Monopolies Without End
The rise of Microsoft, and the antitrust dilemma it has produced, is at once an old story, a uniquely contemporary problem and a harbinger of things to come.
The government’s proposal to dismember Microsoft into separate companies selling operating systems (e.g., Windows) and applications software (e.g., Office) is well-founded. The company is, in fact, a predatory monopolist. Yet, Microsoft is also beginning to show its age, which could become an even more dangerous problem over the next 20 years.
Declining, inefficient monopolists often use their accumulated power to coast. They can retain market dominance and high profits long after their technology falls behind, slowing technical progress and innovation throughout their industry. In the technology sector, where technical change averages more than 40% a year and is the lifeblood of progress, this can be exceedingly dangerous. In some cases, as with IBM between 1980-95, this “excess momentum” can result in huge economic losses before unaided markets correct the problem.
Thus, both because of Microsoft’s ruthlessness and prospective inefficiency, its divestiture, if handled intelligently, would yield significant economic benefits for the U.S. and world economy. In fact, the government took far too long to challenge Microsoft’s behavior effectively. Furthermore, for all its power, Microsoft is a small problem compared with several other regulatory and antitrust problems being generated, or in some cases revealed, by the Internet revolution. For example, both domestically and worldwide, the telecommunications industry alone probably causes at least 10 times more economic damage than is associated with Microsoft’s monopoly. Yet, the antitrust authorities have taken, as yet, no action in this domain.
Slowly, the U.S. government is beginning to realize that Microsoft is only one symptom of a far larger issue. Last week, the assistant attorney general for antitrust, Joel I. Klein, and Treasury Secretary Lawrence H. Summers both delivered speeches in California. Klein defended the proposed Microsoft divestiture. He noted that Microsoft’s recent arguments resembled those advanced by the AT&T; monopoly in the 1970s, which were later proved false by AT&T;’s successful divestiture.
Summers spoke more generally. He noted three features of the information revolution: its dependence on brainpower more than conventional economic resources; the globalization of information technology and markets; and that the industry tends to produce successive monopolies, with a single firm often dominating each generation of technology and products.
Both Klein and Summers were correct in what they said, but there is far more to say. As information technology becomes the engine of world economic growth, it is colliding with powerful, entrenched systems, including monopolies protected by law, wealth and political power. In some of these collisions, technology is losing.
For now, with the exception of Microsoft, most of the technology sector itself is in quite healthy shape: competitive, fast-moving, with an astonishing ferment of new start-ups in areas ranging from Internet software to networking equipment to Web sites to wireless data services. Even Cisco Systems, the awesomely wealthy firm that produces the equipment used to operate the Internet and corporate intranets, is losing market share to younger firms in some important areas. Intel faces competition both from clones and from newer, cheaper microprocessors used in game systems and palmtops. Oracle, IBM, Microsoft and others continue to compete for the database-software market. The world now contains an estimated 10 million Web sites, and there is no danger that anyone will monopolize them. And this year, venture-capital investment in new technology start-ups will probably reach $100 billion in the United States.
This is not to say, however, that everything is fine. First, as Summers correctly stated, the technology sector does tend to generate monopolies, and, at some point, that will surely happen again. But far more important at the moment, the technology revolution has another vital characteristic. As digital information technology progresses, its natural behavior is to invade and replace traditional industries based upon older technology. Thus compact disks replace vinyl records, DVDs replace videotape, digital cameras are replacing film, e-mail is starting to bother the post office and FedEx, and the Web is beginning to encroach upon traditional publishing, even of digital CDs.
In these situations, as long as it’s a fair fight, the technology sector takes its proper share, and things are just fine. The problem is that it’s not always a fair fight. There are many industries in the United States or elsewhere that are entrenched monopolies or are heavily protected by government regulation, or both. In various nations, these include retailing, financial services and publishing. There is, however, a standout. By far the worst, most powerful, most damaging and most important monopoly endangering technology-based economic growth is local telecommunications--your telephone company and cable TV provider.
