David Rosen
Congress, the media and, increasingly, the American public are concerned about the ever-growing power of Big Tech. The recent revelations about Facebook made by whistleblower Frances Haugen, a data scientist, give insight into just how insidious Big Tech can be in its effort to manipulate market power to maximize profit. Many are calling for the break-up of Big Tech companies.
Over the last century, the U.S. has witnessed repeated efforts to break-up, if not outlaw, monopolies, cartels and trusts. The classic effort occurred in the fin de siècle era, from the adoption of the Sherman Antitrust Act (1890) and the Clayton Antitrust Act (1914), with the breakup of Standard Oil and other companies. Nearly a century later, a similar spirit led to the break-up of American Telegraph and Telephone (AT&T, the old Ma Bell) in 1984. While those promoting the current anti-monopoly efforts share much with earlier advocates, today’s efforts face a very different economic situation.
The forces driving Big Tech are just the tip of an economic restructuring that’s been brewing for years. “Since 2008 American firms have engaged in one of the largest rounds of mergers in their country’s history, worth $10 trillion,” The Economist noted in a 2016 study. “Unlike earlier acquisitions aimed at building global empires, these mergers were largely aimed at consolidating in America, allowing the merged companies to increase their market shares and cut their costs.” Consolidation is occurring in all sectors as diverse as airlines, retail, telecom, hospitals & health care, food and even eyeglasses.
A careful consideration of the break-up of Standard Oil and AT&T suggests how the current effort to break-up Big Tech may play out — with unanticipated consequences that could make things worse.
Standard Oil Trust
In 1863, John D. Rockefeller and his partners founded the Standard Oil Company in Cleveland, OH, not to refine gasoline but kerosene. By the early ‘80s, it controlled the refining of 90 to 95 percent of all oil produced in the U.S. “The price of refined petroleum dropped during the 1870s from about 25 cents per gallon to less than 10 cents,” reports Yale economist, Naomi R. Lamoreaux, “much faster than the general price level, and it remained essentially flat in real terms into the twentieth century.” In 1882, the Standard Oil Trust and founded, in 1892, they lost a case in Ohio under the Sherman Act. They then reincorporated in New Jersey as a holding company with 34 subsidiaries.
Concerns were raised not only about the company’s use of secret discounts for railroads to force rivals to sell out, but its power to influence legislators. Ida Tarbell, in her classic 1904 study, The History of the Standard Oil Company, characterized Rockefeller as a “living mummy,” warning, “our national life is on every side distinctly poorer, uglier, meaner, for the kind of influence he exercises.”
During the fin de siècle and the early-20th century, the U.S. suffered through what Mark Twain dubbed “the Gilded Age.” This was the age of the Robber Barons like John D. Rockefeller and Andrew Carnegie; it was also an era marked by deepening poverty, growing unemployment and wide-spread corruption. Between 1897 and 1904, over 4,000 companies were consolidated down into 257 corporate firms. For example, U.S. Steel was formed by the merger of nine of the largest steel companies. By 1904, some 318 companies controlled nearly 40 percent of the nation’s manufacturing output. One estimate claims that a single firm produced over half the output in 78 industries. These corporations became known as “trusts” or “cartels” – and they ruled with a vengeance. One of them was Standard Oil and it was not alone in using predatory pricing, exclusivity deals and other anti-competitive practices to undercut smaller local businesses.
The Dept. of Justice filed a federal antitrust lawsuit against Standard Oil in 1909; two years later, it won the case. As a result, Standard Oil was broken-up into 34 companies. The reformed Standard Oil became a cartel with Standard Oil of New Jersey becoming Exxon and Standard Oil of New York became Mobil (and they became ExxonMobil), Standard Oil of Indiana became Amoco, and Standard Oil of California became Chevron. However, while each company was overseen by an individual board of directors, Rockefeller and other owners controlled the investment equity for the separate companies.
During the Progressive era, other trusts were broken up, including:
Northern Securities (1904), with backing from Rockefeller and J.P. Morgan, it held majority control of Chicago, Burlington, and Quincy (CB&Q) along with the Great Northern along with smaller railroads; Swift & Co. (1905), a leading beef-packing firm that coordinated with other leading meatpackers to fix prices; and American Tobacco (1911), acquiring more than 250 brands and growers, including Lucky Strike, and controlled 90 percent of all cigarettes in 1890.
Now, a century-plus after Standard Oil was formally broken up, the environmental crisis deepens, driven my emissions from the fossil fuel industry.
AT&T Monopoly
On June 2, 1875, while experimenting with his “harmonic telegraph,” Alexander Graham Bell and his assistant, Thomas A. Watson, discovered that sound could be transmitted over a wire. Bell, not unlike Samuel Morse, is remembered for one famous line – “Mr. Watson – Come here – I want to see you” – considered the first words spoken over the telephone.
