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From Chapter 11: Monopoly Buster

By 1966, I understood that wherever computers eventually took us, it would not happen until computers could talk to one another quickly, efficiently, and cheaply. We were moving into a digital world and my instincts moved me to lead the charge.

Sure, there were going to be thick brick walls standing in my way, but I was not intimidated. The first brick wall was the enormous amount of capital needed. The second was the monopoly power of the telephone company with the protection of lawmakers in Washington and in every state capital in the United States. The third wall was engineering a technology solution that really worked and that the prospective customer would love.

To pull them down, first I brought in a UNIVAC guy from Houston named Sy Joffe. He said that the smartest telecommunications engineer at UNIVAC was an ex-Navy man named Ed Berg, who had floated around on a rubber raft for two days during the Battle of Midway after Japanese dive-bombers and torpedo planes sank his aircraft carrier, the Hornet. Ed was the brains behind the UNIVAC 1107s and 1108s, particularly the part of them that married computing and telecommunications. A brilliant engineer, he told me that computers were destined to shift from being giant calculators to a means of communication, and that he could engineer it all like a beautiful digital symphony. Ed became our architect-in-chief for America’s first nationwide digital network, what we envisioned as a highway for computers.

Ed explained to me that, in his design engineering ideal world, we would need to transmit data at the speed of 25,000 words per second. That doesn’t sound fast today when we talk about nanoseconds and terabits per second, but it was lightning compared with AT&T’s analog phone system. And we believed that if we could send data that fast, our project might develop into a low-cost system for electronic mail so that people could send written messages back and forth over distances more quickly and more clearly than by U.S. mail or by telegram, just as the telegram had beat out the Pony Express horseback riders. The problem was that you couldn’t efficiently accomplish what we wanted to do utilizing analog plant from a phone company.

We studied satellites and fiber optics, but they were too far into the dim and distant future. So we decided that the best available technology was digital microwave. Ed promised that we could make the first digital switch work.

Our plan called for building transmitters right across the country, spaced 20 to 30 miles apart. We scouted land for towers, negotiated permission from farmers, got all our permits in order, and started building towers.

The folks at AT&T, meanwhile, were doing their best to get our dream tossed into the garbage. That’s the reason we headquartered Datran in Washington, D.C. If we were going to make this happen, we wanted our senior managers in the FCC offices ten times a day and camped on their doorstep at night. We would get in the FCC’s face and make them understand that we were never going away.

The telephone monopoly couldn’t make our docket completely disappear, so they got the process slowed to a snail’s pace. They were so powerful that our stuff stayed on the FCC’s shelf, unread, for two years.

Of course, I understand why they were so belligerent. We were threatening their very existence. We were planning to move the same amount of data on $1 of digital capital investment that otherwise required $10 of analog capital. We were going to offer higher quality, lower-cost, and better customer service than they could. We were going to give people a choice, not just what the phone monopoly said was good for them but what the consumers themselves wanted. If we got the FCC’s permission, they were in serious trouble.

Our original cost estimate for Datran was $375 million, which put us in the same cost neighborhood as Comsat, the company that launched the Early Bird communications satellite in 1965 and took telephone and television traffic into space. But Comsat was a creature of Congress and enjoyed regulatory protection, had a public stock, and, most important, didn’t threaten AT&T.

We were going to have to do it the hard way.

This was doubly true when you factored in that the government hadn’t given any indication they would welcome competition against the Bell System, which meant that we could lose. AT&T argued there was no need for a separate digital network because there was no demand for one. We proved there was. Well, they said, there might be some demand, but not for the data-transmission services that Datran wanted to do. We proved there was. Okay, they said, even if there was a little demand for what Datran wanted to do, AT&T could meet that minor demand in the command-and-control way, so there was absolutely no need for Datran and this free-market heresy.

They never stopped thinking like the telephone monopoly they were. “Bell heads,” we used to call them. They cast doubt on our competence to do what we said we could do, on our technical abilities, and on our financial resources. Both voice and data ultimately would travel digitally with efficiency thanks to microchips, although that was a long way in the future. Yet we knew back then during our initial challenge to the Bell monopoly that this technological breakthrough had to happen. We knew it from thinking through the existing technology and extrapolating forward. But regulated monopolies have little or no interest in innovation; change threatens their long-term write-offs of whatever equipment they’ve already installed.

