Antitrust Laws: The Neutering of the Near-Term Excellent
Competition is supposed to reward firms that innovate first, that build integrated systems, and that expand before their rivals do.
—Dominick T. Armentano, Antitrust: The Case for Repeal
Irving G. Thalberg was one of the most successful movie producers ever. He oversaw the production of four hundred films, and under his stewardship Metro-Goldwyn-Mayer became Hollywood’s most prestigious studio. A testimony to his lasting influence on the film industry is the Irving G. Thalberg Memorial Award, which the Academy of Motion Picture Arts and Sciences bestows on the “creative producers whose bodies of work reflect a consistently high quality of motion picture production.”
As brilliant a producer as he was, however, Thalberg still had blind spots. He famously told Louis B. Mayer, “Forget it, Louis, no Civil War picture ever made a nickel.”1 The Civil War picture in question was Gone with the Wind. MGM passed up the chance to produce a film adaptation of Margaret Mitchell’s bestseller, which became, by most measures, the top grossing movie of all time.2
Thalberg wasn’t the only Hollywood genius with regrets. The Godfather, the twenty-third-highest grossing film of all time3 and universally regarded as a classic, was almost never made. Paramount Pictures’ senior vice president Robert Evans had a terrible time convincing the studio to take on the film adaptation of Mario Puzo’s bestselling novel. A Paramount executive, Peter Bart, told Evans, “They’re scared of it, Bob . . . it’s that simple. It’s still a spaghetti gangster film. It’s never worked yet.”4 And Marlon Brando was almost passed up for the role of Vito Corleone. Dino de Laurentiis told Charles Bluhdorn, the CEO of Paramount’s parent company, Gulf & Western, “If Brando plays the Don, forget opening the film in Italy. They will laugh him off the screen.” Worse, the word from Gulf & Western headquarters to Evans was: “Will not finance Brando in title role. Do not respond. Case closed.”5 Once again, the smartest people in the business couldn’t predict the future.
What television show has a more secure place in the pantheon of American entertainment than Monday Night Football? But the chairman of CBS, William S. Paley—one of the great visionaries of his industry—rejected a proposal for a Monday evening professional football broadcast in the late 1960s.6 When ABC eventually picked up MNF, Anheuser-Busch declined the opportunity to be a sponsor. So Miller Brewing ultimately bought exclusive rights as MNF’s beer advertiser for five million dollars.7 MNF became a cultural phenomenon, of course, and turned Miller beer into a national favorite. Unhappy Anheuser-Busch executives came back to ABC and told them “they would pay whatever it took to get into the show.” Miller, however, had the rights locked up.8
O. J. Simpson eventually became a fixture on MNF as a commentator, selected because he was “instantly, inescapably likeable.”9 The former football star, once famous for running through airports for a rental car, was considered for the lead role in the 1984 film The Terminator. In one of history’s little ironies, the part went to Arnold Schwarzenegger because the studio brass decided that “[p]eople wouldn’t have believed a nice guy like O. J. playing the part of a ruthless killer.”10
When David Chase shopped his idea for a TV series about a mobster and his family, ABC, CBS, and NBC all turned him down. HBO picked it up, and The Sopranos became the foundation of the cable network’s enormously successful television series business.11 Not that HBO has been infallible either. Though it green-lighted The Sopranos, HBO turned down Mad Men, to AMC’s profit,12 as well as Breaking Bad.
A co-founder of Carlyle Group, the billionaire David Rubenstein passed up a chance to be an early investor in Facebook.13 Twenty-six teams passed on the quarterback Dan Marino before the Miami Dolphins took him in the 1983 NFL Draft. Todd Blackledge, Tony Eason, and Ken O’Brien—all drafted before Marino—never amounted to much in the pros.14 In 2000, the quarterback guru Bill Walsh chose Hofstra’s Giovanni Carmazzi in the third round, overlooking Tom Brady, who lasted until the sixth round.15
History, then, is crowded with experts making mistakes about the future, but what does that have to do with antitrust laws? A lot. Antitrust regulation is based on the power of government lawyers to see into the future. They are able, it is supposed, to discern which businesses will wield too much power. Because of this clairvoyance, antitrust lawyers are authorized to break up successful businesses, force combining firms to shed valuable business lines before merging, and penalize companies for charging too much or too little for their products.
