Antitrust's Greatest Hits

Reason, Nov, 2001 by David B. Kopel, Joseph Bast

Another difference: The AT&T divestiture undid acquisitions from decades before, in which AT&T had swallowed local phone operating companies. Microsoft, by contrast, has expanded primarily through internal growth. Because AT&T had capital and employees dispersed all over the United States to serve its customers, it could therefore divest itself relatively easily of the local telephone companies. These were then organized into seven "Baby Bells" to provide regional phone service. Microsoft, with its capital far more centralized and with much less need to have people "on the ground" in geographically defined areas (except for sales), would be far more adversely affected by such a legal order.

The settlement that led to the AT&T breakup also liberated the company from a 1956 antitrust consent decree that prevented it from entering and competing in non-regulated businesses, such as data processing. In exchange, AT&T voluntarily acceded to divestiture. Thus, the AT&T breakup was a consensual step toward deregulating a part of the economy that had long been regulated under the public utility model. A Microsoft breakup, by contrast, would represent a major increase in the government's intervention in this part of the economy.

At any rate, the AT&T breakup has been far from a complete success. One part of the agreement created a competitor in the long-distance market, free to introduce new technologies. This seems to have been relatively successful, with AT&T moving into cable, wireless, and other data transmission arenas and competing with a variety of businesses around the globe. (Of course, AT&T doesn't always compete successfully, as demonstrated by its huge stake in the floundering cable-modem system Excite@Home, which has been teetering on the verge of bankruptcy for most of this year.)

Much of the old AT&T was left behind as the local Bell companies, which were forbidden to manufacture telephone equipment or design new telephone products. The theory was that keeping these Baby Bells from equipment manufacture and design would prevent them from using their profits from Local telephone service to subsidize new businesses. Instead, the arrangement created local phone monopolies that have been slow to innovate or to let competitors into their captive markets. Lucent, the technology company formed out of the breakup, is itself mired in financial and legal troubles.

Judge Greene's supervision of the telephone companies continued from 1982 until 1996, when an exasperated Congress finally dissolved the consent decree. In the intervening period, hundreds of applications for waivers--usually by local Bell companies wanting to sell or license a new technology-- sat on Judge Greene's docket for an average of four years.

Antitrust is sometimes said to be superior to formal regulation, in that antitrust does not require continuing government oversight of the company's business. But the AT&T case demonstrates that enforcement of antitrust laws can generate as much or more intervention. Like the Standard Oil case, the AT&T case reveals a pattern of government control expanding over time, first to manage prices and avoid "unhealthy" competition, then approving and disapproving of mergers and acquisitions, and ultimately ruling on whether to allow innovations in products and services.