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)

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:

According to a report today from SAI Business Insider, “The Federal Trade Commission is actively investigating Twitter and the way it deals with the companies building applications and services for its platform.”  Apparently the agency has reached out to some competing application / platform providers to ask questions about Twitter’s recent efforts to exert more control over the uses of its API by third parties. [The Wall Street Journal confirms the FTC’s interest in Twitter.]

It remains to be seen whether this leads to any serious regulatory action against Twitter by the FTC, but such a move wouldn’t necessarily be surprising considering the more activist tilt of the agency recently. It’s even less surprising considering that Columbia University law professor and prolific cyberlaw scholar Tim Wu was appointed as a senior advisor to the FTC earlier this year. When the announcement of Wu’s appointment was made, the Wall Street Journal kicked off an article with the warning, “Silicon Valley has a new fear factor.”  It seems the Journal may have been on to something!

It’s impossible to know how much of an influence Tim Wu is having on the agency, but as I have noted here before, Prof. Wu is man with a healthy appetite for regulatory activism. [See all my essays about Wu’s work here.] Moreover, he’s a man who has already determined that Twitter is a “monopolist” in his November 13, 2010 Wall Street Journal op-ed, “In the Grip of the New Monopolists.”

That essay prompted a fiery response from me [“Tim Wu Redefines Monopoly“] as well as a far more reasoned essay by antitrust gurus Geoff Manne and Josh Wright [“What’s An Internet Monopolist? A Reply to Professor Wu.”] Prof. Wu was kind enough to swing by the TLF and respond to my criticisms in an essay “On the Definition of Monopoly,” which he said served as a “corrective” to my earlier essay [even though I continue to believe that what I said fairly reflected the last four decades of economic wisdom on competition policy and that it is Wu who is well off the reservation with his expansionist views of antitrust enforcement].

Regardless of what one thinks about that exchange, if the FTC is moving forward with a case against Twitter, three practical questions need to be considered: (1) What’s the relevant market? (2) Where’s the harm? and (3) What’s the remedy?

I’ll briefly discuss each question below but should also mention that I already explored many of these issues in my essay,  “A Vision of (Regulatory) Things to Come for Twitter,” so I apologize in advance for the repetition.  I will then discuss all this in the context of Tim Wu’s latest law review article on “Agency Threats” and what he approvingly refers to as regulatory “threat regimes.”

On Market Definition

As I noted in my previous essays, it’s very much unclear how to define the contours of the market Twitter serves. After all, Twitter is only a few years old and it competes with many other forms of communication and information dissemination. For me, Twitter is a partial substitute for blogging, IMs, email, phone calls, RSS feeds, and even radio and television news. Yet, like most others, I continue to use all those other technologies and those technologies continue to pressure Twitter to innovate.

Whatever market it serves, however, Tim Wu is apparently willing to write off that market as already “in the grip” of Twitter. But does Wu really believe that nothing better will come along to compete against Twitter or even replace it entirely?  It reminds me of all the hand-wringing we heard about AOL a decade ago when people predicted its “walled gardens” would someday rule the Internet and IM.  And we all know how that turned out.

If you ask me, this episode again reflects the short-term, static snapshot thinking we all too often see at work in debates over media and technology policy. That is, many cyber-worrywarts are prone to taking snapshots of market activity and suggesting that temporary patterns are permanent disasters requiring immediate correction. Of course, a more dynamic view of progress and competition holds that “market failures” and “code failures” are ultimately better addressed by voluntary, spontaneous, bottom-up responses than by coercive, top-down approaches. [More on that conflict of visions in my book chapter on “The Case for Internet Optimism, Part 2 – Saving the Net From Its Supporters.”]

Regardless, I just don’t see how Wu or the FTC can claim Twitter has monopolized a market that is still so young that we can’t even define it.

