Carterfone??

Recently SKYPE filed a petition with the FCC in which SKYPE asked that the FCC's Carterfone rules be applied to wireless telecommunications services. Translating this into English, SKYPE is asking the FCC to rule that a subscriber can attach any telephone handset they want to the wireless telephone network. Case in point, recently Steve Jobs announced the release of Apple's new iPhone. Problem? The iPhone can only be used with the Cingular network. You can't use your Cingular phone on a non-Cingular network, and you can't use your non-Cingular handset on the Cingular network. SKYPE wants the FCC to change that.

But what's all this about Carterfone? To understand Carterfone, we have to use the WAYBACK Machine and go all the way back to the 1950s. Actually, it would be a good idea to take the WAYBACK Machine all the way back to the 1870s.

In 1876, Elisha Gray of Oberlin College (my alma mater) filed a patent for his invention, the telephone. Unfortunately for Elisha and my college's endowment fund, Elisha was too late; Alexander Graham Bell had not two hours earlier filed his own patent for a telephone.

The relevant part of this story is - what did Bell patent? Did he patent a telephone network? Did he patent telephone service? No, he patented the device at the end of the copper wire, the telephone device itself. With this invention, and with the help of a few friends like JP Morgan and Theodore Vail, Bell Telephone grew into a nationwide telephone service monopoly. Bell acquired Western Electric to build its phones, and only sold Bell phones to Bell telephone companies. The Bell business plan involved deriving revenue from telephone sets, local telephone service, and long distance telephone service.

The telephone network was a marvelous invention. It carries data (normally in the form of voice) from here to there. So fabulous was this network that it inspired inventors – those who followed in the footsteps of Bell – who thought they might build a better mousetrap.

In the 1930s, Pastor invented an "autodialer." Push a button and the device would automatically dial your favorite phone number for you (aka one touch dialing). He offered to license his patent to AT&T, but AT&T wasn't interested. Having no one else to sell to, Pastor brought an antitrust claim against Bell. The Court thought that AT&T had no obligation to negotiate with Pastor, but at any rate, it wasn't their problem. These types of complaints should be raised before the appropriate regulatory body (like the FCC).

In the 1950s, the Jordaphone Corporation had a pretty cool device, an answering machine. This time Jordaphone did bring its complaint to the FCC. But the FCC wasn't too interested. AT&T reportedly made no showing that the answering machine would harm its network, but the FCC reasoned that 99% of telephone calls stay inside a state (are intrastate) and therefore this is a state regulatory body issue. Punt.

Then in 1956... Well actually this part of the story starts in the 1920s. Observing the need to have a private conversation, and that people would cup their hands over the handset so that people could not hear the conversation, an inventor said "I can solve that problem" and invented a little plastic scope-like attachment that would go over the handset and make the conversation private. Hush a Phone happily sold this cool little invention for 20 years until an AT&T lawyer had lunch (I guess AT&T lawyers have lunch once every 20 years – har har). The AT&T lawyer walks down the street, sees the Hush a Phone for sale in a store window, fears for the safety of the telephone network, and sues. AT&T argues that this violates their tariff which states that that nothing can be attached to the network. AT&T alleged no specific harm to its network. Nevertheless, the FCC ruled in favor of AT&T, making a slippery slope argument that the unrestricted use of "foreign attachments" could harm telephone service, networks, and personnel.

Well the Hush a Phone Corporation thought this odd since the device had been used for 20 years without the collapse of the network. Therefore Hush a Phone did something that was unheard of at the time; they challenged an FCC order in federal court. The appellate court was simply baffled that AT&T had no problem with people cupping their hands around a handset, but took offense at achieving exactly the same effect by use of the Hush a Phone. The Court concluded that both the FCC and AT&T had engaged in an unwarranted interference with a "telephone subscriber's right reasonably to use his telephone in ways which are privately beneficial without being publicly detrimental." The monopoly which started with a telephone device had seen its first sign of erosion.

The problem with Hush a Phone is that it only permitted the attachment of non electrical devices. What about electrical devices? Carter his this idea of how to patch a telephone handset together with a radio and create a device that would connect the telephone service with a radio system. This might be useful, for example, in connecting people on boats with the telephone service. AT&T was again afraid that this might cause the collapse of the telephone network, and sent notes to their customers saying that if they used a Carterfone, AT&T would cut off service. Carterfone sued. The courts referred the case to the FCC. The FCC looked in its own WAYBACK machine, back to Hush-a-Phone, and concluded that as long as Carterfone did not harm the network, it was permissible. After all, AT&T was selling a device that did almost exactly the same thing, and if the AT&T device would not cause the collapse of the network, then probably the Carterfone was okay too.

The boundaries of AT&T's market power had shifted. A company that had been built on a telephone equipment patent now faced competition in "customer premises equipment." People could now attach anything they wanted to the network. Well almost. It would take until 1975 and the promulgation of Part 68 for these rules to be fully realized. In explaining its policy objectives for Part 68, the FCC stated

We determined in Docket No. 19528 and elsewhere that the public benefits from diversity in the supply of terminal equipment and that consumers for this further reason should have the option of furnishing their own terminals, including main stations. Among these benefits as found in Docket No. 20003 (61 F.C.C.2d at 867), are the public's wider range of options as to terminal devices, competitive stimulus to innovation by telephone companies and independent suppliers, the availability of new equipment features, improved maintenance and reliability, improved installation features including ease of making changes, competitive sources of supply, the option of leasing or owning equipment, and competitive pricing and payment options. . . . We remain of the opinion that the proven and reasonably anticipated public benefits from the competitive supply of terminal equipment, including primary instruments, take precedence over the considerations urged by the telephone industry. If anything, this judgment is the more firm in light of potential developments in home and small business terminals and the heightened desirability of protecting the consumers' freedom of options in such circumstances. "

AT&T's business plan had shifted. Its business was based on a monopoly of both telephone sets and telephone service; after Carterfone, AT&T could no longer treat the telephone set market as its own entirely.

One year after the Carterfone decision, the good folks at the Department of Defense ARPA and UCLA were on the move. Using their newly established rights under Carterfone, these folks plugged a telephone line into something called an IMP (a precursor to a router) and put the ARPANet (the precursor to the Internet) online. Not only did Carterfone impact AT&T's business plan, it was also a necessary precondition to the building of the Internet and the attaching of routers and modems at the ends of the telephone network.

[Note: to be clear, this post is expressing no opinion on the Merit's of the Skype petition – I have not even read it yet – this post is just a joy ride in the WAYBACK machine]