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Chapter 3 - Data Communications: Emergence 1956-1968

3.10 Carterfone, Computer Inquiry I and Deregulation 1967-1968

In April 1967 the Carterfone hearings began. Since Carter was attacking the tariff prohibiting foreign attachments, the hearing was treated as a Complaint Proceeding with the involved parties arguing their case before an administrative law judge or Hearing Examiner, in this case, Chester F. Naumowicz, Jr.

Bernard Strassburg, Chairman of the Common Carrier Bureau (CCB), now convinced of the importance of computers and the need to encourage innovation and competition in telephone equipment, directed the CCB staff to argue before the Hearing Examiner that:

there was sufficient evidence to demonstrate that the tariff was inherently unsound and should be declared unlawful, as unjust and unreasonable, and therefore unlawful.

The CCB then recommend the tariff be replaced with:

tariff provision that ‘clearly and affirmatively states…that customer-provided equipment, apparatus, circuits, or devices may be attached or connected to the telephones furnished by the telephone company in the message toll telephone service for any purpose that is privately beneficial to the customer and not publicly detrimental.81

The hearings were over in just seven days. The parties now had to wait for Examiner Naumowicz’s decision.

Although the AT&T lawyers had argued in the Carterfone case as they had in the past, this philosophy no longer went unquestioned within AT&T. The change began when H. I. Romnes became Chairman and Chief Executive Officer in early 1967. Romnes did not fully agree with AT&T’s long-standing policy opposing foreign attachments and stated publicly shortly after taking office that AT&T’s responsibility for the network could be maintained with the use of “suitable interfaces or buffer devices to keep the attached equipment from affecting other users of the network.”82 He also assembled a high-level Tariff Review Committee to conceive alternative interconnection tariffs that would protect the network.83

In August 1967, Examiner Naumowicz issued his initial decision. Ignoring the CCB’s argument for a broad policy change, he ruled narrowly that harm from use of the Carterfone had not been proven: ”We here consider on a specific device and the evidence as to what, if any, effect it will have on the system.”84

By that fall, responses to the FCC’s Notice of Inquiry began arriving. A sensitive nerve had been struck. An already burdened CCB saw thousands of pages of input and exhibits piling up. As CCB staffers began leafing through the materials, two subjects kept coming up again and again: the prohibition on foreign attachments was unduly restrictive, and telephone rate structures were designed for voice, not data, communications. Equally clear, the CCB had neither the resources nor expertise to make sense of the responses from fifty-five corporations. In early 1968, CCB contracted with the Stanford Research Institute, International (SRI), a think tank and consulting firm on the West Coast, to do the analysis. The SRI report, however, not expected until March 1969, would be upstaged by intervening events.

On June 26, 1968, the FCC, in a surprising and unanimous decision, accepted the CCB’s recommendation and ruled that the tariff restrictions in Carterfone case:

are, and have since their inception been, unreasonable, unlawful, and unreasonably discriminatory under the Communications Act of 1934.85

The Commission then concluded:

The carriers may submit new tariffs which will protect the telephone system against harmful devices, and they may specify technical standards if they wish.86 87

AT&T responded:88

We have had the whole subject of connection of customer-owned devices in our network under intensive review for some time. Our intent is to be as responsive as possible to evolving communication needs through making our network available to expanding uses. At the same time, safeguards are essential to assure that other users of the network are not adversely affected.89

In August, Datamation, a leading trade journal, reported the FCC decision as:

The FCC dropped one shoe June 26 when it decided that Ma Bell’s foreign attachment restrictions are unnecessary, and unfair to users; last month, computer users and foreign attachment manufacturers were waiting for the other shoe to fall.

Experts familiar with the arcane world of communications utility regulation agreed that the next move was up to the carriers. As one lawyer put it: ‘the commission has blasted a gaping hole in the tariff wall, leaving the carriers dangerously exposed. At this moment, any user could hang any foreign attachment on his telephone line and not worry too much about getting arrested.

He added, however, that the user would be hurting himself as well as the telephone company. ‘The carriers lost largely because they couldn’t prove that foreign attachments were harmful. Almost certainly, they will now be looking doubly hard for such evidence in the hope of persuading a judge to overturn the commission’s ruling.

The ruling, if it stands, breaks the market for modems wide open, and provides a major opportunity for independent manufacturers in areas like touch-tone keyboards and picture-phone type units. There are no authoritative figures on the number of Western Electric’s modems in the dial-up network, but one manufacturer says that’s where 90% of the business is. Among data set suppliers are General Electric, which announced an extensive line late last year, Automatic Electric, Milgo, Rixon, Collins Radio, and Ultronic.90

In a press conference held in August, AT&T Board Chairman Romnes and President Ben Gilmer proposed a “newd ata access arrangement,” under which independently manufactured terminals could be coupled electrically, inductively, or acoustically to the public telephone system through a “protective device” and a “network controller.” The data communications user would pay to have the protective device installed, and a pay monthly rent.

In September 1968, the FCC asserted its decision: devices that were privately beneficial without being publicly detrimental could be connected to the interstate telephone system.91

That Fall, Strassburg wrote:

A decision by the Commission to relax the restrictions on the customer’s use of foreign attachments would expand the opportunity for wider participation in not only the computer equipment market, but in the communications equipment market generally.92

In November 1968, AT&T filed new tariffs that far exceeded the expectations of the FCC. Customers would be allowed to directly connect terminal equipment to the public switched network provided they used an AT&T supplied protective connecting arrangement (PCA).93 (See Exhibit 1.4 - AT&T Carterfone Tariff.) Strassburg later testified: “AT&T went well beyond the requirements of Carterfone.” The FCC ruled the new tariffs would become effective January 1, 1969.94

  • [81]

    Language drafted from HAPC, above.

  • [82]

    Temin, p. 44

  • [83]

    Temin, p. 44

  • [84]

    Slippery Slope pg. 105

  • [85]

    “Regulatory and Economic Issues in Computer Communications,” Proceedings of the IEEE vol. 60, November 1972., p. 1266

  • [86]

    Ibid., pp. 1266-1267

  • [87]

    The FCC language also left open the possibility of future lawsuits against the telephone companies: “has been unreasonable, discriminatory, and unlawful in the past.” This matter is settled without suits.

  • [88]

    Brooks, p. 299: “General Counsel Moulton, chief of the AT&T legal team that argued against the Carterfone decision, says of it, ‘That’s one I’d rather forget,’ and adds that it is a ‘a fair question’ whether AT&T could have headed off the far-reaching decision by amending its tariff in advance. Such a move, he concedes, would have required a revolution in thinking inside AT&T, which believed – and indeed had long been encouraged to believe – that the public consensus favored treating the telephone business in all its aspects as a regulated monopoly.”

  • [89]

    Slippery Slope p106

  • [90]

    “FCC Carterfone decision unsettles carriers, encourages modem makers,” Datamation, August, 1968.

  • [91]

    Slippery Slope pg. 106

  • [92]

    “Competition and Monopoly in the Computer and Data Transmission Industries” Bernard Strassburg, The Antitrust Bulletin, Vol XIII Fall 1968, pgs 996-997

  • [93]

    Subsequent discussion will focus on modems for they constitute a key product of the first paradigm of computer communications – data communications.

  • [94]

    Shortly after the tariffs went into effect, accepted by the FCC, the parties to the Carterfone antitrust lawsuit settled out of court. Carter et. al received a reported $375,000; they had sued for $1,350,000. A little over a year later, Carter left his firm for consulting. Henck p. 107