May 1995
by Brock N. Meeks
The Info-Baron: Bill Gates and Microsoft
by Andrew Wheat
Editorial
The Front
Interview
An Interview with Nicholas Johnson
Labor
Invasion of the "Body Shoppers"
by Pratap Chatterjee
Guest Column
by Russell Mokhiber
Book Review
On April 18, officers and agents raided a meeting of the Bolivian Workers Central (COB) union and arrested union leaders. The COB had voted to continue a three-week general strike in protest of government reform policies. Soldiers also arrested the entire membership of the Andean Council of Coca Producers, which represents campesinos from Bolivia, Peru and Colombia . The government then declared a "state of siege" and ordered an end to the strike, banning demonstrations and union meetings.
Press reports say the crackdown may be rooted in demands by the U.S. government to eliminate 1,750 hectares of coca crops, or face a cut-off of aid and international bank credits.
Many union leaders not arrested have gone into hiding. Teachers union leader Telmo Rom�n said the country�s 70,000 teachers will continue to strike until the state of siege is lifted and the unionists are freed. Bolivian Press Federation�s Iv�n Miranda accused the government of negotiating in bad faith while "preparing to stab the union in the back with the state of emergency, assault and prison," reports Latinamerica Press.
The Catholic Church, which was mediating negotiations between the union and the government, condemned the crackdown and asked that the detained unionists be released.
Marcelo de Urioste, press and cultural counselor with the Bolivian Embassy in Washington, D.C., states that the state of siege was declared as a "preventative measure" against separatist elements in the province of Tarija, and because of the teachers� strike, which he says is illegal.
In 1993, Allied-Signal Chair and Chief Executive Officer Lawrence Bossidy led USA*NAFTA, the corporate-funded lobby for NAFTA. Bossidy predicted NAFTA would create a net increase in U.S. jobs and denied any suggestion that the agreement would provide incentives for his own company to move jobs to Mexico . On CNN�s "Moneyline," on August 23, 1993, responding to whether or not he felt NAFTA would result in jobs moving to Mexico, Bossidy said, "I think the jobs that were to move to Mexico have already moved there. I mean, there[�re] more than 700,000 employees in the Mexican maquiladoras now!"
As a result of Allied-Signal shifting jobs to Mexico, CTC reports workers in five U.S. cities have petitioned for NAFTA Transitional Adjustment Assistance, the retraining program set up to help U.S. workers who lose their jobs as a result of NAFTA. In February 1995, the U.S. Department of Labor determined the 170 Allied-Signal workers were layed off because the company shifted production from its Greenville, Ohio plant to Moneterrey, Mexico. Wages at Allied-Signal�s Monterrey plant had dropped from $1.30 to 82 cents an hour in January following the peso crisis. In 1994, workers applied for adjustment assistance following layoffs at Allied-Signal plants in El Paso, Texas; Eatontown, New Jersey; Danville, Illinois; and Orangeburg, South Carolina.
"The Allied-Signal case clearly illustrates who the winners and losers are under NAFTA," says Sarah Anderson, one of the report�s authors. "Mexican workers� wages have plummetted while the company�s CEOs took home some of the highest salaries in the country."
Allied-Signal did not return calls from Multinational Monitor.
CTC lists 21 other USA*NAFTA members who have also carried out NAFTA- related layoffs, including Xerox, Zenith, W.R. Grace, Sara Lee and Digital Equipment.
Dursban is the leading brand used for termite control in the United States. It is also used on more than 90 crops.
The penalty is the largest to date under a section of the Federal Insecticide Fungicide and Rodenticide Act (FIFRA) that requires pesticide companies to submit information regarding adverse effects of their products. DowElanco reported 249 incidents of health problems caused by its pesticides well after the 30-day time period specified in the EPA guidance. The health effects included neurological problems such as persistent headaches, visual disturbances, problems with memory, confusion and depression. A few incidents involved other problems such as asthma or birth defects.
"EPA is concerned about underreporting of pesticide adverse effects incidents," says Steven Herman, EPA�s assistant administrator for enforcement and compliance assurance. "We expect to be taking further actions against registrants that have not reported incidents."
Dr. Lynn Goldman, EPA�s assistant administrator for prevention, pesticides and toxic substances, noted that this action is particularly important because EPA is currently reviewing the registration for chlorpyrifos.
A DowElanco statement said, "We have made a careful evaluation of the reporting process by which we provide information to EPA and have committed additional resources in order to avoid a repetition of these issues in the future."
DowElanco emerged from a joint venture of Midland, Michigan-based Dow Chemical and Indianapolis-based Eli Lilly .
- Aaron Freeman
Women with implants experience a host of ailments, including auto-immune disease, scleroderma (hardening and thickening of the skin), joint swelling and chronic fatigue. Studies have also shown long-term effects of the implants to include blood clots, bone erosion, diseases of connective tissue and cancer. More than 19,000 woman have sued Dow Corning over the implants.
Dow Corning and other implant manufacturers - including Baxter International , Bristol-Myers Squibb , 3M and Union Carbide - reached a settlement with plaintiffs� attorneys in September 1994. Under the terms of the settlement, a $4.23 billion trust would be established - $2 billion of which would be contributed by Dow Corning - to compensate victims. The fund would act as an insurance policy: Women with implants who signed up by the March 1, 1995 deadline would receive compensation if they became ill later, to a maximum of $1.4 million. If they preferred to opt out of the settlement to attempt to recover more through the courts, they had to indicate that they intended to do so by the deadline. The largest component of the trust - $1.2 billion - is a disease compensation fund. When the settlement was reached, Dow Corning agreed that if there was a shortfall in the fund (i.e. if compensation needs became greater than expected), the fund would have to be renegotiated.
Fewer than 10,000 opted out, and more than 410,000 women joined the settlement - 137,000 of whom claim they are already ill because of the implants. This caused a shortfall in compensation funds and U.S. District Judge Samuel Pointer in Birmingham, Alabama, ordered a renegotiation of the settlement, which was in process in the weeks before Dow Corning�s bankruptcy filing.
The bankruptcy will put a halt to any compensation under the settlement, as well as any new lawsuits. Women who desperately need medical treatment, including removal of the implants, will have to wait until the bankruptcy�s resolution before receiving funds. (Most insurance companies have refused to cover treatment.) Moreover, the settlement itself is in jeopardy, since Dow Corning, the primary supplier of the gel used in the implants, is the main contributor to the fund.
Though it has declared bankruptcy, Dow Corning does not appear to be anywhere near bankrupt, except perhaps in moral terms. "Dow Corning emphasize[s] that its underlying business remains strong," a company statement reads. "Our Chapter 11 filing immediately stops all lawsuits against the company," explained Dow Corning Chair and Chief Executive Officer Richard A. Hazleton.
"[A]ttorneys with lawsuits outside of the global settlement have not reduced their exorbitant demands," Hazleton chastened, "threatening our long-term business and, therefore, our ability to fund the global settlement." The message to the victims is clear: If you refuse to accept less for the pain and suffering inflicted upon you, be prepared to accept nothing.
A likely factor behind the decision to file for bankruptcy protection is the tort reform legislation now making its way through Congress. According to Public Citizen�s Alan Morrison, the current versions of the product liability bill in the House and Senate would eliminate the liability of a company that only supplied gel for implants, and not the implants themselves. Dow Corning supplied 81 percent of the gel for all implants, and 29 percent of all implants. In the case of the 50 percent of all implants for which it was only a supplier of gel, the new law, if enacted, would exempt the company from liability if the cases are refiled.
While the bankruptcy filing is symptomatic of a new moral low in a corporate community emboldened by the Republican assault on consumer, health, safety, labor and environmental standards, it is not a new tactic. Johns-Manville , once the largest supplier of asbestos, pioneered this strategy in 1982 when it declared bankruptcy to evade its share of the more than $1 billion in lawsuits from victims of the deadly product. It took six years before a reorganization plan and a trust to compensate those victims was established.
Like Johns-Manville, Dow Corning will almost certainly emerge from bankruptcy, profitable and free to continue doing business.
At best, the bankruptcy will mean even more uncertainty and waiting for women harmed by implants. But Dow Corning will also likely use the bankruptcy filing as a means to corral claimants into the settlement - probably a weakened settlement.
"I think this is a very novel and clever tactic designed to lock claimants into the class action settlement," John Coffee, a specialist in product liability suits at Columbia University, told the Los Angeles Times.
Chapter 11 bankruptcy - designed to set up a mechanism of compensation for creditors of companies in serious financial trouble - was never intended as an escape clause for companies who face litigation over products they make that have crippled and killed their customers.
Once a last refuge, bankruptcy is losing its stigma and becoming an accepted business strategy to avoid costs. It allows a company to take its best shot at defending itself against its victims, and if the outcome is not to the company�s liking, it can use bankruptcy protection for a second try.
The solution is to make corporate executives responsible for egregiously harmful products. Executives found guilty should be criminally prosecuted and jailed. And the conditions for filing Chapter 11 should be tightened to prevent companies from using it as a tactic to evade responsibility.
As long as corporate executives are able to skirt responsibility for the damages caused by the faulty products their company produces, they will have little incentive to cease mugging and maiming consumers. And, without accountability, dangerous products will continue to seep into the marketplace.
A Food and Drug Administration (FDA) ruling made May 25, 1995, puts into effect a controversial interpretation of the GATT-related patent law change that will add $6 billion to the pharmaceutical bills of U.S. consumers, a recent University of Minnesota study says. This change would add an enormous cost to the international trade agreement that multinational corporations and President Bill Clinton touted as a boon to consumers.
U.S. patent holders now enjoy exclusive marketing rights for a period of 17 years from the time a patent is issued. To bring U.S. law in compliance with the GATT, Congress changed the duration of U.S. patents, and the way patent life is calculated, as part of the legislative package approving the world trade agreement. Under the new patent law that takes effect on June 8, 1995, market exclusivity will be awarded for 20 years from the time a patent application is filed.
The $6 billion controversy stems from what happens to patents that have been granted but have not expired by June 8, 1995. Under a Patent and Trademark Office proposal, patents in effect on or prior to June 8 would get the longer of either 20 years from filing or 17 years from patent grant. The proposed policy would ensure that transitional patents get the maximum monopoly marketing period afforded by either the new or old patent system. In the case of the pharmaceutical industry, this policy would result in the unforeseen transfer of billions of dollars from the pockets of consumers and generic drug companies to producers of name-brand drugs.
In reluctantly accepting the Trademark Office�s proposal, the FDA - which instructs generic drug makers when drug patents expire and when they can begin marketing generic versions of the drug - sold short consumers and the many generic companies that have been preparing to market generic versions of name-brand drugs with soon-to-expire patents.
The generic drug industry argues that it was not Congress� intent to eliminate pharmaceutical competition during the transitional patent period. The GATT implementing legislation says that generic producers that have made a "substantial investment" preparing a generic to compete with a name-brand drug can go ahead and market that product during the transitional phase provided that the patent-holder receives "equitable remuneration."
The generic industry takes some solace in this provision but it poses two significant problems. First, Congress did not define the key terms "substantial investment" and "equitable remuneration." As a result, these determinations are likely to be interpreted by the courts. A greater problem is that Congress did not tell the FDA how to resolve apparently conflicting mandates. The 1984 Waxman-Hatch Drug Price Competition Act directs the agency to move generics on the market as soon as possible. But in applying the extended patents to drugs in the transitional period, the FDA will postpone approval of generics that have been cleared for imminent marketing based on the old patent system.
"Our position is that the FDA has the discretion of sticking with the original [patent-expiration] dates because Waxman-Hatch is clear on that and GATT is not," says Robert Milanese, president of the Garden City, New York-based National Association of Pharmaceutical Manufacturers, which represents the generic drug industry. The GATT law "was meant to allow marketing provided that the company that is trying to get on the market can show substantial investment and that they pay a royalty."
Milanese says Congress, the FDA and the generic industry were slow to realize the implications of the GATT-related patent change for generics. "It was only after Bristol- Myer [Squibb] and Glaxo and a few others started crowing about the fact that, �Wow, not only have we gotten 20 years, we�re getting all this other stuff� that everybody said, �Whoa, what happens to us?�"
Glaxo and Bristol-Myers Squibb have led the charge for hard-line enforcement of GATT-extended patent terms. Bristol-Myers� hypertension drug Capoten will be the first important drug affected. According to the FDA "Orange Book," which lists drug patent expiration dates, its patent expires on August 8, 1995. Under the GATT change, this market protection would be extended to February 1996. Milanese says five generic companies have made substantial preparations to market captopril, the generic version of this drug, in August. Bristol-Myers has about $102 million dollars at stake with Capoten, according to the study by the University of Minnesota�s Pharmaceutical Research in Management and Economics (PRIME) Institute. For its part, Glaxo stands to make more than $1 billion of extra revenue from its ulcer drug Zantac if its expiring patent is extended, the PRIME study says.
Glaxo spokesperson Nancy Pekarek says she could not confirm how much extra revenue the company would take in if Zantac�s patent is extended, but she acknowledges that extending its expiration date from December 1995 until July 1997 would be a "considerable" extension. Pekarek says that this aspect of GATT comes as a welcome though unforeseen windfall. "We had supported GATT basically for the 20-year extension but did not realize at the time that GATT was passed that it applied to existing patents," she says. "GATT was signed December 8, I believe, and maybe two weeks after that we realized it. It�s not something we had lobbied for."
Though Glaxo says GATT�s booster for existing patents was unforeseen, it made it clear that it would fight to preserve its interpretation of the law. The Washington, D.C.- based law firm Arnold & Porter filed a complaint with the FDA on Glaxo�s behalf on March 7, 1995. The complaint, supported by letters from Bristol-Myers, sternly warns that the "FDA may not lawfully ignore such revised expiration dates and instead rely on the expiration dates dictated by prior law" when approving generic drug applications. Otherwise, the petition says, "Glaxo may find that it must seek judicial review of FDA�s position." The petition also says the FDA should not collect data on whether a generic firm has made the "substantial investment" described in the GATT implementing legislation. Arnold & Porter�s lawyers argue that FDA "has no ability to judge the validity of claims of substantial investment" and need only evaluate generic drug applications on the basis of whether or not the extended trademark patent is still in force.
