Here’s a new animated explainer video that I narrated for the Federalist Society’s Regulatory Transparency Project. The 3-minute video discusses how earlier “tech giants” rose and fell as technological innovation and new competition sent them off to what the New York Times once appropriately called “The Hall of Fallen Giants.” It’s a continuing testament to the power of “creative destruction” to upend and reorder markets, even as many pundits insist that there’s no possibility change can happen.

This is an important lesson for us to remember today, as I noted in the recent editorial for The Hill about why, “Open-ended antitrust is an innovation killer“:

Those who worry about today’s largest tech giants becoming supposedly unassailable monopolies should consider how similar fears were expressed not so long ago about other tech titans, many of which we laugh about today. Just 14 years ago, headlines proclaimed that “MySpace Is a Natural Monopoly,” and asked, “Will MySpace Ever Lose Its Monopoly?” We all know how that “monopoly” ceased to exist. At the same time, pundits insisted “Apple should pull the plug on the iPhone,” since “there is no likelihood that Apple can be successful in a business this competitive.” The smartphone market of that era was viewed as completely under the control of BlackBerry, Palm, Motorola and Nokia. A few years prior to that, critics lambasted the merger of AOL and TimeWarner as a new corporate “Big Brother” that would decimate digital diversity and online competition.

Accordingly, policymakers should be humble and recognize that, “it’s better to let rivalry and innovation emerge organically,” and only bring in the wrecking ball of heavy-handed antitrust regulation as a last resort, I argued. Technological change and entrepreneurialism has a way of upending and reordering markets when we least expect it. Just ask all those members of the Hall of Fallen Giants.

[UPDATE 4/30/13: This article was subsequently published in Volume 65, Issues 2 of the Federal Communications Law Journal in April 2013. The links below now point to the final FCLJ version.]

The Mercatus Center at George Mason University has just released a new paper by Brent Skorup and me entitled, “Uncreative Destruction: The War on Vertical Integration in the Information Economy.”  Brent, who is the research director for the Information Economy Project at the George Mason University School of Law, and I have been working on this paper since the Spring and we are looking forward to getting it published in a law review shortly. The paper focuses on Tim Wu’s “separations principle” for the digital economy, something I’ve spent some time critiquing here in the past. Here’s the introduction from the 44-page paper that Brent and I just released:

Are information sectors sufficiently different from other sectors of the economy such that more stringent antitrust standards should be applied to them preemptively? Columbia Law School professor Tim Wu responds in the affirmative in his book The Master Switch: The Rise and Fall of Information Empires. Having successfully pushed net-neutrality regulation into the policy spotlight, Wu has turned his attention to what he regards as excessive market concentration and threats to free speech throughout the entire information economy.To support his call for increased antitrust intervention, Wu explains his view of competition in the information economy—a view that deviates substantially from current mainstream antitrust theory. First, Wu contends that “information monopolies” are pervasive in the information economy. Wu’s “monopolists” include Facebook, Apple, Google, and even Twitter. In The Master Switch and essays like “In the Grip of the New Monopolists,” Wu argues that these so-called monopolies are increasing their market power and require more aggressive oversight and regulation.Second, Wu argues that traditional antitrust analysis is not sufficient for information systems because they carry speech. He claims, “Information industries… can never be properly understood as ‘normal’ industries,”and traditional forms of regulation, including antitrust enforcement, “are clearly inadequate for the regulation of information industries.”Wu believes that because information industries “traffic in forms of individual expression” and are “fundamental to democracy,” they should be subject to greater regulatory treatment.Third, in contrast to current competition law’s focus on horizontal relationships, Wu desires a reinvigorated regulatory enforcement that addresses “the corrupting effects of vertically integrated power” in the information sectors.He is particularly concerned about private threats to free speech arising from such vertical integration.The solution, he says, is preventing vertical mergers in the information economy and the mandatory divestiture of vertically integrated companies. To implement this, Wu proposes a Separations Principle for the information economy, which would segregate information providers into three buckets, which we have labeled information creators, information distributors, and hardware makers.This article outlines Wu’s separations proposal, explains why his fears regarding vertical relationships should be rejected by regulatory and antitrust policymakers, and illustrates the legal and practical problems his Separations Principle poses. Wu justifies his Separations Principle by citing monopolies and market power in the information economy. He also advocates using U.S. antitrust authorities to enforce his Principle. We argue that the antitrust harms he fears are not present, and we highlight scholarship on the accepted benefits of vertically integrated firms. We show that Wu’s remedies are policy preferences wrapped in the language of competition law. In fact, the information economy is largely competitive and does not warrant interventionist regulatory enforcement. Since much of American economic vitality flows from the information economy and technology, policymakers should reject a radical antitrust remedy like Wu’s preemptive Separations Principle.

The paper can be downloaded from the Mercatus website, SSRN, or Scribd.

I’m pretty rough on all the Internet and info-tech policy books that I review. There are two reasons for that. First, the vast majority of tech policy books being written today should never have been books in the first place. Most of them would have worked just fine as long-form (magazine-length) essays. Too many authors stretch a promising thesis into a long-winded, highly repetitive narrative just to say they’ve written an entire book about a subject. Second, many info-tech policy books are poorly written or poorly argued. I’m not going to name names, but I am frequently unimpressed by the quality of many books being published today about digital technology and online policy issues.

The books of Harvard University cyberlaw scholars John Palfrey and Urs Gasser offer a welcome break from this mold. Their recent books, Born Digital: Understanding the First Generation of Digital Natives, and Interop: The Promise and Perils of Highly Interconnected Systems, are engaging and extremely well-written books that deserve to be books. There’s no wasted space or mindless filler. It’s all substantive and it’s all interesting. I encourage aspiring tech policy authors to examine their works for a model of how a book should be done.

