The Master Switch: The Rise and Fall of Information Empires

The preliminaries

• The information technology, though seemingly fresh and modern and of-our-times, has been morphing for over a century.
• It generally follows a typical progression: from someone’s hobby to someone’s industry, from freely accessible channel to a monopoly, from an open system to a closed system.
  • History also shows that any technology industry that has been closed for too long is ripe for change.
    • A closed industry can be reopened, exploring all kinds of technical possibilities and uses for the medium, before an effort is made to close the system.
• This oscillation–between opened and closed–is so common a phenomenon that the author calls it “the Cycle.”

The Bell Company & AT&T

Alexander Bell

• In the 1870s, Alexander Bell was in Boston, trying to coax a voice out of a wire, attempting to create a usable telephone. At the time, the Bell Company was a small, and not flourishing, start-up. Bell was an amateur inventor, and he and his assistant toiled in their small attic lab.
• This is the first stage of the Cycle: in a room where one or two people are trying to start a problem. Many revolution innovations start as such, and it is critical to understand lone inventors.
  • The act of invention, typically by an outsider, is critical. They are typically a perfect distance away from the current technology, because with that distance they have a perspective that’s close enough to understand the problem, but far enough away to engage in greater freedom of thought.
    • Additionally, distance allows room (and lack of financial tethers) that might challenge or destroy the dominant industry’s business model.
    • This can lead to the Kronos effect (from Greek mythology, where the second ruler of the universe heard a prophecy that one of his children would dethrone him, so he ate as many children as he could): the efforts that a dominant industry employs to consume its potential successors in their infancy.
    • These concepts are critical to understanding the Cycle, because whatever technology we have is the result of tooth-and-claw industrial combat.
  • Within the world of inventions, there are two main categories:
    • Sustaining innovations are improvements that make the product better and do not threaten the market.
    • Disruptive innovation threatens to displace a product entirely.
    • So, it’s the difference between the electric typewriter, which improved the original typewriter, and the word processor, which supplanted it.
• Bell’s first telephone didn’t work very well, though he did have a patent for it. His primary investor, Gardiner Hubbard, offered Western Union all of Bell’s patents for $100,000 (Western Union refused).
  • Within a year, though, Bell started picking up customers, and Western Union recognized its mistake.
    • In 1878, Western Union dove into the phone business and had overwhelming advantages over Bell: capital, a nationwide network of wires, and a close relationship with newspapers, hotels, and politicians.
    • Western Union also commissioned Thomas Edison to design a better phone, and soon deployed roughly 56,000 telephones
• Hubbard, the Bell Company’s president, showed the prototype to Theodore Vail, an ambitious supervisor in the U.S. Post Office.
  • Vail falls into the category of “Defining Moguls”–people who drive the Cycle not for money (at least, not only money), but rather the dream and will to found a private kingdom.
• Although Bell was overmatched in nearly every regard, he had the patent. So he filed suit for patent infringement.
  • The patent plays a critical role in the Cycle.
    • As used by an outside inventor, a patent is a sort of corporate shield that can prevent a large industrial power from killing you off. Here, if it hadn’t existed, we might never have had a telephone industry separate from the telegraph.
  • And unexpectedly, at the same time, wealthy financier Jay Gould was preparing a hostile takeover of the company, and Western Union broke down–eventually, it agreed to abandon telephony in exchange for 20% of rental income on the Edison telephone.
• Then, in 1885, the Bell Company put Vail in charge of a new subsidiary to build its “long lines,” called the American Telephone and Telegraph Company–AT&T for short.

Rural telephones

• Typically, rural telephone systems were giant party lines, allowing an entire community to chat with or listen to one another. Obviously there wasn’t any privacy, but there were many benefits.
  • Although the Bell Company invented the phone, it didn’t perceive the full spectrum of its uses (known as “founder’s myopia”). As demonstrated with the rural lines, simple farmers in the early 1900s even pioneered the use of the phone line for broadcasting long before the rise of radio broadcasting in the 1920s.
• This also highlights competition in information industries: there are barriers to entry (obstacles that a newcomer must overcome to get into the game) and cost of entry (the monetary cost of getting into the business with a reasonable shot of reaching customers).
• Nowadays, to start a competitive mobile phone service you need something around $10 billion. That means that the phone market is effectively closed.
• But for a brief time around the 1900s, it was different–small-town entrepreneurs could effectively compete with Bell.

J.P. Morgan

• In the early 1900s, mogul J.P. Morgan informed Vail that he wanted Vail to be entirely in charge, as he and a group of other financiers wanted to gain control of the Bell Company and build the world’s greatest wire monopoly.
• Ultimately, in 1907, J.P. Morgan took control of the Bell Company and Vail was the president of AT&T.
  • Morgan’s financial help was critical to establishing Bell as a monopoly.
  • In this phase of the Cycle, the shift from an open industrial phase to a closed market usually begins when capital interests spy the potential for vastly increased profit via monopoly.
• Soon after, Vail also seized Western Union, which meant that AT&T controlled all instantaneous long distance communications in the U.S.
• Accomplishing this involved strategic maneuvering with independents who sought to use the lines more freely: they could be members in the Bell system but would have to adopt Bell’s standards and equipment, and be subject to special fees. Essentially, they could join the network and share the wealth, or face annihilation.

