Broken but better: Monopoly companies should not resist being dismantled by government

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As Microsoft faces being broken up, Bill Gates should take heart from the lesson of history: the biggest beneficiaries of anti-trust break-ups have often been the companies being “punished”.

In the 1980’s the British government planned to restrict and privatise two key industries. In gas, Sir Dennis Rooke fought a successful battle to retain a single, integrated monopoly, that controlled all British Gas from beachhead to burner. In electricity, Lord Marshall failed in a similar endeavour. The Central Electricity Generating Board was dismantled. The new structure contained two separate generating companies and a transmission business, selling to twelve regional distribution companies.

Sir Dennis won, and Lord Marshall lost: Sir Dennis continued at the helm of the privatised British Gas while a defeated Lord Marshall retired. Yet in retrospect, it is clear that although Sir Dennis won the battle his company lost the war, Lord Marshall lost a battle but his industry prospered. British Gas suffered death by a thousand cuts. Regulatory pressure steadily intensified, and the company finally broke itself into component pieces. British electricity (which fortunately never came into being as a legal entity) was able to respond quickly to the challenges and opportunities of a competitive market. Efficiency gains, and commercial instincts, were far longer in coming to gas than to electricity.

As the courts and the parties contemplate their options in the Microsoft case, there are lessons for them from business history. Companies will resist any external suggestion that they be broken up. But the greatest beneficiaries of the process of break up have often been the companies themselves.

The most dramatic instance was the dismemberment of Standard Oil under the populist presidency of Theodore Roosevelt almost a hundred years ago. The largest of the successor companies — Exxon, formerly Standard Oil of New Jersey — occupies the same commanding position in world business today that the original Standard Oil enjoyed. Several other component companies, such as Chevron, Mobil and Amoco, went on to become big corporations. The expanding oil market was more than big enough to accommodate all of them. Competition between the ‘seven sisters’ — five American companies that emerged from the restructuring of the industry and two Europeans — ensured that throughout the century oil company management was of high quality. As a result John D. Rockefeller became far richer in retirement as an owner of shares in thirty successor companies than he had ever been in his working life as proprietor of Standard Oil.

Seventy years later, AT & T, which had exercised a virtual monopoly over US telecommunications throughout the century, was divided into a long distance business and geographically based regional operating companies. The corollary was that the new companies were freed from many restrictions on their ability to compete. These restrictions had been the price of government acceptance of the A.T.&T. monopoly. In retrospect, this development was a defining event in the evolution of the competitive international telecommunications business. The transition from natural and national monopolies to a free market in telecoms has now been followed throughout the world.

The case of A.T. & T illustrates the choice that regulators have always faced between regulation of structure and regulation of conduct. Conduct regulation leaves firms with their dominant positions intact, but imposes restrictions on their behaviour. Sometimes — as in the water business, where meaningful competition is technically and economically impossible — conduct regulation is the only option available. But its disadvantages are substantial.

From the public perspective, conduct regulation often simply fails to achieve the desired effect. In the British gas and electricity industries, for example, the government had introduced rules in 1982 designed to allow new entrants access to the gas and electricity markets. The government had insisted on transparent accounting and pricing, and on a level playing field between newcomers and incumbents.

These measures had almost no practical consequence. The established monopolies observed the letter, but not the spirit, of the rules. And they were not inclined to implement the letter of the rules with any great alacrity. So long as an incumbent firm regards antitrust activity as an affront, an unjustified interference with its own control of the industry, regulation will be a matter of constant skirmishing between the industry and the government.

This perpetual friction is not just unsatisfactory from the point of view of government and consumers: it is damaging to the businesses too. The commercial management of the company takes second place to the regulatory battle. The company will usually lose that battle in the end — as did Standard Oil, A.T.&T and British Gas did. But the process of losing is protracted and debilitating . That is why both A.T & T and British Gas eventually understood that the best business decision was to stop fighting. They accepted the inevitability of competition, and with it the inevitable restructuring of their own operations.

In the long run, monopoly positions are rarely good even for the monopolies themselves. The third major break-up in US antitrust policy, the dismantling of the tobacco trust, is the least clearly successful: the successor companies ultimately found themselves overtaken by Philip Morris, a more nimble competitor that had never suffered the dead hand of monopoly. US Steel, the largest company in the world at the dawn of the twentieth century and the one to escape the clutches of Roosevelt’s trust-busters, was rewarded by a subsequent century of steady decline. Fighting competition is just better business than fighting regulation.

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