dynamic – Technology Liberation Front

The Many Forms of Entrepreneurialism

Adam Thierer — Fri, 31 Aug 2018 14:16:14 +0000

by Adam Thierer & Trace Mitchell

[originally published on The Bridge on August 30, 2018.]

What is an entrepreneur?

While it may seem straightforward, this question is deceptively complex. The term can be used in many different ways to describe a variety of individuals who engage in economic, political, or even social activities. Entrepreneurs affect almost every aspect of modern society. While most people probably have a general sense of what is meant when they hear the term entrepreneur, it can be difficult to provide a precise definition. This is due in no small part to the fact that some of the primary thinkers who have given substance to the term have placed their focus on different aspects of entrepreneurialism.

How Economists Talk About Entrepreneurs

Austrian economist Joseph Schumpeter thought that the purpose of an entrepreneur was “to reform or revolutionize the pattern of production by exploiting an invention.” Schumpeterian entrepreneurs are highly creative, disruptive innovators who challenge the status quo in order to bring about new economic opportunities. American economist Israel Kirzner viewed the defining characteristic of entrepreneurs as “alertness.” Kirznerian entrepreneurs are individuals who are able to identify the ways in which a market could be moved closer to its equilibrium, such as recognizing a gap in knowledge between different economic actors.

In the time since Schumpeter and Kirzner helped lay the groundwork, a number of George Mason University-affiliated scholars have made major contributions to our understanding of entrepreneurialism. Don Boudreaux, Jerry Ellig and Daniel Lin, and Virgil Storr, Stefanie Haeffele and Laura Grube, have offered a merged view of Schumpeterian and Kirznerian entrepreneurialism, showing the significant overlap between the two approaches.

In this new way of looking at the issue, entrepreneurs are crucial to innovation, economic growth, and societal change. They are dynamic actors who respond to incentives and market signals. “Greater discovery and innovation are the benchmarks of dynamic competition,” note Ellig and Lin, “not the driving down of price to marginal cost.”

Productive and Unproductive Entrepreneurs

But are all of these dynamic entrepreneurs good for society? Among modern economists and political scientists, there is a general consensus that Schumpeterian-Kirznerian entrepreneurs are individuals who either find or create value within society. In recent decades, therefore, scholars have focused on applying those insights more broadly and developing a more robust way to categorize different types of entrepreneurial activity.

Another American economist, William Baumol, drew an important distinction between productive and unproductive entrepreneurs. He described productive entrepreneurs as people engaged in enterprising activity that generates value within society, such as the creation of new and innovative technologies. However, he also found that entrepreneurs could be unproductive if they did not create value or actively harmful if they destroyed value. “Indeed, at times the entrepreneur may even lead a parasitical existence that is actually damaging to the economy.” For Baumol, entrepreneurs are not defined as individuals who develop new methods of creating value but rather “persons who are ingenious and creative in finding ways that add to their own wealth, power, and prestige.”

Entrepreneurs in the Political Arena

An individual who is highly skilled at lobbying a particular governmental agency might be considered an entrepreneur, but that does not mean they are necessarily contributing value to society overall. Some scholars refer to this as political entrepreneurialism. Economists Peter Boettke and Christopher Coyne define political entrepreneurs as, “individuals who operate in political institutions and who are alert to profit opportunities created by those institutions.” Utah State University professors Randy Simmons, Ryan Yonk and Diana Thomas observe how such entrepreneurs seek specific rewards or privileges from political institutions and interactions through “alertness to previously unnoticed rent-seeking opportunities.” ‘Rent-seeking’ is an economic concept where one person or group is able to derive certain benefits from a particular institutional arrangement without actually creating value for others.

Our Mercatus Center colleague Matthew Mitchell has documented the “long list of privileges that governments occasionally bestow upon particular firms or particular industries.” Mitchell offers a taxonomy of the sort of privileges that political entrepreneurs seek. They include: “monopoly status, favorable regulations, subsidies, bailouts, loan guarantees, targeted tax breaks, protection from foreign competition, and noncompetitive contracts.”

All of these privileges could qualify as a form of Baumol’s “unproductive entrepreneurship” or, in the extreme, what he called destructive entrepreneurialism. Professors Sameeksha Desai, Zoltan Acs and Utz Weitzel define destructive entrepreneurship as “wealth-destroying (such as the destruction of inputs for production activities).” Whereas unproductive entrepreneurship “seeks to redistribute from one individual to another individual,” Boettke and Coyne note, “destructive entrepreneurship reduces the total surplus in an attempt by the entrepreneur to increase his own wealth.” Outright theft and violent conflict over resources are examples of destructive entrepreneurship.

When policymakers reward political destructive or unproductive entrepreneurs, it has profound effects on the well-being of ordinary people and entire nations.

Evasive and Regulatory Entrepreneurs

Not all political entrepreneurs are necessarily out to gain privileges from government at the expense of others, however. Some entrepreneurs are more interested in simply gaining greater freedom to innovate. Scholars have used the terms evasive entrepreneurs or regulatory entrepreneurs to describe such actors. Researchers Niklas Elert and Magnus Henrekson define evasive entrepreneurialism as “profit-driven business activity in the market aimed at circumventing the existing institutional framework by using innovations to exploit contradictions in that framework.” GMU economists Christopher Coyne and Peter Leeson argue that “[e]vasive activities include the expenditure of resources and efforts in evading the legal system or in avoiding the unproductive activities of other agents.” Regulatory entrepreneurs, according to legal scholars Elizabeth Pollman and Jordan Barry, are innovators who “are in the business of trying to change or shape the law” and are “strategically operating in a zone of questionable legality or breaking the law until they can (hopefully) change it.” Evasive or regulatory entrepreneurs generally adopt a “permissionless innovation” approach to both business and political activities.

Generally speaking, evasive and regulatory entrepreneurs are synonymous, although regulatory entrepreneurialism implies a more active intent to change policy through entrepreneurial acts. Evasive entrepreneurs might also be ignorant of what the law says, whereas regulatory entrepreneurs, by definition, understand how the law negatively affects their efforts and seek to change policy through their actions.

However, both evasive and regulatory entrepreneurs are distinct from what economists Alexandre Padilla and Nicolas Cachanosky call indirectly productive entrepreneurs. They argue that regulation often creates unintended consequences which lead to new entrepreneurial opportunities. Indirectly productive entrepreneurs seize upon these opportunities by finding ways to mitigate the costs associated with specific regulations. Unlike regulatory entrepreneurs, who desire to change policy, or evasive entrepreneurs, who seek to avoid it, indirectly productive entrepreneurs create value by reducing the harm caused by policies. For example, the Transportation Safety Administration (TSA) has a policy prohibiting passengers from bringing liquids on an airplane unless they are kept in a container that is smaller than 3.4 ounces. As a response, several indirectly productive entrepreneurs have created “TSA Approved” containers for shampoo, mouthwash, and other toiletries that make it easier for passengers to comply with the regulation.

Social Entrepreneurs

There is also a growing acknowledgment that entrepreneurial behavior can transcend economic or political activities. Mercatus scholars have defined social entrepreneurs as individuals who engage in “innovative, social value-creating activity that can occur within or across the nonprofit, business, or government sectors.” Social entrepreneurial activities are not typically in pursuit of compensation or profit, but that need not always be the case and “the distinction between social and commercial entrepreneurship is not dichotomous, but… a continuum ranging from purely social to purely economic,” they note.

Some sort of social mission drives this type of entrepreneurship, and social entrepreneurialism will often incorporate what MIT economist Eric von Hippel refers to as “free innovation.” He defines a free innovation as “a functionally novel product, service, or process that (1) was developed by consumers at private cost during their unpaid discretionary time (that is, no one paid them to do it) and (2) is not protected by its developers, and so is potentially acquirable by anyone without payment—for free.” A good example of free innovation would be social entrepreneurs using 3D printers and open source designs to voluntarily create prosthetics for children with limb deficiencies.

Conclusion

As this brief survey reveals, there are many different forms of entrepreneurialism. Individuals can act in an entrepreneurial fashion in pursuit of many different objectives: profits, fame, social or legal change, or even personal or organizational privileges that come at the expense of others. Clearly, not all forms of entrepreneurialism produce socially beneficial outcomes. Policymakers should seek to foster and reward Schumpeterian-Kirznerian entrepreneurs given the positive implications for innovation and economic growth and avoid falling into the trap of rewarding political entrepreneurs, who instead seek to game laws and regulations to their own advantage.

Given the extensive research and academic literature inherent to this subject, we’ve curated a list of selected readings below.

The Failure of Good Intentions: Bike Helmet Laws Edition

Adam Thierer — Tue, 13 Oct 2015 13:25:38 +0000

One of my favorite themes, and not just in the field of tech policy, is the “Unintended Consequences of Well-Intentioned Regulations.” I believe that all laws and regulations have dynamic effects and that to fully appreciate the true impact of any particular public policy, you must always closely investigate the potential opportunity costs and unintended consequences associated with those policies. Because all too often laws and regulations are hastily put on the books with the very best of intentions in mind, only to later be shown to produce the opposite of what was intended.

Today’s case in point comes from a Wall Street Journal article by Rachel Bachman and it involves how the growing wave of cycling helmet laws are having a net negative impact on public health because they discourage ridership in the aggregate. Thus, those potential riders are then either (a) just less active overall or (b) driving their cars to get where they need to go. And both of those results are, ultimately, riskier than cycling without a helmet. For that reason, Bachman reports, cycling advocates “are pushing back against mandatory bike-helmet laws in the U.S. and elsewhere. They say mandatory helmet laws, particularly for adults, make cycling less convenient and seem less safe, thus hindering the larger public-health gains of more people riding bikes.” Supporting evidence comes from this 2012 paper in the journal Risk Analysis by Piet de Jong, a professor in the department of applied finance and actuarial studies at Sydney’s Macquarie University. His paper included an empirical model that showed how mandatory bike-helmet laws “have a net negative health impact.”

This strikes me as one of the very best examples of how to do dynamic benefit-cost analysis and show the full range of societal impacts associated with well-intentioned regulations. And it reminds me of the playground example I use in several of my papers: Laws and liability threats discouraged tall playground climbing structures in the ’80s and ’90s. As a result of those policies, kids have been shown to not only be less active on playgrounds over the past two decades, but even more interesting is the fact that some studies suggest this led to phobias and anxieties about heights later in life when those children became adults. Again, dynamic effects matter! In this case, social learning and resiliency was stunted when children lacked the ability to explore and push boundaries. In essence, it’s the “Boy in the Bubble” problem. [Read this 2012 law review article of mine for all the details on this particular case study.]

Of course, those of you who have read your Frédéric Bastiat have already identified these case studies as excellent examples of what the nineteenth-century French economic philosopher was talking about when he famously explained the importance of considering the many unforeseen, second-order effects of economic change and policy. Many pundits and policy analysts pay attention to only the first-order effects—what Bastiat called “the seen”—and ignore the subsequent and often “unseen” effects. In both these cases, policymakers were myopically obsessed with the short-term “seen” benefit of bike helmet laws or playground safety restrictions. At first blush, it probably seemed like their was no downside to such rules. Of course, a fuller exploration of the potential dynamic effects associated with those policies revealed the opposite effect: They discouraged public health in the aggregate.

Again, every action—especially political and regulatory action—has dynamic consequences. Paternalistic public policies may sound sensible on the surface, but as Milton Friedman taught us long ago, “One of the great mistakes is to judge policies and programs by their intentions rather than their results. We all know a famous road that is paved with good intentions.”

[ Note: If you are interested in more examples like this, I encourage you to read, “The Unintended Consequences of Safety Regulation” by my Mercatus Center colleague Sherzod Abdukadirov.]

CES 2014 Report: The Internet of Things Arrives, but Will Washington Welcome It?

Adam Thierer — Wed, 08 Jan 2014 21:15:26 +0000

With each booth I pass and presentation I listen to at the 2014 International Consumer Electronics Show (CES), it becomes increasingly evident that the “Internet of Things” era has arrived. In just a few short years, the Internet of Things (IoT) has gone from industry buzzword to marketplace reality. Countless new IoT devices are on display throughout the halls of the Las Vegas Convention Center this week, including various wearable technologies, smart appliances, remote monitoring services, autonomous vehicles, and much more.

This isn’t vaporware; these are devices or services that are already on the market or will launch shortly. Some will fail, of course, just as many other earlier technologies on display at past CES shows didn’t pan out. But many of these IoT technologies will succeed, driven by growing consumer demand for highly personalized, ubiquitous, and instantaneous services.

But will policymakers let the Internet of Things revolution continue or will they stop it dead in its tracks? Interestingly, not too many people out here in Vegas at the CES seem all that worried about the latter outcome. Indeed, what I find most striking about the conversation out here at CES this week versus the one about IoT that has been taking place in Washington over the past year is that there is a large and growing disconnect between consumers and policymakers about what the Internet of Things means for the future.

When every device has a sensor, a chip, and some sort of networking capability, amazing opportunities become available to consumers. And that’s what has them so excited and ready to embrace these new technologies. But those same capabilities are exactly what raise the blood pressure of many policymakers and policy activists who fear the safety, security, or privacy-related problems that might creep up in a world filled with such technologies.

But at least so far, most consumers don’t seem to share the same worries. Instead, they are too busy shouting “More, More, More!” IoT technologies have generated enormous interest and every projection I’ve seen so far shows that explosive growth can be expected across all classes of devices. ABI Research estimates that there are more than ten billion wirelessly connected devices in the market today and more than thirty billion devices expected by 2020. Last year Cisco projected that by 2020 thirty-seven billion intelligent things will be connected and communicating but has now apparently revised that estimate upward to 40 or 50 billion. Thus, we are well on the way to a world where “everyone and everything will be connected to the network.”

Yet, it remains unclear what the IoT public policy landscape will look like in coming years and what disposition lawmakers and regulators will adopt toward these new amazing new technologies. Two distinct policy disposition are clashing over what approach should govern the future of innovation in this space.

I discussed this tension during a CES panel this morning on “The Internet of Things and the Home of the Future.” It featured outstanding opening remarks by FTC Commissioner Maureen K. Ohlhausen, who made the case for regulatory humility and focusing on how these new technologies can empower individuals in important new ways. “The Internet has evolved in one generation from a network of electronically interlinked research facilities in the United States to one of the most dynamic forces in the global economy, in the process reshaping entire industries and even changing the way we interact on a personal level,” she noted. “And the Internet of Things offers the promise of even greater progress ahead for consumers and competition.” I strongly encourage you to read Commissioner Ohlhausen’s entire speech. It is terrific and sets exactly the right tone for these discussions.

After Commissioner Ohlhausen spoke, we had a panel discussion that was expertly moderated by tech policy guru Larry Downes and which included remarks from Robert M. McDowell (Hudson Institute), Jeff Hagins, (Smart Things), Robert Pepper (Cisco), Marc Rogers (Lookout), and me.

