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From the Telegraph to Hypercommunications

Why Telecommunications?

Virtually every person who considers the future agrees that the world is in the process of major social and economic changes and that telecommunications is a driving force of those changes. If that is the case, the study of telecommunications is not simply the examination of one more sector, like pulp and paper, clothing, or automobiles. Nor is public policy for telecommunications just one more branch of public policy studies, like civil rights, airlines, or education. If the experts’ projection of the future of telecommunications is a correct one, the sector will be the leading one in shaping our social, economic, and political futures. No reasonable person would attempt to predict the future with precision, but we can certainly surmise certain probable trends, and, as we will see, the nearly uniform considerations of the experts do portend a dominating future for communications—domination so extensive that we can call the sector hypercommunications.

The telephone began as a simple device in 1876, capable of transmitting over very short distances. At the outset, private lines, not an enormous switched network, were conceived as its probable use. Thus, lines between the offices and homes of physicians or burglar alarms between the police and a very few subscribers were conceived as typical uses. Over the next century, visionaries and entrepreneurs conceived more and more novel uses for the telephone. But in recent times the marriage of the telephone, television, and the computer has increased telecommunications possibilities exponentially, so that the new telecommunications now dominates vast numbers of other activities. A few of the new uses now on line or coming on line include (1) telemedicine, (2) telelaw, (3) tele-education, (4) data coordination, (5) design coordination, (6) telecontrol of factory and service operations, (7) telebanking, (8) telemarketing, (9) telecommuting (allowing people to work at home), (10) teleshopping, and (11) teleconferencing (reducing the need for business travel).

In this chapter we will examine some of the consequences of telecommunications, and why choosing the correct set of public policies—or absence of public policies—is vitally important. Probably the best starting point to capture an understanding of the future that looms as a result of hypercommunications is to look at an older technological breakthrough that dramatically changed our economy and society. Probably the best example is the automobile. In 1900 there were approximately 8,000 automobile registrations in the United States. By 1920 there were approximately 8,131,500, and by 1950 about 40,339,000. ¹ Another measure of the automobile’s impact is its rank in the value of products of American industry: one hundred fiftieth in 1899, seventy-seventh in 1904, seventh in 1914, second in 1919, and first in 1925. These direct data do not begin to measure the epoch-making impact of the automobile. The automobile generated dramatic growth in other industries, including petroleum, glass, rubber, and steel; it stimulated the development of innumerable supplier industries, such as pistons, batteries, and car radios. Vast dealer networks were created to market cars. Gasoline stations and repair facilities sprang up in every city, town, and village to support the industry. Highway construction and the manufacture of materials, such as asphalt and concrete, took place throughout the country. The automobile was directly responsible for suburbanization and a large portion of the vast expansion of the leisure industry. And while we may bemoan today’s environmental pollution, let us not forget that the automobile supplanted vast quantities of horse flop that littered every American community.²

In order to understand the imperialist tendencies of telecommunications—its ability to take over and control many other activities—its historical development from the modest beginnings of the telegraph to the contemporary capacities of hypercommunications to dominate virtually every activity should be set forth. The future is best understood as history. The most important dimensions to bear in mind when assessing telecommunications’ impact are time and space, because advances in communications enable each of us to reduce the time required to communicate with others while also increasing the number of persons and institutions with whom we may communicate. For this reason, advances in communications also allow us to enlarge the area in which we can conduct social and business transactions. Thus, you can make a long-distance telephone call or write an electronic mail (E-mail) message to nearly any location in the world. Such communications are almost instantaneous. Therefore, as a practical matter your ability to conduct transactions over a wide area is increased. For the same reason the world economy has recently seen a change to what sociologist Daniel Bell terms “distributed manufacturing,” in which “most firms in retailing (such as Reebok or The Gap) have production in more than forty different countries so as to be able to respond rapidly to style changes and point of sale marketing information.”³

While the foregoing examples suggest the power of communications to coordinate activity, it also enhances one’s opportunity to control activities. The control may be exercised not only over persons but over things, such as machines, as well. Communications expert James R. Beniger has pioneered work in the area of control. He defines control as “purposive influence toward a predetermined goal” consisting of “two essential elements: influence of one agent over another, meaning that the former causes changes in the behavior of the latter; and purpose, in the sense that that influence is directed toward some prior goal of the controlling agent. … Control encompasses the entire range from absolute control to the weakest … form.”⁴

Modern communications, as an example, allows McDonald’s Corporation from its headquarters in Oak Brook, Illinois, to “control” the management of about fourteen thousand restaurants and the production of millions of hamburgers throughout the world. Without modern telecommunications, McDonald’s would have to rely on hiring only persons whose trustworthiness, veracity, and competence would be beyond question. The investigative costs to do this in the case of any large enterprise are virtually prohibitive. For this reason in the era before modern communications, merchants tended to hire, whenever possible, members of their own families for distant transactions; only they could be reasonably trusted.⁵ Given the speed with which information can now be transmitted and the accuracy with which it can be measured, a person exercising control can afford to take greater personnel risks. If a mistake is made, the ability to recover using modern communications is much greater than without it.