In a 2008 review, I heaped praise on Born Digital and declared that this “fine early history of this generation serves as a starting point for any conversation about how to mentor the children of the Web.” I still recommend highly to others today. I’m going to be a bit more critical of their new book, Interop, but I assure you that it is a text you absolutely must have on your shelf if you follow digital policy debates. It’s a supremely balanced treatment of a complicated and sometimes quite contentious set of information policy issues.

In the end, however, I am concerned about the open-ended nature of the standard that Palfrey and Gasser develop to determine when government should intervene to manage or mandate interoperability between or among information systems. I’ll push back against their amorphous theory of “optimal interoperability” and offer an alternative framework that suggests patience, humility, and openness to ongoing marketplace experimentation as the primary public policy virtues that lawmakers should instead embrace.

Interop is Important, but Often Difficult & Filled with Trade-Offs

Palfrey and Gasser begin by noting that “there is no single, agreed-upon definition of interoperability” and that “there are even many views about what interop is and how it should be achieved” (p. 5). They set out to change that by developing “a normative theory identifying what we want out of all this interconnectivity” that the information age has brought us (p. 3).

Generally speaking, Palfrey and Gasser believe increased interoperability — especially among information networks and systems — is a good thing because it “provides consumers greater choice and autonomy” (p. 57), “is generally good for competition and innovation” (p. 90), and “can lead to systemic efficiencies” (p. 129).

But they wisely acknowledge that there are trade-offs, too, noting that “this growing level of interconnectedness comes at an increasingly high price” (p. 2). Whether we are talking about privacy, security, consumer choice, the state of competition, or anything else, Palfrey and Gasser argue that “the problems of too much interconnectivity present enormous challenges both for organizations and for society at large” (p. 2). Their chapter and privacy and security offers many examples, but one need only look around at their own digital existence to realize the truth of this paradox. The more interconnected our information systems become, and the more intertwined our social and economic lives become with those systems, the greater the possibility of spam, viruses, data breaches, and various types of privacy or reputational problems. Interoperability giveth and it taketh away.

When Does “the Public Interest” Demand Interoperability Regulation?

So, how do we know when increased interoperability is good for us or society? How do we strike a reasonable balance? And, most controversially, when should government intervene to tip the balance in one direction or another?

Palfrey and Gasser return to these questions repeatedly throughout the book but admit that their answers will be dissatisfying since “there is no single form or optimal amount of interoperability that will suit every circumstance” (p. 76). Thus, “most of the specifics of how to bring interop about [must] be determined on a case-by-case basis (p. 17). They elaborate:

That can feel unsatisfying. But it is an essential truth: the most interesting interop problems relate to society’s most complex and most fundamental systems. Their answers are never simple to come by, nor are they easy to implement. This characteristic of interop theory is a feature, not a bug. … The price to be paid for striving for a universal principle at the level of theory is that such a theory is full of nuances when it comes to application and practice (p. 17-18).

Fair enough. Yet, Palfrey and Gasser also make it clear they want government(s) to play an active role in ensuring optimal interoperability. They say they favor “blended approaches that draw upon the comparative advantages of the private and public sector” (p. 161), but they argue that government should feel free to tip or nudge interoperability determinations in superior directions. “If deployed with skill,” they argue, “the law can play a central role in ensuring that we get as close as possible to optimal levels of interoperability in complex systems” (p. 88).

That phrase — “optimal level of interoperability” — pops up repeatedly throughout the book. So, too, does the phrase “the public interest.” Palfrey and Gasser argue that governments must look out for “the public interest” and “optimal interoperability” since “market forces do not automatically lead to appropriate standards or to the adoption of the best available technology” (p. 167). Here they introduce two additional amorphous values that complicate the debate: “appropriate standards” and “best available technology.”

The fundamental problem this “public interest” approach to interoperability regulation is that it is no better than the “I-know-it-when-I-see-it” standard we sometimes at work in the realm of speech regulation. It’s an empty vessel, and if it is the lodestar by which policymakers make determinations about the optimal level of interoperability, then it leaves markets, innovators, and consumers subject to the arbitrary whims of what a handful of politicians or regulators think constitutes “optimal interoperability,” “appropriate standards,” and “best available technology.”

On the Limits of Knowledge

Palfrey and Gasser’s framework feels more than just “unsatisfying” in this regard; it feels downright insufficient. That’s because it is missing a major variable: the extent to which state actors are able to adequately define those terms or accurately forecast the future needs of markets or citizen-consumers.

Surprisingly, Palfrey and Gasser don’t really spend much time discussing the specific remedies the state might impose to achieve optimal interoperability. I would have liked to have seen them develop a matrix of interop options and then outline the strengths and weaknesses of each. But even absent a more detailed discussion of possible regulatory remedies, I would have settled for more concrete answers to the following questions: Why are we to assume that regulators possess the requisite knowledge needed to know when it makes sense to foreclose ongoing marketplace experimentation? And why should we trust that, by substituting their own will for that of countless other actors in the information technology marketplace, we will be left better off?

The closest Palfrey and Gasser get to defining a firm standard for when and why such state intervention is warranted comes on page 173 when they are discussing the need for the state to establish sound reasons for intervention. They argue:

The objective should not be interoperability per se but, rather, one or more public policy goal to which interoperability can lead. The goals that usually make sense are innovation and competition, but other objectives might include consumer choice, ease of use of a technology or system, diversity, and so forth (p. 173).

