creation

Ch. 12: Emergence



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. [11] 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.” [12]

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. [13] 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. [14] 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). [15] 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. [16] 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. [17] 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. [18] 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.

[11]Data Pro 1970, Computer Conversions Inc., All About Modems, 70F-300-01b

[12] Thomas Thompson Interview: “This is the type of horror stories they always raised.  So that was what we were stuck with. We were stuck with the DAA."

[13] Henck, p. 107 : “NAS had its Computer Sciences and Engineering Board set up a fourteen-member panel to analyze the considerable amount of written material submitted to the FCC. The fact that panel members were not 'pure' scientists in the sense that they drew paychecks immediately caused criticism. It was a symbol of changing attitudes that most objections were raised because two of the fourteen panelists were officials of the Bell System. The others were employed by nonprofit and/or government organizations, non-Bell manufacturers, independent telephone companies, or large users of communication services."

[14]Stanford Research Institute, Policies and Issues Presented By the Interdependence of Computer and Communications Services (Report Nos. 7379B0. 7 vols.

[15] Romnes, Chairman of AT&T, was a member of IF’s Board of Trustees.

[16] Baran interview: "Here I was working for the FCC and along came this contract from AT&T, for the Institute for the Future, and we needed that work, so I told my friends at FCC that I would no longer be able to be a consultant to them, and they said: "Well, we understand, but why don't you become a general consultant to us on research and development, because we're not doing a very good job with research and development at the FCC and we could use some help, and that should be clean and shouldn't give you any problem with conflict of interest." So I said, "OK." And I said: "First of all, how much are we paying, what would have been the Chief Engineer." They said $25,000. And I said: "Well, that's not enough money to get the sort of person you really need for that top position." They said: "We know, but the Congress dictated that. It's in the legislation, and that was done purposely, because about 25% of the congressmen had some interest or other in a broadcast station, or TV, a very high correlation. It was very important to their political position. So, there was a nice strong political constituency that wanted to see the FCC weak for some time, and so that was a constraint. So I said: "Well, no, until you get this problem fixed, there's hardly very much you can do," cause the people they had were just, they were technicians. So I didn't do a lot more consulting after that one."

[17]Regulatory and Economic Issues in Computer Communications, "IEEE vol. 60, pp 1256, November 1972.

[18] To transmit data at 9600 bps, data had to be encoded not only using the amplitude and frequency of the analog signal but also its phase.