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Could Net Neutrality be to Investments in the Internet What AT&T’s Regulation was to Bell Labs?

As the FCC moves forward with its plans to regulate the internet in the U.S., it’s worth taking a look at what’s happened when the government has regulated other innovative industries. As a facilitator of innovation, I’ve always been fascinated with the history of Bell Labs. Bell Labs was once thought of as the source of most modern innovations. Their lab, after all, created the beginnings of technologies like the transistor, radio astronomy, UNIX operating system, C programming language, C++ programming language, to name just a few. The work done at Bell Labs built the foundation for modern invention leading to phones, space exploration, the internet, music distribution, cell phones, radio and television and more. From the 1930s to the 1970s, Bell Labs in New Jersey was the equivalent of modern day Silicon Valley, laying the groundwork for future technology. (For more about Bell Labs, read “The Idea Factory: Bell Labs and the Great Age of American Innovation” by Jon Gertner, 2012).

Bell Labs was a separate entity, but controlled by AT&T, which was a regulated monopoly by the U.S. government. Despite control over phone pricing, the U.S. Government sought further regulation over AT&T and its Bell Labs for decades, culminating in the breaking apart of AT&T in 1984. Over the years, Bell Labs was forced to open up many of its patents by the government so others could benefit from their discoveries. The idea was to protect the people and ensure that a monopoly didn’t form or use its monopoly status to create more monopolies. The regulation controlled pricing over an important utility, the phone system. Prior to World War II, this served an important function in our society. But after World War II, was this regulation really necessary? And, did it really help advance technology faster or did it slow down what could have otherwise been? Many of the early inventions at Bell Labs have led to the digital world we now live in each day. But faced with this regulation, AT&T/Bell Labs had little incentive to actually release those new technologies to the marketplace. The cost to market and roll out these new products and services is substantial. Those products and services could have and would later benefit all of us. But in those days after World War II there was no economic incentive. Cell phone technology existed right after World War II, but wouldn’t become part of our society for another forty to fifty years. Why? Because there was no economic reason to invest in educating people about the benefits or taking the market risk of gearing up for product roll outs.

While it sounds obvious now, people in the 1950s or 60s would not have inherently understood the value of carrying around a phone with you. It would have to be developed, marketed, and shepherded out to early adopters with the fortitude to withstand the risk for the reward of the tipping point when consumers finally gave in to their need for constant communication. In its core regulated phone business, AT&T had little incentive to create better long distance products or other services. In quite the American way, competitors like MCI, by sheer entrepreneurial drive found a way, regardless of government intervention to regulate or control the phone system—it had to break free to respond to market demands. So, did regulation help because it allowed entrepreneurial companies like MCI to enter the marketplace? Or, did it hurt because it stymied important growth in our technological evolution creating disincentives to release new innovations to the public?

As the concern over regulation of the internet and the Net Neutrality debate has continued, I began to wonder if there were any similarities. After all, when most of us think of who the Bell Labs of today might be, companies like Apple, Google, Facebook, Amazon, and Samsung all come to mind—they are developing technologies and investing heavily in new technologies that could lead to our future—a future most of us can barely imagine like driverless cars or contact lenses that project images from the internet direct onto our eyes. While some of these companies are investing more into devices and tangible assets, they all rely on the internet and free scalable use of the internet by not just their consumers but other entrepreneurs and companies who build ideas like Uber or Grubhub that further the usage of their devices by consumers. They are able to patent, protect and leverage their research and development investments in the marketplace. Would regulations that originate in the idea of Net Neutrality have the same impact of the regulation of AT&T over 5 decades? Will it further or stymie growth? This is the crux of the debate. Many argue entrepreneurial companies can’t compete with the big players. But, if the big players are handcuffed, they have no incentive to leverage all the knowledge they have amassed and it may actually slow the opportunities for other internet entrepreneurs. Today, Google, Apple, Microsoft, they all benefit from startups thinking outside the box and pushing all of our thinking.

Another interesting observation, the internet began shortly after the divestiture of AT&T and Bell Labs in 1984. Prior to this time Bell Labs was the authority on networks (including how the internet did and could work), but their knowledge and expertise was disbursed in the divestiture, potentially slowing down growth of what has become the backbone of our digital society. While some facet of standards may certainly be helpful to the technology backbone of the internet, government regulation may not be the way to go. The software industry has found its own set of standards without any government intervention.

Regulating the telephone company sounded like a good thing at the time and probably was in those early years. Just like Net neutrality sounds like a good idea. The difference here is our society is a bit more advanced technologically and the internet has flourished in the last twenty years without any regulation. While it sounds like a good thing, it is in fact, regulation. Are people being harmed by a free and open, unregulated internet? If not, why is it a good idea? Will a select few benefit from this regulation? Will it deter others from finding important solutions we desperately need like how to protect our privacy and have greater security in our digital world? If the incentives change, market behavior changes. With the changing tides of politics, this is surely a topic to be debated into the future. As with most contemporary questions, history can provide context and guidance to keep us from making the same mistake.

By Jennifer Wolfe, Dot Brand Strategy Advisor

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It is not about regulating the Internet Timothy Denton  –  Mar 2, 2015 10:20 PM

Net neutrality is about regulating carrier behavior, not Internet behavior, as I argue in my article appearing today. The two should not be conflated.

[I]t's worth taking a look at what's Alex Tajirian  –  Mar 3, 2015 11:16 AM

t’s worth taking a look at what’s happened when the government has regulated other innovative industries.

What other innovative industry has it regulated? For one, Bell Labs was not an industry; it was a research lab much like Xerox PARC. Second, the closest thing the government has come to regulation of technology companies was Microsoft. Third, the motive of innovation by start-ups is different from that of research labs. For example, look at the fact that PARC invented the mouse that Steve Jobs commercialized.
“After all, when most of us think of who [sic] the Bell Labs of today might be, companies like Apple, Google, Facebook, Amazon, and Samsung all come to mind”. You are confusing regulation of natural monopolies, like the Ma Bell (old AT&T;) and technology companies that are driven primarily by network effects (efficiency).

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