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Chapter 3 - Data Communications: Emergence 1956-1968

3.3 The Remarkable Growth in the Use of Computers

By the time the Carterfone case had irked AT&T executives, a more serious challenge had emerged. Corporations were beginning to use computers on a scale never imagined, increasingly involving communications over the telephone network. AT&T management’s instinctual reaction was to resist any use of the telephone network that they did not control. Only these new uses also represented a potential source of revenue growth if AT&T could exercise its regulatory powers. Extending the reach of regulation into the competitive computer market set AT&T against IBM and likely every one of their corporate customers, and created problems vastly more complex than squashing some pesky entrepreneur from Texas.

By the mid-1960’s, computers had become a fast growing business because they were desperately needed and were finally becoming usable and affordable. This compelling combination of need and solution propelled the sales of computers from $600 million in 1960 to $7 billion in 1968 – a compounded growth rate of 36 percent a year.25 No wonder AT&T executives contemplated how to grab a piece of the action.

Corporate executives needed computers to cope with an increasingly complex world. In part that complexity was being driven by technology. As H. Igor Ansoff wrote in the Harvard Business Review in 1965:

The 20-year period since World War II has seen a continuing acceleration of product change. Triggered by accumulated technology and pent-up consumer demand, product innovation has become an increasingly important tool of competition and growth. To the business manager it has brought both opportunities and problems.26

The rapid proliferation of products, shorter product life cycles, emergence of entirely new markets, slowing growth in more traditional markets, and potential globalization of everything, all contributed to the felt need by executives for not only computers, but computers capable of providing information both “real-time” and “on-line.”27 The needs that earlier had driven development of the SAGE air defense system now permeated the language of corporate management. Indicative of how important the computer had become, a 1967 survey by the management consulting firm Booz, Allen & Hamilton concludes:28

The day may not be far distant when those who analyze annual businessfailures can add another category to their list of causes – failure to exploit the computer.

Corporate America did not have a computer that was truly usable and affordable until roughly 1966. That computer, announced in grand style on April 7, 1964, by Thomas Watson Jr. and the management of IBM, was the Sytem/360 series of computers. Costing an estimated $5 billion to develop, the System/360 represents the beginning of the third generation of mainframe computers.29 IBM sold an unbelievable 1,000 System/360’s in the first thirty days. The System/360 consumed IBM management’s attention for years before becoming the product they announced that proud day, traumatized their customers into the future, and sent IBM’s competitors scrambling for survival. The effect was cataclysmic.

System/360 might never have happened if not for military funding motivated by the Korean War. In 1950, Thomas J. Watson, President and CEO, and father of the Watson Jr. who announced the System/360, managed an IBM that controlled 90% of the office machinery market. As for the prospects of computers, Watson Jr., remembers his father believing”the electronic computer would have no impact on the way IBM did business, because to him punch-card machines and giant computers belonged in totally separate realms.”31

When the Korean War broke out, Watson “put”32 IBM at President Truman’s disposal. After studying how best IBM might help, James Birkenstock, manager of the IBM Future Demands department, and scientist Cuthbert Hurd recommended IBM build a “general-purpose scientific” computer. The new computer – code named the Defense Calculator – became the most expensive investment in the company’s then history.33 It would become the basis for their commercial computers introduced in 1952. Watson Jr. remembers the subsequent confusion: “Our engineers and production mangers weren’t sure how to proceed.”34

Understanding IBM’s deficiencies, Watson Jr. made it a priority to win a contract being let by MIT and the Air Force to develop a computer for the SAGE air defense system. Jay Forrester, the MIT scientist responsible for procurement, held serious discussions with Remington Rand, RCA, Raytheon, Sylvania, and IBM. In October 1952, he selected IBM to be the subcontractor assisting MIT’s Lincoln Laboratories finalize the SAGE computer design. For IBM, SAGE represented the opportunity to learn state-of-the-art computer technologies from the most advanced computer development laboratory in the world. But while IBM learned, staff at Lincoln Labs felt burdened. Norman Taylor, one of Forrester’s most trusted managers, remembers: “IBM seemed awful stupid to us. They were still designing circuits like radio and TV circuits.”35

In the summer of 1955, IBM completed the SAGE computer prototype. The AN/FSQ-7, or Q7, weighed 300 tons and occupied twenty thousand feet of floor space.36

The SAGE air defense system became obsolete, however, before its full implementation: it had not been designed to track incoming missiles. Even so, it catapulted IBM from “stodgy company” to technological leader.37 In 1954, a year before completing the SAGE prototype, IBM would introduce improvements - in part learned from designing SAGE - into its languishing 702 computer (the one based on the Defense Calculator) and reintroduced it as the 704. 38 Acclaimed a “creative masterpiece,”39 the 704 established IBM as the market leader. The benefits of designing and building an advanced computer for the government were not lost on IBM management. After they lost a bid in 1955 to build a super fast computer for the University of California Radiation Laboratory, they sold a more aggressive design to Los Alamos National Laboratory.40 Although ultimately a failure, it contributed to the knowledge and skill needed to design and build the System/360.