On Harm

Even if one accepted Wu’s premise that Twitter was a monopolist, where is the harm? At least in theory, antitrust law is supposed to be about protecting consumer welfare, not competitors. If this whole thing is about UberMedia losing out in some bidding wars for alternative Twitter platforms, well, that’s just pathetic. UberMedia is free to develop or bid on alternative Twitter applications or work with others to develop entirely new services. It’s not like there’s a shortage of them out there.

If the theory is that consumers are being harmed by Twitter exerting more control over its API, I would just remind everyone that (a) we don’t pay a cent for the service that Twitter provides and (b) Twitter is still scrambling to find a way to monetize its service for the long-haul. There are also some legitimate security issues in play here that cut against the claim that what Twitter is doing is anti-consumer.

In sum, it is hard to understand where the harm lies in Twitter taking greater control of its API, and there’s certainly nothing stopping rival innovators from tying to offer a competing service.  140-character text messages aren’t exactly the stuff of traditional “information empires,” as Wu would call them.

On Remedies

Finally, we come to the thorny issue of remedies. I suppose the easiest remedy would be a prohibition on Twitter acquiring any third-party applications provider that currently relies on Twitter’s API. In other words, downstream vertical integration would be forbidden. But there’s about 40 years of antitrust literature explaining why such integration is generally pro-innovation and pro-consumer and shouldn’t be made illegal by antitrust law. Tim Wu may not buy that–and if you’ve read his recent book The Master Switch, you know he absolutely rejects it–but it is standard thinking in the field of industrial organization and antitrust economics today. Most of the economists at the FTC and DOJ could tell him as much.

Another alternative remedy might be Jonathan Zittrain’s “API neutrality” idea, proposed in his 2008 book, The Future of the Internet and How to Stop It. Zittrain suggested that API neutrality–essentially a variant of Net neutrality but for application protocols–might be needed to ensure fair access to certain services or platforms to guarantee that digital “generativity” was not imperiled. On pg. 181 of the book, Zittrain argued that:

“If there is a present worldwide threat to neutrality in the movement of bits, it comes not from restrictions on traditional Internet access that can be evaded using generative PCs, but from enhancements to traditional and emerging appliancized services that are not open to third-party tinkering.”

After engaging in some hand-wringing about “walled gardens” and “mediated experiences,” Zittrain went on to ask: “So when should we consider network neutrality-style mandates for appliancized systems?” He responds to his own question as follows:

“The answer lies in that subset of appliancized systems that seeks to gain the benefits of third-party contributions while reserving the right to exclude it later. … Those who offer open APIs on the Net in an attempt to harness the generative cycle ought to remain application-neutral after their efforts have succeeded, so all those who built on top of their interface can continue to do so on equal terms.” (p. 184)

This might be a fine generic principle, but Zittrain implies that this should be a legal standard to which online providers are held. At one point, he even alludes to the possibility of applying the common law principle of adverse possession more broadly in these contexts. He notes that adverse possession “dictates that people who openly occupy another’s private property without the owner’s explicit objection (or, for that matter, permission) can, after a lengthy period of time, come to legitimately acquire it.” But he doesn’t make it clear when it would be triggered as it pertains to digital platforms or APIs.

Nonetheless, one could imagine it would be one remedy antitrust officials might look to when considering what to do about Twitter exerting greater control over its API. Essentially, Twitter would become the equivalent of a public utility that all would have access to on regulated terms.

As I noted in the first of my many reviews of Zittrain’s book, there are many problems with the logic of API neutrality or the application of adverse possession in these contexts. Here’s my critique of the “API neutrality” notion (again, this is from 2008 so it now sounds a bit dated):

