Lessons from the Big Tech breakup that never happened

Later this month, the antitrust division of the Department of Justice will have a big decision to make: whether to try to break up one of the richest and most powerful companies on the planet.

By Nov. 20, the DOJ is set to formally propose in federal court remedies that should be taken in the case of US v. Google. This summer, a federal judge declared that Google had maintained an illegal monopoly over internet search.

DOJ has said in previous court filings that it is indeed entertaining what’s known in antitrust circles as a structural remedy, but what for Google may be better termed the nuclear option: splitting the company into separate entities.

The thing is, DOJ has tried before to break up a tech behemoth it accused of monopolistic behavior, a little company by the name of Microsoft.

And for a hot minute, it really did seem like it was going to happen. On June 7, 2000, after weighing DOJ’s proposals, a federal judge ordered Microsoft to be split in two.

Just like Google, Microsoft had been found guilty of acting like a monopolist, mostly by leveraging its dominant Windows operating system to pressure personal computer makers to favor other Microsoft applications, like its Internet Explorer web browser.

“The belief was that if we broke Microsoft into an apps company and an operating system company, that those two separate companies would compete very aggressively,” said Daniel Rubinfeld, an economist in the Bill Clinton administration’s DOJ during the Microsoft trial.

DOJ wanted a clean break partly because “behavioral remedies” — ongoing monitoring and other conditions to make sure Microsoft was playing by the rule — would be tough to enforce.

But Rubinfeld also hoped the split would prevent Microsoft from extending its tentacles into a newfangled technology called the World Wide Web.

“That was a point in time in which we didn’t know for sure exactly how the internet was going to develop other than it was going to be very important,” said Rubinfeld. “We wanted to see innovation that would be significant as the internet developed.”

Ultimately, the breakup never happened. Microsoft successfully appealed, some hanging chads in Florida meant the more business-friendly George W. Bush took over the White House and a settlement was reached in September 2001.

It banned Microsoft from requiring PC makers to exclusively use Microsoft software and appointed an on-site monitoring committee to basically police the company.

There are arguments over how successful that settlement was. Antitrust solutions aren’t just about punishing and preventing anti-competitive behavior. They’re also about resetting the playing field to ensure competition and innovation in relevant markets, including markets for tech products that may not exist yet.

Economist Fiona Scott Morton at the Yale School of Management argued that the settlement, as well as the legal and public scrutiny Microsoft endured during protracted and expensive litigation, succeeded by at least one metric: It kept Microsoft from closing off the nascent web to rivals.

“The Microsoft case stopped the software maker from controlling the internet,” said Scott Morton. “And now we have the Google case, and we hope that that’s stopping the party that controls the internet from dominating the next thing that’s coming. Maybe that’s AI, maybe that’s something else.”

Some supporters of more vigorous antitrust enforcement have argued that without the Microsoft antitrust settlement, Google would not have become the internet powerhouse it is today.

But Adam Kovacevich, CEO of the technology industry association Chamber of Progress, said attributing Google’s success to the Microsoft case misinterprets history.

“The Google founders certainly weren’t thinking at all about the Microsoft antitrust case,” said Kovacevich, who previously worked at Google on antitrust issues. “They weren’t trying to compete with Microsoft. They were trying to improve upon Yahoo.”

But beyond the debate over the impact of the actual Microsoft antitrust settlement, a counterfactual looms large: If Microsoft had been carved up, what would have happened?

“I believe that if there had been more competition, that we would have seen more innovation,” said Rubinfeld. “I mean, I’m pretty happy with a lot of the products I use, but I think they would have been better.”

Underlying the government’s pro-breakup argument is the logic that multiple smaller companies mean more competition to develop the best technology at the cheapest price.

That may sound like a lesson from an Econ 101 textbook, but in the real world, sometimes real innovation requires massive scale, argued Joseph Coniglio, director of antitrust policy at the tech-funded Information Technology and Innovation Foundation.

“Large firms are the ones that have the resources and they have the incentives to be able to make those big investments to create those new products,” said Coniglio.

If Microsoft was broken up in the early 2000s, Coniglio added, maybe it wouldn’t have become a big player and innovator in cloud computing.

“If you were to break up Google, how would that affect the company’s ability to invest in artificial intelligence and these new, next generation of technologies?” Coniglio asked.

The Department of Justice has floated slicing off the Android mobile phone operating system and the Chrome browser from Google, arguing those products reinforce Google’s search monopoly.

Rubinfeld said consumers should know that the rate of technological progress isn’t exclusively dictated by Silicon Valley.

“I think it’s wrong to think that the path of innovation is predetermined and that it can’t be influenced by actions taken in fact by the antitrust agencies,” he said.

For the record, Rubinfeld still uses Windows for his operating system and Google for his search engine.