July 2009

Probably largely the same reason that people hate lawyers:  Anytime you’re dealing with legal rights and contracts, it’s a pain to get anything done. (Having just celebrated my fifth law school reunion, I should know!)

Case in point: I was thrilled to discover the Canadian radio show The Age of Persuasion, dedicated to a subject I’ve come to know and love (to the point of considerable repetition): advertising! Yup, that’s right, those annoying little ads that fund all the free online content and services we all take for granted.

Anyway, the good news is that the show is available online.  The bad news is that it’s only available in streaming audio form—which means I can’t take it with me on my iPod, which means I’ll basically never listen to it.  From Podcasting: what’s ‘holding up the delay’?:

Okay, we’ve got to stop meeting like this.

Time, she passes, yet the legals surrounding podcasting are yet to be settled. Meanwhile, our finely honed spider-sense (and a steady stream of daily emails) tells us many of you are wondering when an AOP podcast will happen.

Alas, for the moment, we are bound not to release Age of Persuasion episodes for podcast. (No, we don’t like it either.)

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Nick Wingfield has a great piece in today’s WSJ: Yahoo Tie-Up Is Latest Sign Tide Turning for Microsoft’s Ballmer (subscription required but can be found through a Google News search) about how Microsoft’s fortunes may be looking up across the board—especially with yesterday’s Yahoo!/Microsoft search/advertising partnership. The most interesting passage is this one:

For [Microsoft CEO Steve] Ballmer, the agreement provides some redemption in an area he has stressed is critical to Microsoft’s future. In an interview, he says the Yahoo deal received “more of my personal attention over the last 18 months than anything else we’re involved with,” including focusing on its most important new product in years, Windows 7. “It’s a big deal,” he says.

Of course, complex partnerships always require lots of time from senior management, but in this case, Ballmer’s quip speaks directly to the costs of antitrust scrutiny in terms of one of the most valuable resources available to any company: the time and attention of senior management. The “attentional cost” can of this deal for Microsoft could be broken into four parts beyond the normal costs of structuring any deal to make the most business sense:

  1. How to structure the a Microsoft/Yahoo! deal so that it would be approved by regulators (defensive);
  2. How to block a Google/Yahoo! deal (offensive);
  3. Nursing the deal through the regulatory approval process over the coming months; and
  4. The possibility that all of these costs could be wasted, to varying degrees, if antitrust regulators decide to block or restrict the deal.

These are all “deadweight losses” on the economy pure and simple—and ultimately costs to consumers.

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Eric Goldman, one of the few active cyberlibertarians in legal academe, has a thoughtful post about the search partnership announced today. Eric notes blogger Danny Sullivan’s observation about the decline in Yahoo’s assets and his comment that:

Microsoft is getting a huge bargain courtesy of the US Department Of Justice. Without Google being able to compete for Yahoo’s business, the billions that were floating around in 2008 become millions in 2009.

Danny and Eric certainly have a strong point: One of the costs of the Justice Department’s decision to block Google from partnering with Yahoo! is that Yahoo! wound up fetching much less in its deal with Microsoft. But the intervening slump in the economy and online advertising has also contributed in the drop in Yahoo!’s share price and overall valuation, so it’s difficult to make an apples-to-apples comparison. Eric is probably right that in assessment that:

Yahoo was unbelievably crazy for passing on Microsoft’s acquisition proposal from a year-and-a-half ago. It looked like a foolish mistake at the time, and hindsight has definitely not improved that assessment!

