Boy, the symposium on “Competition in Online Search” that Daniel Sokol threw together this week over at the Antitrust & Competition Policy Blog could not have been better timed! As most of you know, the European Commission stepped up its attack on Google this week and all signs are that a lot more antitrust activity is on the way on this front.

Anyway, all the entries in the symposium are in and a few rebuttals have followed, including one by me. In my response, I took on Frank Pasquale and Eric Clemons, who were the most aggressive in their calls for search regulation. I thought I would just re-post it here to complement my early entry in the symposium on Monday.

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I enjoyed the entries in this symposium and learned something from each of them. I have a few things to say in response to both Frank Pasquale and Eric Clemons and their sweeping indictments of not just Google but seemingly the entire modern information economy.

Everywhere they look, it seems, Pasquale and Clemons see villainy. Someone completely alien to the modern online ecosystem would read Pasquale’s description of it — “digital feudalism,” “absolute sovereignty,” “opaque technologies,” “leaving users in the dark,” etc., etc. — and likely conclude that a catastrophe had befallen modern man. Of course, Pasquale’s narrative is missing any reference to the unparalleled expansion in the stock of knowledge and human choices that has been made possible by Google and the others companies he castigates (Apple, Facebook, Twitter, and Amazon). Meanwhile, Clemons wants to group Google in with supposed Wall Street robber barons as well as characters from Sinclair’s “The Jungle.” It’s all a bit much.

Regardless, what about those high-tech feudal lords, especially Google? Can we keep their market power in check without extreme steps? It goes without saying that neither Pasquale nor Clemons places much faith in the sort of dynamic, disruptive competition and creative destruction (which I documented in my entry in the symposium) as being an effective check on market behavior. But their skepticism goes well beyond that and transcends tradition antitrust analysis. They seem to assert that we just can’t trust large digital intermediaries at all, primarily because they are profit-maximizers. Clemons suggests that paid search shouldn’t even be permitted, which is a bit like saying ad-supported, for-profit newspapers should have been forbidden or regulated long ago.

Their skepticism about concentrated power fades quickly, however, when it’s the concentrated power of government that will be calling the shots in the digital economy. Regulators, Pasquale says, will be able to devise forms of redress that “help[] us confront issues of discrimination, malfeasance, nonfeasance, and technological due process in a rapidly changing online environment.” He suggests transparency mandates, external regulatory oversight, and that something akin to a mandatory right of reply for search results are all needed. Meanwhile, Clemons wants full-blown structural separation of Google into three or four different firms.

Pasquale and Clemons don’t bother addressing the trade-offs associated with their proposals. They apparently want us to imagine that these proposed remedies are innocuous and costless. They also don’t seem to give much weight to the critiques set forth by Marvin Ammori, James Grimmelman, or Dan Crane regarding the incoherent and potentially counter-productive nature of “search neutrality” remedies. Clemons also doesn’t seem at all worried about the forgone benefits of vertical integration, even though those benefits can be substantial in the field of search. The rich content and specialized integrated services that Google has been able to freely offer consumers deserve greater consideration before imposing the nuclear option of structural separation.

That last point is essential. We can’t divorce this discussion from the real-world evidence of just how well consumers have been served by the search market today. That begins with the fact that consumers don’t pay a penny for the cornucopia of content or expanding universe of constantly innovating services that they enjoy currently. So, to repeat what I said in my initial entry, the traditional goals of public utility regulation — universal service, price competition, and quality service — are already being achieved quite nicely without intervention. That makes the case for search regulation even harder to sustain.

Finally, let’s just talk about the practicality of all the regulation they advocate. Pasquale asks: “Is it too much to ask for some entity outside Google to be able to ‘look under the hood’ and understand what is going on in plausibly contested scenarios?” Well, perhaps it is! The respected blog SearchEngineLand has estimated that approximately 34,000 searches are conducted per second (or 2 million per minute; 121 million per hour; 3 billion per day; 88 billion per month). That’s a lot of activity for regulators to keep tabs on. And Google’s search algorithm is constantly being tweaked– more than 500 changes each year — to offer websurfers improved results and enhanced security against spammers and other malicious activity. Having regulators constantly “looking under the hood” and trying to adjust those results via a political process would likely slow innovation to a crawl. It would also open up the process to a great deal of gaming by other parties — including spammers and scammers. Moreover, the dangers of political gaming of search should not be discounted. Once policymakers have the sort of authority over search that Pasquale and Clemons recommend, the danger of political influence and regulatory shenanigans both grow exponentially.

In the end, I believe the combination of public pressure, social norms and, most importantly, ongoing innovation and creative destruction, can do a better job of protecting consumer welfare than the sort of sweeping regulatory interventions that Pasquale and Clemons advocate. We should be patient and see how this marketplace develops instead of engaging in rash interventions.

It’s my great pleasure this week to be participating in a 2-day symposium on “Competition in Online Search” that is being hosted by the Antitrust & Competition Policy Blog.  Daniel Sokol, Associate Professor of Law at the University of Florida Levin College of Law, was kind enough to invite me to join the fun. Professor Sokol is the editor of the Antitrust & Competition Policy Blog. Others participating in this symposium include: James Grimmelman (NY Law); Eugene Volokh (UCLA); Marvin Ammori (Stanford Law); Mark Jamison (Univ. of Florida); Eric Clemons (Wharton School); Dan Crane (Michigan Law); and both Marina Lao and Frank Pasquale (Seton Hall); and more.

My entry is now live. In it, I focus on how dynamically competitive and innovative the digital economy has been over the past 15 years and question to need for intervention at this time, especially of the “public utility” variety. I’ve re-posted my entry below, but make sure to head over to the Antitrust & Competition Policy Blog to read all the contributions to this excellent symposium.

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If you blink your eyes in the Information Age you can miss revolutions. Let’s take a quick walk back through our turbulent recent history:

• Just five years ago, MySpace dominated social networking and had The Guardian wondering, “Will MySpace Ever Lose Its Monopoly?” A short time later, MySpace lost its early lead and became a major liability for owner Rupert Murdoch. Murdoch paid $580 million for MySpace in 2005 only to sell it for $35 million in June 2011.
• Just six to eight years ago, the mobile landscape was ruled by Palm, BlackBerry, Nokia, and Motorola. Palm is now all but dead and BlackBerry is trying to stay afloat while Nokia and Motorola had to cut deals with Microsoft and Google respectively in order to survive.
• Just 10 years ago, AOL’s hegemony in online services was thought to be unassailable, especially after its merger with Time Warner. But the merger quickly went off the rails and AOL’s online “dominance” quickly evaporated. Losses grew to over $100 billion and the entire deal unraveled within just a few years as AOL’s old dial-up, walled-garden business model had been completely superseded by broadband and the new Web 2.0 world.
• Just 12 years ago, Yahoo! and AltaVista were the go-to companies for online search. No one turns to them first today when they go looking for information online.
• And just 15 years ago, Microsoft was on everyone’s mind. Today, the firm is struggling to remain part of cocktail party chatter when the topic of modern Tech Titans is discussed. For example, a recent Fast Company cover story on “The Great Tech War of 2012” only mentioned Microsoft in passing. The rise of search, social media, and cloud computing represented disruptive shifts that Microsoft wasn’t prepared for.

The graveyard of tech titans is littered with the names of many other once-mighty giants. Schumpeter’s “gales of creative destruction” have rarely blown harder through any sector of our modern economy. And so now we come to the question of Google’s dominance in the field of search. Should we be worried? Some say yes, and the rhetoric of public utilities and essential facilities is increasingly creeping into policy discussions about the Internet, including the search layer. A growing cabal of cyberlaw experts—Tim Wu, Dawn Nunziato, Frank Pasquale, among many others—argue that some sort of regulation is needed.

But the recent history I recounted above makes it clear that patience and humility are the more sensible policy prescriptions. Calls for regulation or public utility classification are particularly premature and problematic. As I argued in my recent white paper, “The Perils of Classifying Social Media Platforms as Public Utilities,” search and social media platforms do not resemble traditional public utilities and there are good reasons why policymakers should avoid a rush to regulate them as such.

First, there has not been any serious showing of monopoly power in the search or social media sectors in which Google operates. It’s also impossible to find any way in which consumer welfare is currently being harmed by Google. All their products are free and constantly evolving. New technologies and rivals continue to emerge. DuckDuckGo, for example, differentiates itself in search by stressing privacy above all else. Meanwhile, the contours of these markets are constantly evolving in a dynamic way, making market definition challenging. Is Facebook a search company? Signs are good that it soon could soon become a formidable one.

These market-definition considerations are especially important because of how long it takes to formulate regulations or impose antitrust remedies. In a market that changes this rapidly, taking several months or even years to complete rulemakings or litigate remedies will almost certainly mean that most rules will be completely out of date by the time they are implemented. And once implemented, there will be very little incentive to rework them as rapidly as the market contours change. Regulation could retard innovation in search and social media markets by denying firms the ability to evolve or innovate across pre-established, artificial market boundaries. Second, treating these digital services as regulated utilities would harm consumer welfare because public utility regulation has traditionally been the archenemy of innovation and competition. Public utility regulation has a long, lamentable history that has been well-documented by economists and political scientists. That’s why it is usually considered the last resort, not the first option. Moreover, the traditional goals of public utility regulation — universal service, price competition, and quality service — are already being achieved without intervention. And as Marvin Ammori and Luke Pelican outline in a new study, all the proposed antitrust remedies to deal with Google in particular also have serious downsides. Almost all the cures would be worse than whatever disease it is critics hope to solve with antitrust intervention.

Third, treating today’s leading search and social media providers as digital essential facilities threatens to convert “natural monopoly” or “essential facility” claims into self-fulfilling prophecies. The very act of imposing utility obligations on a particular platform or company tends to lock it in as the preferred or only choice in its sector. Public utility regulation also shelters a utility from competition once it is enshrined as such. Also, by forcing standardization or a common platform, regulation can erect de jure or de facto barriers to entry that restrict beneficial innovation and the disruption of market leaders.

Fourth, because social media are fundamentally tied up with the production and dissemination of speech and expression, First Amendment values are at stake, warranting heightened constitutional scrutiny of proposals for regulation. As Eugene Volokh noted in a recent white paper, social media providers should possess the editorial discretion to determine how their platforms are configured and what can appear on them.

Will Google meet the same fate as earlier Tech Titans? It’s impossible to know. But with the wrecking ball of creative digital destruction doing such a fine job of keeping competition and innovation thriving, we’d be smart to reject heavy-handed, top-down regulation of such a dynamic segment of our economy at this time.

My most recent Forbes column is entitled, “We All Hate Advertising, But We Can’t Live Without It.” It’s my attempt to briefly (a) defend the role advertising has traditionally played in sustaining news, entertainment, and online service, and (b) discuss some possible alternatives to advertising that could be tapped if advertising starts failing us a media cross-subsidy.

What got me thinking about this issue again was the controversy over satellite video operator DISH Network offering its customers a new “Auto Hop” capability for its Hopper whole-home HD DVR system. Auto Hop will give viewers the ability to automatically skip over commercials for most recorded prime time programs shown on ABC, CBS, FOX and NBC when viewed the day after airing. It makes the viewing experience feel like the ultimate free lunch. Alas, something still must pay the bills. As innovative as that technology is, we can be certain that it will not make content consumption cost-free. We’ll just pay the price in some other way. The same is true for online services since it’s never been easier to use technology to block ads.

So, what is going to pay the bills for content as ad-skipping becomes increasingly automated and effortless? Stated differently, what are the other possible methods of picking up the tab for content creation? Here’s a rough taxonomy:

I.    CHARGES

A.    Direct Fees (Periodic billing / Pay-per-view)

B.    Indirect Charges (Tiers / Bundles / Package pricing)

II.    ADVERTISING

A.    General / Mass market ads (Billboards / Banner ads / Pop-up online ads)

B.    Targeted ads (Directed pitch)

C.    Integrated (Product placement / Payola)

D.    Sponsorship / Underwriting

III.    PHILANTHROPIC

A.    Individual  (ex: Arts & opera funding)

B.    Foundational (ex: Knight Foundation)

C.    Governmental  (ex: CPB / BBC model)

IV.    INTERNAL CROSS-SUBSIDY  (Profitable division subsidizes unprofitable / “loss leader” strategies)

There are probably other ways of subsidizing content creation, but those are the primary methods. I have no idea what combination of strategies will sustain content going forward, but I think advertising is likely to play a diminished role in the mix as it becomes increasingly easy for us to filter it out of the mix. But the content creators will just shift costs elsewhere and raise the prices for programming through direct and indirect pricing techniques. Do you like HBO’s pricing model? Pay-per-view? Paywalls? Well, it doesn’t make a difference whether you do or not because you’ll likely be seeing a lot more of those models in your life in coming years if advertising fades as a subsidization method.

Alternatively, as I also note in my Forbes piece, “we could see a lot more Texaco Star Theaters in our future, with major companies essentially owning specific shows or networks.” Such program sponsorship and content underwriting has always been with it, but it could really explode as a cross-subsidy method if traditional advertising starts failing. “But it will be challenging for every show or website to find its own corporate benefactor, and it will also raise issues about undue influence and bias,” I note in my essay.

I hope no one seriously believes that philanthropic models can fill the gaps. Even if we saw a significant uptick in voluntary charitable giving or even taxpayer support for the arts and media, there’s no way in hell it will possibly begin to cover the the bill for what advertising support covers today.

In the end, I can’t help but think how great we’ve had it when it comes to advertising. As I also noted in my essay, advertising has been “the great subsidizer of the press, entertainment, and online services” historically and benefited us tremendously even if we haven’t appreciated that fact. “It’s possible that no single industry — not newspapers nor search engines nor anything else — has done as much to advance the storehouse of accessible human knowledge in the 20th century as advertisers,” argues Washington Post columnist Ezra Klein. Klein is exactly right, yet it doesn’t really make a difference how important advertising has been to us if we fail to appreciate that fact and increasingly take steps to exclude it from our lives.

As that becomes easier and easier to accomplish, we shouldn’t bitch and whine when the bills (literally) come due for the content we all desire. As always, there is no free lunch. We’ll pay the price one way or another.

Additional Reading:

• my recent Charleston Law Review article on “Advertising, Commercial Speech & First Amendment Parity”
• Ezra Klein on the Importance of Advertising to Media
• The Hidden Benefactor: How Advertising Informs, Educates & Benefits Consumers
• There is No Free Lunch! No Advertising, No Media
• PFF’s Mega-Filing in the FCC’s “Future of Media” Proceeding

Writing over at the conservative Big Government blog (part of the Breitbart.com network of blogs), someone who goes by the pseudonym “Capitol Connection” has posted an editorial about the debate over retransmission consent reform that is full of misinformation and misguided policy prescriptions, at least if you believe is truly limited government. The piece is entitled, “Big Cable Would Prefer if You Paid Their Bills,” and the problems are almost immediately evident from that headline alone.  First, what is a supposedly small government-oriented blog doing using a silly label like “Big Cable” to describe a vigorously competitive sector of our capitalist economy? Using terms like “Big Cable” is a silly lefty tactic. Second, no one in the cable industry is proposing anyone “pay their bills” except for the customers who enjoy their services. Isn’t a fee for service part of capitalism?

Anyway, that’s just the problem with the title of the essay. Sadly, the rest of the piece is filled with even more erroneous information and arguments about the retransmission consent regulatory process as well as the bill that aims to reform that process, “The Next Generation Television Marketplace Act” (H.R. 3675 and S. 2008). That bill, which is sponsored by Senator Jim DeMint (R-SC) and Rep. Steve Scalise (R-LA), represents a comprehensive attempt to deregulate America’s heavily regulated video marketplace. In a recent Forbes oped, I argued that the DeMint-Scalise effort would take us “Toward a True Free Market in Television Programming” by eliminating a litany of archaic media regulations that should have never been on the books to begin with. The measure would:

• eliminate: “retransmission consent” regulations (rules governing contractual negotiations for content);
• end “must carry” mandates (the requirement that video distributors carry broadcast signals even if they don’t want to);
• repeal “network non-duplication” and “syndicated exclusivity” regulations (rules that prohibit distributors from striking deals with broadcasters outside their local communities);
• end various media ownership regulations; and
• end the compulsory licensing requirements of the Copyright Act of 1976, which essentially forced a “duty to deal” upon content owners to the benefit of video distributors.

This represents genuine and much-needed deregulation of a market that has been encumbered with far too much top-down control and micro-management by the FCC over the past several decades. To be clear, none of these rules apply to any other segment of our modern information economy. Every day of the week, deals are cut between content creators and distributors in many other segments of the media industry without these rules encumbering the process. The DeMint-Scalise bill is an attempt to get big government out of the way and let these deals be cut in a truly free market without regulators putting their thumb on the scale in one direction or the other.

Thus, it came as a bit of a shock to me to see a blog that rails against and is self-titled Big Government suggesting that we should retain a form of big government regulation! Indeed, the author gets the intent of the DeMint-Scalise bill exactly backward. The author says the The Next Generation Television Marketplace Act:

would strip broadcasters of their ability to negotiate in the free marketplace. Some cable operators, it turns out, would love to provide Americans with the quality content American broadcast companies churn out. They just don’t happen to want to pay for it.

The author of the piece also says that cable industry representatives:

are lobbying in Washington for key provisions in legislation that would that would allow the Federal government to intervene in what is otherwise a sound, private sector marketplace that benefits consumers each and every day. And they’re doing so under the guise of “deregulation.”

This is all utter poppycock. While I am sure that the cable industry would love to get all that content free of charge, that’s not what the DeMint-Scalise bill would do. It doesn’t end free-market contracting; it bolsters it. Again, the bill would get the government out of the business of setting rules for how these deals get cut and instead allow these big boys to come to the bargaining table and hammer out these deals on their own.  That is called deregulation and true capitalism!

The author of the misguided Big Government editorial seems to be resting their case on a letter that the American Conservative Union (ACU) sent to members of Congress in late March. I addressed the claims found in that letter in this essay and pointed out that ACU had almost everything exactly backward. Both the ACU letter and the Big Government essay just keep erroneously assuming that the end of the regulatory retrans process means that “broadcasters [will] be forced to simply give away their signals and content.” Again, nothing could be further from the truth. As I noted in my response to the ACU letter:

nothing in this bill forces content creators or broadcasters to deal their content to other distributors. And nothing in the bill gives those other video distributors the right to freely distribute content without the permission of its owners. In sum, the bill does not repeal copyright law — it only repeals the compulsory licensing rules that force content owners to deal their programming against their consent on government regulated terms.  That means copyright is actually strengthened under this bill and that content owners have more bargaining power than they do today. Thus, the ACU is horribly mistaken in asserting that the DeMint-Scalise bill would “allow an uncompensated use of broadcast signals and content.” The exact opposite is the case.

