|Table of Contents|
Table of Contents
A survey of telecommunications technologies and services
A recommendation regarding telecommunications research in a rapidly changing environment
The computer connection
Closed-circuit optical communications (Speech to National Association of Educational Broadcasters)
Value choices in electronic funds transfer policy
Interconnection to common-carrier networks
Should government be involved in telecommunications?
Statement of Lynn W. Ellis (ITT)
Statement of Ted B. Westfall (ITT)
Statement of George M. Woodruff III (ITT)
Social implications of computer/telecommunications systems
Statement of Glen W. Belden (United Airlines)
Statement of C. Raymond Kraus (Consulting Communications Engineers, Inc.)
The future of communications and the law
ON 71v Jt iliKM
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCNt
HARLEY 0. STAGGERS, West Virginia, Chairman
TORBERT H. MACDONALD, Massachusetts
JOHN E. MOSS, California
JOHN D. DINGELL, Michigan
PAUL G. ROGERS. Florida
LIONEL VAN DEERLIN, California
FRED B. ROONEY, Pennsylvania
JOHN M. MURPHY, New York
DAVID E. SATTERFIELD III, Virginia
BROCK ADAMS, Washington
W. S. (BILL) STUCKEY, JR., Georgia
BOB ECKHARDT, Texas
RICHARDSON PREYER, North Carolina
JAMES W. SYMINGTON, Missouri
CHARLES J. CARNEY, Ohio
RALPH H. METCALFE, Illinois
GOODLOE E. BYRON, Maryland
JAMES H. SCHEUER, New York
RICHARD L. OTTINGER, New York
HENRY A. WAXMAN, California
ROBERT (BOB) KRUEGER, Texas
TIMOTHY E. WIRTH, Colorado
PHILIP R. SHARP, Indiana
WILLIAM M. BRODHEAD, Michigan
W. G. (BILL) HEFNER, North Carolina
JAMES J. FLORIO, New Jersey
ANTHONY TOBY MOFFETT, Connecticut
JIM SANTINI, Nevada
ANDREW MAGUIRE, New Jersey
SAMUEL L. DEVINE, Ohio
JAMES T. BROYHILL, North Carolin:
TIM LEE CARTER, Kentucky
CLARENCE J. BROWN, Ohio
JOE SKUBITZ, Kansas .
JAMES M. COLLINS, Texas
LOUIS FREY, JR., Florida
JOHN Y. McCOLLISTER, Nebraska
NORMAN F. LENT, New York
H. JOHN HEINZ III, Pennsylvania
EDWARD R. MADIGAN, Illinois
CARLOS J. MOORHEAD, California
MATTHEW J. RINALDO, New Jersey
W. HENSON MOORE, Louisiana
W. E. WILLIAMSON, Clerk
KENNETH J. PAINTER, Assistant
CHARLES B. CURTIS
LEE S. HYDE
JEFFREY H. SCHWARTZ
JAMES M. MENGER, Jr.
WILLIAM P. ADAMS
ROBERT R. NORDHAUS
BRIAN R. MOIR
WILLIAM G. PHILLIPS
SUBCOMMITTEE ON COMMUNICATIONS
TORBERT H. MACDONALD, Massachusetts, Chairman
JOHN M. MURPHY, New York
CHARLES J. CARNEY, Ohio
GOODLOE E. BYRON, Maryland
TIMOTHY E. WIRTH, Colorado
HENRY WAXMAN, California
HARLEY 0. STAGGERS, West Virginia
LOUIS FREY, JR., Florida
W. HENSON MOORE, Louisiana
SAMUEL L. DEVINE, Ohio (ex officio)
HARRY M. SHOOSHAN III, Chief Counsel
ALAN PEARCE, Staff Economist
ANDREW MARGESON, Staff Economist
LEENA JOHNSON, Staff Assistant
.... i ... ....... ....
"A -13umy of Telecommunications Technologies and Services" by Alan
#*A' Recommendation Regarding Telecommunications Research in a
Changing Environment": by Raymond M. VAhnotte ----------- is
Dputer Connection by John-Eger ------------------------------ 21
t P&cal Communications (Speech to National Association
nnW Broadcasters) by Dr. Herber A. Allen ----------- ------- 25
Electronic FunIft-Transfer Policy by James B. Rule ------ 27
on to Common-Carrier Networks by Harry Jones and Fred
------------------------------- : ------------------- 59
1044M, Government be Involved in Telecommunications? by Peter C.
ark ---------------- --------------------------------------- 67
t of Lynn W. Ellis (ITT) ------------------------------------ 71
1 1, of Ted-13. Westfall (ITT) ---------------------------------- 83
of George M. Woodruff III (ITT) --------------------------- 93
Ro4d Implications of Computer/Telecommunications Systems by Edwin
4iaim"f'Olen W. Ci Airlinips 135
ftw$ement of C. Raymond Kraus (Consulting Communications Engineers,
Future Communications and the Law by Douglass Cater ---------- 153,
Je,,4-qvzr, or T=zwxxuwxcAnoNs TwHwOLOGM AND SEMCW
By Alau Pearce
40 F es has been defined as the study of the allocation of scarce
among competing users. Whenever a particular resource or
is scarce several things can, and usually do, happen. The
wt goup,... thus reducing the number of potential buyers; the
P0.can be rationed or regulated by the government; technology
Oop more efficient uses of the resource; or new technologies
,,46veloped that outdat;6`0'r overtake the old resource.
rnlgQ of scarcity gover most amas of economic activity.
ipo= d alnic telecommumeations field, spectrum which forms
of the indust hwas generally been regarded as a scarce
held resource.T"use..of its presumed scarcity, the Fed-
r I -- nation Commission haa been regulating its use for the
the chief (some would prefer the sole) responsibilities of
is to organize the spectrum in such a wa that it meets the
p4stwt public &iiefit Smice no charge is maTe for. use of the
oniists refer to this as zero cost-the so-called balancing
6f 'the mar ace donot operate. Market forces, therefore, are
bY FCC niles and regulations. Over the years these rules and
halve become almost as complex as the many diversified
ications services that use the airwaves.
of the I enormous growth of telecommimications services,
-of the spectrum space have become crowded with the result' that
behave, spectrium Space to be a severely limited resource that
be carefiffly preserved. Critics believe that the FCC should take
look at some of the services that use the airwaves with a view
spue from some services and allocating it to others that are
to -be more in the public interest.
h these arguments should be taken seriously it should also
out that the spectrum is limited because oi the inefficient
has been used.,, As long as the s tram is treated, as a zero-c os
arguments before the FCC are bound to follow the tradi-
author attended the Ln'don 8 ebwl of Zftnamlq "d'PdU"W Belenc% Uzd-
of Isand6n. as both an undergrokduate. and mduato student. He received
D. In Business Administration and Teleeommunkiitions from Indiana University.
1971 to early 1975 be worked at the Federal Communications Coinnilssiou at
the CUIrman"s Office and then In the OSm of Plans and Polity. He Is currently
aal staff member of the Iffouse of Representatives Committee on Interstate
gn Commerce, Subcommittee on Communications, and also'teacbes In the
of B and Management, Unt ad. Thanks are due to Dr.
Mr. Joe Coates, bothv`:VX0W1e:Vr Teehnology Assemment, for
n of this article, sLad aim to JONL% Raymond Wilmotte, a col-
m the IM Any views or coarluslons in this article are those of the
And do not to any way, represent C0n9rWd61W or Committee vlews.
4 WilmoiAte, "Techikologicaiftundarift of Te-l"Islaz4" Office of Chief Engineer,
tons commission, was~ono D.C., beeember 1974.
.. : .. .. :
tional "my use is more in the public interest than your use." Conse-
quently, the FCC has found itself in a perpetual dilemma, having to
What the FCC has generally ignored has been recent technological
developments that are helping increase spectrum space or make its
use infinitely more efficient. Spectrum has been consistently extended
by the opening up of higher and higher frequency bands, and band-
widths for various types of communications have been reduced. But
the development of newer and more efficient technology designed to
increase spectrum utilization does not guarantee its adoption. The
economic and the regulatory hurdles have to be met first, and the FCC
hlias been unable to cope with thesetwin problems because of status
quo thinking and significant industry lobbying design to prevent the
development of newer technology and to stifle competition.
As an example, one can cite the problem of noise in the use of th0
radio spectrum. Noise is the hissing sound heard when the set is tuned
to a weak signal. There are two basic alternatives for reducing noise:
one is to increase the effective power radiated at the transmitter end
of the system, and the other is to use more spectrum space by increas-
ing bandwidth. Since spectrum space costs nothing, the broadcasts
find it more economical to argue for more spectrum space and the
FCC usually goes along with this argument. Sometimes more spec-
trum space is essential, but often the zero cost of spectrum space has
led the industry to discourage the development of new technologies
and changes in the design of our telecommunications system.
The control of permissible bandwidth rests squarely with the FC,
which has been charged by Congress to regulate it. A classical ex-
ample of FCC regulation concerns the AM and FM broadcast bands.
Both AM and FM broadcast voice and music; an FM channel is four
to five times as wide as an AM and is generally designed to provide
higher quality. The FCC decided to give the broadcasters more "free"
bandwidth rather than order them to increase power which is costly.
These problems are finally coming to a head due to a recent explo-
sion in telecommunications technology that is encouraging a new wave
of competition, and to a more curious and inquisitive Congress aind
White House. It should also be added that the FCC itself is beginning
to realize that spectrum might have been regulated inefficiently in the
If the telecommunications technology that is currently available
could be offered to all Americans, those services would include:
Reading and answering your office mail from your home;
Browsing through today's sale items at the drugstore or super-
market and "push buttoning" your orders;
Any movie could be seen on the television set in your living
Teleprinters in every patrol car, ambulance, fire engine, taxi-
cab, and delivery truck;
Increased use of electronic editing via telecommunications
hookups to a remote computer both in the government and busi-
ness office, thus reducing paperwork and increasing productivity;
Nationwide teleconferencing networks, with two-way voice,
data, facsimile, visual displays and hard copy printout capabili-
`,blla aJmatAAYwhere: now wrvci4 by the telephone
Ve electronk preparation and delivery of mail and
M u MATIONS T=HXOIA)Gr.
system lies at the heart of the telecommunications
&T and The Bell Laboratories are often thought to form
I Of telecommumcations technology, not only in the United
thmughout the world.
anddivorsity, the telephone network is perhaps one
complex of all human artifacts. It has achieved. this status
Oswjnbling many individual building block components
interconnected and hierarchical system. The United
1bas-6 five times as many telephones as Japan, the next
system the mileage, of wire in cable, would girdle the
times and th6re -are also many itchboards to
along these wires.2 The flexibility of interconnection at
(*mbines manual diil, and electronic switchboards micro-
'I -C(Axial'cables, and waveguides to carrjr the very
jl hon' trnnkline traffic; and land mobile radio or
16Y W-tup e
1 w. t*ork, program distribution often couple with the tele, -
Th tele'phone, switchmig hierarchy has evolved to five
vbd -offices connect to gabscribers above these arethe toll
the prnihary, the' sectional and the regional centers.3
A unicatious systenu such as broadcasting, ciLble tele-
_bwputer s6vvices, subscriber from the home, and
television itt ednoafional, medical, business, and govern-
scilities, add io this complexity.
jym is formed from a composite of simpler units; these -units
led into a rough, hierarchial structure, with numerous
action being performed at lower levels and mom sopNsti-
ies the upper- levels. The hierarchy of telecommunica.
bl*es shown in Table I parallels the historic development
ribution technologies---earlier ones ai the top,. with the
more sophisticated ones at the bottom. Conducting path-
r-r- urd to as hardwirod channels should be distinguished from
els. Terminal facilties that convert human mponses
signals, one signal form to another, and signals to humanly
outputs are too varied to treat in any fashion other than
sme of their key featuro&-especially those relevant to tb
ure developments in telecommunications.
the, mesng, pathway forming the communication chan-
sign4 distribution, there is no "telecommunications" tech-
Tho for'st Olegraph, message between Baltimore and Washing-
May 24, 18447 6nvinced the world that electricaf -S' lignals
.4 g pathways could transimit, useful information.
Pacities of conducti thways, or hardwired chan-
*jhqp*-*d atan averagerate In; Y" 47-o per year. 4TO"y7s most
were 143.971,000 phones Qf an compables 1111teiby, t 16,449 control
Aystem on of Ow. 31 4-Bell toWhoom P
rumbMeredaV8,148,000 as of
T-f* Di19-0" 00 O"6P**T,,'Pr0Rtk* HAM 19W p4ge 324.
advanced technologies offer more than 30 million times the,.s.maity
of the first telegraph line. These improvements in channel capacity :
arose from learning how to transmit messages simultaneously.-c led
multiplexing-and how to reduce signal losses enroute. -
TABLE I.-TELECOMMUNICATIONS TECHNOLOGIES
Hardwired Broadcast Terminal facilities tt
Local (user facilities):
Single wires--------- Radio------------------------On-line channel.
Twisted pairs--------- Television---------------------Storage.
Coaxial---- ----------------------------- Mobil it.
(Fiber optics)...---------------------------------------- Computer.
Trunklines (central facilities):
Large diameter coaxial Microwave relays----------------- Fixed logic switching.
Waveguides----------- Satellites-------.------------------- Programable switching. -
(Fiber optics)-------- (Millimeter wave systems)..----------- Computer services.
Note: Parentheses represent technologies or services that are only in the experimental or conceptual tag "of
The left-hand column of Table I lists the principal types of distri-
bution using "hardwired" channels. Many of the older, lower capity
technologies are still used for local distribution, but newer technolo-
gies have lower: costs at the high volume of traffic along trunkliaes.
The progression of successive technologies is characterized by the in-
troduction of a more rapid change of signal level which is the same as
carrying higher frequencies. Faster changing signal levels create a
greater information carrying capacity by packing more discrete pules
into the channel. A few comments on the principal types of hardwired
channels should illustrate these points: ,
L. Hardwired Distribution
A. Single wires, such as early telegraph lines and modern por-
lines, can carry telephone frequencies but they pick up. noiS fr6inm
B. Twisted wire pairs reduce the pick-up and cut down on siigal
loss due to antenna like radiation; they can carry up to 24 multiplexed
voice channels as in Bell's T1 system or even television signals for short
C. Coaxial cables reduce radiation loss by surrounding the central
conducting wire with a cylindrical metallic foil shield. Several tele-
vision channels or thousands of phone calls can be carried by a singLe
coaxial cable. ..
D. Large diameter cable with compressed gas insulation between
the central conductor and the shield-rather than plastic foam--re-
duces the signal power lost to insulator absorption. Such cables can
carry television signals 20 or more miles between amplifiers.
E. Waveguides go one step further by removing-the central con-
ductor and insulation. Transmission is achieved by guiding an essen-
tially radiated signal down the reflective tunnel formed by the shield
alone. The recently developed helical waveguides can carry 230,000
simultaneous phone calls.
F. Fiber optics, when perfected, promise a 100 to 10,000 fold im-
provement over today's most advanced operative channels. Fiber op-
AW ables a mad,6 up.of long, very pure, class fibers bound
a Indle. Each fiber ts a perfectly iefllekliig minute tunnel
I'a Presm a '
j5muse oftheir r -low cost
sdti fiber optieslwffi`offer-awide rhupo applicatiormOu
4. amunications *18 8
INOMWer. -the cost Of pun fiber needed in teleco
WvL In addition, light bm= can not be effectively amplified
is varried -outL by emnecting to microwave frequencies.
may -be the. economicaiUylimiting factor for the bandwidth that
,hardwired systems. s i oed Ito prevent losses due to radia-
browic Ain in Wtry..Z ted by Ma 1890's,
k _* 10 MAI. in the late
to use radiated- sign4ls as a means of communication. The
Unit Of I easuiement
of the radiated spectrum, corre-
td a fkMyeUrIv of -6ne cycle',pef second named in honor
,PoAolpli ITertz (1857-1894). who first proved that the
'au of th e I at!pRsoher;coqld it radi-
the jilear 11M .1 r"
b Mt swtrum begins at about 300,000 Hertz or 3M.
low this fmquency cient radiation of signal In-
*caJly in cost above 10billion. Hz or 10 GHZI the air itself
absorb the.. signal -power. Ultimately the capacity of the
slast spectrum. )*A_ finite, but with more efficient. en6x1ing of sig-
call ctmtroi of noise and interference between different sig-
protectioA of the local, environment from very intense electric
near the broadcasting. antennas, and a judicious'subdivision of
area, into local communications zones, many more si 6 gnals, could be
d thus making the spectrum less scarce. Below 30 million
114,30 the ionospheric layer of the upper atmosphere reflects
pit Z*&O waves; thus the earth and the ionosphere form a giant reflective
*avs guide along which radio beams can "skip aratind the world.
The obvious importance of this phenomenon to ocean navigation
6dinternational-commumication need not be explained. For appli-
+ a4low of limited geographical scope, however, this property: raises
4lipterference, problems, especially. for the less -expensive equ:ipment
*#,'UMble at lower frequencies.
-,A. Radio broadeastm* W" shown inTable,[, includes all of the trans-
4*6mions that can skip o the ionosphere. Signal powers are regulated
mational as well as nationil agreements.
AM,, Te,749vieion uses frequencies above 58 11Hz which can provide
40V a local service since, them P the on
41- A Mum-16A inspacellll,'For this mason, and because television si als do not
Win Aladowed areas very well, almost a direct line of W-ght between,
"Amder and receiver is required for good to exceHent reception. Tole-
limion fr yencies, are too low to be conveniently focused into narrow
Pftms ey an used to provide wide area coverl to a limited..
1fi1*____-___1_!____.1__ 1 11 according to a
'99Y Wojun% Tr4pun- Tekvi0ion pictures are,
*'*Ve form, established in the early IM,& Much b6ler jpic-:
,ta* q*jityis feasible, but this would requirlealterations
to an enormous number of trammitters and rewivems StandalIrldiza.
vdtten 30 XM
tion is difficult-if not impossible-to change, given the current Iwg-
C. Microwave frequencies are at the very upper limit of the usabW
broadcast spectrum. At these fi-equencies, microwaves can be fonudmI
into narrow beams of dish-shaped antennas or horns. These beams am
ideal for constructing efficient, high-capacity relays. Hops between
relay stations depend upon topography but range between 25 to M
miles. Many applications of microwave relays are not generally lmown
but are nonetheless very important: telephone long distance tn -
lines outside urban areas are mostly microwave beams; television net-
work broadcasts are distributed via microwave relays; the Advancett
Research Projects Agency of D.O.D. links a nationwide grid of dr
vanced computers into a single microwave relay loop; recent appii-
cations involve urban multipoint distribution services (MDS) pr&
hiding entertainment, such as first run movies and boxing matches, td
subscribers via a network of encoded microwave beams.
D. Satellites at an altitude of 22,300 miles revolve at the same rate!
as the earth so they appear to remain fixed in the sky. From this
vantage point they can act as signal relays since each views rouagby
a third of the earth. Satellites also use microwave frequencies, bu
the transmission path is flexible unlike all other earth bound facilities.
Thus they can provide either an emergency replacement for trouble
trunklines, such as a damaged submarine cable, or a link to a special-
ized high capacity user in remote areas pot along the fixed trunklineO
E. Millimeter wave systems and laser systems attempt to use the.
high frequency intermittent atmospheric windows of greater in"for-
mation capacity, or "band-width," to construct a very high informn-
tion capacity link. Many of these applications will be limited to urban,
sheltered, or desert environments because "windows" are affected by
fog, rain, and snow.
III. Terminal Facilities
All telecommunications channels require signal conversion to a
humanly understandable form. Similarly, they require signal power,
amplification and noise suppression. High capacity channels, such as
the radio and television broadcasting spectrum, are subdivided iito,
bands or narrow channels, by multiplexingg" techniques. The fre-
quency band structure of the radio and television spectrum is referred
to as frequency division multiplexing. Alternative schemes for break-
ing up and compressing messages are time division multiplexing,
delta modulation, pulse code modulation, digital format encoding, etca,
Each is intended to squeeze more messages into a finite capacity chan- H
nel an dto reduce signal distortion or transmission errors. These meth'
ods need not be discussed further since the relatively higher costs of-
sophisticated coding at the terminals is generally traded-off against
the higher costs of implementing higher capacity channels. The re-
ceiver costs of the telephones, radios and television sets are kept low
by using relatively simple codes, while the submarine cables, satellite
transmissions, and microwave computer networks use relatively corn-
plex and more expensive codes.
The features selected as important for the purposes of this paper
are the new or emergent user options and the central facility options.
offering greater flexibility of service.
of tlomtril factlity options shown in Table I is nw-
4t M W of each art o in service today
tr the hied-telephone.
,v becasne widespreP4 with
A*4 'Gr hardwired switchin CW1 the
g I 'e--that
PAttem must be physically in oi&r to change the
Von ephone receiver.
4 witching includes the touch t(Me dialing phones
Gov'QiMent A 4IWed Research Proj ts A
Mter ):iAwork. 14 th6 latter ystem each. staxidaidized
14 qm -address like 4'package of mail, and is relayed
tv receiver, B;ihlisystems will accept reroutmig instrue-
ts; is makes iDossible a dynamic update
QItodeq, one CoU14 envisage' a's a prac. ical reality is
ed JQctor serrice that searches several locations auto-
rer4tb* c=fnands left by the receiving party, M
xwove or malke telephone contact.
's&v MW8 are already paft'of the nation's telecommunii-
for airline reservations, banking and, credit. transfers,
grAmpa" from. remote terminals! TAio wax-
overy, om or two yearg 8umexo8we. computer.
hk in 8peM, logic dewity, 9torage eqpacity &nd einnputa,-
4vikwf 7 guch'rapid devvlopment shifts relative costs in favor
wmory 4 central facilities and Storage at user sites per-
ar roles. Any form of memory or storage offers increased
K ility in the use of the channel, often the option of using
.capacity channel to send a large block of data over a longer
of time, and the advantages of permanent---or semi-perma-
for later reference. All computers have some memoryy
genera ly fast, electronic memory that is needed to carry out
or remember instructions-this is called on-line memory.
Momorv has a slower access time ot much greater capacity.
in theform of magnetic tapes, disks or drums. It could be
aphically or even on punch cards and paper tape. But
ine, readable" by a computer for easy electronic access.
look-up, manipulation and display, are the heart of many
arch and recreational activities. Text editing by computer
rdinote terminal has most of these features; the computer re-
ious draft versions before editing so the development ste
sensitive material may_,I cleleted on command so or7
are printed; and many different formats are avau-
a other user facility features Vn'th'broad ranges of
ah-owU are the basic promise of
Appik i0m iwJuds all sorts of health
alifm*, trAffn control, edumfional interaction with a
I'll ..tt*Or, and- so forth. Them smue, Ivsponse services mAd be
t# aw4erater *Dgs, by i#*UpIe)dng the loml phone or power
Ut Seftad ComMuter Revoluflon, Movmber, 197k
A. # : t
444 t 4 -
U, t t j*
":i -: ih ::;[.:u :.: -:: .m m i
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2. Mobility offers obvious advantages such as keeping in touch. dir-
ing a long commute home and coordinating a fleet of repair as or
taxicabs. Possible future applications are: providing a television pic;
ture of a patient while still in the ambulance or distributing the s9t0-
ices of hospital and school staffs to mobile clinics or classrooms. '
Several groups have assembled extensive lists of user services offered
or promised by telecommunications technologies: James Martin of the
IBM Corporation,8 the MITRE Corporation,9 the RAND Corpora-
tion,10 and the Sloan Commission,"1 to name a few. The primary em- ,
phasis of the MITRE, RAND, and Sloan Commission studies was to
explore the household and institutional uses of broadband transis-
sion-predominantly as a consequence of extensive distribution. of
television by cable. Multichannel television promised by cable could
be broadcast at lower cost in sparsely populated areas and even in
some urban areas. Because full fledged stations cannot seem to find
sufficient support, many UHF channels remain unused.z12 In gene
there is more than one technology appropriate to each service.
8 James Martin, op. cit., 1971.
9 William Mason, et al., "Urban Cable Systems," MITRE, 1972.
10 Walter Baer, et al., "Cable Television: A Handbook for Decision Making", and RAND
series sponsored by NSF, Rand Reports: R-1133-NSF through R-1144-NSF, 1973.
11 The Sloan Commission, "On the Cable, the Television of Abundance," McGraw Hill -
'12 Rand Corporation, "Projecting the Growth of Television Broadcasting," R-1841-FCC,
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THE APPLICATION OF TELECOMMUNICATIONS TECHNOLOGIES
Table II illustrates the possible services available if the regulatory,
political, economic, and competitive constraints were removed. These
.services are presented in the lefthand column and have a wide range of
institutional as well as residential applications, various distance and
-information capacity requirements, and both profit and non-profit
Many of these services have been discussed before as examples of
applications of the various technologies which are again listed along
the top of Table II. Parentheses designate user services or technologies
that are only in the experimental or early stages of development The
entries in Table II represent the pattern of possible utilization of the
technologies in providing the various services. The high degree of.
flexibility of purpose and interchangeability of various telecomnumica- .
tions technologies is revealed by the high density of entries in the table
as a whole. The codes used distinguish existing technologies and ap-
plications from those discussed as possible or expected option. The-en-
tries designated by an X are applications in service today; a code X"O
shows limited application in an area with expected growth or alterna-
tive modes of use; and those designated 0 are either not yet in practical
use or are in the developmental stage. Most of these have as yet un-
proven markets and represent both high risk and great promise. The
capital R designates a required component for the service, while the
small r designates a low capacity response signal path to complete a
two-way service option when the primary signal is distributed by
Several general relationships are revealed by Table II:
First, in most cases there are several alternative communications
channels or combinations of channels that could provide a given serv-
ice. For example, subscriber response television almost immediately
brings cable television to mind, but in remote rural areas broadcast
distribution with telephone return paths may be the only economically
Second, many services require a combination of several channels and
terminal features; these may not all be supplied by the same institu-
'tion. An example would be power switching of non-essential residential
and commercial loads, which requires a low information capacity ad-
dressable channel to each on-off load switch. The power company would
supply the load switch, but the channel could be over telephone lines,
a cable tv link, or the powerlines.
Third, many of the technologies new and old, can support a host of
applications. This would expand the economic base of support and in.
crease the demand for the technology if there could be a general shar-
ing of its use. For example, coaxial cable can be used for nearly all
applications except land mobile. This holds even if one distinguishes
trunkline telephone cables from household subscriber CATV and in-
dustrial plant two-way broadband applications.
Both cables and microwave links can unite educational, medical and
governmental institutions into a two-way broadband network; these
same channels could also distribute network or local television pro-
grn ms in order to supplement operating revenue.
Fourth, most of the services expected in the near future require a
computer; they also require either or both computer assisting ca-
pabilities-an on-line channel or storage option. Subscriber response
%Uviiiau requires a small on-line computer. As demand for oxn-
UW-View m0cream, cable systems and phom linked computer ac-
44mdaftl ma be in direct competition. Polling of telev-ision au-
4iAs by.,=i r response, auddence, response tv quizzes, and inter-
4&7*ibdwation rewire an on-line channel to the -television program
studio. Thison-line channel could alsosupply burglax and
AU but the multichanml television service and land mobile
ons. mquire.either a switched network or an on-line channel
-U* emputer. These two are not cleaxly distinct alternatives -since the
Ut"oue dialing operation isin reility the -use of an "on-line" chan-
,WLIneehief difference is in the interconnection complexity of a tele-
AOM thetwork compared with the many-to-one simPlicaity of on-line
"TV IdIanneig.: Afternafively, cables could provide local phone serv-
ce, if suflitient channels were aevoted to cover the traffic demand of all
"ft an A cable distribution trunk-and a central computer provided
switching, f unctions.,.Since one television channel. can be
AiWpleited.. into, 1700 telephone lines, thisoption is not out of the
*Awkkm given that the,,ca;ble is almady in p1me to provide multichan-
AMtva.ndsubscriber response feature& As a result, the roles of broad-
ics4Wr and eommon-carrier could eventually merge technologically.
,Iftat this would do to competition, FCC regulations, and the socio-
political environment needs to be studied and carefully assessed.
f #08,ixth-j be&use the telephohesystem and the broadcasting industry
un aries as as geograp ic imi: s. More,-
over, the interdependence of both services and technologies will con-
stantly produce adjustments in the old to accommodate the new. The
scale and reach of each technical application will continue to deter-
mine the commercial viability of many businesses which depend on,
or compete with, the telecommunications services.
At beA, this has been me an overview of changing technical
realities and emergm* n the field of telecommimications tech-
-nology. We know little about human communicationsand little more
vhe:h it is handled electronically. New applications often come. rapid-
ly when the conditions 'are ready-television spreadfrom 20 percent
to 80 percent of all U.S. households in only six years. Therefore, the'
processes of growth and chaiige could come verV rapidly, And perhaps
faster than either the precedent or the base of experience upon which
-wi.* policy often depends.