It would seem that both Yahoo! and Microsoft under-estimated the likelihood that antitrust regulators would block a Yahoo!/Google deal a year ago: Microsoft probably wouldn’t have offered as much as it did to acquire Yahoo!’s search business ($31/share) and Yahoo! (currently $15.14/share) certainly wouldn’t have held out for a better deal from Google. While the end result ended up being a Yahoo!/Microsoft deal anyway, the delay of over a year in reaching a deal is itself a significant cost of what economists would call the “regime uncertainty” created antitrust: Without clear rules, it’s difficult for economic actors to predict the decisions by regulators. A delay of a year could well prove to make a big difference in the ability of the two companies to mount a successful response to Google in search and advertising—just as Microsoft’s 18 month delay back in 2003-2004 in developing a search ad auction system to respond to Google’s AdWords system (which now produces 2/3 of its revenue) probably did much to thwart Microsoft’s initial efforts to compete in search. Continue reading →

A key point that Berin and I try to get across in our Forbes editorial today about the Yahoo!-Microsoft deal is that the high-tech marketplace evolves too rapidly for creaky Analog Era antitrust laws to keep up. We wanted to say more on that point in our piece, but we had a tight deadline (and a strict word limit!)  Well, turns out that we really don’t need to do so now because Farhad Manjoo of Slate has done a better job than we ever could have making that point in this essay today entitled, “The Case Against the Case Against Google“:

But if the government was right on the facts [in the Microsoft case], it was wrong on the big picture. The theory behind the prosecution was that Microsoft’s mobster tactics would raise the price of software and slow down innovation. But that didn’t happen. In 2002, Microsoft settled the antitrust case with the Bush administration; it faced no substantial penalties for its years of bad behavior. At that point, it still looked unbeatable—it had the same OS monopoly, office-software monopoly, and Web-browser monopoly. And you know what happened? It got beat anyway. Many of Microsoft’s assets turned out not to matter, because upstarts like Google and old foes like Apple found ways to innovate around them.

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We’ve just published an op-ed over at Forbes.com about today’s big Yahoo!-Microsoft deal.

Searching For Success: Web 1.0 Titans Struggle to Reinvent Themselves
by Berin Szoka & Adam Thierer

Yahoo! and Microsoft on Wednesday announced a partnership in which Microsoft’s Bing search engine technology will power search for both companies, but Yahoo! will manage advertising sales and content creation.

This should be cause for celebration as a good thing for consumers. By providing a strong competitor with a combined 28% market share, the deal should also be a source of relief at Google, which has come under increasing attack for its supposed market dominance. But if recent concerns about online search, advertising, competition and privacy are any guide, many will fail to appreciate why the deal is pro-consumer, or what it says about the rapid evolution of the Internet.

It’s easy to forget that just a decade ago most of us still hadn’t done our first Google search, Microsoft was still focused on the desktop and Yahoo! was still serving up the online equivalent of the Yellow Pages. AltaVista, AOL, CompuServe and Geocities still ruled the roost.

Today, as we enjoy the fruits of a true cyber-renaissance, cyberspace circa 1999 increasingly looks like the Digital Dark Ages: The old online walled gardens have crumbled, desktop applications have migrated to the cloud and search has redefined our experience of the Web.

Oh, and did we mention just about all of it is “free“? Sounds like exactly the sort of vigorous innovation, expanding consumer choice, falling prices and cut-throat competition that policymakers should want, right?

Alas, regulators seem stuck in the past. European officials in particular seem hell-bent on continuing the antitrust crusade of the ’90s against Microsoft, myopically focused on fading paradigms (desktop operating systems and Web browsers). But instead of narrowly defining high-tech markets based on yesterday’s technologies or market structures, policymakers should embrace the one constant of the Internet economy: dynamic, disruptive and irrepressible change.

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My comments on the new Microsoft/Yahoo ad deal appears below. Please ignore the date.

As part of a revise-and-resubmit process, I’ve been spending much of my summer upgrading my draft book, Intellectual Privilege: A Libertarian View of Copyright. That effort has led me to revisit copyright’s constitutional foundations. I find them very shaky, indeed. This passage (with footnotes excerpted) explains why modern copyright law often fails “to promote the Progress of Science and the useful Arts”:

What would copyright look like if we took the Constitution at its word, requiring that copyright promote the progress of both science and the useful arts? We would then have to look askance at the current practice of affording copyright protection to such purely artistic creations as songs, plays, novels, paintings, and sculptures. Even supposing that “science” reaches broadly enough to cover all of the humane sciences—a reading that Malla Pollack documents as an original meaning of the term—copyright law today focuses far more on the expressive arts than on the “useful” ones.

