TELECOM Digest OnLine - Sorted: AT&T Inventions Fueled Tech Boom, And Its Own Fall

AT&T Inventions Fueled Tech Boom, And Its Own Fall

sufaud (
Wed, 02 Feb 2005 06:15:55 +0000

Missed Calls
AT&T Inventions Fueled Tech Boom, And Its Own Fall
Bell Labs Invented Transistor, But Couldn't Exploit It;
Passing Up a Cell License
A Secret On Sale for $25,000


In December 1947, William Shockley and his team of scientists came up
with a solution to a problem vexing their employers at AT&T Corp.

At the time, voice was amplified over long distances using vacuum
tubes. The bulky tubes often overheated and broke down, making
long-distance calling expensive.

Working at AT&T's Bell Labs in Murray Hill, N.J., two members of the
team, Walter Brattain and John Bardeen, came up with a device made
from a paper clip, two slivers of gold foil, and a slab of germanium
on a crystal plate. The contraption made it easier to transmit sounds
with clarity over a long distance. It was later dubbed the transistor.

More than any other technology, the invention unleashed the
information revolution of the late 20th century. Over time, it also
carried the seeds of AT&T's demise.

The transistor, and its subsequent improvement and miniaturization on
silicon chips, made it possible to store and distribute ever-greater
amounts of information. That drove the development of computers,
satellites, space exploration and much of modern communications and
electronics. Dr. Shockley moved to California and founded a company
that played a role in spawning Silicon Valley. The transistor
invention won the Bell Labs team the Nobel Prize in 1956.

William Shockley

The resulting upheaval created new industrial fortunes -- and
destroyed others. AT&T was on the casualty list. After its forced
breakup in 1984, it was slowly crushed by technologies that drove down
the price of a long-distance call, and more recently by wireless
calling and Internet phoning. In the past few years its revenue has
shrunk steadily, leaving it with valuable long-distance business
customers but little else.

Once the largest phone company in the world, with a million employees
when it was broken up by the federal government 21 years ago, a
humbled AT&T agreed Monday to be acquired by one of its offspring, SBC
Communications Inc., for $16 billion.

The transistor "shows how AT&T invented something that worked to sink
it," says David Isenberg, who worked at the company's labs for 12
years until 1998 and is now an independent telecom analyst.

Along with the transistor, many of the inventions critical to the
telecom upheaval today came at least partly from Bell Labs. They
include the Unix computer operating system used in many corporate
computer systems; cellular technology, which sparked the rise of
wireless calling; and voice-compression technology, which helped make
Internet calling possible.

But AT&T's monopoly status meant that it rarely exploited its
inventions. Constantly threatened with breakup, the company agreed to
put its transistor patents in the public domain and submitted to
regulations barring it from businesses that didn't involve the
telephone. Besides, executives felt little need to seize on the lab
achievements since AT&T already enjoyed steady profits from its lock
on the phone business.

"When I run into old Bell Labs people the first thing they say is,
'Can you believe what has happened?' " says Robert Lucky, a scientist
and executive who worked at Bell Labs for 31 years until 1992. Even at
the time of the breakup in 1984, he says, "the feeling was that we had
a network that was the envy of the world. No one could duplicate it."

Instead, says Dr. Lucky, "what you had was big, new industries taking
Bell Labs technology and turning it into lots of revenue."

The growth of Internet phoning was the "final nail in AT&T's coffin,"
says Mr. Isenberg. The technology allows users to make calls through
their high-speed Internet connections independent of the phone
company. Some companies offer software to do this free. The inventor
behind one of them, a Swede named Bastiaan Kleijn, is a former
scientist at Bell Labs. Other companies charge a monthly fee for
unlimited calls.

In the year before its sale to SBC, AT&T embraced Internet
calling. But as the technology takes hold, it is unlikely companies
will be able to charge much for it. "AT&T started the electronics
revolution that in the end devoured it," says Eli Noam, the director
of the Institute for Tele-Information at Columbia University.

The revolution began with Dr. Shockley and some silicon. During World
War II British and American scientists had discovered signs that
silicon could detect high-frequency radar signals, according to a PBS
program and Web site on the history of the transistor, called
"Transistorized." Silicon is a type of semiconductor -- a substance
that conducts only small amounts of electricity.

Dr. Shockley made some headway designing a semiconducting device to
improve long-distance voice transmission, but ran into problems and
handed his work to two members of his team, Dr. Brattain, a physicist
with a knack for building things in a lab, and Dr. Bardeen, an
accomplished theoretical thinker. Shortly before Christmas 1947, the
two made the breakthroughs that led to the creation of the transistor.

Immediately aware of the significance of their discovery, Dr. Shockley
was happy, but also outraged that he had not been included in their
important work. He subsequently built his own, sturdier version of the
transistor within a month and insisted that only his name should go on
the patent.

The other two scientists were shocked. "He called both Bardeen and I
in, shortly after the demonstration, and told us that sometimes the
people who do the work don't get the credit for it," recalled
Dr. Brattain in an interview recorded in 1974 and preserved on the Web
site. Drs. Brattain and Bardeen ultimately kept Dr. Shockley's name
off the first transistor patent although his name was on later

Long Distance: Some key dates in AT&T history

Drs. Brattain and Bardeen later became university professors. In 1956,
Dr. Shockley moved to California where he started his own company,
called Shockley Semiconductor, located near Stanford University.

