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A History of Disruptors: Or How the U.S. Government Saved the Internet from the Telcos

Timothy Denton

Kenji Kushida is a scholar at Stanford University, who has written a most explanatory overview of how America came to dominate cyberspace, through computer companies. He traces the evolution of the Internet to a series of actions taken by the US government to limit the power of the telephone companies.

Kushida looks at the USA, Europe and Japan from the perspective of what happened when telephone monopolies were broken up and competition introduced in the 1990s. He finds that in each zone, a different cluster of industries came to dominate. In Japan, the telephone company held on to profits and financed service innovations. In Europe, the telecom equipment manufacturers, using the GSM standard, came to dominate cellular telephony until the advent of the smartphone. In the US, the computer came to dominate the scene, and the reasons are specific to decisions the US government made about limiting the role of telecommunications companies.

The result, he says, has been commoditization of the offerings of the telecom suppliers —

"Commoditization entails competition based primarily on price, with prices approaching costs, leaving little profit or economic rent from firms…

"The smartphone revolution commoditized telecommunications carriers by reducing their offerings to commodity voice and data services. Carriers' own proprietary services lost value when consumers faced a wealth of smartphone apps that provided better functionality, regardless of carrier."

Kushida's point is that the eventually world-dominating outcome came from a series of governmental actions to isolate telecommunications from the computing industry. This conclusion offends several shibboleths at once; it asserts the usefulness of government intervention by means of anti-trust and telecom regulation; it situates net neutrality discussions in a historical context of protecting the Internet from domination by carriers; and points to how other important ICT players did not get the balance of power between incumbents and disruptors right.

The US government used its regulatory and anti-trust power to keep the carriers away from the computer industry, says Kushida, and this was the precondition for the eventual emergence and success of the Internet. They did so in several stages:

  • The DOJ consent decree of 1956 confined AT&T to telephony, and enabled its manufacturing arm to sell equipment to AT&T with independent accounting, while allowing Bell Labs to licence its patents to other companies;
  • the FCC's Computer Inquiries I (1971) and II (1976) reserved the processing of data to the computer industry and the transmission of data to the telephone companies;
  • The 1974 DOJ break up of AT&T broke of the long distance telephone monopoly, and divested Western Electric and the local operating telcos from the mothership. Critically, says Kushida, "all parts of AT&T were kept out of the rapidly growing computer industry".

We then arrive at the Internet.

"The point is that the Internet, which disrupted telecommunications and equipment firms worldwide, was created almost entirely outside the world of telecommunications, from specific US political economic conditions. Critically, the hand off to private sector management was handled carefully to avoid telecom carriers exerting control."

Kushida notes the following:

  • the Internet was decentralized;
  • the intelligence was placed at the edge

When the National Science Foundation privatized the Internet in 1995, its backbone management was handed off to private firms. Kushida observes:

"If the Internet had not been developed in the US, with critical hand offs to the government science and research sectors occurring after AT&T was broken apart, the outcome of battles over control of the Internet might have turned out very differently. Had telecom carriers dominated it, the Internet almost certainly would have developed into a closed, controlled network rather than an open global network."

He has useful words to say about Japan,too.

"The key lesson from Japan's experience was that when the domestic winners are network infrastructure firms, high value-added services and equipment can be trapped in the domestic market unless infrastructure firms are able to effectively expand abroad."

The lessons for Canada are equally clear, since we have been a part of the US telecom/computer policy environment:

  • segregation of the Internet from the telecom carriers is as vital here as in the US, which we have enforced with net neutrality regulations, or Internet traffic management rules, as we call them.
  • segregation of the Internet from the Broadcasting policy environment is just as vital, because the carriers own the broadcasting undertakings, so that capture of the Internet by broadcasting interests is just the same as capture by the carriers, only more so.

This is what the appeal by Bell Canada of the Klass decision is all about.

By Timothy Denton, lawyer, former national regulator (CRTC)
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Related topics: Policy & Regulation, Telecom
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Conflating wired Internet with mobile? Christopher Parente  –  Mar 02, 2015 1:58 PM PDT

Interesting analysis. The one thing confusing to me is that you seem to position the smartphone revolution circa 2007 on as the inevitable result of policy decisions in the 50s and 70.

I worked in the wireless industry. Every year it was said mobile data use would explode — next year. Then the next, and the next etc. Had the carriers designed devices people truly found intuitive and useful, they could have forestalled the very commoditization this analysis makes sound inevitable.

To put more plainly — the mobile Internet could have been owned by the carriers in the US, but they allowed Google and Apple to grab it.

Early events matter Timothy Denton  –  Mar 02, 2015 3:13 PM PDT

Good point, Christopher. Kushida would answer better than me, surely. The smartphone revolution commoditized most of the things that voice telephones offered. Their makers could not have done so had they not been in existence, and had not Moore's Law found people ready to exploit its characteristics. So yes, I do assert that a continuous line of high-level US policy kept the computer industry apart from the telephone industry, and that cell phone makers and carriers before smartphones were locked into the model of keeping services as expensive as they could.
Thus, US policy of long standing plays a role in what we see before us. This puts net neutrality regulation into perspective, not as an aberration but as consistent with what the US federal government has always done.
The mobile Internet could have been owned by the carriers, as you propose, if only they had broken with their aversion to cheapening the price of bandwidth. This would have meant violating their historical business model. This would be like leaving the development of tanks in WW1 to the cavalry arm: just not going to happen. Changing that corporate culture would have been impossible - and still is.

Timely article Christopher Parente  –  Mar 03, 2015 8:29 AM PDT

Thanks Timothy for reply. I certainly agree that a huge culture shift would have been required for the carriers to seize the opportunity. My only point was that was still possible less than 10 years ago.

This story appeared today. High level but very relevant to discussion, speaks to the situation the carriers are in today: http://seekingalpha.com/article/2968216-google-and-facebook-declare-internet-independence-from-carriers?auth_param=rj64t:1afbh05:be7725ed09d6bdf3fd8d30c9c21185ea&uprof=45&dr=1

Timely article Timothy Denton  –  Mar 03, 2015 12:20 PM PDT

Yes, I agree.

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