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Why the US war with Big Tech could have unintended consequences

Legal experts say the crackdown could spawn the next Microsoft, Google, or Facebook. It could also cement their dominance.

The US government is taking on some of the country’s biggest tech giants in a series of high-stakes antitrust lawsuits. One lesson from past fights is that these cases can create an opening for a new generation of firms to emerge, even if the government isn’t successful.

Take Microsoft (MSFT). The Seattle software and cloud computing giant benefited from a 1969 government case against rival IBM (IBM), which the government eventually dropped after 13 years due to what an assistant attorney general called "flimsy" evidence. The litigation had alleged IBM illegally monopolized the market for business computers.

Later, between 1998 and 2001, Microsoft found itself hobbled by its own extended antitrust battle with the Justice Department, which resulted in a settlement that opened the door to broader competition in the internet browser software market.

UNITED STATES - MARCH 03:  Microsoft chairman Bill Gates has his say at Senate Judiciary Committee hearing into whether the Microsoft computer empire is a monopoly that buries the competition.  (Photo by Harry Hamburg/NY Daily News Archive via Getty Images)
Microsoft's Bill Gates at a 1998 hearing before the Senate Judiciary Committee about whether his company was a monopoly that buried the competition. (Harry Hamburg/NY Daily News Archive via Getty Images) (New York Daily News Archive via Getty Images)

The settlement — which required Microsoft to design its Windows operating system to interoperate with competing browsers, email clients, media players, and instant messaging software — created an opportunity for Google (GOOG, GOOGL), then a startup, to begin its period of meteoric growth in the 2000s.

'These things are highly unpredictable'

This scenario may be ripe to repeat itself with a new set of federal and state lawsuits that seek to break up Google, Facebook-owning Meta (META), and possibly Amazon (AMZN).

The cases create potential for new tech giants to emerge, but no certain path, said former Federal Communications Commission Chief of Staff Blair Levin.

"These things are highly unpredictable," said Levin, who is now a fellow at the Brookings Institution. "I'm pretty sure no one would have predicted that the government's antitrust case against IBM would have produced Microsoft, nor ... that the government's Microsoft antitrust case would have produced Google. But they did."

Assistant Attorney General William Baxter
Assistant Attorney General William Baxter announcing at a news conference in 1982 that a 13-year antitrust case against IBM had been dropped, saying that the case was based on 'flimsy' evidence. (Bettmann Archive) (Bettmann via Getty Images)

One reason, Levin said, is that back then the emerging technology wasn't obvious. Microsoft didn't directly compete with IBM, and Google wasn't a direct competitor to Microsoft.

"But what is certain," he said, citing the story of 5th century Sicilian tyrant Dionysius, "is that history demonstrates that a Damocles sword over the big companies can have a positive result."

Rutgers University Law School professor Michael Carrier said even if the suits lead to a breakup of the Big Tech firms, emerging companies could remain hard pressed to compete over the short term with the dominant players' established scale.

A small toothbrush business, he explains, could benefit if Amazon is forced to stop selling its own competing toothbrush products alongside its third-party sellers.

"On the other hand, I don't see a single company that could replace the entire segment of what Amazon does," Carrier said about the retail giant's reach across dozens of markets. The same goes for Meta, he said, because emerging businesses cannot quickly replicate its network of users.

That scale might already be compounding competition hurdles for one emerging technology, as the cases make their way through the courts. Unlike the IBM and Microsoft antitrust eras of the past, Levin said, today's emerging technology is obvious: artificial intelligence.

And Google, Meta, Microsoft, and Amazon are already spending big on AI.

"There is an argument that AI will completely transform the way we do advertising in very scary ways," Levin said, "but nonetheless, if we're going after Google's ad-tracking technology, it's not clear to me what AI does to the value of it."

"Is AI creating new moats? Or, is it creating new attacking vectors?" he said.

The new case against Big Tech

One agency in Washington is taking on multiple tech giants at once: the Federal Trade Commission.

The FTC is trying to force Meta to split apart Facebook, Instagram, and WhatsApp. A federal case filed in December 2020 alleged the social media giant was illegally monopolizing the personal social networking market.

Another recent FTC target was Microsoft. It tried to stop the Windows maker from completing its acquisition of "Call of Duty" developer Activision Blizzard (ATVI), before backing away from that attempt.