Finally, if nothing else convinces the folks at the Big Government blog and the ACU of the error in their thinking, consider this: The preservation of the current retransmission consent regime and all its corresponding regulations means the preservation and growth of the Federal Communications Commission as a federal regulatory agency overseeing the information economy. Is that a truly free market-oriented position? Do we need federal bureaucrats overseeing free market contractual negotiations in this or any other sector? Because that’s what the law allows today. By contrast, the DeMint-Scalise bill offers us the chance to finally get real deregulation rolling and get FCC downsizing back on track. You will never get a smaller FCC by advocating the retention of regulation.

Thus, I think it’s pretty clear which approach is the most liberty-enhancing. I hope, therefore, that the ACU and the folks at the Big Government blog will reconsider their position.

Via Twitter, Andrew Grossman brought to my attention this terrifically interesting interview with a Kuwaiti censor that appeared in the Kuwait Times (“Read No Evil – Senior Censor Defends Work, Denies Playing Big Brother“). In the interview, the censor, Dalal Al-Mutairi, head of the Foreign Books Department at the Ministry of Information, speaks in a remarkably candid fashion and casual tone about the job she and other Kuwaiti censors do every day. My favorite line comes when Dalal tells the reporter how working as a censor is so very interesting and enlightening: “I like this work. It gives us experience, information and we always learn something new.”  I bet!  But what a shame that others in her society will be denied the same pleasure of always learning something new. Of course, like all censors, Dalal probably believes that she is doing a great public service by screening all culture and content to make sure the masses do not consume offensive, objectionable, or harmful content.

But here’s where the reporter missed a golden opportunity to ask Dalal the one question that you must always ask a censor if you get to meet one: If the content you are censoring is so destructive to the human soul or psyche, how then is it that you are such a well-adjusted person?  And Dalal certainly seems like a well-adjusted person. Although the reporter doesn’t tell us much about her personal life or circumstances, Dalal volunteers this much about herself and her fellow censors: “Many people consider the censor to be a fanatic and uneducated person, but this isn’t true. We are the most literate people as we have read much, almost every day. We receive a lot of information from different fields. We read books for children, religious books, political, philosophical, scientific ones and many others.” Well of course you do… because you are lucky enough to have access to all that content! But you are also taking steps to make sure the rest of your society doesn’t consume it on the theory that it would harm them or harm public morals in some fashion.  But, again, how is it that you have not been utterly corrupted by it all, Ms. Dalal? After all, you get to consume all that impure, sacrilegious, and salacious stuff! Shouldn’t you be some kind of monster by now?

How can this inconsistency be explained? The answer to this riddle can be found in the “Third-Person Effect Hypothesis.” First formulated by psychologist W. Phillips Davison in 1983, “this hypothesis predicts that people will tend to overestimate the influence that mass communications have on the attitudes and behavior of others. More specifically, individuals who are members of an audience that is exposed to a persuasive communication (whether or not this communication is intended to be persuasive) will expect the communication to have a greater effect on others than on themselves.” While originally formulated as an explanation for how people convinced themselves “media bias” existed where none was present, the third-person-effect hypothesis has provided an explanation for other phenomenon and forms of regulation, especially content censorship. Indeed, one of the most intriguing aspects about censorship efforts historically is that it is apparent that many censorship advocates desire regulation to protect others, not themselves, from what they perceive to be persuasive or harmful content. That is, many people imagine themselves immune from the supposedly ill effects of “objectionable” material, or even just persuasive communications or viewpoints they do not agree with, but they claim it will have a corrupting influence on others.

In his brilliant paper, Davison tells this wonderful story of one of the last censor boards in America (and think about that Kuwati censor as you read this):

The phenomenon of censorship offers what is perhaps the most interesting field for speculation about the role of the third-person effect. Insofar as faith and morals are concerned, at least, it is difficult to find a censor who will admit to having been adversely affected by the information whose dissemination is to be prohibited. Even the censor’s friends are usually safe from pollution. It is the general public that must be protected. Or else, it is youthful members of the general public, or those with impressionable minds. When Maryland’s State Board of  Censors, which had been filtering smut from motion pictures since 1916, was finally allowed to die in June 1981, some of its members issued dire forecasts about the future morals of Maryland and the nation (New York Times, June  29, 1981). Yet the censors themselves had apparently emerged unscathed. One of them stated that over the course of 21 years she had “looked at more naked bodies than 50,000 doctors,” but the effect of this experience was apparently more on her diet than on her morals. “I had to stop eating a lot of food because of what they do with it in these movies,” she is quoted as having told the Maryland Legislature.

I just love that story because it gets to the heart of what is so horribly elitist and ironic about censorship: No one every thought to test how corrupted the censors themselves had become because they consumed all the same stuff they were censoring!  If there was anything to the “monkey see, monkey do” theory of media effects theory (i.e., if you read, see, or hear bad things, then you will do bad things), then these censors should all be dope-smoking, axe-wielding, sex addicts. But I bet most of them weren’t. Like Ms. Dalal, they were probably generally well-adjusted members of society. They probably learned how to properly process all that content, even as they had zero faith in the ability of their fellow citizens to do the same.

So, if you ever get a chance to meet an actual censor, make sure to ask them about all the fun stuff they’ve been consuming lately and why it hasn’t turn them into total freaks or madmen!

I wanted to follow up on Eli Dourado’s excellent previous post (“Real Talk on Net Neutrality“) to reiterate the importance of a few points he made and add some additional thoughts about the issues raised in that New York Times article on Net neutrality and forced access regulation that lots of people are talking about today.

What Eli’s post makes clear is that there are those of us who think about Net neutrality and infrastructure regulation in economic terms (a rapidly shrinking group, unfortunately) and those who think it about in quasi-religious terms. The problem with the latter ideology of neutrality uber alles, however, is that at some point it must confront real-world economics. This is Eli’s core point: Something must pay the bills. In this case, something must cover the significant fixed costs associated with broadband investments if you hope to sustain those networks. Unless you are ready to make the plunge and suggest that the government should cover those costs through massive infrastructure expenditures and even potential nationalization or municipalization of broadband networks — and some clearly would be — then you have to get serious about how those costs will be covered by private operators.

Thus, we come back to the importance of business model experimentation and pricing flexibility to this debate. I have been harping on this point for a long time now, going all the way back to this 2005 essay, “The Real Net Neutrality Debate: Pricing Flexibility Versus Pricing Regulation.” And there’s a litany of other things I’ve penned on the same point, many of which I have cited at the end of this essay.

Here are the core points I have tried to get across in those earlier essays:

• For progress to occur in any economic system, firms must be able to freely set prices for goods and services without fear of government price controls or micromanagement of business models. Heavy-handing tech mandates — especially Internet price controls — could have a profoundly deleterious impact on investment, innovation, and competition. After all, there can be no innovation or investment without a company first turning a profit.
• The Net neutrality debate is about whether the government will allow broadband services to be differentiated or specialized for unique needs. Differentiated and prioritized services and pricing are part of almost every industrial sector in a capitalistic economy. (ex: airlines, package shipping, hotels, amusement parks, grades of gasoline, etc.)  Why should it be any different for broadband? Indeed, it is essential that such flexibility be allowed precisely because it is the key to making sure more populations get served with more diversified offerings. Of course, advocates of neutrality uber alles think this is heresy, even if it is based on sound and widely-accepted economics. They just figure you can ban all sorts of business practices without it having any consequences.
• But, again, there is no such thing as a free lunch. Something has to pay for ongoing Internet investment. It doesn’t just fall like manna from heaven. Differentiated business services and pricing can help in this regard by allowing carriers to price more intensive or specialized users and uses to ensure that carriers don’t have to hit everyone – including average household users – with the same bill for service.  Why should the government make that illegal through Net neutrality regulation?
• Net neutrality can have, and already has had, unintended consequences. Consider bandwidth caps, which critics paint as some sort of nefarious, anti-consumer plot. In reality, they are just a tool to manage capacity; a tool that has been necessitated by Net neutrality regulation. When the law says you are not allowed to differentiate or specialize service offerings, you have to find other ways to manage capacity and make sure you can recoup fixed costs. In a world without the omnipresent threat of Net neutrality regulation, things might have played out quite differently. Broadband providers might have found creative ways to have other downstream providers help defray the costs of specialized services so that consumers weren’t stuck picking up the entire bill or being forced to deal with caps. For example, video game developers like Electronic Arts and Activision might be willing to help subsidize the costs associated with online gaming by picking up that expense and then amortizing the expense over a diverse universe of online gamers. Similarly, some content companies or video services could help cross-subsidize new online video ventures to ensure those costs do not have to be spread across all customers but instead only those who most demand those services. Again, this is the alternate universe that might have played out if not for the hyperventilating of vociferous regulatory advocates who worship at the alter of perfect “neutrality” in all things. To reiterate, this is not the way any other sector of our capitalist economy works. Service differentiation and price discrimination are not some sort of bizarre anomaly; they are the norm.
• When it comes to industrial organization questions, infrastructure socialism simply isn’t a sustainable long-term alternative. Sharing is not competing. We’ve tried line-sharing and forced access regimes before and they didn’t end well. Creating networks built on paper is a dangerous endeavor. In the short-term, you can milk existing infrastructures for every drop of value they have left, but eventually the bills will come due and something must pay for sustained investment and upgrades. Facilities-based competition, not infrastructure sharing is the path forward if we want truly robust and sustainable networks and markets.

Where will this debate turn next? As we saw in today’s New York Times piece, the regulatory proponents are turnung up the heat and asking for more day-to-day Net neutrality controls, making it increasingly difficult for differentiated service offerings to develop. That leaves broadband providers in the unenviable position of telling their customers that they’ll either have to live with caps or some variant of metered pricing. But bandwidth caps are increasingly controversial and, quite honestly, completely unnecessary if the carriers are at liberty to freely price their offerings to account for traffic.

Thus, I’d be willing to bet that we’ll see more broadband providers gradually phase in metered or two-part pricing schemes. Pure metering is a harder sell since many consumers resent it and it also remains unclear how easy it is to meter bits and communicate usage patterns to consumers. This leaves two-part pricing and tiered pricing. Two-part pricing would involve a flat fee for service up to a certain level and then a per-unit / metered fee over a certain level. I don’t know where the demarcation should be in terms of where the flat rate ends and the metering begins; that’s for market experimentation to sort out. But the clear advantage of this solution is that it preserves flat-rate, all-you-can-eat pricing for casual to moderate bandwidth users and only resorts to less popular metering pricing strategies when the usage is “excessive,” however that is defined. Or you can just go with tiers of service like wireless operators already have. Of course, if you have enough graduated tiers of service, it very quickly starts to resemble a metering scheme.

In the end, there’s just no way of escaping basic economics. If the law doesn’t allow service providers to use creative schemes to more efficiently allocate fixed costs, the end user will have to pick up the full cost of service. The only interesting question left is whether Net neutrality regulation will make that illegal too.

Additional Reading:

• Netflix Falls Prey to Marginal Cost Fallacy & Pleads for a Broadband Free Ride (July 8, 2011)
• Smartphones & Usage-Based Pricing: Are Price Controls Coming? (July 12, 2011)
• Why Congestion Pricing for the iPhone & Broadband Makes Sense (October 7, 2009)
• The (Un)Free Press Calls for Internet Price Controls: “The Broadband Internet Fairness Act” (June 17, 2009)
• Free Press Hypocrisy over Metering & Internet Price Controls (June 18, 2009)
• Bandwidth Cap Hysteria & the Alternative (October 4, 2008)
• Once Again, Why Not Meter Broadband Pipes?  (September 7, 2007)
• Why Not Meter? (March 12, 2007)
• The Real Net Neutrality Debate: Pricing Flexibility Versus Pricing Regulation (October 27, 2005)

Infrastructure socialism isn’t a sustainable alternative.

This seems like a logical follow-up to Berin Szoka’s previous post about technology, social activism, and government power. ReasonTV has produced this important short clip on “Cops Vs. Cameras: The Killing of Kelly Thomas & The Power of New Media.” It documents how the combined power of citizen journalism, social media, and surveillance video can ensure that our police authorities are held accountable for their actions. In this particular case, it can hopefully win some justice for Kelly Thomas, the homeless Fullerton, California man who was brutally beaten to death by police officers on the night of July 5, 2011.

There is live video from the horrific beating here, but I caution you it is not for the faint of heart. Watching the last moments of man’s life slip away from repeated blows to the head while he begs for his life and calls out for his father is, well, stomach-turning. But imagine if this video and the other citizen videos that were taking that night had not existed. As the ReasonTV clip notes, the Fullerton police department basically ignored requests for more information about the case until Kelly’s father (who was former police officer himself) took cell photos of his son’s beaten face in the hospital and released them to the public. Then the citizen videos of the beating were posted on YouTube and went viral. And then, finally, mainstream media started paying attention. And now the surveillance video from a nearby street camera has been released after citizens and activists demanded it.

While we spend a lot of time today worrying about the privacy implications of new technologies, especially surveillance technologies, episodes like these make it clear that there are also powerful benefits from these new surveillance tools. David Brin first pointed this out in his provocative 1997 book, The Transparent Society, in which he noted:

While new surveillance and data technologies pose vexing challenges, we may be wise to pause and recall what worked for us so far. Reciprocal accountability — a widely shared power to shine light, even on the mighty — is the unsung marvel of our age, empowering even eccentrics and minorities to enforce their own freedom. Shall we scrap civilization’s best tool – light — in favor of a fad of secrecy?

Of course, that doesn’t mean we shouldn’t take steps to limit the surveillance powers of our government over the citizenry. We absolutely must. But we must draw a distinction between the tools and their uses and make sure we do not go overboard with what Brin called the “fad of secrecy” such that new privacy rules limit the use and spread of these technologies.

For far too long governments have avoided accountability for their actions because of a lack of transparency. Nowhere has this been more dismaying that in matters of policing. While our law enforcement officers deserve respect for the hard jobs they have to keep the public safe, they also must account for their actions when they go too far precisely because we grant them coercive powers held by no other group in society. Luckily, new technologies can help us keep their power in check and hold them accountable. While some authorities are fighting back and trying to limit citizen efforts to record them and hold them accountable, the genie is already well out of the bottle. These surveillance tools are not going away and law enforcement authorities will now be forced to live under the gaze of an empowered citizenry. Hopefully that increases transparency and accountability in all policing activities going forward. Read Brin’s short 2011 essay “Sousveillance: A New Era for Police Accountability” for greater elaboration.

While preparing my latest Forbes column, “Does the Internet Need a Global Regulator?” I collected some excellent resources. I figured I would just post all the links here since others might find them useful as we work our way up to the big U.N. International Telecommunication Union (ITU) World Conference on International Telecommunications (WCIT) in Dubai this December. Please let me know of other things that I should add to this resource database. I’ve divided the database into “General Resources” and “Opinion Pieces”:

General Resources:

• World Conference on International Telecommunications (WCIT-12) official website
• White House statement on WCIT: “Ensuring an Open Internet,” by Lawrence Strickling, Philip Verveer, and Daniel Weitzner, May 2, 2012.
• Internet Society “What is the WCIT?” F.A.Q.
• Internet Society’s Scoop.It page curating news on WCIT
• Center for Democracy & Technology briefing paper by : “ITU Move to Expand Powers Threatens the Internet,” March 12, 2012.
• David A. Gross & Ethan Lucarelli, “The 2012 World Conference On International Telecommunications: Another Brewing Storm Over Potential UN Regulation Of The Internet,” November 2011.
• Michael Joseph Gross, “World War 3.0,” Vanity Fair, May 2012.
• [BOOK] Milton Mueller – Networks and States: The Global Politics of Internet Governance (2010).
• Internet Governance Project blog.
• [RADIO] National Public Radio: “Who — If Anyone — Should Control The Internet?” January 12, 2012.

Opinion Pieces:

• Robert McDowell, “The U.N. Threat to Internet Freedom” Wall Street Journal, February 21, 2012.
• ITU Secretary General Dr. Hamadoun Touré, “Securing the Future Benefits of Technology,” The Guardian (U.K.), March 6, 2012. [+ a recent speech on the issue.]
• Andrea Renda, “The U.N., Internet Regulator?” Wall Street Journal Europe, April 25, 2012.
• Gordon Crovitz, “The U.N. Wants to Run the Internet,” Wall Street Journal, May 6, 2012
• Adam Thierer, ”Does the Internet Need a Global Regulator?” Forbes, May 6, 2012
• Gregory Francis, “UN Moves on Internet Governance: Latest Dispatch,” CircleID, April 26, 2012.
• Aspen Institute, Toward a Single Global Digital Economy: The First Report of the Aspen Institute IDEA Project, (April 24, 2012).
• Edward J. Black, “UN’s ITU Could Become Next Internet Freedom Threat,” Huffington Post, March 9, 2012.
• Jerry Brito, “The Case Against Letting the U.N. Govern the Internet,” Time TechLand, February 13, 2012.
• Tom Tauke, Verizon, Speech at New Democrat Network Internet Governance Event, April 19, 2012
• former Rep. Rick Boucher “U.N. Efforts Put Internet Freedom at Risk,” Politico, May 3, 2012.

This morning I spoke at a U.S. Chamber of Commerce event on “Responsible Data Uses: Benefits to Consumers, Businesses and the Economy.” In preparing for the event, I dusted off some old working notes for speeches I had delivered at other events about privacy policy and “big data” and expanded them a bit to account for recent policy developments. For what it’s worth, I figured I would post those notes here.  (I apologize about the informality but I never write out my speeches, I just work from bullet points.)

—————–

Benefits of “Big Data”

• “big data” has numerous micro- and macroeconomic benefits
• Micro benefits:
  • data aggregation of all varieties has powerful social and economic benefits that are sometimes invisible to consumers and citizens but are nonetheless enjoyed by them
  • big data can positively impact the 3 key micro variables – quality, quantity & price – and benefit consumers / citizens in the process

• Macro benefits:
  • Data is the lifeblood of the information economy and it has an increasing bearing on the global competitiveness of companies and countries
  • In the old days, when we talked about comparative and competitive advantage, the focus was on natural resources, labor, and capital.
  • Today, we increasingly talk about another variable: information
  • Data is increasing one of the most important resources that can benefit economic growth, innovation, and the competitive advantage of firms and nations.

