Antitrust Law: Analyzing AT&T and Microsoft

The federal government plays a major role in affecting how big business is run. By regulating the actions of major companies that operate under monopolies, it is easy to tell that the government can change the shape of business as well as the economy. With a split of a monopoly, new competition in a market is created. This could lead to a drastic change in the company that used to run under a monopoly. The company is not used to competing and never really had to do much marketing in order to sustain their dominance.

By looking at the AT&T and Microsoft antitrust lawsuits brought upon them by the federal government, one can see how there are differences in the cases, and how it is not clear as to whether Microsoft actually has a monopoly. However, if Microsoft does end up losing the lawsuit with the government, there are different ways in which the company could be broken up, but signs point to this case resembling the AT&T case. It is also apparent that the government might be using Microsoft to institute new litigation pertaining to the up and coming companies in the information age.

By using a high profile company, such as Microsoft, the government will have an easier time in getting their message across that they can regulate business. No matter the outcome, it does not appear that Microsoft has a clear-cut monopoly and it is not difficult to see why. Full Text: The Supreme Court can play a major role in the day-to-day operations of businesses. This is evident in the cases that were brought up by the federal government against AT&T in the late seventies into the early eighties, and the recent changes brought up against Microsoft.

In both these cases the federal government thought that the companies had a monopoly and wanted to break them up. The breaking up of companies is done to ensure that one company does not control of a particular market. The lack of competition would cause inflation in prices and would hurt the consumer. This is why even though the economy in the United States is considered to be laisse-faire capitalism; the government needs to monitor businesses. In both the AT&T and Microsoft cases, the two companies were charges with being a trust or cartel.

A cartel is a combination of independent business organizations formed to regulate production, pricing, and marketing of goods by the members (www. dictionary. com). Today, there has been a shift to a high tech economy and the government has had to change anti-trust laws to keep up with its changes. Individuals in the technology field feel that the federal government is conducting in a manner that is appropriate under the current changes. The government is keeping the “right balance between anti-trust legislation and intellectual property rights” (Business Week).

The need of the government to protect competition is one of the factors that brought up the suit against Microsoft. The regulators of monopolies within the federal government want to see an increase in rules regarding conduct of abuses dealing with market power. By using the AT&T case as a basis, one can get an idea of how the Microsoft case may turn out. (Business Week) What happened to AT&T was called a divestiture, which is the sale, liquidation, or spin-off of a corporate division or subsidiary (www. dictionary. com).

The government’s anti-trust case against AT&T began in 1974 and was settled in January 1, 1982. At this point, AT&T had agreed to divest itself of the “wholly owned” Bell operating companies, which are the companies of AT&T that provided local telephone call service. Divestiture did not take place until January 1, 1984, some two years after the agreement was made. The Bell System was no more, and in its place was the new AT&T, as well as several regional Bell operating companies, called RBOC’s. (Langhauser 1) (Beckman)

The goal of the federal government’s case was to promote competition in long distance phone services. This was done by a consent decree, which is a judicial decree expressing a voluntary agreement between parties to a suit, especially an agreement by a defendant to cease activities alleged by the government to be illegal in return for an end to the charges (www. dictionary. com). Before 1970, AT&T was the countries only long distance company. However, in the early seventies, new long distance companies began to form, like MCI and Sprint.

For these new companies to provide their service, they would have to use the local phone lines that were owned by the regional bell operating companies. This caused a problem because MCI and Sprint claimed that the bell companies were favoring AT&T, and making it expensive for their companies to compete. As a result of this alleged discrimination, AT&T was to split into eight different parts. Yet again, AT&T was stripped into parts and broken down. In the new settlement, AT&T would keep its long distance service, manufacturing, and research departments.

Seven different companies that were completely independent from AT&T would provide the local phone service. Each of these newly formed companies was assigned a specific region of the country, and was restricted from entering into the long distance field. In theory, the fact that the seven new companies were now independent from AT&T, they would now treat all the long distance companies equally. (Langhauser 1) (Kastre) The consent decree had both positive and negative impacts on AT&T, but they were predominantly negative. First off, it took two years to decide on how the company was to be broken up.

This was done by most of the key executives and managers, and took their attention away from running the business. This would lead to MCI and Sprint being able to catch up to AT&T. Figuring out how to split up such a large company was an enormous challenge as well as being a major distraction for the company. Before the breakup, AT&T was the largest company in the world, employing over one million people. “It had over $130 assets, many of which were not neatly separated into “local” and “long distance” (Langhauser 2). One of the hardest things the company had to do was divided its assets among the eight companies.

The reason this was difficult was because the equipment, trucks, buildings, and electronics were not designed to be broken up. For example, “long distance switching equipment was usually located in the same truck as local switching equipment,” which made it difficult to divide because the seven new companies were restricted from long distance and the new AT&T needed the long distance trucks (Langhauser 2). Just to get an idea of how enormous of a task this was, AT&T’s plan for reorganization was 471 pages, which included hundreds of between AT&T and the soon to be new bell operating companies.

