The ACLU of Washington (ACLU-WA) seeks a self-motivated public policy advocate to lead its work to protect civil liberties in the face of society’s increasingly advanced technologies. The ACLU-WA’s staff of 30 employees and numerous volunteers work in a fast-paced, friendly and professional office in downtown Seattle.

Using strategies of education, policy analysis, legislative advocacy, coalition building, and legal efforts, the Technology and Liberty Director advances a civil liberties perspective on such issues as data aggregation, surveillance technologies, and online free speech. The Technology and Liberty Director works closely and collaboratively with senior ACLU staff, and has significant interaction with the national ACLU Speech, Privacy and Technology Project. The position reports to the Executive Director through the Deputy Director.

Responsibilities: Regular responsibilities will include the following work:

• Engage in both technical and policy research to analyze technology-related programs and proposals by government and industry. In collaboration with senior staff, develop positions and strategies to respond to civil liberties and technology issues.
• Provide expertise to policymakers, the press, and coalition partners.
• Forge relationships with technology experts, public interest groups, government officials, community stakeholders, and academics to engage them in our work.
• In collaboration with the Legislative Director, advocate on selected technology issues before the state legislature, state or local agencies, and other policy makers.
• Engage in outreach and educational activities through written materials, speaking engagements, media, and visits with ACLU supporters.
• Maintain positive working relationships with relevant national ACLU staff, and collaborate on selected efforts.
• Recruit and supervise interns and volunteers working on technology policy.
• Assist in other activities as assigned. Help maintain a positive, respectful, welcoming, and professional work environment for employees, interns and volunteers.

Qualifications:

• A law degree or another relevant advanced degree.
• Experience in legislative advocacy and policy analysis in the areas of privacy, technology, or other related fields.
• Demonstrated skills as an articulate, effective public advocate.
• Excellent analysis, writing, and research skills. Prior experience simplifying and communicating technical issues to non-technical audiences.
• Strong project management, organization and collaboration skills with attention to detail and ability to meet deadlines.
• Strong commitment to and understanding of civil liberties and civil rights.
• Ability to work cooperatively on a variety of projects with a broad range of individuals and community organizations.
• Ability to work independently and under pressure, to attend occasional evening meetings and sometimes to work long or irregular hours.
• A commitment to diversity; a personal approach that values the individual and respects differences of race, ethnicity, age, gender identity and expression, sexual orientation, religion, ability, and socio-economic circumstance.

Compensation:

Salary is based on experience and qualifications. Benefits include three weeks of vacation to start, medical and disability insurance, matching 401(k) plan and bus pass.

Application procedure: To apply, email a letter of application and resume to Jobs@aclu-wa.org and include in the subject line of the email: your last name and Technology & Liberty Director. In your letter, please indicate where you learned of the posting. Applications will be accepted until the position is filled at which time it will be removed from our website at http://www.aclu-wa.org/jobs-internships.

The ACLU is an affirmative action/equal opportunity employer and encourages qualified individuals of every race, creed, ethnicity, disability, sexual orientation, and gender identity and expression to apply.

On the podcast this week, Michael Burstein, assistant professor of law at the Benjamin N. Cardozo School of Law, discusses his paper entitled, Exchanging Information Without Intellectual Property. Burstein begins by discussing theories behind IP law and why it exists. According to Burstein, IP law incentivizes creation of intellectual works because it protects the creator’s investment by preventing others from copying the work and obtaining a benefit without any effort. He then goes on to discuss the critiques of these theories, the costs that are involved in protecting intellectual works, and the effect IP law has on innovation. Burstein then discusses practical examples in the pharmaceutical and biotech industry where actors structure the flow of information in a way that is reciprocal but only requires a small role from IP law. According to Burstein, norms protect intellectual works. He believes these norms allow disclosure of intellectual works in stages and facilitate a trusting relationship between two firms. Burstein ends the discussion by addressing policy conclusions surrounding IP law and what role it should play in information exchange.

Related Links

• Exchanging Information Without Intellectual Property, by Burstein
• “Emerging Markets for High Tech Ideas”, Small Business Trends
• “Frischmann Predicts Prometheus”, Concurring Opinions

To keep the conversation around this episode in one place, we’d like to ask you to comment at the webpage for this episode on Surprisingly Free. Also, why not subscribe to the podcast on iTunes?

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.

_______________

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.

Tim Lee responds to my last post on net neutrality by invoking one of my favorite economists, Friedrich Hayek. As a matter of logic, a perfectly price discriminating monopoly can be as efficient as a competitive industry, at least in a static sense, but Tim wonders if any firm can ever know enough to price discriminate well, and whether in a dynamic sense these outcomes can really be equated.

In short, a market involving numerous competing over-the-top video providers will be fundamentally, qualitatively different from a market in which one or two large broadband incumbents decides which video content to provide to consumers. In the long run, the open Internet is likely to offer a radically broader range of video content than any single cable company’s proprietary video service, just as is true for text and audio content today. But Eli’s model can’t accomodate this difference, because it requires us to treat content as homogenous and service providers as omniscient in order to make the math tractable.

It’s a fair point that a basic price discrimination model like a simple graph with demand and marginal cost is not going to capture the texture of economic change over time. Nevertheless, I think Tim’s criticism is misplaced, and in fact it’s in a dynamic sense that laissez-faire really shines. Here are a few reasons:

1. Contra Tim, firms don’t need to be omniscient to price discriminate well. There are lots of techniques, such as bundling, quantity discounts, and tiering, that induce self-selection among consumers. These techniques are forms of price discrimination.
2. The efficiency properties of price discrimination kick in if the monopolist is able to price discriminate at the low end of the price spectrum, even if it prices poorly to higher-value consumers. There is good evidence that cable companies do this well. For instance, I called Comcast 9 months ago to cancel my economy cable TV package, and they offered me a $15/month credit for a year to keep it. I’m basically getting cable TV for free. Furthermore, as Adam Ozimek pointed out on Twitter last night, almost everyone has cable TV, so the cable company must know how to price it to get low-value consumers on board.
3. In a dynamic sense, monopoly profit can act as a prize for outcompeting everyone else. As long as competition is taking place without entry barriers or favoritism by the state, competition that admits a possibility of monopoly ex post is fiercer, more Schumpeterian, than that which does not.

Whether or not you buy the above arguments, I think my broad point in favor of laissez-faire in broadband is supported by the Hayekian view of competition, to which I am quite sympathetic. Here’s Hayek in his essay, “The Meaning of Competition,” available in Individualism and Economic Order (free pdf):

The argument in favor of competition does not rest on the conditions that would exist if it were perfect. Although, where the objective facts would make it possible for competition to approach perfection, this would also secure the most effective use of resources, and, although there is therefore every case for removing human obstacles to competition, this does not mean that competition does not also bring about as effective a use of resources as can be brought about by any known means where in the nature of the case it must be imperfect. Even where free entry will secure no more than that at anyone moment all the goods and services for which there would be an effective demand if they were available are in fact produced at the least current expenditure of resources at which, in the given historical situation, they can be produced, even though the price the consumer is made to pay for them is considerably higher and only just below the cost of the next best way in which his need could be satisfied, this, I submit, is more than we can expect from any other known system. The decisive point is still the elementary one that it is most unlikely that, without artificial obstacles which government activity either creates or can remove, any commodity or service will for any length of time be available only at a price at which outsiders could expect a more than normal profit if they entered the field.

