Dating the Demise of Silicon Valley by Daniel Berninger

Dating the Demise of Silicon Valley

by Daniel Berninger, founder, VCXC

The decision of the Federal Communication Commission (FCC) to extend the reach of the Communication Act of 1934 via the Open Internet Order to computer networks exposes Silicon Valley to the possibility of regulation for the first time. This threatens the global information technology leadership of the United States and the innovation engine known as Silicon Valley. No one disputes the “Silicon” in Silicon Valley traces to the lease William Shockley signed in January 1956 locating Shockley Semiconductor Laboratory at 391 San Antonio Avenue in Mountain View. Gordon Moore of Moore’s Law fame and one of Shockley’s first recruits points to another event during the same month on January 24, 1956. The signing of the Consent Decree negotiated by Attorney General Herbert Brownell settling the Department of Justice antitrust litigation against AT&T pending since 1949.
The genius of the transistor won Shockley and his co-inventors the Nobel Prize by the end of the same year in 1956. The rise of Silicon Valley nonetheless is implausible without the Consent Decree. The Consent Decree gave Shockley Semiconductor Laboratories royalty free access to the transistor patent and pushed computing beyond the reach of the Communication Act of 1934. The Consent Decree actually won royalty-free access to all of AT&T’s patents for any company in the United States, but, as the co-inventor and former supervisor of the transistor work, the Consent Decree gave Shockley’s startup a degree of access and support equivalent to a research group within Bell Laboratories. With IBM also constrained by another Herbert Brownell Consent Decree in 1956, Silicon Valley emerged from Shockley Semiconductor Laboratories in the form of 400 companies with founders tracing to the talent recruited by William Shockley.
The track record of FCC regulation before and after 1956 leaves no doubt about the importance of non-regulation for the eventual global dominance of the information technology industry in the United States. The history of the communication industry exposes regulation as the means AT&T used to create and sustain a monopoly. Absent Brownell’s Consent Decree, the course of the computing would have followed the same pattern. The invention of the telephone in 1876 triggered 600 patent lawsuits by AT&T against competitors over the 15-year duration of the patent. AT&T never lost a the patent infringement case, but competitors won 50% market share between the expiration of the telephone patent in 1891 and JP Morgan urging Theodore Vail back as CEO in 1907. The tactics Vail used to restore AT&T to 85% market share attracted the first of three antitrust lawsuits.
Vail defended AT&T’s monopoly from the threat of nationalization underway in other countries and settled the antitrust litigation by embracing regulation in the form of the Kingsbury Commitment in 1913. The plan worked fabulously as the expansion of regulation via the 1921 Willis-Graham Act and the Communication Act of 1934 left AT&T with a government sanctioned (and government defended) monopoly over communication. The unsatisfactory stewardship of this monopoly by the FCC led to antitrust lawsuit number two in 1949 and number three in 1974. The Final Judgment negotiated by Attorney General Herbert Brownell to settle the second antitrust case in 1956 and the Modified Final Judgment motivated by Judge Harold Greene in 1982 to settle the third reflect a recognition by Brownell and Greene regarding the limitations of the Federal Communication Commission. The “active ingredient” protecting the public interest in both cases involved shrinking the extent of reliance on regulators.
Shrinking reliance on regulators also known as “deregulation” has proven successful strategy outside of antitrust litigation as the agency itself and Congress worked to unwind monopoly in communication starting with the MCI and Carterfone decisions in 1968.
Silicon Valley does not get started in 1956 to the extent public interest issues around the transistor and computing involve regulators as “referee” distinguishing between good and evil as Chairman Tom Wheeler describes the purpose of the Open Internet Order in 2015. The circumstances around the sudden arrival of the FCC and the Communication Act of 1934 to the regulation of computing today offers a case in point of the forces placing the future of Silicon Valley in doubt. Voice communication – the sole domain of the Communication Act of 1934 – jumped from the telephone network to the Internet on February 28, 1995, with the demonstration of Internet Phone by the Israeli startup VocalTec. The event triggered the ACTA petition filing demanding the FCC ban software enabling voice over internet protocol (VoIP) (aka impose regulation of the Internet.) The telecom industry launched Vail 2.0 with calls to bring the Internet within the jurisdiction of the FCC and the Communication Act of 1934.