IBM rode the System/360 to great success and an estimated 70% of the mainframe computer market. Revenue soared from $2 billion in 1964 to $6.9 billion in 1968. Competing against only seven firms, known as the “Seven Dwarfs” (Burroughs, Control Data Corporation, General Electric, Honeywell, RCA, National Cash Register, and Sperry Rand’s Univac division), IBM, cast as “Snow White,” dictated what peripherals could be connected to its computers and even what software could be used. Competing against IBM proved crushingly difficult and prohibitively expensive.41

A 1968 Business Week article assessed the growth of IBM:

Since it entered the computer business 15 years ago, IBM’s volume has increased 17 times (to $5.3 billion last year [1967]) and its net income has gone up 20 times (to $651.5-million). Last year, IBM zoomed past Texaco and U.S. Steel to become the nation’s eighth largest industrial company when it added $1.1-billion in revenues. That is like creating another Coca-Cola or another Celanese in just one year. In Wall Street’s assessment, IBM is now the most valuable corporation around. Early this week, IBM’s common shares were worth $41.5-billion. The common shares of AT&T, with assets eight times larger, were worth $26.3-billion. The stock market appraises IBM stock as worth at least as much as the combined shares of 21 of the 30 companies that go to make up the Dow-Jones industrial average.42

IBM did not always get everything right. In failing to follow the government’s lead into time-sharing, IBM had left a window of opportunity open to its competitors.

Time-sharing first surfaced as an idea in 1959, when Christopher Strachey, a British mathematician, gave a paper on time-sharing at a UNESCO congress. Near the same time, and working independently, Professor John McCarthy distributed an internal memo about time-sharing at MIT. Under the leadership of professor F.J. Corbato, the MIT Computational Center first demonstrated time-sharing in November 1961.43

Time-sharing differed significantly from the batch-processing paradigm of computing embodied in IBM products, including the System/360. In time-sharing, many simultaneous users believe they have exclusive control of the computer; a sleight of hand made possible by the enormous speed of computers compared to the finger-pecking slowness of humans. In batch processing, one user, normally an operator processing users’ programs, had sole control of the computer, one job at a time.

Time-sharing next benefited from the visionary leadership of Dr. Joesph Carl Robnett (J.C.R.) Licklider and his power to invest government funds. In October 1962, when Jack P. Ruina, the third director of ARPA, needed to hire a director of a newly created Information Processing Techniques Office (IPTO), he made as insightful and inspired a hire as one can make when recruiting Licklider.

Licklider, or simply “Lick” to all who knew him, espoused a radical new concept of computing. He saw the computer as more than just a fast numerical calculator. “Man-computer symbiosis,” as Licklider envisioned it, meant computers would participate as tightly coupled partners with humans, exploiting cooperative decision-making, enabling interactions not possible within the prevailing paradigm of computing, batch processing.44 Such “interactive computing” demanded significant advances in the state of computing, which was what made Licklider such an ideal person to head up an office dedicated to funding advanced information technologies.

Licklider, a psychologist, began his journey into the world of computers after he joined the electrical engineering department at MIT. In the summer of 1951 he became a member of Project Charles, the summer study group that contributed so significantly to the SAGE Project and the creation of Lincoln Laboratory.45 He subsequently employed analog computers for his psyco-acoustic research and modeling. Then one late night in 1956, as he hovered over his paperwork, lost in thought, Licklider was interrupted by a curious Wesley Clark, one of Lincoln Labs most prominent computer designers who had played leading roles in the design of three of the first “small” computers, the TX-0, TX-2 and LINC. Clark remembers wandering into Lick’s basement room:

I found this fellow, and I introduced myself, and that turned out to be Lick, and he was clearly a very interesting guy. He was doing some psycho-physical experiments and we got to talking and explained to one another what we were up to. I invited him to come down to the TX-2.46

Big ideas can seed in the most unexpected places. Two scientists on chance meeting shared their professional enthusiasms and the words of one fractures implicit understandings of the other, creating space for new ideas to form and grow. Such was the case when Clark showed Licklider the TX-2. Licklider immediately understood digital computers would one day be small and personal. More than a tool to calculate, they would become a medium to transform the experience of living. In the flash of a moment, Licklider’s career switched course and, in time, so would the history of computers.

