Corbin Barthold invited me on Tech Freedom’s “Tech Policy Podcast” to discuss the history of antitrust and competition policy over the past half century. We covered a huge range of cases and controversies, including: the DOJ’s mega cases against IBM & AT&T, Blockbuster and Hollywood Video’s derailed merger, the Sirius-XM deal, the hysteria over the AOL-Time Warner merger, the evolution of competition in mobile markets, and how we finally ended that dreaded old MySpace monopoly!

What does the future hold for Google, Facebook, Amazon, and Netflix? Do antitrust regulators at the DOJ or FTC have enough to mount a case against these firms? Which case is most likely to have legs?

Corbin and I also talked about the of progress more generally and the troubling rise of more and more Luddite thinking on both the left and right. I encourage you to give it a listen:

Here’s a new animated explainer video that I narrated for the Federalist Society’s Regulatory Transparency Project. The 3-minute video discusses how earlier “tech giants” rose and fell as technological innovation and new competition sent them off to what the New York Times once appropriately called “The Hall of Fallen Giants.” It’s a continuing testament to the power of “creative destruction” to upend and reorder markets, even as many pundits insist that there’s no possibility change can happen.

This is an important lesson for us to remember today, as I noted in the recent editorial for The Hill about why, “Open-ended antitrust is an innovation killer“:

Those who worry about today’s largest tech giants becoming supposedly unassailable monopolies should consider how similar fears were expressed not so long ago about other tech titans, many of which we laugh about today. Just 14 years ago, headlines proclaimed that “MySpace Is a Natural Monopoly,” and asked, “Will MySpace Ever Lose Its Monopoly?” We all know how that “monopoly” ceased to exist. At the same time, pundits insisted “Apple should pull the plug on the iPhone,” since “there is no likelihood that Apple can be successful in a business this competitive.” The smartphone market of that era was viewed as completely under the control of BlackBerry, Palm, Motorola and Nokia. A few years prior to that, critics lambasted the merger of AOL and TimeWarner as a new corporate “Big Brother” that would decimate digital diversity and online competition.

Accordingly, policymakers should be humble and recognize that, “it’s better to let rivalry and innovation emerge organically,” and only bring in the wrecking ball of heavy-handed antitrust regulation as a last resort, I argued. Technological change and entrepreneurialism has a way of upending and reordering markets when we least expect it. Just ask all those members of the Hall of Fallen Giants.

by Walter Stover and Anne Hobson

Franklin Foer’s article in the Atlantic on Jeff Bezos’s master plan offers insight into the mind of the famed CEO, but his argument that Amazon is all-powerful is flawed. Foer overlooks the role of consumers in shaping Amazon’s narrative. In doing so, he overestimates the actual autonomy of Bezos and the power of Amazon over its consumers. 

The article falls prey to an atomistic theory of Amazon. The thinking goes like this: I am an atom, and Amazon is a (much) larger atom. Because Amazon is so much larger than I am, I need some intervening force to ensure that Amazon does not prey on me. This intervening force must belong to an even larger atom (the U.S. government) in order to check Amazon’s power. The atomistic lens sees individuals as interchangeable and isolated from each other, able to be considered one at a time.

Foer’s application of this theory appears in his treatment of Hayek, one of the staunchest opponents of aggregation and atomism. For example, when he summarizes Hayek’s paper “The Use of Knowledge in Society,” he phrases Hayek’s argument as that “…no bureaucracy could ever match the miracle of markets, which spontaneously and efficiently aggregate the knowledge of a society.” Hayek found the notion of aggregation highly problematic, as seen in another of his articles, “Competition as a Discovery Procedure,” in which he criticizes the idea of a “scientific” objective approach to measuring market variables. His argument against trying to build a science on macroeconomic variables notes that “…the coarse structure of the economy can exhibit no regularities that are not the results of the fine structure… and that those aggregate or mean values… give us no information about what takes place in the fine structure.”

Neither Amazon nor the market can aggregate the knowledge of a society. We can try to speak of the market in aggregate terms, but we end up summing up all of the differences between individuals and concealing the action and agency of the individuals at the bottom. We cannot speak of market activity without reference to the patterns of individual interactions. It is best to think of the market as an emergent, unintended outcome of a constellation of individual actors, not atoms, each of whom have different talents, wants, knowledge, and resources. Actors enter into exchanges with each other and form complicated, semi-rigid, multi-leveled social networks.

Foer describes the great power and wealth of “knowledge” that Amazon has acquired:

“Amazon, however, has acquired the God’s-eye view of the economy that Hayek never imagined any single entity could hope to achieve. At any moment, its website has more than 600 million items for sale and more than 3 million vendors selling them. With its history of past purchases, it has collected the world’s most comprehensive catalog of consumer desire, which allows it to anticipate both individual and collective needs. With its logistics business—and its growing network of trucks and planes—it has an understanding of the flow of goods around the world. In other words, if Marxist revolutionaries ever seized power in the United States, they could nationalize Amazon and call it a day.”

“…[Amazon] distributes economists across a range of teams, where they can, among other things, run controlled experiments that permit scientific, and therefore effective, manipulation of consumer behavior.”

Yet, having data (or having PhD economists, for that matter) is not the same as having complete knowledge or predictive power. Again, the atomistic theory reappears in the assumption that the behavior of individuals can be predicted based on past information in the same way we could compute the trajectory of a single billiard ball. The local, dispersed knowledge Hayek discussed in “The Use of Knowledge” is subjectively held in the minds of the actors, and thus inaccessible to outside observers. People do not, in fact, carry around independently fixed utility functions in their heads from which they–or anyone else–can accurately predict what they will choose in the future. 

 Instead, as economist James Buchanan argues, choices are genuine in that “participants do not know until they enter the process what their own choices will be.” In other words, wants are themselves generated in the choosing process. Amazon cannot reverse engineer the process from any single snapshot, or any series of snapshots, because choices are subjective and dynamic. As an example, any behavior–such as targeted ads or preferential pricing–based on attempts to predict future patterns of consumer behavior is itself information that enters into consumer purchasing decisions. 

Even assuming that Amazon could perfectly predict consumer preferences, this would not pose any kind of threat to consumer welfare, because consumers still retain the ability to shop elsewhere. And competition on the retailer front is still rampant. Walmart has 265 million customers each week and 2.2 million global employees. By contrast, Amazon has 105 million prime subscribers and 613,300 global employees. As long as Amazon cannot exercise coercive authority over consumers, it remains unclear why, exactly, increased predictive power would damage consumer welfare. 

When discussing the high level of trust consumers have in Amazon, Foer argues that “…while Amazon is trusted, no countervailing force has the inclination or capacity to restrain it.” 

Foer again ignores the diffuse countervailing power of consumers, somewhat similar in fashion to Hayek’s notion of dispersed knowledge. Individuals may not be able to exercise much power by themselves against Amazon, but they wield extraordinary power when taking the entire constellation of actors into consideration. This is not the same thing as a collective, organized response such as unions or consumer welfare protection organizations such as the Better Business Bureaus, though these organizations doubtless have very important roles to play. 

In the same way that the market order is a spontaneous outcome of individuals pursuing their own interests, the decentralized actions of consumers in the market similarly can result in the fortunes or fall of a firm without the need to organize everyone involved. Every choice made in the market on the margin is a signal to the firm. A decision to buy books from other websites (for example, from Alibris and not Amazon) is a minute manifestation of this diffuse power of consumers. One signal by itself does not carry much leverage, but when taken in totality, they constitute an ordered force that exerts powerful feedback on a firm’s actions. 

Such a theory of diffuse power can appear profoundly unsatisfactory. We tend to favor narratives of Davids versus Goliaths in part perhaps because we are unaccustomed to trying to think about spontaneous orders in general. In the long run, Amazon will live or die, but not according to the schedule or preferences of a single consumer. 

Diffuse power might seem to be a weak check, but what is the alternative? There are risks to policy intervention (as Foer points out, Marxists could nationalize Amazon and then try to use the consolidated information to run the economy, with disastrous results). Policymakers could restrict Amazon’s growth or activity in a way that limits innovation. It could step in too early and prevent consumer signals from running their course and changing Amazon’s direction to align more with our wants. 

Consumer signals in totality do serve as a countervailing force. And the evidence is in Foer’s article. Amazon (and Bezos in particular) is obsessed with consumer satisfaction and we all benefit from his obsession.

Note: This piece is part three of a series on the epistemic limitations of Artificial Intelligence. Part one on “The Limits of AI in Predicting Human Action” of that series can be found here. Part two on “Amazon, Artificial Intelligence, and Digital Market Manipulation” can be found here.