This should act as a Warning for all policymak'ersfo-r theWhite
"Rouse and the Office of Telecommunications Policy, for the Congress,
for the Pederal Communications Commission-and for all others who
ha-ve &U intbrest im telecommunications. Electronic and telecoinmuni-
"'tations technologies Ppear to be on a competitive collisiotl course
and there is the promise--some would say the threat--of the giant in
computer technology, IBM, competing with the giant in ephone
technology, AT&T, and the giant in posa I communication, the U.S.
Post Office. All of theim bav's stake =the future of telecommunica-
... :E..:.. .............. ......
tions along with ComSat and the communications satellites mnanujt g-!
turers, the broadcasters and the cable operators, among othera:.tB :
era of an integrated telecommunications system is possible .with ai
rent satellite, microwave, cable, and computer technology. I'- :
need is the appropriate policy to decide how the mix will be handled.
and by whom. But these decisions will not be easy.
In an area as complex and dynamic as telecommunications poicy
making can be difficult, even hazardous, because of conflicting public-
interest considerations. Legislation in the area of telecommunicati-ons.
raises another set of problems because its scale, its scope, its iWter-
relatedness, its pervasiveness, its dollar investment, its rapid turanovter,
its high quality, its impact on almost every aspect of our daily lives,.
give telecommunications technology a unique position in society. Fur-
thermore, telecommunications technology overrides all the traditional.
boundaries of governmental authority. ..
Many of the effects of telecommunications technology, because: of
political resistance, economics or status quo thinking, are doaye,.
slow-moving; accumulative, and outside the chain of responsibility of
buyer, seller, and individual government agencies. In other words,.
no one has either overall authority or mapping responsibility with
regard to what telecommunications technology has been doing, is.
doing, and will undoubtedly continue to do on a greater scale in the
All of this places a very heavy burden on the legislators, the bu-
reaucracy, the telecommunications industry itself, the public interest
groups, and the academic and researcck community. Some very diffi-
cult decisions lie ahead; let's hope that these decisions will be as inno-
vative, as flexible, and as far reaching as the technology they hope to.
Echo suppressors may be only
o few hundred miles apart
Regional center Final choice Regional center
(Class 1) (Class 1)
^x^-- ^ -
/ c nt / mSectionalaceneer
(Cla ssm sr If as -
Primary center r hPrimndr choice la cty cinter-
(Class3) _31--- ,"( (Classss3)
Si__Fa___s-tr ___-- J Subscribers.
i H gro-upse gotunk o -
Choike of' pad.s wit.n Y dials Z. A tlpical lon~di~ata. dh~nInsa
efeene: ames auppresstrsn, t. coer., 1ml969, .
SEnd officelocal central officeI 'End of f ice
Subscribers ry l\ Final routes;| ^ J Subscribes..
lY High -usage' groups of trunks:-- |y
Chaime of paiths when Y duiml Z. A tyic slon sltto diallijil networiL
*Referencew: James Marrin, op. cit., 19691, P.3-
.. .. .... . .
.. : . ."".. A "
.-; *b"".'i!!ijiprBB B* *-B.u i t p c c ^ 07jp.o
'"'; -n~ ; ;;:: ::: .. ::::l :: *::':::
:E: :::" "EEE ... "
:.:. JameseMa Yrtin, S. it .,1969, p. 8.
. ... ... ... "
I .. .... .... .
iiiiiiiii:: i: " .
. ............ .. ..... ...
.. ... ................
tE ::'EE" "
:. ':. .. ... .
ml .:..::EE "1 E.
BiODUXXaM&TTON, XGARWNGT=j=x3wumcAnoivs 1?EszARcH rx
RAPmy CHAuGiso Exvmo1q3axT
By, Raymond X Wilmotte
rederal Ccnmunications C' ission, among others of our
,,is facing the very difficult problem of change. Major as-
the envi ronment in *hieh it operates are changin idly
-looking at the past is not a very good g ra nig
noughthat xi for
tho fuiture. Not onV are the form and attitudes in ee &ublic
but aol'is our'economy.and our technology Problems
more complex vbwwause of rapid and comialex interac-
ions much mom d4eult.
In it se6mqd:UeCOss"-y only -to regulate
cation sy" component that generates energy which
biwtero in thi service areas of other transmitters. Ms policy
stfice -the amount of spectrum that we know how to use
for the public's needs. That situation has now changed.
wears. that new radio, services, and indeed, individunI com-
rtg %a pas can 9to ften be accommodated only by sharing or
radio frequency spectrum. It is now clearthat ezifire
S, transmitters and all
Sve....temg consistin of receiver,
elements that, may be in the pa& between them need, to be
'ion must insure that systems do not interfere to an un-
ortent with each other. In technical jargon, thisis known
compatability. While the compatibility betwetu
list be maintained the density of operating systems must be
to sllo-r for the increasing demancU and needs of the t
tU future, We need to develop a broader underst 01
lex problems to keep pacewith. the: anmnz telecommuni-
nt req ires the coidimious review of old
.14 w i n enviroxime III
and7W'development of new ones. Modification of the old and
on of new policy depends on broad overviewsof 'Gift d"
OUS4 and research ifito therorisequences of nV chang"; or
s. Plann* research "s
failing to make change M9 i ifficult, To -be ef -
it must have a coherent structurein. which the seveml elements
'it focus on some Wily specific common purpose. These needs are
a heavy demand on anal "Cal Capability,. Fortunately, auto-
hw struck the. field.of -anarvl, Led by the COTPUterythe aims-
puter &nd the calculator, there.is, a plethora of techfiiques and tools
4ty. Raymond M. wumett* is a consulting tugineer In the Molds of: elfttrmtes Abd
wanseement He holds his doctorate from cambridge University. Euglan&
nwot of, bile professional career he has bftu eonsuitant to the broadefteffng InduAtrY
,=#J*r elee&Oalcs eorporstlans. Of recent yeats, be has been Conewtant to
-mat agescUs and the NatIonal Academy of Bngt r"ingt e war he oper.
Is own laboratorY and produ on fteflity. Ho was awarded the Nurealm of Ordhaum
ett Av*r& He ban Pub gome My papm gmd arUelft in Ike professional
h4s been grauted nearly fifty Patenix.
allowing the analyst to do in minutes what might have previousl-
taken him days to do. These tools and tedmniques are great, thieur
potential enormous. The changing environment demands the intro-
duction of these new methods into the research process to help the-
development of policy., ...... "
The rate at which these changes are taking place is making a -
demand on the various decision levels within the Commission and wo
the Commissioners themselves. It is clear that the effective and smooth
meeting of these problems will depend to a considerable extent on the.
relationship between the analyst and the decision-maker. In this paper,.
I will refer to the decision-maker as the level at which a decision aa.
to be made. This will include tfhe decision levels within the staff of .i&-
Commission as well as the Commissioners themselves.
The decision-maker has two alternatives in seeking to develop an ob-
jective picture and understanding of the situation about which.he1is to
make a decision. The first is the quasi-legal one of obtaining the truth
from the "biased" presentations of parties with conflicting points of
view. The second is to turn to the. professional analyst a hs pre-
sumed objectivity in his search for truth, which may not be generally
available from parties standing to gain from the decision. A goal bf"
the professional analyst is, therefore, to present to the decision-mtkey-
an assessment of the situation which is as free from personal biq$ 4s
The professional analyst, however, inherently suffers from a bias
arising out of his expertise. The bias is not of the kind that favors 6 eo
side of a controversy or another, but exists because the analyst auto-
matically favors the problem areas and approaches that he can mostw
effectively deal with. This may be difficult for the non-expert to. re-
ognize and detect. To a degree, this bias is inevitable; to a.considerable-
extent the analyst can be helped by procedure to minimize its effects..
This bias left uncorrected, will nearly always affect the decision.lGen-
erally, the effect will rest unnoticed.
The manner in which this bias enters into the decision process is
typically as follows: the analyst, when assigned to a problem, breks-
it down into its principal component parts, and asks himself what car
be done to attack each one. Inevitably, he thinks first of the thgs-
that he himself can do, of the things that he can do well. The things"
for which there is inadequate information or those things in which
he is uncertain of his capability, will tend to receive secondary con-
sideration or no consideration at all. A great many analysts of repute
try to overcome this bias, but few can resist the temptation to give
priority to those things which he finds easy to do because of ihiesexper-
tise. It gives him confidence in his ability to resolve the whole pro-
gram and inspires the decision-maker with confidence that the prob--
lem is inii good hands.
While these are good psychological reasons for producing useful
results early in the program, one would expect that it would be better
and more efficient to attack important and difficult things first, in case
it was found that the difficulties encountered might affect the planning
of other parts of the program. Occasionally, the impulse of the analyst
to do those things that he knows how to do well is sufficiently strong
that he will plan, and actually carry out, experiments and analyses
which he expects will be useful, without giving serious consideration
to their form or how they are to be applied to the assigned problem.
of, bisa bw a. subde quality it: Sta Iveliv-SIUMMA
.4titude, Wid pV11ou,, and it is difficult
AA det464',if becauie_.it isaz iuheeatpa'rt of t1ii
t is Pr y impossible to completely eliminite
L pbw- to jictuce. 'it to a onsidemble extent WhM
dani r's.and is..w to ado 'a,
ip Cal C3 g process is one te= g
to the t the andy8t 0 M' do. The process, or.
ri refocuses on adapting the things to
_401 dekk di
Pf *tAd 00blem. It is the coince tual vihich
A Jtl a process, t. V
0 program.. 1or system y devel-
appr6ch and inodify it as.circuoistances. and find-
lie focu is on ---- -- I ization, of the action,
and the boundaries beyond.
will not, e15 is to, list as sf*zifieall as: `ble
'red of the program- The -objective -of the proqm
'decision-niak(ir *ith information which Will he J_
d the scope and ramificationis' of the problem, :11&
t' ve andqu2HtAtive, which will h.elp-him to reach
-,in selecting the *information he presents to the decision-
his judgment. This judgment implies the existence.
1i it was based.-. Theprogram, outputs must, there-
set cif factors on which the outputs are based and clan
list of factors is an importaut feature of the process,
to be carried out will be directed to the means of
the ana!yses mill lead to a number of
sW the comparative a&%ssinent of the f actors will spie,
aodva4tages and disadvantages on the basis of whi&
cm make a recommendation and the decision-maker a de-
ste, in the program. is very important. The list of criteria
wit'hout any consideration of whether it is easy or dif-
Pr impossible, to evaltate the output information. These
to be considered later the process. This means that the
will be focused on estima inff
to the criteria, ifthe
ad!LPt his approach to the needs oT the roblem rather
Y around. Needlessito say that the oily effective way
lex tion is to put a list of factors, in writ-,
80c4na =ite is to make a list of the readil 6 miDuts-
will'be in the analyses--he condition which initiate& the
-a doaimon, its baekgroun, literature, data bawo, mod* an-
tale0k atc. The anilyst is to convert them into the
Outpilu as Y and as as he can. do this, he
M hi a proa& Wo, component
On P1,00rVidilig as 4 1 ii 1 11
output& The str teture of the ana Vill be
in We form of a tree showing how -6idput of
becomes the input of another
depicts the p approwh to the problem
of compopent an to each other. The tree can
a yiiWem tree." It '28a hi&y vWble way of
i^ i :^ ^ "Jiih: .... j
describing the approach to the problem. In constructing the tred&e
analyst will develop a better understanding of the nature of the p6ro b
lem and the needs of the decision-maker. In so doing he will also "d-fi
cover the extent to which he can provide the information require tt
produce the desired outputs. At this point he can then make a ratiomaI
decision, in view of constraints in time and cost under which he is to
operate, as to which analyses he should try to carry out and to what'
depths. He will also turn his attention to what he can do and to *wat
he cannot do toward achieving the desired outputs of the progpnti
More often than not these desired outputs cannot be fully achieved.
It is important for the analyst in planning his program to have a
rough assessment of how the output is expected to meet the needs of
The development of a problem tree along this line of approach will
generally give the analyst a much deeper understanding of the nature::
of the problem. This results in the analyst becoming aware of alterha-
tive approaches which might not have come naturally to his mind ha4
he followed the normal process. That process inevitably restricts the
scope of his imagination.
A warning should be given to those interested in applying this prob-
lem tree approach. On the face of it it looks simple enough, but it.
requires a major change in attitude and focus on the part of the analyst
from the more usual process of planning what to do, but at first it
seems foreign to normal habits; there is a constant tendency for chang.
ing the focus from what the problem needs to what the analyst can.
do, making it difficult at first to build an effective problem tree.
The results are worth the effort. The problem tree has certain
special advantages. It provides a simple picture of the ap-
proach used in the program, making it useful for communicating with
the decision-maker and other interested parties. It gives the analyst
a clearer picture of the areas in which he should direct his effort to pro-
duce the most useful results within the time and cost limitations. At a.
later date he can return to this or to a similar problem, and instead of
starting from scratch, he could start where he left off, attacking cer-
tain analyses which he had not been able to carry out previously. The
tree will also show him where disciplines other than his own wduld
contribute effectively to the program. Bringing several disciplines to-,
gether seldom produces a coordinated result. That occurs only if a.
coordinated procedure such as that outlined is systematically carried
out. Finally, the problem tree will help the analyst to convey to the
decision-maker his understanding of the problem, the extent to which
he has been able to cover his principle aspects and, very important,"he
can indicate the areas he has been unable to cover.
The pressure of change, and the greatly increased complexity of the
problems facing the Federal Communications Commission, is putting J
a heavy strain on the Commission and its staff. Effective research and .
development of policy are becoming increasingly important, and with.
them the objectivity of the analyses on which decisions are made. AA'
mtbis paner, this objectivity is seriously impaired by the,
on part of the analyst due to his expertise. The
I difficulty, amd has a number
%Pproseh overcomeii thILS
characteristics. that have been previously discussed.
outEned here ars particularly suited to the pyeent
of the FedwAl Communlicatiom Cow=ssion,-
ArOso electromaenetic, conpatibility. It seems apparent,
thav eAnbe applied toxvide ranae of problenis.mgov-
iaiiis6joutsi& pf the telecommunications field.
TRZ'PR()W" lkft CHART
in the attached figure shows on the rz a box entitled.
This box Este the types of M*f omati,
selectiou of infonnoion was based., This lit of. -outputs is.
U wiU be- revisecl by an iterative, prwss as the analyst's.
ofJhp jiobjew, dgy
of ima is. simply & dawription of the: condition
lpzoria degim n and nj'ay incl4de the
that box is the one labeled "inputs". The inputs are
IV le informution which can -be used for any of the-
on the top line called "integrator" combines the out-
level I analyses to produce the desired program outputs.
analyses of the program form the branches of the-
;U*Ow These branches are developed without consideration
JIbt the anaJyses can' be carried out.
are divided into several levels. I&vel I comprises the
0 to carry out the integration process. This process will
-A output information- that is needed to evaluate the output
2 comprises the analyses required to provide informa-
th analyses of level 1, and level 3 provides information for--
of level 2, and so on.
this. structure, two principles should be maintained.
ses in a level should interact as little as possible with
the output of a lower level analyses may be an
than one analysis at a higher level.
the problem tree has been developed consideration should be-
kin-a them in order of their ortance in affecting the
outputs. Then attention shouldiuturned to the depth to.
Uov are to be carried out and how best to do so. At this point
chart may be drawn (such as a Part or;b&r chart) outlin-
'*quence in which the analyses should be performed and the.
auh one mi view of the constraints of bucfget and schedule.
Condition I .
Need for of Aalyss
I I _eio-I
* : I l h i l l
; ; I *::..
I : ...
11 p1 ::
. ... .. ...:.
'Ei :| -:
T= ComruTm CoNNFAMON
Ogk* of Telecommunications Pollen, Office of the President)
Idd rmwingr up in ]Illinois, kids used to collect and
eara& WA 6achstick of bubble gum you bought,
31 card with a player's photo on one side and a record
iareer on the othen
h1ving in Washington, I find that the same collection
nly1& collecthrs aren't kids and the ob*ects cof
11eard"he 're ealhd, dossiets. They d= always
1w o contain the record of someone's life.
ca dossier colleddrs, some say, operated with -a
Ao get the "complete set":and thus collect more and
Me baseball carc* dossiers get "traded," too. But
and modern telecommunications capabilities,
a lot more efficient than the baseball card swaps we
&Hdhood. Todav Vou, don't have to give up one of your
get one from A other gay;: you merely arrange for
'to telephone his computer; then the computers make
&%, s cards. In some cases, with the assistance of a little
telecommunications technol you don't even need
A -AL % Sslier in his compifter
you can look at env
Sa'easily a&. you. can look: at one mi your own and vice
o&ereoll4ebors change in on this act, too, soas soon as
or on a particular smubject, every collector has access to it.
teehnol4y every ]did on the block can have all the cards
*W* ]kids collecting baseball cards the only effect of our
Aftding was to decrease our cash and 'increase, our cavi-
ef dosier collectin and trading an far more gr=_
4 a society as., 0;;;1,4ex as' ours necessarily entails the
SLnd tranSferofrecords and informadon. However,
'fial dangers inherent in the utilization of telecommu-
to accomplish those goals. These dangers include,
tIOn. or disclostire of personally identifiable
on to tumn rized or binproper persons or agenmes.
what wa read; telephone.companies, know to whom we
40d, ootaitleEs credit 'agencies know our financial worth;
fif Ve itemize our deductions, what church and chari-
and so on in an ever-widening spiral of commercial
records and peronal information files that would tiall
Vtft em, an Uiretker a lot more about us than anypne
systems, some containino records on indi-
now. The thiats to "ir"e apparent, and
*vmber IkVM JWWWeat Networt., t&a.
growing. Fortunately, the public awareness of those threats is also
expanding. It's difficult to discern from the scattered and sometimes
apocalyptic news reports exactly what's going on, but public concern
lhas recently centered on three Federal systems: the FBI's NCIC, the
General Services Administration's FEDNET and the Defense De-
The FBI wants to alter its National Crime Information Center
System to link the criminal history files of every state and local police
department, corrections systems, prosecutor's office and court system
in such a way that, allegedly, if you were stopped for a defective tail-
light 'anywhere inii the country and a routine criminal history check were
made, the FBI would know of the encounter, as would anyone else with
access to the system who was interested in what you were up to. This is
even more disturbing when you realize that a great portion of all :police
contacts with citizens, resulting in messages that might flow through
the FBI's proposed system, do not involve criminal behavior At all.
A second proposal, now pretty much dead, was the General Service
Administration's FEDNET (Federal Network) plan for an integrated
block of computers large eiiough to store far more information than
the Federal Government was likely to ever need. The FEDNET sys-
tem would probably have streamlined GSA procurement and property
management efforts, would have provided the Department of Agrn-
culture with a highly centralized capability and would have made
available a large reserve capacity for meeting future, but unid&ntified,
needs of other Federal agencies. However, in the opinion of the Office
of Management and Budget and then Vice-President Ford, insufficient
consideration had been given to protecting the individual's right -to
The third system, recently noted in the press, run by the Deense
Department's ARPANET (Advanced Research Project Agency Net-
work), links through a high-speed, relatively economical network t4he
research computers and many universities and allows one data base to
talk with another. Here, too, questions have.been raised about whether
adequate safeguards to individual privacy have been developed
All three of these systems and others have at least two elements in
common. First, they all incorporate advanced computer and teleam-
munications technologies for greater economy and efficiency, and sec-
ond, they pose a threat to privacy by making it easier for Federal
agencies to collect information on citizens and, having collected it,
pass it on to other agencies.
FBI Director Kelley feels that the Bureau's proposed system would
increase his agency's efficiency. The other agencies whose proposed
systems are cause for concern undoubtedly feel the same way and tfhey
may well be right. But the probability is that installation of many eA
those systems will be disapproved because of their perceived threattto
privacy, before anyone gets around to asking whether-privacy
aside-the systems make good sense in terms of efficiency and econonay.
When these threats to privacy occur, as they do today, in a climateof
distrust for both big government and big business, then those of. Us
who feel that advanced computer and communications technology gre
*essential to good government and to a growing economy, had better
get our houses in order-or they'll be pulled down around our ears.
The initial reaction to these threats to privacy is liable to concentrate
Son the first characteristic the systems have in common, namely, that
tm the latest toehn t the most erral computers
by nkin so
unding the li them, Wit phistie&W tele-
to tiom ea iPitiek coul e&sily, but erroneously con-
fftm this that 64: dangers lie in the te6nology itself'and that
Wb* liles in prohibiting or at least del in the development of
a ree4y happening. Senator Promire introduced a bill
d unpose a moraWrium on electronic funds transfers for
4*jWftta,,ki* AJLga, there is talk of grbstly restricting all computer inter-
Jt would not be surprising tt" ) withm an urgent call for a
A* fdl:ne* computer systexn. But- such action would do
M _ to resolve the problem; it would only postpone a forthright
dialogue, obscure the issues and set back the development of computers
a" communications in this country, to everyone's detriment and to
110 Me s gain.
Owputers and telecommunications which make up the most rapidly
91"MU-9 sectors of the United'States economy, are essential to increas-
ing our national productivity. Currently, the United States leads the
WM M the technology of computers and telecommunications. But if
ve try to protect privacy by attacking the technology, we may lose this
lead. throw our computer and communications industries into dis-
arqy and do grave damage tothe long-range health of our economy-
401to, make the whole experience still more painful, when we ad
-AhMhadj- we would find that we had still not'dealt with the problem of
lu troublesome but certain truthis that we cannot solve theprivacy
M by manipulating the technology. We don't collect data on
W'vidiuu ah because we have computers which can handle it rather we
build wm ters gad )"OM them with telecommunications ;;ause we
V"t to Uue the data we have been collecting all alon.g and either do
now things with it. or,'more commonly, do the old things more effici-
* of the invasions of privacy that took place in Watergate.
Many of those involved the misuse of Federal records on individuals
bat pz9bably none would have been prevented by prohibiting com-
jmtek inter6-onnection. The solution is plainI The
y not technological
6*y real solution is enactment of laws which give afirmative pro-
.*Raons to privacy, which &How people to control the ways others use
ee*information. about them-in -much the same way they can al-
control the use of their names or fikeneses by advertisers. If we
Kd this sort of protection it won't matter which technology is used.
8o we are at a crossroads. We can either become. the new Luddites~
viskiin a liri lative axe to the computer-or we can begin the much
W of establishing the sorts of protection which will suffice
tomorrow's technology as well as today's. We already have the
Act of 1974, which provides moe protections regajing Fed-
government record& We, should strengthen its provisions, and
protections suitable for records maintained by- private
The first step is to determine exactly what privacy pro-
wek have now and what their weakneses, are. The Office of Tele-
has recently copapleted an anal U of the
.Am wilf serve as a
g legml and ethical safeguards which hopefully
gw'd in drafting the new protections which are becoming
.i. "ii'i: : ;."' T V :..ii~ iii
We have to set about this task now. The questions that must ei .
solved are so complicated, and in some cases so touchy, that it will take
time to achieve a political consensus on the fundamental pqjiC j.
Drafting and implementing laws and procedures to activate tes
policies will take still longer, as those of us in government who a:...
struggling now to implement the Privacy Act are finding out. ,. -
But if we want to have comprehensive protections in effect before...
we reach 1984, either chronologically or metaphorically, we must...
begin today. If we dawdle or try to deal with the dangers through in-
appropriate means, we may find ourselves several years from :,fw
forced to employ much more dramatic and expensive remedies.
,., . .
-ib .. *
-C," CIDIUMMMCA 0 8
rdVMM TO NAMNAL: ASSOMTION OF EDUCAMONAL BROADOASTERS,
]BY Dr. Herbert. A. I Allen-Arthur D. Little Inc.
a' will little remember are even aware that a "silent explo-.
st '711arred in 1975. This silent explosion ., is more than i ust the
io transmit o-ver short. and 'long distances, at wideband
low fiber cables.
> at low cost and extremely volume optical
1"0 Simultaneous events are occurring:
(1) An* e4firel th reached achievement
y new glass'technolozv at
1975 will be publioally &nnouncecFmi 1976,'which will affect
,porooptic co,'mponents sub-systems operation and cost;
2) Goverxiijaent-sponsored, fiber communication pro-
In thOUS., J an, ermany, Otiece,,. England and Brazil
Lited appriDval to ioces6d. i-A a major way in 1975 as well as
W countries; enerLrv ari&m and
4OW thO easing of *recession., are receiving a surge of investment in
Vecibnftrencing, *telecommting,'telecoitrol, superviso control,
&d ducation ukthods;
'14 dtikrial and compu
(4) Mili r ter systemfiber optic needs
funded ggiessively.on four continents;
Ptic loctronic mail systems design has begun-
Ir&ro" ae I
16 Thi men -of theevolution. towards an "ififormation
Weietv" -WIth grow educational social and medical needs are
'bomir InI.Velyadgressed;.and fin-ally
e incen ive. of the multi-billion dollar fib6r q iccommu-
ions market beyond 1980, and its present active role in world'
weements has attracted major groups and'investments'
f,60 basic mg-redients'of co munication, =661.y Transmission
$witching, Terminals, and Use, are being addrssed M" a Oost/eKii;e
ini high growth areas of fiber optic com In-uni.cation; -areas
as little as a year and a half ago seemed far off. Costs for broad-
ars not much different from narrow band, and optical s rstems for
Ve, internal communications, OATV, or interactive rATV cal-
to be cheaper systems than copper cable systems. Such systems
be cheaperbetter, and will go further, providing switched video
institutions and in the home. Switching techniques of the large-
integrated type will be employed first in such systems, but pure
I switching -and optical repeaters already exist in the laboratory,
ilso micro-optics sub-systems in develope& forms. New, cheaper
that fit with fiber optics are under developmentt because of
_e, basic ingredients display is the most costly. The displays oper-
M analog or digital environment. 'With cheaper switching) tram-
mission and display, extensive uses contemplated in wired city and. .
educational services become technically.and economically feasible. To
this is added the new automated manufacture, maintenance, and auto-
mated communications under development. In 1975, some of these are
In 1975 many new optical communication modulators were devel-
oped, as well as production connectors, splicers, and service equipment-
In 1975 a switched closed circuit fiber optic television system became
available in limited quantity. The advances in 1975 were so positive
that perhaps in 1976 fiber optics CATV trunking will begin to be in-
stalled as well as perhaps a 1976 T3 system in Georgia by ATT; per-
haps a T1 (1.544 Mb/s) system by G.T.E. in California in 1976;, and
perhaps a low and high frequency fiber optic system in Great Britain
in 1976 (8.48 Mb/s and 139.264 Mb/s); and perhaps a major CATV
system with a wide variety of services starting by 1977; perhaps new
micro-processor-controlled C.P.U.'s to service such systems -by lDT;"
perhaps a projected cable cost drop of an order of magnitude. within a
very few years; and perhaps even experimental satellite drops t an
earth station furnished with fiber optic distribution.
As you know, Arthur D. Little has been a conservative-speaking, but
innovative industrial consulting company for the past 90 years, and
for those who know of my own prior work, I also tend to talk only after
detailed appraisal. Those people who.know that, can erase the word'.
perhaps from all my previous statements.
The "silent explosion" occurred in a major way in 1975. It may be
followed by other lesser quiet eruptions. It has so far not been noticed
by many expert executives, analysts, and communications directors
despite their highly developed marketing intelligence systems and
technology intelligence systems. However, the "fallout" should hit
them soon, and in some cases it may take 0-4 years, depending upon
their areas of work.
If you cannot hear "The Silent Explosion" of 1975, or still do not
have sufficient input to analyze it, you will nevertheless soon see and.feel
it as the four basic ingredients of transmission, switching, terminals
and near term uses and methods of delivery and flexibility for change
of use through enormous bandwiths with local individual access and a
multiplicity of services in a cost/effective way. They are here now, and
software improvements are technically possible to be as simple or as
complex as the user may want.
..:.. :i iii :::iiiiiiiii E: .......:E
:: CHOICES IN ErzcnToNc Fui is TRANSFER PoucY
.... Erm m ...m : m:... .
" g '.: W; hI James B. Rule
....IA -LIZTou can look at my bank book, but I'l never let you
E jyour hands on my purse.-Bessie Smith, from the
H a."Ive Got What It Takes (But It Breaks My Heart
ilk: irF^Or-ric VSS&Or TLUAFWCOXUNICAfONB POuCY,
N^^^^ EN EnEcnisV OnTSo OF THE PRESIDENT,
..Wcasigton, D.C... October ,..... .
