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Chapter 3 - Data Communications: Emergence 1956-1968

3.0 Overview

Innovation of information technologies became a priority for the military after World War II. In funding the SAGE (Semiautomatic Ground Environment) air defense system beginning in 1951, the Air Force accelerated technological change in ways that could never have been imagined. One modest subcontract called for AT&T to innovate a device to transmit digital information over telephone lines. That device would be later modified and introduced commercially as a modem by AT&T in February 1958. It marked the beginnings of the economic history of computer communications.

AT&T had the nascent modem market to itself until the mid-1960s. Then growing demand for faster modems than those supplied by AT&T led to a surge in entrepreneurism and competition. Two of the first new entrants, Codex and Milgo, would enter the modem business to escape their uncertain futures as military contractors.

Yet even as competition emerged, the regulated AT&T had the power to prohibit connection of equipment other than its own to the telephone network. In 1965, Thomas Carter filed an antitrust lawsuit against AT&T challenging those rights. Carter proved to be but the tip of an iceberg, one whose hidden importance was being shaped by the explosive growth in the use of computers by corporations. Concerned that the regulatory protection AT&T enjoyed might thwart the emergence of data processing, the Federal Communication Commission (FCC) launched a public inquiry into the issues in 1966.

The growing use of computers, abetted by the commercialization of time-sharing, drove the growth and innovation of not only modems but also multiplexers. In 1968, a start-up, American Data Systems, introduced a second-generation multiplexer; dramatically increasing the number of computer devices, primarily terminals, that could share a telephone line.

By 1967, years of aggressive government spending raised inflation concerns and financial investors turned to stocks for price appreciation, not just dividends, and in the process drove the prices of technology stocks to unprecedented levels. Aggressive investors funneled market profits into venture capital funds that in turn sought investments in exciting technologies, especially those related to computers.

The clash between those wanting to connect innovative equipment to the telephone network and the long-standing regulatory policy supporting AT&T sped to an unexpected outcome by the end of 1968. The history of data, and thus computer, communications was about to become significantly more complex, and interesting.