By Adam Thierer & Jennifer Huddleston Skees

“ He’s making a list and checking it twice. Gonna find out who’s naughty and nice .”

With the Christmas season approaching, apparently it’s not just Santa who is making a list. The Trump Administration has just asked whether a long list of emerging technologies are naughty or nice — as in whether they should be heavily regulated or allowed to be developed and traded freely.

If they land on the naughty list, these technologies could be subjected to complex export control regulations, which would limit research and development efforts in many emerging tech fields and inadvertently undermine U.S. innovation and competitiveness. Worse yet, it isn’t even clear there would be any national security benefit associated with such restrictions.  

From Light-Touch to a Long List

Generally speaking, the Trump Administration has adopted a “light-touch” approach to the regulation of emerging technology and relied on more flexible “soft law” approaches to high-tech policy matters. That’s what makes the move to impose restrictions on the trade and usage of these emerging technologies somewhat counter-intuitive. On November 19, the Department of Commerce’s Bureau of Industry and Security launched a “ Review of Controls for Certain Emerging Technologies .” The notice seeks public comment on “criteria for identifying emerging technologies that are essential to U.S. national security, for example because they have potential conventional weapons, intelligence collection, weapons of mass destruction, or terrorist applications or could provide the United States with a qualitative military or intelligence advantage.”

The Commerce Department has long sought to control the use of such technologies through a combination of methods, including formal export controls. The process for establishing such controls was clumsily cobbled together over time, so Congress passed the Export Control Reform Act of 2018 (ECRA) to formalize these regulations. ECRA requires that the President formulate an interagency process to coordinate these rules with the goal of creating, “a regular and robust process to identify the emerging and other types of critical technologies of concern, as defined in United States foreign direct investment laws, and regulate their release to foreign persons as warranted regardless of the nature of the underlying transaction.” As part of this process, the Commerce Department is to create a list “of foreign persons and end-uses that are determined to be a threat to the national security and foreign policy of the United States . . .  and to whom exports, reexports, and transfers of items are controlled.”

Sweeping Breadth

That is what prompted the Trump Administration’s recent Emerging Technologies notice, which includes is a remarkably sweeping list of technologies that the Commerce Department is considering for the exports controls list. The list has 14 major categories:

(1) Biotechnology

(2) Artificial intelligence

(3) Position, Navigation, and Timing (PNT) technology

(4) Microprocessor technology

(5) Advanced computing technology

(6) Data analytics technology

(7) Quantum information and sensing technology

(8) Logistics technology

(9) Additive manufacturing / 3D printing

(10) Robotics

(11) Brain-computer interfaces

(12) Hypersonics

(13) Advanced materials

(14) Advanced surveillance technologies

The Department’s 14-category list also includes over 40 itemized examples of specific applications. For example, the “artificial intelligence” category alone includes a list of 11 applied types of AI, from AI cloud technologies and chipsets to neural networks to speech and audio processing.

The breadth of this list is remarkable in that it touches almost every emerging technology sector imaginable. It might have been easier for the Commerce Department to simply list those emerging technologies that will not be subject to review for potential export controls. It is an “everything-but-the-kitchen-sink” approach to emerging technology policy oversight and regulation that could clearly have far reaching consequences beyond national security.

There are some obvious dangers with such an open-ended review and it is important to remember these technologies have many beneficial applications as well as any potential risks.

Threatening Beneficial Uses

First, the potential export regulations create the danger of negative spillover effects that could undermine beneficial uses of each technology listed . All of the technologies listed have already been used in many ways that benefit both consumers and businesses. Limitations on their export could limit their availability or prevent improvements due to concerns that such broad interpretations of restrictions could limit the market.

For example, the regulation of AI mentioned above would not only address concerns about how AI might be used in weapons, but could even undermine the export of technology that has become a part of our everyday lives such as Siri in iPhones and Amazon’s Alexa. While the department claims that it seeks to “avoid negatively impacting U.S. leadership in the science, technology, engineering, and manufacturing sectors,” it is unlikely that any but the most narrowly tailored rules could actually avoid having a negative impact on innovation in the named technologies .

The more general purpose a technology the more difficult it will be to control the potential impact on the beneficial uses of the technology as well as the negative impacts. In fact, in some cases such as AI and robotics it can even be difficult to define what the technology is, because it is typically the applications and not the technology more generally that is being discussed and regulated. In many cases, the anti-export regulations would or could at least signal to entrepreneurial innovators that their time is better spent on other technologies or that their work should be taken elsewhere and risks the U.S. falling behind other countries in these important innovative areas.  

Undermining International Competitiveness

Second, the inquiry could undermine U.S. competitiveness by encouraging more offshoring in a world of innovation arbitrage opportunities . With our increasingly connected global economy and specifically the more mobile nature of many emerging technologies, it is becoming easier for innovators who find themselves subjected to onerous regulations in one country to move their research and development efforts to another. This is sometimes referred to as “ innovation arbitrage .”

While the U.S. remains a leader in attracting innovators, this scenario has already played out several times. For example, Amazon moved its drone testing program to the UK rather than test in the US due in large part to FAA regulations regarding drones. Similarly, 23andme also initially took its direct-to-consumer genetic testing abroad after the FDA threatened to shut down their product.

Heavily regulating the export of general applications of these technologies could actually backfire and encourage innovators to take their research to countries like China where they do not face such regulations. R. David Edelman, the director of the Project on Technology, the Economy, and National Security at MIT, has noted that while the inquiry might be “intended to help US companies be more competitive,” the reality is that “it would almost certainly give Chinese companies that don’t face those same restrictions a sizable advantage in the playing field.”

Moreover, if export controls undermine domestic innovation and competitiveness in this fashion and benefit developers in other countries, it means the U.S. will have less of a say over the ethical development of many important technologies. Bloomberg contributor Noah Smith observes that , when it comes to the global race for hegemony in genetic sciences, China is poised to take the lead. “If the U.S. shies away from developing genetic-engineering technology, these riches will flow to China, or to whatever other countries seize the technological edge,” he notes. That would be problematic not just from a competitive perspective, but also from an ethical perspective, because America would have less of a say in guiding the development of these important but controversial technologies. “Dystopian outcomes are also less likely with the U.S. at the helm,” Smith believes.

Limiting or Ending Technologies Consumers Already Enjoy

Third, the inquiry could pose a threat to everyday consumer technologies that are already widely distributed . The most interesting thing about the technologies listed in the notice is that many of them have moved well beyond the “emerging” phrase of development. They are already out in the wild and being used by people every day.

For example, among the AI technologies listed in the notice are “speech and audio processing (e.g., speech recognition and production)” as well as, “natural language processing (e.g., machine translation).” We already enjoy a great many services such as those today, including Siri and Alexa. Meanwhile, there are technologies already on the market that help disabled and autistic children communicate and interact with their peers using AI and robotics.

For example, the KASPAR robot helps children with such disabilities learn social skills to interact with their peers and teach conversational skills. Similarly, technology that translates apparently nonverbal sounds and other methods of communication into speech via apps and other technology with various voices that others can understand could be subject to development ending regulations or be unable to help children in other countries if the proposed export restrictions are phrased too broadly. Not only might new restrictions limit the development of new technologies, it could even limit or eliminate those that we have already embraced and improved the lives of many.

Risk to Research & Open-Source Efforts

Fourth, the expansion of export controls for many of the technologies listed in the inquiry opens the door to widespread policing of open source coding and communications , but offers no explanation of how that would even work. A large number of the technologies on the Commerce Department list have both commercial and non-commercial applications. Innovation scholars use terms like “ free innovation ” and “social entrepreneurialism” to describe innovative efforts that are undertaken by individuals or groups of people to pursue a broader array of social goals or values beyond just profit-seeking.

A prominent example of social entrepreneurs engaging in free innovation involves the use of 3D printers and open source designs to voluntarily create prosthetics for children with limb deficiencies. What happens to collaborative, non-commercial innovations like that if export controls are suddenly imposed on additive manufacturing technologies by the Department of Commerce? If one participant is based outside the US, is that sufficient to subject such collaboration to export controls? What, exactly, would be subjected to controls? The 3D printers? The open source blueprints? The website hosting such information? It is difficult to imagine how such regulation would work in practice but it is easy to imagine the effect it would have if pursued: It would create a massive chilling effect on many beneficial forms of innovation and simultaneously threaten freedom of speech and academic research.