Privacy Concerns

• of course, “big data” also raises big privacy concerns for many groups and individuals
• this has led to calls for regulatory action and virtually all levels of government – federal, state, local, and international – are considering expanded controls on data collection and aggregation

America’s Privacy Regime

• I want to address what I regard as the most powerful myth that governs this debate
• namely, I speak of the myth that America doesn’t have a privacy framework that can balance these goals and concerns about “big data” and data collection in general
• we hear various advocates say that America needs a new privacy regime, and many of these advocates suggest that that regime should more like Europe’s

Europe’s Regime

• first, what is that European regime?
  • a more preemptive top-down approach / data “directives” / stringent requirements on data use
  • basically, under the EU regime, privacy trumps almost all other considerations, regardless of cost or complexity.
  • It’s more of a “Mother, May I” regime in which innovation needs to be “permissioned”

• what’s wrong with European approach?
  • We can relate this back to the question of competitive advantage
  • The European approach leaves less room for innovative uses of data and ongoing marketplace experimentation
  • There’s also some evidence that this regime might influence industry structure and competitiveness as well as the quality and quantity of choices for the consumer
  • Anecdotally-speaking, we can ask ourselves this simple question: Can any of us name a global leader in the modern digital economy that was born in Europe?
  • I suppose there are a few, but I struggle to name them
  • Now, why is that?
  • It could be high taxes and the lack of healthy market for venture capital.
  • But it also must have something to do with regulatory structure that Europe has adopted.

America’s Current Advantages

• Regardless, here’s what we do know: America’s digital economy innovators and social media operators are household names across the globe. Our firms are the envy of the world
• Moreover, while many sectors of the U.S. economy are struggling, I bet if you stopped the average Joe in the street and asked them to name one sector of America’s economy that is currently thriving and an example of innovation that others should emulate, most of them would probably mention information technology and the digital economy.
• Again, many factors may contribute to our current success relative to Europe but certainly our “light-touch” legal and regulatory approach must have had some bearing on that outcome

America’s Privacy Regime

• So, what exactly is America’s privacy regime?
• Again, some say we don’t have one and that regulation is, therefore, needed
• I beg to differ
• America does have a privacy regime; it is one that is:
  • governed by a set of evolutionary norms,
  • ongoing online marketplace interactions and experiments, contractual negotiations,
  • public and press pressures,
  • self-regulatory systems,
  • educational efforts and user empowerment,
  • personal responsibility,
  • and targeted legal enforcement and the use of state torts when true harms can be demonstrated.

•   compared with Europe, our legal regime:
• More bottom-up enforcement
• Issue-specific / Sectoral approach to addressing
• Relies on common law / case law / torts
• States have role; often more stringent than fed law
• evolving industry Self-regulation

• That’s been the uniquely American approach to privacy protection and we should not abandon it lightly.

It’s the Same Regime We’ve Used to Address Online Safety

• Importantly, it’s largely the same approach we have taken in this country toward online speech and child safety matters.
• There, too, we have focused on what I call the “3-E” approach:
  • Education
  • Empowerment, and
  • Enforcement against particularly bad apples

• Thus, in both the online child safety space as well as the privacy policy space, we have made great strides in pushing both personal responsibility and corporate responsibility as the first line of defense, not the last.
• Now, it has always been true, and will always be the case, that “more can be done.”
• Consumers could do more: We need to constantly encourage consumers to take more care to protect the personal data they care most about and to take steps to safeguard that which they do not want collected in the first place
• Companies could do more: And we also need to constantly encourage companies who collect data to take greater steps to:
  • first consider asking permission to collect and use that data
  • second, to be transparent about what data they are collection and what they are using it for
  • and third, to ensure adequate safeguards are in place to guard against unauthorized use of that data

The Difference between the Traditional American Model & the Emerging “Co-Regulatory” Model

• in a sense, this vision tracks the Obama Administration’s proposed model for privacy and data collection
• but here’s the difference: the Obama Administration wants to force this process in a more heavy-handed way by involving various federal agencies in the day-to-day management of how all these decisions get made
• in essence, it’s a small but certain step toward the European model of “co-regulation”
  • government steers, industry rows
  • “multi-stakeholder process”
  • Everyone has a “seat at the table”
  • But we don’t need “a table” if the table is being set by government
  • there’s nothing wrong with truly voluntary “multi-stakeholder” processes, but when the government is the one setting the “seats at the table” and talking about enforcing the “codes” that the committee comes up with, it opens the door to a co-regulation model  that has some real dangers:
    • If every decision about how information is used or aggregated becomes the equivalent of a committee decision — with everyone “at the table” getting a vote or a veto – then it will almost certainly be the case that less innovation occurs
    • The process could lack traditional democratic accountability / due process if more of an “agency threats” model evolves out of this.  After all, if certain officials are in charge of who gets a “seat at the table” and also responsible for enforcing whatever is decided “at the table,” it raises the question of how much pressure they can bring to bear on the process. (File this under “regulation by raised eyebrow”).
    • Any way you cut it, regulation by committee (in this case, the “multistakeholder” process) could become the equivalent of a tax on innovation and have detrimental impacts on the quality and price of online services

Conclusion

• For these reasons, we should instead continue to rely on the uniquely American model of privacy policy that balances diverse goals and values in a more spontaneous, evolutionary, and voluntary way without incessant government oversight and intervention.
• Again, the traditional American model isn’t perfect and sometimes we will need targeted statutes, torts, and even FTC (Sec. 5) enforcement to handle the bad apples out there who cause the most serious problems in terms of privacy violations or data breeches.
• But that more targeted approach to enforcement, along with the education and empowerment-based approaches I have outlined, can adapt to new challenges in this space and the child safety space while also ensuring our global competitive advantage is not sacrificed in the process.
• To sum up: let’s not casually trade in the American model for Europe’s. America’s more flexible, evolutionary model of privacy protection has served us well so far and can adapt to balance competing needs without crushing our innovative information economy or America’s global competitiveness.

Additional Reading:

• my big Mercatus Center filing to the FTC last year on privacy and Do Not Track regulation
• my recent Forbes oped, “The Problem with Obama’s “Let’s Be More Like Europe” Privacy Plan“
• Initial Thoughts on FTC’s Final Privacy Report
• video & slides from Hill Briefing on Online Privacy Policy
• Isn’t “Do Not Track” Just a “Broadcast Flag” Mandate for Privacy?
• Privacy as an Information Control Regime: The Challenges Ahead
• Obama Admin’s “Let’s-Be-Europe” Approach to Privacy Will Undermine U.S. Competitiveness
• Lessons from the Gmail Privacy Scare of 2004
• When It Comes to Information Control, Everybody Has a Pet Issue & Everyone Will Be Disappointed
• And so the IP & Porn Wars Give Way to the Privacy & Cybersecurity Wars
• Book Review: Solove’s Understanding Privacy

The folks at the Concurring Opinions blog were kind enough to invite me to participate in a 2-day symposium they are holding about Brett Frischmann’s new book, Infrastructure: The Social Value of Shared Resources. In my review, I noted that it’s an important book that offers a comprehensive and highly accessible survey of the key issues and concepts, and outlines much of the relevant literature in the field of infrastructure policy.  Frischmann’s book deserves a spot on your shelf whether you are just beginning your investigation of these issues or if you have covered them your entire life. Importantly, readers of this blog will also be interested in the separate chapters Frischmann devotes to communications policy and Net neutrality regulation, as well as his chapter on intellectual property issues.

However, my review focused on a different matter: the book’s almost complete absence of “public choice” insights and Frischmann’s general disregard for thorny “supply-side” questions.  Frischmann is so focused on making the “demand-side” case for better appreciating how open infrastructures “generate spillovers that benefit society as a whole” and facilitate various “downstream productive activities,” that he short-changes the supply-side considerations regarding how infrastructure gets funded and managed. I argue that:

When one begins to ponder infrastructure management problems through the prism of public choice theory, the resulting failures we witness become far less surprising. The sheer scale of many infrastructure projects opens the door to logrolling, rent-seeking, bureaucratic mismanagement, and even outright graft. Regulatory capture is an omnipresent threat, too. . .  any system big enough and important to be captured by special interests and affected parties often will be. Frischmann acknowledges the problem of capture in just a single footnote in the book and admits that “there are many ways in which government failures can be substantial.” (p. 165) But he asks the reader to quickly dispense with any worries about government failure since he believes “the claims rest on ideological and perhaps cultural beliefs rather than proven theory or empirical fact.” (p. 165) To the contrary, decades of public choice scholarship has empirically documented the reality of government failure and its costs to society, as well as the plain old-fashioned inefficiency often associated with large-scale government programs. For infrastructure projects in particular, the combination of these public choice factors usually adds up to massive inefficiencies and cost overruns.

From there I launch into a fuller discussion of public choice insights and outline why it is essential that such considerations inform debates about infrastructure policy going forward. Again, read my entire review here.

The fine folks at George Mason University School of Law’s Henry G. Manne Program in Law & Economics Studies have put together another stellar agenda and lineup of speakers for their Second Annual Conference on Competition, Search & Social Media. The event will be held at GMU’s School of Law on Wednesday, May 16th from 8:00 A.M. to 5:00 P.M. Panel topics are listed as follows:

PANEL 1: Antitrust and Platform Competition in Search and Social Media (This panel will discuss issues involving market definition, network effects, and dynamic considerations when analyzing search and social media platform competition.)

PANEL 2: Search, Duties to Deal, and Essential Facilities (This panel will explore the extent to which search engines should be viewed as utilities, and whether they may have a legal duty to assist their rivals under the essential facilities doctrine as it survives after Trinko and Linkline.)

PANEL 3: The Interface Between Privacy and Competitive Analysis in Search and Social Media (This panel will explore the extent to which privacy should be germane to antitrust analysis of online search and social networks, including whether privacy can be viewed as a dimension of quality and the extent to which privacy regulation may affect competition.)

PANEL 4: Are There Workable Remedies for “Search Engine Bias”? (This panel will discuss economic, legal (including First Amendment), and practical issues surrounding potential remedies to allegedly “biased” search engine results.)

I’m honored to have been asked to moderate the second panel since it focuses on an issue I’ve been given a lot of thought to lately. (See my recent working paper, “The Perils of Classifying Social Media Platforms as Public Utilities.“)

Seriously, you’d be hard-pressed to find a better set of speakers on these topics. Check them all out here, where you can also RSVP if you’re interested.

In this new Money Morning article, “The Antitrust Curse: What Apple Can Learn From Microsoft, IBM,”  David Zeiler wonders whether the antitrust lawsuit filed against Apple and several book publishers by the U.S. Department of Justice last week could open the door to a broader case against Apple or, at a minimum, simply become a major distraction to the firm and it’s ability to innovate going forward. He uses IBM and Microsoft as case studies in this regard and notes that, “the problem with being in the DOJ’s gunsight is that it distracts management, makes the company hesitant to innovate, and blemishes the company’s public image.  While antitrust woes may not have been entirely responsible for Microsoft and IBM ceding their dominant positions in tech, they were clearly a major factor,” he says. “And worse for Apple, the e-book case could be just the beginning.”

Quite right. I raised the same concern in my recent Forbes column,”Regulatory, Antitrust and Disruptive Risks Threaten Apple’s Empire,” which Zeiler was kind enough to quote in his essay. In that piece, I argued:

Even if Apple beats back [the eBooks] investigation, broader questions are being raised about the company’s power that could invite a much broader investigation. The danger for Apple is that antitrust becomes an omnipresent threat that must be factored into all ongoing business decisions. Antitrust is a particular danger to Apple because the firm is highly vertically integrated and that integration is the source of many of their innovations.  As earlier tech titans like IBM and Microsoft learned, when antitrust hangs like the Sword of Damocles, every decision about how to evolve and innovate becomes a calculated gamble.

Regarding the earlier impact that antitrust Sword of Damocles had on Microsoft, Zeiler unearthed this terrific 2005 quote from Mark Kroese, a general manager of information services at the Microsoft Network, who described the impact of the MS antitrust case on innovation at the firm as follows: “Working at Microsoft today vs. five years ago is different,” Kroese said. “If anyone thinks the antitrust case hasn’t slowed us down, you’re wrong. If I want to meet with a products manager for Windows, there needs to be three lawyers in the room. We have to be so careful, we err on the side of caution. We are on such a fine line of conduct.” Regarding how antitrust chilled IBM, Zeiler cites veteran tech journalist Steve Wildstrom of Tech.pinions who noted,  “Twelve years of litigation were an enormous distraction in a time of rapid technological and business change. IBM management became cautious and over-lawyered, constantly looking over its shoulder-a condition that persisted for years after the case ended. The antitrust case was almost certainly a major cause of the serious decline of IBM in the late 1980s and early 90s,” Wildstrom said.

Of course, it is impossible to scientifically determine to what degree antitrust harassment contributed to either IBM or Microsoft’s inability to innovate and adapt to the rapidly changing market conditions. And let’s be clear: both IBM and MS have found ways to rebound and innovate in other ways. But one wonders what was lost in the process as the threat of antitrust constantly loomed and potentially chilled innovative efforts that could have kept both firms on the cutting-edge.

It’s not just Apple that faces similar threats today. Google is obviously another company increasingly mentioned as an antitrust target. Commenting of the dangers of a potential case against Google, Bernstein Research senior analyst Carlos Kirjner argues that “even if regulatory proceedings come to naught, the process has the potential, in the most extreme circumstances, to consume so much of the company’s energy that it can lead to important strategic missteps: many believe that Microsoft missed the boat on the Internet, and IBM on the importance of the personal computer, in large part because their management teams were focused on defending against the DoJ’s antitrust efforts.”

The better approach to disciplining tech firms and markets is to rely less on intervention and more on Schumpeter’s “perennial gales of creative destruction,” which are blowing harder than ever in our modern high-tech economy. In markets built largely upon binary code and governed by Moore’s Law, the pace and nature of change has become hyper-Schumpeterian: unrelenting and utterly unpredictable. Innovative risk-takers are constantly shaking things up and displacing yesterday’s lumbering, lethargic giants. Just ask some of the players that have been largely left in the dust, including AOL, AltaVista, MySpace, Palm, and others. Of course, there’s my favorite recent case study: Research In Motion’s BlackBerry smartphone.  As I noted in my recent column, “Bye Bye BlackBerry. How Long Will Apple Last?” BlackBerry was virtually synonymous with “smartphones” and was considered one of the tech titans that seemed destined to dominate for many years to come. But now the BlackBerry’s days appear numbered and its parent company Research In Motion Ltd. is struggling for its very survival.

Too many tech industry pundits today ignore these dynamic realities and instead rely a myopic analytical approach to the information economy that is fundamentally static in character. Many static equilibrium scholars in both the legal and economic profession tend to adopt a snapshot view of markets and innovation. Such critics often express an overly nostalgic view of the technological past while adopting an excessively gloomy view of the present and the chances for future progress.

But, a la Schumpeter, modern tech markets are highly dynamic. There is no static end-state, “perfect competition,” or “market equilibrium” in today’s information technology marketplace. Change and innovation are chaotic, non-linear, and paradigm-shattering. Schumpeter said it best long ago when he noted how, “in capitalist reality as distinguished from its textbook picture, it is not [perfect] competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization… competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. This kind of competition is as much more effective than the other,” he argued, because the “ever-present threat” of dynamic, disruptive change “disciplines before it attacks.”

By contrast, the static equilibrium mindset is myopically fixated on short-term market share and price competition while ignoring “competition for innovation,” which is what matters most in the more dynamic Schumpeterian model. “Schumpeterian competition is primarily about active, risk-taking decision makers who seek to change their parameters,” note economists Jerry Ellig and Daniel Lin. “It is about continually destroying the old economic structure from within and replacing it with a new one.” Thus, while static or “perfect competition” models assume away innovation and are preoccupied with equilibrium, dynamic models revolve around disequilibrium and assume that the only constant is change. What is most important to economic progress, therefore, is the ongoing process of constant experimentation and spontaneous discovery that allows new business models and organizational structures to emerge in response to market signals.

The other danger of the static equilibrium mindset is that the same new innovators and innovations that obtain success and scale quite rapidly as a result of this process are sometimes thought to possess problematic market power. Accusations of “monopoly” quickly follow. As Nobel Laureate Ronald Coase noted, “if an economist finds something—a business practice of one sort or another—that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of understandable practices tends to be very large, and the reliance on a monopoly explanation, frequent,” he argued.  Of course, non-economists are just as likely—perhaps more likely—to make that same error. This is why a short-term fixation on market share and market power is so problematic.

Moreover, as Schumpeter also taught us, it is essential that uneven entrepreneurial gains be tolerated so that innovation can occur and be continuously incentivized. Economies need innovators to take risks because progress is born from it. Penalizing the risk-takers by trying to “level the playing field” through rash regulation or antitrust interventions will simply sap the entrepreneurial spirit from the marketplace, limit technological innovation, and diminish the possibility of progress and prosperity over the long-haul.

If you’d like a better understanding of this dynamic conception of competition and an explanation of why the static equilibrium mindset — especially in the antitrust field — is so horribly misguided, then I strongly recommend you begin your investigation with the following readings:

Two weeks ago, I penned a column for Forbes about the astonishing rise and fall of BlackBerry (“Bye Bye BlackBerry. How Long Will Apple Last?”), which somehow became the most widely-read and retweeted thing I’ve ever written in my life. I argued that BlackBerry’s story — indeed, the story of the entire U.S. smartphone sector — is the living embodiment of Schumpeterian creative destruction. Joseph Schumpeter’s “perennial gales of creative destruction” are blowing harder than ever in today’s tech economy and laying waste to those who don’t innovate fast enough, I argued, and nowhere is that more true than in the smartphone sector. I noted how, just five years ago, “BlackBerry” was virtually synonymous with “smartphones” and was considered one of the tech titans that seemed destined to dominate for many years to come. But now the BlackBerry’s days appear numbered and its parent company Research In Motion Ltd. is struggling for its very survival.

But there’s another company that I ignored in that essay that was also perched atop the mobile handset hill for a long time: Nokia. Here’s the horrifying opening lines from a Wall Street Journal story today about the company (“Nokia Crisis Deepens, Shares Plunge“):

Nokia Corp., long the biggest name in the cellphone business, is scrambling to stay relevant in the smartphone age. On Wednesday the company warned things will get worse before they get better, saying that competitors are rapidly eating into its sales in emerging markets such as China and India. Nokia also said its newest phone in the U.S. had a software glitch that is preventing some users from connecting to the Internet, marring its attempt to fight into the world’s most important smartphone market. The company’s American depositary shares slid 16% to a 15-year low of $4.24 in New York. Its market capitalization now stands at $16 billion, down from $90 billion five years ago.

