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How Reagan, Clinton, and Bill Gates paved the way for the rise of Big Tech

In this excerpt from Matt Stoller’s new book, ‘Goliath: The 100-Year War Between Monopoly Power and Democracy,’ he describes how Microsoft avoided the fate of IBM, which was constantly under threat by antitrust authorities.

How Reagan, Clinton, and Bill Gates paved the way for the rise of Big Tech
[Photos: Library of Congress, Prints & Photographs Division, photograph by Carol M. Highsmith [LC-HS503- 5174 (ONLINE)] (Reagan); Ann E. Yow-Dyson/Getty Images (Gates); Architect of the Capitol photo courtesy of the Library of Congress, Prints & Photographs Division, [LC-USZC4-7730] (Clinton)]

Like the rest of the Clinton administration, the DOJ Antitrust Division in the 1990s talked populist, but governed with a deference to monopoly. Clinton’s first appointment to run the division was a Washington lawyer named Anne Bingaman. Antitrust was not particularly important to the administration, and it seemed to some that Bingaman got the job as a political favor to her husband, New Mexico senator Jeff Bingaman. “Hmph,” Attorney General Janet Reno said to The Wall Street Journal, “there’s the White House trying to push a Senator’s wife on me.”

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Nevertheless, when she took office, Bingaman was ready to entirely remake the dormant division. She “fired up” the staff, and opened up new investigations. “Anne Bingaman has a blunt message for corporate America: The antitrust cops are back on the beat,” said the Journal. One of Bingaman’s first goals was to open up the most important new area of the economy, the one where Reagan had allowed nascent robber barons to not only seize power over industry but over the future of technology. She would take on the big bad monopolist of the computer industry, Microsoft, which was frightening Silicon Valley, and increasingly, much of corporate America.

In the 1960s, Silicon Valley was a middle-class area populated by farmers and engineers. Up until the early 1980s, the personal computing industry was largely a world of hobbyists, composed of tinkerers who played with what most businessmen thought were toys. Hobbyist culture was pervasive and utopianist, a combination of both the San Francisco counterculture scene and the Cold War–era New Deal high-tech can-do spirit. One of the early forums for the personal computer, for instance, the Homebrew Computer Club, inspired the design of the Apple I. Tinkerers passed around software to each other for free, updating and improving it collectively.

New Deal enforcers had enabled this freewheeling culture. AT&T and IBM were both under constant threat by antitrust authorities, with IBM sued on the last business day of the Lyndon Johnson administration, and both companies being sued throughout the 1970s. Both developed software standards and languages, like COBOL and UNIX, widely available at little or no cost. Xerox, like AT&T and IBM, had been the target of aggressive antitrust actions. The corporation, through its Xerox PARC lab, developed core aspects of personal computing like the mouse and the graphical user interface, and allowed its technologies to be commercialized by others (including some of its employees who left to start their own companies). In the early 1980s, IBM, meanwhile, stepped gingerly into personal computing, afraid of new antitrust actions. The company worked to transfer enormous programming, manufacturing, and technical skills to the nascent personal computer supply chain of independent companies, without its usual vicious disciplinary tactics. It even indirectly financed the production of PC “clones,” competitors to its own PCs.

Information technology, like the railroad, the telephone, or the telegraph, is based on networks. Operating systems, software, memory chips, disk drives, videotapes—these are not just products but systems organized around common standards. The value of a piece of software is not just what you can do with the software, but whether it is compatible with other software and with various hardware platforms. When the market for personal computers exploded in the 1980s, it opened the way for a host of new software and hardware products, everything from memory to microchips to spreadsheets and word processing. The technical dynamics were similar to the digital computer market of the 1950s and 1960s, but with a much bigger market and more possibilities for entrepreneurs.

The key political economy question was whether industry standard setting would be public and open, or proprietary and monopolistic. This was not a new problem; there was a reason John D. Rockefeller named his company Standard Oil. New Dealers had forced standards to be relatively open. The fax standard, for instance, and that of TV broadcasting, were not proprietary.

The legal context of the Reagan era, however, returned business to Rockefeller’s era. In 1980, Congress passed a law applying copyright restrictions to software, and in 1982, Reagan dropped the IBM antitrust suit that had pressured the company to retain its open architecture model for computing. It also broke up AT&T, creating a burst of competition in communications, but for the purpose of “deregulating” the telecommunications field.

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The rest of the industry took notice. As with Rockefeller leveraging the network of railroads to monopolize the oil industry, entrepreneurs used the exploding personal computer market to seize monopoly power around key bottlenecks. Spreadsheets, word processors, and operating systems became costly software monopolies. There were rivals in these markets—Lotus 123 and Boland in spreadsheets, for instance— but competition took place through lawsuits as they battled over who would control standards, not over whose product was better.

