Anthony J. Pennings, PhD

WRITINGS ON DIGITAL STRATEGIES, ICT ECONOMICS, AND GLOBAL COMMUNICATIONS

Four Futures: One Humanity

Posted on | January 2, 2020 | No Comments

I’ve had a long-term interest in an area of research called “Futures Studies.” I had read Alvin Toffler’s Future Shock in high school and Third Wave in college and reading science fiction actually led to my studies in biochemistry and other sciences as an undergraduate. But the future is hard to predict and it was coming on so fast that by the 1990s, one of my favorite authors, William Gibson, quipped appropriately, “the best science fiction is on CNN.”

This post looks at a few of my favorite futurists and a book I recently found intriguing that presented four visions of the future.

One of my favorite futurists was Buckminister Fuller. He mixed science with politics and had a unique view on economics. Comprehensive Anticipatory Design Science was the name he gave to his approach to the future. It was, in part, based on his “Synergetics” science that would eventually lead to a significant discovery in chemistry called Fullerenes or “Bucky Balls.” These are small soccer ball like molecules that are leading to new materials and medicines. One of his first inventions based on Synergetics was the geodesic dome, which provided durable protection for radar installations starting in the Cold War and is still used in the design of many buildings.

Fuller challenged the status quo with his peculiar use of language that seemed to counter common sense and yet be surprisingly insightful. He often used the metaphor of a bow and arrow to describe the importance of history in the study of the future. The further back you can pull the string of the bow he explained, the farther the arrow will travel. Likewise, he believed the further back you take your historical analysis, the better you can project into the future. Fuller promoted the idea of a utopian future based on technologies, if those technologies did more with less.

Another major influence was Jim Dator, a professor at the University of Hawaii while I was working on my PhD. He dissuaded his students of the idea of a one true future whose probability could be calculated with positivistic certainty, and suggested we use a futures visioning process to develop several alternative scenarios.

Dator has been working on four types of future scenarios: Growth, Collapse, Discipline, and Transformation. Growth projects the current emphasis on economic development and its social and environment implications. Collapse suggests a catastrophic turnaround due to natural or human-made disasters. Discipline appeals to a society that values precious places, processes, or values that are threatened by the existing social trajectory. In this scenario, it is believed that life should be “disciplined” around a set of fundamental cultural, ideological, or religious values. Finally, a Transformative society anticipates a radical makeover of society based on a technological revolution creating new “posthuman” bodies and an entirely redesigned set of global economic and political structures.

So I was immediately drawn to Four Futures: Life After Capitalism (2016) by Peter Frase when it was recommended by a former classmate. It is an extremely interesting read. His publisher Verso, advertises it as “an exhilarating exploration into the utopias and dystopias that could develop from present society.”

For Frase, something new is coming, and its based on two main drivers: climate change and automation. These issues are bringing problems and promises for humanity and will likely result in one of four scenarios:

  • a society of equality and abundance (Communism);
  • a society of hierarchy and abundance (Rentism);
  • a society of equality and scarcity (Socialism); and;
  • a society of hierarchy and scarcity (Exterminism).

Or at least we can use these four “ideal types” to think about the future and plan strategies for approximating a preferred one.[1] They set up contrasting visions of the future and work to produce an analytical structure that provides provocative ideas and insights. Granted some of these terms are quite charged in contemporary society. Communism is the boogeyman of the right, Exterminism is the great fear of the left.

But this is not your father’s Communism. This is a highly automated future with increased leisure time and a new abundance of resources based on renewal energy. While some think this only comes with great political mobilization and struggle, Frase believes the process will be facilitated by technological change and the institutional responses that come with regulatory adjustments. Those technological changes will also be the catalyst for a stronger democracy.

Rentism is a future that is produced when strong intellectual property (IP) laws persist and dominate over a new era of manufactured commodities produced by 3-D printers and Star Trek-like replicators. We already live in a world economy dominated by supply chains that produce major international flows of royalty payments. Copyrights and patents bestow rents to the owner of these intellectual properties, making them the newly rich and also creating a new era of scarcity. Legalism will proliferate to keep track of all the IP uses, but AI will largely replace lawyers.

Socialism is a future that has not kicked its carbon habits. It thus operates within the limits of hydrocarbon access on the one hand, and the extreme ecological damage it creates on the other. Addressing the resultant environmental issues may create new conditions for democratic governance and distribution.

Exterminism is a future of both scarcity and inequality. Automation has made labor redundant, and environmental damage has made them dangerous. The rich hide in “enclave societies” behind gates or perhaps “off-world” and become increasingly desensitized to the conditions of the poor. Just as tabulating machines, punched cards, and tattooed prisoners enabled the Nazi’s Final Solution, social media and big data technologies are available for identifying those classified as unwanted by a society. Immigrants, refugees, gender deviants, as well as poor people in general, could be easily targeted.

Frase grounds his work in The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies (2014), by Erik Brynjolfsson and Andrew McAfee. The first machine age was made possible by the application of steam power to industrial processes that led to subsequent innovations in energy and other technologies changing work, society, and the economy. Brynjolfsson and McAfee argued the second machine age is based on digital technologies. These technologies produce information that has little to no marginal costs when reproduced and shared, continues to double in processing power every two years, and stays user-friendly with its “combinatorial” power.

Music, for example, can be reproduced and distributed with little cost and distributed to smartphones with incredible abilities to provide high-quality sound, produce playlists, and provide lyrics and other artist information. That same device records data, takes and stores pictures, makes phone calls. The authors call this “bounty,” massive benefits allowing us to do Bucky Fuller’s more with less – like talking or videoconferencing overseas for hours for virtually no cost.

Lastly, the term “spread” refers to the increasing inequality that is also resulting from the widespread adoption of new technology. Automation will continue to eliminate routine jobs and at least keep wages stagnating in certain areas. Furthermore, networked technologies tend to create winner-take-all markets, and the globally linked stock markets have dramatically improved the wealth of investors.

These digital technologies produce more: more education, more entertainment, more health care, more travel, etc. Still, the future of the social and political institutions that they will produce is yet to be determined. Futures studies is an interesting exercise in thinking about available directions and choices to be made.

Notes

[1] The notion of ideal types comes primarily from Max Weber.

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AnthonybwAnthony J. Pennings, Ph.D. is a Professor in the Department of Technology and Society, State University of New York, Korea. From 2002-2012 was on the faculty of New York University. Previously, he taught at Hannam University in South Korea, Marist College in New York, Victoria University in New Zealand. He keeps his American home in Austin, Texas and has taught there in the Digital Media MBA program atSt. Edwards University He joyfully spent 9 years at the East-West Center in Honolulu, Hawaii.

The CDA’s Section 230: How Facebook and other ISPs became Exempt from Third Party Content Liabilities

Posted on | November 26, 2019 | No Comments

The rewrite of the communications law that emerged by early 1996 was driven by the appetite of the Bell legatees to position themselves as central providers of both content and conduit for the information age. – Patricia Aufderheide [1]

Facebook and other Internet Service Providers (ISPs) are facing criticism for the legitimacy of the third party content they carry and their attempts to manage it, especially political advertising. According to Title V of the Telecommunications Act of 1996, online intermediaries such as ISPs and telcos are legally protected from what users and publishers might do or say. The legislation was passed to enhance the service providers’ ability to monitor and even delete content without becoming publishers. In an emerging age of user-curated and user-generated content, the legislation has specific implications for the provision of news and social media in general.

Specifically, Section 230 of the Communications Decency Act (CDA) stated that, “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.”[2] Section 230 also offered protection to bloggers who host comments on their blogs. Bloggers and later vloggers were not liable for comments left by readers or tips left via email.[3] Although the CDA was struck down by the Supreme Court as being too restrictive to free speech, Section 230 continued.

The Clinton Administration and its appointed Federal Communications Commission (FCC) Chairman worked with the Republican-controlled Congress to pass the Telecom Act of 1996 and its associated Section 230 of the CDA. President William Jefferson Clinton, Vice President Al Gore, and the new FCC Chair, Reed Hundt, drove the policy process intending to enact a new telecommunications re-regulation to help revive the economy with a strategy based on the centrality of information technology. An agreement depended on getting some support from the new Republican Congress.