It gets worse from there. The article continues on to document Nokia’s gradual slide and notes that, “like BlackBerry maker Research In Motion Ltd., Nokia is trying to re-establish its relevance in a market dominated by Apple Inc.’s iPhone and Google-powered devices. Both Nokia and RIM are working on new devices they hope will make a splash, even as Apple and Android work on improvements of their own.”

To put into context how remarkable this rapid reversal of fortunes is, you need to try remember what life was like just five years ago:

• The iPhone and Android had not yet landed.
• Most of the best-selling phones of 2007 were made by Nokia and Motorola.
• Feature phones still dominated the market; smartphones were still a luxury (and a clunky luxury at that).
• There were no app stores and what “apps” did exist were mostly proprietary and device or carrier-specific.
• There was no 4G service.
• And regulatory advocates like Tim Wu and the New America Foundation were running around saying that the FCC needed to pursue massive regulation of the cellular industry for a variety of silly reasons.

In those now-seemingly Mobile Dark Ages, those competing for power included Nokia, Motorola, LG, Sony, BlackBerry, Palm, and Microsoft, among others. Some pundits thought the idea of entry by anyone else — especially Apple and Google — was simply silly. Here are some of the more entertaining predictions I unearthed when researching my Forbes piece two weeks ago:

• In December 2006, Palm CEO Ed Colligan summarily dismissed the idea that a traditional personal computing company could compete in the smartphone business. “We’ve learned and struggled for a few years here figuring out how to make a decent phone,” he said. “PC guys are not going to just figure this out. They’re not going to just walk in.”
• In January 2007, Microsoft CEO Steve Ballmer laughed off the prospect of an expensive smartphone without a keyboard having a chance in the marketplace as follows: “Five hundred dollars? Fully subsidized? With a plan? I said that’s the most expensive phone in the world and it doesn’t appeal to business customers because it doesn’t have a keyboard, which makes it not a very good e-mail machine.”
• In March 2007, computing industry pundit John C. Dvorak argued that “Apple should pull the plug on the iPhone” since “There is no likelihood that Apple can be successful in a business this competitive.” Dvorak believed the mobile handset business was already locked up by the era’s major players. “This is not an emerging business. In fact it’s gone so far that it’s in the process of consolidation with probably two players dominating everything, Nokia Corp. and Motorola Inc.”

Of course, we now know how this story turned out. Today, less than five years after these predictions were made, Nokia’s profits and market share have plummeted and a struggling Motorola was purchased by Google last summer. Meanwhile, Palm appears dead and Microsoft is struggling to win back all the market share it has lost to Apple and Google in this arena. Of course, Microsoft has partnered with Nokia to try to make a go of it together. Five years ago, the Antitrust Gods would have likely thrown down the hammer and stopped such a deal. Today, many analysts wonder if MS has made yet another strategic blunder by partnering with Nokia. Their new Lumia 900 is a very impressive device, but it’s already been plagued by design flaws. Moreover, as today’s Journal article notes, “It’s still far from clear whether Nokia’s effort will be enough to convince many customers that its smartphones are a good alternative to the iPhone and Android devices. Part of the reason: iPhone and Android offer a much greater array of ‘apps’ built by third-party developers.”

Meanwhile, wireless carriers (Sprint, T-Mobile, Verizon, AT&T, etc.) are suffering from whiplash as they wonder how Apple and Google flew right by them to become the focus of all the headlines and the darlings of Wall Street analysts. This is all part of the ongoing “Gravitational Shift” we are witnessing in the mobile ecosystem, as economist Tom Hazlett argues in a Barron’s oped this week. “The telecommunications industry’s center of gravity has shifted,” Hazlett noted. “The edge is squeezing the core.” Hazlett continues on:

Competition among the physical networks spins profits out to the virtual networks. Apple’s value (from iPhones and iPads) to the wireless industry was estimated in early February at $248 billion—about 92% of the enterprise value of the entire U.S. mobile-network sector. Apple owns not a single base station or wireless license; it builds no networks. And yet it has emerged, in four short years, as “dominant in the mobile market”—an unqualified assessment offered by Walter Isaacson in his superb Steve Jobs biography.

I cannot find a more dynamic, Schumpeterian market on Planet Earth than today’s mobile marketplace. Everything and everyone has been upended in just 5 years. Not even Schumpeter could have imagined creative destruction on this scale.

Nokia after the iPhone

So, the Department of Justice has formally filed suit against Apple and several major book publishers claiming collusion over eBook pricing. Let’s say Apple and the publishers are guilty as charged and in violation of our nation’s antitrust laws. Here’s my opinion on that: So what? What Apple and the publishers are doing here is trying to find a way to sustain creative works in an era when copyright law is slowly dying. As I noted here in a post yesterday, I take no joy in reporting the fact that property rights for intellectual creations no longer function effectively. I wish they did still work, but they are failing rather miserably in an age of highly decentralized digital dissemination. Moreover, I am not prepared to see government go to absurd enforcement extremes in an attempt to make intellectual property rights work. But, that being said, something needs to sustain and cross-subsidize cultural creations in an age of mass piracy. I have increasingly come to believe that consolidation of content and conduit (or devices) is a big part of the answer. Alternatively, some sort of informal collusion among cultural creators and information distributors may be the answer.

Apple and the publishers have figured that out and come up with a plan that keeps intellectual works flowing while making sure that the creators behind them get paid. At a time when copyright critics always say “just find a better business model” Apple and the publishers did just that. But now Department of Justice officials say that business model should be forbidden. That’s crazy.  If we’re going to let copyright die, we should at least grant more pricing and deal-making flexibility to the creative community to structure business arrangements that might give them a lifeline.

But won’t such deals give publishers and other creative artists and industries more pricing power that will help them keep prices up artificially? Yes, of course! That is the whole point! God forbid we actually have to pay something to cultural creators. Ain’t that a scandal. But here’s a news flash: That’s what copyright law was all about, too. It was about helping creators put some fences around their “property” to help them maintain some degree of pricing power for goods with zero marginal cost. The scheme worked brilliantly for many years. It spawned a vibrant marketplace of ideas and helped America become the leading exporter of expressive works on the planet. But now the effectiveness of traditional copyright is fading rapidly. Industry consolidation, cross-promotions, pricing deals, and so on, will increasingly be the “better business model” some will turn to.  So, are we going to allow it? Or will critics just keep mouthing “go find a better business model” and have the government step in every time they don’t like the one industry chooses?  I say let experimentation continue.

Heritage Foundation released a new study this week arguing that “Congress Should Not Authorize States to Expand Collection of Taxes on Internet and Mail Order Sales.” It’s a good contribution to the ongoing debate over Internet tax policy. In the paper, David S. Addington, the Vice President for Domestic and Economic Policy at Heritage, takes a close look at the constitutional considerations in play in this debate. Specifically, he examines the wisdom of S. 1832, “The Marketplace Fairness Act.” Addington argues that, “enactment of S. 1832 would discourage free market competition” and raise a host of other issues:

The Constitution of the United States has set the legal baseline—the level playing field—around which the American free-market economy has built itself. The Constitution, as reflected in the Quill decision, is the source of the present arrangement regarding collection of state sales and use taxes by remote sellers. Ever since the Supreme Court decided Quill in 1992, American businesses have made millions of business decisions in the competitive marketplace based in part on settled expectations regarding state taxation affecting their sales transactions. The states and businesses advocating S. 1832 seek to change the current, constitutionally prescribed playing field. They seek to use governmental power to intervene in the economy to help in-state, store-based businesses by imposing a new tax-collection burden on out-of-state competitors who sell over the Internet, through mail order catalogs, or by telephone. Free-market principles generally discourage such government intervention in the economy to pick winners and losers based on legislative policy preferences.

Veronique de Rugy and I raised similar concerns in both a recent Mercatus white paper (“The Internet, Sales Taxes, and Tax Competition“) and an earlier 2003 Cato white paper, (“The Internet Tax Solution: Tax Competition, Not Tax Collusion”). We argued that there are better ways to achieve “tax fairness” without sacrificing tax competition or opening the doors to unjust, unconstitutional, and burdensome state-based taxation of interstate sales. Specifically, we point out that an “origin-based” sourcing rule would be the cleanest, most pro-constitutional, and pro-competitive alternative. I also discussed these issues at a recent Cato event. [Video follows.]

Andrew Orlowski of The Register (U.K.) recently posted a very interesting essay making the case for treating online copyright and privacy as essentially the same problem in need of the same solution: increased property rights. In his essay (“‘Don’t break the internet’: How an idiot’s slogan stole your privacy“), he argues that, “The absence of permissions on our personal data and the absence of permissions on digital copyright objects are two sides of the same coin. Economically and legally they’re an absence of property rights – and an insistence on preserving the internet as a childlike, utopian world, where nobody owns anything, or ever turns a request down. But as we’ve seen, you can build things like libraries with permissions too – and create new markets.” He argues that “no matter what law you pass, it won’t work unless there’s ownership attached to data, and you, as the individual, are the ultimate owner. From the basis of ownership, we can then agree what kind of rights are associated with the data – eg, the right to exclude people from it, the right to sell it or exchange it – and then build a permission-based world on top of that.”

And so, he concludes, we should set aside concerns about Internet regulation and information control and get down to the business of engineering solutions that would help us property-tize both intangible creations and intangible facts about ourselves to better shield our intellectual creations and our privacy in the information age. He builds on the thoughts of Mark Bide, a tech consultant:

For Bide, privacy and content markets are just a technical challenges that need to be addressed intelligently.”You can take two views,” he told me. “One is that every piece of information flowing around a network is a good thing, and we should know everything about everybody, and have no constraints on access to it all.” People who believe this, he added, tend to be inflexible – there is no half-way house. “The alternative view is that we can take the technology to make privacy and intellectual property work on the network. The function of copyright is to allow creators and people who invest in creation to define how it can be used. That’s the purpose of it. “So which way do we want to do it?” he asks. “Do we want to throw up our hands and do nothing? The workings of a civilised society need both privacy and creator’s rights.”  But this a new way of thinking about things: it will be met with cognitive dissonance. Copyright activists who fight property rights on the internet and have never seen a copyright law they like, generally do like their privacy. They want to preserve it, and will support laws that do. But to succeed, they’ll need to argue for stronger property rights. They have yet to realise that their opponents in the copyright wars have been arguing for those too, for years. Both sides of the copyright “fight” actually need the same thing. This is odd, I said to Bide. How can he account for this irony? “Ah,” says Bide. “Privacy and copyright are two things nobody cares about unless it’s their own privacy, and their own copyright.”

These are important insights that get at a fundamental truth that all too many people ignore today: At root, most information control efforts are related and solutions for one problem can often be used to address others. But there’s another insight that Orlowski ignores: Whether we are discussing copyright, privacy, online speech and child safety, or cybersecurity, all these efforts to control the free flow of digitized bits over decentralized global networks will be increasingly complex, costly, and riddled with myriad unintended consequences. Importantly, that is true whether you seek to control information flows through top-down administrative regulation or by assigning and enforcing property rights in intellectual creations or private information.

Let me elaborate a bit (and I apologize for the rambling mess of rant that follows).

Parallels in Debates over Copyright & Privacy Protection

In several essays here over the past few years I have attempted to draw parallels between the battles over protecting digital copyright and online privacy, as well as battle over online safety/speech and cybersecurity. Here are a few of those essays in case you’re interested in seeing the evolution of my thinking about this:

• When It Comes to Information Control, Everybody Has a Pet Issue & Everyone Will Be Disappointed
• And so the IP & Porn Wars Give Way to the Privacy & Cybersecurity Wars
• SOPA & Selective Memory about a Technologically Incompetent Congress
• Privacy as an Information Control Regime: The Challenges Ahead
• Isn’t “Do Not Track” Just a “Broadcast Flag” Mandate for Privacy?

In those essays I have argued that a combination of selective morality and wishful thinking are at work in the information policy world these days. In essence, people hate Internet regulation… until they love it! Here’s how I summarized that fact during the debate over SOPA:

… conservatives rush out and breathlessly denounce each and every effort to impose Net neutrality regulation because of the danger of empowering an already over-zealous bunch of bumbling bureaucrats at the FCC. (And I agree with them.) Yet, with their next breath many conservatives praise SOPA even though it also empowers government to muck with the inner workings of the Internet. Some of those conservatives are also turning a blind eye to the growing appetite of the defense/security community to meddle with the Net’s architecture in the name of avoiding any number of non-catastrophes. Meanwhile, the liberals decry SOPA and want it stopped at all costs. There’s never been a copyright protection measure they liked, of course, but each time one pops up we hear them claim that our analog era Congress is not well-positioned to be designing industrial policy schemes for the Internet. (And I generally agree with them.) But most liberals do a complete 180 whenever online privacy or Net neutrality regulations are the subject of congressional inquiry. Suddenly, the cyber-oafs in Congress are considered veritable technocratic philosopher kings who we should trust to guard our cyber-freedoms to lead us to the digital promised land.

Again, it’s both selective morality and wishful thinking. It’s selective morality in that some folks think certain values are sacrosanct and deserving of a “by-any-means-necessary” enforcement attitude, yet they are often just as likely to denounce similar information control efforts when it comes to issues or values they don’t give a damn about.  And it is wishful thinking in that you can’t run around insisting that “information wants to be free” in some contexts but then express outrage when something that you want to bottle up turns out to “just want to be free” as well!

But the important takeaway here is that, consistent with what Orlowski argues, I believe that online copyright and privacy are essentially the same problem: It’s an information control problem.

Potential Costs of Control

Once you start thinking about Internet policy debates as a single issue — namely, information control — you can begin to investigate the potential costs of control in a somewhat more objective fashion. Of course, challenging issues remain:

1. Which method of control should we choose? On one hand, there are many varieties of administrative regulation, technical infrastructure controls, and device mandates. On the other hand, there are property rights and liability / tort schemes. And there are many hybrid enforcement models, such as increasingly popular “co-regulation” models, government standard-setting, and “nudging” of system defaults. Each method will entail different costs and trade-offs.
2. What metric(s) should we use when attempting to determine whether the benefits of control exceed the costs? Ask any advocate of information control about whether the costs might exceed the benefits of regulation for their pet issue and they will typically suggest that either (a) there are no costs or that (b) the benefits dwarf any costs that may exist. But all too often the benefits they identify are extremely subjective and amorphous in character (“privacy,” “safety,” and “security” are hard to quantify, after all) while the costs are very real and increasingly substantial.

In my view, these practical questions are increasingly the most interesting issues to explore in the field of cyberlaw and digital economics. We can debate the normative or ethical considerations until we’re all blue in the face and ready to rip each other’s heads off, but I am less and less interested in such squabbles. Instead, I keep coming back to the question of how we’ll go about controlling info flows and how much effort and resources it makes sense to expend in pursuit of each of the values identified above. Some of the specific considerations I find myself asking in every paper I write these days include:

(A) Will the proposed form of information control tie us up in the courts forever, lead to increasingly onerous and unworkable liability norms, and end up yielding outrageous litigation costs?

(B) Will the proposed form of information control require a significant increase in regulatory bureaucracy? How many levels of government will need to be involved in the proposed enforcement scheme? How many new offices and officials will need to be empowered in the hope of achieving some measure of control?

(C) What are the alternatives to the proposed form of information control? Are there less costly or less restrictive means of addressing the concern in question? For example, education and empowerment effort are often an effective way to address many online safety and digital privacy concerns. Can we use those methods in conjunction with social norms, public pressure, self-regulation, informal contracting, and other methods to address these and other concerns?

For me, the costs associated with the A & B are increasing so rapidly that I almost always default to C as the better approach. Importantly, although A & B will be less onerous or costly when the solution is of the increased property-ization variety than of the administrative regulation variety, that does not mean property rights-based solutions for information are costless. Indeed, I increasingly find myself concluding that C solutions are more cost-effective even compared to increased property rights.

Practical Advice Once You Accept the Increasing Costs & Complications of Control

At this point, readers may be thinking: “Wait a minute, this dude is just some kooky libertarian who doesn’t want any form of information control, so he’s just trying to rationalize anarchy here.” No, I’m not. I certainly favor less control across the board than most people, but I also understand that there are times, at the margin, when some forms of “control” are necessary. But my views on the wisdom of control are heavily influenced by the costs of control. The costs of control — broadly defined — are a key factor in every cost-benefit analysis I do related to the wisdom of Net regulation and information control methods — even when one of those methods is increased “property-ization.” And because I have come to believe that those costs are going up and that most information control efforts will not work well in practice, I have boiled down my advice on this front to two simple principles:

1. Choose your info control battles wisely. Figure out where the most serious harms or threats lie and then target the info control solution accordingly and forget about the rest. For example, in child safety debates, that would mean going after child porn rings but leaving run-of-the-mill adult porn alone entirely. In copyright, it would mean nailing the largest commercial mass piracy sites but accepting a certain amount of casual sharing. In the field of personal info, it means singling out health and financial information and data for special protections and likely giving up on most other forms of info control. And so on. In essence, these are where the greatest potential harms lie that most people would consider intolerable. As you move further away from such issues, the case for control becomes harder and harder and the costs will almost certainly exceed the benefits.
2. Have a good backup plan in mind when those info control plans fail anyway. That backup plan should generally be based on education, empowerment, coping strategies, and resiliency. Again, these are the “C” solutions mentioned above. [I developed this model more robustly in the second half of this recent paper.] This approach won’t be perfect but it will likely be what you’ll end up relying on anyway, so you better start thinking about plowing more resources into this alternative approach even while you’re trying to devise info control mechanisms.

Let me just say a brief word to my market-oriented friends who are dismayed by my inclusion of property rights in the mix of “information control” efforts. I’m a big believer in the importance of property rights in many contexts, but context does matter. More specifically, physicality matters. It is easy to create property rights in tangible goods and almost always right to do so. Property rights in intangible ideas and creations raise special issues, however. Because ideas are non-rivalrous and have public good qualities, it makes property-ization more complicated and less effective. Property rights in facts can also come into conflict with other values and more well-established rights, especially freedom of speech and expression.

On the privacy front, Eugene Volokh made this point in his famous 2000 law review article, “Freedom of Speech, Information Privacy, and the Troubling Implications of a Right to Stop People from Speaking About You,” when he noted that, “The difficulty[with] the right to information privacy — the right to control other people’s communication of personally identifiable information about you — is a right to have the government stop people from speaking about you. And the First Amendment (which is already our basic code of “fair information practices”) generally bars the government from “control[ling the communication] of information,” either by direct regulation or through the authorization of private lawsuits.” That doesn’t mean free speech values should always trump privacy values, but denying this tension is just plain silly. If you want to propertytize all personal information, then you better be prepared to explain how that plays out in practice. How far are you prepared to go to ban the dissemination of facts? Would you place prior restraint on the press to accomplish it? Would you ban a historian from writing a biographies that reveal intimate facts about the subject? Would you shut down all the online sites and services that rely on a certain amount of personal information to fuel their free offerings?

