Critiquing Wireless Carterfone

by on June 1, 2007 · 4 comments

In the latest installment of TechKnowledge, I critique Tim Wu’s recent article on “wireless Carterfone”:

True, a government-designed standard is not impossible, but “not impossible” is a long way from a good idea. Indeed, Wu seems to be implicitly conceding that it is far from the “simple requirement” he touts in his Forbes article. He seems to be proposing that the FCC dictate to wireless carriers what network services they must offer, who may access them, on what terms, and at what price.

History suggests that such efforts often end badly. Even when a government-created monopoly situation makes public utility regulation unavoidable, as in the Carterfone case, it can take a decade or longer for the dust to settle. The Clinton-era FCC attempted to create competition in the telephone and DSL markets by requiring Baby Bells to “unbundled” their local phone lines and lease them at FCC-determined prices to competitors. The Bells ultimately killed the plan using a combination of lobbying, litigation, and foot-dragging. But for the nine years between the passage of the Telecom Act in 1996 and the Supreme Court’s Brand X decision in 2005, telecommunications firms spent tens of millions of dollars on lawyers and lobbyists to seek advantage in the regulatory arena.

An even better example is the seemingly interminable battle over the CableCARD, a credit-card-sized device that allows televisions to decode cable signals without a set-top box. It, too, was prompted by the 1996 Telecom Act, which instructed the FCC to create regulations opening the market for cable set-top boxes. The CableCARD fight is closely analogous to Wu’s proposal because the FCC ordered the cable industry to develop a standard interface that could be used to build third-party set-top boxes. Like the Bells, the cable industry has done everything in its power to slow the progress of the CableCARD effort because it prefers to continue using proprietary set-top boxes. As a result, after more than a decade of bickering, the CableCARD continues to be a niche product.

Even the Carterfone decision itself shows that forcing owners to open their networks is not a simple process. Wu is right that Carterfone was a landmark decision exposing a government-backed monopolist to much-needed competition in the market for telephone equipment. But it took a long time to come about, much less have an impact. Thomas Carter began selling the Carterfone in 1959. Soon after, he sued AT&T on antitrust grounds. He got a favorable court ruling in 1966, and the FCC released the Carterfone decision in 1968. But the FCC didn’t formally codify the principles behind that decision until 1975.

I agree with Wu that it would probably be good for technological progress if at least some of the carriers adopted more open policies for their wireless networks. But I think he is overestimating how easy it would be for the FCC to pry those networks open by regulatory fiat. And given that any FCC intervention is likely to stretch well into the next decade, it seems premature to be declaring the market competition a failure after just 3 years of competition in the 3G marketplace. This isn’t exactly a market that’s standing still, and there’s every reason to think that one of the incumbents could be persuaded that a more open network would be profitable.

  • http://www.timwu.org Tim Wu

    As I always, I respect Tim Lee’s comments on these topics.

    A few comments. First, I think efforts to open markets have a mixed story of success and failures. Its sometimes hard to know what going to work and what isn’t. For example, Carterfone and number portability and Computer II (which had Carterfone elements) were notable successes, to my mind. Some of the others, which TL focuses on, were arguably less successful.

    That said, I there’s an imoprtant difference between the winner and loser examples. The winner examples are either easily understood, or tend to try and open the market to an entire vertical industry (e.g., carterfone, number portability, etc.). The loser examples tend to be trying to support competition in a place where it might otherwise not exist.

    No one should doubt that the line between the two is hard to guess. But my guess is that the cell phone world is a world where entire industries want to do more, but are being bottlenecked by the carriers.

    Second, to suggest abandoning open standards efforts because the carriers will resist too heavily is to simply surrender to lobbying permanently.

    For example, say you think number portability rules are important. A counter argument might be, but no, the carriers will resist and drag out the process for years, therefore number portability rules are a bad idea.

    Sometimes DC people argue that we shouldn’t have X rule because it will be complex, involve litigation, etc. etc. But those costs are not infinite; and sometimes the rule in question is worth it, despite the obvious costs to people close to the DC regulatory process.

    For example, Cartferfone involved struggle, techical standards-making, etc. But the social benefits were arguably worth the candle — even if that isn’t obvious to someone who is just watching the process-costs.

  • http://www.timwu.org Tim Wu

    As I always, I respect Tim Lee’s comments on these topics.

    A few comments. First, I think efforts to open markets have a mixed story of success and failures. Its sometimes hard to know what going to work and what isn’t. For example, Carterfone and number portability and Computer II (which had Carterfone elements) were notable successes, to my mind. Some of the others, which TL focuses on, were arguably less successful.

    That said, I there’s an imoprtant difference between the winner and loser examples. The winner examples are either easily understood, or tend to try and open the market to an entire vertical industry (e.g., carterfone, number portability, etc.). The loser examples tend to be trying to support competition in a place where it might otherwise not exist.