First, most developers who offer open APIs aren’t likely to close them later precisely because they don’t want to incur the wrath of “those who built on top of their interface.” But, second, for the sake of argument, let’s say they did want to abandoned previously open APIs and move to some sort of walled garden. So what? Isn’t that called marketplace experimentation? Are we really going to make that illegal? Finally, if they were so foolish as to engage in such games, it might be the best thing that ever happened to the market and consumers since it could encourage more entry and innovation as people seek out more open, pro-generative alternatives. Consider this example: Now that Apple has opened to door to third-party iPhone development a bit with the SDK, does that mean that under Jonathan’s proposed paradigm we should treat the iPhone as the equivalent of commoditized common carriage device? That seems incredibly misguided to me. If Steve Jobs opens the development door just a little bit only to slam it shut a short time later, he will pay dearly for that mistake in the marketplace. For God’s sake, just spend a few minutes over on the Howard Forums or the PPC Geeks forum if you want to get a taste for the insane amount of tinkering going on out there in the mobile world right now on other systems. If Apple tries to roll back the clock, Microsoft and others will be all too happy to take their business by offering a wealth of devices that allow you to tinker to your heart’s content. We should let such experiments continue and let the future of the Internet be determined by market choices, not regulatory choices such as forced API neutrality.

I think the same critique would apply to efforts to impose API neutrality on Twitter.  Regardless, would such a remedy be imposed through targeted regulatory action, an antitrust consent decree, or perhaps through what Tim Wu calls “agency threats”?

Wu’s “Threat Regime” Model of Internet Governance

Prof. Wu recently published a law review article on “Agency Threats” and what he approvingly refers to as “threat regimes.” The paper is a “defense of regulatory threats in particular contexts.”  Here’s a portion of the abstract:

The use of threats instead of law can be a useful choice — not simply a procedural end run. My argument is that the merits of any regulative modality cannot be determined without reference to the state of the industry being regulated. Threat regimes, I suggest, are important and 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.

I’m extremely troubled by this reasoning and can think of a couple of alternative labels for such behavior by government agencies: unaccountable, above-the-law, unconstitutional, anti-democratic, thuggery, regulatory blackmail, and so on.

But what’s even more troubling about Wu’s thinking about “threat regimes” is that he assumes this arbitrary mode of governing-by-intimidation makes even more sense in fast-moving high-tech industries. That seems counter-intuitive. If a given sector finds itself in a state of “high uncertainty” as Wu calls it, doesn’t that mean, by definition, it is dynamic and subject to forces that might bring about beneficial change? And shouldn’t we assume that those are the last sectors we would want regulators monkeying with since bureaucrats lack the requisite knowledge of how to best guide the evolution of complex information technologies?

Wu seems to believe that regulators possess a crystal ball and a set of magical dials that can guide the evolution of technology markets to a better equilibrium through the use of constant Sunstein-ian “nudges” (or perhaps shoves).  I think that’s poppycock.

Regardless, once we realize that this is the way Tim Wu thinks, an FTC investigation into Twitter’s current business practices starts to make a lot more sense. It’s about creating a “threat regime” that intimidates Twitter into to playing by the arbitrary rules of Washington bureaucrats instead of responding to marketplace demands and developments in a natural, evolutionary way. In fact, in his “threats” essay, Wu explicitly rejects that model:

The second option—“wait and see”—may sound attractive because it allows the industry to develop in what might be called a natural way. This approach, however, makes a great sacrifice: the public’s interest may be entirely unrepresented during the industry’s formative period. The risk is that the industry’s norms and business models will, effectively, be set without any public input. Waiting for the industry to settle down may result in undesirable practices that prove extremely hard to reverse or influence with rules issued later. To state the matter more colloquially, the industry may be “baked” by the time there is any real oversight or public input.

In essence, Wu desires a “mixed economy” model for high-tech sectors in which decision are guided at every juncture by the supposed wisdom of techno-cratic philosopher kings like himself. We must trust that he and his fellow regulators will guide us and our economy down an more enlightened path. And we must accept that some “threats” may be necessary to get the job done.

I find this mode of thinking disturbing in the extreme because of the rank hubris at the center of it. Regardless, Twitter appears to be well on its way to becoming a test case for Wu’s “threat” model of Internet governance.

