Gary Reback: US Government Must Enforce Antitrust Laws to Encourage Innovation

May 15, 2009
By

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:
 
www.computerhistory.org/events/The_Rise_of_Silicon_Valley_EventSummary.pdf
 
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: 
  1. Google created technology that people liked and it worked well. 
  2. 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.
 
 
 

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15 Responses to Gary Reback: US Government Must Enforce Antitrust Laws to Encourage Innovation

  1. Alan Weissberger
    June 27, 2009 at 10:39 am

    Gary Reback will be speaking at the Computer History Museum in Mt View, CA on June 28th. If there is any interest, I’ll write a summary report. Please let me know.

  2. caridad O'Neill
    June 7, 2009 at 9:41 pm

    I think the Commonwealth Club-SV should have a lecture on the increase in Autism amongst children of parents working in High Tech- especially in Silicon Valley. It is a more appropriate topic than anti-trust legistlation against tech companies.

    • June 7, 2009 at 9:45 pm

      This request was already made to Gloria Duffy- President of Commonwealth Club.

  3. May 22, 2009 at 9:30 am

    Regarding Google, the San Jose Mercury reported that “Valley firms to face heightened antitrust scrutiny.” Here’s a quote from the article:

    In a meeting with reporters last week, Google CEO Eric Schmidt said, “Information is incredibly important, and we should expect governments around the world to pay attention to what we do, and also to hold us to the principles that we’ve articulated.” He said Google has been working harder to anticipate concerns and is trying to strike a balance between doing the right things for its users and dealing “with very legitimate concerns about what we are doing.”

    http://www.mercurynews.com/business/ci_12342433

    So why is Schmidt still on Apple’s Board of Directors?

  4. jake Gibbons
    May 20, 2009 at 10:03 am

    From a US government antitrust perspective, Google is the next Microsoft. Google dominates the Internet search and search advertising business just as Microsoft completely controls and owns PC software. Google withdrew from their Yahoo business relationship, because they feared the government would launch an antitrust investigation.

    The New York Times got it right in their article: New Mood in Antitrust May Target Google

    http://www.nytimes.com/2009/05/18/technology/companies/18antitrust.html

    There is also the matter of Google CEO Eric Schmidt being on Apple’s board of directors. Seeing those two companies will be competing in several markets (e.g. Google’s Android phones vs Apple’s iPhone), isn’t that an anittrust violation?

  5. May 19, 2009 at 7:24 pm

    I don’t think we can make all reprehensible business conduct illegal. Would congress actually pass such a law?

    There is often a fine line between unlawful and unethical conduct. Therefore, I believe the U.S. government should encourage business leaders of large corporations to practice good business ethics. Perhaps, all management employees should be required to take courses in business ethics and pass a test, inorder to maintain their management positions.

  6. May 19, 2009 at 6:32 pm

    Editor’s Note: Gary Reback provided this comment via email to be posted herein.

    Gary Reback responds to comments:

    Several comments have raised questions about the EU’s fine against Intel. First, while the U.S. government’s case against Microsoft involved some complicated antitrust questions about whether Microsoft could bundle its browser with its operating system, the balance of the charges leveled against Microsoft bear more than a casual similarity to what Intel is accused of.

    In the Antitrust Division’s 1994 case against Microsoft, the company was accused of adopting a discount schedule — called a “per processor license” — that made it impossible for computer manufacturers to adopt the operating system of a Microsoft competitor for any portion of the manufacturer’s line without having to pay double for the Microsoft operating system still needed for the manufacturer’s primary products. Microsoft did not contest the charges and agreed to stop the practice.

    But a few years later, Microsoft was accused of paying (that is, giving discounts to) computer manufacturers and Internet service providers so they would put Netscape at a disadvantage — by giving that company’s product poor placement on the desktop or by not offering it to purchasers in the first instance. This time Microsoft contested the charges and a court found against it. Microsoft contended that its practices did not harm consumers, but, again, the court found otherwise, and its decision was affirmed on appeal.

    Microsoft eventually settled the case by promising, once again, not to engage in preclusive discounting practices. Intel stands accused of much the same — giving discounts to computer manufacturers on the condition they use fewer AMD chips. But while Microsoft has been found culpable by the courts, Intel merely stands accused.

    We haven’t even seen the EU’s evidence yet (I expect much of it to be made public very soon), much less the result of a court’s evaluation. So, while I can understand the sentiment of some to condemn Intel more vigorously, I’d simply like to wait a bit to see how the evidence — as opposed to the allegations — actually turns out.

