Business

OF EMPIRES BROKEN

ROSS LAVER March 15 1999
Business

OF EMPIRES BROKEN

ROSS LAVER March 15 1999

OF EMPIRES BROKEN

COVER

Business

When the U.S. justice department launched its epic antitrust case against Microsoft by playing a videotaped deposition of chairman Bill Gates, it was inevitable that some commentators would compare the software king’s predicament to that of another famous Bill—the one who occupies the White House. To legal scholars, however, Microsoft’s situation more closely parallels an earlier antitrust case. In 1906, U.S. government lawyers filed suit against John D. Rockefeller, the legendary industrialist and founder of Standard Oil Co. of New Jersey. Like Microsoft, Standard Oil was a fearsome competitor that controlled about 90 per cent of the oil produced in the United States. And like Gates, Rockefeller inspired widely differing reactions among Americans who bought his products. Some saw a visionary genius, while others denounced him as a bully whose obsessive pursuit of profits had harmed consumers and competitors alike.

Microsoft can only hope its antitrust ordeal—the trial in Washington is to resume next month—does not end the same way Rockefeller’s did. Five years after the Standard Oil case began, the U.S. Supreme Court split the corporation into 34 smaller entities, among them the corporate ancestors of Exxon, Mobil, Chevron and Amoco. (Late last year, Exxon and Mobil announced a merger which, if approved by regulators, will create the world’s biggest oil company.) The 1911 ruling emboldened critics of big corporations and established a precedent that, almost nine decades later, continues to shape U.S. antitrust law.

lire Clinton administration has not said whether it would seek a similar decree to break up Microsoft in the event that it prevails in the current fight. But government lawyers can, if they wish, point to several other cases in which that remedy was used. In 1911, the same year that Rockefeller lost his antitrust battle, the courts broke up James and Benjamin Duke’s American Tobacco Co., which controlled 95 per cent of the U.S. market for tobacco products. Two of the major companies to emerge from that case were R. J. Reynolds (best known now as the manufacturer of Camel cigarettes) and British American Tobacco PLC, which today owns 42 per cent of Montreal-based Imasco Ltd. And in the early 1980s, the federal government broke up American Telephone & Telegraph Corp., allowing AT&T to keep its long-distance operations while forcing it to spin off seven regional phone companies. Many analysts credit that decision with driving down prices for telecommunications services and unleashing a wave of technological innovation.

The key legislation in each of those cases was the 1890 Sherman Antitrust Act, which makes it a crime to enter into business combinations that “substantially” lessen competition. The act gives the courts wide latitude to determine whether or not a monopoly is, in fact, illegal. Around the same time the Standard Oil case was coming to a head, Washington filed suit against United States Steel Co., which had been formed from 180 companies and, at its peak, supplied 80 per cent of the country’s steel. In 1920, the Supreme Court found that U.S. Steel officials had met regularly with rivals who subsequently followed the company’s lead on pricing, but the court ruled that those meetings did not constitute price-fixing. More than two decades later, the courts threw out an antitrust case against Aluminum Co.

Do antitrust rules apply in the era of the microchip?

of America after finding that it had legally captured 90 per cent of the market using efficient production methods and lower prices.

Citing those judgments and others, some experts have argued that the Sherman Act needs to be toughened. But the laws governing monopolies in the United States are still far stricter than in any other country. Canada’s Competition Act is strong on paper, says Daniel Martin Bellemare of McGill University’s Centre for the Study of Regulated Industries, but governments have shown little willingness to enforce it. “In the United States, people are naturally suspicious of large institutions, be they public or private, and that is reflected in a long history of antitrust enforcement,” he says. In contrast, Canadian politicians have tolerated, if not encouraged, the creation of dominant companies that could stand up to foreign competition. As a result, says Bellemare, the federal Competition Bureau is “toothless and totally ineffective.”

The question some U.S. antitrust experts are asking is whether the Sherman Act remains relevant in the era of the microchip, when technological shifts can endanger even the most successful high-tech companies. But even if Microsoft is found guilty, and even if the government and the courts shy away from imposing the ultimate penalty on Microsoft, the case could have profound implications. In 1982, the pro-business Reagan administration abandoned a 13-year antitrust case aimed at breaking up IBM. Big Blue won the battle, but ultimately it lost the war because, to avoid further offending the justice department, it had chosen not to acquire equity stakes in several key outside suppliers—including the West Coast startup that had been contracted to produce an operating system for IBM’s first personal computer. That company, of course, was Microsoft. A decade later, Bill Gates’s empire was bigger than IBM itself—and so powerful that it, too, eventually became a target of the trustbusters.

ROSS LAVER