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Some observers have noted that in the years after Standard Oil was broken into smaller regional companies, the stock prices of those smaller companies rose, leading to speculation that breaking up Microsoft might have a similar positive effect on the total value of Microsoft stock. This is a misreading. Nearly all oil companies' stock went up in that period, not because of the breakup but because of rising demand and technological breakthroughs. Nor did the breakup have any discernible impact on oil production or oil prices.
The government's victory against Standard Oil had a long-term effect on the oil industry that is seldom discussed by those who see parallels with the Microsoft case. Only six years after losing the antitrust case, Standard Oil dramatically changed its attitude toward Washington, moving from hostility or avoidance to a very warm embrace. Company chief A.C. Bedford served as chairman of the War Services Committee, an agency created to mobilize the nation's supplies of gasoline and diesel fuel for military use during World War I. After the war, federal control never retreated, transforming what economist Dominick Armentano has called "a virtual textbook example of a free and competitive market" into "what had previously been unobtainable: a governmentally sanctioned cartel in oil." The legacies of this transformation include higher prices for consumers and the "energy crisis" of the 1970s. Deregulation in the 1980s finally restored some measure of competition to the industry.
The Standard Oil case teaches some important lessons about competition, innovation, and antitrust law. We see the difficulty antitrust has dealing with highly innovative companies. We witness the vagueness of antitrust law, which allows prosecution on the basis of alleged intent rather than specific actions. And we see how the Standard Oil case ultimately failed to benefit consumers or investors. Instead, it laid the groundwork for collusion between industry and government, bringing about many of the very ills the "progressive" proponents of antitrust said they were fighting.
Too Good to Be Allowed
In 1937, the U.S. government filed suit against the Aluminum Company of America, alleging over 100 violations of antitrust law. The government lost the case and appealed. The matter was finally decided eight years later, in 1945. This case is remarkable because it held that a company could be prosecuted under antitrust laws for being too efficient and responding too quickly to consumer demand.
The Aluminum Company of America (later Alcoa) grew out of the Pittsburgh Reduction Co., founded in 1887 by Charles Hall, the man who discovered and patented the technology for producing commercial quantities of aluminum. At the time, aluminum ingots sold for $5 a pound. By the time of the antitrust suit, the price was down to 22 cents per pound.
Alcoa dominated its industry from the start. It not only invented nearly all the tools and techniques required to lower production costs and raise the quality of the aluminum it produced, but also played a major role in creating markets for the new metal. While many companies entered the business of fabricating products out of aluminum and collecting and recycling used aluminum, none attempted to compete with Alcoa by producing virgin aluminum ingots. This was not because Alcoa restricted access to inputs such as electricity or aluminum bauxite, both of which the courts ruled were available to potential competitors in ample supply. Nor, by the time of the suit, did Alcoa deny others access to the manufacturing techniques it had patented: Those patents had expired in 1910. Alcoa was dominant because, as Armentano summarizes the situation, "users of ingot or sheet, and ultimately the consumers of fabricated products made from aluminum by Alcoa, were being served at degrees of excellence, prices, and profit rates that no one could equal or exceed."
The lower court found Alcoa innocent of all counts of anti-competitive behavior, even while acknowledging that it controlled 90 percent of the market for virgin aluminum ingot. (The other 10 percent was imports.) District Court Judge Francis G. Caffey reasoned that the Sherman Act forbade activity aimed at monopolizing markets, but did not outlaw the common business practices of companies that held dominant market shares due simply to the absence of competitors.
The appeals court agreed with Judge Caffey that the government had failed to show that Alcoa engaged in anti-competitive behavior or charged higher prices than it should. But Judge Learned Hand, writing for the majority of the federal Court of Appeals, held that Alcoa's de facto monopoly was itself a violation of antitrust law. Alcoa, he wrote, "insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connection and the elite of personnel."
One is reminded of those police officers who sometimes pull over drivers late at night for moving at exactly the speed limit and staying in the middle of their lanes, on the grounds that this kind of careful conduct may be evidence of overcompensation by a drunken driver.
Having found no evidence of specific actions that were illegal, the court could hardly remedy the situation by restricting Alcoa's ongoing business practices. Nor, since the judges recognized the firm's outstanding efficiency and service to consumers, did it seem right to break up the company. Instead, the court settled for prohibiting the company from bidding for government aluminum plants which had been built to meet World War II military needs, and which were being sold off. Those assets were subsequently sold to Reynolds Metal and Kaiser Aluminum.
In 1948, Alcoa and the federal government asked the federal District Court for New York to reconsider the 1945 decision. Alcoa sought to be relieved of the scarlet M-for-monopoly that effectively criminalized its common business practices; the government, on the other hand, wanted to force Alcoa to divest some of its holdings. The district court, under the direction of a different judge than in 1937, once again found the government's case without merit, and this time ruled that Alcoa was not a monopolist.
A Real Monopolist
Besides Standard Oil, the case most touted by advocates of the Microsoft prosecution is the 1982 breakup of AT&T, which was overseen by federal judge Harold Greene. But while both cases involve information technology, there are important differences.
AT&T was indisputably a monopoly. From the beginning, the company lobbied for, and won, government protection against competition. It maintained its market share thanks partly to an array of legal prohibitions on other companies entering any part of the telephone services market, be it local or long-distance service -- or even selling telephones and other equipment that could be attached to a phone line. The company's first president stated its strategy succinctly: "If there is to be state control and regulation, there should also be state protection to a corporation striving to serve the whole community...from aggressive competition which covers only that part which is profitable." Obviously, Microsoft has not called for similar protections from its competitors, nor is it today similarly protected.