[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.

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!

Braden has noted the release of John McCain’s tech policy–rightly decrying McCain’s socialistic community broadband concept.  But far more outrageous, in my view is this bit of doublethink.  First, the good part we should all applaud:

John McCain Has Fought to Keep the Internet Free From Government Regulation The role of government in the Innovation Age should be focused on creating opportunities for all Americans and maintaining the vibrancy of the Internet economy. Given the enormous benefits we have seen from a lightly regulated Internet and software market, our government should refrain from imposing burdensome regulation. John McCain understands that unnecessary government intrusion can harm the innovative genius of the Internet. Government should have to prove regulation is needed, rather than have entrepreneurs prove it is not.

Amen!  Even a hardened Ron Paul/Bob Taft/Grover Cleveland/Jack Randolph-survivalist/libertarian-crank like me can rally behind that banner.  But then this self-styled champion of deregulation pulls a really fast one:

John McCain Will Preserve Consumer Freedoms. John McCain will focus on policies that leave consumers free to access the content they choose; free to use the applications and services they choose; free to attach devices they choose, if they do not harm the network; and free to chose among broadband service providers.

That sure sounds nice, but it’s all Wu-vian code for re-regulation, not de-regulation.  You might recognize that McCain is talking obliquely here about the FCC’s 1968 Carterfone doctrine, which has consumed much attention on the TLF (see this piece in particular).

McCain then insists that he will be a bold leader for “good” regulations:

When Regulation Is Warranted, John McCain Acts. John McCain does not believe in prescriptive regulation like “net-neutrality,” but rather he believes that an open marketplace with a variety of consumer choices is the best deterrent against unfair practices…

What would you call requiring “openness” but “prescriptive regulation” against business models that require closed networks?  McCain deserves credit for rejecting, at least on a rhetorical level, “net neutrality” mandates, but what is Skype/Carterfone but “Wireless Net Neutrality?”  Whatever fine distinctions one may draw between these two ideas (both spawned from the hyperactive brain of Tim Wu), one finds no such nuance here–just the intellectually contradictory acceptance of a very politically popular position (“openness” for network devices) with the rejection of a closely related, if not inseparable, concept.  Indeed, if McCain weren’t such a saintly model of philosophical and political consistency, one might wonder whether his campaign was simply trying have the best of both worlds by appealing to the tech-policy center-left while paying lip-service to the free market community by denouncing the loathsomely anti-free market concept of “net neutrality.”

John McCain has always believed the government’s role must be rooted in protecting consumers. He championed laws that penalized fraudulent marketing practice…

Indeed, where would we be today without John McCain championing the FTC’s ability to punish unfair and deceptive trade practices–which dates back to 1914?  Still, it’s certainly a good sign that McCain at least listed is this second (after his idea of requiring openness through regulation as a way of decreasing the need for other forms of regulation).  Show me the tech policy issue that can’t be adequately addressed by simple enforcement of privacy policies and we can have a real tech policy debate!

…protected kids from harmful Internet content…

Really?  Did McCain help right all the software tools that let parents control what their kids can access online?  If not, I’m not sure what he’s referring to here other than Internet censorship.

… secured consumer privacy, and sought to minimize spam.

Ah yes, if it weren’t for the CAN-SPAM Act, we’d all be getting deluged with spam.  Oh, wait, it’s spam-filters and not legislation that have actually “minimized” this problem.”

When businesses struggled to assess the legal role of electronic signatures, John McCain led legislative efforts to ensure that these Innovation Age signatures were legally sufficient so that e-commerce could thrive. His record reflects the careful balance between protecting the essential elements of the Internet and securing the Internet as a safe tool of commerce, education and entertainment for our citizens. Offering simple common sense solutions to real problems is at the core of the McCain’s innovation agenda.

It’s hard to argue with “balance” and “common sense.”  Both would be a welcome change of pace from the the current chicken-little-ism by which so many Internet policy debates are driven by vague, unsubstantiated fears and shameless scare-tactics by the advocates of regulation.

But what’s ominous about McCain’s Internet policy is that he doesn’t even mention “free speech” or the “first amendment.”  This omission from the man who so famously said (about his relentless efforts to restrict political speech in the name of “campaign finance reform”):

I would rather have a clean government than one where quote First Amendment rights are being respected that has become corrupt. If I had my choice, I’d rather have the clean government.

I, for one, find it pretty troubling that McCain’s idea of “balance” when it comes to the Internet is all about “safety” and (mandatory) “openness” without so much as a mention of freedom of expression.

McCain deserves credit for opposing Internet taxation and “net neutrality” (among other things), and Obama’s alternative isn’t exactly Mises 2.0 either.  But you don’t have to be much of a libertarian to scan down the list of the government programs and regulations he supports–especially “Internet Access For All Americans”–and realize that he is, at best, a fair-weather free-marketeer.  If free-marketeers have learned anything from Kevin Martin’s reign of terror at the FCC, it’s that a “free-market” Republican president can appoint regulators who pay lip-service to free market ideas while selling them out at (almost) every turn–especially when it comes to content Republican voters don’t like.