". .. ..... A..Bocnn.u
WIfL nei Coucil Committee on tre Right of Privacy,
dy, Vaue Choices Electronic Funds Transfer Po-
iei "Conomi which face us in the development of Ec-
..: a..: a......i.. nd policy making regarding EF deeply
. ..... as began to scrutinize closely te increasing range of
I..i ...il .* Bie Govt activity in this area. In order to facilitate efforts
A d making responsible policy decisions, we e ommissio ed
S.. B. Rulthe of the State Universl Committee of New York at of
S h t ,are th e M' Eactcomany Fi Transfer Por-
I~Xf repoit addresses the range of non-economic issues of concern
fl. SI' within an original and provocative framework, providing a
sad1 extremely useful perception of the relation of social change
blflsiiqical innovation. The focus% as the title suggests, is on value
fl... win. h must be made in the evolution of EFT. The studyElec-
................... (EFT) systems in .the United States.
..... actvites mid policy making regarding EFT deeply
S:a needed foundation for examining how those choices can beour
focusing on thvolve need for detering to tae interconnection of long-term goals
11 1 l with t4eceommunications, an interconnection which ii the
': ioof any EFT system, and~because of our concern
and effective formulationlue of point ion, in the study executive
*^|Brfinaune~d inquiry, discussion and debate.
M .h concrete level, the study cloresely the social aspects of
.development, such asin the impact on individual autonomy ofert
at the social consequences on transforming our Standards for
obligations, isues whponsible policy decisionsw have been commissionoed or,
i Inadequs B.ly considered. Dr. f theater U university of New York at
,:,2 .m....i": k to prepare the accompanying report.
.. ".o.p,,t.,..addresses the range of non-economic issues of concern.
i anl or iginal andes perspective fo r better understandoviing a
extremely useful perception of the relate ofs h
i~ii: ':':.... innovation. The focus, as the title suggests, is on value
.ng whichmust be made in the evolution ofreFT. The study
411Hmis a needed foundation for examining how Hhme choices can (ie
....... on the need for determination of long-term goals
......g .... o conflicting- -tu ri~ m he study Acts tbe.
ifedinuiry, discuss on,. and ..debte
........ More %AR level, the study explorestv social-"aspects of
i: mentsuch as the impact on individual autonomy Of
ond &s'social consequences on trawfor ming our standad for
.... p"ions, issue which until. how have been iagno or,
:. u~tly colmidere&. Dr. Rule' examinto ofNFT as a
:.." .i provides perspective for better undd_
...... which FTwill brn td our nation. Fu the study
!ii;+, :: ::: ,.,::, ..W.)
clearly spells out the characteristics of bureaucratic information sys-
tems, their use for social control today, and the likely impact of E
on the structure and function of such systems. The discussion empha-
sizes in concrete terms the probable effect of EFT on informational
privacy, as well as examining a broad range of related-consumer
Though it provides no final answers, the study forces to our aften-
tion the fundamental questions which must be resolved as EFT
evolves--whether that resolution is a product of design or circum-
In directing preparation of the report and in beginning to employ
it as a building block in the development of executive branch policy
regarding EFT, two factors have been of greatest concern to this
Office. The first is the dearth of examination by those now beginning to
shape national policy of the broad non-economic policy questions raised
by EFT; the second, and even more important, is the proliferation of,
forums in which policy is being fashioned and the often conflieting
and parochial interests of the various parties who are making im-
portant policy choices.
On the substantive level, OTP is concerned over the Federal Gov-
ernment's role in EFT development. This Office believes that there are
serious and as yet unresolved questions regarding (a) whether thed
Federal Government should have an operational role in EFT, (b)
whether or to what extent Government should regulate any !such
systems, and (c) what structure should be. created to provide legal deft-
initions of responsibility for the information which would -0flow
through such systems. While many of the most significant economic
questions have been raised, critical non-economic issues have not been:
addrbssed-such as the desirability of unfettered government access
to personal records either as a user or an operator-of any EFT system :
Even though such basic questions continue unanswered, and often
unasked, several Federal agencies have moved ahead, creating aw-Fed*-
eral role in EFT operation. The Federal Home Loan Bank Board, the
Federal Reserve Board, and the Department of the Treasury have all)
taken steps which move us closer to Federal operation and control
of EFT systems. Yet, the proper Federal role is still an open ques-'
tion; perhaps most important, it is a question of such far-reaching
consequence that it should be addressed and decided at the highest
possible level and in the broadest possible forum. At the very least, it
is not a question which should be left in the hands of a small group of:
agencies whose interests may not be broad enough to guarantee.adei'
quate consideration of all the issues. .
The Office of Telecommunications Policy has made efforts to fovew
stall precipitous development of a government operated or controlled
EFT system. Such development should not occur without far broader
and more disinterested consideration of the issues. Further, we do not
think the critical choices which face us should be made in an ad Mfib
fashion by independent agencies or other departments of govermnien-M
particularly when the EFT Commission is just beginning to undertake:
a wide-ranging examination of EFT policy. But we cannot rely on the
Commission for resolution of all problems. Some choices have to be-
made before the Commission will speak; the private sector, is mo0ingo
forward rapidly and operational problems demanding immediate
decision face us even now.
wcapftnyinp: stud will, alertaU of those. who
Concernedto the 6ritical range of social choices which we
in the.. development of a co4oreut Electronic Funds Trans-
furt4pr,, 1. urge that all take: to heart. Dr. Rule's aamoni-
le decisions which face us are too important to be made on
qi -'VA A.40rely
JoHx EGEu, Act' Director.
is indebted- to 'a number of persons and institutions for
iLnd amistgim6 in the course of prep'armig this report: To
rsofis, for her interest in tYe project since, its inception; to
her Heller, for 'his conscientious -provision of relevant in-
and other indispensable support; to Charles Perrow for his
o*ading of the manuscript and recommendations for its im-
and to the State Universii 't f New York, Stony Brook
tl e settings for its
Colleare. Oxford, for provi ing i repa-
ess to say, no one. but the autlior bars ally responsibility
'P al product.
that technology is EL ke sourm of change in modern,
.hW y &v4ooped societies. As far as it gombs, that statement is no
movo, than -an une xceptionablecliche. Yet the notion of technolo i al
AeVOWPO in gic,
mt as, an dependent cawe of social change cau easily be-
a b1gek to understand. For it. may, lead us to view scientific or
I I 40*01opment. mistakenly, as a dehu mianized or desocialized
61fi w independently: shaping or conditioning social relations
,,,Uew technologies, and the new social arran'gements which
w4th them, re e more nor less than the effects of'
go a n4her
8 smal forces. Most: of the applications of sdentific under-
t 1 0 technological change which are theoretically possible,
never.stand a cha-nee of being put into practice. Nor
S to6st people ever have a. chance, to sponsor technological innova-
TWehn6logical'C'h1ange' always 'amounts to a new way of doing
W I -
bohaff of S, ific social intereas-,on behalf of'specific
-intention na inno-
anticipate. ifily the, s of the, 6ri *', I
themsel s, leav to accom-
,do not shup y-,Wcur,,of ve Ing soc
boa it tan.: In s-tea'aj, particular parties foster technologica
behalf 61 their oim-,characteristie goals a4d intemsts, and.
-enoush to the detriment-of other ihtdrests.
1111 the study of. technological change fascinating, and,
makes siich changes seem as th6ugh endowed with wilT of
6w1i Iiat, thq Ion -tenn, effects of new tchnolog'ns are oftew.
"to 14icipate. dertainly the infe'ntions of the original inno-
aii )io infallible guide lin.111isrespect. One doubts Nihether the
txffle manufact-tirers wlio. introduced the 'first aut6matic
any idea of th6ir role in the far-reaching social, technical.
wonomie ehangBs. which signate is the in-
-we now svvepingly de
i; voll-dtim Once theramifying e'haiin of pause-and-effect rela-
4 -lie wififin the htr6l f those
ks effects'may 'no longer co
set, it oil.
: : y .: ..:: .. *
For technological change, although fueled by people's pursuit. .
pre-existiing interests and goals, changes the terms and conditiwa. ..
which this pursuit goes forward. In people's scramble to accori.mSW
existing interests to the rules of a new game, qualitatively new; ..fl.
relationships come to the fore. This is especially true in that te...i .
logical innovations are, by definition, matters of techriqw. h Wf
vantages and disadvantages generated by technology never:. .ah ..
automatically to any one specific party, but stand to be captured by the i,
winner among many contending parties. The mastery over industrial
processes, which served to propel the capitalists of the English Mid-
lands to an ascendant social position in the mid-nineteenth century, has
served as well to consolidate the power base of the Soviet Comnnunt.
The long-term social effects of technological innovation stand to0bQ,
determined not only by the unique qualities of the technology itpcl
but also by the social forces which shape its applications.
Electronic Funds Transfer, or EFT, is as authentic an instance aA
one could wish of technical innovation with potential for far-reach-
ing, long-term social effects. I have written this report in an attempt
to anticipate some of those possible effects, especially as they b:ar
upon such social goods as privacy, freedom and personal autonomy'.
For although the effects of technological change may be hard to prei.,
I believe that we know enough to anticipate different possible out-
comes of policies which might guide the development of EFT. This i*;
especially so in that the path of that development is not yet set, so that
informed decision-making has the maximum opportunity to shape
long-term social outcomes. :
Personal Data tand EFT
Electronic Funds Transfer is, of course, not a single entity buht.
genre of related practices. What the various applications of ERIT
share is the use of electronic impulses, generated and interpreted by..
computers, to effect debits and credits ii financial accounts. The trans-'
actions included in this category run the gamut from massive, traan-.
fers among banks and other financial institutions to the relatifrel
simple recording of withdrawals made from private persons' ba,
or other accounts via automatic cash machines. Some of the betmte-
known EFT applications are the automatic deposit of payroll .an4,
other checks to persons' bank accounts;, automatic debits from sutlh
accounts for recurrent expenses such as mortgage payments; thi
maintenance of "automated teller" installations, remote from the,
account-keeping organization, where account-holders may male do-,
posits or withdrawals; and the servicing of point-of-sale instaltion.,
ii retail establishments where charges otherwise paid in cash, ch?*
or credit cards are debited directly fromin the buyer's account. *
SThe concerns of this report lie with the consumer appljicatinp;pf
EFT-those entailing the transmission of data on private persoa-i
since it is these which raise the major questions of privacy and prr
sonal autonomy. Even this subset of the broader category compie
a heterogeneous array of processes and techniques. But nearly a .o,
them involve the working of four elements: the EFT account, th
remote terminal, an identification process, and the switcliu .
Any organization maintaining computerized financial accountfr
members of the general public could, in principle, make those accouP4
.;: : **-
FXTI =qt institutigns include not only ba0s and
iqA4UAQMq bqt o, cred'it card firms, credit unions, department
othem Nor nee. private EFT accounts work only on a
itutiqns. coillcl honor EFT charges up to a ppecified
t on much the same plan as that followed today in credit
And many chee-1- d-ng accounts. Indeed, EFT would make
accounts wier to aAminister, in that electronic arcount-
could, prevent, chares from exceedin the credit limit
e lifus making it im-
charges could even e consummated,
to over-extend one's credit limit. The fact that so many dif-
1PAitutions could offer much the same services would, as often
ted tend to blur the distinction in the public's mind be-
aAd other account7keelping orgranizations.
oonsumer applications of EIFT, wiffi the exception of the auto-
ov "t and debit of recurrent ents from personal accounts,
ow& pput from a remote terminal of some kina. The term*nal-
il_ I'' W
ter console-takes a somewhat. different
$ X1_ t, lea oix-going compu
1119M *- e0h use. Perhaps the simplest is the "cash machine," which
users account cards and transmits electronic impulses
ttat 'a withdrawal has taken place. Other terminals-those
14- "tomatic teller installations or Koint of sale transactions--
Uvit o ties for more complicated:,exc n e of data. These could
koyed console for traitsmitting ( ata on the nature, and
f ;the transaction, some means of'communicatingr signals
W ulp asto wheth!a ittransa. ction is authorized, and a xx;echfinism
out written receipts of transactions.
ial to all EFT transactions is some electronic process
fying tl* acount or accounts involved. In payments made
amputeiiied hecounting. systems, the account number for
6e p -ment is destined is recorded in the computer memory
'A&66htin f whichz the payment es. In other
g syAm rom originat
krT tiansactions, however, the EFT user wishing to activate
or)er own account must provide identifying information at the
Otacce,%m The most feasible identification system available now
inserflon of plastic cards, resembling credit cards into the
ternAnal. These..Cs6AS typical: ly carry a machinereadable 11ma&-
to S_ ut with the organization
4tri hich ideii & the. user9 acco
TC Such. cards'already serv to aAivate the "cash ma-
iiini;Led by'some, banks. Future, refihpment of EFT tech-
pkoises eventually' to Make possible identification of users
etwtrorue rea ing d' f voiceprints o'r fingerprints, and the
10- f _h to the
ksspe'lati n 0, t em corresp6ndini account& Such
&iously M& haire the advantage of king it impossible for
use '40len or other false identificiition.
m6tching mechanism, an unseen but eagential element of aAy
very siriiplest EFT system, represents the link betwetn remote
'a n*d the accounts of users. Virtiially RU.' I ns for consumer-
K`10T enviisaffe- I situation where a] rminal *mRV Sam
accounts witt any aceount-keping orga;ni;1B&ion, iWA-whem
user may have accounts, with more than one such body.-JN=
f6r, a separate computer to mediate between-the impulm
4W'the terminal and the computer kee ljw* the users. acdGML
to n mputer As
My co, "Teads" t4e uftrA 4n
.. - im~ib ii', i'i-
sented at the terminal; selects the EFT account towhikthi I :...
determines, if appropriate, whether the account has sufficient 7 .il
or credit to permit the transaction; signals this determination., .
user at the terminal; and debits or credits the user's account 'at14
others involved accordingly. ::
The typical user-initiated EFT transaction might transpire "
lows. First, the user inserts his EFT card into the terninal; ll
either the user or, for transactions originating from retail etaIjik:
ments, a clerk uses the keyed console to tap in further data "
sought-after transaction. The switching computer then locatesthesact
,count being accessed by the request, determines whether the trai
action is "legitimate" under the rules governing the account, t:d'stg.
nals the result of this inquiry to the terminal. If the transaction goes
ahead, the switch debits or credits the user's account accordingly, and
likewise credits any other accounts involved, such as that of the retail
establishment involved in a point of sale transaction. It is likely :that
most EFT systems would levy a small per-transaction charge, com-
parable to the charge for a single check, on the use of each acont.
All of these details are at least somewhat speculative, in that most
EFT applications even today remain in the planning stages. Never-
theless, it is clear that any operational form of EFT would have to
entail the transmission of a good deal of personal data, and that thse
data would have to remain "on file" for some periodof time in each
user's account. For a start, the record of each transaction would h:ve
to include the amount and nature of the transaction, the date, an 4
probably also the kind of goods or services rendered, in the caee .of
point-of-sale transactions. These data represent no more than a mil
mum, and it is easy to imagine other information that might be t.
quired. But without at least these facts, it would seem that any ET
system would lose the accountability for its own operations whichlae
public would inevitably demand. Yet even this much data w ld
obviously be volatile in its potential effects on the user. "
Should consumer-oriented EFT be introduced as described hlie,
its beguiling convenience would clearly make widespread public RA,-
ceptance extremely likely. Given the proper advertising induce meni'
and the habituation of consumers to the use of plastic credit 'c-:'Csr
there is every reason to think that EFT will recapitulate the eiplosveT
development of the credit card habit. This would mean the dp'"Po-
tunity to use EFT for all sorts of transactions in all sorts of i6f
tions-in short, a world, blanketed by consumer terminals. And.tfr .
more numerous the users of EFT, and the larger the ,proportion$
each consumer's transactions effected through the EFT mediuitri^i4
more compelling become questions concerning the effects of technology
on personal privacy and autonomy. .-..
In the extreme case where all of everyone's consumer transactxsp |
took place through: this medium, EFT accounts-would become aniato-
mated, bureaucratically recorded diary of every consumer's moemef
and activities, as well as of his or her financial resources. The likelioo4d
of such a prospect, of course, remains to be discussed.
No less important in implications for privacy and autonomy t ixi
the extensiveness of reliance upon EFT is flthe character of: the coin-
)nunications networks developed to implement it. I have noted that tht
most likely form of EFT development would make any account acoes-
,Iflhe alternative would be to require e
ty I'll 0 6
eiTry account-keepm organization-4 commercially un-
The fact I:t any termM*81 could access an
inum that inq'ui ries to the system f rom any point coulY,
eircumstancesaccess account data; onany account,
so'cess would bethe number of the account contain-
and the proper. electronic M'structions to cause the
Dinathose, data to release them. The fulfillment of
in* reai EFT S- tem, of course, is problematic.
I L 8 ISRI cant that, it every user had but a single ac-
ounts of the: same user bore basically the sa 4
an intercoinecting'commiinieations system of the sort
would provide opportunities for drawing together the whole
,111;dwr f roun
orin, are the:essenti I d rules of commer
ons of Electronic Funos. re, a d some of the po-
eh have causedconcern #boyt issues such as the effects of
on priya:cy and autonothy. Yetclearly these potential ef-
Ord EFT b6come an operaflonal reality, are subject to the
of interpretations.- Are thes po6ntial developmenti
to be considered 'grounds for concern? What concerns
serious, or most urgent? Is there any legitimate role for'
in dealing with these concerns 1 We now turn to discus-
and Technical Chowles
age of'policy is often far frdni nigorops. Even the basic
goodness" of a particular: measure is, subject to many
nwg& One',often hears people talk about IIgxx)d'I lerisla-
or nAminiAration, meaning by it measures wlilch are bighly
",to specific agreed-uponen s. In other contexts, people talk
g6d&ess of such things so as to praise the quality of the long-
416*0*wselves which the policy is meant to serve.
(m involved is roughly that between ultimate ends and
awfe or means. Consider an example from a topical issue
I!rom Electronic Funds Transfer, that of women's rights.
IM. mown of legislation and policy on this issue focuses on such
vx4 15,W-111 a particular equal-rights meamre really succeed
job opportunities to women I" or "Will a certain piece
Do icy, or abninistrative ruling) entail too much red
,mloreftble V' These are technical queqiO1M. question, about
vemms of specific measures or means in rel ion to certain
jends or results. Yet in discussion of this same issue, one is
I T. to ''hear raised, perhaps more often implicitly than ex-
such as4 CIs it really desirable to live in &,vorld wherv
ui6n owupy the same social roles? or "Is it just that the
rejgWAte social behavior of 'this kind V" These am value
qbestions of the nature of the social goods or ultimate ends
-Jof policy requiree both sorts of nki
ties MM4 9-
IN A "Sire PDW"OPOOD-sed "istn'tive policy
'Polid(W n'xw3euver, is wortht emaidering unless it ap-
to the ends for',*hicb it is *kten"; and of course
Ma Ift to do,,,wit -the, relalive promise of dif-
** i- i;;I: *;!!i::i!
ferent measures for producing sought-after ends. At the s8ia thtfl
another broad category of political discussion deals with quetioisf
ultimate value-the nature of the social goods which ought to M1
served by political action.
Many of the thorniest of these discussions arise in situations whe-t
the maximization of one such social good or value conflicts with thit
of another-e.g., individual liberty versus the security of the state.
Clearly it is meaningless to think of pursuing any social good with-
out a more or less efficacious technique for doing so-as meaningless
as it would be to attempt to appraise the effectiveness of a technique
without regard to the ends at which it was directed.
It is significant, however, that technical questions and value ques-
tions require very different steps for resolution. Strictly technical
questions are ones answerable through an appeal to evidence, through
an examination of "the facts"-whatever the relevant facts may be inm
a particular case. In other words, to test the effectiveness of a partic-
ular measure in a purely technical sense, one might gather more infor-
mation about the attitudes of those who would be affected by it, or
one might try it out on a limited basis and closely examine the results.
Whether or not the evidence is easy to collect, this implicit evaluation
of the measure by the criterion of "how it would work" marks it as a
By contrast, questions of value are not fundamentally answerable
by appeal to evidence. Whether it is morally preferable to live in a
world where -women and men play the same social roles, or in a world
where distinctions as to such roles are rigidly enforced is hardly a.
matter to be decided by new evidence or more intensive research.
Rather, one answers such questions by examining one's own moral
sensibilities-which is to say, one's own values.
There is no reason to assume the existence of a single "right answer"
to such a question, since people's answers are apt to 'be as varied as
their moral codes. In the case of the roles of men and women, there
is every reason to believe that the values espoused by Americans are
We already have a substantial literature on EFT, and on the man-
agement of personal data more generally. The bulk of these writings,
it seems to me, have examined technical questions, rather than ques-
tions of social value. They have dealt with questions such as "Would it
be more effective to organize EFT under a public utility, or under
purely competitive, profit-making auspices?" or "What are the best
procedures for preventing unauthorized access to a given category of
personal records?" Discussions of EFT could begin and end with
questions like these, if only the ultimate social goals or values to be
sought after in these respects were matters of general agreement.
But this is not the case. For people's views on the long-term ends
which the new technologies should serve, and a fortiori on the thorny
question of what it means to protect personal privacy and freedom in I
conjunction with them, are very far from unanimous. What social
purposes justify the collection of personal data at all ? Under what
circumstances is it justified to use personal information for enforce-
ment of obligations against those to whom the data refer? When is it
right to use personal data collected for one purpose in other activities
which the data subject might not approve ? Obviously one would not
"swer these questions by seeking new information or evi-
M."Wers can Oome on1v through clarifFeation of one's own values
'10*7 WOR prove to difter froira those of other intArested parties.
9buketillies a shorteond ng o discussions of these matters,
they have treated such value questions as satled when
*`a is far, from the case, Sometimes this I" hag resulted
on of technical uestiom with value questions, as though
the effectiveness 3 a particular policy could substitute for
acmptabil#y of the ends served the policy. Thus some
st have treated privacy as though t were the same as data
view woufd consi.ider privcy to be protected if only
ns were unable to gainaccess to given data. But
la approa leaves open critical.- value questions, such as whether
tUdita should be collected in the first place, and, if so, who ought
to have access to them.
IvMoa', thievery notion of* privacy is an evaluative CADneept. It is
NO to. ffistuss the privacy afforded by a data system as an
%FWA.W y of a computer or the number of
A vwlact, like the core capacity
i I 111 k tMO a file. No concept of privacy is meaningful without some
PPOP-Mouou of the values which one supposes it to entail. We speak
Of 6419y"lon of ri'vacy, for example, as the unwarranted collection
tion 0 personal data, or -as the unjwtifled intrusion of
y into certain inpproprWe areas of personal life. Such
assumes some notion of what intrusions are justified or
Wl"VIduft1tions of data are warranted-and these, of course, are value
It would be a mistake to assume that these questions are
44MY I t1to resolve, or that all informed persons would resolve them in
It"may be that this tendency to treat value issues associated with
VWV-Wy as thou h theyvere settled and clear explains the seeming
imumW* Y of ;Tlic opinion in favor of the protection of privacy.
'Without some further specification of what social values are involved
io ft& pTotection, the notion is virtually defined as something which
Ove"Ime favors. The invasion of privacy, like governmental waste,
polhifm* motivated statements and irresp'onsibil7ity in high places,
bKoft" something which anyone can attack, since no one would ever
d4md it. Tito rub comes when we must specify how we would imple-
't the smial values entailed in the protection of privacT. There we
sm,1**1Y to find no more unanimity, say, than in our views of the
P ions between the sexes.
M. report will have rather little to say about the strictly technical
!!! -At connected with EFT. It offers no arguments, for example, on
mu&-debated question of whether public or private auspices prom-
*4pore efficient delivery of EFT switching services. It provides no
on whether the: limitation of the ei3tablishment of EFT
to the imn-mdiatie area of the host institution -will help or
EFT development. 1nstead, what I have to Bay deals with
of the social goods or values implied in the prospad of
c FuncU Transfer These are questions like, f, Are there
social'comequenm of EFT which call into qu i4m the
of developing it at all V "How mueh, transfer of personal in-
wUeeted V'1& EFT for other'social purposes would be Justi
o what tkkJA is it possibk to design an EFT system which
individual autonomy and libertyll' "How does one reckon
3:' ::f m:: .':iiiiiiii m' ''-\::ii.
the risks to privacy and freedom posed by EFT against the beneis ,
which the system promises ?" AM q
It is not my purpose to take a stand in behalf of any of ther :
positions which this report will consider. I aim simply to pemu...i
reader that value questions are authentic and inescapable min El
Funds Transfer policy, and that not all social goods or valuS, ...-.
volved-including convenience, efficiency, privacy and personal at y:td
omy-can simultaneously be maximized. In this respect, my p-u : -s .
is the opposite of that of many writings on policy. For instead of'aitI0
ing to press a single point of view against others, and thus to iiatir
the range of choices under consideration, this study aims to fbNr ite '
debate by emphasizing fundamental conflicts involved in any poi" !
making in this area. "
". ; : i. " ; ..
EFT as a Social Resource : 7
To understand the role of Electronic Funds Transfer in raising -
sues of social value, it is helpfulto place it in the context of similar
social developments. One might think of EFT as part of a broader
category of what one might term "novel social resources." By thi I
mean innovative mechanisms for effecting some socially desired result:
or more simply, new arrangements for accomplishing things that
people want done.
Any reader, with a few moments reflection, can create his or. hen
own list of novel social resources. Such innovations need not stm nu
from technological change. Broadcasting obviously represented: a.
novel social resource at the turn of the century, and it resulted directly
from Marconi's invention; but the inception of Rural Free Delivery
represented an equally authentic new social resource, and here the 'm
novation came through legislation, not technology. The development
of reliable birth control methods speltthe appearance of a new resource
deriving from science and technology; but the attribution to corpora-
tions of the legal rights of persons is an instance stemming from social
and legal changes rather than technical or scientific ones. "-;
It is characteristic of the introduction of such new social resources,
as I noted above, that they may promise far-reaching rearrangements
in social relations, and particularly in the distribution of social in-
terests. Yet the exact nature of such a redistribution need not be fore"
gone at the beginning, and may not be at all predictable to those in-
volved as observers at the time. The point is, a new means of producing
something which people want, whether that something is an invention,.
a technique of mass persuasion, or a legal mechanism, is bound to bni j
come an object of contest among interests which would like to Mono.P-
olize it. The interests which give rise to such innovations will not
necessarily be the same as those which control its application. at all:
points in the future.
One does not know for certain how the development of EFT, in any"
of its possible forms, might affect existing interests and social .eh
tionihips in America. What is certain is that the long-term effects |
of such development will spell qualitative changes in social relutiom ,
rather than mere increments in existing conditions. The internalcomi;
bustion engine, at the time of its first applications, provided power:
for transport in virtually the same contexts as the horse. '
The superior possibilities of that novel leurdeU ltintelybnigb
about changes in social relations ranging from the human icolbgyy o
Qy structum:.qnd sexual.beh i r. Thus I cannot
of fa;m Mo..
owing rem iiice&V: ffered by a
'the spirit 01 the foll ark
the present sponsors of tFT:
is new only in method of delivering the service, not in the
It is simply another step in making it more convenient and timely
to xWe banking services.
c Funds Transfer promises to begin by offering a
L for processes now 'accomplished by other means.
tution would not be attractive to anyone, unless the elec-
offered,' powerful differences from their present-
EFT promises the marshalling of more and more
1 information in thezourse of financial transactions.
to enable financial institutionsfo rem' ain in constant contact
their customer&--a category which could come to represent
adult population. And it promises to provide a potent
1" for the enforcementof financial obligations,--and, to this
to offer new mechjanlsm for the formation of all sorts of
obliga S. To describe the development of these poten-
methods for deliverm*g current services would be much Eke
present-day tyanscontinental communications as u further
of the Pony Express.
a Bureaucratic Tool 16
Funds Transfer, then, offers multifarious possibilities
ibl or which can
ishing tasks which are either imposs' e today,
S ed only much less efficiently. Not all of these capabilities,
interests which they will ultimately serve, are foreseeable
'16,tho 04*06ent-d&Y observer. Yet one major genre of EFT applications
`pr6dictable, and this is its use for what sociologists would term
-409'" of social bontrol. Whatever other ends these gstems may
:*rVvs, they will surely contribute to a pattern of gro "wing monitor-
regulation of private person's affairs by large, bureaucratic
Wtibwi I have attempted to deal with these processes at length
in,14401ier work.. Private L W*e8 and Public Surveillance.
,CROActeristic of modern societies are situations in which large
ic agencies must deal authoritatively with-literally millions
=iiOwbm of the general public. Whether governmental or private,
face the task of keeping track of their vast "clienteles"
atic record-keeping, and, on occasion, using the data so
enforce compliance from the persons depicted in them.
