The Internet tax issue is not as hot and sexy as it was a few years back, but we can still give it a big KISS (Keep it Simple Stupid). Yesterday’s hearing of the Senate Finance Committee shows that there is still some thunderous passion over taxing the ‘Net. The hearing–consisting of two full panels of witnesses, one devoted to sales tax and another toward the business activity tax–featured state tax collectors and offline companies versus online companies and direct marketers. The legislative thrust of the one panel related to sales taxes is S. 2152, a bill introduced by Senator Michael Enzi.
The hearing revealed that the Streamlined Sales Tax Project (the SSTP, an attempt to make sales taxes more easily collectable by out-of-state sellers), just isn’t simple enough. In particular, I’ll direct TLF readers to the informative (and anti-SSTP) testimony of George Isaacson, tax counsel for the Direct Marketing Association.
The uninitiated can easily be caught up by all the different arguments advanced by proponents for the SSTP. Supporters say that a system that allows remote sellers to evade collecting sales tax from consumers hurts state tax revenues and is unfair to offline “Main Street” retailers that may have higher prices because they do have to collect the tax. But fortunately, while this high-tech debate may be fashioned by the seemingly borderless jurisdiction of digital networks, the old fashioned U.S. Constitution has something to say about this form of interstate commerce. A little background is required though.
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Remember the digital TV subsidy? Last year, as part of the price for establishing a firm date for broadcasters to return their old (now) analog frequencies by 2009, making them available for new uses, Congress set up a program to subsidize converter boxes for those that don’t already have digital TV sets. More precisely, it ordered the Department of Commerce to set one up. It has now started that process–proposing rules on exactly who will will get money and how.
The total cost authorized for the program was $990 million–with an automatic extension up to $1.5 billion if Commerce so requests. That’s much less than the $3 billion at one time being considered by Congress, but still real money.
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On Sunday I offered one reason that platform monopolies might not stimulate as much innovation as the ideal case would suggest.
Here’s another reason: R&D spending often has diminishing returns. The surplus generated by a successful new platform (DOS/Windows, x86, iTunes/iPod, etc) provides an enormous windfall to the company that creates it–a windfall that may be totally out of proportion to the amount of money the company spent developing the platform. The first version of Microsoft’s DOS operating system, was called QDOS (for quick and dirty OS) and was licensed from another company for a small sum. It’s not at all obvious that there’s any connection between the amount of R&D Microsoft did on early versions of DOS and the large subsequent profits they made.
If we had changed public policy in the 1970s to halve or double the long-run rewards to creating a PC operating system, it’s not obvious it would have changed the outcome for Microsoft one bit. For many technological categories, the winning platform tends to be made by the firm that is in the right place at the right time. Above a certain point, increased R&D spending is likely to show diminishing returns. It only costs so much to develop a microchip, an iPod, or an operating system. If the return on doing so is 10 or 100 times the cost, we don’t want firms to spend money beyond the point of diminishing returns.
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CNN famously made its mark during the first Gulf War, as its 24-hour, on-the-spot reporting brought that conflict into people’s homes in a way never done before, marking a revolution in TV news. A story in today’s Washington Post suggests that the current Lebanon war may mark another revolution in how people get information However, this time the change isn’t coming from a news organization, but from videos posted by countless individuals on youtube.com
Up till now, youtube has been known mostly as a place to watch home videos shot by others, and perhaps the odd Jon Stewart clip. But, the Post reports, in recent days it has taken on a more serious role. As the Post explains it: “In a matter of weeks, YouTube has become a video Dumpster for a global audience to share first-hand reports, military strategies, propaganda videos and personal commentary about a violent conflict as it unfolds.”
While not likely to replace professional journalism, the amateur posts on youtube have a substantial audience. According to Robert Niles of USC’s Online Journalism Review: “in real numbers, I think any broadcast executive would consider it a huge audience–it’s just dispersed around the globe. It would probably challenge hourly ratings at NBC or CNN.”
A trend worth watching.