Not all multinational drug corporations support the Glaxo and Bristol-Myers line. Ciba-Geigy Corporation produces both name- brand drugs - including four that would benefit from the patent extension - and generics. Apparently, Ciba-Geigy, which did not respond to requests for comment, has more to gain from speedier generic sales than from patent extensions. "Ciba owns one of the companies that we�re in [patent-infringement] litigation over on a generic" version of Zantac, Glaxo�s Pekarek says, referring to Ciba subsidiary Geneva Pharmaceutical Inc. "If they would�ve prevailed in the litigation they would�ve been able to market [a generic version of Zantac] in December of this year. Whereas, even if litigation were to be finished this year, in our view they still couldn�t market until July of 1997 unless someone says the GATT extensions are not to be honored," Pekarek says.
A spokesperson for the Pharmaceutical Research and Manufacturers of America (PhRMA), which represents name-brand drug companies, some of which also sell generics, says the trade group is not taking a position on how the FDA should apply the GATT-related patent law to generic drugs because the issue will benefit some PhRMA members and hurt others. "When that happens, we stay out of it," he says.
The PRIME study, "Economic Impact of GATT Patent Extension on Currently Marketed Drugs," illustrates the stakes in the patent term dispute. The study analyzed most FDA-approved drugs (the main exception are antibiotics), identifying 109 drugs whose patent holders would benefit from the patent extension. The average patent- extension gain for these products is 12 additional months of monopoly pricing. An increase in the prices of antibiotic drugs, which are to be the subject of a subsequent study, would add to the overall cost to consumers. The study was funded by the National Association of Pharmaceutical Manufacturers and the National Pharmaceutical Alliance, which mainly represent generic drug producers.
The introduction of generic drugs following patent expiration brings enormous cost savings to consumers. On average, one year after generic entry, a generic alternative costs 55 percent of what the original drug cost when its patent ran out. After two years, the average generic costs just 39 percent of the patent-protected price, according to the study.
Although the $6 billion in additional profits that pharmaceutical companies may receive from the GATT extension is derived from 109 different drugs, just 10 drugs account for two-thirds of these added profits. Similarly, although 34 drug companies and subsidiaries would benefit, just three companies would pocket half of the $6 billion windfall. The lucky companies are Merck , Glaxo and Bristol-Myers Squibb.
Unlike the other big three, Merck has not urged the FDA to postpone the entry of new generic drugs until the extended patent terms expire. Like Ciba-Geigy, Merck has made a hefty investment in generic versions of drugs with patents that will soon expire unless they receive the windfall extension. Dupont Merck Pharmaceutical Co. and Mylan Pharmaceuticals Inc. filed suit against Bristol-Myers in the U.S. District Court in Delaware on May 10, 1995, seeking a court order allowing them to proceed with their plans to market captopril, a generic version of Bristol-Myers Capoten.
Because the patent law change for Capoten and 108 other drugs would transfer enormous costs to government health programs, drug consumers will essentially pay twice: once at the pharmacy and again as taxpayers. "Based on current expenditure patterns of Medicaid, Medicare, and other government programs such as the Veterans Administration and the Department of Defense, this extension of existing patents will cost federal and state governments more than $1.25 billion over the next two decades," the report says.
Six senators, four of whom voted for GATT and the patent change, wrote a letter to FDA Commissioner David Kessler on March 27, urging him to oppose the giveaway. "In no way did Congress intend GATT to serve as an obstacle to the workings of the free market nor as an inducement to particular industries to seek shelter behind regulatory barriers," the letter says. "The health of American consumers, particularly older Americans, often depends upon their access to high quality and more affordable generic drugs. Rather than impede the drug approval process, the FDA should continue to recognize pre-GATT patent expirations and allow the marketing of generics for which substantial preparation has been made."
Ciba-Geigy and the generic National Association of Pharmaceutical Manufacturers advocate a legislative solution to the problem through an amendment to the 1984 Drug Price Competition Act. Such an amendment could require new generic drug applicants to certify to the FDA that they have made a substantial investment in product development prior to June 8, 1995 and that they have notified the patent holder of the filing. Then it would be up to the patent holder, the generic company and, if necessary, the courts to solve the issue of "equitable remuneration." Such legislation would have to be passed over the strenuous objections of such companies as Glaxo and Bristol-Myers.
The FDA ruling acknowledged that its interpretation may not reflect Congress� intent, leaving the door open to a legislative fix. Senator David Pryor, D-Arkansas, who had spearheaded the March letter to Kessler, responded to the FDA decision by pledging to introduce a bill to reduce the terms of drugs now under patent or in the application pipeline.
- Andrew Wheat
Patently Obscene: Drugs That Would Most Benefit from a Patent Extension
Generic name Trade name Producer Months extended Usage Savings ($1996)
ranitidine Zantac Glaxo 19.7 ulcers $1,046,930,747
omeprazole Prilosec Merck 16.9 ulcers 586,890,482
lovastatin Mevacor Merck 19.4 cholesterol 448,172,731
loratadine Claritin Schering-Plough 22.5 antihistamine 436,099,410
fluconazole Diflucan Pfizer 20.6 anti-viral 410,485,737
paroxtetine Paxil SK Beecham 20.9 anti-depressant 390,689,487
pravastatin Pravachol Bristol-Myers Squibb 21.4 clogged arteries 272,531,323
famotidine Pepcid Merck 16.5 ulcers 183,222,361
buspirone Buspar Bristol-Myers Squibb 16.4 anxiety, stress 141,602,241
ketorolac Toradol Roche-Syntex 13.9 pain killer 125,084,993
Source: PRIME Institute, University of Minnesota
WE HAVE MET THE ENEMY and it is government agencies and the industries they regulate. This corruption of an old Pogo cartoon is a reasonable summary of an April 1995 report from the Project on Government Oversight (POGO).
Seven of the largest U.S. oil companies are cheating the federal government out of $1.5 billion for oil extracted from federal lands in California, according to a report from the Washington, D.C.-based Project on Government Oversight (POGO). The government has done little to recover the money, the report says.
Because they control the whole production process - extracting, transporting and refining oil - these seven so-called "integrated" companies are free to set whatever artificial crude price benefits them. According to the report, Texaco , Shell , Mobil , ARCO , Chevron , Exxon and Unocal deprived taxpayers and oil independents of revenue by depressing the "well-head" or production-site price below market value. These alleged pricing practices hurt others because the oil revenues of independent oil producers, the state of California and the federal government are all based on the well-head price of crude.
The report, "Department of Interior Looks the Other Way: the Government�s Slick Deal for the Oil Industry," says all of these companies except Exxon are fully integrated in California. Although Exxon extracts California crude and refines it in its own facilities, it is not fully integrated because it does not have a proprietary pipeline in that state, POGO says.
The California case is unusual. Although the state is the nation�s fifth largest oil producer and has the largest U.S. market for transportation fuel, only one of the seven major oil pipelines crossing federal lands in California is a common carrier. Most oil pumped by independent producers must flow through proprietary pipelines of the integrated companies or be moved by truck, which is much more expensive.
Refineries owned by the integrated companies require more crude than the owners produce directly. To meet this demand, the integrated companies stipulate that independents using their pipelines must sell all crude passing through proprietary pipelines to the pipeline�s owner, the report says. The revenue of independent producers depends on crude prices "set" by the integrated producers, which produce more than 80 percent of California crude. Independent refiners, on the other hand, typically purchase transported crude from integrated suppliers at prices that are substantially above the Big Seven well- head price, on which government royalties are based.
A 1988 General Accounting Office report found well-head prices for California crude were 13 percent lower than prices for a similar grade of West Texas crude between 1980 and 1986. A 1994 Department of Energy report concluded that the California crude market "could amply support an increase in crude oil prices of $1.50 to $2.00 per barrel without necessarily causing an increase in consumer prices."
The depressed well-head price of California crude has not helped consumers; the price of the fuel coming from the refineries of these integrated companies is comparable to average prices around the country. The integrated companies "push their profits downstream to the refinery end," the report alleges.
The practices of these integrated companies are common knowledge within the appropriate federal agencies, explains the POGO report, citing documents from the Commerce and Interior departments. Oil royalties "may have been underpaid by as much as $29.5 million from 1990 through 1993," according to a draft Department of Interior (DOI) Inspector General report cited in the study.
"These oil companies have already settled for over $350 million with the State of California for royalties owed to the State for the same reasons money is owed to the Federal Treasury," the POGO report says. "However, all the evidence used by the State to retrieve this money has been sealed by the courts at the request of the oil companies who feared �potentially prejudicial pretrial publicity.�"
Several oil companies asked about the report by Multinational Monitor referred to it as if it were a work of fiction. "We have paid all royalties owed," says a spokesperson at Mobil headquarters in Fairfax, Virginia. "We weren�t aware of what they were referring to." "This story has been overplayed. We don�t know when or why our name has been connected with it," says Albert Greenstein, a spokesperson in ARCO�s Los Angeles headquarters. "It�s not in our interest to keep prices artificially low."
"This is a moot issue for us," says a spokesperson in Chevron�s San Francisco headquarters. "All but one of our pipelines in California are common carriers" and the other doesn�t cross federal lands, she says.
Danielle Brian, author of the POGO report, says Chevron was operating its pipeline as a common carrier until three years ago, when it moved the pipeline off public federal lands to circumvent the common carrier requirement.
In June 1994, the House of Representatives directed the DOI to come up with a plan to recover "royalties and interest from supposed undervaluation" when submitting its fiscal 1996 budget request in April 1995. The POGO report says the DOI is still preparing plans for a limited audit of just two integrated companies.
POGO recommends that the DOI enforce Mineral Leasing Act provisions that require pipelines crossing federal lands to be operated as common carriers. The group is also calling for the oil royalty regulations to be amended to allow the DOI to cross-check and challenge suspiciously low crude oil prices submitted by companies operating on federal lands.
But the watchdog group noted that these changes will not alter the status quo until the DOI reverses "its mind-set from trying to find reasons not to collect money from the big oil companies, to trying, instead, to figure out how to retrieve this windfall for the American people."
The DOI has not issued a formal response to the report yet. "Some things are inaccurate [in the POGO report] and they come to some wrong conclusions," says Lyn Herdt, a spokesperson in the DOI�s Minerals Management Service (MMS). Herdt confirmed that a task force with representatives of the departments of Energy, Justice Commerce and Interior have requested information from two of the oil companies for an audit. The next day, however, another MMS spokesperson said only Texaco has been selected for an audit. Texaco is cooperating with the MMS audit and the agency will determine how to proceed on the basis of that study, the second spokesperson said.
- Andrew Wheat
by Brock N.Meeks
If Congress has its way, by this time next year, a high-tech gold rush will be unleashed on a U.S. industry that accounts for almost one-fifth of the country�s entire gross domestic product: the $1 trillion telephone and television communications industry.
The prize nugget these prospectors are fighting over is the "local loop," the wires and cables that deliver a dial tone into U.S. homes and businesses. Those best positioned to control the local loop are the companies that already dominate it: the seven major U.S. "Baby Bell" phone companies created by the Justice Department�s 1982 break up of the AT& T monopoly. The Baby Bells have enjoyed a decade-long monopoly, albeit a heavily-regulated one. Last year, each Bell took in from $10 billion to $17 billion in revenue. U.S. citizens made some $160 billion in local and domestic long distance phone calls last year. Analysts estimate that by end of the century, the nation�s annual phone bill will exceed $200 billion.
Out of the loop
The Baby Bells now face competition from a handful of so-called "major independents" that maintain various kinds of national or regional telecommunications monopolies. These include:
o the long distance telephone industry, dominated by AT& T, which, with annual revenues exceeding $64 billion, is eager to get back into local phone service;
o the cable television industry, which has strung cable that now is accessible to 95 percent of U.S. homes, but generates combined revenues which barely exceed that of a single Baby Bell; and
o a host of smaller, regional "Competitive Access Providers" (CAPs) that regulators have allowed to compete with the Bells in the most lucrative metropolitan business markets.
At stake for all of these companies in the gold rush is previously protected turf - their own and that of their competitors. The Bell companies have had the local loop to themselves for most of the decade since the courts broke up "Ma Bell." CAPs have been allowed to infiltrate major business markets and offer alternative phone service only in the last year. Just as other competitors were kept out of the local loop until recently, the Bells have been banned from such operations as long distance service and manufacturing.
Cable companies also have enjoyed monopolies. Cable operators forge deals - called franchise agreements - at the municipal government level that guarantee them a monopoly on local cable service. In return, the local government gets to collect the franchise fees and usually requires the cable company to hook up the local school systems to the cable network.
The AT& T breakup barred Bell companies from cable services. Last year, a federal district court struck down that ban as unconstitutional on First Amendment grounds. The ban violated the Bell companies� rights to constitutionally-protected free speech, the court said. Finally, long distance companies have been banned from local telephone service, a market that they desperately want to penetrate.
As the walls that once sealed off different sectors of the telecommunications industry come tumbling down, many of the companies in each sector have fought to preserve whatever protections they can for themselves, even as they labor to undermine the surviving barriers that bar them from branching out into diversified telecommunications services. Companies protect their monopolies in various ways, some subtle, others not so subtle.
Litigation is one common tool. When the government makes a ruling that�s unfavorable to one group of companies, a law suit is almost certain to follow. For example, earlier this year the Federal Communications Commission (FCC) mandated that all Bell companies must give competitors physical access to their central offices. These offices contain the computerized switches that route local and long distance calls and handle advanced services such as caller identification and call forwarding. The Bells revolted, arguing that the FCC had no right to grant their competitors access to their equipment and facilities. A federal district judge ultimately ruled in their favor.
Cable companies, for their part, tie up local telephone companies with endless filings before the FCC. For every Bell company that filed applications with the FCC to build cable-like "video dial tone" (VDT) networks, the cable companies filed reams of paper opposing the plans. By law, the FCC had to act on all complaints. As a result, some Bell companies have been waiting more than two years for FCC approval to install these services. Bell Atlantic cited these delays in announcing recently that it would scrap all of its VDT plans.
Off to the races
Coveting each other�s markets, each group wants freedom from market restrictions - at least for itself. Legislation before Congress in May 1995, however, would bring sweeping deregulation to the industry, allowing companies in each sector to feed on everyone else�s market.
Senator Bob Packwood, R-Oregon, has likened this deregulatory process to the Indy 500, the high speed car race that traditionally got under way with contestants being instructed, "Gentlemen, start your engines." During Senate Commerce Committee hearings on the bill in March, Packwood said, "We should just pick a date and let the competition begin." But unless deregulation is carefully refereed, the outcome may end up resembling a demolition derby in which drivers race around the track, smashing into their opponents until just one victorious car is left running.