A century later, AT&T was, according to Steve Coll, author of classic tale, The Deal of the Century: The Breakup of AT&T, “the largest corporation in the world.” It had over 1 million employees, controlled almost all U.S. local and long distance telephone service as well as the equipment in most homes and networks; and its Bellcore was the nation’s leading research organization.
The Bell Telephone Company was formally organized on July 9, 1877, with Brazil’s Emperor Dom Pedro II the first person to buy shares in the new tech company. During the early-20th century, AT&T became a “monopoly,” controlling over four-fifths (83%) of all American telephone service. The Bell companies consisted of two dozen companies that provided local telephone service throughout the country. In the wake of Great Depression, concerns rose in Congress and the media that the communications companies – and AT&T in particular — were plagued with financial abuses. As one observer noted, AT&T “operated free of effective regulation, particularly at the interstate level.”
This concern contributed to the drafting of the Communications Act of 1934 and the establishment of the Federal Communications Commission (FCC). The Act called to “make available, so far as possible, to all the people of the United States, a rapid, efficient, nation-wide, and world-wide wire and radio communications service with adequate facilities at reasonable charges.”
For decades AT&T operated as was a legal – if moderately regulated — monopoly. In 1974, the Justice Department filed an antitrust case against AT&T to break up the Bell system and, a decade later, U.S. District Judge Harold Greene oversaw what was formally known as the Modification of Final Judgment (MFJ) that broke-up AT&T. “What the Bell System did was illegal,” Greene noted. “It abused its monopoly in local service to keep out competitors in other areas. Competition will give this country the most advanced, best, cheapest telephone network.”
The MFJ consolidated AT&T’s 22 subsidiary companies into seven Regional Bell Operating Companies (RBOCs or “Baby Bells”). The new AT&T kept its long-line business and Yellow Pages, but it was prohibited from providing “information services” (e.g., cable television) or manufacture equipment. In addition, it had to provide all interexchange carriers — MCI, Sprint, etc. — equal access to its networks.
A decade after the MFJ, Pres. Bill Clinton signed the Telecommunications Act of 1996 that was envisioned bringing telecom service into the 21st century. Clinton argued that it would “promote competition as the key to opening new markets and new opportunities.” He insisted that deregulation “will protect consumers by regulating the remaining monopolies for a time and by providing a roadmap for deregulation in the future.” Well, that future never arrived.
The Act “deregulated” innovate telecom service and fostered a wave of mergers and acquisitions (M&As) leading to the restructuring of the telecom industry. Over the following few decades, the telecom industry was recast and four corporations – AT&T, Comcast, Charter Communications and Verizon — came to dominate, controlling wireline and wireless services as well as internet and streaming services, and moving to acquire media/content businesses and theme parks. In the wake of the break-up of AT&T and deregulation, the U.S. has become a second-tier telecom nation.
Does History Repeat Itself?
Today, history may be repeating itself – but with a postmodern twist. We are witnessing the reemergence of the old Robber Baron cartels. As Amazon, Apple, Facebook, Google and Microsoft replaced Standard Oil and Ma Bell, so too have Rockefeller, Carnegie, J. P. Morgan, et al., been superseded by Elon Musk, Mark Zuckerberg, Bill Gates, Larry Page, Jeff Bezos and Warren Buffet. These parallel developments – of companies and individuals – bespeaks the fundamental transformation of capitalism over the last century. Yet, it’s a transformation in which nothing fundamental really seems to have changed but only gotten worse.
Perdue University economist John Connor defines cartels as “voluntary associations of legally independent companies that manipulate market prices or industry output in order to increase their collective profits.” He distinguishes between “private” cartels (i.e., “not protected by national sovereignty or by treaties”) and “international” cartels (i.e., those that have participants from two or more nations”). He adds, “private cartels operate secretly to avoid detection.” This development underscores The Economist’s concern that the current round of “mergers were largely aimed at consolidating in America, allowing the merged companies to increase their market shares and cut their costs.”
“Big Tech is a cartel, and must be regulated,” declared an “Opinion Editorial” in Rupert Murdoch’s New York Post. It took offense at Apple and Google for stopping new users from downloading the Parler, a rightwing social networking app, and at Amazon for cutting the app from its web-hosting services. In the telecom sector, which enables Big Tech to operate, a cartel may dominate. The journalist David Cay Johnston, in a 2012 New York Times op-ed, linked the issue of cartels to the telecom crisis. He argued, “what we’ve witnessed instead is low-quality service and prices that are higher than a truly competitive market would bring.” He went on, noting, “after a brief fling with competition, ownership has reconcentrated into a stodgy duopoly of Bell Twins — AT&T and Verizon. Now, thanks to new government rules, each in effect has become the leader of its own cartel.” He added, “because AT&T’s and Verizon’s own land-based services operate mostly in discrete geographic markets, each cartel rules its domain as a near monopoly.”
One can only wonder if the process by which the old Standard Oil and AT&T were broken-up only to be reconstituted in an even-larger cartels will be the same fate of the current Congressional procedure with regard to Big Tech. Sadly, history seems to repeat itself but only with graver consequences.
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