I’m as concerned as anyone about Facebook’s “fact-checking,” deleting posts, and political interference. But the Dec. 9 announced prosecution by the Federal Trade Commission and 46 state attorneys general is not about that. It is an attack on the company’s size and monopoly power. An earlier launch by the Justice Department against Google is along the same lines.
The Federal Trade Commission claims that Facebook “is illegally maintaining its personal social networking monopoly through a years-long course of anticompetitive conduct.” It wants Facebook to divest itself of two immensely popular apps, WhatsApp and Instagram.
This sounds awfully familiar. In fact, this pattern has been repeated a number of times in American history since the beginning of the 20th century. An innovative company springs up from nothing and dominates its field—usually a new field. Politicians become agitated and do all they can to prosecute it for monopoly behavior and if possible, break it up.
Without addressing the specific issues of this rendition, I want to share some examples of what happened with antitrust actions in the past. To foreshadow my point, let me say that the government’s bark was loud but often the bite was weak.
Standard Oil set the stage. Oil was discovered in Pennsylvania in 1859 and a lot of small refiners sprang up. But by 1900 John D. Rockefeller had bought up competitors to the point where he controlled 90 percent of the refinery market. The government charged him with cutthroat competition (mainly through secret deals with railroads) that drove companies out of business or forced them to sell out to Standard Oil.
The fact that customers generally benefited from Standard Oil’s competitive prices did not enter into the calculation. Standard Oil was too big, and it was divided up under the Sherman Antitrust Act in 1911. Thanks to the breakup, Rockefeller became the richest man in American history and many of the component parts (which became companies such as Exxon, Mobil, and Chevron) did very well themselves.
Beginning in 1937, the federal government attacked the monopoly powers of the Aluminum Company of America (Alcoa). In 1886, Alcoa’s founder, Charles Hall, had developed a way to extract aluminum from bauxite. This made it a viable product (at one time aluminum was more expensive than gold). Even after Alcoa’s patents expired, the company held about 90 percent of the ingot market.
Alcoa was never found to have done anything illegal; it was just big. The case led to Judge Learned Hand’s infamous explanation of what Alcoa did wrong:
Nothing compelled it (Alcoa) to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections and the elite of personnel.
“To embrace each new opportunity as it opened” was Alcoa’s sin. The company lost the case, but did not suffer much. To spur competition, the federal government sold surplus aluminum production facilities after World War II, creating Kaiser Aluminum and expanding Reynolds.
In 1998, the Justice Department went after Microsoft. The specific charge was arranging to have its Web browser, Internet Explorer, built into personal computers during their manufacture, making it difficult for competitors (like Netscape) to get market share. Or, as an MIT Tech Review writer said, Microsoft “bullied other firms in an illegal attempt to quell competition. “Microsoft settled and the issue of browsers faded into oblivion.
The case did lead Microsoft to become a more active player in the political process (i.e., lobbying) and also to concentrate on other products. It is still one of the largest companies in the world, with a capital value of around $1 trillion.
Let me address one other breakup. It, too, was about “bigness,” but AT&T was no upstart. As early as 1907, its founder, Theodore Vail, had sought federal regulation not only to provide protection from competition but also to provide stability so that AT&T could fulfill its goal of “universal service. As Richard Gabel wrote in 1969, “Vail early saw the possibilities of effecting . . . normalization and stability in the telephone industry.” To accomplish this, in 1910 Congress slipped a phrase into a bill about the Interstate Commerce Commission, adding communications to its transportation oversight.
That regulation became entrenched protectionism by the time of Gabel’s article. “The advantages thus gained by the Bell System over its remaining competition have been parlayed into a practically unassailable market position fortified by political and legal ramparts,” he wrote.
However, as we have seen, a new attitude about competition emerged and AT&T did become assailable and was forced to break up. In 1984, it divested its local operations. That opened up greater innovation, leading, of course, to our smartphones and many other novel products. AT&T itself had a rocky history and was bought in 2005 by one of its divested units.
It will be interesting to watch the current assault on size. We should expect the process to be full of “Sturm und Drang,” to take a long time, and probably end with a whimper.