Ma Bell is back. Should you be afraid?

Ma Bell is back. Blown into eight pieces by an antitrust court in 1984, AT&T, like a self-repairing robot, has slowly put itself back together. Last Friday, the Federal Communications Commission, demanding net neutrality and other conditions, approved AT&T’s acquisition of BellSouth. That will make AT&T—once again—the world’s largest technology company. And don’t just think big. Think Goliath, with about $110 billion in annual revenue, more than 300,000 employees, and 90 million paying accounts. Google, by way of comparison, brings in about $9 billion a year. Even Microsoft, at $45 billion, is a mere elephant compared to the AT&T mammoth.

So, should you be afraid? A little. AT&T will wield power over the nation’s information networks to a degree unprecedented in the Internet age. How you feel about that depends on whether you trust the company, and unfortunately, AT&T has the corporate version of a criminal record. From the 1950s through the 1970s, AT&T—while creating the greatest network on earth—also killed long-distance competition, bottled up new technologies like the cell phone and home answering machine, and resisted the innovations that were later known as “the Internet.” Some will argue that letting AT&T run the nation’s networks is like putting Hannibal Lecter in charge of making dinner.

Yet the passage of time has also clarified the lessons learned from that era. Chiefly this: The danger posed by AT&T, both then and now, is not merely size. There is such a thing as a friendly giant, and perhaps a reformed AT&T will be the Hogwart’s Hagrid of telecom. The enduring danger is that AT&T will instead be the evil giant who uses its power to mess with everything attached to the AT&T system. Today, that would mean messing with search engines, slowing down your cousin’s blog, degrading YouTube or voice-over-IP, and so on. Guarding against those dangers are the milestone network-neutrality rules—the most important rules the FCC has made AT&T agree to. But those rules will last only two years, and it is now clear that Congress needs to make those rules into enduring law.

From 1913 through the 1980s, the Bell Company, now AT&T, held a near–total monopoly over telephone service in the United States. The company was a magnificent product of American ingenuity, famous for reliable service and a sponsor of important research. But that AT&T also had a dark side. The company blocked or tried to kill emerging competitors for long-distance services. It also suppressed a range of new consumer technologies. The firm took centralization and integration to new levels, exercising total control over the nation’s local lines, long-distance service, and even telephones. Its old motto was “One Policy, One System, Universal Service.” Catchy, but it also left little room for anyone else. Today’s sloppy collectivism of Wikipedia or the blogosphere was not exactly the AT&T way.

In the 1970s the U.S. government, under the banner of “deregulation,” awoke to AT&T’s abuses and began an attack on its power, through a strategy we might call slice and dice. It sliced the company into eight separate pieces—a long distance company (as AT&T-in-exile, it kept the name) along with seven regional local phone companies—Bell Atlantic, Pacific Bell, and so on. Meanwhile, a different line of FCC efforts severed AT&T’s local line monopoly—the “bottleneck”—from the rest of the business world. The FCC barred AT&T from using its power over local phone lines to mess with any of the businesses surrounding it, meaning that AT&T was forced to allow consumers to plug in any phone they wanted and use any long-distance service or Internet service provider they liked. These neutrality rules (known as the Computer Inquiries in telecom jargon) are the direct ancestors of today’s network neutrality rules.

We will never know what would have happened had Bell been left alone. Yet like ferns growing out of a fallen redwood, new firms grew out of AT&T’s carcass, making the years since the slice-and-dice operation the most vibrant in the nation’s communications history.

Optimists predicted cheap telephones and long-distance service. That’s happened, but no one anticipated the full consequences of free market entry in telecom. Among the bounty: the appearance of a cell-phone industry, the birth of a mass Internet created by companies like AOL and Earthlink, and, in time, the myriad companies of the World Wide Web, from Netscape through eBay, Google, the blogosphere, and Wikipedia. In 1984, no one imagined that more people would be watching lonelygirl15 than 60 Minutes, over the lines once policed exclusively by AT&T.

Looking back, the “slice” demanded by the Justice Department looks much less important than the “dice” part. Breaking AT&T into small pieces failed to introduce much local competition. The Baby Bells, as they are called, simply worked together to eliminate most of their direct competitors. Only cable, which has its own networks, survived. The horizontal split arguably just created new inefficiencies.

Instead, the most important rules were the vertical neutrality rules—rules preventing the Bells from killing, crippling, or controlling the companies dependent upon Bell lines to reach their consumers. In the 1980s, that meant companies like USRobotics, which sold modems. In the 1990s, it meant AOL—which, as we said, built mass Internet access over Bell’s phone lines. And today that means companies like MySpace or Google, which need broadband to reach their users. In each case, the phone company, or a cable company, is a silent but essential partner.

In effect, this is the core difference between a giant like AT&T and a giant like Exxon: Both supply a good (bandwidth and gas) which is essential to doing what we want to do. Both, in business jargon, are “big dog” firms that support a “long tail” of uses. But the nature of gas makes it much harder for Exxon to exercise control over its end uses.  Exxon has no control over whether you use your gas to power a chainsaw or drive a hybrid, motorcycle, or SUV. Information networks are different. AT&T has the power to control what you do with the Internet. It can control Internet speech and the Internet economy, and that makes all the difference.

So, the recombination of AT&T has effectively undone the “slice” part of the FCC’s meddling—the breakup. The AT&T of 2007 reconstitutes five of the original eight pieces, leaving Verizon and Qwest as the last companies that haven’t returned to the mother ship. The question isn’t whether AT&T will be big. It is whether AT&T will be a giant in the image of Harry Potter’s friend Hagrid, or the more bloodthirsty variety from “Jack and the Beanstalk.” Will the behemoth be a faithful provider of well-priced, reliable, and ultra-high-speed broadband connections, a beloved common carrier? Or a company that tries to remake the Internet in its own image, use its networks to control who comes to market, and in the process ruin the freewheeling competition that has made the network great?  That’s the question that makes network neutrality the center of the debate.

Over the 2006 holidays, AT&T’s lawyers and two commissioners of the FCC were in intense and quiet negotiations. To merge with BellSouth, AT&T needed the FCC’s approval, and two of four voting FCC commissioners demanded that AT&T agree to basic network-neutrality rules. After many rounds, AT&T agreed, just before New Year’s Eve, to the neutrality rules described in this agreement. (Click here for more on network-neutrality theory; for a legal analysis of the rules, read this.) The rules are a milestone: While there have been many ancestors, these are the first full-fledged network-neutrality rules that are fully enforceable as law.

AT&T has promised not to discriminate—not to “prioritize, degrade, or privilege” based on “source, ownership, or destination.” And if AT&T indeed plays by those rules, its expanded size and efficiency may do much to restore America’s slipping status in the Internet world. We may see the softer “reach out and touch someone” face of the old Bell Company. But if it begins to pick and choose favorites in an attempt to create an “AT&T Internet,” watch out. The threat of recidivism is real.

That is why Congress should pass a network neutrality law, and make what has worked for the last 20 years endure for the next 20. But congressional action is only part of the solution, and the other part is you. Because even if passed, there is only one way net neutrality can work, and that’s if it becomes the third rail of telecom politics. The advantage of the neutrality concept is that while the subject is complex, people know they’re angry when the phone or cable company decides how they should be using the Internet. That kind of interference gets libertarians as mad as Naderites. If there’s one thing the Internet has shown, it’s that Americans like a huge variety of strange and obscure stuff, and they get mad when they can’t get it. Oddly enough, that’s the public spirit that, as much as any law, can keep AT&T a friendlier giant.