The practical lesson of all this, I think, is that we should worry much less about whether competition in a given case is perfect and worry much more whether there is competition at all. What our theoretical models of separate industries conceal is that in practice a much bigger gulf divides competition from no competition than perfect from imperfect competition. Yet the current tendency in discussion is to be intolerant about the imperfections and to be silent about the prevention of competition. We can probably still learn more about the real significance of competition by studying the results which regularly occur where competition is deliberately suppressed than by concentrating on the shortcomings of actual competition compared with an ideal which is irrelevant for the given facts. I say advisedly “where competition is deliberately suppressed” and not merely “where it is absent,” because its main effects are usually operating, even if more slowly, so long as it is not outright suppressed with the assistance or the tolerance of the state. The evils which experience has shown to be the regular consequence of a suppression of competition are on a different plane from those which the imperfections of competition may cause. Much more serious than the fact that prices may not correspond to marginal cost is the fact that, with an intrenched monopoly, costs are likely to be much higher than is necessary. A monopoly based on superior efficiency, on the other hand, does comparatively little harm so long as it is assured that it will disappear as soon as anyone else becomes more efficient in providing satisfaction to the consumers.

Hayek’s position is my position. Let’s put aside simplistic notions of competition like “how many firms are there in the industry.” The important question is whether, as Hayek writes earlier in the essay, “only people licensed by authority [are] allowed to produce particular things, or prices [are] fixed by authority, or both.” Unless I am misreading Tim, he is at least sympathetic to using authority to forbid people from producing a particular thing, a private network, and charging what they like for its use.

Since I know that Tim is fond of quoting Milton Friedman, I’ll point out that Friedman’s position on natural monopoly is also consistent with my own. Here he is in Capitalism and Freedom:

When technical conditions make a monopoly the natural outcome of competitive market forces, there are only three alternatives that seem available: private monopoly, public monopoly, or public regulation. All three are bad so we must choose among evils. … I reluctantly conclude that, if tolerable, private monopoly may be the least of the evils.

If society were static so that the conditions which give rise to a technical monopoly were sure to remain, I would have little confidence in this solution. In a rapidly changing society, however, the conditions making for technical monopoly frequently change and I suspect that both public regulation and public monopoly are likely to be less responsive to such changes in conditions, to be less readily capable of elimination, than private monopoly.

My reading of Friedman is that he became even more hostile to competition policy over time, as economists discovered new, efficient rationales for illegal practices and analyzed cases, like United Shoe and Coors, where the government and the courts got it wrong.

[UPDATE] Tim did not find the preceding Friedman quotation impressive, so here is a more forceful one from later in his life, supporting my claim that he became more hostile to competition policy over time:

My own views about the antitrust laws have changed greatly over time. When I started in this business, as a believer in competition, I was a great supporter of antitrust laws; I thought enforcing them was one of the few desirable things that the government could do to promote more competition. But as I watched what actually happened, I saw that, instead of promoting competition, antitrust laws tended to do exactly the opposite, because they tended, like so many government activities, to be taken over by the people they were supposed to regulate and control. And so over time I have gradually come to the conclusion that antitrust laws do far more harm than good and that we would be better off if we didn’t have them at all, if we could get rid of them.

[/UPDATE]

Whatever the shortcomings of my view of efficiency, I know dozens of economists even more steeped in the work of Hayek than I am. I can’t think of a single one who would support a government-imposed top-down net neutrality policy framework. For Tim to argue for such a policy on Hayekian grounds seems to me to be quite a stretch.

More this week on the efforts of Reed Hastings of Netflix to reignite the perennial debate over network access regulation, courtesy of the New York Times.  Hastings is seeking a free ride on Comcast’s multi-billion-dollar investment in broadband Internet access.

Times columnist Eduardo Porter apparently believes that he has seen the future and thinks it works: The French government forced France Télécom to lease capacity on its wires to rivals for a regulated price, he reports, and now competitor Iliad offers packages that include free international calls to 70 countries and a download speed of 100 megabits per second for less than $40.

It should be noted at the outset that the percentage of French households with broadband in 2009 (57%) was less than the percentage of U.S. households (63%)   according to statistics cited by the Federal Communications Commission.

There is a much stronger argument for unbundling in France – which lacks a fully-developed cable TV industry – than in the U.S.  As the Berkman Center paper to which Porter’s column links notes on pages 266-68, DSL subscriptions – most of which ride France Télécom’s network – make up 95% of all broadband connections in France.  Cable constitutes approximately only 5% of the overall broadband market.  Competition among DSL providers has produced lower prices for consumers, but at the expense of private investment in fiber networks.

Despite commitments by several of the major broadband companies … to invest in fiber roll-out, fiber-based broadband connections remain marginal in France …. In part, this may be due to the public controversy regarding access to the infrastructure of France Télécom … The delayed investment is also consistent with the argument that requiring open access to incumbent facilities delays investment.

This observation is from the same Berkman Center paper.  As a result of the delayed private investment, the paper acknowledges that “the French government has annouced its intention to help finance the deployment of fiber networks.”  Public subsidy is frequently the only option after politicians tax and/or regulate something to death.

The U.S. has already experimented with unbundling, and the trial was unsuccessful.  Prior to 2003, new entrants could purchase the high-frequency portion of local telephone loops to provide their own DSL service.  In February of 2003, the FCC eliminated line-sharing, which had allowed new entrants to offer DSL – but not voice – over incumbent loops (henceforth, new entrants could either purchase the entire loop or partner with a voice provider).

“There is no evidence that network sharing has increased competition in U.S. broadband markets,” according to Robert W. Crandall of the Brookings Institution.  “At the end of 2003, the FCC reported that only 1.7 percent of all broadband lines were DSL lines offered by nonincumbent telephone companies.”  (See Crandall, Competition and Chaos, 2005.)

Porter also claims that cable is often the only choice for consumers who desire very high speeds.  He is insinuating that there is monopoly problem in broadband, which might justify common carrier regulation pursuant to ancient legal theory.  The legal scholar Blackstone wrote an early text book on this subject in the 18th century.  Common carrier regulation guarded against monopolist misbehavior, but it also defended government-awarded monopolies from “ruinous” competition or unlimited liability.  It turned out to be a sweet deal for monopolists.  The fact that it victimized consumers became apparent by the 1970s.

Although telecommunications carriers are not investing in fiber-to-the-premises at the moment, they are investing in 4G wireless technologies that promise download speeds of 100 megabits per second or higher.  Verizon Chairman and CEO Lowell C. McAdam predicted earlier this week in Tampa that “mobile devices will generate more Internet traffic than all wired devices combined” by the middle of this decade.  And Wall Street Journal columnist Holman W. Jenkins, Jr. wrote this week that it seems, at least for now, that “wireless is the future of broadband.”

None of us can be sure what this market will look like in the future.  If big cable companies seem frightening now, it is worth recalling that for years doomsayers predicted that telecommunications carriers would monopolize data processing, video services, classified advertising, alarm monitoring, etc.  None of these predictions proved accurate.  Most successful commercial enterprises are one-trick ponies.

What is clear is that we never seem to tire of the network access regulation debate.  After many years of consideration, the FCC ruled  in 1984 that providers of “computer enhanced services” would not be regulated as common carriers.  Under pressure to reverse course in the late 1990s, FCC Chairman William E. Kennard (Democrat) declared that “the best decision government ever made with respect to the Internet was the decision that the FCC made 15 years ago NOT to impose regulation on it.”  In 2010, the FCC voted along party lines to “preserve the Internet as an open network.”  That decision is the subject of pending litigation.

Hastings apparently hopes to write the next version of this debate.

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.

A lot of people are talking about this New York Times article on net neutrality, which highlights the effect on Netflix of Comcast launching its own video platform on the Xbox that is exempt from Comcast’s bandwidth limitations. While this policy may indeed result in more customers for Comcast’s video services and fewer for Netflix’s in the short run, I don’t think that critics are seriously thinking through the economics of Internet service before they speak.