The Bell companies say they are fighting for their competitive lives. They claim that the idea of a "natural monopoly" - caused by the prohibitively expensive costs of entering a market (i.e. installing phone lines) - is a fallacy. Roy Neel, president of the United States Telephone Association, a leading trade group, points to the 25 most populated U.S. cities and says, "There are two or more competing telephone companies in each of these markets ... if that�s not a sign that our current regulatory scheme [designed to regulate a single monopoly company] is outdated, I don�t know what is."
Neel is right - in part. Businesses in these markets now are free to choose between their traditional Bell provider and a CAP. What Neel, a former Clinton administration White House deputy chief of staff, leaves out is that the combined revenues of all CAPs does not add up to even 1 percent of the combined revenues of the Bells. But the Bells also are eager to expand beyond the confines of their monopoly roles. There is no future in remaining just a phone company and the Baby Bells must change to survive, says Daniel Migilo, president of the Southern New England Telephone company.
For whom the Bells toll
A crucial question that offers insight into the advisability of the deregulatory proposals is: Who would benefit? The telephone companies claim consumers will. According to an economic study the Bells commissioned from the WEFA Group, a Washington, D.C.- based economic consulting firm, barring the Bells' entry into the markets they covet until the turn of the century would shave $137 billion off the U.S. gross domestic product and would prevent the creation of 1.5 million new jobs.
"Freed from outdated restrictions," says Gary McBee, chair of the Alliance for Competitive Communications, a trade group for the Bells, "the Bell companies can help ensure that America�s communications industry continues to be an engine for economic growth." The WEFA study claims that, if the telecommunications market were deregulated immediately, every U.S. household would "gain an average of $850 in disposable income annually over the next decade." The estimate is based on projected lower costs for cable TV and local and long distance phone calls.
Armed with these claims and backed by a new deregulatory Republican majority in Congress, communications executives sound confident. By the year 2000, "we will all probably forget which company once offered long distance, which local, which cable service," says Bell Atlantic Vice-Chair James Cullen. Consumers will find such changes "confusing at first," Cullen acknowledges, "because everybody will be offering new services." There will be a myriad of new "national brands" he says. After 10 years of choosing between long distance providers, U.S. consumers have been "conditioned" to shop "for the best service and prices," Cullen says.
But critics argue that deregulation will strip state regulators of the authority to examine the rates of local telephone companies. As written, the telecommunications reform bill would increase telephone bills by "more than $44 billion over 4 years," says Brian Moir, staff counsel for the International Communications Association (ICA), which represents large commercial firms such as financial and insurance companies. Moir�s data is derived from an ICA-funded study.
McBee alleges the ICA study exemplifies attempts by "the sky-is-falling" crowd to skew the deregulation debate. "The study is so preposterous that I hesitate to dignify it with a response," McBee says. Similar claims were made when the AT& T monopoly was broken in 1984, he points out. At that time, consumer groups including the Consumer Federation of America predicted that as many as six million telephone customers would be priced out of the market by 1986, McBee says. Such predictions, "weren�t even close and in fact, telephone subscribership has increased."
Though the telecommunications industry argues that deregulation will stimulate competition, Bradley Stillman of the Consumer Federation of America says the impact of the legislation would be "anticompetitive" because it "doesn�t have adequate provisions to keep telephone companies from buying up their competitors." Consumer advocates also argue that consumers will be stuck with the cost of such acquisitions. "Consumers are going to be left paying the bill" through rate hikes designed to finance such expansion, says Gene Kimmelman, director of the Washington, D.C. office of the Consumer�s Union. Kimmelman warns that it is foolish to relax telecommunications regulations prematurely, before the industry attains a truly competitive environment.
Cabling for assistance
The cable companies have also been confined to their narrow sectoral fish bowl for a decade. TCI, the biggest cable operator in the United States, is the only cable company to turn a profit so far, and that was just $1 million for a single quarter in 1994.
The cable industry has plowed its revenues back into its infrastructure, which "can now reach 95 percent of American homes," says Decker Anstrom, president of the National Cable TV Association (NCTA). Over the next five years, the cable industry will double its band-width capacity, he says, allowing it to carry new multimedia information technologies.
Capacity is being expanded to beef up the industry�s ability to offer phone service and online computer graphic images. The industry invested about $2.6 billion in 1994, up from $1.8 billion in 1993, to upgrade its facilities to be able to deliver phone service, says Meredith Jones, head of the FCC�s Cable Bureau.
The cable industry is now pressuring Congress and the FCC to forestall the Baby Bells� entry into the cable business. NCTA�s Anstrom says that the Cable Reregulation Act of 1992, which brought price controls to an industry that Congress felt was out of control, undermined the industry�s ability to compete and that it should be given some protection from the telephone company giants. The cable industry is worth $20 billion, whereas the Bells are worth more than five times this amount, Anstrom says. Cable reregulation cost the industry $20 billion in revenues, depriving the industry of its ability to borrow money, Decker adds.
That argument is "bogus," says Bradley Stillman, director of legislative affairs for the Consumer Federation of America. The cable industry�s "revenues are up; their subscribers are up for an industry supposedly struggling to survive, they seem to be doing all right," he says. A study by Paul Kagan Associations, a Wall Street analyst firm, found that cable company stocks rose four times faster than the average stock in the Standard & Poors 500 in the two-year time period following passage of the 1992 Cable Reregulation Act.
The Paul Kagan report jibes with the picture the industry presents its investors. "The telephone industry is a $100 billion dollar industry and cable is a $20 billion dollar industry," says Cox Cable Enterprises in its 1994 annual report. "For [cable] to get into the telephone business we need to spend X in capital investment. For [the phone companies] to get into the cable business, they need to spend 2, 3 or maybe 4 times X. For that 2 to 4 times X they get to chase a $20 billion pie. For our single X, we chase a $100 billion pie. That paradigm drives [our industry�s] entire thinking. Can we run circles around those guys? Yes!"
Striking the Cable Reregulation Act would also be "a disaster" for consumers, says Consumer Union�s Kimmelman. It would wipe out more than $3 billion that consumers have saved as a result of the lower rates the act mandated, he says.
Long distance runners
The long distance phone companies are also scheming to expand their spheres of influence. Last year, MCI , the nation�s second- largest long distance phone company, announced that it would launch a new company subsidiary, MCI Metro, to compete aggressively for local phone customers. MCI Metro is part of a $20 billion initiative to capture market share in the local loop and in information services such as those found on the Internet, the global computer network.
In another development earlier this year, the cable industry formed a coalition with the long distance industry in an effort to enter the local loop. These parties decided to "work together on a state-by-state basis" to lobby state regulators to open local telephone markets to competition, said NCTA�s Anstrom. The group has targeted six states - Florida, Georgia, North Carolina, Ohio, Texas and Virginia - for its initial campaign. Heather Gold, president of the Association of Local Telecommunications Services, which represents companies that resell local telephone services, says this state campaign is part of an ongoing strategy and does not reflect doubts about deregulatory legislation before Congress.
This long distance-cable coalition draws sneers from the Baby Bells. The cable industry is not really interested in fostering competition, charges Bell Atlantic Vice President Edward Young. The FCC is not "fooled by the cable TV smoke screen and state regulators shouldn�t be deceived either," he says. NCTA�s Anstrom counters that it is the Baby Bells that loathe competition, with 40 states still protecting "telephone monopolies."
Of the 10 states that have experimented with local phone competition - Connecticut, Illinois, Massachusetts, Maryland, Michigan, New York, Oregon, Washington and Wisconsin - New York has gone the furthest. In a pilot test, the state completely deregulated the city of Rochester�s phone market. Regulators let Rochester Telephone, a large independent regional phone company, break itself into separate companies and open local markets up to competition. The biggest competitor to come along is AT& T. By buying local loop capacity from Rochester Telephone, AT& T is offering local phone service. For its part, Rochester Telephone makes money from AT& T as well as by offering its own local telephone service.
The idea for the experiment was first floated by Rochester Telephone itself. "If these were the good old days, we�d all probably be comfortable, fat and happy" with the status quo, says company President Ronald Bittner, explaining his company�s unusual position. "We realized that the telecommunications industry was on the brink of major upheaval and we decided to meet the transformation head on."
Plotting the future
Not content to wait for formal deregulation of the industry by Congress, the phone companies are already scrambling to get a head start on their deregulated futures.
Over the past two years, federal courts in every district encouraged them to do so when they all overturned the ban on phone companies offering cable-like services. Taking advantage of this victory, the phone companies plan to offer these new services over "video dial tone" systems (VDTs). Although VDTs are being hailed as "information superhighways," all they are likely to deliver in the near future are "on-demand" video movies, given that technologies for other advanced services are still in the laboratory testing phase. Advanced services include arcade-like, multi-player video games, full internet access, online banking and shopping.
Several Bells have launched investments on VDT networks that will end up costing tens of billions of dollars (since they have to lay their own lines), but no commercially viable system is yet in place. The FCC, which has cleared just three VDTs for construction, has slowed the process. The agency is reviewing another 26 VDT applications.
Many Bells are diversifying their holdings. US West, for example, spent $2.5 billion to buy 26 percent of entertainment giant Time Warner. US West is also a part owner, along with TCI, of a dual cable and phone company in the United Kingdom. This experience "should give us a good head start in the U.S." says Chuck Lamar, US West�s vice president for strategic development.
Bell companies Pacific Telesis , Bell Atlantic and NYNEX recently formed a joint venture with Hollywood�s Creative Artists Agency create video programming content that eventually they plan to "front load" on their VDT networks, according to Bell Atlantic spokesperson Larry Plumb.
In April 1995, the FCC granted approval for the first time for the Bells to produce and deliver their own home-grown programming on their future VDT systems. "We�ve got to make sure we have access to programming," explains Ameritech chair Richard Notebaert. Toward this end, Bell Atlantic has spent $200 million to build its own video services unit in Reston, Virginia to develop program content; Nynex has spent $1.2 billion to buy into cable program provider giant Viacom; and Southwestern Bell has spent $650 million for two small cable companies in Maryland.
Home team advantage?
In an effort to free themselves from market restrictions, while preserving as many barriers to their would-be competitors as possible, the Bells have emerged as one of the most powerful lobbying forces in Washington. Blocking tactics used by the Bells include forcing customers who opt to switch phone companies to change their phone number and forcing competitors� customers to dial up to 14 digits to place a local call. Scoring public relations points, the Bells have offered schools and non-profits "at-cost" access to new information technologies. Bell Atlantic, for example, has given schools in its market free access to its new cable system. Beyond public relations, the individual Bells have spent $105 million in the past two years to lobby state and federal officials.
But the biggest Bell advantage is that they are "local constituents," says Pacific Telesis CEO Philip Quigley. "The Bells are headquartered and can claim a representative in every district," he says. "That gives us a lot of access and a lot of ability to monitor" the activities of members of Congress, he says. In local congressional districts, many members of Congress cannot afford to write off the votes of an active, unionized Bell workforce.
Despite the Bells� political tour de force, "We aren�t sticking our heads in the sand," said Bell Atlantic�s Cullen. He estimates that his company stands to lose between 10 percent and 20 percent of the local loop, once it is opened to competition. On the other hand, Cullen calculates that, by the turn of the century, his company could pick up between 10 percent and 15 percent of the long distance market and 10 percent to 40 percent of the cable market in its region.
Bell Atlantic Chair Raymond Smith says Congress is determined to dismantle the local monopoly and, if the Bells refuse to acknowledge it, they risk being "mowed over by the forces of technological convergence."
Sidebar
Power Play
BURIED WITHIN THE MASSIVE telecommunications proposals now before Congress is a long-sought victory for the nation�s large electric utilities: the removal of a 60-year-old ban on their participation in telecommunications businesses. Elimination of the ban would allow an unprecedented expansion of already immense monopoly power, jeopardizing electric and telecommunications ratepayers and environmental protection, critics say.
If the legislation passes, "the resulting conglomerate[s] would be extremely powerful multistate, multifaceted utility monopol[ies], potentially controlling every aspect of utility services for ratepayers: electric, gas, telephone, cable, mass media and even information services," warns Larry Frimerman, legislative liaison for the Ohio Office of the Consumers� Counsel. "Such powerful entities could control both the content and the methods of delivery for all of these services. An entity controlling so much of our utility network would be difficult to police."
A pending bill moving through Congress would remove restrictions on the ability of electric utilities to diversify into unregulated telecommunications businesses. These restrictions were imposed under New Deal legislation, the Public Utility Holding Company Act (PUHCA), after a period when a few massive holding companies controlled virtually all U.S. utilities and non-utility businesses as well. These companies cost investors and ratepayers untold sums through such monopoly ploys as cross-subsidization, whereby ratepayers subsidize the utility�s ventures in unregulated industries.
PUHCA ensures that companies benefiting from government-granted franchises make serving their "captive" customers their primary obligation and that states can effectively protect consumers by regulating utility rates. Its key provisions impose strict limits on diversification into unrelated businesses and promote local ownership and control. PUHCA�s most strict regulations govern "registered" holding companies, which are generally larger and operate in multiple states, because they are less susceptible to effective state regulation. (The 10 registered electric holding companies hold about $115 billion in assets and earned more than $3 billion in profits in 1994.)
A broad coalition of consumer and environmental groups - ranging from organizations representing large industrial electric consumers and state consumer advocates to national public interest groups - oppose allowing energy companies to participate in telecommunication markets. In a letter to Senate Republican leadership in March 1995, the coalition wrote: "The anti-competitive aspects of the current [Senate] bill are two-fold: it places millions of electric and gas customers at risk from the tremendous market power these utilities continue to enjoy, and it jeopardizes the development of true competition in telecommunications markets because of the likelihood of cross subsidies. ... The only real guarantee that anti-competitive behavior can be prevented is to prohibit the possibility of cross-subsidization in the first place, by preventing monopoly owners from entering telecommunication markets."
Utility executives have been surprisingly forthright about their intention to reach into the pockets of electric ratepayers to subsidize their telecommunications ventures. At a congressional hearing on similar legislation last summer, utility representatives advocated that ratepayers serve as the "anchor tenant" for construction of the information highway. Paul DeNicola, president and chief executive officer of the Southern Company, which has 3.4 million captive ratepayers in Alabama, Georgia, Florida and Mississippi, argued that few companies will build fiber optics at the local level "unless they have a predictable source of revenue that supports most, if not all, of the capital cost."