    No one should doubt that the line between the two is hard to guess. But my guess is that the cell phone world is a world where entire industries want to do more, but are being bottlenecked by the carriers.

    Second, to suggest abandoning open standards efforts because the carriers will resist too heavily is to simply surrender to lobbying permanently.

    For example, say you think number portability rules are important. A counter argument might be, but no, the carriers will resist and drag out the process for years, therefore number portability rules are a bad idea.

    Sometimes DC people argue that we shouldn’t have X rule because it will be complex, involve litigation, etc. etc. But those costs are not infinite; and sometimes the rule in question is worth it, despite the obvious costs to people close to the DC regulatory process.

    For example, Cartferfone involved struggle, techical standards-making, etc. But the social benefits were arguably worth the candle — even if that isn’t obvious to someone who is just watching the process-costs.

  • Tom Coseven

    Tim & Tim, I had the opportunity to participate in both Carterfone and 629. They represent very opposite outcomes for very obvious reasons. Carterfone (and Computer II) was about the PBX industry in the 10 years. The importance to residential telephones only came later. People talk fax machines and modems for consumers to attach to the Internet, but without the open office products, including Cisco, Wellfleet, Synoptics and 3COM, the Internet would probably have been unaffordable for the masses and died with NSFNet in 1994.

    The main difference between Carterfone and 629 was channel. The PBX industry quickly built an independent distribution channel, which in turn was adapted into the VAR channel for the LAN industry. This channel provided compete networks with software and support.

    The equivalent channel for set-top boxes is the Cable and Satellite companies. The Satellite channel was independent in 1996, but by the time the first CableCard box arrived there was no independent channel. (If you think BestBuy would be a good channel for CableCard, you didn’t read any of the Tivo message boards on Series 3.)

    Another huge difference between Carterfone and 629 was that Part 68 had an independent party define a very simple open interface, and 629 had CableLabs (even though Congress specified an independent “standards body,” the FCC let the Cable companies write interface rules). There were several proposals that were far simpler, but CableLabs chose the most cumbersome technology available at the time.

    Lastly, when the idea of separation for security and navigation was conceived, it was felt that multiple providers would be offering video services to subscriber (think cable plus Video Dialtone) and that interactive TV was right around the corner. In fact, in 1994, there were higher expectations that interactive TV shopping would be far greater than Internet e-commerce.

    Tim Wu, I have spent thousands of hours working with mobile operators in the US, Europe and Asia on walled garden services. 1) There is a lot of truth to accusing them of holding back features to retard competition or more often get a kick-back from the service provider. 2) VoIP and WLAN are the worst examples to make your case with, because there are so many legitimate performance and support cost reasons to block them. 3) US operators are more open to 3rd party services (without demanding kick-backs) than the Europeans and the Japanese. The Europeans may appear more open to you because they do not subsidize phones and GSM/UMTS phones use interchangeable cards.

  • Tom Coseven

    Tim & Tim, I had the opportunity to participate in both Carterfone and 629. They represent very opposite outcomes for very obvious reasons. Carterfone (and Computer II) was about the PBX industry in the 10 years. The importance to residential telephones only came later. People talk fax machines and modems for consumers to attach to the Internet, but without the open office products, including Cisco, Wellfleet, Synoptics and 3COM, the Internet would probably have been unaffordable for the masses and died with NSFNet in 1994.

    The main difference between Carterfone and 629 was channel. The PBX industry quickly built an independent distribution channel, which in turn was adapted into the VAR channel for the LAN industry. This channel provided compete networks with software and support.

    The equivalent channel for set-top boxes is the Cable and Satellite companies. The Satellite channel was independent in 1996, but by the time the first CableCard box arrived there was no independent channel. (If you think BestBuy would be a good channel for CableCard, you didn’t read any of the Tivo message boards on Series 3.)

    Another huge difference between Carterfone and 629 was that Part 68 had an independent party define a very simple open interface, and 629 had CableLabs (even though Congress specified an independent “standards body,” the FCC let the Cable companies write interface rules). There were several proposals that were far simpler, but CableLabs chose the most cumbersome technology available at the time.

    Lastly, when the idea of separation for security and navigation was conceived, it was felt that multiple providers would be offering video services to subscriber (think cable plus Video Dialtone) and that interactive TV was right around the corner. In fact, in 1994, there were higher expectations that interactive TV shopping would be far greater than Internet e-commerce.

    Tim Wu, I have spent thousands of hours working with mobile operators in the US, Europe and Asia on walled garden services. 1) There is a lot of truth to accusing them of holding back features to retard competition or more often get a kick-back from the service provider. 2) VoIP and WLAN are the worst examples to make your case with, because there are so many legitimate performance and support cost reasons to block them. 3) US operators are more open to 3rd party services (without demanding kick-backs) than the Europeans and the Japanese. The Europeans may appear more open to you because they do not subsidize phones and GSM/UMTS phones use interchangeable cards.

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