This same problem could play out in many other technology fields listed in the Commerce Department notice, including: robotics, speech recognition, biotechnology, and genetic engineering, among many others often engage in open and cross-border collaboration for open source development. Free innovation and social entrepreneurialism are expanding rapidly in these and other emerging technology arenas. Thus, export control regulation can no longer hinge on going after “deep-pocketed” corporations looking to sell physical systems. To be truly effective, regulations will need to cover bottom-up, “grassroots” innovation. But that move will have profound ramifications for the freedom to freely tinker with or even freely research important technologies and technological processes.

Dubious National Security Benefits

There’s a final danger associated with this effort: it might not help advance America’s national security objectives , and could even hinder them.

To the extent that ECRA and this new Department of Commerce effort lead to heightened scrutiny for the many dozens of technologies identified, it could undermine research and development efforts in many of those fields. It could do so directly (by formally limiting or forbidding domestic R&D efforts) or indirectly (by incentivizing many domestic emerging tech innovators to move their operations offshore, or discouraging foreign developers from setting up shop here). Not only would such actions risk the US losing its lead in innovation, it could actually result in such regulations backfiring from a national security perspective.  

At the end of the day, the problem here is that Congress is failing to clearly identify what is “essential to the national security of the United States.” ECRA just passes the buck on that thorny question to the Commerce Department for a laundry list of emerging technologies. By soliciting public input, the best hope here is that experts in these various emerging technology sectors will step forward and identify the trade-offs associated with inclusion of most of these technologies on the export controls list. Hopefully, the list would then be narrowed the much smaller class of applied technologies that have a very real, immediate, and clearly catastrophic potential for harm to the national security interests of the nation. That would have been the better way to begin this process, but Congress and the Administration have instead adopted the opposite approach here and now we must hope that they are willing to significantly pare back the list of technologies even being considered for inclusion.

Back to the Crypto Wars?

In a sense, this debate was foreshadowed by the debate in the late 1990s over export controls for encryption technologies. As encryption emerged , law enforcement and national security agencies were concerned about its potential use by bad actors to hide or destroy evidence or information by using encrypted devices or services and sought to require backdoors to be able to access encrypted data and to restrict the export of certain types of encryption and certain encrypted devices. Such requirements, as the Information Technology & Innovation Foundation’s Daniel Castro and Alan McQuinn pointed out, would actually reduce the security of everyday Americans to cyber attacks, negatively impact U.S. businesses’ global competitiveness, and reduce the competitiveness and innovation of the technology sector not only in encryption but in related fields as well.

Luckily, many of these concerns were avoided and encryption restrictions have been narrowly tailored. Recent tensions between the FBI and tech companies like Apple illustrate that this debate is far from settled. Now it seems that the Commerce Department’s proposed restrictions could create the same vulnerabilities more broadly for a great number of emerging technologies.

“Soft Law” & Next Steps

In some ways this move to regulate technologies via export restrictions shows the dark side of the growing trend of “soft law.” Soft law, as we discuss in more detail in our forthcoming paper , includes regulatory actions such as guidance documents, working groups, sandboxing, and many other informal regulatory mechanisms. Such mechanisms are often used to regulate emerging technologies in the absence of formal actions or because the traditional policymaking apparatus cannot keep pace with the rapid evolution of technology. In many cases soft law has been used to accelerate technological development that otherwise might have been limited by traditional hard law.

But where soft law thrives in the vacuum left by a lack of formal delegation and regulation, this inaction also poses risks. Agencies like the Commerce Department could extend amorphous powers over emerging technologies without the expertise to fully understand the way such regulations might negatively affect beneficial technological developments, which are typically hard to predict in advance.

A smarter approach to export controls for emerging technologies begins with a rational assessment of:

1. a more robust evaluation of what really constitutes a tangible, immediate, irreversible, and catastrophic harm to the national security interests of the United States;
2. the practicality of proposed controls for any emerging technologies considered for inclusion on the list;
3. the wisdom of placing technologies on the list which already have been developed or marketed overseas (or appear poised to be); and,
4. the potential unintended consequences that any new export controls might have on the innovative potential of American creators and companies, the future of research in important sectors, the free flow of knowledge regarding peaceful applications, and the competitive standing of the United States relative to other countries.
5. whether catastrophic concerns about emerging technologies might be better addressed through multilateral accords or agreements aimed at achieving global consensus regarding inappropriate use and applications (as has been done in chemical weapon treaties and nuclear non-proliferation efforts).

Several specific technologies may still qualify for inclusion on the export controls list after such an evaluation, but it will start with a more limited approach and then expand as necessary. Such an approach assumes that in general purpose technology is not a threat until proven otherwise. By inverting the process in this fashion, the Administration wouldn’t be treating every emerging technology under the sun as guilty until proven innocent; innovations would be allowed to flourish naturally until the potential for harm is well-documented.

Unfortunately, the Commerce Department’s proposed approach does just the opposite and risks minimizing the benefits of these emerging technologies while doing little to advance national security interests in a meaningful way.

Recently, Noah Smith explored an emerging question in tech. Is there a kill zone where new and innovative upstarts are being throttled by the biggest players? He explains ,

Facebook commissioned a study by consultant Oliver Wyman that concluded that venture investment in the technology sector wasn’t lower than in other sectors, which led Wyman to conclude that there was no kill zone.

But economist Ian Hathaway noted that looking at the overall technology industry was too broad. Examining three specific industry categories — internet retail, internet software and social/platform software, corresponding to the industries dominated by Amazon, Google and Facebook, respectively — Hathaway found that initial venture-capital financings have declined by much more in the past few years than in comparable industries. That suggests the kill zone is real.

A recent paper by economists Wen Wen and Feng Zhu reaches a similar conclusion. Observing that Google has tended to follow Apple in deciding which mobile-app markets to enter, they assessed whether the threat of potential entry by Google (as measured by Apple’s actions) deters innovation by startups making apps for Google’s Android platform. They conclude that when the threat of the platform owner’s entry is higher, fewer app makers will be interested in offering a product for that particular niche. A 2014 paper by the same authors found similar results for Amazon and third-party merchants using its platform.

So, are American tech companies making it difficult for startups? Perhaps, but there are some other reasons to be skeptical.

First off, the nature of the venture capital market has changed due to the declining costs of computing. Not too long ago, much of a tech company’s Series A and B would be dedicated to buying  server racks and computing power. But with the advent of Amazon Web Services (AWS) and other cloud computing technologies, this need has dried up.

What does this mean for the ecosystem? Ben Thompson explained the impact back in 2015 :

In fact, angels have nearly completely replaced venture capital at the seed stage, which means they are the first to form critical relationships with founders. True, this has led to an explosion in new companies far beyond the levels seen previously, which is entirely expected — lower barriers to entry to any market means more total entries — but this has actually made it even more difficult for venture capitalists to invest in seed rounds: most aren’t capable of writing massive numbers of seed checks; the amounts are just too small to justify the effort.

Instead, venture capitalists have gone up-market: firms may claim they invest in Series’ A and B, but those come well after one or possibly two rounds of seed investment; in other words, today’s Series A is yesteryear’s Series C. This, by the way, is the key to understanding the so-called “Series A crunch”: it used to be that Series C was the make-or-break funding round, and in fact it still is — it just has a different name now. Moreover, the fact more companies can get started doesn’t mean that more companies will succeed; venture capitalists just have more companies to choose from.

Research is only now catching up with Thompson’s hunch. In a newly released NBER working paper , economists David Byrne, Carol Corrado, Daniel E. Sichel find that prices for computing, database, and storage services offered by AWS dropped dramatically from 2009 to 2016. As they concluded, “cloud service providers are undertaking large amounts of own-account investment in IT equipment and that some of this investment may not be captured in GDP.”

Second, a decline in startups was predicted by Nobel winning economist Robert Lucas back in 1978 . Over time, Lucas surmised, productivity increases will yield wage increases, which in turn will incentivize marginal entrepreneurs to become employees. This will increase productivity at the company, but also increases the size of the firm. Over time, as productivity and wages inch upwards, working at a firm gets incentivized over starting a company. Entrepreneurs as a portion of the economy will thus decline and industries with higher productivity rates will see bigger firms.

Recent analysis of 50 separate national economies confirmed the inverse relationship between entrepreneurship rates and Gross Domestic Product (GDP), which has also been confirmed by the World Bank Group Entrepreneurship Survey as well. Time series analysis also hints at this relationship. Employment within large firms tends to grow over time as a country gets wealthier. Analysis of the Census Business Dynamics Statistics (BDS) illustrates this, as does groundwork conducted in American manufacturing from 1850 to 1880. But the United States isn’t the only country where this relationship can be found. The same trend exists for Canada , Germany , Indonesia , Japan , South Korea , and Thailand .