One of the utility�s primary arguments for legalizing entry into telecommunications is the potential use of telecommunications for "real-time" electricity pricing, which, in theory, allows consumers to adjust their consumption to accurate price signals (although utilities can manipulate this system by charging ratepayers a higher total cost for all electricity consumed during a given period, although only a portion of that electricity actually costs more to produce). "Customers like real-time pricing because it will give them lower bills," argues Thomas Schockley, an executive vice president with Central and South West Corporation, another large holding company operating in Texas, Oklahoma, Arkansas and Louisiana. "Utilities like the idea because it will permit them to use their existing plants more efficiently. The environmental community likes the idea because it will allow utilities to defer construction of new plants. Real-time pricing appears to be a potent demand-side management tool."
But many environmentalists are highly skeptical of the utilities� environmental arguments. The coalition letter states that the "alleged environmental benefits of unrestricted energy utility entry into telecommunications have been overstated by utility representatives." The group argues that "diversification into non-utility businesses also will diminish the utility�s primary mission of providing least cost energy service."
Critics also point out that when electric utilities have been permitted to diversify into unrelated businesses, customers rarely benefit and often bear the brunt of higher costs. In 1992, Charles Studness, a columnist for the trade publication Public Utilities Fortnightly, analyzed the diversification experiences of utilities, finding them "horrendous in the aggregate ... and satisfactory to disastrous for individual utilities." If shareholders want to invest in non-utility businesses like telecommunications, critics argue, they are free to invest on their own, independent of their utility investments, without exposing ratepayers to new risks.
Mark Cooper, who testified at last summer�s hearing for Environmental Action and Consumer Federation of America, compared the risks of the legislation to the nuclear power plant debacle now costing utility ratepayers and shareholders billions of dollars in excessive costs. "In the aggregate, it will cost more than all the money spent on all the nuclear power plants started or finished, in the past several decades," Cooper said, noting that the cost of building the information superhighway will be well over a quarter trillion dollars. "Most of the entities seeking to build it are looking for a subsidy. They seek to have current captive ratepayers pay excessive rates for existing services as a source of funds to build the superhighway."
"While we understand the desire to build the information superhighway and to have regulatory parity between potential entrants into the information age, assuring companies with immense market power an opportunity to abuse ratepayers is not what we have in mind," Cooper said.
- David Lapp
by Andrew Wheat
A MEGALOMANIAC SEEKING TO BE THE WORLD�S MOST POWERFUL person in the coming century might logically conclude that the best stepping stone to this goal is to take control of the computer-driven information industry. To do so, she would have to overcome two main obstacles: Intel and Microsoft .
Though Intel has 85 percent of the personal computer (PC) microprocessor market, Microsoft, with more than 70 percent of the PC operating system market and most of the market for many leading software programs, is arguably even more strategically situated. Since most mass-market computer software programs must be designed to run on Microsoft�s operating systems - DOS and Windows - the company wields enormous influence over the smaller software companies that it rivals. What is more, Microsoft has positioned itself to extend its tentacles downstream to produce and sell a whole new array of online multimedia and information systems, including home banking and other personal computing services. Given its huge share of the critical PC operating system market, critics argue that there is little room for fair competition in whatever branch of the computer-information industry that Microsoft chooses to enter.
If these charges are true, fair entry and industry competition are stifled, thereby depriving other companies of business and denying product choice and competitive prices to consumers. Some critics suggest that the implications are even broader and more ominous. Vast concentrations of economic power corrode democracy, particularly when the commodity in question is information. "This is an area where the public interest community must get involved because this sort of technology in the hands of consumers and public interest groups gives tremendous access to information systems," says a former public interest lawyer who works in one of the Silicon Valley�s leading PC intellectual property practices. "To turn the keys to all of that over to a megacorporation like Microsoft is unconscionable," says the lawyer, who requested anonymity on behalf of his clients.
As a testament to the firm grip that the world�s largest software producer holds on this $77 billion industry, its rivals will not publicly challenge Microsoft�s most questionable business practices for fear that the company would retaliate. But recently, a lone judge�s ruling and the Justice Department�s first imposition of checks on Microsoft�s expansion have given lesser software titans hope that the government or the courts may curb Microsoft�s unrelenting growth. Microsoft�s business practices have been the subject of federal antitrust investigations for five years, and, in the past 12 months, the Justice Department, ever so gently, has begun to rein in Microsoft.
Modus operandi
The springboard for Microsoft�s software dominance was IBM �s 1980 selection of Microsoft DOS as the operating system for IBM�s popular line of personal computers (PCs). A computer�s operating system is the basic set of instructions it follows. It acts as the go-between that makes the machine (or "hardware") interact productively with the programs (or "software") that instruct a PC to perform such tasks as word processing, number crunching, electronic communications or computerized games. By licensing DOS to IBM and dozens of manufacturers of cheap IBM clones, Microsoft took up residence in more than 120 million PCs around the world, well over 70 percent of the market.
Critics say Microsoft and its founder, Bill Gates, exploited their control of the industry�s standard operating system to expand Microsoft�s commanding share of the software market. Microsoft counters that the market is competitive and its market share of software reflects the popularity of its products.
Once Microsoft�s operating systems became the industry standard, many consumers were reluctant to invest the time and frustration needed to master a new operating system. Consumers also shopped for computer products that were compatible with DOS and its more user-friendly offspring, Windows. As a result, Microsoft found itself in a position where it could play hardball with manufacturers of both computer hardware and software. Since demand was limited for PCs that lacked Microsoft operating systems, PC manufacturers felt compelled to license this technology on terms dictated by Microsoft. "These are classic anticompetitive practices by Microsoft because they have the market power to force people to play their game," the Silicon Valley lawyer says.
Similarly, Microsoft operating systems were the means through which most software interacted with a PC, which gave Microsoft significant control over software production. To be a relevant player in the PC market, most software engineers must design programs to work with the operating systems that Microsoft is continually updating and improving.
Software developed by engineers with incomplete information about an operating system is likely to contain serious flaws. Obviously, the company with the most up-to-date information about Microsoft operating systems is Microsoft. This is an increasingly decisive advantage, as Microsoft aggressively seeks to acquire rival software companies and expand its offerings of in-house software and other spin-off products. Another advantage Microsoft enjoys is that many software companies submit prototypes of their newest products to ensure that they will be compatible with next-generation versions of Microsoft operating systems, a practice that gives Microsoft an opportunity to preview competitors� new software.
For Apple Computer , Microsoft�s growing dominance has been a double-edged sword that has been wielded against Apple�s hardware and software. As Windows establishes itself as the industry standard, there is less incentive for software makers to design programs that run on Apple Macintosh computers. The relative shortage of software for Apples encourages more consumers to buy PCs rather than Macintosh computers. Apple also has alleged that Microsoft kept details of its coming Windows 95 operating and graphics interface system from Apple for more than a year - until the U.S. Justice Department�s Antitrust Division urged Microsoft to share the information with Apple.
Gary Reback of Wilson, Sonsini, Goodrich & Rosati, Silicon Valley�s leading intellectual property law firm, submitted other antitrust charges against Microsoft to federal courts earlier this year as a federal judge reviewed an antitrust settlement between Microsoft and the Justice Department. Reback�s charges are controversial because he made them on behalf of anonymous clients in the software industry, who industry observers suspect come from a small pool of lesser titans: Apple, Sybase, Borland, Novell and Sun. When it became clear that the federal judge would listen to such charges, Apple complained openly about Microsoft practices. Reback says his clients will not challenge Microsoft publicly due to concerns about retaliation from the industry giant. Microsoft argues that anonymity violates its due process rights.
Prominent among Reback�s allegations are two alleged Microsoft practices:
o Deriving unfair advantages in software development by providing in-house software engineers with details of Microsoft operating systems that are not disclosed to competitors;
o Announcing the pending introduction of fictitious or premature products, so- called "vaporware," to discourage consumers from buying competing products by suggesting that a competitor�s product will soon be obsolete.
Among the supporting documents that Reback submitted to the courts were two internal Microsoft employee self-evaluation forms. Reback presented these evaluations as smoking-gun evidence of Microsoft�s vaporware tactics against competitor Borland International. One Microsoft marketing employee wrote, "I developed a rollout plan for QuickC and CS that focused on minimizing Borland�s first mover advantage by preannouncing with an aggressive communications campaign." QuickC is a software tool used by engineers to develop other software programs.
Operating the system
A three-year Federal Trade Commission (FTC) investigation into antitrust charges against Microsoft ended when the FTC commissioners deadlocked over whether to take action against the company. Then, the Justice Department stepped in. Justice�s complaint against Microsoft focused on business practices that it concluded "may have contributed to Microsoft�s maintenance of monopoly power" and threatened "to impede future innovation and competition in [computer] operating systems." In its complaint, which it released in August 1994 along with a consent agreement with which the government and Microsoft proposed to settle the charges, Justice charged Microsoft with four anticompetitive practices:
o All or nothing - Microsoft required computer manufacturers which wanted to carry its operating systems to pay a licensing fee for each PC they shipped - even those that did not include a Microsoft operating system.
o Long terms - The all-or-nothing licensing agreements that Microsoft signed with PC manufacturers carried terms of two to three years, a sharply restrictive time commitment in an industry that continually reinvents itself.
o Volume pricing - Microsoft offered discounts to PC manufacturers who would agree to license a minimum number of operating systems during Microsoft�s long licensing terms, another binding commitment for companies that depend on agility and flexibility.
o Nondisclosure - In making its operating system codes available to software designers, Microsoft insisted on long-term nondisclosure agreements with software vendors about the content of those codes that exceeded Microsoft�s legitimate interest in preventing its proprietary secrets from being passed to rival operating system developers. Its nondisclosure agreements were so strict as to discourage other software companies from independently developing their own operating systems or designing software for competing operating systems.
Under the Justice-Microsoft settlement - which the company reportedly has implemented - Microsoft abandoned volume pricing and all-or-nothing licensing agreements. It also capped license terms at one year and limited the terms of its nondisclosure agreements with software companies to either one year or the date of a new operating system�s commercial release, whichever comes first. In consenting to these agreements, Microsoft denied that any of its practices violate antitrust laws or are unethical.
Although the settlement addressed Justice�s charges, the lesser titans - which include such computer companies as Apple, Sun Microsystems , Borland International , Sybase , America Online , Oracle , Lotus and Novell - regard it as wholly inadequate to the scale of Microsoft�s dominance of the industry. The consent agreement confines itself to remedies that, with varying degrees of success, address Microsoft�s licensing of PC operating systems. What disturbs the lesser titans is how much the agreement overlooks.
Survival of the biggest?
The settlement agreement�s limited focus on PCs worries Sun Microsystems, a Microsoft rival that produces software and computer workstations (computers that are more sophisticated than PCs), a market that the agreement leaves Microsoft free to dominate. A couple years ago, Microsoft introduced the Windows NT Workstation system. Windows NT is faster and has more sophisticated networking capabilities than Windows for PCs. George Paolini, a spokesperson in Sun�s Mountain View, California headquarters, declines to respond directly to questions about whether Sun is concerned about Microsoft eventually dominating workstation operating systems to the degree that it has captured the PC market today. "Windows NT is not included in the [Microsoft-Justice] consent agreement," Paolini says. "You can infer from that what our concern might be."
The most far-reaching limitation of the consent agreement for consumers and other software companies is its exclusive focus on operating systems. Nothing in the agreement prevents Microsoft from aggressively expanding its current dominance of PC operating systems (DOS and Windows), word processing (MS-Word) and mathematical spreadsheets (MS-Excel) into entirely new software realms.
Last October, the company made a $1.5 billion bid to acquire Menlo Park, California-based Intuit Inc. This acquisition would have made Microsoft a leader in financial software and services. Intuit produces Quicken, the number-one personal finance software. It also owns both ChipSoft, the leading producer of tax software, and the National Payment Clearinghouse, a top provider of bank electronic payment services. Microsoft viewed Intuit as a major stepping stone for its plan to expand into electronic banking and commerce via its Microsoft Network online service, which is to be launched in August.
Like so many of the company�s new forays, the Intuit acquisition and Network prompted antitrust concerns. Network�s most immediate threat is to providers of online computer services, such as America Online, Prodigy (owned by IBM and Sears, Roebuck ) and CompuServe (owned by H & R Block ). Microsoft intends to build the Network service into its long-awaited Windows 95 upgrade. When installing the new Windows on their PCs, customers will be presented with an option of subscribing to Network for a monthly fee, giving Microsoft an advantage in signing up new customers that other online providers lack.
Jane Torbica, a spokesperson for Columbus, Ohio-based CompuServe, concedes that Microsoft�s operating system base will give the company an advantage in signing up new subscribers. Noting that online service is her company�s core business, however, Torbica says CompuServe eventually will woo away many initial MS Network subscribers. Steve Case, President and Chief Executive Officer of Vienna, Virginia-based America Online, is less optimistic. "Microsoft, as the provider of the dominant operating system, should not be permitted to limit consumers� equal access to other online services by giving preference to their own online service within the Windows �95 environment," Case said in a statement issued at the time Justice moved to block the Intuit acquisition. "We hope the Justice Department will take additional action to prevent Microsoft from exerting its dominant market power to control the emerging market of online services."
"A lot of people would like to become players providing network services," adds Ed Black, president of the Computer Communications Industry Association (CCIA). "But if Microsoft offers it and bundles and packages it with other software, they can subsidize the cost and out-compete even better products that might come to the market. Investors are leery to invest in someone who will compete with Microsoft," he says. Once Microsoft gains a market advantage, it can raise prices and recoup money lost through its initial discounts.
Other fertile areas targeted for Microsoft expansion include:
o Reference and children�s multimedia consumer software;
o "Microsoft At Work," interlinking PCs with phones and office equipment; and
o Video and television software.
With rapid convergence occurring between such once-isolated technology-based industries as computers, telephones and broadcast and cable television, and with technology beginning to catch up with "information superhighway" hype, a big concern among these industries is what kind of multimedia content they will be able to deliver to consumers once the infrastructure is in place. Competitors are racing to secure deals with partners who can provide such content. On May 16, Microsoft and NBC announced that they had formed a "strategic multimedia alliance" to provide audio-video online services, entertainment software and interactive television services. The new deal dovetails with the introduction of the online Microsoft Network slated to debut in August. Under the terms of the deal, NBC, which has been providing material to America Online and Prodigy, will supply Microsoft exclusively.