Likewise, copyright law was far more effective in the analog age when we were still pressing music on vinyl and plastic. As soon as digitization become widespread, it was pretty much game over for traditional copyright law and now we are off and running with all sorts of convoluted and increasingly costly regulatory regimes. It’s not that I don’t want these some of these schemes to work — I’ve been a long-time copyright defender — but, again, the practicality of control simply must be considered here. I am not will to “pay any price, bear any burden” in defense of protecting intellectual property rights even as I remain outraged by the staggering amount of free-riding at work every single second of the day on the Internet. So, adopting the framework I outlined about, we might try targeted solutions to go after the biggest of those freeloaders — commercial mass piracy hubs — but we should generally avoid the sort of ham-handed technical control methods we saw in SOPA and other fights, like the broadcast flag battle among others. But, generally speaking, property rights just aren’t going to work as well in this space going forward. I’ve come to believe that the best hope lies in massive consolidation of content and conduit. In other words, pipe and device owners need to buy out all the content-creating industries and just embed a small fee in their monthly services to cross-subsidize content. This is essentially a private collective licensing solution and it is not unprecedented. Nor is it perfect. It will be very leaky. Plenty of piracy will still take place. But it will probably offer creators a better chance of finding a sustainable revenue stream than the current system does. The old copyright system that served them and us so well is dying and they had better start thinking of alternatives like this. Of course, antitrust law may never allow it, so I could be wasting my breath here. (Just look at all the grief that antitrust officials both here and abroad are giving Apple and eBook sellers for working together even though that it probably the best scheme devised in recent memory to sustain publishing in an age of mass piracy. Policymakers should be encouraging more of that sort of thing, not punishing it.)

An Uncertain Future

So, to wrap up… I can imagine a future in which both heavy-handed, top-down info control efforts and property / liability solutions are failing almost universally because of the ubiquitous, instantaneous, quicksilver-like flow of information across decentralized digital networks. Some utopians will argue that such a world will be better in every way than the one we live in today. I do not share such hyper-optimism. While I believe that, on balance, the free flow if information generally benefits society, I also understand how it creates enormous angst and intractable challenges for many. It’s a world in which copyright is a hollow shell of its former self that offers creators very little protection for their expressive works. And it’s a world in which personal privacy is harder to safeguard with each passing day because no matter how hard we try to property-tize facts about ourselves, that enforcement model simply breaks down at some point or becomes socially and economically intolerable. As with copyright, efforts to property-tize personal information will lose the battle against data sharing. As computer scientist Ben Adida argued in his essay, “(Your) Information Wants to be Free,” “unfortunately, information replication doesn’t discriminate: your personal data, credit cards and medical problems alike, also want to be free. Keeping it secret is really, really hard.”

Indeed, and it is growing harder by the day. Contrary to what Orlowski suggests, therefore, this isn’t a simple engineering problem. I wish it were as easy as he suggests to build “permissions-based markets” because they could have real benefits for individuals and society. But it is most certainly not that simple. It is far more costly and complicated than ever to devise workable information control schemes on one hand and “permissions-based” property rights schemes on the other. In some cases, I might still be willing to try the latter, but unlike Orlowski, I just don’t place much faith in the success of the endeavor.

Yesterday on TechCrunch, Josh Constine posted an interesting essay about how some in the press were “Selling Digital Fear” on the privacy front. His specific target was The Wall Street Journal, which has been running an ongoing investigation of online privacy issues with a particular focus on online apps. Much of the reporting in their “What They Know” series has been valuable in that it has helped shine light on some data collection practices and privacy concerns that deserve more scrutiny. But as Constine notes, sometimes the articles in the WSJ series lack sufficient context, fail to discuss trade-offs, or do not identify any concrete harm or risk to users. In other words, some of it is just simple fear-mongering. Constine argues:

Reality has yet to stop media outlets from yelling about privacy, and because the WSJ writers were on assignment, they wrote the “Selling You On Facebook” hit piece despite thin findings. These kind of articles can make mainstream users so worried about the worst-case scenario of what could happen to their data, they don’t see the value they get in exchange for it. “Selling You On Facebook” does bring up the important topic of how apps can utilize personal data granted to them by their users, but it overstates the risks. Yes, the business models of Facebook and the apps on its platform depend on your personal information, but so do the services they provide. That means each user needs to decide what information to grant to who, and Facebook has spent years making the terms of this value exchange as clear as possible.

“While sensationalizing the dangers of online privacy sure drives page views and ad revenue,” Constine also noted, “it also impedes innovation and harms the business of honest software developers.” These trade-offs are important because, to the extent policymakers get more interested in pursing privacy regulations based on these fears, they could force higher prices or less innovation upon us with very little benefit in exchange.

Of course, the press generating hypothetical fears or greatly inflating dangers is nothing new. We have seen it happen many times in the past and it can be seen at work in many other fields today (online child safety is a good example). In my recent 80-page paper on “Technopanics, Threat Inflation, and the Danger of an Information Technology Precautionary Principle,” I discussed how and why the press and other players inflate threats and sell fear. Here’s a passage from my paper:

“The most obvious reason that doomsday fears get disproportionate public attention is that bad news is newsworthy, and frightening forecasts cause people to sit up and take notice,” Julian Simon astutely observed in 1996.[1] That is equally true today.[2] Many media outlets and sensationalist authors sometimes use fear-based rhetorical devices to gain influence or sell books. “Opportunists will take advantage of this fear for personal and institutional gain,” notes University of Colorado Law School professor Paul Ohm.[3]

Fear mongering and prophecies of doom have always been with us, since they represent easy ways to attract attention and get heard. “Pessimism has always been big box office,” notes [Matt] Ridley.[4] This is even more true in the midst of the modern information age cacophony. Breaking through all the noise is hard when competition for our eyes and ears is so intense. It should not be surprising, therefore, that sensationalism and alarmism are used as media differentiation tactics. This is particularly true as it relates to kids and online safety.[5] “Unbalanced headlines and confusion have contributed to the climate of anxiety that surrounds public discourse on children’s use of new technology,” argues Professor Sonia Livingstone of the London School Economics. “Panic and fear often drown out evidence.”[6]

Sadly, most of us are eager listeners and lap up bad news, even when it is overhyped, exaggerated, or misreported. [Michael] Shermer notes that psychologists have identified this phenomenon as “negativity bias,” or “the tendency to pay closer attention and give more weight to negative events, beliefs, and information than to positive.”[7] Negativity bias, which is closely related to the phenomenon of “pessimistic bias” …  is frequently on display in debates over online child safety, digital privacy, and cybersecurity.

Imagine the following scenario. The government passes a law that includes regulations governing “transactional consent” for retail commerce. These regulations stipulate how buyers and sellers of various goods shall do business. Some of the rules give the sellers special rights to demand that the stores carry some of their goods as well as rules stipulating that stores not carry the goods of competing sellers from other markets. On the flip side, other preexisting rules give buyers the right to demand that certain sellers deal their goods to them at regulated rates.

Now, it’s true that a contractual negotiation takes place in this “marketplace” governed by ”transactional consent” regulations, but does this sound like a truly free market to you? Most of us would say No.

Regrettably, that’s the essential error that the American Conservative Union (ACU) makes in a letter they sent to members of Congress this week in which they made the case against H.R. 3675 and S. 2008, “The Next Generation Television Marketplace Act.” That bill, which is sponsored by Senator Jim DeMint (R-SC) and Rep. Steve Scalise (R-LA), represents a comprehensive attempt to deregulate America’s heavily regulated video marketplace. In a recent Forbes oped, I argued that the DeMint-Scalise effort would take us “Toward a True Free Market in Television Programming” by eliminating a litany of archaic media regulations that should have never been on the books to begin with. The measure would:

• eliminate: “retransmission consent” regulations (rules governing contractual negotiations for content);
• end “must carry” mandates (the requirement that video distributors carry broadcast signals even if they don’t want to);
• repeal “network non-duplication” and “syndicated exclusivity” regulations (rules that prohibit distributors from striking deals with broadcasters outside their local communities);
• end various media ownership regulations; and
• end the compulsory licensing requirements of the Copyright Act of 1976, which essentially forced a “duty to deal” upon content owners to the benefit of video distributors.

Despite these clearly deregulatory provisions, in its letter to Capitol Hill, the ACU argues that the DeMint-Scalise bill would somehow interfere with what they regard as a free market in video programming. The ACU writes:

one of the major outcomes of the bill would be to strip away the negotiation process known as “retransmission consent.”  This process created a marketplace to ensure that broadcasters were compensated by pay-tv providers for the use of their signal and content. In 1992 Congress set up “retransmission consent” — a process by which broadcasters and the pay-tv industry would have to negotiate with each other for the use of the broadcast signal.  This prevented the pay-tv industry’s previous practice of using the signal for free and then profiting from its retransmission by selling the broadcasters’ content as part of their basic service. The programming that is most viewed today is still produced by broadcasting companies.  Broadcasters take risks by investing significant amounts of money into content production and marketing, and should have the right of determining its distribution.

It continues on:

The reality is that today we have a functioning market in which opposing parties are able to bring value to the negotiating table.  By stripping away the right to compensation for the use of the signal the government would be tipping the scales heavily to the side of the pay-tv companies.  It would distort the marketplace and allow an uncompensated use of broadcast signals and content and is certainly not “deregulation.”  So we urge you to oppose the retransmission consent provisions contained in HR 3675 and S 2008.

ACU has mistakenly equated the retransmission consent regulatory process with an actual free market contracting process. The two are not synonymous. Again, there are many layers of red tape that continue to encumber this marketplace and it would be incorrect to claim that the contracting process for video signals today represents a truly free and unfettered marketplace. The government has its thumb on one side of the scales with the retrans, must carry, and out-of-market signal regulations, but government simultaneously has its other thumb on the other side of the scale with the compulsory licensing requirements. And plenty of other regs litter the video landscape.  Thus, contrary to what the ACU claims, (1) a truly free video marketplace does not exist today because, by definition, a truly free marketplace would not be cluttered with so many federal regulations; and (2) the DeMint-Scalise bill absolutely does represent genuine deregulation of this marketplace since it would remove those unnecessary regulations. These are indisputable facts. No contortion of the English language can render them otherwise.

Unsurprisingly, because the ACU has made the mistake of assuming we currently live in a free market nirvana, it makes another error commonly heard in this debate. The ACU claims that an elimination of retransmission consent rules represents the end of free market contracting for video services. Indeed, the ACU’s claim that the DeMint-Scalise bill “would distort the marketplace and allow an uncompensated use of broadcast signals and content” gets it exactly backward. In reality, the DeMint-Scalise bill would end the regulatory policies that actually do currently “distort the marketplace” and then allow a truly free marketplace in video contracting to develop without any regulatory thumb on the scale in either direction.

Most importantly, nothing in this bill forces content creators or broadcasters to deal their content to other distributors. And nothing in the bill gives those other video distributors the right to freely distribute content without the permission of its owners. In sum, the bill does not repeal copyright law — it only repeals the compulsory licensing rules that force content owners to deal their programming against their consent on government regulated terms.  That means copyright is actually strengthened under this bill and that content owners have more bargaining power than they do today. Thus, the ACU is horribly mistaken in asserting that the DeMint-Scalise bill would “allow an uncompensated use of broadcast signals and content.” The exact opposite is the case.

If the ACU wants to make a case against this measure, I would respectfully suggest that they first get their terminology and facts right. And then we can have an honest debate about true video marketplace deregulation–which is exactly what the DeMint-Scalise bill represents.

I want to highly recommend everyone watch this interesting new talk by danah boyd on “Culture of Fear + Attention Economy = ?!?!” In her talk, danah discusses “how fear gets people into a frenzy” or panic about new technologies and new forms of culture. “The culture of fear is the idea that fear can be employed by marketers, politicians, the media, and the public to really regulate the public… such that they can be controlled,” she argues. “Fear isn’t simply the product of natural forces. It can systematically be generated to entice, motivate, or suppress. It can be leveraged as a political tool and those in power have long used fear for precisely these goals.”  I discuss many of these issues in my new 80-page white paper, “Technopanics, Threat Inflation, and the Danger of an Information Technology Precautionary Principle.“

Webstock ’12: danah boyd – Culture of Fear + Attention Economy = ?!?! from Webstock on Vimeo.

danah points out that new media is often leveraged to generate fear and so we should not be surprised when the Internet and digital technologies are used in much the same way. She also correctly notes that our cluttered, cacophonous information age might also be causing an escalation of fear-based tactics. “The more there are stimuli competing for your attention, the more likely it is that fear is going to be the thing that will drive your attention” to the things that some want you to notice or worry about.

I spent some time in my technopanics paper discussing this point in Section III.C (“Bad News Sells: The Role of the Media, Advocates, and the Listener.”) Here’s the relevant passage:

Fear mongering and prophecies of doom have always been with us, since they represent easy ways to attract attention and get heard. “Pessimism has always been big box office,” notes [Matt] Ridley. This is even more true in the midst of the modern information age cacophony. Breaking through all the noise is hard when competition for our eyes and ears is so intense. It should not be surprising, therefore, that sensationalism and alarmism are used as media differentiation tactics. This is particularly true as it relates to kids and online safety. “Unbalanced headlines and confusion have contributed to the climate of anxiety that surrounds public discourse on children’s use of new technology,” argues Professor Sonia Livingstone of the London School Economics. “Panic and fear often drown out evidence.” Sadly, most of us are eager listeners and lap up bad news, even when it is overhyped, exaggerated, or misreported. [Michael] Shermer notes that psychologists have identified this phenomenon as “negativity bias,” or “the tendency to pay closer attention and give more weight to negative events, beliefs, and information than to positive.” Negativity bias, which is closely related to the phenomenon of “pessimistic bias” … is frequently on display in debates over online child safety, digital privacy, and cybersecurity.

Unfortunately, as danah correctly notes in her remarks, “it’s extremely difficult to combat fear [but] it’s extremely easy to ramp it up.” Worse yet,  “it’s impossible to combat fear with statistics.”  As I note in my paper, fear-tactics are remarkably powerful rhetorical devices that can be enormously challenging to overcome. However, I remain a bit more optimistic than danah that facts and common sense can prevail eventually. After all, most panics don’t last. They fizzle out after a time. I’d like to believe that part of the reason they do is because facts, education, awareness, and reasonable discussion all combine to debunk fears and help us cope with the realities of cultural or technological change.  On the other hand, as I note in the paper, it may instead simply be the case that one panic crowds out an older one! As I note in the paper (on pgs. 42-3):

Perhaps it is the case that the unique factors that combine to create technopanics tend to dissipate more rapidly over time precisely because technological changes continue to unfold at such a rapid clip. Maybe there is something about human psychology that “crowds out” one panic as new fears arise. Perhaps the media and elites lose interest in the panic du jour and move on to other issues. Finally, people may simply learn to accommodate cultural and economic changes. Indeed, some of things that evoke panic in one generation come to be worshiped (or at least respected) in another. As The Economist magazine recently noted, “There is a long tradition of dire warnings about new forms of media, from translations of the Bible into vernacular languages to cinema and rock music. But as time passes such novelties become uncontroversial, and eventually some of them are elevated into art forms.” These topics and explanations are ripe for future study.

danah also notes that “one of the frustrating thing about my job these days is that I’m dealing with the idea that ‘protect the kids’ becomes justification for regulating the Internet in any way you can possibly imagine.” Of course, that’s nothing new. “It’s for the children!” is the mantra we hear regularly in media and Internet policy debates. [Some of you might find my mock testimony on this front to be humorous: "It’s For the Children: A Template for Hill Testimony on Child Safety Issues."] In my paper, I devote a great deal of time to explaining how generational differences and fears about the impact of technology on society–especially the young–accounts for a large part of the pessimism at work in debates over these issues.

Anyway, please listen to danah’s talk. It’s well worth your time. And I hope some of you will read my paper as well.

Note: All my TLF essays on moral panics and technopanics can be found here.

The Federal Trade Commission (FTC) has just released its final privacy framework proposal, “Protecting Consumer Privacy in an Era of Rapid Change.” The agency released a draft report with the same title back in late 2010 and then asked for comments. [Here were my comments to the agency.] The FTC’s final report comes just a month after the Obama Administration released its 50-page privacy framework, Consumer Data Privacy in a Networked World, which included a privacy “bill of rights.” That report was primarily driven by the Department of Commerce. [I penned a Forbes column about that report the day it was released.]  The new FTC report is fairly consistent with the earlier Commerce Department report.  Here are some of the key themes or recommendations from the final FTC report:

• rooted in a set of baseline privacy principles with a strong push for “privacy by design,” more consumer choice, and better transparency.
• along with Dept of Commerce, the agency will work with industry to develop privacy codes of conduct and then give them teeth with possibility of FTC enforcement.
• pushes for industry to pursue voluntary “Do Not Track” mechanism, which to the agency apparently means “do not collect” any info.
• calls on Congress to pass data security legislation and legislation “to provide greater transparency for, and control over, the practices of information brokers.” Also, “to further increase transparency, the Commission calls on data brokers that compile data for marketing purposes to explore creating a centralized website where data brokers could (1) identify themselves to consumers and describe how they collect and use consumer data and (2) detail the access rights and other choices they provide with respect to the consumer data they maintain.”
• the agency will host a workshop later this year to discuss privacy withing “large platform providers.” The report notes: “To the extent that large platforms, such as Internet Service Providers, operating systems, browsers, and social media, seek to comprehensively track consumers’ online activities, it raises heightened privacy concerns.”
• the agency is also stepping up oversight on mobile privacy issues.
• the agency says it “generally supports the exploration of efforts to develop additional mechanisms, such as the ‘eraser button’ for social media,” but stops short of saying it should be mandated at this time.

Some of my initial random thoughts about the FTC report:

Not as bad as it could have been…

Overall, the FTC’s final privacy report not as heavy-handed as it could have been. There’s no sweeping, immediate effort to impose a top-down privacy regime or “Data Directive” that some of us feared would put the FTC in a position to become a full-blown Data Protection Agency and regulate every facet of the information economy.

… but “self-regulation” sure sounds a lot like European-style “co-regulation.”