Moreover, the distribution of firms tends to change as a country becomes wealthier. As economist Markus Poschke noted, “richer countries thus feature fewer, larger firms, with a firm size distribution that is more dispersed and more skewed.” So, it not just the United States that has large firms. Sweden, the Netherlands and Ireland all have large firms, but they too are relatively wealthy by international standards. Productivity goes a long way to explain the distributional changes.

Nicholas Kozeniauskas, a recent minted economist from NYU, also has been working on research showing the skewed nature of entrepreneurism, which adds some depth to this conversation. As he found , the decline in entrepreneurship has been more pronounced for higher education levels. Overall, “an increase in fixed costs explains most of the decline in the aggregate entrepreneurship rate.”  

As of right now, I think we should be unsatisfied with the evidence of a kill zone. The research doesn’t point in the same direction. But as new insight comes in, we will need to update, as always.  

In recent essays and papers, I have discussed the growth of “innovation arbitrage,” which I defined as, “The movement of ideas, innovations, or operations to those jurisdictions that provide a legal and regulatory environment more hospitable to entrepreneurial activity.” A new Economist article about “Why startups are leaving Silicon Valley,” discusses innovation arbitrage without calling it such. The article notes that, for a variety of reasons, Valley innovators and investors are looking elsewhere to set up shop or put money into new ventures. The article continues:

Other cities are rising in relative importance as a result. The Kauffman Foundation, a non-profit group that tracks entrepreneurship, now ranks the Miami-Fort Lauderdale area first for startup activity in America, based on the density of startups and new entrepreneurs. Mr Thiel is moving to Los Angeles, which has a vibrant tech scene. Phoenix and Pittsburgh have become hubs for autonomous vehicles; New York for media startups; London for fintech; Shenzhen for hardware. None of these places can match the Valley on its own; between them, they point to a world in which innovation is more distributed. If great ideas can bubble up in more places, that has to be welcome. There are some reasons to think the playing-field for innovation is indeed being levelled up. Capital is becoming more widely available to bright sparks everywhere: tech investors increasingly trawl the world, not just California, for hot ideas. There is less reason than ever for a single region to be the epicentre of technology. Thanks to the tools that the Valley’s own firms have produced, from smartphones to video calls to messaging apps, teams can work effectively from different offices and places.

That’s the power of innovation arbitrage at work. Alas, the Economist article ends on a sour note, arguing that “innovation everywhere is becoming harder” because tech firms are becoming too big and anti-immigrant policies (especially in the US) are turning away some of the best and brightest minds. The latter is a real problem and one that is of the Trump Administration’s own making. By turning away the next generation of exciting innovators and limiting exciting start-up opportunities, America is shooting itself in the foot by undermining competitiveness and our competitive advantage among nations more generally. Which speaks to the first point made in the Economist article: If we want more competition to the big dogs, we need a lot more puppies. We’re not going to get them with backwards immigration policies. But nor will we get them by hobbling the biggest tech innovators. We shouldn’t be punishing success; we should be praising it.

We should recall Joseph Schumpeter’s essential insights in this regard. First, never underestimate how, in his words, “an untried technological possibility” can usher in one wave of “creative destruction” after another. Many critics talk about today’s “tech titans” (like Google, Facebook, Apple, and Amazon) as if they have always stalked the land. In reality, if you jump back in time just 15 years, it was Microsoft, MySpace, AOL Time Warner, Blackberry, and Motorola which allegedly possessed unassailable market power. And then creative destruction rolled into town. It happened before and it can happen again.

Schumpeter’s second insight was even more crucial and closely linked to his first. As I described it in a previous essay:

[Schumpeter] explained that uneven entrepreneurial gains — even supranormal short-term profits — must be tolerated if innovation is to occur. Innovators will only take risks if they can expect the potential for big gains from it. Attempts to curtail those potential benefits through hasty regulatory interventions or antitrust threats will sap the entrepreneurial spirit from the marketplace, limit technological innovation, and diminish the possibility of greater market dynamism and consumer choice over the long-haul. “In this respect,” Schumpeter concluded, “perfect competition is not only impossible but inferior,” precisely because it would sabotage “the most powerful engine of that progress … those entrepreneurial profits which are the prizes offered by capitalist society to the successful innovator.”

Thus, if you want still more disruptive innovation and creative destruction, you absolutely cannot sabotage entrepreneurs by eliminating the quest for the prize of profitability. Innovators need to know that when they take big risks, big rewards are possible. If they see innovative acts punished, they will look elsewhere. Indeed, that’s one reason that innovation arbitrage happens with increasing regularity today.

That doesn’t mean we throw out antitrust law entirely. There can still be circumstances where market power is abused and needs to be addressed, but simply making big profits does not automatically qualify as an abuse of consumer welfare.

In preparation for a Federalist Society teleforum call that I participated in today about the compliance costs of the EU’s General Data Protection Regulation (GDPR), I gathered together some helpful recent articles on the topic and put together some talking points. I thought I would post them here and try to update this list in coming months as I find new material. (My thanks to Andrea O’Sullivan for a major assist on coming up with all this.)

Key Points :

• GDPR is no free lunch; compliance is very costly

• • • All regulation entails trade-offs, no matter how well-intentioned rules are
    • $7.8 billion estimated compliance cost for U.S. firms already
    • Punitive fees can range from €20 million to 4 percent of global firm revenue
    • Vagueness of language leads to considerable regulatory uncertainty — no one knows what “compliance” looks like
    • Even EU member states do not know what compliance looks like: 17 of 24 regulatory bodies polled by Reuters said they were unprepared for GDPR

• GDPR will hurt competition & innovation; favors big players over small

• • • Google, Facebook & others beefing up compliance departments. (“ EU official, Vera Jourova: “They have the money, an army of lawyers, an army of technicians and so on.”)
    • Smaller firms exiting or dumping data that could be used to provide better, more tailored services
    • PwC survey found that 88% of companies surveyed spent more than $1 million on GDPR preparations, and 40% more than $10 million.
    • Before GDPR, half of all EU ad spend went to Google. The first day after it took effect, an astounding 95 percent went to Google.
    • In essence, with the GDPR, the EU is surrendering on the idea of competition being possible going forward
    • The law will actually benefit the same big companies that the EU has been going after on antitrust grounds. Meanwhile, the smaller innovators and innovations will suffer.

• GDPR likely to raise costs to consumers, or diminish choice/quality

• • • Consumers care about privacy, but they also care about choice, convenience, and low-cost services
    • The modern data-driven economy has given consumers access to an unparalleled cornucopia of information and services and it is remarkable how much of that content and how many of those services are offered to the public at no charge to them. That’s a real benefit.  
    • But if you take all the data out of the Data Economy, you won’t have much of an economy left
    • “Many organizations will pass these costs on to consumers either by erecting paywalls or forcing users to view more ads.”
    • Websites blacked out post GDPR: Instapaper, Los Angeles Times , Chicago Tribune (all Tronc- and Lee Enterprises-owned media platforms), A&E Networks websites.
    • “EU-only” web experience: stripped down websites without illustration or images. NPR and USA Today .
    • Washington Post is charging for a more expensive GDPR compliant subscription.

• GDPR hurts global flow of information; worsens problem of data localization

• • Rules only allow data to move to jurisdictions that offer an adequate level of protection
  • Cloud computing? Cloud architects are building costly new infrastructure that can isolate and inspect EU data to ensure it is not “sent” to the wrong jurisdiction.
  • Another step toward a more “bordered” Internet
  • Likely to just create more walled gardens
  • Max Schrems: “Unfortunately data localization is probably the best solution right now. It’s not really a solution that appeals to me a lot, but I think we need data localization for other reasons anyways, like load times and so on.”
  • Roundabout way to impose tariffs? Data-based firms are largely external to EU.

• GDPR doesn’t solve bigger problem of government access to data

• • EU Data Retention Directive: third parties must keep data for law enforcement for two years (passed after terrorist attacks).
  • EU member states often have no FISA-like body overseeing government wiretap requests. France and the UK have no court apparatus governing surveillance — instead issued directly by administrative bodies. In Germany, their FBI equivalent can install a “Federal Trojan” virus directly into third party platforms without their knowledge.