This introduces three other aspects of modern communications: dialectic, feedback, and accuracy. Before looking at these concepts, consider that the cost of obtaining information is a component of almost every activity. Information costs are those costs incurred in obtaining information about the prospective use of resources. Thus, when a pharmaceutical company expends millions of dollars to develop information about a product’s safety, effectiveness, and side effects, it has incurred information costs. To take another example, the United States government expends millions of dollars each year to learn about the actions and potential actions of foreign nations. And, of course, entire industries, such as advertising and book publishing, sell information.⁶ If we next assume that a great deal of human behavior, notably market behavior, involves a quest to be more efficient rather than less efficient, it follows that this consideration applies to information costs, just as it does to production or acquisition costs. Telecommunications can obviously be a factor in reducing information costs and, hence, total costs.

Let us now return to dialectic, feedback, and accuracy. Dialectic is the process of dispute or debate with other persons. Obviously, almost all situations involve degrees of uncertainty or risk. Discussions with people whose assessments and information differ from one’s own can lead to a higher synthesis. The larger the network of discussants is and the more interactive the discussion is, the more likely it is that one can reach a better and more efficient solution. Modern telecommunications is the instrument to accomplish these goals. And the dialectic possibilities of telecommunications continue to increase as costs for services (such as fax, long distance, and video) fall, technological progress continues, and new services (such as the Internet) develop. Feedback consists of communicating the results of actions taken to see how closely the actual results correspond to the anticipated ones. Obviously, the opportunity to correct as quickly as possible when things are going wrong is enormously advantageous in adjusting both ends and means. Again, it is clear that this advantage of modern telecommunications ramifies throughout the economy and society. The net result of the dialectic and feedback processes is to facilitate the likelihood of greater control by controllers over persons and things to do what the controller desires—the essence of accuracy.

It is easier to conceive the power of telecommunications by looking at the past rather than contemplating the future. Consider the telegraph. Less than twenty-five years after Samuel F.B. Morse invented a practical telegraph in 1837, there were 32,000 miles of pole line transmitting approximately five million messages per year. Coast-to-coast transmission began in 1861, and in 1866 the second Atlantic cable opened, permitting rapid communication between North America and Europe. Samuel F.B. Morse, a devoutly religious man, exclaimed about his invention, “What hath God wrought!” And at least part of the answer is that it contributed in a major way to extraordinary transformations in economic and social life. Geographical markets were expanded and integrated, capital flows were greatly facilitated, information and transaction costs were dramatically reduced for all businesses ready to use the new technology, the time required to enter into transactions dramatically diminished, while the number of transactions increased substantially. New businesses, such as credit reporting, commodity exchanges, a national securities market, and wire services developed. Socially, personal communications between people located far apart took place more rapidly than anyone had dreamed possible before the telegraph’s invention.⁷

Of course, one must be careful not to overstate the telegraph’s contribution to the transformation of life that occurred from its invention in 1837 until the telephone’s invention in 1876. It was a major contributor, not the dominant factor, in the transformation during that period. Certainly the railroad played a more important role, as did extraordinary changes in industrial technologies. Even in communications we can easily forget about such important developments during that period as ink pens with steel nibs, the lead pencil, mass-produced envelopes, and, most importantly, the typewriter.⁸ The era of hypercommunications was far off, but even in its infancy, telecommunications had crucial impacts in the business and social worlds. With each successive phase in telecommunications history, the sector became increasingly important.

The Plan of the Book

There are many ways in which telecommunications can be studied. It can be examined as a history of invention and technological breakthroughs, starting with Morse’s telegraph through such recent innovations as digital cellular telephony, fiber optics, and asynchronous transfer mode (ATM) switching. This book will not be a telecommunications engineering text. Nevertheless, it will be attentive to technological developments because the behavior of government and private-sector actors cannot be understood without considering their responses to technological breakthroughs and opportunities. Nor will the book be a social history of telecommunications, although attention must be paid to the impact of the telephone and other telecommunications devices on our social lives and the entrepreneurial and marketing decisions that triggered new uses and their consequences. Nor will this book be a business history of the corporate organizations, most importantly AT&T and its predecessors, that have been the major players in the dramatic changes that have occurred since the invention of the telephone to the present day. Nor will this book be a legal history of the administrative and court decisions that have been crucial in shaping modern telecommunications. Nor will this book be a political study of the important actors and forces that have shaped the pertinent communications statutes, such as the Communications Act of 1934.