These nascent monopolies were lucrative and did extremely well under the finance-friendly Reagan political economy. Software and computer companies sold shares on the frothy stock market; by the mid-1980s there were so many millionaires in Silicon Valley that there were shortages of high-end housing.

The industry consolidated quickly. The key alliance dominating the technology industry, like that between the Pennsylvania Railroad and John D. Rockefeller in the 1880s, was that of Bill Gates’s Microsoft software producer and Intel microchip company. In 1980, IBM, wary of being accused of controlling the personal computer business, signed a deal with Microsoft to produce an operating system—known as DOS— for its personal computer, and standardized its PC chips on Intel. IBM then transferred enormous programming and technical know-how to both companies, and even protected Intel throughout the 1980s from Japanese competition. Gates was the more powerful of the two. He had gotten his start commercializing software in the late 1970s, fighting against the sharing culture of the early personal computer hobbyists.

The operating system (OS) is the basic controlling software for a computer, setting the specifications by which other software operates. IBM allowed Gates to sell his OS to other producers of personal computers. By 1983, Microsoft controlled the industry standard on-ramp to the personal computer. Gates soon realized how powerful this intermediary position was, and he moved quickly to entrench his monopoly power by forcing computer makers to take a “per processor” license fee. Under this arrangement, computer makers paid Microsoft for every computer shipped, regardless of whether it had a Microsoft operating system. The per processor contract excluded competitors from the operating system market.

By 1987, Gates, not IBM, controlled what customers sought in a personal computer, which was not the computer itself or the IBM brand or even the operating system, but the ability to do different things with their machine, like write documents using a word processor or play games with video game software. All software producers would essentially have to write software applications for Microsoft’s DOS operating system.

Gates then began to leverage his monopoly position. Over the course of the 1980s, Microsoft launched software applications that competed with the most popular business applications, like Lotus 123 spreadsheets, or WordPerfect word processing. It gave its own internal teams secret information about upcoming changes to its operating system product, Windows, leveraging its monopoly in operating systems into another monopoly for business software. Programmers at Microsoft used to say, “DOS ain’t done till Lotus don’t run.” Gates was aiming for two key monopolies—operating systems and business applications—in the most important and fastest-growing product market in history, the personal computer.

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In 1991, spurred by Microsoft’s rivals in Silicon Valley, the Federal Trade Commission started investigating the corporation’s practices. Gates was openly contemptuous of the FTC, reportedly calling one commissioner a “Communist” and telling BusinessWeek, “The worst that could come of this is that I could fall down on the steps of the FTC, hit my head, and kill myself.” The commission could not reach an agreement about whether to move forward with a case. In 1993, with support from Republican and Democratic senators, Bingaman took over the case from the FTC.

This was the moment when the Clinton administration could have turned back the Reagan-era monopolization free-for-all. Bingaman could have sent a powerful signal to corporate America. Despite her pledge to stiffen the division’s work on antitrust, there were signs that Bingaman, like Clinton, was no populist. For one thing, she studied antitrust under William Baxter. More than his student, she was also his admirer, praising his brilliance and his “monumental” legacy. She did not veer from Baxter’s merger guidelines, which had helped unleash the merger boom, asserting they “appeared economically sound.” Her only area of disagreement was that Reagan-era antitrust was insufficiently supportive of chain stores and consumerism. She pledged to prosecute fair trade agreements where merchants maintained a minimum price for their products.

Bingaman also had little intellectual support for taking on the largest and most powerful company in the personal computing industry. While many of Microsoft’s Silicon Valley competitors backed the suit, intellectuals and commentators did not. Frank Fisher, an important economist at MIT, argued that “you don’t want to confuse Microsoft’s success with monopoly.” Rob Shapiro, an operative who worked in Al From’s orbit at a New Democrat think tank, warned DOJ that it would damage America’s software industry with an ill-advised suit, noting that Microsoft’s high market share in operating systems was a sign not of dysfunction, but that the “market is working well.” And liberal legend Alfred Kahn said the costs of inaction were worth it. Should Microsoft turn slothful, he said, “We’ll just have to deal with the problem if and when it comes.”

In July of 1994, the DOJ settled with the company, allowing Microsoft to retain its market position in operating systems and its ability to leverage that into new application markets. Bingaman earned a modest concession, where Microsoft stopped its per processor licensing fee structure. But by 1994, this contractual arrangement was irrelevant; Microsoft’s operating system had become the industry standard. Bingaman claimed victory and lawyers at DOJ cracked open champagne to celebrate, but it was a hollow and embarrassing announcement, undercut a few days later when Bill Gates mocked her. No one will change anything they are doing at Microsoft, he said, though he would have one official deign to read the agreement. Microsoft soon dominated the market for key business tools, including databases, presentation software, and word processing, with massive monopoly profits to match. Its stock jumped from $48 to $62 in the four months after the settlement.

