Judge Greene of the 21st Century?

The Justice Department’s plan was simple. Just break up the company into separate firms, based upon product lines. The parts with monopoly or bottleneck attributes would be severed from those in competitive markets. It looked like a neat solution to a vexing problem. A no muss, no fuss antitrust remedy that promised to increase competition, without burdensome regulation.

Last month’s Justice Department proposal for Microsoft? No, this was the 1982 decision to break up AT&T into separate long-distance and local telephone companies. The similarities aren’t accidental–antitrust regulators have consciously used the AT&T break-up as a model, seeing “Baby Bills” in the place of “Baby Bells.”

But there’s one drawback that’s been largely overlooked: The Bell break-up didn’t exactly work as planned. Sure, today we have much more competition in long-distance telephone service, but that started long before the AT&T case. MCI, remember, had been around since the ’70s. On the other hand, the restrictions imposed under the plan, and enforced by district court judge Harold Greene, quickly became a regulatory enforcement quagmire–hindering the development of new telecommunication technologies.

For instance: The antitrust consent decree barred the local Bell companies from manufacturing telephone equipment. That sounds simple, but what does it mean? After some litigation, Judge Greene determined that manufacturing even included such things as product “design” (but not product “conceptualization”). Treading this fine line limited the ability of Bell engineers to cooperate with manufacturers. As one US West official testified, “We can say ‘no’ to this and ‘yes’ to that, but we can’t talk in specifics.…And so, instead of better, faster, cheaper, we do things adequately, slower, and maybe a little more expensively.”

The Bells, of course, could always ask for a waiver of specific parts of the decree. But, even if granted, waivers often took years of legal wrangling and often stifled innovative new technologies.

In large degree because of the problems with the consent decree, a part of it was lifted by court order in 1991, and Congress dissolved the consent decree when it passed the Telecommunications Act of 1996. In all but one state, however, the Bell companies are still barred from providing long-distance service. This vestige of the consent decree–by limiting Bell investment in national Internet backbone networks–continues to impose unintended harm on the information economy.

A break-up of Microsoft could lead to similar problems. Notably, the DOJ’s proposal so far avoids the most obvious pitfall of the AT&T case: There is no explicit prohibition on the operating system company getting back into the applications business.

But don’t relax yet. Line-of-business restrictions could be added at a later stage of the process (without them, one has to wonder what the regulators hope to accomplish). Moreover, other restrictions proposed by DOJ could still tie the Internet in knots–with “conduct” restrictions on everything from exchange of technical information between the two companies to limits on the integration of new features into Windows.

Will Microsoft judge Thomas Penfield Jackson do better than Judge Greene at administering all this? Not likely. If Greene had trouble keeping up with the telecom technologies of the 1980s, what chance will Jackson have with the Internet technologies of the 21st century?

The folks at the Justice Department do have one point right. The AT&T case provides a model for the Microsoft litigation. A model that we should avoid.

James Gattuso, CEI’s vice president for policy and management, can be reached at [email protected].