The economics of running a large ISP is one of fixed costs. When you introduce large fixed costs, a lot of consumers’ ordinary economic intuition becomes worse than useless. If Comcast incurs a lot of fixed costs from building a network, someone has to pay for it. Suppose that the fixed cost is currently divided between TV subscription and advertising revenue and Internet service revenue. If Comcast’s TV revenues collapse because everyone is switching to Netflix, where will Comcast get the revenue to pay its high fixed costs? You guessed it, they will have to raise the price of Internet service.

To give a dramatically oversimplified example, suppose that TV service and Internet service each cost $50/month and Comcast has $90/customer/month in fixed costs and $10/customer/month in TV content licensing costs. If all of Comcast’s customers drop TV service and switch to Netflix, which costs $8/month, Comcast loses its $10/month licensing expense but it still has $90/month in fixed costs for maintaining its network. It will have to raise the price of its Internet service to $90/month to recover those costs. Consumers will now pay $90/month to Comcast for Internet service and $8/month to Netflix for TV service, for a total of $98/month, which is $2 less than they were paying before.

However, Comcast’s “non-neutral” Xbox service could improve on this for some customers, assuming that customers are heterogeneous. Suppose that critics’ worst fear comes true and I am the only Comcast customer to switch from Comcast video to Netflix. Then Comcast’s pricing does not have to change, I pay $58/month, and other customers continue paying $100/month, just as they were before. This pricing policy is great for me, the most elastic customer. If you are a Netflix subscriber, therefore, you benefit from Comcast’s non-neutral Xbox service.

But what about the inelastic customers? They have to pay more. However, it is economically efficient—and this can be proven rigorously—for the less elastic customers to pay a higher share of the fixed cost. Given that we’re going to have a network with a large fixed cost, the question we should be asking is, “What is the most efficient way of paying that fixed cost?” And the answer is, in many cases, in a non-neutral way.

The bottom line is that there is a lot of wishful thinking when it comes to net neutrality. In many respects, it reminds me of the simpleton’s dream of à la carte cable, as if pricing of $0.50/channel in a bundle of 100 channels can be extended to customers buying only 5 channels. Fools! You must pay the fixed cost somehow. And the best, most efficient way of splitting up this fixed cost is not equally, and certainly not at taxpayer expense, which is completely unfair to taxpayers who do not value the service, but inversely with demand elasticity. This means the network should always be non-neutral to some extent, balanced of course against our willingness to pay more as consumers for a neutral Internet.

On the podcast this week, Jim Harper, director of information policy studies at the Cato Institute, and Ryan Radia, associate director of technology studies at the Competitive Enterprise Institute, discuss Congress’s recent interest in cybersecurity. Harper and Radia begin by discussing why Congress wants to legislate cybersecurity and the potential threats that have Congress frightened. Harper and Radia then discuss the types of bills before Congress, which include aspects of information sharing that would promote cybersecurity intelligence but may have privacy implications, and mandates for a security infrastructure. The discussion then turns to the role of government in cybersecurity and whether the protection of online information and assets should be left to markets. The discussion ends with Harper and Radia predicting the future of the proposed bills.

Related Links

• “Cybersecurity Bills? No, Thanks”, cato@liberty
• Government Bureaucrats Can’t Prevent Data Breaches, CEI.org
• “Cyberwar Is the New Yellowcake”, Wired
“Cybersecurity bill passes, Obama threatens veto”, CNN Money

To keep the conversation around this episode in one place, we’d like to ask you to comment at the webpage for this episode on Surprisingly Free. Also, why not subscribe to the podcast on iTunes?

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.

In the lead essay for the “Cato Unbound” symposium this month, I analyze recent political movements that have been aided by Internet-based communication by positing a set of questions,

Activists played important roles in bringing down dictators in the Arab world, stopping the Stop Online Piracy Act (SOPA) in Congress and electing Barack Obama—just to name a few examples. But how much did the Internet matter in making these watershed events possible? How effective is it likely to be in the future? And how would we measure whether activism “works” for society—not just the activists?

I respond to the concerns raised by Evgeny Morozov in his iconoclastic 2010 book, The Net Delusion: The Dark Side of Internet Freedom (summarized in his short essay in TechFreedom’s free ebook The Next Digital Decade: Essays on the Future of the Internet).  In general, I suggest that we simply do not yet understand the Internet’s effect on activism well enough to make strong normative judgments about it.  But applying Public Choice theory can help us understand how developments in communication technologies are changing the relationship between an individual and the group in social movements. A few highlights:

• Social media lower organizational costs, especially of recruiting members, but also noticeability: “members’ ability to notice each other’s actions.” Even in 2003, there was little way to tell whether your friends actually followed through when you asked them to help join a cause. But today, it’s easy to encourage them to re-share material on Facebook or Twitter—and to “notice” whether they’ve done so.
• Social media allows members of large groups—think Twitter followers—to be continuously bombarded with propaganda about the worthiness of the cause creating social pressures not entirely unlike those that can be generated in a face-to face group.
• The Internet empowers large, dispersed groups (like dedicated Internet users) to organize against small but concentrated interests. As anyone who works in technology policy in Washington can attest, SOPA’s implosion made Congress more cautious—at least about Internet regulation, where fear of a digital activist backlash is greatest.
• Ultimately, the Internet does make coordination easier among like-minded people to provide reputational feedback about corporations and governments. However we must still be vigilant—governments can and do manipulate the Internet in overt and covert ways to stifle their populations.
• Activism works largely by imposing reputational costs on its targets.  Online reputation markets deliver information much faster and more cheaply than ever before.

I conclude by saying: “The Internet may not necessarily make the world a better place in every way, but the more we understand how it changes our relationships with each other, the better equipped we will be to steer its evolution in more humane directions.”

In the coming days, Jason Benlevi, Rebecca MacKinnon and John O. McGinnis will all respond, leading to a spirited debate on the topic of Internet activism and to what degree technology really does enhance freedom.

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.

The airline would not let coach passenger Susan Crawford stow her viola in first class on a crowded flight from DC to Boston, she writes at Wired (Be Very Afraid: The Cable-ization of Online Life Is Upon Us).

Just imagine trying to run a business that is utterly dependent on a single delivery network — a gatekeeper — that can make up the rules on the fly and knows you have nowhere else to go. To get the predictability you need to stay solvent, you’ll be told to pay a “first class” premium to reach your customers. From your perspective, the whole situation will feel like you’re being shaken down: It’s arbitrary, unfair, and coercive.

Most people don’t own a viola, nor do they want to subsidize viola travel. They want to pay the lowest fare. Differential pricing (prices set according to the differing costs of supplying products and services) has democratized air travel since Congress deregulated the airlines in 1978. First class helps make it possible for airlines to offer both lower economy ticket prices and more frequent service. Which is probably why Crawford’s column isn’t about airlines.

For one thing, Crawford seems to be annoyed that the “open Internet protections” adopted by the Federal Communications Commission in 2010 do not curtail specialized services — such as an offering from Comcast that lets Xbox 360 owners get thousands of movies and TV shows from XFINITY On Demand. As the commission explained,

“[S]pecialized services,” such as some broadband providers’ existing facilities-based VoIP and Internet Protocol-video offerings, differ from broadband Internet access service and may drive additional private investment in broadband networks and provide end users valued services, supplementing the benefits of the open Internet. (emphasis mine)

Since XFINITY on Xbox is a specialized service similar to traditional cable television service, it doesn’t have to count towards the data usage threshold that applies to broadband Internet access services provided by Comcast. Netflix doesn’t want to be “shaken down” or pay “tribute” to get similar treatment, according to Crawford.

For the data usage threshold exemption to be provided at no charge to Netflix, however, Comcast would have to recover the cost and/or the value from somewhere else. Broadband providers invested nearly $65 billion in 2010 alone. FCC staff have estimated the cost of universal broadband availability is $350 billion for 100 Mbps or faster.

