Where New Industries Get Their Start: Rebooting the Startup Economy

Before the Committee on the Judiciary,
Subcommittee on Antitrust, Commercial, and Administrative Law
U.S. House of Representatives
Tim WuJulius Silver Professor, Columbia University School of Law
Author, “The Curse of Bigness: Antitrust in the New Gilded Age”
July 16, 2019
Chairman, Ranking Member, and Members of the subcommittee, thank you for inviting
me to testify today.
For more than a century now, the key economic advantage of the United States has
been its startup economy and capacity for launching new industries. This is innovation, yes, butof a particularly important kind. It is not just the improvement of mousetraps, but rather thepioneering of entire industries that, in time, come to employ millions and generate trillions. Being
the place companies get their start has given the United States an extraordinary advantage overthe last century, and helped make it the world’s preeminent economic power.
But this advantage, which we sometimes take for granted, is now threatened byexcessive consolidation in the U.S. economy. The most obvious symptom is the decline of theAmerican startup. As a recent Brooking study shows, startup rates have declined dramatically
across the economy.1 In an extraordinary development, the number of companies shutting
down has grown to match the number that are starting up.2 The Department of Labor shows adeclining number of people working for startups, while the Center for American
Entrepreneurship documents a relative decline in American VC funding relative to the rest of theworld. We may, in short, be entering a “startup winter.”3 This is a problem that affects manyindustries, but is particularly obvious in the Internet economy.
There will, of course, be those who resist the implication that anything is amiss. Someargue that all is well, that the big guys are friendly giants, and really all we need to do is stop

1 Jay Shambaugh, Ryan Nunn, Audrey Breitwieser, and Patrick Liu, The State ofCompetition and Dynamism: Facts about Concentration, Start-Ups, and Related
Policies, Brookings Institute (June 2018).
2 Ibid.
3 Richard Floria and Ian Hathaway, Rise of the Global Startup City, American Center for

Entrepreneurship (2018).

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worrying and learn to love our national champions. When it comes to the platform economy weneed not fear, because the giants will either invent everything, or buy whoever is. And venture
capitalists can invest in startups confident that everyone will earn their payout.
I do not agree with this perspective. Economic structure matters, and I fear that theUnited States is losing a vital capacity: of being the best place for new industries to get theirstart. We are becoming a country of giant concerns, admirable in their way, but whereincremental improvement is the norm, where bureaucracy rules, and stagnation may beinevitable. We will become a country where inventors and entrepreneurs dream of beingbought, not of building something of their own. While it once seemed impossible, the Internet isbecoming the case study of that development.
The solution, I believe, should be a broad effort to reboot the startup economy. That canbe done not through one policy or passing any single law. It requires a thoughtful yet forcefulreassertion of the bundle of pro-innovative laws and policies which have made up the best ofAmerican innovation policy over the last century. I see three essential elements in that policy:4• Pro-competitive laws and regulations (also known as “competition catalysts”);• The reassertion of antitrust, including retroactive merger review; and• The funding of visionary research projects, in the spirit of the ARPANET, both basic andapplied.
These policies have several things in common. They open the economy by reducing
barriers to entry — in economic jargon, “lower rivals’ costs.”5 They reduce the power of older
companies to control the new, allowing new industries to arise on their own. And they givenewer or smaller competitors the opportunity to compete with larger concerns. Collectively, thismixture of policies and rules have had an extraordinary track record in putting the United Statesin a position of technological leadership in the world. It is to this, the best practices of the lastcentury, to which we should return.
***
Let me turn now to the Web, the specific topic of this hearing. Eleven years ago I was in San
Francisco doing research for a book, The Master Switch, and thinking about the historic cyclesof technological innovation.6 In that research I noticed a pattern. Big inventions break open
4 Outside of the intellectual property laws, their own subject.
5 Cf. Steven C. Salop and David T. Scheffman, Raising Rivals' Costs, 73 American

Economic Review 267 (1983).
6 Tim Wu, The Master Switch (Knopf: 2010).

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industries, leading to the birth of new and innovative industries, and a characteristic pattern ofhundreds if not thousands of startups.
But that doesn’t last. The new industry is prone, after some time, to consolidation,
monopolization, and in time, stagnation that can last for decades. And, importantly, onceconsolidation occurs, existing industries often try to co-opt or prevent the emergence of newindustries — the so-called “Kronos effect.” 7 That was the pattern for the telephone, radio,television, cable, automobile and many other “high tech” industries.
The question, back in the 2000s, is whether the same might happen to the web. At the time, theidea that the web might undergo consolidation seemed crazy. Many, in fact, believed itimpossible. The web was intrinsically different, went the prevailing wisdom: it was open by
design, and new entrants would always be “one click away.” No firm could expect to holdlasting power: the 5 year-old firm was already middle-aged; the 8-year was on life support. For
this was an ecosystem, not an industry, and ecosystems just don’t tolerate monopoly.
Ten years later, at the risk of stating the obvious, things look a little different. History has, infact, repeated itself and traditional economics — matters like economies of scale — havereasserted themselves. The ecosystem has been replaced, and the idea that the web isdominated by a handful of large firms is a mystery to no one.
A symbolically key moment, in retrospect, was in 2012, when Facebook bought Instagram. At
the time, Facebook was about 8 years old, ancient in web terms, and seemed destined to be
replaced by something like Instagram; something newer, better, and more in tune with ayounger generation. But Facebook broke the narrative by buying Instagram — paying double
the previous offer — and managing to get the merger past the Federal Trade Commission
despite documentary evidence that the merger was intended to eliminate a nascent competitor.8
That moment demonstrated the power of buyouts to eliminate competitive threats, and thewillingness of government to let a threatened firm get away with it.
Today, the 2019, the old slogan that competition is one click away seems like a bad joke. Unlikein 2008, the big firms seem in no danger of fading under the onslaught of smaller rivals. Instead(often in violation of the antitrust laws) most of those would-be rivals have been bought oreffectively tamed. I’m not alone in this assessment. Most Silicon Valley observers, from MaryMeeker through Tim O’Reilly believe that the American tech is in a lull, innovation-wise. We
can tell by the conversations: instead of talking about a crazy new firm that is trying something
new, the talk is all “what will Google do? What will Amazon launch?” Or, alternatively, we talkabout China is up to. That, to my mind, is a sign of where things stand.