• GDPR doesn’t really move the needle much in terms of real privacy protection

• • heavy-handed, top-down regulatory regimes don’t always accomplish their goals when it comes to privacy
  • what consumers need is new competitive options and privacy innovations
  • Unfortunately, the world won’t get the new choices we need if regulations like the GDPR essentially punish them with regulatory compliance costs that only the largest current incumbents can possibly absorb

Related Research & Articles :

• Oliver Smith, “The GDPR Racket: Who’s Making Money From This $9bn Business Shakedown,” Forbes , May 2, 2018, https://www.forbes.com/sites/oliversmith/2018/05/02/the-gdpr-racket-whos-making-money-from-this-9bn-business-shakedown/#44d6f57b34a2  
• John Battelle, “How GDPR Kills The Innovation Economy,” NewCoShift , May 25, 2018, https://shift.newco.co/amp/p/844570b70a7a .
• Daniel Lyons, “GDPR: Privacy as Europe’s tariff by other means?” AEIdeas , July 3, 2018, https://www.aei.org/publication/gdpr-privacy-as-europes-tariff-by-other-means/
• Will Rinehart, “The Law & Economics of ‘Owning Your Data,’” American Action Forum, Insight , April 10, 2018, https://www.americanactionforum.org/insight/law-economics-owning-data/#ixzz5Klci9G
• Adam Thierer, “How Well-Intentioned Privacy Regulation Could Boost Market Power of Facebook & Google,” Technology Liberation Front , April 25, 2018, https://techliberation.com/2018/04/25/how-well-intentioned-privacy-regulation-could-boost-market-power-of-facebook-google/
• Andrea O’ Sullivan, “The EU’s New Privacy Rules Are Already Causing International Headaches,” Reason, June 12, 2018, https://reason.com/archives/2018/06/12/the-eus-new-privacy-rules-are-already-ca
• Alice Calder & Anne Hobson, “Data Privacy at a Price,” Medium , May 25, 2018, https://readplaintext.com/data-privacy-at-a-price-398634622f8b
• Daisuke Wakabayashi and Adam Satariano, “ How Looming Privacy Regulations May Strengthen Facebook and Google ,” New York Times , April 23, 2018,
• Sam Schechner and Nick Kostov, “ Google and Facebook Likely to Benefit From Europe’s Privacy Crackdown ,” Wall Street Journal , April 23, 2018, https://www.wsj.com/articles/how-europes-new-privacy-rules-favor-google-and-facebook-1524536324
• Nick Kostov and Sam Schechner, “Google Emerges as Early Winner From Europe’s New Data Privacy Law,” Wall Street Journal , May 31, 2018, https://www.wsj.com/articles/eus-strict-new-privacy-law-is-sending-more-ad-money-to-google-1527759001   https://www.wsj.com/articles/eus-strict-new-privacy-law-is-sending-more-ad-money-to-google-1527759001  
• Daniel Castro & Michael McLaughlin, “Why the GDPR Will Make Your Online Experience Worse,” Fortune , May 23, 2018, http://fortune.com/2018/05/23/gdpr-compliant-privacy-facebook-google-analytics-policy-deadline/
• Brent Skorup & Jennifer Huddleston Skees, “It’s Not About Facebook; It’s about the Next Facebook,” Real Clear Policy , June 01, 2018, https://www.realclearpolicy.com/articles/2018/06/01/its_not_about_facebook_its_about_the_next_facebook_110654.html
• Jennifer Skees & Jordan Reimschisel, “GDPR and Me: how the EU data rules could impact genetic testing,” Medium , May 18, 2018, https://readplaintext.com/gdpr-and-me-how-the-eu-data-rules-could-impact-genetic-testing-851494e55dd3 

On March 19th, I had the chance to debate Franklin Foer at a Patrick Henry College event focused on the question, “Is Big Tech Big Brother?” It was billed as a debate over the role of technology in American society and whether government should be regulating media and technology platforms more generally.  [The full event video is here.] Foer is the author of the new book, World Without Mind: The Existential Threat of Big Tech, in which he advocates a fairly expansive regulatory regime for modern information technology platforms. He is open to building on regulatory ideas from the past, including broadcast-esque licensing regimes, “Fairness Doctrine”-like mandates for digital intermediaries, “fiduciary” responsibilities, beefed-up antitrust intervention, and other types of controls. In a review of the book for Reason, and then again during the debate at Patrick Henry University, I offered some reflections on what we can learn from history about how well ideas like those worked out in practice.

My closing statement of the debate, which lasted just a little over three minutes, offers a concise summation of what that history teaches us and why it would be so dangerous to repeat the mistakes of the past by wandering down that disastrous path again. That 3-minute clip is posted below. (The audience was polled before and after the event and asked the same question each time: “Do large tech companies wield too much power in our economy, media and personal lives and if so, should government(s) intervene?” Apparently at the beginning, the poll was roughly Yes – 70% and No – 30%, but after the debated ended it has reversed, with only 30% in favor of intervention and 70% against. Glad to turn around some minds on this one!)

via ytCropper

If the techno-pessimists are right and robots are set to take all the jobs, shouldn’t employment in Amazon warehouses be plummeting right now? After all, Amazon’s sorting and fulfillment centers have been automated at a rapid pace, with robotic technologies now being integrated into almost every facet of the process. (Just watch the video below to see it all in action.)

And yet according to this Wall Street Journal story by Laura Stevens, Amazon is looking to immediately fill 50,000 new jobs, which would mean that its U.S. workforce “would swell to around 300,000, compared with 30,000 in 2011.”  According to the article, “Nearly 40,000 of the promised jobs are full-time at the company’s fulfillment centers, including some facilities that will open in the coming months. Most of the remainder are part-time positions available at Amazon’s more than 30 sorting centers.”

How can this be? Shouldn’t the robots have eaten all those jobs by now?

The reality is that we suffer from a serious poverty of imagination when it comes to thinking about the future, and future job opportunities in particular. “One thing automation alarmists sometimes miss is that the simplistic ‘machines steal jobs’ story tells an incomplete tale,” observes James Pethokoukis of the American Enterprise Institute. “How machines can complement what humans do and create increased demand should not be overlooked when evaluating the rise of the robots. Yet it seems like it often is,” he notes.

Bank tellers are the paradigmatic example. With the rise of ATMs a few decades ago, many thought the days of bank tellers were numbered. But research by economist James Bessen of Boston University shows that we have more bank tellers today than we did 40 years ago. (See chart below). How’s that? Because once the ATMs could handle the menial tasks of counting and distributing money, the tellers were freed up to do other things.

This is a part of the story of technological change that is often ignored, as Pethokoukis suggests. Old jobs and skills are indeed often replaced by mechanization and new technological processes. But that in turn opens the door to people to take on new opportunities — often in new sectors and new firms, but sometimes even within the same industries and companies. And because human needs and wants are essentially infinite, this process just goes on and on and on as we search for new and better ways of doing things. And that’s how, in the long run, robots and automation are actually employment-enhancing rather than employment-reducing. (For a historical overview of this process, see this paper on “Does Productivity Growth Threaten Employment?” by David Autor and Anna Salomons as well as Autor’s 2015 paper, “Why Are There Still So Many Jobs? The History and Future of Workplace Automation.” Also see this McKinsey report on “Four fundamentals of workplace automation.” from 2015.)

Of course, in the short-run, that process of creative destruction isn’t always pretty. In fact, it can be gut-wrenching for some professions and workers. But the long arc of history, this is how progress happens.

This article originally appeared at techfreedom.org.

Today, the Supreme Court declined to review a Second Circuit decision that held Apple violated the antitrust laws by fixing ebook prices when, in preparing to launch its own iBookstore, it negotiated a deal with publishers that would allow them to set prices above Amazon’s one-size-fits-all $9.99 price. The appeals court reached its decision by applying the strict per se rule, which ignores any procompetitive justifications of a challenged business practice. The dissent had argued that Apple “was unwilling to [enter the ebook market] on terms that would incur a loss on e-book sales (as would happen if it met Amazon’s below-cost price),” and thus that Apple’s agreement with major publishers actually benefitted consumers by facilitating competition in the ebooks market, even if it meant higher prices for some ebooks.

The Supreme Court’s refusal to hear the case means the 2013 verdict against Apple, resulting in a $450 million dollar class-action settlement, will stand. The case began in 2010 when Apple negotiated with five major publishers, adopting an agency pricing model in which the publishers set a book’s price and gave a sales commission to Apple. This pricing model is distinct from Amazon’s previously dominant model, where t was allowed to unilaterally set e-book prices — often for below cost as a loss leader strategy to encourage sales of its own Kindle reader and promote the overall Amazon platform. The Justice Department claimed that Apple’s agency model amounted to antitrust conspiracy — and the Second Circuit agreed. Meanwhile, Apple’s entry reduced Amazon’s share of the ebooks market from 90% to 60%.

