In an interview with ProMarket, antitrust lawyer Gary Reback elaborated on the difference between antitrust enforcement in the U.S. and Europe, the influence the U.S. Supreme Court’s Citizens United decision has had on antitrust enforcement, and the relationship between antitrust and innovation.
In the 1990s, antitrust lawyer Gary Reback convinced the Department of Justice to bring a case against Microsoft by using relatively new economic literature on increasing returns and network effects.
Now, nearly 20 years after being described as “Bill Gates’ worst nightmare” on the cover of Wired, Reback—a lawyer at the Silicon Valley firm Carr & Ferrell—is again pursuing an antitrust case against a powerful tech giant: Google. This time, however, instead of flying to Washington to persuade the Department of Justice, he flies to Brussels, where he thinks he can find more receptive ears. Reback is currently involved in the European antitrust effort against Google, representing a number of Google’s business rivals.
“The Citizens United case and the two or three cases that followed it have really changed a lot,” Reback said in an interview with ProMarket last month. “These political contributions are affecting our government’s efficacy across the board. Antitrust is not only no exception; it may be the paramount example.”
In the interview with ProMarket1, Reback elaborated on the difference between antitrust enforcement in the U.S. and Europe, the influence the U.S. Supreme Court’s Citizens United decision has had on antitrust enforcement, and the relationship between antitrust and innovation.
Q: How can antitrust lead to innovation? You don’t hear this very often.
That’s how much politics in this country has changed. The antitrust case against IBM, which led IBM to “unbundle” its software, was the beginning of our software industry. There wouldn’t be an American software industry without antitrust enforcement. The Microsoft case created web 2.0—no antitrust, no Google, no Facebook. But people have lost that in this country. When was the last time you heard anyone talk about the real history of the IBM case or the benefits of the AT&T break up?
AT&T was broken up by my antitrust professor, William Baxter. The backstory here is that Baxter went to a meeting of the Cabinet, and he told the president that “We have tried regulating AT&T for 100 years, it has not worked. Unless you, Mr. President, tell me not to do it, I am going to break up AT&T.” There was a senior White House advisor named Edwin Meese who advised Reagan not to interfere, and so Baxter called his aides and told them: “the president did not tell me not to break up AT&T, so we’re breaking up AT&T.”
The same thing happened with the IBM suit. Why did IBM unbundle? They unbundled because when the threat is credible, you can get results. We don’t have a credible threat now.
Q: How do you explain that?
There’s a sense now that our antitrust policy has been failing. It’s gotten to the point in the United States that you can’t take antitrust action unless you’re taking it against a company that’s tied to the other political party. Democrats can go after hospital mergers or the traditional industries, but won’t go after information technology. Would Republicans? I don’t know. Google has gotten smart. It paid the Republicans a lot of money too.
Q: Antitrust seems to be experiencing a significant resurgence in American politics at the moment. Hillary Clinton, Bernie Sanders, even Donald Trump, all spoke about the need for more rigorous antitrust enforcement during their presidential campaigns. Senator Elizabeth Warren gave a speech last month, in which she also targeted Google, Amazon, and Facebook. The Obama administration issued an executive order that instructs federal agencies to open noncompetitive markets.
I’m glad they did it. In year eight, they finally got around to it. And still, no Google.
Is antitrust going to come back generally? There are more people talking about it, that’s for sure. But the entrenched interests are so much more powerful. Talking about changing things and actually changing things are two enormously different things.
I published my book to coincide with the beginning of the Obama administration. The publisher rushed it to market at the very beginning of the Obama administration, because Obama said he was going to enforce antitrust, and I was hoping these forces would come together. But he didn’t. Now we are beginning to see all these forces coming together again.
Q: In your book, you argue that government is crucial to keeping markets competitive, and that in the modern IT economy markets are even more vulnerable to manipulation from firms that have market power. What makes the digital economy more vulnerable to anticompetitive behavior?
In a modern IT economy, we have network effects at a very strong level. We’ve always had some network effects—for the telegraph, the telephone—but network effects are really pervasive in the software industry and, since at least 1986, economists have been pointing out that that is fertile ground for predation.
Companies that understand how those markets work, that get a lead in those markets and then use predatory conduct to suppress their competitors, they can stay in control for a very long time, perhaps indefinitely.
These economic forces are different from traditional markets like agriculture or steel smelting, where there may be a small network effect. The fact that you drive a Chevrolet isn’t going to convince me to drive a Chevrolet. [However,] in software, the fact that you use Microsoft means I have to.
I remember after Joel Klein2 had brought the case against Microsoft, we were chatting and he said to me, in a lot of industries it’s like a mile run: if somebody gets ahead on a false start, over a mile the better guys will win anyway. But these industries, they are like a 100-meter dash where, if somebody gets an unfair advantage, the race is over before everyone else gets up to stride. I think that’s a very good analogy, and that is why governments have to be even more vigilant in these industries than they have to be in other industries.
Q: Did tech and internet companies learn how to be more efficient in circumventing antitrust since the Microsoft case?