7 Ibid.
8 Josh Kosman,“Facebook boasted of buying Instagram to kill the competition: sources,”

Post, February 26, 2019.

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I don’t think “rely on the giants” is a good innovation policy for this country. We’ve tried it
before: in telecommunications for almost 70 years, in the car industry for many decades, and inmany other industries as well. It is not as if giant firms don’t innovate, but they do soincrementally, carefully, and in a way designed to protect their existing revenue streams. Overthe last century, competitive, open sectors — ecosystems — have proved themselves superior
to those monopolized or dominated by a “big three” or “big four.”9Fortunately, it is not too late to act. The United States has faced excessive consolidation before,
and found ways to encourage innovation and entrepreneurship in cycles where dominance isthe pattern. Looking back at the 20th century, three major tools were employed.
The first was regulatory: so called “competition catalysts” laws and regulations that limit thepower of monopolists or other dominant firms exercise power beyond its market, and to treat
fairly those who depend on it.10 The telecom laws and net neutrality are the key examples ofthis approach, but there are others as well, like the rules that force optometrists to issue writtenprescriptions so that you can buy glasses anywhere.11 In telecom, the government fostered thegrowth of industries “on top” of AT&T’s network (and “at the ends”), limiting AT&T to providing
transmission. That policy led to the birth of the first dial-up network providers, AOL andCompuserve, and ultimately, in the 1990s what we now call the mass Internet.
The second is the use of antitrust, the topic of this hearing. The United States brought a trilogyof tech cases — AT&T, IBM, and Microsoft — that I see as foundational in terms of shaking up
industry and creating room for new firms and new industries to grow. 12 At the time, for each of
those cases, the naysayers suggested that the law was obsolete, that monopoly was inherently
fragile, or that to interfere with America’s national champions would simply hand the future toJapan — a country that knew how to support its tech companies, not attack them.13
Yet in retrospect, the breakup of AT&T, and the challenges to IBM and Microsoft helped create
the tech economy we now take for granted, along with American leadership in the sector. This
is not to say that the engineers, entrepreneurs and capital markets are undeserving of the credit
they are given. But it is to say that technologies like the personal computer, the emergence of asoftware industry, the ISP industry, the web, and even the very companies we discuss today
benefited from the economic structure created by both regulatory action and antitrust.
9 On whether monopoly or competition generates more competition, see Jon Baker, Beyond

Schumpeter vs. Arrow: How Antitrust Fosters Innovation, 74 Antitrust L. J. 575 (2007).
10 For a survey of these rules and laws, see Tim Wu, Antitrust via Rulemaking: Competition

Catalysts, 16 Colorado Technology L. Rev. 33 (2017).
11 Ibid.
12 See Tim Wu, The Curse of Bigness (2018).
13 See Tim Wu, Don’t Fall for Facebook’s ‘China Argument,’ The New York Times Dec. 10, 2018.

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“I do not believe in trust-busting for trust-busting’s sake,” as Robert Jackson once said. But I dobelieve, after a century of experience, that industries do consolidate, that today’s vibrant anddynamic industries can get too large and begin to stagnate. The American car industry, forexample, was considering a highly innovative industry in the 1950s, but by the 1970s wasshowing severe signs of consolidation and lack of entry.
One key tool we need to make more use of is retroactive review of mergers that have led to
anticompetitive consequences. Today, almost all merger review is prospective; but predictions
are hard, especially about the future. The antitrust agencies are, I believe, beginning todevelop ways to look at mergers retrospectively under Section 7 of the Clayton Act, or consider
a merger as part of a program of monopoly maintenance under Section 2 of the Sherman Act,but this a key for fixing a big blind spot in antitrust enforcement.
The third is government’s own investment in innovative research projects. The Internet, we
often forget, began as a bold and visionary project funded by the federal government.
Importantly, it didn’t have a business model, nor need to make money — instead, it served as aplatform for others to launch from, including all of the platforms who are here today. If theApollo moon project remains the most visible example of government-backed engineeringachievement, the spin-offs and spillovers from the Internet project have clearly yielded more,
overall for the American people than any other.
One of the best ways to see the advantage of this bundle of policies is by comparison. It isalmost natural to worship great and powerful companies, and they have a way of becoming
favorites of government. But the nations who fully embraced and supported their tech powers in
the 1970s and 80s — Europe and Japan — have fallen behind. The United States forced its
companies to face the heat of competition created opportunities for the new and the unknown,and has benefited greatly from that approach.
In fact, what makes the United States so distinctive is that, just about every decade, it produces
new winners. We aren’t waiting around seeing what IBM and Hewlett-Packard, the powers of
the 1970s will do next, and we should not have an innovation policy that consists of dependingon what Google, Facebook and Amazon will do or who they will buy.
In closing, we must never forget that the story of America’s preeminence in the tech industry is
not a story of just one actor or set of actors. It has been a joint project that involves engineers,entrepreneurs, managers, investors, venture capitalists, and also wise action and thoughtful
setting of the ground rules by government. It is a grave mistake to confuse wisdom with doing
nothing; for doing nothing is its own form of industrial policy, one that has not served us in thelong run.

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