Republicans grouped around Newt Gingrich, a history professor from Georgia, who had been elected to the US House of Representatives in 1979. “Newt” proposed a new strategy of extreme partisanship, encouraging a total lack of cooperation with Democrats. He attacked House Speaker Jim Wright on ethics charges of bribery and not reporting book receipts, eventually driving him from office. Often invoking the memory of Ronald Reagan, Gingrich helped move the political landscape significantly to the political right.

Gingrich became the chief architect of the infamous “Contract with America,” an attempt to revive the Reagan Revolution. The Contract attempted to legislate the radical agenda of the Republican right, such as cutting back on welfare, forcing a balanced budget, eliminating public television, and phasing out government regulations on the media and telecommunications industries. Newt also wanted to get rid of the FCC, and relax accounting and securities rules on corporations.

On November 8, 1994, the Republicans obtained the House majority with a flood of new freshmen Congressmen, including Sonny Bono, the former Mayor of Palm Springs, and the slightly less talented side of the “Sonny and Cher” act. Another new Congressmen, Joe Scarborough later became the host of “Morning Joe,” an MSNBC morning cable news show. With the Republican victory, Gingrich became the Speaker of House, coordinating the legislative agenda and stepping up his divisive efforts.

On the legislative docket was a major reform of the Communications Act of 1934, eagerly pursued by both the Democrats and the Republicans. Central for Gingrich was the abolishing of the FCC and rolling back of anti-monopoly regulation. Tom DeLay’s (R-Tex.) worked with some 350 industry lobbyists drafting deregulation bills. Called Project Relief, the secretive group organizing campaign contributions for the legislation’s supporters while charting the course for a new era of oligopoly-controlled distribution of content.

It was the Democrats that took the more prurient course. Despite Gore’s objection, Senator J. James Exon, a Democrat from Nebraska, inserted the Communications Decency Act that criminalized offensive content. Section 230 of the Communications Decency Act was not part of the original Senate legislation, but took shape in negotiations with the House of Representatives, where it had been separately introduced by Congressmen Christopher Cox (R-CA) and Ron Wyden (D-OR). Called the Internet Freedom and Family Empowerment Act, it passed by a near-unanimous vote.

One of the key issues guiding Section 230 goes back to a lawsuit called Stratton Oakmont v. Prodigy. Stratton Oakmont was a financial institution, and Prodigy was an online service that ran a chat room and offered a number of other services such as news and weather. Stratton Oakmont sued Prodigy because an anonymous participant in the chat room tarnished the financial company’s good name. Because the person who posted the information could not be found, Stratton Oakmont sued Prodigy. They won in court because they considered Prodigy a publisher as they had been filtering offensive content.

Congress, with encouragement from the telcos, did not agree and Title V was introduced to the Senate Committee of Commerce, Science, and Transportation by Senators James Exon (D-NE) and Slade Gorton (R-WA). Title V attempted to regulate both the exposure of indecency to children and obscenity online. It was added to the Telecommunications Act in the Senate on June 15, 1995 by an 81–18.

It effectively immunized both ISPs and Internet users from torts committed by others using their online services. A tort is legal liability for a civil wrong done by a person that unfairly causes someone else to suffer some harm or loss. The exemption was designed to protect the service provider, even if they fail to take action after receiving complaints about the harmful or offensive content.

The Telecommunications Act of 1996 was the most significant legislation affecting media industries since 1934. Signed into law by President Clinton on February 8, 1997, it contained several prominent provisions. Most notorious was the CDA that sought to make it a crime to post indecent materials on the Internet. The CDA was later overturned by the U.S. Supreme Court as an infringement of the First Amendment. After much fanfare, it was struck down on June 26, 1997 although it maintained protection for the private sector blocking and screening of offensive material.

Also controversial was Section 551, “Parental Choice in Television Viewing” which required that a V-Chip be installed in all new television sets so that parents could program their TVs to block programming according to a new ratings system. The V-Chips went in but they were largely ignored by parents.

It was an awkward piece of legislation, but one that allowed the FCC to create a new environment for the Internet to grow. Telcos were required to allow other companies to lease their network at regulated rates. This led to large number of ISPs offering low-cost Internet access.

The Act had a lot of political pork; in particular, the broadcast networks were given free spectrum for future offerings of digital high definition television. Section 336 specifying “Broadcast Spectrum Flexibility” doubled the frequency spectrum to 6 MHz for established licensees. The value of these public airwaves given away to private media corporations was estimated at $150 billion at the time. Although decried by some politicians like Bob Dole, the story did not get a lot of media coverage.

High-definition television (HDTV) in the United States began in 1998 and became a major economic force. HD (ATSC 1.0) and ATSC 2.0 provided 19.4 Mbps transmission and advanced video compression techniques that allowed major broadcasters to reach cord-cutters. With ATSC 3.0, 4K (3840 X 2160 at 60 frames per second) TV viewers will have web-enabled interactive features, Video on Demand (VoD) but also targeted ads.

Part of the Act broke open the segmentation that had separated the different communication sectors. After the Act, companies could invade the other’s turf. It removed barriers to entry to the once protected monopoly-controlled sectors. For example, broadcasters could move into broadband, and carriers could offer content. It also allowed consolidation of different media companies, creating a new frenzy of mergers. AT&T, for example, made significant multi-billion purchases of Media One and TCI to become a cable behemoth after they invented cable modems for broadband delivery along with television services. AOL, by far the largest ISP, merged with Time-Warner in an attempt to cross-pollinate between the “old economy” and the “new economy.”

Notes

[1] Aufderheide, Patricia (1998) Communications Policy and the Public Interest: The Telecommunications Act of 1996. NY: Guilford Publications, Inc. p. 37.

[2] (47 U.S.C. § 230). U.S. Code Title 47. TELECOMMUNICATIONS Chapter 5. WIRE OR RADIO COMMUNICATION Subchapter II. COMMON CARRIERS Part I. Common Carrier Regulation Section 230.

[3] Mackey, Aaron, et al. “Section 230 of the Communications Decency Act.” Section 230 of the Communications Decency Act, Electronic Frontier Foundation, www.eff.org/issues/cda230. Accessed November 25, 2019.

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AnthonybwAnthony J. Pennings, Ph.D. is Professor and Vice-Chair at the Department of Technology and Society, State University of New York, Korea. From 2002-2012 was on the faculty of New York University. Previously, he taught at Hannam University in South Korea, Marist College in New York, Victoria University in New Zealand. He keeps his American home in Austin, Texas and has taught there in the Digital Media MBA program atSt. Edwards University He joyfully spent 9 years at the East-West Center in Honolulu, Hawaii.

The Spreadsheet that Fueled the Telecom Boom – and Bust

Posted on | October 24, 2019 | No Comments

“I had built a model in an Excel spreadsheet that translated what our sales forecast was into how much traffic we would expect to see,” he says. “And so I just assigned variables for those various parameters, and then said we can set those variables to whatever we think is appropriate.”Tom Stluka, Worldcom 1997 [1]

By the mid 1990s, telecommunications infrastructure was at the center of the world’s attention. The Internet and its World Wide Web were taking off. Cable TV began to offer broadband services. Satellite signal power shrunk dishes to a few meters. Mobile telephony also showed promise. In the wake of the Telecommunications Act of 1996 and the 1997 meeting of the World Trade Organization (WTO), investors poured some US$2 trillion dollars into the telecommunications industry.[2]

This post explores the story that an employee at WorldCom, a major telecommunications company that later became part of Verizon, formulated and propagated a spreadsheet that projected a major growth period for the Internet. It created a media conversation that heavily influenced the flow of investment capital into the telecommunications sector.

I’ve written previously about the impact of the digital spreadsheet on modern society. It has become what I call an techno-epistemological tool that creates meaning and cognitive trajectories of analysis and action. These worksheets combine words, numbers, lists, tables, with quantitative tools and formulas that structure information and suggest decision paths and scenarios. This case of the spreadsheet that changed the telecommunications environment of the 1990s operated initially within the WorldCom operation. Then it produced results that diffused throughout the telecommunications/Internet industry and investment community. The story became a bit of an urban myth, but that only points to its rhetorical value as it circulated through the technologically-driven economy of the 1990s “Bull Run” era.