Rather, a book on telecommunications must be interdisciplinary, incorporating a study of all of these facets. The interface of business and government in telecommunications must embrace all of these topics, for in the real world, engineers, businesspersons, and governmental actors incorporate all of these disciplines in arriving at strategies and policies. Consider a single historical example that illustrates the point. Until the 1940s, the basic path of an intercity telephone conversation was through wire pairs. After that time, wire pairs were gradually supplanted by microwave transmission and coaxial cable. While the cost and technological considerations of wire pairs led regulators to believe that the industry was a natural monopoly (an industry in which production is carried out most efficiently by a single firm), the later technological developments and associated cost considerations led them to change their minds in favor of regulated competition.⁹ In more recent times fiber optics have significantly supplanted microwave and coaxial cable, and this has led some analysts to believe that the basic transmission of intercity telecommunications would once again be undertaken by a single provider if fierce competition prevailed.¹⁰ At this juncture it is not important to evaluate the various economic, technological, or policy claims. It is only necessary to illustrate that issues in telecommunications cannot be neatly subdivided into discrete segments. The field is inherently interdisciplinary and is treated that way by those who are actively involved as well as those who study it. The state of technology at any time is the starting point, however.

This book is, then, an interdisciplinary look at telecommunications from its early period to the present time. It will examine the impact of each major new development from the earliest crude telephones through the most modern digital devices. We will see how the vision of telecommunications moved from private lines to local loops, long distance to today’s global networks. But uncertainty and incorrect analysis have also played roles with an important policy message. Policymakers should be cautious and government intervention incorporating uncertainty will fare better than that which embraces rigid planning. A brief story about the microprocessor, one of the most important contributors to hypercommunications, illustrates the importance of uncertainty and the difficulty of incorporating all of the relevant variables that lead to a correct decision. In 1971 Marcian E. (Ted) Hoff, an engineer at the then three-year-old Intel Corporation, invented the micro-processor, a new kind of chip. The microprocessor placed most of the transistors (a device invented earlier by AT&T) that constitute a computer’s logic circuits on a single chip and made the chip programmable—controllable by software. By 1975 Intel thought that its microprocessors were too slow and limited to be used for anything but specialized controllers for applications like traffic lights. In that year Bill Gates, not yet twenty, showed that BASIC, an important computer programming language, could operate on a microprocessor. By 1980 Intel was able to place 30,000 transistors on a chip that ran far more rapidly than the original microprocessor. In that period IBM, which had dominated the mainframe computer industry, had decided to enter the personal computer (PC) business and was casting about for a supplier of microprocessors and another supplier of an operating system. It chose, respectively, Intel and Microsoft. IBM was confident that it would dominate the PC business as it had the mainframe business, a judgment shared by virtually every knowledgeable observer and journalist. Accordingly, IBM made an enormous business mistake. It failed to obtain exclusive rights to either Intel’s microprocessor line or Microsoft’s operating system.¹¹

IBM’s decision allowed Intel and Microsoft to supply hundreds of so-called clones that soon deluged the PC market, reducing IBM to a lesser role. The PC, in turn, boosted the power of telecommunications as no device had since the invention of the telephone. Electronic mail, the Internet, and a whole host of equipment and services based on the PC were either not conceived or dimly surmised at the time Ted Hoff had his stroke of genius. The point of the story is that even the highly intelligent and knowledgeable actors associated with the genesis of the PC could not accurately glimpse future developments. There are simply too many variables in the social world for even the most extraordinary mind to incorporate. The story, rather, illustrates once again what Friedrich A. Hayek, the Nobel Prize-winning economist, terms the “synoptic delusion": The utilization of knowledge “is and remains widely dispersed among individuals … and in the case of very complex phenomena the powers of science are … limited by the practical impossibility of ascertaining all the particular facts which we would have to know if its theories were to give us the power of predicting specific events.”¹²

