AAI Questions Hewlett Packard- Compaq Merger. Says Manufacturer Consolidation Points to Need for Strong Remedy in Microsoft Case

Contacts:

Albert A. Foer, President, American Antitrust Institute(202) 244-9800, bfoer@antitrustinstitute.org

Norman Hawker, Research Fellow, American Antitrust Institute, and Associate Professor, Haworth College, Western Michigan University (616) 387-6118, norman.hawker@wmich.edu

American Antitrust Institute Questions HP/Compaq Merger, Saying It Points to Need for Strong Remedy in Microsoft Case

Hewlett-Packard Co.'s proposed twenty-plus billion-dollar acquisition of Compaq Computer Corp. raises serious antitrust concerns.

HP and Compaq compete with each other and are already major players in the computer server, services, and personal computer markets. Indeed, HP is the third largest manufacturer of personal computers, and Compaq is the second largest. They directly compete in a variety of markets, some of which appear to be highly concentrated. For example, HP and Compaq are reported to control two-thirds of U.S. in-store personal computer sales.

The government needs to look not only at the concentration levels in particular product markets where there are overlaps, as required by the federal merger guidelines, but also at the larger picture and trends in the markets where HP and Compaq compete. Until now, vigorous competition has characterized these markets and has greatly benefited consumers.

The proposed merger threatens to lessen competition in a number of ways. First, it will altogether eliminate competition between two of the three largest firms. Second, there is widespread speculation that the remaining firms in the industry will for strategic reasons seek merger partners to offset the combined HP/Compaq's new power with retailers and suppliers. If there is likelihood that this gigantic merger event will trigger a rapid consolidation of the industry, then the government should intervene. Although not specifically a part of the federal merger guidelines, Congress sought to avoid this type of incipient harm when it amended the Clayton Act in 1950 to prohibit mergers that "may ... substantially ... lessen competition, or ... tend to create a monopoly."

HP and Compaq have billed this merger as a remedy for the current slump in computer sales and the tight profit margins that all hardware firms face. Lessening competition, however, is not the right medicine for what ails the computer industry. There's little reason to think that companies like IBM, HP, and Compaq are too small to be efficiently competitive.

The immediate pressure on the computer industry stems from the current economic slowdown. From a national perspective, a permanent loss of competition is not an appropriate solution for what appears to be a temporary economic problem.

Second, the most significant long-term problem faced by computer manufacturers such as HP and Compaq is the monopoly power of their suppliers, Intel and, more importantly, Microsoft.

The government has already proven that Microsoft is an abusive monopolist. With its monopoly power left unchecked, Microsoft is in a position to continue to siphon off whatever profit manufacturers make, a problem exacerbated by Microsoft's practice of price discrimination among manufacturers. This is what people in Silicon Valley mean when they speak of the "Microsoft tax" on the computer industry.

The merger may (or may not) give HP/Compaq some additional negotiating leverage with Microsoft and Intel, but from the standpoint of consumers, it would be a major mistake to try to correct a monopoly problem at the supplier end of the computer industry by creating a huge concentration of market power at the manufacturer end.

The government should be taking a long-term view of the computer industry that enhances competition and gives consumers more choices; that is, by pursuing meaningful remedies against Microsoft, not by allowing manufacturers to create new monopolies or near-monopolies of their own.