When I spoke, I described the future of the Internet of Things as a grand battle of two alternative worldviews: the “precautionary principle” and “permissionless innovation.” The “precautionary principle” refers to the belief that new innovations should be curtailed or disallowed until their developers can prove that they will not cause any harms to individuals, groups, specific entities, cultural norms, or various existing laws, norms, or traditions. The other worldview, “permissionless innovation,” refers to the notion that experimentation with new technologies and business models should generally be permitted by default. Unless a compelling case can be made that a new invention will bring serious harm to society, innovation should be allowed to continue unabated and problems, if they develop at all, can be addressed later.

I’ll soon be releasing a new eBook about this conflict of visions. The book will be called, “Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom” and it should be out in the next few weeks. In it, I will explain how precautionary principle thinking is increasingly creeping into modern information technology policy discussions, explain how that is dangerous and must be rejected, and argue that policymakers should instead unapologetically embrace and defend the permissionless innovation vision — not just for the Internet but also for all new classes of networked technologies and platforms.

This intellectual tension is already evident in debates over the Internet of Things. While we are still very early in this debate, we can expect rising calls for preemptive regulatory controls on IoT technologies based on various safety, security, and especially privacy rationales. If the precautionary principle mentality wins out and trumps the permissionless innovation ethos that has already powered the first wave of the digital revolution, it will have profound ramifications.

As I’ll note in my forthcoming eBook, preserving and extending the permissionless innovation ethos to the Internet of Things is not about “protecting corporate profits” or assisting any particular technology, industry sector, or set of innovators. Rather, preserving an environment in which permissionless innovation can flourish is about ensuring that individuals as both citizens and consumers continue to enjoy the myriad benefits that accompany an open, innovative information ecosystem. More profoundly, this general freedom to innovate is essential for powering the next great wave of industrial innovation and rejuvenating our dynamic, high-growth economy. Even more profoundly, this is about preserving social and economic freedom more generally while rejecting the central-planning mentality and methods that throughout history have stifled human progress and prosperity.

Safety, security, and privacy problems will continue to persist, of course, and we should work to find practical, “bottom-up” solutions to them. As I detail in my eBook, education and empowerment, social pressure, societal norms, voluntary self-regulation, transparency efforts, and targeted enforcement of existing legal norms (especially through the common law) are almost always superior to “top-down,” command-and-control regulatory edits and bureaucratic schemes of a “Mother, May I” (i.e., permissioned) nature. Preemptive technological controls of that sort would limit new innovation in this space and sacrifice the many benefits that will flow to consumers from continued experimentation.

Those who advocate precautionary regulatory approaches to the Internet of Things should think through to consequences of preemptively prohibiting technological innovation and realize that not everyone shares their same values, especially pertaining to privacy, which is a highly subjective concept that is often difficult to legislate around. We should instead find ways work with together to seek out those practical, bottom-up solutions that will help individuals, institutions, and society learn how to better cope with technological change over time. Using this approach, we can embrace our dynamic future together without doing permanent damage to our innovative minds and economy.

Book Review: Brown & Marsden’s “Regulating Code”

Adam Thierer — Thu, 27 Jun 2013 20:51:52 +0000

Ian Brown and Christopher T. Marsden’s new book, Regulating Code: Good Governance and Better Regulation in the Information Age, will go down as one of the most important Internet policy books of 2013 for two reasons. First, their book offers an excellent overview of how Internet regulation has unfolded on five different fronts: privacy and data protection; copyright; content censorship; social networks and user-generated content issues; and net neutrality regulation. They craft detailed case studies that incorporate important insights about how countries across the globe are dealing with these issues. Second, the authors endorse a specific normative approach to Net governance that they argue is taking hold across these policy arenas. They call their preferred policy paradigm “prosumer law” and it envisions an active role for governments, which they think should pursue “smarter regulation” of code.

In terms of organization, Brown and Marsden’s book follows the same format found in Milton Mueller’s important 2010 book Networks and States: The Global Politics of Internet Governance; both books feature meaty case studies in the middle bookended by chapters that endorse a specific approach to Internet policymaking. (Incidentally, both books were published by MIT Press.) And, also like Mueller’s book, Brown and Marsden’s Regulating Code does a somewhat better job using case studies to explore the forces shaping Internet policy across the globe than it does making the normative case for their preferred approach to these issues.

Thus, for most readers, the primary benefit of reading either book will be to see how the respective authors develop rich portraits of the institutional political economy surrounding various Internet policy issues over the past 10 to 15 years. In fact, of all the books I have read and reviewed in recent years, I cannot think of two titles that have done a better job developing detailed case studies for such a diverse set of issues. For that reason alone, both texts are important resources for those studying ongoing Internet policy developments.

That’s not to say that both books don’t also make a solid case for their preferred policy paradigms, it’s just that the normative elements of the texts are over-shadowed by the excellent case studies. As a result, readers are left wanting more detail about what their respective policy paradigms would (or should) mean in practice. Regardless, in the remainder of this review, I’ll discuss Brown and Marsden’s normative approach to digital policy and contrast it with Mueller’s since they stand in stark contrast and help frame the policy battles to come on this front.

Governing Cyberspace: Mueller vs. Brown & Marsden

Mueller’s normative goal in Networks and States was to breathe new life into the old cyber-libertarian philosophy that was more prevalent during the Net’s founding era but which has lost favor in recent years. He made the case for a “cyberliberty” movement rooted in what he described as a “denationalized liberalism” vision of Net governance. He argued that “we need to find ways to translate classical liberal rights and freedoms into a governance framework suitable for the global Internet. There can be no cyberliberty without a political movement to define, defend, and institutionalize individual rights and freedoms on a transnational scale.”

I wholeheartedly endorsed that vision in my review of Mueller’s book, even if he was a bit short on the details of how to bring it about. But it is useful to keep Mueller’s paradigm in mind because it provides a nice contrast with the approach Brown and Marsden advocate, which is quite different.

Generally speaking, Brown and Marsden reject most forms of “Internet exceptionalism” and certainly reject the sort of “cyberliberty” ethos that Mueller and I embrace. They instead endorse a fairly broad role for governments in ordering the affairs of cyberspace. In their self-described “prosumer” paradigm, the State is generally viewed as benevolent actor, well-positioned to guide the course of code development toward supposedly more enlightened ends.

Consistent with the strong focus on European policymaking found throughout the book, the authors are quite enamored with the “co-regulatory” models that have become increasing prevalent across the continent. Like many other scholars and policy advocates today, they occasionally call for “multi-stakeholderism” as a solution but they do not necessarily mean the sort of truly voluntary, bottom-up multi-stakeholderism of the Net’s early days. Rather, they are usually thinking of multi-stakeholderism as what is essentially pluralistic politics; it’s the government setting the table, inviting the stakeholders to it, and then guiding (or at least “nudging”) policy along the way. “We are convinced that fudging with nudges needs to be reinforced with the reality of regulation and coregulation, in order to enable prosumers to maximize their potential on the broadband Internet,” they say. (p. 187)

Meet the New Boss, Same as the Old Boss?

Thus, despite the new gloss, their “prosumer law” paradigm ends up sounding quite a bit like a rehash of traditional “public interest” law and common carrier regulation, albeit with a new appreciation of just how dynamics markets built on code can be. Indeed, Brown and Marsden repeatedly acknowledge how often law and regulation fails to keep pace with the rapid evolution of digital technology. “Code changes quickly, user adoption more slowly, legal contracting and judicial adaptation to new technologies slower yet, and regulation through legislation slowest of all,” they correctly note (p. xv). This reflects what Larry Downes refers to as the most fundamental “law of disruption” of the digital age: “technology changes exponentially, but social, economic, and legal systems change incrementally.”

At the end of the day, however, that insight doesn’t seem to inform Brown and Marsden’s policy prescriptions all that much. Theirs is a world in which policy tinkering errors will apparently be corrected promptly and efficiently by still more policy tinkering, or “smarter regulation.” Moreover, like many other Internet policy scholars today, they don’t mind regulatory interventions that come early and often since they believe that will help regulators get out ahead of the technological curve and steer markets in preferred directions. “If regulators fail to address regulatory objects at first, then the regulatory object can grow until its technique overwhelms the regulator,” they say (p. 31).

This is the same mentality that is often on display in Tim Wu’s work, which I have been quite critical of here and elsewhere. For example, Wu has advocated informal “agency threats” and the use of “threat regimes” to accomplish policy goals that prove difficult to steer though the formal democratic rulemaking process. As part of his “defense of regulatory threats in particular contexts,” Wu stresses the importance of regulators taking control of fast-moving tech markets early in their life cycles. “Threat regimes,” Wu argues, “are best justified when the industry is undergoing rapid change — under conditions of ‘high uncertainty.’ Highly informal regimes are most useful, that is, when the agency faces a problem in an environment in which facts are highly unclear and evolving. Examples include periods surrounding a newly invented technology or business model, or a practice about which little is known,” Wu concludes.

This is essentially where most of the “co-regulation” schemes that Brown and Marsden favor would take us: Code regulators would take an active role in shaping the evolution of digital technologies and markets early in its life cycle. What are the preferred regulatory mechanisms? Like Wu and many other cyberlaw professors today, Brown and Marsden favor robust interconnection and interoperability mandates bolstered by antitrust actions as well. And, again, they aren’t willing to wait around and let the courts adjudicate these issues in an ex post fashion. “Essential facilities law is a very poor substitute for the active role of prosumer law that we advocate, especially in its Chicago school minimalist phase” (p. 185). In other words, we shouldn’t wait for someone to bring a case and litigate it through the courts when preemptive, proactive regulatory interventions can sagaciously steer us to a superior end.

More specifically, they propose that “competition authorities should impose ex ante interoperability requirements upon dominant social utilities… to minimize network barriers” (p. 190) and they model this on traditional regulatory schemes such as must-carry obligations, API interface disclosure requirements, and other interconnection mandates (such as those imposed on AOL/Time Warner a decade ago to alleviate fears about instant messaging dominance). They also note that “Effective, scalable state regulation often depends on the recruitment of intermediaries as enforcers” to help achieve various policy objectives (p. 170).

The Problem with Interoperability Über Alles

So, in essence, the Brown-Marsden Internet policy paradigm might be thought of as interoperability über alles. Interoperability and interconnection in pursuit of more “open” and “neutral” systems is generally considered an unalloyed good and most everything else is subservient to this objective.

This is a serious policy error and one that I address in great detail in my absurdly long review of John Palfrey and Urs Gasser’s Interop: The Promise and Perils of Highly Interconnected Systems. I’m not going to repeat all 6,500 words of that critique here when you can just click back and read it, but here’s the high level summary: There is no such thing as “optimal interoperability” that can be determined in an a priori fashion. 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.

More importantly, when interoperability is treated as sacrosanct and forcibly imposed through top-down regulatory schemes, it will often have many unintended consequences and costs. It can even lock in existing market power and market structures by encouraging users and companies to flock to a single platform instead of trying to innovate around it. (Go back and take a look at how the “Kingsbury Commitment” — the interconnection deal from the early days of the U.S. telecom system — actually allowed AT&T to gain greater control over the industry instead of assisting independent operators.)

Citing Palfrey and Gasser, Brown and Marsden do note that “mandated interoperability is neither necessary in all cases nor necessarily desirable” (p. 32), but they don’t spend as much time as Palfrey and Gasser itemizing these trade-offs and the potential downsides of some interoperability mandates. But what frustrates me about both books is the almost quasi-religious reverence accorded to interoperability and open standards when such faith is simply not warranted after historical experience is taken into consideration.

Plenty of the best forms of digital innovation today are due to a lack of interoperability and openness. Proprietary systems have produced some of the most exciting devices (iPhone) and content (video games) of modern times. Then again, voluntary interoperable and “open” services and devices thrive, too. The key point here — and one that I develop in far greater detail in my book chapter, “The Case for Internet Optimism, Part 2 – Saving the Net From Its Supporters” — is that the market for digital services is working marvelously and providing us with choices of many different flavors. Innovation continues to unfold rapidly in both directions along the “open” vs. “closed” continuum. (Here are 30 more essays I have written on this topic if you need more proof.)

Generally speaking, we should avoid mandatory interop and openness solutions. We should instead push those approaches and solutions in a truly voluntary, bottom-up fashion. And, more importantly, we should be pushing for outside-the-box solutions of the Schumpeterian (creative destruction / disruptive innovation) variety instead of surrendering so quickly on competition through forced sharing mandates.

The Case for Patience & Policy Restraint

But Brown and Marsden clearly do not subscribe to that sort of Schumpeterian thinking. They think most code markets tip and lock into monopoly in fairly short order and that only wise interventions can rectify that. For example, they claim that Facebook’s “monopoly is now durable,” which will certainly come as a big surprise to the millions of us who do not use it all. And the story of MySpace’s rapid rise and equally precipitous fall has little bearing on this story, they argue.

But, no matter how you define the “social networking market,” here are two facts about it: First, it is still very, very young. It’s only about a decade old. Second, in that short period of time, we have already witnessed the entire first generation of players fall by the wayside. While the second generation is currently dominated by Facebook, it is by no means alone. Again, millions like me don’t use it at all and get along just fine with other “social networking” technologies, including Twitter, LinkedIn, Google+, and even older tech like email, SMS, and yes, phone calls! Accusations of “monopoly” in this space strain credulity in the extreme. I invite you to read my Mercatus working paper, “The Perils of Classifying Social Media Platforms as Public Utilities,” for a more thorough debunking of this logic. (Note: The final version of that paper will be published in the CommLaw Conspectus shortly.)

Such facts should have a bearing on the debate about regulatory interventions. We continue to witness the power of Schumpeterian rivalry as new and existing players battle in a race for the prize of market power. Brown and Marsden fear that the race is already over in many sectors and that it is time to throw in the towel and get busy regulating. But when I look around at the information technology marketplace today, I am astonished just how radically different it looks from even just a few years ago, and not just in the social media market. I have written extensively about the smartphone marketplace, where innovation continues at a frantic pace. As I noted in my essay here on “Smartphones & Schumpeter,” it’s hard to remember now, but just 6 short 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; and,
There was no 4G service.

It’s also easy to forget just how many market analysts and policy wonks were making absurd predictions at the time about how the telecom operators at the time had so much market power that they would crush new innovation without regulation. Instead, in very short order, the market was completely upended in a way that mobile providers never saw coming. There was a huge shift in relative market power flowing from the core of these markets to the fringes, especially to Apple, which wasn’t even a player in that space before the launch of the iPhone.

As I noted in concluding that piece last year, these facts should lead us to believe that this is a healthy, dynamic marketplace in action. Not even Schumpeter could have imagined creative destruction on this scale. (Just look as BlackBerry). But much the same could be said of many other sectors of the information economy. While it is certainly true that many large players exist, we continue to see a healthy amount of churn in these markets and an astonishing amount of technological innovation.

