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Innovation Kills Monopolies Faster Than Governments Can

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Do government antitrust measures help break up monopolies and increase innovation? Not according to new research from the Technology Policy Institute, which looked at the high-profile antitrust investigations of IBM (s ibm), AT&T (s t) and Microsoft (s msft). The research found that in each case, the innovation that changed the industry did not come as a result of government intervention, but from sources that regulators could not possibly have predicted. This is likely to be music to the ears of Google (s goog), which has come under increasing pressure from both regulators and critics as it expands beyond search into other areas — including a controversial acquisition offer for travel industry player ITA that is currently under review.

The research (the full version of which is available as a PDF here) was done by Robert Crandall — a senior fellow in economics at the Brookings Institute — and Charles Jackson, a computer science professor at George Washington University. They found that despite the years of political and legal work that went into these high-profile antitrust cases, in the end, technological change was what had the most impact on the market, not government antitrust remedies.

  • IBM. The pioneering computer maker was never actually sanctioned by the government, despite the fact that an antitrust case against it — originally filed in 1969 — continued for 13 years. In fact, the government eventually asked the courts to dismiss the case because even it admitted that the market had changed so much as to make the case moot. The authors say the competitive structure of the computer market eventually changed “because rapid technological change led to the development of personal computers connected to the Internet and using services provided by servers (minicomputers), something the government never envisioned when it filed its suit.”
  • AT&T. Although the splitting up of the telecom conglomerate after the Justice Department’s antitrust decree, and the implementation of “equal access” did have an effect on the competitive landscape, the authors argue that the arrival of high-speed Internet access and competition from wireless players and cable television had far more dramatic and long-lasting effects on both AT&T itself and the market as a whole than anything the government did as a result of the antitrust case.
  • Microsoft. Despite the DoJ’s antitrust decree and the European Union order in 2004 that forced the company to unbundle Internet Explorer from Windows, the researchers note that Microsoft remains dominant in desktop operating systems — but it’s under fire from significant forces such as cloud computing, virtual appliances and the rise of mobile computing. The authors note that “there is little evidence that these emerging technologies were a result of antitrust remedies,” although the rise of Firefox — particularly in Europe — appears to be an offshoot of the EU order.

In each of the cases, the authors say:

[T]he ultimate source of major changes in the competitive landscape appears to have been innovation and new technology – technology that was apparently not unleashed by the antitrust litigation. In each case, the government did not and probably could not see how technology would develop over time. Therefore, it was difficult for the government to design remedies that would accelerate competition when this competition developed from new technologies.

Adam Thierer, a research fellow at George Mason University and former director of telecommunications studies at the Cato Institute, says the paper highlights the clash between those who see the technology industry as a dynamic and evolving marketplace with a high degree of unpredictability, and those in government who see the market as a static thing that can be manipulated by regulators to achieve certain outcomes.

There’s another case that arguably fits the research thesis: Intel (s intc). The chip giant has also been the subject of antitrust investigation by the FTC due to its dominance, but the evolution of the industry — including the rise of specialized graphics chips from Nvidia (s NVDA) and others — along with the success of ARM (s ARMH) chips in the rapidly-growing mobile market, effectively made Intel’s monopoly moot even before the FTC started getting involved. As Stacey noted in her story yesterday, the chip giant has more or less been forced to settle outstanding litigation with Nvidia because it is no longer in a position to dictate terms to the rest of the chip market.

What the research suggests is that forces we may not even fully understand or appreciate yet could have more to do with blunting the power of Google than anything the Department of Justice or the FTC decide to do.

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Post and thumbnail photo courtesy of Flickr user Mark Strozier

8 Responses to “Innovation Kills Monopolies Faster Than Governments Can”

  1. Is it a Monopoly? Is it a Government? Is it a Non-Profit?… Yes…No…I Mean Maybe!

    ICANN is a group tasked with the effective running of the World Wide Web. Well, perhaps it’s not quite that simple. Nevertheless, ICANN is one of the most powerful organizations (if not the most powerful) on the Internet. Therefore, is it unreasonable to ask their status?

    So, is ICANN a Monopoly, a Government or a Non-Profit? The answer appears to depend on the question. Conceivably, the answer is all three.

    Running alongside ICANN today, operates a parallel Internet using new Dashcom (not Dotcom) Domain Names. Dashcoms are web addresses in the format http://business-com or http://stock-market. With users and members in over 90 countries worldwide, resolution is via an APP (although ISP links are now available to negate that need).

    With the growth in popularity of Dashcoms, it would be easy for a body like ICANN to have these addresses recognised on their route servers (making global resolution that much simpler). For ICANN, the consequences would be little more than a bit of extra data, yet the results of such a move would provide Internet users with real choice on an almost infinite level.