I won’t hold my breath for a de-regulatory tech policy agenda under a McCain presidency, but “hope springs eternal in the human breast.”  Should McCain win, we can only hope that the current vagaries of his tech policy ( e.g., “openness” and “protecting children”) will be resolved in favor of McCain’s de-regulatory talk, and that his current re-regulatory positions will either “evolve” for the better or at least not becomes priorities of his administration.  As for the good aspects of his policies, let us all remember Regan’s dictum:  “Trust, but verify.”

Global handset manufacturing giant Nokia has purchased the shares they didn’t already own in Symbian, Ltd., the company formed in 1998 as a partnership among Ericsson, Nokia, Motorola and Psion and the developer of the Symbian mobile operating system, by far the world’s leading OS for “smart mobile” phones with 67% of the market, followed by Microsoft on 13%, with RIM on 10% (source).

But wait, there’s more (per Engadget)!

Here’s where it gets interesting, though: rather than taking Symbian’s intellectual private for Nokia’s own benefit, the goods will be turned over to the Symbian Foundation, a nonprofit whose sole goal will be the advancement of the Symbian platform in its many flavors. Motorola and Sony Ericsson have signed up to contribute UIQ assets, while NTT DoCoMo (which uses Symbian-based wares in a number of its phones) will be donating code as well. Other Symbian Foundation members include Texas Instruments, Vodafone, Samsung, LG, and AT&T (yep, the same AT&T that currently sells precisely one Symbian-based phone), so things could get interesting. The move clearly seems to be a preemptive strike against Google’s Open Handset Alliance, LiMo, and other collaborative efforts forming around the globe with the goal of standardizing smartphone operating systems; the writing was on the wall, and Symbian didn’t want to miss the train. Total cash outlay for the move will run Nokia roughly €264 million — about $410 million in yankee currency.

Other reports note that the Symbian Foundation will eventually take Symbian open source, and that this move is as much as response to Apple’s closed iPhone platform as it is to Gogole’s open Android and LiMo platforms.  (Although it is intriguing to note that AT&T, Apple’s exclusive U.S. partner for the iPhone, is among the backers of the new Symbian Foundation, perhaps indicating that even AT&T is hedging its bets.)

The fact that we will soon see three open source platforms (counting Google’s Android and LiMo) competing for market share provides yet another measure of the exceptionally high degree of competition in the wireless industry.  Even FCC Chairman Kevin Martin, hardly a “regulatory skeptic,” has recognized the significance of this aspect of wireless competition and widespread availability of wireless carrier choice in his recent statements indicating his intent to dismiss Skype’s Petition to impose open access requirements a la the FCC’s 1968 Carterfone decision, calling “wireless … the poster child for competition” and noting that “95 percent of the people in the U.S. can choose form at least three wireless operators competing to offer them service.”

Cumulatively, the increased competitiveness–and openness-of the wireless industry mitigates strongly against recent proposals for Carterfone-style requirements (see Tim Wu’s June 2007 piece); banning exclusive relationships between handset manufacturers and wireless carriers, as my colleague Barabara Esbin and I noted in our recent paper (PDF); heavy-handed regulation of early termination fees, as dicussed by Barbara (PDF) and other attempts to impose unnecessary regulations on an industry that is already the most competitive within the FCC’s purview and one in which open standards should facilitate continued innovation.

Nokia’s move is, in some respects, reminiscent of AOL’s 2003 decision to create the Mozilla Foundation.  If Symbian achieves even a fraction of Mozilla’s success with Firefox in growing a developer community that can build a strong product, the pace of wireless innovation could increase still further.

I love my iPhone. Despite what others might say, it is the most innovative mobile phone in a decade. I also think innovators should be rewarded, which is why I’m fine with the iPhone being locked to AT&T’s network. As a result, Apple gets a cut of my (and every other iPhone owner’s) wireless bill.

France might be left behind when it comes to this innovation, however. That country has laws similar to the wireless Carterfone rules Tim Wu, Skype, and others have advocated for the U.S. Locked phones in France must be unlocked by the carrier upon user request, and wireless carriers must also sell unlocked versions of their mobile phones. As a result, Apple is considering keeping the iPhones off French shelves indefinitely.

To me it’s clear that forced access laws limit innovation. I think folks who propose such rules want to have their cake and eat it, too. That is, they want the innovation that comes from entrepreneurs acting in a free market (and often fueled by exclusive deals such as the one between Apple and AT&T), and they also want the forced openness of networks. They think that the latter will have no impact on the former; that innovators will innovate regardless of the incentives. The iPhone snag in France, however, shows that incentives do matter.