Supreme Court oral arguments in FCC v. Fox (Background)

by on November 3, 2008 · 23 comments

Supreme CourtTomorrow morning, the U.S. Supreme Court will hear oral arguments in the potentially historic free speech case of Federal Communications Commission v. Fox Television Stations, Inc. I plan on attending and will try to post some thoughts about how the arguments played out here later tomorrow afternoon or evening. [I won’t be able to live blog of Twitter it because no electronic devices are allowed in the courtroom, which I’ve always thought is outrageous.] In the meantime, here again is the background of the case.

The FCC v. Fox case is the indecency case involving the FCC’s new policy for “fleeting expletives.” I wrote about the Second Circuit Court of Appeals decision here and the full 2nd Circuit decision is here. [By contrast, the so-called “Janet Jackson case” — CBS v. FCC — took place in the Third Circuit Court of Appeals and that court recently handed down a decision that also went against the FCC. I wrote about the Third Circuit’s decision here.]

In a 2-1 decision, the Second Circuit ruled that “the FCC’s new policy sanctioning “fleeting expletives” is arbitrary and capricious under the Administrative Procedure Act for failing to articulate a reasoned basis for its change in policy.” The decision demonstrates how, over just the past few years, the FCC has arbitrarily thrown out 30+ years worth of precedent and greatly expand the scope of its regulatory authority over speech on broadcast TV and radio. As a result, the FCC’s order was vacated and remanded to the agency. The agency appealed the decision, however, and the Supreme Court accepted it for review.

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Ticketmaster & Front Line Merger: Highway to Ticket Hell?

by on November 3, 2008 · 11 comments

Ticketmaster last week completed its acquisition of Front Line Management, a talent agency — expanding Ticketmaster’s empire into a vertically integrated unit renamed “Ticketmaster Entertainment.” Combine the acquisition with AC/DC announcing it is the latest band to use Ticketmaster’s “paperless ticket” technology on its live tour, and I’m left wondering — are we on the highway to ticket hell?

As I’ve written in a previous posting, Ticketmaster has introduced what it calls a “Paperless Ticket” and Veritix has a paperless ticketing technology called Flash Seats. The concept is the same – no more paper tickets.

And while I’m unabashedly pro-technology on many fronts, here’s where I’m skeptical. The use of electronic tickets, when combined with the recent vertical integration moves of both Ticketmaster and Live Nation, could provide less control for consumers to do what they want with tickets.

The trend in the industry is to integrate the 4 major aspects of a live show: 1) primary ticket sales; 2) management and promotion; 3) direct artist to fan (clubs and paraphernalia); and 4) secondary ticket sales. Technology can be used to help tie the ticket to all aspects of the business, and even provide more control to music artists, but the downside could be a lack of consumer control once the ticket is purchased.

Under Ticketmaster’s paperless tickets policy, you have to present a credit card and a government-issued photo identification for admittance. What if you want to sell the ticket? Or your baby sitter cancels in the last minute and you want to give your tickets to a friend? Can’t do it. At least not under the current policy.

AC/DC’s latest tour is named after its new album, Black Ice. Let’s hope that electronic tickets aren’t the cause of consumers skidding out of control of their own tickets.

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Freedom of Contract and Contract Costs

by on November 3, 2008 · 28 comments

I made the point last week that freedom of contract includes the right not to be party to contracts without your consent, and that consent has to involve some sort of affirmative action. Shrink-wrap contracts that are presented only after a sale is complete don’t cut it in my view. If the contract wasn’t available for review at the point of sale, then I don’t care what might be in the box. You didn’t consent to the contract.

Now, some people might (and in the comments to previous posts, did) claim that this is just nitpicking, and that the really important thing is to promote economic efficiency by making contract formation easier. On this theory, contract negotiations are a transaction cost, and it’s economically beneficial to lower transaction costs as much as possible. So even if you haven’t technically agreed to the shrink-wrap EULA before you leave Best Buy, some people might argue that you “should have known” there would be a EULA in the box, and therefore it’s economically efficient to bind you to the contract unless you return the product to the store.

The problem with this argument is that it focuses myopically on the costs of contract negotiation to the exclusion of other costs that in many cases are much more important. It should be remembered that every contract signed is a prelude to possible state coercion if the contract is broken. Like all other kinds of coercion, the possibility of contract-related litigation creates uncertainty and other deadweight costs. In addition, the act of offering contracts imposes a deadweight cost. Every time I’m presented with a contract, I have to at least skim through it to make sure that the terms are acceptable. A society in which contract formation is extremely cheap for one party will be a society in which other people have to spend a lot of time scrutinizing the contracts they offer. Finally, contracts impose costs on the court system. A legal system that makes contracts to cheap to create will lead to too much taxpayer money being wasted on contract litigation.

