Prof. Doug Lichtman, UCLA School of Law
March 8, 2011
Writing in the Wall Street Journal a few months ago, Columbia Law Professor Tim Wu complained that technology markets are too often allowed to remain under the control of a single dominant firm. The theme is drawn from his recently published book, The Master Switch: The Rise and Fall of Information Empires; and, on the surface, the theme resonates. Social networking has for years been dominated by Facebook. Instant commentary is similarly being dominated by Twitter. And search, even though there are viable options like Bing or Yahoo, remains a market served primarily by a single behemoth named Google. Unlike the market for shampoo, where dozens of brands are engaged in an endless struggle for consumer dollars, information markets do seem typically to be defined by a single dominant firm. As Tim puts it, in technology markets, competition is the exception, monopoly is the rule.
I am sympathetic to Tim’s overall project. While I would not use the word monopoly to describe the interactions to which he refers, I understand his intuitive point to be a point about uncomfortable, long-lasting dominance. And, as Tim explores in his book, dominance of this form was a problem even before the Internet became the information platform of choice. The landline telephone grid, for example, remained under the thumb of the Bell Telephony Company for nearly a century. Similarly, in the market for television over the air, there has been no single dominant player, but there were only three contenders for a long time: ABC, NBC, and CBS. The markets for terrestrial radio, cable television, and personal computers similarly can be fairly described as markets that, even if not monopolized, were for important lengths of times heavily influenced by a single firm or a surprisingly small number of firms.
But so what? Tim in his editorial and his book tells us that dominance is bad for innovation. But I am not so sure that history is on Tim’s side. Consider, for example, the Bell Telephone Company. As I mentioned in passing above, from the early 1900s through until at least 1984, the Bell Telephone Company dominated landline telephone service in the United States. With very few exceptions nationwide, if you had a landline telephone, and it worked, you were a Bell Telephone customer. Tim wants to tell us that innovation suffered during that period because he apparently has found some evidence that Bell slowed down the development of, for example, home answering machines. Apparently, Bell executives were worried that the ability to record telephone calls would scare off telephone customers, many of whom presumably wanted to say private or naughty things and then have those words disappear into the ether. The possibility of recording calls, thought Bell, would scare those customers off.
Bell’s concern looks quaint to modern eyes. But even if Bell did wrongly slow the development of that one technology, there is evidence in favor of meaningful innovation that cannot be readily ignored. With Bell at the helm, the United States succeeded in deploying a robust, pervasive telephone network that connected every kitchen, bedroom, den, and office in the country. Facebook looks pathetic by contrast; Zuckerberg needed only to convince us to point a computer we already owned, toward a website we could already access, thanks to an Internet subscription that we already had, using wires or spectrum that someone already had paid for.
But there is more. One arm of the Bell Telephony Company was a research laboratory that ultimately came to be known as Bell Labs. Anyone know what was invented there during the period of Bell’s supposedly anti-innovation dominance? The transistor. The computer language C. And literally hundreds of other world-shaking contributions related to everything from astronomy to encryption. Indeed, between 1937 and 1978, Bell employees were awarded the Nobel Prize in Physics a total of four times. Not sure about you, but against that backdrop, I am worried a little less about the answering machine, especially because Bell’s apparent justification does not sound so crazy to me. How many lawyers out there have seen their clients’ faces turn white when those clients were told that emails do not disappear into the ether but instead are typically stored and hence discoverable, even when the writer did not intend for their words to persist?
If dominance were clearly bad for innovation, I still would have concerns with Tim’s broad-strokes “big is bad” campaign. Staying with the example of the Bell Telephone Company, it turns out that there were good public policy reasons why the government favored a telephone system run by a single company rather than a telephone system competitively supplied in bits and pieces. The main reason: The Bell Telephone Company was able to make sure that a telephone in Cleveland, Ohio, could reliably connect with a telephone in Boise, Idaho. We cannot underestimate that just because it is familiar to us. Websites written using Adobe Flash cannot run on my otherwise snazzy Apple iPad. (Shame on you, Steve Jobs.) The layout of documents written in Apple’s iWorks is inevitably corrupted when I try to move them from iWorks to Microsoft’s Word. But the telephone, even in its early days, reliably connected one phone to another even across great distances and even if the phones themselves were built and installed at different times. Try to achieve that, wildly competitive market.
Bell had other policy charms as well. In a more competitive market, multiple firms might have endeavored to run wires from the center of every town to the various homes at every edge. Deploying that duplicative infrastructure would have been costly, but that extra cost would have represented some substantial social waste. The single wire run by Bell was already enough to pick up and drop off all the necessary voice conversations from and to the average home. The introduction of a second wire would have meant competition, sure, but it would have also meant that the first wire would be systematically underutilized. Among other implications, that would in turn mean that both companies would as a result need to charge more in order to cover the now greater net cost of telephone wire provision.
Putting all that to one side, I still worry about Tim’s provocative thesis because I am not sure how Tim wants us to solve the problem he perceives. That is, even to the extent Tim is right that dominant firms overstay their welcome and in that way reduce innovation; and even to the extent Tim is right that at some point the harms to innovation outweigh any other benefits that might be associated with dominance; I stand here today still unsure about what Tim would have us do about it. I have stuck with the example of the Bell Telephone Company because it makes this point sharply. Given that Bell was contributing mightily to technical innovation, and given that Bell’s dominance was facilitating other forms of public benefit, how would Tim have known when the time was right to cut the cord, end the monopoly, and replace Bell with competitive entrants? And even if Tim would somehow have known, do we have any reason to think that antitrust law or intellectual property law are up to that complicated, fact-specific task?
Lastly, to the extent that consolidation is driven by economics or strategy, I worry that it might be really hard to resist that pressure. Think about radio, for example. Tim clearly cheers for a world where there would be a large number of small, local stations. Well, for many years, official FCC policy aimed for that outcome also; and the FCC in fact has authorized a large number of small local stations over time. But what happened? Instead of airing local content, many of those just went out and licensed national syndicated programming from the likes of Rush Limbaugh and Howard Stern. The policymakers were thus fully thwarted. They wanted diverse, local radio, but, thanks to the underlying economics of the industry, all they got was local repetition of consolidated, national fare.
None of this is meant to disagree with Tim per se. Far from it, I agree with him that consolidation is a real worry in information markets, and I agree that consolidated incumbents do often seem to overstay their welcome. My point for now is simply that solving those problems strikes me as enormously difficult if our solution is going to be found through some explicit legal intervention. Our best hope, in fact, might be to rely primarily on traditional competition, the very force that caused AOL to give way to Facebook, and Microsoft to give substantial ground to Google.
Doug Lichtman is Professor of Law at UCLA. He and Tim Wu engaged in a lively discussion of the issues presented here a few weeks ago. Audio from that event can be accessed at http://www.ipcolloquium.com/Programs/17.html.