Antitrust is key to innovation in telecommunication---AT&T’s case proves.

“Innovation is like a manna from heaven,” over which policymakers have little control, according to Robert Solow’s model. Despite this, if we look at the computer industry, antitrust seems to have achieved some important results. In this article, I will briefly review how antitrust enforcement against AT&T, IBM, Microsoft and Intel spurred innovation in the computer hardware and software industries.

AT&T, probably the most famous case in United States antitrust history, is well-known for the decision in 1982 that required the telecommunication monopoly to break up into several companies. However, the AT&T antitrust story is much more complex and fascinating with clear fundamental effects on the computer economy we live in today. Historically, AT&T owned Bell Labs—also called the “idea factory”— which was the birthplace of several Nobel Prize-winning inventions. Probably the most famous invention at Bell Labs was the 1947 invention of the transistor, for which  Bell Labs scientists William Shockley, John Bardeen and Walter  Brattain won the Nobel Prize in Physics in 1956. The transistor represents the beginning of the digital age and is present in all our modern digital devices.  

This part of history is well known. Less remembered is how the transistor was widely adopted so rapidly. Here antitrust comes into play. This breakthrough technology was sold under the AT&T license. In the mid-twentieth century, AT&T was in the crosshairs of the Department of Justice Antitrust Division for possible monopolistic practices. The antitrust investigation, opened in 1949, was settled by a consent decree in 1956. AT&T agreed to implement several remedies to address the antitrust concerns raised by the DOJ, including “to grant to all applicants non-exclusive licenses for all existing and future Bell System patents,” which included the transistor. The decree also required AT&T to provide, upon payment of reasonable fees, the technical information needed for manufacturing the equipment covered by the patent license.

A variety of present-day economists have conducted studies to assess the impact of this remedy on economic growth and innovation. Professors Peter Grindley and David Teece considered AT&T’s licensing policy as “one of the most unheralded contributions to economic development—possibly far exceeding the Marshall Plan in terms of wealth generation capability it established abroad and in the United States.” 

Intel’s co-founder Gordon Moore considered the AT&T consent decree of 1956 “one of the most important developments for the commercial semiconductor industry.” It is important to remember that AT&T agreed to the compulsory license remedy to end the DOJ antitrust investigation started in 1949. Remedies enshrined in consent decrees are typically offered by the investigated parties. Thus, they are the result of a ‘consensus mechanism’, benefiting from input of the same company under investigation, which often has created the market that is accused of having been monopolized.

The Story of Unix

The 1956 consent decree against AT&T also had the incidental consequence of paving the way to the open-source movement in the computer industry and being instrumental to the development of the first internet network—Arpanet.  

Interestingly, many attributed the development of the software industry to another antitrust-related intervention in the computer industry—the IBM antitrust case back in the 1960s. Between 1967 and 1968, IBM’s competitors, following the lead of the once major supercomputer company Control Data Corporation (CDC), urged the DOJ Antitrust Division to file an antitrust complaint against IBM for monopolization conduct in the computer industry. Although the DOJ was seriously considering taking formal action against IBM, in December 1968 the CDC decided to start its own suit accusing IBM of engaging in a series of monopolistic practices that were harming CDC’s business and growth.  

IBM’s executives started conversation with senior DOJ attorneys and opted for announcing the  unbundling of its services before the DOJ filed any antitrust suits. The executives decided that the risk of an antitrust lawsuit and potential damages, was high enough to threaten IBM’s business existence. IBM understood  from their past the consequences of an antitrust lawsuit. Beyond being a constant target of antitrust investigations, in 1913 IBM’s famous Chairman Thomas Watson Sr. “was sentenced to a year in jail” for criminal antitrust violation while he was executive at National Cash Register Company.  The Court of Appeal found the case defective requiring the government to retry it, which never occurred. But the case had strong media coverage. President Wilson was even asked to pardon Watson and the other executives involved. His son, Thomas Watson Jr., became the chairman of IBM in 1956 serving until 1971.