The Bull Run

Interest in telecommunications intensified in the late 1980s with the emergence of contending “information superhighways”. Fiber optic cabling, multi-protocol routers, and ADSL broadband connections promised new services for both traditional cable and telephone companies. Mobile telephony and some data services like Gopher also started to become viable.

The privatization of the Internet in 1992 and invention of the World Wide Web’s hypertext protocols a few years later made “dot.com” companies feasible. The IPO of Netscape, famous for its radical web browser, marked the start of the dramatic “dotcom” investment boom of the bull run. People bought PCs or Macs, hooked to a modem, dialed into a local ISP, and “surfed the web.”

WorldCom was at the center of that investment boom, but many telecommunications firms benefited. Money also flowed into new companies like Enron, Global Crossing, Tyco, and Winstar, as well as traditional telecommunications companies like AT&T and the “Baby Bells” of the time (Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, US West). WorldCom emerged in the 1990s as a a significant growth company as it expanded from a long-distance provider to a major Internet Service Provider (ISP).

WorldCom started with long-distance telephone services after the breakup of AT&T but continued to expand through mergers and acquisitions. It acquired telecom competition pioneer MCI and became the largest ISP in the world after its purchase of backbone provider UUNET. Although WorldCom would end in accounting scandals, bankruptcy and ruin, and its CEO sent to prison, they inadvertently (or not) sparked the dramatic investment boom in telecommunications.

The Spreadsheet Model/Meme

In 1997, when he was an employee of WorldCom, Tom Stluka created a “best-case scenario” for the Internet’s growth on an Excel spreadsheet. Tom Stluka was an engineer for UUNET, a popular Internet service provider (ISP) that was taken over by WorldCom in 1996. He regularly developed estimates for data traffic based on a spreadsheet model he created.

Stluka’s CEO, Kevin Boyne, would often encourage Stluka to increase his forecast. Boyne wanted his suppliers of fiber optics and other new telecom equipment to increase their production so that supplies of the glass conduits and routers would be sufficient, and prices driven lower due to an abundance of supply. Boyne contended that the Internet was doubling in size every 100 days. So Stluka created a spreadsheet that validated these best-case scenarios for the Internet’s growth.

The spreadsheet story was revealed in a CNBC television news show, “The Big Lie: Inside the Rise and Fraud of WorldCom,” by their news analyst David Faber. Edward Romar and Martin Calkins explained:

    The so-called “big lie” was promoted by citing an internally developed spreadsheet developed by Tom Stluka, a capacity planner at WorldCom, that modeled in Excel format the amount of traffic WorldCom could expect in a best-case scenario of Internet growth. In essence, “Stluka’s model suggested that in the best of all possible worlds Internet traffic would double every 100 days” (Faber, 2003). In working with the model, Stluka simply assigned variables with various parameters to “whatever we think is appropriate.” (David Faber, 2003)[3]

The “doubling meme” started to become popular in the telecommunications industry to the point where it began to drive investment. In the wake of the “irrational exuberance” comment by Alan Greenspan, the telecommunications industry began forecasting its growth according to this spreadsheet model. Bernie Ebbers at WorldCom soon echoed the forecast as did new AT&T CEO Armstrong. The proliferation of tech-related magazines such as Red Herring and Wired inspired enthusiasm in the latest tech environment and the Holy Grail of Internet growth. Business news channels such as CNBC and the ill-fated CNNfn also promoted telecom stocks.

The Bubbles Burst

The spring of 2000 saw the end of the “new economy.” A lot of investment money had gone into companies offering dot.com services on the Internet. Every IPO it seemed, such as Pets.com was met with hordes of cash. NASDAQ, the online trading environment for technology stocks, reached a high of over 5000 in March, but the next month, prices began to fall. By the time the Bush administration settled into their new offices at the White House less than a year later, it had declined by over 3000 points. The NASDAQ continued to fall while the Dow-Jones Index of 30 established corporations climbed even higher, surpassing the 11,000 mark again in February 2001.

Research by Andrew Odlyzko, a mathematician who went to the University of Minnesota’s University of Minnesota’s Digital Technology Center and of the Minnesota Supercomputing Institute after working at AT&T, challenged the meme.[4]

    To be fair, says Mr Odlyzko, Internet traffic did grow this quickly in 1995 and 1996, when the Internet first went mainstream. But since then, he estimates, annual growth has settled down at around 70-150%, a far cry from the 700-1,500% trumpeted by WorldCom. The myth of 100-day doubling, however, refused to die.[5]

Rival telecoms companies such as Global Crossing and Qwest tried to adjust to the contrived projections, leading to the “Bad Apple” accounting scandals and telecom crash that rocked the US economy in the immediate years after 9/11. Many companies believed the meme or at least thought that they had to respond accordingly. They soon resorted to “capacity swaps” and other accounting tricks to boost their sales numbers to inflate earnings to compete with what WorldCom was reporting. Capacity swaps are the exchange of telecommunications bandwidth capacity between carriers that is accounted as revenue despite no exchange of currency.

The Fall of WorldCom

The telecommunications industry soon went into steep decline. The first revelation came with the meltdown of Enron, an energy company that embraced the Internet and bought and built 18,000 miles of fiber optic network. One of its schemes in an interesting but futile attempt to create a trading environment for bandwidth as it had for natural gas spot contracts. But it was too little, too late and would soon wind up as the largest bankruptcy in history.

As the WorldCom case would show, many companies started to engage in illegal accounting techniques after the markets faltered. In late June 2002 CNBC reported that WorldCom had been discovered to have accounting irregularities dating back to early 2001. Nearly US$4 billion had been illegally documented as capital expenditures. WorldCom had registered $17.79 billion in 2001 “line cost” expenses instead of the $14.73 billion it should have reported. The result was that it reported US$2.393 billion in 2001 profits instead of showing what should have been a $662 million dollar loss.

Shares dropped quickly. Although the stock had already fallen from its 1999 high of $64 a share to just over $2, it soon dropped to mere pennies before the stock stopped trading. Other companies such as Qwest and Tyco further reduced the vestiges of the general public’s confidence in the stock market, and particularly its telecommunications companies.[6]

The Telecom Crash

The stock markets continued to decline as new corporate scandals were revealed.The “Dow,” representing mainly the stalwarts of the old economy, would maintain its strength during the Bush administration’s early years. It would dip below, but return to highs over 10,000 intermittently until the summer of 2002 when the corporate scandals were exposed. Bush’s SEC chief, Harvey Pitt, failed to gain the confidence of investors and eventually resigned.

By July 22, 2002, over $7 trillion of stock values had dissipated. The Wilshire Total Market Index fell from $17.25 trillion on March 24, 2000 to $10.03 trillion on July 18, 2002. Telecommunications services, which had accounted for 7.54% of the Wilshire Total Market Index at the end of March, 2000; saw its total value fall to only 3.63%. Information technology fell from 36.2% to 15.01% and even Microsoft saw its market capitalization fall from $581.3 billion to $276.8 billion.

Finally, Congress passed the Sarbannes-Oxley Bill in August of 2002. The legislation enacted strict new accounting rules for publicly traded corporations. Accountants, auditors, and corporate officers were required to follow stringent record-keeping requirements and CEOs had to sign off on their company’s books. The stock price fall abated, but at a cost of trillions of investor dollars from IRAs, mutual funds, individual investments, and pension funds.

