Computer I (1966)

It is the 1960s. The FCC faces a problem. At that time there existed a communications network that offered basic communications service. This communications network was provided by the incumbent monopoly Ma Bell, also known as AT&T. This network has been traditionally regulated by the FCC. It had been built in a regulatory environment as a sanctioned monopoly with rate payer fees. [First Sec. 706 Report, ¶ 45 (1999)]

The problem was that someone had figured out how to build a better mouse trap. Someone had figured out how to use computers with this network. Someone had figured out how to enhance the network by adding devices at the ends of the network, layering protocols on top of the network, and achieving data processing using remote terminals. Ultimately these innovations would evolve into computer networks. These enhancements were dependent upon the underlying communications monopoly and came with the marvelous promise of economic expansion, innovation, and competition. However, these enhancements also threatened to be a substitute for regulated services, and regulated services threatened to be a bottleneck in the way of the growth of these services.

Western Union

In the 1960s, the FCC's common carrier authority covered not merely Ma Bell; Western Union also fell under title II of the Communications Act. The Western Union telegram service was, in retrospect, an interesting service. The service took the message from a user. The user would provide a destination address and content for the message. The message would then be inserted into the Western Union system. However, if the message originated in Baltimore for a destination in Los Angeles, it did not go straight through a wire from Baltimore to Los Angeles. Rather, the operator in Baltimore, not knowing the full path of the transmission to Los Angeles, knew instead the next hop in the general direction of Los Angeles, and forwarded the message to the next hop. At the next hop, which might have been Chicago, an operator would receive the telegram, read only the header with the address, and then forward the message back into the network in the general direction of the destination. In this way, the message would work its way through the network, being stored and then forwarded, hopping from node to node in a best effort, until it reached its final destination and was stored until the delivered to the recipient. [Smith]

In the 1960s, it dawned on users of main frame computers that they could take advantage of the excess capacity of the main frames to send messages to each other. Alfred may log onto the main frame from one remote terminal, and leave a message for Beth. Beth would then log onto the main frame from another remote terminal, perhaps in another state, and receive the message. Eventually computer message-switching [CCIA 203 n 6] [CI Tentative ¶ 15] became a commercial service that did not simply store messages on a main frame, but transmitted messages through computer networks. Alfred would create a message and hit send. The message would go to the first email server, which would read the address, and then send the message onto the next hop in the network. The next hop would read the address and act accordingly. When the message reached its destination computer, the message was stored until accessed by the recipient Beth. [Email]

These two things look very similar to each other. However, one was regulated. The other was not. One was expensive. The other one was cheap, and avoided regulatory fees. One is a substitute service for the other.

There are two things to be taken away from this. First, message switching was dependent upon a regulated underlying telephone monopoly for transmission. Second, unregulated message switching was a substitute service for the regulated telegram services of Western Union. [See Smith p 831, 836] What exactly to do with message switching was one of the significant drivers of the Computer I inquiry. [See Smith p 852]

Big Iron and New Networks

This is a moment of major expansion of the American economy. Big iron main frame computing had taken hold and was becoming big business. Main frame computing was also evolving with the advent of time sharing and remote terminal access. [CI NOI ¶ 16] The role of IBM, computer manufacturers, and data processing services in the economy had grown and promised continued growth (Pursuant to the 1956 Consent Decree, IBM was prohibited from entering the computer service bureau market and could only act as a supplier of equipment). There were in-house computer services, computer service bureaus, and specialized computer services such as stock quotation services. [CI NOI ¶ 3-9] [Smith p 831, 836] Computers were being used to facilitate President Kennedy's space race, advance the cold war, run communications networks replacing human operators, and recreate the way business was conducted. The Internet would not be born until the end of the 1960s. The United States Government responded to the 1950s Soviet launch of Sputnik with, among other things, the establishment of the Advanced Research Projects Agency (ARPA). ARPA's computer research program, headed by individuals such as J.C.R. Licklider and Larry Roberts, led a team of researchers to develop the ARPANet. On October 25, 1969, ARPANet went online, transmitting its first message between computers at UCLA and the Stanford Research Institute. Originally, the government-run ARPANet would use the Network Control Protocol; it would not migrate to the Internet Protocol for 14 years.

The Issue

In the 1960s, the FCC faced a problem of something the Commission referred to as "convergence." [CI NOI ¶ 13] [CII Final ¶ 19 ("The First Computer Inquiry was a vehicle for identification and better understanding of problems spawned by the confluence of computer and communications technologies taking place at that time.")] There were computers that facilitate the operation of the communications network and there were computers with which humans interacted. [CI NOI ¶¶ 10-16 (discussing the migration of common carriers to the use of computers to run networks)] What should the Commission make of these computers? How should they be treated and how do they fall within the regulatory scheme? What type of jurisdiction did the FCC have over these computers and should data processing services be regulated under Title II of the Communications Act? Should the FCC be concerned that some of those regulated communications companies were wandering off and entering into the unregulated data processing markets, at times using the excess capacity of their communications network computers to do data processing? Were the communication networks keeping up with the needs and the demands of the data processing networks?

