Thoughts on Tim Wu’s Master Switch, Part 2 (On “Cycles” & “Market Failure”)

by on October 26, 2010 · 10 comments

Tim Wu was kind enough to comment on my general overview and critique of his new book, The Master Switch: The Rise and Fall of Information Empires.  That essay will be the first of many I plan to pen about Wu’s important book.  I appreciate Prof. Wu being willing to engage me in a debate over some of these issues since I’m sure he has better things to do with his time. Some of the points he raised in his comment will be addressed in subsequent posts.

In this post, I want to respond briefly to his assertion that I was “missing the point of the book” which is “to describe the world we live in.” He says that his book, “suggests that we tend to go through open and closed cycles in the Information Industries, and that, roughly, both have their strengths and weaknesses, and both become popular at different times for various reasons.”  But he fears there are “greater risks in the closed periods.”

Contrary to what he suggests, I certainly understand that’s the point of his book, it’s just that I don’t fully agree with his analysis or conclusions. Let me be clear about a crucial point, however: I accept that almost every industry goes through “cycles” of some sort and that, typically, after a “Wild West” period of greater “openness” and more atomistic competition, some degree of “consolidation” or more “closed” (or proprietary) models often sets in.  (A somewhat different and far more descriptive interpretation of such cycles can be found in Deborah Spar’s 2001 book, Ruling the Waves: Cycles of Discovery, Chaos, and Wealth from Compass to the Internet. She outlines a more refined 4-part cycle of: Innovation, Commercialization, Creative Anarchy, and Rules.)

My primary beef with Prof. Wu is that, contrary to his assertion yesterday in commenting on my post, his book seems to regard the progression of “the Cycle” as mostly linear and one-directional: straight down toward a perfectly closed, corporate-controlled, anti-consumer Hell.  By my reading of his book – much like Lessig and Zittrain’s work – Wu is painting an overly pessimistic portrait of technologies being subjected to the “perfect control” of largely unfettered markets.

I believe history – especially recent history — teaches us something very different.  While information technology markets certainly go through cycles, they tend to oscillate between open and closed more fluidly than Wu suggests – and that dynamic is accelerating today.  Moreover, during periods which Wu regards as more “closed,” things aren’t always as closed as he suggests.  Or, more importantly, the “closed” models typically spawn more innovation than Wu and others bother acknowledging. It’s during what some regard as a market’s darkest hour when some of the most exciting forms of disruptive technologies and innovation are developing.  Finally, to the extent some markets are completely locked-down for a time, it’s more often than not due to public policies that facilitate that lockdown or the “closing” of systems.

I spent a great deal of time making these points in the second essay I submitted to the recent Concurring Opinions symposium about Jonathan Zittrain’s The Future of the Internet. In my essay, “On Defining Generativity, Openness, and Code Failure,” I argued that what separates our worldviews primarily comes down to the more static (or “stasis”) mindset that Lessig, Zittrain, and Wu adopt in their work.  They take static snapshots of markets at what seems to be their darkest hour and then suggest there’s little chance of escaping that Hell.

Of course, how one defines Hell is important. What Wu does in his book, following the lead set by Lessig and Zittrain, is to “define-down” market failure.  If you regard proprietary business models, property rights, or the success of a small handful of companies as the enemy of “openness” and innovation, then it’s easy to see why you might buy into the notion that market failure is ubiquitous and that “steps must be taken” to correct it.   If, on the other hand, you understand that markets are in a constant state of flux, and that those other variables listed above are not necessarily at odds with openness and innovation, then, like me, you’re more cautious about calling in the Code Cops to steer markets and outcomes in other directions.

But the really important point here is that markets evolve. Moreover, that evolution takes place at a much faster clip in the digital arena than it does in other markets. Innovators don’t sit still. People innovate around “failure.” Indeed, “market failure” is really just the glass-is-half-empty view of a golden opportunity for innovation. Markets evolve. New ideas, innovations, and companies are born.  And things generally change for the better—and do so rapidly.

Consider my two favorite case studies from recent times: the AOL-Time Warner merger and the supposed Microsoft monopoly.

