This is part of IEEE Spectrum's special report: Always On: Living in a Networked World.
How quickly memory fades! Barely six months ago--before news of Florida recounts and U.S. electoral college debates took over the world press--headlines were dominated by U.S. District Judge Robert Penfield Jackson's order to split Microsoft into two companies. Just a month after that, while Microsoft Corp. chairman Bill Gates was still licking his wounds, WorldCom's founding chief executive officer Bernie Ebbers had to digest the unwelcome news that European and U.S. antitrust regulators would reject his proposed merger with Sprint Corp. And for the remainder of the year, America On-line Inc.'s (AOL's) founding chairman Stephen M. Case and Time Warner Inc. chief Gerald M. Levin found themselves wresting with an even wider cast of regulators about the terms of their proposed merger.
With the exception of cellular telephony [see "Mobile Merger Mania"], 2000 was the year in which titans of industry got their comeuppance--but also a year in which much of the U.S. public and many opinion leaders expressed chagrin at the government's hobbling the very heroes seen as responsible for the economy's spectacular performance.
While antitrust enforcement received little explicit attention in a presidential campaign seemingly dedicated to the minimization of all potentially divisive issues, the question nonetheless looms: what will be the future, this year and thereafter, of policy regarding mergers and acquisitions?
The answer is not intuitively obvious. On the face of it, U.S. regulators might be expected to back off--especially if the U.S. economy falters, and leading telecommunications companies like AT&T, WorldCom, and Lucent Technologies continue to experience serious financial difficulties. A change in philosophy at the top of the government, with a new Administration taking office in January, could be an additional factor.
But it is important to remember, noted Harvey Goldschmid, a law professor at Columbia University in New York City, that antitrust has never been a creature of just one party. "Teddy Roosevelt, the original trustbuster, was a Republican, and relatively vigorous enforcement took place in the Eisenhower and Nixon administrations," he said. "Only in the Reagan administration [with the settlement of the long-festering IBM case and the consent decree breaking up AT&T] was antitrust largely put aside."
Nor is antitrust, Goldschmid might have added, a labor versus big business issue of the type that traditionally divides Democrats and Republicans. Remember: many of the complaints driving enforcement actions against companies like Microsoft and AOL-Time Warner have come from other multinational players almost equally formidable--companies like Sun, Cisco, and Disney.
Indeed, the ubiquitous activities of such companies, and their increasingly complex maneuverings for turf, not just in the United States but worldwide, have brought an ever-growing cast of players into antitrust enforcement. In the United States, not just the Federal government, but also top legal officials representing a couple of dozen states were crucial to pressing the case against Microsoft. In Europe, the emergence of the European Union's Competition Directorate as a big force in antitrust enforcement was perhaps the single most noteworthy development of the past year. Even in Japan, traditionally quiescent and industry-friendly regulators are restless.
As a result, the prospects are not--as they seemed to be, just a couple of years back--good for unfettered industrial combinations. In 1998--with mega-mergers between AT&T and TCI, and between the so-called Baby Bells SBC and Ameritech and Bell Atlantic and GTE--commentators were wondering whether the nation was witnessing the reconstruction of the national telephone system broken up in 1982-83. Now, to the contrary, the sense is that corporate combinations, one way or another, will continue to get close scrutiny. While multinationals no doubt will continue to rearrange and recombine themselves, it will not be a willy-nilly process in which the public interest gets short shrift.
Prospects for Microsoft proceeding
On 27 November, coincidentally the same day as the Florida Secretary of State certified George W. Bush as the winner of the state's electoral votes, making him the likely next President, Microsoft filed its motion with a U.S. appeals court asking it to throw out Judge Jackson's breakup order. The company's lawyers argued that the judge's decision was faulty on both procedural and legal grounds.
Given public opinion that is siding narrowly with Microsoft, a newly-installed U.S Attorney General might look for a way to negotiate with the company, seeking some kind of out-of-court settlement. That, anyway, is the view of Nicholas Economides, an economist at New York University's Stern School of Business, who has been critical of the government's case. Economides concedes that it would be awkward and possibly "insufficient" for the Federal government to settle, even while state attorneys general press ahead with the case they were instrumental in launching in the first place.
At the least, though, Economides thinks the appeals court will remand the remedy part of the case--that is, the decision to divide Microsoft--to the district court for reconsideration. This is because Judge Jackson allowed little formal discussion of his proposed remedy at the time he issued it.
In the view of Lawrence Lessig, a Stanford Law School professor who once served as court-appointed "master" in the Microsoft proceedings and was charged with preparing a basic analysis for Judge Jackson, a change in Administration will not have much impact on the case. Any attempt by Microsoft to use an earlier appeals court decision favoring its position to "immunize itself in the current proceeding will fail," he told IEEE Spectrum.