"What the FTC is doing relevant to Al, is adopting a merger policy that will tend to discourage investment in startups," said former Justice Department Deputy Attorney General Tad Lipsky. The more the government challenges acquisitions of emerging technologies, the more startup funding dies up, he said, and dominant companies will look to develop technologies in house.

The FTC is also reportedly preparing a suit against Amazon over concerns the e-commerce giant is unfairly competing with third-party sellers who use its marketplace.

California and Washington, D.C., already sued Amazon over those concerns, arguing that the company illegally forced sellers to hike prices outside of the Amazon platform. The case filed by Washington, D.C., was thrown out by a judge last year, and the California case is ongoing.

The FTC's campaign is being led by its 34-year-old chair Lina Khan, who has made taking on Big Tech the cornerstone of her tenure. She rose to prominence after publishing a 2017 article in the Yale Law Journal titled "Amazon's Antitrust Paradox."

The article argued modern antitrust laws weren't equipped to tackle the tech industry's anticompetitive behavior because they were too focused on pricing as a means of determining consumer harms.

UNITED STATES - JULY 13: FTC Chairwoman Lina Khan testifies during the House Judiciary Committee hearing titled
FTC chair Lina Khan testifying before a House committee in July. (Tom Williams/CQ-Roll Call, Inc via Getty Images) (Tom Williams via Getty Images)

Those laws, she argued, needed to be rethought to bring Big Tech companies to heel. Now she is attempting to rein in these companies as chair.

It's the 1990s all over again

But the case that most closely resembles the government's attempts to rein in Microsoft during the 1990s targets the company that benefited most from Microsoft's quarter-century-old battle: Google.

The Department of Justice and a collection of state attorneys general are suing Google in two consolidated cases launched during President Trump’s administration, alleging the company abuses its market power across search and search advertising to squeeze competition.

Those cases go to trial beginning Sept. 12 before the US District Court for the District of Columbia, which has dismissed some of the claims.

Multiple groups of state attorneys general are also targeting Google's mobile app distribution dominance, as well as its dominance across the markets for selling and brokering online ads.

U.S. Attorney General Merrick Garland announces the appointment of Special Counsel David Weiss in the ongoing investigation of Hunter Biden, son of U.S. President Joe Biden, during a brief statement at the Justice Department in Washington, U.S., August 11, 2023. REUTERS/Bonnie Cash
US Attorney General Merrick Garland speaking at the Justice Department earlier this month. (Bonnie Cash/REUTERS) (Bonnie Cash / reuters)

In its case against Google, the DOJ alleges the search and advertising giant is violating the Sherman Antitrust Act — the same law, first effective in 1890, that was at the heart of its case against Microsoft.

In its complaint, federal prosecutors claim that Google makes software that can't be deleted and is contractually required by default.

They made a similar claim against Microsoft in the 1990s. The DOJ and a group of states said the software giant sustained an illegal monopoly for personal computer (PC) operating systems using contracts with PC manufacturers that required them to exclude competing software.

The government’s case zeroed in on Microsoft’s proprietary web browser, Internet Explorer (IE), that it developed to compete with the world’s first browser, Netscape.

Instead of selling IE as a browser to run on top of multiple operating systems, Microsoft gave away the browser free of charge on Windows-equipped PCs, which then accounted for more than 90% of the market. Microsoft also made it difficult for users to uninstall IE in favor of an alternate browser.

But back then, prosecutors ran into a major hurdle that could pose problems for them today: a presumption that lower, even free, prices are a consumer advantage and not necessarily anticompetitive.

One possible outcome of this period, said Lipsky, is that this push to rein in big companies could have the opposite impact that regulators are hoping for. It could make the big companies even more dominant.

Venture capital funding for startups could dry up because investors fear the companies they support are not going to be able to be acquired by larger players. And if giants can't complete mergers without protracted litigation, they will simply decide to develop more products in house.

Microsoft's arc over the last three decades helps prove that point. After its humbling encounter with the Justice Department in the 1990s, it went on to become a major new player in several industries, including cloud computing and gaming.

"I think the fact of the matter is, it will tend to favor the large incumbents," Lipsky said.

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