The AOL Case Study

When Lessig penned Code a decade ago, it was AOL that was set to become the corporate enslaver of cyberspace. For a time, it was easy to see why Lessig and others might have been worried.  25 million subscribers were willing to pay $20 per month to get a guided tour of AOL’s walled garden version of the Internet.  Then AOL and Time Warner announced a historic mega-merger that had some predicting the rise of “new totalitarianisms” and corporate “Big Brother.”

But the deal quickly went off the rails. By April 2002, just two years after the deal was struck, AOL-Time Warner had already reported a staggering $54 billion loss. By January 2003, losses had grown to $99 billion. By September 2003, Time Warner decided to drop AOL from its name altogether and the deal continued to slowly unravel from there.  In a 2006 interview with the Wall Street Journal, Time Warner President Jeffrey Bewkes famously declared the death of “synergy” and went so far as to call synergy “bullsh*t”!  In early 2008, Time Warner decided to shed AOL’s dial-up service and then to spin off AOL entirely.  Looking back at the deal, Fortune magazine senior editor at large Allan Sloan called it the “turkey of the decade.” The formal divorce between the two firms took place in 2008. Further deconsolidation followed for Time Warner, which spun off its cable TV unit and various other properties.

(The hysteria about AOL’s looming monopolization of instant messaging—and with it, the rest of the web—seems particularly silly: Today, anyone can download a free chat client like Digsby or Adium to manage multiple IM services from AOL, Yahoo!, Google, Facebook and just about anyone else, all within a single interface, essentially making it irrelevant which chat service your friends use.)

In the larger scheme of things, AOL’s story has already become an afterthought in our chaotic cyber-history. But we shouldn’t let those old critics forget about their lugubrious lamentations.  To recap: the big, bad corporate villain of Lessig’s Code attempted to construct the largest walled garden ever, and partner with a titan of the media sector in doing so—and this dastardly plot failed miserably.

To Wu’s credit, he acknowledges that AOL-Time Warner was “a surprising wreck” and that “AOL was [a] dinosaur limping into the new age” before the mass Internet. (p. 262-3) [Of course, there’s no mention in the book of the dire prognostications some of his academic compatriots made a decade ago about AOL or its deal with Time Warner.]  Surprisingly, however, Wu suggests that what ultimately undermined the deal was Net neutrality! He argues that, in order for the merger to achieve the perfect Hell of a giant corporate walled garden, AOL Time Warner would have needed to “subdue Google, Yahoo! and their many cousins. In short, to be viable, the firm would have needed to overturn the net neutrality principles at the core of the Internet’s design.” (p. 267)

Now, isn’t that interesting since, quite obviously, there have been no Net neutrality laws on the books despite the fact that critics like Wu have been hollering for their supposed need!  In a similar vein, Wu recently told Forbes magazine “If there were no net neutrality, Skype would have already been suppressed.”  Again, there is no formal Net neutrality law in place today, so what Wu is essentially saying is that market norms, not regulatory edicts, ensured that new applications came online and that market power was checked.

Even more interesting is the fact that Wu continues on to essentially make the libertarian case against formal Net neutrality regulation when he argues:

The only entity that has so far really succeeded in such a mission [of overturning the net neutrality principles at the core of the Internet’s design] is the government of mainland China, as we saw in 2010, when it drove an exasperated Google out of its sovereign territory by demanding extensive control over what Google let users find.  Indeed, the feat requires such power and resources as belong uniquely to the state: access to the very choke points of a nation’s communications infrastructure, its Master Switch. AOL Time Warner, however vast, did not have police power—it could not imprison Google’s executives for failing to block Wikipedia or Disney content. (p. 267)

Exactly right; it really does come down to that profound difference between who has coercive police power (the State) and who does not (corporations).  It’s not just a difference of degree but a difference of kind.   So, welcome to libertarian movement, Tim Wu!  I plan on citing that block quote in every paper I write from now on regarding why we don’t need preemptive Net neutrality regulation!

The Microsoft Case Study

I want to also briefly mention the Microsoft case study since it is quite instructive in this regard.