Because of the many high-tech areas that the consent agreement would allow Microsoft to dominate, the lesser titans view it as a sweetheart deal for Microsoft. They are not alone.
Unexpected Valentine
On February 14, 1995, U.S. District Judge Stanley Sporkin issued an order rejecting the consent agreement. Sporkin�s order followed his examination of the settlement under the 1974 Tunney Act, which requires judicial review of antitrust consent agreements to assure that they serve the public interest. Sporkin electrified the computer industry by concluding that the agreement did not meet the public interest test established in prior case law. According to this test, the remedies proposed in an antitrust agreement must "effectively pry open to competition a market that has been closed by defendant illegal restraints."
Sporkin, a former Securities and Exchange Commission enforcement director, said the Microsoft agreement failed the public-interest test because:
o The Justice Department failed to demonstrate to the court that the agreement served the public interest;
o The scope of the agreement is too narrow;
o The agreement fails to address anticompetitive practices which Microsoft intends to continue; and
o The agreement�s enforcement and compliance mechanisms are unsatisfactory.
The immediate effect of Sporkin�s order was to energize the lesser titans, who saw Sporkin as a champion of their all-but-abandoned cause. The Valentine�s Day order also threw together Microsoft and Justice, the original adversaries in U.S. v. Microsoft, both of whom used similar arguments in appealing Sporkin�s order to the Federal Appeals Court for the D.C. Circuit.
Leading the charge, U.S. Attorney General Janet Reno denounced Sporkin�s order, suggesting that Sporkin had exceeded his authority by attempting to review the government�s entire Microsoft investigation. "If I file criminal charges against somebody and work out an appropriate negotiation and take it to court, the judge can say, �I don�t like the sentence you are recommending to me and if that�s your deal I don�t want it,�" Reno said in a February 16 press conference. "But [the judge] can�t turn around and say I want you to charge this person with another crime that you�ve not charged him with because I don�t think you�ve thoroughly investigated this case." Assistant U.S. Attorney General Anne Bingaman, head of the agency�s antitrust division and wife of U.S. Senator Jeff Bingaman, D-New Mexico, had a bristling courtroom showdown with Sporkin over the extent of his powers.
Responding to criticism that he had usurped Justice�s role as prosecutor, Sporkin wrote an unusual March 15 clarification order that says the court did not tell the government to revise its pleadings. "All the court did was hold that, based on the record before it, the court could not find the proposed settlement to be in the public interest," he wrote. "Other than being told the Government spent a great deal of time on a wide ranging inquiry and that the defendant is a tough bargainer, the court has not been provided with the essential information it needs to make its public interest finding," Sporkin�s February opinion says. Sporkin said the government remained free to drop the case, take it to trial, renegotiate the agreement or document to the court that the agreement served the public interest.
In its appellate brief, Justice argues that upholding Sporkin�s broad interpretation of the Tunney Act and meeting his demands for publicly disclosing any deals the government might have made with Microsoft in their negotiations would mark the end of consent agreements in antitrust cases. Like Justice, Microsoft argues in its appellate brief that Sporkin exceeded the scope of his authority in issuing a ruling that is "an invitation to anarchy." Microsoft argues that Sporkin prejudged the company on the basis of extrajudicial information and urges the appeals courts to remand Sporkin�s order to a different district judge.
Personal vs. corporate finance
The Justice Department clearly did not welcome Judge Sporkin�s decision, which brought heightened scrutiny of Microsoft�s alleged anticompetitive tactics and fed criticisms that Justice�s complaint was too narrow. This pressure may have been a catalyst for Justice�s decision to try and block Microsoft�s Intuit acquisition, though Justice officials insist they are two unrelated cases with separate facts. "Public pressure on the Justice Department had a major impact on their broader approach" toward the Intuit acquisition, the Silicone Valley lawyer says.
In its April 27, 1995 antitrust complaint seeking to block the Microsoft-Intuit merger, Justice notes that Intuit commanded 69 percent of the personal finance software market in 1994; when Microsoft�s share is factored in, the post-merger company would have 91 percent of the market. "The proposed acquisition would eliminate competition between Microsoft and Intuit, which has benefited consumers by leading to high quality innovative products at low prices," the complaint says. The complaint notes that Microsoft spent four years and incurred substantial losses to garner 22 percent of the personal finance market with its MS-Money software. Lesser titans would be unlikely to try to penetrate this market after the merger.
In an effort to evade antitrust hurdles to the proposed merger, Microsoft offered to give away MS-Money to its competitor Novell. Justice�s complaint rejects this giveaway as a solution, noting that Novell would have little chance of competing with Intuit�s Quicken, MS-Money�s main competitor, since it has little experience in personal finance software and the Microsoft staff that developed MS-Money would not transfer to Novell with the software. An internal June 1994 Microsoft memo cited in Justice�s complaint notes that no intelligent competitor would pay good money for MS-Money knowing that the giant was acquiring Quicken.
In contrast to Justice�s August 1994 complaint and proposed settlement with Microsoft, which kept a narrow focus on PC operating systems, the new complaint recognizes that the proposed acquisition "could reach well beyond today�s" personal finance market. Current personal finance software users are likely to lead the charge into PC-based home banking, a vast emerging market in which consumers would perform such transactions as banking, investing, shopping and paying bills through their home computer. Microsoft had already cultivated relationships with third parties such as Visa International , Chase Manhattan Bank , First National Bank of Chicago and US Bancorporation to provide these home-banking services.
Intuit�s strengths in banking and personal finance software would pose a major competitive hurdle to Microsoft�s plans. Justice�s complaint quotes internal memos from both companies that suggest that the proposed merger was designed to eliminate that competitive hurdle. Intuit "is the clear and dominant leader in PF [personal finance] software and the current installed base of users would likely prefer to stay with Quicken when they do electronic transactions," an August 1994 analysis of the proposed merger by a Microsoft executive says. "MS owns Windows and Marvel [a code name for Network] and therefore is in a much better position to access many millions of users in the future with PF service options. Since neither company has both of these strengths, the banks, credit card associations and others are in a stronger position to play us off against each other. As a combination, we would be dominant."
Faced with what was likely to be a long, acrimonious and expensive court battle with Justice over their right to consummate such dominance, Microsoft and Intuit called off the deal May 20, 1995.
Microsoft�s appeal
Oral arguments before the appellate court on April 24 provided a glimpse into the clash Microsoft and Justice had with Judge Sporkin over the proposed operating system settlement.
Sparring with Microsoft�s attorney, Richard Urowsky, Judge Laurence Silberman, a member of the three-judge appeals panel, showed some sensitivity to issues that have been raised by the lesser titans, demanding to know why the proposed settlement is limited to PC operating systems - ignoring other Microsoft software.
After apparently failing to convince the judge that such products as Windows NT do not raise relevant antitrust issues because they "have a tiny share of their market," Urowsky retreated to the argument that the courts lack the authority to raise issues that Justice�s complaint did not broach. Statements made by each member of the three-judge panel suggest that they share this view. Judge James Buckley said that most of the issues raised by attorneys sympathetic to the lesser titans vanish "if we construe the Tunney Act as constraining [judicial antitrust settlement] review to charges made by the government." The appeals court is unlikely to entertain issues that go beyond Justice�s narrow complaint, the Silicon Valley intellectual property lawyer says. Such an approach by the appeals judges would bury many of Sporkin�s antitrust concerns about Microsoft - at least for now.
Microsoft�s Enviable Market Shares
Market Product Share
PC Operating Systems DOS, Windows 82%
PC Word Processing Word for Windows 64%
Macintosh Word Processing MS Word 60%
PC Spreadsheets Excel for Windows 61%
Macintosh Spreadsheets Excel 89%
Source: Fortune magazine
An interview with Nicholas Johnson
Nicholas Johnson, former FCC Commissioner and author of How to Talk Back to Your Television Set, currently lectures through the Leigh Lecture Bureau and teaches at the University of Iowa College of Law.
Multinational Monitor: Is concentration in the media markets something about which citizens should be concerned?
Nicholas Johnson: At the time of the Time-Warner merger, when company executives were asked why they were merging, they said that according to their calculations, it would not be long before there would be five firms that control all the media on Planet Earth, and that they intended to be one of them.
It�s not yet true that there are only five firms that control all the world�s media, but it is true that there are six firms that control over 90 percent of all the world�s music. The trend clearly is in that direction.
There is now not only no objection to people owning more and more newspapers or owning more and more broadcasting stations, there is also no objection to the merger between publishers of magazines and books, television networks, video cassette rental companies, Hollywood studios, and so forth.
You now have the phenomenon of the single owner paying money to the writer of the novel in the form of book advance and royalties, and then paying the screenwriter to write the feature film which is produced at the owner�s Hollywood studio. The owner�s magazine does features about actors, producers, directors and other celebrities and otherwise promotes their movie, while the same person or corporation owns a television network that has the late night talk show on which these folks appear as guests; they own the theaters in which the movie is shown; they own the cable networks on which the rerun is provided; they own the pay-per-view services where people watch it in hotels; and they own the video rental stores where others go to rent it. So, you have created the possibility of an incredible multi-media, multi-national hype of a product which left on its own might very well have gone nowhere. More and more, this dominates what we�re going to be reading in books, seeing in feature films, reading in magazine articles and so forth.
MM: Why should consumers care if there are only a half dozen or a dozen big media firms? Aren�t the big companies still going to be disciplined by consumer buying power?
Johnson: To some extent they will be. But the point is that hype has an enormous amount to do with bottom line. That�s why manufacturers of all kinds of goods, not the least of them media products, spend billions of dollars on advertising. Through advertising, you can, in fact, shape and manipulate and encourage consumer buying patterns.
If you take out a multi-million dollar ad campaign on television for a movie, you will probably have a lot more people showing up at the movie theaters to watch that movie than if you released the movie and relied on nothing but word of mouth. That�s sort of intuitive and obvious on its face.
That doesn�t mean that you can take a real loser and blow it up into a success, but it does give you a tremendous advantage going in with whatever product you happen to have.
MM: What kind of impact will media concentration have on the diversity of ideas that are presented? Won�t there still be smaller outlets able to air a wide range of ideas?
Johnson: Sure, and that has always been the case. There are some 50,000 books published each year in the United States. There are probably 30,000 to 50,000 periodicals available, and if you happen to be in a community where there is a large university and you have access to the periodicals room of the library at that university, you have access to a wide range of material. Even if you live in the most remote place in America you can still get subscriptions by mail, or the Internet, to a wide range of publications that will bring you a diversity of views.
But it is also true that most people get most of their information from television. It is also true that fewer and fewer people, particularly young people, are reading newspapers. Of those who are reading newspapers, most are reading local papers which are newspaper monopolies and which have very little in them besides supermarket ads, AP wire copy and some report on the high school football team.
In the United States, we probably have theoretical and potential access to one of the widest and most diverse ranges of views of any nation on earth. There are countries of course where satellite receivers are banned; where there is close watch by customs over printed material coming into the country and so forth. We don�t have those problems.
But the fact is, the largest proportion of folks are getting their political insights from Rush Limbaugh on radio during the afternoon, and Jay Leno during his opening stand-up monologue at night. They are not reading the wide range of publications that are available, or listening to Pacifica Radio if they happen to be in a community where it�s available, or reading the Multinational Monitor or whatever. So, when you�re talking about what the American people as a whole have learned from all the available information when they vote or make a consumer choice or express an opinion on an issue, the range is pretty narrow.
MM: Will there be any expanded genuine competition with the entry of telephone companies into the television and cable markets, and the general inter- and intra-industry competition in the television, cable and telephone industries that appears on the horizon?
Johnson: Quite the contrary. The relevant issue is not how many competitors are in the marketplace. The relevant issue is what the rules are regarding entry into those oligopolistic channels of communication.
When we had one telephone company, AT& T , that controlled everything from the telephone instrument on the desk to the cables to the switching stations, the company was subjected to a lot of ridicule - think of Lily Tomlin�s routine ("We don�t care, we don�t have to, we�re the telephone company") - and some serious criticism, but nobody ever criticized the phone company because of the threat it posed to the diversity of ideas.
The reason for that was the ground rules - the law, expectations, practices and experiences - that were put in place. The first rule was that anybody who wanted a telephone could have one. The second was that anybody who had a phone could say anything they wanted over the phone; and any liability that came about did not come about because of enforcement by the phone company. You could be prosecuted for dealing in national security secrets or stalking or fraud or child pornography or drug dealing or whatever, but you were not going to be prosecuted by the phone company. You were being prosecuted for what you said by somebody outside of the communications system.
The media reform public interest advocates went to the newspapers and argued that there ought to be a similar right of entry into the newspaper; somebody willing to buy space in the paper ought to be able to do so and to say whatever they want to say. Jerome Barron published an article in the Harvard Law Review, and later a book, in which he argued that, at the time of the adoption of the First Amendment, the conception was of folks visiting on the village green and tacking up notices on barns and trees and publishing lots of little one-page newspapers. Today, by contrast, we tend to have monopolies in newspapers. Therefore, if we are to have the same kind of open accessibility to a range of views, the argument went, we have to give individuals a legally- enforceable right of entry into those monopoly conduits. Unfortunately, we lost that argument.
The state of Florida passed legislation essentially providing that right of access to newspapers, and the Florida Supreme Court upheld it. But the U.S. Supreme Court overturned it. They said, "It is the newspaper owner that has the First Amendment right, not the citizen seeking access, and that First Amendment right to speak includes a right to censor."
Then we went to radio. A group called Business Executives Move for Vietnam Peace went to Katherine Graham�s [the owner of the Washington Post�s] radio station in Washington, D.C., WTOP, and said, "We have a little clip we�d like to put on. We�ll pay your commercial rates. It features a general who has decided to oppose the Vietnam War." The station said, "Nope. Sorry. You have the money but we�re just not going to let you put that message out over the air." Once again, the Supreme Court said, "That�s fine, because the right of free speech includes the right to censor, and therefore the station has the right to censor."
Television stations have this right. Radio stations have this right. Newspapers have this right. Cable television, with a little footnote, has this right.