,a iTstem of income -taxation, maintaining a credit card or
creffit system, administering a modern system of con-
managh these and countless
am, or ig a system of life misurance,-
pcslly modern bureaucratic operations require the shrewd
c administration. of large amounts of personal data on
0 *#h whom th6rWevant bureaucracy deals. Usian thesedata
or punish tax fraud, to curtail bad debts, to il; 7tt and
thow I uired to serve, in the armed forms, or to-prevent
ing inm rance at standard rate"hese are
r'9f J. Rez Dirwe 9A behalf of th6 Amerleem ftatm AmKwlation before the
'Ott TUSneW lbstitutions of the Senate C6mmlttee *a Bauklax, HousIm
Affatre 00 S. 243,."Tbe Electronic Funds Transfer Moratorium Aet," Mareh
Yor*k. 'Shod" Booft. 1074. ffbw'e o*r the terminology In the following passages
90*kb*d =art ftUy In Chapter One ot thatw6riL
On the face of things, the agencies involved in these social qontr.l
operations would seem to, have every advantage at their disb"*'I
conscription system, after all, cah mobilize the authority of ....i&d .
to enforce its decisions; a grantor of consumer credit can extefld":i
withdraw credit at its own discretion. But one must remember th*aete
numbers of persons involved are so vast that enormous resource aT$
required merely to keep track of them all even in the most supe,..pia.
way. While the power of any of these systems is awesome in relatioi to
any single member of the public, each system must spread its power a-4
its attentions quite widely in order to deal with everyone. .
The costs, in time, attention and other resources, of tracking d' wn
and punishing just one draft-dodger or one credit delinquent ..ki
seriously detract from the efforts necessary to deal effectively with
the millions which remain. And yet the stakes are high-for enormous
social benefits accrue to any organization which can deal with such
large numbers of people and exa-ct some form of compliance, however
modest, from them.
Clearly the efficient use of personal data is essential if bureauc-
racies are to succeed in these tasks. In such situations, I have argued,
there are four aspects of the use of personal information which matter
enormously to the viability of efforts at bureaucratic control. One is
the sheer amount of meaningful personal data available on those with
whom the system must deal. Another is the effective centraUsMiSon
of data resources, so that all available data can be brought to bear
on decision-making problems wherever in the system they occur. A
third is the '8peed of information flow and decision-making within
the system, for speedy movement of data and quick decisions mesa
that the system can "react" to those with whom it deals before tlhy
can "escape." A final determinant of the effectiveness of systems like
these is the points of contact between system and clientele, that is,
the number of locations through which the system can absorb new
data, and from which it can "reach out" against those on whom some
corrective action is contemplated. The aggregate of these qualities I
term system capacity for mass surveillance and control ; bureaucratic
record-keeping systems on persons have higher capacity to the extent
that they maximize each of these dimensions.3 .
A system of the highest capacity is one which "watches" virtually
everyone all of the time and which consequently has the maximum
chance of shaping everyone's behaviour-an unpleasant prospect from
the standpoint of some value positions, but a splended technical fat
in the control of large numbers of persons. ,i
These observations on the technique of dealing with large amounts
of personal information for purposes of enforcement hold true..J
would contend, quite regardless of the nature of the enforcement w,-
lationship between the system and its clientele. Whether the task is a
fairly benign one of running a contributory system of public isurr-
ance, or the punitive one of tracking down .criminals or politic
unreliables, the same organizational principles apply. Whatever i:t*e
enforcement problem, in other words, any system is better off .L:it
can deal with more data, if its data are centralized, if its informatio(L
processes are more rapid, and if it maintains more rather then feaer
points of contact with the public. If thesbe qualities 'are virtues4f. l
'Private Lives and Public Surveillance, pp., 37-40....
. .. -, .- .: .. *: ; -: -. :" ,. -.. *,
*iftu* Aottied to the implementation of any one social
presen't-day, PVent ;ystenis, there can be no ques-
Wo quic y. A D % di8tinct increase: in surveillance
the amount of usable personal data generated
for example "the adoption-of EFT would cause many
W 1eave '11cfata trails' where now there are none--for
Pomt of sale transactions Aow handled in cash.
now entailing payment by checkor ciedit card would
more data under EIFT, and would certainly register
more quickly and 'in a more accessible form to the institu-
In terms of the centralization of data, as I have noted,
Ing quality of EFT.sstems could make it possible
PeraLo al informalion on any userr from any terminal within
u. This could hold true even if actual storage of data were
provi ed that the inquirer had access to the user's account
could provide the proper accessin instructions to the
armng-rement would amount effectively to total centraliza-
many of which, under, prtsent circumstances, are not as-
here. In terms of speed of information flow and decision-,
T would bring about a quantum leap over present pay-
for tran:&wtions would register with the speed of light.
71 present-day, check and most credit card traxisactions take
weeks to roster at the institution maintaining the user's
y only a minority of larger credit card sales, for example,
apinst the useFs account status before the transaction is
Vally, concerning points of contact between system and
terminal of an EFT system would represent a point
UL I Milt onal: data and a potential point for generating sig-
reactions to members of the EFTmusing public. These processes
k111y to become both more efficient and more widespread
rlaeamt equivalent today.
-7 *tofin ver mass publics in America today, in the
terms used .. ere, is generally quite looso. B this I mean
'priv per4onW activities go unrecorded, eweetively "un-
"t any organizational arm of the state or private industry,
on such activities might be extTemely useful to those
ion -9f boolm at the library, registering at a hote. pres-
i iii Particular bar or restaurant, a walk in he country, remarks
poikiwquaintance in an elevator-all of these emounters can in
te data relevant to the con=ns of some agency p ome-
the data so generated:vau vastly M': theextent. t which
ed-', ank W en r e ap in the extent to which they are
*ud usefW fourth action y oroniza ions toward rRembers
of the development of EFT like that of many er
h;xve appeared In recqnt decades, works to wesr away at
Ma'nonymity. Where clita, ondiscrete, dispsrateini
have lain unrecorcled or unoonecW, new institutional
qxqgrowiig uptotahuloUsurh data and inake them usable
hum-qcr i-omAt the s4jn6e t6o timt people probably
u frmfainily, neighbors and other individual curio-
large inAitutions find new ways to turn personal data
,, :: l,,;,:
.'profitably to the task of monitoring relations with the persons to. .
they pertain. .
There is nothing about EFT which constrains the social pIfrjNI.:
which it, like other new forms of bureaucratic monitoring of per.hfS'
-activities, will serve. As presently envisaged, Electronic Funds. Tra
Jer systems would work only to monitor persons' financial affairs. t'
'EFT mechanisms could equally well serve other social ends.- 167Wt
most unpleasant manifestation, such a system could serve to store"
data on persons' political reliability, and to monitor their activities ad&
movements to that same purpose. To acknowledge that such use i. a
possibility-however little it might accord with people's values-is
hardly to suggest that it need necessarily come about. The poit is.
simply that EFT, like other personal information systems, is A.tei-
nical device, a complex tool whose only purposes are those which pu
pie attribute to it.
In sum, the introduction of EFT would entail the creation of a
vigilant third party to a whole host of personal transactions. To dsfte,
many of these transactions have entailed only two parties, e.g., the
private exchanges of cash between parties to retail sales. Or,the third
party in the equivalent transactions today is less attenive or more.
remote-witness the often relatively slow response to the overextension
of credit card accounts, or the after-the-fact response to the issuance
of bad checks. The role of the strengthened third party in EFT tras-
actions may simply be to ensure that the transaction proceeds accord-
ing to sound financial criteria. Or that third party role could eventutal-
ly become something considerably different, whether on behalf of the
state or of other social interests. The question of what patterns Of
development of EFT ought to prevail can only be answered in teot
of the social values which one feels that such systems should serve.
Some Predictable Controversies
The uses which EFT systems serve are bound to -become matter 6f
controversy. These disputes will fundamentally be value controvrsies,
debates over the ultimate social goods most worthy of being served in
EFT policy. Many of the sharpest of these disputes, though not neces-
"sarilv all, will have to do with the use of EFT systems for purposes of
social control. Such controversies are at least partly predictable, in:
that they are bound to recapitulate controversies surrounding other"
bureaucratic uses of personal data. Some of the contentious question ,
'which seem bound to emerge are as follows: 1.
1. Is EFT in any form socially desirable?-For a long time lthe ||
collection and use of personal data was regarded as a matter of egitb
mate concern only to those who did the collecting. By now, however, ii
is widely agreed that both the subjects of data files and the public ,
large oufrht to have some say in the creation and maintenance oof a,
banks. Official discussions in some Western European countrie'.iA l
entertained the idea of requiring all data banks to be licensed, with the
burden of proving the necessity of creating the data store on the would&
be creator. This relatively new, guarded attitude toward any colletih
and use of large amounts of personal data no doubt stems directly frotf
a perception of such systems as potentially oppressive. Thus a res-ponse
of one element of American public opinion to the prospect of the mi
plementation of EFT will no doubt be that the need for such a system
.............. the risks entailed by compiling such large amounts
aIM&in such easily transmissible form.
i le responsimble for the safekeeping and security of EFT
petionalEFT system would necessarily entail the
.of sensitive personal data through various organiza-
ns. What are the responsibilities of these various
f. "theft" of personal information? What is the re-
m,'of Xinstitutional depositors to EFT accounts in the
0t data should be intercepted? The responsibility of
WPOinp t-of-sale transactions? The responsibility of the
the EFT account, and of the organization respon-
switching system? How, in any event, can unauthorized
data be detected, and how would one single out any of
I responsibility in such cases?
~~ such s?
owie legitimate access to EFT data?-This question
if possible, than the preceding one. Any EFT system
wcwUilate a backlog of significant account data for every
ig .amounts of deposits and debits, the times of such
d quite possibly data on the establishments and agen-
.for them. These data represent an attractive resource
H.interests in society. Should the courts be able to claim
as they can to written documents? Should the In-
have this right ? Should welfare officials be able to make
for example, in screening applicants for public assist-
t....iyif at all, should people be able to examine their
uld the organization maintaining the account have the
Such data to outside commercial interests, such as
.and market research firms? Issues such as these are
0notional, and there will clearly be no avoiding them.
S atmahou be enforceable through EFT?-Inher-
.. itet. of Electronic Funds Transfer is the notion of a sep-
. ......... keeping charge of persons' financial resources. The ques-
yarises as to when such an agency should be authorized
laccount without permission from the user. Again, should
S. .suffice ...... and, if so, how readily should such orders be
M one's .EFT account be subject to automatic debits for
*utfor example, or for arrears in one's income tax?
ez t to see two categories of financial obligations, e.g.
tnent.... s. subject .to automatic collection by debiting the
t#4nd"soft" ones still requiring some affirmative step by
tOr is there a social value entailed in requiring a volun-
H' wi.iheacco^unt holder for the discharge of all obligations?
aMr s.ponsibility for EFT charges be allocatd.-DiTs-
..i...idt y of such charges are inevitable. Should EFT,
n the event that the consumer subsequently returns
I "o is to make this determination ? Who should be re-
of..... stolen EFT cards.? What. sort of record-keeping
of the parties to EFT transactions---depositors,
Ifid organizations maintaining the accounts-in order.
.. 4ata oincasesOd.i te transactions,:
.b jsulic controversy conerubur EFT represent pro-
futre; but they ae not fanciful projections. -On t.ho.
r ovfthroversie already take place i!M cnect wit
E.^ co wt
...' ........ .
::!ii iii[ [ :: :.:. .:......: ..:: : .
other personal data systems. Nor should these points seem surprising
in light of the discussion of EFT as a novel social resource. For. thf
potential disputes outlined above represent inevitable conflicts over
the allocation of benefits which spring from any such resource.
Sonfe Alternative Value Positions
How are responses to controversial questions such as those cited
above to be formulated? Above all, I have suggested, responses mut
stem from the observer's own values, the social goods which one would
wish to see served by the systems. The value positions which form the
bases for such responses are hardly abstruse; one hears them invoked
all the time as bases for policy or political action on these and a wide
variety of other subjects.
Below are brief descriptions of four of what I see as key value
positions relating to the development of EFT. These four points are
not scenarios or predictions of specific events, but rather broad phi-
losophies of what good policy in this connection ought to accomplish.
There is varying potential for conflict among the four positions, but I
would argue that each of the four, in some form, would find a substan-
tial share of supporters within American. public opinion.
1. A Free-Enterprise Model: Profitability the Highest Goal.--In
this view, the highest social good to be served by the development of
EFT would be the profit-making potential of the firms controlling
the systems. In cases of conflict between profitability and other social
goods, such as users' privacy or the need of the government for data,
considerations of profitability would always stand preeminent.
2. A Statist Model: Strength and Efficiency of the State the Highest
Goal.-In this view, the most important purpose of the development of
EFT would be to serve the needs of government-needs for access to
personal data on citizens and needs for mechanisms of enforcement of
obligations to the state. These interests would always prevail over
3. An Individualist or Libertarian Model: Rights and Prerogative.
of the Individual User the Greatest Good.-Under this philosophy, no
development of EFT would be admissable unless it enhanced the con.-
venience and freedom of the individual. Other social purposes that
might be served by EFT, such as profitability or welfare of the state,
would be sacrificed, should they conflict with the prerogatives of the
4. A Conservative Model: Curtailmnent of the Potential for Bureaus-
eratic Control the Greatest Good.-This philosophy would simply
reject any development of EFT as too dangerous to personal privacy
I have already indicated that this report does not aim to advocate
any of these value positions as against the others. The one point on
which these remarks insist is that choice among these values-or, to be
more exact, among contending policies which might follow from
them-is inevitable in the shaping of EFT policy. For the four value
positions presented above are, to varying degrees, antithetical to one
another in their implications for policy.
Perhaps the one approach to the development of EFT policy, dearly
incompatible with the underlying assumptions of this report, is the
laissez-faire philosophy of "letting the market decide." One does hear
the claim that advance assessment of policy choices like those con-
is superflu'ous if not actually dangerous, given the e:iist-
Accordh3g to ition, the ultimate
t#6f EFT as a consumer service will provide ample evidence
the public am ts or rejects the implications of an EFT-
t If the pubfik finds the systems objectionable mi ny
4W.Irae goes, it will offer the severest form. of censure sun-
to Support.them in.the market place.
this ar rument -is that it confuses two different
n-making. We judgments which one makes about a
wO 84 institution in one's capacity as a consumer are no more
-16ally comparable tx) those made as' a participant in a
A19 a consumer of products, or institutions, or tech-
saks "Will this item serve the requirements of my own
present conditions?" But in addressing questions: of
As a sialist or as a thoughtful member of the public,
Vill the',viidesprtad adoption crt this or that inndva-
consumers shape social conditions m general? Are the
conditions brought about by such -adoption desirable,
ction between these two kinds of decision-making, then, is
1. it is the distinction between the policy decision as to
to favor the private automobile or mass transit in develop-
runtion. system, on t1t6one hand, and the personal decision
W drive to work or to take the bus, on the other. The first kind
addresses the question of what sort of social world is 6 be
i*m-nd kind ot decision is over how to deal in one's own
IW& world it is, like it or not.
V not be necessary to point out that the second kind of
ttainot substitute for the firsOPeople may-and often do-
pdtonal options under conditions which they rish'the
-4 # may V! y
Wfe to hVM. Pbople may reconcile themselves to using their
Arkint I while wishing that an earlier policy decision had
N, 'thout them.
ret alon w
t tEng is latide facto Policy commitments may
'JILL L S & t I
the interaction 'of many individual, personalistic deci-
4Mout anyone's having planned or desired the former. When
members of the public, acting individually, decide to rely- on
&URUV esVS4 the effect may be pollution, traffic jam& and all sorts of
outcomes which never figured in the thin1d. of those
the perso nal decision, under previous conditions, to opt for
tt I ropsporL 'No one may really desire an arms race or a war
-b4 va the: absence of some binding commitment on all parties,
Al pursuant of self-interest may lead W such undesired
m the longer run. If we do not consider the possible longer-
of policies before c9mmitting ourselves to those poiiies,
run the risk of h i to ]i
avina ive with undesirable outcomes
opted for in the first
EFT..Offered a convenient shortcut to settling financial
the American public is apt to respond in the same terms
ofror lis made. But such a response tells nothing about
view of the desimbility or lmdesirability of sny of tbg wl.
Ift 'of the" *nd Rome related tmm we Mancur Oison, jr.,
ter Aetim," C*mbrWm Rarvard UnIveraft* Prea% 1"&
.. .' .." ... ...... ""
4 4,:*: r i: :::
iE: " ... ". HT
elective outcomes stemming from the aggregates of these p.4 .u
decisions. Without some attempt to envisage in advance what 011.0"'
of the most likely of these joint outcomes are, and to evalua"ite t".
possible results, we are bound eventually to confront outcomes.wbd ...
no one had any chance to consider in advance. ... ..... .. : ,
The balance of this report aims to do precisely these thing! ... ......
imagine some of the possible long-term effects of the developneqA(1,E..
EFT, and to appraise these results in terms of values current in.A&
ican political and social thinking. These value positions are to varying .
extents at odds with one another, and, as I have already suggest it;,
may be impossible to "prove" the superiority of any one over anothixp
What is possible-and, I would hold, extremely desirable-is to4IV 'I
discussion more informed by enlarging understanding of the mplik g-
tions of possible value choices. To do this, the following pages attet .t
to consider each of the four positions in its pure form, and tihentit"
enquire what practical results might stem from its implementatitt.--, : .
By considering some effects of implementing the four position"' "I
their most uncompromising form, we shall confront in effect. heir
most radical implications. Therefore disclaimers are in orderr, Tho
following discussion deals, for purposes of discussion and clarificatiopn,
with the most extreme implications of values which few people .ay.:
hold in their pure form. I certainly do not mean to suggest, in wh4 "
follows, that any real businessperson would favor all of the appliM-r
tions of free-enterprise thinking contemplated below. Nor, for t ,t
matter, would one expect any government spokesman to defend- alS
the possible implications of the statist model. But confronting the.e.-
treme implications of values in their pure form causes us to consider
and to reconsider our feelings about those values. If one is moved.to
consider profitability, for example, unsatisfactory as the only principle.
to guide EFT policy, one must then face the subtle question of bow.
to limit the use of EFT for profit-making purposes. By throwing dogn
the gauntlet with extreme interpretations of values which many people,
certainly accept in more moderate forui, this report should encourar,
people to clarify and perhaps even modify their own positions i.:
regard to these values. But even then, there is no guarantee that the .
following pages will lead all readers to modify their positions inf the.
same direction. .
A Free-Enterprise Model ,
Profit-making firms are today among the main proponents of Ele6- ,
tronic Funds Transfer. Their immediate plans are to generate profits
by substituting electronic transactions for ones now accomplished
through other means. But it is also possible to envisage much more'
far-reaching applications of EFT principles for profit, ones which
are challenging in relation to privacy and personal autonomy. '
Discussion has already noted how any EFT system is bound t&
generate and retain succinct and highly pertinent data on each irans:-'
action carried out by each user. It is difficult to foresee how any viable
system could avoid maintaining data which would describe the date,
time and nature of each transaction, the location of the user at the?
moment of the transaction, the identity of other parties hi. thl trnas-
action, and the extent of the user's financial resources. It is easy t&
imagine how EFT account data would also contain information an
other pertinent matters, such as the user's age and place of residence;'
0. do^, to put it, mildly,. promise, many potwitial uses. to
it must also be remembered, increases directly the
depen of the public upon EFT becomes. As more and
tt6sumerls total transactions come to be mediated through
system, and as more and more consumers come to be
the richness of EFT account data for purposes of
increasingly attractive. IAt us assume, simply
discussion, that dependence upon- EFT were reall ex-
hout the consumer population, and thit complete UT
persons' transactions were readily available to profit-
Such assumptions are, after all, no more than con-
"the assumption 6f profitability as %cardinal guiding
Vnerated in such a thoroughgoing EFT system would
ouslypseful in consumer cieffit checking. This form of
that is, over th6 faithfulness with which people
ovidit obligaions,-imfferi considerably at present from the
loose organization of : *information practices relating to
'derable oten ial
vith consi 114 ti importance to credit decision-
-such as that on suppPementarY sources of income or hidden
imeh as alimony, or on court ju ents or 1 ankrupteie: a. re
to credit checking agencies. Such ageicies ;ive
th4se dafii but the facrthat the information originates from
*x=es in sometimes unlikely locations makes it difficult
etenem lncomleteness may- remit in granting credit
e *Andpoint.'f the institution, it should not be, granted,
At,' hm the complete record would warrint the'opposite.
the remit is inefficiency m swial control,
4 on the other hand could be developed: into something
WrAvldel and comprehensive' hisory of each consumer's credit-
-If all ornearly all, financial transcations TINDS
andif SWA tra, nsactions were automatically available
,0 to any profit-making firm, the efficiency of consumer credit
would sharply mereami... By making it impossible to
daiadl, of one's tinanci*1 history, EFT 'could conduce to
vknf-,Ting control over the extension of consumer credit.
"JA V1% ~th informational riches of EFT records avail-
Vks*ket researchers could result mim*cre4libly sophisticated and
rertising campaigns. Adverti of course, constantl
AkWh theappeal to the person or gro, dp to whom it is
n tion of EFT files could provide very exact data on,
between such things as inco;ne and, consumption habits.
*M other credit-related data such -as family status and,
t0f riace, such information would open the: *a to very
concerning the sorts of advertising-to whiel anyone
6r an fttegory of persons would be mostsusceptible. Suphis-
UM N such data t establish for example, what category of
ldmtifiable by n a and address show a strong likeh-
ttm- ing, a now household SDIDDD) ance within the next few
V of Such products could then beam their appeals
is 6imt aihenable group.
an 0"21 MO" SDPNHCielted a phca6on of such techiniques
the advortising appeal, y to the IEFT p4odnt-of-We
transaction itself. Imagine a television screen and a loudspea3rkei6P
nected to every point of sale computer terminal in every retail et'b.6
lishment imagine further that the system established a delayr6f,'ay,
ninety seconds between every EFT request and the ultimate app&io'v
or disapproval of the sale. During this time a computer routinecu
analyze the sought-after transaction in relation to its total backlog
of data on the individual, and present a televised advertisement sited
precisely to the susceptibilities of the user at that specific moment.g,
Thus a request for a purchase of an engagement ring from a you.n.g
man who, according to the records, had made five similar purchases.
within the preceding month, could activate a discreet, televised mes-
sage from a law firm dealing with breach-of-promise actions. Te
interpolation of the appeal at the moment of purchase could promise
an unprecedented tool of persuasion. :- "
Still another forceful use of EFT in the service of profitability
might come by adapting EFT systems to use as mechanisms for enx
forcement of payment on credit obligations. Imagine a syseiiiin
which all pay checks and other income had to be credited to elec-
tronic accounts, and where credit grantors had the prerogative of
charging bad debts to the EFT account of the indebted person with-
out the latter's consent. By removing the considerable legal and-prac-
tical problems of making people pay under the present system, such
an innovation would drastically reduce both bad debt losses and the
expense of collections.
Since it would be impossible for customers to avoid payment, busi-
nesses would be much more willing to extend credit in all sorts of
setting where credit is now problematic. The removal of possible non-
compliance on the part of consumers would thus distinctly increase
the ease and convenience of access to credit. Some lending institutions
have already grasped this principle, in making the extension of loans
conditional on the customer's agreement to an automatic "charge-off"
of the monthly installment from his or her bank or credit union
The looseness of social control which characterizes today's pay-
ment system conduces both to certain inefficiencies and to certain pro-
tections for consumers. The inefficiencies, stemming from lack of con-
fidence on the part of firms that checks will be honored or credit ob-
ligations met, often mean the blocking of credit processes which would
otherwise go ahead. The protections to the consumer lie in his or her
option not to pay-to stop payment on a check or to refuse payment
on a credit obligation in dissatisfaction at some aspect of the merchant's
behavior. Clearly the development of EFT could both heighten the
efficiencies and remove the protections inherent in the current system.,
In this context, as elsewhere, the development of electronic payments
systems promise a more orderly, more efficient, but also more tightly-
controlled social world. Whether such a world is worth trading for the
present one can only be a question of one's values.
Perhaps not even the most convinced capitalist would advocate a
total end to the discretion afforded by present payment systenis in
regard to consumer debts. Perhaps not even the most enthusiastic ad-
vertising and marketing executive would wish to mobilize EFT data
and circuitry to exploit users' most intimate predilections in the ways
-described above. These observations are not meant to suggest that real
exist to thwe effects. Tliey are heuristic examples-food for
rather than practical schemes.
181 1 one doeanot accept these extreme applications. if
mot believe that the real profitability which such schemes could
Vvm*e mn warrant such drastic demands on privacy and autonomy,
m4wmiicae to draw the line V If unlimited discretion of credit grantors
i44"'A.M a4wounts is excessive, how much discretion should there
1*V4> what extent should any EFT user be expected to commit him-
*Mb#barWf in advance to allowing future debits from the account?
'$;h have the right to impose such automatic debiting as a
busi ess with anyone? If so, should the account.-
WderAm hsv_Ji right to close out that account, or to have payroll
MA o"r thecks deposited elsewhere? When 8hould E T-generated
4 be available to outside interests such as credit reporting or mar-
*Ut remarch firms? At present, account data are ava'ilable for such
p4xpows from. credit card and other credit-granting firms. Should
.UT data be any different 2. If so, what-restrittions should there be
Iw its availabilit or o I n the uses to which the data are put, once they
-are made availalle 9. Should consumers have a say in the, release of
41their" data? If profitability is not the only consideration in these
vo4ters, what other considerations should one expect EFT polig in
tJ~-aections to serve 2. And how is one to choose in cases of direct
cot6h* between profitability andlother contending values?
Institutions are hardly the only bodies with con-
t a interests in the development of EFT; the Federal
and th Ueril Rome Loan Bank Board have both acted ag
=m 4tthe early stages. Onemain appeal of the development of
9M q9tems to federal agencies is the increased certainty that they
i ;;;W1c1m6!!er concerning the deposit of federal checks to private persons'
"obutd:0. By ellm R"%$ Aoss or theft of funds intended for such per-
some Weral pensioners and Social'Security beneficiaries, EFT
wpw)A nader the work of the agencies involved distinctly more
This #*vernmental quest for greater efficiency through .gareater con-
fto-1 ftesents another variation on a now-familiar theme. -Many simi-
Ur'"teappheations spring to mind. equally readily. Just as EFT can
P"da ctrtainty of the receipt of funds, these same processes coulil
iwrn fo, Inonitor the wes of federally-distributed funds. For example,
*eMw* re'eipients could have their accounts tagged so that point of
sav. to liquor stores would e impossible. If cash with-
m ucb'accounts were also bloc ed, such a protection could
'j6SUsave taxpayers many misspent dollars. Ok, by the same token,
EFT lists of welfare recipients against other computerized
!V2M,_UFd make it possible to identify welfare cheaters who had
*kar 9ources of income. These sorts of checking, of course, are vastly
V`,w h accomplished electronically.
the financial control affor&d to th6 state by EFT extend
to those who, like welfare recipients, had formally relinquished
knanagement, of their own affairs., The informaoo generated in
T system Would provide a marvelous adjunct to the enforcement
lIffiancial oblio-utions binding on all citizens, such as incofii6 taxa-
-The'more'iFT became the vehicle for all personal fingacial
E .: .::..... .. .:: .
transactions-all payments: made and received, all transfers .,
accounts, etc.-the easier it would be to establish liability for isma
tax. Indeed, total state access to EFT machinery would also g.ttly
ease the collection of taxes, since obligations to the state could eladi
subject to automatic debiting. ,
SNext, consider the problems faced by the state in contacting pd
identifying the countless persons wanted for some sort of admixitza-
tive action. This category would include persons wanted by the police,
illegal aliens, escapees from mental institutions, absconding ifatfhra
who leave dependent wives and children on public assistance and a:
host of others. Such persons will energetically strive to avoid contact
with the agencies which seek them. Given our present, relatively lose
organization of social control in America, such efforts stand a good
chance of success. Like bad check artists and poor credit risks in their
relationship to business institutions, fugitives from state power may
well manage to move in circles where they are not known. Intensive
efforts by investigative bodies may avail in the search for any one
individual whose apprehension is deemed especially important. But
such extreme efforts can only take away from the total available re-
sources for the pursuit and apprehension of others.
Yet consider the effect upon such persons of instituting a really
thoroughgoing state-oriented system of EFT. This would be a system
where the state would know the EFT account number of each user,.
and could use that number to gain immediate access to the account
data. It would be a system, again, where all financial transactions ht
to go through EFT. Preferably fingerprints or voiceprints could servq
to identify users, rather than plastic cards, so that no one could con-
ceal his or her identity while using the system. And in such a system,
agents of the state would constantly monitor the use of the EFT net'.
work, ready to swoop down upon any user who might be wanted for
the settlement of obligations with any arm of the government. uJndf
such a relentless system of state surveillance, the only way of avoid-:
ing state action would be to avoid contact with the EFT system alto;
gether. And if all wage payments and other financial transaction,
worked electronically, this would be no easy matter.