Taking “Science and useful Arts” seriously would thus radically narrow the proper scope of copyright. The first Copyright Act, enacted in 1790 by some of the same people who wrote and ratified the Constitution, covered only maps, charts, and books. Permitting copyrights in first two types of works plainly promoted both science and the useful arts. Lawmakers in 1790 probably regarded books, too, primarily as tools rather than diversions. Novels had yet to rise to prominence, after all; the first American one, William Hill Brown’s THE POWER OF SYMPATHY, had appeared only the year before, and even it aimed at practical ends, promising “to Expose the fatal consequences of SEDUCTION.” Judging from the titles in libraries and on sale, fiction made up only a small portion of the books available in late eighteenth century America. The 1790 Copyright Acts moreover excluded such purely artistic expressions as songs, plays, paintings, and sculptures—even though its drafters undoubtedly knew of and appreciated those sorts of works.

It appears, then, that “[t]o promote the Progress of Science and useful Arts” originally meant that that copyrights had to serve practical ends, rather than merely expressive ones. But originalists should not alone embrace that constitutional limitation on copyright’s scope. Given that “Science” now connotes a more technical and specialized endeavor than it did in the eighteenth century, the plain, present, public meaning of the Constitution likewise counsels against extending copyright protection to purely artistic works. Whether we give the Constitution’s text its original meaning or its current one, therefore, copyright should cover little more than maps, charts, non-fiction books, illustrations, documentaries, computer programs, and architecture. Most songs, plays, fictional books, paintings, sculptures, dances, movies, and other artistic works, because they fail to promote the progress of science and the useful arts, would on that reasoning not qualify for copyright protection.

However rigorously logical, that argument against the constitutionality of almost all modern copyright law will, I grant, probably generate more grins than agreement. Courts and commentators have hitherto hardly bothered to distinguish between “Science and useful Arts”; still less have they taken those words to impose real limitations on federal power. Here as elsewhere, acquiescence to long-accepted practices has dulled us to the Constitution’s bracingly straightforward words. We should read them anew and reflect that the Founding generation did not evidently think that granting statutory privileges to such purely artistic creations as romantic operas or pretty pictures would promote the progress of both science and the useful arts. Furthermore, most citizens today would, if presented with the Constitution’s plain language rather than the convoluted arguments of professional jurisprudes, probably say the same thing about pop songs, blockbuster movies, and the like. That is certainly not to say that purely expressive works lack value. They may very well promote such important goals as beauty, truth, and simple amusement. The Constitution requires that copyright promote something else, however—”the Progress of Science and useful Arts”—and a great many works now covered by copyright cannot plausibly claim to do both.

This argument against the constitutionality of most modern copyright relies, by the way, on a prior argument about the structure of the copyright clause; to wit, that “Science and useful Arts” modifies both “authors” and “inventors.” Also, I intend to follow up the above with an analysis of how the Supreme Court in Eldred took a view almost exactly opposite to the text-based one I’ve embraced. (I’d call that an admission, were I not proud to disagree with the Court.)

[[Crossposted at Agoraphilia, TechLiberation Front.]

Adam SmithTwo weeks ago, I mentioned here that John Stuart Mill’s On Liberty celebrated its 150th anniversary this year.  This year also marks the anniversary of another classic text: Adam Smith’s The Theory of Moral Sentiments, which turns 250 this year.   Although Smith will always be most closely associated with The Wealth of Nations, some Smith fans (like me) consider The Theory of Moral Sentiments to be his real masterpiece.  First published in 1759, the book is a far more robust theory of life, ethics, human relations, and justice.  Indeed, as Dan Klein and Russ Roberts of George Mason University note in this excellent podcast, The Wealth of Nations is best viewed as an installment in, or an extension of, a much larger project that Smith really brought together more holistically in Theory of Moral Sentiments. [Note: Klein and Roberts have an amazing 6-part podcast series celebrating the 250th anniversary of the book, all of which can be found here].