“ The question here wasn’t actually whether Apple should win, but whether Apple should even be allowed to argue that its arrangement could benefit consumers,” said TechFreedom President Berin Szoka. “Apple made a strong case that its deal with publishers was critical to allowing it compete with Amazon. The Supreme Court might or might not have found those arguments convincing, but it should have at least weighed them under antitrust’s flexible rule of reason. By letting the rigid per se deal stand as the controlling legal standard, the Court has ensured that antitrust law in general will put obsolete legal precedents from the pre-digital era above consumer welfare.”

“ Business model innovation is no less essential for progress than technological innovation,” concluded Szoka. “Indeed, the two usually go hand in hand. And new business models are usually essential to unseating the first mover in new markets like ebook publishing, especially when the first mover sets artificially low prices. Categorically banning deals that attempt to rebalance pricing power between distributors and publishers in multi-sided markets likely means strangling competition in its crib. Unfortunately, the real costs of today’s decision will go unseen: without an opportunity to defend new business models, innovative companies like Apple will be less likely to attempt to disrupt the dominance of entrenched incumbents. Consumers will simply never know how much today’s decision cost them.”

Read more about the argument for reversing the Second Circuit and applying a rule of reason to novel business arrangements in the amicus brief filed by the International Center for Law & Economics and eleven leading antitrust scholars. Truth on the Market, a blog dedicated to law and economics, held ablog symposium on the case last month.

Yesterday afternoon, the Federal Aviation Administration (FAA) finally released its much-delayed rules for private drone operations. As The Wall Street Journal  points out, the rules “are about four years behind schedule,” but now the agency is asking for expedited public comments over the next 60 days on the whopping 200-page order. (You have to love the irony in that!) I’m still going through all the details in the FAA’s new order — and here’s a summary of what the major provisions — but here are some high-level thoughts about what the agency has proposed.

Opening the Skies…

• The good news is that, after a long delay, the FAA is finally taking some baby steps toward freeing up the market for private drone operations.
• Innovators will no longer have to operate entirely outside the law in a sort of drone black market. There’s now a path to legal operation. Specifically, small unmanned aircraft systems (UAS) operators (for drones under 55 lbs.) will be able to go through a formal certification process and, after passing a test, get to operate their systems.

… but Not Without Some Serious Constraints

• The problem is that the rules only open the skies incrementally for drone innovation.
• You can’t read through these 200 pages of regulations without getting sense that the FAA still wishes that private drones would just go away.
• For example, the FAA still wants to keep a bit of a leash around drones by (1) limiting their use to being daylight-only flights (2) that are in the visual line-of-sight of the operators at all times. And (3) the agency also says that drones cannot be flown over people.
• Those three limitations will hinder some obvious innovations, such as same-day drone delivery for small packages, which Amazon has suggested they are interested in pursuing. (Amazon isn’t happy about these restrictions.)

Impact on Small Innovators?

• But what I worry about more are all the small ‘Mom-and-Pop’ drone entrepreneur, who want to use airspace as a platform for open, creative innovation. These folks are out there but they don’t have the name or the resources to weather these restrictions the way that Amazon can. After all, if Amazon has to abandon same-day drone delivery because of the FAA rules, the company will still have a thriving commercial operation to fall back on. But all those small, nameless drone innovators currently experimenting with new, unforeseeable innovations may not be so lucky.
• As a result, there’s a real threat here of drone entrepreneurs bolting the U.S. and offering their services in more hospitable environments if the FAA doesn’t take a more flexible approach.
• [For more discussion of this problem, see my recent essay on “global innovation arbitrage.”]

Impact on News-Gathering?

• It’s also worth asking how these rules might limit legitimate news-gathering operations by both journalistic enterprises and average citizens. If we can never fly a drone over a crowd of people, as the rules stipulate, that places some rather serious constraints on our ability to capture real-time images and video from events of societal importance (such as political protests or even just major events like sporting events or concerts).
• [For more discussion about this, see this September 2014 Mercatus Center working paper, “News from Above: First Amendment Implications of the Federal Aviation Administration Ban on Commercial Drones.”]

Still Time to Reconsider More Flexible Rules

• Of course, these aren’t final rules and the agency still has time to relax some of these restrictions to free the skies for less fettered private drone operation.
• I suspect that drone innovators will protest the three specific limitations I identified above and ask for a more flexible approach to enforcing those rules.
• But it’s good that the FAA has finally taken the first step toward decriminalizing private drone operations in the United States.

___________________________

Additional  Reading

• Permissionless Innovation & Commercial Drones, February 4, 2015.
• DRM for Drones Will Fail, January 28, 2015.
• Regulatory Capture: FAA and Commercial Drones Edition, January 16, 2015.
• Global Innovation Arbitrage: Commercial Drones & Sharing Economy Edition, December 9, 2014.
• How to Destroy American Innovation: The FAA & Commercial Drones, October 6, 2014.
• Filing to FAA on Drones & “Model Aircraft”, Sept. 23, 2014.
• Private Drones & the First Amendment, Sept. 19, 2014.
• [TV interview] The Beneficial Uses of Private Drones, March 28, 2014.
• Comments of the Mercatus Center to the FAA on integration of drones into the nation’s airspace, April 23, 2o13.
• Eli Dourado, Deregulate the Skies: Why We Can’t Afford to Fear Drones, Wired, April 23, 2013.
• Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom (2014).
• [Video] Cap Hill Briefing on Emerging Tech Policy Issues (June 2014).

Over the course of the year, I collect some of my favorite (and least favorite) tech policy essays and put them together in an end-of-year blog post so I will remember notable essays in the future. (Here’s my list from 2013.) Here are some of the best tech policy essays I read in 2014 (in chronological order).

• Joel Mokyr – “The Next Age of Invention,” City Journal, Winter 2014. (An absolutely beautiful refutation of the technological pessimism that haunts our age. Mokry concludes by noting that, “technology will continue to develop and change human life and society at a rate that may well dwarf even the dazzling developments of the twentieth century. Not everyone will like the disruptions that this progress will bring. The concern that what we gain as consumers, viewers, patients, and citizens, we may lose as workers is fair. The fear that this progress will create problems that no one can envisage is equally realistic. Yet technological progress still beats the alternatives; we cannot do without it.” Mokyr followed it up with a terrific August 8 Wall Street Journal oped, “What Today’s Economic Gloomsayers Are Missing.“)
• Michael Moynihan – “ Can a Tweet Put You in Prison? It Certainly Will in the UK ,”  The Daily Beast , January 23, 2014. (Great essay on the right and wrong way to fight online hate. Here’s the kicker: “There is a presumption that ugly ideas are contagious and if the already overburdened police force could only disinfect the Internet, racism would dissipate. This is arrant nonsense.”)
• Hanni Fakhoury –  “ The U.S. Crackdown on Hackers Is Our New War on Drugs,” Wired , January 23, 2014. (“We shouldn’t let the government’s fear of computers justify disproportionate punishment. . . . It’s time for the government to learn from its failed 20th century experiment over-punishing drugs and start making sensible decisions about high-tech punishment in the 21st century.”)
• Carole Cadwalladr – “Meet Cody Wilson, Creator of the 3D-gun, Anarchist, Libertarian,” Guardian/Observer, February 8, 2014. (Entertaining profile of one of the modern digital age’s most fascinating characters. “There are enough headlines out there which ask: Is Cody Wilson a terrorist? Though my favourite is the one that asks: ‘Cody Wilson: troll, genius, patriot, provocateur, anarchist, attention whore, gun nut or Second Amendment champion.’ Though it could have added, ‘Or b) all of the above?'”)