The problem, as with other forms of regulation, is one of talent. If you’re skilled at forecasting the future, you don’t toil for a federal salary. You work in the private sector, and if you’re good, you earn many times what you’d earn policing companies from the nation’s capital. If Irving Thalberg could not see the potential of Gone with the Wind, and if William Paley dismissed Monday Night Football, who really thinks that government lawyers can tell which businesses will possess too much power down the line?
* * *
In 2010, Blockbuster Video filed for bankruptcy. But once upon a time, Blockbuster reigned as the largest video rental chain, with sixty thousand employees and over nine thousand stores.16 How quickly things change.
In 2005, Blockbuster abandoned its plan to purchase its competitor Hollywood Video after antitrust officials at the Federal Trade Commission leaked their plan to block the deal.17 The FTC predicted that a merger between Blockbuster and Hollywood Video would concentrate too much market power in one company, giving it the ability to raise prices on consumers. Hollywood Video ultimately paired up with another competitor, Movie Gallery, only to cease operations in 2010 when Movie Gallery filed for bankruptcy.18
It wasn’t competition from other video chains that bankrupted Blockbuster but an unexpected change in the video rental industry. Antitrust officials who blocked the ability of Blockbuster to combine with a rival missed the “disrupter,” Reed Hastings.
In 1997, Hastings failed to return a copy of Apollo 13 to his local Blockbuster on time, and he was assessed a forty-dollar late fee. Hastings sensed an opportunity and founded Netflix in Los Gatos, California, two years later.19 Netflix offered two major improvements on the Blockbuster model. First, geography no longer bound customers to a retail location. They could select DVDs or videos online and receive them by mail, often within a day, thanks to a network of warehouses around the country. Second, customers could keep their movies for as long as they desired. Netflix charged a flat monthly fee based on how many DVDs a customer wanted at a time, removing a great deal of unease—and expense—from the movie renting. Yet, despite these improvements, Netflix was in trouble by 2000. Blockbuster could have purchased Netflix then for fifty million dollars but passed on the opportunity.20
While antitrust officials focused their energies on the possibility that Blockbuster might grow too powerful through the acquisition of other retail chains, tiny Netflix entered the DVD rental business and took over the market. The biggest names in video rental have long since vanished, while an outsider that the FTC knew little about managed to change the business completely.
Netflix is a hot stock today. But Reed Hastings is well aware of how he caught once powerful Blockbuster flatfooted. For his next innovation, he introduced online streaming video services to eliminate waiting for a DVD to arrive in the mail. Someday another entrepreneur may well make Netflix’s model obsolete, and it is a fair bet that antitrust officials will not see the business disruption coming.
Indeed, a merger between Blockbuster and Hollywood Video might have allowed the firm to compete with Netflix, but thanks to the hubris of antitrust regulators, we’ll never know. Instead, investors—who would give anything to possess the talent that antitrust regulators purport to have—get to watch new video entrants such as Roku, Apple TV, and Amazon Prime compete with Netflix. Meanwhile, Netflix has moved into movie production. So far its output is limited, but both House of Cards and Orange Is the New Black have received popular and critical acclaim. If Netflix does to Hollywood’s studio model what it did to Blockbuster’s video rental model, it will again make a mockery of the very idea of antitrust regulation. If Netflix chooses to buy a movie studio, will antitrust officials allow them to? One can only hope.
Federal regulators would not allow Blockbuster to purchase Hollywood Video, but on occasion they are a bit more “generous.” Of course, there’s a catch. Regulators allow companies to merge if they weaken themselves in the process. On November 12, 2013, the Department of Justice approved the merger of American Airlines and US Airways. However, the approval depended on the combined company’s forfeiting gates at some of the most heavily trafficked airports around the United States. Specifically, the two carriers sold access to coveted gates at Reagan National in Washington, D.C., and LaGuardia in New York for $425 million.21 The two airlines merged in order to become more competitive, but ended up less so.
Forced divestiture of assets is the norm in mergers today. It also defies the basic economic logic of allowing the shareholders who own companies to combine them in ways that will maximize shareholder returns. But bureaucracies, ever in search of a purpose, have seemingly found one in forcing companies to neuter themselves before a merger. All this is based on the naïve presumption that tomorrow’s commercial outlook will mirror today’s. The problem is that it rarely does.