    Several people have raised questions about Intel’s business ethics, as did Chris O’Brien in the Merc. We all want our companies to behave honestly and ethically. But ethics are sometimes a matter of personal judgment. What seems ethical to some people people is reprehensible to others, sometimes making it difficult to go after companies just for ethical lapses.

    I have always believed that if we believe certain business conduct is reprehensible, we should make that conduct illegal, so companies know what to do and not do, without resorting to debates about ethics. In this case, both the EU and the U.S. have set up legal rules to prevent discounts that harm the competitive process by precluding legitimate competitors. I think we are better off focusing on the legal rules in this case, instead of relying on the vagaries of ethical judgments.

  7. Dave Walters
    May 19, 2009 at 11:14 am

    I think business ethics is much more important then merger enforcement. We need to teach our corporate leaders to instill ethical behavior in the workplace. Despite all the scandals and antitrust violations, they still have not learned anything!

  8. May 19, 2009 at 7:56 am

    NY Times: New Mood in Antitrust May Target Google
    http://www.nytimes.com/2009/05/18/technology/companies/18antitrust.html

    In the new antitrust climate of the Obama administration, the stakes appear to be highest for Google, the rising power of the Internet economy.

    The new antitrust leadership, legal experts say, is likely to scrutinize networks — technology platforms that become so dominant that everyone feels the need to plug into them. The advantages to the companies that control such networks snowball as they attract more users, advertisers or software developers.

    Internet search and search advertising, like personal computer operating software, is one example, said Herbert Hovenkamp, an antitrust expert at the University of Iowa law school. “Google is a dominant network, as is Microsoft,” Mr. Hovenkamp said. “Networks become competitive only if everyone has the same chance.”

    Google’s corporate behavior is already being closely monitored. Last year, Google abandoned a planned search advertising partnership with Yahoo after the Justice Department said it intended to file suit to block the agreement on antitrust grounds. Google has 64 percent of the Web search market in America, while Yahoo has 21 percent and Microsoft 8 percent, according to comScore, a research firm.

  9. May 18, 2009 at 7:05 pm

    Correct url for San Jose Mercury article on Intel losing its moral compass:
    http://www.mercurynews.com/ci_12363898

    Quote from SJ Merc article:
    “Intel’s behavior even seems egregious when compared to some of the worst accusations leveled against Microsoft during the days when it faced its own antitrust legal problems. Yes, Microsoft may have been heavy-handed in dealing with PC makers in requiring them to take its browser so it could suffocate Netscape. But it never paid people to not distribute Netscape Navigator.” Perhaps, that answers Jack Reed’s comment.

    It’s pretty damaging stuff, especially coming from the home town newspaper! It seems to me that Intel’s reputation is severely tarnished and it will be difficult for them to re-establish their good name established by Bob Noyce, Gordon Moore, and Andy Grove.

    And Intel has yet another huge battle to deal with. The Billions of dollars the company has spent nurturing a mobile WiMAX ecosystem is not paying off in revenues, let alone profits. Unfortunately, this Silicon Valley icon seems to think too much of itself, but it is not invincible.

  10. Jack Reed
    May 18, 2009 at 5:36 pm

    Excellent summary of a very interesting and relevent talk!

    How does Intel’s anti-competitive practices compare with those of Microsoft (forcing PC OEMs to bundle Microsoft IE and other software in the products they sold)? They seem to be quite similar, except it was hardware in one case (Intel) and software (Microssoft) in the other.

    What does the speaker think? Readers?

  11. Caridad O'Neill
    May 18, 2009 at 5:21 pm

    I attended this lecture on May 14th, but I’m not sure if the topic was broad enough. Shouldn’t business ethics been addressed too?

    I was surprised that Mr. Reback did not have more to say about the EU’s record $1.4B fine against Intel- either in his prepared remarks or in answer to a written question on this same issue. The author of this article asks: should Intel have known better?

    The San Jose Mercury certainly had an answer to that question. They chose to put an opinion piece by Chris O’Brien on the front page of its May 14th edition titled: “Intel executives lost their moral compass”

    Brien writes: “I still found myself stunned by the behavior of Intel documented by the European Commission in its antitrust case. One would hope that even the most aggressive of competitors would find a line it would not cross. One would hope that a large public corporation would not engage in systematic behavior that could risk eroding the company’s hard-won reputation built over decades should it ever come to light.

    But in Intel’s case, apparently not. Instead, it appears that some executives at this legendary company have misplaced their moral compass.”

    What does the speaker or readers think about that?