Considering that Jackson invited Lesssig to write an amicus brief, even after Microsoft's lawyers succeeded in having him removed as master, he might reasonably be considered to be a partisan of the court. Nonetheless, he is inclined to agree with Economides that the appeals court will remand the break-up penalty for further hearing at the district level.
Columbia University's Goldschmid, also a proponent of strong antitrust enforcement, takes a similar line. "Microsoft would have to show more statesmanship than it's shown so far, and have to be ready to take a bigger hit than it's been willing to accept before," for any out-of-court settlement to be reached in an arms-length negotiation, he told Spectrum.
European Union raises hackles
Separately from the suits brought against Microsoft by the U.S. government and the state attorneys general, two parallel investigations of Microsoft have been under way in Europe. One is the result of a complaint brought by Sun Microsystems Inc., in 1998, alleging that Microsoft was not divulging adequate information about its Windows software interfaces. The second is an inquiry initiated last year, involving similar issues but focusing on Windows 2000.
Not so very long ago, an antitrust investigation by the supposedly toothless European Union would have seemed small potatoes indeed. But not after developments last year that repeatedly put the EU competition chief Mario Monti into the spotlight, and suddenly made this hitherto obscure Italian economist the subject of profiles in every leading financial publication.
In May came the startling news that the EU Competition Directorate, which apparently had been exchanging information and views with the U.S. Department of Justice, would reject the proposed merger between MCI-WorldCom and Sprint, dooming the deal. This was the first time the commission had scuttled a merger between two non-European companies. Its main reason was the excessive market dominance the combination would give the company over Europe's Internet backbone--a view WorldCom will challenge in the EU's Court of First Instance, in Luxembourg, on procedural, legal, and substantive grounds.
An anomalous aspect of antitrust enforcement in Europe is that the Competition Directorate serves at the outset not only as investigator but as prosecutor, jury, and judge, in contrast to the exacting judicial procedures the U.S. Justice Department must follow from the start. What is more, political pressures no doubt are brought to bear on the European Commission when European companies are involved--France would scarcely permit it, say, to break up Electricité de France without a murmur--but when the companies at issue are foreign-based, local advocates are lacking.
Pressures on AOL-Time Warner
No wonder, then, that when the commission started to raise serious questions this summer about the proposed mega-merger between AOL and Time Warner, the executives at those companies paid close heed. In the end they had to agree to spin off the music retailer EMI, because of concerns that otherwise the merged company would control too large a share of European music distribution.
In the United States, the aspect of the AOL-Time Warner merger that has been of greatest concern to regulators has been the unparalleled power the new company would have over the creation and distribution of Internet content. The Federal Trade Commission (FTC) has zeroed in especially on the highly controversial issue of whether the combined company should be required, by analogy with telephone common carriers, to open its cable networks to competing Internet service providers (ISPs) on nondiscriminatory terms. Pressure from the FTC resulted in the Federal Communications Commission (FCC) taking a much harder line on the question than it might otherwise have been disposed to take, and the FCC launched a year-long investigation into whether cable owners generally should be required to provide open access to ISPs.
Telecom rules heat up
Once launched, regulatory investigations, like wars, have a life of their own, and are not easily stopped without being pushed to a final resolution.
Since AT&T acquired the cable giant TCI in 1998 and announced a strategy of offering consumers packaged broadband services, including local telephone service over TCI's networks, it has been a darling of the FCC. The commission's hope was that AT&T would force open local telephony to the winds of competition.
But with AT&T's decision this fall to separate its consumer phone service from its cable business, its standing dropped precipitously at the FCC, which suddenly has been notably more critical of its leadership.
Because of AT&T's radically different profile in the wake of its breakup last fall (its third), because of continuing pressure from FTC staff (whatever the situation at the top), and because (not least) of lobbying from other ISPs and Internet content providers, starting with Disney, it is a fair bet that AT&T--along with Time Warner and all other big cable operators--will be subjected eventually to stricter open-access rules.
Meawhile in Japan, not previously known for strict telecom or antitrust regulation, officials at its Fair Trade Commission have opened an investigation into whether the national telephone company, NTT Corp., has been systematically impeding independent providers of digital subscriber lines (DSLs) from linking into the network. That in turn has lit a fire under the Ministry of Post and Telecommunication's regulators, who are hurriedly writing up new rules to govern the situation.
The situation in Japan is strikingly similar to that in the United States, where the U.S. FTC fired up the FCC. Indeed, with the consolidated local telephone companies in the United States beginning to dominate DSL provision, and with independent DSL providers suddenly on the ropes, this, too--like Internet backbone dominance and excess market power in content provision--may be a case of issues crossing oceans in both directions.
Networks are global, and so, too, are all the regulatory issues their management involves. Accordingly, whatever particular changes in personnel take place here or there, problems requiring international resolution will continue to arise, and authorities willing to address them will not be wanting.