Conclusion

My research on spreadsheets mainly focuses on the productive aspects of this transformative technology in the financial and administrative spheres and not so much on the problems that may occur with their misuse, either on purpose or by mistake. But the expose by CNBC on Worldcom was extraordinarily interesting in that it showed how the power bestowed on quantitative and forecasting methods, and in this case, utilized with spreadsheets, can circulate throughout an industry and gather media attention and take on a life of their own. The “doubling meme” quantified and justified by the WorldCom spreadsheet accelerated over-investment in the telecommunications capacity needed for the Internet.[7]

Notes

[1] Quote from Faber, David. “The Rise and Fraud of WorldCom.” NBCNews.com. NBCUniversal News Group, 09 Sept. 2003. Web. 22 June 2017.
[2] BUSINESS WEEK, (2002) “Inside the Telecom Game”. Cover Story, August 5, 2002. Pp. 34-40.
[3] Quote from Romar, Edward J., and Martin Calkins. “WorldCom Case Study Update.” Markkula Center for Applied Ethics, Santa Clara University, www.scu.edu/ethics/focus-areas/business-ethics/resources/worldcom-case-study-update/. The references to Faber,2003 are from the CNBC television expose The Rise and Fraud of WorldCom. 8 September 2003.
[4] Coffman, Kerry, and Andrew Odlyzko. “The Size and Growth Rate of the Internet.” First Monday, A Great Cities Initiative of the University of Illinois at Chicago University Library., 5 Oct. 1998, firstmonday.org/ojs/index.php/fm/article/view/620/541.
[5] Quote from “The Power of WorldCom’s Puff.” The Economist, The Economist Newspaper, 18 July 2002. www.economist.com/special-report/2002/07/18/the-power-of-worldcoms-puff.
[6] An article by John Duchemin about Tyco on the Honolulu Advertiser’s website. It chronicled the travails of the Tyco telecommunications hub in Wai’anae. The 38,000 square foot center went unused when the telecom market collapsed. August 13, 2002.
[7] A good discussion of the doubling meme can be found in The Great Telecom Meltdown by Fred R. Goldstein, p. 72.

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AnthonybwAnthony J. Pennings, PhD is Professor and Associate Chair of the Department of Technology and Society, State University of New York, Korea. Before joining SUNY, he taught at Hannam University in South Korea and from 2002-2012 was on the faculty of New York University. Previously, he taught at St. Edwards University in Austin, Texas, Marist College in New York, and Victoria University in New Zealand. He has also spent time as a Fellow at the East-West Center in Honolulu, Hawaii.

HOW THE US MOBILE INDUSTRY CAME TOGETHER, PART III: JUNK BONDS CONSOLIDATE THE NETWORK

Posted on | October 6, 2019 | No Comments

Prosperity is the sum of financial technology times the sum of human capital plus social capital plus real assets. P=ΣEFT (DHC+ESC+ERA)
– Michael Milken

This post is the third on how the mobile industry emerged in the US. The first installment talked about how AT&T ceded the wireless opportunity to the local telephone companies when they were broken up in the early 1980s. The second post talked about how the regulatory dynamics during that time resulted in a bifurcated market structure when the FCC dedicated equal radio spectrum to landline RBOCs and non-landline bidders in an auction. The below looks at how an alternative funding system emerged to help partially consolidate the industry and return AT&T to telephony dominance via radio spectrum dedicated to non-wireline mobile.

In 1986, McCaw Cellular approached financier Michael Milken for capital to compete against AT&T with a wireless network. The McCaw family wanted the money to purchase cellular licenses and to buy MCI Wireless for nearly $2 billion. McCaw Cellular Communications was later sold to AT&T Wireless Services in 1994, combining the nation’s biggest cellular carrier with the largest long-distance telephone company.

Milken, formerly of the defunct investment firm Drexel Burnham Lambert, was one of the most controversial financiers in modern history. Convicted and jailed in the early 1990s from charges brought on by US Attorney for the Southern District of New York Mayor Rudy Giuliani. Milken became the poster-boy for the financial greed of the Reagan era due to work with high-yield “junk” bonds. Milken started with the oil industry, and she began to shift his focus towards media and the building of “information highways.”

By raising funds for a variety of new media companies such as CNN’s satellite news network, TCI’s cable television network, and MCI’s alternative fiber optics-based telecommunications system, that were taking advantage of new technologies. He and his colleagues piped some $26 billion into the emerging information industries and its leading companies such as Cablevision Systems, CNN, MCI, Metromedia, News Corporation, Time Warner Cable, and Viacom.

McCaw Cellular started in 1981 when McCaw came across an AT&T projection about the future of cellular telephony. While it predicted less than a million subscribers by the start of the 21st century, McCaw was intrigued as he knew the value and dynamics of subscribers from his success with cable television. Radio licenses for the cellular spectrum were being sold at less than $5 per “pop.” He decided to purchase licenses in some of the largest markets.

By 1982, the Federal Communications Commission (FCC) began to recognize the potential of wireless technology. The federal agency began to define Cellular Market Areas (CMA) and assign area-based radio licenses. They determined 306 metropolitan statistical areas (MSA) and 428 rural service areas that could be assigned radio frequencies and auctioned off. The FCC wanted to promote competition, so it gave 20 MHz of the radio spectrum (RSA) it had allocated to cellular in each area to two market segments. The FCC’s 1981 Report and Order specified that half would go to the local landline telephone companies in each geographical area and the other to interested “nonwireline” licensee companies by lottery. [1]

In January of 1985, Pacific Telesis, a West Coast landline RBOC, announced that it wanted to expand its cellphone business. Its target was CellNet’s interest in a San Francisco license. A month later McCaw asked the FCC to block Pacific Telesis. It argued the big RBOC had no incentive to provide good cellular service since it would compete with its land services. It also filed suit in the California Supreme Court to block the Pacific Telesis purchase. The lawsuit caused widespread uncertainty about the wireless industry.

One of the first big companies to abandon the cellular industry was MCI. After losing the Los Angeles license and consequently setting back its plan for a national network, MCI decided that it wanted to sell its cellular interests. McCaw would lose the lawsuit the next year, but the attempt would keep several nonwireless companies out of the wireless business, and in the meantime, the uncertainty would keep POP prices cheap.

MCI shunned a McCaw deal at first, thinking they would not have the money. In August MCI nearly completed an agreement with American Cellular Communications Corporation (ACCC) but after discovering that BellSouth heavily financed the company, it ended the negotiations. McCaw was back in, and soon inked a deal with MCI, but it needed significant financing. In the Fall of 1985, McCaw took a health sabbatical while the company searched for capital to complete the MCI deal.

McCaw needed some $225 million to buy parts of MCI’s wireless and paging businesses, and gain a stronghold in the cellular business. In the spring of 1986, Salomon Brothers approached McCaw with the promise to provide funding, but came up painfully short as the MCI deadline approached. After several months of prefatory research, the famed Wall Street financial operator could only raise $4.5 million.[2] The McCaw executives were beginning to worry that MCI might back out if they failed to deliver payment in time. With POP prices rising again, McCaw needed to secure the deal with MCI and pursue other acquisitions as well. Desperate for the needed capital, McCaw executives visited Michael Milken.

The visit to Drexel was famous for Milken’s opening statement, “You guys needed brain surgery and went to a bunch of veterinarians.”[3] The king of junk bonds was prepared. He proceeded to recount for the McCaw executives (Craig McCaw was on a health sabbatical) why Salomon Brothers had approached them for funding, and why they were not successful. He then asked how much they needed. To their reply of $225 million, he responded, “The first thing we need to do is increase the size of the deal. We’ll go for $250 million.”[4] Hearing of the Milken meeting, Craig McCaw endorsed the new direction wholeheartedly, preferring to take on the debt load rather than giving up control and equity in a joint venture. But the funding had to be in place before the July 3rd deadline, just weeks away. Otherwise, MCI could renegotiate the price, or worse, change their minds.

The summer of 1986 was a dynamic one for the wireless industry. Emboldened by the potential Drexel funding, the McCaw team launched a campaign to expand their cellular holdings dramatically. This included buying 9 million POPs throughout the Southern states in cities like Jacksonville and Memphis.
The FCC had also given another 10 Mhz to each market segment.[5] Just days before Drexel bond closing, Southwestern Bell and Metromedia announced a deal at $45 a POP, two and half times more than McCaw’s current contracts. If Milken could not deliver, and the MCI deal went into default, McGowan and company would certainly restructure the deal beyond McCaw’s financial capabilities.

On the crucial day, McCaw executives went to MCI headquarters with Milken’s assurance that the bond sale had closed successfully the day before. But they still needed to deliver the money, an act that depended on multiple electronic wire transfers. As 3 PM approached, still no word from the MCI treasurer. Then at 3:25 PM, the word came, the money had arrived, and the deal had closed.