One of the things that hurt AT&T the most was that this reorganizing took up so much of the companies time, they sis not have time to figure out how they were going to compete in the long distance market. This caused MCI and Sprint not only catch up, but also allowed them to establish their businesses without AT&T to challenge them. (Langhauser 2) The process of allocating what companies got what assets, rights, and liabilities quickly became “fractious and divisive. ” Each of the companies wanted the best equipment and the least liabilities in order to maximize their business.

It got to the point that the designated presidents of the new bell operating companies, who still worked for AT&T, testified in court against AT&T. It is hard to see how the tension that happened before the breakup hindered future relations between AT&T and the newly form bell companies, however, it did have a negative impact because AT&T’s equipment manufacturing was competing with the other companies (MCI and Sprint) for the RBOC’s business. (Langhauser 2) Under the guidelines of the consent decree, the RBOC’s were restricted from entering the long distance market and manufacturing telecommunications equipment.

However, almost immediately after the split, they were appealing to lift the restrictions of their business. Soon after the divestiture, many of the RBOC’s were going to the court that was supervising the consent decree, and appealing to get waivers on their restrictions. AT&T was of course against the waiving of the restrictions. This opposition did not make the RBOC’s happy and they made it known that if AT&T continued to oppose their attempts to lift the restrictions, they would severely cut back on their purchasing of equipment from AT&T.

This tension caused AT&T to once again divest itself from its manufacturing operations, and created Lucent. The RBOC’s were not successful in lifting the restrictions in court, but did succeed in doing so through the courts. (Langhauser 2) (Beckman)(Masud) In February of 1996, the Telecommunications Act of 1996 was passed. This act allowed the RBOC’s to provide long distance service was it was evident that they had opened their local services to competition. Today, five years after the act was established, the RBOC’s are only able to provide long distance in five states: NY, TX, KS, OK and MA.

(Langhauser 3) “A successful government anti-trust suit usually provokes private lawsuits from actual or potential competitors” (Langhauser 3). This was the case in the AT&T suit. It got to the point, that in 1984, at divestiture, AT&T had about 60 lawsuits pending in the courts. Although many of these suits were settled by 1985, this again distracted the executives at AT&T from managing the business, as well as forcing the company to spend a lot of money on lawyers and court fees. (Langhauser 3) There were good things to come of this divestiture, but they were not really good for AT&T.

For example, prior to divestiture, a ten minute phone call from Washington DC to Dallas, Texas would cost $4. 30. Today, that is unheard of because the going rate is five cents per minute. Once it was stripped of its monopoly, AT&T was now forced to operate as a regular business, lowering prices, balancing cost, and marketing strategies to attract customers. This was difficult for AT&T to do. “By 1998, there were over 500 US long distance phone companies and prices had fallen 60 percent, with AT&T share of the market dropping from ninety percent to fifty percent” (Kastre).

Today, there is a similar situation going on with the federal governments case against Microsoft. However, it will be more difficult to prove that Microsoft has an illegal monopoly that it was to prove that AT&T had one. The reason for this is that there is no real competition against Microsoft. In 1995, Microsoft agreed to a consent decree as a way of settling a government antitrust suit, and agreed to not engage in particular practices. The consent decree was designed to prevent Microsoft from using the licensing process to protect its operating systems monopoly, and there was evidence that Microsoft was beginning to do just that.

This case is arguably the most serious antitrust case since the AT&T case, and will be a “litmus test of how corporate power will be reconciled with consumer rights in the information age” (Shapiro). People are saying that Microsoft is leveraging its market power by using strong-arm tactics and predatory practices to expand into all communications markets. Economist call what Microsoft has “network effects,” which leads certain companies with successful products to dominate the market as well as preventing competition from possibly superior products. (Shapiro)

According to the government, Microsoft barred Netscape from access to windows consumers by negotiating exclusionary contracts requiring that computer manufacturers include Internet Explorer, Microsoft’s web browser, when they sell a computer with windows. This is a difficult claim for the government to make, because there is sufficient evidence that shows otherwise. For example, more than 150 million copies of Netscape’s browser were installed in computers in 1998, and more than 65 million use Netcenter, making it the second most visited site, with only Yahoo being visited more.

Not only that, but Netscape’s home page has more links to it than Microsoft’s, and in 1999 when the charges were initiated, Netscape had a 42 percent share of the browser market, with an additional 16 percent coming when they acquired America Online (AOL). Also, at the same time Netscape was saying they were being forced out of the market by Microsoft, Netscape was bragging about its growing market share to its future partner, AOL. (Levy)(Shapiro) Microsoft is nowhere near as dominant as AT&T was and its dominance is threatened on five fronts.

The first threat is from Sun’s Java programming language, which, when operational, will allow programs to run on PC’s as well as over the Internet with no problems. The second threat is that browsers have replaced parts of windows. Third, downloads from the Internet could turn low-cost network computers into high-speed PC’s. Fourth, handheld computer devices have altered the nature and function of the operating system. Fifth, the new economy has shifted the profit opportunities away from operating system and into Internet portals, which, in that market, Microsoft is behind.