  12. May 16, 2009 at 3:00 pm

    The first thing that you have to ask is whether or not the federal government has the authority to implement antitrust regulation and since it is not an enumerated power, it is obviously prohibited by the 10th Amendment. Far from encouraging innovation, it has created an economy that focuses on improving the same mousetrap because it is the easiest way. We do not know whether or not there is a better way to communicate and share information than the PC. We can’t imagine one because we have not been encouraged to. We can simply make a living by building a PC that is slightly faster and slightly cheaper with maybe a few more features.

    All of this speculation is going on as the government supports the largest most powerful monopoly in the world and its siblings. The Federal Reserve’s monetary policies have created one bubble and recession after another while the inflationary nature of these policies have caused the American work force to become non-competitive and forced corporations to move their manufacturing offshore or to lobby the government for more H1-B visas. In the meantime, Congress has allowed Fed siblings to, after they get us trapped with predatory marketing, raise their interest beyond loan shark rates and strip us of our wealth. We have a problem because these companies exist. 95% of the banks are not in trouble and we will not have a problem if the perpetrators of our economic crisis disappear.

    The correct way to increase the money supply to support innovation and a growing economy is to issue it as a grant that does not have to be paid back to companies involved in new technology. It is not to issue it in the form of a loan that has to be paid back with interest stripping the money supply plus interest from the economy.

    Intel has every right to get as much business as it can and its ability to do so should not be limited by any government. AMD also has the same rights and if they can’t take the heat they should innovate and get into another market. Instead of taking the EU back into court, Intel should simply prevent its product from being shipped to EU member countries. Unless AMD can find the capital and infrastructure to suddenly quadruple their capabilities, the EU will quickly change its tune.

    Prices that are too high result in unsold product and create opportunities that are quickly filled by innovation. This was recently proven by gasoline prices. Over 50 new electric, hydrogen, and compressed air powered car companies, along with battery developments, rapidly came into existence and gasoline prices dropped rapidly. Fortunately, a bad taste was left in the mouths on consumers and a few of these new alternative fuel companies will survive aided by concerns about the environment and our dependency on foreign oil.

    The federal government is responding to the speculated crisis by trying to implement cap and trade. Polluters will buy carbon credits, mark them up, and resell them to the public. The population will end up paying polluters to pollute and the capital needed to fund innovation and buy it will be further stripped from the economy. This is such an obviously destructive program that you begin to understand where conspiracy theories come from.

    As a result of lobbying money and campaign donations, the federal government, in spite of the fact that over 75% of the non-government employed population works for small business, now regulates on behalf of big business. If you are a work at home mom making ends meet by creating teddy bears and selling them, you must now first submit them for testing first. You must do this for each new doll or stuffed animal that you create. In other words, you are out of business along with retail stores that resell used toys and children’s books.

    The federal government was created and given the authority to protect our rights and property. It was not given the right to regulate but it was given the power to make sure that state regulations do not become oppressive or destructive. This could be simply and legally accomplished with a law that says that if you create and produce a product that causes harm to the population or its property, you will be prosecuted and imprisoned.

  13. May 16, 2009 at 2:07 am

    Agree or disagree with Reback, he raises some interesting points. A level playing field and one where the rules are the same for all players is imperative. It’s definitely a question of balance, as government intervention, with its inertia and influence of politics, has been shown to harm as well as enhance economic development.

  14. May 15, 2009 at 8:47 pm

    Here’s the San Jose Mercury book review of Gary’s latest:

    Gary Reback’s new book argues for antitrust action

    When the full history of Silicon Valley is written, attorney Gary Reback will occupy a spot halfway between a modern-day Tom Paine and Paul Revere. Nobody was more responsible than the 59-year-old Tennessee native for the legal assault on Microsoft a decade ago.

    In his new book, “Free the Market!” which is due to be published formally in April, Reback offers a smorgasbord of words — part legal argument, part memoir, part economic treatise. Reback assails his foes in the “Chicago School” of antitrust theory, who prescribe a laissez-faire role for government. But it’s the memoir of legal warfare that will interest most of us.

    Reback was there for almost all the key battles — defending Apple in its fight with mail-order merchants; holding Borland’s standard against Lotus before the U.S. Supreme Court; persuading the government to question the Microsoft-Intuit deal, and of course, persuading Justice Department officials to sue Microsoft as a monopolist.

    The book, which you can pre-order for $17.79 on Amazon.com, is tough slogging at many points for a lay reader. But there is no mistaking Reback’s two central arguments: He tries to refute the view that competition resolves monopolistic behavior, and he rejects the argument that government intervention is almost always bad.

    More at: http://www.mercurynews.com/ci_11700122?source=rss

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