Here's What The End Of Net Neutrality Could Cost You

Analyzing the wave of innovation that resulted from an earlier battle to open telecom networks is a good way to judge how much lost innovation the end of Net Neutrality (1) can cause. I’m referring to the battles to open up the public switched telephone network (PSTN) in the 1960s, which ended when 1968 the Carterfone decision allowed consumers and businesses to attach devices of their choice to the network.

What, you might ask, is a Carterfone? And isn’t attaching our own device to the network part of that inalienable right to the pursuit of happiness that is enshrined in the U.S. constitution?

Actually, attaching devices to the telephone network falls under the jurisdiction of the FCC, just like Network Neutrality (2). Until 1968, FCC rules prohibited attachment of foreign devices to the telephone network on the basis they might damage the network. This, despite the fact that said network largely consists of wires strung though trees and buried in walls and shallow trenches that are vulnerable to breaks and shorts caused by falling limbs, digging, and hungry rodents. The PSTN is designed to survive those challenges and does that well. The threat posed by a rogue telephone seems mild in comparison. But, hey, any pretext to maintain the monopoly …

Before Carterfone, all customer premises equipment (the terminal devices in our homes and offices) came from the Bell System (the national telephone monopoly). It was big, clunkly, limited in features, and almost always beige. And it was very profitable for the telcos: in the 1990s (thirty years later) AT&T was still making substantial profits renting old telephones to (mostly old) customers who had never bought a phone.

Via the Carterfone decision, the FCC allowed “any lawful device” to be connected to the telephone network as long as it did no harm. This unleashed two forces: 1) the creative energy of entrepreneurs and big companies alike, conceiving and implementing new functionality from network attached devices, and 2) price competition, bringing prices sharply down and expanding markets.

Here are some of the important innovations in customer-owned telephone equipment that followed the opening of the network:

• The Carterfone, which connects a radio network to a telephone network, enabling phone calls to be placed from a mobile radio.
• In the home, innovation and competition eventually produced home answering machines and cordless telephones for less than $100.
• Fax machines became widespread and affordable. In the 1960s fax machines were rare and expensive.
• Smart, inexpensive dial-up modems arrived in 1981. They enabled the early consumer Internet. Probably, the broadband consumer Internet would have developed much more slowly if dial-up had not proved the demand and the business model.
• Businesses were able to deploy “smart dialers” that automatically inserted the extra ~10 digits needed to route their long distance calls to alternative service providers, saving megabucks. (Until the 1990s long distance telecommunications was very expensive.) Remember MCI in its glory days, or Sprint before it became a mobile company?
• Business customer premises equipment developed into sophisticated “private branch exchanges” (PBXs) that incorporated the smart dialer function, gave businesses much greater control over their telecom spend, and offered nice features like speed-dialing.
• Businesses installed voice mail networks, the precursor to today’s email and texting services.
• Video conferencing got its start, albeit a very limited and expensive one.

The Internet has made many of these products/businesses obsolete. But, they were very important in their time, and they showed the way and created the market for the Internet-based products that replaced them.

The FCC is considering proposed rules that will end Net Neutrality and allow Internet service providers to lock small companies out of the Internet fast lane if they cannot pay the extra fees that major companies pay. This is analogous to the FCC rules that, before 1968, locked innovators like Carterfone out of the business of providing sophisticated customer equipment attached to the phone network.

Analogies are never perfect, but they are always instructive. My point is: opening the old public switched telecommunications network to innovation produced a flood of products and services that customers bought hungrily because they found them to be highly valuable and good value for money. These products and services increased the productivity of business, reduced the friction in personal lives, and helped pull down the monopolistic prices of long-distance services by making alternative carriers more accessible. Before the Carterfone decision, no one could have predicted the scope, variety, and value of benefits that an open network produced.

If we keep innovators locked out of the Internet fast lane, we may never know what we are missing, but we will likely miss innovations of huge value.

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Notes:

1. Net Neutrality refers to regulatory policy that requires Internet service providers such as Comcast, AT&T, and Verizon to offer equal quality of service to all services regardless of who the service provider is. For example, Comcast is required to offer the same quality of service to Netflix that it offers to its internal on-demand streaming video service.
2. The “inalienable right to the pursuit of happiness” is political rhetoric. It comes from the preamble to the Declaration of Independence and is not a part of the Constitution or U.S. law.
3. Licensed under a Creative Commons Distribution License v3.0.