All of which is to say that economic efficiency is not promoted by making contract formation as cheap as possible. Rather, the goal should be to align incentives so that a party only offers a contract if its benefits to all parties outweigh its expected costs. One thing that we should particularly try to avoid is a situation in which offering contracts is almost costless to one party, but reviewing them is expensive for the other party. Because then the offering party will offer inefficiently many contracts favorable to itself, and its counterparties will accept inefficiently many contracts because the costs of scrutinizing them individually is too high.

In contrast, if things are structured so that each party bears roughly half the costs of contract negotiation, then each party is only going to propose a formal, written contract if he believes that the benefits of doing so will outweigh the costs to both parties. This is one of the good things about paper contract negotiations between flesh-and-blood people: If you give me a long contract to sign, you’re going to have to stand there and wait while I read the contract and decide if I want to sign it. Since standing around is a waste of your time, you’re only going to do that if you believe the transaction can’t happen without it. And you’re going to try to make the contract as short as possible so you don’t have to stand around too long.

In the vast majority of business transactions, the default UCC terms work just fine. Grocery stores don’t try to attach contracts to the items they sell because it would slow down the checkout line too much if customers had to stand around reading their Banana Licensing Agreements before they were allowed to take their groceries home.

The reason shrinkwrap licenses on software are more popular than supermarket checkout contracts is not because software sales are some kind of exotic financial transaction that require special contractual terms. The UCC defaults can and do work just fine for software. Rather, the reason software firms make extensive use of EULAs is because they’ve found a clever gimmick that allows them to use copyright law as a way to bypass the ordinary rules of contract law and foist almost all the costs of contract negotiation onto the customer.

If a grocery store checkout clerk slipped a Banana Licensing Agreement into your grocery bag, no court of law would regard that as an enforceable contract. But software vendors have been pushing the legal fiction that software is licensed rather than sold. And if software is licensed rather than sold, then using software without accepting the license agreement is copyright infringement, which operates under an entirely different set of rules than ordinary contract law.

This claim is pretty clearly contrary to copyright’s First Sale Doctrine, and some courts have explicitly rejected it in some cases, but other courts have upheld it, and software vendors find the ability to skirt the ordinary rules of contract law so convenient that they keep trying.

But as a policy matter, there isn’t any good reason to let them get away with it. It would be bad policy to allow grocery stores to attach Banana License Agreements to their customers’ banana purchases by putting a BLA in each grocery bag, and it’s equally bad policy to allow software vendors to bind their customers to contracts they’re not able to review until after a sale is made. If software vendors want the software they sell to come with particular contractual restrictions, they should have the clerk at Best Buy provide the customer with a copy of the license agreement and require her to sign it before she can leave the store. If software vendors aren’t willing to put their customers through that hassle (and I’d bet money that they’re not) then it’s obviously not that important to them for their products to come with contractual restrictions attached, in which case the right outcome is for the software to be sold without special contractual restrictions, the same way that movies, music, books, and other creative works do.

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Mythbusters Takes on the FAA

by on November 2, 2008 · 16 comments

As Adam Thierer has previously commented on this very blog, Mythbusters is “the best science show on TV in years.” Since the show tackles ridiculous beliefs that have entered the popular culture, it would make sense that at some point, they’d expose some dumb government policy. But, generally, the Mythbusters stay away from terribly controversial topics. So, unlike Bill Maher, they don’t debunk religious beliefs. And, unlike Adam, they haven’t shown that concerns over airplane terrorism are overblown.

But maybe Adam and Jamie’s policy is changing. I just watched an episode (which originally premiered in 2006) where they test whether cell phone signals can interfere with airplane avionics. Shockingly, even when they hauled into a real plane a radio transmitter broadcasting all kinds of cell phone signals at hundreds of times their normal power, there was no interference at all! This makes sense; after all, there are lots of radio signals travelling through the air everywhere anyway. Airplanes are built to ensure that these signals don’t affect their navigation equipment. And the EU has allowed cell phone use on planes for years, without incident. Plus, we all know that people have used their phones on planes in the US, just more covertly.

I reported on the US’s absurd ban before over at OpenMarket. And it looks like, in spite of liberalizing moves on the part of the FAA and FCC, the ban isn’t going anywhere, thanks to Congress. I guess you can bust myths with science, but the government won’t listen. If only we could recruit Mythbusters to show that the FDA does more harm than good or that Social Security creates fiscal insecurity.

