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June 16, 2019, 11:52 p.m. EDT

Big Tech was built by the same type of antitrust actions that could now tear it down

The investigation of IBM gave software companies like Microsoft the air to breathe, and the charges against Microsoft provided a lift for tech companies like Apple, Google, Facebook and Amazon

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By Jon Swartz


Bloomberg News/Landov
Bill Gates was chief executive of Microsoft during the Justice Department’s marathon antitrust investigation in the 1990s and early 2000s, which helped foster the rise of its current competitors.

The fear in Silicon Valley is that antitrust investigations of Big Tech will blunt momentum of an industry that powers the U.S. economy. But history tells us another story.

The investigations of the most influential technology company of the 20th century led to the creation of Microsoft Corp. /zigman2/quotes/207732364/composite MSFT +0.25% . The eventual antitrust charges against Microsoft helped foster the rise of the four companies currently under the scrutiny of the federal government: Apple Inc. /zigman2/quotes/202934861/composite AAPL +0.50% , Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN +0.75% , Alphabet Inc.’s /zigman2/quotes/202490156/composite GOOGL -1.03%    /zigman2/quotes/205453964/composite GOOG -1.06% Google and Facebook Inc. /zigman2/quotes/205064656/composite FB +1.18%  .

“Microsoft could have killed Google in the cradle,” antitrust lawyer Gary Reback, who played an integral role in the case against Microsoft, told MarketWatch in a phone interview. “Its fear of additional antitrust investigation influenced its decision not to crush Google, and paved the way for Web 2.0 and a huge wave of new companies.”

Reback contends that an earlier, yearslong probe of International Business Machines Corp. /zigman2/quotes/203856914/composite IBM -0.07%  that forced it to unbundle software from its hardware products, in turn, helped “produce the American software industry” that begat Microsoft, Oracle Corp. /zigman2/quotes/202180826/composite ORCL -0.41%  , SAP SE /zigman2/quotes/203458330/delayed DE:SAP +0.72%  and others.

Don’t miss: Four reasons why antitrust actions will likely fail to break up Big Tech

In both instances, the threat of government action pressured monopolists and sparked innovation in new markets, said Reback, who still practices law in Silicon Valley.

In the case of the Microsoft investigation more than 20 years ago, several courts held — the George W. Bush administration dropped the effort to break up Microsoft before eventually settling the case with a consent decree — that the software giant’s bundling of a so-called “zero-price offering” (Internet Explorer) with a dominant platform (Windows) “distorted markets by robbing consumers of a real choice between technology services (i.e., other browsers) and stifled innovation,” said Peter Day, a technology attorney based in Silicon Valley.

Of course, by the time the government reached a settlement with Microsoft, many years had passed and the tech market had seen the emergence of new markets for mobile and cloud, as well as the transformation of Microsoft into a cloud and gaming behemoth.

Ultimately, federal authorities were successful in changing Microsoft’s behavior toward competitors, prompting it to soften its ruthless ways and indirectly fomenting competition in the emerging fields of search, social media and e-commerce. The man leading the push acknowledged that historical record in a speech Tuesday .

“The government’s successful antitrust case against Microsoft arguably paved the way for companies like Google, Yahoo, and Apple to enter the market with their own desktop and mobile products,” said Makan Delrahim, the Justice Department’s antitrust chief.

For more: Antitrust chief warns Big Tech, noting Standard Oil parallel

Since then, Big Tech — led by the four companies under scrutiny — has voraciously gobbled up smaller competitors with their formidable cash piles to reach near-dominant status in search (Google), social media (Facebook) and e-commerce (Amazon). Yet the only major investigation so far, a broad Federal Trade Commission investigation into Google, resulted in no action in 2013.

“They control their markets in ways Microsoft ruled the PC operating-system market,” Reback said. “Government lacked early enforcement in these cases.”

Experts contend the current antitrust investigations against Big Tech will likely take a long time to go nowhere in terms of actual penalties for the companies themselves. But the bigger question is what the effects of the investigation will be beyond the four companies at issue, as a full-on attack against the biggest companies by the federal government will likely change the tech sector in some regard.

It’s possible the threat of regulation could put a damper on the ambitions of the four companies under a federal microscope, opening competition for startups in fledgling fields such as mixed reality and artificial intelligence, said antitrust lawyer Colin Kass.

Still, the situation may be different today because the four companies in question have amassed nearly $3 trillion in market value, hundreds of billions of dollars in cash, employ hundreds of thousands worldwide, and have spread their tentacles via aggressive acquisitions into countless industries that touch nearly aspect of Americans’ lives. By 2020, Google and Facebook will command 75% of digital ad revenue worldwide, according to market researcher Gartner. And Amazon is already the No. 1 retailer in the U.S., it added.

A popular idea is to splinter the companies of their properties, which could prove a financial windfall for investors. Facebook could create billions of dollars in additional value through the spinoff of WhatsApp and Instagram, and Google could do the same with YouTube, according to Scott Galloway, a marketing professor at New York University and author of “The Four: The Hidden DNA of Amazon, Apple, Facebook and Google.”

See also: If the government breaks up Google, would it be worth more?

Needham analyst Laura Martin wrote in a note Tuesday that cleaving parts of Alphabet would likely result in more valuable pure-play properties for investors. Separately, Cowen analyst John Blackledge estimated Amazon Web Services would be worth $500 billion as a separate company, making it one of the world’s 10 most valuable companies.

The problem with that approach is that the individual businesses could actually better compete against pure-play startups that can benefit from being singularly focused when facing off with a large company. Instead of four large companies ruling the tech world, there could be many that still have ties to a former corporate parent but are actually better equipped to harm competition.

“The threat of a Microsoft-like judgment could drive some of these (four) companies to spin off certain business lines in an effort to be seen as promoting competition,” Day said. “Whether such actions will, in fact, promote meaningful competition or just further reinforce the position of existing players or platforms remains to be seen.”

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DE : Germany: Frankfurt
122.90
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P/E Ratio
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Dividend Yield
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Jon Swartz is a senior reporter for MarketWatch in San Francisco, covering many of the biggest players in tech, including Netflix, Facebook and Google. Jon has covered technology for more than 20 years, and previously worked for Barron's and USA Today. Follow him on Twitter @jswartz.

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