Heritage has just released a new paper by my colleague James Carafano, THF’s homeland security guru, on the federal role in emergency communications. The paper finds that throwing more money, or spectrum, emergency communications systems is not the answer. “The commercial space uses the spectrum about 20 times more efficiently than governments,” Carafano writes. “The spectrum licensed to federal, state, and local public safety users supports fewer than 3 million users across the U.S. In contrast, commercial operators (such as Sprint and T-Mobile) support about 80 million users in a comparable amount of spectrum.” Instead, he argues, policymakers should focus on:
– Scaling back bloated, bureaucratic programs and wasteful homeland security and interoperability grants;
– Focusing on developing capabilities to enhance regional information sharing and response to catastrophic disasters;
– Revising federal policies and laws to open dual-use spectrum for commercial and emergency management use, as well as facilitating the sharing of spectrum among local, state, and federal users;
-Setting national standards to promote open-architecture, non-proprietary systems that are compatible with commercial standards;
-Establishing services that can provide an emergency wide-area network wireless system to support existing responder communications equipment and emerging capabilities like VoIP; and
-Assigning specific missions and responsibilities to agencies for the implementation of critical policies.
Worth a read.
David Robinson, guest blogging at Freedom to Tinker, points out this fascinating preview at Engadget of Zune, Microsoft’s answer to the iPod/iTunes juggernaut. Engadget predicts that Microsoft will “buy out” iTunes switchers, scanning the user’s iTunes library and buying the users those same songs encoded in Zune’s DRM format.
Like Robinson, I hadn’t thought of this possibility. The recording industry almost certainly gave Microsoft a steep discount on song-repurchases. It’s conceivable they even let Microsoft do this for close to nothing, simply to undercut Apple’s market power and (consequently) its negotiating position vis-a-vis the labels. If a substantial fraction of music listeners are using Microsoft’s Zune service, that gives the labels a credible threat to walk away from the bargaining table if Apple plays hardball next time contract renewals come around.
As Robinson said, some of us in the anti-DMCA choir probably underestimated the potential of markets to undercut the monopoly created by the DMCA. The development arguably undermines the argument I made last year that the labels are giving away the store to Apple. However, I don’t think development eliminates the concerns over the DMCA by any means. The barriers to entry into the music business remain extraordinarily high. To do what Microsoft is doing here, you not only have to build an MP3 player and develop jukebox software, but you also have to sign deals with all the major labels. Even if we assume the labels are giving Microsoft the music for free, it’s unlikely that very many other companies have the resources to replicate Microsoft’s feat. A company that wanted to develop a portable music player without also building an online music store and negotiating with the labels is still out of luck.
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EFF has filed an amicus brief in the Perfect 10 v. Google appeal to the Ninth Circuit. The case focuses on whether an image search engine can be held liable for displaying thumbnails of copyrighted images that were posted on third-party web sites without permission of the copyright holder. Judge Matz’s decision appears to be in tension with the Kelly v. Arriba Soft decision, which found that search engine thumbnails are a fair use. Here’s EFF’s argument:
Copyright law grants to rightsholders a limited set of statutorily defined exclusive rights, supplemented by narrowly drawn, judge-made principles of secondary liability. That set of rights plainly reaches the infringing activities of websites that amass and post unauthorized copies of Perfect 10’s photographs. Unsatisfied with the remedies afforded by copyright law against these infringers, Perfect 10 and its supporting amici urge this Court to expand the reach of copyright law to the four corners of the digital universe, ensnaring everyone from the individual web surfer who comes across a Perfect 10 image online, to search engines like Google that index these images alongside billions of others on the Web. Like the District Court below, this Court should reject this effort to hold the whole world liable for the infringing acts of a few.
As I wrote back in February, Judge Matz’s fair use analysis is deeply flawed:
Google Image Search doesn’t give any particular preference to web sites that serve up AdSense ads. And AdSense serves up ads regardless of what search engine brought the user to the site. If Google cancelled Google Image Search altogether, there’s little reason to think AdSense would suffer financially–users would likely find the same pages using other search engines… Google Image Search and AdSense are unrelated products. It makes no sense to consider them as a single product for the purposes of fair use analysis. That should be obvious to anyone with substantial experience using the web. It seems like a reasonable assumption that Judge Matz isn’t the most Internet-savvy guy around.