This perceptive conclusion is not an invitation to paralysis; neither markets nor government can operate that way. Rather, it leads, first, to the adoption of mechanisms that allow flexible adjustment, of which free markets are the most obvious example. When government actors intervene in this process by stimulating one technology at the expense of others, the synoptic delusion is bound to occur. Indeed, government is more likely to do so than people engaged in the day-to-day workings of a complex activity that is disciplined by a market. But as we will see in this book, there are times when government must act because nonmarket values are involved or the market is not performing or is doing so unsatisfactorily. This leads to the second important conclusion that follows from Hayek’s synoptic delusion hypothesis. When government is constrained to act, it should do so modestly. Lighter regulation in which reasonable performance goals are set for private monopolists (such as the old AT&T) is far superior to rigid government planning of goals, specific design standards, and inflexible timetables. Again, agencies with continuous regulatory authority over specific industries are superior instruments than oversight and legislation through generalist institutions, such as Congress or state legislatures. These and similar themes will be seen throughout this book.

The third conclusion that follows from Hayek’s synoptic delusion concept concerns what has been termed public philosophy. Walter Lippmann, the great American political theorist, coined the phrase “public philosophy” to apply to the most central features of a society, including such values as free speech and religion. These underlying values tend not be questioned and form the bases for specific actions. The phrase public philosophy, thus, describes underlying axioms and the unquestioned bases of policymaking.¹³ The same conception can apply to economic ideologies, such as “socialism,” “free markets,” “welfare state,” and so on. Different public philosophies employ important conceptual terms that guide policymakers’ decision making to a presumably sound solution. For example, in recent times the word “privatization” has entered the vocabulary of policymakers. It essentially means selling off government property to private investors. The term, widely used in contemporary public discourse, would have little political importance in earlier eras when the idea of selling off state property played no role in government thinking about policymaking. In 1933, for example, when Franklin D. Roosevelt became president of the United States, a strong statist trend was in evidence throughout the major nations, and competition—indeed, the whole business enterprise system—was in disrepute. Business firms had to be guided by “wise” government officials and the strong arm of the state. This conception applied to telecommunications as it did to other important sectors. Once such a public philosophy becomes established—sometimes over vigorous opposition—policies are made incrementally. I do not suggest that policies are made mechanistically in the way one follows a recipe. There can be difficulties and uncertainties, to be sure. Nevertheless, a public philosophy reduces the amount of information that must be considered in solving public problems and the amount of effort required in reaching decisions, since it guides patterns of thought to a policy conclusion.¹⁴

A point is reached, however, when even modifications of a prevailing public philosophy no longer achieve desirable results or are unable to reasonably approximate expected outcomes. The synoptic delusion, in short, has struck with hurricane force. When this occurs, policymakers search for a new public philosophy. Economist John Maynard Keynes prophetically wrote that “Practical men who believe themselves to be quite exempt from any intellectual influences are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are usually distilling their frenzy from some academic scribbler of a few years back.”¹⁵ In recent times, the intellectual repute of public ownership and close governmental regulation has symbolically crumbled just as the actual crumbling of the Berlin Wall symbolized the political damage and economic stagnation associated with regimes that embraced the dead hand of state ownership. These developments occurred at the same time as an unprecedented rate of technological progress in the West and Japan in such areas as telecommunications, computers, microprocessors, optoelectronics, robotics, and biotechnology. These and other progressive fields were associated with private-sector firms and entrepreneurship. Philosopher of science Thomas S. Kuhn perceptively wrote that “Political revolutions are inaugurated by a growing sense … that existing institutions have ceased adequately to meet the problems posed by an environment that they have created.”¹⁶ Gradually (but associated with Margaret Thatcher’s ascendancy to the British prime ministership in 1979) a new public philosophy came to prevail in which vigorous competition, privatization of public enterprises, a market economy, and technological progress through entrepreneurship were cornerstones.¹⁷

Reform of the telecommunications sector became a vital component of the new public philosophy because of the importance of that sector. The speed with which information can move around the globe is the most important facet of the world economy. Control and coordination can occur almost simultaneously everywhere. A factory in Malaysia or a financial center in Germany can be readily directed from New York or Tokyo. Nations, even regions, can no longer be viewed as isolated but are, rather, part of the world economy. In turn then, every nation’s (and firm’s) competitiveness requires that full attention be paid to cost reduction and quality control. Not only does the telecommunications revolution closely affect the competitiveness of nations and firms, but its efficient application is one of the key elements in the path to superior competitiveness.¹⁸ One of the most important inquiries in this book will be to see how and why the public philosophy concerning American telecommunications has changed several times—why yesterday’s conventional wisdom has become, in contemporary eyes, fallacious theory.