Twitter could be in for a world of potential pain. Regulatory pain, that is. The company’s announcement on Friday that it would soon be cracking down on the uses of its API by third parties is raising eyebrows in cyberspace and, if recent regulatory history is any indicator, this high-tech innovator could soon face some heat from regulatory advocates and public policy makers. If this thing goes down as I describe it below, it will be one hell of a fight that once again features warring conceptions of “Internet freedom” butting heads over the question of whether Twitter should be forced to share its API with rivals via some sort of “open access” regulatory regime or “API neutrality,” in particular. I’ll explore that possibility in this essay. First, a bit of background.

Understanding Forced Access Regulation

In the field of communications law, the dominant public policy fight of the past 15 years has been the battle over “open access” and “neutrality” regulation. Generally speaking, open access regulations demand that a company share its property (networks, systems, devices, or code) with rivals on terms established by law. Neutrality regulation is a variant of open access regulation, which also requires that systems be used in ways specified by law, but usually without the physical sharing requirements. Both forms of regulation derive from traditional common carriage principles / regulatory regimes. Critics of such regulation, which would most definitely include me, decry the inefficiencies associated with such “forced access” regimes, as we prefer to label them. Forced access regulation also raises certain constitutional issues related to First and Fifth Amendment rights of speech and property.

The Telecommunications Act of 1996 got this ball rolling with its mandated access provisions for local phone service. To make a very long and tortured history much shorter, this was a battle over how far law should go to force local telephone companies to share their phone lines with rivals at regulated rates. (Check this old piece of mine for a flavor of how well that turned out.) The advocates of open access regulation eventually turned their attention to cable systems and tried (but failed) to apply similar sharing / access rules there. Following those fights, which involved many nasty court skirmishes, the Net neutrality wars broke out. Net neutrality is a type of forced access regime for broadband platforms. Although Net neutrality regulation would not necessarily require carriers to share networks with rivals, it would at least require that platform providers play by special access and interconnection rules set by federal regulators.

Forced access provisions have been used in other contexts. We might think of the provisions we saw at work in the Microsoft antitrust case as a form of forced access regulation. Some may also recall the interconnection provisions that governed AOL’s instant messaging service following its merger with Time Warner (discussed more below). There are other examples, but I think you get the point.

New Frontiers for Forced Access Regulation?

All this history is well known to all readers of this blog and followers of communications policy. The reason I repeat it here is because this fight is now spreading to new sectors, platforms, and technologies.

For example, “search neutrality” is one of those new frontiers of the forced access fight. Some academics and regulatory advocates are pushing for rules that would govern how search results are shown or for special requirements on search providers to eliminate supposed “search bias” or to ensure search “fairness” of various sorts. Make sure to read James Grimmelmann’s terrific treatment of the concept from his chapter in TechFreedom’s book, The Next Digital Decade, and then also listen to this podcast featuring Danny Sullivan dissecting the issue.

Some critics also want to treat search engines (and Google in particular) as “essential facilities.” In another essay from The Next Digital Decade, Geoff Manne has done a good job pointing out why that’s such a misguided idea.

Similarly, some folks (such as danah boyd) are already calling for Facebook to be regulated as a public utility or essential facility. I responded in my essay, “Facebook Isn’t a “Utility” & You Certainly Shouldn’t Want it to Be Regulated As Such,” in which I pointed out that Facebook isn’t exactly a “life-essential” service that is gouging customers, who have plenty of other choices in social networking services.

Adverse Possession & API Neutrality for Twitter?

An equally interesting battle is now set to unfold for Twitter following Friday’s announced changes. To get a flavor for what might lie ahead for the company, we might begin by taking a second look at what Harvard University’s Jonathan Zittrain proposed in his 2008 book, The Future of the Internet and How to Stop It. In that book, Zittrain suggested that “API neutrality” might be needed to ensure fair access to certain cyber-services or digital platforms to ensure “generativity” was not imperiled. On pg. 181 of the book, Zittrain argued that:

“If there is a present worldwide threat to neutrality in the movement of bits, it comes not from restrictions on traditional Internet access that can be evaded using generative PCs, but from enhancements to traditional and emerging appliancized services that are not open to third-party tinkering.”

