Facebook's Critics Have No Clue How Difficult Buying Companies Is
(Bill Clark/Pool via AP)
Facebook's Critics Have No Clue How Difficult Buying Companies Is
(Bill Clark/Pool via AP)
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In 1980 AT&T hired McKinsey to conduct a study on the future viability of the mobile phone industry. The consulting giant was much less than optimistic. It concluded that by the year 2000 there would be no more than 300,000 wireless phones. Really, where was the market for what was nosebleed expensive?  

AT&T passed on the purchase of cellular properties that the world’s greatest consulting firm advised them would never be worth much. Funny about this is that the telecommunications behemoth once literally controlled 100% of the long-distance communications market. “Ma Bell” also employed 1 out of every 500 Americans. The two previous data points are a way of saying that AT&T could have easily purchased future market dominance for a small fraction of its total net worth in 1980, but then AT&T was not interested in dominating a market it expected to be small. So it once again passed.  

AT&T ultimately invested its resources in a fight for continued long-distance dominance with MCI. MCI, once the ant on AT&T’s proverbial elephantine behind, proved a worthy competitor for long distance thanks to the brilliant financial engineering of the great Michael Milken. Milken deeply understood the business his client was in, and helped develop MCI into a worthy foe.  

Notable about the eventual challenger to AT&T is that MCI, in building up what proved a formidable network for global long distance, also acquired cellular assets. The problem was that this eventual long-distance giant, like AT&T, didn’t appreciate cellular’s potential. As a result it sold the cellular assets to a communications outsider by the name of Craig McCaw.  

Some will detect a pattern here, as McCaw’s purchase was similarly financed by Milken. McCaw saw a major future in cellular only for MCI to sell him the assets that would help the communications visionary bring the future into the present. As McCaw once calmly put it, “the greatest ideas you ever have are the ones that other people don’t understand.” Giants like AT&T and MCI surely didn’t, only for the former to eventually re-enter wireless through the purchase of McCaw’s once dismissed McCaw Cellular. Of course, entry for AT&T years late cost it $12.6 billion.  

All of what’s been written so far rates mention as a preface to a quote from routinely wrong, but never in doubt Columbia law professor Tim Wu. Ever fearful of success and achievement by real people doing real things that would never occur to him, Wu protested in a recent New York Times op-ed that a “business can survive in one of two ways: it can be as good as, or better than, the competition, or it can spend money to buy up any competitors that endanger its market share.” Wu’s view from the sidelines is that Facebook is maintaining its dominance in checkbook fashion by purchasing every competitor that presumes to vanquish it. What a silly assertion.  

That’s the case because buying a business is an art. It’s an extraordinarily skill, and it is because in a commercial world that Wu will always observe from afar in his inimitable ankle-biter fashion, the future is incredibly opaque. Today rarely resembles tomorrow. See above. AT&T and MCI were fighting over market share in landline long distance only for the future of communications to leapfrog their war for the past. Each had the cash to aggressively purchase cellular properties in order to ward off competition, but doing so plainly wasn’t obvious.  

Explicit in Wu’s analysis is that buying off competition is as simple as buying off what perhaps reads as competition today. He thinks and writes like a professor. Translated, Wu is limited by the known. The problem for this much-less-than-original thinker is that the future is defined by the unknown. Competition invariably comes from unexpected locales.  

Blockbuster is instructive. Back in 2005 it was the dominant player in the video/DVD rental market only for it to seek greater dominance through the purchase of competitor Hollywood Video. The FTC, staffed by thinkers held back by the known in the way Wu still is, remarkably disallowed the combination out of fear that a merged Blockbuster and Hollywood Video would exert too much market power in the video rental space. The joke was on the faux “trustbusters” always looking in the rearview mirror.  

While Blockbuster and the drones at the FTC were captured by the known, Netflix was moving in an entirely different direction with DVDs by mail, and eventually the streaming of what used to be on DVD. Blockbuster had the option to purchase Netflix twice, could have done so without generating any antitust scrutiny since “trustbusters” only see dominance once it’s about to no longer be, but it instead focused on Hollywood Video.  

Leave it to Wu to presume Facebook’s dominance is a function of it buying what's getting attention today. Except that it's not that easy. In commerce the present is a lousy predictor of the future. Facebook itself instructs here. Lest readers forget, it purchased Instagram for $1 billion. Had its future prominence been a known in 2012, it would have cost more than 100 times that. Only on campus is it easy to detect where competition is coming from, only to buy it cheaply. 

Back to the reality that always renders academic “theory” rather wanting, rare is the individual or business that can see around the corner only to know which businesses will shape what’s ahead. The future is blurry. The only individuals unaware of this basic truth are Facebook’s clueless critics. The social media giant isn't buying dominance or warding off competition as much as it recognizes it will soon go the way of Blockbuster, AT&T and other once prominent giants unless it figures out what 's next against extraordinarily difficult odds. 

John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). His next book, set for release in March of 2021, is titled When Politicians Panicked: The New Coronavirus, Expert Opinion, and a Tragic Lapse of Reason. Other books by Tamny include They're Both Wrong: A Policy Guide for America's Frustrated Independent Thinkers, The End of Work, about the exciting growth of jobs more and more of us love, Who Needs the Fed? and Popular Economics. He can be reached at jtamny@realclearmarkets.com.  

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