It’s suddenly quite easy to forget just how much hand-wringing took place in the late 1990s and early 2000s over Microsoft’s dominance of the web browser market.  Dour predictions of perpetual Internet Explorer lock-in followed.  For a short time, there was some truth to this.  But, yet again, innovators weren’t just sitting still; exciting things were happening.  In particular, the seeds were being planted for the rise of Firefox and Chrome as robust challengers to IE’s dominance—not to mention mobile browsers.

Of course, it’s true that roughly half of all websurfers still use a version of IE today.  But IE’s share of the market is falling rapidly as viable, impressive alternatives now exist and innovation among these competitors is more vibrant than ever.  That’s all that counts. The world changed, and for the better, despite all the doomsday predictions we heard less than a decade ago about Microsoft’s potential dominance of cyberspace.  Moreover, all the innovation taking place at the browser layer today certainly undercuts the gloomy “death of the Net” or “death of openness” thesis set forth by Zittrain and Wu.

Indeed, as Tim O’Reilly argues, this case study illustrates the power of markets to evolve and “route around” market failure or excessively closed systems even during what appears to be a certain sector’s darkest hour:

Just as Microsoft appeared to have everything locked down in the PC industry, the open Internet restarted the game, away from what everyone thought was the main action. I guarantee that if anyone gets a lock on the mobile Internet, the same thing will happen. We’ll be surprised by the innovation that starts happening somewhere else, out on the free edges. And that free edge will eventually become the new center, because open is where innovation happens. […] it’s far too early to call the open web dead, just because some big media companies are excited about the app ecosystem. I predict that those same big media companies are going to get their clocks cleaned by small innovators, just as they did on the web.

Lessons Learned – Or Ignored?

From these case studies, one would hope that the Openness Evangelicals would have gained a newfound appreciation for the evolutionary and dynamic nature of markets and come to understand that, especially in markets built upon information and digital code, the pace and nature of change is unrelenting and utterly unpredictable.  Indeed, contra Lessig’s lament in Code that “Left to itself, cyberspace will become a perfect tool of control,” cyberspace has proven far more difficult to “control” or regulate than any of us ever imagined.  The volume and pace of technological innovation we have witnessed in information sectors over the past decade has been nothing short of stunning.

Critics like Zittrain and Wu, however, wants to keep beating the cyber-sourpuss drum.  So, the face of corporate evil has to change. Today, Steve Jobs has become the supposed apotheosis of all this closed-system evil instead of AOL.  Jobs serves as a prime villain in the books of Zittrain and Wu and in many of the essays they and other Openness Evangelicals pen. But their enemies list is growing longer.  Today, according to the narratives in Zittrain and Wu’s books, it’s not just one of two corporate titans we need to worry about, but just about every major player in the high-tech ecosystem—telcos, cable companies, wireless operators, entertainment providers, Facebook, and others.

Even Google — Silicon Valley’s supposed savior of Internet openness — is not spared their scorn.  “Google is the Internet’s switch,” Wu argues. “In fact, it’s the world’s most popular Internet switch, and as such, it might even be described as the current custodian of the Master Switch.” More ominously, he warns, “it is the switch that transformed mere communications into networking—that ultimately decides who reached what or whom.” (p. 280)

It seems, then, that the face of “closed” evil is constantly morphing.  But shouldn’t that tell us something about how dynamic these markets are?!  I look forward to reading the next edition of Tim’s book to see who the new villains are and whether he’s drawn any lessons from the constantly changing cast of characters.

Conclusion

In sum, history counsels patience and humility instead of Chicken Little-ism and incessant calls for preemptive regulation to serve some amorphous, politically-defined “public interest.”  More generally, history counsels what we might call “technological agnosticism.” In particular, we should avoid declaring “openness” – especially of the mandated variety — a sacrosanct principle and making everything else subservient to it without regard to cost or consumer desires.  As Wired’s Chris Anderson notes, “there are many Web triumphalists who still believe that there is only One True Way, and will fight to the death to preserve the open, searchable common platform that the Web represented for most of its first two decades (before Apple and Facebook, to name two, decided that there were Other Ways).”  The better position is one based on a general agnosticism regarding the nature of technological platforms and change.  In this view, the spontaneous evolution of markets has value in its own right, and continued experimentation with new models—be they “open” or “closed,” “generative” or “tethered”—should be permitted.

