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Should unregulated Facebook get a free pass?

Dan Schiller, emeritus professor at the University of Illinois at Urbana-Champaign, is the author of a forthcoming history of US telecommunications

Facebook’s October 4 outages across its platforms, which affected billions of people, and the company’s handling of it raise a far-reaching question: Should we simply rest content with a complete shutdown of service across four platforms, which underpin much of the planet’s economic and cultural interaction and one of which, WhatsApp, has become an essential and free substitute for phone calling and many other communications? Should we just accept Facebook’s mea culpas and promises “to make our infrastructure more resilient”?

Facebook’s reach conjures up comparisons to the “old” AT&T — the sprawling, vertically and horizontally integrated behemoth which, until its break-up in 1982, served US business and residential telephone customers across the nation.

Yet, for decades AT&T experienced no nationwide outage of its telephone network. This was the case even though the giant company repeatedly re-engineered and rebuilt its network to accommodate innovations such as self-service dial technology and, later, electronic switching. The company instructed its engineers to lavish resources on its network so that subscribers could make a telephone call successfully an extraordinary 99.999 per cent of the time. Such reliability has never since been matched on an equivalent scale.

Although natural disasters and local events sometimes brought down the network in a particular area, AT&T never suffered the sort of systemwide outage that Facebook (and some smaller internet companies as well), have experienced in recent years. The reason? Because the giant company was subject to rate-base regulation — regulators had to approve AT&T’s network investments, on which its rates were to be based — accompanied by significant public accountability standards.

Rate-base regulation provided an incentive to build the best network, one that adhered to rigorous performance standard — even though AT&T became adept at gaming the system by finding ways to enlarge its authorised rate base and swell its profits. Nevertheless, a constant need for regulatory approval kept AT&T sensitive both to public opinion and regulators’ opinions. Even so, beginning in the 1960s, attacks on the regulated monopoly system took hold, leading to the entry of less-regulated competitors. While this new era produced the innovations that led to the internet, it also freed the tech companies that emerged, eventually including Facebook, from obligations to the public.

AT&T’s awesome network was a product of a complex historical process, involving considerable social conflict and political struggle. Although many other small local telephone companies existed, AT&T’s Long Lines long-distance subsidiary knit them all together into a unified monopoly service. Western Electric, its manufacturing unit, supplied virtually all the equipment used by AT&T's local Bell operating companies and its Long Lines subsidiary. AT&T’s Bell Laboratories researched anything and everything pertaining to telecommunications and beyond.

Cities and states tried to regulate local and toll telephone rates at beginning at the turn of the 20th century, only to be stymied by an impenetrably opaque company whose tangle of subsidiaries mostly operated outside their limited legal jurisdiction. Municipal and state-level rate-making simply could not reach AT&T.

In the context of the Great Depression, both the lack of reach of AT&T’s service and its treatment of workers became intolerable. Not only did half the nation’s households still lack home telephone service but, by 1933, hard-pressed existing subscribers had given up about 15 per cent of telephones then in use. AT&T also continued to drop its standard dividend into investors’ pockets, even as the company laid off tens of thousands of employees.

Franklin D. Roosevelt had attacked such abuses by utilities during his gubernatorial campaigns in 1928 and 1930, and his ascent to the presidency finally gave him the power to address them. Roosevelt’s New Deal swiftly made telecommunications reform a priority. The Communications Act of 1934 subjected the telephone industry — and AT&T in particular — for the first time to substantial federal public service oversight. The legislation established the Federal Communications Commission and authorised an unprecedented “telephone investigation”; at its peak during the mid-1930s, 250 federally authorised accountants, engineers and lawyers combed through AT&T’s books for evidence of exactly how the company had been built and how it now operated.

This endeavour laid the groundwork for an effort to compel AT&T to divest its Western Electric manufacturing subsidiary, thereby removing the single largest structural factor in the company’s ability to manipulate the rate base. Not surprisingly, AT&T fought back, ultimately successfully. Nevertheless, this activist FCC and its telephone investigation laid a basis for regulatory and antitrust initiatives throughout the next 50 years.