One particular source of strength to a system like this would be the
possibilities it would open for sharing data on persons among differ-
ent state agencies. Imagine that any arm of the government with obW
ligations to enforce from the general public would have the preroga-s
tive of "tagging" someone's EFT account. Such a designation. could
prevent any further use of the account until the agency had resolved,
its differences with the person. Thus, if someone were overdue in.pay.-.
ing a parking ticket, he or she might find it impossible to engage in any;
further EFT transactions until the debt were paid. Or. persons wanted
by the police could simply be "cut off" from all EFT transaction.
until they surrendered.
Obviously, under a system like this, the more vital needs become,
contingent upon EFT transactions, the more efficient any one enforce-
ment activity becomes. The checking of passports under today's techb-,
nology is relatively cumbersome, in that Immigrations officials must
refer to bulky, loose-leaf volumes to determine whether the holder o
a particular passport requires some special action. Under an EF "
system, the account number could serve to tag persons leaving
t Of any outstanding obligations, from VISa
Aw Mlimony d el i n encies to w &Tants for arrest. By the same
ObI to Me one's income
pould be used to make it imposs e
for arrest, or to purchase, groceries if one's immigration
-UY I I N I A g *1 such discrete enforcement activities in
system *T control, IEFT could make a ma'jor con-
respect for law and order in America.
M#yone think that such an application would necessarily
ve. A system like the one described here would actu-
ible to render the adminis;tration of justice more
compliance with the law more certain. It would
boar4 for example, to grant parole with greater cer-
Votrictions on the movements of the parolee would be ad-
YOICePrMts* or fingerprints were the means. of identifi-
it OFT te cr were extremely widespread, a paroled
simply be ired to "check in" to a terminal every
4to ensure that he dffihi not venture awo f rom the area where
to reside. This would be guinplr and less costly than
persons to presentthemselves, to a parole officer, and
less burdensome for the parolee. By ma social
OUgh, some would claim, one would also be making it
Ond more just.
control iin present-Oay America is extremely loose in
faiiciful extreme,, Trius, there are instances of coopera-
of information among enforcement agencies, as
eck names of persons applying for or renewing
t or whenthe Imm gration. Service checks applications
card& But "yone close to government enforce-
In rica will admit that there are countless instances.
Teft hand simply does not know what the right is doing-
realdi ipu ty in finding out. Toa very large extent this
from the costs of exchanging data and
a4ivitles-smon&r the agencies coneerned. But it probably.
some extent from feelin.". that too much centr "on
powers is a bad thine in itself.
sophisticated information systems
the cost constraints which countervail against
these Powers- The long-term development of-EFT
it relatively easy.and cheap to pool state enforcement
to tie theik to a svztem which would monitor the daily
of a large proporeion of the population. Whether, such
ptove generally desirable. or acceptable is another matter.
questions are inevitable as to howmuch state use of a
for purely personal financial transwflo stifif KL
mom how much the value of Mal hun- the
of the state. sho guide'systems like- EFT11 and how cases
"Mweni this and other social values are to be resolved.
be no doubt that the choices involved would be exqruciat-
for example, that an esicaped murderer had wwouncod
o killing agaim Would tbepolice, be justified in using,
account number, assuming it were known, to trace
and to apprehend him I Most A ericans, I presame,
no in anmering afflmnativoly. But wbat other
be ineluded, iin such'a mandate for state use of the
...~~~~~~~~~~~~... ..... ...... .....,i~i i !!! iJi ~i:ii
....... ... :EL ..:.:...
.IEE: '" .:. :':E" E. "::::.
*. '* ::.
EFT system? Should such a system be used for tagging al panis
wanted by the police? The recent resistance to participation,' in : i
FBI's National Crime Information Center suggests that some of the
public would balk at this. Should the Internal Revenue have asemss
to EFT files, to check the validity of income tax returns? Shoulcd
court orders, say, for alimony payments be enforceable automa tically.
through an EFT system, without the consent of the account holder .;
Should different arms of the government be able to "share" EFT en
forcement capabilities, so that, for example, it would be impossible
to renew one's driving license without having paid one's income ta=:
To answer negatively to any of these questions is to affirm a belief:
that the strength of the state is not the only social value to be imple-
mented in connection with the new technology-or, to put it anolmr
way, to place other social values above that of a strong state. But where,
then, should the limits of state influence in the workings of such Byes-
Has anyone actually proposed any of these more thoroughgoing
applications of EFT on behalf of government purposes? Not so far as
I know. Again, my intent is not to lay such plans at the doorstep of any-
one, but only to insist that the inception of EFT would necessarily
raise these issues in due course. Given the insistence from many quar-
ters on the most stringent possible measures to enforce any legitimate
obligations to the government and to combat lawlessness, it would be
rash to disregard the possibility of serious efforts on behalf of EFT ap-
plications such as these.
A Libertarian Model
Obviously the first two guiding philosophies for development of
EFT have much in common. Both would entail, after all, the creation
of powerful bureaucratic tools of control over the general public. A
third model might differ precisely on this point-that is, in terms of
the distribution of advantages between the organizational powers.con-
trolling the system and the general public of EFT users. Under this
third, libertarian philosophy, no implementation of EFT would be
acceptable unless it served both to enhance the convenience and to
protect the autonomy of individual users.
Such a value position would of course be antipathetic to any use of
EFT data for purposes other than the direct provision of EFT servw-
ices. Advertising and market research, enforcement of financial and
civic obligations-all these derivative uses would be an anathema to a
purely individualistic philosophy. An EFT system implemented
under these principles would collect and retain only the absolute mini-
mum of personal data necessary to assure efficient financial trans-,
actions and easy verification of accounts by the user.
Discussion of the previous two models did not entertain the possi-
bility of any "due process" guarantees to users, nor of any review
process by which individual consumers might contest charges or other
uses of the system which they found unacceptable. Presumably sqeh
protections to the individual could only contravene the complete.
ascendance of profitability or state power, and hence would not war-.
rant consideration. But the libertarian philosophy would require elab-
orate means of protecting these interests .through due process guaran-
tees and processes of review. Presumably such rules would guarantee
every user the fullest access to his or bxr. own file .and p;ovide 0"s
for eradimfion' of contested charges and rwtification of other
betory practice& These guarantees would resuma-bly also
At"g penalties for aocem to or use of E14-generated data,
not involved in'EFT transactions.
004" extent. any liberal or individualistic philosophy for the
of EFT 6ntails a measure of self-contradiction. The very
a of a6n Electronic Funds Transfer Min 18 one of a COMPIPIX9,
42 entty twhiidh necessarily collects and uses personal data,
"d in (10W*o so imposes a measurp of. control over its users. Any sys-
tem which clid not at least prevent users from making purchases or
,wMdrawals beyond the limit of their available deposits or credit, for,
would be so weak as no longer to remain viable as a system.
Nor necessarily clear where tbe individual's interests lie with
reprd to the retention of accumulated personal data. Is it better, from
thi standpoint of the user, to collect and retain a great deal of account
MWAX" *:INA as to facilitate resolution of disputes over charges and 'other,
transwtions? Or is it preferable from the libertarian point of view
to, io the collection of such data-to eradicate it from all files
as soon as possible for exampi as to minimize the threat of its
being vpriatedl In Misappl. System which of its nature finposes a
nwamre orregimentation on individual affairs, a wholly individual-
isdo philosopliy is -bound to confront some such ambi 'ties.
A Comervadve ModeZ
This realization that any form of EFT development would entail
saime measure Of bureaucratic monitoring or control over the general
e may lead some observers to take a fourth position-the notion
any development of these systems at all would be excessively
ng to essential social. values. The implementation of this
value position is,Y far the easiest to explain: It would simply entail.
dw blanket prohibition of the development of EFT in all its forms.
This model is conservative in that it espouses mistrust "in principle
of the consequences of any centralization of control over persons' lives.
No libertarian guarantees or other restrictions on the purposes served
swh srYstems would make much difference to the exponent of this
on. !For he or she would argue that the potential power of the
machinery represents a source of unacceptalble risk to privacy
and liberty,- even when its present operations are exemplary. Such
0 the long-terTn effects of centralize& pow of
-'ilo'n;%gree Mi political thought, especially within the,
8~ AppUe4ti~ of Vah4e. M` Policy.
Some of the possible implications of the positions considered above
kave I been quite fanciful but not in the sanse of. idle fancy. For I
hold that even the numt extreme of the possibiRties considered
k0awareno more than implementations of pnneaples which, in their
less extreme forms, many informed Americano. -wouldembram And
ing the application of such inellp -
pri i les in their-extreme
i-tvm when those applications seem outrageous, should help,
,g U1 peo*Lto clarify what values theiv would espouse M thesw
Ap"Oetions. and howfar stch espouml shouldbe pursued in pra&iee.
It Ow could* not countenance the use of an EFTsysten for the.pres-
Gal6on of commereW, neftages as contemplated Am, for -exampK
.. .* .. .E "".
what commercial uses of EFT would one condone? If one holNdJ "
libertarian guarantees are an essential condition for the imp.i"3
tion of EFT, should those guarantee extend so far as to t
user who is wanted for murder from detection through the s ;
Considering the alternative value positions in their pure form .p .. :
us confront such hard questions. And there is no doubt that tactusl .
policy-making in connection with EFT must deal with dilemma ss i
precisely this sort.
Most recent policies on personal data management, in other Vods' M
aim to provide some sort of mix between prerogatives to the state nd
those to the individual data subject, or between those of individuals.
and those of private data-keeping organizations, or between the rights
of such organizations and those of the state. To be sure, discussion of
such measures rarely identifies explicitly the social values which they
embody; but the ultimate social goods which such policies aim to seres
are implicit in the terms of the policy itself. Significantly, recent
American thinking on these matters has shown no great consistency'in:
terms of the social values which it has favored. Let us consider some im-
portant cases in point:
1. The Fair Credit Reporting Act (19W70).-This Act represented fhi
first major federal effort to regulate the handling of identifiable per-
sonal data. It came into being as the result of mounting public cow
troversy over the unregulated collection, processing and sale of per-
sonal data, and over the highly influential role of such data in theta
outcome of credit applications. It embodies both the libertarian pria-
ciples discussed above and an effort to protect the profitability of the
firms comprising this industry. P
The Act establishes, for example, a statute of limitations of seven
to fourteen years for derogatory information held in file. It provides
channels by which persons can verify the content of their own files,
and some limited means for the challenge of erroneous or misleading
entries. It stipulates the purposes for which credit reports may-be:
drawn, though the purposes so specified are very broad. All in ii1
there are a number of attempts of varying forcefulness to guarahntew.
some rights and prerogatives to the individual consumer in relation
to the handling of data referring to him or her.
At the same time, the Fair Credit Reporting Act virtually ratifies.
the position of the consumer credit reporting industry to continue in
its main forms of profit-making activity. It does not restrict to is='-,
ance of credit reports for any of the main purposes which had beenu
customary in the industry, nor curtail the use of any of the main forms
of personal data going into those reports. It requires credit agend",i1
to reinvestigate data disputed by consumers, but not when the agency
"has reasonable grounds to believe that the dispute by the consumer is.
frivolous or irrelevant." In short, the 1970 Act aims to protect the
liberties of data subjects without serious curtmling: thee-industry's
processes of data management. 2
It is interesting that the Act also implements to some extent the
second value position, concerning the role of the state. It authorizes
the issuance of credit reports in response to court order, for example, i
and the release of important personal data from credit files to am,
government agency which requests it. What the Act definitelydtt
not do is to put into effect any version of the fourth value posationA"-1i
the proscription of personal information management as a bad thing
Mie thrust, of the legislation is toward regulatm*g, legitimat-
&g such adtMties, n0t to cutting themlack.
al for a Nah~l -. Datd..P Center (1967).---Jn 1966
headed by -the distinauished economist Carl
466omminded the creation, of: a computerized national data
Mw *6posed, c6nter would centralize personal inforinatiork
Vernment agencies including the Census, the Social
afid the Internal-Ttevenue, for purposes of'
'Avid, li%.d Unlike the other three forms of record-
ire, the. National Data Center was not:to use any
for actions directed specifically to the persons concerned;
WaS to deal with'its data only in aggregate, while keeping
roversy qui6kly arose over wheth& such a center might result
t6 a"'Personal privacy. Statements from both members of
and Senate and intrested members of the public rapidly
JKMI I y of the use of such a central data store for author-
and oppre6sive purposes;. Sponsors of the measure protested
4 posed -center would only, deal with factual statistical data
by various government ageicies, and insisted that excel:-
r& existed by which. the privacy and anonymity of files
pit served. Some put forward the idea that these data were
6 Smgle center than in, their dispersed locations. Yet in the
wa6 not moved. Senator Edward Long remarked durm*nf
on the matter "Our privacy today depends on decentra
,of formation on individuals.". 5 This was the viewAich pre-
*V t f
M 'he MCI I and the proposal died for lack of support.
Computers. and tU Rig7d8 Of CitiZeM; Report of the,
8 Admigory Committee on Aut&mated PergonaZ Data Sys-
j Departtwid'of Health, Education and Welfare (July
Report obv:-lously represents neither legislation nor bind-
as such. But it is worth considerinLy here as one of the most
t-out. statements of position. o'n the institutional han-
Pers al data.
f the main values implicitly affirmed in this Report, as in the
t Reporting Act, is the libertarian position; many of its
ons, in other words, aim at providing protections to the
*Aiil ffi connection with 'the management of his or her data. One
s ions, for example, 'is "There must be no pezorfil data
i rg, systems whose very existence is secret." 6 Other rec
include the designation of persons responsiWe for the
d[ministration of safe-ICeeping of any data system; the 'insist-
data so kept be timely, pertinent, complete and accurate,- and
of conditions under which data can be transferred from
11 Bd 'personal record-keeping system to another.
sme tMe, many of the'Report's recommendations imphek. y
M eWy, "affirm, the right of governmental or private institutions: to
# control over personal data for their own pirposm Tht4s, for
that transfeirs of data without the--consent
stibJect be prohibited if the destination. of the data, i "an
'permulml &h% Ustem that is not subjeiet to these safe-
ft, thix*w VM* lbom is Mareh1967.
.:" : :. E:. ::". .. .... :..
guard requirements." Such a position in effect establishes t 4itrp
*other data systems as acceptable. Similarly, the Reporto opviY
collection of personal data which cannot be shown to be neesary;
yet this requirement implicitly assumes that many routine g9rT -
ment and private information practices are indeed "necessarfja
hence deserve to continue. In fact, the "necessity" of collect a
sort of data is more a value question than a technical question, d
the implicit value position here is that present circumstances j1st4
the maintenance of a good many personal data systems. Thus, the
HEW Report, like the Fair Credit Reporting Act and Privacy Act ol
1974, embodies both limited guarantees to the individual conceramg
the use of his data and implicit assurances to state and private inter-
ests that their major activities will not be jeopardized.
Still another value position, however, is implicit in the recommenda-
tions of the Report concerning the use of the Social Security number.
Here the authors hold that consequences of further extension of such
use are simply too risky to permit it:
We take the position that a standard universal identifier (SUI) should not be
-established in the United States now or in the foreseeable future...
We recommend against the adoption of any nationwide, standard, personal
identification format, with or without the SSN, that would enhance the Ukeli-
hood of arbitrary or uncontrolled linkage of records about people.7
The principle behind this recommendation differs qualitatively from
others embodied in the Report as discussed above. The earlier points
aimed at regulating the collection, maintenance and transmission of
personal data, whereas the recommendation concerning the Social
Security number as a Standard Universal Identifier seeks to avoid the
collection of potentially useful data in the first place. This latter rea-
soning resembles much more closely that which led to the rejection ot
the National Data Center. It is, of course, a manifestation of the fourth
value position discussed above.
4. The Privacy Act of 1974.-This important piece of legislation
embodies few surprises in relation to the preceding three policy posi-
tions, so far as the values which it implements are concerned. Like the
Fair Credit Reporting Act transposed into the area of federal record-
keeping, it aims to guarantee certain rights and protections to the
subjects of personal documentation, while affirming the legitimacy of
major institutional interests in maintaining and using such records.
Thus it specifies procedures by which federal agencies maintaining
systems of personal records must publicize basic information about
the system, including the categories of persons depicted in it and the
routine uses of these records. It makes it possible for data subjects to
inspect and verify the contents of their records, and to initiate pr-
ceedings to amend them in cases of dispute. It legally requires "accu-
racy, relevance, timeliness and completeness" of the recorded data in
relation to the purposes which they are supposed to serve. It require
restriction of access to the filed data.
The obverse of all these libertarian guarantees, of course, is the cor-
responding guarantee to the agencies concerned that, given compliance
with the law, their recordkeeping practices can continue much asjsu.
Nowhere does the 1974 legislation forbid the collection and use of da4
now regularly required by federal agencies. Rather, it requires that
mintain. . only such information about an individ-
riand necessary to accomplish & purpose of the
Thus the purpose of the Act is not to curtail the collec-
I Mbf personal atta in principle, but to provide to the individ-
3|I RS in the handling of his or her own data. It represents an
WA Some statist and some libertarian values. But none of
tive, anti-recordkeeping principles implied in the opposi-
I..ial Data Center find expression in it.
w ~r p FTPolicy
i opening pages of this report I vowed not to advocate any
position with regard to the development of EFT. I hope
ji~id will agree that I have stuck to my guns in this respect.
St ttying to derive from the various policy directions discussed
.. most acceptable policy, and then arguing on behalf of
Ii I have tried to emphasize the distinctness of different posi-
tim- SET. Instead of seeking out areas of underlying agreement in
lrius philosophies or orientations, I have tried to elucidate the
.P.bt.. a of their antipathies.
(discussion has made it clear that compromise is possible
j111Eg degrees among the four main value positions discussed here,
principle and in practice. Perhaps the form of compromise
tbitble ..in principle is that between the statist and free-enterprise
.i For there it was apparent that the development of bureau-
iai ery for EFT on behalf of either one of those two interests
liD, i probably facilitate its use on behalf of the other. That is,
MilmpI.e, a system where people use EFT as extensively as possible
ie.ir ercial. purposes would ipso facto produce more and more
.Bit personal. data, say, for use in the enforcement of income
ini. Recent legislation and policy thinking abounds in practical
imph of such compromise between these two broad interests in the
M.VgB.et of personal data systems.
.iso-,Is seen how readily practical compromises have emerged
....... `.....he first two positions, on the one hand, and the libertarian
ike, on the other. Here the antipathy in principle is a bit more
..'reithat the very practices which distinguish the libertarian posi-
S.a. often ones which curtail the prerogatives of private or state
cacies. But the solution in practice has been to guarantee cer-
t idb.ited spheres of interest in the handling of personal data to
rjP e .concern.ed. Thus, as we have noted, compromise policies of
IIRI may provide to data subjects some access to and control over
fA., while also stipulating certain ways which state and private
I I i KAmay use those data which are not necessarily desirable
B in user's standpoint. Indeed, it would probably be no exaggera-
e mde.scribe the bulk of legislation of this kind as given over to
mutual responsibilities and prerogatives in these respects.
sily compromised, however, is the fourth value position, the
| inig any development of machinery for surveillance and con-
| urnceptable in itself. The compromise position notd above
OWiie tbmugh the adjustment of the purposes served by bureau-
t.. recordkeeping, so that all parties have some control over those
Buti But i is the essene of the fourth position to downgrade
umportael oite purposes served by the technology at any one
MiAm t to yery fact of the existence of data-man-
tion-ones resembling the blanket skepticism of the responset"
proposed National Data Center-and approaches. inspired 4y ar
combination of the first three..
Certainly there is no difficulty in imaging how to translate thes.p.t 'Wo,
broaging machposinery. For than EFT ponent policy. The "compromise"is position, any devN
of instruments of social control entails unconscionable risks :::f||'^
applifuture. Thus the most cled guar-ct antee uagonism of the devehnologypment for c6iin
policy t-makingy be between approaches rtain state purposes, whipired by the also prohvauIe i-
tion--ones resembling the blanket skepticism of the response' tot
circumscribed protectionalns to the interests-and approaches inspired.by Ids
provide means for the firslatter to inspect their own files, for example,
Certain uses of EFT-generated data for purposes other than e t.tca
broad positions into andsuch EFT policy. The "omproolicymight also s
the Internal Revenue Service and certain other government ag eis
appliedss to EFTfiles, anwould might allow EFT firms t echnology for ti
praccount data, e.g., to credit reporting state purposncies, without thile also providing
of thcircumscribed protexactionsly where todraw the lineinterests between individual users. ant dght
provide means for the lrogatives would be a contentious matter, butfor example, rn
curtail uses of EFT-generated data for purposes other than fi nania
legislation the other hand, suc that it could be dmpromise policy might also assu te
the Internal Revenue Service and certain other government ag-enie
development of systems altogether.
If recent precedent is any guide, the policy ultimately guiding the'
aesponse to EFT fill res, and might allow EFT firmtwo broad positions.ell accuat
whiaccount data, e.g., to credit reporting agencies, without king or any other analysissi of
of the matusers discuss exactly whelpre to designate the "right" response dvdual thind
coinstitunectional prerogatihaves would thbe a contentious matter, but thepond-ther
legislation the social value shows that it could be done. On the persons who judge, and theater hand, thea-
skeptical position, applied thus do EFT, woulead unambiguousimply to aprosine
correctc" answer equally valid for all observers.
developmention of systhe various value positions underlying suchudgether.-
If recent preedent is any guidervers to understand the policy ultimately guiding
ofresponse to EFT will resemble one of thesmake two broad positions amons. But
alternatives moruldit be ? Csatisfying to themselves. Bing or any otherfinal analysis Oth
thoie ismattpersonal one, and there help to designatee t"right" response n iof
connthe value choices in fact, I havance isargued that such judgmentsarrow thaurn prepond-
the differences among participants to these debates. who judge, and that exana-
tion sumof the mighfacts obsef thrve thcaseat theus do not lead unambiguously todiffer abov single
"correct" answer equally valid for all observers.
Examinationdegree of opthe various value positions underlying such Judfavoring
the development of EFT embodying certain due-process guarantees,
is fundaments ally distinctly optimibservers to understand theimism ismplicationst i.
of posits classically Amerwhicanh they espouse, and there make decisions among eithe
alternativesl or more satisfingn-made, to thequmselves. But more bouin the finaful way of life whih
choice is a personal onell and determined manipulation of conditions cannot overcome.f
Againstthe value choices in advantage or threat potentialkely raised by EF to narrow than to wide
individual privacy or autonomy, it would assume, enlightened planners
canthe differeatnes a countervailing protection or rese debateming benefit. Thus ns.
drawbacks posed by the systems would be seen as serious enough to
warraIn sum, one might observe that conveniences which these two broad positions differ abot-
Thall in degree of optimism. The compromisend position, the one proscribing the development of EFTavoring
the development of EFT embodying certain due-process guar~antes
is fundamentally d, is pessimistinctly optimparisticon. PrThat oponents of this manifestposition
wouits classically Amt therican be assumption that there are no obstacles, either
natural or man-made, to the quest for more bountiful way of life which.
good will and determined manipulation of conditions cannot overcome.
Against any disadvantage or threat potentially raised by EFT to
individual privacy or autonomy, it would assume, enllightened planners
can create a countervailing protection or redeeming benefit. Thus no
drawbacks posed by the systems would be seen as serious enough to
warrant renouncing the great conveniences which they could undoulbt-
edly provide. "
The second position, the one proscribing the development of EFT
in principle, is pessimistic in comparison. Proponents of this position i
would insist that there can be no-gains of convenience provided by
t o peiional d&tA *hicli Ao not:
...... Mumte risks. Due ntees and other safe-
view, can never constraiii absolutely t6, future un-
ulsew,which the systen s might serve.
&nt, then, the 4ifferences between proponents of these two
are differences 'in willingness to accept risks. Such'differences
'Iiffereaices M' their clalssie'al form. Yet at th6i same time they
differences in the assessment of how serious. the risks of unde-
0 f thew systems really are.
.the optii st would *insist that means are availabI6 for reducing
of misuse of EFT to very low levels. By establisiiii;9
Avidelines for who can and cannot use the s stems, by creating
'for preview and outsi& in"qul'ry into tKe working -of the
b, SP ridly in advance the uses which are and which
_ci In ri 19
itted of, tte system-in short, by creating strong adminis-
kotection m advance, it would be held, the risks can be made
ff dnod6u.bt reply that even very small risks of very
outcomes should be Wd unacceptable. One accepts a one-
*14d risk of missing a train, for example, yet rejects an equally
-to, the safet of one's family. Similarly,* the skeptic might
qq the -acceptaLlity. of, a risk has to do with the frequency
it tecurs. one-in-a-thousand risk which recurs every day
a fif(y-flfty risk over the course of more than two years. Thus
r[g existence, of systems with danggerous potentials must
bicome too threatening
-makers hammer out their position on the future of
no doubt expect much discussion of these risk considera-
of the va"luepositions wiffi which they are interwined. I
these remarks will help parties to these discussions to be
mom -concious about the values which they espouse, and that such
will make those. discussions more to the point. But I should
spin that the effects of these remarks, even to ihose. who
them persuasive, will not necessarily be to foster unanimity on
ons. Indeed, if this discussion has established anything, it
that no single "correct" policy on EFT,, in the sense of'one
Will resolve: 0 quesdons or satisfy all interests, is to be found.
ey may favor profitability, or state power, or individual
ives coupled with individual convenience, or collective. free-
risks of Oppressive applica ions of the technology--or it
sme combination of these things. But no policy can claim
Alt all of these values equally.
Paul, "Privacy Aspects of the Cashless and Checkless Society;
ony before the Senate Subcommittee on Administrative Prac-
tim and Procedure, April, 1968." A Rand Corporatio&._ Paper,
D. Little, Tne., "The Consequences of Electronic Funds Trans
Technoloirv Assessment of Movement Towards.. A lim
IlAm Cash Society," Report Submitted to and for Review
,"*Ahe National Science Foundation, Washington, D.C., 1975.
EE! 'h::: :" : i:'! "
Department of Communications and Department of Justice; 3a4a,
"Privacy and Computers," report of Joint Task Force, 1972. .
Dunn, Edgar Streeter, "Social Information Processing and Statiatic
Systems," Change and Reform, New York, Wiley, 1974. .
Greenawalt, Kent, "Legal Protections of Privacy," Washington, DU.('
Office of Telecommunications Policy, 1975.
Laudon, Kenneth C., "Computers and Bureaucratic Reform,"' New
York, Wiley, 1974..
Lee, Robert E., "Dialing for Dollars; Communications-Regul&-;.
tion and Electronic Funds Transfer Systems." .
Miller, Arthur R., "The Assault on Privacy," Ann Arbor, Univmesity.
of Michigan Press, 1971.
Robertson, Arthur Henry, ed., "Privacy and Human Rights," reports
and communications presented at the third international colloquy
about the European convention organized by the Belgian Universi-
ties and the Council of Europe, Brussels, 1970; Manchester, MAni-:
chester University Press, 1973.
Royal Committee on Privacy (Chairman: Rt. Ron. K. Younger),
Report, London, HMSO, 1972.
Turner, John N., and Gerard Pelletier, "Towards an Electronic Pay-
ments System." Ottawa, Department of Communications and De-
partment of Finance, no date.
United States Department of Health, Education and Welfare, "Rec-
ords. Computers and Rights of Citizens," Washington, D.C., 197&.
United States Senate, Committee on Government Operations, "Pri-.:
vacy and Protection of Personal Information in Europe; Privacy:
Developments in Europe and Their Implications for United States
Policy." A Staff Report, March, 1975.
United States Senate, Committee on the Judiciary, Subcommittee on.
Administrative Practices and Procedure, "Government Dossiert.,
An inventory of Government information about individuals, New.
Westin, Alan, "Privacy and Freedom," New York, Atheneum, 196.7.
Westin, Alan, and Michael Baker, Databanks in a Free Society, New.
York, Quadrangle Books, 1973. ,
Wheeler, Stanton, ed., "On Record," New York, Russell Sage Fouuda-,
Wilensky, Harold, "Organizational Intelligence," New York, IBas
* .. -.f i
144imoxNEMON To Commox-CAmmm Nrrwomw
By Harry Jones and Fred Haber
06M WIROOL OF MIXOMCAL VNG1"1XWQ7 UNIVMS= or
rr"STLVANTA, ]PHIF-A)ELPHIA, PA.
lntereowmtionin the context of this paperi impfies that signaix
ia the ammon-camer network enter or exit b way of non-common-
oanier a Fedeaml agencies, Western Nion, railrok* other-
'way oompanies, local telephone companies, and the television
vetworks wme for: instance, interconnected with the AT and T net-
work the present controversy. In particular, the railroads"
telegraph, and existed before the AT and T network
was formed. When prob ems occu it is sometimes difficult to mign
*1 A .. I I
the IPM-ty, b- Ut the two interconnected parties are basically
Formerly, there were many plams served by two tele-
cMPaMe& Some were fully competitive, some were pa!tly over-
ng in area, and.some were specialized business or municipal serv-
ROMU36 of the W*convenience and expense of interconnecting-
cOlsi comimfint systems have usuallv disappeared. Where overlap
oastinuei p one umm are dissatished. Me* seems to require
that telephone service be a monopoly.