Neither taxpayers nor lenders are going to sustain this level of investment in the current economic and political environment. It will have to come from private investors, who have many options for managing their money and demand competitive returns on equity. Since specialized services share last-mile facility capacity with broadband Internet access services, they provide a valuable additional source of revenue for fueling investment in the network. The concept is the same as first class and economy class passengers sharing the cost of air travel.

Increasing broadband adoption is justifiably a major objective of FCC Chairman Julius Genachowski, who estimated that more than 100 million Americans (roughly 35% of U.S. households) could but did not have broadband in 2010 in part because they felt they could not afford it.

Making broadband universally affordable and preventing businesses from having the option to pay a first class premium to reach their customers (if they want) are not compatible goals. If anything, there is a need to reduce broadband prices, not subsidize Netflix sales. Broadband providers must be allowed to let customers who value their products and services pay more money so broadband providers will be in a stronger position to appeal to price-conscious consumers.

Kindle users, for example, pay for the content and get the wireless connectivity for free.

Crawford falsely claims that broadband is a “single delivery network — a gatekeeper — that can make up the rules on the fly and knows you have nowhere else to go.” She makes this untrue claim because “natural monopoly” is the classic legal justification for close government scrutiny and pervasive regulation.

The fact is that cable, telephone and mobile wireless providers all compete to offer similar broadband Internet access services. Fourth-generation wireless technologies being deployed now are believed to be capable of delivering peak download speeds of 100 Mbps or higher, comparable to DOCSIS 3.0 and Verizon’s FiOS service. There is no gatekeeper problem, only a desire on the part of some firms to seek political favors instead of undertaking the difficult and uncertain task of creating real consumer value.

Netflix’s success derives in large part because FedEx, UPS and the U.S. Postal Service did not rent out DVDs. Delivering video is a Comcast speciality, however, and Netflix has no obvious source of competitive advantage. That’s unfortunate, but a bailout would impose hidden costs on consumers in the form of high prices for broadband Internet access.

When government intrudes in the free market to perform a rescue of the type Netflix is seeking, it is picking winners and losers. Capricious government intervention frightens private investors and can lead to crony capitalism and corruption.

I’m not sure what Susan Crawford can do to avoid having to gate check her viola in the future. But not even she is advocating that Congress repeal airline deregulation so airlines are treated the same as telecommunications carriers again. Which is exactly what she is advocating for broadband.

The Reason Foundation today has published the Telecommunications and Internet section of its 2011 Annual Privatization Review.

Although there’s been a bit of lead time since the articles were written, they are still timely. Notable is the discussion on the collection of state sales taxes from Internet retailers, back in the news now that Amazon.com has reached an agreement with the state of Texas to collect sales taxes from consumers in the Lone Star State. The settlement concludes a lengthy battle in Austin as to whether Amazon’s distribution facility in Ft. Worth constitutes a “nexus” as defined in previous court cases.

While a blow to Amazon’s Texas customers (full disclosure: I count myself as one), the action may shed further light on the debate as to how much advantage the Amazon has because it can waive sales tax collection. Competitors such as ailing Best Buy have said it’s enough to hurt brick-and-mortar retailers. Amazon points to findings that in New York, the most populous state where it collects sales tax, sales have not fallen off. Soon we’ll see if Texas tracks with that data as well. If it does, it will further validate opinions that Amazon and other on-line retailers are succeeding because they have fundamentally changed the way people shop, not because they can simply avoid sales taxes.

Also in the report look for updates on the FCC’s options for the next spectrum auction, state and federal policymaking on search engines and social networking sites, and how priorities may change as the FCC migrates from the current Federal Universal Service Fund to its new more broadband-oriented Connect America Fund.

The telecom section of APR 2011 can be found here.

On the podcast this week, Jennifer Shkabatur, Fellow at the Berkman Center for Internet Society at Harvard University, discusses her new paper, “Transparency With(out) Accountability: The Effects of the Internet on the Administrative State. Shkabatur begins by discussing the focus of her paper, a critical look at open government initiatives. Shkabatur believes promises of transparency in government fall short and do not promote accountability. She then discusses innovations in accountability facilitated by the Internet, which she divides into three categories: mandatory transparency, discretionary transparency, and involuntary transparency. Shkabatur then sets forth types of reforms that she believes would improve government transparency. According to Shkabatur, context and details on agency processes are necessary along with details about how an agency performs various tasks.

Related Links

• Transparency With(out) Accountability, by Shkabatur
• “Transparency Through Technology: Evaluating Federal Open Government Efforts”, Mercatus.org
• “The Power of Open Government”, Brookings Institute

To keep the conversation around this episode in one place, we’d like to ask you to comment at the webpage for this episode on Surprisingly Free. Also, why not subscribe to the podcast on iTunes?

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.

On the podcast this week, Naomi Cahn, John Theodore Fey Research Professor of Law at George Washington University, discusses her new paper entitled, “Postmortem Life Online.” Cahn first discusses what could happen to online accounts like Facebook once a person dies. According to Cahn, technology is outpacing the law in this area and it isn’t very clear what can happen to an online presence once the account holder passes away. She discusses the various problems family members face when trying to access a deceased loved one’s account, and also the problems online companies face in trying to balance the deceased’s privacy rights with the need to settle an estate. Cahn claims that terms of service often dictate what will happen to an online account after death, but these terms may not be in line with account holder wishes. She then suggests some steps to take in making sure online accounts are taken care of after death, including taking inventory of all online accounts and determining who should have access to those accounts after death.

Related Links

• “Postmortem Life On-Line”, by Cahn
• “What happens to your Facebook account when you die?”, The Digital Beyond
• “Deathless data: What happens to our digital property after we die?”, The Economist

To keep the conversation around this episode in one place, we’d like to ask you to comment at the webpage for this episode on Surprisingly Free. Also, why not subscribe to the podcast on iTunes?

There is a Senate Commerce Committee hearing today on online video, and our friends at Free Press, Consumers Union, Public Knowledge, and New America Foundation argue that it should be used to investigate ISP-imposed data caps.

If data caps had a legitimate economic justification, they might be just a necessary annoyance. But they do not have such a justification. Arbitrary caps and limits are imposed by multichannel video providers that also provide broadband Internet access, because the providers have a strong incentive and ability to protect their legacy, linear video distribution models from emerging online video competition.

As someone who uses an ISP with a data cap and who is a paid subscriber to three different online video services, you might think that I too would concerned about these caps. But to the contrary, I think there are some legitimate economic reasons ISPs might impose data caps, and I don’t see a reason to stop ISPs from setting the price and policies for the services they offer.

The first and most basic reason that ISPs might want to implement a cap is to price discriminate. The term “price discrimination” makes a lot of people uneasy because it contains the word “discrimination.” While that sounds nefarious, price discrimination usually increases economic welfare. If a firm has to charge all consumers $100/month for service, some consumers who can only afford $50/month will be left out. In contrast, if it can charge $50/month to those customers and $150/month to other customers, more customers will use the product. Price discrimination especially benefits those customers at the low end of the consumption spectrum, who would otherwise have to go without.

Comcast and AT&T have 250 GB/month caps on data usage for their residential service. Very few residential customers are likely to bump up against this cap. In fact, residential service is so adequate for most uses that some business customers might be tempted to use residential-class service. By imposing a cap on usage, ISPs are really trying to force these customers to buy their more-expensive business-class service, which does not have a usage cap. This is good for residential customers because it means that businesses are paying a greater share of the fixed costs associated with providing Internet service; business customers are cross-subsidizing residential customers.

Some people argue that price discrimination is bad because it is a sign of market power. However, relatively recent developments in the economics literature do not support automatic linkage between these two elements. Consider for instance that the most notorious price discriminators are airlines, who seem to be continuously going bankrupt! The best paper on the subject is Michael Levine’s “Price Discrimination Without Market Power” (gated published version, ungated working paper). Levine argues that firms in industries with large fixed costs or networks to maintain will be forced by competition to price discriminate to efficiently allocate their fixed costs. From this perspective, it is bans on price discrimination that can be thought of as a restraint of trade.