This is a bit better, but it still doesn’t fully grapple with the cost side of the cost-benefit calculus for intervention. Palfrey and Gasser are willing to at least acknowledge some of those problems when they remark that “the state is rarely in a position to call a winner among competing technologies” (p. 174). Moreover,

Lawmakers need to keep in view the limits of their own effectiveness when it comes to accomplishing optimal levels of interoperability. Case studies of government intervention, especially where complex information technologies are involved, show that states tend to be ill suited to determine on their own what specific technology will be the best option for the future (p. 175)

Quite right! Yet, that insight does not seem to influence their calls elsewhere in the book for regulatory activism. That’s a shame since the admonition about policymakers recognizing the “limits of their own effectiveness” should be able to help us devise some limiting principles regarding the state’s role.

Toward an Alternative Theory: Experimental, Evolutionary Interoperability

Allow me to offer a different theory of optimal interoperability that flows from these previous insights. It’s based on a more dynamic view of markets and the central importance of experimentation in the face of uncertainty. Let me just go ahead and articulate the core principles of what I will refer to as  “experimental, evolutionary interoperability theory.” Then I’ll explain it in more detail

• Experimental, evolutionary interoperability : The theory that ongoing marketplace experimentation with technical standards, modes of information production and dissemination, and interoperable information systems, is almost always preferable to the artificial foreclosure of this dynamic process through state action. The former allows for better learning and coping mechanisms to develop while also incentivizing the spontaneous, natural evolution of the market and market responses. The latter (regulatory foreclosure of experimentation) limits that potential.

Palfrey and Gasser would label this a “laissez-faire” theory of interoperability and oppose it since they believe “a pure laissez-faire approach to interop rarely works out well” (p. 160). But they are wrong, at least to the extent they include the sweeping modifier “rarely” to describe this model’s effectiveness. In reality, the vast majority of interoperability that occurs into today’s information economy happens in a completely natural, evolutionary fashion without any significant state intervention whatsoever. In countless small and big ways alike, interconnection and interoperability happens every day throughout society. Yes, it is true that interoperability often happens against the backdrop of a legal system that allows court action to enforce certain rights or address perceived harms, but I would not classify that as a significant direct state intervention to tip or nudge interconnection decisions in one direction or another. And when interoperability doesn’t happen naturally, there are often good reasons it doesn’t and, even if there aren’t, non-interop spawns beneficial marketplace reactions and innovations.

Experimental, evolutionary interoperability theory flows out of Schumpeterian competition theory and the related field of evolutionary economics, but it is also heavily influenced by public choice theory (which stresses the limitations of romanticized theories of politics, planning, and “public interest” regulation). This alternative theory begins by accepting the simple fact that, as Austrian economist F.A. Hayek taught us, “progress by its very nature cannot be planned.” The wiser man, Hayek noted, “is very much aware that we do not know all the answers and that he is not sure that the answers he has are certainly the right ones or even that we can find all the answers.”

Ongoing experimentation with varying business models and modalities of social and economic production allows us to see what consumer choice and trial and error experimentation yields naturally over time. Ongoing experiments with flexible, voluntary interop standards and negotiations also allows us to determine which technological standards seem to benefit consumers in the short-term while also encouraging innovators to leap-frog existing standards and platforms when they become locked-in for too long or seem sub-optimal.

In the short-term, it is entirely possible that such voluntary, evolutionary interop experiments “fail” in various ways. That is often a good thing. Failures are how individuals and a society learn to cope with change and devise systems and solutions to accommodate technological change. As Samuel Beckett once counseled: “Ever tried. Ever failed. No matter. Try Again. Fail again. Fail better.” Progress depends upon an embrace of this uncertainty and acceptance of a world of constant upheaval if we are to learn how to cope, adapt, and move forward.

In this model, technological innovation often springs from the quest for the prize of market power.  Palfrey and Gasser generally reject this Schumpeterian vision of dynamic competition, but they at least do a nice job of describing it:

firms may have a stronger incentive to be innovative when low levels of interoperability promise higher or even monopoly profits. This sort of competition… creates incentives for firms to come up with entirely new generations of technologies or business methods that are proprietary (p. 121).

They reject this approach based on (1) the mistaken notion that the quest of the prize of market power ends in the attainment and preservation of that market power; and (2) the belief that policymakers possess the ability to set us on a better course through wise interventions.

In a moment, I’ll prove why that is misguided by examining a few real-world cases studies. For now, however, let’s return to Palfrey & Gasser’s central operating principle and contrast it with the vision I’ve articulated here. Recall that they argue “it is important to maintain and facilitate diversity in the marketplace. We simply want systems to work together when we want them to and to not work together when we do not.” Again, there is no standard here if one is suggesting this as the principle by which to determine when state intervention is desirable . But if one is looking at that aspirational statement as a description of the natural order of things — namely, that we do indeed “want systems to work together when we want them to and to not work together when we do not” — then that is a perfectly sound principle for understanding why state intervention should be disfavored in all but the most extreme circumstances. To reiterate: We should not allow the state to foreclose interoperability experiments because (a) those experiments have value in and of themselves, and (b) state action is likely to have myriad unintended consequences and unforeseen costs that are not easily remedied or reversed.

There are moments in the book when Palfrey and Gasser appear somewhat sympathetic to the sort of alternative “evolutionary interop” theory I have articulated here. For example, they note that:

The web is a great equalizer for technology firms. As consumers, we have come to expect that everything will work together without incident or interruption. We think it bizarre when something in the digitally networked world does not mesh with something else, perceiving whatever it is to be broken, in need of repair. This high degree of expectation is a powerful driver of interoperability. Market players are increasingly responding to this consumer demand and making these invisible links work for their customers without any government intervention” (p. 28) [italics added]

You won’t be surprised to hear that I agree wholeheartedly! Moreover, what it really proves is that ongoing marketplace experimentation and the evolution of norms and standards generally solve interoperability problems as they develop. That doesn’t mean markets are perfectly competitive or always produce perfect interoperability. But, again, why should we believe state intervention will do a better job? And isn’t it possible that intervention could negatively counter those natural instincts that Palfrey and Gasser describe about how consumers and market actors interact to make those “invisible links” work out as nicely as they do today?

