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Hiawatha Bray | Tech Lab

Break up Big Tech? The senator’s plan has plenty of precedent

Senator Elizabeth Warren has made antitrust action against online giants Facebook, Google, and Amazon a cornerstone of her presidential campaign.
COREY SIPKIN/AFP/Getty Images
Senator Elizabeth Warren has made antitrust action against online giants Facebook, Google, and Amazon a cornerstone of her presidential campaign.

US Senator Elizabeth Warrenof Massachusetts is supposed to represent the hard left of the Democratic Party. But her call for tough antitrust sanctions against the Internet giants Facebook, Google, and Amazon is far from radical. If anything, it fits within a historic cycle of tech-industry innovation, followed by aggressive federal regulation. And through it all, the US tech sector has risen to global dominance.

Antitrust suits against technology companies have been routine over the past century. Among the leading targets have been industry titans like AT&T, IBM, and Microsoft. Each seemingly impregnable giant was forced by federal courts to make major changes in how they do business.

In each case, critics warned that government meddling would do more harm than good. AT&T’s Bell Telephone monopoly was torn apart. IBM nearly went bankrupt, and Microsoft was a moribund giant for more than a decade until reviving by branching into cloud computing.

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Defenders of strong antitrust enforcement say these federal actions not only brought major benefits to consumers, but also made possible the booming tech sector that spawned Google, Facebook, and Amazon.

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Richard John, a telecommunications historian who teaches at the Columbia School of Journalism, said the AT&T breakup paved the way for the development of the cellphone industry, while also resulting in much lower costs for consumers.

“The challenges to the largest, most powerful corporations through antitrust have always been to the public good,” John said.

When the United States launched an antitrust lawsuit against IBM in 1969, IBM responded by letting its customers buy hardware and software separately. That gave competitors a shot at developing new software they could sell to businesses.

“That’s where the American software industry came from,” said a Silicon Valley antitrust attorney, Gary Reback.

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IBM eventually won this antitrust case, perhaps because its voluntary shift on software opened the industry to new competition. Software became big business, especially when personal computers came along, making it possible for Microsoft to earn billions of dollars selling software to the masses — and in the process becoming yet another target of the antitrusters.

Reback led that antitrust campaign against Microsoft in the late 1990s, and he was deeply disappointed when the government didn’t break up the company. Instead, Microsoft was forced into a settlement that put the company’s wheeling and dealing under strict federal scrutiny. “I didn’t think it would work at all,” Reback said.

But he later came to believe that constant oversight by the government prevented Microsoft from acquiring or crushing its rivals. Reback said the Microsoft of old would have annihilated upstarts like Google, Amazon, and Facebook long before they became competitive threats.

“The reason they didn’t do that was they were afraid of further antitrust enforcement,” Reback said.

Antitrust isn’t the only legal strategy that can be brought to bear against the tech giants. On Tuesday, Facebook settled a housing discrimination lawsuit brought by the American Civil Liberties Union and others, agreeing to change its advertising service to prevent real estate ads that discriminate on the basis of race, sex, age or disability.

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Warren’s antitrust approach, meanwhile, relies on a two-step strategy.

First, Warren would have the Justice Department order the unraveling of previously approved acquisitions: Facebook would sell off Instagram and WhatsApp; Google its YouTube video service or Android smartphone operating system; and Amazon’s Whole Foods chain and footwear vendor Zappos.

Then, Warren proposes that tech companies be barred from buying or selling their own versions of products in marketplaces they control. For instance, a vendor that sells its products on Amazon may find Amazon itself makes a competing product. This happens all the time in traditional retail stores. But online, Amazon can use its product-search feature to promote its own products while bumping rival products further down the Web page.

The Wall Street Journal reported last week that a feature Amazon is testing for its smartphone app favored the company’s own products over competitors’. Under the Warren plan, this would be forbidden, because Amazon would no longer be allowed to sell its own products on Amazon.

Richard Schmalensee, a professor emeritus of economics at the Massachusetts Institute of Technology who testified on behalf of Microsoft in its antitrust case, said the first of Warren’s ideas — undoing those mergers — would be nearly impossible. The combined companies have become too integrated over time to separate, he said, and breaking them up might not provide any tangible benefits to consumers.

Schmalensee does think regulators should be vigilant in approving such deals in the first place. But unless they can prove a completed deal is doing real harm to consumers, “I don’t think there’s a prayer,” he said.

Schmalensee has kinder words for Warren’s proposal to bar tech companies from selling in their own marketplaces, saying the current system could give Amazon a built-in advantage over competing sellers.

“It’s not nutty,” Schmalensee said, but added that the idea needed further study.

Michael Strain, an economist at the American Enterprise Institute, a conservative think tank, is much more dismissive. “I don’t see any evidence that these companies are such a threat to competition that they should be broken up by federal regulators,” Strain said.

Even though Amazon controls half of the online retail market in the United States, online purchases make up just 10 percent of US retail spending. For all its might, Amazon is dwarfed by Walmart, which is investing billions of dollars to catch up with Amazon in online retailing.

And while Facebook and Google clearly dominate in search, social networking, and online advertising, that may not be enough for an antitrust case. In recent decades, US antitrust law has treated a company’s sheer size as unimportant; what matters is whether the business practices harm consumers. For example, AT&T’ made telephone calls needlessly expensive and prevented the introduction of innovative new technologies, such as voice mail.

By contrast, Facebook and Google often introduce innovative products and services. Perhaps most important for antitrust purposes, they give away most of their services to the public, while relying on advertising revenue for their profits. If “no harm, no foul” to the consumer is the antitrust standard, the government would find it hard to make cases against Facebook and Google.

Much of the hostility aimed at Google and Facebook relates to concerns over how they use or perhaps abuse vast amounts of sensitive personal data collected from their billions of customers worldwide. If Facebook sells off Instagram and WhatsApp, the corporate mothership would still have a trove of sensitive information it could use in almost any way it chooses, with no outside oversight.

“I do not see how breaking the companies up through antitrust action addresses any of these issues,” Strain said.

Regulators in Europe have made privacy a major line of attack against Big Tech, adopting a series of increasingly stringent restrictions on what Facebook and other Internet companies can do with sensitive personal data. Warren’s colleagues, including Senator Amy Klobuchar of Minnesota — one of Warren’s rivals for the 2020 Democratic presidential nomination — have introduced a US version of the privacy rule in the Senate.

Hiawatha Bray can be reached at hiawatha.bray@globe.com. Follow him on Twitter @GlobeTechLab.