Once a new public philosophy has become established—often after a struggle—it moves to the background. It becomes invisible politics, so to speak, until it is frontally challenged. Visible politics usually becomes the clash of interests, interest groups, and governmental actors who make their arguments in terms of appealing to the dominant public philosophy. Of course, there are times that interests cannot attain their goals under a public philosophy and, therefore, must call for either its modification or its overthrow. The safest course usually, however, is for an interest group to attempt to persuade political decision makers that its self-interest is the public interest. As we will see, MCI in its struggle against AT&T followed such a gradualist strategy until it was ready to directly challenge the existing public philosophy. The major reason that attorneys are the principal actors in carrying out these strategies no matter what the forums are—courts, legislatures, administrative agencies—is that their art consists of attempting to converge their clients’ self-interest with the reigning conception of the public interest. They are adept at using the short hard phrases, such as “competition” or “public service,” that purport to capture the essential goals of the public philosophy. Crude lobbying, mobilizing public opinion, perhaps even bribery may occasionally be employed by the actors in telecommunications policy. But, as we will see, the old-fashioned art of persuasion is the most important resource that the actors can bring to bear.

The private-sector actors in telecommunications policy are usually individual firms (or would-be firms) and are almost never larger than industry segments that enter into temporary alliances. In the United States, for example, MCI and AT&T have usually been at each other’s throats, fighting bitterly before administrative agencies, courts, and Congress. Yet occasionally they have joined together to seek a common end against other rivals, such as the local operating companies or cable firms. As we will see, nothing could be further from the truth than that there is a “big business” interest. Large firms in the industry are rarely unified over long time periods about anything other than that they would pay less rather than more taxes. And it should be noted at the outset that AT&T, the largest firm in telecommunications, has lost most of the major battles before public forums since 1968, although it won most before that date. These results are consistent because AT&T was able to persuade political actors that its self-interest accorded with the public interest before 1968. But in the changed environment after that date, AT&T was less and less able to persuade political decision makers that its self-interest accorded with the public interest. For that reason, we will see, AT&T lost more and more of its battles.

Politics, Technology, and Markets

Ultimately, changes in public policy toward telecommunications can be traced to technological or marketing innovations. But the linkages are not direct. Technological issues are usually intermixed with other ones and are usually framed in terms of a prevailing public philosophy, although the implications of new technologies can also help to reshape public philosophies. Relationships between politics, technology, and markets in telecommunications cannot be reduced to a set of simple statements; they are complex. Nevertheless, an attempt will be made to sort out the relationships as they apply to telecommunications.

We start with the observation that new inventions or discoveries do not automatically lead to an understanding of what markets or submarkets they can exploit commercially. Technological possibilities are not self-executing; rather, entrepreneurs or would-be entrepreneurs must conceive of what markets to attempt to reach and how to reach them. Further, adjustments must be continuously made as market signals are received. Consider, for example, the videocassette recorder (VCR). Ampex, an American firm, was the original VCR innovator but failed to make any impact on the market. Sony, one of the most successful consumer electronics firms, launched its Betamax format in 1975 and failed to gain much market acceptance. Philips Electronics, the giant Dutch firm, saw the opportunities but failed to bring its product to market in a reasonable time. The winner was JVC, which introduced its VHS format in 1976 and generally made the correct marketing and production decisions.¹⁹

Technological and marketing innovations can be just as critical in established industries. Consider the automobile. “In 1958, Alfred P. Sloan, the architect of General Motors highly successful product strategy … and justly famous management system … had just retired from the chairmanship after almost 40 years. The company he left behind dominated its industry…. Imports were then a minor part of the market. Volkswagen was a curiosity; Nissan and Toyota engineers were busily trying to figure out why their first exports were falling apart on the Los Angeles freeway; and Honda was producing motorcycles.”²⁰ Within a few years the marketing and technological innovations of the principal Japanese producers responding to the possibilities raised by energy shortages, new production methods, the application of electronics to automobiles, and the like had radically transformed the American automobile industry.

Entrepreneurship is the starting point in understanding the relationships between politics, technology, and markets, not just in such industries as VCRs and automobiles but in such traditionally heavily regulated industries as telecommunications as well. But what exactly is entrepreneurship? The classic exposition is provided by economist Joseph Schumpeter.