Interop, Competition & Innovation: Some Cases Studies of Evolutionary Interoperability in Action

To better explain experimental, evolutionary interop theory and how it plays out in the real-world, let’s examine the complex relationship between interoperability, competition, and innovation in the information economy through the prism of three case studies: AOL and instant messaging, video game consoles, and smartphones.

AOL

America Online’s (AOL) case study is probably the most profound example of Schumpeterian creative destruction rapidly eroding the market power of a once “dominant” digital giant. Not long ago, AOL was cast as the great villain of online openness and interoperability. In fact, when Lawrence Lessig penned his acclaimed book Code in the late 1990s, AOL was supposedly set to become the corporate enslaver of cyberspace.

For a time, it was easy to see why Lessig and others were worried. Twenty five million subscribers were willing to pay $20 per month to get a guided tour of AOL’s walled garden version of the Internet. Then AOL and media titan Time Warner announced a historic mega-merger that had some predicting the rise of “new totalitarianisms” and corporate “Big Brother.”

Fearing the worst, several conditions were placed on approval of the merger by both the Federal Trade Commission and the Federal Communication Commission. These included “open access” provisions that forced Time Warner to offer the competing ISP service from the second largest ISP at that time (Earthlink) before it made AOL’s service available across its largest cable divisions.  Another provision imposed by the FCC mandated interoperability of instant messaging systems based on the fear that AOL was poised to monopolize that emerging technology.

Palfrey and Gasser suggest this was a necessary and effective intervention. “The AOL IM case is another instance in which the role of government was key in establishing a more interoperable ecosystem” and they credit the FCC’s action with cutting AOL’s share of the IM (p. 68-9). That’s a huge stretch. The reality is that markets and technologies evolved around AOL’s walled garden and decimated whatever advantage the firm had in either the web portal business or instant messaging market.

First, despite all the hand-wringing and regulatory worry, AOL’s merger with Time Warner quickly went off the rails and AOL’s online “dominance” quickly evaporated. Looking back at the deal with TW, Fortune magazine senior editor Allan Sloan called it the “turkey of the decade” since it cost shareholders hundreds of billions. Second, AOL’s attempt to construct the largest walled garden ever also failed miserably as organic search and social networking flourished. Consumers showed they demanded more than the hand-held tour of cyberspace.

Finally, the hysteria about AOL’s threat to monopolize instant messaging and deny interoperability proved particularly unwarranted and also serves as a cautionary tale for those who argue regulation is needed to solve interoperability problems. At the time, well-heeled major competitors like Yahoo and Microsoft already had significant competing IM platforms, and others were rapidly developing. Interoperability among those systems was also spontaneously developing as consumers demanded greater flexibility among and within their communications systems. The development of Trillian, which allowed IM users to see all their various IM feeds at once, was an early precursor of what was to come. Today, anyone can download a free chat client like Digsby or Adium to manage multiple IM and email services from Yahoo!, Google, Facebook and just about anyone else, all within a single interface, essentially making it irrelevant which chat service friends use.

In a truly Schumpetrian sense, innovators came in and disrupted AOL’s plans to dominate instant messaging with innovative offerings that few critics or regulators would have believed possible just a decade ago. Progress happened, and nobody planned it from above. The FCC’s IM interoperability provision was quietly sunset less than three years after its inception since the evolution of technology and markets had rapidly eliminated the perceived problem. That mandate, as it turned out, wasn’t needed at all, and all it probably accomplished during its short life span was to hobble AOL’s ability to find a way to remain relevant in the increasingly competitive Web. 2.0 world.

Video game consoles

At first blush, the video game console wars might seem like the ideal case study for those who favor greater interoperability regulation. After all, in a static sense, why do we really need several competing video game platforms that prevent consumers from playing their games on more than one system? The lack of console interoperability also drives up development costs for game makers. Many of those developers would prefer to just code games for a single, universal gaming platform. Therefore, isn’t this the perfect excuse for state intervention to ensure “optimal interoperability”?

To the contrary, this is another example of why government should generally avoid intervening to try to achieve some sort of artificial optimal interoperability. This market has undergone continuous, turbulent change and witnessed remarkable pro-consumer innovation despite a lack of interoperability.

The video game console wars have raged since the late 1970s. The first generation of consoles was dominated Atari (2600), Mattel (Intellivision), and Coleco (ColecoVision). By the mid-1980s, the industry saw a new cast of characters displace the old players. Nintendo (NES), and Sega (Genesis) took the lead. Atari attempted a rebirth with its “Jaguar” console but failed miserably.

The demise of Atari’s 2600 console was particularly notable. When it debuted in 1977, the system revolutionized the home game market on its way to selling more than 30 million units.  For a few years, it utterly dominated the console market and the company “rushed out games, assuming that its customers would play whatever it released,” notes New York Times reporters Sam Grobart and Ian Austen. But demand rapidly dried up as other consoles and personal computers took the lead with more powerful, flexible platforms and games. In the end, “millions of unsold games and consoles were buried in a New Mexico landfill in 1983. Warner Communications, which bought Atari in 1976 for $28 million, sold it in 1984 for no cash.”