After engaging in some hand-wringing about “walled gardens” and “mediated experiences,” Zittrain went on to ask: “So when should we consider network neutrality-style mandates for appliancized systems?” He responds to his own question as follows:

“The answer lies in that subset of appliancized systems that seeks to gain the benefits of third-party contributions while reserving the right to exclude it later. … Those who offer open APIs on the Net in an attempt to harness the generative cycle ought to remain application-neutral after their efforts have succeeded, so all those who built on top of their interface can continue to do so on equal terms.” (p. 184)

This might be a fine generic principle, but Zittrain implies that this should be a legal standard to which online providers are held. At one point, he even alludes to the possibility of applying the common law principle of adverse possession more broadly in these contexts. He notes that adverse possession “dictates that people who openly occupy another’s private property without the owner’s explicit objection (or, for that matter, permission) can, after a lengthy period of time, come to legitimately acquire it.” But he doesn’t make it clear when it would be triggered as it pertains to digital platforms or APIs.

As I noted in the first of my many reviews of his book, there are many problems with the logic of API neutrality or the application of adverse possession in these contexts. Here’s my critique of the “API neutrality” notion (again, this is from 2008):

First, most developers who offer open APIs aren’t likely to close them later precisely because they don’t want to incur the wrath of “those who built on top of their interface.” But, second, for the sake of argument, let’s say they did want to abandoned previously open APIs and move to some sort of walled garden. So what? Isn’t that called marketplace experimentation? Are we really going to make that illegal? Finally, if they were so foolish as to engage in such games, it might be the best thing that ever happened to the market and consumers since it could encourage more entry and innovation as people seek out more open, pro-generative alternatives. Consider this example: Now that Apple has opened to door to third-party iPhone development a bit with the SDK, does that mean that under Jonathan’s proposed paradigm we should treat the iPhone as the equivalent of commoditized common carriage device? That seems incredibly misguided to me. If Steve Jobs opens the development door just a little bit only to slam it shut a short time later, he will pay dearly for that mistake in the marketplace. For God’s sake, just spend a few minutes over on the Howard Forums or the PPC Geeks forum if you want to get a taste for the insane amount of tinkering going on out there in the mobile world right now on other systems. If Apple tries to roll back the clock, Microsoft and others will be all too happy to take their business by offering a wealth of devices that allow you to tinker to your heart’s content. We should let such experiments continue and let the future of the Internet be determined by market choices, not regulatory choices such as forced API neutrality.

I think the same critique would apply to efforts to impose API neutrality on Twitter. But before going into more detail, we need to first ask another question: Does Twitter possess “market power” such that their actions warrant antitrust or regulatory scrutiny at all?

But Isn’t Twitter a “Monopoly”?

Savvy readers will recall that influential Columbia Law School cyberlaw professor Tim Wu has already labeled Twitter a “monopoly,” although he has not yet bothered telling us what the relevant market is here. As I pointed out in an essay critiquing the way Prof. Wu flippantly assigns the label “monopoly” to just about any big tech provider, it’s very much unclear what to call the market Twitter serves. After all, the service is only a few years old and competes with many other forms of communication and information dissemination. For me, Twitter is a partial substitute for blogging, IMs, email, phone calls, and my RSS feed. Yet, like most others, I continue to use all those other technologies and those technologies continue to pressure Twitter to innovate.

Regardless, Prof. Wu is now in a position to put his ideas into action since he is currently serving a short tenure as special advisor to the Federal Trade Commission (FTC).  Might he act on his instincts, therefore, and advise the agency to take action against Twitter? It is unlikely that Prof Wu will be around the FTC long enough to help them bring any sort of formal action against Twitter, but he could help lay the groundwork for a creative interpretation of our nation’s antitrust laws such that Twitter somehow comes to be labeled a “monopoly” or what he refers to as an “information empire” in his new book The Master Switch. (See my last review of the book here.)