Thus, the FCC, in order to resolve these problems, launched in 1966 what came to be known as the Computer I inquiry. The task before the Commission could be boiled down to two questions:

• The nature and extent of the regulatory jurisdiction to be applied to data processing services; and
• Whether, under what circumstances, and subject to what conditions or safeguards, common carriers should be permitted to engage in data processing. [CI Tentative ¶ 14]

The Policy

Classification

The year 1970 saw the FCC's first attempt to divide the world. The FCC concluded that the appropriate division would be between those computers that ran the communications network and those computers at the ends of the telephone lines with which people interacted. The division was technological, focused on computer processing, attempting to divine the difference between circuit or message switching and data processing. [CII Final, ¶ 17] The Commission attempted to divide the world between "pure communications" and "pure data processing." [CCIA p 203]

Pure communications exist where the content of the message is transmitted over the network transparently with no change in content or form of the message. [CCIA p 203] [CI Tentative ¶ 15] Compare Telecom Service. Pure data processing is the processing that takes place at the end of the telephone line. It is:

 

[t]he use of a computer for the processing of information as distinguished from circuit or message-switching. 'Processing' involves the use of the computer for operations which include, inter alia, the functions of storing, retrieving, sorting, merging and calculating data, according to programmed instructions.

[CI Tentative ¶ 15] The problem is that there is computer processing in both communications and data communications. What to do with things that looked like they were a little bit communications and a little bit data processing? The FCC was not too sure so it created a third category known as hybrids. [CI Tentative ¶ 15 ("Hybrid Service—an offering of service which combines Remote Access data processing and message-switching to form a single integrated service.")].

This was the gray area and the FCC declared that it would resolve the classification of these gray services on an ad hoc, case-by-case basis. [CI Final ¶¶ 27, 31-38] [CI Tentative ¶¶ 39-45] If it was more communications than not, then it was communications; if it was more data processing than not, then it was data processing. [CII Tentative ¶¶ 6-7, 17] [CII Final ¶¶ 13-14] [CII NOI ¶¶ 13-14] This gray area was the exception that subsumed the rule and quickly became Computer I's undoing.

Regulation

These two categories had very different characteristics that led to different policy results. This pivotal theme goes through out the Computer Inquiries. The Commission made policy decisions about these different computers based, not upon the technology, but upon the markets within which the technology existed.

The pure data processing market was viewed as an innovative, competitive market with low barriers to entry and little chance of monopolization. Viewing this market, the FCC concluded that there was no demonstrated need for regulation or safeguards.

 

Applying these standards to the record before us we conclude that the offering of data processing services is essentially competitive and that, except to the limited extent hereinafter set forth, there is no public interest requirement for regulation by government of such activities. Thus, there is ample evidence that data processing services of all kinds are becoming available in larger volume and that there are no natural or economic barriers to free entry into the market for these services. The number of data processing bureaus, time sharing systems, and specialized information services is steadily increasing and there are no indications that any of these markets are threatened with monopolization.

[CI Tentative ¶ 20] See also [CII Final, ¶ 127 (reviewing Computer I history)] [CII Tentative ¶¶ 16-17 (reviewing Computer I history)] The FCC became quite apologetic as Computer I went on clarifying that it never had any intention whatsoever at any time of regulating data processing:

 

It should be made clear that we are not seeking to regulate data processing as such, nor are we attempting to regulate the substance of any carrier's offerings of data processing. Rather, we are limiting regulation to requirements respecting the framework in which a carrier may publicly offer particular non-regulated services, the nature and characteristics of which require separation before predictable abuses are given opportunity to arise.

[CI Final ¶ 30].

The pure communications market, on the other hand, was provisioned by an incumbent monopoly. Almost always this monopoly was AT&T but there were a few other players such as GTE and a large handful of small, mainly rural, incumbent carriers. In any given market, these players exercised control through their regulated monopoly. Thus the FCC articulated four concerns about the incumbent telephone companies:

 

(a) That the sale of data processing services by carriers should not hurt the provision of common carrier services

(b) That the costs of such data processing services should not be passed on to telephone rate payers

(c) That revenues derived from common carrier services should not be used to cross subsidize data processing services and

(d) That the furnishing of such data processing services by carriers should not hurt the competitive computer market.

