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Do not punish dominant firms for being innovative

By XN Iraki | October 27th 2020

1n 1982, the US federal government broke up the 97-year-old American Telephone & Telegraph (AT&T) into seven regional telcos.

A case opposing the split had lasted from 1974-82. Following the split, AT & T lost control of local phone companies and Western Electric, which had a monopoly for making telecommunications equipment.

AT&T was broken under the USA antitrust laws, specifically the Sherman Act of 1890.  

Currently, two other Federal antitrust laws are in force. They include the Clayton Act and the Federal Trade Commission Act both of 1914.  

In Kenya, the Competition Authority of Kenya (CAK) is the key weapon against uncompetitive behaviour like forming cartels, collusion, price-fixing or buyer abuse.  CAK is established under the Competition Act, No. 12 of 2010 (the Act).

Its mandate is “to enforce the Act with the objective of enhancing the welfare of the people of Kenya by promoting and protecting effective competition in markets and preventing misleading market conduct throughout Kenya.”  

It was amended last year to clarify the abuse of power. It is the near-equivalent to the US’ Sherman Act of 1890. 

CAK has been very active since its formation, particularly on mergers and acquisitions.  

The aftermath of AT&T break was the competition that gave rise to mobile phones and associated services.

There were arguments against breaking up AT&T, which was later paradoxically bought by one of its daughter companies. One was the recent reintegration of regional telcos in the US.

Two, the Internet, mobile, and cable services could have given AT&T enough competition. 

Others argued that breaking up the giant firm may have delayed high-speed Internet connection to many consumers because bundling was not allowed. Could this be why Safaricom has been so successful? 

It was further argued that uniform standards in telcos would be compromised and economies of scale would be sacrificed. But the regulators saw innovation and competition among the new companies as more beneficial.

They have since been proved right. Should the US government break up Google too? Some think it is all part of Republican politics to make voters think the government is trying to confront the big companies, which nowadays control our lives - a major theme for democrats.

Other firms seen as too dominant include Microsoft, Apple and Amazon. The firms are already facing antitrust issues in Europe. 

Beyond politics, the reality is that we have become too dependent on a few companies for services, particularly information. Think of the phone you use, the Internet or payment solutions or even the site you buy your goods and services on.

Covid-19 has made these firms more powerful and profitable. One of the noticeable characteristics of the developed economies is the dominance of a few companies in every sector.

Once an innovation comes to the market, many firms are formed to take advantage, but time weeds them out, leading to only a handful of them.

As companies become fewer, they gain market power, which they can easily abuse.

Their sheer size often becomes a barrier for others. They are likely to make more money, which they use to buy potential rivals. Some will even co-opt the regulators. 

But some became big because they are more efficient and innovative. They can spot opportunities others can’t or better understand our behaviour and identify grey areas in the law or regulations. The size of the firms and their money makes antitrust cases hard and lengthy.

Add the fact that such big firms can hire good lawyers! Some argue the threat to take big firms like Google to court shows regulators have not been doing their jobs.  

Locally, a call for Safaricom to spin off M-Pesa as an independent company fizzled out.

The same argument on market dominance was used. But who can contest that Safaricom is innovative, understands our behaviour and can identify grey areas in regulation?  

Did you know that Kenya Posta refused to partner with Safaricom to offer M-Pesa? 

Google, too, is innovative and has been keen on buying potential rivals like Youtube. More importantly for Google and Safaricom, we have choices.

That would make it hard to prove their dominance. Is this why the US government is focusing on advertising part of Google? 

Instead of breaking Google or Safaricom, we should focus on creating a level playing ground through optional regulation. The resulting competition will lead to better prices and quality for the customers.  

Innovations and changing environments are great regulators and equalisers. They are at times better than the visible hand of the government.  

We can say confidently that the debate on the dominance of some big Western, mostly American, firms in the global market is not about to end. Please relax, go on googling, Google won’t be broken up anytime soon.

-The writer is an associate professor at the University of Nairobi.

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