In the months to come, Bingaman would reveal herself as an ardent Chicago School adherent, seeing little wrong with Microsoft’s increasing market power. In 1995, Microsoft tried to buy Intuit, the leading personal finance software maker. The goal was to dominate the then-nascent internet. The company, as one executive said in 1997, was trying to get a “vig,” a mobster’s term for a share, of every transaction made on the internet. Bingaman reached a deal with Microsoft to allow the transaction to go through, but when she went before a court to have the settlement approved, she ran into Judge Stanley Sporkin, a former SEC enforcer and adamant opponent of white-collar misdeeds. Sporkin delayed the deal, and even allowed corporate opponents of the deal, led by lawyer Gary Reback, to argue against the merger in his court. Bingaman angrily demanded the judge allow Microsoft to leverage its monopoly power into control of the internet, but he would not. She soon left the DOJ, and a new chief, Joel Klein, filed suit to block the acquisition. Gates abandoned the merger attempt.

But Microsoft wasn’t chastened. Gates had decided that his company would dominate the internet. A small start-up called Netscape had created something called a browser, a piece of software letting a user look at websites easily. This would be the on-ramp to the internet, much as the operating system was the on-ramp to the personal computer. Gates decided to create a competitive product, Internet Explorer, and leverage his power to destroy Netscape. The company updated its operating system, Windows 95, bundling its browser and seeking to, as one rival executive testified he heard from a Microsoft executive, “cut off Netscape’s air supply.” It used the same exclusionary tactics as it had to defeat other creators of applications, bullying a host of PC makers and internet service providers. Netscape soon hired Reback to see what he could do to get enforcers to pursue a case against Microsoft.

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Goliath: The 100 Year War Between Monopoly, Power, and Democracy by Matt Stoller

Microsoft then began its next strategic move to leverage its monopoly power, this time into swaths of the nondigital economy. Gates understood that Americans would one day do their shopping, banking, news consumption, and social interactions online, and he wanted to rule it all. Microsoft launched a travel company called Expedia, and began investing in media, including a company called Sidewalk, which was intended to dominate the lucrative classified advertising market. It brought together over a hundred venture capitalists and implied strongly they should refrain from investing in areas Microsoft intended to dominate. The extent of Gates’s ambition and power finally scared old-line corporate America as well as state-level officials.

In 1998, the Texas attorney general became interested in Microsoft’s monopolization of the browser market; some key PC makers were located in his state. More state attorneys general followed his lead. In 1998, the Department of Justice, spurred by Reback, gathering interest from state attorneys general and angry venture capitalists, launched an antitrust suit against the company. Klein presided over the largest trial since that against AT&T. In 2000, the court ruled for the government, and put forward a plan to split up Microsoft into two companies, one that held the operating systems and the other that controlled the Microsoft software businesses that ran on top of the operating system, similar to how Congress had split railroads from other businesses. It was a cautious decision; Microsoft would still retain its monopolies, even if they were now in separate companies. But Gates appealed the decision anyway, and the most conservative circuit court in America overturned the breakup order. In 2001, the George W. Bush administration essentially dropped the remainder of the case.

The Microsoft suit had two critical impacts on the development of the American political economy. Microsoft never dominated the internet the way it had the personal computer, because it was never able to leverage its hold over the browser market to control how users interacted with third-party websites. Like IBM, which under fear of antitrust had allowed an open computer industry, Microsoft allowed an open internet. It did not block a new company dedicated to selling books called Amazon and a new company with an innovative search engine called Google from accessing customers through Internet Explorer.

But the suit also signaled an end to antimonopoly prosecutions. The Clinton administration clearly had little interest in prosecuting monopoly, and had to be embarrassed and cajoled into doing something about an obvious monopoly in a key sector of the economy. The Bush administration was even less inclined to do anything about monopoly power. While Microsoft’s internal culture was reoriented away from predatory action, after this case the Department of Justice would cease bringing forward monopolization cases entirely.

In 2003, Larry Ellison, the CEO of large software maker Oracle, said he had no choice but to copy Microsoft’s tactics. “We have to roll up our industry,” he said. Like every industry, the business software market was going to have just one key company. “We will be that dominant player.”

Adapted from GOLIATH: The 100-Year War Between Monopoly Power and Democracy, by Matt Stoller. Copyright © 2019 by Matt Stoller. Reprinted by permission of Simon & Schuster. All rights reserved.

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