The telephone companies were acquiring large computers that helped run their networks during peak performance. These computers were paid for by rate payers. During the off peak hours, these computers would have excess capacity that the telephone companies could use to enter the data processing market. [CI Final, ¶ 7] [CI NOI ¶¶ 10-16] Since these services were paid for with telephone revenue, this gave the telephone companies the ability to enter the data processing market at significantly reduced rates.

First, a major regulatory concern of the Commission was the appropriateness of a carrier utilizing part of its communications switching plant of offer a data processing service. Further, there was the issue of whether communication common carriers should be permitted to sell data processing services and, if so, what safeguards should be imposed to insure that the carriers would not engage in anti-competitive or discriminatory practices. There was also concern as to the extent to which data processing organizations should be permitted to sell communications as part of a data processing package not subject to regulation.

[CII NOI ¶ 3] Having entered the market, the carriers would have the incentive and the opportunity for cross subsidization and other unfair trade practices. [CI Final ¶¶ 21-22] See also [CII NOI ¶ 5("[W]e were concerned about the possibility that common carriers might favor their own data processing activities by discriminatory services, cross subsidization, improper pricing of common carrier services, and related anticompetitive practices and activities which could result in burdening or impairing the carrier's provision of its other regulated services.")] [CI Tentative ¶ 25].

It was not the design of the FCC to bluntly bar carriers from the provision of data processing services; [CI Final ¶ 11 (discussing and rejecting parties’ views that there should be an outright ban on carrier provision of data processing services)] rather the Commission recognized certain benefits if safeguards could be designed to permit carriers to enter into the market. [CI Tentative ¶¶ 30-33]

Also, the Commission at this time was concerned that the telephone companies were sufficiently meeting the needs of data processing and computer services.

This, then, is another area of concern. Are the service offerings of the common carriers, as well as their tariffs and practices, keeping pace with the quickened developments in digital technology? Does a gap exist between computer industry needs and requirements, on the one side, and communications technology and tariff rates and practices on the other?

[CI NOI ¶ 21]. See also [CI Tentative ¶¶ 6-11 (resolving issue of whether common carrier offerings are meeting needs of the computer industry)] [CII Final ¶ 14] [CII Tentative ¶ 2]. The Computer Inquiries policy explicitly had as its goal the promotion of economic growth and innovation in the computer services market. [CII Tentative ¶ 59] The Commission recognized the dependency of the computer networks on the underlying communications facility.

There is virtually unanimous agreement by all who have commented in response to our Inquiry, as well as by all those who have contributed to the rapidly expanding professional literature in the field, that the data processing industry has become a major force in the American economy, and that its importance to the economy will increase in both absolute and relative terms in the years ahead. There is similar agreement that there is a close and intimate relationship between data processing and communications services and that this interdependence will continue to increase. In fact, it is clear that data processing cannot survive, much less develop further, except through reliance upon and use of communication facilities and services.

[CI Final ¶ 7] See also [CI NOI ¶ 1 ("Effective use of the computer is, therefore, becoming increasingly dependent upon communication common carrier facilities and services by which the computers and the user are given instantaneous access to each other.")] The communications facility was a crucial resource upon which they depended, supplied by a single provider who also had the potential to be a competitor.

Telephone companies had both the ability and the incentive to act in an anticompetitive manner.

That the ability for abuse exists as does the incentive, of that there can also be no doubt. As stated above, information services are fragile, and because of their fragility, time-sensitivity, and their negative reactions to even small degradations in transmission quality and speed, they are most easily subject to destruction by those who control their transmission. Among the more obvious means of anti-competitive action in this regard are increases in the rates for those switched and private line services upon which Regional Company competitors depend while lower rates are maintained for Regional Company network services; manipulation of the quality of access lines; impairment of the speed, quality, and efficiency of dedicated private lines used by competitors; development of new information services to take advantage of planned, but not yet publicly known, changes in the underlying network; and use for Regional Company benefit of the knowledge of the design, nature, geographic coverage, and traffic patters of competitive information service providers.

[United States v.W. Elec. Co., 673 F.Supp. 525, 566 (DDC 1987)]. They sat in an unusual place in the market of being both supplier and competitor to the data processing services. [CI NOI ¶ 15 ("As a consequence, common carriers, in offering these services, are, or will be, in many instances, competitive with services sold by computer manufacturers and service bureau firms. At the same time, such firms will be dependent upon common carriers for reasonably priced communication facilities and services. ")]. The Commission expressed misgivings about whether permitting telephone companies to enter the data processing market was prudent, questioning whether telephone companies should be permitted into this market at all. [CII Tentative ¶ 15] If they were so permitted, then the question was, on what terms and with what safeguards. [CII Tentative ¶ 3]

Safeguard: Maximum Separation

In response to the concerns related to the communications facility, the Commission devised its "Maximum Separation" safeguards. [CI Final ¶ 10].