McCaw was soon propelled into the number one cellular company in the US. Armed with the Drexel war chest, the McCaw team scoured the country for additional deals. Returning from a sabbatical in September 1986, McCaw put the cable business up for sale and began to focus exclusively on cellular. Taking advantage of their experience with the Counter-Alliance and Big Monopoly Game, they contacted the licensees they had been working with to see if they could buy them out. “By the summer of 1987, just before the IPO, McCaw owned licenses covering 35 million POPs in 94 markets—nearly twice as many POPs as the second biggest nonwireless company, LIN Broadcasting, which had 18 million.”[6]

When McCaw Cellular Communications went public in late 1987, they made a fortune. The decision to use junk bonds was figured to have saved the owners nearly US$1.2 billion. By going with debt instead of dispersing equity, not only did the McCaws retain their ownership, but also their control, flexibility, and independence.

Drexel raised nearly $2 billion for McCaw Wireless, and in return made approximately $45 million for itself.[7] McCaw was bought by AT&T in September 1994 and the McCaw family wound up as AT&T Wireless Services, Inc.’s biggest owners with over $2 billion in the company’s stock.[8] Craig McCaw and his brothers amassed a fortune of $6.4 billion by the summer of 1998.[9]

Notes

[1] Hell, R. (1992) Competition in the Cellular Telephone Service Industry. Diane Publishing Co, Darby, PA.
[2] McCaw choice of Drexel over Salomon Brothers from O. Casey Corr’s (2000) Money from Thin Air. p. 138. The figure of how much Salomon Brothers raised has been quoted as long as $2 million by James B. Murray, Jr. (2000) Wireless Nation: The Frenzied Launch of the Cellular Revolution in America. Cambridge, MA: Perseus Publishing. p.200.
[3] Brain surgery quote from James B. Murray, Jr. (2000) Wireless Nation: The Frenzied Launch of the Cellular Revolution in America. Cambridge, MA: Perseus Publishing. p.201.
[4] $250 million quote from James B. Murray, Jr. (2000) Wireless Nation: The Frenzied Launch of the Cellular Revolution in America. Cambridge, MA: Perseus Publishing. p.201.
[5] Hell, R. (1992) Competition in the Cellular Telephone Service Industry. Diane Publishing Co, Darby, PA.
[6] 35 million POPs quote from James B. Murray, Jr. (2000) Wireless Nation: The Frenzied Launch of the Cellular Revolution in America. Cambridge, MA: Perseus Publishing. p.205.
[7] McCaw raising of money at Drexel from O. Casey Corr’s (2000) Money from Thin Air. p. 140.
[8] McCaw ownership of ATT from O. Casey Corr’s (2000) Money from Thin Air. p. 226.
[9] McCaw fortune from FORBES.COM, “Craig McCaw – The Wireless Wizard of Oz”. 6/22/98. Accessed on February 12, 2004. Figures are for 1998 when the prices of stocks were quite high.

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AnthonybwAnthony J. Pennings, Ph.D. is Professor and Associate Chair of the Department of Technology and Society, State University of New York, Korea. From 2002-2012 was on the faculty of New York University. Previously, he taught at Hannam University in South Korea, Marist College in New York, Victoria University in New Zealand. He keeps his American home in Austin, Texas and has taught there in the Digital Media MBA program atSt. Edwards University He joyfully spent 9 years at the East-West Center in Honolulu, Hawaii.

Early Internationalization of the Internet

Posted on | September 18, 2019 | No Comments

A conference was organized in 1972 to bring network engineers and computer scientists from around the world together to discuss the future of data communications. It was held in Washington DC and primarily provided a showcase for the ARPANET, the first data packet network. Funded by the Pentagon’s Advanced Research Projects Agency (ARPA) and built by BBN in the late 1960s, the ARPANET was struggling with operational costs and was becoming somewhat of an albatross for its handlers. Meanwhile, it was attracting the attention of the research community and some telecommunications operators, primarily from Europe, that saw the potential of connecting computers.

In October 1972, the IEEE’s First International Conference on Computers and Communications began at the Hilton Hotel. Organized by Bob Kahn of BBN and supported by Larry Roberts at ARPA, the conference sparked a major discussion of what the ARPANET could do and where it was heading. A number of ideas were discussed concerning future uses and implementation of the ARPANET, including its integration with other networks around the world. It’s objectives were to show off the ARPANET’s capabilities and perhaps unload the network to a research institute or the private sector.

Researchers from many countries eagerly attended the conference. One of the major concerns was voiced by representatives from those nations who wanted to implement their own packet-switching networks. French representatives for example were planning a packet-switching network called CYCLADES and the British had their own network independently designed by the National Physical Laboratory (NPL) in 1971. Even in the US, a group of disgruntled employees had left BBN in July 1972 and formed Packet Communications Incorporated, expressing concerns that BBN was commercializing too slowly.

Like most conferences, graduate students were crucial to its success. Bob Metcalfe was working on his PhD at Harvard (and future inventor of Ethernet and founder of 3Comm) and assigned the task of compiling a list of uses for the ARPANET. He queried the administrators of ARPANET, many of which he knew because of his participation in the project. He then wrote a manuscript called Scenarios, which listed 19 things to do with the ARPANET. The list included activities such as Remote Job Entry (RJE) as well as games and symbolic manipulation of mathematical formulas. Many of which would be demonstrated at the conference.

The ICCC of 1972 was the first major demonstration of ARPANET and Metcalfe was an obvious choice to demonstrate the fledgling computer network at the conference. An IMP was set up in Georgetown Ballroom of the Hilton Hotel and terminals were set up around the room. Kahn had requested participation from the various nodes of the network and universities which ARPA was funding. Together they included some thirty universities such as Carnegie Melon, Harvard, Hawaii, Illinois, MIT, New York University, USC, and Utah, as well as AMES, BBN, MITRE, and RAND. One major objective of the conference was to shop the network to interested private concerns and/or unload the operational aspects of the facilities. They saw its potential as a commercial operation licensed with the FCC as a specialized common carrier and providing packet-switched data communications to corporate and other clients.

An obvious candidate for taking over the ARPANET was AT&T. Ten executives from AT&T scheduled a meeting with Metcalfe that he recounts with visible anger. Partway into the demonstration, the IMP crashed. The AT&T executives appeared visibly pleased and laughed, reassured that this new technology would be no threat to the largest network in the world. Bob Metcalfe never forgave them. He went on to Hawaii to learn the AlohaNet radio packet broadcasting system and then incorporated those ideas into Ethernet at Xerox PARC.

It would was the International Telecommunications Union (ITU) that would play the next important role in the adoption of packet-switching technologies.

To get some perspective of what the Internet has transformed into, view this video by whoishostingthis.com.

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AnthonybwAnthony J. Pennings, PhD is Professor and Associate Chair of the Department of Technology and Society, State University of New York, Korea. Before joining SUNY, he taught at Hannam University in South Korea and from 2002-2012 was on the faculty of New York University. Previously, he taught at St. Edwards University in Austin, Texas, Marist College in New York, and Victoria University in New Zealand. He has also spent time as a Fellow at the East-West Center in Honolulu, Hawaii.

The World is Bubbly: Capital, Cities, and Creative People

Posted on | July 21, 2019 | No Comments

Edited keynote presentation at the “Conference on Urban and Regional Development in an International Perspective” held in Opole, Poland on May 14 -16, 2018. The event was organized by the University of Opole and supported by an European Community Erasmus+ grant.

Greetings from the State University of New York (SUNY) in the Republic of Korea. SUNY Korea is located in Songdo, a new city built out of the Yellow Sea. It was designed as a “smart city” and part of the Incheon Free Economic Zone (IFEZ), along with the Incheon Airport, often rated as the top airport in the world.

Since I’m opening up this conference, I thought it would be appropriate to introduce a juxtaposition with two statements that recently achieved significant currency in popular discussions. These are the “The World is Flat” by Thomas L. Friedman and “The World is Spiky” by Richard Florida.

The World is Spiky

I’m also going to introduce a third statement, “The World is Bubbly,” that points to problems associated with rising asset prices in urban areas and their economic ramifications. I am using “bubbly” to refer to the price inflation associated with urban real estate and how it influences the artistic, creative, and innovative forces that drive much of the economic energy of the city.

Urban environments are becoming storage facilities for global surplus wealth, and consequently, these investments are seriously challenging the economies of major cities. The carbon bubble, in particular, has been creating pockets of excess wealth in significant cities as investors crave the luxury brands, cultural amenities, and increasing security of cosmopolitan urban life.

