History lesson: Fiber's current boom made by genius and AT&T divestiture

May 1, 2000

The Draper award to three scientists for their optical work at ITT, Corning, and Bell Labs, respectively, in the 1960s and 1970s is a postscript on a regulatory battle of the early 1980s between Corning, AT&T, and Fujitsu.

By Stephen N. Brown

Charles Kao, Robert Maurer, and John MacChesney were preeminent geniuses who decades ago saw the potential of optical communications and transformed it from the abstract to concrete reality. In February, the National Academy of Engineering (NAE) granted latter-day recognition by awarding them the $500,000 Draper award. In a press release following the NAE's award, Corning trumpeted the accomplishments of its shining lights, Maurer and his colleagues, Drs. Donald Keck and Peter Schultz. "It was a contrarian act that led to the creation of Corning's optical fiber," said the company. Maurer's contrarian act was to "start with high silica glasses because no one else was doing that....If you're going to find something new, you've got to do something that no one else is trying."

Thus, the company's panegyric concluded: "Today, thanks to that kind of attitude, Corning is the world's largest producer of optical fiber....By the end of 1999, more than 260 million kilometers of fiber-optic cable had been installed worldwide." But the fiber industry's current boom is not an exclusive product of scientific insight. It is also a child of long-ago regulation.

Today's good fortune was not in Corning's wildest imagination 20 years ago when pre-divestitured AT&T applied to the Federal Communications Commission (FCC) for permission to build the nation's first major long-haul fiber system from Richmond, VA, to Cambridge, MA-the "Northeast Corridor" project. In FCC docket W-P-C 3071, AT&T planned to use from 50,000 to 70,000 kilometers of fiber, but at the time of filing, AT&T could manufacturer neither singlemode nor multimode fiber. The amount of fiber was well beyond the cumulative production capacity of American fiber producers, and AT&T reserved the right to build its own plants without subcontracting fiber production to Corning or any other producer. Thus, pre-divestitured AT&T intended to retain its vertical integration by sourcing all of its fiber needs to its wholly owned subsidiary, Western Electric.

Corning was alarmed and told the FCC that AT&T's plan "includes installing excess communications capacity which will preclude installations on the Northeast Corridor for about twenty years." Corning asked the FCC to condition its approval on AT&T acquiring fiber through competitive bidding, saying "the damage to the fiber industry could be irreparable if Western [Electric] dominates fiber production even for this one installation." AT&T replied with the now infamous "system" argument, that piecing together a system from various component makers was bad economics: "Competitive bidding would stifle the evolution of individual subcomponents, such as fiber, as well as tradeoff opportunities among system elements for optimum system design." The company also said that Western Electric would "necessarily continue to base 'make-[vs.]- buy' decisions on the basis of economics and overall system performance...Corning's competitive bid suggestion...is without merit."

The FCC took a middle position between Corning and AT&T. Noting that the project was in two phases, Richmond to New York and New York to Cambridge, the agency's Jan. 27, 1981 order approved the first part but withheld approval for the second part: "We believe the current proposal is an important developmental effort that may have many long-term benefits for the ratepayer and the telecommunications industry as a whole....The first part of the application will be granted....We are unable to rule on the second half....We believe applicants' commitments to seek proposals from suppliers other than its subsidiary for the second phase may satisfy our concerns."

Apparently, AT&T's second-phase fiber requirements would be met by competitive bidding, but that was cleverly sidestepped once AT&T let it be known that a Japanese fiber producer, Fujitsu, was a low bidder. In early October 1981, the FCC received letters of concern from several U.S. Senators and Representatives questioning the wisdom of competitive bidding. Sen. Strom Thurmond (R-SC) sent a note to the White House saying, "the possibility that a Japanese firm may be awarded the contract for the completion of the Northeast Corridor system is of concern to me....It would establish a foreign corporation as the essential operator of our sensitive communication network on which our Defense Depart ment would be dependent." Former Congressman Tim Wirth, who was chairman of the House Committee on Tele communi cations in 1981, wrote: "I would view it as most unfortunate if the Commission... were to implement an order which resulted in a mas sive headstart for an overseas competitor in what promises to be a critical technology."

The FCC was surprised not only by the congressional letters but by Fujitsu being the low bidder. The agency told the congressmen that it had not been informed of the events, despite the agency's order telling AT&T "to keep us inform[ed] as to the status of the selection facilities process for the New York-to-Cambridge segment."

But AT&T had not kept the FCC informed. On Oct. 29, 1981, the agency sent a letter to the company noting that it had not filed anything with the agency since June 10, 1981 and that "a substantial period of time has elapsed since your last correspondence, and we are interested in what events have transpired in the interim."

One day later, on Oct. 30, 1981, the Wall Street Journal ran a story headlined, "AT&T Gives Job to Unit, Rejects Low Foreign Bid," which is how the FCC found out about AT&T's decision. On the same date, the company notified Fujitsu it would not receive a contract: "We were favorably impressed with the demonstration of your system...however, it has been determined that it is in the national interest to use American suppliers for this project"-Western Electric.

Fujitsu responded by filing with the FCC a "petition to deny" approval to the second phase of AT&T's project. The Japanese company asked the FCC to resolve several questions: Why had AT&T asked Fujitsu and three other foreign makers of fiber to submit bids if the project had a national security aspect? Who made telecommunications policy in the United States, the government or AT&T? Why had members of Congress publicly suggested that Fujitsu colluded with other foreign firms to rig the bid when there had been no such effort? Fujitsu concluded that AT&T had taken part in a "well-organized exercise in xenophobia." Of course, AT&T did not share that opinion. Ira Jacobs, an AT&T luminary and director of the transmission technology lab at AT&T Bell Labs, glossed over the details when he wrote a historical descri p tion of the project in 1986: "After considerable input from both the executive and legislative branches of government... AT&T selected West ern Electric."

The U.S. Depart ments of Defense and State and the Japanese government were drawn into the fray, but by April 1982, the FCC dropped the competitive-bidding requirement and Western Electric built the project, which used multimode fiber with 4.2-mile repeater spacing, before adding a singlemode path in 1986. However, AT&T's victory was pyrrhic be cause the com pany's behavior through out 1981 hardened the Reagan Administration's intent to continue the federal government's antitrust suit against AT&T, which the government began in 1974.

The Reagan Administration came to power with no preconception of the antitrust case, but by late 1981, the company looked too much like a "government within a government" whose only defender in government was the defense establishment, which later withdrew its support and built its own telecommunications system independent of the public network. In January 1982, the government proposed separating Western Electric and AT&T, but AT&T wanted the manufacturing and gave up the operating companies instead and lost a great deal of control over the American telecommunications industry. Clearly, had there been no divestiture, there would be no fiber boom today.

Stephen N. Brown writes on public policy in telecommunications. He can be contacted by e-mail at [email protected] or telephone (615) 399-1239.

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