AI, Ma Bell, and the Case for Oligopolies

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Amidst the bidding war that seems to have arisen for Warner Brothers Discovery, one suitor has reportedly raised antitrust concerns. The New York Post on Sunday reported that unidentified senior White House officials have expressed worries that Netflix’s bid for Warner Bros. studio and the HBO Max streaming service could have an anticompetitive effect on the content-streaming industry.

The potential for anticompetitive behavior in the tech sector has long been a concern in Washington, both in the Biden administration and in the Trump White House. It’s likely not an oversight that the January2024 FTC inquiry into the AI competitive landscape, targeting Alphabet, Amazon, Anthropic, Microsoft, and OpenAI has remained open even after Donald Trump returned to the Oval Office. The same is true for a Department of Justice antitrust investigation into Nvidia. While no charges have been filed in either investigation, neither have the probes been terminated. Despite the president’s ties to Larry Ellison, Jensen Huang, and (sometimes) Elon Musk, a significant faction within MAGA remains deeply suspicious of Silicon Valley’s influence.

Yet despite the FTC inquiry, the partnerships and deals between major AI players have only become more plentiful, interwoven, and extensive – sort of an AI Merry-Go-Round, in fact. The merry-go-round continues to get more crowded: yesterday Nvidia announced that it had taken a $2 billion stake in Synopsys (SNPS 2.32% ) to become the seventh-largest shareholder of the automated chip-design software company. Nvidia has long been a Synopsys customer, as has its rival, AMD, and yesterday’s deal is unlikely to change that. Nor will it change Nvidia’s continued relationship with Synopsys rivals like Cadence (CDNS 0.45% ), at least not for the time being.

For investors, such circularity has primarily been a concern due to fears of an AI bubble. Yet there is arguably a larger worry at stake here: one of the primary tenets of antitrust law and policy is that by impeding competition, monopolies and oligopolies also inhibit innovation. The textbook example used to illustrate the point is the Bell System, or “Ma Bell” as it was often called. Antitrust proponents point out that the early 1980s breakup of the Ma Bell monopoly was followed by innovations such as answering machines, cordless phones, long-distance carriers, and eventually mobile phones and mobile data services. 

That’s true, of course, but it’s not necessarily true that oligopolies impede innovation. After all, the monopoly that was Ma Bell famously funded Bell Labs, which gave the world the transistor, the laser, solar cells, communications satellites, information theory, the Unix operating system,  as well as the foundations for cellular technology and digital imaging/photography. Oh, and along the way, researchers at Bell Labs earned 11 Nobel Prizes. How’s that for innovation?

Some economists suggest that this was not a fluke. In their view, oligopolies and large corporations are among the few that can actually afford to fund R&D research – and with the Trump administration actively seeking to reduce government funding of basic science at leading universities, that’s an increasingly important consideration. That’s the opinion of economists like Pier Paolo Creanza, for instance, building on earlier work by the likes of Joseph Schumpeter. Creanza argues that the Great Merger Wave of 1895-1940 saw a consolidation-driven wave of innovation, as newly deep-pocketed corporations funded R&D labs in a variety of industries. 

We can already see that in some of today’s tech giants. Microsoft Research funds research in a diverse array of fields outside of traditional computing, while Alphabet’s DeepMind has branched out into areas such as neuroscience, health diagnostics, drug discovery, and advanced materials, for instance. Neither are yet regarded as the next Bell Labs, but nevertheless, each is doing important work. 

That brings us back to the Warner Bros. Discovery bidding war. Paramount, viewed as a leading contender for the acquisition (in part due to the Ellison family’s positive relationship with Trump), just happens to play a key role in antitrust history. It was the landmark 1948 Supreme Court decision in United States v Paramount Pictures, Inc. that ended the Hollywood oligopoly in which the likes of  Paramount and Warner Bros. owned not just the studios that made movies, but also the distributors and movie theaters that brought them to filmgoers. The old-school Hollywood studio system certainly had its flaws, but it would be wrong to say that it stifled innovation. After all, it birthed masterpieces like Gone With the Wind, Snow White and the Seven Dwarfs, King Kong, and The Wizard of Oz, each not just artistically important, but technologically significant.

Just ahead of yesterday’s deadline, Netflix, Paramount, and Comcast each made second-round bids for Warner Bros. Discovery. 

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📧✍️Here’s what a reader commented📧✍️

Q:  Are fears of Chinese dominance in the production and refinement of critical materials overblown?

A: No. The fears are not overblown. They are very real. And this administration expanded these fears with its launch of a trade war against China. How stupid, ill advised, and ill planned. First we attack our leading trading partners Canada and Mexico. We then attack China believing we can bully it into submission. But China has a virtual monopoly on rare earths. Can this trade war really be as dumb as it is. Why wouldn’t any nation exploit this power which the US simply ignored. We declare victory by managing to get back to where we started. And at what cost? Who knows what Trump promised Xi.

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