Nonetheless, it doesn’t mean that can’t happen. It is clear that the new FTC and Commerce privacy reports signal the next step in the Obama Administration’s gradual move toward more of a “co-regulation” model for Internet governance on the privacy front. The Administration seems to favor a “government steers, industry rows” model for privacy policy that assigns a broad oversight role to federal regulators allowing them to “nudge” the tech industry in certain directions with the stern but amorphous “do this or else” sword of Damocles hanging over industry “self-regulatory” decisions on this front.

In his dissenting statement, Commissioner J. Thomas Rosch makes this point (on C-8):

The Report also acknowledges that it is intended to serve as a template for legislative recommendations. Moreover, to the extent that the Report’s “best practices” mirror the Administration’s privacy “Bill of Rights,” the President has specifically asked either that the “Bill of Rights” be adopted by the Congress or that they be distilled into “enforceable codes of conduct.” As I testified before the same subcommittee, this is a “tautology;” either these practices are to be adopted voluntarily by the firms involved or else there is a federal requirement that they be adopted, in which case there can be no pretense that they are “voluntary.” It makes no difference whether the federal requirement is in the form of enforceable codes of conduct or in the form of an act of Congress. Indeed, it is arguable that neither is needed if these firms feel obliged to comply with the “best practices” or face the wrath of “the Commission” or its staff.

Columbia Law School professor and former FTC adviser Tim Wu refers to this as an “agency threats” model of governance. That’s generally what the FTC is endorsing here. Intimidation is often a very effective regulatory policy. Thus, I hope we can dispense with this silly notion that this process represents truly voluntary self-regulation.  Ask yourself this: If the FTC and Dept of Commerce had instead proposed this same framework for overseeing private media ratings or online speech “codes of conduct,” would anyone seriously call it “voluntary” or “self-regulatory”?  I don’t think so. We’d understand that these implied threats constituted a form of indirect speech control. The only difference in this case–as I have noted here many times before–is that a bit of selective morality is in play when it comes to privacy policy; many of those who oppose regulation-via-intimidation in other contexts are, unfortunately, positively giddy about when it comes to privacy! And so we have arrived at the point where these tactics have become favored information control mechanisms in some contexts but not others.

Trade-offs associated with regulation still must be considered.

If the Obama Administration’s new co-regulatory model results in the sort of de facto regulatory regime that many wanted them to just impose forcefully right from the start, then we are right back at the same point we were before in terms of the trade-offs between information sharing and the largely unregulated economy of “free” online sites and services. As I noted in my filing to the FTC in this matter: ” There is no free lunch. While well-intentioned, government regulation that attempts to create a cost-free opt-out for data collection and targeted online advertising will likely have damaging unintended consequences. In terms of direct costs to consumers, Do Not Track could result in higher prices for service as paywalls go up or, at a minimum, advertising will become less relevant to consumers and, therefore, more “intrusive” in other ways.” To be clear, we could get this result even in absence of a top-down regulatory regime if the FTC and Commerce are able to use threats to accomplish their same regulatory objectives.

“Harmonization” is overrated.

The final FTC report continues the Obama Admin’s misguided obsession with “global harmonization” in terms of achieving more consistent international privacy norms and regulations. As I have noted before, this is an epic blunder. If our norms aren’t the same as Europe’s or the rest of the world’s, some might point out that’s why our Internet sector is better positioned and more highly regarded than the rest of the planet’s online sectors and operators! Even if you don’t accept that premise, you should be skeptical of the wisdom of doing whatever it takes to make America’s privacy policies more consistent with the regulatory models others follow. Sometimes when it comes to global standards and “harmonization,” the better approach is to just go our own way.

The FTC has been doing plenty without additional regulatory authority.

Ironically, the report opens with two pages (p. ii-iii) of “developments since issuance of the preliminary report,” listing the many ways the FTC has been active on this front over the past year in the absence of expanded authority. That includes major actions against two tech titans, Google and Facebook, which included the FTC slapping 20-year privacy audits on them. The FTC also lists many other enforcement actions (via COPPA, FCRA, and  general Sec. 5 authority) and other educational steps it has taken over the past year.  All of which begs the question: Why, then, do we need to expanded federal regulation and enhanced agency power over the information economy?

Does anyone still care about personal responsibility?

Sadly, the report doesn’t have much to say about the role of personal responsibility in this context. It does note that “All stakeholders should expand their efforts to educate consumers about commercial data privacy practices.” That’s good. But had this been an agency report on child safety issues, I have to imagine that the agency would have pointed out that best practices begin at home. As I noted in my filing to the agency, “For some reason, when the topic of debate shifts from concerns about potentially objectionable content to the free movement of personal information, personal responsibility and self-regulation become the last option, not the first.  . . . those who advocate personal responsibility and industry self-regulatory approaches to free-speech and child-protection issues should be advancing the same position with regards to privacy. . . . it is not unreasonable to expect privacy-sensitive consumers to exercise some degree of personal responsibility to avoid unwanted content or communications in this context, just as they must in the context of objectionably content or online child safety.”   Again, the Obama Administration doesn’t seem very interested in pushing personal responsibility as the first order of business with regards to online privacy the way it has for online safety issues.  That’s a real shame.

There is another way.

In closing, I continue to believe that privacy is best governed by a set of evolutionary norms, ongoing online marketplace interactions and experiments, contractual negotiations, public pressures, educational efforts, user empowerment, personal responsibility, and targeted legal enforcement and the use of state torts when true harms can be demonstrated. That’s been the uniquely American approach to privacy protection and we should not abandon it lightly.

I’ll try to update this post after I read through the report a second time but wanted to just get these initial thoughts out for now.

Additional Reading:

• my big Mercatus Center filing to the FTC last year on privacy and Do Not Track regulation
• my recent Forbes oped, “The Problem with Obama’s “Let’s Be More Like Europe” Privacy Plan“

other TLF essays…

• Isn’t “Do Not Track” Just a “Broadcast Flag” Mandate for Privacy?
• Privacy as an Information Control Regime: The Challenges Ahead
• Obama Admin’s “Let’s-Be-Europe” Approach to Privacy Will Undermine U.S. Competitiveness
• Lessons from the Gmail Privacy Scare of 2004
• When It Comes to Information Control, Everybody Has a Pet Issue & Everyone Will Be Disappointed
• And so the IP & Porn Wars Give Way to the Privacy & Cybersecurity Wars
• Book Review: Solove’s Understanding Privacy

On Monday it was my great pleasure to participate in a Cato Institute briefing on Capitol Hill about “Internet Taxation: Should States Be Allowed to Tax outside Their Borders?” Also speaking was my old friend Dan Mitchell, a senior fellow with Cato. From the event description: “State officials have spent the last 15 years attempting to devise a regime so they can force out-of-state vendors to collect sales taxes, but the Supreme Court has ruled that such a cartel is not permissible without congressional approval. Congress is currently considering the Main Street Fairness Act, a bill that would authorize a multistate tax compact and force many Internet retailers to collect sales taxes for the first time. Is this sensible? Are there alternative ways to address tax “fairness” concerns in this context?”

Watch the video for our answers. Also, here’s the big Cato paper that Veronique de Rugy and I penned for Cato on this back in 2003 and here’s a shorter recent piece we did for Mercatus.

In their paper, “Loving the Cyber Bomb? The Dangers of Threat Inflation in Cybersecurity Policy,” my Mercatus Center colleagues Jerry Brito and Tate Watkins warned of the dangers of “threat inflation” in cybersecurity policy debates. In early 2011, Mercatus also published a paper by Sean Lawson, an assistant professor in the Department of Communication at the University of Utah, entitled “Beyond Cyber Doom” that documented how fear-based tactics and cyber-doom scenarios and rhetoric increasingly were on display in cybersecurity policy debates.  Finally, in my recent Mercatus Center working paper, “Technopanics, Threat Inflation, and the Danger of an Information Technology Precautionary Principle,” I extended their threat inflation analysis and developed a comprehensive framework offering additional examples of, and explanations for, threat inflation in technology policy debates.

These papers make it clear that a sort of hysteria has developed around cyberwar and cybersecurity issues. Frequent allusions are made in cybersecurity debates to the potential for a “Digital Pearl Harbor,” a “cyber cold war,” a “cyber Katrina,” or even a “cyber 9/11.” These analogies are made even though these historical incidents resulted in death and destruction of a sort not comparable to attacks on digital networks. Others refer to “cyber bombs” even though no one can be “bombed” with binary code. And new examples of such inflationary rhetoric seem to emerge each day. For example, today’s NPR’s Morning Edition program featured a segment by Tom Gjelten entitled, “Cybersecurity Bill: Vital Need Or Just More Rules?” that included the comments of Michael McConnell, a former director of National Intelligence, Here’s what McConnell said about cyberwar at the 6:30 mark of the show:

“this threat is so intrusive, it’s so serious, it could literally suck the life’s blood out of this country, and if we don’t address it, it’s going to be a severe impact and so I think we have no choice but to address it and some of that process will be regulatory.”

Wow, who knew the blood could literally be drained from our bodies by cyberattacks! Have the Chinese or Iranians developed a cyber-superweapon that can reach through our screens and suck the life right out of us? (Like a cross between Videodrome and Halloween III: Season of the Witch!)

I’m being silly, of course. And some might dismiss such rhetorical flourishes or even defend them in the name of “doing whatever it takes” to raise awareness about an important concern. But these fear-based tactics are dangerous. As Brito and Watkins note, “when a threat is inflated, the marketplace of ideas on which a democracy relies to make sound judgments—in particular, the media and popular debate—can become overwhelmed by fallacious information.” In my paper, I argue that technopanics and threat inflation can have many troubling ramifications. They can:

1. Foster animosities and suspicions among the citizenry;
2. Create distrust of many institutions, especially the press;
3. Often divert attention from actual, far more serious risks; and,
4. Lead to calls for information control.

But we shouldn’t expect such rhetorically tactics to subside any time soon. After all, bombastic predictions of an impending cyber-apocalypse are nothing new, especially because they are such an effective way to grab attention, headlines, and funding.

Back in January 1996, the conservative Weekly Standard magazine ran a truly over-the-top cover story by Charles J. Dunlap entitled “How We Lost the High-Tech War of 2007.” (The actual cover appears above and the whole outlandish article is worth reading for its comedic value if noting else.) It included a dramatic Tom Clancy-esque cover illustration of the U.S. Capitol building smoldering in flames after an apparent cyber-attack of some sort.  Of course, there was no High-Tech War of 2007. But talk is cheap and there are few downsides to using such alarmist tactics. Pessimistic critics who use threat inflation to advance their causes are rarely held accountable when their panicky predictions fail to come to pass. As journalist Matt Ridley correctly observes, “Pessimism has always been big box office.”  Bad news sells, and there are always plenty of buyers.

It’s a shame rational debate is increasing impossible in this and other Internet policy arenas.

The Mercatus Center at George Mason University has just released my new white paper, “The Perils of Classifying Social Media Platforms as Public Utilities.” [PDF] I first presented a draft of this paper last November at a Michigan State University conference on “The Governance of Social Media.” [Video of my panel here.]

In this paper, I note that to the extent public utility-style regulation has been debated within the Internet policy arena over the past decade, the focus has been almost entirely on the physical layer of the Internet. The question has been whether Internet service providers should be considered “essential facilities” or “natural monopolies” and regulated as public utilities. The debate over “net neutrality” regulation has been animated by such concerns.

While that debate still rages, the rhetoric of public utilities and essential facilities is increasingly creeping into policy discussions about other layers of the Internet, such as the search layer. More recently, there have been rumblings within academic and public policy circles regarding whether social media platforms, especially social networking sites, might also possess public utility characteristics. Presumably, such a classification would entail greater regulation of those sites’ structures and business practices.

Proponents of treating social media platforms as public utilities offer a variety of justifications for regulation. Amorphous “fairness” concerns animate many of these calls, but privacy and reputational concerns are also frequently mentioned as rationales for regulation. Proponents of regulation also sometimes invoke “social utility” or “social commons” arguments in defense of increased government oversight, even though these notions lack clear definition.

Social media platforms do not resemble traditional public utilities, however, and there are good reasons why policymakers should avoid a rush to regulate them as such. Treating these nascent digital services as regulated utilities would harm consumer welfare because public utility regulation has traditionally been the archenemy of innovation and competition. Furthermore, treating today’s leading social media providers as digital essential facilities threatens to convert “natural monopoly” or “essential facility” claims into self-fulfilling prophecies. Related proposals to mandate “API neutrality” or enforce a “Separations Principle” on integrated information platforms would be particularly problematic. Such regulation also threatens innovation and investment. Marketplace experimentation in search of sustainable business models should not be made illegal.

Remedies less onerous than regulation are available. Transparency and data-portability policies would solve many of the problems that concern critics, and numerous private empowerment solutions exist for those users concerned about their privacy on social media sites.

Finally, because social media are fundamentally tied up with the production and dissemination of speech and expression, First Amendment values are at stake, warranting heightened constitutional scrutiny of proposals for regulation. Social media providers should possess the editorial discretion to determine how their platforms are configured and what can appear on them.

This 63-page paper can be found on the Mercatus site here, on SSRN, or on Scribd.  I’ve also embedded it below in a Scribd reader. Eventually, a shorter version of this paper will appear as a chapter in a MIT Press book.

Social Networks as Public Utilities [Adam Thierer]

Time Warner Cable (TWC) has announced it will once again attempt an experiment with usage-based pricing (UBP) for its broadband services. (News coverage here, here, and here.) The company gave UBP a shot a few years ago and some consumers, regulatory advocates, and lawmakers howled in protest. The radical activist group Free Press called for immediate policy action and former Rep. Eric Massa’s (D-NY) was happy to oblige with his proposed “Broadband Internet Fairness Act,” which would have let the FCC decide whether such pricing plans were permissible.

For their latest UBP experiment, TWC goes out of its way to avoid controversy, primarily by making it clear the plan is entirely optional. Here’s what their consumers are offered as part of what is being labelled it’s “Value Edition” plan:

• Up to 5GB/month of data transmission for a $5/month discount from one’s current monthly bill. All Standard, Basic and Lite broadband customers will be eligible. Turbo, Extreme and Wideband customers will continue as always, with access to unlimited broadband and no optional tiered plan or discounts.
• The ability to opt-in and opt-out of a tiered package at any time.
• A “meter” that tracks usage on a daily, monthly, weekly or even hourly basis, enabling customers to accurately gauge usage. Below is an example of the hourly meter:
• A 60 day/2 billing-cycle grace period to allow customers to adjust usage patterns. During this time we will notify customers of overages but won’t charge for them.
• Overages will cost $1 per GB, not to exceed a maximum of $25/month.

It’s hard to see how anyone could be against this and I was pleased to see that Harold Feld of Public Knowledge didn’t automatically dismiss it and, in fact, had some rather favorable things to say about it. Nonetheless, as UBP schemes begin to multiply — and they will — we can expect some of the same old concerns and criticisms to surface. Many folks hate the sound of differential pricing / price discrimination, believing it to be annoying at best or unfair at worst. But price discrimination and UBP techniques are all around us in the real world.

The important thing to keep in mind here is that pricing experimentation is good, not only because it can save consumers money and more fairly allocate costs, but because it helps pay for future investments and innovations in high fixed cost / low marginal cost industries like broadband. I won’t go into all the details about why I’m particularly fond of a “Ramsey pricing” (a two-part charge that would involve a flat fee for service up to a certain level and then a per-unit or metered fee over a certain level of use) approach because I’ve said it all here before. See:

• Smartphones & Usage-Based Pricing: Are Price Controls Coming (July 12, 2011)
• Netflix Falls Prey to Marginal Cost Fallacy & Pleads for a Broadband Free Ride (July 8, 2011)
• Why Congestion Pricing for the iPhone & Broadband Makes Sense (October 7, 2009)
• The (Un)Free Press Calls for Internet Price Controls: “The Broadband Internet Fairness Act” (June 17, 2009)
• Free Press Hypocrisy over Metering & Internet Price Controls (June 18, 2009)
• Bandwidth Cap Hysteria & the Alternative  (October 4, 2008)
• Once Again, Why Not Meter Broadband Pipes?  (September 7, 2007)
• Why Not Meter? (March 12, 2007)
• The Real Net Neutrality Debate: Pricing Flexibility Versus Pricing Regulation (October 27, 2005)

While I think some variant of UBP makes a great deal of sense for broadband (whether its wired or wireless), I believe it is essential that public policy remains agnostic regarding which pricing techniques are optimal and instead lets ongoing marketplace experimentation figure that out for us. It may be that different companies devise different pricing schemes in an attempt to differentiate themselves from competitors or potential new entrants. Let the experiments continue! I look forward to watching the Time Warner Cable experiment and others like it.

I’m pleased to report that the Mercatus Center at George Mason University has just released my huge new white paper, “Technopanics, Threat Inflation, and the Danger of an Information Technology Precautionary Principle.” I’ve been working on this paper for a long time and look forward to finding it a home in a law journal some time soon.  Here’s the summary of this 80-page paper:

Fear is an extremely powerful motivating force, especially in public policy debates where it is used in an attempt to sway opinion or bolster the case for action. Often, this action involves preemptive regulation based on false assumptions and evidence. Such fears are frequently on display in the Internet policy arena and take the form of full-blown “technopanic,” or real-world manifestations of this illogical fear. While it’s true that cyberspace has its fair share of troublemakers, there is no evidence that the Internet is leading to greater problems for society. This paper considers the structure of fear appeal arguments in technology policy debates and then outlines how those arguments can be deconstructed and refuted in both cultural and economic contexts. Several examples of fear appeal arguments are offered with a particular focus on online child safety, digital privacy, and cybersecurity. The  various  factors  contributing  to  “fear  cycles”  in these policy areas are documented. To the extent that these concerns are valid, they are best addressed by ongoing societal learning, experimentation, resiliency, and coping strategies rather than by regulation. If steps must be taken to address these concerns, education and empowerment-based solutions represent superior approaches to dealing with them compared to a precautionary principle approach, which would limit beneficial learning opportunities and retard technological progress.

The complete paper can be found on the Mercatus site here, on SSRN, or on Scribd.  I’ve also embedded it below in a Scribd reader.

Technopanics and Threat Inflation [Adam Thierer - Mercatus Center]

Over at Forbes I have posted some thoughts on the new privacy framework (Consumer Data Privacy in a Networked World) that the Obama Administration released today. In my essay, “The Problem with Obama’s “Let’s Be More Like Europe” Privacy Plan,” I hammer home the same point I’ve made here before many times: Regulation is not a costless exercise. No matter how well-intentioned regulatory proposals may be, they can often have unforeseen, unintended consequences. This is equally true for privacy controls. I discuss how a new privacy regulatory regime could drive up prices for services that currently are free or inexpensive, limit new digital services and innovations, create barriers to entry for new entrants and entrepreneurs, negatively impact the competitiveness of existing U.S. Internet operators, and, more generally, increase the horizons of government power over the Internet.

