Big is bad. That sums up how many in Washington are thinking about tech in 2019. Tough trustbusting talk swirls through the growing Democratic presidential field and the halls of Congress, and antitrust experts warn that government inaction in the face of tech’s untrammeled bigness threatens competition, future innovation and democracy itself.
Unsurprisingly, tech leaders have pushed back. If American tech is hobbled by regulation and antitrust suits, they argue, the nation will cede the market to other, less democratic actors, especially China. There are also less noble reasons for their antiregulatory stance: Comfort with monopoly power is deeply rooted in an industry where corporate survival long demanded rapid growth and elimination of market rivals. As venture capitalist Peter Thiel piquantly put it, “competition is for losers.”
But there is an example of antitrust enforcement in Silicon Valley’s own history that provides a powerful counterargument — both to those who argue that tech must be broken up, and to those that counter that tech must be left alone. The 1956 AT&T consent decree reveals that some antitrust enforcement can be critical to opening up new, competitive marketplaces, even when the biggest of big-tech companies are allowed to stay intact.
Ma Bell’s antitrust saga is nearly as old as antitrust legislation itself. In 1913, an agreement between the federal government and AT&T turned the company into a regulated telephone monopoly. The reasoning had to do with the nature of telephony: Only a single network, lawmakers recognized, could provide seamless, universal service. Protected in its market position and flush with government contracts during and after World War II, the phone company became an extraordinary seedbed of technological innovation. This included the device that made the information revolution possible: the electronic transistor.
Riding high on this technological triumph that became foundational to all modern electronics, the company made increasingly bold moves into the computer market. The feds would have none of it. Having witnessed how massive corporations had been critical contributors to the rise of European fascism, America’s postwar mood had turned sharply anti-monopolist. The Department of Justice sued for antitrust violations in 1949, a mere two years after the transistor’s creation.
The breakup threat prompted AT&T to drop the licensing prices for its patents, creating opportunity for other market entrants, including several from the Bell Labs transistor team who decamped to other companies, or struck out on their own. One, William Shockley, went to Palo Alto, Calif., sparking the silicon semiconductor industry that gave the Valley its name.
This was only the start. When the lawsuit was settled seven years later, AT&T didn’t have to break up or divest any of its major businesses. Nor did it have to stop its research operations. Instead, it had to share them. The government mandated AT&T had to license its existing patents — including the transistor — free. Future inventions had to be licensed for a modest fee.
Opponents of the deal howled that the phone monopoly had gotten off with a slap on the wrist. AT&T’s leaders had to agree. “The loss of royalties,” a company spokesman declared, “will not have a significant effect on the company’s future revenues.”
These revenues did matter for the future of Silicon Valley, however.
The settlement allowed the smallest of tech start-ups to license the most advanced technology. A fiercely competitive semiconductor industry bloomed, where companies had to come up with new and better products to compete in the market. If you wanted to point to a singular event that allowed the silicon chip business to “really get started,” reflected Intel co-founder Gordon Moore, it was the 1956 consent decree.
While AT&T remained a cash-rich Goliath through the 1960s and 1970s, compulsory licensing and regulatory enforcement created space for plenty of tech and telecom Davids to grow: wireless communication, computer networking, telecom equipment. Further court decisions swatted away AT&T’s attempts to squash long-distance competitors and permitted the use of third-party equipment on its wires. “That most monopolistic of all monopolies,” noted the New York Times rather gleefully, “is finally faced with the threat of competition.”
Meanwhile, the consent decree remained the gift that kept on giving. Bell Labs’ patents fueled ever-more-advanced chipmaking that made it possible to shrink computers down to desktop size, then to connect them online.
Ironically, AT&T’s insatiable hunger to get a piece of the information age precipitated its breakup. The feds had filed a fresh antitrust suit in late 1974, charging that the Bell System was unfairly throttling its upstart competitors. To the dismay of company executives, the case pushed forward even after the arrival of the decidedly more pro-business Reagan administration — thanks to its newly appointed antitrust chief, Stanford law professor William F. Baxter.
Baxter was a staunch free-market conservative who believed government overreach was a far graver danger than corporate bigness. But he also was a Stanford alumnus whose more than 30 years on that campus had given him a front-row seat to Silicon Valley’s information revolution. The government’s case had merit, Baxter believed, and he vowed to litigate it “to the eyeballs.”
As tech-friendly Democrats in Congress turned up the heat as well, AT&T was backed into a corner. The personal computer industry was booming, dial-up networking was starting to blossom and Ma Bell wanted in. But the government wasn’t going to allow it.
So, in late 1982, AT&T agreed to break itself up. The local carriers spun off into “Baby Bells.” Bell Labs became an independent company, Lucent. The AT&T that remained made a play for the PC business, but didn’t get very far. IBM, another company only recently released from antitrust enforcement’s claws, had already cornered the market.
The settlement still placed limits on what the companies of the former Bell System could do. AT&T couldn’t get into the business of providing online news and information. Local carriers couldn’t make and market telecom equipment. But once again, these regulatory guardrails created space for whole new industries to grow. Imagine how the tech story of the past 30 years might have played out without online service providers like CompuServe, Prodigy and AOL, networking hardware giants like Cisco or any of the thousands of companies that built the infrastructure and information platforms that enabled today’s wired world.
In future-tense Silicon Valley, memory of this history is now largely lost. But it is critical to understanding how and why the industry grew in the first place. Antitrust enforcement of one very large, rich, innovative company opened up opportunities for many other firms to grow and thrive. The relentless competition among many once-small companies — from the semiconductor makers to the personal-computing home-brewers to the dot-coms and beyond — made Silicon Valley so remarkably good at producing one innovative generation after another.
Regulation didn’t choke the big guys, either. The Bell System remained wildly profitable through its life as a regulated monopoly. Its deep pockets allowed it to become the industrial research laboratory for an entire set of industries — from chips and computers to networks and routers. AT&T continued to deliver hefty returns to shareholders even after it had broken into pieces.
So bigness doesn’t necessarily have to be badness. That is, as long as there are rules in place to allow small companies to grow along with the large, for the innovative resources of tech giants to be shared widely and for the government to step in when necessary.
Teddy Roosevelt, a champion of regulation more than he was a buster of trusts, said it best. “Concentration and co-operation are conditions imperatively essential for industrial advance,” TR declared in 1912, but “there must be control in order to protect the people.”
And as the case of AT&T shows, control protects innovation, too.