• Michael Sacasas – “What Are We Talking About When We Talk About Technology?” February 14, 2014, and “Traditions of Technological Criticism,” February 15, 2014. (Sacasas continues his discussion of differing conceptions of the term “technology.” In the process, he surveys a wide swath of technology theorists & critics and then offers a rough taxonomy grouping them in various ways. Terrifically interesting. Note: I used Michael’s posts as the launching point for a blog post of my own on, “Defining ‘Technology.'”)
• Glenn Garvin – “TV’s Deregulated Golden Age: Why so few critics understand what made HBO possible,” Reason, February 2014. (Garvin explains how freedom to innovate was the key ingredient in unleashing the modern Golden Age of television. I love the opening lines: “For decades, no art form was more meticulously regulated by the government than television. For decades, no art form was more relentlessly bashed by its critics. Amazingly, nobody ever seems to make a connection between these two facts.” So damn true.)
• Antonis Polemitis – “Bitcoin Series 19: Bizarre Shadowy Paper-Based Payment System Being Rolled Out Worldwide,” Ledra Capital blog, February 17, 2014. (An absolutely epic satire of the Bitcoin technopanic. Hugely entertaining.)
• Eli Dourado – “Why the Left Doesn’t Have to Hate Innovation,” The Umlaut, April 2, 2014. (A sharp response to an Evgeny Morozov rant about innovation policy.)
• John Villasenor – “The Future Of Innovation: Five Things We Can Learn From Bitcoin,” Forbes, May 12, 2014. (Offers “five things that the growth of cryptocurrencies can teach us about the future of innovation.”)
• Marc Andreesen – “This is Probably a Good Time to Say That I Don’t Believe Robots Will Eat All the Jobs…,” Andreessen Horowitz blog, June 13, 2014. (Andreessen single-handedly revolutionized Twitter posting style in 2014 with his “Twitterstorm” format of essentially blogging via multi-part tweets. His mini-manifestos are powerful stuff, and none were better than this one, which he thankfully transcribed and posted to his firm’s blog. In it, he lays out the optimistic case for robotic automation and the many benefits he believes it will bring to society.)
• Adam Thierer – “Muddling Through: How We Learn to Cope with Technological Change,” Medium, June 30, 2014. (Is it wrong to put one of my own essays on this list. Probably! But I am quite proud of this one and, if nothing else, I hope it offers others a good reading list on the topic. Specifically, the essay surveys the extensive writing on “heaven” and “hell” scenarios about the impact of technological change on society.)
• Peter W. Singer & Allan Friedman, “The 5 Biggest Cybersecurity Myths, Debunked,” Wired, July 2, 2014. (Singer & Friedman inject some much-needed sanity back into the techno-panicky debates over cybersecurity and “cyberwar.”)
• Daniel Akst, “What Can We Learn From Past Anxiety Over Automation?” Wilson Quarterly, Summer 2014. (A nice look back at a century’s worth of hand-wringing over the looming threat of automation and job-displacement.)
• Clive Thompson, “How a 1974 sci-fi novel for teens eerily predicted the rise of personal drones,” Medium, September 5, 2014. (Probably my favorite essay of the year since Clive manages to combine lessons from one my favorite childhood books along with my current fascination with “precautionary principle” thinking. Splendid writing, as always, from Thompson.)
• Jason Feifer, “The Internet is Not Harming You. Here’s What’s Harmful: Fearmongering about the Internet,” Fast Company, November 2014. (“Falsely romanticizing the past allows us to think that we stand at a threshold as some last vestige of better, tech-disconnected humans. The truth is that as culture evolves our priorities change as well.”)
• Adam Elkus – “Don’t Fear Artificial Intelligence,” Slate, October 31, 2014. (Elkus pushes back against what he regards as the growing technopanic over artificial intelligence.)
• Steven Johnson – “We’re living the dream; we just don’t realize it,” CNN, November 28, 2014.  (“Americans enjoy longer, healthier lives in more stable families and communities than we did 20 years ago. But other than the crime trends, these facts are rarely reported or shared via word-of-mouth channels.”)
• Blake Ross – “Uber.gov: It’s Time to Let the Government Drive,” Medium, December 2, 2014. (A fun tongue-and-cheek piece about just how badly Las Vegas, Nevada — like many other governments — have mangled their “consumer protection” mandate when it comes to transportation services.)

And my nominees for Worst Tech Policy Essays of 2014 go to:

• Evgeny Morozov – “Stunt the Growth” (As the old saying goes, you can’t put lipstick on a pig, but preeminent techno-crank Evgeny Morozov certainly tries his darnedest to dress up Ludditism and make it sexy in this elitist rant endorsing a “degrowth” movement for the world of information technology.)
• Anthony Weiner – “Here’s What Tesla And The Other Silicon Valley ‘Disruptors’ Don’t Get About Politics” (An astonishing defense of cronyist and protectionist state laws that harm consumer welfare. In essence, Weiner says that disruptive entrepreneurs should just shut up on get on with the business of playing ball with politicians and regulators. Don’t rock the boat, you damn innovators!)
• Richard Eskow – “Let’s nationalize Amazon and Google: Publicly funded technology built Big Tech” (Yes, some people still think converting tech companies into public utilities is a good idea. Do I really need to explain why that’s such a bad idea? OK, well I did in this 62-page paper!)

Timothy B. Lee, founder of The Washington Post’s blog The Switch discusses his approach to reporting at the intersection of technology and policy. He covers how to make tech concepts more accessible; the difference between blogs and the news; the importance of investigative journalism in the tech space; whether paywalls are here to stay; Jeff Bezos’ recent purchase of The Washington Post; and the future of print news.

Download

Related Links

• Here are eight ways investing in Bitcoins could go horribly wrongn, Lee
• Blind advocates: Hollywood lobbying threatens deal for accessible books, Lee
• New Job, Lee

CBS and Time Warner Cable have been embroiled in a heated contractual battle over the past week that has resulted in viewers in some major markets losing access to CBS programming. When disputes like these go nuclear and signal blackouts occur, it is inevitable that some folks will call for policy interventions since nobody likes it when the content they love goes dark.

While some policy responses are warranted in this matter, policymakers should proceed with caution. Heated contractual negotiations are a normal part of any capitalist marketplace. We shouldn’t expect lawmakers to intervene to speed up negotiations or set content prices because that would disrupt the normal allocation of programming by placing a regulatory thumb too heavily on one side of the scale. This is why I am somewhat sympathetic to CBS in this fight. In an age when content creators struggle to protect their copyrighted content and get compensation for it, the last thing we need is government intervention that undermines the few distribution schemes that actually work well.

On the other hand, Time Warner Cable deserves sympathy here, too, since CBS currently enjoys some preexisting regulatory benefits. As I noted in this 2012 Forbes oped, “Toward a True Free Market in Television Programming,” many layers of red tape still encumber America’s video marketplace and prevent a truly free market in video programming from developing. The battle here revolves around the “retransmission consent” rules that were put in place as part of the Cable Act of 1992 and govern how video distributors carry signals from TV broadcasters, which includes CBS.

But those “retrans” rules are not the only part of the regulatory mess here. There are many related federal rules that tip the scales toward broadcasters and content creators, such as the requirement that video distributors carry broadcast signals even if they don’t want to (“must carry”); rules that prohibit distributors from striking deals with broadcasters outside their local communities (“network non-duplication” and “syndicated exclusivity” rules); regs specifying where broadcast channels appear on the cable channel lineup; and prohibitions against carrying sporting events on cable when the local stadium doesn’t sell all its seats on game day (“sports blackout rule”).

As they say on TV.. ” But Wait, There’s More!” Working in the favor of video distributors are the compulsory licensing requirements of the Copyright Act of 1976, which essentially forced a “duty to deal” upon broadcasters. Broadcasters have to let cable operators and other video distributors retransmit local stations, though the system at least ensures they get compensated for it. As I noted in my old Forbes essay, along with must carry rules, “Compulsory licensing is the original sin of video marketplace regulation. We could have avoided most of the regulatory mess of the past quarter century if Congress had simply left these rights and contractual negotiations alone. Once Congress forced broadcasters to share their programming, however, marketplace manipulation was off and rolling.”

Of course, the more primal and problematic intervention came decades before in the 1920s and ’30s when the government decided to nationalize spectrum management. Once mandates instead of markets where chosen as the primary allocation agent, America was off and running with a grand experiment in spectrum central planning. We’re still living with the results today. The very fact that spectrum is licensed and can only be used and sold for very narrow purposes as detailed in meticulous FCC regulations is a sign of just how far-removed we are from a pure free market here.

The question now is, what are we going to do about this fine mess? And is there any chance we can get it done?

The problem in this debate is that there are multiple layers of interventions that have built up over the years and created constituencies that are wedded to their preservation. Broadcasters, networks, independent content creators, big cable companies, small cable companies, satellite companies, sports leagues, and viewing consumers themselves — they all have conflicting interests and a stake in how this debate turns out. In his 2012 Mercatus Center working paper, “Consumer Welfare and TV Program Regulation,” media economist Bruce M. Owen noted that “What distinguishes TV programs from other mass media content, including both traditional print and new online media, is the extreme eagerness of Washington to engage in efforts to prevent markets from working freely, often in response to interest group pressures and opportunities for political advantage and with almost complete indifference to the welfare of consumers.”