From the 19W's until recently, interconnection was allowed only
with the permission of the telephone company. Interconnection, has
booom* &:emtroversial public policy issue because two FCC decisions
.,have allowed interconnection in competition with the traditional com-
MM-carr'lem The competition is not in providing rival local telephone.
networlm, but in twoother areas, namely, specialired communication
servkesaxd privately owned terminal equipment.
In IWT the FCC made the famous Carterfone decision. The Carter-
fonewas'an acoustic and inductively coupled device designed to inter-
cotmed a PnvsLte mobile: radio 7stem to the telephone network. The
telephone, 'handset was placed into the Carterfone cradle, alkming-
tway, ounication over a combined radio and UleDhone link.
%%m4w o hi basis of
I Pposition to the Carterflone by AT and T: on
pro prohibiting interconnection, ax!d it was claimed that
intercomnection would compronuse the reliability and
ility of service. The FCC decided in favor of Carter the
At P"Ovision forbidding intercofine6tion was -ruled m''validbecafise
t tid a -blanket prohibition on harmless as well as harmful
11nis openedthe way for other manufacturers to provide ter.7,
In'to4liance with the FCC decisions, AT&T 6M reviwd iift
%*jfy. key' sipal charaet&istics and req*ro the use of tele-
AM Pany-Proridod interconnecting deviem. w a buftr betvwn
oquipment and the ne:twork. Them technioal standards
in the intereonnection questiou. Equipment sup-
pliers resist the interconnecting devices, claiming that their purpose
is to impede interconnections and that they add an extra cost not
levied on Bell equipment.
In 1969, the FCC granted Microwave Communications, Inc. (MCI)
permission to construct a microwave system for limited common
carrier private line service, ending the monopoly at AT&T long lines.
MCI was formed because it was claimed that AT&T's rates werehigher
than justified by costs, especially on high volume routes. This was not
disputed by AT&T but justified by them on the grounds of their policy
of "value of service" pricing which reflects nationwide average costs.
Since the FCC approves the rates, regulated monopoly has been re-
placed by regulated competition. There have been at least a dbzin
other applications to form specialized common carriers. While it is
possible for specialized common carriers to provide a complete link9
some depend on local telephone companies for local loops. AT&T has
been ordered by the FCC to allow MCI to interconnect to local net-
works on the same basis as AT&T long lines, and MCI is suing to
hasten AT&T's compliance. Voluminuos standards already exist for
this type of interconnection.
In 1969, after AT&T's interconnection tariff was filed, the Common
Carrier Bureau of the FCC asked the NAS to perform a technical
analysis of the interconnection problem. A panel was formed, of senior
people from industry, government, universities, and the Bell system.
More than 50 papers were submitted, including several from AT&T.
The panel readied these conclusions: .
1. Uncontrolled interconnection can harm personnel, network
performance and property.
2. The signal specifications are technlmically based and valid, and
exceeding them can cause harm.
3. The tariff specifications and connecting arrangements assure'
These conclusions-and the extensive supporting discussions-are
in agreement with AT&T's submissions and replies to the panel. These.
conclusions are quite reasonable, but they generate obvious questions.
What control is required? How much harm is caused by exceeding the
specifications? Can protection be assured without connecting arranged
ments? The NAS report considered if connecting arrangements could
be avoided, and concluded that
4. The present tariffs with "a properly authorized and enforced
program of standards development, equipment authorization,
equipment certification, and controlled installation and mabOte-
nance are an acceptable basis of achieving direct user interoa-'
Acting on this, the FCC established advisory committees to develop
standards and procedures for each type of terminal device. Satisfying
the standards seems more difficult than using connecting arrangemes.;
For example, the first committee to report delivered a 366 page report:
on Barrier PBX's. Defining the interface takes 58 pages. There.re
159 pages describing certification tests and inspection, 47 pages jor
on-site test and inspection, 30 pages on procedures and enforemquat,
and 44 pages of largely dissenting comments of committee memibs.
At the University of Pennsylvania some of our work on an ,NSF
grant has been aimed at investigating the possible harms of intermpn-
.. . ..i .. M "
F.: .... 6
P o :a)::"' o":::"" .
deyuthafts -were listed in the NAS report) voltages 4it-
ttaiaiA Wfe, b) signals of excessive amplitude or spectrum,
.... balance, d) improper control signals. We have con-
P Zlihood of these harms, the-way harm is caused, the in-
"':! 'e.uipment manufacturers and users to cause or avoid
*9 yto prevent harms.
.. Aproach is to strongly prevent harm by a combination
*eciK'tiins and connecting arrangements. AT&T gains
Mis~~connetion, and prefers not to accept any risk of harm.
.....g ... connecti'g arrangement, typically $5.00 per month, is
t..i.t.6reonnecting customer. These costs total more than $20
ear, assuming 400,000 connecting arrangements. For con-
IWSl xnect equipment, coupler costs usually equal equipment
wsLTH .s discourages interconnection, or causes interconnection to be
.......... Electric (AT&T) equipment, connecting arrangements
... ...... eaid, and their functions are not duplicated. AT&T designs
We ii',... ability and performance, and justly considers its stand-
or to.those of the consumuner electronics industry.
...... standards, enforce by the FCC on all interconnect
i. ra, -could prevent harm at less cost than connecting ar-
i tad would also prevent harm due to illegal interconnec-
ik tting program, lasting 4 years and covering more than 4
i residential telephones, found a '1.5 % incidence of unauthorized
7:. qiu Since there are 130 million telephones, illegal interconnec-
f yexweda legal interconnection. Illegal minterconnection
,'tpiws p.. resentc controls
'flifli .befr, 'standards to prevent harm were proposed by
tlwJiA..Sn:.andu prepared by several FCC advisory committees.
Standards are elaborate, particularly concerning control signals,
.. .no especially pre ferablefto connecting arrangements. The
|ceitificitons, tests, and controls, which AT&T
tItflt&equr&I to meet, may ar exceed the. cost of connecting ar-
_rl^ei protection from .improper control signals given by
ti it s is better than the protection given by connecting ar-
r i~ 'iidl dohd not correct dial pulse timing.
i lmto be no reason for requiring interconnect manufacturers
.4i cult standards than Western Electric does this would
fifi e ion. Furthermore, specifications are needed only w.n
iilg or deliberate violation of the tariff. spcifications,
to the common-carrier system, without s.. fiantly
Sthe interconnector. If poor design causes iOffi lty fVortle
M4*ikectd equipment, he will corret thq probl.n. Wiin
i..... .... .., ... . .e./, .. ; ,\. :.. io
h `is Tn*ork means poor pertoria~ce, stidads' are*
de thefo4nrrlidrrno 'V.:
Most important harm is the first, voltages d4a1igrous to human
ibtee that high vltags, espc y t Pwr,
... Ilir&Wtdd tW local ioops. Such baihires have occurred, hut .:o
VWd letitzd. Danger 'us v gpt _yAsatura-
M~bilikietgf!^ 'ad by yarsctbi lUnteri5 in tI connaettjng *arrange-
Isoz& wry vblt'te 0p f& that no
t tif i't M TPHfl T i W1 tPS, .
It is not easy to define a dangerous voltage. Harmful effects are
determined by the amount of current passing through the body. T1
lowest body resistance is 1,000 ohms, and the accepted maximum harm-....
less current is 5mA, which is above the threshold of perception. Injury
can occur at 15mA, due to muscular contraction, and death from vea-
tricular fibrillation (disorganized heart pumping) can occur at 100mA.
A few hundred micro-Amperes flowing through heart tissj.ia caue
fibrillation, so that the current path through the body is important.
It follows that 5 volts is harmless, 15 volts can cause injury, and 100
volts can cause death. High skin resistance and involuntary muscle
contractions, which jerk a person away from the voltage source, often
prevent injury, even for much higher voltages. It is sometimes claimed
that the heart is most sensitive to power line frequencies, 50 to 60 Hertz,
but heart response is similar for DC and low frequency AC.
AT&T typically uses a 48VAC voice power supply, and superimposes
96VAC at 20Hz for ringing. Teletype lines use 200 VDC at 60mA. The
metallic conductor specifications limit AC to 70.7V peak to ground
and limit DC to 135V to ground. Current is limited by fuses and re-
sistors to one Ampere. Operating current may be 350mA. Telephone
company voltages meet the specifications because telepltpe local loops
are wire pairs, balanced to ground. 100V RMS AC and 270 VDC are
allowed. These voltages are potentially lethal, even though no fatali-
ties have been due to telephone company voltages. Hands on contact
with such voltages should be avoided.
House power is 117V RMS to ground. Current is fused at 15 to 30
Amperes, enough to cause respiratory paralysis and burns. This voltage
can be imposed on a local loop by an equipment failure. Power -and
voice wires may be pinched together, a wire may short to a terminal,
or circuit components may become shorted. These failures often have
high impedance and low current capacity.
Injury due to a dangerous voltage derived from customer provided
equipment can result only (1) if the customer provided equipment has
a failure causing a low impedance contact between the power line and
the telephone loop, (2) if the equipment continues to operate normally,
and (3) if a repairman accidentally touches the loop.-While this is un-
likely, more is needed than a prohibition on connecting power to the
telephone wires. Following Western Electric practice, interconnect
equipment manufacturers should be required to separate the telephone
lines from power lines and circuits and to meet AT&T's restrictions on
operating voltage and current given above. Competitive pressures
force manufacturers to cut corners, but poor design should not be
allowed to compromise safety.
The second harm is signals of excessive amplitude or ipproper spec-
trum. There are two specifications on signal power. Loop input power
must be less than OdBm to avoid local loop cable cross-talk. Central
office power must be less than -12dBm to avoid overloading long dis-
tance repeater amplifiers, which also causes cross-talk.
Local loop cross-talk is due to capacitive coupling between different
pairs in a cable. Equal voltages are induced in a balanced pair, and
these cancel at the loop termination. Cables are twisted and alternated
in position to reduce coupling, and the typical loss between pairs in a
cable is 100dB, with 99% better than 80dB. The contribution of each
disturbing pair is so small that cross-talk is usually observed as a
noise-like signal, due to many disturbing pair. For example, if coup-
for a1 itble of 1,000 pairs powered at OdBm, there is
libI M-1001+30 or -t70dBm. Only very high power sig-
ed me the 80 or 100dB loss and produce intelligible crosm-
Slwould require a substantial increase in average power to
mg bs to a noticeable level.*
SIi Bx specification at the central office is more serious. Since
ii 1 typically 3 to 5dB, this specification is usually the tightest.
.... N m mrfesd, repeater amplifiers become nonlinear, and inter-
S iodu-ts- ae genea Repeatert are designed to mini-
tdlation, with the requirement that intermod ulation noise
e ,cd thermal noise at -16dBm average channel power.
1%m# 0, allowing 3dB because onl one direction of a two way chan-
i s".at stimv e and allowing IdB loss from the test point to the
..El. gives a -12dBm requirement.) -16dBm power is then
p l wer p because less power gives a lower ratio of signal power
noiise and more power will increase intermodulation noise.
.ji:pllifier characteristics are important. Human voice peaks
*rld above rage power, and the fraction of repeater chas-
ter hasvpeakepower '
vares atly. The TD-3 microwave repeater has peak power
1*Pa $Ie" the -16dBm average per channel or -4.8dBm. .he
IilfliM, so that increased signal power does not increase traps-
i r ~or distortion. The N-3 cable carrier repeater qom-
9.0 input signal. This generates the same intermodulation noise
i f range of input power. For higher input power, gain is
Lid*duthe TD-3 and N-3 systems, increased signal power d'oes
. '4 aas intermodulation noise.. The IA coaxial repeater is a
Ai plifler designed for low intermodulation. The modula-
|a xof the best design varies less than .2dB for signal power
.f7. .. t 18dBm and -14 dBm per voice channel In the AL4 system,
Irq4I-Atzon noise power increases as many dB as the total signal
iwer iwywes at least for power less than 13dBm. At some higher
6tt i jaw the intermodulation may increase faster than input
i cable cross-talk and for intermodulation noise in standard
nte cross-talk noise power increases the same amount as
ig iaZ power increases. For example, if half the channels have
13ii &aJ Owed power (3dB more) while the rest have the allowel
O htl power is 1.5 times larger (+1.8dB) and so is the inter-
..O n and cross-talk noise. If one per cent of the channels have
': .e a.t lowed power (e- 10dB), total power is 1.09 times larger
+..). .one.... Iuser i-ncreases power, his signal-to-noise ratio in-
|seb will have increased noise and decreased signal-
|o p W% important to control power levels to prevent 4s,
....power must be controlled.
tee sinal-to-n se is SdB for long distance, and
"r srt ins.el system noise measurements show tt
S a a normal distribution Sin dB.Standard deviations
(time for londistance and 13dB (200:times) feonhot
Wri o eary one-thi ave signal-to-ie
*~oWone tanrdde kOnavorbeow the ave e
-no-se ratio. Tl 'iere is a large vacation in circuit quality. For
0.... circuits noise is inaudible, and twice the noise power would
.be. inaudibl& If the noise is several dB above the threshold of
perception, the minimum perceptable increase in. lij,
Wing of noise power (+ 3dB);, no smaller increase Qai ao ,
signal-to-noise ratio is poor, 12dB, only 90% of the w6
be correctly identified. If noise power is doubled, 82% of t'he 4 i i7.
still be correctly identified. A noise increase of less than 3dB wo.ldA
be noticed by telephone users, and Bell system surveys do not deti
average noise power any closer than plus or minus MB- r
The 12dBm specification applies at the central office. A 4dB typi-
cal loop attenuation can be allowed, so average input power should rot
exceed -8dBm. If power is controlled by loop length, as in standad
telephones, equipment on longer loops can use more power. Ikterit6-
nect manufacturers should be required to design equipment fIr
- 12dBm or less nominal power at the central office, and be required
to use sufficient control to insure that the average power at the central
office will not exceed 12dBm by more than 3dB. The second requir-
ment is easily met, even when many inputs have double the nominal
power. This specification is meant to apply to terminal equipment
sold over the counter, for connection to the switched network. For
data modems used on private lines, the standard interface power is
OdBm. Private line equipment does not have dialing capability, so us-
ing it on the switched network requires a telephone and coupling
The second harm also includes signals of improper spectrum. Bell
is concerned that signals having significant power at frequencies
above 4,000Hz will be used, causing harm. Coupling arrangements do
not protect against this harm. Human voice power is at least 20dB
below 500Hz power at these frequencies, so that equipment for voice
transmission is unlikely to cause harm. There are several specifications.
Power between 3,995 and 4,005Hz must be 18dB below in-band power,
to avoid interference with the 4,000Hz N3 carrier. Even if most of tblie
signal power were in this band, the loop attenuation at 4,000Hz wo6ld
insure that this specification was met. Power between 41KHz and
10KHz must be less than 16dBm, to avoid adding cross-talk noise to
FM program material. The supporting calculation, in the NAS: re-
port and Bell's submission to the NAS, shows that the disturbing
power in the entire audio spectrum, not only 4 to 10KHz, should be
less than 16dBm; this is the maximum specified power. As long is
the power in the 4 to 10KHz band does not exceed the maximum al-
lowed power, this specification is met.
There are more limitations on out-of-band power, based on the re-
quirements of the U-1 carrier and Picturephone systems. The U-1
never entered production and Picturephone is restricted to a few ex-
perimental areas. There are other Bell subscriber loop carrier systems
which use high frequencies, but interference with these systems by
voice band terminal equipment is unlikely. Most interference would be
from similar systems using the same frequencies. No casesof customer
equipment causing harm due to out-of-band power are known.,Thi re
is no need to control out-of-band power. The local loop can carry sig-
nals up to 1MHz, although with large attenuation. Bell is concerned
that users will exploit this spectrum, using systems similar to Bell's
subscriber loop carrier, while paying only for voice band serv ica.
The t-hiord- harm i's hinproper line balance. If the wire pair is not
Rlwwu crow-Wk owou IN* incraws. The coupling arrangement
4transformer corrects unnance. roun one conductor of a pair
g by 2OdB to a normaJ pair. If two wire pairs ea&
have a groun ire, coup _g increases as much as 6OdB. The effixt.
of increased coupling I's similar to the effect of increased power. A
'g-roundedd termination causes a noise level equal to that of a balanced
r, terminal with 2odBPoo thnes) more power. If there am hundreds
of Wire Pairs in a cable, and only one is gTounded, the noise increase
is ne "-ble. However, co 11 is due to capacitance between the
wirl'!S, and works both ways. Re pair ith a grounded termination will
reouve 2OdB more cross-talk noise from all other pairs. In addition,
if there is more than one grounded termination, co h between
such pairs increases 6OdB. Unbalanced customer provided equipment
will have very r sijgrI-to-noise ratio, even when not causing ie-
tectable harm. roorly designed, accidentally grounded, or failed equip-
ment that is unbalanced to ground will be repaired or replaced. Al-
though a balanced termination is desirable, a specification requiring a
balanced termination is not necessary, 0
The fourth and final harm, i i r control signa s. T'he or(fina
0 1!Impmpe Z
1-tele is required to provide an on-hook ff-hook signal, whic
indicate when the receiver is lifted, and dial pulse contacts or touch-
tone sigmals which control switching. Wrong numbers waste operating
time and annoy users. Connecting arrangements that don't use stand-,
ard telephones to do network signaling, use a relay to repeat the dial
pulses. Improper timing is not corrected, even thogh it causes wrong
numbers. The NAS report characterized the protection provided as
minimal, and observed that experienced companies build control signal
'eqwpment as good as Bell's.
A 2,600Rz single frequency is used to indicate a circuit is not in
,vs& If the power in the 2,450 to 2,750111z band exceeds the power in
the 800 to 2,45OHz band, the network may mistakenly respond to
216W and break the connection. Mistaken detection of this signal
m known as talk-off, and sometimes occurs with a human voice and
Improper network control signals of these types (on-hook, dial
pulse, or 2,600Hz) will interfere with normal use of customer pro-
iided equipment, and will be obvious to the operator, who can be
expected to take corrective action. For this reason, specifications on
network control signalling are not necessary.
Our conclusions are:
(1) A uniform specification on manufacturers would prevent harm,
ally harm due to illegal interconnection.
(2) Specifications are required only to reduce the 0 bili of
Iine crosses, to limit operating voltage and current, and to limit;
3) Signals having power aboye 4 cause no technical harm.
4) Uie unbalance and improper network control signals are much
harmful to the user than to the networks and do not require
ox=,GIoYr"xzxT BiB II+MLVFM INTzLrco3aLuNxcATioNs I
Ny Peter C. G61dmark, President, Goldmark Communications Corpo-
r4tion, and Director of -the "New Rural Society Project"
X am Peter Goldmark, President and Director of Research of Gold-
,Vw, k Communications Cor oration Stamford, Connecticut. My Dre-
Iiaas smiation has been wit the Cohn&& Broadcasting System,
,wlaare I served as President -of CBS IAboratories, I welcome
oppQrtunity to submit a statement to this distinguished com-
mittee ind express my views on telecommunications research and
19icept d:dring the last 60 odd years, all during recorded history,
pwple bn earth existed without telecommunications.
Because of radical changes we have created *in the world around
us as a result of the rapid development of science and technology, in-
oludixg. tplecommunications,. it will be increasingly difficult for gov-
to function effectively without frequent and sometimes
rodiml revision of systems and regulations, which were still adequate
&t, the start of. this Century, but not so toward the end.
Before Sputnik, space technolo" in the USA was almost non-
existent. Only the government coM plan and execute a program of
151tl& Inam proportions, entrusted to the newly created NASA. World-
-wide satellite communications was one outcome of this huge under-
which private industry never would and never could have
44t, t4p:. job for gatellite communications has onlv began. For in
gsW, one-quarter .. of this country's population has elthei no or inade-
quate access to the entertainment, cultural and educational offerm*gs
4*vailable to urban and suburban residents through broadcast TV and
Rive stage ]orf ormance&
Our major concerns are now the urban, rural and energy problems,
which are- interdependent. Makin 'g rural America attradive. to more
People as a place to live and work, should help to redistribute popula-
tion based on free choice. In the early 1930's, when electric power was
becoming a necessity for rural homes and farms, the Rural Eledrifica-
tion Administration was created. Today, telecommunication has be-
come anothef such common need.
Daring last ear)s study of the Communications Panel of the Nix-
tional Council on behalf of NASA "On practical applica-
tions Of ace systems," an finportant, case in t was recommended
for consi e I This had to Zlo with a i system to provide TV
and cultural and educational program to all rural areas, including
farms, in the U.S.
The Study Panel felt.that indeed the full range of informational,
odw*tional, and entertainment Programs could be delivered electroni-
callY bDour 50 million ruralxeside but that Cable TV could
onl' provide adequate capacity in rural America, at a
very high investment, since it is required to serve vast areas of low
To fulfill the need of making rural America attractive for more
people and to deliver to their homes, in addition to the entertainment
and public affairs offerings on national TV, vocational, continuing
and health education as well as regional and community informtion,
the Panel offered a concept of a synchronous communications satellite
system consisting of two identical satellites, both with fourtef n 'D
MHz TV transponders each with 100 watts output. Typiycaly Ithe
total of 28 transponders can be utilized as follows: On Satellite I,
three 400 watt high-power signals are produced by combining, four
output stages for each of three national TV channels correspoan i1
to the commercial networks. These three TV signals, each 40 MFaI
wide, are fed to the same antenna, covering the entire U.S. Two mire
channels on the same satellite serve, regions I and II, approximately
corresponding to Time Zones I and II, counting from the West. Satel-
lie II 'has two national broadcast channels, again each combining the
output from four 100 watt transmitters. One of these channels sould
be assigned to the Public Broadcast Service and the other to eahlb
networking or for educational and health care services. Of the remain-
ing 100 watt transmitters, two would serve Time Zone III and fotr
would broadcast to Time Zone IV (East Coast of the U.S.) This
makes it possible on the average for six states to share one transponder.
Thus, within a given region or time zone, each state can have one-sith
share of the broadcast day 'to transmit pertinent local or regional
information which can be received everywhere within the zone. Each
satellite would have two antennas, the smaller one taking the broad
cast feeds covering the entire nation; and the large antenna serving the
individual zones. .
Figures I and II illustrate the above and also the nunher of 4 M)k z
channels transmitted by the two satellites numbered F1 through F' 12.
Th6 twelfth 40 MHz channel, namely F,, is reserved to be com-bined
with F5 providing an 80 MHz wide special broadcast channel fir the
high-resolution color TV signal for theater projection. -
Regarding reception, it is estimated that a two-meter antnnaha
together with a 250 receiver and using a parametric amplifier at room
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or LNrN W. BuIe, DIm won, TELECOMMUNICATIONS,
3.T TECHNICAL DEPARTMENT, Nzw Yopx Crrr
1=me::' is Lynn W. Ellis. I reside at Westport, Connecticut. I am
[, ;"p| Telecommunications, ITT Technical Department, New York
i 1_ Cornell University, earning the degree of Bachelor of
r ...i..alJ Engineering in 1948. Following a number of years of part-
|ifl tanate study, while employed, I attained the degree of Master
fSeiii inm 1954 from Stevens Institute of Technology, and subse-
q.et7ly engaged in additional graduate study at the New York Uni-
~i~t7ehool of Business Administration.
P:ith 1*48 to 1955, I was employed in various engineering positions
upt ot engineer in I 's Federal Telecommumications Labora-
N tCJ~.e (now Defense Communication Division) in Nutley, New Jersey,
WA Usii p exption of a period for military service as a Lieutenant in
S.i Slo CoMrps. In 1955 I was transferred to ITT's International
8t4iM Electric Corporation for systems engineering management
f~lb eluding three years in Spamn, and three years in the Trans-
.iak... Division of ITT's affiliate, Standard Telephones and Cables
i in London, England, and a further year in Spain.
I'n 1901 was transferred to ITT's Standard Telephones and Cables
(Pty.) Ltd. in Sidney, Australia, initially as Chief Transmission
flginMer, and successively, Deputy Managr, Transmission Division;
&I agr To Dvsin
)i: inawe, Radio Division; and Assistant Managing Director with re-
so.ssbihtie for the manufacture of telecommunications equipment
and electronic components.
"Returning^ to ITT. Headquarters in 1966, 1 was assigned responsi-
bties as Technical Director, Transmission Systems for guiding lT',
search, Development and Engineering (ILR. D. & E.) in wire tranmis-
Sbzn systems, radio and microwave transmission systems; and coma
Smumcations" and power cables. In my current position as Director-
Telecoimnimcations I continue the above responsibilities and also am
asp nsihble for E. D. & E. in computers, teleprinters, data peripherals,
rMi jfPatrr aids to design, postal automation, and railway signalling.
'Ikrmg the past 9 years I have also for various intervals eldreqspon-
,Ablitss for remote control systems, engineering standardization, in-
4 tI..rial .desir., and telecommunications planm*i I am President.of
i.. lT subsidiary, Intelplan, Inc., which has conducted contract stud-
Ontelecommumoations planning for telephone administrations in
+l" f America. --.... *:.
In. 178 I was elected a Fellow of the Institute of Electrical and
|;soniR Engineers. Following service an the National Academy of
|ligineerin's Panels on Urban Communications (as an adviser) and
STicomnuations Research (as a member) I was designated in
10. ...73 and currently nerve as a member of that Acaemny's Committee OB
0hillieoinmunitibns which has subssqtuntly been organizstinaaly
mtsnfe.red: under the Asembly of Engineering of the National R e
i ...... .. .i ..... .t
ITT's Overall R.D.E. Program
Research, Development and Engineering (R. D. E.) in ITT is di-
vided into Research and Development (R. & D.), representing intern-
ally funded investigations, studies, and product and process develqp-
ment; customer contract engineering, representing studies and "devil-
opment (principally of military products) which are paid for directly
by a customer; customer design and application engineering repre-
senting costs applicable to specific hardware contracts which are
charged to cost of sales; and engineering assistance to marketing and
manufacturing which is paid for by those departments. The, iii
Headquarters Technical function is charged with central control and
supervision of R. & D. throughout the ITT System, and for monitor-
ing and aiding in the effective exercise of the other functions which]
are controlled and supervised on a decentralized basis.
ITT Exhibit 16, annexed to my testimony, represents the trends
and absolute values of R. D. & E. and R. & D. in ITT over a 10 year
period from 1966 to1975 (1966 to 1973 actual costs, 1974 and 1975
budgeted costs). During this period ITT acquired certain affiliates
which provide various consumer services, so a more meaningful com-
parison is shown in ITT Exhibit 17 representing the R.D. & E. and
R. & D. costs related to total manufacturing sales of ITT. These curves
reflect a changing product mix in ITT between the telecommunica-
tions and other manufactured products, and a conscious effort to shift
the technical sourcess towards more R. & D. by improving engineer-
ing effectiveness, as shown in ITT Exhibit 18. By 1974 the R. & D. per-
centage had reached half of total R. D. & E., insuring a steady flow of
new products to the market place.
ITT Exhibits 20 and 21 show, respectively, the division of R. &
E. and R. & D. between the operating groups and areas of ITT. Tele-
communications, R. & D. is concentrated in the Europe, N.A. Tele-
communications, Latin America and Far East & Pacific groups which
include also some other product lines. The dominant R. & D. expendi-
ture of ITT in Europe is a direct consequence of access to markets on
that continent, although as a percentage of sales R. & D. in North
American Telecommunications is actually slightly higher.
ITT's8 Telecommunications R. D. & E. Program-Worldwide
Under existing intercompany arrangements applicable to telecom-
munications, the R. D. & E. done in one area is available freely to
companies in other areas, providing the receiving company recom-
penses the originating company for out-of-pocket expenses involved
in the transfer. In the case of a product in manufacture this may be
as little as the cost of reproduction of manufacturing drawings if
they are comprehensive. In some cases where sketches were used by
the originating company rather than full drawings, or where local
adaptations are required by the receiving company, these charges have
been extensive, and have also involved the physical transfer of tech-
nical staff during the start up phase, as will be described in a specific
example later in this testimony. Because of the pace of competition,
it may not be possible to wait until the originating company has com-
pleted manufacturing darwings, and proved them in production,and
often transfer takes place in a fragmentary manner from laboraty
information. Virtually all of the telecommunications manufacturing
ha"at one time or mother used'these different methods
o1. btwning su& information frb2n: divisions in offier wuntrie&
'it R6aesrch and Advanced Development pro& I mip in telecom-
is carried out at four eentrol, laboratories "in:
arlow Essex, United Kingdom
Madrid, Spain; and
Stuiftprt, West Germany.
du elee unications is ca
Pro, uct development in, t rried out in many.
