Before there were “computers” in the modern sense, years before Alan Turing built a machine to decode Enigma, there were “tabulating machines,” some manufactured by IBM (NYSE:IBM). These machines became the subjects of an antitrust lawsuit, because the company tied its leases of the machine to the purchase of the punch-cards that were to be employed in its use. According to the government this tie was an effort to use IBM’s dominance in the manufacture of the machine to develop dominance in the otherwise pristine market of the manufacture of punch cards.
In a decision in 1936, the U.S. Supreme Court ruled against IBM, ordering the defendant to let its lessees use competitor’s cards.
According to the Oxford Encyclopedia of Economic History, IBM complied with this order but the compliance did it no harm. It continued to hold 90% of the market for the cards.
Antitrust theories that involve tying violations continue to play out in the world of computers. On April 5th I posted here some reflections on the early history of Microsoft (NASDAQ:MSFT)’s Windows OS and Microsoft’s Internet Explorer, another arena for the alleged abuse of tie-ins.
My review of the history suggested some advice. Alpha might be generated even in the sedate world of public equity long positions, I suggested, by those willing to buy into firms against whom the Department of Justice has just brought an antitrust complaint, or opened a high-profile investigation, especially if that complaint or investigation involves the illegal monopolization of an industry.
Testing My Theory
It is not the U.S. Justice Department, but the European Commission that has obliged with a test by now bringing a case against a tech firm that bears comparison with Microsoft in its heyday (or with IBM in its): Google (NASDAQ:GOOGL).
The complaint filed Wednesday, April 15th, is a narrow one, focused on Google’s comparison shopping service. Most observers see this as but an opening salvo.
The underlying argument is again about the tying of one product or service to another. Indeed, the EC’s underlying grievance with Google involves Android and handset manufacturers. Look for the EC sometime in the near future to bring a complaint about the contracts into which Google has entered with manufacturers that require them to construct the handsets in a way that favors Google’s famous search engine [over, for example, Microsoft’s Bing.] This battle is just a skirmish setting up that one.
And consider the implications of that! Microsoft, the dominant cutthroat monopolist of the 1990s, has to be cast now as the victim, the struggling search engine designer trying to get an even break from … the newer dominant cutthroat monopolist. It appears that there is less to dominance than meets the eye.
Taking an Analogy for a Walk
At any rate, let’s take this analogy out for a walk. On August 23, 1993, the U.S. Justice Department opened its investigation of whether MS was abusing its dominance in the OS market. Over the following week, the stock price declined. But the dip was not severe and did not continue. Since months thereafter, its stock value was up 5% from the August 23 level; one year later, 44%; 18 months later, 60%.
Likewise, on October 27, 1997, the Justice Department filed a lawsuit demanding that MS be fined $1 million a day for bundling its IE3 with the Windows ’95 OS. This time there was no early dip. At six months, one year, and eighteen months out the stock price was up 40.2%, 63.6%, and 160.7% respectively.
If GOOG has a comparable run over the next 18 months starting with the day of the EC announcement, I’ll start wearing swami gear. If it has firstly a comparable run, and secondly the EC then brings the charge it really wants to bring, against the tie-in of Android and the search engine, and thirdly the price goes on another 18-month upward jag, I may feel compelled to shave my head and have a business card printed up in which I’ll call myself a Grand Enlightened Master.