The Idea Factory: Bell Labs and the Great Age of American Innovation (39 page)

By the early 1970s, the crowd was gone. At Bell Labs, Bill Baker was the last of the Young Turks. John Pierce, feeling himself in a rut, had retired a few years before his sixty-fifth birthday, accepting a teaching position at his alma mater, the California Institute of Technology, and relocating to the West Coast, not far from where he had attended high school and flown glider planes. “John Pierce is the model of contemporary man,” Baker said at Pierce’s 1971 retirement ceremony, “because he is always ahead of his time by decades and hence can’t avoid eventually being contemporary.” It wasn’t only men such as Albert Einstein or Niels Bohr, Baker added with his usual enthusiasm, who should be heroes of twentieth-century science; those men, brilliant as they were, could never have done what Pierce did, which was to “inject realism into every element of physical science pursued at the Bell Laboratories.” In Baker’s view, Pierce had helped create “usable and visible” technology. It wasn’t theory; it was work that changed people’s lives.

As he departed, Pierce asked if he could consult for Bell Labs. Bill Shockley—now teaching at Stanford—was consulting already, making some extra money by working for Jack Morton in the device department. But in the 1970s, the contributions of both Pierce and Shockley amounted to visits from California to New Jersey for a few weeks a year. They were at most an occasional presence, their influence minimal. Julius Molnar,
meanwhile, the czar of the development organization and Fisk’s heir apparent, had taken ill during the latter part of 1972. When he died of colon cancer the following January, he was fifty-six years old. As Molnar’s condition grew dire, Fisk had called Bill Baker at his home one evening and asked him to come over. “I bet he’s going to ask you to be president,” Baker’s wife said to her husband after he hung up the phone. When the prediction turned out to be true, Baker hesitated before accepting. Being director of research at Bell Labs had been the only job Baker ever wanted. Over the years he had turned down a number of government positions and university presidencies so he could remain. Only when he decided that as president he could still keep a hand in managing basic research did he accept.
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Assuming the presidency meant Baker would be addressing the same kinds of questions that Frank Jewett had faced when he established Bell Labs nearly fifty years before. What problems did AT&T and the local phone companies need Bell Labs to solve for them? And what new communications technologies might exist—or should exist—ten or twenty years hence? But Baker would also have to address some challenges that Jewett never faced. Over the past decade or so, some of the phone company’s problems had become problems of business rather than technology: Several new companies, most of them using innovations developed by Bell Labs, were trying to compete in both telephone equipment sales and long-distance services. These competitors were helped in the late 1960s and early 1970s by a burgeoning philosophy, now finding adherents among politicians and lawyers in Washington, D.C., that American consumers would be better served through competition rather than a tight federal control of industry. The U.S. Congress was already getting poised to loosen the rules that had long governed the airline, railroad, and securities businesses. In the argot of the day, these industries would soon be “deregulated.” Should telecommunications be next? The dilemma was whether it remained in Americans’ best interests to have a regulated phone monopoly such as AT&T—a monopoly that had “an end-to-end responsibility” for telephone service—or whether the phone giant should
be dismantled in the expectation of more competition, lower costs, and perhaps an even greater rate of innovation.

Such questions had little to do with science and engineering. And thus they went far beyond the purview of Bill Baker, and farther still beyond the problem-solving capabilities of even the brightest minds at Bell Labs.

F
OR MORE THAN FIFTY YEARS
, AT&T had remained intact at the pleasure of the United States government—always, as the economist Peter Temin points out, “operating at the limit of what the antitrust laws would allow.”
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The company’s unprecedented size and reach and power—ownership of Bell Laboratories and the equipment manufacturer Western Electric; ownership of the long-distance company known as AT&T Long Lines; and shares in or outright ownership of twenty-two local phone companies—had repeatedly been the cause for legal action on the part of the U.S. government. Yet each time, AT&T had found a way to dodge or duck; the company would appease regulators and politicians and continue on its usual business. Each time, moreover, the legal arguments subsided into a renewed understanding that telecommunications were “a natural monopoly” and were therefore best carried out by a single entity.