Twenty years of FCC leadership under Chairs Hundt, Kennard, Powell, Martin, and Genachowski declined to take the invitation to regulate the Internet. Applying the Communication Act of 1934 became known as the “unthinkable” “nuclear option”. With the decision not to oppose Free World Dialup’s petition for VoIP non-regulation (aka Pulver Order) in 2004, the telecom industry added their support to the notion of preserving Internet independence. The seeming end of the risk of Internet regulation triggered an explosion of investment in IP communications starting with Skype and continuing with a proliferation of subsequent communication startups such as WhatsApp as well as communication functionality like Apple Facetime and Facebook Messenger. Network operators invested $1 trillion between 1995 and 2015 to expand capacity 1000-fold while the Internet remained beyond the reach of the FCC. The amazing results of non-regulation making communication even more central to the economic and social lives ironically triggered new calls for regulation – literally, regulation to preserve the benefits on non-regulation.  The return of the century old anxiety about the gatekeeper potential of network operators led to two attempts at implementing “non-nuclear” and “thinkable” regulation blocked by the court (see Comcast v. FCC and Verizon v. FCC) and a 3-2 vote extending the Communication Act of 1934.
The new policy of regulation awards the future to 1200 lawyers in Washington with no concept of or experience with the Internet as Chairman Wheeler stated as his objective in a first day speech to FCC staff in October 2014 stating – “…the 21st century flows through us”. Extending regulation to the Internet required policymakers to claim an equivalence between the telephone network and the Internet. The entire technical, business, and policy development of the Internet exists in a realm 180 degrees in polar opposition to the telephone network. The Communication Act of 1934 predates the transistor and electronic computing, yet the FCC finds it applies to anything with an IP address (aka everything). The voice quality and experience of a telephone call remains unchanged since 1934 when the FCC won status as the master product manager. The equivalent of a routine (and previously non-regulated information service) 4G/LTE smartphone connection today cost $10,000 per month as a regulated service in 1995.
The events and a decade of debate leading to the regulation of the Internet provides a case study and cautionary tale Attorney General Brownell sought to avoid in 1956. Consider the absence of problems sufficient to justify a wholesale change required framing of the policy change in pre-crime terms. Consider the decision to bring the Internet within the regulatory reach of the Communication Act of 1934 was justified to “protect” the amazing successes of non-regulation. Consider the Open Internet Order expands by a factor of 10 the segment of the economy within the FCC’s regulatory reach without consulting Congress. The new powers make regulatory arbitrage and seeking the grace of the FCC Chairman the path of least resistance to competitive advantage.  Even absent the 80 year track record of regulatory failure, the extent of arbitrary and capricious decisions necessary to impose regulation of the Internet leading up to February 26, 2015 is sufficient to end new investment.
A future generation of historians sorting through the rubble of Silicon Valley will discover February 26, 2015, as the beginning of the end.
[…  I am a named plaintiff in the appeal of the Open Internet Order scheduled for Oral Argument at the US Court of Appeals DC Circuit on December 4th.
My objection owes to the transformative implications of the equivalence asserted by the Open Internet Order between IP addresses and telephone numbers.
Discussions with folks about these topics reveals a significant gap in knowledge about the history of communication regulation and connection to the origins of Silicon Valley.
Everyone knows William Shockley (co-inventor of the transistor and Nobel Prize winner) put the “Silicon” in Silicon Valley by locating Shockley Semiconductor in Mountain View in 1956.
No one seems to remember the 1956 AT&T Consent Decree negotiated by Attorney General Herbert Brownell making the founding of Shockley Semiconductor possible.
The Consent Decree gave Shockley royalty free access to the transistor patent and left the nascent computing industry unregulated by limiting AT&T (and its regulators) to the communication business.
Prior to the Consent Decree, everything that eventually became the basis for the rise of Silicon Valley from the transistor to Claude Shannon’s Information Theory remained locked inside AT&T Bell Laboratories.
I believe a future generation of historians sorting through the rubble of Silicon Valley will date the beginning of the end to the February 26, 2015 vote by the FCC approving the Open Internet Order.
The essay connecting these dots is included below as text and posted at