The next generation of machines was dominated by Nintendo and Sega. But by the turn of the century, more new faces appeared and disrupted the second generation of market leaders. Sony (PlayStation) and Microsoft (Xbox) introduced powerful new consoles that continue to evolve to this day. Both consoles have already cycled through three iterations, each increasingly powerful and more functional. Sega dropped out of the console business and refocused on game development. Nintendo managed to survive with its innovative “Wii” system, but has fallen from its perch as king of the console market. Many also forget Apple’s failed run at the console business with its “Pippin” system in the late 1990s. Steve Jobs killed off the console when he returned to once again lead Apple in 1997. Ironically, just a decade later, with the rise of the iPhone and the Apple App Store, the company would emerge as a major player in the gaming market as smartphone gaming exploded.

Of course, PC gaming existed across these generations and handheld gaming devices and now smartphones are also providing competition to traditional consoles. Arcade games also existed both then and now. Thus, the video game market has always been broader than just home gaming consoles.

Nonetheless, at no time during the turbulent history of this sector have major consoles interoperated. The result has been a constant effort by major console developers to leap-frog the competition with increasingly innovative and powerful consoles and peripherals. Would Microsoft have developed the Kinect motion-sensing device if Nintendo had not previously developed their game-changing Wii motion controllers? It’s impossible to know but it would seem that non-interoperability had something to do with that beneficial development. Microsoft needed a game-changing peripheral of its own to meet the Nintendo challenge since Nintendo was not about to share its innovations with the competition. Meanwhile, Sony has developed its own motion-based “Move” system to compete Microsoft and Nintendo.

This is a highly dynamic marketplace at work. Could policymakers have determined that 3 major non-interoperable home consoles would have produced so much innovation? Would they have judged that to be too much or too little competition?  Would they have been able to foresee or help bring about the disruptive competition from portable gaming devices or smartphones? What sort of interop regulation would have made that happen?

As Palfrey and Gasser suggest in their book, there really “is no single form or optimal amount of interoperability that will suit every circumstance.” The video game case study seems to prove that. Yet, their framework leaves the door open a bit wider for state meddling to determine “optimal interop.” I have little faith that state planners could have given us a more innovative video game marketplace through interop nudging. And I also worry that if the door had been open for regulators at the FCC or elsewhere to influence interoperability decisions, it might have also opened to the door to content regulation since many lawmakers have long had an appetite for video game censorship.

Smartphones

The mobile phone handset and operating system marketplace has undergone continuous change over the past 15 years and is still evolving rapidly. There are some interoperable elements, such as the ability to make connecting calls and send texts and IMs. But other parts of the smartphone ecosystem are not interoperable, such as underlying operating systems or apps and app stores.

In the midst of this mixed system of interoperable and non-interoperable elements, innovation and cut-throat competition have flourished.

When cellular telephone service first started taking off in the mid-1990s, handsets and mobile operating systems were essentially one in the same, and Nokia and Motorola dominated the sector with fairly rudimentary devices. The era of personal digital assistants (PDAs) dawned during this period, but mostly saw a series of overhyped devices, including Apple’s “Newton,” that failed to catch on. In the early 2000s, however, a host of new players and devices entered the market, many of which are still on the scene today, including LG, Sony, Samsung, Siemens, and HTC. Importantly, the sector began splitting into handsets versus operating systems (OS). Leading mobile OS makers have included: Microsoft, Palm, Symbian, BlackBerry (RIM), Apple, and Android (Google).

The sector continues to undergo rapid change and interoperability norms have evolved at the same time. Looking back, it’s hard to know whether increased interoperability would have helped or hurt the state of competition and innovation.

Consider Palm, Blackberry, and Microsoft which all limited interoperability with other systems in various ways. Palm smartphones were wildly popular for a brief time and brought many innovations to the marketplace, for example. Palm underwent many ownership and management changes, however, and rapidly faded from the scene.  After buying Palm in 2010, HP announced it would use its webOS platform in a variety of new products.  That effort failed, however, and HP instead announced it would transition webOS to an open source software development mode.

Similarly, RIM’s BlackBerry was thought to be the dominant smartphone device for a time, but it has recently been decimated. BlackBerry’s rollercoaster ride has left it “trying to avoid the hall of fallen giants” in the words of an early 2012 New York Times headline.  The company once commanded more than half of the American smartphone market but now has under 10 percent, and that number continues to fall.

Microsoft also had a huge lead in licensing its Windows Mobile OS to high-end smartphone handset makers until Apple and Android disrupted its business. It’s hard to believe now, but just a few years ago the idea of Apple or Google being serious contenders in the smartphone business was greeted with suspicion, even scorn by popular handset makers such as Nokia and Motorola. This serves as another classic example of those with a static snapshot mentality disregarding the potential for new entry and technological disruption. Just a few years later, Nokia’s profits and market share have plummeted and a struggling Motorola was purchased by Google. Meanwhile, again, Palm seems dead, BlackBerry is dying, and Microsoft is struggling to win back market share it has lost to Apple and Google in this arena.

It would seem logical to conclude that the ebbs and flows of interoperable and non-interoperable elements of the smartphone world have created a turbulent but vibrantly innovative sector. Has the lack of interoperable operating systems or apps and apps stores hurt smartphone consumers? It’s hard to see how. Mandating interoperability at either level could lead to an OS or app store monopoly, most likely for Apple if such a policy were pursued today.

