Breaking up Google is a fool’s game
Summary
- Antitrust enforcers intent on sparking innovation and competition risk harming it, to Beijing’s benefit.
A word to the Justice Department, which is considering whether to push for a breakup of Google to spur competition in the online search market: Don’t. We’ve seen this movie before and it ended poorly. The 1984 breakup of AT&T was supposed to ignite competition and innovation but did the opposite. If we rush to dismantle Google, we risk undermining our global competitiveness against China and other adversaries.
AT&T, which Alexander Graham Bell created in the mid-1880s, is the poster child for the dangers of breaking up tech firms. In the postwar period, AT&T was a telecommunications giant with greater size and influence than Google today. Most experts admired it for operating the world’s most advanced and reliable telephone system. Its equipment arm, Western Electric (later Lucent), and its research-and-development powerhouse, Bell Labs, were global leaders in innovation, producing technological breakthroughs that shaped the modern world. Yet for nearly 60 years the Justice Department tried to break up AT&T, not because the company failed consumers but because it was too successful as a regulated monopoly. The government’s crackdown gave us AT&T and the seven Bell dwarfs.
Ideological trustbusters couldn’t bring themselves to see that monopoly—or at least some degree of size, scale and market power—can be a powerful driver of innovation and productivity. By selling to AT&T domestically, Western Electric had a captive market (as Huawei now does in China), which allowed it to dominate world markets, exporting billions of dollars of equipment annually. No regular company would have funded Bell Labs, as AT&T did, because the spillover benefits to other firms would have been too great. Only a large monopoly like AT&T could afford to incur those costs.
As the U.S. faces a formidable state-backed technological dragon in China, the risks of large tech breakups are even more potent. Before 1979, when shareholder capitalism wasn’t as dominant, many U.S. companies invested heavily in basic research to innovate and build world-leading manufacturing enterprises. Very few prioritize either today, which has eroded America’s tech advantages.
Large companies that command some market power are exceptions. They, along with many drug companies, are among the small minority of U.S. firms that still invest significant amounts of capital into R&D. The top five big tech companies—Amazon, Apple, Meta, Microsoft and Google’s parent, Alphabet—invested an estimated $154 billion in R&D in 2021: more than every country in the world except the U.S. and China. These companies have enough cash flow to invest in high-risk ventures, and they are growing quickly enough to ignore investors who, seeking short-term gains, tell them to stop investing so much.
Why is the U.S. leading in artificial intelligence? It isn’t because of federal funding for science—which, tied with 2017, is at its lowest level in 70 years as a share of gross domestic product, according to the National Center for Science and Engineering Statistics. It’s because companies like Google are investing huge amounts of resources in things that may or may not succeed.
Alphabet has also invested billions to develop autonomous vehicles, transform agriculture and bring the internet to isolated parts of the world. It funds Alphabet Labs, an entity devoted to developing and testing potentially world-changing ideas, much of which never see the consumer market. The other four big tech companies also invest billions to drive innovation and advance U.S. technology leadership.
When the government brought its antitrust case against AT&T in 1974, Bill Baker, a leading Bell Labs scientist, was asked what it would mean if the government won. His answer: “I think that Bell Laboratories as we know it now would just disappear." Sadly, he was right. The National Research Council concluded that “post-restructuring, industrial support for such research has declined, become more short-term in scope, and become less stable."
Many of today’s antitrust crusaders, drawing inspiration from Justice Louis Brandeis (1856-1941)—who famously railed against the “curse of bigness" in corporate America—are fond of the AT&T breakup, as it supports their arguments against Google and other leading tech firms. A case in point: Tim Wu, a former competition-policy adviser to President Biden, recently wrote that breaking up AT&T’s Bell System was responsible for “transforming the telecommunications industry (over time) from an economic backwater into what we now call the internet industries."
Yet the implication that a breakup was necessary is absurd. The government simply needed to mandate interoperability and interchangeability among rival networks and devices. This is exactly what the Federal Communications Commission did in 1980 in the second of its trilogy of “Computer Inquiries," and it’s what lawmakers did in the 1996 Telecom Act.
Many antitrust officials today simply don’t understand innovation. As the economist Joseph Schumpeter explained, that process and its fruits come when firms have incentives to invest in research and profit from innovations that work. Breaking up large tech companies would undermine those incentives, with serious consequences for innovation and economic growth. That would be a recipe for American decline and Chinese innovation leadership.
Mr. Atkinson is president of the Information Technology and Innovation Foundation.
