To the amazement of everyone - the author of this column in particular - antitrust law has come to the forefront of legal controversies in the world of adult media because of the government's attacks on Microsoft, Visa and MasterCard. When the predecessor to this column first was hatched in AVN in the late 1980s, it would have been unfathomable to think that antitrust would ever be a crucial topic. But here we are; we live in a world of computers and credit cards, and antitrust issues cloud both. By the time this issue hits the streets, there likely will have been two critical court decisions: The Supreme Court surely will have decided whether to take the Microsoft case directly, and there may well be a decision in the Visa/MasterCard case.
The question before the courts is, are Microsoft, Visa and MasterCard simply exceptionally well-run businesses which were in the right place at the right time, or did they stack the deck, becoming successful by using illegal tactics? Decide for yourself. But first, some background.
Pure laissez-faire economics dictate that the government leaves the business world to operate by itself. From an antitrust standpoint, that would mean that if a company can afford to purchase all of its competitors, so be it; if Pepsi and Coke decide to get together and agree to raise the price of soft drinks throughout the country, no problem. Nor would pure laissez-faire capitalism interfere with Blockbuster Video if, faced with the specter of a new "mom-and-pop" store holding a grand opening next door, it lowered all of its rental prices to 29� a week until the mom-and-pop went bankrupt.
When this country was a sparsely populated expanse occupied by family farms and private tradesmen, laissez-faire economics worked pretty well. The "invisible hand" of capitalism created a reasonably good balance between supply and demand. Granted, there were some aberrations but, by and large, everything worked. Even relatively large projects - constructing barns, and so on - could be accomplished by relatively small businesses.
The Industrial Revolution, however, changed all of that. With the advent of mass production and factories, the creation of many of the products that were critical to economic development could not take place in a small-business environment. It took a large capital investment to get into many businesses. And a company that got off to a good head start in any large industry could put an overwhelming economic ax to any upstart competitors.
As economic strength in various industries became concentrated in a small number of companies, the public, and thus the politicians, became unhappy about the situation. If you wanted to work in a particular industry, there might have been only one company where you could find employment. If you wanted to buy a particular product, there might be only one source. This is beginning to sound familiar, isn't it?
"Robber Barons!" the public and the politicians cried out at these people who had amassed fortunes and monopolies in so-called "money trusts." The term "robber barons" incidentally, was not - as most people think - newly coined for the purpose of describing these billionaire monopolists. Rather, the term has its roots in medieval Europe, where it was used to describe gangs of thugs on horseback that looted merchant caravans. Even during the Industrial Revolution, when politicians rallied around a cause, they always adopted some pejorative battle cry to describe the opposition.
While the source of all this political energy against the "robber barons" no doubt arose in the main from frustrated industrial workers who were paid slave wages, there certainly was some substance to their complaint from a macroeconomic perspective. Emerging industries which would become critical to the Industrial Revolution's new economy, were subject to powerful monopolies. John D. Rockefeller's Standard Oil, for example, monopolized 90% of the oil production and distribution in the United States. Daniel Drew, Jay Gould, Jim Fisk and Cornelius Vanderbilt built enormous railroad empires, critical to the economics of the day.
Congress responded. Under its express constitutional power to regulate interstate commerce, new antitrust laws emerged from the Capitol Building.
Many people misunderstand the principles underlying antitrust laws. There is nothing illegal about having a monopoly. Rather, antitrust laws are designed only to regulate anti-competitive behavior - particularly by companies that have a monopoly - thus encouraging a competitive marketplace. This, in theory, is best for the economy.
Antitrust laws start with a concept of "relevant market." This raises some interesting issues. For example, if a single company owns every movie theater in a medium-sized city, does it have a monopoly? The theater owner would argue that it has no monopoly. Motion picture theaters, it would contend, are in the business of entertainment - and face competition from television, sports, live theater, musical events, radio, carnivals, go-cart rides, the zoo, the WWF, and whatever other activities there are in town which people might do for amusement. This argument, however, only serves to illustrate the "relevant market" issue; it didn't fly, as the government dismantled the vertically integrated motion picture industry with a consent decree in the 1950s.
