EVOLUTION OF UNITED STATES TELECOMMUNICATIONS POLICY, TECHNOLOGY, AND COMPETITION AT THE BELL OPERATING COMPANIES 1952-1996 A Dissertation Presented to The Academic Faculty By Wayne R. Drews In Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy in History and Sociology of Technology Georgia Institute of Technology December 2017 Copyright © 2017 by Wayne R. Drews EVOLUTION OF UNITED STATES TELECOMMUNICATIONS POLICY, TECHNOLOGY, AND COMPETITION AT THE LOCAL BELL OPERATING COMPANIES 1952-1996 Approved by: Dr. Steven Usselman, Advisor Dr. William Winders School of History and Sociology School of History and Sociology Georgia Institute of Technology Georgia Institute of Technology Dr. John Krige Dr. Richard Barke School of History and Sociology School of Public Policy Georgia Institute of Technology Georgia Institute of Technology Dr. Douglas Flamming Date Approved: October 5, 2017 School of History and Sociology Georgia Institute of Technology To my wife: Diane ACKNOWLEDGEMENTS My wife encouraged me and her belief that I could achieve success kept me going forward. Without her continuing support, I could never have completed the requirements. My daughter earned her Ph.D. and made me so proud that for the first time there was a Dr. Drews. Then she got married. After a career in technology-based companies, the thought was not in my mind that when I left the business world I could be her replacement as a Dr. Drews. I was honored to be accepted into the Georgia Tech History of Technology graduate program with the intention of seeking a Master’s degree and possibly teaching at the college level. My first contact was with John Krige. He suggested that I enroll as a Ph.D. student to give me the latitude to continue after a Master’s degree if I should desire. I greatly appreciate that excellent suggestion. Though I doubted I ever could finish it at my advanced age. My daughter has continued to inspire me. She and my wife both believed I could do this, even when I doubted it. Their faith and support, along with all the other members of my family, is the reason for my success. The many classes which I took were ALL very enjoyable, challenging and enlightening. The best teachers I could ever imagine. Krige, Usselman, Flamming and Winders all stand out in my mind for what I learned and how they conducted their classes. Dr. Krige visited me in Paris when I was hospitalized there with a serious illness. I had at my bedside a book about writing dissertations. He told me he was pleased to see it and I should not give up on my dreams. Several former employees in the Bell Operating Companies (BOCs), who were involved with relevant activities in the timeframe of this study, were interested and iii gracious to share their experiences and perspectives. Foremost among them were Joe McMonagle, Phyllis Anderson, Joe Villarreal and Marvin Thomason. I found their insights to be very helpful in putting issues into the context of those who faced daily the challenges at the ground level of the BOCs. I am indebted to LaDonna Bowen-Chavers for all her excellent counsel and help in navigating through the administrative processes. Without her knowledge and assistance, I certainly could never have met the requirements and would have become forever lost in the forest. Also, there were my fellow graduate students, past and present, who formed a community which I cherished greatly. Walking with them along the same well-trod paths has been an inspiration and a pleasure. Most importantly, it was very fortunate for me that Steve Usselman agreed to make time in his busy schedule to be my advisor and to guide me along the way. His input has been right on target. In times when I felt weak and uncertain about how to proceed, he was there to instruct and support me. The confidence he expressed in my ability to reach the finish line encouraged me to believe that I could do this and helped to keep me going. iv TABLE OF CONTENTS ACKNOWLEDGEMENTS iii LIST OF TABLES vi LIST OF FIGURES vii DEFINITIONS viii SUMMARY xii CHAPTER 1. Introduction 1 CHAPTER 2. The Regulatory Background 16 CHAPTER 3. Losing End-to-End Control 38 CHAPTER 4. Data Transmission and Deregulation 92 CHAPTER 5. Commissions, Consumers, and Carter 139 CHAPTER 6. Divestiture and its Repercussions 161 CHAPTER 7. Conclusions 182 TIMELINE 192 REFERENCES 195 v LIST OF TABLES Table 1 Projected losses for non-Bell operating companies……………………87 Table 2 Projected losses for non-Bell operating companies in CPE by market...88 Table 3 Comparisons of AT&T to IBM in 1975 ($ Billions)…………………..110 Table 4 AT&T Quarterly Earnings in Millions of Dollars……………………..148 Table 5 Projections for Anticipated Revenue Losses of Independents…...…….153 Table 6 Spending on Information and Communications Technologies………...174 Table 7 Internet Users by Country in 2016……………………………………..187 Table 8 Household Income and Telephone Penetration After Divestiture...