Antitrust

• In the 1910s, laws like the Sherman Act, then the broadest antitrust statute, were fairly new. Such laws prohibited agreements that restrained trade, and would punish a monopolist who abused its power.
• AT&T’s first meeting with the federal Department of Justice, though, revealed something interesting that occurs repeatedly throughout the history of communications.
  • Otherwise put, the Cycle also involves the state’s calculated exercise of discretion over whether to bless or destroy the monopoly in power.
  • At this meeting, Vail executed an ingenious maneuver: he asked the government to regulate the company, agreeing to operate it per government-set rates. It also agreed to sell Western Union and allow certain independent entrepreneurs to retain their independence.
    • This was superficially a victory for openness and competition, but realistically, Western Union (telegraphs) was becoming a dinosaur anyway, and the Independents eventually dissipated.
• In the end, Bell became that coveted common carrier.
  • As a simple example, if a woman operates the only ferry over to town, she is in a position of great power. She could charge one person more than another to carry goods, etc.
    • As a matter of policy, which businesses should be considered common carriers with special duties to the public, and which companies should be run by the government (like the Post Office) and which should be “ordinary services” left mostly to the forces of the free market?
    • There are four basic industries that are “public callings”: telecommunications, banking, energy, and transportation. Each plays a certain essential role in the workings of the nation and the economy.
• Vail died in 1920, when the Bell system uncontestedly dominated the U.S. telephone industry.
• In 1921, Congress passed the Graham Act, recognizing AT&T’s monopoly, and AT&T would remain in charge as such until the 1980s.

Hush-A-Phone

• The Hush-A-Phone was a scoop-shaped product that fit around the speaking-end of a receiver so that no one could hear what the user said on the phone.
  • Business was fairly decent, until one day in the late 1940s, AT&T launched a crackdown.
  • The company referenced a special rule that was part of their deal with the covenant, that said that any equipment not furnished by AT&T couldn’t be attached to the phone.
    • Basically, AT&T wanted to punish its customers for placing a plastic cup over their phone.
• This reveals one of the weaknesses of centralized systems of innovation: the necessity of placing all control in a few hands.
  • If all resources for addressing any problem are located in a central location, the person controlling that location has to be right in predicting the future if innovation is to proceed effectively–monopoly presumes a presence that humans are seldom capable of.
• After a long and expensive lawsuit, a judge affirmed that a user has the right to reasonably use her telephone in ways that are privately beneficial.
  • This cracked the door open to all sorts of ancillary devices in the 1970s, but also to the collapse of Bell’s once indomitable empire.

The End of the Bell Monopoly and the Return of AT&T

• In 1974, the Nixon administration pushed very hard to end the Bell monopoly, believing that the telephone system no longer needed to be monopolized, and that the nation would benefit from dividing AT&T into smaller parts.
• Then came the Reagan era, where the enthusiasm for “competition” and “deregulation” reached fever-pitch–in the late 1970s, the greatest firm in communications history agreed to be divided into 8 pieces.

• In 2002, Bush signed an order authorizing the National Security Agency to monitor the telephone conversations and Internet transactions of American citizens without a court warrant.
  • Notably, NSA could not have fulfilled the order alone–it needed help from telephone companies.
  • It soon became clear that AT&T was the beneficiary of federal communications policy; it wasn’t an outright monopoly but it found ways to be of unique use to the administration.
• By 2007, most of the Bell system was back in place in the world’s largest communications firm.

The Internet

• In the early days, the internet ran on a collection of government lines and lines leased from AT&T.
  • It was just one of three networks in development. The others were radio and satellite.
  • Vint Cerf and Robert Kahn tried to think of a way to make all these networks talk to each other, thus expanding the realm of communication.
• Ultimately, the internet founders built their unifying network around this fundamental contrast: they couldn’t create an alternative infrastructure, so from the beginning, the network was beholden to the power and autonomy of its owners.
  • It would become known as TCP (Transmission COntrol Protocol), and Cerf and Kahn created a standard for the size and flow rate of data packets, thereby furnishing computer users with a universal language that could work among all networks.
  • Put differently, this allowed the Internet to run on any infrastructure, which was a first in human history: an electronic information network independent of the physical infrastructure from which it ran.
• Every other invention of its kind has had its period of openness, only to be sucked into yet another information empire. Which is mightier: the radicalism of the Internet or the inevitability of the Cycle?
  • The Internet’s structure is deeply counterintuitive because it defies every expectation developed from experience of other media industries, which are all predicated on controlling the customer.
• One of the great questions of our time is whether our approach to the power of information should take into account what that power’s political consequences are.
  • Moving forward, it is crucial to recognize the importance of a Separations Principle for the information economy–the idea of maintaining a certain distance between differing functions in the information economy.
    • For example, protecting young industry against incumbents, and keeping some distance between government and industry. 
    • Like the difference between the legislature, judiciary, and executive; or church and state–the demand for space between what would otherwise be too mighty a centralized power.
  • There’s also Regulatory Separation that must be seriously examined: the challenge of maintaining a certain distance between industry and state even while the state enforces the necessary separation norms within industry.

• The open age of American Radio and the arrival of mass broadcasting, with low barriers to entry (whereas now, it is nearly impossible to get a radio license and broadcasting without one is a felony), and its eventual centralization
• How the American film industry came to be and the rise of Hollywood–Adolph Zukor, the Warner Brothers, Twentieth Century-Fox, Paramount Pictures, Universal Studios, and other Hollywood entrepreneurs–morphing from one of the most open industries to one of the most controlled
• The Nixon administration’s push for cable television
• Ted Turner and how he founded an entirely new industrial model as the essential pioneer of the cable network
• What informations empires mean for speech and innovation, and the power of industry to censor expression or squelch invention
• Intricate details about the beginning of the internet
• Apple, Google, and Bill Gates – the relationship and fights between closed systems and open systems