The second reason that ISPs might legitimately impose data caps is because it is easier for consumers than other superficially more rational approaches to handling congestion. If I were designing a bandwidth pricing scheme for homo economicus, I would impose two-part pricing. Every consumer would pay a fixed fee just to be part of the network, and then a per-bit metered fee so that they bear the costs associated with their own use. Even better, the per-bit fee would be higher when the network was more congested! However, it could be the case that such pricing imposes “mental accounting costs” on ordinary homo sapiens consumers. As Public Knowledge writes in their new paper on Internet data caps and usage-based pricing:

The strongest arguments for flat rates are best explained by the concept of “mental accounting costs.” As the world gets increasingly complicated, people are overwhelmed by the available choices and the need to devote mental efforts to sorting them out, and therefore search for simplicity. They are willing to pay extra for the peace of mind that flat rates offer them.

A 250 GB cap eliminates mental accounting costs for most consumers, relative to the two-part pricing scheme that I proposed above, while eliminating the congestion created by network hogs. My argument is not that a 250 GB cap is optimal, necessarily. ISPs probably have to do some experimentation to find solutions that strike the right tradeoff between congestion management and consumer value. But a 250 GB cap might work relatively well because Grandma doesn’t have to worry about running up her Internet bill. Nor would the vast majority of consumers, for that matter.

A third reason that ISPs might impose data caps is not actually about Internet service at all, but rather about copyright. ISPs quite understandably do not want to be the copyright police. They don’t want to get roped (further) into the ongoing battle between the content-Congressional complex and ordinary consumers. It is in ISPs’ interest, therefore, to find ways to make the content piracy problem go away without alienating the majority of their users. A 250 GB/month data cap probably strikes a nice balance for them on that score. Uncapped service would result in some users running their bit torrent clients at full speed for 23+ hours per day, consuming terabytes of data and distributing lots of copyrighted content. It would also result in further calls by policymakers and content producers for ISPs to do more with respect to copyright. By imposing a cap, ISPs eliminate the most egregious file-sharing practices without overburdening casual file-sharers and without having to monitor users directly.

The bottom line is that off the top of my head, I can think of three legitimate and sensible reasons for ISPs to impose caps. I’m not saying that any one of these is the answer; the real answer might be a combination of these and other reasons. I have no doubt that our friends have the best of intentions, but their claim that data caps have no possible legitimate economic justification suggests to me that either they don’t know much about economics or they’re not trying very hard.

In previous posts about the battle for control of the Cato Institute, I’ve noted (Part I) that the “Koch side” is a variety of different actors with different motivations who collectively seem not to apprehend the Cato Institute’s value. Next (Part II), I looked at why the Koch side is fairly the object of the greater scrutiny: their precipitous filing of the original lawsuit.

My premise has been that the Koch side cares. That is, I’ve assumed that they want to preserve Cato and see its role in the libertarian movement continue. Some evidence to undercut that assumption has come around, namely, their filing of a second lawsuit—and now a third! [Update: Mea culpa---there hasn't been a third lawsuit. Just a new report of the second one. I had assumed the second was filed in state court and thus thought this was distinct. I'm not following the legal issues, obviously, which matter very little.]

The Koch side may be “on tilt.” Lawsuit-happy, win-at-any-cost. We will just have to wait and see.

For the time being, I will continue to assume that the Koch side has the best interests of liberty in mind and explore the dispute from that perspective. I owe the world some discussion of Cato-side miscalculation—of course, there is some—but before I get to that in my next post, I think it’s worth talking about the burden of proof in the Kochs’ campaign to take control of Cato.

Only fringies will deny that the Cato Institute adds some value to the liberty movement. It does. The question—if preservation of liberty is the goal—is how well it will do so in the future. The central substantive issue in the case—there are many side issues—is how Cato will operate in the future.

Now, here’s a quick primer on public campaigns and the difference between the “yes” side and the “no” side.

A “yes” campaign is hard. The moving side—the “yes” side—has to make the case that there is a problem, and it also has to make the case that it offers the best available solution.

A “no” campaign is easy. The “no” side can choose to dispute the existence of the problem, or it can dispute that the “yes” side’s solution is the right one.

In 1994, I worked for a campaign to defeat a single-payer health care initiative, California’s Prop. 186. The most memorable work we did—and the most fun—was a weekly release we faxed out (yes, faxed!) called the “Whopper of the Week.” Our side would take any dimension of the other side’s campaign and pound on it as hard as we could with mocking disdain and a smattering of the facts as we saw them.

By the end of the campaign, the “yes” side was arguing that their losses in battles like this were becoming more narrow each time around. Pathetic. We blasted out an Alice-in-Wonderland-themed Whopper. No, health-care socializers, a loss is not a win.

In the battle for control of Cato, the Kochs are the moving party, the “yes” campaign. But it has done almost none of the work that a “yes” campaign should.

As I wrote previously, they didn’t even make the case that there is a problem:

In terms of communications and public relations, this is kind of jaw-dropping stuff. It looks as though the Koch side laid little or no groundwork for public discussion of their move to take control of Cato. They didn’t register a public complaint about the direction of Cato’s research. They didn’t enlist a single ally or proxy into raising questions about Cato’s management.

And it’s becoming conspicuous with the passage of time that the Koch side isn’t putting forward a solution.

When the Kochs filed their original lawsuit, their public messaging was that it was a narrow contract dispute. “Nothing to see here.”

Then, the Koch messaging aimed at Ed Crane’s personality and management style. A statement from David Koch cited Ed’s rudeness. A pair of unsigned stories on Breitbart.com expanded on that theme a little breathlessly (using a picture of Ed that makes him look mean and fat!). I presume the Kochs helped with the placement of these stories, though I could certainly be wrong.

[UPDATE: (4/23/12) A third Breitbart story went up today, but is no longer available at its original source. A mirror of the story, "The Crane Chronicles, Part III: Ed Gone Wild," is available here.]

You only have to look at that “mean and fat” picture of Ed Crane to know he was going to be out the door soon anyway. Hopefully, to a chaise lounge and a mai tai with a little umbrella in it. Ironically, the instant dispute may keep Ed at Cato longer than he would have been if someone just said “thank you” and thrown him a nice going-away party.

Attacking Ed Crane does nothing to make the Kochs’ case for taking over Cato. It is at best one-third of the first half of a “yes” campaign.

What about the other two-thirds of the “problem” statement? Has Cato’s fundraising lagged? Is the scholarship weak? Has Cato failed to strike the right balance between principle and relevance? These are important, substantive questions … that the Koch side has barely raised.

Much less has the Koch side put forward the solutions that it thinks are the right ones. PR statements won’t do for the people who dedicate their every work-day to advancing liberty. What is the Koch vision for Cato? Who do the Kochs think should be at the helm? How can we know that Cato will remain a distinct, non-partisan voice in Washington? It takes something more than words when the devil we know has a 35-year track record.

The evidence of miscalculation I bring to bear in this post is the dog that didn’t bark. By all appearances, the Kochs didn’t prepare for the campaign to take over Cato. A fair inference is that the Kochs aren’t prepared to run it.

I’m fascinated in writing this post that I feel the need to explain to whoever is running this issue for the Kochs what they should have done in the effort to get control of Cato. It’s not because I wish the Koch side success. It’s because the evidence we have indicates fairly strongly that the Koch side is not prepared to run the Cato Institute. What happens if the dog catches the car?

Frederick Jackson Turner (1861-1932)

On Fierce Mobile IT, I’ve posted a detailed analysis of the NTIA’s recent report on government spectrum holdings in the 1755-1850 MHz. range and the possibility of freeing up some or all of it for mobile broadband users.