In my college days, I majored in both journalism and political science, but I briefly flirted with the idea of a major in psychology as well. (Actually, I was just trying to extend my college partying days as long as possible but I ran out of money!) While I was briefly flirting with the idea of a psychology major, I took a psyc class that featured a brief discussion of a subject that would forever change the way I look at the world and media issues in particular: “third-person-effect hypothesis.” Simply stated, the hypothesis predicts that people tend to overestimate the influence of communications / media on the attitudes and behavior of others relative to themselves. For example, many people will see media “bias” where there is none (or very little) and they will often advocate a “re-tilting” of the news in their preferred direction. (Incidentally, in case you’re wondering, there’s plenty of research to back up the thesis.)
When I first read about this hypothesis, I experienced a profound personal epiphany; a real “ah-hah!” moment that helped me finally unlock the secret to why so many people alleged media bias where I personally saw none. Specifically, it helped me understand why good friends of mine on both the political Left and Right saw different forms of bias in the exact same news. As someone who was, and remains, rabidly independent (I’ve never voted for either major party in my life and I doubt I ever will), I was always fascinated by this. When I sat down with classmates, friends, roommates or others to watch the news, I’d witnessed endless bickering among them about supposed slant one way or the other. But, with a few exceptions, I never quite saw or heard that bias myself. I’m not saying that all news is perfectly unbiased, it’s just that a large percentage of the time it is not biased and yet people argue that it is, but in decidedly different ways and directions.
What explains this? The answer is “third-person-effect hypothesis” and “hostile media effect” theory. To explain, let me step back and begin by telling you what got me thinking about this again.
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Wired has a story about Tesla Motors, a company that’s been getting a lot of buzz lately, and is likely to get even more press when its cars launch next year. They’re launching an electric sports car. Whereas most electric cars in the past have been “punishment cars” focused on efficiency and cost at the expense of range and performance, Tesla has gone in the opposite direction, targeting wealthy buyers and focusing on building an electric car that can compete with hgih-end sports car. It can apparently do 0-60 MPH in about 4 seconds.
Their plan is to build the sports car first, and then if that’s successful they’ll branch out and make lower-cost, family-oriented vehicles. They seem to believe that Detroit has largely focused on squeezing an electric motor into a gas-powered car, and that you can squeeze considerable efficiency out of an electric car if you design it from the ground up to run off of batteries. Given the incredible improvements in laptop battery life over the last decade, it seems like this might very well be true.
I’m not convinced that they can make the things competitive with traditional gas-powered cars, though. I see three problems, all related to fundamental properties of gasoline as opposed to batteries. First gasoline has phenomenally high energy density. That is, a kilogram of gasoline contains far more energy than an equivalent weight of even the best batteries. As a result, a lot more space in your electric car has to be taken up by batteries than the volume of the gas tank in an ordinary internal combustion engine car. You can see the batteries in their diagram of the Roadster: they run the width of the car and appear to take up as much room as a row of seats.
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On May 8, 1998, Paramount Pictures released a summer blockbuster in which a comet was discovered on a collision course with Earth. A team of astronauts is dispatched to destroy the comet with nuclear weapons before it hits Earth. After some setbacks, the astronauts do save the planet from total destruction, but they lose their lives in the effort.
On July 1, 1998, Touchstone Pictures released a summer blockbuster in which an asteroid was discovered on a collision course with Earth. A team of oil drillers is dispatched to destroy the asteroid with a nuclear weapon before it hits Earth. After some setbacks, the drillers do save the planet from destruction, but one of them loses his life in the effort.
The first film, Deep Impact cost $75 million to make and brought in $349 million worldwide. The second, Armageddon cost $140 million to make and brought in $553 million.
One of the assumptions behind the pro-platform rights argument I laid out last week was that increasing the rewards for platform creation lead firms to engage in socially-beneficial R&D spending. The hope is that increasing the returns to platform-creation will stimulate new R&D spending, which will in turn lead to innovations that expand the size of the economic pie. And, we hope, the pie should grow enough to offset the social costs of platform rights that I’ve laid out in previous posts.
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The Technology Liberation Front is the tech policy blog dedicated to keeping politicians' hands off the 'net and everything else related to technology.