In 1957, Licklider left MIT to join the small Cambridge firm of Bolt Beranek and Newman (BBN) to pursue his passion for human-computer interactions. He convinced BBN to buy the first PDP-1 minicomputer from the start-up firm Digital Equipment Company (DEC) He then attracted talent, such as Marvin Minsky and John McCarthy, two of the future founders of artificial intelligence, and others, all drawn to his, Licklider’s, efforts to realize interactive computing. In 1960, he published his seminal paper: “Man-Computer Symbiosis,” describing a vastly grander vision of what computers could be than current conventional wisdom.

On joining ARPA in October 1962, Licklider had his vision of computing, a small office, a very large budget, and his knowledge and instincts of which individuals at what institutions were doing interesting research. In choosing projects advancing the state of computers and communications to fund, Licklider formalized his existing social network, transforming it into a network of individuals and institutions that would revolutionize computing and computer communications.47 Licklider remembers:

When I went to ARPA there was the assumption that I was going to run a command and control project, and it was my conviction that you can’t really do command and control with batch processing. So I got agreement and we were off and running.48

Strategically, Licklider focused his investments on thirteen different research projects, primarily at MIT; the University(s) of California at Berkeley, Santa Barbara and Los Angeles; University of Southern California (USC); Carnegie-Mellon University; the University of Utah; the RAND Institute; Stanford Research Institute (to become SRI International (SRI)); and Systems Development Corporation (SDC).49 He selected projects on the basis of the talents of a few individuals at each organization, individuals who he personally knew. Licklider’s initial choice of projects, combined with his commitment to long-term funding, proved essential to his success.

One of his most successful projects was Project MAC (Multiple-Access Computer). At the time, the Office of Naval Research had been funding research on time-sharing at MIT in the Information Processing Center.50 Licklider, desiring change, proposed that MIT create an inter-disciplinary, inter-departmental lab to build a time-sharing computer under the direction of Robert Fano. Fano, encouraged by Licklider, and with MIT’s agreement, submitted a proposal to ARPA, and in 1963 Project MAC received $2.2 million.51 Project MAC would become the most influential organization and research effort in time-sharing. (Project Multics, another very influential time-sharing project, succeeded Project MAC.) By 1967, IPTO would be providing over $12 million to a dozen time-sharing projects, both at universities and at research organizations.52 The first computer company to emphasize time-sharing was General Electric (GE). In May 1964, a GE computer was used in a time-sharing demonstration at Dartmouth College.53 That summer, GE announced all its 600 series computers would support time-sharing using software developed with Dartmouth. That fall, MIT surprised everyone with the announcement that it would buy a GE computer for its time-sharing operations. IBM scrambled.54

It would take two years before IBM announced their System 360/67 time-sharing computer in 1966.55 Recognizing the importance of time-sharing, IBM stated it would represent 30% of the computer market. GE projected that by 1970, 75% of all computers would support time-sharing. Business Week projected a $2.5 billion time-sharing market in five years up from only $20 million in 1968.56

Time-sharing became increasingly popular as the Computer Utility. In 1966, the resident computer expert at the FCC, Dr. Manley R. Irwin wrote in an article titled “The Computer Utility” for Datamation:57

Within the next decade electronic data centers are expected to sell computational power to the general public in a way somewhat analogous to today’s distribution of electricity.

The Computer Utility seemed a perfect metaphor in a time when computers were expensive, difficult to program, and required trained personnel who were in very short supply.58 If computers were going to be used by most, if not all companies, then sharing made sense, especially given the success of the utility concept in both electricity and telephony.59

The explosion in growth of computer service bureaus seemed to validate the Computer Utility concept. Service bureaus, as either independent organizations or operations of computer manufacturers, sold computer time and services to other companies.60 Existing since the earliest days of commercial computing, it was not until time-sharing that service bureaus could support real-time access to many users at the same time. By 1966, an estimated 800 service bureaus generated $650 million in revenues – thought to be growing at 40% per year.61 IBM, even though restricted as to how they could compete in the service bureau business by their 1956 Consent Decree with the Justice Department, ran two nationwide service bureaus.62

The concept of Computer Utilities galvanized the logic of many users employing the telephone network to connect to distant computers. Customers required modems to transmit computer data, digital information, over the analog telephone network. Faster modems than those available from AT&T. This power of AT&T to restrict the right of attachment of equipment to the telephone network was what made the Carterfone case so important.