Public Choice Insights: What History Tells Us

One would hope these realities would have a greater bearing on the policy prescriptions suggested by analysts like Brown and Marsden, but they don’t seem to. Instead, the attitude on display here is that governments can, generally speaking, act wisely and nudge efficiently to correct short-term market hiccups and set us on a better course. But there are strong reasons to question that presumption.

Specifically, what I found most regrettable about Brown and Marsden’s book was the way — like all too many books in this field these days — the authors briefly introduce “public choice” insights and concerns only to summarily dismiss them as unfounded or overblown. (See my review of Brett Frischmann’s book, Infrastructure: The Social Value of Shared Resources for a more extended discussion of this problem as it pertains to discussions about not just infrastructure regulation by the regulation of all complex industries and technologies.)

Brown and Marsden make it clear that their intentions are pure and that their methods would incorporate the lessons of the past, but they aren’t very interested in dwelling on the long, lamentable history of regulatory failures and capture in the communications and media policy sectors. They do note the dangers of a growing “security-industrial complex” and argue that “commercial actors dominate technical actors in policy debates.” They also say that the “potential for capture by regulated interests, especially large corporate lobbies, is an essential insight” that informs their approach. The problem is that it really doesn’t. They largely ignore those insights and instead imply that, to the extent this is a problem at all, we can build a better breed of bureaucrats going forward who will craft “smarter regulation” that is immune from such pressures. Or, they claim that “multi-stakeholderism” — again, the new, more activist and government-influenced conception of it — can overcome these public choice problems.

A better understanding of power politics that is informed by the wisdom of the ages would instead counsel that minimizing the scope of politicization of technology markets is the better remedy. Capture and cronyism in communications and media markets has always grown in direct proportion to the overall scope of law governing those sectors. (I invite you to read all the troubling examples of this that Brent Skorup and I have documented in our new 72-page working paper, “A History of Cronyism and Capture in the Information Technology Sector.” Warning: It makes for miserable reading but proves beyond any doubt that there is something to public choice concerns.)

To be clear, it’s not that I believe that “market failures” or “code failures” never occur, rather, as I noted in this debate with Larry Lessig, it’s that such problems are typically “better addressed by voluntary, spontaneous, bottom-up, marketplace responses than by coerced, top-down, governmental solutions. Moreover, the decisive advantage of the market-driven approach to correcting code failure comes down to the rapidity and nimbleness of those response(s).” It’s not just that traditional regulatory remedies cannot keep pace with code markets, it’s that those attempting to craft the remedies do not possess the requisite knowledge needed to know how to steer us down a superior path. (See my essay, “Antitrust & Innovation in the New Economy: The Problem with the Static Equilibrium Mindset,” for more on that point.)

Regardless, at a minimum, I expect scholars to take seriously the very real public choice problems at work in this arena. You cannot talk about the history of these sectors without acknowledging the horrifically anti-consumer policies that were often put in place at the request of one industry or another to shield themselves from disruptive innovation. No amount of wishful thinking about “prosumer” policies will change these grim political realities. Only by minimizing chances to politicize technology markets and decisions can we overcome these problems.

Conclusion

For those of us who prefer to focus on freeing code, Brown and Marsden’s Regulating Code is another reminder that liberty is increasingly a loser in Internet policy circles these days. Milton Mueller’s dream of decentralized, denationalized liberalism seems more and more unlikely as armies of policymakers, regulators, special interests, regulatory advocates, academics, and others all line up and plead for their pet interest or cause to be satisfied through pure power politics. No matter what you call it — fudging, nudging, coregulation, smart regulation, multistakeholderism, prosumer law, or whatever else, — there is no escaping the fact that we are witnessing the complete politicization of almost every facet of code creation and digital decisionmaking today.

Despite my deep reservations about a more politicized cyberspace, Brown and Marsden’s book is an important text because it is one of the most sophisticated articulations and defenses of it to date. Their book also helps us better understand the rapidly developing institutional political economy of Internet regulation in both broad and narrow policy contexts. Thus, it is worth your time and attention even if, like me, you are disheartened to be reading yet another Net policy book that ultimately endorses mandates over of markets as the primary modus operandi of the information age.

Additional Resources about the book:

the official MIT Press website for Regulating Code
shorter Brown & Marsden paper on “Prosumer Law” (via SSRN)
Little Atoms podcast featuring Brown & Marsden discussing Regulating Code
Ian Brown edited this beefy Research Handbook On Governance Of The Internet, which makes a nice complement to Regulating Code. It offers even more detailed case studies on the major issues featured in the book. A terrific resource (if you can afford it!)
a video of Brown & Marsden discussing the book at the Oxford Internet Institute (also embedded below):

Other books you should read alongside “Regulating Code” (links are for my reviews of each):

Milton Mueller’s Networks and States: The Global Politics of Internet Governance
John Palfrey & Urs Gasser’s Interop: The Promise and Perils of Highly Interconnected Systems
Rebecca MacKinnon’s Consent of the Networked: The Worldwide Struggle for Internet Freedom
David G. Post’s In Search of Jefferson’s Moose: Notes on the State of Cyberspace
Christopher Yoo’s The Dynamic Internet: How Technology, Users, and Businesses are Transforming the Network
Larry Lessig’s Code (my 2-part exchange with Lessig upon Code’s 10^th anniversary: Part 1, Part 2)

Important Cyberlaw & Info-Tech Policy Books (2012 Edition)

Adam Thierer — Mon, 17 Dec 2012 19:23:44 +0000

The number of major cyberlaw and information tech policy books being published annually continues to grow at an astonishing pace, so much so that I have lost the ability to read and review all of them. In past years, I put together end-of-year lists of important info-tech policy books (here are the lists for 2008, 2009, 2010, and 2011) and I was fairly confident I had read just about everything of importance that was out there (at least that was available in the U.S.). But last year that became a real struggle for me and this year it became an impossibility. A decade ago, there was merely a trickle of Internet policy books coming out each year. Then the trickle turned into a steady stream. Now it has turned into a flood. Thus, I’ve had to become far more selective about what is on my reading list. (This is also because the volume of journal articles about info-tech policy matters has increased exponentially at the same time.)

So, here’s what I’m going to do. I’m going to discuss what I regard to be the five most important titles of 2012, briefly summarize a half dozen others that I’ve read, and then I’m just going to list the rest of the books out there. I’ve read most of them but I have placed an asterisk next to the ones I haven’t. Please let me know what titles I have missed so that I can add them to the list. (Incidentally, here’s my compendium of all the major tech policy books from the 2000s and here’s the running list of all my book reviews.)

As I do each year, I need to repeat a few disclaimers. First, what qualifies as an “important” info-tech policy book is highly subjective, but I would define it as a title that many people — especially scholars in the field — are currently discussing and that we will likely be referencing for many years to come. But I “weight” books in the sense that narrowly-focused titles lose a few points. For example, books that deal mostly with privacy issues, copyright law, or antitrust policy are docked a few points relative to “big picture” info-tech policy books that offer a broader exploration of policy issues and which offer more wide-ranging recommendations.

Second, almost all of the books included have something profound to say about Internet policy (either directly or indirectly) and the more profound and clear the policy recommendations or implications, the higher the titles rank in terms of importance on my list.

Third, and most importantly: Just because a book appears on this list that does not necessarily mean I agree with everything in it. In fact, as was the case in previous years, I found much with which to disagree in most of the books listed here. Simply put, the cyber-liberty I cherish is a real loser in both academic and public policy circles these days. It has very few defenders today. So, if this was simply a list of my personal favorite books, there would only be 2 or 3 titles on it. Instead, this is my effort to list important books in the field, regardless of whether I agree with the content and conclusions found in those titles.

OK, on to the list.

(1) Rebecca MacKinnon – Consent of the Network: The Worldwide Struggle for Internet Freedom

Rebecca MacKinnon’s book was the most important information technology policy book released in 2012 because it: (1) presented a splendid history of the ideas and forces shaping Internet policy debates globally; (2) offered policy insights that were extremely relevant to breaking developments in this field; and (3) set forth a call-to-arms to global Internet activists and gave them a new way of framing their issue advocacy.

MacKinnon is a former journalist and her outstanding reporting skills are on display throughout the text. Her coverage of China’s efforts to regulate the Net is outstanding. She also surveys some of the recent policy fights here and abroad over issues such as online privacy, Net neutrality regulation, free speech matters, and the copyright wars. The book demands attention for this historical work and analysis alone.

Even more importantly, however, MacKinnon makes a forceful argument for how to think about Internet freedom and democracy in new digital worlds. Her book is an attempt to take the Net freedom movement to the next level; to formalize it and to put in place a set of governance principles that will help us hold the “sovereigns of cyberspace” more accountable. Many of her proposals are quite sensible. But, as I noted in my much longer review of the book, I had a real problem with MacKinnon’s use of the term “digital sovereigns” or “sovereigns of cyberspace” and the loose definition of “sovereignty” that pervades her narrative. She too often blurs and equates private power and political power, and she sometimes leads us to believe that the problem of the dealing with the mythical nation-states of “Facebookistan” and “Googledom” is somehow on par with the problem of dealing with actual sovereign power — government power — over digital networks, online speech, and the world’s Netizenry.

Despite these nitpicks, MacKinnon has many other ideas about Net governance in the book that are less controversial and entirely sensible in my opinion. She wants to “expand the technical commons” by building and distributing more tools to help activists and make organizations more transparent and accountable. These would include circumvention and anonymization tools, software and programs that allow both greater data security and portability, and devices and network systems to expand the range of communication and participation, especially in more repressed countries. She would also like to see neitzens “devise more systematic and effective strategies for organizing, lobbying, and collective bargaining with the companies whose service we depend upon — to minimize the chances that terms of service, design choices, technical decisions, or market entry strategies could put people at risk or result in infringement of their rights.” This also makes sense as part of a broader push for improved corporate social responsibility.

Regarding the role of law, MacKinnon has a mixed view. She says: “There is a need for regulation and legislation based on solid data and research (as opposed to whatever gets handed to legislative staffers by lobbyists) as well as consultation with a genuinely broad cross-section of people and groups affected by the problem the legislation seeks to solve, along with those likely to be affected by the proposed solutions.” Of course, that’s a fairly ambiguous standard that could open the door to excessive political meddling with the Net if we’re not careful. Overall, though, she acknowledges how regulation so often lags far behind innovation. “A broader and more intractable problem with regulating technology companies is that legislation appears much too late in corporate innovation and business cycles,” she rightly notes.

MacKinnon’s book will be of great interest to Internet policy scholars and students, but it is also accessible to a broader audience interested in learning more about the debates and policies that will shape the future of the Internet and digital networks for many years to come. One other note: MacKinnon’s clearly-worded prose and cool-headed tone deserve praise and emulation. It serves as a model for how to write a thoughtful Internet policy book, even if you don’t agree with all her conclusions or recommendations.

My complete review of Consent of the Networked can be found here.

(2) Susan Crawford – Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age

Susan Crawford’s book was probably my least favorite title of 2012, but that doesn’t mean I can discount its significance within this field. Crawford has made herself a widely-recognized and highly-charged figure in the world of Internet policy through her work as an activist, an academic, and even a government official. In Captive Audience, she doesn’t even try to hide her self-described “radicalized” views on communications policy anymore and in the process she solidifies her role as the ringleader of the growing movement to impose centralized, top-down government control on America’s broadband infrastructure.

What is most astonishing about Captive Audience is the way Crawford so audaciously waxes nostalgic for the days of regulated monopoly. Simply put, Crawford doesn’t believe that capitalism or competition have any role to play in the provision of broadband networks and services. “No competitive pressure will force these companies to act [in the public interest],” she argues on the last page of the manifesto. “Americans,” she claims, “have allowed a naive belief in the power and beneficence of the free market to cloud their vision.” She suggests we should just give up our false hope that markets can deliver such an important service and get on with the task of converting broadband into a full-blown regulated public utility.

Her proposed solutions read like the typical Big Government grab-bag of policy proposals: more government spending, more government ownership, and more government regulation (forced access regulation and rate controls) for any private carriers that are allowed to remain in operation as de facto handmaidens of the state. Crawford’s perfect world scenario would seem to be some sort of amalgam of the U.S. Postal Service and the federal highway program. While both programs have sought to provide an important service to the masses, it goes without saying that both are also an absolute basket case in terms of service management and economic viability. But, for the sake of argument, let’s say that Crawford is right and that public ownership and comprehensive government management is the way to go. Where will all this money come from for all the new government activity Crawford desires? Apparently it grows on trees because she isn’t ever willing to admit that we find ourselves in the midst of major fiscal crisis that likely constrains the ability of governments to make these investments themselves. Luckily, private wireline and wireless broadband providers have been investing tens of billions in infrastructural upgrades in recent years (don’t take my word for it, read what the Progressive Policy Institute has to say), a fact that Crawford conveniently ignores.

More importantly, Crawford never fully confronts the fact that the era of regulated monopoly she cherishes was an unmitigated croynist disaster for consumers. That era had nothing to do with the “public interest” and everything to do with protecting the private interests of regulated entities — namely, Ma Bell on the communications side and broadcasters on the media side. She also doesn’t address the lackluster state of innovation during the 70 or so years during which time communications and media markets were under the tight grip of federal and state regulators, who controlled rates, restricted new entry, and discouraged innovation at virtually every juncture. If one is going to recommend a return to the regulatory past, they had better grapple with that uncomfortable, anti-consumer, anti-innovation history. Crawford utterly fails to in Captive Audience.

While the book is nominally about broadband regulation, the bulk of it is actually dedicated to taking on one company — Comcast — and specifically picking apart its recent merger with NBC Universal. For Crawford, the Comcast-NBC deal represented something akin to the Mayan apocalypse of media policy. She wants us to believe that the deal has forever solidified Comcast’s grasp on both programming and broadband markets. Comcast chief Brian Roberts is presented as the nefarious villain of the narrative; Crawford paints him as a cross between Gordon Gecko and Mr. Burns from “The Simpsons.” Usually such neurotic narratives are reserved for Rupert Murdoch and how he is supposedly plotting mass media domination to brainwash the minds of the masses. But Crawford suggests that Roberts is the new Bond villain du jour and chapter after chapter are devoted to demonizing him, his father, and other execs at Comcast. She argues that “Comcast now owns the Internet in America” and that the company is “squeezing independent online video” providers out of the market.

Despite all this hand-wringing, the situation in the video marketplace has never looked brighter. Crawford fails to put things in historical perspective and examine consumer choices in this market today relative to the past — a point I made in this debate with her last year. Of course, she probably didn’t want to seriously examine that evidence because by every metric available — and I published an entire report called Media Metrics a few years ago proving this — Americans have more and better viewing options at their disposal than ever before in history. We have more channels and more content available over more platforms (cable, satellite, telco, online, DVD, mail, etc) and more devices than ever before. Consumers have an unprecedented ability to access, record, time-shift, interact with, and even manipulate and redistribute video content. Of course, all this choice and quality comes at a cost, as Crawford continuously complains throughout the text. Apparently, in her view, all these great new programming options and technologies should just fall to us like manna from heaven with no price tag attached.