But I think he’d have a very hard time convincing the folks in the FTC’s Economics Bureau that Twitter is really worth worrying about or that it has anything approximating a “monopoly” in this emerging market, whatever that market is. But Wu has the ear of key people in government right now and could be lobbying for more expansive constructions of “information monopoly” since he made it very clear in his book that traditional antitrust analysis was not sufficient for information sectors. “[I]nformation industries… can never be properly understood as ‘normal’ industries,” Wu claimed, and even traditional forms of regulation, including antitrust, “are clearly inadequate for the regulation of information industries,” he says. (p. 303)

The Principle of the Matter

So here’s my take on the issue. Twitter is an amazing innovator. It created the space it now plays in and that market is still so new and unique that we don’t even have a name for it yet. In America, we should – and usually do – celebrate such entrepreneurialism. But sometimes certain Ivory Tower elites, regulatory-minded advocates, paternalistic policymakers, or even disgruntled competitors, claim that such innovators “owe” the rest of us something because they got rich or powerful thanks to that innovation. “Forced access” or “neutrality” mandates becomes a convenient regulatory prescription to achieve that end even though the motivating principle behind such regulation is, essentially, “what’s yours is mine.”

Indeed, from my perspective, the entire notion of forced access to the Twitter API could be dismissed by noting that, technically speaking, Twitter’s API is its private property and they should be free to do as they wish with it. That’s why I’m particularly concerned with Zittrain’s notion that we might consider applying adverse possession principles to any digital platform with enough users; at root, it’s a call to limit or even abolish property rights for digital platforms once they gain popularity or have a large number of users. As noted below, that has extremely dangerous ramifications for digital innovation but, more profoundly in my opinion, it is an unjust and unconstitutional taking of an innovator’s property. Of course, I understand that property rights aren’t exactly in vogue in America anymore and that this isn’t really a satisfying answer from the consumer’s perspective, so let’s continue on and consider a few other reasons why forced access regulation of Twitter via API neutrality would be a mistake.

First, we should not forget that Twitter has yet to find a way to turn its service into a serious revenue-generator. The most obvious reason for that is that Twitter (a) doesn’t charge anything for the service it provides and (b) doesn’t lock down its platform / API such that they might be able to earn a return on their investment by monetizing eyeballs via advertising on their own platform. That’s why Twitter’s announcement on Friday won’t come to a shock to anyone with a whiff of business sense in their heads. At some point, Twitter probably had to do something like this if they wanted to find a way to monetize and grow their business.

I can hear some out there screaming out “but it’s not fair!” as if there was cosmic sense of cyber-justice that has been betrayed because Twitter had the audacity to lock-down their platform. Of course, it is certainly true that some third-party app providers may suffer because of Twitter’s move here.  I’m not going to lie to you; if Twitter’s move to exert greater control over its API somehow destroys the beauty that is the TweetDeck desktop interface, I am going to be screaming mad myself! I do not think there has ever been a slicker, more user-friendly interface for any web service in Internet history than what TweetDeck offers consumers. For my money – which means nothing since TweetDeck is free! – TweetDeck is digital perfection defined. And, incidentally, I’d be happy to pay for it if they asked.

But despite my gushing love for it, let’s be clear about something: TweetDeck has no inherent right to exist. Indeed, TweetDeck owes its very existence to the fact that Twitter offered its API to the world on a completely free, unlicensed, unrestricted basis. The same holds true for all those other third-party platforms that depend upon the Twitter API. What Twitter giveth, Twitter can taketh away.

