While the Chicago School gained vigor and strength over the 1970s, it would be wrong to imply that antitrust lawyers and judges woke up, read Bork’s “Legislative Intent and the Policy of the Sherman Act,” and hung up their hats. Instead, antitrust continued to run hot, clocking, along with some outlandish failures, some of its largest, most transformational cases. None was more so than the epic campaign against the dreadnought itself, the AT&T Corporation.
In the year 1974, AT&T was the largest firm on the planet, the employer of over a million people, and the uncontested holder of a monopoly that had, by then, lasted a full six decades. It was the most important and powerful incarnation of the corporatist vision—Morgan’s creation; the colossus restrained, its activities carefully regulated by the Federal Communications Commission, under the banner of “regulated monopoly.”
Life, in other words, was fine for the world’s greatest blue whale, until 1974, when the Nixon White House announced a surprising change in policy. “Unless the would-be monopolist [AT&T] or the public can demonstrate a special public policy consideration that justifies monopoly, it should not be permitted.” Later that same year, the Justice Department filed suits against AT&T, producing the largest and perhaps most consequential case in the entire history of the competition laws, resulting in the last massive breakup, and arguably the most successful in terms of its effect on the American economy, in the postwar era.
We should be a little more precise: AT&T was not the mere holder of a monopoly, but multiple monopolies—six or seven, depending on how one counts—making it the quintessential “super monopolist.” At its height the firm controlled local telephone service, long distance service, the physical telephones, all other attachments, business telephone services, and markets just coming into existence, like “online” services.
Nowadays, even dominant firms pay at least lip service to the importance of competition. Not so AT&T, which even in its time was unusual in its ideological dedication to the principles of monopoly rule. Through the 1970s, it was still preaching the gospel of Morgan, celebrating the trust as a great human achievement, and denouncing “chaotic” and “ruinous” competition. That was a tone set by AT&T’s first true ruler, Theodore Vail, who had made his reasoning moralistic: Competition was giving American business a bad name. “The vicious acts associated with aggressive competition are responsible for much, if not all, of the present antagonism in the public mind to business, particularly to large business.”
Over the years, AT&T had not been content to be merely the neighborhood telephone monopolist. No, AT&T was the jealous God of telecommunications, brooking no rivals, accepting no sharing, and swallowing any children with even the most remote chance of unseating Kronos. As it insisted to the FCC in 1968, competition was inconsistent with its very mission of running a phone system: hence the Bell companies “must have absolute control over the quality, installation, and maintenance of all parts of the [telephone] system in order effectively to carry out that responsibility.” Much trouble came from this deep aversion to competition. Almost as if unable to help itself, it did everything it could to kill MCI, a tiny rival that used microwave towers to offer cheaper long distance services. Over the 1970s, like an enraged bull, the firm became even more aggressive in its attacks on competitors, despite the ongoing investigation. Its seventh decade would be its last.
In addition to the economic, there were particular political, even Constitutional, justifications for the AT&T lawsuit. As a regulated monopolist, AT&T had a resistance to competitors born of government support. Congress had, at times, made it illegal to compete with AT&T in some markets. And at times the FCC had been willing to assist the monopolist in its extermination of even relatively minor competitors, like those who sought to attach “foreign” equipment (like answering machines) to the phone lines. In short, given both the firm’s entrenchment and its relationship with government, expecting “the market” to naturally limit the firm’s monopoly was wishful thinking.
One of the real triggers for the Justice Department, however, was signs that AT&T was also resistant even to government control. Over the 1970s, the FCC, in a change of policy, was actually trying to introduce competition in equipment and long-distance services. In a particularly farsighted effort, the FCC introduced an ancestor to Net Neutrality rules, in an effort to protect the first “online service providers” from death or destruction by the monopolist. But Bell managed to subvert or undermine many of these policies, thwarting the introduction of competition, running roughshod over the FCC. As in Theodore Roosevelt’s time, the idea of a monopolist that considered itself above government control compelled the Justice Department to action.
The AT&T litigation lasted a decade, but created no great court decision, and in fact the Supreme Court never weighed in. Instead, in the early 1980s, during the Reagan administration, AT&T agreed to a dramatic breakup that echoed those of the classic trusts. The firm held on to its long distance services, Bell Labs, and Western Electric, its equipment manufacturer. But seven separate regional operating companies would be carved from the corporate carcass, the local monopolists now released as independent companies. Since each of the so-called Baby Bells would continue to have an effective monopoly over local services, each was placed in a newly designed regulatory cage of reinforced and toughened FCC rules. Each would be obliged to accept connections from any long distance company (not just their former parent), and all were explicitly shut out of new markets such as online services and cable.
As the last major breakup, it is worth examining what consequence it had. It unquestionably created chaos over the short term. Some economists point to lower prices in the wake of the dissolution, but the real impact was different and far more important. It became apparent, in retrospect, just how much innovation the Bell system monopoly had been holding back. For out of the carcass of AT&T emerged entirely new types of industries unimagined or unimaginable during the reign of AT&T. For example, the liberty to sell things to consumers that plugged into a (new) phone jack not only yielded the answering machine, but the home modulator/demodulator, or modem, allowing a home computer to speak with a network. That, in turn, made feasible an industry of “online service providers” like AOL or Compuserve, which themselves spawned internet service providers that were accessible from home, producing the Internet revolution.