1wations in developed countries, including the U.S.,
V.K.1 Fftnce, Spain, West Germany, Switzerland, Austria,,
11W -Um, Netherlands De rk,, 8weden Brazi,17
'"A-Mes aid Australia. In a number, of other countries there is
Jocqj jitaaptive. and ap ications engineering. capability.
-&wn is given in ITT Exhibit 22 showing total engineering,
I Imd R. I). & E.- for 197.2 by major n ustry groups. Of th&
engineerinf people'about 709,'o represented engineer&
ciahtists and the'ba ance t6chnicians, draftsmen and miscalla--
li"40chnieal support personnel,
IffA&V of the telecommunication administrations in ihese developed,
.,ha-ve strong ideas on product development and features. In
6&V6 bountries such as the U.K. and France organiied consortia or
committees exist. to harmomze the designs-of natIonal: manufacturers'
Vn&r the supervision of the, telephone administration which is itseJf
wot entity. In othe "."ount 'less formal administration"
a, r, c ries
66&ri of duct pro development exist onlV test
(such as speci"g
aftem, arrangements and equipment dn' n-ensions), and in, some aevel-
opodpountries, *nd,.. "in most -of the less developed countries, the choice
Toeft tp the m ufactutre as to how he develops his product.
bope with tbe:ayersity, research and advanced development-.
tall conducted on a non-national basis either against interna-
re or against an internall e4l (by
qimrements, y generat
mv) r ionhl Functional Specification (IFS). Almost always
t1ils is Carried ro to an ITT standard product which is'
or, oiwrt m*:, those: countries with 1. em formal nquirements.,
h Ptoduct is 1 16W" volilme, one country's national sWidard MY
be adopW & ITT standard rather. than.undergo the expeinse of hav-
1hir, two versions.
In tho66 cp i with very formal siandardi where has suffi-
mrket access, a national [a d' will tm developed
A fi76in t HT standard pnod-
or a&ptkt mi whole or pa he
(e bf national stand&rd products: developed, se rately
r4WA electronic PA13X in the the 11 11
th' TF M eec
tBJeRh4ue switching system. in the 1U.M., mbehaniW filter fre-
dtslon multiple West Germany, and high power 11GFfz
wave radio links 'In. Switzerland. Am emniple of, a natioma
systen! adapted from an ITT standard system 1*#, the- T12*
ystem in the U.S., ch will be disc% :later.
rosults of this multii-faceted approach ha been the' velop-
ITrof Com he standird of PrWA In the,
pre wive ilies etsin
ReWs of telecommunic, the Mg:
%tions, ine din<;l tollow
0a f yoURO&
'accoxt amily of crossbar switching
.:rl The, 31etaoo&afvxailj: of eaeCOOW.C: MAC S3*AM
3. Crossbar PABX's.
4. Telephone subscribers'apparatus.
5. Key sets.
6. Submarine cable systems.
7. Microwave radio links.
8. Land coaxial cable systems.
9. PCM transmission systems.
10. Data modems and many others.
ITT's U.S. Telecommunication R.D. & E. Program
In countries where national standards are formal, the cost of RD.
& E. must be borne by the volume of national production. In less for-
mal standard countries, the total volume of ITT production of the
standard product is available to offset the R.D. & E. expenses. The
U.S., with its national standards set by AT&T, provides for ITT an
example of the basic problem of justifying R. & D. cases in the light
of the extremely small open market and the almost complete reluc-
tance of the integrated operating companies to buy outside their own
manufacturing facilities. Nevertheless, ITT has had a number of suc-
cessful such products developed in or for the U.S. market including
1. Ancillary systems for step-by-step central offices.-Such as Tel-
Touch adapters, CAMA, etc.
2. The A-1 crossbar central office and centrex switching system.-
Althouglh the piece parts and relays employed in this system were those
employed by the standard Pentaconta family, the internal system
architecture and features were developed specially for the U.S. mar-
3. The TE-400 A, G, and H family of fully solid-state electronic
PABX's.-This was a purely U.S. development based on the TE-400
PABX. As with nearly all innovative efforts in telephony the earliest
model, the TE-400 had a history of problems in the field, including
with the So. New England Telephone Co. (SNET). Within less than
a year those problems were resolved with the resulting excellent prod-
uct family of TE-400A, G and H. replacing the TE-400. So far as we
are aware SNET got no help from AT&T or BTL on the TE-400
problems, nor did ITT.
4. The TCS 2 Solid State PABX.-Increasing demand in the U.S.
for larger PABX's than the TE-400 A family (50 to 800 lines) has
lead ITT to develop the TCS 2 system. This is a direct outgrowth
of the TE-400 A products. It uses stored program control with two
ITT 1650 miniprocessors in a call sharing mode which provides hight
reliability and excellent overload characteristics. The switching net-
work is an end marked matrix of PNPN diodes. By carefully choos-
ing components, techniques and manufacturing procedures, many of
which are already used in ITT switching machines, it has been pos-
sible to organize the system to be cost effective from below 800 lines
to 6,000 lines or slightly more.
5. PCM Channel Banks-T-124 and T-324.-PCM goes back a long
way in ITT-in fact back to 1937 when Alex Reeves working in ITT's
laboratories in France first enunciated the fundamental principles.
Dr. McKay has acknowledged this work of Reeves in the 1937-1938
era as being the foundation upon which the superstructure of present
day technology has been erected, but as he also pointed out, the
Muhtin." technology did not permit commercial application of the
ijxiibtjeu. BTL quite properly deserves the credit or developing the
I n toovercmethe problem.
The. multipleing POCM channels make possible a transmission
sytm employing digital techniques to a maximum degree. The ad-
vanlas of information transmission in digital form are becoming
increasingly apparent as the technology of computers produces more
and more appropriate semiconductor devices at lower and lower
The first practical application of these principles on a large scale in
U.&S;Ia made by the Bell System with the introduction of T-Carrier
into their plnt in the latter part of 1962. These first systems by Bell
Mwed the Dl channel bank, which seems to have been of about 1958
vintage as far as components used are concerned, the system being
delayed apparently by repeater development troubles. The design of
the channel bank was very reliable and was used by Bell for almost
Inthe 1960-1965 period, ITT was considerably involved with Euro-
pean developments in PCM. These developments were following a
somewhat different path from the Bell developments, particularly in
reipdo of the channel bank.
The Bll D-1 channel bank was characterized by a particularly
complex diode arrangement which had one serious deficiency in that
its tracinq performance could not be precisely specified. Our European
work avoided the critical tracking problems that resulted from West-
ern's temperature stabilized diode by using a non-linear encoder which
approximated the diode curve by precisely defined linear segments,
which meant that tracking performance could be precisely and uni-
hinly defined. This technique was put into production in 1966 in a
23Sdpel PCM system for the U.K. Post Office.
By567 we had it studied the situation sufficiently to satisfy our-
selves that we could manufacture and sell equipment using these
principles in the U.S. at lower prices than the Bell equipment even
if manufactured in low volume. This equipment would not only be
lower in price but would have superior performance by eliminating
the tracking adjustments needed on the Bell D-I and by using less
power and being more compact. A team of seven European engineers
was brought to the U.S. and together with American engineers began
to develop a PCM channel bank to D-1 standards. This equipment,
called T 124, was put into manufacture in the second quarter of 1969
and met its objectives of being economical to produce and requiring
much less power and space. A primary reason for better performance
than the D-1 was the use of more modern and improved semicon-
ductor devices than had been available for use in the older Bell
Parenthetically, I would like to note that despite certain of the com-
mits in ITT Exhibit 23, the May 21, 1970, analysis of ITT's T 124,
the writers pretty clearly understood that the ITT equipment was
wbperibr to D-1. In the first place, it was far less expensive, and they
needed that T 124 met six of seven Bell standards. Its alleged failure
tomeet the so-called tracking tests is a defect in D-l, not T 124. Bell
never was able to issue a performance and compatibility specification
f.6r D-l, I am sure because it could never solve the problem of specify-
ing precise tracking given the characteristics of its diode 'arrasgemm_.
for the D-1 encoder. The writers of the report must.li4m .oreon6ud
that ITT's non-linear encoder was the preferable -:solution-akwAuwa
BTL had adopted the same solution, for its D-2/D-3 development.
In fact, of course, subsequent experience at SNET demonstrated that
T-124 will work compatibly with D-l, including for data trasmirs-
sion. The real reason for not going to T-124 is revealed, at the en4 of
the report where the writers note that D-3 is expected by SeptemJer
1972, or in 21/2 years. What the writers of the report did not take into
account was the possibility, which became a reality, that ITT would
as quickly develop a D-3 equivalent which would also be better. and
cheaper than Western's. -'
Meanwhile, as I have stated, Bell had been working on a new dhaa-
nel bank called the D-2. This channel bank also used a non-linear ean-
coder similar to the T-124. In addition, the evident principle was te
cost reduce the D-1 by time-sharing the encoder and decoder across 96
channels instead of 24 and assembling and disassembling the resultant
time multiplexed bit stream into four streams for the unchanged 24
channel line system. This was a complicated idea which no doub4
looked good at first. When we heard about it, we decided that sorving
the problems of going to and from the 96 channel streams would cost
more than could be saved by more efficient use of the encoder at the
1970 costs of semiconductors. Thus, ITT proceeded with its develop.
ment of the T 324, which simply applied the ideas of the .T 124 but
matched the characteristics of the D-2 and was more cost. effective.
Apparently, the Bell System decided that D-2 was not the answer
because it very soon developed the D-3 channel bank which does es-
sentially the same thing as ITT's T 324. The ITT equipment is adapt-
able to interworking with either the D-2 or the D-3 and it is atso
lower priced than either. For the development of the T 324 one. of the
European engineers who had participated in the T 124 development
and had subsequently returned to Europe was brought back to bring
with him the latest European ideas, but American engineers formed
the balance of the T 324 development team.
Allocation of Funds to U.S. Telecommunications R. & D.
In determining the allocation of funds to U.S, telecommunications
R. & D., there is often a temptation to base plans on the large market
potential in the AT&T operating companies rather than on the much
smaller independent market to which ITT has traditionallyenjoyed
access. Discouraging such planning has been the experience thatod-
veloping a superior product has not led to enhanced access to the
AT&T market. As indicated in the testimony by Mr. Woodruff, the
evaluation period by AT&T has traditionally been long and at the same
time Bell Labs and Western Electric are usually pushing ahead with
the development of a. competitive product which is often ready for sale
by the time the evaluation is completed, at which time AT&T decides
to buy "in-house."
Thus our observation of AT&T's actions, which contradicts Dr.
McKay's testimony, is that AT&T relies almost entirely for innova-
tion on Bell Laboratories and is not really interested in the innovative
efforts of outsiders. A few of the operating companies, such as SNET,
are willing to look for products outside Bell Labs/Western Electric,
but they do this on their own without help or encouragement from
#4k. of Bel Technical Information to Independent Manufacturers
q cie f the most serious problems an outside manufacturer faces is
th sheei lack of timely information concerning AT&T's plans for the
pe..pone network. AT&T treats all information as proprietary and
do. it out only as it sees fit and often withholds it. There is a proce-
d i.. ~der the 1956 Consent Decree and through the USITA manu-
PtP..F siib-committee for obtaining information, but both are in-
ent manufacturers are almost 2-3 years late when intended for use
with new Western products because final interface details are not re-
lease by Western until their product is in production. This attitude
ens ..to arise from absolutely literal interpretation of information re-
qired tp be released (sold) under the 1956 Consent Decree. What is
required to be sold is information concerning equipment manufactured
4y Western, and this is apparently interpreted as not existing until
.methiag is manufactured. Furthermore, one purchases what exists
qt the time of the purchase-subsequent changes are not volunteered
but may be purchased if you happen to find out about them.
STh USITA manufacturers' subcommittee is the formal channel to
obtain compatibility information so that a supplier to the independent
telephone companies can make equipment that will interwork with
Bell equipment. This channel is also very slow and awkward. For ex-
maple, at the end of 1971 ITT was beginning the development of a
dat& modem in Europe which was to be somewhat similar to Bell's
C 98A modem. Our modem was to depend heavily on custom designed
Jarge scale integrated (LSI) circuits. When the 208A was announced
by Bell in early 1972 we thought that we could include the necessary
variations in our LSI circuits to enable them to operate to either U.S.
QK:European standards. We asked for the necessary information to
p ke & modem which would interwork with the Bell device. We knew
bDW to make it, but we needed the Bell parameters.
.This question was put on the agenda and discussed at USITA meet-
0No. 24 on April 10-11,1973. The answer from Bell was:
Stlhe customer Interface for the No. 208A has been defied In a technical In-
formation bulletin. Detailed product deign information which defines the line
Interface is being furnished to manufacturers under patent license and technical
Information agreements to implement non-Bell sources of equivalent units.
ITT certainly did not wish to purchase manufacturing information
for the Bell modem. All we needed to know was what parameters we
had to match. So we went back to the next meeting on October -4,
1973 and asked again. This time Bell changed its mind and without
any explanation furnished the information when the minutes were
distributed on January 11, 1974. Thus, it took almost two years to
obtain the design parameters for this one item of data equipment. By
this time ITT's LSI modem was frozen in Europe without provision
for the U.S. parameters and we decided it was not economic to mar-
ket a U.S. product. This illustrates how the untimely release of in-
formation by Bell eliminated competition of others with Western
The interworking of Bell and non-Bell products is obviously a vital
consideration to the independent manufacturer. Another example of
the difficulties created for the independent by restrictive or non-release
of information is the PCM system described previously. As I stated
Bell has never issued a compatibility specification on the D-1. As a
result ITT had much trouble trying to find the parameters we should
match to make our T 124 PCM channel bank interwork with the Bell
D-1 channel bank. We eventually achieved compatibility by purchas-
ing one D-1 bank and making many tests. And for about a year West-
ern refused to sell us a single bank for this purpose, purporting to base
their refusal on their policy of selling equipment only to the Bell
operating companies. Western was persuaded to sell this item to ITT
only after high-level representation by ITT's Legal Staff to Western
If the independent manufacturer is to receive fair treatment we
should have the following while retaining all present arrangements:
1. Full and timely advice of plans long before projects enter the
manufacturing phase, including regular (four times a year) trend of
development briefings for industry.
This information should be volunteered as well as being in response
to questions. Present USITA machinery is generally limited to dis-
cussion of agenda and specific questions prepared by independent
manufacturers. The proposed briefings should be prepared by Bell as
an honest reflection of activities. Attendance at these briefings should
not be restricted to two people per company but should be open to all.
2. Quarterly publication by BTL of descriptions and status of all
current R. and D. work.
3. Release to industry of specifications and objectives used by West-
ern for product development at the time product development is
initiated. This is to be updated quarterly as development proceeds and
should include operating company requirements.
4. Automatic updating of manufacturing information purchased by
5. Availability for purchase (or loan) of Western Electric equip-
ment when the independent manufacturer considers this is desirable
and appropriate for tests of compatibility and interworking.
As pointed out earlier in my testimony, ITT divisions are quite used
to working from less than full manufacturing information in transfers
between ITT units and would have no undue difficulty in adopting such
a method of interworking with Bell Labs.
RESEARCH, DEVELOPMENT& ENGINEERING
.... . ....
65 66 67 68 69 70 -41 72 73 74 75
wcj < 6
't" 4 ............... I
a- cz) 2 ..... .............. .............
.:. a I ( ....
65 66 67 68,,. 69 70 71 72 73 74 75*
1966 11967 1968 1969 1970 1971 11972 19T3 1975
SALES $XMILLIONS _?,121 2, 761 4,,0 7 5,475 6,364 7.346 8.557 10,183 11 7 llkll
RUE U MILLIONS ?M 210' 210 236 257 2038 328 400 478 534
]%Of SALFS 10.4 7.6 5.2 U .0 3.9 3.8 3.9 4.2 6
$X MILLIONS 60 62 63 77 96 120 144 188 237 270
1% OF SALES 1 2.8 Z 2 1.5 1.41 1.5 1 1.6 1 1.7 1.8 2.1 Z 3
Er r E Is- 07
RESEAR01, DEVELOPMENT &ENGINEERING
065 66 67 68-6 9 70 71 7j2- 73 74 75
tj --RD.&E- I
L" LA- 2 RUL
0. 61 69 70 71 72 73 74 75
1966 11%7 1%9 : 1969 1970 1971 1972 1 1974. 11975
368. 6-13-1-6- 7 W9 4.542
JMFG.SALES $X MILLIONS 1.633 1,971 1 3.050 4-195 49 37 5 192
RUE $X MILLIONS 220 210 210 236 257 288 328 40:0 478 534
%OF SALES 13.5 11.2 6.9 5.6 5.2 5.4 5.2 5.1 5..0 5.2
R&P $X MILLIONS 60 62 63 77 96 120 144 IN 237 270
S OF SALES. 3.7 3.3 2.1 La L9 2.2 Z3 Z4 Z5 2.7
T-rr Ex. ;
RESEARCH. DEVELOPMENT & ENGINEERING
RESEARCH & DEVELOPMENT CUSTOMER DESIGN & APPLICATION ENGI
i i -- i ] -- i i -- i i I I i i i i --
65 66 67 68 69 70 71 72 73 74 75 65 66 67 68 69 70 71 72 73 74 75
CUSTOMER CONTRACT ENGINEERING g 100ENGINEERING ASS I STANCE
.------ ----- ------ ------ ----- ------- ----- ------ ------^---jgQ ------ ----- ----------------------------------------------------------------
:irii 11L7J 60"
---- aI 20-
I ------- --- 0 I-- ------i
65 66 67 63 69 70 71 72 73 74 75 65 66 67 68 69 70 71 72 73 74 75
Total Percent of Total Percent of change
(thousand) sales (thousands) sales 1975-74-
RESEARCH, DEVELOPMENT, AND ENGINEERING
Defense/space-----------.-----.------------ $72,815 15.8 $76,620 16.5 5.2
Technical and industrial products---.........-- 9,339 2.6 10,120 2.6 8.4
Electromechanical components------.....------------- 3,574 3.1 4,358 3.4 21.9
Illumination and electrical products....--------------- 2,065 1.6 2,214 1.5 7.2
Grinnell ---------------------------------- 2,722 .6 2,938 .7 7.9-
Semiconductors W.W-------------------------- 7,172 3.5 7,684 3.8 7.1
Europe...................... ---------------------------------314,808 5.6 358,944 6.0 14.0
N. A. Telecommunications-.-------------------- 14,376 5.9 15,682 6.3 9.1
Latin America-------------............---------------- 11,946 5.6 15,048 5.9 26.0
Far East and Pacific----...--..---........----.---. --- 6,680 4.9 7,352 4.5 10.1
Telephone operating group..--....-.........---........ 0 0 0 0 0
ICO .... --------------------------------------- 0 0 0 0 0
World directories-...............-............... 0 0 0 0 0
Natural resources------------------ --------- 9,354 1.4 10,068 1.2 7.6
Food products, services.------------ --------- 3,086 .2 2,945 .2 (4.6)
Consumer services---- -------------------------0 0 0 0 0
Financial services--.-------...------------ --------- 0 0 0 0 0
N. A. Automotive Products---------------------- 2,185 .7 2,636 .8 20.6
Headquarters and miscellaneous.. -----------------17,660 0 17,425 0 (1.3)-
Total ITT system--.....-------------------- 477,782 4.2 534,034 4.6 11.8
RESEARCH AND DEVELOPMENT
Defense/space-.---------------------------- 8. 295 1.8 9,162 2.0 10.5
Technical and industrial products-------------- -- 6,373 1.8 7,140 1.8 12.0
Electromechanical components------------------- 2,361 2.1 3,033 2.4 28.5
Illumination and electrical products.------.------- 1,480 1.2 1,605 1.1 8.4
Grinnell- --------------------------------- 1,280 .3 1,378 .3 7.7
Semiconductors W.W....------------------------- 6,069 3.0 7,064 3.4 16.4
Europe- --....---------------------------- 169,574 3.0 196,088 3.3 15.6
N.A. Telecommunications-------------------- -- 7,914 3.2 9,179 3.7 16.0
Latin America ----------------------------- 2,396 1.1 3,152 1.2 31.6.
Far East and Pacific--------------------------- 3,420 2.5 3,490 2.2 2.0
Telephone operating group.----------------------- 0 0 0 0 0
ICO............... .... ...... ...... 0 0 0 0 0
World directories------------------------------.............................. 0 0 0 0 0
Natural resources--------------------------- 7,175 1.1 7,799 1.0 8.7'
__ ---i^ "=
mvDm lm mw
Total Pormd of Total Pumd of Cho
QJmwnd) sales ("mmands) sales 19704'
Fowl pmam* =rdm -------------------------- 2,164 .2 2,2DD .2 1.7
Cwwftr qwlm ------------------------------ 0 0 a 0 0
ftwwwWoonim ------------------------------- 0 0 0 0 0
N. A. AekwAfive Pm&xb ----------------------- 1,436 5 1.568 .5 9.2
Nondquartm and min0anewes ------------------ 17,066 0 16.840 0 (1.3)
Total ITT "stm ------------------------- 237,OD3 2.1 269,699 2.3 13.8
1972 R.D. & QSALES
Sales R.D. & E. R.D. & E. En"gineer.i:f
(billions) millions) of sales
dions equipment- ---------------------- $1.8 $158 8 11,867
------------------------------- 1.6 49 3.1 1,496
;vZwzrz;"Ccniiww --------- ------------------- 1.0 19 1.9 1,075
mahusl "Dowces ----------------------------------- .4 5 1.3 247
00an and space ---------------------------------- .5 .95 19.0 3,718
Food pemming vW semice -------------------------- 1.0 2 .2 71
Subbtal manghcturing ------------------------ C 3 328 5.3 18,474
comsow nrvkms ---------------------------------- .7 ------------------------------------------
-lecolowfilinications Owat!0" ----------------------- .2 ---------------------------- 293
so firamcial SOVKU ----------------------- .4 ------------------------------------------
vNesubu Ope"Num -------------------------------- 1.0 ---------------------------- 331
Total ---------------------------------------- &6 328 3.8 19,098
oF Tim B. Wzn7Am, ITT, T=xcomxuwicATtoz;
n 'me is Ted B. Westfall and I now reside in Delray Beach,
am a graduate of the University of Oklahoma with a Bachelor of
86"Umm, Business Admini ration (1940) and of the George Wash-
versity lAw School (1949). 1 am a Certified Public Ac-
00untant (Texas) and a member of the bar (District of Columbia.)
I qxmtfour years as a public accountant with Price, Waterhouse &
Covq-Any in Houston, Texas, and after service in the Navy, joined the
GumiW Accounting Office in Washington, D.C. as a senior accountant
in ths Corporations Audit Divisio'n. I was later an Assistant Director
i of the Corporation Audits Division and at the time of my resignation
was Director of all auditing activities of the GAO.
Joixk6d, Grace Line Inc., as an Assistant Vice President in 1952 and
was succes--sively Treasurer, Vice President, and finally Executive Vice
President and Director.
In October, 1960, 1 became Vice President of ITT and later was
elected a Dir ector. Effective January 1, 1965, 1 was named Executive
rice Prmident and served both as an Executive Vice President and
Director until my resignation from both positions on December 31,
During my fourteen years with ITT, I have, among other activities,
been responsible during substantial periods of time for ITT's:
1. Telephone operations in Puerto Rico and the rn-gin Islands
and South America;
1 2. Overseas telephone cable satellite operations;
3. Domestic and Latin American telecommunications manu-
facturino activities; smd
4. Domestic and overseas international telegraph, telex, leased
wire and related record operations.
Since my resignation as Executive Vice President and Director 11
am employed y M astelecommunications advisor.
I I I -Froia tht time I i oied in- 1960, 1 have studied the structure
sad Practices of the telephone industry in the United States and the
PFOWeTs of an independent manufacturer in: develorping, manufactur-
mg oad selling a quality product in this environment. It is my position
#k'k perhaps the greatest opportpnity for the Bell System and the
JhMpendopts to bold down or mini ize the continuougly increasmg
telephone service'to theconsuming public,-6ver'the medium
andlonig-term future is to open ulD the Bell equipment markerOto com-
rwWon. Whether or-not the Bell System's vertical integratioh Violates
the antitrust laws, as alleged by the Department of Justice. the. Fed-
-Communications Commission still has the. responsibility to as-
so" that the Bell Svstem oDemting bompanios quality
-at the lowest price they canobtain and to reflect those sav-
bw in their rates to the-. consumers, This cannot beamomplished so
long as the Bell System, through its organizational structure, purchas-
ing policies and procedures and custom and practice assures the pur-
chase by the operating companies of practically all of their telecom-
munications equipment requirements from Western Electric..,
ITT is in a position to supply and has offered to sell apparatus,
transmission and switching equipment to the Bell SystemwoBa com-
petitive basis and I am sure that othershave or will do the same if given
a reasonable chance. Moreover, we, and I am sure many others, are will-
ing and anxious to make whatever investments are necessary to' tiilyl
this market once the opportunity exists. However, to date this1]
portunity remains largely obscure or non-existent.
AT&T usually responds to these statements by asserting that ieithef
AT&T nor Western determines what the Bell operating telephonb de0-
panies purchase in the way of equipment, that the operating compatiies
are free to buy where they please and further that their price surveys
show that Western's prices in general are far lower than the pic
available from general trade manufacturers, (GTM). Those surVeyd
have customarily compared prices to the huge Bell market with th"i.
quoted in markets only a fraction of the size of Bell.
The vertical integration of the Bell System with nearly 85% of-the
telephones in the U.S. means that one manufacturer-Western" Elc-
tric- has roughly 51/ times the opportunity to achieve scale economieSl
as all of the.other U.S. manufacturers taken together. Inri reality, bi
course, no single manufacturer can be wholly successful in selling the
balance, and instead the remaining 15-20% is divided between the
General Telephone (GTE) market and the remainder fought over bl
five major manufacturers-Automatic Electric (Automatic), Nodfl
Electric (North), Stromberg-Carlson (S-C), ITT, and No.rthethi
Electric (Northern)-and a host of smaller concerns selling piticullar
lines of transmission and apparatus products, such as Vicom, Farinen,
Collins, etc. By reason of its affiliation with GTE combined with some
sales to non-affiliated independents Automatic now has betweeft 45%
and 50% of the independent market, and is therefore at a scale disad-
vantage of more than 10 to 1. The other manufacturers, including ITT,
are even more seriously disadvantaged in relation to Western.
In addition, the single largest manufacturer in the independent
market, Automatic, has been faced with the problem of choosing be-
tween protecting its profit margins on its captive business and engaging
in active price competition. In the post-World War II period the ihV
dependent market underwent a significant change, no doubt in part .ue
to the vertical structure maintained by Bell. Although Automatic had
always been associated with the Theodore Gary group of operating
telephone companies, the degree of market foreclosure represented
this vertical integration had been relatively modest. Automatic had
traditionally been the largest manufacturer of telephone equipment iii
the independent industry, but the bulk of its sales had been to mnm'
affiliated companies. ... .
Beginning in 1955 with the acquisition of the Gary group of Gen-
eral Telephone (which subsequently became General Telephoine nnd
Electronics, or GTE, following its acquisition of Sylvania.) this: situ-
tion changed. The General System then represented more than 3&
of the independent industry, in terms of telephones, and thus more
than half of Automatic's sales were to affiliated companies. There-
after, GTE embarked on an extremely aggressive acquisition program
Ins companies. GTE used its control of those
eammnuo. in the words of the District Court in Hawaii, to
se of telecommunications equpment for
MemVely O]PO companies into its own supplier.
AY IM the ew represented over 85% of atie's
",V 3 Autom,
alm *ad the General S procured 799o' of its reqwrements from
A 44,n T ywA" -= tlat the primary reason the percmtage was
as low as that was Automatic's tardiness in develoRm'g common con-
tM1,swi*t&ing. Now that its electronic Bwi chinff is m production, no
U10114M Automatic's share of the General System business is higher.
Itn'sot my purpose to reargue the antitrust case which ITT brought
GTE m Hawaii although the findin of the District Court
Mike, of Vertical Integration on purch patterns and prac-
tkee ars certainly instructive. ne point I wisb to make is that as the
am6ral System grew in size and became an increasingly iWortant
C Qsk_ M facto, nearly the only customer-of Automatic, that
.04av gradually lost its incentive to compete for business outside
liftz System Because of regulatory restraints Automatic could
vA siR to non-affidiates at prices lower ihan it charged the General
A-Antmatic- chose to maintain margins on its in-house sales at the
cost of 1xiing non-affiliated business. One example will suffice. ITT his
Jdaff isbibuted its moparatusto the small independents through Gra
bar, the largest independent distributor of teJephone equi pment m we
U.S. FICT WM to G*ybor at a* substantial discount from a list price
,whirA until MiBntly w as at or just below Automatic's pparatus prim,
The hUW independent holding companies such as the United Sy%-
tem, Mi&Continent and Centril Telephone have established centril
"rdw6 mi xib ti ganizations to which we could sell
g and dist unsorrul
it distaibutor prices without pfing our normal distribution chan-
ad to &&multitude of small independents.