The report follows from a 2010 White House directive issued shortly after the FCC’s National Broadband Plan was published, in which the FCC raised the alarm of an imminent “spectrum crunch” for mobile users.

By the FCC’s estimates, mobile broadband will need an additional 300 MHz. of spectrum by 2015 and 500 MHz. by 2020, in order to satisfy increases in demand that have only amped up since the report was issued.  So far, only a small amount of additional spectrum has been allocated.  Increasingly, the FCC appears rudderless in efforts to supply the rest, and to do so in time.

It’s not entirely their fault.  At the core of the problem, the FCC is simply not constituted to resolve this increasingly urgent crisis.  That’s because, as I write in the article, the management of radio frequencies has entered new and unchartered territory.

For the first time since the FCC and its predecessor agencies began licensing spectrum nearly 100 years ago, there is no unassigned spectrum available, or at least none of which current technology can make effective use.

The spectrum frontier is now closed.  But the FCC, as created by Congress, is an agency that only functions at all on the frontier.

So it’s worth remembering what happened a hundred years earlier, when a young historian named Frederick Jackson Turner showed up at the 1893 annual meeting of the American Historical Association to present his paper on “The Significance of the Frontier in American History.”

The meeting took place that year on the grounds of the World’s Columbian Exposition in Chicago.  The weather was unspeakably hot, and Turner’s talk was poorly attended.  (The President of the AHA, Henry Adams, was in attendance but appears not to have heard Turner’s talk or ever to have read the paper—he was meditating in the Hall of Turbines, as he wrote in his autobiography, “The Education of Henry Adams,” having a nervous breakdown.)   But the paper has had an outsized and long-lasting impact, launching the field of western or frontier history.

Turner’s thesis was simple and unassailable.  Citing census data that showed there was no longer a recognizable line of American territory beyond which there was no settlement, Turner declared that by 1890 the frontier had “closed.”  The era of seemingly endless supplies of readily-available cheap land, dispensed for free or for nominal cost by the federal government, had come to an end.

For Turner, the history of the west was the history of the American experience.  And the defining feature of American life—shaping its laws, customs, culture and economy–had disappeared.  A new phase, with new rules, was beginning.

The FCC Only Functions, When it Functions at All, on the Frontier

Our problem, at least, is equally easy to describe.  The FCC, as created by Congress, is an agency that only functions, when it functions at all, on the frontier.

All the talk of “spectrum crunch” boils down to a simple but devastating fact:  it’s no longer possible to add capacity to existing mobile networks by assigning them unused ranges of radio frequencies.  While technology continues to expand the definition of “usable” frequencies, demand for mobile broadband is increasing faster than our ability to create new supply.

We need more spectrum.  And the only way to put more spectrum to use for the insatiable demands of mobile consumers is to reallocate spectrum that has already been licensed to someone else.

In the American west, reallocation of land was easy.  Land grants were given with full legal title, and holders were under no lasting obligation to use their land for any specific purpose or in any particular way.

The various acts of Congress that authorized the grants were intended to foster important social values—populating the frontier, developing agriculture, compensating freed slaves, building the railroads.  But those intentions were never translated into the kind of limited estates that plagued modern Europe after the feudal age came to an end.  (For a good example of the mischief a conditional estate can cause hundreds of years later, watch “Downton Abbey.”  Watch it even if you don’t want to see an example of inflexible estate law.)

Speculators sold to farmers, farmers to ranchers, ranchers to railroads and miners and oil drillers, and from there to developers of towns and other permanent settlements.  The market established the transfer price, and the government stood behind the change of title and its enforcement, where necessary.  Which was rarely.

So the closing of the western frontier, while it changed the nature of settlement in the American west, never threatened to bring future development to a screeching halt.

Reallocation Options are Few and Far Between

Unfortunately, spectrum licensing has never followed a property model, even though one was first proposed by Ronald Coase as early as 1959.  Under the FCC’s command-and-control model, spectrum assignments have historically been made to foster new technologies or new applications the FCC deems to be of good potential to advance national interests.  Spectrum has been licensed, usually at no or nominal cost to the licensor, for particular uses, with special conditions (often unrelated) attached.

In theory, of course, the FCC could begin revoking the licenses of public and private users who aren’t using the spectrum they already have, or who aren’t using it effectively or, to use the legal term of art, “in the public interest.”  Legally and politically, however, revoking (or even refusing to renew) licenses is a non-starter.

Consequently, the most disastrous side-effect of the “public interest” approach to licensing has been that when old technologies grow obsolete, there is no efficient way to reclaim the spectrum for new or more valuable uses.  The FCC must by law approve any transfer of an existing license on the secondary market, slowing the process at best and creating an opportunity to introduce new criteria and new conditions for the transfer at worst.

Even when the agency approves a transfer, the limitations on use and the existing conditions of the original licensor apply in full force to the new user.  That means that specific ranges of spectrum more-or-less arbitrarily set aside for a particular application remains forever set aside for that application, unless and until the FCC undertakes a rulemaking to reassign it.

That also takes time and effort, and offers the chance for new regulatory mischief.  (Only since 1999, the FCC has had the power, under limited circumstances, to grant flexible use licenses.  The power cannot be applied retroactively to existing licenses.)

With the spectrum frontier closed, mobile broadband providers must find additional capacity from existing license holders.  But because of the use restrictions and conditions, the universe of potential acquisition targets immediately and drastically shrinks to those making similar use of their licenses–that is, to current competitors.

So it’s no surprise that since 2005, as mobile use has exploded with the advent of 2G, 3G, and now 4G networks, the FCC has been called upon to approve over a dozen significant transfers within the mobile industry, including Sprint/Nextel, Verizon/Alltel, and Sprint Nextel/Clearwire.  Indeed, expanding capacity through merger seemed to be the agency’s preferred solution, and the one that required the least amount of time and effort.

But with the rejection last year of AT&T’s proposed merger with T-Mobile USA, the FCC has signaled that it no longer sees such transactions as a preferred or perhaps even potential avenue for acquiring additional capacity.  At least not for AT&T–and perhaps as well for Verizon, which is currently fighting to acquire unused spectrum held by a consortium of cable providers.

What other avenues are left?  With the approval of “voluntary incentive auction” legislation earlier this year, the FCC can now begin the process of gently coercing over-the-air television broadcasters to give up some or all of their licensed capacity in exchange for a share of the proceeds of any auctions the agency conducts to repurpose that spectrum for mobile broadband.

(Broadcast television seems the obvious place to start freeing up spectrum.  With the transition to digital TV, every station was given a 6 MHz. allocation in the 700 MHz. range.  But over-the-air viewership has collapsed to as few as 10% of homes in favor of cable and fiber systems, which today reach nearly every home in the country and offer far greater selection and services.  Many local broadcasters remain in business largely through the regulatory arbitrage of the FCC’s retransmission consent and must-carry rules.)

Those auctions will likely take years to complete, however, and the agency and Congress have already fallen out over how and how much the agency can “shape” the outcomes of these future auctions by disqualifying bidders who the agency feels already have too high a concentration of existing licenses.

And it’s far from clear that the broadcasters will be in any hurry to sign up, or that enough of them will to make the auctions worthwhile.  Participation is, at least so far, entirely voluntary.  Just getting Congress to agree to give the FCC even limited new auction authority took years.

There’s also the possibility of reassigning other kinds of spectrum to mobile use—increasing the pool of usable spectrum allocated to mobile, in other words.  That option, however, has also failed to produce results.  For example, the FCC initially gave start-up LightSquared a waiver that would allow it to repurpose unused spectrum allocated for satellite use for a new satellite and terrestrial-based LTE network.

But after concerns were raised by the Department of Defense and the GPS device industry about possible interference, the waiver was revoked and the company now stands on the brink of bankruptcy.  (Allegations of political favoritism in the granting of the waiver are holding up the nominations of two FCC commissioners.)

