Chapter 3
Data Communications: Market Competition 1969-1972
Modems and Multiplexers
3.8 AT&T and Computer Inquiry I 1970-1971
After the FCC had issued the Report and Further Notice
of Inquiry to solicit opinions on the SRI study and while waiting
for the National Academy of Sciences (NAS) report regarding the DAAs,
Strassburg remembers his perspective changing:
"We, I at least, felt there was a compelling
reason to be concerned about certain trends that were out there, that Bell
couldn't be all things to all people for all times, that the environment
had changed, or was changing, and that innovation and creativity didn't
all start within the walls of Bell Labs, and all the wisdom wasn't necessarily
in Bell Labs. We were also concerned -- I was concerned that AT&T was
beginning to grow big, in terms of not only revenue -- they had always
been dominant as a corporate power -- but at this time it was getting awfully
big, so was there room for other participants in this marketplace called
communications?"
On April 3, 1970, the FCC issued its Tentative Decision
and Notice of Proposed Rulemaking, 28 F.C.C. 2d 291 (1970) or the "Tentative
Decision." The entire proceedings become popularly known as the "Computer
Inquiry." Public argument on the Tentative Decision was scheduled
for September 3, 1970, and March 18, 1971.
The Tentative Decision addressed four key issues:
Data Processing Computer Services
Everyone agreed that data processing did not exhibit
economies of scale as did natural monopolies such as telephone exchange
services. Therefore, the FCC concluded:
"...in view of all the foregoing evidence
of an effective competitive situation, we see no need to assert regulatory
authority over data processing facilities in order to link the terminals
of subscribers to centralized computers." The Commission retained the prerogative to "re-examine
the policies set forth herein...if there should develop significant changes
in the structure of the data processing industry."
Common-Carrier Provision of Data-Processing Services
The issue of common carriers offering data processing
services was a more complicated issue and one that remained unresolved
until the Final Report. The problem arose because data processing had been
declared an unregulated activity. How could economically motivated cross-subsidies
within common carriers from regulated to unregulated businesses be avoided?
Store-and-Forward Message-Switching Services
The FCC concluded that message-switching services are "essentially
communications" and "warrant
appropriate regulatory treatment as common carrier services under the
Act."
Hybrid Services
Hybrid services were those having both data processing
and message-switching components. The Commission, using a
"primary business test," declared that:
"Where message switching
is offered as an integral part of, and as an incidental feature of, a package
offering that is primarily data processing, there will be total regulatory
forbearance with respect to the entire service whether offered by a common
carrier or non-common carrier, except to the extent that common carriers
offering such a hybrid service will do so through [separate] affiliates.....If,
on the other hand, the package offering is oriented essentially to satisfy
the communications or message switching requirements of the subscriber,
and the data processing feature or function is an integral part of, and
incidental to message switching, the entire service will be treated as
a communications service for hire, whether offered by a common carrier
or a non-common carrier and will be subject to regulation under the Communications
Act."
In September, the FCC heard oral arguments on the Tentative
Decision from some twenty interested parties.
In June, 1970, the FCC received
the NAS report commissioned in response to the uproar by the independent
modem manufacturers over the tariffs filed by AT&T requiring the use
of PCAs (DAAs). (See Exhibit 3.1 - NAS Recommendation.)
The report concluded:
- Uncontrolled interconnection could cause
harm to personnel, network performance, and property.
- The use of protective couplers and signal-level
criteria was an acceptable way of assuring network protection; however,
the added equipment increased overall costs.
- A program of standards and enforced certification
of equipment would be another acceptable way of assuring network protection.
In a subsequent study commissioned by the FCC, Dittberner
Associates, a Washington-based firm of computer consultants, concluded
that manufacturers of data modems and other types of interconnected customer
equipment could easily build into their equipment the necessary circuitry
to protect the telephone network. The common carriers need not be the only
ones providing network protective couplers. Furthermore, a program of standards and certification
would be an inexpensive way to extend interconnection privileges without
harm to the common-carrier network.
Both the NAS and Dittberner reports agreed that safe
attachment of customer provided equipment could be accomplished without
the objectionable carrier-supplied access arrangements or PCAs. Knowing an alternative to the PCAs existed,
and given no cessation of complaints -- long delays in getting PCAs installed,
too expensive, and constantly changing interface specifications -- the
CCB needed a plan of action. Due to manufacturer and customer interest,
PBX standards and certification procedures were attended to first. On
March 26, 1971, the FCC established a PBX industry advisory committee
with some thirty members representing carriers, equipment manufacturers,
and users. This committee had the responsibility of devising technical
standards, as well as creating certification and enforcement procedures
permitting direct connection of PBX equipment to the telephone network
-- without using PCAs.
In that same month, on March 18, 1971, the FCC, in a
divided 4 to 3 vote, rendered its Final Decision in the Inquiry (Final
Decision, 28 FCC 2d 267 (1971)). In it, the FCC introduced the concept of "maximum
separation" to solve the problem of common carriers wanting to provide
data processing services. To compete in the unregulated field of data
processing services, common carriers must create separate subsidiaries
with separate books of account, separate officers, separate operating
personnel, separate equipment, and facilities devoted exclusively to
the rendition of data processing services. These subsidiaries would lease communication
services from carriers (the parent company or any other carrier) under
public tariffs, just like competing suppliers of data-processing services. Some issues remained, however, particularly
those of "hybrid services." But in general, the regulatory
issues between data processing and communications seemed to have been
settled.
Exhibit 3.1 - NAS Recommendation
