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Chapter 1 - Introduction

1.5 Institutional Change in Communications: Deregulation and Break-up of AT&T

Returning again to 1968, American Telephone & Telegraph (AT&T), a regulated monopoly of telecommunications, represented a gigantic roadblock to the emergence of data communications. AT&T management tightly controlled how the telephone network could be used and, in particular, believed data communications was irrelevant and thus focused on protecting its voice telephone network from foreign attachments But computer users and manufacturers saw the world differently and were frustrated with AT&T’s slowness in responding to their data needs. The Federal Communication Commission, the Federal agency responsible for regulating AT&T, hearing these complaints, initiated a public inquiry in 1967 to gather the facts necessary to inform public policy. In part their efforts would be upstaged by the settlement of the Carterfone antitrust suit in 1968 that mandated easy attachment of foreign devices to the AT&T system. Independent firms began selling modems and multiplexers and Data Communications was born. (Competition emerged in PBXs as well; PBXs, or private branch exchanges, were customer premises telephone switches. The FCC also liberalized the rules governing specialized common carriers and competition in long distance telecommunications began. Neither of these important developments are the focus of this history.)

The cracks in AT&T’s monopoly caused corporate managers to look even more intently at the rapidly growing computer market. But how could AT&T exist as both a regulated monopoly and a firm participating in markets decided by market competition? This problem persisted until January 1982 when AT&T consented to being broken-up, part of the company being free to compete where it wanted, specifically in the computer markets, and the balance to continue to serve the public as regulated monopolies. Although agreed to in January 1982, dismantling the largest corporation in the world would take time, so the formal legal separation was set for January 1, 1984.

Subsequent to the break-up, AT&T management realized they needed to become more aggressive. Since digital designs and semiconductor technology was dramatically reducing the cost of providing circuits, they began lowering the price of high-bandwidth T-1 digital circuits. Large corporations seized the opportunity to build their own private voice networks with T-I multiplexers being sold by Data Communication firms and new start-ups. These predominantly voice wide-area networks (WANs) soon became the means for corporations to interconnect their LANs. Again led by new firms, competitors began selling routers to interconnect LANs over WANs and the sales of the Internetworking sector took off. AT&T would never be a competitive force in either Networking or Internetworking and even struggled to maintain a reasonable market share in Data Communications.