In 2000, America Online (AOL) announced a merger with the media giant Time Warner. AOL’s market capitalization was double that of Time Warner’s,22 and the internet darling appeared unstoppable. “AOL everywhere” was its tagline. The columnist Norman Solomon warned of the “servitude” to which consumers would be reduced by the supposed power of the combined entity.23 Taking its cue from the handwringing media, the Federal Trade Commission took a year to approve the deal.24
In April 2002, the merged company announced a fifty-four-billion-dollar loss; a year later the loss was ninety-nine billion. By September 2003, the once dominant AOL had become obsolete in the constantly evolving communications field, and Time Warner dropped AOL from its name.25 Ted Turner, the founder of CNN and the largest individual shareholder of the combined company, lost 80 percent of his net worth, or eight billion dollars, on a deal so stupendously misconceived that it has inspired two books—Fools Rush In and There Must Be a Pony in Here Somewhere—chronicling the debacle.26
Nearly fourteen years after the announcement of the failed AOL/Time Warner combination, the cable operator Comcast announced a plan to purchase Time Warner for forty-five billion dollars. The antitrust Chicken Littles began flapping about on cue. Business Insider warned, “Comcast’s $45 Billion Purchase of Time Warner Cable Is Trouble,” while the Arizona Daily Star fretted, “Many fear Comcast–Time Warner Cable merger spells monopoly.”27 Time Warner’s previous megamerger had been an object lesson in the perils of predicting monopolies, but the confidence of the antitrust faithful in the forecasting talents of federal regulators was unshaken.
Competition can arise from unexpected places. Blockbuster never imagined that Netflix, which it scorned to acquire at a bargain price, would bring about its demise. If Borders had foreseen that Amazon would trump Barnes & Noble as its main competitor, it would have entered into internet book sales alongside Jeff Bezos. Antitrust regulators, out of fear of Comcast’s acquiring monopoly powers, will surely make Comcast jump through hoops to acquire Time Warner.
Mergers are ultimately about survival. Companies must adjust to an uncertain future business climate, and restraining the ability of larger businesses to act in the best interest of shareholders is counterproductive. Antitrust regulation does not foster competition so much as it reduces successful companies to sitting ducks.
Blockage of mergers also robs the economy of essential information that makes growth possible. If the future were obvious, then everyone would be a billionaire. Since it’s not, antitrust regulators should leave businesses free to compete without restraint. Some will succeed and others will fail, but that is the point. Speedier judgments by the market allow quicker allocation of limited capital to new ideas.
New markets are constantly appearing, but antitrust regulators can react only to yesterday’s marketplace. Microsoft manufactures software and Dell makes computers, but a combination of the two would never get past antitrust lawyers. Nor is there any chance for a merger between television networks such as ABC and NBC. Microsoft was late to the internet search engine game, so Google is far more popular than Microsoft’s Bing. Microsoft saved Apple from bankruptcy in the late 1990s, but the iPod easily crushed the Microsoft Zune. Apple also beat Dell to the market with tablets, which might eventually replace desktop computers. ABC and NBC claim lots of viewers and content, but as the “binge-watching” of Netflix’s House of Cards reveals, sources of content that do not require a television promise to grow further. Federal bureaucrats can’t possibly anticipate the developments in these markets, and it’s laughable for them to try.
Then there is the issue of waste. Henry Hazlitt wisely observed that “one occupation can expand only at the expense of all other occupations.”28 In short, it is impossible to do everything. But if Microsoft and Dell were to combine operations, some of their limited resources would be freed up to work on new product lines. How would such a merger end up? We simply don’t know—see AOL/Time Warner.
Antitrust policy is notoriously inconsistent. Antitrust regulators from the Department of Justice kept Microsoft in their crosshairs in the late 1990s. If the software giant had charged for access to the Internet Explorer browser built into its Windows software, it would have certainly faced federal lawsuits for using its “monopoly” software power to gouge customers. Yet bundling Explorer into Windows for free was deemed “predatory.” Today, Microsoft’s Internet Explorer is losing market share to Mozilla Firefox and Google Chrome, showing that all the antitrust fuss was about nothing.