That perceived natural monopoly wasn’t only justified by the phone system’s technological complexity and interdependence; it was also—in an argument that telephone executives made over and over again—a matter of economics. With one company in effect serving the country’s phone customers, some parts of the phone business that were highly profitable, such as long-distance service, could subsidize other aspects that were less profitable, such as local calling. Profits from high-paying corporate customers, moreover, could subsidize service to residential customers. Profits from dense urban areas could subsidize expansion into sparse rural areas. All in all, this kind of “averaging,” as it was sometimes called, helped make telephone service available and affordable for most Americans. At the same time, thanks to technological innovations, the quality
of the service had steadily improved over the years, even as many of the costs had steadily decreased.

The history of relations between the Bell System and the U.S. government seemed to follow a pattern, with truces occurring roughly every other decade. In 1913, in response to an antitrust suit by the U.S. Department of Justice, AT&T had agreed to stop buying up local phone companies and to offer the ones that continued to do business access to its long-distance phone network. In the late 1930s, the newly minted Federal Communications Commission had embarked on an investigation of the phone company that had resulted in a scathing evaluation of its business practices. In the end regulators had homed in on questionable billing practices AT&T had used in providing equipment to customers through its manufacturing arm, Western Electric. Yet in 1939, the government’s line of attack stalled: World War II intervened, and Western Electric and Bell Labs demonstrated in the work on radar and other devices that they were essential gears in the nation’s military machinery. It wasn’t until 1949 that the Justice Department, picking up on existing government complaints, filed a new antitrust suit against the Bell System. What followed were years of hearings and a series of cozy negotiations between government officials and AT&T lawyers, until finally the 1949 suit was settled through an agreement known as the 1956 consent decree. AT&T could continue its regulated monopoly on phone service. But the decree forced the company out of the computer business and insisted that it make its older patents freely available and its new patents available for a reasonable charge.

In the wake of the 1956 agreement, AT&T appeared to be indestructible. It now had the U.S. government’s blessing. It was easily the largest company in the world by assets and by workforce. And its Bell Laboratories, as
Fortune
magazine had declared, was indisputably “the world’s greatest industrial laboratory.”

And yet even in the 1960s and 1970s, as Bill Baker’s former deputy Ian Ross recalls, the “long, long history of worry about losing our monopoly status persisted.” To a certain extent, Bill Baker and Mervin Kelly believed their involvement in government affairs could lessen these worries.
In the view of Ross and others, such efforts probably helped delay a variety of antitrust actions. Ross recalls, “Kelly set up Sandia Labs, which was run by AT&T, managed by us, and whenever I asked, ‘Why do we stay with this damn thing, it’s not our line of business,’ the answer was, ‘It helps us if we get into an antitrust suit.’ And Bell Labs did work on military programs. Why? Not really to make money. It was part of being invaluable.”

