Question: When is a merger a monopoly?
Answer: When the government says it is.
You may have thought the answer was "when the consumer suffers." But that wouldn't be correct, especially in high tech. And that lesson is about to be learned by XM and Sirius satellite radio in the weeks ahead as the government probes their proposed $13 billion merger.
The XM/Sirius merger will, detractors say, create a monolithic company that will essentially own 100 percent of the satellite radio industry. Yeah, and so what?
The FCC and the Justice Department may very well rule the proposed merger a monopoly. But it probably shouldn't. Even with 100 percent control of satellite radio, the combined company would face numerous forms of competition, ensuring that consumers have enough choice to keep the new company honest.
What Makes a Monopoly?
If the history of the tech industry has told us anything, it's that monopolies, whether real or perceived, are usually only temporary and rarely do much to hinder either innovation or consumer choice.
There are a number of traditional definitions of a monopoly. I remember being taught them in business school. The standard scenario is when a company enjoys such sufficient market domination that it can set prices that do not accurately reflect the balance of supply and demand in the market.
As the narrative goes, the monopolistic company first cuts prices drastically, relying upon its sheer size and cash reserves to survive long enough to drive its competitors out of the business. Then, once the competitive landscape is clear, the company boosts prices and enjoys obscene profits from that point forward.
Needless to say, there are an endless number of variations on this theme of control and profitability. For example, the major companies in a market can secretly collude to "fix" prices so they all enjoy profits they could never achieve under the regime of real competition.
Or, a company can patent a new invention or idea, refuse to license it to anyone else and then not only own the new market it creates, but also "bundle" other products to that invention -- that is, require users to buy those other products if they wish to get the invention itself.
Or, a company that sells millions of a single device, one that gives an important time-competitive advantage to its customers, may say to its biggest customers: "If you buy even one unit of a similar device from one of our competitors we will drop you from No. 12 on our delivery list (in two weeks) to No. 20,000 (i.e., next year), and you will fall behind your own competitors."
Or -- and this one is more subtle -- you identify the top design talents at your chief competitor, and steal them away. You then steal your competitor's products by duplicating them, within the bounds of legality. And, if that fails, you've still wounded your competitor by stealing its best designers and adding them to your own team.
Every one of these tricks has been tried over the last half-century in the electronics industry. If you are even remotely familiar with the history of high tech, you can probably attach names like Microsoft, Intel, Hitachi, National Semiconductor, Oracle, IBM, etc. to one or another of these tactics. Having covered tech, and especially Silicon Valley, now for almost three decades, I can probably add another dozen names to that list, including some supposedly "good" corporations that might surprise you.
Some of these companies drew the attention of the FCC, FTC, SEC, the Justice Department and/or Congress and had to run the gauntlet of antitrust hearings, investigations, even legislation. Some were fined, a few even broken up. Others, among them some of the worst offenders, escaped scot-free.
The Government Doesn't Always Get It Right
Having watched all of this for years, I have come to some conclusions that may surprise you. For example, I see little correlation between corporate monopolistic practices and actual government investigation. On the other hand, I see a direct connection between real corporate success and federal intrusion.
But most of all, I concluded a long time ago that, thanks to the unique nature of the electronics industry, most particularly Moore's Law, it is almost impossible to achieve a true, classical monopoly in electronics … and those who pursue that goal only hasten their failure.
For example, over the past 50 years, a handful of tech companies have been deemed dangerous monopolies -- among them IBM, Intel, Apple, Microsoft and, today, Google. IBM was hit hard by the Feds in the 1950s and 1970s, the latter delaying Big Blue's entry into personal computing (opening the way for Apple, itself then accused of owning too much of the PC industry). But IBM, once unleashed, proceeded to roll up the personal computer business, only to then screw up and almost collapse.
Apple "owned" personal computing until it failed to learn how to sell to Corporate America and watched its market share fall to single digits. Intel crushed its competitors in the microprocessor business, briefly becoming the most valuable manufacturer on the planet. But today it finds itself struggling against more nimble competitors like Samsung. And Microsoft, once seen as the most dangerous monopoly of all, these days looks slow and confused -- it's recent, year-late Vista OS arriving on the scene not with a bang, but a whimper.