Even in the operating systems market, which is the market that Microsoft dominates, there are alternatives to windows. One of its competitors in this market is Apple, whose iMac is making rises in its market use with approximately half of the new computer users buying one. The biggest threat to Microsoft now is Linux, who’s had deals with Intel, IBM, Compaq, Hewlett-Packard, Dell, and Netscape. (Levy)

Another reason why it is difficult to say that Microsoft has an unfair advantage is because of the rise in stocks of its competitors around the time that the suit was brought about. One reason that some people think the government is still pursuing the case against Microsoft is because it needs to justify to the public that it did not waste the $30 to $60 million already spent on Microsoft litigation.

Also, there was a proposed 17 percent budget increase for the Antitrust Division during the Clinton administration. The case against Microsoft could be just a ploy to get more finding. (Levy) There are two ways in which the government could break up Microsoft, if they do in fact with the lawsuit.

One way would be to break Microsoft into two rival companies. This would lead to drastic decrease in the value of the stakeholders stock in Microsoft. This means that the monetary damages suffered by Microsoft’s stakeholder would be far greater than the damages caused by its misconduct. Although there may be an immediate benefit to the consumer, it is what will happen in the long run that counts. Not only would this cause a decrease in the investments made in Microsoft, it would also lead to a decrease in the investments of smaller software companies.

It is scary to think that the government would destroy a company that achieved its dominance though hard work simply on the basis that it maintained that dominance through illegal means. Another way the government could break up Microsoft is to split the company into non-rival companies, like what happened with AT&T. The government would split Microsoft into an operating systems company and an applications company. The problem with doing this is because there is no way to draw up lines to divide the business, like how the RBOC’s were divided by region.

Since the operating systems field and applications field are inter-related, both of the Microsoft companies would end up competing in the others market. If it were true that Microsoft is using strong-arm tactics and conducting illegal anticompetitive behavior, then it would seem to be that Microsoft gains and the consumer loses. This however, is not the whole basis for the case. While no one in the antitrust division will admit to it, bringing Microsoft into court now is a public relations move, as well as being a legal one.

“The brilliant thing about using the consent decree is that Justice can keep Microsoft on the defensive, raise consumer awareness about the company’s cutthroat tactics and encourage industry to come forward with evidence of unfair dealing” (Shapiro). This appeared to have worked, because after the charges were announced, reports have come forward about anticompetitive practices by Microsoft. One suggestion made by Senator Lloyd Constantine was to amend the Sherman Antitrust Act to “make leveraging monopoly power from one market to another a clear violation of the statute” (Shapiro).

William Kovacic, a professor at George Washington University, said that one answer to the idea the government is using lawsuits as litigation is, “the mere fact of intervening makes a difference regardless of the legal outcome” (Ricadela). Though all this litigation brought forth by the government, Microsoft has received resignations by some high-level executives. This leads me to believe that the Microsoft case could end up the same way that the AT&T case did. In both cases, the company had almost total control of its market, and both, at the time of the lawsuits, were the top companies in the world.

I feel the main difference is that AT&T had no real competitors, as compared to Microsoft that does. It is almost as if the government is going after Microsoft because it fears that Microsoft will become another AT&T. It is very possible that his could happen, if the government would not have intervened. A simple example that shows the main difference in my opinion between Microsoft and AT&T, which proves that Microsoft does not have a monopoly, is the fact that the Bucknell libraries computer lab has half of its computers with Microsoft’s Windows operating system, and the other half with Apple iMac’s.

Back in AT&T’s prime, everything involving telephones was AT&T made and operated. It is very apart that Microsoft, although far superior to any other technological company, does not have a monopoly. A monopoly is exclusive control by one group of the means of producing or selling a commodity or service (www. dictionary. com). Using that definition, Microsoft does not have a monopoly. However, the federal government, by using the courts as a means to get its goals accomplished, has had a major effect of Microsoft, regardless of whether or not they win the lawsuit.

Works Cited Beckman, Kristen. February 12, 2001 v20 i7 p16(2). RCR Wireless News. “Breaking ma bell. ” Kastre, Michael. February 26, 2001 v22 i9 p61. Multichannel News. “The Inevitable Demise of ‘Ma Bell’. ” Levy, Robert. October 18, 1999 v15 i38 p45. Insight on the News. “Microsoft Has No Monopoly Since It Has No Real Competitors. ” (the federal government’s questionable case against Microsoft) Masud, Sam. October 30, 1995 v14 n23 p35(2). Government Computer News. “Ma Bell breaks up the family again – no bad news for feds. ” No Author.

March 22, 1999 i3621 p34(1). Business Week. “Making Antitrust Fit High-Tech. (Government Activity) Ricadela, Aaron. October 9, 2000 p94. Information Week. “Litigation: The Price of doing Business in the New Economy. ” Shapiro, Andrew L. December 8, 1997 v265 n19 p22(3). The Nation. “Hard drive on Microsoft: whether or not this government antitrust charges stick, justice should prevail. ” www. dictionary. com – definitions Personal Communication: John Langhauser – Vice President of Law and Government Affairs, Atlantic Region of AT&T Email – April 20, 2001