“Who owns a telephone?”
It’s a question I frequently ask when I speak on college campuses about impediments to innovation. Every hand goes up, and I get quizzical looks as if I just asked who was wearing clothes.
“Who knows that when I was a kid, it was illegal to own your own telephone?”
A couple of graying professors raise their hands, recalling the days when you had to rent your phone from Ma Bell, the only legal provider.
“Hitchhiking back to college after a weekend break, why did I call my mom, ring the phone three times, and hang up to let her know I got back safely?” More quizzical looks. “Because in 1972 a three-minute long distance call cost the same as two pitchers of beer and three bags of Beer Nuts.”
I have their attention.
From the time my father was born in the 1920s to the time I went to college in the 1970s, the consumer experience of telephone service barely changed. You could have plugged a 1920s telephone into the 1970s telephone network and it would have worked just fine.
Sure, there were a few changes. Long distance operators were replaced by direct dialing. Push-buttons supplanted the old rotary dial. Other than that, the experience of making a telephone call barely changed for 50 years. Fifty years! New features? Hey, the Princess Phone has a lighted dial! As for consumers enjoying a Moore’s Law decline in prices? Fuggedaboudit.
I ask, “How many of you think the smartphone you are carrying is still going to be supported 50 years from now?” They laugh. “How would you like it you weren’t allowed to have new features until everyone on the planet gets a phone?” Eyes roll.
I tell them about a paper that was published in the late 1970s — when I had my first job as an engineer at Bell Laboratories — that explained why you could never send data down a telephone line at a rate faster than 9,600 bits per second. More quizzical looks from generation broadband. You’re putting us on, right?
This is where connecting the past to different possible futures gets interesting.
An entire generation has grown up with no knowledge of what it was like to live under the government sanctioned telecom monopoly known as the Bell System. Today, we have choices unimaginable during that 50-year era. So why did stasis last so long?
The answer is the number one killer of innovation — government-enforced “fairness.”
The prime directive of the Bell monopoly since the Federal government handed the keys to the kingdom to AT&T in 1913 was that telephone service should be fair and ubiquitous. The farmer should pay the same as the city slicker and every American should have access to the same products and services. No region of a city, state, or the country should be discriminated against when it came to network investment. To ensure all this, prices would be set by government regulators, while guaranteeing the Bell System a “fair” 12 percent rate of return on investment — without risk and with no competition to worry about.
AT&T, to its credit, kept its side of the bargain. Over the decades, the entire country was wired up. Fairness was drilled into the culture. Invent away, but no one could have something new unless you found a way to give it to everyone.
That’s why those 1970s Bell Labs scientists were not off the mark when they said you could never put data down a phone line faster than 9,600 bits per second. Never mind that you could go 10,000 times faster on short lines in the city. On long loops in rural areas high speed was a non-starter. So because it would be inherently unfair, no one got it.
Many books have been written about the marvelous climate of innovation at Bell Labs. Truth be told, when it came to making incremental improvements to the legacy circuit-switched telephone network, they did a solid job. But few benefits accrued to consumers. Long distance calls long remained a luxury. Yes, they invented the transistor, but completely missed the boat on the Internet. It took Silicon Valley to really run with it to become the Mecca of permissionless innovation.
So what changed? In 1983 the Bell monopoly was broken up by the courts, unleashing unbridled competition for the first time in decades. Since then, the telecom industry has gone on a rocket ride of innovation we’re still on today, as entrepreneurs tinkering in their garages continue to put Bell Labs to shame.
Yet, there’s no guarantee it had to happen. By a quirk of regulatory fate, the nascent Internet largely escaped the federal bureaucracy’s clutches, which allowed it to flourish without being handicapped by, you got it, enforced “fairness.” Technology companies bashed each others’ brains out, with the benefits largely accruing to consumers. Prices dropped like a rock as Moore’s Law advances made long distance telephony free. With video. All the way around the world.
This should all be cause for celebration, right? Not if you ask President Obama. Under the banner of “network neutrality,” a gussied up name for “fairness,” he has instructed the Federal Communications Commission to regulate the Internet under a regime set up eight decades ago to manage the Bell monopoly.
And if Congress lets the FCC gets away with it, the greatest innovation we’ll see will be among lobbyists vying to get a “fair” share of the pie for their clients.
Bill Frezza is a fellow at the Competitive Enterprise Institute and the host of RealClear Radio Hour.