Low-interest lending rates have also been a significant factor in general asset inflation as accommodating monetary policy by central banks has made borrowing cheap, allowing many others to also participate in asset bubbles. The flows of investment into expensive condos and high rent buildings are problematic because they are pushing out key aspects of the labor force, in particular, the “creative class,”[1] a prime economic catalyst that sets in motion much of the action and innovation in urban economic development.

This post examines the economic importance of cities, the centrality of creative workers, and problems attracting and retaining creative talent. It will critique the role of creative capital and the “spiky world” these and discuss issues related to the divide between creative workers and service workers. Also how jobs, income, housing, and transit remain key issues for the future of urban environments, especially in an era of real estate appreciation.

Jane Jacobs and The Economy of Cities

Let me first explain the underlying contention of this presentation. That is that cities are major engines of economic growth and innovation. They are spaces where people interact regularly, and information flows quickly. They attract people who appreciate the intensity of interactions and the cultural and economic opportunities available in urban environments. The renowned urbanist Jane Jacobs followed her classic The Death and Life of Great American Cities (1961) with a treatise on The Economy of Cities (1969) where she celebrated the diversity, the liveliness, the desires, the inefficiencies, and the creativity of urban areas.

She argued cities had been largely neglected as sources of economic growth. Richard Florida echoed this concern and placed emphasis on the creative class that is attracted to life and work in cities. My own concern follows Florida’s, but I’m concerned that as cities develop policies to become more attractive to the creative class, that they sow the seeds of their own demise by attracting excess real estate capital.

In support of the argument that cities are engines of economic growth is the data from Yale University’s G-Econ Project. They mapped data on global economic activity and provided estimates of “gross cell product” for the entire globe measured at a 1-degree longitude by 1-degree latitude resolution at a global scale. It shows that economic activity is predominately located in urban areas, confirming Jacob’s argument.[2]

The World is Flat

Thomas L. Friedman popularized the idea of global “flatness” in his The World Is Flat: A Brief History of the Twenty-first Century. it refers to the spread of opportunity afforded by a number of historical events and technologies. The collapse of the USSR combined with a set of complementary technologies around PCs, the World Wide Web and its Netscape browser that broadened the audience for the Internet and spurred the “dot.com” era.[2]

These tools made documents and files of all kinds manipulable and shareable, whether they were applications, pictures, text, or videos. Technology also became available for people to collaborate over long distances and from rural to urban areas without actual travel. By not only downloading webpages but also uploading files to cloud technologies and being able to work on them collaboratively, new alliances and interactions could take place.

For Friedman, technology is allowing people from more places to participate in the global economy, even if they reside in regions and countries generally considered peripheral environments. With fiber optic cables spanning land and sea and with satellite signals hopping across geographical barriers, it has become possible for people to connect and compete like never before.

Digital technologies have become “permissive” in that they allow organizations to collaborate, outsource, subcontract, offshore, supply-chain, in-source, etc. These processes are having a significant influence on the world economy and, in a sense, “flattening it.”

Capital is moving to places that had previously been unable to participate in manufacturing or services such as call centers. The result is a “level playing field” with opportunities opening up for previously restricted or hampered environments.

The World is Spiky

Richard Florida countered that the world is “spiky” because economic growth is primarily created in cities, and less so in suburban and rural areas.[3] Like Friedman, he acknowledged that the global economy is significant, but he promoted cities as the major economic generators. He cited the critical intellectual leadership of Jacobs and argued that urban areas are particularly energized by groups of highly educated and skilled workers he called the “creative class.”

He argued that cities would continue to be significant in the world economy primarily because innovation comes from producing spaces that attract and enhance clusterings of creative people. The presence of the creative class provides creative capital – the human ability to create new ideas. And, consequently, we get new business models, cultural forms, and advanced technologies, leading in some cases to whole new industries. Architects, artists, engineers, healthcare professionals, lawyers, scientists, writers, etc. are some of the contributing members of the creative class.

Florida argued the primary economic policy concern for any city, region, or nation is to ensure the constant influx of creative talent. The key to doing that is being mindful that the creative class gravitates to the three T’s: Technology, Talent, and Tolerance. Access to advanced technology, the talent to use it effectively, and an openness to all the different types of people that can contribute to a community are the keys to successful economic growth, especially in urban areas.[4]

The World is Bubbly

This thesis is that the dynamics of global finance capital are both following the creative class into cities and subsequently pushing them out. Increasing global flows of capital and low interest rates due to accommodating monetary policy have pushed up urban real estate, both in terms of vertical heights and inflationary prices.

Wealthy investors are attracted to urban lifestyles because of the availability of cultural activities, leading restaurants, and quality education. Bolstered by the “wealth defense industry” that provides everything from asset management, tax avoidance, foundation setup, to private security forces, capital has become transnational. Global wealth has been looking for appreciating assets to deposit their surplus wealth, preferably detached from the reach of any taxing governments. A preferred target has been “land bank” real estate properties in progressive cities.

While this is not particularly new to primary cities (New York, London, Paris, Seoul, and Tokyo), secondary cities (Boston, Chicago, San Francisco, Washington DC, Shanghai) and even tertiary cities like Vancouver and Austin have seen prices increase substantially in the past decade due to cheap global capital unhindered by national boundaries and regulatory constraints.[5]

Not surprising, Richard Florida’s “creative industry workers” are also attracted to the benefits of urban living conditions. But while creative workers are generally well paid, they cannot universally participate in the asset growth associated with real estate investment in major cities. Global flows of capital and low interest rates due to accommodating monetary policy has pushed up urban real estate, both in terms of vertical heights and inflationary prices, making the world “bubbly.”

Addressing the Urban Crisis

So, what to do about the situation? Below is an interview with Richard Florida on August 3, 2015, that I found interesting. The unedited audio from The Brian Lehrer Show on WNYC public radio can be found here.

Florida was talking along with Steven Pedigo, director of Creative Cities & Civic Innovation at New York University’s School of Professional Studies, about their analysis of New York City’s post-recession economy and the role of the creative economy. In particular, they talked about strategies to relieve urban inequality and how jobs, income, housing, and transit remain vital issues for the future of metropolitan economies.

In his 2017 book, The New Urban Crisis: How Our Cities Are Increasing Inequality, Deepening Segregation, and Failing the Middle Class-and What We Can Do About It, he addresses the growing crisis facing the creative class as well as blue collar and service workers such as police and fire protection that keep the city livable. In addition to the need for higher incomes, many place-based policies need to be addressed that include improving transportation and creating more affordable housing.

Postscript 2020

Three of the most important sources of investment “oligarchic capital” in luxury real estate have declined significantly. China has instituted strict currency controls and its citizens have expressed concerns about racism in the US. Russian oligarchs are struggling with reduced prices of oil, as are the princes of Saudi Arabia, especially in the wake of the coronavirus. Prices are going down as the carbon bubble continues to deflate.

Notes

[1] Richard Florida actually credits his editors with the term “creative class.”
[2] Robert Friedman (2005)The World Is Flat: A Brief History of the Twenty-first Century
[3] Richard Florida (2005, Oct) The World is Spiky. The Atlantic Monthly.
[4] Richard Florida, Charlotta Mellander, Kevin Stolarick. Talent, Technology and Tolerance in Canadian Regional Development. See also Richard Florida (2004) Cities and the Creative Class.
[5] Saskia Sassen pointed out in her Global City: New York, London, Tokyo that one of the characteristics of the modern global economy is that commodity and manufacturing activities have been spatially dispersed while management and marketing-related services such as accounting, advertising, finance, and management have been centralized in several urban “global cities.”

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AnthonybwAnthony J. Pennings, Ph.D. is Professor at the Department of Technology and Society, State University of New York, Korea. From 2002-2012 he was on the faculty of New York University. Previously, he taught at Hannam University in South Korea, Marist College in New York, Victoria University in New Zealand, and St. Edwards University in Austin, Texas where he keeps his American home. He spent 9 years as a Fellow at the East-West Center in Honolulu, Hawaii.

