Pushing Apple to open i-Phones

Last week, Attorney General Merrick Garland announced the Justice Department has filed an antitrust case again Apple. It’s about time although one shouldn’t hold your breath for any reasonable resolution. My pessimism is rooted primarily in my experience with the break-up of the Bell System over forty years ago.

I am a life-long capitalist who believes in the free market as the best arbiter for development, distribution and improvement of goods and services consumed by the public. And, I recognize that for a free market system to work with minimal abuse you must have a robust system to identify anti-competitive (monopolistic) practices. We have long had such a system but it currently lacks the modernization necessary to deal with the business of collecting, manipulating and marketing data. The importance of this is that a quick look at the financial markets demonstrates that a significant amount of the growth in the Dow, S&P 500 and NASCAP is due to the growth of what are known as the FAANG stocks – all of whom participate in whole, or in substantial part, in the acquisition, manipulation and marketing of data – Facebook (now Meta), Apple, Amazon, Netflix, and Google (trading under Alphabet), now joined by NVIDIA. Let’s not forget that several of these companies grew by buying competitors who had better products – proof that bigger isn’t necessarily better, just richer.

The allegations against Apple is that it built a barrier to access to its wildly popular I-phones – both physical interconnections and, more importantly, software interoperability. The net effect of such operations would be to created a barrier for software and hardware sellers who could otherwise compete with Apple. At the same time it would limit choices available to consumers – particularly owners of I-phones – for so many other apps. The allegations, if substantiated, are text book examples of anti-competitive conduct.

Anti-competitive litigation is extremely complex and not for those expecting a prompt resolution. The Department of Justice has a whole section devoted to “antitrust” enforcement and work on both civil and criminal investigations. The section includes lawyers, investigators, economists, financial experts, forensic accountants and a variety of other specialties depending on the focus of current investigations. It is safe to say that they are staffed to identify and litigate anti-competitive conduct. What they are not particularly well staffed to do is propose and implement remedies to rectify anti-competitive conduct. The reason is that most of the lawyers are lifetime government employees and have no real experience in the competitive world, even as to in how businesses make money. But they have virtually unlimited access to taxpayer funds to pursue and prosecute their cases.

Most of the large multi-state firms likewise have sections solely devoted to antitrust litigation. And while they do not have unlimited access to taxpayer funds, they often represent clients whose “deep pockets” rival those of the government – i.e. Apple, Google, Microsoft, Facebook and Amazon. And while they may have some say in any remedies imposed it would be very little since they lost the battle and more importantly any advice offered would be viewed with suspicion that such advice is done more to protect their clients than to further competition.

But to show the weakness of crafting an appropriate solution let’s take a look at the breakup of the Bell System – AT&T. The purported rationale for breaking up the Bell System is that long distance service providers could not compete with AT&T because it controlled the “last mile” of the telecommunications network – the local network. It was true and AT&T did every thing short of armed resistance to deny non-discriminatory access to that local network. So what would be a reasonable solution. That’s right, require AT&T to provide technically equivalent interconnection and distribution of long distance calls to local users at non-discriminatory rates. Now remember the culprit in all of this was AT&T and its senior management structure – they designed the network, they barred interconnection, and they determined the pricing which was hardly non-discriminatory.

So what was the actual remedy. Well, they did require interconnection to the last mile (the local distribution network) on a non-discriminatory technology basis with non-discriminatory pricing. But that wasn’t enough. They then freed AT&T to compete freely with other long distance providers and to retain all of its current long distance technology including connectivity to the local distribution network. But being historical monopolists, AT&T proved to be inept at competing and eventually failed. The AT&T you know today is basically the former local network provider Southwest Bell who recovered the AT&T name as it failed in the market place. Don’t shed a tear for the former AT&T management because they simply failed in a competitive marketplace even without the burden of government controls. Failed even after a head start on all the other competitors as they geared up to be nationwide competitors.

But on the flip side of that, the government, in addition to requiring “equal access” on a non-discriminatory technical and pricing basis for all long distance carriers, imposed extraordinary restraints on the local network providers that were spun off by the break up of the Bell System: NYNEX, Ameritech, Atlantic Bell, BellSouth, Southwestern Bell, USWEST and Pacific Telesis:

• They were barred from providing long distance service even despite opening their networks to competitors on a non-discriminatory basis.
• They were constrained to providing short haul intercity service within what were called Local Access and Transport Areas – although in many instances did not necessarily recognize state boundaries, existing network designs or economic connections, particularly in rural communities.
• And they were barred from participating in any other line of business without specific permission of the trial court then headed by Judge Harold Greene – a lifetime public employee who had little or no experience in business, in general and telecommunication specifically.

Now here is the insane part. The local operating companies were initially huge cash generators. At the same time the technology changes from analog to digital switch was dramatically reducing the cost of providing the local distribution network – it was less labor intensive and required dramatically less maintenance. The local operating companies could have upgraded their distribution network using fiber optics that were coming online but local regulators barred them recovering the cost of such upgrades reasoning that the companies would have to recover their existing investments over their physical usefulness rather than their technical usefulness. With excess cash the management of these local distribution companies recognized that expansion would be slow in coming and sought other venues for investments. US WEST chose to seek authority to enter the commercial real estate business within its fourteen state territory. The Justice Department’s antitrust division balked. After a lack of progress, lawyers from the Justice Department were asked to attend a meeting with lawyers from USWEST – as a newly minted member of the law department, one of the few with any extensive history of representing mainstreet clients who worked in competitive enterprises, I was invited to attend. The meeting was congenial, at least until we asked for the Justice Department’s rationale for opposing the company’s request. And at this point the government lawyers opined that they were suspicious that our real intention was to use the buildings that we would purchase or construct to mount microwave towers that could transmit telecommunications and re-enter the long distance market. Never having been burdened with diplomacy in the face of stupidity, my jaw dropped. While my colleagues sought to respond politely I asked one of the government lawyers whether he really thought we would buy or build a $50 million dollar office building so as to put a $50,000 microwave structure on top that could broadcast approximately thirty miles before needing a repeater station in our fourteen western states noted for their sparse population and uninhabited distances. Dead silence. Our general counsel gave me a look but remained silent. The Justice Department lawyers dismissed the meeting and said they would get back to us*.

It is that kind of exchange that has soured me on looking to the government for practical solutions.

In the current dust up, should the Justice Department prove its case, the remedy is quite simple for Apple. Simply require Apple to provide equal access to their I-phone system at non-discriminatory rates and equivalent interconnection. That includes allowing competitors access to the Apple app store.

But this is the government and they will cock it up somehow.

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*Eventually the Justice Department accepted our request.