Now the question is, what about the telephone companies? If they get into the sale of information, aren�t we going to have greater choice? I say, no, we�re going to have less.
Why do I say that? Because once the phone companies start getting into the information and entertainment business, and they use their own conduits for the transmission of their own material, then it seems to me they are going to be in a position to make exactly the same argument that the Miami Herald made in the Tornillo case, and that WTOP made in the Business Executives Move for Vietnam Peace case. And I don�t see how the Supreme Court is going to be able to come up with a basis for distinguishing those other cases from the telephone context.
Then you�re going to have the telephone company in the business of deciding who can say what over the telephone system. If they can control what is distributed over the telephone system in the forum of video, then they have free speech rights, which included the right to censor.
It seems to me that if they want to put out voice information (which in fact they already do), or they want to put out data (which they certainly want to), then they are going to be in a position to censor voice and data as well.
Once that happens we will end up with even less freedom than what we have now. Today, the only remaining meaningful media of mass communication available to the American public - that is, media in which we have First Amendment rights we can exercise without fear of content censorship - are the Post Office and the telephone company. Once we lose the phone company, we have nothing left but direct mail.
MM: Before following up on that, could you clarify what you mean by the phone companies putting out voice information and data?
Johnson: There are lots of informational things you can already get. They may have a time and temperature service. You can call up numbers and get movie schedules. It is a voice informational service where you dial a number and you get information.
It seems to me that if the phone companies are providing that and I go to them and say, "Look, I have my own little message I�d like to get out about these consumer groups that are trying to get organized to fight the telecommunications oligopoly," then the phone company could say, "Oh no, you�re not going to put that voice message out there."
You or I offering a message over a voice service, set up by the phone company, would be treated like taking out an ad in the local paper or buying commercial time on a local radio station. The company makes space or time available to other commercial advertisers in the area. You come in and you ask their rate. They give you their rate card and you put your cash on the counter and they say, "Just a minute. Let�s look at what kind of message you�re going to be putting out." They look at your message and they say, "Oh no, you�re not going to put that message out there."
MM: Are you suggesting that this might extend into the private conversation that two individuals might have over the phone?
Johnson: I don�t see why not.
MM: What sort of censorship would you imagine taking place in that context?
Johnson: Well I think it could be any possible censorship.
Remember the song called "Cop Killer" that the singer Ice T put out? There was Time-Warner with multiple industries in which it is dominant, one of which is music; within that are a number of recording companies; within that is one company for which Ice T records; within that are a number of CDs the recording company has put out; within that is the one CD that has this particular song; and on that CD is this song. So we�re way down the organizational chart. And here�s one little song with some lyrics in it that get people upset enough that the likes of Charleton Heston shows up at the shareholders meeting for Time-Warner, police departments all across the country are complaining - as well as the ACLU - and all hell breaks loose.
That�s the kind of thing the phone companies are going to be up against when they start making decisions about what can be said and what can�t be said.
They don�t have the problem so long as they take the position that they are not in the information business - that if you have a beef about something that somebody said to you over the telephone, or some faxes that are coming to you, or whatever, it�s up to you to pursue the sender, in courts or the legislature. In other words, the phone companies don�t have the problem so long as their position is that they are content neutral, that they just provide the conduit, charging the people that provide the information.
I�m saying I think that would be in the shareholders� best interests as well as in the best public interest, the consumers� best interest and the artists� best interest. It would be in the shareholders� best interest because it gets them out of those kind of very debilitating and profit-sucking conflicts that Warner Bros. got into with Ice T.
Once they say, "We warrant, Mr. and Mrs. America, that whatever comes to you over a line that we control is fit for your family and your home," then if somebody calls me up on the phone and offers to give me a special rate on a subscription to Playboy Magazine, and I think Playboy Magazine is a publication of the devil, I�m going to go back to the phone company and complain about it.
Once they say that, I think ultimately the phone companies are going to be responsible for the content of the voice communication that people get. If you are defamed, if somebody says something that causes you emotional harm and suffering, you might very well want to join the phone company as a co-defendant in a lawsuit because they�ve taken responsibility for the content flowing over the lines, and you were harmed, or believed yourself to have been, by something that came to you over a telephone line.
MM: To avoid that problem, do you favor keeping the telephone companies out of the cable market altogether?
Johnson: My enthusiasm runs both for and against once you understand what I�m talking about. And the enthusiasm is equal.
I am enthusiastically in favor of the telephone companies making a conduit available that can handle broad-band communications like television and movies. I think that�s terrific. That is, the conduit, but not the content.
I am equally emotionally adamant in my opposition to the notion of the phone companies owning any of the content flowing through that conduit.
So when you ask if I am opposed to the telephone companies providing cable service, Not only am I not opposed, I�m very enthusiastic about an alternative service similar to what we now call cable television, coming to me over conduits owned and operated by what we now call the telephone company. But what I don�t want is for the telephone company that is bringing that conduit into my home to also own the programming content, or to own what we today would call a cable company, which packages that programming content into an entertainment service.
MM: Is the sort of thing you are describing the explanation for why Paramount and Warner Bros. started up new networks? So that they could control both content and carrying capacity?
Johnson: I think so. Right now everybody wants a piece of everything. The phone companies want part of Hollywood. Cable television wants to be able to get into the telephone voice and data business. Microsoft wants to get into the communications networks and banking business. Everybody wants to get into everybody else�s business.
MM: What is the position of the FCC on this content-conduit issue, and what would you like to see the Commission do about it?
Johnson: I don�t know whether they are foolish or naive, but when you say that we don�t need regulation anymore because we have all these alternative sources of supply, then you totally fail to take into account the need for separation of content and conduit.
If you�re going to permit the conduit owner and operator to also own some of the content flowing over that conduit, then you�ve created an economic conflict of interest for that operator who may gain by keeping competitors� material off, or in some other way disadvantaging the competitor.
Yet that�s what the FCC seems prepared to do. They say, "Well gee, we�re going to have this direct satellite home service and cable, and the telephone companies are going to provide similar services, and so we�re going to have all this competition."
But that is not necessarily so. Just as with radio stations, if you listen up and down the dial throughout most of the geographic area of the United States, you find very little diversity. Why is that? Because radio stations tend to be operated by members of the Republican Party and the local Rotary Club, who are operating them as a business for which revenue is generated through the sale of advertising, and for which they want to purchase programming at the cheapest possible rate.
To get genuine diversity, you need to add to those commercial outlets some alternative services that are funded and operated in different ways, like Pacifica, or National Public Radio, or community radio stations.
In the same way, when we have all these multinational conglomerates operating television services, that does not mean that we are going to get diversity in terms of program formats and ideas.
MM: Especially in radio, but in television too, what is the concentration of corporate media power going to mean for local-content-oriented programming?
Johnson: In the early days of radio, in the radio conferences in the 1920s and then subsequently in the 1927 Radio Act, which became the Communications Act in 1934, there was tremendous emphasis on localism. There was a limitation on how many stations any one person could own. There was a limitation on how much power any given station could have. There were concerns about the power of networks. There were demands that local stations provide local service, local news, and so forth.
Now we just kind of blithely accept the notion of these new little 18-inch satellite receiving dishes for television programming that is beamed down over the entire nation, which is obviously the 180 degree antithesis of the original congressional conception.
As one member of Congress said at the time, "If we should ever allow such a potentially powerful medium to fall into the hands of the few, then woe be to those who would dare to disagree with them." Of course that is exactly what we are now doing: letting the power fall into fewer and fewer hands, and it is equally true today that "woe be to those who would dare to disagree with them."
One of many consequences of this concentration of power is the loss of localism, because, while it is true that you can get a cable channel via cable television, you can get that programming from a direct broadcast satellite, too. However, there is no way you can get your local over-the-air conventional broadcast television stations, or the locally- originated community access cable channels, from a nationally distributed service.
We see that with the radio stations that are simply picking up a music service off of a satellite and rebroadcasting it with conventional radio transmitter technology out to their listeners. We see it with these direct satellite-to-home services, and we see it with the nationally distributed cable services, and the network services that go out to the local conventional radio and television station.
The result is that we are not getting a local service. The nationally-distributed media are not dealing with local issues. Folks who say, "Think globally, act locally," are going to have a tough time either thinking or acting locally if they don�t have the foggiest notion of what�s going on in their own community, and they are not going to get it by watching nationally-distributed news and information and entertainment services.
MM: So you believe that something is being lost?
Johnson: Absolutely. Even if you buy into the Newt Gingrich view of the world that we should dismantle the federal government, and turn government functions back to the states and communities - a vision which I do not share - you have to accept the notion that we simply must have viable, strong, vibrant, thorough, fair, investigative, local media. If we�re not going to have federal regulation and federal control, then we need to have more active local participation and involvement, and that requires that people be informed, and that requires that their local media inform them, and that those local media have a capacity for finding out what�s going on in the local community.
by Pratap Chatterjee
Buy a stack of securities from the Union Bank of Switzerland (UBS) in Geneva and your purchase will be registered instantly by a computer program designed in the southern Indian city of Madras and delivered to UBS and other banks by satellite.
If you leave UBS and take the Monday afternoon SWISSAIR flight from Geneva to Jeddah, Saudi Arabia, chances are that your airline payment transactions and those of fellow travelers will be processed by a software system customized in Bombay, India�s financial capital.
If you call home from Jeddah, you will be patched through newly installed AT& T telephone lines by a computer system that was designed in India by Roltas India, a diversified refrigerator manufacturer.
"German auto manufacturers operate factories in the United States, American toy makers rely on Chinese workers and most of the VCRs in our homes come from Japan. So why not develop our software in India?" asks Kurt Johnson, analyst at the International Data Corporation in Framingham, Massachusetts, author of a World Bank study, "Software Integration Services: The Risks and Rewards of Offshore Software Development."
"Body shopping"
Designing software - programs that instruct a computer how to perform tasks such as word processing, number crunching, communications and business transactions - requires three resources: highly trained personnel, computer equipment (or "hardware") and a means to deliver the product to clients. The equipment costs a few thousand dollars and can be set up in a matter of minutes anywhere in the world. A continuous power supply and a dependable telephone line to transmit data to clients are also critical software-production assets. These services can be hard to obtain in India, but have been made available recently to those willing to pay a premium price. Finally, trained personnel are abundant in India . Training institutes such as the National Institute for Information Technology (NIIT) are matriculating more than 100,000 computer programmers each year.
Indian programmers rarely create major cutting-edge commercial software packages. Their typical roles in the global economy include customizing commercially available programs to a particular customer�s needs and updating or debugging smaller commercial packages. But while good software engineers can earn $100,000 a year in California, their best and brightest counterparts in India earn $10,000. Less-qualified programmers in India are put to work on the monotonous routine of keying in largely repetitive computer code. In some large programming projects, this code can run millions of lines long, coding that would take a single full-time programmer 100 years to enter.
The origins of India�s entry into the information technology race date back to the early 1980s. At that time, a generation of computer professionals that had trained at India�s world-class engineering universities traveled abroad in search of jobs because there were few computers, let alone jobs, for professionals with their talent in India. A prominent example was Sun Microsystems co-founder Vinod Khosla, who realized his dream of setting up an international computer company and retiring by age 30. Today, Sun, which he helped create in 1982, is a $5.5 billion company with 13,000 employees.
Around that time, the computer industry made its transition from huge, prohibitively expensive "mainframes" to more affordable computer workstations and personal computers. Meanwhile, the Indian government slashed tariffs on computer imports in 1984 to promote the industry. Khosla�s would-be followers started to bring personal computers to India. They quickly realized that Khosla�s success could not be duplicated easily but that there were other ways to make money in the computer industry. One of these is to take advantage of the low cost of Indian programmers both in India and by sending them to the United States on work permits, a practice Indian programmers call "body shopping."
Just as General Motors moved some of its automobile factories from Michigan to Mexico in recent years to reduce labor costs, companies like Hewlett-Packard , AT& T , Xerox and IBM are looking to India for cheap programmers. Just as the move to Mexico by Detroit�s Big Three automobile manufacturers threw thousands of their U.S. employees out of work, U.S. software engineers are being forced off the information superhighway as it detours through India.
Today, some 275 Indian companies export software. The biggest software exporter in 1994 was the Bombay-based TCS group, which earned $67.3 million, followed by the joint venture Tata Unisys , another Bombay company, which grossed $25 million in 1994. According to Johnson�s World Bank study, just 1 percent of the $32.3 billion worth of annual computer programming sales are made in India. But India�s share of the industry�s sales has been expanding by more than 50 percent a year for the last three years.
Silicon Valley goes to Bombay
Palo Alto, California-based Hewlett-Packard already owns a company in Naida, India, called HCL, the biggest computer company in the country. While it is primarily involved in selling computer hardware and peripherals, more than 11 percent of its $118 million in annual sales are derived from software exports to industrialized countries. HCL now runs a distant third among Indian software exporters, but may be looking to expand. Hewlett- Packard announced plans in December 1994 to invest $24 million to expand its Indian programming staff from 140 to 2,000 by the year 2000. The investment amounts to just 0.1 percent of the company�s $25 billion global annual revenue.
"The skill levels and ability of Indian professionals to bring timely solutions was unique on a global basis," says Mike Leavell, the general manager of Hewlett-Packard�s Solutions Integration Group, explaining the company�s expansion in India.
Other companies, such as IBM, prefer to contract work out to Indian programmers rather than open their own plants on unfamiliar soil. Some of IBM�s work is done by a company called Tata Consultancy Services (TCS) of Bombay, India�s largest software exporter. Tata employed 4,500 people to churn out $67.3 million worth of software in 1994. About 350 of these employees work as contractors for U.S. clients.
The U.S. market accounts for 60 percent of all Indian software sales. Until two years ago, most of this exported software was produced on U.S. soil by employees of India-based companies or their foreign affiliates. Until recently, recurring problems in exporting software over Indian telephone lines prevented more work from being done in India.
Bringing Bombay to Silicon Valley
Employing Indian programmers in the United States has diminished recently, after the U.S. Department of Labor discovered that the Indian companies were exploiting immigrant programmers by paying them $15,000 a year plus housing and travel, a bargain compared to the $70,000 plus benefits that their average U.S. counterparts receive. The practice, however, violates U.S. laws. Companies seeking to hire foreign programmers in the United States must certify that the foreigner will perform a job that no U.S. citizen can do. They also are required to pay the foreigner the prevailing market-rate salary for a particular occupation. Many companies report the market-rate salary to the Labor Department but pay the foreign workers substantially less.