Antitrust regulation is animated by the fear of monopoly. If businesses grow too large or attain too much market share, they will raise their prices. That concern seems plausible at first glance, but it is divorced from observable realities. With its iPod, iPhone, and iPad—products that were unique upon their introduction—Apple created monopolies out of thin air. But instead of raising the prices of these devices, Apple has been feverishly cutting them. The reason for this is basic: profits attract imitators and innovators.
Businesses that attain a monopoly—and monopolies are ephemeral in a market economy—do not maintain their market share by gouging customers. Rather, they aggressively seek production enhancements that will allow them to continue reducing prices so they can possess as much of the market as possible amid the entry of new firms in search of the profits. Apple is acting in its own interest when it cuts prices or bundles products.
The most famous “monopolist” was John D. Rockefeller, who started selling kerosene in 1870, bringing light into otherwise dark evenings. His Standard Oil Company had 4 percent of the kerosene market in 1870. By 1890, its share of the market amounted to 85 percent. If the logic of antitrust regulation were valid, the price of kerosene would have risen with Rockefeller’s market share. In fact kerosene prices fell from thirty cents per gallon in 1869 to nine cents in 1880 and 5.9 cents by 1897.29 Companies do not grow successful by jacking up prices. Instead, they aggressively search for production efficiencies that increase profits amid constantly falling prices. Rockefeller grew wealthier by meeting market needs—for kerosene first, and later for the fuel oil that powered increasingly ubiquitous cars. While he was meeting consumer needs, Rockefeller did not deter competitors. In 1911, the year that Standard Oil was ruled an “illegal monopoly,” there were roughly 147 oil refineries in business to compete against Rockefeller. Just as, a century later, antitrust regulators would pursue Microsoft at the very moment new firms were eroding its dominance, they went after Standard Oil when it was producing only about 9 percent of America’s oil supply.30
Government regulators—you can count on it—are always late to presumed “problems” that are invariably fixed by market competition. Once again, if regulators could predict markets, they surely wouldn’t be working as regulators.
The history of General Motors is a fine example of the absurdity underlying monopolistic assumptions. In 1952, John Kenneth Galbraith asserted, “The decisions of General Motors on power, design, price, model changes, production schedules, and the myriad other details concerning its automobiles are final. There is no appeal; the career or reputation of no authority is at stake.” In 1976, two American Motors executives warned that if GM’s growth was not halted, “they might find themselves selling the whole market.” If “they wanted to wipe out everybody by 1980, the only one who could stop them is the government.”31
The federal government did not stop GM. It did not need to. The once “invincible” automaker found itself in such poor condition by 2008 that it had to beg the federal government for a bailout. General Motors was once highly profitable, but profits attract imitators and innovators if markets are largely free. The exciting “disruption” that felled GM is at work in other industries. In time, industry leaders like Apple, Netflix, and Amazon will be knocked from their perches. Market forces will do what antitrust regulators cannot do.
Skeptics should consult the classic book In Search of Excellence. Written in 1982 and describing the best practices of forty-three top U.S. businesses, it flew off of bookstore shelves upon release. Everyone wanted to know what the best businesses did in order to stay on top. Yet within two years, fourteen of those businesses were in serious financial trouble.32 Antitrust is ultimately about using government force to make the excellent less excellent. It is an obstacle to economic evolution. History shows that competition in the marketplace makes the work of antitrust lawyers superfluous.
We should ask ourselves a couple of important, and provocative, questions. Which is preferable: weak companies like GM and Citigroup, which need taxpayer support to stay in business, or strong companies like Microsoft and IBM, which can survive on their own? If markets excel at humbling the powerful, then antitrust attorneys are unnecessary. And what’s not to like about monopoly profits? Isn’t the pursuit of monopoly profits a good reason to go into business in the first place? Achieving a monopoly suggests that a business has identified and abundantly met a market need.
Consumers confer market share on businesses. If a company enjoys a large share of the market, it’s because it best serves consumers’ needs. Businesses grow large because consumer demand for what they offer is large. But large companies can falter, ensuring a rapidly changing picture of the most successful companies.
That’s what is so great about monopoly profits. The profits signal to the ambitious the wealth they can earn by entering previously unknown markets. Without monopoly profits, investors, entrepreneurs, and businesses have no idea where capital will be most rewarded. So when antitrust regulators neuter the successful pioneers, they leave the markets in the dark, and we’re left with the blind leading the blind.