If you want to see what the opposite of Internet freedom and digital capitalism looks like, look no further than this book. It is the definitive articulation of the cyber-planner’s ethos. Of course, that’s also what makes Captive Audience one of the most important books of 2012. But if you really must read such one-sided propaganda — since this book will, no doubt, be assigned in many cyberlaw and media studies classes across America — then I encourage you to also read Christopher Yoo’s Dynamic Internet and Randy May’s edited collection of essays on Communications Law and Policy in the Digital Age, both of which are mentioned below. Both of those books offer a refreshingly level-headed examination of the true state of this marketplace. I’d also recommend you check out these recent essays by Bret Swanson and Richard Bennett for a hard look at the shoddy numbers and assumptions underlying many of the broadband policy critiques you hear out there today from Crawford and others.

(3) John Palfrey & Urs Gasser – Interop: The Promise and Perils of Highly Interconnected Systems

What makes Palfrey & Gasser’s book so important is that the authors aim to develop “a normative theory identifying what we want out of all this interconnectivity” that the information age has brought us. They correctly note “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.” Generally speaking, they argue increased interoperability — especially among information networks and systems — is a good thing because it “provides consumers greater choice and autonomy,” “is generally good for competition and innovation,” and “can lead to systemic efficiencies.”

But they wisely acknowledge that there are trade-offs, too, noting that “this growing level of interconnectedness comes at an increasingly high price.” 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.” 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.

Ultimately, however, the authors fail to develop a clear standard for when interoperability is good and when governments should take steps to facilitate or mandate it. They argue that “there is no single form or optimal amount of interoperability that will suit every circumstance” and that “most of the specifics of how to bring interop about [must] be determined on a case-by-case basis. 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,” but they argue that government should feel free to tip or nudge interoperability determinations in superior directions to satisfy “the public interest.” “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.”

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.”

In my absurdly long review of their book, I offered an alternative framework that suggests patience, humility, and openness to ongoing marketplace experimentation as the primary public policy virtues that lawmakers should instead embrace. 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.

Defining “optimal interoperability,” is not just difficult as Palfrey and Gasser suggest, but I would argue that it is a pipe dream. Sometimes consumers demanded a certain amount interoperability and they usually get it. But it seems equally obvious that consumers don’t always demand perfect interoperability. Just look at your iPhone or Xbox for proof. Quite often, a lack of interoperability helps firms finance important new products and services while simultaneously ensuring users a tailored and potentially more secure and satisfying experience. Importantly, however, non-interoperability also spurs new forms of innovation from rivals looking to leap-frog the old front-runners. Progress flows from this never-ending cycle of technological change and industrial churn.

In sum, we cannot define or determine “optimal interoperability” in an a priori fashion; only ongoing experimentation can help us determine what truly lies in “the public interest.” Despite my different approach and conclusions, Palfrey and Gasser’s book perfectly frames what should be a very interesting ongoing debate over these issues and for that reason will be required reading on this subject for years to come.

Again, my longer review of Palfrey and Gasser’s book can be found here, and listen to John Palfrey’s podcast discussion with Jerry Brito here.]

(4) Christopher Yoo – The Dynamic Internet: How Technology, Users, and Businesses are Transforming the Network

Christopher Yoo’s book was my personal favorite of the year, but it won’t capture as much interest and recognition as some of the other titles on this list. The book offers a concise overview of how Internet architecture has evolved and a principled discussion of the public policies that should govern the Net going forward. Yoo makes two straight-forward arguments. First, the Internet is changing. In Part 1 of the book, Yoo offers a layman-friendly overview of the changing dynamics of Internet architecture and engineering. He documents the evolving nature of Internet standards, traffic management and congestion policies, spam and security control efforts, and peering and pricing policies. He also discusses the rise of peer-to-peer applications, the growth of mobile broadband, the emergence of the app store economy, and what the explosion of online video consumption means for ongoing bandwidth management efforts. Those are the supply-side issues. Yoo also outlines the implications of changes in the demand-side of the equation, such as changing user demographics and rapidly evolving demands from consumers. He notes that these new demand-side realities of Internet usage are resulting in changes to network management and engineering, further reinforcing changes already underway on the supply-side.

Yoo’s second point in the book flows logically from the first: as the Internet continues to evolve in such a highly dynamic fashion, public policy must as well. Yoo is particularly worried about calls to lock in standards, protocols, and policies from what he regards as a bygone era of Internet engineering, architecture, and policy. “The dramatic shift in Internet usage suggests that its founding architectural principles form the mid-1990s may no longer be appropriate today,” he argues. “[T]he optimal network architecture is unlikely to be static. Instead, it is likely to be dynamic over time, changing with the shifts in end-user demands,” he says. Thus, “the static, one-size-fits-all approach that dominates the current debate misses the mark.”

Yoo makes a particular powerful case for flexible network pricing policies. His outstanding chapter on “The Growing Complexity of Internet Pricing” offers an excellent overview of the changing dynamics of pricing in this arena and explains why experimentation with different pricing methods and business models must be allowed to continue. Getting pricing right is essential, Yoo notes, if we hope to ensure ongoing investment in new networks and services. He also notes how foolish it is to expect the government to come in and save the day thought massive infrastructure investment to cover the hundreds of billions of dollars needed to continue to build-out high-speed services.

Throughout the second half of his book, Yoo explains why it would be a disaster for consumers and high-tech innovation if policymakers limited pricing flexibility and experimentation with new business models and technological standards. He argues that public policy should generally seek to avoid ex ante forms of preemptive, prophylactic Internet regulation and instead rely on an ex post approach when and if things go wrong. Essentially, he wants policymakers to embrace “techno-agnosticism” toward ongoing debates over standards, protocols, business models, pricing methods, and so on. Lawmakers should not be preemptively tilting the balance in one direction or the other or, worse yet, restricting experimentation that can help us find superior solutions.

And even under that model of retrospective review, Yoo makes it clear throughout the book that there should be a very high bar established before any regulation is pursued. This is particularly true because of the First Amendment values at stake when the government attempts to regulate speech platforms. In Chapter 9 of the book, Yoo walks the reader through all the relevant case law on this front and makes it clear how “the Supreme Court has repeatedly recognized that the editorial discretion exercised by intermediaries serves important free speech values.” Yoo also makes the case that a certain degree of intermediation helps serve consumer needs by helping them more easily find the content and services they desire. Law should not seek to constrain that and, under current Supreme Court First Amendment jurisprudence, it probably cannot.

To me, Yoo’s approach strikes the right balance for Net governance and public policy in the information age. It all comes down to flexibility and freedom. If the Internet and all modern digital technologies are to thrive, we must reject the central planner’s mindset that dominated the analog era and forever bury all the static thinking it entailed.

My complete review of Yoo’s Dynamic Internet is here.

(5) Brett Frischmann – Infrastructure: The Social Value of Shared Resources

Frischmann’s book offers a nice contrast with Yoo’s in that it suggests a far more ambitious role for the state in shaping the future of digital networks and online platforms. Although not strictly a book about information technology infrastructure, Frischmann spends a great deal of time making the case for a greater government action in the realm of communications policy and for open access and Net neutrality regulation in particular. (There’s also a chapter on intellectual property issues that tech policy wonks will find of interest). The book is a veritable paean to open access regulation; Frischmann aims to persuade the reader that “society is better off sharing infrastructure openly” and devotes considerable energy to hammering that point home in one context after another.

In my review of the book, which was part of 2-day symposium on the book over at the Concurring Opinions blog, I took Frischmann’s book to task for its almost complete absence of public choice insights and his general disregard for thorny “supply-side” questions. Frischmann is so single-mindedly focused on making the “demand-side” case for better appreciating how open infrastructures “generate spillovers that benefit society as a whole” and facilitate various “downstream productive activities,” that he short-changes the supply-side considerations regarding how infrastructure gets funded and managed to begin with.

The book also ignored the omnipresent threat of regulatory capture and the fact that any major infrastructure regulatory system big enough and important to be captured by special interests and affected parties often will be. Frischmann acknowledges the problem of capture in just a single footnote in the book and admits that “there are many ways in which government failures can be substantial,” but he asks the reader to quickly dispense with any worries about government failure since he believes “the claims rest on ideological and perhaps cultural beliefs rather than proven theory or empirical fact.” I found that assertion outrageous and argued that, to the contrary, decades of scholarship has empirically documented the reality of government failure and its costs to society, as well as the plain old-fashioned inefficiency often associated with large-scale government programs. For infrastructure projects in particular, the combination of these public choice factors usually adds up to massive inefficiencies and cost overruns.

For those reasons, I argued in my review that society would be better off adopting a “3-P” approach to infrastructure management: privatize, property-tize, and price. But Frischmann is dead set against such thinking and makes it clear that everything must be subservient to the goal of “openness” and commons-based management. Unsurprisingly, therefore, this leads him to suggest that we need “a dramatic shift — perhaps a paradigm shift — away from the conventional position favoring market provisioning and markets ‘free’ from government intervention.” But the problem with that reasoning, as I pointed out in my review, is that most of the infrastructure that Frischmann cites as failing us today is already managed in the fashion he favors! Nonetheless, he wants to pile on still more commons-based government control / ownership solutions even though they are the primary cause of our infrastructure problems today. In this sense, Frischmann’s approach parallels Susan Crawford’s in her book Captive Audience, discussed above. They both seek to gloss over the ugly realities of traditional public infrastructure (mis-)management and they imply that we just need to build a better breed of bureaucrats who will somehow be immune to all the problems of the past. Needless to say, I don’t place much faith in such efforts.

Despite these serious deficiencies, students and scholars studying infrastructure theory will benefit from Frischmann’s excellent treatment of public goods and social goods; spillovers and externalities; proprietary versus commons systems management; common carriage policies and open access regulation; congestion pricing strategies; and the debate over price discrimination for infrastructural resources. He at least does a nice job outlining these concepts and controversies, even if he ultimately fails to make the case for radically expanding government control of infrastructural resources.

Again, you can read my entire review of Frischmann’s book here.

— Other Major Releases in 2012 —

Julie E. Cohen – Configuring the Networked Self: Law, Code, and the Play of Everyday Practice

Cohen’s book represents an effort to move “beyond the bounds of traditional liberal political theory” by transcending what she labels the traditional “information-as-freedom” versus “information-as-control” paradigms. Her aim is to promote “cultural environmentalism” and “the structural conditions of human flourishing.” She argues that “a commitment to human flourishing demands a more critical stance toward the market-driven evolution of network architectures.” In other words, don’t trust markets.

I didn’t find her case very convincing and it didn’t help that the book is filled with impenetrable prose that sometimes leaves the reader’s head a bit numb. (Two representative samples: “With respect to space, surveillance employs a twofold dynamic of containerization and affective modulation in order to pursue large-scale behavioral modification.” … and… “Here the performative impulse introduces static into the circuits of the surveillant assemblage; it seeks to reclaim bodies and reappropriate spaces.” Say what? Write in plain English, professor!)

The closing chapter also includes a strange reinterpretation of Ludditism. Cohen argues: “the tale of the Luddites poses an important challenge for scholars and policy makers in the emerging networked information society. If technologies do not have natural trajectories, it is our obligation to seek pathways of development that promote the well-being of situated, embodied users and communities. When our preferred policy prescriptions persistently produce information architectures and institutions that undermine human flourishing in critical ways, it is time to question them and to experiment with ways of doing better.” Hmmm… I’m not sure I want to know what that would mean in practice!

Regardless, Cohen’s book has a lot to say about modern privacy and copyright battles and will be of great interest to scholars in those specific fields of study. You can find all the chapters online here.

Cole Stryker – Hacking the Future: Privacy, Identity, and Anonymity on the Web

Stryker’s Hacking the Future provides a concise overview of the battles over online anonymity that have raged since the Net’s early days and he outlines the many new threats to it. “What we are seeing is an all-out war on anonymity, and thus free speech, waged by a variety of armies with widely diverse motivations, often for compelling reasons,” he says. The book will be a great use to those covering ongoing policy debates over cybersecurity, the “nymwars” and online authentication / identification debates, post-Arab Spring political activism & “hactivism,” encryption issues, social networking privacy, troll culture and cyberbullying, and much more. Stryker makes a strong case for the continuing importance of online anonymity but isn’t scared to ask hard questions about the trade-offs society faces when some can mask their online identities. But he also explores the question of whether anonymity can survive given recent technological and policy-related developments, both of which aim to make individuals more identifiable online. I particularly enjoyed Chapter 10’s breakdown of the “Faces of Anonymity,” in which Stryker crafts a detailed taxonomy of anonymous character types online.

He also offers a run-down of the tools and steps that people can take advantage of if they want to ensure their anonymity / privacy online, including: cookie blocking, private browsing tools, disabling HTML in email and limiting or disabling broswer extensions, clearing browser histories, and using encryption tools, proxy servers, and VPN tunneling. “The question we have to ask ourselves,” Stryker notes, is “Does the accessibility of these anonymizing technologies make the world a safer, more equitable place, better place?” He answers: “It’s difficult to measure, but their abolition certainly wouldn’t.” He also draws this interesting parallel with efforts to regulate firearms: “The logic here is not unlike that used by those who oppose gun control: if guns are made illegal, then only criminals will have guns, leaving well-meaning folks defenseless. The reasoning is compelling within the identity space,” he argues, “regardless of what you might think about the merits of gun control.”

Two other notes: First, Wide Open Privacy: Strategies For The Digital Life by J.R. Smith & Siobhan MacDermott makes a nice compliment to Hacking the Future. It also offers a breakdown of privacy-enhancing technologies and outlines other strategies to safeguard your online anonymity. Second, if you are interested in digging even deeper in the Luzsec side of this story, you should check out Parmy Olson’s W e are Anonymous: Inside the Hacker Wor ld of Lulzsec, Anonymous and the Global Cyber Insurgency. It’s a splendid history but doesn’t have as much to say about the various policy issues that Stryker tackles in Hacking the Future. Or just listen to Olson’s podcast discussion with Jerry Brito. Speaking of that Brito character…

Jerry Brito (ed.) – Copyright Unbalanced: From Incentive to Excess

My Mercatus Center colleague Jerry Brito put together this important collection of essays by various conservatives and libertarian authors to highlight growing concerns about copyright policy. Contributors include Tom W. Bell, David G. Post, Reihan Salam, Patrick Ruffini, Tim Lee, Christina Mulligan, and Eli Dourado (also of Mercatus). Their essays suggest that the tide may be turning against copyright among free market analysts. Their chapters explore the increasingly complexity of copyright law and the rising costs associated with its enforcement and make a powerful case for reform of, or at least restraints on, the current copyright system. The consensus seemed to revolve around a few key reforms: significantly shortened copyright terms, the reintroduction of formalities (i.e., registration), and limits on criminal prosecution and civil asset forfeiture. The authors also make a strong case that public choice problems pervade today’s copyright system and that we should be concerned that cronyism is increasing creeping into the politics of copyright law and its seemingly endless expansion.