How the US Mobile Industry Came Together, Part II: The Grand Alliance

Posted on | July 21, 2019 | No Comments

Much like J.P. Morgan’s creation of telephone industry giant AT&T, the wireless industry was one of the information industries (along with cable TV, fiber optics and satellite TV) created mainly through the efforts of financier Michael Milken of the defunct investment firm Drexel Burnham Lambert. Milken helped the McCaw family assemble the wireless industry during the 1980s by raising money to purchase cellular licenses and to buy MCI Wireless for nearly $2 billion. McCaw Cellular Communications was later sold to AT&T Wireless Services in 1994, combining the nation’s biggest cellular carrier with the largest long-distance telephone company.

In a previous post, I explained how the wireless “mobile phone” business emerged about the same time as the breakup of AT&T, which had been under new anti-trust scrutiny since the Department of Justice (DOJ) filed suit in 1974. A year before, Motorola made the first mobile phone call and later in 1977, the FCC permitted them to build experimental systems in two major cities. In 1980 an AT&T report estimated that the market for mobile phones in 2000 would be 900,000 subscribers (The actual number of mobile phone subscribers in 2000 was 109.5 million). Consequently, when AT&T was forced to break up in 1982, it ceded the wireless business to the local phone companies. It was a significant strategic mistake that would cost them billions of dollars in the future.

Despite the limited market forecast, the FCC felt obliged to assign spectrum to the new mobile service. In May of 1981, they divided the 40 MHz frequency allocated to cellular into two segments in an attempt to create duopolistic competition. One segment would go to the local telephone company in each market, and the other would be open to non-telephone companies that wanted it.[1] This way, the phone companies could improve the service while the market could be “democratized.” If more than one company applied for the license, an administrative judge would review the company’s application. They would judge the merit of its plans and technical capability to provide the service coverage. On June 7, 1982, some 190 applicants applied for FCC licenses to provide cellular in America’s 30 largest cities. The applicants included a wide range of companies looking to make a play in the mobile industry, from the upstart McCaw Company to the former telegraph monolith Western Union. One of the most dramatic technological roll-outs of the 20th century was beginning but not without an additional twist in the method.

The year 1984 was a significant one for the development of the technological infrastructure in the US. Apple introduced the Macintosh computer; IBM bought Rolm, a pioneer of digital office technology; and AT&T was divided into a long-distance company, a manufacturing entity, and an assortment of regional local phone companies. 1984 was also the time the mobile phone industry began a series of dramatic changes. The telephone companies were starting to roll out their cellular services, and on April 10th Bell Atlantic made its first mobile call to comedian Bob Hope.

Progress also continued for the non-wire companies when in February of 1984, the “Grand Alliance” was born. This group consisted of the non-RBOC companies vying for the alternative cellular market. CellNet, Cox Cable LIN, MCI, Metromedia, Metro Mobile, MCI, The Washington Post Company, and Western Union signed several agreements to share or merge markets. They also made arrangements for rounds II and III of the FCC spectrum distribution.[2] The reason for the Alliance was the idea of “cumulative chances.” These companies began to agree to merge applications in a given market to increase the chances of one company getting control of a specific area and competing successfully against the local phone company.

In April however the FCC decided to allocate markets 31st to 90th via lottery, even digging up the same Ping-Pong drum used to select draftees during the Vietnam War.[3] Sown into the decision though, were the seeds of its own destruction. The FCC included three rules that ultimately would create chaos and lead to the elevation of McCaw. The government ruled that: 1) applicants could file duplicates of their applications; 2) they would not have to tie up capital; and 3) that the second through tenth place winners would be drawn at the same time. This last decision was made so the lottery would not have to be redone if the first choice became ineligible for some reason.[4] As a result, a new strategy began to form based on the notion of buying cumulative chances, and McCaw got the process started.

McCaw was spread quite evenly among cable, cellular and paging but by the summer of 1984, they began aggressively going after mobile. They took a risk and bought Knight-Ridder’s cellular applications for $1 million. They had no assurances from the FCC that the government agency wouldn’t declare the previous application ineligible and nix the idea of buying license applications in general. But when Round IV for the 91st to 120th largest markets began, over 5,100 applications arrived. Richard L. Vega and Associates had begun producing applications for $1,500 each whereas applications for Round I had cost about $300,000. The applications flooded the FCC’s headquarters and threw it into chaos. As a result, the FCC announced in late August that it would speed up the process and hold its Round II lottery on October 3. Shocked by the announcement, Telocator, the DC-based trade association for the cellular industry, formed The Counter-Alliance. Within a month, some 150 different businesses representing 700 various applications agreed to merge into 60 partnerships and take the process out of the FCC hands. McCaw aide John Stanton headed the Counter-Alliance and skillfully brought together the smallest of the FCC applicants with the promise of working out their differences and combining their “cumulative chances” into controlling interests.[5]

What would transpire in a New York City conference room is probably the most unheralded major telecommunications event of the 20th century. The Counter-Alliance put the smaller players back in the game but it also allowed McCaw to develop relationships that proved useful later for acquisitions. With Stanton reaching out to small license holders across the nation, McCaw was doing valuable research for future acquisitions. But that future was still unclear. In September, a “trading room” was formed at Rubin Baum law offices in NYC to work out what was called “Le Grand Deal”.[6] Representatives from Rounds II and III met in a conference room on Fifth Avenue to trade license applications in order to increase the chances that a company could control a single market, say Austin, Texas. Since the lottery would be drawn for the first 10 applications, the idea was that a single company could trade licenses in other markets in order to increase their chances to control other markets.

One crucial issue was equivalence. What would be the metric of value? How would the traders determine the value of each market? Their answer was the “POP,” a value determined by the 1980 population census. The traders worked out a formula that divided the population of an area by the number of license applicants. For example, Orlando, Florida, had a population of 700,000 people. Thirteen companies had applied for the FCC license in that area. So each application was allocated 55,000 POPs. A value of $3 per POP was used based on the McCaw-Knight-Ridder deal. Each could trade POPs for POPs.[7]

In the next post, I will discuss how McCaw Cellular became the dominant alternate cellular network by utilizing a new financial tool, the junk bond.

Notes

[1] While AT&T was the dominant phone company, GTE had a significant share and small companies such as the Warwick Phone Company in Warwick, New York also provided service.
[2] Alliance formation from James B. Murray, Jr. (2000) Wireless Nation: The Frenzied Launch of the Cellular Revolution in America. Cambridge, MA: Perseus Publishing. p. 77.
[3] Sale of McCaw Cable from James B. Murray, Jr. (2000) Wireless Nation: The Frenzied Launch of the Cellular Revolution in America. Cambridge, MA: Perseus Publishing. pp. 146-147.
[4] FCC three rules from James B. Murray, Jr. (2000) Wireless Nation: The Frenzied Launch of the Cellular Revolution in America. Cambridge, MA: Perseus Publishing. pp. 81-82.
[5] Counter Alliance from James B. Murray, Jr. (2000) Wireless Nation: The Frenzied Launch of the Cellular Revolution in America. Cambridge, MA: Perseus Publishing. p. 92.
[6] from James B. Murray, Jr. (2000) Wireless Nation: The Frenzied Launch of the Cellular Revolution in America. Cambridge, MA: Perseus Publishing. p. 92.
[7] Pop figures from James B. Murray, Jr. (2000) Wireless Nation: The Frenzied Launch of the Cellular Revolution in America. Cambridge, MA: Perseus Publishing. p.200-205.
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AnthonybwAnthony J. Pennings, Ph.D. is Professor and Associate Chair of the Department of Technology and Society, State University of New York, Korea. From 2002-2012 was on the faculty of New York University. Previously, he taught at Hannam University in South Korea, Marist College in New York, Victoria University in New Zealand. He keeps his American home in Austin, Texas and has taught there in the Digital Media MBA program atSt. Edwards University He joyfully spent 9 years at the East-West Center in Honolulu, Hawaii.

How the US Mobile Industry Came Together, Part I: Transformation of the Network

Posted on | June 27, 2019 | No Comments

The ubiquity, ease and sophistication of mobile “smartphone” services has proven to be an extraordinarily popular addition to modern social and productive life. We are now on the cusp of the 5th generation (5G) rollout of wireless services. It is different to gauge the characteristics of social change in the midst of such dramatic technological change, but mobile services have arguably extended our sense of self, allowed us to reintegrate caring (and some annoying relationships), and provided new ways to create and to learn.