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What’s More Dangerous: The Internet or Drunk Drivers?

by on November 2, 2008 · 10 comments

My friend Larry Magid, one of America’s leading Internet safety experts, has an outstanding column over at the Yahoo Kids “Connected Parent” site entitled “Is the Internet as Dangerous as Drunk Driving?” In it, he discusses the surprising results of a recent survey of 1,000 moms of teenagers commissioned by McAfee and conducted by Harris Interactive which found that “about two-thirds of mothers of teens in the United States are just as, or more, concerned about their teenagers’ online safety, such as from threatening emails or solicitation by online sexual predators, as they are about drunk driving (62 per cent) and experimenting with drugs (65 per cent).”

Like Larry, I was a bit shocked that so many mothers would equate online safety with the dangers of drunk driving. After all, as Larry proves, the relative risks aren’t even close:

While moms have good reason to be concerned about how their teens use the Internet, online dangers pale compared to the risks of drunk driving. In 2007, 6,552 people were killed in auto accidents involving young drivers (16-20), according to the National Highway Transportation Safety Administration (NHTSA). In 2006, nearly a fifth (18%) of the 7,643 15- to 20-year-old drivers involved in fatal traffic crashes had a blood had a blood alcohol concentration of .08 or higher.

Perception of Internet danger has been heightened thanks to the TV show “To Catch a Predator” and inaccurate reports such as “one in five children have been sexually solicited by a predator.” That statistic is a misquote from a 2000 study by the Crimes Against Children Research Center. The data (which, based on a 2005 follow-up study was revised to one in seven) is based on a survey that asked teens if they had in the last year received an unwanted sexual solicitation.

But many (possibly most) of those solicitations were from other teens, not from adult predators. What’s more most recipients didn’t view them as serious or threatening, “almost all youth handled the solicitations easily and effectively” and “extremely few youth (two out of 1500 interviewed) were actually sexually victimized by someone they met online,” reported the authors of the study. Other studies have shown that “the stereotype of the Internet child molester who uses trickery and violence to assault children is largely inaccurate” (Wolak, Finkelhor & Mitchell, 2004). In a survey of law enforcement investigators of Internet sex crimes, it was reported that only 5% of offenders pretended to be teens when trying to meet potential victims online.

Those of us who work on Internet policy issues need to do a better job of helping the press and public put online safety risks in proper perspective. Misguided Internet legislation is often premised upon irrational or conjectural fears. Unfortunately, a lot of average moms have been swayed by misperceptions, many of which have been driven by the press or public interest groups that favor more regulation of the Net.

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“Intellectual Property Colloquium” podcast with Doug Lichtman

by on November 2, 2008 · 4 comments

We’ve failed to keep our podcast alive here at the TLF — and I apologize about that — but there are still a lot of good tech policy-related podcasts out there for you to listen to. Here’s a new one that sounds very promising. It’s called the “Intellectual Property Colloquium” podcast, and it’s hosted by the brilliant Doug Lichtman, a professor of law at UCLA Law School.

The first show features a discussion that took place in one of Prof. Lichtman’s classes in which the always-interesting Fred Von Lohmann of the Electronic Frontier Foundation (EFF) begins by talking about the controversial Cablevision DVR case and then transitions into copyright law and infringement more generally. Doug jumps into the conversation about 12 minutes and needles Fred with a litany of excellent questions that really get the debate going. Whenever Doug and Fred go at it, it is a real intellectual clash of the titans.

The upcoming shows look just as good. Next up is a debate between Stacey Byrnes of NBC-Universal and Tim Wu of Columbia University about the DMCA notice-and-takedown process. The November show will include Dan Solove talking about “Privacy in a Networked World.” [I am just finishing up his important new book, Understanding Privacy, and I will be posting a review of it here soon.] And the December show is called “Everyone Hates DRM,” and is set to include Ed Felton of Princeton University versus Dean Marks of Warner Brothers. That should be a interesting conversation.

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Use Competition to Bridge the Gap in Human Spaceflight

by on October 31, 2008 · 4 comments

As TLF readers may know, I took over in July as Chairman of the Board of the Space Frontier Foundation.  As I explained in my recent interview on The Space Show, SFF has been the leading citizens’ advocacy group for space commercialization since 1988.  Dedicated to promoting Princeton physicist Gerard O’Neill‘s vision of space settlement, as described in his 1976 masterpiece The High Frontier, the Foundation has always argued that “space is a place, not a program.”

