Trust-busting: a two-sided legacy

As US looks to split Microsoft, history suggests prices are likely to fall. But it's also hard to make breakups stick.

If the "great trust buster," Teddy Roosevelt, were here today, he'd drop his monocle: Many of the industries he ripped apart at the turn of the century are back together again.

Railroads he fought to keep from uniting are now one. The US oil industry, carved into 28 separate pieces from behemoth Standard Oil, now numbers just seven firms. Even recent experience shows that government trust busting doesn't necessarily stick: The Baby Bells, born during the split-up of the AT&T empire in 1984, are merging back together.

Today, a la Roosevelt, the US Justice Department and 19 states are expected to propose breaking Microsoft Corp. into two companies - one for the Windows operating system and the other to make applications, such as the Microsoft Office programs.

While history shows the long-term implications of trust-busting can be uncertain, a breakup of the software giant could have the immediate effect of reconfiguring the entire information economy. Some say it could be as far-reaching as the Ma Bell split, an event that affected virtually every American.

Indeed, even if these court-imposed actions are often fraught with problems, they can prod innovation and lower prices for consumers. After the breakup of Standard Oil, for example, prices came down as brands competed against one another. And other important benefits surfaced as well.

"They got a lot of new refined products and a proliferation of technological development," says Jim Johnston, a retired economist who worked at Amoco.

The same was true for telephone services. Joseph Angland, an antitrust lawyer with Dewey Ballantine in Washington, remembers calling his girlfriend long distance before the AT&T breakup. It cost him 75 cents a minute. Today, adjusted for inflation, "long distance costs less than 10 percent of what it did."

But the record also shows that the breakups may not last longer than the judge who ordered them.

"What the government has rendered asunder does not necessarily stay asunder," says Denis Binder, an antitrust professor at the Chapman School of Law in Orange, Calif.

In the phone-monopoly breakup, the US initially wanted the Baby Bells separated from Ma Bell to allow competitors such as MCI more opportunity to compete. Then, as technology changed, many of the Baby Bells began merging back together again - and even compete with AT&T for long-distance service. AT&T has continued to grow by entering the cable business.

"It's debatable if it's worked out well," says John Stuart Smith, an antitrust lawyer and partner with the law firm Nixon Peabody in Washington. "The advent of cellular technology may have made the whole breakup unnecessary."

In fact, a recurring theme is that the government acts too late and at a time when technology is changing. That was the case with the government's long-standing antitrust case against IBM, says Mr. Smith. When the case began, IBM controlled the market in mainframe computers. But with the introduction of personal computers, IBM lost customers and the government finally dropped the case.

"It's taken years for IBM to get back into a strong position," says Smith.

Moreover, once the government steps in and prevails in court, companies involved often find it difficult to wrest themselves from oversight.

After the AT&T settlement, Judge Harold Greene, who presided over the case, made rulings for 12 years on important issues affecting the companies. If they wanted to enter a new line of business, for example, he ruled pro or con.

"Antitrust practitioners and scholars think it's not a good idea to have an industry czar, particularly a judge," says Mr. Angland.

Will any of these lessons have any bearing on how the government treats Microsoft?

According to published reports, the Justice Department would split Microsoft into two companies: One would continue to produce the leading PC operating system Microsoft Windows; the other would produce software products, including its Internet browser and office-productivity software. Both currently dominate their respective markets.

The government's hope is that this will keep the company from using its control of one market to stifle competition in another, which the Justice Department argues has been the firm's standard operating procedure for years.

Microsoft, on the other hand, says innovation would be stifled more by a breakup of the company, which it considers a radical and undesirable shift. It is expected to appeal such a punishment all the way to the US Supreme Court - and many legal experts think Microsoft could yet save itself in the process.

Whatever happens, observers agree that the stakes are massive. One sign of how seriously Wall Street views the ramifications: Ever since the government's breakup proposal was leaked to the press, Microsoft stock has plunged, along with the entire technology sector.

"What Microsoft is facing now is competitive threats from so many directions that it's harder to predict what will happen than probably ever in its history," says Martin Kenney, a sociologist at the University of California at Davis who has written extensively on the software industry.

Moreover, the software business is very different from oil and telephone businesses. One factor is the sheer pace of change; even if the government action doesn't cost Microsoft its preeminent position, alternative technologies like the Linux operating system or Internet-based computing could.

"These markets change radically, even within themselves, from year to year," says Thomas Hazlett at the American Enterprise Institute.

(c) Copyright 2000. The Christian Science Publishing Society