Importantly, one need not believe that the markets are “perfectly competitive” to accept that they are “competitive enough” compared to the alternatives—especially those re-shaped by the sort of regulation Wu and others advocate.  “Market failures” or “code failures” are ultimately better addressed by voluntary, spontaneous, bottom-up, marketplace responses than by coerced, top-down, governmental solutions.  Moreover, the decisive advantage of the market-driven, evolutionary approach lies in the rapidity and nimbleness of those responses compared to regulatory alternatives.

Thus, in closing, Tim Wu’s assertion yesterday that I was “missing the point of the book… [which is] to describe the world we live in,” is based on his belief that he has accurately described our world, its history, and the forces that move it.  As I’ve suggested here, there’s a very different way of looking at things.  In my opinion, Wu’s Master Switch is just too hung up on the static snapshot mindset and a bit too obsessed with the supposed One True Way of doing things.

____________

[Note: In the next installment, I will address Wu’s mistaken claim that purely free markets have guided America’s communications and media sectors over the past century and his assertion that “the purely economic laissez-faire approach… is no longer feasible.”]

  • Anonymous

    I haven’t read Tim’s book yet, of course, but I see the AOL story quite differently than at least your paraphrase. I didn’t see the merger as a “surprising wreck” at all, but an entirely predictable one, for starters. AOL, recall, wasn’t offering a “walled garden” version of the Internet–it was offering an alternative to the Internet in the form of limited, but curated, content. Time-Warner was pursuing a similar strategy. Does anyone else recall the hilariously self-centered TW website “Pathfinder,” which operated from the assumption that the only interesting content was Time-Warner magazines? The home page was literally just a jumble of magazine logos. (Interesting to think how many of those publications are now gone.)

    Likewise, AOL chat and email initially limited the world of users to other AOL subscribers. This was hardly an idiotic approach–the Internet was and is a scary place. AOL believed (even if its principals are now rewriting history against themselves) that the average user would prefer to pay AOL a fee to moderate and limit their options, providing some level of editorial and other supervision in exchange for several senses of security, including customer service and a “community” of like-minded individuals, easy to find and stay with.

    For a while, of course, this worked. Which is to say that AOL was pursuing closed on the belief that consumers (or at least a sizable group of them) preferred closed and were willing to pay a premium for it.

    So the AOL strategy wasn’t to “subdue” Google et. al, but rather to provide an alternative to the public Internet. The belief was that the general public would prefer fewer choices that were moderated and carefully pre-organized to the wide open frontier of junk and jewels, poorly organized and hard to navigate (relatively). Microsoft tried a similar approach with various incarnations of MSN. In more limited domains, Lexis-Nexis continues to believe that its collection of largely-public documents is superior to what one can find on-line.

    So to me the AOL example is about open (and uncurated) vs. closed (and moderated). AOL bet its marbles on closed and lost. Once the AOL community (what turned out to be the real value, not the moderated content) stopped growing, it ceased to be compelling. Users wanted more users, or at least the sense of a healthy, growing community. Hence MySpace loses to Facebook, largely because Facebook started to grow faster than MySpace.

    When it comes to anything having to do with social interaction or community, as I’ve argued in all of my books, open always wins and closed always loses–eventually. That I think is what some of the more dour worriers of the public Internet get wrong–they vastly underestimate the force of consumers expressing their desire, however awkwardly, for more–or at least the appearance of more.

  • Anonymous

    I haven’t read Tim’s book yet, of course, but I see the AOL story quite differently than at least your paraphrase. I didn’t see the merger as a “surprising wreck” at all, but an entirely predictable one, for starters. AOL, recall, wasn’t offering a “walled garden” version of the Internet–it was offering an alternative to the Internet in the form of limited, but curated, content. Time-Warner was pursuing a similar strategy. Does anyone else recall the hilariously self-centered TW website “Pathfinder,” which operated from the assumption that the only interesting content was Time-Warner magazines? The home page was literally just a jumble of magazine logos. (Interesting to think how many of those publications are now gone.)