If you interested in a different take on IP issues to balance out Brito’s collection, I’d recommend picking up the forthcoming Laws of Creation: Property Rights in the World of Ideas by Ronald A. Cass and Keith N. Hylton. It’s a 2013 release but it is already in stock. I’m reading an advance copy from the publisher right now and will likely have more to say about it in a forthcoming post.

Randolph J. May (ed.) – Communications Law and Policy in the Digital Age: The Next Five Years

My former colleague Randy May put together this nice collection of essays by some of America’s leading communications and media policy scholars, including Bruce Owen, Christopher Yoo, James Speta, Daniel Lyons and others. The authors offer a generally skeptical take on the expansion of communications and broadband regulation and the growing power of the Federal Communications Commission over these markets. In particular, many of the contributors take the FCC to task for sketchy assertions of jurisdiction and the agency’s efforts to expand its imperial regulatory ambitions without always having the clear statutory authority to do so. The chapters by James Speta and Seth Cooper are particularly good in that regard. Admin law geeks will eat them up.

Those analysts following the ongoing Net neutrality wars will also find the book informative, even if they disagree with the generally skeptical take on the issue from contributors. Spectrum and universal service policy wonks will also appreciate the excellent chapters on those two issues from Michele P. Connolly and Daniel A. Lyons, respectively. And the closing chapter by Bruce Owen is, like everything Bruce does, a masterpiece. Owen is probably the most respected media economist on the planet and his decades of experience in this field shines through in his powerful essay on “Communications Policy Reform, Interest Groups, and Legislative Capture.” He crafts a political economy of the regulatory state and points out that the explosion of rent-seeking and legislative/regulatory capture in this sector is unlikely to dissipate. “Therefore,” Owen argues, “communications policy likely will continue to be subject to welfare-suppressing regulation because such regulation is consistent with the interests of legislators,” who are often beholden to special interests and their campaign dollars.

Joshua Gans – Information Wants to Be Shared

I really enjoyed this book. It’s an insightful exploration of modern media economics filled with interesting questions and scenarios about how information markets will evolve in the future. What will sustain movies, music, book, local reporting, and so on in the future? Gans does a terrific job making these issues easy to understand and doesn’t try to evangelize as much as the many others who have written on these issues. If you’ve read and enjoyed Carl Shapiro and Hal Varian’s classic text, Information Rules, then you will find Gans’ book to be the perfect compliment.

Gans doesn’t have a lot to say about public policy, however. This is really more of a business book suited for industry analysts and business school students. Nonetheless, some of its implications for policy are clear since many of these business model debates boil over into the policy arena.

P.S. I should mention that, even if you don’t pick up his new book, you should be following Gans’ “Digitopoly” blog. It is always worth reading.

Andrew Keen – Digital Vertigo: How Today’s Online Social Revolution Is Dividing, Diminishing, and Disorienting Us

If you’re into ‘the-whole-world-is-going-to-Hell-and-the-Internet-is-to-blame’ screeds, Andrew Keen will never disappoint. In Digital Vertigo as well as his earlier book, The Cult of the Amateur, Keen is grumpy about, well, just about everything under the sun. In the earlier book, it was the Web 2.0 world of blogging and “amateur” content creation — most notably Wikipedia and YouTube — that earned Keen’s wrath. In the new book, it is users themselves and the social sharing sites and technologies that they favor that Keen goes off on.

Specifically, Keen is worried that our increased reliance on new online and interactive technologies is spawning a “hypervisible age of great exhibitionism” that sacrifices privacy and individuality at the altar of sharing and social status-seeking. He also makes sweeping claims that we are now living in “a world in which many of us have forgotten what it means to be human,” or that “we are forgetting who we really are.” As I noted in my Forbes review of the book, it’s classic technopanic talk. Not only does Keen fail to substantiate such claims, but he also doesn’t bother to even offer the reader any sort of practical plan for how to achieve a more balanced digital life.

Bruce Schneier – Liars & Outliers: Enabling the Trust that Society Needs to Thrive

Security expert Bruce Schneier’s latest book was a terrific read and easily one of my favorites of the year. It wasn’t a book about technology policy per se, but it certainly has important ramifications for it. Schneier explains four “societal pressures” combine to help create and preserve trust within society. Those pressures include: (1) Moral pressures; (2) Reputational pressures; (3) Institutional pressures; and (4) Security systems. By “dialing in” these societal pressures in varying degrees, trust is generated over time within groups. Of course, these societal pressures also fail on occasion, Schneier notes. He explores a host of scenarios — in organizations, corporations, and governments — when trust breaks down because defectors seek to evade the norms and rules the society lives by. These defectors are the “liars and outliers” in Schneier’s narrative and his book is an attempt to explain the complex array of incentives and trade-offs that are at work and which lead some humans to “game” systems or evade the norms and rules others follow.

Indeed, Schneier’s book serves as an excellent primer on game theory as he walks readers through complex scenarios such as prisoner’s dilemma, the hawk-dove game, the free-rider problem, the bad apple effect, principle-agent problems, the game of chicken, race to the bottom, capture theory, and more. These problems are all quite familiar to economists, psychologists, and political scientists, who have spent their lives attempting to work through these scenarios. Schneier has provided a great service here by making game theory more accessible to the masses and given it practical application to a host of real-world issues.

The most essential lesson Schneier teaches us is that perfect security is an illusion, and this is where the implications for tech policy come in. We can rely on those four societal pressures in varying mixes to mitigate problems like theft, terrorism, fraud, online harassment, and so on, but it would be foolish and dangerous to believe we can eradicate such problems completely. “There can be too much security,” Schneier explains, because, at some point, constantly expanding security systems and policies will result in rapidly diminishing returns. Trying to eradicate every social pathology would bankrupt us and, worse yet, “too much security system pressure lands you in a police state,” he correctly notes.

Despite these challenges, Schneier reminds us that there is cause for optimism. Humans adapt better to social change than they sometimes realize, usually by tweaking the four societal pressures Schneier identifies until a new balance emerges. While liars and outliers will always exist, society will march on.

See my longer review of Schneier’s excellent book over at Forbes. I highly recommend you pick up Liars & Outliers no matter what your field of study. It is outstanding.

… and still more titles from 2012 (* asterisk means I didn’t find time to finish them)…

E. Gabriella Coleman – Coding Freedom: The Ethics and Aesthetics of Hacking *
Sean A. Pager & Adam Candeub (eds.) – Transnational Culture in the Internet Age *
John Naughton – From Gutenberg to Zuckerberg: What You Really Need to Know about the Internet
Erik Brynjolfsson & Andrew McAfee – Race Against the Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy [listen to McAfee’s podcast discussion with Jerry Brito]
Chris Reed – Making Laws for Cyberspace *
J.R. Smith & Siobhan MacDermott – Wide Open Privacy: Strategies For The Digital Life
Virginia Eubanks – Digital Dead End: Fighting for Social Justice in the Information Age *
Lori Andrews – I Know Who You Are and I Saw What You Did: Social Networks and the Death of Privacy
Hassan Masum and Mark Tovey (eds.) – The Reputation Society: How Online Opinions Are Reshaping the Offline World *
Reed Hundt & Blair Levin – The Politics of Abundance: How Technology Can Fix the Budget, Revive the American Dream, and Establish Obama’s Legacy *
Kal Raustiala & Christopher Sprigman – The Knockoff Economy: How Imitation sparks Innovation* [listen to Sprigman’s podcast discussion with Jerry Brito]
Jason Mazzone, Copyfraud and Other Abuses of Intellectual Property Law * [listen to Mazzone’s podcast discussion with Jerry Brito]
Clay A. Johnson – The Information Diet: A Case for Conscious Consumption
Julian Assange – Cypherpunks: Freedom and the Future of the Internet
Andy Greenberg – This Machine Kills Secrets: How WikiLeakers, Cypherpunks, and Hacktivists Aim to Free the World’s Information

… and, again, here are the lists of important books from 2008, 2009, 2010, and 2011.

New Paper on Wu’s “Separations Principle” & the War on Vertical Integration in the Tech Economy

Adam Thierer — Tue, 16 Oct 2012 20:29:53 +0000

[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.

Book Review: Christopher Yoo’s “The Dynamic Internet”

Adam Thierer — Tue, 02 Oct 2012 18:13:29 +0000

Looking for a concise overview of how Internet architecture has evolved and a principled discussion of the public policies that should govern the Net going forward? Then look no further than Christopher Yoo‘s new book, The Dynamic Internet: How Technology, Users, and Businesses are Transforming the Network. It’s a quick read (just 140 pages) and is worth picking up. Yoo is a Professor of Law, Communication, and Computer & Information Science at the University of Pennsylvania and also serves as the Director of the Center for Technology, Innovation & Competition there. For those who monitor ongoing developments in cyberlaw and digital economics, Yoo is a well-known and prolific intellectual who has established himself as one of the giants of this rapidly growing policy arena.

Yoo makes two straight-forward arguments in his new book. First, the Internet is changing. In Part 1 of the book, Yoo offers a layman-friendly overview of the changing dynamics of Internet architecture and engineering. He documents the evolving nature of Internet standards, traffic management and congestion policies, spam and security control efforts, and peering and pricing policies. He also discusses the rise of peer-to-peer applications, the growth of mobile broadband, the emergence of the app store economy, and what the explosion of online video consumption means for ongoing bandwidth management efforts. Those are the supply-side issues. Yoo also outlines the implications of changes in the demand-side of the equation, such as changing user demographics and rapidly evolving demands from consumers. He notes that these new demand-side realities of Internet usage are resulting in changes to network management and engineering, further reinforcing changes already underway on the supply-side.

Yoo’s second point in the book flows logically from the first: as the Internet continues to evolve in such a highly dynamic fashion, public policy must as well. Yoo is particularly worried about calls to lock in standards, protocols, and policies from what he regards as a bygone era of Internet engineering, architecture, and policy. “The dramatic shift in Internet usage suggests that its founding architectural principles form the mid-1990s may no longer be appropriate today,” he argues. (p. 4) “[T]he optimal network architecture is unlikely to be static. Instead, it is likely to be dynamic over time, changing with the shifts in end-user demands,” he says. (p. 7) Thus, “the static, one-size-fits-all approach that dominates the current debate misses the mark.” (p. 7)

Most industry and political observers believe that the federal government will not be in a position to allocate that amount of money to upgrade our nation’s broadband infrastructure for the foreseeable future. The next-generation network will thus be built by private enterprise. But private corporations cannot be expected to undertake such investments unless they have a reasonable prospect of recovering their upfront costs from consumers who are using the increased bandwidth and other enhancements to the existing network. (p. 102)

Again, that’s why flexible pricing policies and ongoing experimentation with various business models is vital. This insight is particularly timely in light of the recent renewed interest in data caps. A lot of people who don’t know a lick about economics and have never run a real business in their lives are seemingly obsessed with telling private operators how to run theirs. If the Net neutrality wars devolve into a battle over price controls — exactly as I predicted they would 7 years ago this month — then we could be headed for a day when federal policymakers derail the advances in broadband we’ve seen in recent years by substituting mandates for markets.

Throughout the second half of his book, Yoo explains why that would be a disaster for consumers and high-tech innovation. To most of us, the arguments Yoo advances here are perfectly logical, but to many Ivory Tower intellectuals who dominate Net policy debates today, it will all be considered apostasy of the very highest order. Those that elevate Net neutrality and so-called “public interest” regulation to quasi-religious concepts will likely be constructing Christopher Yoo voodoo dolls and attempting to sew his mouth shut. Yet, the policy standard Yoo is advancing here is perfectly logical. In essence, he’s trying to counter the gradual growth of a Precautionary Principle mindset for Internet policy. Here’s how he puts it:

Just as engineers must design structures that preserve room for experimentation, so must regulators. In particular, regulators should avoid promulgating policies that foreclose certain technical approaches or require industry actors to obtain advance approval before they can experiment with new technological solutions. The benefits of most practices will remain ambiguous before they are deployed, and placing the burden on industry actors to prove consumer benefit before implementation would chill experimentation and effectively prevent ambiguous practices from ever being deployed. This in turn would prevent engineers from obtaining the real-world experience they need to evaluate different technological solutions and eliminate the breathing room on which technological progress depends. In the face of uncertainty, policymakers should not attempt to predict which particular network solution will ultimately prevail; rather, they ought to focus on creating regulatory structures that give industry participants the freedom to pursue a wide range of business strategies and allow consumers to decide which one (or ones, if consumer demand is sufficiently diverse to support multiple business models targeted at different market niches) ultimately proves to be the best.” (p. 8)

In other words, public policy must not restrict experimentation based on conjectural fears and boogeyman scenarios. Public policy should generally seek to avoid ex ante forms of preemptive, prophylactic Internet regulation and instead rely on an ex post approach when and if things go wrong. As I have argued here many times before, as a general rule, our policymakers should embrace “techno-agnosticism” toward ongoing debates over standards, protocols, business models, pricing methods, and so on. Lawmakers should not be preemptively tilting the balance in one direction or the other or, worse yet, restricting experimentation that can help us find superior solutions. Here’s how Yoo articulates this same principle of techno-agnosticism:

network engineering is inherently an exercise in tradeoffs that does not lend itself to broad generalizations. There is no such thing as a perfect, inherently superior architecture. Instead, the optimal infrastructure for any particular network depends on the nature of the flows passing through the network as well as the costs of the technologies comprising the network. This perspective stands in stark contrast to the categorical tone that has dominated debates over Internet policy for the past five years. (p. 138)

Indeed it does. If you read through books by Zittrain, Lessig, Wu, van Schewick, Frischmann, and others, you will notice the consistent assertion that we already have the magic formula for the Internet and all networks, for that matter. It almost always comes down to what I have referred to as an ideology of “openness at any cost” or “neutrality uber alles.” In this religion, everything is subservient to openness and neutrality, no matter what the cost (and no matter how defined, even if that is much trickier than those academics let on). But for all the reasons Yoo lays out in his book, we should reject neutrality uber alles as the basis of public policy. “The shifts in the technological and economic environment surrounding the network should remind everyone involved in Internet policy of the importance of embracing change.” (p. 139). Again, that counsels techno-agnosticism and light-touch, responsive regulation — not a preemptive Precautionary Principle for Internet decision-making. As Yoo states in his conclusion:

Perhaps the best means for creating such an environment is to create a regulatory-enforcement regime that evaluates any charges of improper behavior on a case-by-case basis after the fact… So long as the burden of proof is placed on the party challenging the practice, such a regime should provide sufficient breathing room for industry participants to experiment with new solutions for emerging problems while simultaneously safeguarding consumers against any anticompetitive practices. (p. 139).