Stated differently, Twitter has thus far had a voluntary open access policy in place for the first few years of its existence but now wants to partially abandon that policy. This policy reversal will, no doubt, lead to claims that the company is acting like one of Wu’s proverbial “information empires” and that perhaps Zittrain’s API neutrality regime should be put in place as a remedy.  Indeed, Zittrain has already referred to it as a “bait-and-switch” and cited back to the provisions of his book that I outlined above. I believe that foreshadows what’s to come: more pressure from the Ivory Tower and then, potentially, from public policy makers that will first encourage and then push to force Twitter to grant access to its platform on terms set by others.  It’s a potential first step toward the forced commoditization of the Twitter API and the involuntary surrender of its property rights to some collective authority who will manage it as a “collective good,” “common carrier,” or “essential facility.”

But Consider This… (on API Neutrality and Disincentives)

Of course, the people at Twitter certain realize how important all those third-party apps and platforms have been to growing the Twitter information empire. Thus, an overly-zealous move to crush third parities by denying them the API or any incidental use of the Twitter name / branding could backfire in two ways: it could lead to a major consumer backlash which in turn spurs the development of alternative platforms and entirely new types of competing services.

Vertical integration might be one way to partially alleviate those problems. Twitter could start cutting deals with existing third-party platforms that rely upon its API such that they were brought under the Twitter corporate umbrella, where more standardization could occur. But Twitter doesn’t have the money to buy them all out. Moreover, Twitter doesn’t want to see dozens of interfaces under its corporate umbrella. For them, this is about “a consistent user experience.” In other words, they’d obviously prefer a more standardized platform / interface that simply got rid of some of those third-party apps and platforms altogether.

As a result, in the short term, I think we’ll likely end up with a market dominated by Twitter’s proprietary platform(s) but with a couple of other leading existing third-party providers being tolerated by the company so as not to rock the boat too much. And that’s not a bad thing. Here’s the key principle to keep in mind: If we apply API neutrality or adverse possession principles forcibly, it sends a horrible signal to entrepreneurs that basically says their platforms are theirs in name only and will be forcibly commoditized once they are popular enough. That’s a horrible disincentive to future innovation and investment. However, it means we must sometimes tolerate short term spells of “market power” when we allow entrepreneurs to realize the benefits of their past innovations and investments if we hope to get more of them in the future.

Avoiding Static Snapshots

But wait, you say, isn’t this all quite horrible for the consumers and competition? Isn’t this just Wu’s “information empire” fear manifesting itself such that antitrust or API neutrality really is required?

Here’s where those warring conceptions of “Internet freedom” come into play. As I’ve noted here many times before in my work on the “conflict of visions” about Internet freedom today, it is during what some might regard as a market’s darkest hour when some of the most exciting disruptive technologies and innovations develop. People don’t sit still; they respond to incentives, including short spells of apparently excessive private power.

By contrast, the “static snapshot” crowd gets so worked up about short term spells of “market power” – which usually don’t represent serious market power at all – that they call for the reordering of markets to suit their tastes.  Sadly, they sometimes do this under the banner of “Internet freedom,” claiming that we can “free” consumers from the supposed tyranny of the marketplace. In reality, that vision wraps markets in chains and ultimately leaves consumers worse off by stifling innovation and inviting in ham-handed regulatory edits and bureaucracies to plan this fast-paced sector of our economy.

“Splitting the Root”

And innovation is possible. Is it really that unthinkable that a Twitter competitor might come along? In a sense, TweetDeck shows the way forward.  TweetDeck has already bucked Twitter’s 140-character limit by offering “Deck.ly,” an exclusive service that allows TweetDeck users to type Twitter messages longer than 140 characters, but which will only be visible via TweetDeck platforms. What if TweetDeck took the next bold step and offered an entirely separate API in direct competition to Twitter? It would be the tweeting equivalent of “splitting the root,” to borrow a concept from the domain name space.