This post addresses the transformation of the telecommunications industry and its expansion into mobile services. This was initiated by a series of actions that led to the breakup of the AT&T monopoly and opened the environment for the major business, regulatory and technological disruptions that led to the proliferation of smartphones and other portable devices. The next post will examine the emergence of the wireless industry which grew rather independently of the telcos, until the 1990s anyway. I delved into my notes first for the below explanation of the “breakup” of AT&T and how it opened up the telecommunications to new innovations, including wireless.

In 1980, IBM officially went into competition with AT&T when it offered its Satellite Business Systems (SBS) service, a partnership with Aetna Life & Casualty and Comsat. SBS was set up to provide “intranet” telecommunications services for banks and other businesses after the FCC deregulated satellite services in the early 1970s. Using new Ku band technology, SBS services such as data, facsimile, electronic mail, telephony and video conferencing could be transmitted directly to smaller antennas at the user’s premises. This meant that they could effectively bypass AT&T’s network and provide a type of direct broadcasting service, except with two-way capabilities. Jill Hills: “It seems to have been the entry of IBM via its SBS consortium into direct competition that altered AT&T’s attitude from formal toleration of competition to outright aggression in defense of its monopoly.”[1] The Consent Decree of 1956 had restricted AT&T from computer activities and now it saw IBM entering a potentially very lucrative market. With some US$1.26 billion invested in this competing satellite communications system that could circumvent Ma Bell’s existing facilities, it got the full attention of AT&T. [2]

Consequently, in the early 1980s, AT&T looked to the political realm for protection. “Action switched from the FCC to Congress as AT&T under its chairman, John de Butt, set about raising political consciousness of the FCC decisions.”[3] However, members of Congress did not rush to support AT&T, a potent contributor, as a number of criticisms were in the process of being raised. These primarily concerned:

    1) competing equipment suppliers who wanted to break into the telecommunications and customer premise equipment (CPE) markets that were dominated by AT&T’s Western Electric;
    2) business users, especially banks, who wanted more sophisticated services, including those offered by SBS, and;
    3) competing carriers who found it difficult to compete against AT&T’s dominance of long distance transmission facilities and “local loop” telephony services. In fact, the government was looking to create a more competitive, privatized data-networking environment free from the dominance of AT&T. [4]

Deregulatory actions during the 1960s and 1970s cut into AT&T’s legislatively mandated monopoly on all telecommunications, but it was still by far the major service and equipment provider. The Justice Department had filed an anti-trust suit against Ma Bell in 1974, challenging its competitive practices and seeking to divest Western Electric, its manufacturing arm, in addition to its Bell Operating Companies. Then 1980, the FCC issued its Computer II Decision that was specifically focused on the future role of AT&T. It deregulated all data processing services and customer premises equipment allowing AT&T to enter other markets, although through a separate subsidiary. Despite some restrictions, this officially allowed AT&T to compete outside its traditional purview for the first time.[5]

Despite his ideological convictions, Ronald Reagan was noncommittal about the breakup, mainly because his Secretary of Commerce William Baldridge presented the threat of foreign equipment manufacturers entering the US market and also because his Secretary of Defense, Casper Weinberg, argued forcibly “that an integrated AT&T was desirable for national security.” However, his Justice Department was ideologically motivated enough to carry on with the divestiture, particularly William Baxter, the Assistant Attorney General for Anti-Trust.[6] Baxter argued in 1981 that the radical restructuring of the world’s largest company would forward the new administration’s promise of reducing regulation and promoting competition. In face of the opposition from the Departments of Commerce and Defense, the DOJ continued with its anti-trust case.

The result was a three-pronged approach. The Department of Justice continued its investigation of AT&T while the FCC sought, through Computer II, to distinguish between regulated basic service (both long distance and local loop services) and unregulated enhanced services such as data communications. The Republican Congress, led on this issue by Senator Packwood, chair of the Senate Commerce Committee, proceeded with a legislative solution along the basic/enhanced distinctions desired by FCC but with awkward accounting and regulatory requirements. Although passed by the Senate and supported by AT&T, the Packwood bill failed to make it through the House and it never became law. It was the Justice Department that won out, agreeing to a Consent Decree with AT&T in January of 1982. AT&T, facing the DOJ’s persuasive case, decided to settle. The result was a political decision bypassing the FCC and other traditional forms of telecommunications policy. Ultimately called the Modified Final Judgement (MFJ), it split AT&T into a competitive company consisting of a long distance carrier and a manufacturing arm and a set of regulated Bell Operating Companies (BOCs) that would provide local exchange services. AT&T and the Justice Department agree on tentative terms for settlement of anti-trust suit filed against AT&T in 1974.

The MFJ created 22 Bell Operating Companies, 7 Regional Bell Operating Companies (RBOCs or “Baby Bells”) and AT&T.

While the MFJ did not provide the total datacom solution wanted in the corporate world, it initiated the opening up what was previously a significantly closed telecommunications system. The next year, in a coffee shop in Hattiesburg, Mississippi. Bernard J. Ebbers, Bill Fields, David Singleton and Murray Waldron worked out details for starting a long distance company, LDDS (Long Distance Discount Service), the precursor to WorldCom. In 1984 President Reagan approved international competition for the INTELSAT international satellite system after petition from Orion to provide transatlantic telecommunications services for corporate users. But while significant liberalization was being made in the United States, countries around the world still held on to a government owned and controlled telecommunications system. In order for the new internationalization of financial services and digital commerce to be enacted, telecommunications changes needed to occur worldwide.

As a result of the Department of Justice’s 1982 Consent Decree, AT&T divested its Regional Bell Operating Companies (RBOCs) which retained control over the basic telecommunications exchanges and local lines in their respective territories. A Consent Decree means that all parties agree to the remedy. The RBOCs or “Baby Bells” as they were sometimes called were restricted from entering the long-distance interstate communications markets and also from manufacturing telephone equipment. The parent company was called ATT and it retained its continental Long Lines Division, research center Bell Telephone Labs (Bellcore) and Western Electric, its manufacturing arm. Two new subsidiaries were created to allow the company to expand into previously restricted areas. ATT Information Systems was an unregulated subsidiary offering, what was termed by the Second Computer Inquiry, “enhanced” services. These included information services and customer premise equipment, including computers.

AT&T had been involved with the creation of the mobile phone through its Bell Labs division but lost the initiative to Motorola in 1970s. It later effectively ceded the mobile business to the RBOCs after an AT&T report estimated the market for mobile phones in the year 2000 would be 900,000. In January of 1982, AT&T indicated that cellular would be given to the local companies, the RBOCs, after the FCC divided the 40 MHz it allocated to cellular into two segments. One segment would go to the local telephone company in each market and the other would be open to non-telephone companies that wanted it.

As a result of this bifurcated market, the mobile telephone industry emerged largely in this “other” market, thanks largely to the controversial financing methods of Michael Milken and the defunct investment firm Drexel Burnham Lambert. Milken helped the McCaw family assemble the wireless industry during the 1980s, raising raising money for the formation of McCaw Wireless which it sold to AT&T in 1994.

Notes

[1] Hills, J. (1986) Deregulating Telecoms: Competition and Control in the United States, Japan and Britain. p. 66. Quote on IBM’s threat to AT&T.
[2] Hills, J. (1986) p. 63. Investment figures on SBS.
[3] Hills, J. (1986) p. 66. Raising concerns about FCC to members of Congress.
[4] Dan Schiller. Telematics and Government. p. 92. Stance of US government towards AT&T.
[5] For example, the subsidiary could not use Bell Labs software. Hills, J. (1986) Deregulating Telecoms. p. 66.
[6] Brock, G. (1981) The Telecommunications Industry: The Dynamics of Market Structure. Harvard University Press. p. 156-157.
[7] Schiller, D. (1982), p. 163.

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AnthonybwAnthony J. Pennings, Ph.D. is Professor and Associate Chair of the Department of Technology and Society, State University of New York, Korea. From 2002-2012 was on the faculty of New York University. Previously, he taught at Hannam University in South Korea, Marist College in New York, Victoria University in New Zealand. He keeps his American home in Austin, Texas and has taught there in the Digital Media MBA program atSt. Edwards University He joyfully spent 9 years at the East-West Center in Honolulu, Hawaii.

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