So when Dish Networks recently asked for a similar waiver, the agency traded speed and flexibility for the relative safety of  full process.  The FCC has now published a formal Notice of Proposed Rulemaking to evaluate the request.  If the rulemaking is approved, Dish will be able to repurpose satellite spectrum for a terrestrial mobile broadband network (possibly a wholesale network, rather than a new competitor).  That, of course, will take time.  And given enough time, anything can and will happen.

Finally, there’s the potential to free up unused or underutilized spectrum currently licensed to the federal government, one of the largest holders of usable spectrum and a notoriously poor manager of this valuable resource.

That was the subject of the NTIA’s recent report, which seemed to suggest that the high-priority 1755-1850 MHz. range (internationally targeted for mobile users) could be cleared of government users within ten years—some in five years, and in some cases, with possible sharing of public and private use during a transitional phase.

But as I point out in the article, the details behind that encouraging headline suggest rather that some if not all of the twenty agencies who currently hold some 1,300 assignments in this band are in no hurry to vacate it.  Having paid nothing for their allocations and with no option to get future auction proceeds earmarked to their agency, the feds have little incentive to do so.  (NTIA can’t make them do much of anything.)  The offer to share may in fact be a stalling tactic to ensure they never actually have to vacate the frequencies.

What’s Left?  Perhaps Nothing, at Least as Far as the FCC is Concerned

The color-coded map of current assignments is so complicated it can’t actually be read at all except on very large screens.  There are currently some 50,000 active licenses.  The agency still doesn’t even have a working inventory of them.  This is the legacy of the FCC’s command-and-control approach to spectrum allocation over nearly 100 years.

Almost everyone agrees that even with advances in hardware and software that make spectrum usage and sharing more efficient, large quantities of additional spectrum must be allocated soon if we want to keep the mobile ecosystem healthy and the mobile revolution in full and glorious swing.

With the closing of the spectrum frontier, the easy solutions have all been extinguished.  And the century-long licensing regime, which tolerated tremendous inefficiency and waste when spectrum was cheap, has left the FCC, the NTIA, the mobile industry and consumers dangerously hamstrung in finding alternative methods to meet demand.  Existing spectrum, by and large, can’t be repurposed even when everyone involved wants to do so and where the market would easily catalyze mutually-beneficial transactions.

Given the law as it stands and the FCC’s current policy choices, carriers can’t get spectrum from outside the mobile industry, nor can they get it from their competitors.  They can’t get it from the government, and may not be allowed to participate in future auctions of spectrum agonizingly pried loose from broadcasters who aren’t using what they have cost-effectively—assuming those auctions ever take place.  They also can’t put up more towers and antennae to make better use of what they have, thanks to the foot-dragging and NIMBY policies of local zoning authorities.

And even when network operators do get more usable spectrum, it comes burdened with inflexible use limits and unrelated conditions that attach like barnacles at every stage of the process—from assignment to auction to transfer—and which require regular reporting, oversight, and supervision by the FCC.

A New Approach to Spectrum Management–Following an Old Model that Worked

The frontier system for spectrum management is hopelessly and dangerously broken.  It cannot be repaired.  For the mobile broadband economy to continue its remarkable development (one bright spot throughout the sour economy), Congress and the FCC must transition quickly to a new model that makes sense in a world without a spectrum frontier.

That model would look much more like the 19th century system of federal land management than the FCC’s legacy command-and-control system.  The new approach would start by taking the FCC out of the middle of every transaction, and leave to the market to determine the best and highest use of our limited range of usable frequencies.  It would treat licenses as transferable property, just like federal land grants in the 18^th and 19^th centuries.

It would leave to the market—with the legal system as backup—to work out problems of interference, just as the common law courts have stood as backup for land disputes.

And it would deal with any genuine problems of over-concentration (that is, those that cause demonstrable harm to consumers) through modern principles of antitrust applied by the Department of Justice, not the squishy and undefined “public interest” non-standard of the FCC.  It would correct problems once it was clear the market had failed to do so, not short-circuit the market at the first hint of theoretical trouble.  (Hello, net neutrality rules.)

That’s the system, according to Frederick Jackson Turner, that formed American culture and values, shaped American law and provided the fuel to create the engine of capitalism.

For starters.

On the podcast this week, Spencer Weber Waller, Professor and Director at the Institute for Consumer Antitrust Studies at Loyola University Chicago School of Law, discusses his new paper entitled, Antitrust and Social Networking. The discussion centers on the likelihood of Facebook being charged by the government as having a monopoly over the social networking market. Waller first explains antitrust law, which, among other things, prohibits monopolization to protect competition. Waller then discusses the difficulty of defining the market for social networks. He claims that Facebook is dominant in the market, but he also says there are multiple markets for Facebook’s participation, like consumer use and advertising. Waller goes on to explain how a court would analyze an antitrust violation. According to Waller, there is a two-step process involved where courts ask whether there is market power, and whether a company is doing anything with that power to interfere with competition. Waller ends the discussion by analyzing the likelihood of Facebook ever being charged with antitrust violations. Waller also briefly gives his thoughts on the recent antitrust suit filed by the DOJ against Apple.

Related Links

• Antitrust and Social Networking, By Waller
• “Will Facebook’s Instagram Deal Face Antitrust Scrutiny?”, CNBC
• “The procompetitive story that could undermine the DOJ’s e-books antitrust case against Apple”, Technology Liberation Front

To keep the conversation around this episode in one place, we’d like to ask you to comment at the webpage for this episode on Surprisingly Free. Also, why not subscribe to the podcast on iTunes?

Cecilia Kang of the Washington Post reports that

the telecom industry is forcing policymakers to re-examine what has long been a basic guarantee of government – that every American home should have access to a phone, along with other utilities such as water or electricity. Industry executives and state lawmakers who support this effort want to expand the definition of the phone utility beyond the century-old icon of the American home to include Web-based devices or mobile phones.

The quid pro quo for a monopoly franchise was an obligation to provide timely service upon reasonable request to anyone, subject to regulated rates, terms and conditions.  The Telecommunications Act of 1996 eliminated the monopoly franchise, but the obligation to serve remains in the statute books of most states.  Telecom providers, aka carriers-of-last-resort (COLR), are stuck with the quid without the quo.

This has become a problem as more and more consumers are “cutting the cord” in favor of wireless or VoIP services.  AT&T, for example, has lost nearly half of its consumer switched access lines since the end of 2006.  However, most of the loops, switches, cables and other infrastructure which comprise the telephone network must be maintained if telecom providers have to furnish telephone service to anyone who wants it within days.

The network consists of approximately 45 million tons of copper, not to mention thousands of supercomputers (optimized for switching calls, not routing packets), plus cavernous central offices with nearly vacant employee parking lots in most of the nation’s towns, suburbs and urban districts, and so on.  The cost of this massive capital base is recovered according to insanely long depreciation schedules and other gimmicks established by politicians serving on “expert” public utility commissions intent on keeping rates for basic local telephone service far below cost.

In other words, there are high fixed costs in the telecom business which do not vary in direct proportion to the number of consumers who choose to pay for telephone service in any given month or year.  When millions of consumers cut the cord, there are far fewer customers to share these substantial fixed costs.

The legacy telephone network, which is extremely reliable but horribly inefficient, cannot be sustained indefinitely.  Voice services will be delivered over broadband platforms along with data and video.  Once networks are optimized for video, incidentally, voice may become a free app.  “The challenge for the country,” according to the National Broadband Plan at page 59, “is to ensure that as [Internet Protocol]-based services replace circuit-switched services, there is a smooth transition for Americans who use traditional phone service and for the businesses that provide it.”

States with legacy COLR requirements will have no choice but to act. Where consumers have a choice between voice service providers, no provider should be saddled with a monopoly-era COLR obligation.