Some would decry the potential lack of interoperability at first. But I bet some sharp folks out there would quickly find work-arounds. Has everyone forgotten the hand-wringing that took place over instant message interoperability just a decade ago (and the resulting restrictions placed on the company following its merger with Time Warner)? Big bad AOL was going to eat everyone’s lunch in the IM space, don’t you remember? But all the hand-wringing about AOL’s looming monopolization of instant messaging seems particularly silly now since anyone can download a free chat client like Digsby or Adium to manage IM services from AOL, Yahoo!, Google, Facebook and just about anyone else, all within a single interface — essentially making it irrelevant which chat service your friends use.

Again, people respond to incentives, and sometimes it takes bone-headed moves by market leaders to really get people off their butts and motivate them to code work-arounds and superior solutions. Is it so hard to imagine that a similar response might follow Twitter’s move this week? After all, we are not talking about replicating a massive physical network of pipes or towers here. We are talking about pure code, for God’s sake! Competition to Twitter is more than possible and it’s likely to come from sources and platforms we cannot currently imagine (just as few of us could have imagined something like Twitter developing just five years ago).

Conclusion

So, Twitter’s move is not an end but rather a new beginning. Personally, I think it could spawn another amazing round of innovation in this space. Again, we must not forget that we are dealing with a space that is still so new that we do not know what to call it. For that reason alone, we should be skeptical of calls for a preemptive regulatory strike. We need to have a little faith in the entrepreneurial spirit and the dynamic nature of markets built upon code, which have the uncanny ability to morph and upend themselves seemingly every few years. In the short term, Twitter will continue to possess a dominant position in whatever we call this market that it serves. But the short term is just that; it’s not the end of the story.

Now excuse me while I get back to Tweeting!

This is the second of two essays making “The Case for Internet Optimism.” This essay was included in the book, The Next Digital Decade: Essays on the Future of the Internet (2011), which was edited by Berin Szoka and Adam Marcus of TechFreedom. In my previous essay, which I discussed here yesterday, I examined the first variant of Internet pessimism: “Net Skeptics,” who are pessimistic about the Internet improving the lot of mankind. In this second essay, I take on a very different breed of Net pessimists:  “Net Lovers” who, though they embrace the Net and digital technologies, argue that they are “dying” due to a lack of sufficient care or collective oversight.  In particular, they fear that the “open” Internet and “generative” digital systems are giving way to closed, proprietary systems, typically run by villainous corporations out to erect walled gardens and quash our digital liberties.  Thus, they are pessimistic about the long-term survival of the Internet that we currently know and love.

Leading exponents of this theory include noted cyberlaw scholars Lawrence Lessig, Jonathan Zittrain, and Tim Wu.  I argue that these scholars tend to significantly overstate the severity of this problem (the supposed decline of openness or generativity, that is) and seem to have very little faith in the ability of such systems to win out in a free market. Moreover, there’s nothing wrong with a hybrid world in which some “closed” devices and platforms remain (or even thrive) alongside “open” ones. Importantly, “openness” is a highly subjective term, and a constantly evolving one.  And many “open” systems or devices are as perfectly open as these advocates suggest.

Finally, I argue that it’s likely that the “openness” advocated by these advocates will devolve into expanded government control of cyberspace and digital systems than that unregulated systems will become subject to “perfect control” by the private sector, as they fear.  Indeed, the implicit message in the work of all these hyper-pessimistic critics is that markets must be steered in a more sensible direction by those technocratic philosopher kings (although the details of their blueprint for digital salvation are often scarce).   Thus, I conclude that the dour, depressing “the-Net-is-about-to-die” fear that seems to fuel this worldview is almost completely unfounded and should be rejected before serious damage is done to the evolutionary Internet through misguided government action.

I’ve embedded the entire essay down below in Scribd reader, but it can also be found on TechFreedom’s Next Digital Decade book website and SSRN.

The Case for Internet Optimism Part 2 – Saving the Net From Its Supporters (Adam Thierer) http://d1.scribdassets.com/ScribdViewer.swf

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.]

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.