And even under that regime, Yoo makes it clear throughout the book that there should be a very high bar established before regulation is pursued. This is particularly true because of the First Amendment values at stake when the government attempts to regulate speech platforms. In Chapter 9 of the book, Yoo walks the reader through all the relevant case law on this front and makes it clear how “the Supreme Court has repeatedly recognized that the editorial discretion exercised by intermediaries serves important free speech values.” (p. 120). Yoo also makes the case that a certain degree of intermediation helps serve consumer needs by helping them more easily find the content and services they desire. Law should not seek to constrain that and, under current Supreme Court First Amendment jurisprudence, it probably cannot.

So, in conclusion, I strongly encourage everyone to pick up a copy of Christopher Yoo’s Dynamic Internet. It strikes just the right balance for Net governance and public policy in the information age. It all comes down to flexibility and freedom. If the Internet and all modern digital technologies are to thrive, we must reject the central planner’s mindset that dominated the analog era and forever bury all the static thinking it entailed.

Additional Reading:

The Real Net Neutrality Debate: Pricing Flexibility Versus Pricing Regulation (Oct 2005)
More on Net Neutrality, the Importance of Business Model Experimentation & Pricing Flexibility (May 2012)
Smartphones & Usage-Based Pricing: Are Price Controls Coming? (July 2011)
Netflix Falls Prey to Marginal Cost Fallacy & Pleads for a Broadband Free Ride (July 8, 2011)
Why Congestion Pricing for the iPhone & Broadband Makes Sense (October 7, 2009)
The (Un)Free Press Calls for Internet Price Controls: “The Broadband Internet Fairness Act” (June 17, 2009)
Free Press Hypocrisy over Metering & Internet Price Controls (June 18, 2009)
Mueller’s “Networks and States” = Classical Liberalism for the Information Age (Nov. 2010)
Doctorow’s Definition of “Techno-Optimism” Is Full of Fear & False Choices (May 2011)
review of Zittrain’s “Future of the Internet” (March 2008)
Code, Pessimism, and the Illusion of “Perfect Control” [review of Lessig’s “Code” at 10th anniversary] (May 2009)

The 12 Best Papers on Antitrust & the Digital Economy

Adam Thierer — Thu, 06 Sep 2012 14:50:16 +0000

In my last post, I discussed an outstanding new paper from Ronald Cass on “Antitrust for High-Tech and Low: Regulation, Innovation, and Risk .” As I noted, it’s one of the best things I’ve ever read about the relationship between antitrust regulation and the modern information economy. That got me thinking about what other papers on this topic that I might recommend to others. So, for what it’s worth, here are the 12 papers that have most influenced my own thinking on the issue. (If you have other suggestions for what belongs on the list, let me know. No reason to keep it limited to just 12.)

J. Gregory Sidak & David J. Teece, “Dynamic Competition in Antitrust Law,” 5 Journal of Competition Law & Economics (2009).
Geoffrey A. Manne & Joshua D. Wright, “Innovation and the Limits of Antitrust,” 6 Journal of Competition Law & Economics, (2010): 153
Joshua D. Wright, “Antitrust, Multi-Dimensional Competition, and Innovation: Do We Have an Antitrust-Relevant Theory of Competition Now?” (August 2009).
Daniel F. Spulber, “Unlocking Technology: Antitrust and Innovation,” 4(4) Journal of Competition Law & Economics, (2008): 915.
Ronald Cass, “Antitrust for High-Tech and Low: Regulation, Innovation, and Risk ,” 9(2) Journal of Law, Economics and Policy, Forthcoming (Spring 2012)
Richard Posner, “Antitrust in the New Economy,” 68 Antitrust Law Journal, (2001).
Stan J. Liebowitz & Stephen E. Margolis,”Path Dependence, Lock-in, and History,” 11(1) Journal of Law, Economics and Organization, (April 1995): 205-26.
Robert Crandall and Charles Jackson, “Antitrust in High-Tech Industries,” Technology Policy Institute (December 2010).
Bruce Owen, “Antitrust and Vertical Integration in ‘New Economy’ Industries,” Technology Policy Institute (November 2010).
Douglas H. Ginsburg & Joshua D. Wright, “Dynamic Analysis and the Limits of Antitrust Institutions,” 78 (1) Antitrust Law Journal (2012): 1-21.
Thomas Hazlett, David Teece, Leonard Waverman, “Walled Garden Rivalry: The Creation of Mobile Network Ecosystems,” George Mason University Law and Economics Research Paper Series, (November 21, 2011), No. 11-50.
David S. Evans, “The Antitrust Economics of Two Sided Markets.”

The Best Paper on Antitrust that You Will Read This Year

Adam Thierer — Thu, 06 Sep 2012 14:41:14 +0000

Ronald Cass, Dean Emeritus of Boston University School of Law, has penned the best paper on antitrust regulation that you will read this year, especially if you’re interested in the relationship between antitrust and information technology sectors. His paper is entitled, “Antitrust for High-Tech and Low: Regulation, Innovation, and Risk,” and it makes two straightforward points:

Antitrust enforcement has characteristics and risks similar to other forms of regulation.
Antitrust authorities need to exercise special care in making enforcement decisions respecting conduct of individual dominant firms in high-technology industries.

Here are some highlights from the paper that build on those two points.

Antitrust Is Economic Regulation & Carries Many of the Same Risks

As I noted in my 2009 review of Gary Reback’s antitrust screed “Free the Market,” there are few things that frustrate me more than the myth that antitrust is somehow not a form of economic regulation. I hear this tired old argument trotted out time and time again, even by many conservatives. It’s utter bunk. Cass makes that abundantly clear in his paper. “Application of antitrust laws by government officials… has the same risks and problems associated with other forms of regulation, including other “fair play” regulations,” notes Cass. “It requires considerable information on how particular firms and particular markets work, on the effect of particular business practices, and on the costs and benefits of intervening to stop a particular practice as opposed to allowing market forces to limit its effects,” he says (p. 6-7).

Cass isn’t the only one who has made this point. As James Miller notes in this Federalist Society video (starting around the 18-minute mark), antitrust is not just a form of regulation but it often takes the form of a industrial policy scheme, complete with all its failings. Rick Rule agrees, noting how antitrust is a specialized form of regulation. Cass also appeared at that event and, starting around the 36-minute mark, makes his case for antitrust as just another form of regulation. If you want to watch the entire panel discussion, I’ve embedded the video down below.

Information Technology Markets are Highly Dynamic; Antitrust Can Hurt High-Tech Innovation

The more important takeaway from Cass’s excellent paper is that, precisely because antitrust regulation is haunted by many of the same problems as traditional economic regulatory controls, it is particularly ill-suited for fast-paced, rapidly-evolving information technology markets. “The problem arises in part because, while the concerns over network effects are dynamic, the principal tools for antitrust analysis – especially respecting definition of the relevant market – are static,” Cass observes. “These tools almost inevitably orient enforcers’ decisions toward excessive concern with one part of what, rightly understood, is a much larger competitive picture, even though the composition of the larger picture is difficult to predict. (p. 3) “Rather than demonstrating special caution in venturing into this set of cases, however, antitrust enforcers seem anxious to engage the leading high-technology firms while markets are evolving at a rapid pace,” he notes. (p. 2) Such intervention is particularly unwise, Cass argues, because:

These are markets where it is particularly difficult to maintain dominance, where sustained leadership over some time frame most likely indicates strong efficiencies (strong consumer value), and where innovations that are not yet recognized as significant can offer the strongest constraints on dominant firm behavior and the most important challenges to crafting a meaningful remedy that does more than disadvantage an individual contestant in a changing world. (p. 35)

The real danger of excessive antitrust is how it can force innovators to take their eye off the ball and spend more time trying to please policymakers than the general public. Cass notes:

If successful firms trying to stay on top in industries that can change rapidly and unpredictably often become targets for antitrust scrutiny, rational calculations of innovation costs (investments that help firms succeed) will necessarily include the (discounted) cost of contesting antitrust challenges as well as the costs of directly pursuing innovation. Antitrust inquiries can exact extraordinarily high costs from target firms, both in direct expenditures and in distraction from core business operations. That is true even for inquiries that do not result in suits, as enterprises facing the possibility of a long, expensive lawsuit (and, if the suit is lost, a potentially expensive and disruptive remedy) obviously will respond by trying both to persuade enforcement authorities that their conduct has been lawful and to avoid conduct that will increase the prospect of an action being filed. (p. 10)

Cass identifies IBM’s 13-year long antitrust ordeal as “the paradigmatic case for ill-conceived antitrust enforcement” where all these problems where on display. During the 13-year case, the government collected more than 750 million documents and required IBM to retain 200 attorneys at one point. (Read CNet staff writer Rachel Konrad’s summary of the fiasco from back in 2000). The DOJ finally abandoned the case in 1982 after it became clear how markets had evolved around whatever earlier “dominance” IBM had in mainframe markets. Namely, the desktop PC and software revolution had passed IBM (and clueless antitrust regulators) right by. “In the end,” notes Cass, “the case stands for the proposition that government officials, even with the benefit of extensive investigation and expertise, are unlikely to appreciate the most important sources of competition to enterprises that dominate a particular market and are especially prone to ill-advised interventions based on theoretical objections to market structure.” (p. 16) Worse yet, he notes, was the impact on IBM’s ability to innovate:

More significant than the draw on IBM’s funds were two other byproducts of the antitrust litigation: the distraction of its executives from planning and executing functions necessary to IBM’s long-term business interests, and the active discouragement of decisions that would have benefited the business but might have triggered further antitrust action. (p. 15)

As Peter Pitsch noted in his 1996 PFF book The Innovation Age, “In 1981 the Department of Justice was still pressing their case against IBM while market forces were about to lay waste to the company.” Pitsch noted that IBM’s manufacturing capacity was slashed in the years that followed and also notes that, astonishingly, “in the space of five years after 1987, IBM lost two thirds of its market value — more than $70 billion.” IBM has recovered and is a very different company today, of course. Yet, it seems clear that the DOJ’s antitrust industrial policy scheming decimated the firm’s chances of keeping pace with others digital technology leaders during the 80s and even 90s.

Cass notes that this same thing played out for Microsoft following its antitrust ordeal as the firm was forced to become extra cautious about how it innovated with regulators always staring over their shoulder. Yet, “it is plain that the real competitive threat to the company came from innovations that lay outside the market as government officials saw it,” Cass notes, since few were talking about search and social networking in the late 90s as a serious threat to Microsoft’s hegemony.

Lessons: Appreciate Dynamism and Be Careful about Market Definition

Cass leaves us with several lessons from the history he recounts. I’ll just cite a few passages here, but generally his lessons can be boiled down to: (1) before intervening, appreciate just how dynamic these information technology markets can be; and, relatedly, (2) be very careful about how you define markets for purposes of antitrust analysis. He notes, for example:

With this in mind, the overarching caution to antitrust enforcers that emerges from the cases reviewed above is against presuming that the obvious, common-sense boundaries around a market… appropriately set the field of vision for antitrust enforcement (much less the artificially circumscribed market definitions that enforcers will urge when a case has been initiated). The market boundaries that so often are taken for granted frequently fail to capture the most important sources of competition. That is true even in markets as “old-line” and seemingly simple as the auto market, but it is even more likely to be true in high-technology industries where, almost by definition, new innovations will revise established assumptions about how things are done. The market definition problem reflects more than the fact that officials so frequently cannot see changes coming that will dramatically alter competitive conditions in an industry. Almost no one, even those most intimately engaged in the industry itself, is apt to make good predictions about which technologies will succeed or what the ultimate scope of a new technology will be. (p. 28-9)
The more trenchant flaw in antitrust enforcement is not officials’ failure to identify specific market changes or specific companies that will dramatically rise or fall in value. Rather, the larger problem is that it is exceedingly difficult for government officials to discern the critical factors that explain what actually makes a particular firm dominant, the factors that affect the durability of dominance, or the kinds of change in the market (either on the demand side or the supply side) that could dramatically erode that dominance. (p. 28)
Despite the networks they have established, each of these businesses also is notable for the relative ease with which consumers can switch from one provider (or one technology) to another – allowing consumers to substitute one product or service for another or, in many cases, to add additional products or services from multiple providers at minimal or zero cost. (p. 31)

These lessons and themes have motivated all my thinking about how information technology policy should be formulated and the (very limited) role that antitrust regulation should play. Just about every other installment of my weekly Forbes column has dealt with such issues, including most notably these essays:

“Tech Titans & Schumpeter’s Vision,” (8/22/11)
“No One Owns A Techno Crystal Ball” (10/2/11)
“The Rule Of Three: The Nature of Competition In The Digital Economy” (6/29/12)
“Bye Bye BlackBerry. How Long Will Apple Last?” (4/1/12)
“Regulatory, Antitrust and Disruptive Risks Threaten Apple’s Empire” (4/8/12)
“Searching In Vain For An Antitrust Case Against Google” (6/30/12)
“Sunsetting Technology Regulation: Applying Moore’s Law to Washington” (3/25/12)

Anyway, please make sure to read the entire Cass paper. It’s a keeper. I know I will be citing it in virtually everything I write on the topic in coming months and years. In a follow-up post, I will offer a list of other important papers on antitrust and high-tech markets that you want to have on your reading list.

On Fast Firms, Slow Regulators, Antitrust & the Digital Economy

Adam Thierer — Fri, 06 Jul 2012 19:15:30 +0000

I liked the title of this new Cecilia Kang article in the Washington Post: “In Silicon Valley, Fast Firms and Slow Regulators.” Kang notes:

As federal regulators launch fresh investigations into Silicon Valley, their history of drawn-out cases has companies on edge. In taking on an industry that moves at lightening speed, federal officials risk actions that could appear to be too heavy-handed or embarrassingly outdated, some analysts and antitrust experts say.

For example, she cites ongoing regulatory oversight of Microsoft and MySpace, even though both companies have fallen from the earlier King of the Hill status in their respective fields. Kang notes that some “want the government to aggressively pursue abusive practices but question whether antitrust laws are too dated to rein in firms that are continually redefining themselves and using their dominance in one arena to press into others.”

Simply put, antitrust can’t keep up with an economy built on Moore’s Law, which refers to the rule of thumb that the processing power of computers doubles roughly every 18 months while prices remain fairly constant. This issue has been the topic of several of my Forbes columns over the past year, as well as several other essays I’ve written here and elsewhere. [See the list at bottom of this essay.] Moore’s Law has been a relentless regulator of markets and has helped keep the power of “tech titans” in check better than any Beltway regulator ever could. As I noted here before in my essay, “Antitrust & Innovation in the New Economy: The Problem with the Static Equilibrium Mindset“:

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.”