    There is no call for ICANN to incorporate these new domain names. There is no call for ICANN even to approve them. As for potential problems of namespace collision, Dotcoms cannot collide with Dashcoms. Yet despite all the advantages and for the worst of reasons, any implementation is hardly straightforward. It’s not just that in this “open-market” there are rather more interested parties than expected to be found at the negotiating table; it’s that Mr Monopoly, Mr Government and Mr Non-Profit all seem to be occupying the same chair.

    Does innovation kill monopoly faster than government? Well, that rather depends on whether monopolies and governments are working together and whether they’re both really one and the same.

  2. Who will decide upon what will be the next dominant design? Most of the time, not the company “owning” (Nokia, Pentium, Freon etc.) that design. They are too entangled in established structures, not just in terms of investments in themselves, but also in terms of their extended network of relationships to partners, competitors, suppliers etc. They will spend more time fending off newcomers by increasing their power than trying to invent the next big thing. That’s because it is a threat to their acquired position. exceptions might be companies that become a part of a larger system than themselves, let’s say companies that are infrastructure companies, companies that provide services to an extent that they fuel that very same system. Yes, big oil will soon be replaced (or will they?). Becoming the dominant player, the “monogarch”, might be lucrative but by the time the worth of every improvements converges towards zero and other solutions are becoming increasingly popular, that castle will tremble. It’s the same thing in every industry.

  3. I’ve seen “monopolies” shut down innovators more often than I’ve seen it go the other way around.

    I wish it were true and it would be true if companies didn’t have monopoly positions. Think of the telcos and cable companies. We have more than enough innovation to make them go out of business today yet it doesn’t happen because of their monopoly positions, and their ability to buy or negate innovative technologies.

  4. John Galt

    Duh. Of course!

    Capitalism wins as usual and government central planning fails and wastes everyone’s time and money. This is nothing new.

    Standard Oil was #3 in the market by the time it was broken up, and it was the standard barer for the regulations in the first place! (coincidently Antitrust is the only law that you don’t know you’ve broken until someone tells you you have, and is the only law that punishes you for being too successful, double whammy of evil)

    AT&T was a government created monopoly which are the only exceptions to the rule. Only government force can insure that a monopoly isn’t eliminated by capitalism. Example: Amtrack, USPS. (and oil and nuclear with their subsidies that make alternative sources of energy impossible without even more government subsidies!)

    Get the government out of it and leave us alone. The best thing for the individual is capitalism. People can vote with their feet. The use of government force does nothing other than breed corruption and in no way helps the individual.

  5. Stephen B.

    This is, of course, correct, however government protectionism, including artificial barriers to entry, government favoritism in contract and standards awards, and corporate agency capture can considerably slow the process of monopoly breakdown and the reestablishment of competitive environments. It is the government protection of commerce, often in the guise of regulating it, that most needs to come under scrutiny.

  6. This article captures the essential point that inovation is the greater power, overwhelmingly greater in the long run than government intervention by regulators, administrative agencies, and the competitive watch dogs.

    But wait! There were cases where innovation could not even get a breath: You pointed out that the AT&T divestiture was due to “an antitrust decree”, it was actually a consent decree that followed several landmark Sherman Act trials, notably, Caterphone. Also, what kicked this off was a white flag by Kingsbury, an influential AT&T Exec, who agreed to work with the ICC (pre-FTC) to have AT&T abstain from its monopolistic roll ups of the local telco markets. The Kingsbury Commitment launched the collective mind of regulators and communications conglomerates into a mindset whereby the concepts of ‘beneficial monopoly’ (Google?) are no longer considered valid, but rather toxic to competition.

    There are times when private equity can fund a player of ill intent, while the lambs in one particularly interconnection dependent market are focused on technology, and innovation, sovereign wealth of questionable provenance comes to buy the weak, shut down interconnections, and erase a market that once was peered collegially, into a top down, “beneficial monopoly”, which many people, legislators included, though was AT&T’s role. They had access to J.P morgan’s capital, and had cash asetts of over 185 billion in 1933, a staggering sum rivaling the cash assets of the Federal Gov. All of this was prior to the divestiture which started with Kingsbury, and ended with the Consent Decree.

    Then there were many Antitrust, pre telecom reform battles over the concepts of “essential facilities doctrine”.

    In today’s B2B market, we see David and Goliath battles fomenting between the innovators who can’t even get regulators to care, (FCC hello), while behemoths roll up the EDI and B2B integration market.

    The current case filed in Federal District Courts Greenbelt, MD in re Loren Data Corp v GXS Inc., is a textbook Sherman act case of a small, agile innovator with a stellar track record seeking redress against a laggard incumbent funded by private equity of questionable provenance.

    And, that’s why the Sherman and Clayton act exist, so that smaller innovators, who cant get a break or a breath, can, especially in interconnect dependent markets, access to the consolidated networks that are born from corporate roll-ups, disadvantaging the clients, and competitors, mostly while bough and paid for analysts and paid shills cheer the buyouts.

    stay tuned EDI space rangers!

    There are