As for Google, it is rapidly becoming the new bogeyman of high tech, especially in Europe, where it is seen as yet another example of Yankee imperialism intruding into daily life in the EU. When the Guardian is decrying Google's influence, you can be sure that bureaucrats in Brussels aren't far behind. And since American courts increasingly can't make a decision without looking to their European betters for guidance, it would seem that Google's days as a free company are numbered. How Do Monopolies Hurt Tech?
So, the question to be asked is: if outrageous profits and long-term market control are the goals of monopolies, where exactly has this worked in the high tech industry? Where have prices gone up? Where has innovation slowed? Most of all, when have tech companies that have tried to monopolize their industries accomplished anything over the long term beyond cutting their own throats?
You may answer that the government investigations themselves tripped up these companies. But that doesn't explain why companies the Feds left alone, like Apple in the late 1970s, managed to screw things up all by themselves.
No, the biggest threats to hugely successful, dominating tech companies is complacency, the loss of key talent that have gotten rich with the company, the fading of entrepreneurial energy, the legacy challenge of tending to existing customers and the growing inability to adapt to change. A decade ago, when it was Microsoft's turn in the government barrel, Bill Gates all-but predicted that this would be Microsoft's fate -- and he was right.
For the Public Good, or Just Pandering to Constituents?
But if all of this is true, and supported by the weight of historical evidence, why is the government incapable of learning this lesson? I think there are two reasons:
First, somebody has to pay for the economic excesses of a boom era. A scapegoat has to be punished as a warning to others -- and who better than the big, bad company that everyone so feared that it became synonymous with the age? This makes constituents happy, and happy constituents make happy legislators. In other words, high tech anti-trust investigations are almost always, in the end, not about economics, but politics.
Second, I believe both legislators and regulatory investigators are trapped in the old school, Robber Baron/Big Trust paradigm of what constitutes a business monopoly. In that world (which I suspect was never really true), markets are rigid, innovation is rare, and whoever takes most of the pie has time to eat it.
That static old model may still rule somewhere in American industry, (though I'm not sure where: look at the U.S. automobile business these days) but it certainly doesn't in tech. In the tech industry, the only real monopoly is held by Moore's Law, and even the most powerful firms must dance to its demand for perpetual, rapid change, or be run over by new start-up companies or equally big competitors crossing over from other industries. But most of all, Moore's Law guarantees that even dominant companies are always under dire threat from some unexpected new invention that will render their entire business obsolete.
And that brings us to the XM/Sirius merger, which will purportedly monopolize the satellite radio industry. But of course, the satellite radio industry doesn't operate in a competitive vacuum. On the contrary, it is at serious threat from everything from iPods and MP3 players to Internet radio -- and the latter may prove fatal to satellite radio when the Web finally comes to the automobile dashboard. Heck, even traditional broadcast radio could really challenge satellite radio if it would just rouse itself from its death spiral and start coming up with innovative solutions.
Market control? That's not likely, unless you are dumb enough -- which may be the case with the FCC -- to look at the satellite radio market in isolation.
Price gouging? Oh. please… There is a price point out there at which XM/Sirius will earn a realistic profit, and I'll bet it's not much different from the current 13 bucks or so per month. The fact that both companies have seen a leveling off in users already suggests that both subscriber fees and the industry itself have already peaked.
So, will the FCC and the Justice Dept. allow the XM/Sirius merger to go through? I hope so, just for the sake of market efficiencies. But then, I have to remind myself, the final decision will, as always in these cases, have very little to do with economics.
This work is the opinion of the columnist and in no way reflects the opinion of ABC News.
Michael S. Malone, once called the Boswell of Silicon Valley, is one of the nation's best-known technology writers. He has covered Silicon Valley and high-tech for more than 25 years, beginning with the San Jose Mercury News, as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, the Economist and Fortune, and for two years he was a columnist for The New York Times. He was editor of Forbes ASAP, the world's largest-circulation business-tech magazine, at the height of the dot-com boom. Malone is best-known as the author or co-author of a dozen books, notably the best-selling "Virtual Corporation." Malone has also hosted three public television interview series, and most recently co-produced the celebrated PBS miniseries on social entrepreneurs, "The New Heroes." He has been the ABCNEWS.com "Silicon Insider" columnist since 2000.