The Second Information Revolution

Published by EH.NET (August 2004)

Gerald W. Brock, The Second Information Revolution. Cambridge, MA: Harvard University Press, 2003. xiv + 322 pp. $39.95 (cloth), ISBN: 0-674-01178-3.

Reviewed for EH.NET by David Gabel, Department of Economics, Queens College of the City University of New York.

Gerald Brock, a leading authority on both the computer and telecommunications industries, explores in his new book why the rate of technological change has been faster in the computer industry than the telecommunications industry. Brock argues that the older telephone industry was constrained by regulation and compatibility requirements, neither factor being terribly important for the computer industry during the post-World War II years.

Brock addresses two major themes: A comparison of the technological responses of the unregulated data processing industry and the regulated communications industry to new opportunities; and analysis of the evolution of institutions that were designed on the basis of one technology into institutions suitable for application of a new and different technology.

In Brock’s view, regulation of telecommunications was the central reason this sector lagged the emerging and rapidly developing computing sector. In his view, the slow rate of technological change, to the extent that it could have been faster, was harmful to the economy in light of the second information revolution. According to Brock, there have been two times in history when information technology has dramatically changed daily life by lowering the price of obtaining information. The first “information revolution” involved the use of telephones and telegraphs for integrating national markets. The second information revolution is currently in progress and involves the use of computer-enhanced communications. This new equipment is facilitating “major business and political changes” (p. 7).

The book contains many interesting examples of how new technology was introduced slowly into the heavily regulated telephone industry. For example, Brock contends that the roll-out of ISDN was delayed by the Federal Communications Commission’s technical standards (p. 178). However, Brock fails to note that ISDN suffered painfully slow roll-outs the world over. This may be because of similar regulatory constraints, but it may also be that ISDN was never a viable product, as was commonly suggested as early as the late 1980s (Elton, 1991).

Brock also hypothesizes that the rapid changes in the computing industry had a profound affect on the regulated telecommunications industry. Policy makers in telecommunications observed that computing and telecommunications were converging, but the rate of technological change was faster in the unregulated sector of the economy (p. 289). In his view, policy makers were more willing to experiment with liberalization after observing the rapid introduction of new products in the comparatively unregulated data market.

Brock states that telecommunications regulators, through the New Deal, gave “no attention to the effects that their policies could have on the development of new technology” (p.15). No citation is provided for this curious assertion. Later in the book, after noting that AT&T did not believe that it was in its best interests to undertake a wholesale replacement of its mechanical equipment with computer controlled switching equipment, Brock conjectures that “state regulators would not have allowed it to do so if it had tried” (p.128). Brock’s supporting evidence for his hypothesis is thin at best.

Regulation was not the only source of innovatory difficulty at Ma Bell. Brock is well aware that the private benefit from adopting a new technology is often influenced by a firm’s installed base. He points out how IBM found it profitable to rapidly innovate when it did not have an installed base of equipment, but acted differently once it had an established product. Brock states that the “success of the System/360 made it difficult for IBM to introduce radical changes. Although it was under no legal compulsion to maintain compatibility, it risked loss of its growing and profitable customer base if it did not preserve their investment in software and training by compatible improvements” (p. 161). I find it striking that Brock gives so much weight to the economics of installed base when discussing the unregulated computer industry but gives these economies comparatively little consideration when discussing the telecommunications industry.

Elsewhere, Brock contends that the slow rate of technological change was not only due to regulators, but also the engineering practices of AT&T. Switching equipment was designed so that it would be out of service for only two hours in a forty-year period. Brock speculates that the “standards slowed the utilization of new opportunities created by advances in semiconductors and computers” (p. 114). Again here, while perhaps correct about the internal operations of AT&T, Brock provides no citation to support his view that technological change was impeded by engineering mindsets or existing standards.

Brock’s book contains much that will interest the specialist. Brock’s expertise in computers and telecommunications is best illustrated in his chapter on data communications. Here he provides an interesting description of how the selection of the network protocols affected the evolution from a centrally controlled to edge network.

At the outset of the book Brock concedes that the roll-out of new telecommunications technologies could have been impeded by both regulation and the internal operations of AT&T. Since the divestiture of AT&T, the internal operations of AT&T are no longer a concern. The firm was split into different operating companies and each had the latitude to adopt its own mode of operation. It would have been interesting to examine how differing degrees of regulation have affected these firms. Moreover, additional insight might have been provided by an examination of what remains of AT&T. Its manufacturing arm, Lucent, is floundering. It lost significant amounts of money when it moved into the computer and cable industries. AT&T’s long distance business is struggling, and it has withdrawn from the mobile market. Maybe corporate culture is still playing a role more important than Brock is willing to credit.

In summary, regulation remains a potential impediment to technological change, but the degree to which it occurs is not convincingly made in this book due to the lack of supporting evidence and a failure to adequately explore the private and social profitability of adopting new modes of operation, as well as corporate culture.

David Gabel’s publications include “Competition in a Network Industry: The Telephone Industry, 1894-1910,” Journal of Economic History, Vol. 54, No. 3, September 1994.