Antitrust is best for innovation

Antitrust has always played a fundamental role in guiding the innovation process. The AT&T antitrust consent decree of 1956 led to the creation of Unix, the first and most important universal computer operating system and the underlying language of the Internet. The Internet is probably the main technological innovation that has affected markets in the last thirty years taking us in the Internet Era and massively generating digital online markets. Based on Pen Internet surveys, in mid-2011, seventy-eight percent of the American people interviewed were Internet users. Hi-tech companies built on the Internet platform, such as Google and Amazon, exponentially increased in size in a few years. In 1998, Google counted six million of Web pages; in two years Google ran a billion of pages. The blockchain has the potential to be the next cutting edge technology which will change markets paradigm again bringing us to a new era—the Blockchain era. Similar to Java technologies developed in the late 20th, blockchain represents a world of new opportunities for some companies. Alternatively there is a looming threat for others who hold market power in present centralized networks as such platforms may become unnecessary. At the end of the 1990s Microsoft, which held over ninety percent of the world’s personal computer (PC) market, had to confront the threat of Java. Microsoft v. Java is an interesting case and useful to the blockchain discussion, because Java technology was the first open technology to enable software developers to write programs that could run on any operating system or microprocessor, bypassing Microsoft. Present large players, including Google and Amazon, may be tempted to engage in anticompetitive conduct to slow down the success of the blockchain technology or to misuse this technology to increase their market power or to collude with others. Blockchain technology is in its infancy and far from being perfect. Private/closed blockchains can, for example, create the perfect conditions for companies to collude and smart contracts automatically punish deviations by participants from cartel agreements. In private/closed blockchains exclusionary conduct might also occur, as the participation to those networks is by invitation only. Antitrust enforcers have the responsibility to investigate similar risks and be proactive. On the other hand, a public and open blockchain devises an open democratic platform that preserves economic democracy and open markets. Since Standard Oil, the creation and preservation of open and free markets is the primary antitrust goal; the same goal should be encouraged for blockchain technology today. Standard Oil, AT&T and more recently U.S. and EU Microsoft cases have shown that the temptation for companies that have the most to lose in a totally open market to engage in illegal anticompetitive behavior is often too compelling. Antitrust enforcers are markets’ irreplaceable gatekeepers and need to be aware and prepared for such a risk without compromising companies’ incentives to innovate as it is explained in the following section—Microsoft v. Java. A. Microsoft v. Java (1995) In 1995, Sun Microsystem (Sun) released the Java platform, which included a set of computer software and specifications; the DOJ saw in Sun and its development of Java technologies a potential alternative to Microsoft’s quasi-monopoly in operating systems. At the time that Sun developed Java technologies, which included both Java programming language, Java class libraries, and Java Virtual Machine (JVM), Microsoft held about 95 percent of the “licensing of all Intel-compatible PC operating systems worldwide.” Java technologies enabled software developers to write computer programs that could run on any operating system through a JVM, a virtual translator that enabled software written in Java or other computer languages to be executed in different operating systems or directly on microprocessors like Intel. Before Java was released, all computer programs were written to and run only on a specific operating system or microprocessor. Microsoft Windows or Apple IOS needed specific compilers (called platforms-dependent) to execute computer programs because each operating system reads/understands a specific machine language. Conversely, the JVM is a virtual machine (not a compiler designed for a single operating system) that enables operating systems to run any computer programs, significantly lowering the barriers of the operating systems market. By doing so, the JVM could have become the common platform used to perform computer programs on any machines. Sun, in addition to collaborating with Netscape, started collaborating with Intel, the market leader of computer microprocessors (Intel x86 CPU). Sun and Intel aimed at optimizing the translation of the computer program codes directly to Intel microprocessors, bypassing the Microsoft operating system (Windows). In 1996, as Java was increasing in size and threatened to overshadow Windows’ quasimonopoly, Microsoft created a fork of Java technologies. In particular, the Microsoft fork included the Microsoft version of the JVM that was intentionally incompatible with any Sun products. Although the DOJ considered that Microsoft’s fork of Java aimed at weakening the JVM competitive position, the district court did not embrace the DOJ’s complaint. As