There were several big mistakes that Bill Gates made. One was disdain for Washington. He wouldn’t spend a penny on lobbyists, and he wasn’t going to spend time talking to senators. It was a stupid, worthless enterprise to him, and he said it publicly.
That gave us the opportunity. We went in and got Robert Bork to endorse our position. We got Ralph Nader to endorse our position. We had Orrin Hatch and we had the liberals. We got both corners nailed down.
Eric Schmidt was my client during most of that. He was at Sun and then Novell. He saw the Microsoft playbook and understood fully well that when somebody calls you a mean dirty monopolist, you just smile and shuffle your feet and say “how about I buy you lunch?” Bill Gates’ biggest problem was that he said what he believed, and that got him into trouble.
Q: Antitrust lawyers like you are flying to Brussels these days to pursue antitrust cases through the European Commission. Is this because there is a greater expectation that European enforcers will actually take action? Is it because they think that the fight is lost in the U.S. for now?
Yeah, it has been [lost in some areas, for now]. But there are problems in Europe too. It used to be and probably still is that I can go in the antitrust enforcement agencies in Washington and say “I represent a start-up company that’s competing against the biggest companies and has a better product. If you enforce antitrust laws, my company will wipe them out.” I think there are now people in Washington who will say, “We’ll protect start-up technology, great idea.” In Europe, it’s the entrenched interests from the 1400s.
It took me a long time to sell Washington on Netscape, and I only sold Washington on Netscape after it was too late for them to help Netscape. But I don’t think I would have ever convinced Brussels to support a new company that makes new-generation technology. The Europeans will take action when a technology is so disruptive that it starts burning the fingers of those entrenched interests. But it’s the only place we can go.
Antitrust was invented in the United States. It’s an American concept. We would be enormously better-off as an economy and society if we took charge of these issues, like the Google issue, and fixed them in the way we thought would be best, instead of relying on technocrats in Brussels. It doesn’t make a lot of sense, but that’s the way it is.
Q: In a recent New America conference3, you said: “Google has learned that there’s no point in arguing with the government—you can just buy the government.” When it comes to Google, American antitrust enforcers have taken a different approach than their European counterparts. While the Europeans are bringing multiple cases, it has not happened in the U.S. How can we explain this discrepancy?
The way I explain it is campaign contributions. Several years ago the Supreme Court ruled on a case called Citizens United that changed how our government works with respect to monopolies.
But in Google’s case, it’s not just Citizens United. Citizens United makes it easy for Google to give money, but there is also a closeness between Google and Obama. Eric Schmidt is personally very close to Barack Obama. He was one of his early supporters. Obama comes out to California all the time and raises money. Google executives have events for him. And that’s not lost on people like the chair of the FTC.
The consequence is that they’re not going after Google, in my view, because of political considerations and not because they can’t prove something.
So the short answer to your question is: it’s political.
Q: That’s a very severe charge.
I cannot tell you that somebody made a phone call, because I don’t know that. But look, BusinessWeek reported that Eric Schmidt was personally in Obama’s boiler room in his campaign headquarters, working, doing data analysis on Election Day. What are we to conclude about that?
In 2013, after the FTC charges against Google were dropped, I wrote a piece in Politico criticizing what had happened. And then the FTC published a response in Politico to what I said, signed by the five commissioners. Later, we learned that a Google lobbyist had sent an email to [Jon] Leibowitz saying “You’ve got to respond to that.” Something similar happened after the Wall Street Journal story, where BuzzFeed got a hold of an internal email where Google’s top lobbyist is pushing for the FTC to respond. So, if Google’s top lobbyist is communicating directly with the chair of the FTC, what are we to make of that?
Q: The inaction can also stem from a conceptual problem, can’t it? Google and other dominant tech firms don’t exactly fit the definition of textbook monopolies. Google often says that competition is “one click away.”
Microsoft litigated for three years saying it wasn’t a monopoly either. The Chicago school definition of monopoly is somebody who can raise prices while excluding competition. Google can do that, and they’ve done it in advertising. [But] that definition really is not helpful in the modern age anyway because you may take your profit out of a different area than the one where you’re suppressing competition. These markets are interrelated.
If Google just had a monopoly in organic search, we wouldn’t worry about them nearly as much. It’s just that they have a monopoly in the organic search and in online advertising, so they have a monopoly in the advertising setup. Those are tiered monopolies.
Garth Saloner, who wrote one of the first papers about this, once said that if somebody gets a monopoly, they’ll choke you, and, if they get a tiered monopoly, they’ll choke you to death because they can extract the rent from this level or that level. Everybody who enters has to enter on two levels, against an entrenched incumbent in both levels.
Q: Some will say that there is no need for antitrust to increase innovation in tech. That Google, Facebook, Amazon, et cetera are not only innovative, but are some of the most innovative companies in the U.S.
Let me explain the difference: browsers can be both a compliment and a partial substitute. When Netscape was spending on its browser, they were trying to figure out new plug-ins, new API. Microsoft, on the other hand, was trying to make sure the browser was just a compliment to the operating system, that no one could use it to hurt it. So they were both making an investment, but the investment is not to the same effect.