The function of entrepreneurs is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for products, by reorganizing an industry and so on….To undertake such new things is difficult and constitutes a distinct economic function, first, because they lie outside the routine tasks which everyone understands, and, secondly, because the environment resists in many ways…. This function does not essentially consist in either inventing anything or otherwise creating the conditions which the enterprise exploits. It consists in getting things done.²¹

Innovation appears in both large firms, such as AT&T or IBM, as well as upstarts who face initial difficulty in obtaining venture capital; nowhere is this more the case than in telecommunications, where the telephone, invented in 1876, was first conceived as a supplement to the telegraph. Its initial uses were thought to be as a toy for the rich and a vital instrument for physicians, as well as a device that could be employed as a burglar alarm. Within short order, new uses were seen largely due to the foresight of Theodore J. Vail, one of the greatest managers in American business history. Telecommunications from its outset to the present day has frequently innovated in all the ways that Schumpeter described. Entrepreneurship has appeared in old and new firms and companies of every size.

Innovation and entrepreneurship in telecommunications differ from those in many other industries in a crucial way that shapes the politics of that sector. In many other industries, a firm may enter without the necessity of obtaining the approval of a governmental authority. Telecommunications has traditionally been characterized by entry controls. Thus, any person or company may decide to open and operate a steel mill or a microchip foundry, but entry into cable television or the operation of cellular telephones is restricted by government controls. Subject to the laws of bankruptcy, a firm may similarly exit from an industry or switch to another activity as it wishes. But in telecommunications the firms granted operating franchises must obtain governmental permission to exit from the field or to enter a different business field. While firms in every industry are subject to a variety of regulatory controls, such as complying with environmental or civil rights rules, they are free to exercise independent judgment about most matters, such as prices, design, advertising campaigns, and so on. Without minimizing the regulatory burden on such firms, the behavior of firms in so-called public utilities, of which telecommunications is a prime example, is regulated in a qualitatively higher degree. Rates, for example, are closely regulated in public utilities. Until the 1990s, one could not move into a new territory or enter even a related field without securing government approval. IBM, for example, moved from the manufacture of tabulators and electric typewriters to computers. Such a transition in a regulated industry had been unlawful without government approval. And to complicate the matter further, telecommunications (like most every other sector) is also subject to the rules of the Sherman Antitrust Act governing competition.

In telecommunications, then, technological and economic concerns are closely intertwined with political issues. Business firms can seek a variety of goals relating to profits and sales. And while I will not discuss the complex problems concerning the goals of business firms, it is safe to say that they ordinarily prefer more to less profit. Accordingly, they will adopt not only economic strategies but strategies that will attempt to persuade government agencies that the firm’s economic interests accord with the broader conception of the public interest. If the prevailing public philosophy will fit the bill, the firm utilizes its persuasiveness to show that its desired plans best satisfy it. But if the prevailing public philosophy is not congenial to a firm’s goals, it begins the process of undermining that philosophy or carving out an exception to it. The forums chosen in which to undertake these efforts include regulatory agencies, courts, and legislatures at both the state and federal levels.

Not only is the politics of telecommunications intimately connected with technological and economic considerations, it is largely a politics in which individual firms are the fundamental private-sector actors. Firms may enter into alliances with other firms or governmental actors (which, as we will see, can sometimes adopt different perspectives), but these alliances tend to be temporary. MCI and AT&T have struggled in every conceivable forum, but there have been some post-1984 issues in which the two firms were on the same side. Until the AT&T’s divestiture in 1984, its long-distance arm and the various local operating companies, such as Southwestern Bell, were part of the same organization in which differences were settled internally. Since the 1984 breakup, the separate firms have often clashed over issues.

Many of the past and present political battles between firms and their allies have concerned boundary issues. These include such questions as what activities a particular firm or sector should be permitted to undertake. For example, should cable television firms be permitted to provide telephone service? Should long-distance companies be permitted to provide local service, and vice versa? Should companies that distribute information also be permitted to produce content? Should firms that distribute information be permitted to supply customer premises equipment or manufacture switches and transmission equipment? In largely unregulated industries cost and quality analysis in the market is the mechanism by which companies determine whether to organize particular activities internally or through the market employing the price mechanism.²² For example, automobile manufacturers determine whether to manufacture engines internally or to contract with a supplier. But in sectors that are highly regulated, such as telecommunications, courts, regulatory agencies, and legislatures often make such boundary decisions. Frequently we will see that boundary issues have been extremely important in telecommunications from early days through the Telecommunications Act of 1996.