Once we recognize the power of Moore’s Law to naturally regulate markets—and the corresponding danger of leaving Washington’s laws on the books too long—it should be clear why it is essential to align America’s legal and regulatory policies with the realities of modern tech markets. One way policymakers could do so, I argued in this old Forbes essay, is by literally applying the logic of Moore’s Law to all current and future laws and regulations through two simple principles:

Principle #1 – Every new technology proposal should include a provision sunsetting the law or regulation 18 months after enactment. Policymakers can always reenact the rule if they believe it is still sensible.
Principle #2 – Reopen all existing technology laws and regulations and reassess their worth. If no compelling reason for their continued existence can be identified and substantiated, those laws or rules should be repealed within 18 months. If a rationale for continuing existing laws and regs can be identified, the rule can be re-implemented and Principle #1 applied to it.

What should be the test for determining when technology laws and regulations are retained? That bar should be fairly high. Conjectural harms and boogeyman scenarios can’t be used in defense of new rules or the reenactment of old ones. Policymakers must conduct a robust cost-benefit analysis of all tech rules and then offer a clear showing of tangible harm or actual market failure before enactment or reenactment of any policy.

Of course, this doesn’t leave much room for antitrust law since it almost never moves that fast. But if you think that there is truth in Kang’s “Fast Firms, Slow Regulators” headline, what option do we have but to largely abandon the effort– especially when Moore’s Law and Schumpeterian “creative destruction” do such a better job of keep markets competitive and innovative?

Of course, some academic and regulatory activists like Columbia’s Tim Wu favor a very different sort of regime based on “agency threats” and a preemptive dismantling of the digital economy through the imposition of a “Separations Principle.” The Separations Principle would divide and strictly quarantine the various elements of the tech world — networks, devices, and content — such that vertical integration would become per se illegal. That’s certainly one way of dealing with the “Fast Firms, Slow Regulators” problem! Of course, it would handle that problem by essential decimating much of what makes the digital economy so dynamic and innovative. (I have a new paper coming out shortly that will documented why Wu’s remedy would be such a disaster in practice.)

In any event, it’s good that people are acknowledging that there is a problem here–that antitrust cannot keep pace with the pace of innovation we see in the tech economy–but we must be cautious that this insight does not lead to new or more destructive forms of regulatory adventurism. As I noted in last week’s Forbes column, “The Rule Of Three: The Nature of Competition In The Digital Economy,” there exists a tendency among many to take static snapshots of a sector at any given time and then leap to conclusions about “market power” or “oligopoly.” But competition is a process, not an end-point, and a more sophisticated understanding of the digital economy recognizes how often the borders between sectors are blurred or obliterated by dynamic, disruptive change. Churn is rampant and relentless. Thus, short-term measures of market power are often meaningless since firms can get very big very fast, but they can stumble and fall just as rapidly.

Anyway, if you care to read the very best papers written recently on this topic, you’ll want to check out:

Geoffrey A. Manne & Joshua D. Wright, “Innovation and the Limits of Antitrust,” George Mason Law & Economics Research Paper No. 09-54, February 16, 2010.
J. Gregory Sidak & David J. Teece, “Dynamic Competition in Antitrust Law,” 5 Journal of Competition Law & Economics (2009).
Thomas Hazlett, David Teece, Leonard Waverman, “Walled Garden Rivalry: The Creation of Mobile Network Ecosystems,” George Mason University Law and Economics Research Paper Series, (November 21, 2011), No. 11-50.
Bruce Owen, “Antitrust and Vertical Integration in ‘New Economy’ Industries,” Technology Policy Institute (November 2010).
Daniel F. Spulber, “Unlocking Technology: Antitrust and Innovation,” Journal of Competition Law & Economics, 4(4), 915 (2008).
Richard Posner, “Antitrust in the New Economy,” 68 ANTITRUST L.J. 925, 927 (2001).
Jerry Ellig and Daniel Lin, “A Taxonomy of Dynamic Competition Theories,” in Jerry Ellig (ed.), Dynamic Competition and Public Policy: Technology, Innovation, and Antitrust Issues (Cambridge, Cambridge University Press, 2001), 16-44.

Als0 make sure to check out these classic works from ‘Austrian School’ economists:

Israel Kirzner, Discovery and the Capitalist Process (University of Chicago Press, 1985).
F.A. Hayek, “Competition as a Discovery Procedure,” in New Studies in Philosophy, Politics, Economics and the History of Ideas (Chicago, IL: University of Chicago Press, 1978).
Gerald P. O’Driscoll, Jr. & Mario J. Rizzo, “Competition and Discovery,” in The Economics of Time and Ignorance (London: Routledge, 1985, 1996).

Finally, here are a few other essays I have penned on this issue:

“The Rule Of Three: The Nature of Competition In The Digital Economy,” Forbes, June 29, 2012.
“Sunsetting Technology Regulation: Applying Moore’s Law to Washington,” Forbes, May 25, 2012.
“Of “Tech Titans” and Schumpeter’s Vision,” Forbes, August 22, 2011.
“Bye Bye BlackBerry. How Long Will Apple Last?” Forbes, April 1, 2012.
“Gary Reback’s Antitrust Love Letter,” Technology Liberation Front, September 20, 2009.
“What is “Optimal Interoperability”? A Review of Palfrey & Gasser’s’“Interop,’” Technology Liberation Front, June 11, 2012.

What is “Optimal Interoperability”? A Review of Palfrey & Gasser’s “Interop”

Adam Thierer — Mon, 11 Jun 2012 17:36:47 +0000

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.”

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:

Antitrust & Innovation in the New Economy: The Problem with the Static Equilibrium Mindset

Adam Thierer — Mon, 16 Apr 2012 16:03:16 +0000

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:

Jerry Ellig and Daniel Lin, “A Taxonomy of Dynamic Competition Theories,” in Jerry Ellig (ed.), Dynamic Competition and Public Policy: Technology, Innovation, and Antitrust Issues (Cambridge, Cambridge University Press, 2001).
J. Gregory Sidak & David J. Teece, “Dynamic Competition in Antitrust Law,” 5 Journal of Competition Law & Economics (2009).
Geoffrey A. Manne & Joshua D. Wright, “Innovation and the Limits of Antitrust,” George Mason Law & Economics Research Paper No. 09-54, February 16, 2010.
Joshua D. Wright, “Antitrust, Multi-Dimensional Competition, and Innovation: Do We Have an Antitrust-Relevant Theory of Competition Now?” (August 2009).
Thomas Hazlett, David Teece, Leonard Waverman, “Walled Garden Rivalry: The Creation of Mobile Network Ecosystems,” George Mason University Law and Economics Research Paper Series, (November 21, 2011), No. 11-50.
Bruce Owen, “Antitrust and Vertical Integration in ‘New Economy’ Industries,” Technology Policy Institute (November 2010).
Daniel F. Spulber, “Unlocking Technology: Antitrust and Innovation,” Journal of Competition Law & Economics, 4(4), 915 (2008).
Richard Posner, “Antitrust in the New Economy,” 68 ANTITRUST L.J. 925, 927 (2001).

Also make sure to check out these classic works from Austrian School economists:

Israel Kirzner, Discovery and the Capitalist Process (University of Chicago Press, 1985).
F.A. Hayek, “Competition as a Discovery Procedure,” in New Studies in Philosophy, Politics, Economics and the History of Ideas (Chicago, IL: University of Chicago Press, 1978).
Gerald P. O’Driscoll, Jr. & Mario J. Rizzo, “Competition and Discovery, in The Economics of Time and Ignorance (London: Routledge, 1985, 1996).

new paper: The Perils of Classifying Social Media Platforms as Public Utilities

Adam Thierer — Mon, 19 Mar 2012 18:25:33 +0000

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

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

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

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

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

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

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

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

Social Networks as Public Utilities [Adam Thierer]

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

Adam Thierer — Wed, 23 Mar 2011 16:01:02 +0000

Venture capitalist Bill Gurley asked a good question in a Tweet late last night when he was “wondering if Apple’s 30% rake isn’t a foolish act of hubris. Why drive Amazon, Facebook, and others to different platforms?” As most of you know, Gurley is referring to Apple’s announcement in February that it would require a 30% cut of app developers’ revenues if they wanted a place in the Apple App Store.

Indeed, why would Apple be so foolish? Of course, some critics will cry “monopoly!” and claim that Apple’s “act of hubris” was simply a logical move by a platform monopolist to exploit its supposedly dominant position in the mobile OS / app store marketplace. But what then are we to make of Amazon’s big announcement yesterday that it was jumping in the ring with its new app store for Android? And what are we to make of the fact that Google immediately responded to Apple’s 30% announcement by offering publishers a more reasonable 10%-of-the-cut deal? And, as Gurley notes, you can’t forget about Facebook. Who knows what they have up their sleeve next. They’ve denied any interest in marketing their own phone and, at least so far, have not announced any intention to offer a competing app store, but why would they need to? Their platform can integrate apps directly into it! Oh, and don’t forget that there’s a little company called Microsoft out there still trying to stake its claim to a patch of land in the mobile OS landscape. Oh, and have you visited the HP-Palm development center lately? Some very interesting things going on there that we shouldn’t ignore.

What these developments illustrate is a point that I have constantly reiterated here: Markets are extremely dynamic, and when markets are built upon code, the pace and nature of change becomes unrelenting and utterly unpredictable. It is often during what some claim is a given sector’s darkest hour that the most exciting things are happening within it. That very much seems to be the case in the mobile OS / app store world. Companies and coders are responding to incentives. With it’s 30% rake, Apple has made what many consider a massive strategic miscalculation with competitors, consumers, and critics alike. In other words, opportunity knocks for innovative alternatives.

But some critics — especially those in the academy— continue to suffer from a “static snapshot” mentality and tend to underplay this dynamic process of market discovery and entrepreneurialism. Far too often, such critics look only at the day’s seeming bad news (like Apple’s 30% announcement) and claim that the sky is falling. In their myopia (and seeming desire to have someone or something intervene to “make things right”) they often fail to follow up and investigate how markets respond to bone-headed moves. It’s a point I’ve gone to great lengths to make in my battles with Professors Lessig, Zittrain, and Wu. Here’s how I put it in a debate with Lessig two years ago when I was contrasting the “cyber-libertarian” vs. “cyber-collectivst” modes of thinking about these issues:

Cyber-libertarians are not oblivious to the problems Lessig raises regarding “bad code,” or what might even be thought of as “code failures.” In fact, when I wake up each day and scan TechMeme and my RSS reader to peruse the digital news of the day, I am always struck by the countless mini-market failures I am witnessing. I think to myself, for example: “Wow, look at the bone-headed move Facebook just made on privacy! Ugh, look at the silliness Sony is up to with rootkits! Geez, does Google really want to do that?” And so on. There seems to be one such story in the news every day. But here’s the amazing thing: I usually wake up the next day, fire up my RSS reader again, and find a world almost literally transformed overnight. I see the power of public pressure, press scrutiny, social norms, and innovation by competitors combining to correct the “bad code” or “code failures” of the previous day. OK, so sometimes it takes longer that a day, a week, or a month. And occasionally legal sanctions must enter the picture if the companies or coders did something particularly egregious. But, more often than not, markets evolve and bad code eventually gives way to better code; short-term “market failures” give rise to a world of innovative alternatives. Thus, at risk of repeating myself, I must underscore the key principles that separate the cyber-libertarian and cyber-collectivist schools of thinking. It comes down to this: The cyber-libertarian believes that “code failures” are ultimately better addressed by voluntary, spontaneous, bottom-up, marketplace responses than by coerced, top-down, governmental solutions. Moreover, the decisive advantage of the market-driven approach to correcting code failure comes down to the rapidity and nimbleness of those response(s).

And that’s very much what we’re seeing play out in the mobile OS / app store ecosystem today: Apple’s “foolish act of hubris,” as Gurley calls it, is driving incredible innovation as critics, consumers, and competitors think about how alternative platforms can offer a better experience. It’s certainly true that none of these competing platforms or app stores have Apple’s reach today. But who cares? The fact that they exist and that innovation continues at such a healthy clip is all that counts.

Cyber-capitalism works, when you let it.

Thoughts on Wu, Part 5: What Ultimately Separates the Cyber-Libertarian & Cyber-Collectivist

Adam Thierer — Fri, 29 Oct 2010 20:33:31 +0000

I want to thank Tim Wu for continuing to engage in a discussion here about his book, The Master Switch, with his various comments to my ongoing rants. After pouring out about 15,000 words over the past 4 days, I suspect I’m beginning to sound a bit like his cyber-stalker! I feel a bit bad about this because I really do like Tim a lot and find him to be one of the all-around coolest and most laid-back guys in the Net policy business. But, as I’ve noted in my ongoing series [see parts 1, 2, 3, & 4], we have profoundly different worldviews when it comes to information history and policy. And some of the recent comments he made to my 3^rd post deserve a serious response.

In one of those comments he asks, “The question, then, is how you get, essentially, limited, controlled government in regulatory affairs; how you duplicate, in some sense, the limits imposed on other dangerous gov’t functions like the army. I don’t think this is having things both ways; I think this is trying to learn from what has gone wrong in the past.” In the other, he says: “The question I’m asking in the end of the book is whether we can do better; try to have rules against the worse forms abuse without a creeping regulation that turns into capture. I suspect you think that’s impossible, but I don’t.”

So, here’s my response (and I’m making it a new, dedicated post here instead of just a comment in an old thread because I feel we are getting to the heart of the difference between cyber-libertarians (like myself) and cyber-collectivists (or whatever Tim would call himself).

To be clear, I don’t think corporations are angels or that there is never a time when a market can’t be naturally subject to a great deal of control by one company or a handful of companies. The difference between us comes down to two things primarily.

First, as I have already noted in a couple of these essays (especially this one), I believe regulatory capture, mismanagement, or other shenanigans have more to do with creating and / or maintaining “monopoly” or lasting / harmful “market power” than natural market forces. By definition, a “purely economic laissez-faire approach” does not exist in markets characterized by regulatory capture and bureaucratic mismanagement. And you won’t ever get less regulatory capture and bureaucratic mismanagement by increasing the scope of government control over a market.

Second, to the extent that any company or set of companies is able to achieve “market power” is a largely natural fashion (think IBM in 70s or Microsoft in late 90s), I believe that markets can and do act to evolve around those situations quite rapidly, even more rapidly when the market is built on code.

I spent time developing these points in detail in this two-part debate [1, 2] with Lawrence Lessig, which I hope Prof. Wu will take the time to read since I went to great pains to clearly delineate the differences that separate our worldviews. Ultimately, as I said there in response to Prof. Lessig, what really separates the cyber-libertarian and cyber-collectivist schools of thinking comes down to a belief that “market failures” or “code failures” are ultimately better addressed by voluntary, spontaneous, bottom-up, marketplace responses than by coerced, top-down, governmental solutions. Moreover, the decisive advantage of the market-driven approach to correcting code failure comes down to the rapidity and nimbleness of those response(s).

Does that mean cyber-libertarians believe everything will be all wine and roses in a truly free marketplace? Absolutely not. There will be short term spells of what many of us would regard as excessive market power. The difference between us comes down to the amount of faith we would place in government actors versus market forces / evolution to better solve that problem. We cyber-libertarians would obviously have a lot more patience with markets and technological change, and would be willing to wait and see how things work out. We believe, as I have noted in my previous responses to Wu, that it is during what some regard as a market’s darkest hour when some of the most exciting disruptive technologies and innovation are developing. We are bullish on what I have called experimental, evolutionary dynamism. People don’t sit still; they respond to incentives, including short-term spells of “market power.”