The famous economist John Hicks once said, “The best of all monopoly profits is a quiet life.” If there’s nobody to push you, life is much easier. In my book, I talk about the Oracle trial, when Larry Ellison was on the stand and was asked “would you make these investments if you didn’t have competition?” to which he answered, “Of course not. It would be wasteful. Why would I do that?” It was the correct answer, and it was given in this case by one of preeminent entrepreneurs of our time.
Are monopolists innovative? Of course. But is the pressure on them to innovate the same? No. Just ask Larry Ellison.
Q: Can a company like Google be prosecuted under the current antitrust regime? Can antitrust enforcers prove consumer harm, for instance?
The Microsoft case by itself is a powerful tool. For the stuff that Google is doing, we have enough [to pursue an antitrust case] and win. I think the Europeans will win the case. It might take a lot of time, but I think they’ll win.
Google made the first set of changes in 2007, demoting rivals and raising its own [search] results. That set of changes was directed toward competitors. That was enough in the Microsoft case. We didn’t have consumer harm in the Microsoft case. We had exactly what happened in 2007. So it’s always been enough under American antitrust law.
But take it one step further, after the FTC dropped the investigation, Google made another change where they got rid of their own price comparison service in their organic search results. They just eliminated it, further demoting rivals, and just put ads at the top of the page. Those ads, by virtue of the fact that the ads don’t show the lowest price, but show what the people who bought that ad space sell the product for, the consequence is that prices are much higher. That is the second stage of Google’s conduct that we could call monopoly exploitation.
It’s not just me saying this. Consumer Watchdog said this. The Financial Times said this. The kind of harm that they caused in 2007 against competitors was exactly what was actionable in the Microsoft case, and, if that’s not enough, what they did in 2014 raised consumer prices by enormous amounts. There’s not a lack of anything except political will.
Q: You recently called Citizens United “the most important antitrust measure in recent memory.” Can you elaborate?
And it’s not even an antitrust case. It’s a case about campaign contributions.
If you’re a monopolist, particularly if you’re a monopoly in a lucrative industry like online advertising, you’ve got more money than God. Why not spend some of it on that, protecting your monopoly? It’s the rational thing to do. When somebody has a monopoly, under game theory, you would logically spend some of your monopoly profits trying to sustain your monopoly. That’s what you would do; that’s what every rational person would do.
So monopolists wouldn’t ignore Washington; they would embrace Washington. They would think it’s a good business expense to take some of the monopoly profits and use it to make sure you always have more monopoly profits. Monopolies have more money to spend than rivals do. It is a cycle, which serves to perpetuate the dominant company.
Q: Do you see an antitrust action against Google in the near future?
No. Not during this administration, and I have said this many times. What we’re having is a discussion about the next administration. It’s not like Eric Schmidt was there with Hillary Clinton from her first primary. [But] I think it’s going to be hard to get them to do something about Google.
Q: Is this a case of regulatory capture?
Those of us who practice U.S. antitrust law don’t think of antitrust law as regulation. We think of antitrust law as law enforcement. As Robert Pitofsky, former chairman of the FTC, used to say: Antitrust is the free market answer to regulation. With regulation, you’re just going to let the company be a monopolist, but try to make them behave as if they were in a competitive market. That’s very difficult to do. You have to come in and tell them how much to charge and who to sell to and how to sell their product—it becomes very difficult and not very effective.
I don’t think in the Google case we’re talking about regulatory capture. The problem with Google is not regulatory capture, but influence bought by money. It’s a little different.
Q: You compared Microsoft’s use of its monopoly in the PC market to promote Explorer and Google’s use of Android. In the 1990s, you argued that Microsoft should be broken up. Do you think Google should be broken up?
That’s a good question. At one point, the judge ordered the breakup of Microsoft. But, because of the cumulative effect of all the other things, we got the desired result without having to break them up.
The problem with break ups is that, when you break up a company, you always have to worry about inefficiencies that you might create. I think inefficiencies are vastly overstated, particularly in technology like software, where things can work together.
Can Google be broken up? I hope it doesn’t come to that. But there are things like it that could be done. In comparison shopping, where they wiped out the competition by illegal conduct, ban them from doing their own comparison shopping for five years, so that they have to use competitors. That’s a form of break up, but I don’t have to go in and segregate the various assets, which would be harder.
This reminds me one of Baxter’s remedies for monopoly: If someone ends up with a durable monopoly, and they have no other real competitors who can pressure them, and there are none on the horizon, then the President of the United States invites the CEO to the White House for dinner. They have a steak dinner, and they are toasted by the head of the Federal Reserve and the Secretary of Commerce. The next morning, they fly to New York, and there’s a ticker tape parade down Wall Street. And at the end of the parade, the President turns to the CEO and says, “You’ve done a great job, you’ve dominated your industry, you’ve wiped out the competition, so we’re going to break up your company to a dozen pieces. Which one you would like to lead?”
The reason you would do that is not because the company did anything wrong; it’s because in our system progress comes from competition. It’s the competitive process that makes us good.