Local telecommunications is a $100-billion industry in the United States, more than $500 billion worldwide. It is both utterly vital to, and deeply threatened by, the Internet revolution and the health of the entire U.S. technology sector. It is also a politically powerful, technologically obsolete, inefficient monopoly industry whose true core competence is blocking competition, progress and change. Yet, local telecommunications, long a sleepy regulated utility sector, must now become an extremely fast-moving, very-high-technology industry.
Traditional telecommunications technology is increasingly obsolete. New, often Internet-based technology will (or at least should) soon start to displace traditional telephone service, fax, videoconferencing and data-communications services. Indeed, even in the face of the industry’s opposition, Internet telephony is growing rapidly. Internet-based technology could dramatically lower the prices, and increase the markets, for traditional services and also make possible a wide array of new offerings. Thus, on the one hand, there is a huge opportunity.
But, on the other, there is an immense need not being met. Every part of the technology sector--personal computers, networking, palmtops, software, Web services--is undergoing technological progress of at least 40% a year. These sectors, and their users, all depend on local telecommunications for Internet access, and for all these industries to make continued progress, it is imperative that telecommunications keep pace. However, telecommunications is most definitely not keeping up. While the industry generally refuses to release the data required to assess technical change, it is clear that the rate of technological progress exhibited by the local telecommunications sector is extremely low, and, in some cases, at zero. Its quality of service is often abysmal. And in most markets, your local telephone company is still effectively a monopoly.
In principle, this should not be possible. Congress passed, and President Bill Clinton signed, the Telecommunications Act of 1996, which specifically de-monopolizes local telecommunications and facilitates competitive entry by new, innovative companies. But the industry has stonewalled, spent billions of dollars lobbying, filed lawsuits challenging implementation of the law and engaged in a huge merger wave that went completely unopposed by the antitrust authorities.
The mergers reduced the number of local providers in the U.S. from eight to four, and also included the cable TV industry. AT&T; purchased TCI, and, recently, America Online merged with Time Warner. Despite complaints from every local telephone carrier that the 1996 act unfairly subsidized competitors, not one has attempted to take advantage of this by competing in the territories of any of the others. Funny, huh? As a result, five years into the Internet revolution, only 2 million U.S. households have high-speed Internet access, and the costs of business Internet services have barely moved at all.
Three years ago, when I first studied this problem, I concluded that the telecommunications bottleneck was probably costing the United States 1% a year in gross national product and productivity growth. In many other nations, the problem is far worse. Indeed, the European Union recently issued a statement warning European national telephone monopolies that their conduct was impeding the progress of Internet services, and that they might face antitrust sanctions if they did not open their networks to real competition. Yet, the U.S. antitrust authorities have taken no action. Why?
There are two reasons. The first is simply that the regulatory and antitrust systems of the U.S. government remain woefully unprepared for the new economy. The Justice Department’s Antitrust Division, for example, has more than 900 employees; about 350 are lawyers, another 50 are economists. How many scientists, technologists, engineers? Zero. In dealing with technically complex industries, this is a fatal defect. The conditions of the Federal Communications Commission, the Federal Trade Commission and the courts are roughly similar. Indeed, the government’s conduct in the Microsoft case has been unusually good; its general record in high-technology antitrust actions is extremely poor.
The other reason for inaction in the telecommunications situation, alas, is that for all of its size and power, Microsoft is an easy, comparatively powerless target. It is one company with $30 billion in revenues, 25,000 employees and perhaps two dozen lobbyists. The telecommunications industry has hundreds of thousands of employees, thousands of lobbyists and spends an estimated half-billion dollars a year on political and regulatory action: lobbying, political contributions, hiring expensive academic economists to testify before regulators, filing lawsuits to defeat competition. In any antitrust case, the industry would outspend the government by at least 10-1--probably far more--and would doubtless use maximum political pressure.
Yet, these issues will not go away. The importance and visibility of the Microsoft case is just one example of the degree to which the rise of the technology sector is changing the problems faced by government policy, antitrust included. Hopefully, the government is starting to get the message. *