    Likewise, AOL chat and email initially limited the world of users to other AOL subscribers. This was hardly an idiotic approach–the Internet was and is a scary place. AOL believed (even if its principals are now rewriting history against themselves) that the average user would prefer to pay AOL a fee to moderate and limit their options, providing some level of editorial and other supervision in exchange for several senses of security, including customer service and a “community” of like-minded individuals, easy to find and stay with.

    For a while, of course, this worked. Which is to say that AOL was pursuing closed on the belief that consumers (or at least a sizable group of them) preferred closed and were willing to pay a premium for it.

    So the AOL strategy wasn’t to “subdue” Google et. al, but rather to provide an alternative to the public Internet. The belief was that the general public would prefer fewer choices that were moderated and carefully pre-organized to the wide open frontier of junk and jewels, poorly organized and hard to navigate (relatively). Microsoft tried a similar approach with various incarnations of MSN. In more limited domains, Lexis-Nexis continues to believe that its collection of largely-public documents is superior to what one can find on-line.

    So to me the AOL example is about open (and uncurated) vs. closed (and moderated). AOL bet its marbles on closed and lost. Once the AOL community (what turned out to be the real value, not the moderated content) stopped growing, it ceased to be compelling. Users wanted more users, or at least the sense of a healthy, growing community. Hence MySpace loses to Facebook, largely because Facebook started to grow faster than MySpace.

    When it comes to anything having to do with social interaction or community, as I’ve argued in all of my books, open always wins and closed always loses–eventually. That I think is what some of the more dour worriers of the public Internet get wrong–they vastly underestimate the force of consumers expressing their desire, however awkwardly, for more–or at least the appearance of more.

  • Jim Harper

    I noted with surprise a few weeks ago that Prof. Wu's discussion of corporate-controlled radio at the Open Video Conference didn't even mention the FCC's role. I listened to an interview of him this morning (I forget where) in which he talked as if Theodore Vail of AT&T acted alone.

    It sounds like you might be getting to this. I'd be interested in your take on his treatment of the FCC.

  • http://www.techliberation.com Adam Thierer

    Yep. I will be addressing Wu's interpretation of the Bell System monopolization in my next post and explaining how he only tells us half the story of what actually happened.

  • Guest1

    Didn't the antitrust suit also play a part in IE's demise?

  • Tim Wu

    Dear Adam and Jim,

    It is extremely clear, as I say multiple times in the book, that government aid to firms is helpful in creating monopoly and maintaining it. Indeed that is one of the most important theories in the book: that Joseph Schumpeter missed the power of government to maintain a monopoly past the point where he would predict its demise.

    Why would anyone argue differently? Its just a fact. But that doesn't also mean that firms don't create monopolies themselves, nor does it mean that they aren't capable of using government as a tool to prolong their rule.

    Any theory of causation, in my mind, that says market structure is all government or all private is simply wrong. So, similarly, is any theory that monopolies last forever, or will always collapse without doing any damage. The problem, in my mind, is getting religion as to whether govn't or the private sector causes everything, is the causes of all causes, so to speak.

    My view is that both private and public are concepts; behind what we call “govnt” or a “corporation” are humans capable of good, evil or neither. Govn't has the advantage of force, but that doesn't make it all powerful; for it has the limit of the constitution, voting, term limits and more intense scrutiny by the public.

    This difference in theories of causation is what seems to divide us at the deepest levels.

  • Pingback: Thoughts on Tim Wu’s Master Switch, Part 1

  • Pingback: Tim Wu Redefines “Monopoly”

  • Albert

    Adam Thierer says “more importantly, the “closed” models typically spawn more innovation than Wu and others bother acknowledging. It’s during what some regard as a market’s darkest hour when some of the most exciting forms of disruptive technologies and innovation are developing.”

    I was under the impression that these innovations (presumably referring to new technologies or ideas) that are spawned during “closed,” periods are simply the start of a new “Cycle,” (as Tim Wu defines it in his book).

    You could say that these innovations are sent on a similar cycle, eventually ending up in this closed, controlled market or period, which is a prime environment for new ideas or technologies to be created and adapted.

  • Pingback: App Store Wars: Apple, Amazon, Google, Microsoft & Dynamic Platform Competition

Previous post:

Next post: