Breaking Up is Hard to Do
This week, the United States Justice Department and 38 state attorneys-general will make their case in a federal courtroom that Google uses unfair business practices to stifle competition from denting its monopoly over search engine traffic.
Google pays lofty sums to companies in exchange for making its search the default option on browsers and phones. The government will argue this leaves competitors without a hope in hell to compete for the customer’s attention.
Google will rebut that their 90% market share in search is the outcome of developing a superior product. After all, a user can switch away from the default search engine, which is Google, if they choose and use something else.
If successful, Google could be forced to break up its search business or alter their agreements with the phone manufacturers.
This is considered the largest U.S. antitrust case in a generation. Many are comparing it to Microsoft (1999), AT&T (1982), and Standard Oil (1911).
In the late 1990s, because Microsoft bundled the Windows operating system with Internet Explorer, the government alleged that it held a monopoly in personal computing software and consequently blocked rival Internet browsers (like Netscape) from competing.
U.S. District Court Judge Thomas Penfield Jackson ruled that “Microsoft enjoys monopoly power” on November 5, 1999. However, the stock price didn’t seem to care, falling only 2.8% in the next five trading days.
Finding reason to believe Microsoft undertook efforts to crush its competitors, the judge then ruled on July 7, 2000, that Microsoft be broken up into two units, one to produce the Windows operating system and one to produce other software components (such as the Internet Explorer browser). However, the market wasn’t buying it. Bill Gates posted a press release following the decision, saying the company had strong merits to overturn the decision on appeal. The stock price rose 2% after-hours.
On June 28, 2001, an appellate court overturned the decision to break up the company. That same year, Microsoft reached a settlement with the government. No break up took place.
Following 8 years of litigation, American Telephone & Telegraph Company (AT&T) was ordered in January 1982 to break up its vertically integrated monopoly that controlled 90% of the telephones in U.S. households.
AT&T would divest two-thirds of its assets itself into seven smaller, regional companies.
In the next five years, prices rose 15%, well above the rate of inflation.
While many local providers emerged following the breakup, the industry has come almost full circle forty years later. Mergers of smaller providers took place in subsequent decades to create powerful regional providers, which then consolidated to create national networks.
Standard Oil (1911)
John D. Rockefeller’s Standard Oil controlled 91% of the oil production and 85% of the sales in the United States in 1904. Consequently, the U.S. government sued Standard Oil in 1906 and successfully argued that it “price gouged” its customers. After being ordered to break up Standard Oil into smaller firms, the sum of each part combined doubled in value, making Rockefeller the richest person in the world.
Lessons from Microsoft, AT&T, and Standard Oil
We draw these conclusions from each of these three situations as it pertains to Google’s present fight with the antitrust lawyers in court.
Never underestimate the power of a good lawyer. Microsoft may have lost at trial but the appellate court overturned the order to break up the company.
Large companies, like Microsoft in 2001, will make settlements with the government to defend their business.
More competition is not always advantageous to the consumer. Just ask the rural population that paid higher phone rates after AT&T was broken up.
Antitrust cases can take a very long time – 8 years in the case of AT&T – before concluding.
The sum-of-the-parts can be worth much more than the combined entity, as was the case with Standard Oil.
This week’s case between the government and Google is the largest antitrust case in decades. Its outcome will shape the future of large technology companies, especially those that are responsible for the majority of this year’s stock market gains. However, its outcome will be unknown for years and Alphabet will remain the dominant leader in search until that happens.
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