Politically, the slicing and dicing of the Bell System weakened the political power wielded by the entity, and made it harder to control or destroy the entrants into mobile phone service like T-Mobile and Sprint. For a while, over the 1990s, the split between AT&T (in long distance) and the underlying Bell companies created some equality of arms in the world of telecommunications lobbying, lasting at least until the Bush administration foolishly allowed the Bell system to reconsolidate into two large empires.
Obviously not everything that happened over the 1980s and 1990s can be attributed to the AT&T breakup, but so many of the basics were impossible under the Bell system that real credit must be given. We might also consider nations that did not break up their telephone monopolies. The Europeans, always more corporatist, left their telecom monopolists intact, and found their computing industries perpetually relegated to the sidelines. But perhaps the strongest counterexample is Japan, which, by the 1980s, was considered a serious rival to the United States in technology industries such as computing and online services. But because Japan never broke the power of its telephone monopoly, independent telecommunications and internet firms never really grew, and by the early 2000s the United States had leaped far ahead. There is, after all, only so much you can do when your innovations need to be engineered not to disturb the mother ship.
Microsoft
Joel Klein was President Bill Clinton’s second head of antitrust at the Justice Department, and many thought Klein would a mild-mannered laissez-faire kind of guy. But he surprised everyone by seizing the mantle of the Trustbuster to prosecute the last of the big cases of the twentieth century, against the Microsoft monopoly. “Where I think there is a case, I want to litigate,” he told the Washington Post. “I’m not looking for seven cents on the dollar, or something like that.”
Microsoft, in the 1990s, was a different sort of creature than the gentler giant it would later become. It was an aggressive, cunning, and often abusive machine, ruthless in its dispatch of its various rivals. Its founder and leader, Bill Gates, before he became a philanthropist, was the archetype of the evil nerd, a brilliant strategist who, while rarely holding the better technologies, nonetheless managed to consistently beat and outplay firms that did.
Gates had an undeniable gift for foreseeing the future and the ambition to try to always control it. By 1995, he’d noticed that this whole “internet” thing might threaten Microsoft’s dominance over much of the computing industries. As he pointed out in a secret memo entitled “The Internet tidal wave,” it was very possible that people might come to think of the web as more important than the applications running on their computers, and of the browser as more important than their operating systems. He was right: Microsoft’s two main monopolies were endangered.
Gates also had an acute sensitivity to where the points of control in his industry were to be found: He quickly seized on the browser as the key to the future. At the time, the leading browser was a darling little company named Netscape, whose Navigator was the first browser of truly mass popularity. To control the browser, Gates realized, was to gain control over the future of the web, and, as it later became clear, pretty much the future of the world.
It was an acute insight, but not an unfamiliar one, because it was actually a replica of the maneuver that Gates had built his entire fortune on. From the beginning, Microsoft had proven the mantra that good artists copy but great artists steal. Its first operating system (MS-DOS) was actually a clone of CP/M, another operating system.* Microsoft Windows was a rip-off of the Apple Macintosh operating system; Microsoft Word and Excel were copies of Wordperfect and Lotus 1-2-3, respectively. In no instance were Microsoft’s products actually better in a clear way—instead, they were always bundled with something else you really needed. Microsoft’s products never won by choice, but rather, by the sense that there was no real choice.
By the late 1990s Microsoft had unleashed its signature strategy against Netscape. Explorer was Microsoft’s copy of Navigator, and suddenly Explorer was everywhere and Navigator nowhere. That was no accident, but rather the byproduct of coercive deals pushed by Microsoft on the entire industry. In a few short years, Netscape was bankrupt, and Microsoft had added a new monopoly to its collection.
In our times, with minimal antitrust enforcement, Microsoft would have been in a perfect position to control the future of the internet, just as Gates had planned. Small firms like Google, Facebook, Amazon, and others were all dependent on the web browser, over which Microsoft now had a monopoly. To take just one example, it is highly doubtful that Google would have achieved dominance in a world where Microsoft could dictate what search engine was being used on every computer in the world. We would all be using BING.
Microsoft was a monopolist with over 90 percent of the market share, engaged in the destruction of a small company with the goal of acquiring a new monopoly in a new market. Nonetheless, the critics of antitrust attacked Klein for bringing suit. Tech markets were too complicated or “fast-moving” for the law to catch up and understand. The government would kill the goose that lays the golden egg.
But the facts, as they came out, strongly favored the Justice Department. Microsoft’s motives were made clear by its internal memoranda; and Microsoft had great difficult coming up with anything but the most pretextual reasons for the tactics it employed against Netscape. Bill Gates endured a brutal and lengthy deposition, which, if it did not score any fatal blows, revealed a far darker side to the man than his various hagiographies had depicted.
The Justice Department won in district court, and then won on appeal, and seemed to be cruising toward another big breakup. “Big case” antitrust, it seemed, was alive and well. But it was just about then that George W. Bush won the 2000 presidential election, by a small and contested margin of the Florida vote. Not too long thereafter, his Justice Department decided to settle the Microsoft litigation, instead of seeking the traditional breakup. It was a sign of things to come, for with that, the campaigns against monopoly and overconcentration were about to enter their deepest freeze since the time of William McKinley.
*The core of MS-DOS, moreover, was acquired from another firm, Seattle Computer Products.