A few big US-based technology companies have emerged as winners in recent years as the Internet has opened huge opportunities.
In the capitalist world, the Hidden Hand of the free market is expected to select the winners – except that the losers cry foul and ask for government intervention to level the competitive field.
The US government has intervened in technology industries before when big new industries emerged, and will do so in the future. Sometimes it has helped, sometimes it has been irrelevant, and sometimes it wreaked havoc on the US economy.
Here’s an example of beneficial regulation: In the 1920s the new wireless communications industry became a target because of the belief that it was monopolized by the Radio Corporation of America (later RCA), which had emerged as the dominant industry leader with many key patents that kept competitors out. In 1930 the company signed a consent decree to license its patents to other corporations.
Perhaps this set a pattern. In the 1950s after RCA invented color television, the company licensed its patents broadly. With many equipment vendors, there was rapid growth of the color-television receiver and broadcast market. This clearly was a beneficial development that avoided a technological “monopoly,” because the new color-TV standards required RCA patents for implementation.
The US computer industry was investigated in the 1960s when IBM was the dominant supplier of mainframe computers. It was accused of violation of the Sherman Antitrust Act by allegedly “monopolizing the general-purpose digital electronic computer market.” There was talk of breaking up the company to level the competitive situation.
The case was dismissed in 1969. The company did a good thing, however, that opened up the computer software market. IBM unbundled the hardware and software prices of its computers; previously the two had been combined. This allowed independent software vendors to enter the market in competition with IBM.
IBM was not found guilty of antitrust activity because its success was earned by doing a better job than its competitors in building useful machines and developing the software to operate them. There was nothing nefarious that could be pinned on the company.
But IBM’s industry dominance was short-lived because new industry competitors displaced it in the computer business with midsize computers that gradually displaced the IBM mainframes. This was possible because the technology continued to make great strides outside of IBM.
This was one example of the history that has shown that technology market leadership is transitory – with or without government action.
Big and growing markets inevitably attract well-financed new competitors with new technology. Incumbents usually ignore them to their peril. We remember Westinghouse, Polaroid, Motorola and Hewlett-Packard, just to name a few, which for a while enjoyed leadership in defined technology markets. We may even add General Electric to that list of former technology behemoths in various sectors.
The communications industry was the target for antitrust activity in the 1980s as great technical strides were made with wireless and fiber-optic systems greatly improving transmission capacity. One company was a true monopoly hindering new competition in the US market.
AT&T was the longtime monopoly telecommunications provider incorporating everything from equipment to software and services in one company. The company’s Western Union division was the world’s leading telecommunications equipment supplier and, with its Bell Labs, a powerful technology innovator.
The US government forced the breakup of the company in 1982. It was divided into a service company, with seven regional units, and the other company parts consisting primarily of the equipment providers.
This breakup has had good and bad consequences for the US economy.
The good result of the breakup was that the US market was open to new service competition. The bad result was that along with Bell Labs, the equipment business eventually disappeared, removing the source of so many innovations from the founding of Bell Labs in 1925 to its dissolution in 1996.
The US ended up without an equipment supplier and without a strong communications-focused research laboratory. Huawei has since emerged to fill that void.
The conclusion from the breakup of AT&T is that breaking up industry leaders is fraught with the risk of leaving a national void.
Now we have the Internet, which has transformed the world and created new industrial dynamics in many fields. A few huge global companies started in the US have emerged with dominant positions. They are displacing many companies and are placing a high bar on competitors.
It is not surprising that governments in many countries including the US are anxious to exert regulatory influence to control the competitive environment to make room for others.
We are far from the late 19th century when “robber barons” colluded to monopolize markets and illegally control prices of commodities or railroad service by nefarious business practices. These new companies have achieved – and maintain – dominant positions owing to their technology and ability to exploit opportunities enabled by the Internet much better than others. Satisfied customers are the ultimate best judges of the company value.
To consider some examples: Google, starting with many others that recognized the value of Internet search, has ended up a dominant and highly profitable company on the basis of superior management, business models and technology. Amazon.com similarly went into online commerce that attracted hundreds of startups and many billions of investment. Most failed. Amazon owes its leadership to excellent management and technology and is the model that competitors try to emulate.
Such successful companies have leaders who marshal the resources needed to compete globally and support strong technology-development teams.
No one has a legal monopoly. They have competitors who can gain market share by exploiting the weaknesses of the leaders.
It is not accidental that so many world-leading innovative companies continue to originate in the US. It is because entrepreneurs and innovators are able to move new concepts into the domestic and global markets with large amounts of risk capital. The job of the government is to ensure legal business practices, not to penalize successful entrepreneurial companies.
The right level of government involvement can be helpful in maintaining an open competitive environment by punishing illegal practices. But it must be mindful that the benefits of entrepreneurial risk-taking are not stifled. That would kill the golden goose.
Henry Kressel is a technologist, inventor and long-term Warburg Pincus private equity investor. Among his technological achievements is the pioneering of the modern semiconductor laser device that enables modern communications systems.