The second set of political issues, closely related to the boundary issue, concerns entry and the structure of an industry. A preliminary question is how we define a market. For example, are metal food containers and glass food containers part of the same market even though their physical compositions are different? Economists as well as courts that consider such questions use the concept of cross elasticity of demand to answer the question. Under that concept the focus is on the extent to which consumers will switch from one product or service to another if the price or quality of one changes while the other remains constant.²³ It is obvious that since all customers have limited resources, the sale of any product or service affects the sale of every other product or service to some degree. But when consumer switching leads to high cross elasticity of demand, we can say that two products or services form part of the same product market.

Because of the deep government involvement in telecommunications, the cross elasticity of demand arises in a peculiar way. Government rules may impose artificial entry barriers when, in fact, full-scale competition is technologically feasible. For example, cable companies and local telephone operating companies might be able to deliver the same kinds of information and, therefore, have high cross elasticities of demand. But government policies have kept these industries in their respective niches. The political ramification of new technological possibilities is that some firms, industry segments, and government actors seek to break down these artificial barriers, while others seek to preserve them. At times bargaining can occur so that each firm or sector enters each other’s field with government officials acting as arbiters. Sometimes, too, a would-be entrant adopts the strategy of initially attempting to enter a small market niche and then gradually enter into other parts until it is a full-scale competitor. As we will see, this was the strategy that MCI adopted when it undertook to end AT&T’s long-distance monopoly and make the industry a somewhat competitive one.

The third set of issues with which policymakers have been involved concerns allocation. We conventionally think of land and personal property in terms of allocation and use legal conceptions, most importantly contract and property, to determine such questions as who owns what, and why. The philosopher David Hume’s formulation is still the best one: “Some method must be shown by which we may distinguish what particular goods are to be assigned to each particular person, while the rest of mankind are excluded from their possession and enjoyment.”²⁴ While the principle of property allocation is widely accepted in the cases of land and personal property, many people do not think of the concept in important segments of telecommunications, especially wireless transmission. Yet, as economist R.H. Coase argued, the same principles apply. The electromagnetic spectrum available for the transmission of information is a scarce resource in exactly the same way that the number of Rembrandt paintings is even more limited. Therefore, contract and property rules can be applied to spectra.²⁵ Precisely the same point can be made about transmission through satellites in the sky and wire under or above the ground.

These observations raise a number of issues in telecommunications politics. The threshold one is whether the free market, government rules, or some hybrid of the two should be the principal allocation mechanism. If the unregulated market is the mechanism and government plays no role in the allocation process, the traditional rules governing ownership, transfer, and obligation for automobiles or commercial real estate apply. But that has been the rare case in telecommunications transmission; government has almost always played a significant role. Accordingly, governmental players devise rules that competing firms and other actors bitterly contest. But while such allocation issues have led to heated contests, one should not get the misconception that the electromagnetic spectrum capable of exploitation is inherently limited and cannot be expanded. Just as the Netherlands reclaims land from the sea, innovators have continuously discovered ways of utilizing hitherto unused spectra or utilizing spectra in new ways. Some of the most contentious battles have occurred when new spectra can be utilized or when frequencies already in use can be used in novel ways. The same principles apply to the other transmission media, including satellites and wires. Keeping rivals out can be just as important a strategy as enlarging capacity utilization in some cases.

The Network

The biggest antitrust case in history was United States v. AT&T, which resulted in the breakup ofthat giant company in 1984. The principal focus of that case was on one of the thorniest issues in telecommunications: whether it is sound policy to allow a single company to dominate too many of the component parts of a network. AT&T, in its defense of controlling local telephone service, long distance, equipment manufacture, and research, argued, “If a toaster is defective, it may blow a fuse, but it cannot affect the electrical service of others. By contrast, an improperly designed or maintained telephone, when put into operation, can distort the electric current flowing to it from the central office in such a way as to cause return signals that interfere with the quality of service not only for that customer, but for his neighbor as well…. Indeed, a malfunctioning device or a block age in a local switching center in New York can have a direct impact on a caller as far away as California.”²⁶ While AT&T had an obvious vested interest in strongly arguing that the complementarity of the components of the telecommunications network required common ownership of all the parts, it is nevertheless true that such a network has distinct characteristics. In any event, the theme has been very important in American telecommunications policy and compels us to look closely at the network idea and the components of a network.

Until the 1970s, telecommunications and broadcasting were conceived as being distinctive networks. Simon Nora and Alain Mine, who were among the first to notice that the markets were converging, wrote: “Designed like a star with a single point of emission, the television network is unidirectional, broadcasting from the center toward all of the receivers. On the other hand, telecommunications networks handle the traffic between two points, a transmitter and receiver; furthermore, telecommunication can occur in each direction, while the television receiver is condemned to remain totally voiceless.”²⁷ Convergence of the two previously disparate sectors has been based, in part, on digitalization and the development of encryption/decryption technologies so that broadcasting signals can be properly received only by those persons for whom they are intended. At the same time, the capabilities of the separate cable television and telephone networks have been increasingly becoming identical. Thus, the idea that broadcasting and telecommunications constitute distinct networks, although largely useful at one time, is increasingly less so.