the Microsoft JVM ran faster than “ones calling upon Windows APIs with Sun’s method,” the district court recognized Microsoft’s conduct as lawful. In other words, Microsoft invested in developing a JVM for Microsoft that ran faster and was incompatible with Sun products, to prevent the JVM, and more generally Java’s technologies from jeopardizing Microsoft’s dominance. Although de facto Microsoft’s conduct was directly focused on limiting Sun’s success through the standardization process of its technologies, Microsoft developed a higher quality product for its operating systems than Sun. Considering the fact that antitrust law encourages competition among companies and competitors, no antitrust intervention was taken with respect to the Microsoft/JVM fragmentation issue. Antitrust enforcers thought that no matter what the underlying intent of Microsoft conduct was or whether its conduct damaged competitors, in the end, Microsoft created a better version of this operating system which increased consumer welfare. Although I am still not convinced that the decision of the district court was the best antitrust solution—it makes legal sense. There is much to learn from Microsoft v. Java case that can be useful as it relates to the development of blockchain and the preservation of a truly open market. Antitrust enforcers will be faced with a similar situation when confronting the potential of blockchain as it relates to the players that have the most to lose in a totally open market. Antitrust law protects consumers and markets’ efficiency—not competitors. Antitrust analysis should evaluate the overall results in the behavior of companies in the light of innovation technology and consumer welfare. The innovation process inevitably increases consumer welfare providing a wider variety of technological products and services at increasingly lower prices. The main focus of antitrust law should be to achieve this competitive outcome. B. Antitrust and Innovation “Without change there is no innovation, creativity, or incentive for improvement.” (William Pollard) If we look back historically, antitrust law has made clear the importance of the innovation process in preserving market efficiency and consumer welfare, often leading the path to innovation and the development of new markets. The AT&T antitrust consent decree of 1956, for example, led to the creation of Unix, the first and most important universal computer operating system. Although AT&T developed the Unix operating system for private use in 1969, AT&T could not sell Unix because the terms of the consent decree of 1956 prevented AT&T from selling software, such as Unix. AT&T decided to freely license the Unix operating system to universities and Unix soon became the most important universal operating system due to its network effects 100 and the underlying language of the Internet. In 1980, Berkeley University, which had created complementary software for Unix, collaborated with the Defense Advanced Research Projects Agency to adapt Unix for the creation of the precursor to the Internet—the ARPANET project. Unix has been developed in many different versions, such as GNU/Linux, Sun Solaris and MacOS X. Linux is the open source operating system that powers Google, Facebook, Twitter and Amazon. In the discussion on antitrust and innovation, the IBM antitrust case and the creation of the market of operating systems represents another interesting story. In 1960s, IBM was the leading computer manufacturer, which produced from the hardware to the operating system and most of software installed in IBM computers. In 1968, the DOJ required IBM to implement a software unbundling policy, which prevented IBM from installing its own operating system. The IBM unbundling decision opened the market of operating systems to competition. In 1980s, Microsoft started developing the operating system for IBM’s personal computers (IBM PC) —the rest of the story is well known. The 1956 antitrust intervention at AT&T set the tone for the creation of the Internet. In 2018 blockchain potentially could be the next technology that would lead the innovation process. Blockchain may change market paradigm again and markets shift from digital to blockchain platforms. Innovation means “the discovery, development, and commercialization of new and improved products and processes,” according to Professor Michael Carrier, hence new markets. Professor William Baumol, Robert Litan and Carl J. Schmman provided a broader definition, defining innovation as “the marriage of new knowledge, embodied in an invention.” Blockchain technology falls perfectly into both of these definitions. Antitrust and innovation (such as the blockchain) are not separate issues. Antitrust and the innovation process pursue the same goals: increasing market efficiency and consumer welfare. Antitrust and innovation need each other to achieve such goals. Similar to the Internet, blockchain can change markets again bringing us to a new economic era—the blockchain era— where ‘blind alleys’ are the standard and where antitrust needs to serve as first market guidance enforcing antitrust rules and principles. Antitrust enforcers must endorse and oversee this new economic era maintaining the delicate balance between over controlling the actions of large high technology companies and keeping incentives for them to lead in the creation of new technologies.