……188 vi LIST OF FIGURES Figure 1 Advertisement for the Hush-A-Phone………………………………….40 Figure 2 The Original Carterfone………………………………………………...45 Figure 3 Advertisement for non-Bell decorator phones………………………….65 Figure 4 Carter’s Uncertainty…………………………………………………...137 Figure 5 Reagan and Regulatory Reform……………………………………….162 Figure 6 BOCs Before Divestiture………………………………………………165 Figure 7 RBOCs After Divestiture………………………………………………166 Figure 8 Cartoon Illustration of the Standards Process………………………….181 vii DEFINITIONS1 Basic Exchange Service: Service within a local calling area provided to customers by the incumbent telephone company which allows them to make calls for a monthly charge. BOC: A Bell Operating Company was owned by the parent company, AT&T, which provided local and long distance services within a specific region of the country. Calls between regions and internationally where provided by another wholly owned company, AT&T Long Lines. Certification: Inspection of proposed non-Bell terminal equipment by an expert agency which determines if it can be connected to the network without creating harms. Channel: An electronic path over which communications signals in the form of voice or data are transmitted. Common Carrier Principle: The position that regulation should limit the number of businesses which provide certain essential public services (such as utilities and transportation) in each geographic area. The contention is this will achieve low-cost, high- quality service through regulatory oversight using standards of accountability for prices, profits, and service. It argues this approach is preferable to multiple competing firms and will result in greater utilization of capacity and therefore lower unit costs. 1 Some definitions are paraphrased from sources in the 1970 to 1985 years with the intent of reflecting commonly used terminology of that period. They are modified by the author to present a clearer and more balanced perspective. viii Connecting Arrangements: Interface equipment provided by the regulated telephone company to be installed between customer-provided terminal equipment and telephone network facilities. The goal was to insure against damaging signals and voltage emanating from terminals which could interfere with the service to other customers or possibly create hazards for customers or company technicians. Cost Averaging: The policy of the BOCs before competitors entered the market. It provided for all products and services in all geographic areas to be equally priced as the means used to establish universal service. The goal was to permit all users to have access to all services at prices they could afford even when the cost to provide a specific service to a specific customer was greater than the price. It also meant that some products and service were priced above the cost and this became the target area for new competitors. CPE: This acronym has been used in two ways. Initially, it meant Customer Premises Equipment, but later it also was used to mean Customer Provided Equipment. End-to-End responsibility: The traditionally held belief within telephone companies that the only way to ensure quality service is for them to provide and maintain all aspects, which included CPE. Hard-wired: Direct connection of CPE to telephone company network rather than through inductive or acoustic coupling. Independents: Local telephone operating companies that were not part of the AT&T Bell System. ix ICT: Information and Communications Technologies is an umbrella term that includes any communication device or application, encompassing: radio, television, cellular phones, computer and network hardware and software, satellite systems and so on, as well as the various services and applications. Interconnection: A generic term for linking equipment or systems with the principle telephone network. In this dissertation, the term will primarily refer to the connection of premises equipment to the access lines of the local telephone network. Local loops: Communications facilities that connect a customer’s premises to a carrier’s switching center or hub site. LRMC: The minimum increase in total cost associated with an increase of one unit of output when all inputs are variable. The long-run marginal cost curve is shaped by returns to scale, a long-run concept, rather than the law of diminishing marginal returns, which is a short-run concept. The telephone companies historically used this accounting method. Depreciation rates for capital investment, such as cables and switches, were typically thirty years. MTS: Message telecommunications service refers to services made available to customers over the nationwide switched network rather than private line services which are furnished to a single customer for their exclusive use. NARUC: The National Association of Regulatory Utility Commissions represents Public Service Commissioners who regulate essential utility service in each state with the charge to assure reliable utility service at fair, just and reasonable rates. x OTP: The White House Office of Telecommunications Policy (OTP) was established in 1970. In 1978, it was merged, along with the Department of Commerce's Office of Telecommunications (OT), into the newly created National Telecommunications and Information Administration (NTIA).