Is this blind faith in the market? I suspect Prof. Wu and others would accuse us of that. But I would argue it isn’t blind faith but informed fact. It’s interesting, for example, that one of the “information empires” Wu doesn’t spend much time on in his book is IBM. Back in the 60s and 70s, (as I have documented here before) IBM was the big, bad dog of the computing world, with significant “market power” in mainframes — the only computers that really counted at the time. Big Blue’s market power was achieved in a fairly natural way, however. Importantly, there isn’t much regulatory capture or interference I could point to that helped cause or maintain the power IBM had. So, it’s certainly a better case study than others Wu uses in his book, most of which were subject to early meddling by government that tipped the balance in unnatural directions.

Anyway, back in the 1960’s, some folks at the time feared IBM might “leverage” their significant market power into new fields. As a result, the Department of Justice opened an antitrust case against Big Blue in 1969 that would become a 13-year quagmire, with little to show for all the legal wrangling by the time the case was abandoned in 1982. Here’s how CNet staff writer Rachel Konrad summarized the fiasco back in 2000:

In January 1969, the government began a sweeping antitrust investigation into IBM’s dominance and attempted to break it into smaller companies that would compete against one another. During the six most critical years of the trial, from 1975 to 1980, the parties called 974 witnesses and read 104,400 pages of transcripts, according to Emerson Pugh’s 1995 book “Building IBM: Shaping an Industry and Its Technology.” The 13-year investigation, which required IBM to retain 200 attorneys at one point, fizzled in the early ’80s as the computing landscape shifted from mainframes to personal computers. The government abandoned the tainted effort entirely in 1982, as clones of the IBM PC eroded Big Blue’s dominance. But the company, still fearful of the watchful eye of the Justice Department, took pains to avoid the appearance of a monopoly long after it relinquished its hold on the market. People who worked for IBM in the ’80s and early ’90s said the company routinely fell victim to “pricing death strategy”–a reluctance to lower prices below cost, even on products that weren’t selling–to avoid what the government would call predatory pricing. By the mid-’80s, the company was in bad shape. The antitrust troubles, combined with ill-timed product failures such as the Future System, pinched revenues. The company began a nearly decade-long financial slide. In retrospect, the antitrust case against IBM seemed laughable.

IBM had become the victim of a classic “disruptive technology” paradigm shift that few could have foreseen in 1969. As Peter Pitsch noted in his 1996 PFF book The Innovation Age, “In 1981 the Department of Justice was still pressing their case against IBM while market forces were about to lay waste to the company.” Pitsch continued:

IBM certainly did not expect to see PCs erode the market share and profitability of its venerable mainframe computers, but the fall of the old “big iron” machines was rapid and spectacular. The revenue of IBM’s mainframe unit fell from roughly $9 billion in 1990 to an estimated $4.5 billion in 1994… [T]he parties destined to become players in the PC revolution were unknown when the PC was introduced, and the experts’ predictions of a much-ballyhooed computer face-off between IBM and AT&T never materialized. Innovative companies that did not exist at the beginning of the revolution rose rapidly. Few people had ever heard of a small company named Microsoft. Nor had they heard of Intel, Novell, Compaq, Dell, or Netscape.

Pitsch went on to summarize how IBM’s manufacturing capacity was slashed in the years that followed and also notes that, astonishingly, “in the space of five years after 1987, IBM lost two thirds of its market value — more than $70 billion.” In sum, new marketplace innovation and competition handled the short-term market power concern that antitrust regulators had about Big Blue. Pitsch goes on to explain what the antitrust regulators missed:

A dominant firm can lose its “King of the Hill” status in two ways. First, if it does not continually improve, it will lose market share and profits to low-cost imitators. For example, the ability of low-end PC manufacturers to make IBM clones fostered robust price competition in the PC market. Second, today’s market leaders must worry that some established and well-financed competitor or possibly an upstart produce a technical breakthrough that will displace them. This situation reflects [the] fact that gains from innovation are so powerful and beneficial to consumers that they outweigh the higher prices dominant firms can charge. Indeed, attempts to eliminate these high profits by regulating prices would almost certainly disserve consumers even if the regulations dampened the incentives for innovation only slightly.

What Pitsch is talking about here is dynamic competition, not the static competition. And what the history of IBM shows is the power of evolutionary dynamism in action. Markets are a learning experience; a “discovery process” as Austrian economists have taught us. Those of us who believe in dynamic competition and evolutionary dynamism see markets in a constant state of flux and expect that sub-optimal market developments or configurations are exactly the spark that incentivizes new form of market entry, innovation, price competition, and so on. Experimentation and evolution happen if you let them happen.

Others, however – and I suspect this includes Prof. Wu – would argue that’s not good enough. They want action, and they want it now! Every short-term hiccup deserves a policy response in the name of protecting “the public interest,” however they define it through regulation. But what about the costs and trade-offs associated with early, preemptive, or prescriptive regulation? What of the danger of regulation steering markets in unnatural or inefficient directions? The possibility of picking technological winners and losers, or technological lock-in? The possibility of regulatory capture and the creation of a special interest, lobbying hell inside the Beltway?

Somehow these factors often go out the window for those who subscribe to the more static, snapshot-oriented view of markets and competition that is so prevalent in cyber-collectivist circles. But the cyber-libertarian can’t let those go. Those factors lie at the core of the problem, we would argue. Actions have consequences. Regulations have costs. And those costs typically outweigh the benefits of preemptive strikes by the State.

And that, at root, is what separates the cyber-libertarian and cyber-collectivist worldviews when it comes to concerns about “market power” and what to do about it.

[Jump to Part 6 in the series.]

Even Media Moguls Often Underestimate How Dynamic Markets Can Be

Adam Thierer — Thu, 19 Nov 2009 03:46:03 +0000

I was just digging through some old files and came across a quote that I found entertaining. Back in 2003, when he was still president and chief operating officer of Viacom, Mel Karmazin said with reference to Microsoft, AOL-Time Warner, and Comcast: “I can’t imagine being a competitor with any of these guys.” At the time, some media worrywarts made great hay of Mel’s quip and claimed, as Gene Kimmelman of Consumers Union argued at the time, that it proved how “Media moguls themselves admit their desire to avoid real competition within their industry.”

Utter rubbish. In fact, just six years after Karmazin spoke those words, Microsoft finds itself in a heated war with Google on all fronts, AOL-Time Warner has crumbled (even Time Warner Cable and Time Warner Entertainment got divorced!), and Comcast is now squaring off against telco and online video competitors that were unfathomable at the time (not to mention traditional satellite TV competitors.) In the meanwhile, Karmazin abandoned Viacom and today, as CEO of Sirius XM, is struggling to find a way to make the satellite radio universe survive the ongoing digital music bloodbath thanks to unforeseen competition from online music services and a little thing called the iPod!

It’s proof positive that media markets and digital technologies always evolve faster than most people — even smart industry titans like Karmazin — anticipate.

Is Apple’s iPhone the End of Innovation? Hahn & Singer on Handset Exclusivity Fears

Adam Thierer — Sun, 27 Sep 2009 18:09:36 +0000

In a week in which neutrality regulation is making a lot of news, I hope that Robert Hahn and Hal Singer’s terrific new study, “Why the iPhone Won’t Last Forever and What the Government Should Do to Promote its Successor” gets some attention. It provides a wonderful overview of how dynamically competitive the mobile marketplace has been over the past two decades and why critics are wrong to get worked up about the short-term “dominance” of Apple’s iPhone. Here’s the abstract of their paper:

Because of the overwhelming, positive response to the iPhone as compared to other smart phones, exclusive agreements between handset makers and wireless carriers have come under increasing scrutiny by regulators and lawmakers. In this paper, we document the myriad revolutions that have occurred in the mobile handset market over the past twenty years. Although casual observers have often claimed that a particular innovation was here to stay, they commonly are proven wrong by unforeseen developments in this fast-changing marketplace. We argue that exclusive agreements can play an important role in helping to ensure that another must-have device will soon come along that will supplant the iPhone, and generate large benefits for consumers. These agreements, which encourage risk taking, increase choice, and frequently lower prices, should be applauded by the government. In contrast, government regulation that would require forced sharing of a successful break-through technology is likely to stifle innovation and hurt consumer welfare.

“New technologies often seemingly emerge from nowhere, but also frequently lose their luster quickly,” Hahn and Singer go on to argue. As evidence they cite the recent examples of Second Life and MySpace, which were hyped as potentially become dominant providers in their respective areas just a few years ago, but now are subjected to intense competition. “[T]he the mobile handset market is subject to these same disruptive forces,” they argue:

an iconic handset emerges, is quickly crowned the “winner,” and soon thereafter is replaced by another technology that was not even conceived of at the time the “winner” was launched. Many iPhone-inspired smartphones, including the Blackberry Storm and the HTC G1, could unseat the iPhone in the smartphone segment. We argue that heavy-handed regulation of such dynamic markets is likely to reduce welfare on net. The cost of erring through regulatory intervention—for example, by restricting voluntary private agreements that promote risk taking—can be significant. Delaying the benefits associated with innovation in mobile handsets could cost consumers dearly. In sum, exclusive contracts between handset makers and wireless carriers benefit consumers by encouraging innovation by both handset makers and wireless service providers that are vying for market share, and by enabling some handset makers to remain viable. These benefits take the form of greater variety of choices in handsets, greatly enhanced capabilities, and a more affordable range of device options. Banning exclusive contracts could have the unintended consequence of reducing innovation, reducing options, raising prices, and potentially establishing market dominance for an incumbent handset maker.

The End of Innovation?

In their excellent history of handset innovation over the past two decades, Hahn and Singer point out that there were many other “iconic” phones that some felt represented the end of the road in terms of innovation. I just love this quote they unearthed from a 1989 Fortune article about how the release of Motorola’s MicroTAC flip phone represented the apparent pinnacle of handset innovation: “Portable phones won’t get a lot smaller than this one. After all, they have to reach from your ear to your mouth.”

This highlights the myopia that sometimes accompanies technological forecasting and public policymaking. We sometimes just can’t think “outside the box” and comprehend the ways in which technological devices or services might come along and leapfrog today’s market leaders. It gets back to the point I made in my recent book review of Gary Reback’s over-the-top ode to antitrust regulation, Free the Market: Those who view markets through the lens of the a static competition, fixed-pie mentality always seem to live in fear of short term “market power” while those of us who believe in dynamic competition see markets in a constant state of flux and expect that sub-optimal market developments or configurations are exactly the spark that incentivizes new form of market entry, innovation, price competition, and so on. And the real problem with that static competition mentality is that it often leads to knee-jerk regulatory responses. Here’s how I put it in my recent debate with Larry Lessig:

What concerns me about the way Prof. Lessig approaches these issues in Code and in his subsequent work is that he is far too quick to declare the debate over by labeling short-term.. hiccups as sky-is-falling market failures. The end result of such myopic techno-pessimism is the inevitable call for governments to intervene and “do something” to correct supposed [market] failures.

In other words, have a little faith and some patience. Apple’s iPhone is today’s hottest handset, but it’s hardly the end of innovation in this marketplace. And we certainly don’t need handset regulation or “device neutrality” as a solution to this non-problem. Read Hahn and Singer’s dynamite new paper for a better understanding of why that’s the case.

The Economist Launches “Schumpeter” Column on Innovation, Entrepreneurship & Dynamism

Berin Szoka — Wed, 23 Sep 2009 03:17:36 +0000

I’m thrilled to hear that the Economist has just launched a new column about business, innovation and entrepreneurship in honor of Joseph Schumpeter (1883-1950), the brilliant Austrian economist who,

argued that innovation is at the heart of economic progress. It gives new businesses a chance to replace old ones, but it also dooms those new businesses to fail unless they can keep on innovating (or find a powerful government patron). In his most famous phrase he likened capitalism to a “perennial gale of creative destruction”. For Schumpeter the people who kept this gale blowing were entrepreneurs. He was responsible for popularising the word itself, and for identifying the entrepreneur’s central function: of moving resources, however painfully, to areas where they can be used more productively. But he also recognised that big businesses can be as innovative as small ones, and that entrepreneurs can arise from middle management as well as college dorm-rooms.

Schumpeter’s work on the dynamism of high-tech markets (later married with Clayton Christensen‘s concept of “disruptive innovation“) is one of the most persistent themes across cyber-libertarian thinking of all stripes on a wide variety of issues. You can listen to an interview with the new column’s author on the Economist podcast here (MP3). One important point the author makes is that Schumpeter realized that celebrating capitalism did not preclude criticizing individual capitalists when justified and vice versa—something all too often forgotten today.

dynamic – Technology Liberation Front

The Many Forms of Entrepreneurialism

How Economists Talk About Entrepreneurs

Productive and Unproductive Entrepreneurs

Entrepreneurs in the Political Arena

Evasive and Regulatory Entrepreneurs

Social Entrepreneurs

Conclusion

Further Reading

The Failure of Good Intentions: Bike Helmet Laws Edition

CES 2014 Report: The Internet of Things Arrives, but Will Washington Welcome It?

Book Review: Brown & Marsden’s “Regulating Code”

Governing Cyberspace: Mueller vs. Brown & Marsden

Meet the New Boss, Same as the Old Boss?

The Problem with Interoperability Über Alles

The Case for Patience & Policy Restraint

Public Choice Insights: What History Tells Us

Conclusion

Important Cyberlaw & Info-Tech Policy Books (2012 Edition)

New Paper on Wu’s “Separations Principle” & the War on Vertical Integration in the Tech Economy

Book Review: Christopher Yoo’s “The Dynamic Internet”

The 12 Best Papers on Antitrust & the Digital Economy

The Best Paper on Antitrust that You Will Read This Year

On Fast Firms, Slow Regulators, Antitrust & the Digital Economy

What is “Optimal Interoperability”? A Review of Palfrey & Gasser’s “Interop”

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

When Does “the Public Interest” Demand Interoperability Regulation?

On the Limits of Knowledge

Toward an Alternative Theory: Experimental, Evolutionary Interoperability

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

Conclusion: Let Interop Experiments Continue!

Additional Reading:

Antitrust & Innovation in the New Economy: The Problem with the Static Equilibrium Mindset

new paper: The Perils of Classifying Social Media Platforms as Public Utilities

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

Thoughts on Wu, Part 5: What Ultimately Separates the Cyber-Libertarian & Cyber-Collectivist

Even Media Moguls Often Underestimate How Dynamic Markets Can Be

Is Apple’s iPhone the End of Innovation? Hahn & Singer on Handset Exclusivity Fears

The Economist Launches “Schumpeter” Column on Innovation, Entrepreneurship & Dynamism