On the need for government intervention in the free market to protect competition and encourage innovation
Gary Reback is one of the nation’s most prominent antitrust attorneys, best known for spearheading the efforts that led to the federal lawsuit against Microsoft. Gary spoke to an attentive and eager audience on May 14th in Santa Clara, CA. The Commonwealth Club and Yale Club of Silicon Valley sponsored his enlightening and provocative talk. Reback’s main message was that the government l’aissez faire policies, so strongly promoted by University of Chicago economists, have gone way too far. As a counter-weight, he says we need more government oversight of the private sector along with more vigilant anti-trust enforcement.
To set the stage for the current recessionary economy, Gary began by chronicling the history of the U.S. antitrust movement. From its beginnings in the 1870s (a time when big business controlled the railroads), through Teddy and Franklin D. Roosevelt, Thurmond Arnold and others, there has been an ebb and flow of power and control between the federal government in Washington and big business (e.g. monopolies) or Wall Street investment firms. Starting about thirty years ago, conservatives forced an overhaul of competition policy that has loosened business rules for everything from selling products to buying competitors. In the free market era of the 1990s, big business and investment banks certainly had the upper hand. To a large extent, that is what has caused the global financial meltdown and enabled companies like Microsoft, Intel, Cisco, Oracle, and Google to become so powerful. We were surprised to learn that expensive medical care and non-generic prescription drugs are the result of a lack of anti-trust enforcement.
Mr Reback firmly believes that in a high-tech world, U.S. government “hands off” policies actually slow innovation, hurt consumers, and entrench big companies at the expense of entrepreneurs. In particular, Gary calls for increased government scrutiny of high tech firms monopolistic practices. He argues that monopolies have the power to raise prices by restricting output, supply and competition. As a result, the economy weakens, unemployment increases, and innovation is pressured.
We take it for granted now, but many of the advances in semiconductors and software were the result of a few dominant lawsuits against big companies.
In the late 1950’s, AT&T was forced by the U.S. government to license the transistor. William Shockley, one of the co-inventors of the transistor, licensed it from AT&T to form Shockley Labs, which later begat Fairchild Semiconductor, which in turn begat Intel, AMD, and National Semiconductor. The early years of the semiconductor industry in Santa Clara Valley (it was not called Silicon Valley till the mid 1970s) was therefore, a direct result of the lawsuit against AT&T. For more on those early years, please see the article by this author:
In the early 1970s, concerned about possible anti-trust legislation, IBM was forced to unbundle software from hardware. This created a whole new independent software industry, which had not existed before. Software had previously been bundled with mainframes and minicomputers made by the same computer manufacturer.
Merger enforcement is perhaps the biggest business issue of our time, according to Reback. What do we do with companies too big to fail? How about Citibank Group, for example? If it had not been for the repeal of the Glass Steagall act in 1999, Citi would not have been able to acquire Smith Barney, Solomon Brothers and other investment firms. Hence they would not have gotten too big to fail. Better to have government carefully scrutinize the mergers and acquisitions and/or break up large companies before they become too big to fail! One has to wonder if certain tech companies, like Oracle and Cisco have become too dominant in their industry or even too big to fail because of acquisitions that occurred without anti-trust scrutiny. For example, Oracle has done over 40 mergers after it acquired People Soft and now has proposed to acquire Sun Microsystems.
Is Google the next Microsoft? Yes, in terms of its dominance over web search software, in comparison to Microsoft control over desktop and notebook PC software. No, in at least two other important ways:
- Google created technology that people liked and it worked well.
- The company was also more customer friendly with a more congenial corporate culture and image.
Author’s Note: the next battle between these software titans will be in mobile OS market- Android platform from Google vs Windows Mobile from Microsoft.
Gary believes that Google’s big search competition will come from social networking sites (e.g. Twitter and Facebook), rather then from traditional search engines from Yahoo or Microsoft. He also noted that potential anti-trust action was enough for Google to call off its plans to put adverts on Yahoo’s search result pages.
Was the European Union’s (EU) huge fine against Intel Corp justified? Just one day before this talk- on May 13th- EU regulators slapped a record 1.06 billion euro ($1.45 billion) fine on Intel for antitrust violations and ordered it to halt illegal efforts to squeeze out arch-foe AMD. This fine was levied after an 8 year EU investigation of the company. "Intel has harmed millions of European consumers by deliberately acting to keep competitors out of the market for computer chips for many years," EU Competition Commissioner Neelie Kroes told a news conference.
Should Intel have known better to refrain from engaging in unfair trade practices? Most definitely yes, according to Gary. Intel was actually a U.S. government witness in the huge anti-trust suit against Microsoft in 1998. The plaintiffs (US Department of Justice and 20 states) alleged that Microsoft abused monopoly power on Intel-based PCs in its handling of operating system and web browser sales. The issue central to the case was whether Microsoft was allowed to bundle its flagship Internet Explorer web browser software with its Microsoft Windows operating system. Bundling them together is alleged to have been responsible for Microsoft’s victory in the browser wars, especially over arch rival Netscape (which seemed by this author to be a superior web browser). Didn’t Intel learn anything from the trial and the verdict against Microsoft regarding unfair competitive practices? Gary response, "Of course, Intel says it is innocent of the charges and never broke the law, so perhaps the company will be exonerated after the EU Commission decision is reviewed by the European courts."
Opinion: We suggest the reader to ask the question to an Intel executive or lawyer.
In summing up, Reback opined that “anti-trust action failures” in the health care and banking industries have contributed to unreasonably high medical costs and a financial meltdown. Meanwhile, heightened scrutiny over acquisitions (e.g. Oracle’s) would result in a stronger U.S. economy by encouraging more competition and invigorating innovation and the start up culture.
Bio: Gary Reback is one of the nation’s most prominent antitrust attorneys. He has been named one of the “100 Most Influential Lawyers” in America by the National Law Journal and is quoted regularly by major media. His book Free the Market! is a memoir of Reback’s titanic legal battles—involving top companies such as Apple, Microsoft, IBM, Oracle, and AT&T—and a persuasive argument for measured government intervention in the free market to foster competition. Gary is currently of counsel with Carr & Ferrell LLP. He is a very friendly and easy to get a long with person, in this author’s opinion.