Rarely has any moral philosopher gotten to his point quicker — namely in the very first line of the first page of the text — than Smith did in Theory of Moral Sentiments.  Smith wanted to show that man is both self-regarding and other-regarding, and that these seemingly contradictory notions were actually quite complementary.  In other words, “self-interest” (properly understood) and empathy for others could be reconciled:

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it. Of this kind is pity or compassion, the emotion we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrows of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous or the humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it. [Book I, Chap. 1]

These opening lines make it clear why those who have criticized Smith’s theories as based on nothing more that greed or selfishness simply don’t know what they are talking about.  Continue reading →

The new Maine law I blogged about on Sunday is much worse than I thought based on my initial reading. If allowed to stand, it would constitute a sweeping age verification mandate introduced through the back door of “child protection.”

The law, which goes into effect in September, would extend the approach of the Children’s Online Privacy Protection Act (COPPA) of 1998 by requiring “verifiable parental consent” before the collection of kids “personal information” about kids, not just those under 13, but also adolescents age 13-17.  Unlike other state-level proposals in New Jersey, Illinois, Georgia and North Carolina, Maine’s “COPPA 2.0” law would also cover health information, but would only govern the collection and use of  data for marketing purposes (while the FTC has interpreted COPPA to cover to essentially any capability for communicating personal information among users).

But the Maine law would go much further than these proposals or COPPA itself by banning transfer or use of such data in anything other than de-identified, aggregate form. Still I took some comfort in the fact that the Maine law, unlike COPPA or these other proposals, lacked the second of COPPA’s two prongs: (i) collection from kids and (ii) collection on sites that are directed at kids. It’s because of the second prong that COPPA applies not only when a site operator knows that it’s collecting information from kids (or merely allowing them to share information with other users), but also when the operator’s site is (like, say, Club Penguin) targeted to kids in terms of its subject matter, branding, interface, etc. Because I initially concluded that the Maine law would apply only to knowing collection, I supposed that it would be less likely to require age verification of all users, as other COPPA 2.0 proposals would—something that would be unlikely to survive a First Amendment challenge based on the harm to online anonymity.

But I was quite wrong. During the PFF Capitol Hill briefing Adam and I held on Monday, Jim Halpert, one of our panelists, noted that the bill imposed “strict liability.”  Continue reading →

The FCC has less than seven months to complete and submit to Congress a “National Broadband Plan For Our Future.” Last week, CEI filed reply comments with the FCC on the broadband plan. One of our arguments was that network neutrality rules amount to price controls. ArsTechnica quoted our comments in a recent article and expressed skepticism toward our contention about neutrality mandates:638px-World_War_II_Domestic_Price_Controls

“In particular, [neutrality rules] require ISPs to offer content providers a price of zero, and to differentiate prices to consumers only in certain limited ways,” says CEI’s filing. “The disastrous consequences of price controls are all too familiar. And while neutrality may currently align with industry best practices, that fact limits the possible benefits just as much as the possible harm.”

Content providers pay for bandwidth on the competitive market, so it’s not clear what the line about “a price of zero” refers to (that money is passed along to other ISPs along the network path through the mechanism of “peering and transit“). But it is clear what groups like CEI want from a broadband plan: nothing at all.

Ars is correct in pointing out that pricing based on usage is already commonplace in the form of the well-established system of peering arrangements and transit pricing. But pricing needn’t be based solely on usage; it could also be based on priority levels or quality of service tiers. Such pricing schemes remain in a nascent stage, yet many of them would be prohibited or restricted by neutrality rules. This is because neutrality rules by definition set the price of many kinds of data prioritization at zero. Thus, even if an effective mechanism for differentiating between data streams at the network level were to gain traction, it would be subject to regulatory burdens if neutrality were to be enshrined into law.

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