  • [25]

    Computers in use exploded from 2,500 in 1959 to 50,000 in 1969. Datamation, January 1970, p. 69

  • [26]

    Ibid., p. 163

  • [27]

    Between 1946 and 1961, corporate research and development expenditures rose from $1.2 billion to $10 billion.

  • [28]

    Neal J. Dean, “The computer comes of age,” Harvard Business Review, Jan/Feb 1968, p. 83

  • [29]

    “The Rocky Road to the Marketplace,” Fortune October 1966, p. 138

  • [30]
  • [31]

    Thomas J. Watson Jr., Father, Son & Co., Bantam Books, 1990, p.200

  • [32]

    Ibid., p. 213

  • [33]

    Ibid., pp. 216-217

  • [34]

    Ibid., p. 259

  • [35]

    Glenn Rifkin and George Harrar, The Ultimate Entrepreneur, Contemporary Books 1988, p. 22-23

  • [36]

    Howard Rheingold, Tools for Thought, Prentice Hall Press 1985, p. 142

  • [37]

    “Stodgy company” was an expression of Watson Jr.

  • [38]

    The 702 and 704 owed their genesis to the Defense Computer. Magnetic core memory, tape storage and the first commercial high-level programming language, FORTRAN. into

  • [39]


  • [40]

    University of California Radiation Laboratory is now the Lawrence Livermore National Laboratory.

  • [41]

    Similar to the control mind set that animated AT&T.

  • [42]

    “Where IBM looks for new growth,” Business Week June 15, 1968, p. 88

  • [43]

    Fortune Aug 67, p. 91

  • [44]

    “Man-Computer Symbiosis,” IRE Transactions on Human Factors in Electronics, Vol. HFE-1, PP. 4-11, Mar. 1960

  • [45]

    Thomas P. Hughes, Rescuing Prometheus: Four Monumental Projects that Changed Our World, Knopf Doubleday Publishing Group, 2011, pp 22-

  • [46]

    Interview with author

  • [47]

    For the balance of the 1960’s, this network is thought to have invested over half of all research dollars spent on computer technology, including the private sector.

  • [48]

    Interview with author

  • [49]

    Tools for Thought

  • [50]

    Under the direction of Fernando Corbato

  • [51]

    Hughes, Rescuing Prometheus

  • [52]

    Fortune Aug 67, p. 91

  • [53]

    Fortune Aug 67, p. 91

  • [54]

    Fortune Oct 1966, p. 206

  • [55]

    “Two years ago, for example, IBM rushed out the Model 360-67 computer, a machine designed for the broadest time sharing applications, when General Electric appeared to have jumped ahead in the field. IBM’s machine was a disappointment, and its time sharing service bureau operation lagged GE’s effort. (This week, IBM introduced a more competitive time sharing service based on its 360-50 computer.)” Business Week, June 15, 1968, p. 88

  • [56]

    Manley R. Irwin, “The Computer Utility,” Datamation Nov 1966, p. 22

  • [57]

    Manley R. Irwin, “The Computer Utility,” Datamation Nov 1966, p. 22

  • [58]

    “The scarcity of good programmers alone provides a significant impetus towards the computer utility.” Datamation, Oct 69, p. 126

  • [59]

    “Economies of scale are becoming more and more pronounced. As these facts become clearer to computer designers, operators, and users, the time-shared public utility will assume its role as an important factor in fulfilling the computing requirements of the future.” Lee L. Selwyn, “The Information Utility,” Industrial Management Review, Spring 1966, p.17

  • [60]

    John L. Roy, “The Changing Role of the Service Bureau,” Datamation, Mar 1970, p. 52

  • [61]

    Gilbert Burck, “The Computer Industry’s Great Expectations,” Fortune, Aug 1968, p. 142

  • [62]

    Dr. Irwin writes: “These new developments in technology and services raise the question, once again, of the status of IBM’s consent decree. Does time sharing merely permit IBM to sell computer time over telephone lines, or is IBM processing customer data for a fee? What is legitimate activity for IBM as a manufacturer and IBM as a service bureau? The answers to these questions are not clear, but as if to hedge its short term anti-trust bet, both the Service Bureau Corporation and IBM, the parent corporation, have recently introduced nationwide systems of time-shared computer centers. In the long run, however, IBM many find it necessary to convince the Justice Department that new technology has invalidated major premises of its 1956 judgment.”