For a more detailed analysis of these issues, I encourage you to check out my big Mercatus Center filing to the FTC last year on privacy and Do Not Track regulation. Also, here are few TLF essays that summarize my skepticism about expanded privacy controls:

• Isn’t “Do Not Track” Just a “Broadcast Flag” Mandate for Privacy?
• Privacy as an Information Control Regime: The Challenges Ahead
• Obama Admin’s “Let’s-Be-Europe” Approach to Privacy Will Undermine U.S. Competitiveness
• Lessons from the Gmail Privacy Scare of 2004
• When It Comes to Information Control, Everybody Has a Pet Issue & Everyone Will Be Disappointed
• And so the IP & Porn Wars Give Way to the Privacy & Cybersecurity Wars
• Book Review: Solove’s Understanding Privacy

Today the Federal Trade Commission released a new report entitled, “Mobile Apps for Kids: Current Privacy Disclosures Are Disappointing,” which concludes that “confusing and hard-to-find disclosures do not give parents the control that they need in this area. The FTC argues that “parents need consistent, easily accessible, and recognizable disclosures regarding in-app purchase capabilities so that they can make informed decisions about whether to allow their children to use apps with such capabilities.”

It’s hard to be against the FTC’s “the more disclosure, the better” policy recommendation and I’m not about to come out against it here. But the question is: how much disclosure is enough? Reading through the report and seeing how hard the FTC hammers this point home makes me think the agency wants our app store checkout process to be littered with the pages of fine print disclosure policies that now accompany our credit card statements and home mortgage payments! Seriously, would that make us better off?

As a parent of two kids who both download countless apps on my Android phone, my wife’s iPhone, and our family’s Android tablet, I appreciate a certain amount of disclosure about what sort of information apps are collecting and how they are using it. I think Google’s Android marketplace strikes a nice balance here, providing us with the most crucial facts about what the application will access or share. Apple could do more on disclosure but the company also prides itself (to the dismay of some!) on its rigorous pre-screening process to make sure the apps in the App Store are safe and don’t violate certain privacy and security policies. Yet, as the FTC correctly points out, “the details of this screening process are not clear.” Of course, most Apple users simply don’t give a damn. They’re all too happy to let Apple just take care of it for them even if they’re not really sure what’s happening to their data behind the scenes. The more privacy-sensitive crowd wants greater disclosure and control, of course, and I’m sympathetic to that plea.  But again, how much disclosure is enough? Are you going to wade through pages of disclosure policies and privacy opt-ins before downloading that latest iteration of “Angry Birds” or “Cut the Rope”? Yeah, I didn’t think so.

Anyway, I don’t want to dwell on that. The more interested findings in the survey relate to price and market dynamics and I am hoping people don’t ignore them. After surveying the price of kids’ apps available in the Android Market and Apple App Store, the agency found that, “While prices ranged from free to $9.99, most of the 960 app store promotion pages listed a price of $0.99 or less. Indeed, 77% of the apps in the survey listed an install price of $0.99 or less, and 48% were free.  Free apps appeared to be the most frequently downloaded.” Here’s the pricing breakdown for both Android and Apple:

Folks, these are astonishing numbers. Almost 100% of the most downloaded kids apps in the Android Market are free… as in ZERO dollars and ZERO cents! And while Apple App Store prices tend to be a bit higher, 93% of apps are $2 or less.  This is one of the great consumer success stories of our time. Consumer welfare is vastly enhanced by the presence of hundred of kids apps that serve almost every interest and desire under the sun, and all for less than what you’d pay for a cup of coffee or a gallon of gas.

But wait, there’s more!!

This incredible success story is even more remarkable because of what the FTC finds next about market structure:

Staff found that hundreds of developers were responsible for the apps in the study. Staff encountered 441 unique developers in this study, only twelve of which had apps on both platforms. Only a handful of app developers were responsible for more than 10 apps in our sample. Developers with one app in our sample were popular, accounting for about 50% of all downloads/feedback ratings, even though they were responsible for only about 30% of the apps. In contrast, those developers with more than 10 apps in our sample accounted for about 1% of the feedback ratings for Apple, (and 20% of the downloads for Android) despite accounting for about 20% of all of the apps in the survey. This finding illustrates the broad and diverse nature of the mobile app marketplace.

“Broad and diverse marketplace,” you say?  That might be the understatement of the year!  I challenge you to find another part of not just our online ecosystem but indeed our entire economy that is this broad, diverse, innovate, competitive, and inexpensive.  I’m not sure that such a radically atomistic, mom-and-pop marketplace of entrepreneurs can last forever, but let’s pause and appreciate the fact that it does exist today.

Now, here’s the really interesting part of this story: This is generally what the world of kids’ online services looked like back in the late 1990s as well. It was incredibly diverse with lots of small mom-and-pop sites catering to kids and parents, often at no charge. And then along came COPPA. [Background here for those who are not familiar.] While COPPA helped address the legitimate problems a small handful of bad apples out there at the time created, it also raised serious compliance costs for that entire sector, including the many smaller mom-and-pop sites. In a letter send to the FTC back in 2005, child safety advocate Parry Aftab claimed that, “The cost of obtaining verifiable parental consent for interactive communications is very high, estimated at more than $45 per child, and even at that price difficult to obtain.” I have no idea how accurate that number was then (I think that was way too high of an estimate), or what the compliance cost per child was in the late 1990s, but let’s be conservative and say it was much smaller, perhaps less that a few bucks per child verified under COPPA.  And let’s assume that if we extended COPPA-like regulatory requirements to app stores that there would be some compliance cost. Again, even if the compliance cost was only a buck per kid, can you see how it devastating that would be to all the small mom-and-pop app developers out there who currently only get a dollar or two for their apps (assuming they charge anything at all)? Yes, it’s true that some of them use ads to offset their costs, but those ads have to pick up the tab for all their labor and development costs.  If you add new regulatory compliance costs to the mix, those mom-and-pop developers will be hit very hard. And then we will have far fewer of them. And the ones that remain will likely charge us more than the couple of bucks we pay per app today.

Further, even if the compliance cost per child gets down to a few cents (or tens of cents) per kid for large operators, it’s probably much higher for smaller operators. In other words, most of the costs here are fixed (hiring an extra employee, having lawyers review your policy, etc.), not marginal (the cost of verifying each additional kid), so it’s really hard to say what the real costs are. And with Apple and Google also taking a cut of the apps sold in the market, you really begin to see how adding on any additional compliance costs could hit the bottom lines of smaller app developers in a big way. When margins are this thin, burdensome regulatory mandates hurt even more. And sometimes they can drive you right out of business.

Which brings us back to the FTC’s role here. It’s clear that the consumer protection side of the agency has an important role to play here when it comes to ensuring consumers are better informed about data collection practices and corresponding privacy issues. But let’s not forget that the FTC was originally created as a competition agency. It’s supposed to care about market structure, competition, and consumer welfare. So, I wonder… are the folks in the FTC’s Bureau of Economics paying any attention to what their colleague are doing here? Because if we start layering on privacy regulations, all the good intentions in the world won’t be able to hold back the likely contraction and consolidation of this vibrant industry that will take place as small mom-and-pops struggle to absorb new regulatory burdens and compliance costs.

Something to think about before regulatory intervention drives up consumers prices and drives out of the market the countless entrepreneurs that make this sector so exciting–especially for parents and kids.

Friends of Internet freedom, I need your assistance. I think we need to develop a principled, pro-liberty blueprint for Internet policy going forward. Can you help me draw up five solid principles to guide that effort?

No, wait, don’t worry about it… it has has already been done!

As I noted in my latest weekly Forbes column, “Fifteen years ago, the Clinton Administration proposed a paradigm for how cyberspace should be governed that remains the most succinct articulation of a pro-liberty, market-oriented vision for cyberspace ever penned. It recommended that we rely on civil society, contractual negotiations, voluntary agreements, and ongoing marketplace experiments to solve information age problems. In essence, they were recommending a high-tech Hippocratic oath: First, do no harm (to the Internet).”

That was the vision articulated by President Clinton’s chief policy counsel Ira Magaziner, who was in charge of crafting the administration’s Framework for Global Electronic Commerce in July 1997.  I was blown away by the document then and continue to genuflect before it today. Let’s recall the five principles at the heart of this beautiful Framework:

1. The private sector should lead. The Internet should develop as a market driven arena not a regulated industry. Even where collective action is necessary, governments should encourage industry self-regulation and private sector leadership where possible.

2. Governments should avoid undue restrictions on electronic commerce. In general, parties should be able to enter into legitimate agreements to buy and sell products and services across the Internet with minimal government involvement or intervention. Governments should refrain from imposing new and unnecessary regulations, bureaucratic procedures or new taxes and tariffs on commercial activities that take place via the Internet.

3. Where governmental involvement is needed, its aim should be to support and enforce a predictable, minimalist, consistent and simple legal environment for commerce. Where government intervention is necessary, its role should be to ensure competition, protect intellectual property and privacy, prevent fraud, foster transparency, and facilitate dispute resolution, not to regulate.

4. Governments should recognize the unique qualities of the Internet. The genius and explosive success of the Internet can be attributed in part to its decentralized nature and to its tradition of bottom-up governance. Accordingly, the regulatory frameworks established over the past 60 years for telecommunication, radio and television may not fit the Internet. Existing laws and regulations that may hinder electronic commerce should be reviewed and revised or eliminated to reflect the needs of the new electronic age.

5. Electronic commerce on the Internet should be facilitated on a global basis. The Internet is a global marketplace. The legal framework supporting commercial transactions should be consistent and predictable regardless of the jurisdiction in which a particular buyer and seller reside.

It doesn’t get much better than that. Sure, some will nitpick about some of the Clinton Administration’s views on a few issues like encryption and copyright, but the fact remains that we would be hard-pressed today to come with a better set of general principles to guide Internet policymaking than those five. And these principles can be embraced in a non-partisan fashion. Liberal and conservatives alike should learn to abandon their pet regulatory issues and instead embrace this more principled approach to keeping government’s paws off the Net before cyberspace gets smothered by red tape both here and abroad.

Finally, I encourage you to also check out this remarkable speech that Ira Magaziner delivered two years after issuing the Framework in which he argued that “even if it were desirable to centrally control the Internet in some way, it is impossible, and life is too short to spend too much time doing things that are impossible. By the same token, we need to respect the nature of the medium in the sense that technology moves very quickly, and any policy that is tied to a given technology is going to be outmoded before it is enacted.”

He concluded that speech by noting that we should rely “first and foremost on the marketplace and on self-regulation, of limited and highly targeted government involvement based on consensus, of non-partisan debate and international cooperation. Most importantly of all,” he said, we should “retain a sense of humility and…acknowledge that none of us can, on these issues at least, claim to have all the answers.”

Yes, yes, YES!  Such humility is sorely lacking in our policymakers today.

So, who will join me in renewing the fight for the Clinton-Magaziner vision for the Internet policy?

On numerous occasions here at the TLF over the past eight years, I’ve noted the profound influence that the late Ithiel de Sola Pool had on my thinking about the interaction of technology, information, and public policy. In fact, when I needed to pick a thematic title for my weekly Forbes column, it only took me a second to think of the perfect one: “Technologies of Freedom.” I borrowed that from the title of Pool’s 1983 masterpiece, Technologies of Freedom: On Free Speech in an Electronic Age. As I noted in my short Amazon.com review, Pool’s technological tour de force is simply breathtaking in its polemical power and predictive capabilities. Reading this book three decades after it was published, one comes to believe that Pool must have possessed a crystal ball or had a Nostradamus-like ability to foresee the future.

I felt that same was this week when I was re-reading some chapters from his posthumous book, Technologies without Boundaries: On Telecommunications in a Global Age–a collection of his remaining essays nicely edited and tied together by Eli Noam after Pool’s death in 1984. Re-reading it again reminded me of Pool’s remarkable predictive powers. In particular, the closing chapter on “Technology and Culture” includes some of Pool’s thoughts on the future of copyright. As you read through that passage below, please try to remember he wrote these words back in the early 1980s, long before most people had even heard of the Internet and when home personal computing was only just beginning to take off. Yet, from what he already knew about networked computers and digital methods of transmitting information, Pool was able to paint a prescient portrait of the future copyright wars that we now find ourselves in the midst of. Here’s what he had to say almost 30 years ago about how things would play out:

Can a computer infringe copyright? The printed output of recorded copyright material is likely to be a statutory violation of the Copyright Act which vests the exclusive right “to print, reporting, publish, copy and vend the…work.”

In short, the process of computer communication entails processing of texts that are partly controlled by people and partly automatic. They are happening all through the system. Some of the text is never visible but is only stored electronically; some is flashed briefly on a terminal display; some is printed out in hard copy. What started as one text varies and changes by degrees to other things. The receivers may be individuals and clearly identified, or they may be passers­by with access but whose access is never recorded; the passer­by may only look, as a reader browsing through a book, or he may make an automatic copy; sometimes the program will record that, sometimes it will not.

To try to apply the concept of copyright to all these stages and actors would require a most elaborate set of regulations. It has none of the simplicity of checking what copies rolled off a printing press. Good intentions about what one would like can be defined. One would like to compensate an author if a computer terminal is used as a printing press to run off numerous copies of a valuable text. One would like not to impose any control as someone works at a terminal in the role of a reader and checks back and forth through various files. The boundary, however, is impossible to draw. In the new technology of interactive computing, the reader, the writer, the bookseller, and the printer have become one. In the old technology of printing one could have a right to free press for the reader and the writer but try to enforce copyright on the printer and the bookseller. That distinction will no longer work, any more than it would ever have worked in the past on conversation.

Those whose livelihood is at stake in copyright do not like that kind of comment. They contend that creative work must be compensated. Indeed it must. Publishers may point the finger in accusation and charge that one is taking bread out of the mouths of struggling writers. But the system must be practical to work. On highly charged subjects there is an impulse to insist that those who make a negative comment must have a panacea to offer instead. If one says prisons do not cure criminals, the rejoinder is apt to be, “Do you want to let them out to kill people?” One does not necessarily want that at all, but it may still be true the prisons do not cure criminals. Likewise, one can say that in an era of infinitely varied, automated text manipulation there is no reasonable way to count copies and charge royalties on them.

That is the situation now emerging. It may be very unfair to authors. It may have a profoundly negative effect on some aspects of culture, and in any case, whether positive or negative, it may change things considerably. If it becomes more difficult for authors and artists to be paid by a royalty scheme, more of them will seek salaried bases from which to work. Some may try to get paid by personal appearances or other auxiliaries to fame. Or the highly illustrated, well-bound book may acquire a special marketing significance if the mere words of the text are hard to protect. Or one may try to sell subscriptions to a continuing service, with the customer knowing that he will be a first recipient.

These are the kinds of considerations one must think about in speculating about the consequences for culture of a world where the royalty-carrying unit copy is no longer easy to protect in many of the domains where it has been dominant. While Congress tries to hold the fort, it is clear that with photocopiers and computers, copyright is an anachronism. Like many other unenforceable laws that we keep on the statute books from the past, this one may be with us for some time to come, but with less and less effect. (pp. 257-59)

Indeed, as I wrote in one of my recent Forbes column’s (The Twilight of Copyright?”), it appears that–whether some of us like it or not–”copyright is dying… [as it] is being undermined by the unrelenting realities of the information age: digitization, instantaneous copying, borderless transactions, user-generated content, and so on.” Of course, I’m basing that assertion on the facts on the ground around me circa 2012. By contrast, Ithiel de Sola Pool already had it figured out 30 years ago. Absolutely remarkable.

Rebecca MacKinnon’s new book, Consent of the Networked: The Worldwide Struggle for Internet Freedom, is well-researched exploration of the forces driving Internet developments and policy across the globe today. She serves up an outstanding history of recent global protest movements and social revolutions and explores the role that Internet technologies and digital networks played in those efforts. She also surveys some of the recent policy fights here and abroad over issues such as online privacy, Net neutrality regulation, free speech matters, and the copyright wars. The Consent of the Networked is certainly worth reading and will go down as one of the most important Internet policy books of 2012.

A Call to Action

Of course, it’s not just a history lesson. MacKinnon has also issued a call-to-arms here. As a well-known web activist, MacKinnon has emerged as a leading force in the broad-based, if loosely-defined, “Net freedom” movement. The term “Net freedom,” she notes, means very different things to different people. It’s “like a Rorschach inkblot test: different people look at the same ink splotch and see very different things.” (p. 188)  Nonetheless, on the global stage, the Internet freedom movement is fundamentally tied up with efforts to hold both governments and corporate actors more accountable for their actions toward the Netizens, digital networks, and online speech and expression.

MacKinnon has rightly won praise for her efforts to devise an institutional structure and accompanying set of social/moral pressures that can get private actors to understand “why it is good for their business in the long run to be both responsible and publicly accountable when it comes to protecting users’ and customers’ rights.” (p. 182)  She was instrumental in setting up the Global Network Initiative (GNI), an effort to devise a set of best practices and a sort of voluntary code of conduct for online operators doing business in repressive states. The GNI lays out a set of principles for online expression, privacy, corporate transparency, and multi-stakeholder interaction that members are expected to live up to. Thus far, however, the only major corporate signatories are Microsoft, Google, and Yahoo.

Consent of the Networked is MacKinnon’s effort to take the “Net freedom” movement to the next level; to formalize it and to put in place a set of governance principles that will help us hold the “sovereigns of cyberspace” more accountable.  Many of her proposals are quite sensible. But my primary problem with MacKinnon’s book lies in her use of the term “digital sovereigns” or “sovereigns  of cyberspace” and the loose definition of “sovereignty” that pervades the narrative. She too often blurs and equates private power and political power, and she sometimes leads us to believe that the problem of the dealing with the mythical nation-states of “Facebookistan” and “Googledom” is somehow on par with the problem of dealing with actual sovereign power—government power—over digital networks, online speech, and the world’s Netizenry.

Back to Political Philosophy 101: What a Sovereign Is, and Isn’t

MacKinnon suggests that we need to begin to think about our interactions with various private digital intermediaries in much the same way many political philosophers have traditionally thought about the relationship between citizens and the state. Building on social contract theory (a la Hobbes, Locke, Rousseau, etc.), she seeks to apply “consent of the governed” notions to the digital sphere such that we might achieve as sort of “consent of the networked.” “It is time for the new digital sovereigns to recognize that their own legitimacy — their social if not legal license to operate — depends on whether they too will sufficiently respect citizens’ rights,” she argues. (p. 165) “It is time to upgrade the social contract over the governance of our digital lives to a Lockean level, so that the management of our identities and our access to information can more genuinely and sincerely reflect the consent of the networked.” (p. 165)

It sounds great in theory. In practice, however, this notion is highly problematic.  Private companies are not “sovereigns,” nor should we move to formally classify them as such. Equally problematic is MacKinnon’s quip about their “legal license to operate,” which raises other concerns.