As the new regime stabilised during the 1940s and 1950s, AT&T had to report regularly to federal regulators, who worked out a system with state public utility commissions and with AT&T to ensure that the telephone system would function effectively.

In other words, the telephone network operated smoothly not only because it was engineered to do so, but also because its executives and managers now faced accountability: they could not be insensitive to their public responsibilities.

The closest that AT&T came to a meltdown was during the late 1960s and early 1970s, when New York, Boston, Denver and Houston each experienced major service deterioration: crosstalk, interference, dropped calls. New York’s case was the most serious. It resulted from several factors. There were sudden, unanticipated spikes in demand, both owing to a surge in Wall Street stock trading and a great increase in requests for telephone installations, after city authorities decided that local telephone service could be included in welfare payments. Some charged that the Bell System affiliate, New York Telephone, was unprepared because it had been underinvesting in the city’s telephone infrastructure.

Once the crisis hit, however, AT&T threw everything it had at the problems, spending $110 million between 1969 and 1972 to virtually rebuild its physical plant in the city. Whether it would have done so absent the system of public service regulation within which it was encased must remain an open question.

Yet, this upgrade could not shield the regulatory system from new criticism. On both the left and right, critics charged that the FCC was chronically underfunded; that its commissioners were political appointees; that, overall, it was a captive of the industry that it purported to oversee. There was sufficient evidence, especially from the agency’s well-publicised complicity with AT&T in trying to curtail a Justice Department antitrust suit during the early-to-mid 1950s, to give credence to these charges.

These critiques left out the good done by regulation. Nevertheless, making use of them, a force that would fundamentally alter US telecommunications was coalescing. It included both computer suppliers, new telecom companies such as MCI and an array of major trade groups, including the National Retail Merchants Association, the Automobile Manufacturers Association, the American Petroleum Institute, the Aerospace Industries Association and the American Bankers Association. Its aim was to develop the coming generation of telecommunications, centred on computerised data networking, free of any sort of accountability to the commonwealth. It gained support, witting or not, from academic economists touting the virtues of “competition” and “deregulation”. In short, it sought to dismantle public utility regulation altogether.

A complex transition to market liberalisation and deregulation unfolded between the mid-1960s and the early 1980s. A series of obtuse proceedings before the FCC opened more and more segments of what had been AT&T’s domain to entry by new companies free of existing regulatory responsibilities. Their major customers were business users, who were demanding new, specialised, often cheaper alternatives to the general public network.

These interests wanted to build private networks that would perform basic but sensitive tasks such as inventory control, electronic funds transfers and production scheduling. AT&T could have used its increasingly computerised national network to perform these functions, but large companies did not want to cede power over their most basic operations to the heavily regulated and unionised telephone company. With the Justice Department-ordered break-up of AT&T in 1982, the liberalised, deregulated system was set in stone.

This was the space in which the internet developed, eventually becoming an alternative to telephone communications. The status of internet service providers under FCC regulation has been a hot potato for 25 years. (For example, this past July, President Joe Biden issued an executive order encouraging the FCC to restore rules, reversed by his predecessor, to regulate ISPs as telecommunications common carriers.) However, no comprehensive scheme of internet oversight and accountability has been established.

The present masters of the internet, Facebook among them, clawed their way to dominance in this Wild West internet environment, shorn of accountability to anyone or anything beyond their own profitability. The Facebook outages of October 2021 — like Facebook practices with respect to its algorithm — are a symptom of this withdrawal of public responsibility. Without genuine regulatory oversight from the Government, like AT&T before 1934, companies such as Facebook will remain free to chase the bottom line.

Dan Schiller, emeritus professor at the University of Illinois at Urbana-Champaign, is the author of a forthcoming history of US telecommunications

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Published October 07, 2021 at 7:58 am (Updated October 07, 2021 at 7:23 am)

Should unregulated Facebook get a free pass?

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