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 # 405  

 May 2002




Needed: A 21st Century Anti-Trust Policy for a 21st Century Economy


by Amy Ridenour

We have heard much these past few years about using the government to protect the consumer. A far more urgent problem is to protect the consumer from the government.1

Economist Milton Friedman issued this wise warning years ago in reference to trade policy, but it applies equally well to the anti-trust policies of the Internet Age.

If you use the Internet, a personal computer, view television through cable or satellite connections or use other communications products - a cell phone, perhaps? - you would be wise to heed Friedman's warning, because government actions can slow the development of new technology, reduce our Internet access and electronic communications and entertainment options, and/or cause us to pay more than we otherwise would.

What's scary is that the government policies that cause all this harm nonetheless may be well-intentioned.

At issue is the application of anti-trust laws written for low-tech, slow-changing industries to high-tech, swiftly-changing businesses.

Anti-trust laws came into being in 1890 with the Sherman Anti-Trust Act, which was designed with railroads in mind, not broadband.

Whatever the merits of the Sherman Act two centuries ago, it and the subsequent body of U.S. anti-trust law make for a weak case against high-tech industries. A case in point: Microsoft and IBM.

Microsoft's history - how a brand-new company led by inexperienced college dropouts all but cornered the market on operating systems for millions of personal computers - is the stuff of lore.

For those who need a refresher, a quick recap.

IBM dominated the computer market. Needing an operating system for its then-new line of personal computers, it had a choice: write its own, or license one from elsewhere.

Concerned that the federal government was mulling over anti-trust actions against IBM as a dominant provider of computer equipment, IBM was wary of any action that would add to the government's case. So rather than integrate its own technology into its new line of personal computers, it diversified by licensing the DOS operating system from Microsoft.

Flash-forward a generation. IBM no longer dominates the personal computer market. In fact, it no longer manufactures PCs at all, having been driven out by market pressures. The only consistency is that the trustbusters are still on the job. Now Microsoft is the target.

Never mind that it was the federal government's own anti-trust policies helped spur Microsoft's incredible rise to market dominance in the first place.

Two lessons can be drawn. One, that even well-intentioned government policies sometimes have adverse consequences. Two, that change comes so fast in the technology field that a firm holding a strong market share one year may lose it the next.

A situation of tremendous interest to consumers is now ongoing in the field of pay TV. The Dish Network and DirecTV, both peddlers of satellite TV access and related Internet services for American homes, want to merge into a combined entity under the name EchoStar. If they do, consumers of satellite TV will have access to more channels, have new satellite access to local broadcast channels, and have the opportunity to obtain low-cost high-speed Internet access even if they live in rural areas, where such access heretofore has been prohibitively expensive, if it is available at all.

Sounds good, right? To most people. But here's the rub: If the Dish Network and DirecTV merge into the new EchoStar, the new entity will have 91 percent of the business of those who currently are satellite TV customers.

Those wedded to industrial-era anti-trust policies such as the 1890 Sherman Act might say no firm should hold this amount of the market. And lobbyists hired by the competition predictably will agree. But it isn't 1890 anymore. In 1890, railroad customers didn't yet have the option of shipping by air or truck instead of by railroad. These days, satellite customers have the option of using cable providers instead for their pay television, and dial-up telephone access and (in some markets) DSL for the Internet.

When cable television is taken into account, the post-merger EchoStar would have but 17 percent of the pay-TV market.2 Even using old-style anti-trust analysis, that's a small enough piece of the pie to keep EchoStar on its toes, and to keep it from ever raising its prices past the level of what a competitive market can bear.

So the big question for consumers is this: which vision of anti-trust will be applied to technology firms in the Internet age? A narrow vision, circa 1890, which says satellite firms compete only with other satellite firms, so mergers like this are bad policy? Or a new 21st Century vision, which takes into account that there is more than one way to wire a house to the Internet (or make a phone call, or obtain TV channels, or do an increasing number of things unthinkable a generation ago, let alone in 1890), and takes ALL these options into account?

Will the forward-looking vision win, or will our anti-trust policy (and many of our homes) remain wired in the past?

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Amy Ridenour is the president of The National Center for Public Policy Research, a non-partisan Washington, D.C. think tank. She can be reached at [email protected].



Footnotes:

1 Milton Friedman, "Friedman on Free Trade," Fedgazette, The Federal Reserve Bank of Minneapolis, October 1993, downloaded from http://minneapolisfed.org/pubs/fedgaz/fg/edi9310a.html on April 25, 2002.
2 "GM's Hughes Electronics to Merge with EchoStar Communications," joint press release of General Motors, Hughes Communications and EchoStar Communications Corporation, October 28, 2001, downloaded from the Internet at http://www.echostarmerger.com/5030/wrapper.jsp?PID=5030-10&CID=5030-102801A on April 16, 2002.



 


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