First, let’s drill down a bit on the sovereignty point.

Sovereignty is, at root, about power; supreme power over a group in a defined geographic territory. In a Hobbesian sense, sovereignty is the coercive power to rule absolutely over those people. For a more extensive discussion, see Bertrand Russell’s magisterial A History of Western Philosophy. (Touchstone, 1945, pp. 546-557.)  Or we might also reference Blackstone who noted that “For legislature, as was before observed, is the greatest act of superiority that can be exercised by one being over another. Wherefore it is requisite to the very essence of a law, that it be made by the supreme power. Sovereignty and legislature are indeed convertible terms; one cannot subsist without the other.”

Of course, the uniquely American contribution to this discussion — flowing from the radicalism of the American Revolution — is that sovereignty lies in the people themselves and that only when they delegate some of that power to the state does the state come to have any legitimacy. Through “the consent of the governed” and the requisite constitutions or other contracting elements, “we the people” transfer power to governments to handle a variety of things that we deem better not left to private actors or actions. More on those powers in a sec.

But first, let’s be clear about the essential transfer of power that takes place here and why we shouldn’t take it lightly. At the heart of sovereignty lies the collectivization of force and coercion. In her essay “On the Source of the Authority of the State,” the British philosopher G.E.M. Anscombe’s pinpointed the “institutional violent coercive power” of the State as the crucial element of its sovereign authority over any group. “No political theory can be worth a jot, that does not acknowledge the violence of the state, or face the problem of distinguishing between states and syndicates,” Anscombe argued. This is just as true for the sort of sovereignty derived from the “consent of the governed” via the Lockean-American model as it is in the British tradition or any other system.

But there’s another essential element to sovereignty, properly understood: the impossibility of escaping the reach of that authority. Commenting on Anscombe’s framework, Jenny Teichman and Katherine C. Evans, authors of Philosophy: A Beginner’s Guide, note that “there surely must be some difference between a state and a voluntary association… The chief difference between a voluntary association and a state is that you can resign from a voluntary association, but it is never possible to resign from the state.” (p. 105).

The American Revolution gave us a new way of thinking about this, too. Because true sovereignty lies with the people, even after we transfer some of it to the state as an agent of power over us, we can later change our minds and take that power back. Of course, that’s much easier said than done, especially if we are talking about a full-blown revolution being required to accomplish the return of that power to the people such that we might contract with a new sovereign entity.

But the important point here is that, while the state does exist and retains the power we have delegated to it, it (a) possess unique coercive powers over us and (b) the possibility of escaping their rule is often quite limited, sometimes by geographic or economic realities, other times by efforts by the sovereign to restrict flight.

The same facts do not hold for corporate entities. That is the essential insight missing from MacKinnon’s narrative. “Facebookistan” and “Googledom” are cute labels, but let us not pretend for one moment that there is any legitimacy whatsoever to their “rule” over us.  They do not possess such coercive powers over us and we are able to escape their “territories” any time we want, or not even join them in the first place if we don’t want to.

Not to put too fine a point on it, but here are the three essential things that sovereign governments can do that “Facebookistan,” “Googledom” or any other corporations cannot: (1) Imprison you. (2) Tax you. (3) Confiscate your property.  But that’s not the end of the list. There are many other powers that are exclusive to governments. For example, they can: coin money, regulate various forms of commerce, form standing armies, form treaties with foreign sovereigns, declare war on those foreign sovereigns with those aforementioned standing armies, etc, etc). But those big three powers are the ones that matter most.

While, in theory, “we the people” could contract with Facebook, Google, or another private entity to hold these powers and literally become “sovereigns of cyberspace” ruling over us, the reality is that that has never happened and isn’t about to any time soon. In fact, no corporation holds these powers unless governments deputize them — whether willingly or reluctantly — to become henchmen of the State. That’s a crucial point, and one often misunderstood in debates about Internet freedom, online privacy, digital copyright, and online freedom of speech. Luckily, that distinction is not lost on MacKinnon. In fact, she nails what it so insidious about it. More on that point in a moment.

The Self-fulfilling Prophecy Problem

But first, there’s another major problem with MacKinnon’s suggestion that we think of certain private digital entities as “sovereigns.”  We might think of it as “the self-fulfilling prophecy problem”: If you declare certain digital operators to be “sovereigns” or even “essential social facilities” to use public utility parlance, then you should not be at all surprised when the very act of affixing that label (and concurrent obligations) on a particular platform or company tends to lock it in as the preferred or only choice in its sector.

If, for example, we had a formal “constitutional convention” for Facebookistan and its users (God only knows how such a thing would work), it could very well tip the market in favor of Facebook being the primary or preferred choice for social networking going forward.  This has been a long-standing problem in the field of communications where public utility regulation often shelters a “utility” from competition once it is enshrined as such. Or, by forcing standardization or a common platform, regulation can help lock it in for the long-haul and erect de jure or de facto barriers to entry that restrict beneficial innovation and disruption of market leaders.

The last thing we want to do is lock-in Facebook or Google as market leaders by declaring that we need special rules governing MacKinnon’s mythical sovereigns of “Facebookistan” and “Googledom.” Those countries do not exist, nor should the law declare that they do. [Note: I have a paper coming out next month on “The Perils of Classifying Social Media Platforms as Public Utilities” that will address these issues in more detail.]

The Velocity of “Tech Titan” Meltdowns also Undercuts “Sovereignty” Claims

Importantly, MacKinnon also fails to consider the rapid rise and fall of these supposed digital sovereigns. In my work attacking the Lessig-Zittrain-Wu school of thinking about cyberlaw and digital economics, I’ve argued that there’s a serious short-sightedness and a needlessly pessimistic outlook among many Internet academics today. [See my book chapter from The Next Digital Decade: “The Case for Internet Optimism, Part 2 – Saving the Net from Its Supporters.”]

Creative destruction and disruptive technologies continue to upend tech markets and displace supposedly “dominant” digital giants with increasingly regularity. Change and churn are the only constants in an economy built largely on the foundations of binary code. Absolutely nothing that was sitting on our desktops in 1995 remains there today (can you name another sector like that?), and most of the first generation of “tech titans” have already faded from the picture. If MacKinnon had written her book just a decade ago, would she have referred to AOL as a “sovereign of cyberspace”? If she had penned it five years ago, would she have fretted about “MySpace-istan”?

By contrast, the reign of most actual “sovereigns” is usually measured in decades, even centuries. That is far longer than the brief time in the sun that most digital providers and platforms enjoy today. Markets discipline and sometimes severely punish those that don’t satisfy the desires of users and customers.

Power Begets Power: The Dangers of Middleman Deputization

But let’s get back to the dangers of middleman deputization. It should be obvious that any move to treat digital operators more like “sovereigns” will likely end up ensuring that actual sovereigns rope them into a host of regulatory regimes. This is why I was dismayed by MacKinnon’s “legal license to operate” line, even though she never fully develops what she means by that. It seems to imply that these entities only exist by the good graces of the State and that they could be used to accomplish a variety of government goals.

I was relieved, therefore, to see what a nice job MacKinnon does documenting and critiquing the many ways that governments already enlist digital intermediaries into a variety of regulatory efforts, including: copyright enforcement, online child safety, online harassment / defamation, and national security / law enforcement matters. In one of the best portions of the book, she takes on policymakers and academics who increasingly call for increased intermediary deputization, which often diminishes users’ liberties in one fashion or another. “Internet companies around the world face mounting pressure from governments not just to block websites but to delete a wide range of content from the Internet completely, as well as track what their users are doing so they can be prosecuted or cut off if they do anything illegal,” she correctly notes. (p. 93)

MacKinnon also takes on Cass Sunstein and some of the other contributors to the troubling recent book The Offensive Internet. Several of the academics who penned essays for that collection call for expanded intermediary policing of the Net as well as new laws aimed at limiting online anonymity. These deputization mandates would open the door to excessive government control of speech and also raise serious privacy and security issues. MacKinnon wonders: “Can Sunstein and his coauthors be so naïve as to think that power holders in the twenty-first century United States are different from power holders in any other place or time?” (p. 89)  Excellent question!

MacKinnon notes that South Korea adopted a law demanding websites with more than 100,000 visitors per day to obtain the real names, addresses, and national ID numbers of all users upon account creation. The law followed concerns similar to those raised by American critics who are worried about online harassment. “But this legal solution pursued by a democratically elected parliament ended up being used by economically and politically powerful people in South Korea to stifle speech they happened to find threatening,” MacKinnon notes. She recalls the case of South Korean blogger Park Dae-sung, who was arrested and jailed under the law for “spreading false information to harm the public interest.” (p. 90) In reality, Park had done little more than blog critically about the country’s economic policies and found himself loathed by many inside the government as a result.

Regrettably, this was not an isolated case. Other Koreans were charged under the law before it was finally overturned in mid-2011, but not before much of the personal information collected by the government was stolen by Chinese hackers. “Herein lies the dangerous slippery slope in legislation to curb anonymity,” argues MacKinnon. “[T]he people of South Korea,” she notes, “learned a painful lesson about why excessive data retention and ID requirements can make citizens less rather than more secure.” (p. 91)

Here in the United States, we are lucky that 47 U.S.C. § 230, commonly known as “Section 230,” shields online operators from liability for information posted or published on their systems by users, ensuring that they cannot be deputized by governments to more aggressively police — even self-censor — their sites for various types of online content that public officials wanted curbed. I’ve argued that Sec. 230 is “the greatest Internet law” because it grants online intermediaries generous leeway to determine what content and commerce travels over their systems without the fear that they will be overwhelmed by lawsuits if other parties object to some of that content. Many of the online social media and e-commerce sites that we know and love today — Yelp, Twitter, eBay, etc. — might not exist without Sec. 230’s protections. Moreover, many users would find their online liberties and privacy in greater peril without Sec. 230’s protections.

Still, as MacKinnon correctly notes, many digital intermediaries are pressured (and sometimes required) to serve as the handmaidens of government. This is particularly problematic when it comes to the forcible surrender of personal information or technological capabilities to government officials. When government officials come knocking on a company’s door asking for user records, files, search histories, or whatever else, that’s obviously a huge problem.

But, as I noted in this debate with Lawrence Lessig a few years ago, this is a problem we should handle by putting more constraints on our government(s), not by imposing more regulations on code or coders. While, as a general principle, it is wise for companies to minimize the amount of data they collect about consumers or websurfers, we need not force that by law. And we should certainly hold companies to high standards when it comes to data security and breach. But, again, the best way to deal with many of the surveillance and data collection threats that MacKinnon worries about in her book is to tightly limit the powers of government to access private information through intermediaries in the first place. Most obviously, we could start by tightening up the Electronic Communications Privacy Act and other laws that limit government data access. And continuing to defend Section 230 against attacks is essential. If we’re going to be legislating about the Internet, we need more laws like that to create a high and tight firewall between government and our online communities.

MacKinnon’s Net Governance Ideas

I apologize for dwelling so long on the point about sovereignty, but I believe it’s essential we not start thinking of private operators as “sovereigns” for the reasons I’ve outlined.  Anyway, MacKinnon has many other ideas about Net governance in the book that are less controversial. In fact, I find myself largely in agreement with many of her recommendations.

For example, she wants to “expand the technical commons” by building and distributing more tools to help activists and make organizations more transparent and accountable. These would include circumvention and anonymization tools, software and programs that allow both greater data security and portability, and devices and network systems to expand the range of communication and participation, especially in more repressed countries.  All terrific ideas.

MacKinnon would also like to see neitzens “devise more systematic and effective strategies for organizing, lobbying, and collective bargaining with the companies whose service we depend upon — to minimize the chances that terms of service, design choices, technical decisions, or market entry strategies could put people at risk or result in infringement of their rights.” (p. 247)  This also makes sense as part of a broader push for improved corporate social responsibility. When people band together — as consumers, users, citizens, etc. — they can provide a powerful check on corporate behavior and encourage the evolution of new social and market norms. There are so many Internet advocacy organizations out there doing this now that I sometimes wonder if some of them would be better off merging to increase their collective bargaining power. But that’s a discussion for another day.

What Role for Law?

In terms of law, it’s not always clear what MacKinnon is after, even if it is obvious she’s open to more regulation, so long as it’s for what she regards as the right purpose. “There is a need for regulation and legislation based on solid data and research (as opposed to whatever gets handed to legislative staffers by lobbyists) as well as consultation with a genuinely broad cross-section of people and groups affected by the problem the legislation seeks to solve, along with those likely to be affected by the proposed solutions,” she says. (p. 172) While this implies an openness to political solutions to “net freedom” and privacy problems, MacKinnon never really makes it clear how we strike the right balance. Adding to the confusion is the very next line: “In many other situations, government regulation—especially when large numbers or people have good reason not to trust the motives of the regulators or legislators in question—can create as many problems as it solves.”

In other words, the standard for green-lighting government action seems to be this: When we can trust the motives of the regulators and legislators in question, then it’s fine to bring politics into the equation. Sorry, but that’s still a fairy subjective test.

It’s worth noting that, on balance, MacKinnon expresses serious reservations about the wisdom of many government solutions. And, as noted above with regards to deputization solutions, she certainly appreciates the many unintended consequences of regulation. She notes how regulation so often lags far behind innovation. “A broader and more intractable problem with regulating technology companies is that legislation appears much too late in corporate innovation and business cycles,” MacKinnon argues. (p. 174)  She notes that proposals like the Global Online Freedom Act (GOFA), which aimed to devise legal solutions and penalties for companies doing business in repressive regimes, ultimately won’t work.  Not only were the issues evolving too quickly for GOFA to be a solution, but its “one-size-fits-all legislative approach” didn’t make sense for the multiplicity of businesses, countries, cultures, and laws that are out there.

Despite these reservations, she seems entirely at ease with expanded government privacy mandates and Net neutrality regulation, among others. Yet, she grows more concerned when referencing efforts to legislate on copyright, child safety, defamation, and national security matters. And so we arrive back at a problem I have previously labeled the “selective morality problem” within modern cyberlaw debates: People hate Internet regulation… until they love it!  I’ve expanded on this notion at greater length in my essays, “When It Comes to Information Control, Everybody Has a Pet Issue & Everyone Will Be Disappointed,” And so the IP & Porn Wars Give Way to the Privacy & Cybersecurity Wars,” and more recently, “SOPA & Selective Memory about a Technologically Incompetent Congress.”

Like most other Internet policy scholars today, I don’t suspect MacKinnon will ever come around to embracing a more consistent, across-the-board approach to keeping government’s paws off the Net, but I would appreciate it if smart folks like her would at least acknowledge the inconsistency in their views as well as the danger of opening the door to government meddling for their pet concerns, since that will undoubtedly open it up wider and wider to all the other issues that people want handled politically. Eventually, this is how governments across the globe will wrap their tentacles tightly around every facet of online life and commerce. No one today mounts a consistent defense of cyber-liberty.

The problem is that MacKinnon, like so many other well-intentioned academics and activists today, seems to imagine that she’ll be able to dictate when the law gets used to do “the right thing” and then later we can just shut down the regulatory process and stop misguided legislative adventures. But you can’t have your cake and eat it too, even though that seems to be the operational assumption here. Again, we see that when she warns of the danger of regulatory capture and argues law should not be based on “whatever gets handed to legislative staffers by lobbyists.” Well, I hate to be such a cynic, but good luck with that!  If you want to know why I am such a cynic, take a look at my growing compendium, “Regulatory Capture: What the Experts Have Found.” It does not make for fun reading but the lesson is unambiguous: Increasing the scope of political meddling for some issues — even those you think worthwhile — will inevitably increases the grim reality of more Net regulation and more industry capture. It continues to be the #1 reason I prefer civil society-based and market-based solutions over governmental solutions, even when I sympathize with the concerns regulatory advocates raise.

Closing Thoughts

Despite the nitpicks I’ve raised here, there’s much to like in Rebecca MacKinnon’s Consent of the Networked. In particular, it offers a rich history of modern Net governance debates that is not to be missed. In particular, her coverage of China and the Net is second to none. More generally, she’s just a terrific all-around researcher and writer; her old journalism skills really paid off here. Other scholars in the field would do well to use her book as a model for how to communicate complex ideas in a clear and convincing fashion.

Cyberlaw and Internet policy scholars and students would be wise to read MacKinnon’s Consent of the Networked alongside Milton Mueller’s Networks and States: The Global Politics of Internet Governance [reviewed here], Evgeny Morozov’s The Net Delusion [reviewed here], and Access Contested: Security, Identity, and Resistance in Asian Cyberspace by Deibert, Palfrey, Rohozinski and Zittrain. Of course, the work of David G. Post and David R. Johnson is also mandatory reading on this topic. They were writing about Net governance before Net governance was cool. Post’s recent book, In Search of Jefferson’s Moose: Notes on the State of Cyberspace, [review here] is very much worth reading, as well as his much older 1998 essay, “The ‘Unsettled Paradox’: The Internet, the State, and the Consent of the Governed.” Also, David Johnson’s recent chapter in The Next Digital Decade closely tracks MacKinnon’s thinking on Net governance and is worth checking out. It’s entitled, “Democracy in Cyberspace: Self-Governing Netizens & a New, Global Form of Civic Virtue, Online.” There are many other important essays in that volume, too. I should also mention the massive collection of essays that Wayne Crews and I edited and bound together for Cato back in 2003. The volume was entitled Who Rules the Net? Internet Governance and Jurisdiction. There were some terrific essays in there on topics related to MacKinnon’s book.  Finally, for an international perspective on some of these issues, students should check out Chris Marsden’s recent book, Internet Co-Regulation: European Law, Regulatory Governance and Legitimacy in Cyberspace.

Down below you will find some additional links to explore Consent of the Networked and Rebecca MacKinnon’s other research and advocacy. Again, I recommend you add the book to your collection.

[Reminder: All my tech policy book reviews can be found here.]

Additional Reading:

• Official site for Consent of the Networked
• MacKinnon’s blog, “RConversation”
• MacKinnon’s recent Washington Post oped, “Why doesn’t Washington understand the Internet?”
• Global Network Initiative (GNI)
• MacKinnon interviewed on “Democracy Now” with Amy Goodman
• MacKinnon’s TED talk, “Let’s Take Back the Net”