This should be a heady time for Gary Reback.
This week the European Commission is expected to issue a finding that Google illegally used the dominance of its Android operating system to thwart competitors. In response, the EC, the European Union’s competition enforcer, is expected to slap Google with a multibillion-euro fine and order it to change some of its business practices. The legal setback will be the second such finding by the EU against Google in the last 15 months and the second jumbo fine.
Given that Reback, a longtime antitrust lawyer who famously fought Microsoft in the 1990s, helped prompt the investigations that led to both EU findings against Google, you might think he’d be taking a victory lap of sorts now. But you’d be wrong. Instead of celebrating, Reback is disappointed and frustrated.
“Although these things in Europe are enormously important, in many ways they have yet to yield any results,” he said.
Even though the the EU issued an “enormous” fine against the search giant last year, that move “didn’t restore competition, and it didn’t change Google’s conduct,” continued Reback, an attorney with Silicon Valley law firm Carr & Farrell who represents firms that charge they’ve been harmed by the search firm.
And Reback is worried that in the future, rivals are going to have any even tougher time trying to compete with Google and the other tech giants because no one’s really ensuring a level playing field. While European competition regulators have been slow and largely ineffectual, American antitrust regulators have almost entirely abdicated their role.
At least in the US, “it’s not hard to imagine we might be out of the monopoly enforcement area altogether,” he said.
In the past, US officials were serious about enforcing antitrust law in tech
It didn’t have to be this way.
As Reback has often argued, the tech industry is particularly susceptible to so-called network effects. Leading companies tend to become more dominant over time. The more users they have, the more likely it is they will attract additional users, and then the cycle repeats, allowing the firms to lock in their advantage. Once they achieve a monopoly — or something close to it — companies have tended to use it to frustrate would-be rivals and to extend their dominance into new areas.
But in the past, the US government repeatedly stepped in to rebalance the equation. In the 1970s, it pursued antitrust cases against AT&T and IBM. In the 1990s, it sued Microsoft.
“It’s fair to say in earlier time periods, you had more antitrust enforcement generally,” Reback said. He continued: “In those days, even the conservatives favored antitrust enforcement.” The legal outcomes of those cases were mixed. The case against AT&T led to the breakup of Ma Bell, while an appeals court threw out a similar effort to break up Microsoft. The government ended up dropping its case against IBM after it spent more than a decade in the courts. But the cases all were crucial to the development of the tech industry, Reback argues.
The internet developed and flourished in the space afforded by the fracturing of AT&T and the constraints placed on its behavior. The IBM case led to the company’s voluntary agreement to separate its hardware from its software, a move that led directly to the modern software industry. And the Microsoft case constrained the tech giant enough to allow the web to take off and companies including Google, Facebook, and Netflix to succeed.
“The fact is that antitrust enforcement does produce very positive results,” he said.
The Microsoft case showed the importance of antitrust enforcement
The government’s case against Microsoft was particularly important, Reback argued. When the Bush administration settled the case in 2001, many critics thought the outcome was too favorable to the software giant. Although a district court judge had ordered the company to be broken up, that penalty was thrown out by an appeals court, and the settlement agreement left intact not only the company but its monopoly of PC desktop computers.
But the case and settlement ended up being much more consequential than people realized at the time, Reback said. The case showed that antitrust law and principles weren’t outdated but could be applied as they were to cutting-edge technology firms. It also demonstrated that when the government focused on it, antitrust enforcement could be quick and timely. What’s more, the court’s determination that Microsoft was a monopoly that had abused its power — a ruling that was upheld by the appeals court — helped set the rules of the road for technology companies for the next 10 years, highlighting behavior that was out of bounds, Reback said.
As part of the settlement, Microsoft agreed to certain restrictions on its behavior and agreed to have a committee of experts oversee its compliance with those restrictions. Additionally, the company was hit with repeated fines from European regulators in their separate but related antitrust inquiry.
The case itself distracted company executives from focusing on new technologies and emerging threats to Microsoft’s business, company President Brad Smith, who was one of the software giant’s top lawyers at the time, said recently. But they also became gun shy about introducing new features, the New York Times reported earlier this year.
One executive reviewed proposed new features with a compliance officer, allowing the officer to approve or block them, according to The Times report. Others went so far as to share the company’s plans with competitors to make sure they didn’t object to those plans.
“People started second-guessing themselves,” Gene Burrus, a former Microsoft lawyer, told The Times. “No one wanted to test the regulators anymore.”
The Microsoft case allowed Google and Facebook to flourish
Thanks to its dominance over both PC operating systems and web browsers at the turn of the millennium, Microsoft could have easily crushed Google, Facebook, and other internet startups in their cribs. In many cases, it had the incentive to do so, because it had its own web sites and services. What’s more, the company actually considered redirecting users who typed in “www.google.com” to Microsoft’s own MSN search site instead and displaying an alert warning users of the privacy dangers of using Google,” the Times reported.
But the antitrust case stopped Microsoft in its tracks.
“There was a new culture of compliance, and we didn’t want to get in trouble again, so nothing happened,” Burrus told The Times.
Unfortunately, the US government hasn’t brought a major antitrust case in the tech industry since it took on Microsoft. Instead, its general rule in the last 10 years or so has been to either close investigations without taking any kind of action or to negotiate a so-called consent decree with a tech firm. In those decrees, the companies generally avoid prosecution by agreeing to make certain changes in their behavior.
Those consent decrees, though, have done little to constrain the huge and growing power of the big tech firms. For one thing, they’re difficult to enforce, Reback said. Government agencies typically don’t have the resources to closely monitor the tech firms’ behavior to make sure they’re complying with terms of the decrees.
The tech firms learned they need to stay out of the limelight
For another, they allow the companies to avoid a public trial. Before its antitrust trial, Microsoft was one of the most admired companies in America, Reback noted. But the case was covered closely by the press. And after prosecutors released emails that showed how the company was engaging in cutthroat behavior and played a video deposition of Bill Gates in which he came across as arrogant and ruthless, public support for the company took a sharp turn.
What’s more, it became apparent through the trial that certain companies and technologies were victims of Microsoft’s behavior and consumers had lost out because of it, Reback said.
“I think Google and these other big companies understand fully how damaging [a] public trial would be … so they’re going to do damn near anything to avoid that,” he said.
And what they’ve mostly done is to step up their political contributions, Reback charges. Antitrust law hasn’t changed since the Microsoft trial, but campaign finance law certainly has, most notoriously with the Citizens United decision. The tech companies have stepped up their political donations and lobby — and the result has been little more than taps on the wrist when it comes to antitrust enforcement, Reback said.
Worse, it’s a self-perpetuating system. Companies with monopoly profits have plenty of money to throw around on lobbyists and political donations that are targeted at maintaining their monopolies, he said.
“It make it increasingly difficult for the government to do anything meaningful,” he said.
Europe has become the antitrust enforcer by default
That’s left the Europeans as the chief antitrust enforcers of late, most notably when it comes to Google. But the European investigations have done little to redress the competitive balance. The fine they levied against Google last year was the result of an investigation into how the company handled shopping search results that started in 2007. The Android inquiry has literally been going on for years too. That’s a lifetime in the fast-moving tech industry.
Because Europe’s antitrust enforcement is mostly done behind closed doors, rather than through a public trial, the cases against Google haven’t offered a chance to widely inform the public about what it’s doing. And as big as the fines have been, they’ve done nothing to open up space for potential rivals to Google.
“On one hand, the EU deserves … praise and credit for what they’ve done,” Reback said. “But man, they only look good because we’re totally absent.”