Breaking Up (Companies) is Hard to Do–But It Does Happen

Jun 17, 2021 | Techonomy

The backdrop was the 1980’s. The Reagan years. It’s a tale of two companies– AT&T and IBM.  The first was broken up by the government for having a near-absolute monopoly in telecommunications.  The other was left untouched because it promised to mend its monopolistic ways in what was then a merely-nascent computer industry.  Looking back over the past forty years reveals a lot about the pros and cons of regulating monopolies. It also suggests that today’s American tech monopolies and semi-monopolies may themselves not last in their current form, regardless of government action.

Here’s a NYT headline from Jan 9, 1982:

U.S. SETTLES PHONE SUIT, DROPS I.B.M. CASE; A.T.& T.  TO SPLIT UP, TRANSFORMING INDUSTRY

Books have been written about each of these cases, but here’s the skinny:

The Bell System (fondly recalled as Ma Bell) was the company store of telecommunications. You bought (or more likely rented) your hardware (phones) and your service (dial up) from the Bell System. (The American Telephone & Telegraph Company, later known as just AT&T,  had become the monopolist after the American Bell Telephone Company sold its assets to its subsidiary in 1899.) Long distance, local calls, international calls, hardware, support, enterprise equipment — AT&T owned it all, and used its power to squelch competition. If you used its lines, the company for many decades successfully defended its rights to prevent you from attaching to them any equipment other than its own.

In 1982, after a prolonged legal battle with the U.S. Department of Justice, AT&T was forced to split up.  It relinquished control of the Baby Bells, as they were known, which were the regional operating companies (RBOCs) that provided local service. The RBOC business at the time was valued at about two-thirds of AT&T’s total assets. After the breakup, the RBOCs would still provide local service but no longer would customers be forced to buy or rent hardware from AT&T’s Western Electric device-making subsidiary. It’s widely agreed that the breakup introduced competition and innovation, ushering in the explosively innovative era of the internet and wireless communications.

At the same time, IBM was mired in a 13-year antitrust battle over its monopolization of the computer industry. IBM unveiled its first computer in 1952 and in the 60’s and 70’s had 70 percent of U.S. computer market share. The series of antitrust suits which began in 1969 were all dropped by then Assistant Attorney General William Baxter in 1982. During the six most critical years of the trial, from 1975 to 1980, the parties called 974 witnesses, resulting in 104,400 pages of transcripts, according to Emerson Pugh’s 1995 book Building IBM: Shaping an Industry and Its Technology.  Baxter cited the enormous costs of litigation and an unlikely settlement as the main reasons for dropping the case.

Fast forward.  Despite the fact that one company was forced to breakup and the other was given a stay, the results have not been that different. The breakup of AT&T produced immediate benefits (and a few headaches) for consumers.  They could buy an inexpensive phone from a different company and not fear that AT&T would refuse to provide services.  A thriving market for phones appeared.  Prices decreased, quality increased. The Baby Bells that provided local services were forced to allow consumers to choose between different competing long-distance carriers. Companies like MCI and Sprint were born and long-distance calls became dramatically less expensive.

Those who remember that era might remember rampant consumer confusion, though. Suddenly you had myriad choices and it was up to you to piecemeal your phone service needs into a unified plan. But, ultimately it paved the way for the move from telephony towards the birth of cable and wireless services, which eventually became dominant players in the new Internet market. One can easily argue that the wide adoption of the Internet would have taken must longer had AT&T not been broken up.

For IBM it was natural evolution, not legislative and regulatory forces that prevailed. IBM’s mainframe business was rightsized based on market pressures. The company went on to face huge competition in the PC market, with much less ability to dominate than it had had in earlier eras. (Recall that eventually IBM sold its PC business to Lenovo, and got out of other hardware businesses like printers, too, by spinning off various of its parts.)  In the battle between IBM’s PCjr and the Apple II there was ultimately a very clear victor. Analysts cite IBM’s underestimation of the importance of the PC as the company’s Waterloo. Perhaps focusing on maintaining its mainframe and minicomputer dominance took its focus off of the much bigger prize.  Today, IBM is more squarely positioned in the software business with its eyes on prizes like AI and quantum computing.

There are many parallels with today. Now the Senate and Congress, the judiciary, and the FCC are all grappling with big tech’s massive acquisition of power — data information, pipelines, ecommerce, hardware, fulfillment– the list goes on and on. The platform players–Amazon, Google and its parent company AlphabetApple, and Facebook–maintain an outsized hold on what are in effect many industries. Now many argue that it’s time to wrestle with regulation again.

This week a Senate panel confronted Amazon and Google officials about their unfair competitive edge and the  stranglehold they have on  consumer data and access to smart home devices. President Biden also this week named Lina Khan as the Federal Trade Commission’s new leader. Khan became prominent for her tough and innovative views for how to rein in Amazon. There is even bipartisanship around the idea that these companies need tough regulation, though Democrats and Republicans radically disagree, most of the time, on what the companies are doing wrong.

Again, we have two paths–natural selection or regulation. Facebook is an obvious example of a company that will likely become less dominant because of market forces. Despite its best efforts to mimic or acquire competition, newcomers like TikTok, SnapChat, and Discord are gaining. Similarly, Epic Games is taking on Apple in an attempt to release its stranglehold in its apps store. Other application companies are cheering that on, and in general the control Apple, Google and even Facebook have exerted over their app stores is almost certain to diminish.

Google and Amazon?  If regulation can work, the likely place to start would be with this duo. Splitting Amazon’s various arms seems fairly straightforward. It’s easy to envision a world where hardware (like Alexa) or fulfillment chains like Whole Foods and Amazon Go stores would be spun off from the Amazon online store, for starters. Amazon Web Services could, it seems, quite easily have its own independent life. Similarly, Google’s hardware, smartphones, tablets, laptops, earbuds, Nest, and Google Home products and services could easily be separated from its parent search-based company.

Jonathan Zittrain,  law professor and co-founder of the Berkman Klein Center for Internet & Society at Harvard University testified this week at the Senate antitrust hearing. He warned that the Internet of Things moment we’re experiencing now requires regulatory intervention: “There is a layer of genuine if superficial competition among competing ecosystems to connect people with the things whose features they’d like to control over the Internet — usually through their mobile phones. Amazon, Google, and Apple are among those offering smart home systems to control such things as light bulbs, thermostats, and speakers. And some makers of devices, whether particular brands of light bulbs, dishwashers, or home security systems, offer single-purpose mobile phone apps or Web sites through which to control those things over the Internet.”  He contends that the government should focus on breaking the “artificial” connections between smart devices that the top players are developing. “There is also no way of discovering how the companies are using vast amounts of data”, he said in his testimony. “ Now is the time to arrive at a vision “to set clear boundaries for market participants.”

There is a raft of bills and legislation floating around Washington. Any one of them could force companies like Google and Amazon to divest themselves of certain categories of product or to make other major changes that would diminish their power, but that journey is likely to be long, arduous and expensive.

The desire to break up big tech is one baby step in a long journey.  But especially in the cases of Amazon and Google, a little divestiture might spark a raft of innovation that might never see the light of day in the present environment. But just like in the 1960s, it’s likely that both government force and market forces will eventually lead to a fairer, more level, and ultimately more innovative playing field in technology.

Source: https://techonomy.com/2021/06/breaking-companies-hard-happen/

 

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