It is not difficult to understand why there should be some restrictions on the anti-competitive activities of a company that owns every movie theater in a city. In the above example, you can see why it might be appropriate for the government to step in if, upon the opening of a competing theater, the company that theretofore had a monopoly on theaters purchased the building which the competing theater was leasing, evicted the competitor, and set up shop for itself in the same place.
Another good example of anti-competitive behavior which properly is the subject of antitrust law occurs if any number of companies own all of the theaters in a given market and, every Wednesday night, the owners all get together to decide who will show which movies and what prices will be charged. Price fixing is an antitrust no-no.
In 1911, the federal government succeeded - in the United States Supreme Court - in bringing down the Standard Oil monopoly, dividing it into many companies that you now recognize. Subsequent endeavors dismantled monopolies in steel, aluminum, the motion picture industry and, perhaps most recently, AT&T.
So, turning to today, are Microsoft, Visa and MasterCard - "Robber Barons"? Each has a gargantuan market share and each has a product which, as a practical matter, the public cannot do without. Did they develop these enormous market shares by simply running efficient businesses and offering high-quality products? Or was there explosive expansion fueled by activities which run afoul of the antitrust laws?
Intertwined with this issue, at least to some extent, is the existence of a degree of government-approved monopolies. Copyrights, for example, confer exclusive rights for a very long time. If you are issued a valid patent on an invention, it is yours to the exclusion of anyone else for about 20 years. That is a significant issue, incidentally, in the realm of computer hardware given the rapidly evolving technology, and may become more significant if business-method patents continue to grow. On the other hand, copyrights and patents are creatures of Congress, so if some species of patents or copyrights tend to vest unreasonable monopoly powers in their owners - a particular problem in the fast-changing computer world - statutes can be amended to reduce those powers, such as reducing the duration of the governmentally authorized monopoly.
At this writing, it was the order of United States District Judge Thomas Penfield Jackson that Microsoft had engaged in activities to maintain its monopoly power by illegal, anticompetitive means - "contractual and... technological shackles in order to ensure that the prominent (and ultimately permanent) presence of Internet Explorer on every Windows user's PC system," for example. In general, "Microsoft placed an oppressive thumb on the scale of competitive fortune, thereby effectively guaranteeing its continued dominance in the relevant market. Microsoft's anticompetitive actions trammeled the competitive process through which the computer software industry generally stimulates innovation and conduces to the optimum benefit of consumers."
Congress has afforded broad powers in responding to antitrust violations. Here, Judge Penfield ordered Microsoft to create a new entity, spinning off product so as to result in Windows on one hand and most everything else on the other.
Microsoft appealed to the United States District Court for the District of Columbia. The Department of Justice sought to invoke a special statutes allowing cases like this one to go directly to the Supreme Court - not a popular idea around Microsoft, since it would have only one bite at the apple (no pun intended). If the Supreme Court takes the case directly, the breakup of Microsoft will be ordered - or not - by the end of the next Supreme Court term (i.e., June 2001). Otherwise, it likely will be a couple of more years before this issue is finally decided.
Up the road in New York is a venue for the Department of Justice's antitrust action against Visa and MasterCard, before United States District Judge Barbara S. Jones. You may not be surprised to learn that some of the best coverage of this trial can be found on the Net at www.americanexpress.com. The gravamen of the case is the Department of Justice's contention that the monopoly that Visa and MasterCard have on bank-issued cards resulted from violations of the antitrust laws, and banks therefore should be allowed to issue other cards as a remedy. By the time this issue of AVN Online hits the streets, that trial should be complete, or in advanced stages, having started in June 2000.
Stay tuned for development.
Clyde DeWitt is a partner in the Los Angeles, California law firm of Weston, Garrou & DeWitt. He can be reached through AVN's offices, at his office at 12121 Wilshire Boulevard, Suite 900 Los Angeles, CA 90025 or over the Internet at [email protected]. Readers are considered a valuable source of court decisions, legal gossip and information from around the country, all of which is received with interest. Books, pro and con, are encouraged to be submitted for review, but they will not be returned. This column does not constitute legal advice but, rather, serves to inform readers of legal news, developments in cases and editorial comment about legal developments and trends. Readers who believe anything reported in this column might impact them should contact their personal attorneys.