While Apple has had great success and earned endless kudos for their slick, user-friendly innovations from consumers and tech wonks alike, some critics decry their proprietary business model and more “controlled” user experience. Apple tightly controls almost every level of production of its iPhone smartphone and iPad tablet. Interoperability with competing systems, standards, or technologies is limited in many ways. Is that bad? Some critics think so, suggesting that greater “openness” — presumably in the form of greater device or program interoperability — is needed. But so what? Consumers seem extremely happy with Apple devices. Moreover, well-heeled rivals like Google (Android) and Microsoft continue to innovate at a healthy clip and offer consumers a decidedly different user experience. As with video games consoles, non-interop has had some important dynamic effects and advantages for consumers. It’s hard to know what “optimal interoperability” would even look like in the modern smartphone marketplace and how it would be achieved, but it’s equally hard to believe that consumers would be significantly better off if regulators were trying to achieve it through top-down mandates on such a dynamic, fast-moving market.  [For more on this topic, see my 2011 book chapter, “The Case for Internet Optimism, Part 2 – Saving the Net From Its Supporters,” from the book, The Next Digital Decade.]

Case Study Summary & Analysis

These case studies suggest that defining “optimal interoperability” is a pipe dream. In some cases, consumers demanded a certain amount interoperability and they got it. But it seems equally obvious that they did not demand perfect interoperability in every case. Few consumers are tripping over their own feet in a mad rush to toss out their XBoxs or iPhones just because they are not perfectly interoperable. On the other hand, since the days of the old “walled garden” hell of AOL, CompuServe, Prodigy, and so on, it would seem that information technology markets are growing more “open” in other ways. You can’t completely lock-down a user’s online experience and expect to win their business over the long haul.

Palfrey and Gasser make that point quite nicely in the book:

Increasingly, though, businesses are seeing the merits of strategies based on openness. A growing number of businesses are pursuing models that incorporate interoperability as a core principle. More and more firms, especially in the information business, are shedding their proprietary approaches in favor of interoperability at multiple levels. The goal is not to be charitable to competitors or customers, of course, but to maximize returns over time by building an ecosystem with others that holds greater promise than the go-it-alone approach (p. 149).

Quite right, but let’s not pretend that any mass market information platforms or systems will ever be perfectly “open” or interoperable. There will always be some limitations on how such systems are used or shared. And that’s just fine once you embrace a more flexible theory of evolutionary interoperability.  Ongoing experiments will get us to a better place.

Conclusion: Let Interop Experiments Continue!

So, let me wrap up by restating my alternative theory of optimal interoperability as succinctly as possible: When in doubt, ongoing, bottom-up, dynamic experimentation will almost always yield better answers than arbitrary intervention and top-down planning. Again, that is not to say that all interoperability experiments will leave society better off in the short-term. Some interoperability experiments and resulting market norms or outcomes can create challenging dilemmas for individuals and institutions. There may be short-term spells of “market power,” for example, and some standards may get locked in longer than some of us think makes sense. If, however, we have faith in humans to solve problems with information and technology, then still more experimentation — not state intervention — is the answer. And that is especially true once you accept the fact that those seeking to intervene have very limited knowledge of all the relevant facts needed to even make wise decisions about the future course of technology markets or information systems.

Some will find my alternative theory of optimal interoperability no more satisfying than Palfrey and Gasser’s since they may find the experimental interop framework too inflexible when it comes to state action. Whereas the frustration with Palfrey and Gasser’s theory will likely flow from their failure to define a coherent standard for when intervention is warranted, my approach solves that problem by suggesting we should largely abandon the endeavor and instead let ongoing market experiments solve interop problems over time. For me, we would need to find ourselves in a veritable whole-world-is-about-to-go-to-hell sort of moment before I could go along with state intervention to tip the interop scales in one direction or another. And, generally speaking, this is exactly the sort of thing that antitrust laws are supposed to address after a clear showing of harm to consumer welfare. Stated differently, to the extent any state intervention to address interoperability can be justified, ex post antitrust remedies should almost always trump ex ante regulatory meddling.

This alternative vision of evolutionary, experimental interoperability will be rejected by those who believe the state has the ability to wisely intervene and nudge markets to achieve “optimal interoperability” through some sort of Goldilocks principle that can supposedly get it just right. For those of us who have doubts about the likelihood of such sagacious state action — especially for fast-paced information sectors — the benefits of ongoing marketplace experimentation far outweigh the costs of letting those experiments run their course.

Regardless, we should be thankful that John Palfrey and Urs Gasser have provided us with a book that so perfectly frames what should be a very interesting ongoing debate over these issues. I encourage everyone to pick up a copy of Interop so you can join us in this important discussion.

Additional Reading:

• the official book site
• buy the book on Amazon or Barnes & Noble
• Follow the authors on Twitter: @JPalfrey & @UGasser
• a video of their Harvard book launch follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Nokia after the iPhone

Tim Wu: Not Looking Happy about Being So Wrong

Three years ago this month, Columbia University Law School professor Tim Wu released a controversial white paper in conjunction with the New America Foundation entitled, “Wireless Net Neutrality: Cellular Carterfone and Consumer Choice in Mobile Broadband.” It contained a litany of accusations regarding supposed corporate shenanigans in the mobile marketplace, including: intentional crippling of features and functionality; refusal to allow 3rd party attachments or intentional curtailment of a market for 3rd party application developers; and various concerns about “discrimination” of one sort or another.

Here at the TLF, we responded quite forcefully. I think every one of us piled on this study in one way or another. (ex: Hance, Jerry, James, Tim Lee, me x 2, + a podcast).  I called his proposal “a declaration of surrender” since Prof. Wu was essential calling the game early and raising the white flag on mobile competition. Further, I argued he was essentially asking for “the forced commoditization of cellular networks” which “would necessitate at return to the rate-of-return regulatory methods of the past.”  Others were a bit more kind to him, but we were all pretty skeptical of his gloomy claims. However, each of us here also argued that the wireless market (especially the applications side of the market) was still developing and that we’d have to check back in a few years to see how well the hands-off approach worked out.