Because of the increasing involvement of interstate communications facilities and services in the provision of data transmission, the need for such separation is apparent and urgent. This need exists whether or not at the present time the carrier is engaged in the sale of local or remote access data processing. In either instance, there is a potential for abuse in the form of a commingling of costs associated with the rendition of communication and data processing services, which can give rise to the above-discussed problems of cross-subsidization and other unfair competitive practices in the pricing of regulated and nonregulated services. Also, such commingling of operations and related costs will unduly complicate the task of effective regulation of the communication rates and services of common carriers. It will tend to obscure, if not defeat, the ready identification and allocation for accounting and ratemaking purposes of the costs associated with each activity.

[CI Tentative ¶ 35] See [CII Final, ¶ 18] [CII Tentative ¶¶ 4, 123]. Maximum Separation meant that regulated communications carriers could enter the unregulated data processing market, but only through a fully separate subsidiary. [See CI Tentative ¶¶ 36-38]. The FCC required that a carrier establish a separate data processing corporation, have separate accounting books, have separate officers, have separate personnel, and have separate equipment and facilities. [See CI Tentative ¶ 36]. The carrier was also prohibited from promoting the data processing services offered by the separate subsidiary. [CI Final ¶¶ 18, 21("[W]e have decided to modify our rules to prohibit a data affiliate from using the name of its related common carrier in its promotions and, further, to prohibit such affiliate from using, in its corporate name, any words or symbols contained in the name of its affiliated carrier.")] The carrier could not use its network computers for non-network purposes; the carrier could not use the excess capacity of the network computers during off peak times to provision data processing services. [CI Final ¶¶ 13-15, 24]. Carriers could use their own computers to meet their own data processing needs and the needs of independent telephone companies, so long as those needs were incidental to the provision of communications services. [CI Final ¶ 40]. The carrier was otherwise, however, prohibited from acquiring the services of its data processing affiliate. [CI Final ¶ 20] Finally, the affiliated subsidiary was not itself permitted to own transmission services but had to acquire all such services on a tariff basis. [See CII Final ¶ 229]

Legacy of Computer I

What is the legacy of Computer I? The policy objectives laid down in Computer I are consistently followed through out the entire proceeding. How these first principles are applied and the outcome that is produced may be different, but the Computer Inquiries are consistently concerned about markets:

• The data processing market is highly competitive and innovative and demonstrates no need for regulation. The data processing market, however, is dependent upon the communications market.
• The communications companies are both a bottleneck supplier of services and a competitor in the data processing market.

Therefore, strict safeguards were put into place in order to restrain the market power of the communications company and for the benefit of the data processing market. These are border regulations between markets where the divisions between the markets can easily be discerned and maintained. These safeguards create an open communications platform available to all users on a non-discriminatory basis.

There is another important point. Contrary to popular mischaracterization, this is not a history of regulatory restraint. This is not a history of the FCC "not regulating the Internet." Rather, this is a history of the FCC taking affirmative and aggressive regulation of communications network, specifically for the benefit of the computer networks. The computer networks were clearly the designated beneficiaries of safeguards.

Finally, the problems addressed by the Commission in the 1960s are parallel to the issues today. It was called "convergence" back then just like today. The "new service" was a substitute for the old service. The new service was unregulated where the old service was entrenched and regulated. The new service was dependent upon the underlying old service. The old service sought to enter the market of the new service. The old service market was highly consolidated (well, ok, it was a monopoly then). These are similar to today's issues.

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Computer I

• Reg. and Policy Problems Presented by the Interdependence of Computer and Communications Services, Final Decision, 28 FCC2d 267, 21 Rad. Reg.2d (P & F) 1561 (1971)
• Reg. and Policy Problems Presented by the Interdependence of Computer and Communications Services, Tentative Decision, 28 FCC2d 291, 18 Rad. Reg.2d (P & F) 1713 (1970)
• Reg. and Policy Problems Presented by the Interdependence of Computer and Communication Services, Notice of Inquiry, 7 FCC2d 11, 8 Rad. Reg.2d (P & F) 1567 (1966)

Caselaw

• Computer and Communications Indus. Ass’n v. FCC, 693 F.2d 198, 203 n.6 (D.C. Cir. 1982) (“‘Message-switching’ was defined as ‘[t]he computer-controlled transmission of messages, between two or more points, via communications facilities, wherein the content of the message remains unaltered.’")

Papers

• Delbert D. Smith, The Interdependence of Computer and Communications Services and Facilities: A Question of Federal Regulation, 1117 U. Pa. L. Rev. 829 (1969).