The convergence of traditional broadcasting and telecommunications is joined by another important convergence with immense implications—the marriage of telecommunications and the computer networks. Once, one carried voice and the other carried data. Among the important implications of the convergence is the conceptualization of information as a large, inclusive category of services once comprehended as discrete. The idea of an “information society” was conceived by economist Fritz Machlup in the early 1960s, when he grouped together the various industries and services, the primary purposes of which were the generation, transformation, and provision of information.²⁸ It was during that same period of the early 1960s that digital communication was first introduced into telephone networks. The ability to use a series of binary codes (zeros and ones) to represent information meant that the type of information conveyed became of secondary importance to the ability to represent it digitally. Moreover, it also followed that it would be possible to transmit information from machines to machines, machines to persons, and persons to machines, just as persons had traditionally communicated to persons.

Based on the intellectual effort begun by Machlup and the implications of digitalization, the concept of “information” was developed. The kind of information became secondary to the question of how it can be reduced to zeros and ones—a task still under way. There are several important implications. First, information can be in the form of speech, music, motion videos, still pictures, data, text, graphics, and signals (such as those used in pagers). It is not far-fetched to agree with James R. Beniger that “eventually tastes, odors and possibly even sensations, all might one day be stored, processed and communicated in the same digital form.”²⁹ Second, because of the diverse kinds of information, telecommunications is no longer a homogeneous distribution system transmitting only voice information in a constricted information range. Because customers can desire various mixes and quantities of different kinds of information, distribution can become a heterogeneous system in which different distribution firms provide a variety of information packages, almost simultaneously or at different times. Third, because of digitalization a wide variety of digital devices, such as CD-ROMs, digital cameras, game consoles, and so on can be plugged into the telecommunications distribution system.

Information content requires a transmission device to begin its travels through the network. The traditional device is, of course, the plain old telephone. But in recent times it has been joined by the computer (often through a modem), fax machine, pager, videophone, wireless transmitter, cellular telephone, and so on. The same devices are in use at the reception end, but antennae and multimedia receivers (capable of receiving different kinds of information almost simultaneously) supplement them. Early in the telephone’s life, however, the same instrument became capable of transmitting and receiving, and this has been the usual model since. These instruments are grouped in the category of customer premises equipment (CPE). The transmission medium is the next component of the network and is usually composed of twisted copper wires, fiber-optic lines, coaxial cable, satellites, and various wireless frequencies. Although they have an ancient lineage, storage and forwarding devices—the next component of the network—have only recently come into common use. They include answering machines, tape recorders, instructed microchips, telephone services, computer devices, and video on demand. The heart of a network is switching, which allows each subscriber to communicate with a large number of other persons through different transmission paths. For this purpose switching and transmission equipment, often of exceptional complexity, are necessary. Transmission paths are divided into local service and long distance, each with differing economic characteristics. Finally, networks require signaling devices that facilitate the establishment, supervision, and disconnection of communication as well as billing. Signaling equipment is contained not only in transmitters and receivers, but in central offices as well. All of these activities must share common standards and must function harmoniously.

Until the late 1960s, AT&T persuaded governmental actors that the network required centralized control and coordination. Experience bolstered its monopoly position by showing that the costs of intervention into the network exceeded the benefits. Accordingly, even government actors ordinarily hostile to monopoly went along with AT&T’s network domination. After the late 1960s, technological and entrepreneurial innovation began to erode AT&T’s position, and government regulators gradually opened each part of the network to other firms. Although the positions are superficially inconsistent, the response of regulators and legislators correctly served a higher interest—the public interest.³⁰

There can, of course, be a variety of networks, including the telephone network, Internet, cable television, and so on. These independent networks may or may not be interconnected. When one considers the complexity of networks, it may be surprising, until one learns the reasons, that until 1984 American telecommunications was dominated in every facet by a single firm—AT&T and its predecessor companies. Indeed, it is no exaggeration to state that from the invention of the telephone until 1984, the story of American telecommunications was largely the story of a single firm and its relationships with government agencies and (with the single exception of Western Union for a short time) much smaller rivals. Even since 1984 the single most important firm in American telecommunications has been AT&T. It is to that company and its development that we now turn.