Of course the market was big enough for all of us, but AT&T was arrogant, genetically incapable of accepting a competitive market. When they were finally forced to move out of the monopoly, they just didn’t know anything else. They tried to be IBM and got killed.

We had to spend almost as much money fighting the regulatory battle as we did creating the technology. We had run headfirst into a clash of cultures. Computer people were in a hurry to get things working. Phone company people were in a hurry not to miss the carpool at four o’clock. How else could anyone explain why, in those days, it took two months just to get a telephone line installed?

The man I brought in to run Datran was a young electronics engineer from Texas Instruments (TI) named Glenn Penisten. Glenn saw this ultimate goal as a series of smaller, intermediate goals, which was right in line with the way I’ve always set goals. We’d have to build this thing one step at a time.

Standing in our way was the Chairman of AT&T, a tough old South Carolina codger named John DeButts.  He was stunned that we were brazen enough to challenge his authority. DeButts just kept walking around the mulberry bush. He didn’t want to hear what we had to say.

I never had any direct interaction with DeButts, but in my mind the two of us were talking all the time. I kept saying, “John, I’m gonna whip you in Washington,” and I could hear DeButts saying, “Sam, ultimately you might, but it’ll take you thirty years to whip me in every Statehouse.” He was right. But that wasn’t stopping me.

We needed more than better technology to build a nationwide network; we needed a lot of capital. But all our markets downturned against us sharply in 1972, and we lost a staggering $83 million on sales of $101 million. You couldn’t give tech stocks away. And safe blue chips dropped to five-times earnings. Treasury bonds dropped 50 percent. People were pulling whatever was left of their savings out of their mutual funds and depositing their remaining cash in bank deposits. Fear ran high. Those bankers and brokers who had once adored us computer-age dreamers were now gone from Wall Street and out selling cars and houses and teaching school.

During those times, when the public scorecard wasn’t good, it didn’t burden me more than I could bear because I kept my own scorecard. I knew that the public scorecard would one day catch up. Eventually, if you’re doing the right thing, it will be there. We simply needed to survive long enough to keep our dream alive. We had to cut back and pay off debt, sell parts of the company, and seek fresh capital.

Our Swiss friend Walter Haefner had come on the UCC board and saw the promise in a digital future, so I turned to him and he came through for us. He liked the idea of Datran enough to make an entrepreneurial bet and, over the next five years, invested $40 million.

Without Walter, Datran would never have stood a chance. But inflation was raging and even though Gulf’s portfolio was blue chip, the oil shock drove interest rates through the roof. Times were tough—the worst decade in my business life. I had to mortgage our stock in Gulf Insurance to secure a $30 million loan, and Walter invested another $20 million.

But the good news was that after five very long and expensive years, the FCC had finally made its decision.

It was yes.

They ruled that competition in the area of data transmission was both practical and desirable. They didn’t have the power to bust up AT&T—their monopoly over voice transmission remained in place—but they said that Datran could transmit data over private lines.

We won.

Unfortunately, that didn’t mean AT&T was going to accept defeat gracefully. They hunkered down for a long war of attrition. They shifted to street fighting in the capital markets and in Congress.

We were negotiating a $50 million private placement and it looked like everything was all set to go, but then our banks told us that “calls had been made”—AT&T had threatened them—and they were pulling out of the deal.

As the battle heated up, the Bell monopoly ruthlessly used their power in Congress. With one-third of the House of Representatives in their pocket, they introduced the Bell Bill, which would overturn the FCC’s decision for competition.

The Bell Bill did not get passed. This marked the beginning of the end of the telephone monopoly. But a free market would be a long time in coming and we’d have a lot more pain to endure.

Read more about Sam Wyly's pioneering ventures in computers and software in "1,000 Dollars and an Idea."  Buy the book. 

Copyright © 2008, 2009 Sam Wyly