From Bang to Net

How Arno Penzias, who won the Nobel Prize for confirming the universe started with a Big Bang, turned his back on pure science and became an investment banker for Silicon Valley

"He turned out to show that it was much less abundant than other astronomers had claimed, because they had claimed that they thought they saw a signal. This was an improvement on the previous work and showed that, in fact, hydrogen was extremely rare there and not detected at all. He did the best job anyone had ever done and anyone has done since. In a sense that was a disappointment, because when you don't find something, that's not as exciting as when you find something, perhaps. On the other hand, it was a very important result, even though negative. He did a good job, finished a nice thesis, and Bell Labs hired him."

The year after Arno Penzias, Nobel laureate and scientific hero, was made AT&T vice president of research and director of Bell Labs, AT&T suddenly faced an ominous future.

On Aug. 24, 1982, U.S. District Judge Harold H. Greene approved the consent decree that split up AT&T, ending an antitrust action related to the company's monopoly on local and long-distance telephone service in the United States. Although it wasn't completely apparent at the time, Judge Greene's pen erased the economic logic that had allowed Bell Labs to thrive.

In this age of deregulation, it may be difficult for younger Americans to imagine how pervasive AT&T was just a decade-and-a-half ago. Since 1956, by which time AT&T had built its 80-year-old telephone business into a monopoly, AT&T had agreed with the government to stick to the telephone business, in exchange for a promise to stay out of businesses not specifically related to phones. As part of that regulated monopoly arrangement, the multibillion-dollar budget item that financed Bell Labs was routinely approved as part of the official pact with the government on telephone service. In effect, the financing for the Labs came from a government-sanctioned science tax, tacked on to every American's phone bill.

During AT&T's years as a monopoly, company executives and scientists alike assumed that the company would be responsible for all advances in communications technology for many decades to come, just as it had always been. As a result, much research was performed based on the idea that it might produce a tangible technological advance 20, or even 30 years down the road.

As this long, straight road descended into the twists and turns of de-monopolized competition, this rationale suddenly disappeared. To compound the danger this state of affairs posed to the Labs, the cultures of AT&T's business units and its research labs had evolved quite separately. It was typical for managers in the business units to be largely unaware of Bell Labs research that had the potential to improve the bottom line. Researchers, meanwhile, had been protected from gaining a useful understanding of the needs of the business units, thanks to the AT&T ethic that had been born by the economics of monopoly: If you build the world's best research institution and leave it alone, the inventions will come.

AT&T compounded these problems at first, pretending they did not exist. Statements by AT&T executives during the divestiture transition period include balmy proclamations about the importance of preserving AT&T's -- and science's -- crown jewel, about the essential nature of top-quality science to AT&T's success, and the central role the Labs played in the company's storied history.

In what hindsight now describes as a daredevil gambit, AT&T suggested it would win the wars of competition by beefing up, rather than paring down, its research. Without the fetters of government regulation, the optimistic corporate fable of the day went, AT&T would be allowed to fully exploit the inventions that had made the company famous. Others may have made billions off the transistor, but the profits from the next generations' inventions would be AT&T's. Or at least, that is what the company's leadership wanted the country to believe.

As if to prove the value it placed on pure science, AT&T fingered one of its newest Nobel Prize recipients, Arno Penzias, as the man who would lead Bell Labs' research during this brave new era.

Penzias characterized his new mandate during a swaggering interview for a magazine article published in 1984.

"These are not people who are going to make us better light bulbs or better word processors. [If] I hire the fifth-best theoretical-physics student in this country, I can get away with it, but if I hire the fifteenth best, I am wasting my time. We are looking for No. 2, or No. 3, and we want to compete with the best universities for No. 1. That is where we are.

"I am a high-pressure guy, and I didn't take this job to conduct a going-out-of-business sale."

But as Penzias was making such boldly optimistic statements, AT&T's management was making ill-conceived business decisions by the handful, many of which can be traced to the company's proud history of scientific discovery. In order to fend off encroaching regulators during the 1950s, AT&T had agreed to stay out of fields not directly related to its telecommunications business. As a result, it had to allow others to capitalize on its greatest inventions. With divestiture, that era had ended, AT&T's executives declared.

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