Just a year later, exasperated with Dr. Shockey's difficult
personality, eight of the original scientists at the company left to
start their own company called Fairchild Semiconductor Corp. Veterans
of Fairchild went on to form other powerhouse chip makers including
Intel Corp., bringing to prominence the industry that gave Silicon
Valley its name. (Dr. Shockley's reputation was later tarnished by his
theories on intelligence and race. He died in 1989.)

Normally a company would seek to squeeze maximum licensing fees from a
breakthrough patent. But AT&T was motivated to share its transistor
technology. The U.S. government had filed an antitrust lawsuit in
1949, seeking to break up the company. "If AT&T sat on the patents it
would give the Justice Department one more reason to break it up,"
says Michael Riordan, co-author of a book on the history of the
transistor, called "Crystal Fire." The company had repeatedly argued
that its monopoly -- and the innovation its labs nourished -- was for
the public good.

Bell Labs agreed to share its knowledge on how to build a transistor
with any interested party for just $25,000. Dozens of companies,
including International Business Machines Corp., General Electric
Co. and Texas Instruments Inc. paid the fee, according to
Mr. Riordan. Another buyer was a Japanese tape-recorder maker called
Tokyo Tsushin Kogyo. It developed a transistor radio along with other
consumer electronics and soon found a name Americans could pronounce:

In 1956, AT&T signed a consent decree with the federal government that
allowed it to keep its structure under which it sold both phone
service and telephones themselves. In exchange, AT&T promised to stay
out of other businesses and license its patents freely. AT&T's
equipment arm, Western Electric, had to withdraw from selling sound
equipment for film producers and movie theaters -- giving up
experience in a competitive market that would have proved useful

The decree also put the transistor patents in the public domain. As a
result, while AT&T used transistors to improve the reliability and
quality of the phone calls it relayed, it played little role in
developing the integrated circuit. That fame and fortune went largely
to Texas Instruments and Fairchild, which independently figured out a
way in the late 1950s to fabricate and embed multiple, miniaturized
transistors on a tiny silicon chip. Those advances led to the birth of
the microprocessor, the engine of personal computers.

Keeping AT&T from selling to customers other than itself made it
wholly unprepared for the day, in 1984, when it was no longer a
monopoly and became free to compete like any other company.

"There was never any sense of urgency in the company because
competition was absent," says Greg Blonder, an engineer and executive
at the labs for 17 years until 1999 and now a venture capitalist.
"Whereas everyone else in the world saw the new technologies as an
opportunity to upend the market, AT&T saw no reason to do this."

Cellphones were a major area where AT&T squandered a technology lead,
and it wasn't because of government restrictions. Bell Labs scientists
conceived of the cellular concept -- the idea that a phone call could
be moved from one tower to another as the caller moved -- as early as
1947. Along with Motorola Inc., Bell Labs scientists helped make
mobile telephones a commercially viable proposition in the 1970s.

In 1983 the Federal Communications Commission set guidelines for the
rollout of cellphone service. An incumbent carrier would get one
license in each market while the second would be up for grabs. At the
time, AT&T was about to be split up, and it could have demanded that
the new AT&T long-distance company be given the incumbent
licenses. But Charles Brown, then chief executive, decided that the
cellphone was largely a local business.

"He felt that it was logical that the cellular business should go to
the Baby Bells," says Sheldon Hochheiser, AT&T's former historian,
referring to the local phone companies spun off in the 1984 breakup. A
study at the time by McKinsey & Co. predicted that by the year 2000
there would be 900,000 cellphone users in the U.S. Many thought the
prediction was way too high. The actual number was more than 100-fold
greater than the prediction. The licenses that Mr. Brown had decided
not to seek turned out to be worth many billions of dollars.

Eventually AT&T realized it had missed the boat on cellphones. It
bought a cellphone provider in 1993 but later spun it off as an
independent company called AT&T Wireless. That company was acquired
last year by Cingular Wireless, which is 60%-owned by SBC, and the
AT&T Wireless name was retired.

AT&T was also well-positioned to become a powerhouse in computers at
the time of its breakup. Some envisioned it as a competitor to
IBM. "It turns out that knowing a lot about computers was different
than selling them," says Mr. Hochheiser. AT&T was used to designing
computers for itself, not outside customers. To jump-start the
business, in 1991 AT&T bought computer maker NCR Corp. in a hostile
deal worth $7.4 billion. The deal flopped and NCR was spun off five
years later.

Inside AT&T, some played down the failure to seize new markets,
believing that new technology was driving growth in the company's core
business. The fax machine, for example, was another innovation Bell
Labs helped develop that ended up being manufactured and sold
elsewhere. "AT&T as an equipment maker missed the fax machine," says
John Zeglis, the former chief executive of AT&T Wireless who also
served earlier as AT&T's president and general counsel. "But wow, did
long-distance minutes boom. The theory was, give away the technology
so it creates more usage for the communications path."

Now as AT&T finally prepares to vanish as an independent company, it
leaves a vacuum in innovation and research that will be hard to
fill. AT&T could afford to embark on long-run research because, as a
telephone monopoly, it was the only phone company that would
benefit. But in today's world of cutthroat competition, few companies
can afford such an approach. (Lucent Technologies Inc. owns the bulk
of the old Bell Labs, which focuses on developments with more
immediate uses for Lucent.)

"Yes, phone calls were very expensive and we got rid of a monopoly,"
says Mr. Riordan, the co-author of the transistor history. "But this
was a company that literally dumped technology on our country. I don't
think we'll see an organization with that kind of record ever again."

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