If it is necessary to require an incumbent to provide service, the incumbent should be free to choose the technology(ies) it will use to serve its customers.  It might be cheaper, for example, to serve consumers in some remote areas by satellite than by other means.

What about Susan Shaw cited in the Washington Post, the 53-year-old grandmother who is not interested in paying for cellular service, which would probably be costlier than the $12 a month she pays for her plain old phone?

Ms. Shaw’s landline phone service is heavily subsidized, costing far in excess of the $12 a month she pays.  Telecom providers no longer have captive ratepayers.  They are struggling to compete and cannot continue to act as private-sector tax collectors.

If $12 a month voice service for Ms. Shaw is a national priority, Congress should commit general tax revenues for that purpose.  In that case, Congress might want to consider that the economics of fixed-line telephone service doesn’t compute anymore and there may be a range of more efficient alternatives.

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:

Meet the Data Transparency Coalition.

The Washington Post‘s Capitol Business blog reports this morning:

A small but growing collection of companies has formed a coalition that will push the federal government to establish a standard system by which agencies categorize their data. …
“Our members understand that if the government identified its data elements in consistent ways, there would be vast new opportunities for the tools that they are building,” Executive Director Hudson Hollister said.

Early supporters include Microsoft and data analysis and management firms Level One Technologies, Teradata, and BrightScope. I’m on their Board of Advisors. One of their early priorities will be to pass H.R. 2146, the DATA Act.

(Here’s a nit I can’t help but pick: The Post says the coalition “aims to standardize ‘big data.’” No. It’s just data.)

Follow the coalition‘s founder and executive director on Twitter @hudsonhollister, and you can Like their Facebook page, as well, to get updates that way.

When the federal government torpedoed the AT&T/T-Mobile USA merger in December pursuant to the current administration’s commitment to “reinvigorate antitrust enforcement,” it created a new client in search of official protection and favors.

It was clear there is no way T-Mobile – which lost 802,000 contract customers in the fourth quarter – is capable of becoming a significant competitor in the near future.  T-Mobile doesn’t have the capital or rights to the necessary electromagnetic spectrum to build an advanced fourth-generation wireless broadband network of its own.

T-Mobile’s parent, Deutsche Telekom AG, has been losing money in Europe and expected its American affiliate to become self-reliant.  In 2008, T-Mobile sat out the last major auction for spectrum the company needs.

The company received cash and spectrum worth $4 billion from AT&T when the merger fell apart, from which T-Mobile plans to spend only $1.4 billion this year and next on the construction of a limited 4G network in the U.S.  But it must acquire additional capital and spectrum to become a viable competitor.

Unfortunately, every wireless service provider requires additional spectrum. “[P]rojected growth in data traffic can be achieved only by making more spectrum available for wireless use,” according to the President’s Council of Economic Advisers.  Congress recently gave the FCC new authority to auction more spectrum, but it failed – in the words of FCC Chairman Julius Genachowski – to “eliminate traditional FCC tools for setting terms for participation in auctions.”

Everyone fears it will take the FCC years to successfully conduct the next round of auctions while it fiddles “in the public interest.”  That’s why Verizon Wireless is seeking to acquire airwaves from a consortium of cable companies, and why T-Mobile will do anything to stop it.

T-Mobile previously looked into buying the spectrum for itself, but it didn’t happen.  If regulators can be persuaded to block the Verizon Wireless from acquiring it, that would reduce the market value of the spectrum and create an opening for T-Mobile to acquire it at a significant savings.

When government intervenes to protect an underdog, it diminishes the rewards for success and the penalties for failure that drive competition and innovation.

In this case, T-Mobile is arguing that (1) spectrum is not created equal, (2) Verizon Wireless has acquired more than its “fair” share of the most valuable frequencies, (3) Verizon Wireless is acting with anticompetitive animus to foreclose T-Mobile’s access to a critical input, i.e., low-frequency spectrum, which (4) Verizon Wireless itself does not need but intends to “warehouse.”

The argument that Verizon Wireless has ended up with valuable frequencies while T-Mobile has not does not stand up to close scrutiny.  The FCC has wisely declined to take this bait in the past.

Although it is true that it takes fewer towers or cell sites to serve a geographical area at a lower frequency, superior coverage counts for less in urban areas where heavier demand requires more towers to boost capacity.  In higher population densities, low and high frequencies offer almost equivalent performance, according to Peter Rysavy.  Operating in the higher frequencies in congested areas, as T-Mobile does, if anything, provides a competitive advantage, because those frequencies have a lower market value and therefore cost less to acquire.

Verizon Wireless does require additional spectrum, just like every other wireless provider.  The issue here is simply who is more “deserving” of spectrum that is available for purchase now on a secondary market while the rest of the industry waits for the FCC to play its political games.  No one is suggesting that any entity has more spectrum than needed to accommodate rapidly increasing demand for wireless services.

The contention that Verizon Wireless plans to warehouse the spectrum it seeks to purchase ignores the fact that the FCC imposes performance requirements on licensees.  There are buildout deadlines, plus the necessity to demonstrate that substantial service was provided in order to win a license renewal every ten years or so.

When the Department of Justice and the FCC prevented AT&T from acquiring T-Mobile last year, they apparently thought they were promoting competition.  But government efforts to enhance competition, accelerate private investment or attract new entrants almost always have unintended consequences.

The principle of moral hazard posits that if the cost of failure will be borne by someone else, those who are in the best position to minimize risk will have little incentive to do so.  When government partners with private companies, it often ends in bankruptcy.  As a nation, we depend on businesspeople to manage firms with skill and foresight, not on taxpayers to bail them out.

If T-Mobile can’t make it on its own, which seems more likely than not, the FCC and DOJ have merely laid the foundation for a vicious cycle of regulatory battles, of which Verizon Wireless/SpectrumCo/Cox Wireless transaction is just the beginning.  One suspects the agencies have signed on a high-maintenance client.

A few weeks back, now-former Best Buy CEO Brian Dunn blamed the retailer’s $1.7 billion quarterly loss and its decision to close 50 stores nationwide on the fact that its online competitors, Amazon.com in particular, “aren’t encumbered by the costs of running physical locations and in many cases don’t have to collect sales tax.”

Dunn’s comments rehash the now-familiar meme that forcing e-retailers to collect sales tax is the silver bullet to saving brick-and-mortar retailers. It gives politicians on all sides cover–for some, it’s a way to keep revenues coming in for excessive spending. For others, it’s a handy way to wave the flag for local commerce.

But slapping consumers with more taxes isn’t going to save retailing. In a short piece this week, BusinessWeek explores the fundamental shifts online retailing has created in consumer behavior. Here’s a nugget from the article:

Best Buy’s decline reflects a cultural shift that’s reshaping the retail world. All big-box stores, and Best Buy in particular, thrived in an era when comparison shopping meant physically going from store to store. The effort required of consumers was a kind of transactional friction. With the advent of mobile technology, friction has all but disappeared. Rather than ruminate with a salesperson before making a selection, tech-savvy consumers are more likely to walk into stores, eyeball products, scan barcodes with their smartphones, note cheaper prices online, and head for the exit. Shoppers can purchase virtually any product under the sun on Amazon or eBay while sipping a latte at Starbucks. For traditional retailers, that spells trouble, if not death. “So far nothing Best Buy is doing is fast enough or significant enough to get in front of these waves,” says Scot Wingo, CEO of e-commerce consulting firm ChannelAdvisor.

Certainly e-commerce created competitive problems for Best Buy, but the sales tax advantage was likely the least of them. Brick-and-mortar retailing is facing an out-and-out crisis that’s going to require creativity and innovation to solve. Taxing consumers who buy online won’t do much toward that end.

And for more, see Adam’s post on Heritage Foundation’s new report on Internet tax policy.