But being invaluable to the Department of Defense was not necessarily the same as being invaluable to the Department of Justice or the Federal Communications Commission. And the Department of Justice still employed lawyers who harbored a deep mistrust of the Bell System from the manner in which the 1949 antitrust suit had been swept aside by the 1956 consent decree. “Throughout the 1960s,” the journalist Steve Coll noted in his account of the 1970s-era battles between AT&T and the federal government, “the [antitrust] division maintained files about AT&T’s activities, waiting for the right moment to go after Western Electric again.”
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Relations between Ma Bell and various regulatory commissions were also strained. A number of service problems in the late 1960s, especially in New York City, had undercut the phone company’s image of quality and perfection. At the same time, a variety of independent manufacturers had won the right, granted by the FCC, to connect their equipment, such as office switchboards, into Ma Bell’s precious network.
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Most important, however, was that certain lawyers at the FCC were increasingly sympathetic to a new long-distance company, run out of a modest Washington office by a brilliant, bare-knuckled businessman—a smoker and a drinker, and judging by the risks he took on his telecom business, a gambler, too—named Bill McGowan. The company was known as Microwave Communications Inc., but was better known as MCI.
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I
N THE LATE 1960s
, McGowan had teamed up with an entrepreneur named Jack Goeken to start building a nationwide network of microwave towers, just as Bell Labs had done in the early 1950s. Their company offered
long-distance service, first to businesses, then to ordinary residents. MCI’s service wasn’t any better than the Bell System’s—indeed, the quality of calls and the network connections were sometimes poor, and the technology was in certain respects inferior. But the service was significantly cheaper than AT&T’s. Unlike Ma Bell, MCI didn’t have to build things to last forty years. It likewise didn’t have to subsidize its local phone service by charging high long-distance rates. MCI didn’t
own
any local phone companies. The executives at AT&T therefore maintained that MCI was “cream-skimming.” What they meant was that MCI was homing in on the most profitable part of the phone business and taking none of the responsibility for a nationwide “end-to-end” network, as AT&T was obliged, by law and tradition, to do. The FCC had nevertheless concluded that MCI was a worthy competitor that offered businesses and individuals a useful service. In 1971 the FCC commissioners maintained that AT&T had to connect MCI’s long-distance microwave network into its local switching centers.
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To Bell Laboratories’ top managers, the decision was both astounding and deeply threatening. The Bell System had long coexisted with a modicum of competition: Smaller local phone companies still operated in rural areas, relics of an agreement struck between AT&T’s Theodore Vail and the government early in the century, when Vail had agreed to stop buying up his competition. But MCI’s pursuit of the profitable long-distance monopoly was different. It left some Bell Labs executives to wonder if they were seeing the start of a potentially mortal threat. Indeed, MCI was finding sympathy from the FCC as well as from various U.S. congressmen, who were now warming to the idea of greater competition and a less monolithic AT&T. A breakup, once deemed unthinkable, had moved into the realm of the possible.

In testimony before the U.S. Senate’s Subcommittee on Antitrust and Monopoly, Bill Baker asserted that “the notion that Bell Laboratories could endure and function away from AT&T, Western Electric, and the operating integrated Bell System would be laughable were it not so sinister and so ominous.” It was an argument like the one a gifted child might
make in favor of preserving his parents’ marriage. The strength of Bell Labs, Baker declared, was in its links with other parts of the monopoly. It was what allowed the Labs’ scientists and engineers to “think of new digital networks, or new telephone instruments, of new modes of distribution like satellites and fiber optics.” It was, Baker added with a typical flourish, what allowed “human creativity [to be] converted to human benefits.” The arrangement must continue.

Four months later, on November 20, 1974, the Department of Justice filed a sweeping antitrust suit against AT&T, naming Bell Labs and Western Electric as codefendants. The government alleged that AT&T and Co. had engaged in “an unlawful conspiracy” to monopolize communications service. Among other things, the phone giant had made it difficult for equipment providers to compete against Western Electric and had obstructed service providers such as MCI from connecting to its network. The defendants, the government said, “are continuing and will continue these violations” unless something was done. The Department of Justice not only implored the courts to break off Western Electric from AT&T; it urged that some or all of the local phone companies be split off as well.
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John Pierce had never been enthusiastic about AT&T’s stuffy corporate management. In his Bell Labs office, Pierce had placed a large sign on his desk that asked, in reference to AT&T’s headquarters, “195 Broadway: Is there intelligent life there?” But the threat of breakup stirred in Pierce, now an academic in California, a fervid willingness to defend his old employer. “It is certainly within the law for the Department of Justice to institute a suit against the Bell System,” Pierce wrote in an essay he submitted to the
New York Times
op-ed page, “but I think that it goes beyond all reason when they assert that this could possibly result in cheaper or better telephone service for the public. We have too many examples in other countries of the high costs and poor service created by the very sort of situation that the Justice Department is trying to create.” John deButts, the powerful chairman of AT&T, read one of Pierce’s defenses of the phone company in a financial magazine and sent Pierce a warm note on his personal stationery. “Not many men have so broad a
grasp of how crucial organization is to innovation, and we are fortunate to have so authoritative a voice as yours to point out what mischief the Justice Department suit would do should it succeed. Which it won’t.”
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