We sent out the following press release on October 28, calling for a major transformation of the U.S. government’s space program by which the U.S. government would buy commercial transportation to the International Space Station.  We’ll have more to say about this in the coming weeks.

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Space Frontier Foundation Finds Funding Source for COTS-D

The Space Frontier Foundation today called upon Presidential candidates Barack Obama and John McCain to invest the $2 billion in new funds they have promised to NASA for reducing the “Gap” in U.S. human spaceflight (after the Space Shuttle is retired in 2010) to spur innovation and competition in America.

Foundation Chairman Berin Szoka said “It’s time that our national leaders give American entrepreneurs a shot at closing this gap. Let’s take the two billion dollars in the candidates’ plans and fund up to five winners of COTS-D.”

The NASA Authorization Act of 2008, recently signed into law by the President, directs NASA to “issue a notice of intent [by mid-April 2009] … to enter into a funded, competitively awarded Space Act Agreement with two or more commercial entities’ for transporting humans to the ISS”-the “Capability D” of NASA’s Commercial Orbital Transportation Services program (or COTS-D for short). But that directive is not yet funded.

Szoka continued, “Let’s have an American competition in space – to create good jobs, fuel innovation, and close the gap more quickly. With private funds matching government’s investment, we can dramatically leverage the $2 billion to produce breakthroughs in a new American industry – commercial orbital human spaceflight.” Continue reading →

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New Economy Business Models (Carr vs. Anderson)

by on October 31, 2008 · 11 comments

Somewhere between Nick Carr’s “Typology of Network Strategies” and Chris Anderson’s “Four Kinds of Free” is the secret to understanding our new economy:

Carr’s “Typology of Network Strategies”:

  1. Network effect
  2. Data mining
  3. Digital sharecropping, or “user-generated content”
  4. Complements
  5. Two-sided markets
  6. Economies of scale, economies of scope, and experience

Anderson’s “Four Kinds of Free”:

  1. Direct cross-subsidy (get one thing free, pay for another)
  2. Ad-supported (third-party subsidizes second party)
  3. “Freemium” (a few people subsidize everyone else)
  4. “Gift economy” (people give away things for non-monetary rewards)

Of course, both Carr and Anderson are building on theories and business models previously articulated by many others. A few that come to mind:

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Goodbye to Most Business Method & Software Patents?

by on October 30, 2008 · 11 comments

The Federal Circuit significantly limited the patentability of software and business methods today.  Mike Masnick at TechDirt summarizes the holding of the case as follows:

the court has said that there’s a two-pronged test to determine whether a software of business method process patent is valid: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing. In other words, pure software or business method patents that are neither tied to a specific machine nor change something into a different state are not patentable.

I’m sure several of my TLF colleagues will have a great deal to say about this.   Tim Lee has already written about this on Ars Technica:

The Bilski decision, then, is a clear signal that the pendulum has begun to swing back toward tighter limits on software and business patents. However, it remains to be seen how far the court will go in this direction. Bilski was a relatively easy case. The applicant made little effort to hide the fact that he was seeking to patent a mental process, something the Supreme Court has clearly said is not allowed. Therefore, the Federal Circuit’s rejection of this patent doesn’t tell us how it will rule when confronted with software or business method patents that are tied more directly to a physical machine or a transformation of matter. And indeed, the Federal Circuit reiterated that some software and business method patents are valid, so we are unlikely to return to the near-prohibition on such patents that prevailed until the early 1980s.

Thoughts?

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Reform Intercarrier Compensation

by on October 30, 2008 · 5 comments

The Federal Communications Commission began a broad inquiry of intercarrier compensation in 2001 and now it may finally be getting around to acting on it on Nov. 4 while everyone’s thoughts are on something else.

This is about 12 years overdue. Congress in 1996 foresaw that implicit phone subsidies were unsustainable and ordered the FCC to replace them with a competitively-neutral subsidy mechanism. Due to political pressure, regulators have failed to complete the job.

Intercarrier compensation refers to “access charges” for long-distance calls and “reciprocal compensation” for local calls. A long-distance carrier may be forced to pay a local carrier more than 30 cents per minute to deliver a long-distance call, but local carriers receive as little as .0007 cents per minute to deliver calls they receive from other local carriers.

Once upon a time, before fiber optics, there were significant distance related costs. Now distance isn’t a major factor.

The high access charges remain only because the recipients, typically small and mid-size phone companies serving sparsely populated areas, have successfully lobbied regulators and legislators to keep them.

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