Well, thankfully, we now know for certain that Tim Wu’s was much too lugubrious in his outlook and far too quick to call for regulatory intervention to solve a non-crisis. On the occasion of the 3rd anniversary of the release of Prof. Wu’s paper, CTIA-The Wireless Association filed a short paper with the FCC taking stock of just how far the mobile marketplace has come in just three short years. The results are really quite remarkable, as CTIA’s letter notes:

Contrary to the professor’s view of how the ecosystem would evolve, in the absence of regulation, every element of the wireless ecosystem has expanded. Today, the fact that there are over six hundred devices in the U.S. offering hundreds of different capabilities for consumers, over 170,000 applications, more open networks with open developer initiatives and software development kits, the sale of phones through numerous online and retail outlets, multiple operating systems, and the launch of the newest and most innovative handsets first in the United States demonstrates that the mobile wireless ecosystem continues to evolve to serve customers, contrary to Professor Wu’s arguments.

The filing goes on to examine each of the complaints Prof. Wu had articulated and then discusses current marketplace realities. Here’s the summary:

• Professor Wu asserted that carriers had a “near lock” on the retailing of mobile devices that, presumably, would only be altered through regulatory intervention. Today, consumers can purchase handsets from carriers, directly from manufacturers, through brick-and-mortar retail chains, via Internet discounters, and through a healthy secondary market. For example, Best Buy, Target, Wal-Mart, TigerDirect.com, Amazon.com, LetsTalk.com, Apple, Nokia, Google, Motorola and many others all sell handsets directly to consumers. The recent Best Buy catalog alone lists over a hundred wireless devices for sale. • Professor Wu argued that the U.S. market had only “a small fraction of the phones available [elsewhere],” implying that carriers restricted the diversity of handsets. Today, the U.S. market has over 630 devices manufactured by 33 different companies, including the BlackBerry® Tour 9630, Samsung Omnia, HTC TouchPro, Motorola Droid, Apple  iPhone 3GS, Motorola Karma QA1, BlackBerry® Bold, Motorola Cliq, myTouch 3G, G1, BlackBerry® Pearl Flip, HTC Touch Pro2, Palm Pre, HTC Hero, Samsung Instinct S30, Cricket TXTM8, Motorola Evoke QA4, Samsung JetSet, Motorola Hint, Samsung Finesse, Samsung Messager, LG Tritan, Samsung TwoStep, and the LG Rhythm. Of note, almost every one of the phones listed above was first launched in the United States. • Professor Wu painted a picture of a “stalled” application market where developers were unable to create applications for mobile devices. Today, a vibrant “apps” market exists where over 170,000 applications are available for popular operating systems, and where developers as young as age 9 can navigate the approval process to become highly successful. At least seven different companies, none of whom are affiliated with wireless carriers, market the overwhelming majority of these applications. • Professor Wu criticized carriers’ control over handset design. Today, all major carriers, and most of the other carriers in the country, have extensive open network development platforms for devices and software. Intra-industry groups have developed the Open Handset Alliance (which has created the Android operating system), and several other operating systems have moved to an open platform. Additionally, as discussed above, numerous handset manufacturers are selling directly to consumers. • Professor Wu stated that the “oligopoly” in handset sales resulted in a market where consumer-friendly capabilities, such as Bluetooth, Wi-Fi, and picture distribution, were “crippled.” Today, all of these capabilities, and hundreds more that reflect a broad array of consumer desires, are available to U.S. consumers. With the wealth of options, consumers can make buying decisions based on a range of factors. This is exactly the market that consumers want, and regulators should encourage.

Now, I’m sure some folks will say, “hey, we can’t trust industry to report on this stuff,” but these are facts, folks. CTIA hasn’t made anything up here. If anything, I think they’ve actually gone too easy on Tim and underplayed just how revolutionary the changes we’ve seen over the last 3 years have been.

That’s especially the case on the operating system front.  This war among Apple, Google, Microsoft, RIM (Blackberry), Palm, Symbian, and others has actually forced me to ask if we have, “Too Much Platform Competition” in this arena. App developers must now craft their offerings for so many platforms that it has become a significant developmental hassle and expense. But hey, from a consumer perspective, this is great! And it shocking how vibrant that OS-level competition continues to be. (For more details, see Berin’s post on “The Fiercely Competitive Mobile OS & Device Markets.”)

And then there’s the applications market. As I have noted in my essays repeatedly hammering Jonathan Zittrain’s equally dismal view of the digital world, today’s market for 3rd party mobile applications would have been virtually unfathomable just a few years ago. Can you even remember 2005 when we had none of those apps at our disposal? Today, by contrast, Apple’s App Store alone has over 100,000 apps in 20 different categories (available in 77 countries) to choose from. Android and Windows Mobile apps are also exploding. Frankly, I get exhausted trying to filter through the thousands and thousands of apps in the Android marketplace I now have to choose from. Again, we had zip, zero, zilch, nadda, N-O-T-H-I-N-G to choose from just a few years ago.  Folks, that is called progress—insane, amazing, beautiful, miraculous progress!

The following GigaOm chart was intended to show average app prices but also includes total app figures for each of the five leading mobile operating systems:

So, will Tim Wu come out and admit that his pessimism was unwarranted? Somehow I doubt it. But allow me to offer him a way to save face: I remember debating Tim about these issues in New York a few years back and he told me that he really didn’t want to see the feds jump in and start aggressively regulating most high-tech markets. Instead, he just wanted to shake things up and put the fear of God in the hearts of private operators so they would change their ways for the better in an effort to avoid the sledgehammer of federal regulation. (Tim, if you are reading this and have forgetting that conversation, it was at that FOSI dinner in New York where we were also debating who was a bigger Dungeons & Dragons nerd back in our childhood. I think you at least had the better of me in that debate!)

