Independent Thinking^®

Adapting to Change: The Evolution of the Technology Market

If the history of antitrust law teaches us anything, it’s that innovation is the natural state, at least in the United States. By the time regulators focus on an issue, the market is often already working toward solving the problem.

When the U.S. government first filed its lawsuit in 1906, Standard Oil controlled over 90% of the domestic oil refining market. It also had a major position in pipeline distribution and was building scale in exploration and production. The company’s founder, John D. Rockefeller, was known for using aggressive corporate tactics, including securing exclusive agreements with railroads, driving competitors out of business through underpricing, and acquiring rival firms.

Yet, new competitors and new major oil finds were already on the horizon. The 1901 discovery of the Spindletop reserve in Texas – the first in the state – resulted in the formation of Gulf Oil and Texaco. The merger of Royal Dutch and Shell Transport and Trading Company was completed in 1907, creating the first scaled competitor to Standard. At the same time, the Anglo-Persian Oil Company was growing rapidly in the Middle East, changing the global playing field. It took until 1911 for the final judgment in the lawsuit to break up Standard Oil into 34 smaller companies.

Economically, the breakup created a windfall for Standard Oil shareholders but provided little relief for consumers. Rockefeller, who had stakes in all the new companies, saw his net worth treble between 1911 and 1913 to $900 million, or the equivalent of 3% of U.S. GDP, making him by this measure the richest man in the world¹ – a record that has yet to be bested (Elon Musk is currently worth about 1.5% of U.S. 2023 GDP).² Market dynamics and technology continued to change in ways that would have been unrecognizable to the Standard founder or the government regulators of his time, with new drilling technology, new modes of energy transportation and distribution, and expanding uses for energy all upending the status quo. Today, most of the legacy Standard companies are part of either Chevron or ExxonMobil; pieces of it are now owned by far-flung companies including ConocoPhillips, BP, and Shell.

AT&T, the successor company to Alexander Graham Bell’s Bell Telephone Co., was founded in 1885, and for over a century it maintained a dominant monopoly in both local and long-distance telephone service, and in telecom equipment manufacturing. The AT&T subsidiary Bell Labs was among the most innovative and influential research facilities in the world. The government’s antitrust case took eight years to conclude and another two to result in the breakup and sale of the local telephone business into seven new regionally focused entities, known at the time as the Baby Bells. The long-distance business remained with the legacy company.

A reasonable argument can be made that the breakup allowed for more competition in the short term, which begat more robust innovation, benefiting both consumers as well as investors. But we now know that the technology the government saw fit to break up was soon to be made irrelevant, as fiber optics, cellular telephones and the internet all displaced AT&T’s legacy technology. Consumer prices fell dramatically in the 1990s, particularly for long distance. By 2006, the phone companies stopped charging for long distance altogether, mostly due to robust competition from new entrants, like MCI and Sprint. But the price cuts came at the expense of significant added complexity, as consumers had to enter into separate bill pay and service agreements.

The Baby Bells have since reconstituted in the form of a more modern AT&T and Verizon. However, these companies derive most of their revenue from mobile and fiber optics businesses, both nonexistent businesses in 1982.

The Microsoft 1998 antitrust case did not result in a breakup. Although the initial judgment in 2000 ordered the company to devolve into two segments, it was overturned on appeal. Instead, the company agreed in 2001 to a settlement stipulating that Microsoft had to share its application programming interfaces, or APIs, with third-party companies.

Like Standard Oil and AT&T, Microsoft’s dominance in consumer technology was waning. One could argue that this was in part because of the settlement, which provided an easier competitive environment for companies like Alphabet (Google’s parent company), Meta and Amazon to build significant consumer-facing software businesses. And it is worth noting that allowing third-party API development is the model for today’s major consumer and enterprise platforms, including Google and Apple, which have been extremely powerful in spurring innovation in app development (Uber being perhaps the most obvious example). But competition in consumer technology is persistent, and the businesses Microsoft once dominated are a relatively small part of technology profits today.

Microsoft remains among the most valuable companies in the world. For investors in the company, the first decade post settlement, Microsoft’s shares underperformed the S&P 500 Index, as it took both time and effort to recalibrate the company’s focus to new areas. But investors who held on saw their total cumulative return rise 2,184% over the 23 years since the close of the case, close to triple the S&P 500 Index over that time.³ Today, Microsoft is a dominant cloud computing and enterprise solutions company, with consumer-facing businesses representing only a fraction of total revenue.

During the antitrust case against Microsoft, Bill Gates said, “People who feared IBM were wrong. Technology is ever-changing.” He was referring to the failed IBM antitrust case, which was the fourth largest (after the three discussed here) U.S. government antitrust case since 1900, and arguably the most redundant. But Gates’ point is important as we consider the potential antitrust cases against the Magnificent Seven.

While the incumbents might seem unassailable in 2024, it’s worth recalling that as recently as the end of 2012 (which was the first year all of the Magnificent Seven were public companies), Meta, then called Facebook, had a $63 billion market cap, was down 30% from its IPO earlier in the year, and was struggling to convert its revenue model to a mobile environment. Amazon had a $113 billion market cap, but almost no net income or free cash flow, and had yet to break out their cloud services unit, AWS, now its most important and profitable business, into its own reporting segment. And few had heard of NVIDIA, a $9 billion market cap company that was best known for making semiconductors for high-end gamers. No one has thought of IBM as a technology titan in a very long time.

To quote Bob Dylan, there’s nothing so stable as change. We remain vigilant both in questioning the depth and sustainability of the moats and management quality maintained by the largest technology companies. We are also attentive to opportunities to invest in smaller companies with innovative cultures that could be the subject of the next generation’s antitrust suit.

Brian Pollak is the Chair of the Investment Policy Committee at Evercore Wealth Management. He can be contacted at [email protected].

¹ Titan: The Life of John D. Rockefeller, Sr. by Ron Chernow
² Elon Musk has a net worth of $416 billion according to Forbes 2024 Billionaire List.
³ October 31, 2001 to November 30, 2024.