Carterfone Case Showed How Regulations Promote Competition

Dominant communications corporations are preventing innovation and economic growth.

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David Brodwin is a cofounder and board member of American Sustainable Business Council. Follow him on Twitter at @davidbrodwin.

This week marks the 44th anniversary of the Federal Communications Commission's ruling in the Carterfone case. While few remember the device, no one in America is unaffected by the Carterfone decision, which blew the doors off the tightly-controlled telecommunications industry. Without the FCC's courage, we wouldn't enjoy the vibrant, open, ever-changing Internet that we have today. 

But, as important as Carterfone was for telecommunications, its implications for the economy are much broader. The decision shows that rulemakers need to step in at times so innovation can flourish. New rules are needed when corporations that control entire industries lock out inventions that threaten them. Carterfone has many parallels today, particularly in telecommunications and energy markets.

Back in 1968, before Carterfone, AT&T controlled the entire United States telecommunications systems. AT&T's manufacturing arm, Western Electric, made all the equipment that connected to the phone system. Nobody owned their own phones. If you had phone service, you leased a phone from AT&T. No one was allowed to connect their own phones or computers equipment to AT&T's network. There were no answering machines or modems. There were no computers connected to phone lines. There was no Internet—except for the closed, private military network.

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The Carterfone was invented to solve a Texas-sized problem: Long before cell phones, satellite phones, and WiFi, Texas ranchers and oil-field workers needed a way to keep in contact without being near a phone line. Entrepreneur Thomas Carter invented a gadget that connected an ordinary phone line to a two-way radio, much like one of today's walkie-talkies. The Carterfone was affordable and effective—but it broke AT&T's rules against connecting third-party equipment to its network. AT&T tried to stop Mr. Carter, claiming that its entire phone network was at risk. AT&T's army of lawyers had thwarted similar challenges before.

The FCC surprised the public and industry analysts. It bucked existing law and prior court cases to rule in favor of Carterfone. It said that AT&T did not have a right to ban third party equipment from its networks. AT&T only had the right to impose reasonable technical standards to make sure that the third party equipment was compatible with the network and would not disrupt communications. AT&T had to allow customers to connect any equipment that met reasonable standards.

This crucial ruling led to extraordinary innovation. At first, it made possible an abundance of phones with advanced features and creative designs, plus modems, answering machines, computer terminals, and office telephone systems. Then it opened the way to routers, gateways, switches and all the third-party gear that powers the public Internet. Without this crucial act of regulatory bravery in the face of corporate power we might still be tethered to copper wire to talk to each other. We might still be mailing CDs to share files.

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The Carterfone decision is important because it shows that regulations are sometimes needed to prevent dominant companies from blocking progress. It shows that markets alone are not always enough to give good ideas a chance to develop. Sometimes regulation is needed so the seeds of innovation can sprout and grow.

We need the spirit and boldness of the Carterfone decision today. Some of today's dominant companies continue to thwart innovation. Comcast is under scrutiny for how it prices Internet service. It wants to keep viewers tethered to conventional cable TV and away from Hulu, YouTube, and others. The wireless giants AT&T and Verizon have thus far defeated attempts to open the cellular network. Electric utility operators have largely avoided buying power on a fair basis from homes and businesses that generate excess power from sun and wind. In each of these examples, innovation lags and the economy suffers so that dominant corporations can keep control.  

The Carterfone decision reminds us of the willingness we once had to change the rules and promote innovation. We must find this willingness once again, or our economy will stagnate.

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