Take Rajesh Ahuja (not his real name), a computer programmer from Bombay, India, who was hired by HCL and sent to its offices in Palo Alto, California, on a B1/B2 visa in 1990. This visa is intended for foreign consultants to work in the United States for relatively short stints. Ahuja worked anywhere HCL sent him, at whatever company he was subcontracted to, and was required to work overtime without extra pay at HCL�s behest. Ahuja says he did not like the body shopping exploitation, but that it afforded him a unique opportunity.
When asked why he endured the exploitation, Ahuja explains, "All my life I have dreamed about coming to the United States and being able to go to New York and Disneyland, and listen to bands like the Rolling Stones. I get to do this for two years and my flight is even paid for."
"I shared a two-bedroom apartment and a car with three other programmers, and got $40 a day for expenses. This is enough for me and plus I get my Indian salary of about $800 a month paid into my bank account in India, which is all savings," Ahuja told Multinational Monitor.
Ahuja spent most of his stay in the United States working for Mountain View, California-based Sun Microsystems. For Ahuja�s services, Sun paid HCL $50 an hour, about half of which remained with HCL. Once Ahuja completed his assignment at Sun, he returned home for what he intended to be a brief visit. In India, however, Ahuja learned that HCL had not bothered to renew his visa, and he could not return to the United States.
"That�s typical of them. When I lived in California, one person would be in charge of all the paperwork, transportation and living arrangement for 160 of us who lived in an apartment complex they rented for us," he said.
Recently, stories of more blatant abuse have emerged. Kala Sivasubramanian, for example, is an Indian programmer who was brought to San Francisco by TCS. When Sivasubramanian tried to leave TCS for another company, the company sued to enforce her contract, which called for her to pay more than $30,000 to the company if she quit.
D.S. Fastri, the lawyer who represents TCS, says it has sued 16 former employees successfully. "I cannot tell you whether we received any compensation because the courts have ordered us not to release any information about the cases," he said. "The judgment in the Sivasubramaniam case was in our favor but there are still matters that have to be settled."
The boom in visiting Indian programmers has served U.S. companies well. Maynard, Massachusetts-based Digital Equipment Corporation (DEC) has cut over 20,000 jobs in its U.S. offices since late 1991, during the same time that it sought permission to bring in thousands of Indian programmers.
Backlash
The Texas-based Software Professionals� Political Action Committee (Softpac) estimates that between 1990 and 1993, 50,000 temporary computer workers entered the United States and 100,000 computer professionals immigrated to the country. During the same period, the number of unemployed computer professionals doubled to 104,000.
"They compete unfairly with their low wages," Doug Pfenninger, a Los Angeles programmer with 27 years experience, told the Los Angeles Times after losing several jobs to immigrant workers.
Pfenninger, who has worked for such leading aerospace companies as Rockwell International, Northrop and Lockheed, lost a job with Hughes Aircraft during a wave of cutbacks in 1992. After losing his house, he took a contract job on a project for Hitachi America in Northern California. After three months, he lost that job to a lower-paid foreign programmer.
Also bitter was Lou Citarella of Livingston, New Jersey, after he lost his $52,000 job at the American International Group (AIG) to an immigrant who he had trained. AIG�s immigrants were brought to the country by Syntel , a Bombay-based software company that specializes in bringing computer workers from India. Most of the company�s contracts are signed through its U.S. office in Troy, Michigan. Its 300 employees work for such clients as AT& T, Xerox, Safeway and AIG . Syntel�s 1994 revenues were $1.3 million, a 268 percent increase over the previous year.
The immigration of programmers set off a storm of protest in California from unemployed programmers as well as from anti-immigration groups like Californians for Population Stabilization, which sued HCL in 1993 for underpaying its programmers. As a result of the lawsuit, Hewlett-Packard agreed to cut some of its "body shopping" and requires its contractors to provide proof of pay.
The U.S. government imposed visa restrictions in 1994 on foreign programmers, causing the percentage of "on-site" programming sales conducted in U.S. offices to drop to 63 percent from 1993 to 1994. During this period, the number of programmers allowed into the United States dropped from 2,000 to 1,092.
The Department of Labor investigated alleged abuses of foreign workers and issued fines in eight cases in 1993. This year, the Labor Department fined Syntel, the company that helped put Citarella out of work, $117,000 for underpaying 40 Indian programmers. The company has been suspended from bringing in new programmers for a year. Syntel, which was bringing in programmers from its three-year-old Bombay subsidiary, was placed under observation when complaints were received about its "willful underpayment" of AIG contract workers.
In February 1995, the Department of Labor announced new rules under which employers will be required to certify that they pay their foreign employees the prevailing wage rate, that their plants have no strikes or lockouts and that they are not endangering U.S. jobs. The agency also pledged to investigate suspected abuses without awaiting formal complaints. But how effective these rules will be remains to be seen. Larry Richards, executive director of Softpac, says he filed an application last December to hire foreign programmers at $5 an hour, a rate far below the prevailing wage. His application was approved in just six days.
International outsourcing
Even as the Labor Department has taken some steps to clamp down on abuses of foreign programmers in the United States, the demand for such workers on U.S. soil appears to be diminishing as constraints on performing such work in India are overcome. The Indian government has authorized the installation of new high-speed telephone lines that allow programming to be done in India and sent to overseas customers. This infrastructure improvement - an 18-fold increase in the number of dedicated high-speed telephone lines since just three years ago - allows data to be transmitted to the United States at 64 kilobytes per second, the equivalent of 5 million words an hour.
The first "body shoppers" arrived in Silicon Valley in 1987 and soon business was booming. "In 1984, the government still believed in self-reliance, indigenisation and protection of the domestic [computer] industry," Murli Menon, editor of India�s C& C magazine, wrote in his 1994 round-up of the industry. "Today, in 1994, self-reliance and indigenisation have given way to phrases such as �free market� and �economic liberalisation� ... and India has made its first step towards becoming an international player in the infotech business."
Although India�s gain is a loss for U.S. programmers and foreign workers still face hurdles in crossing international boundaries, programming work itself faces no such barriers if sub-contractors can provide clients and consumers with quality products at rock-bottom prices.
by Russel Mokhiber
With the corporate crime lobby consolidating control over the law-making process in Washington, D.C. and around the country, it is important to ask fundamental questions about the damage inflicted by corporate crime and why society�s leading liberal and conservative opinion shapers continue to run interference for the nation�s most egregious wrongdoers.
Controlling corporate crime is a critically important task for society to tackle, since corporations are its most powerful institutions. Corporate crime and violence, by any definition, is a serious problem in the United States. Exactly how serious a problem only the criminals and their lobbyists and lawyers know for sure. The Federal Bureau of Investigation (FBI) issues each year a "Crime in the United States" report that documents murder, robbery, assault, burglary and other street crimes. But the report ignores corporate and white-collar crimes such as pollution, procurement fraud, financial fraud, public corruption and occupational homicide. No annual "Corporate Crime in the United States" report is compiled.
There is a vigorous public debate on crime in the United States. A multi- million dollar crime bill was recently passed into law. Yet corporate crime and violence did not enter that debate, nor was it addressed in the law. Attorney General Janet Reno says violent crime is her priority. But she does not consider corporate crime violent crime. The corporate crime lobby and its myriad mouthpieces take advantage of this lack of scrutiny or hard data to portray perpetrators of crime predominantly as minorities and the poor, a view often parroted in the media.
"Crime is generally an occupation of the poor," wrote Washington Post columnist Charles Krauthammer on December 23, 1994. This must have come as a surprise to white-collar and corporate crime lawyers. They know better than most that poverty has little to do with the crime that inflicts the most damage on society. White-collar fraud, generally committed by intelligent people of means - such as doctors, lawyers, accountants and businesspeople - alone costs $200 billion a year. The savings and loan scandal that former Attorney General Dick Thornburgh called "the biggest white-collar swindle in history," cost the nation between $300 billion and $500 billion. In contrast, the FBI estimates that street robbery and burglary combined cost $4.3 billion a year.
Krauthammer also believes that there is a "rarity" of violent crime among the rich. If true, it is only because much of the violence of the wealthy and powerful either has not been criminalized or, if criminalized, is rarely prosecuted. The federal auto safety law, for example, carries no criminal sanctions. For years, auto safety advocates have sought to add criminal sanctions to the law, but the auto lobby has blocked their passage.
There is certainly no "rarity� of violence among wealthy and powerful corporations. The handful of the world�s corporate criminologists who have studied this issue agree that corporate violence kills and injures far more people than all street violence combined.
For example, while the FBI pegs the murder rate in the United States at about 24,000 a year, the National Institute of Occupational Safety and Health estimates that occupational diseases alone kill 50,000 U.S. workers a year. In addition, 10,000 U.S. workers die on the job every year.
As a rule, these cases are not criminally prosecuted. In a recent exception, Los Angeles district attorneys charged Chicago-based salt maker Morton International in May 1995 with involuntary manslaughter in connection with the death of a worker, Jorge Torres. Torres, 25, a plant employee, died on May 9, 1994, while cleaning a large salt bin. L.A. District Attorney officials say Torres was crushed and suffocated in a cave-in during the cleaning procedures. The bin held 50 to 60 tons of salt.
Hundreds of thousands have died from asbestos-induced disease, black lung disease (which afflicts coal miners), brown lung disease (afflicting textile workers), auto defects and hazardous pharmaceuticals. The Dalkon Shield IUD injured thousands of women who used it. In 1984, 2,000 to 5,000 people were killed and 200,000 were injured - 30,000 to 40,000 of them seriously - after a Union Carbide affiliate�s factory in Bhopal, India belched a deadly gas over the town.
Krauthammer argues that people fear street crime more than they fear white-collar crime. One reason for this might be that people are constantly barraged with news about street crime. When was the last time the myriad television crime shows ran a story on corporate crime and violence? Blanket O.J. Simpson-trial-style television coverage of tobacco-induced disease, which claims the lives of more than 1,000 U.S. citizens every day, would justifiably increase parents� fear of the tobacco companies� efforts to induce children to begin smoking. And blanket television coverage of industrial pollution would justifiably increase people�s fear of corporate-induced cancer.
"Who, after all, inspires more fear?" Krauthammer asks. "The guy ahead of you, the one you are trying to catch up with? Or the guy behind you, the one who wants what�s yours?" To me, this question translates as follows: "Who inspires more fear? The industrial corporations that dominate and pollute cities like Niagara Falls, New York, where I was born and grew up as a young child? Or the street criminals of Washington, D.C., where I have lived for the past 20 years?" The answer: the industrial corporations that dominate and pollute cities like Niagara Falls.
I have lived in Washington, D.C. for 20 years without being subjected to a street crime. The industrial corporations back home in Niagara Falls, on the other hand, have taken a toll. After my father died at a relatively young 52, my mother decided to uproot her young family and leave the city, in no small part because of the industrial violence inflicted on the city�s residents by polluting corporations. While we were in Niagara Falls, two of my first cousins, who were brother and sister, died at the age of five and six from leukemia. Since we left, one cousin died from Hodgkin�s disease at the age of 31. Another cousin died from a rare form of brain cancer at the age of 35.
I know that it is difficult to prove that corporate violence killed members of my family. Maybe it�s a bad gene pool. On the other hand, I also know from reading the work of public health physicians such as Philip Landrigan, chair of the Department of Community Medicine at the Mount Sinai School of Medicine in New York, that toxic chemicals in the environment are important, widespread, proven causes of human disease. "Each year, preventable exposure to chemical toxins sicken and kill thousands of persons of all ages in the United States and around the world," according to Dr. Landrigan.
Cancer is on the increase in the United States. Breast cancer kills 50,000 women in the United States every year. Bella Abzug and Greenpeace recently released a study linking toxic pollution to breast cancer. The report found that women with the highest concentrations of chlorine-based pesticides and other chemicals in their blood and fat have been found to have breast cancer risks four to 10 times higher than women with lower concentrations. A bill was recently introduced in Congress to phase out chlorine use in the pulp- and paper-making industries in five years. But the bill has little chance in the Corporate Congress.
Leaders of the Congress openly defend the corporate criminals to which they are firmly attached. Earlier this year, Speaker of the House of Representatives Newt Gingrich, R-Georgia, bristled visibly when he was asked about his association with Southwire Company and why he had not severed his ties to the Richards family which controls the company and which has dumped more than $100,000 into Gingrich�s various campaigns and projects.
The company had been convicted of environmental crimes in South Carolina. In 1992, the company pled guilty to a "knowing failure to report the distribution of hazardous waste" from filters that extract lead and cadmium from copper smelter emissions. This toxic waste was mixed with fertilizer and illegally sold as "fertilizer" to unsuspecting farmers in Bangladesh, who spread it on their crops by hand. "I hardly think that having been convicted of a violation turns one into a criminal company," Gingrich said.
No Law, No Crime
Corporate wrongdoers sometimes avoid criminal prosecution, and the resulting adverse publicity, by successfully working to defeat or weaken legislation that would criminalize their behavior.
Every major federal effort to clamp down on corporate wrongdoing - be it pollution, price-fixing, bribing public officials, occupational death and disease, financial fraud or consumer product hazards - has been fought tooth and nail by corporate wrongdoers seeking to limit their liability.
Until recently, corporations would fight these battles through trade groups such as the Beer Institute, the National Coal Association, the Chamber of Commerce and the American Petroleum Institute. At least then, citizens would know who they were dealing with. Increasingly, corporations are setting up front groups - groups that sound like public interest groups but are established to defend business interests. Examples of such groups include the National Wetlands Coalition, a group supported by oil companies and real estate developers seeking to defeat wetlands protection legislation, and the Coalition for Vehicle Choice, a group funded by auto companies to combat fuel-economy legislation.
Criminal law teaches right from wrong
For centuries, street crimes such as murder, robbery and burglary have been considered "real crimes." Legal scholars have argued that criminal law would be devalued if it were used to penalize behavior not historically thought of as criminal in nature. But the public also learns what is immoral or shameful from what is branded as criminal. It is a legitimate social function to define socially intolerable conduct and teach the difference between right and wrong by bringing criminal cases against corporations and their executives for egregious conduct that injures, kills and steals.