For many years Central had been a steady customer of Automatic,
good to resist. However
bdt 1T1% +oTer of 'a distributor price was too I
(ka-rd first a proached Automatic to determine if it would match
s -- ThU answer was no for the explicit reason that meetingy
Mr's price *-wouldme!m losing margin on its General System business
where -ITTS l6wer Prices were immaterial.
A, um-nb- aerr of Shk& cominissions, including New, York, California,
#M, Worth- Carofimuh hav6 recognized that prices in the independent
iiwket am M effect set by Automatic and are not indicative of what
wadd be if thewh6le independent market were open. This
cimhardly I hope o assess Weitern's perform-anbe on the
comparisons oi pruoms in such a market. In MY udgment, this
C6mmissio-n will never have a basis for dete ninfzXe ieasonaMe-
am of WeiAern"s Pnibes' 'until a ffiiigmificant '*rtion of System busi-
MI I ; I
jam ava:ilable to Genvril Trade Manuftetunmrs.
U bis UsUmony, Mr. Woodruff dievelops. the I d of. 117ra
quotes for T 3M Mimpment and Metaconts L
]Wncuwg MjWpmentl I Will not repeat his teo4miony for I have a dif-
Ott pii- to make. First withresped to T 3247 as Mr. Woodruff
Out., had an eXistine volume discount mhedule in IM
W" Prims an included in Mr. WoM 1973 pnidifi g study. At the-
OVM v. 4MA 361 Jr. Supo. 1153, "97 (A Raw. 1972), apped VmOW (Wh Or.)
highest volumes ITT's prices were significantly below Western's prices,
Those discount prices were available to all Bell System customers, but
in 1973 only Southern New England Telephone Company (SNET)
purchased T 324 in any quantity, and its needs were insufficient to
obtain the maximum discounts available. As a result, SNET's de-
cision to standardize on T 324 was based on quality and superior fea-
tures, since ITT's price at the lower volumes was approximately'the
same as Western's.
This was the situation when in late 1973 Pacific Telephone, for the
first time that I am personally aware of, opened up its procurement
of a major item of equipment to competitive quotations. And the ex-
pected happened. With the prospect o a significant annual order, ITT
shaved its prices, which were already lower than Western's, so that at
the upper volume levels, 3000-5000 terminals, ITT quoted nearly
25% below Western's transfer prices.
A similar circumstance arose in connection with the Price Survey
Group's recent request for prices on 460,000 lines of electronic switch-
ing equipment. ITT decided to treat this request as if the Bell System
had put out this volume of business for outside procurement. Based
on Dr. McKay's testimony and discussions with representatives of thQ
Bell System Purchased Products Division (BSPPD), we knew .that
it would be necessary to quote a price lower than Western's transfer
prices, since ITT's Metaconta L is functionally equivalent to Bell's
Obviously anyone can quote a price. The problem, of course, is
whether ITT could deliver equipment at that price and make a profit.
The effort to determine that answer engaged the personal attention of
Mr. Geneen, ITT's Chief Executive, as well as ITT's Office of the
President and resulted in the expenditure of hundreds of man-hours by
engineering and technical and financial personnel in New York and
Europe. And the answer was, yes, ITT could do it; and we quoted that
lower price to the Price SurveyGroup;
The point is that it is only the prospect of real business that generates
real prices. This quotation was no exception, for I am confident that
ITT will not spend those thousands of dollars again if this should
turn out to be the customary academic exercise for the Price Survey
Group. To repeat, only if a substantial portion of Bell System busi-
ness is truly made available to the competition of manufacturers other
than Western will the Commission have a valid benchmark with which
to judge the reasonableness of Western's transfer prices to the Bell
System operating companies. As against the reality of actual sales, the
activities and results of AT&T's Price Survey Group do not provide
this Commission with a reliable basis for making that important
Moreover, the testimony and exhibits in this hearing demonstrate
that notwithstanding Western's overwhelming volume advantages,
combined with all the real and substantial benefits of vertical integra-
tion, there is a significant body of products on which the actual prices
charged or quoted by ITT and other independent manufacturers are
now equal to or lower than Western's. These include PCM carrier
equipment, certain Key Systems and Key System apparatus, cross-bar
and electronic PABX, accessory equipment for step-by-step switching
systems, and selected station equipment. In my judgment, these oppor-
tunities would be expanded many fold and the industry's costs would
Aw %o down if the Bell System market were open to competitive
Jtia a matter of record that our offerings have not led the Bell Sys-
tin'to rchase. *in any substantial Quantity from outside manufac-
10MM (Tt ahould be made clear that ITT has quoted competitive Priem
Jar difter6nt typm of equipment at var i gr volume levels. The dollar
.1 to support a conypietitive price for electronic switch-
Ulgr for intance is far greater than that required for carrier equip-
nmt such as the T 824.) The Be-Ull System clearly has not sought out
the better and/or cheaper product available from GTMs, nor pur-
ohawd such equiptnent in th instances where their availability has
beepme manifest. Why is this so I I believe that there are several struc-
tural aspects of the Bell System that explain this phenomenon.
First and foremost, of course, is simply the integrated structure of
ihe Bell System. And by that I do not mean to refer simply to the
of a manufacturer with its prinetpal customer. Rather I
umm the whole, coordinated one Sy8tem approach described most
Vhical.y in the testimony of Dr. Kenneth McKa with AT&T
3&1PV-11%.OVtAng previkhij the.operating companies with tle highest level
ad an %wistance and coordinating the efforts of Bell
T=MhoMneUbVo'rL"a6to'Lrnie9` (BTL) and Western to do the same, working
with BTL on system engineering and design as well as performance
Ve-w4fications for the products being developed by BTL for Western,
fidorming, advising, recon -1 g to the Operating Companies the
RX)cc equipment and applications manufactured by Western, and
on the other side deciding which products am to be produced by West-
ern and when.
In operating such a Sygkm obviously looks inward. The peop e in
lUt System naturally see their personal future dependent on m m""
ihe Slistem work. A problem with an item of Western equipment is
rawed,9& just that: & problem to be solved with the resources of the
qokm ;:Ud the chief engineer who is experiencing the problem.
On the other hand, a problein or inadequacy in an outsidees item of
oquipment is viewed as a mason for not buying. Only the strongest and
umst, independent engineer will. take a chance on an item of equi pment
without an AT&T recommendation, since (a) he can expect littl% if
any help from the System if he should encounter a problem and (b)
in Ki unhappy event the problem becomes an adverse reflection on
Vndiir these circumstances AT&T management must know that if it
cloes nothing"the overwhelming likelihood is that the operating com.
will purchase from Western. Thus, the standard response that
H operating companies are free to purchase from ny source
without interference by AT&T is sinply a more Sophisticated way of
Ad*vmig-fhe desired result of maximum purchases from the System
)LT&T's top management f ails to take the steps necessary
to Oommunicate the availabffity and recommend the purcham of less
,qra.ve or superior GTM or to arran
,a; 0 go for volume pgr-
wmmmg when such is essential to -obtain lower prices for compafible-
"wpaen4 that m gement has not dimharged -its respomsibility.
Mem I refiar specificaMy to paragraph -5 (a) Of the liceise contrad
which requii" AT&T to famish "advice and awistanceP in all m&Uw
"pertaining to the efficient, economical and successful conduct" 0fti
business of the operating companies, and paragraph 4, which re.tilA
AT&T to "make and maintain continuously adequate arrangee.its "
whereby the operating companies may purchase telephone equipin. t
"at prices which shall be reasonable." Failure to make arrangeneik.
to enable or require the operating companies to take advantage of
volume discounts available from ITT and other GTMs is a breah,
of the duty assumed contractually by AT&T for which the operating
companies pay 1% of their revenues. "
Moreover, AT&T's staff is not above taking affirmative steps to in-
sure that a System company does not stray off the reservation in
important procurements. In 1971 New York Telephone came very
close to purchasing ITT's T 124 for the twin towers of the WorM
Trade Center in New York City. There were several reasons for this.
ITT's equipment had a substantial space advantage over .D-l; West-
ern's D-3 was not then scheduled to be commencially available until
1973, and New York Telephone required the equipment in mid-197f;
and as originally conceived D-3 was not intended to be end-to-en-d^
compatible with D-l, an'd New York Telephone wanted compatibility.
Notwithstanding, ITT did not receive this order. Instead AT&T'
Engineering set out to find a "solution" to this problem. The solutitni
was for BTL to develop a plug in accessory to make D-3 compatible
with D-1 and for BTL and Western to build the first units, essentially.
laboratory models, and place them in the WTC without a field trial.
This enabled Western to promise in service dates by September 1972,
and New York Telephone agreed to that schedule.
Another structural problem is that in the past and now under th6
new BSPPD, thl people in AT&T-BTL responsible for the evaluating
of GTM equipment are the same people whose past responsibilities
have included decisions as to the design and development of specific"
items of Western equipment. It is unreasonable to expect expeditious
evaluations or recommendations of GTM equipment by the samex&
people and organizations responsible for the design and development;
of the comparable Western equipment.
ITT's experience in attempting to sell T124 and T324 illustrates'
both of the above problems. The testimony of Mr. Woodruff and ITT
Exhibits 13 and 23 demonstrate that since 1969 there has never been
a point in time when ITT's PCM transmission equipment was not.
cheaper, or better, or both, than the comparable Western equipment.
Those facts were known to the Bell System as early as May 1970 with
respect to T 124, and by April 1973 in the case of T 324. Yet theti
does not appear to have been any effort by the AT&T Vice President
Transmission to communicate those facts to the Operating Companies
and certainly no recommendations to purchase ITT's T 124 or T 3824
in preference to Western's D-1 or D-3. In the past year the individual
operating companies (SNET and PT&T) were left to their own e
vices in evaluating ITT's T 324. SNET's experience does not seem to.
have been communicated to the other companies. It is a fair inference
that these omissions may be attributable, at least in part, to the :em-
barrassment ITT's superior performance has caused to those in the
AT&T Transmission group responsible for the development rof,
AT&T's line of PCM equipment ...
The operations and policies of BTL as a research and development,
organization also act to the disadvantage of outside manufacturers.
t to engqge:in Ldamental research,
m"nug, am ee ing) and direct "develop-
MIAMM vpm Dy -he License
)y Opth*e are A' sin t Contract. However,
Y t research has been delegated b
0 BW-U and rwponsibility for system engineering is sharZ
_TL and AT&T, althouih Western aft 'patestosomsex-
as Part of the spideffic def'Ri gn nd dev
0 pment work. Funda-
fesearch and system en me is paid for'primarily by the
ww" thmugh license eputrad fee% but th specific
4;uveiopment work on discrete product rferred to as ap-
SIOMMe and design is perf=41 by BTL and funded by
t:J=jwtmypurposie to question them arrangaments from an operat-
sixm they may well be an 404 and desirable mode
a Y 14.egrated.organizatim The problem is that this divi-
*M* of, 1"spol nsibil among several corporate entities of that which
1A. W i pwmwd perf under ffie License Contract obwures
VhsirAow astum AT&T treats all theinformation in these
activities as proprietary to be provided to the industry only as
A(M aws, At As: Mr., Ellis describes in his ny, in the pa;t it
.L.....Allt to find out AT&T's plans for future. de-
Of the te-lephone.network. This information is required if
.iumulacturers: are to be: in a Position to develop and supply
i i it to Westarn.46quipment on a ti
LVRM imel basis.
'I;tern ha's complete and total access to this informa-
in fse,4. w0cipates in its creation. No other manufacturer
Le., no other manufacturer has instant access
I rMwrch, advance. planning, SyStMSengineer
the opportunity to fund specific development projects per-
hy- BTIL In short, the 1`others7' referred to in the AT&T Li-
A4hVhM6&X()Odkrwt turns out to be only Western. AT&T has decided to use
Ostgenerated by its franchised operating companies and paid
for ral- rate -payers for the exclusive benefit of its affiliated
-r,. As I said before, the nature of these payments and
Alware obscured by dividing AT&T's performance of its Lieense
among separate, legal entities in the Svstem. But
04o fe",on AT&T alone, it is clear that it owes a duty to ihe operat-
P"i-M, ho pay the bill to look to and utilize the resources of
#&;Mthii taephimm equipment manufactu industry.
is no logical or business reason why any in-
which is paid for by the operating companies. and made
xvwl le to rn should be considered proprietary, thus -Preclud*
to othiw manal ieturer& PSYRI& something, then
ii I=Lnufaeturers Aobld be abl to obbk the same thing by
AfVro riate paymentIll, What I am saying is that AT&T ought to take
*rkagy its contractual obEgation to work with-"otheWl-plurs4 not
then lookin to Western for e
%I ift"XI, if them is to1e: hi* and open entry y1sterAf
Wotwn Aould have no Part. in Purchtsmi COMI i? produeft
t 0 V its petitor
q0tratmg cow em In the: Plam Wwtorrk ne"r. and:
bMatiig d the inh6rent 6onRK 4, as' si, truePAM
okmt out the bat, ts at. the ]Owed Prum
eompsnleL Sewndly wli"w &-a
Ot in laa0pImpriate amm Wedftr&Uad -
ment, there is no reason why Western margins should be-addwA-teO.4 lT
prices, nor why Western should have the extraordinary competitive- I
advantages of total intimate access to competitor's product pricing.
Further, by acting as purchasing agent, Western has prior knowledge.
of a potential lost sale at a point in time when 'by formal or informal
methods Western has maximum opportunity to discourage out-of-
In summary, it is my testimony that: .
1. The Bell System telecommunications equipment market is.
effectively closed to all but Western Electric equipment andl asa
result equipment prices to the entire industry are higher than they
2. The Bell System has avoided comparing its Western prices
with those which it could realistically obtain from other suppliers
for reasonable volumes of Bell procurement.
3. The Bell System has treated as proprietary information that
which potential competitors of Western require in order to devel-
op products for sale to the Bell System operating companies on a
4. When, despite all of the size, timing, cost and other advan-
tages enjoyed by Western as an integral part of a vertical struc-
ture, highly competitive quotes are nonetheless offered by out*
suppliers, AT&T has managed to avoid a buy decision.
5. Bell operating companies, although in theory and to some
extent in practice free to buy from outsiders, do not do so and in
fact are neither responsible for obtaining competitive quotes nor
are they generally geared up to do so.
6. AT&T has not solicted competitive quotes from the Bell
market and except for the routine price surveys is not organized
to do so. As a result, there are no clear policies, practices or proce-
dures for AT&T or its operating companies to test and evalwate
competitive equipment. Attempts to sell competitive equipment.
have been greeted by inaction and long delays.
7. What little purchasing there has been from GTMs is usually
through Western and Western is privy to all competitive design,
price, quality and other information and is .in a position to re-
duce its prices and take other actions to meet such competition.
8. Western computes profit and return on investment only by
product line and is therefore able to "price selectively" to meet
competition and to mix results on competitive and monopoly prod-
ucts so that products with no competition can carry underpriced
9. -Tbw'new BSPPD may eventually be of some influence inrfoic-
ing consideration of non-system pt6dudts but cannot effectively
do so at present because of the basic Bell System structure andc
apparent lack of a clear sense of direction.
Finally, it should be recognized that my testimony is concerned with only one
phase of a rate case, the first phase of which has long since been completed. It Is-
not my purpose to contribute to the "break-up of the Bell System" nor do 1I
contend that AT&T's current rate base should be reduced, even though in some-
instances the operating companies have paid higher prices that they could haye-
obtained from suppliers.other than Western. .
On the contrary, I believe that the Bell System rate base is greatly underL
stated by reason of custom and regulatory practices which limit its investors't0*
earnings on historical costs. In fact,' wVe have take the position, in 'another.eser
-P;;i M. M ana, ro a large extent, current reguatury prucuces in me gas ana
teetd.ltty fields involving long delays in compensating for increased operating
.exp.. s and non-recognition of high replacement costs are endangering the
idtr 4 's economic future.
I aote i that while this phase of the case is still pending, AT&T has found it
HIr emesary to file for very substantially higher earnings. Based on my own knowl-
:.:,... experience, I can well believe that such increases are fully Justified.
I........, I think continuing cost increase make it all the more important that
I A.. VW be required to open its equipment market to competition and that its oper-
.. stng units be required to consider alternatives to the present virtual 100%
apwit of Western Electric if the System is to be granted the higher rates of
to which it Is Justly entitled.
If AT&T were to make the structural and policy changes I have sug-
gested earlier, AT&T and therefore the nation would in a very few
years receive the benefits of competition and a competitive industry
without in any way sacrificing the substantial benefits to the Bell
System of Western's existing economies of scale or the real advantages
of vertical integration.
For I would concur tith Mr. DeButts, who stated in his strong policy
h m wit before NARUC in September 1973 that Western is a great
outfit. For that matter, the Bell System is a great System. But the teh-
nology of communications has become too complex, as Mr. DeButts
also recognized, for one company, Western, and I would add, one Sys-
temr The Bell System, to have the complete answer to everything. In
the immediate past, a small opening of the market in the Carter/one de-
cision created an opportunity into which many manufacturers rushed
with a large variety of products for the interconnect customer.
Once AT&T begins to look outward and to deal responsibly with all
those who have an idea or a product for the telephone network I think
itwill be both surprised and pleased to find how responsive the com-
petitive world is to its needs. This Commission should do anything
and everything it can to encourage and require the Bell System to take
advantage of this opportunity.
z,,*4u op GwjwE M. WooDRurFIII, DwcToR, PWDucrPLAX-
xme TrjjwoKXUWTCAM0N8, ITT's NoiwrHAxmcA1q TmAco*mu-
*ymme is George M. Woodmff III, and I- reside at Corinth, Mis-
swikxi- I am Director, Product Planning Telecommunications for
JETT's Worth American Telecommunications Group. I report to the
.Viee President and Group General Manager, Mr. Howard Truss. .
1recoive4 a B.S. deem in Mechanical Engineermig with an Indu6-
'trw I opil'on from Michigan State University in 1956.
Prior to. entering the Service that year I wus briefly a production
traineewith A.C. Spark Plug Division of General Motors. After two
yftra in the Service as a Lieutenant in the U.S. Army-Ordnance Corps
,stationed at Aberdeen ProvingGround, Maryland, I entered Purdue
Universify Graduate School receiving a Master of Science degree: in
My &A employment was with Union Carbide Nuclear Company,
Oak,-Ridge, Tennessee, as an electronic buyer, later being promoteA
to office supervisor. In 1962 1 left-Union Carbide to work for the Indus.
trial, Products Division of Westinghouse Air Brake Company As As-
sistant to the Director of Marketing, and thereafter, successively,
District, Sales Manager, Product Manager and, Product Marko
In January 1968 1 was hired by ITT Telecommunicatious Apparatus
,06piirtment in Corinth,- Mississippi, and. served primarily as Diredor
of, Product Planning and Advanced Business Development until Sep-
tember 1972 when Iassumed mX present: position.
,Nor*,'America Telecommunications Group consists, of a number of
units and divisions in both the United States and Canada. Four of
those- units manufacture and sell conventional telephony equipmeiit
in the Uniied States. The four units are: ITT Telecommunications
Apparatus Department, Corinth, Mississippi, which manufactures
telephone apparatus includmiff telep ones and key systems; Tele-
Comm= nation 19lectronic gwitAing Center, Des Plaines, Illinoi%
vhich manufactures electronic PABVs and electronic switebing; ITT
Telecommunications ]Electromechanical Switching Center, Milan,
Ten, which manufactures electromechanical switching,,mcluding
9tePbrVstep,: cross-bar and ancillary systeins, such as. CAMA, (ANI-)
ana-fel*'Touch conversion equipment, for step-by-step switching of.
fiTs, and a mall electronic PABX ITT Telecommunications Trams-
ini ion Department, Raleigh, North Carolina, -which manufactures
transmisoion eqW'pment including PCM.Carrier, microwave, multiplex,
line'tmatment and marine radio. Sales of these four units for: the 'pea
riod 1970 through 1973 are outlined below.
.. . .. .... ..
[In thousands of dollars]
: ..,, .
----- -------- --- ---- - --- - - --- - -.--.... ..._ :' J::i ==
1970 1971 1972 ,
.. .: :.......... :...
Corinth-------------------------------------------25,2.56 29,301 524
Corinth ............................................ 25, 256 293146, 524 .. ;'!;tt!
Des Plain---------------. -----........--------------- ,075 6,064 9,06 I
Milan-.--------------------------------------- 24, 890 40,293 43830 M
Raleigh- --------------------------------------- 16,440 14,311 21,3S6 4v S
Total---------------------..... -------------- 72,661 89,969 120,815 i3stus
----------------------------------------------------, *-:: a .; '** ,*.. ,.!..
One of my prime functions since joining ITT in 1968 and cctiit
with my present position has been the development of new prd .
The primary document employed in ITT's product planning isaliM
a Product Plan. (ITT Exhibit 8 is the form currently in use.) T::
document analyzes the market and its size, cost targets, price prec-
tions and profit, cash flow and other factors which apply to a par'.
ticular product. The projected capital expenditures, return on inv-w
ment and assets, profits and project pay back periods are examined.
and form the basis for the first decision to develop a product.- The
second key document is the commercial specification which defines the:. :
product from the standpoint of cost, performance and other factors b
insure that the product when developed will sell at a profit. ... *
Full development can not begin until these two documents have been
approved at either Group level, or, if a large program isinvoln" by
the Office of the President ITT. Prior to that only an engie g
feasibility study can be made. Such an engineering study may be -
ployed to determine if the project is technically feasible, or if the
marketing cost target could possibly be met. With an approved pro duct
plan and commercial specification a development case is issued and.
product development begins. ..
To define a product or market and its requirements ITT perfct
market studies employing both inside and outside personnel. Thee
studies cover statistical analysis, telephony customer interviews as
well as interviews of end customers including individual snibrs.
Each project must stand on its own merits from a $50,000 investment
for a small item, such as key system card, to one involving tens of. miI
lions of dollars such as the development of electronic switdiig J
In ITT's market and financial analysis for a product only the inde
pendent market, excluding the Bell System and the General Sysb-a
is normally considered. In the latter markets the only projected sslaew'
which would be accepted as realistic possibilities would be to thei- |
terconnect market. This is not to say that we do not make. vey
reasonable effort to design products to be acceptable to 09hose sp
terns, nor that we slight them in our sales efforts. Long experience,
however, has taught us that realistic investment, cost, price decision.
cannot be based on projected sales to those systems.. ,,
ITT has generally followed Western very closely in the apparatnu
area, and in several instances purchased Western drawings. How*
ever, many products such as the 6 button wall key telephone and. 18,
24, 30 button key telephone have not been manufactured by Co!rithi
because the anticipated returns on investment were inadequate. .'4 SII :
did design a 30 button telephone following Western's 10/20 foim t;
as tooling expense was minimal. In POM transmission ITT has at-.
tempted to be end to end compatible with Western Electric, but our
S .....'....:::. ::... .. .
:. ,.. ".1.
.. .. .^ 1;,.i~..
d asign approaches have necessarily differed both for technical
Teawns and becaaw of the constraints of our volumes and coft
In swi OZMMLV PABXs we have generally fo owed
own to avail thelimited U.S. market of the resources of ITT
ing the development process rinarketig is constantl monitoring
p&gormance and se lules, as development pr ects will be
st int the pro"ect %pparently can not meet cost and/or
0 POT gew products evolve from several de-
#op4 Now competit4ve products, new customer needs, changes in
needs said changis in teehnoloa'u Pticing also is a mixture
factors: what tYie end subscriU; -ii in tan- frs what
the opm ti telephone company can afford, what-related products sell
$ae4f7 whA savings can be achieved. Cost targets are set based on price
and Oetorminio the economic viability of the product.
F6r aw&-alyears I haver had personal contact and discussions with
Mr. WoR and other members of the AX&T Price Survey Group. I
been responsible for supplying him, with the current prices on
some =.- product which are included in the studies of that Group.
r, I personally validated the ITT Apparatus prices used
ia the 1972 and 1973 studies which have.been submitted as part
cd the rword in this case.
my review of the 1972 stud ITT tbrough: its counsel
W m9formed the FCC Trial StYin i at the prices
used by Wolf were accurate but not necessarily the prices which
*ould actually sell equipment to the Bell Sysioni if firm volume
orders were laced on it. (ITT Exhibit 9 is a copy of that exchange
Up truth of that statement can be demonstrated b reference to
io, a letter dated February 25, 1974 from ar. Howard Truss,
Vift Prbsidmf. and General Manapi Northern. American Telecom-'
ons to Walter Kelly, the AT&T Vice President designated
to emduct a7e study of the Bell Systemis policies and practices for
Promting equi ment from, general trade manufacturers G111) and
ately led to the creation of the Bell.. Par-
study J System
Division (BS As the letter indic tes, it was
..to a meeting, the object of which w to inform.
through him thellell S em, that there were ucts;
Omfid be p am m, I that would 4er sub-
il advantages overcomparam WeAbrn products in featureor'
prim or both. It was our expremA. request and hope sions to
not bave: to inmit the completion of this. long 'overdue
Unfortunately that has not. beea realized.
respect, to the 111. mentioned in the letter: mrs
*,outrent"prices based on no volure commitment -of any Idnil
,AT&T, V% oir any of the Bell 0
peratinr Companies. Afflow"
Vut letter we -did enter into n*obistions vi Wastern whi& for
reasons had to iustO this spnpment and which acted. as pur-
w agent for the operating compames. During thos6 negotiations
to reduce itayrices bv 15% for an assured volume of an-
$10 million in border per 7ear. Thom negotiations 4tl-,
f6undered on Western's claixiwd *Wty to poadmit, or to make
for the Bell operating pames to a
R 7ts, to repeat, th prices td ITV9
i . ..=..... ... ... ...
CAMA equipment then being sold to the Bell System, which '.wdti
the prices used in a Price Survey Group study to compare Weetirt&
ANI-D equipment, are not the prices at which we would b *W'bi"
sell to the Bell System if Western would commit, or if arma:M
could be made for the operating companies to commit, to a 11,3...:.
volume of business. I should add that ITT was not simply tiyli-to
buy business with a lower price; rather with an assured volhune'kpn..
in advance there were opportunities for economies which ia 6
lower price equally profitable to ITT. J.T c"
The same is true of the apparatus equipment mentioned in -I&1
Truss' letter. Those numbers refer to the following kinds ofi tsS
500 CL (BA) 30M-standard desk rotary dial telephone in eolr.,....
554 CL (BA) 30M-standard wall mounted telephone in colors ....
2500 CL (BA) 30M-standard push button desk telephbno ih co44 s
2554 CL (BA) 30M-standard push button wall telephone is oglors
2200 CL (BA) 30M-Push button desk dial-in-handset telephonip
2254 CL (BA) 30MK-Push button wall dial-in-handset telephone.. i.
Those particular items were chosen because at current costs- i
felt that we could offer to the Bell System a significantly lower jrie
than the current transfer prices of Western to the Bell operating com-
panics. However, in this instance it was even more important to haven
a commitment from Bell to purchase a minimum number of units tl&:
cause it would be necessary for ITT, from a practical marketing stand-.
point, to offer the same low prices to its existing customers. If thD Bell,
System were to buy only a few thousand units at the lower prices,=e
would have simply sacrificed margin on our existing -business hr"i
purpose. However, we felt that at approximately one million :ite.
(which I estimate to be about 15% of Bell's apparatus requirements).
ITT's total profits on its existing and newly acquired Bell business
would be greater than the profits on a smaller volume of business beiag.
done with the independents at a higher price. It happens that .these
items of equipment are virtually identical to the Western produict.and
in fact, in most instances the piece parts are interchangeable. Nevrths'
less, there has been no follow-up by AT&T or Western on the offer dot
trained in Mr. Truss' letter. Accordingly, there have been no'prifel,.
quoted to the Bell System different from those set forth in the study ..
the Price Survey Group, but again those prices are not necessarily the.:
prices at which ITT would sell to the Bell System at agreed u:pon:
In a variety of traffic and feature configurations ITT's prices on Its
electronic PABX series are already lower than Western's: existig
prices for its equipment, a fact which has been conceded in this hear-
ing at least as to the TE 400 A, G and H series. With respect to: TCS So
pricing is somewhat more complicated because this is a large procemoi .
controlled PBX with capacity from 600 to 6600 lines. The TC(S 2 is iat
precisely comparable to Western's ESS 101, but it covers a portion.6ft
the spectrum of applications and functions of that equipment. In the-.
latter part of 1974 ITT quoted TCS 2 against an ESS 101 application:
at South Western Bell at a price of $80.0,000 as against an ESS 101 cosvt:.
of $1 million. We did not receive that order, however, becamse, we wer. i