So, to save face here, Tim should declare victory and go home.  He should tell the world he single-handled revolutionized the wireless world with his vociferous agitation for a comprehensive federal regulatory regime for mobile and that it has blessed us one of the great capitalist success stories of our time.

Thank you Professor Wu for making the world a better place!

As Berin and I have noted here before (here and here), there seems to be no shortage of competition and innovation in the mobile operating system (OS) space. We’ve got:

1. Apple’s iPhone platform,
2. Microsoft’s Windows Mobile,
3. Symbian,
4. Google’s Android,
5. BlackBerry,
6. Palm OS (+ Palm’s new WebOS),
7. the LiMo platform, and
8. OpenMoko.

I am missing any? I don’t think so. Even if I have, this is really an astonishing degree of platform competition for a network-based industry. Network industries are typically characterized by platform consolidation over time as both application developers and consumers flock to just a couple of standards — and sometimes just one — while others gradually fade away. But that has not yet been the case for mobile operating systems.  I just can’t see it lasting, however. As I argued in my essay on “Too Much Platform Competition?,” I would think that many application providers would be clamoring for consolidation to make it easier to develop and roll out new services.  Some are, and yet we still have more than a half-dozen mobile OS platforms on the market.

Regardless, the currently level of platform competition also seems to run counter to the thesis set forth by Jonathan Zittrain and others who fear the impending decline or death of digital “generativity.” That is, technologies or networks that invite or allow tinkering and all sorts of creative uses are supposedly “dying” or on the decline because companies are trying to exert more control over proprietary or closed systems. You will recall that in his book The Future of the Internet and How to Stop It, Zittrain casts the iPhone as the enemy of generativity and suggests that more and more devices will look like it in the future. (Ignore the fact that the iPhone becomes more open to 3rd party apps with each passing day and that Apple’s latest iPhone OS was cracked in a matter of hours after release). Zittrain and many others have been beating this gloomy ‘generativity-is-dying’ drum now for awhile, so you would think that they would have some substantive evidence to point to in defense of their thesis.

But today’s mobile OS market certainly doesn’t seem to help them make their case — whether we are talking about OS-level competition or innovation at the applications level by third parties. Indeed, take a look at the latest PC World magazine in which Harry McCracken conducts a “Smart Phone OS Smackdown” to see how the the current mobile operating systems stack up and what they offer consumers in terms of both built-in functionality and third-party add-ons. It’s the third-party stuff that is most of interest to our inquiry here regarding the Zittrain-ian fear of declining mobile generativity. Here’s what PC World reports about the third-party apps available for 5 major mobile OS platforms:

Apple iPhone: “Just months after Apple opened up the iPhone to other developers, thousands of programs are available, and downloading them directly via the App Store is a cakewalk.”

Windows Mobile: “The best thing about this OS is the sheer variety of available applications in every category. Utilities such as Lakeridge Software’s WisBar Advance let you tweak the interface’s look, feel, and functionality, compensating for some of its deficiencies. But you get no built-in app store à la iPhone OS and Android.”

Google Android: “Developers are just beginning to hop on the Android bandwagon. The iPhone-like Market service lets you download apps directly to the phone from Google; unlike with the iPhone, you can also snag programs from third-party merchants such as Handango. …   Android’s potential is gigantic, especially if it winds up on scads of phones.”

BlackBerry: “Once upon a time, users didn’t have many BlackBerry programs to choose from, but recently the market has boomed–thousands, from productivity apps to games, are available now. Windows Mobile and S60 have even more bountiful selections, though. Currently BlackBerry has no over-the-air storefront comparable to Apple’s App Store or Android Market. RIM’s BlackBerry storefront is expected to launch in March 2009.”

Symbian: “A profusion of useful S60-compatible applications is available at sites such as Handango–one of the deepest libraries for any platform, thanks to Symbian’s long life span and wide usage.”

Importantly, McCracken didn’t even take a look at the Palm OS or Palm’s aftermarket offerings, and he failed to mention the significant “home brew” market for hacks and add-ons that countless people like me take advantage of through sites like PPC Geeks and Howard’s Forums. Regardless, as the PC World article illustrates, there’s lots of innovation and generativity out there in the mobile space today. Of course, it’s true that Apple’s iPhone isn’t quite as open as the rest of the platforms out there.  As McCracken notes of the iPhone:

But the limitations that Apple puts on third-party apps–they can’t run in the background or access data other than their own–place major obstacles in the way of everything from instant messengers to office suites. And Apple, the sole distributor of iPhone software, has declined to make available some useful applications that developers have submitted.

But as I have said before, there is a simple solution to that: Just buy a different phone!!  No one has any sort of God-given right to a perfectly “open” OS. You know what you’re getting when you buy an iPhone and realize that it may not be perfectly open to all third-party apps or hacks. But hey, it’s still a pretty damn spectacular phone. Apparently it’s even good enough for the generativity-worshiping Jonathan Zittrain, who I outed at this New America Foundation debate as an iPhone user himself!

Bottom line: Generativity in the mobile marketplace is alive and well. And, contrary to what worrywarts like Zittrain and other critics claim, the trend is clearly in the direction of MORE openness and generativity over time, not less.

Update: I just caught Tim Lee’s post on “The Perpetual Peril of Open Platforms” over at Freedom to Tinker. Worth reading if you are interested in more on this subject.