Criminal sanctions are currently inadequate in deterring corporate wrongdoing. The first comprehensive study of antitrust criminal penalties published in 1994 found that the average fine imposed on antitrust criminal price-fixing cases from 1955 to 1993 amounted to only a minuscule percentage of the optimal penalty. The authors said that optimal deterrence was achieved when the expected costs of the antitrust offense to the potential offender equals the external costs of the offense to society.
The authors looked at 250 price-fixing cases and found that the average fine amounted to four-one hundredths of one percent of the optimal penalty. They concluded that "there is very little deterrence resulting from these criminal prosecutions."
Three Strikes double standard
Three Strikes and You�re Out" is the get-tough-on-street-crime philosophy that is sweeping the United States. But it is not being applied to corporate crooks. Though corporations steal millions of dollars, they are rarely convicted of criminal theft. Instead, they are often caught by company whistleblowers and charged by federal or state officials under the civil law.
In 1994, a group of the nation�s largest defense contractors worked the halls of Congress in an effort to weaken the nation�s toughest anti- white-collar crime law, the federal False Claims Act. A Washington, D.C.-based public interest group, The Project on Government Oversight, studied the histories of these companies and found that they had been engaged in adjudicated fraudulent activities, some of them criminal, many of them having been convicted three or more times. The study found that since 1990, 20 of the largest defense contractors, those same companies who wanted to weaken the False Claims Act, paid the government over $500 million in penalties and settlements for corporate wrongdoing.
The study found that General Electric engaged in fraudulent activities 16 times since 1990. Under the criteria of "Three Strikes and You�re Out," GE should be disqualified from bidding on government contracts.
A three strikes and you�re out rule for corporations engaged in wrongdoing would also disqualify Boeing (4), Grumman (5), Honeywell (3), Hughes Aircraft (9), Martin Marietta (5), McDonnell Douglas (4), Northrop (4), Raytheon (4), Rockwell (4), Teledyne (5), Texas Instruments (3) and United Technologies (3).
Shame and the Good Society
Much of the path-breaking scholarship on legal intervention and corporate responsibility has been conducted by Australian corporate criminologists John Braithwaite and Brent Fisse. Braithwaite argues that the fundamental problem in societies with rampant white collar crime is the "absence of effective processes of societal shaming."
"If we are serious about controlling corporate crime, the first priority should be to create a culture in which corporate crime is not tolerated," Braithwaite and Brent Fisse argue in their classic study, The Impact of Publicity on Corporate Offenders. "The informal processes of shaming unwanted conduct and praising exemplary behavior need to be emphasized."
The first step in shaming corporate criminals is to identify them. That means opinion leaders like Krauthammer will have to turn off the O.J. trial, readjust their moral compasses, and come to grips with the crimes of the powerful institutions that control society.
Losing Ground
By Mark Dowie
Cambridge, MA: The MIT Press
317 pages, $25.00
Reviewed by Ned Daly
More than 80 percent of U.S. citizens polled describe themselves as environmentalists. With such a broad potential base, why is the national environmental movement "courting irrelevance"? This question is at the heart of Losing Ground, Mark Dowie�s critique of the U.S. environmental movement.
The answer, which Dowie lays out in detail, is a national movement that is out of touch, too willing to compromise, and much too close to the industries and legislators they are trying to influence. Dowie, who broke the stories on the Dalkon Shield and the Ford Pinto in the mid-1970s, uses his investigative skills to ferret out so many stories of capitulation, compromise and double-dealing that it seems there is little hope for environmentalism in the United States. Fortunately, Dowie does see some hope within the movement, all of which comes from grassroots activists like Lois Gibbs, Tim Hermach, Andy Mahler and others who he describes as the "fourth wave" of the environmental movement.
While the national groups or "environmental corporations," try to make careers out of saving the planet, fourth wave activists have been thrust into the movement by experiencing the destruction first hand. Like Lois Gibbs, a mother from Love Canal, New York, who inspired millions with her crusade against toxics, the fourth wave germinates within communities facing environmental degradation, rather than the divine intervention model which the national groups often try. The fourth wave does not crave power, access or money, only the protection of their communities.
Losing Ground serves as a case study of the two U.S. environmental movements that exist today: the "nationals" controlled by the old establishment of the environmental movement, including Sierra Club, National Wildlife Federation, Environmental Defense Fund; and the grassroots which includes thousands of small groups fighting specific problems, usually on the local level.
Of the nationals, Dowie paints a picture similar to that of many "relic" species that these groups are trying to save. Like the Florida panther and the mountain gorilla, the national groups are dangerously close to losing the ability to sustain themselves. Unlike these species though, the nationals have brought this fate upon themselves.
Michael Fisher, a past director of the Sierra Club, spells out the problem in an interview with Dowie when he proclaims, "Sierra Club national leaders know that they can�t just walk into Congress and say no more clearcutting. So we are stuck with the incremental approach, which we hope will lead to slow progress in the halls of power. The problem is the incremental approach lacks the ability to stir people�s souls, to get them angry and fulfilled." A reliance on the incremental or capitulation approach and the inability to stir up the masses creates a dependence on legislators for action. This makes the legislators so crucial to "success" that they are above reproach.
Even legislators who fail environmental ratings like the League of Conservation Voters scorecard are able to receive endorsements and PAC money from the nationals if they are marginally better than the next guy. The support of the national environmental movement makes it easier for legislators to fight stronger grassroots initiatives that they oppose. The capitulation of the nationals makes the grassroots seem extreme, so proposals based in science or local sentiment, rather than beltway politics, are written off as "politically unrealistic."
What is most unbelievable is that despite what the Sierra Club leadership knows, a bill that would ban clearcutting in all national forests was perhaps the most widely- supported piece of forest management legislation in the last Congress. The bill has been pushed by Save America�s Forests, a grassroots coalition based on the model of Dowie�s fourth wave. What Save America�s Forests lacks in insider connections they make up in activism, the formula Dowie believes will eventually save environmentalism.
The nationals have also compromised their effectiveness by soliciting corporate funding. A particularly egregious example of putting corporate interests above environmental interests is an infamous meeting in which Jay Hair, president of the National Wildlife Federation (NWF), joined Dean Buntrock, chief executive officer of Waste Management Corporation (now WMX Corp.) and U.S. Environmental Protection Agency (EPA) Director William Reilly for a breakfast meeting. Buntrock, an NWF board member, was having problems in South Carolina, where state standards were higher than federal standards and difficult for the waste management industry to meet. Buntrock was also seeking approval for a toxic waste incinerator in New Jersey. Reilly agreed to change EPA policy to fix the South Carolina problem and approve the New Jersey facility. Despite his presence at the meeting where this was decided, Hair opposed the new EPA policy, but later admitted after a congressional inquiry that his involvement in the meeting had been "injudicious." Worst of all, none of the local citizens or grassroots groups working on these issues were invited to the meeting.
Though this may be one of the most blatant examples of subversion of environmental standards it is not the most damaging. The nationals have changed their agenda in order to make it easier to work with corporations they should be fighting against. Dowie calls the nationals� move toward market incentives, "a convenient, all encompassing, label for every possible concession to free enterprise." In their attempt to work with corporations, the nationals have ignored the voice of the grassroots and their ability to win. The victims of this strategy are people like Lois Gibbs, president of the Citizens Clearinghouse on Hazardous Waste, and those Gibbs represents, mostly community members affected by hazardous waste.
In some cases, the nationals went international with their undermining strategies. In 1991, the National Resources Defense Council (NRDC) gave its blessing to DuPont- owned Conoco oil to drill on the Huaorani indigenous reserve in Ecuador in exchange for a $10 million donation to an Ecuadorian foundation set up by NRDC and Cultural Survival. "NRDC has jeopardized two years of work by the Ecuadorian environmental and indigenous communities to fend off Conoco�s oil development plans," said a statement by a coalition of environmental and civil rights organizations in Ecuador. "In pursuit of their goals NRDC misrepresented the views of Ecuadorian environmental organizations [and] intentionally deceived Ecuador�s indigenous people about their true aims and extent of their dealings with Conoco."
Dowie opens the book with a quote from John Berger, "The world has left the Earth behind it." This also seems to be Dowie�s view of national environmental groups.
Toward the end of the book, Dowie devotes too few pages to the burgeoning environmental fourth wave. Dowie hopes that this fourth wave will transform environmentalism into a social movement rather than a political movement. This makes sense after reading seven chapters describing failed legislative and litigation strategies advanced by national groups.
It is diversity and commitment to environmental justice issues that will allow the fourth wave to make this transformation, Dowie contends. Among its other shortcomings, the national movement is too white, too male and employs too many lawyers and MBAs making it unable to relate to middle America and those most effected by toxins and unsustainable extractive industries. But grassroots leaders like Lois Gibbs, who did not plan on becoming a career environmentalist until the children in her Love Canal, New York community began to get sick from toxic waste, do relate to middle America. Gibbs is making people part of their own community rather than part of an organization outside of their community.
Unfortunately for the reader interested in the on-the-ground efforts and successes of the fourth wave, Dowie spends much of this chapter on some of the new philosophies of the fourth wave. The synopses are interesting, but with so little ink afforded the fourth wave, some readers may have a difficult time jumping from Lois Gibbs� straightforward approach to feminist ecology, bioregionalism or spiritual ecology.
Dowie�s tight writing style allows him to pack a huge amount of information into 250 pages, but there are some parts of the story that have been left out. Foundations and Congress are discussed in the book, but it is usually in reference to the nationals� inability to succeed. Both Congress and foundations bear some responsibility for the failure of the environmental movement, but Dowie seems to place all the blame on the Big Ten national groups.
Also absent is any discussion of the seemingly unsolvable and universal problem of fracturing and mistrust as a movement gains power. This is important because Dowie lays blame on the nationals for something few other movements have overcome. What really split the environmental movement, like so many other movements before it, was fragmentation and distrust among environmentalists.
Those "out in the field," as the grassroots are often described, are seen by the nationals as incompetent and unable to use the movement�s new-found power. The nationals, working inside the Beltway, are often described as "sellouts" who are doing the bidding of politicians. Similarly, Malcolm X described a conflict between "the House nigger and the field nigger," where the workers in the field were afraid of being "sold up the river" by those in the house who were trying to impress their master. Malcolm�s analogy is fitting not only for the environmental movement, but also the labor, women�s, gay rights and many other movements. If this is problematic in so many social and political movements, should the blame lay squarely on the nationals or is it a larger problem which society needs to wrestle with? Perhaps Dowie can enlighten us on this question in the future.
The GAO concluded that 25,138 foreign-based multinational firms operating in the U.S. paid no income tax despite sales of $359 billion and more than $680 billion in assets in 1991, the most recent year for which figures are available. Nearly half of the largest firms with assets of $100 million or more paid no U.S. income tax. The number of firms that size which pay no U.S. income tax doubled in the last four years measured by the GAO to 715 firms.
U.S.-based multinational firms are also avoiding U.S. taxes, the GAO report concluded. More than 1.2 million U.S.-based multinational firms - 62 percent of U.S.- based multinationals - paid no U.S. income tax, despite sales of $1.5 trillion and $3.2 trillion in assets.
"The problem of massive tax avoidance is growing rapidly worse," says Senator Byron Dorgan, D-North Dakota, "Tax avoidance on this scale is an outrage."
Dorgan says corporations use a scheme called "transfer pricing" to avoid U.S. taxes. Under the scheme, companies transfer profits out of the country through "creative accounting" practices. Foreign-based operations paid their U.S.-based affiliates artificially low prices for goods and services produced in the United States and sold their own foreign-produced goods and services to U.S. affiliates at artificially high prices. With transfer pricing, some firms claim their U.S. affiliates "purchased safety pins for $29 each, toothbrushes for $18 each and sold pianos for $50 each and tractor tires for $7.69 each," Dorgan says.
Dorgan called on the Internal Revenue Service to "scrap its outdated international tax enforcement tools" which allow the companies to avoid paying U.S. taxes through transfer pricing. He also called on the Senate Finance Committee and the House Ways and Means Committee to hold hearings aimed at beefing up tax enforcement multinational corporations.
"Time after time, the same companies that tell Congress, the investment community and the public that product liability is ruining them, report in their filings with the [Securities and Exchange Commission (SEC)] that their liability exposures pose no material threat to the bottom line," Nader wrote.
Nader identified executives of a number of corporations who have publicly protested the prohibitive cost of product liability even though the financial reports that their companies file tell a completely different story.
For example, Nader quoted David S. J. Brown, Monsanto vice-president for government affairs and chair of the Product Liability Coordinating Committee. "Out-of-control product liability litigation clogs our courts, curtails American innovation and creativity, drives up the costs of consumer products, and prevents some valuable products and services from ever coming to market," Brown said in a news release. The numbers are "in the stratosphere," added Monsanto�s CEO Richard J. Mahoney, referring to jury awards in product liability cases.
But if Monsanto�s product liability costs are in the stratosphere, its profits are somewhere much further out in orbit. According to Monsanto�s 10-K report for the period ending December 31, 1993, "while the results of litigation cannot be predicted with certainty, Monsanto does not believe these matters or their ultimate disposition will have a material adverse effect on Monsanto�s financial position."
Nader took similar contrasting statements from officials of several other companies, including Upjohn , Dow Chemical , Corning , Coleman Co. and Cooper Industries .
"Elected officials have a duty to see through these transparent deceptions and vote against weakening product liability law standards that protect people," Nader says. "Experience has shown that this is the best way to minimize the size of the next generation of victims of dangerous and faulty products."
"Conoco has agreed to resolve this matter as quickly as possible and to implement a corporate-wide program of auditing and correcting any deficiencies in the process safety management of highly hazardous chemicals," says OSHA chief Joseph Dear. "The settlement agreement avoids the burden of possible prolonged litigation and furthers the efforts of both OSHA and Conoco to provide safe workplaces."
The explosion and fire at the Westlake refinery occurred on October 28, 1994. One fatality and one hospitalization resulted. The explosion occurred during startup operations on a catalytic cracking unit. A large isolation valve leaked, allowing flammable gases to reach an ignition source.
OSHA alleges the company failed to provide employee training required under process safety management standards, did not perform required inspections and tests on process equipment and failed to correct equipment deficiencies.
"Although we disagree with the [OSHA] citation and findings, it is best to put this behind us and move forward," says Conoco Lake Charles refinery manager Jim Leigh.
Ten contractors working at the Westlake refinery also were cited for various alleged violations as a result of the OSHA investigation.
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