As a result, if you talk to almost anyone involved in this debate, they will all insist that only their very specific reforms are the ones that can or should be implemented. Consequently, comprehensive reform will be challenging precisely because of all the conflicting interests and layers of law and regulation that must be eradicated.

But at least there is a blueprint for how to get the job done right. Many times here before I have written about “The Next Generation Television Marketplace Act,” which was floated last session by Rep. Steve Scalise (R-LA) and then-Senator Jim DeMint (R-SC). It proposed wiping off the books all the archaic rules outlined above. Alas, the bill never went anywhere in the last Congress and now that Sen. DeMint has left to lead the Heritage Foundation, there is no supporter in the Senate this session. Instead, we have some lawmakers floating bad ideas like S.912, the “Television Consumer Freedom Act of 2013,” which just proposes more regulatory gaming of an already over-gamed system.

We instead need policy reforms like the old DeMint-Scalise bill that clean up the regulatory mess of the past. But there just isn’t much appetite for such a house-cleaning. Most parties affected by these rules want very specific outcomes and deregulation won’t give them any such guarantees. After all, there will still be blackouts after deregulation. And the cost of some content may continue to go up in response to demand. And there will still be fights over sports programming. And there’s no certainty that all local broadcasters or small video distributors will survive. And so on, and so on.

But it is also true that a deregulatory environment is more likely to lead to even more experimentation and innovation with new business models, technologies, and methods of content creation and delivery. We already see much innovation in this marketplace despite all the red tape that exists. Just look at what’s been going on recent years with alternative video delivery platforms, including: Netflix, Hulu, XBox Live, Vudu, Roku, Redbox, Boxee, Amazon, Apple TV, Aereo, Google Chromecast, and so on. And don’t forget the strides that the old broadcast and cable giants have made here, too. CBS is actually a pretty good model for how content can be re-purposed online in creative ways on a firm’s own digital platform. Likewise, cable companies like Time Warner Cable are slowly but surely adapting to consumers’ demand for video to be delivered to multiple devices.

Of course, there there will always be hiccups along the road to video nirvana. Some regulatory activists seemingly expect that all content can be delivered effortless and cheaply to consumers without giving a thought in the world to just how complicated it is to get that content financed and distributed in the first place. Great content and great delivery platforms don’t just happen by magic or the good intentions of activists or policymakers. Those platforms happen because new markets and monetization mechanisms develop to facilitate them. If we cut back the regulatory deadwood in our modern information marketplace, we’d likely get even more experimentation and innovation that would likely produce all new ways of financing, creating, and delivering content to consumers. But we’ll never know unless we are willing to embrace change and kill all those old regulatory weeds that continue to grow in our information garden.

Alas, if Congress can’t muster the courage to do that, then lawmakers ought to at least consider asking the broadcasters to return all that juicy spectrum they are sitting on. After all, the current retrans racket gives the broadcasters an increasingly lucrative revenue stream when they deliver content on cable and satellite systems (in addition to the advertising revenues they already receive). No good reason exists to give them preferential treatment relative to any other cable channel out there today. Don’t forget, there are all sorts of garden-variety cable carriage disputes that happen outside the regulated retrans system today. (Remember last year’s big spats between AMC vs. Dish and Viacom vs. DirecTV?) There are no special rules that either side can rely on in those instances. So why should special rules be applied to other content companies simply because some of their properties are broadcast channels? Answer: they shouldn’t.

But if no other reforms occur and if companies like CBS still want to be more like a cable mega-channel — albeit, a very handsomely compensated cable channel — then by all means go for it. In the meantime, however, they can return all that spectrum for re-auction for some better purpose. In fact, back early 2009, CBS Corp. President and CEO Les Moonves told an investor conference that moving all CBS network programming to cable and satellite platforms would be “a very interesting proposition.” I agree! But, absent other reforms, it might be time to make that “interesting proposition” a mandatory one.

ICANN is meeting in Durban, South Africa this week, and this morning, its Governmental Advisory Committee, which goes by the delightfully onomatopoetic acronym GAC, announced its official objection to the .amazon top-level domain name, which was set to go to Amazon, the online purveyor of books and everything else. Domain Incite reports:

The objection came at the behest of Brazil and other Latin American countries that claim rights to Amazon as a geographic term, and follows failed attempts by Amazon to reach agreement.

Brazil was able to achieve consensus in the GAC because the United States, which refused to agree to the objection three months ago in Beijing, had decided to keep mum this time around.

The objection will be forwarded to the ICANN board in the GAC’s Durban communique later in the week, after which the board will have a presumption that the .amazon application should be rejected.

The board could overrule the GAC, but it seems unlikely.

This is a loss for anything resembling rule of law on the Internet. There are rules for applying for new generic TLDs, and the rules specifically say which geographic terms are protected. Basically, anything on this list, known as ISO 3166-1 is verboten. But “Amazon” is not on that list, nor is “Patagonia;” .patagonia was recently withdrawn. Amazon and Patagonia followed the rules and won their respective gTLDs fair and square.

The US’s decision to appease other countries by remaining silent is a mistake. The idea of diplomacy is to get countries to like you so that you can get what you want on policy, not to give up what is right on policy so that other countries will like you. I agree with Milton Mueller, whose bottom line is:

What is at stake here is far more important than the interests of Amazon, Inc. and Patagonia, Inc. What’s really at stake is whether the Internet is free of pointless constraints and petty political objections; whether governments can abuse the ICANN process to create rights and powers for themselves without any international legislative process subject to democratic and judicial checks and balances; whether the alternative governance model that ICANN was supposed to represent is real; whether domain name policy is made through an open, bottom-up consensus or top-down by states; whether the use of words or names on the Internet is subject to arbitrary objections from politicians globalizing their local prejudices.

Richard Brandt, technology journalist and author, discusses his new book, One Click: Jeff Bezos and the Rise of Amazon.Com. Brandt discusses Bezos’ entrepreneurial drive, his business philosophy, and how he’s grown Amazon to become the biggest retailer in the world. This episode also covers the biggest mistake Bezos ever made, how Amazon uses patent laws to its advantage, whether Amazon will soon become a publishing house, Bezos’ idea for privately-funded space exploration and his plan to revolutionize technology with quantum computing.

Download

Related Links

• One Click: Jeff Bezos and the Rise of Amazon.com, Brandt
• History of Google/About Google, Brandt
• Five minutes with Richard Brandt, Author of One Click, Ennyman

[UPDATE 4/30/13: This article was subsequently published in Volume 65, Issues 2 of the Federal Communications Law Journal in April 2013. The links below now point to the final FCLJ version.]

The Mercatus Center at George Mason University has just released a new paper by Brent Skorup and me entitled, “Uncreative Destruction: The War on Vertical Integration in the Information Economy.”  Brent, who is the research director for the Information Economy Project at the George Mason University School of Law, and I have been working on this paper since the Spring and we are looking forward to getting it published in a law review shortly. The paper focuses on Tim Wu’s “separations principle” for the digital economy, something I’ve spent some time critiquing here in the past. Here’s the introduction from the 44-page paper that Brent and I just released:

Are information sectors sufficiently different from other sectors of the economy such that more stringent antitrust standards should be applied to them preemptively? Columbia Law School professor Tim Wu responds in the affirmative in his book The Master Switch: The Rise and Fall of Information Empires. Having successfully pushed net-neutrality regulation into the policy spotlight, Wu has turned his attention to what he regards as excessive market concentration and threats to free speech throughout the entire information economy.To support his call for increased antitrust intervention, Wu explains his view of competition in the information economy—a view that deviates substantially from current mainstream antitrust theory. First, Wu contends that “information monopolies” are pervasive in the information economy. Wu’s “monopolists” include Facebook, Apple, Google, and even Twitter. In The Master Switch and essays like “In the Grip of the New Monopolists,” Wu argues that these so-called monopolies are increasing their market power and require more aggressive oversight and regulation.Second, Wu argues that traditional antitrust analysis is not sufficient for information systems because they carry speech. He claims, “Information industries… can never be properly understood as ‘normal’ industries,”and traditional forms of regulation, including antitrust enforcement, “are clearly inadequate for the regulation of information industries.”Wu believes that because information industries “traffic in forms of individual expression” and are “fundamental to democracy,” they should be subject to greater regulatory treatment.Third, in contrast to current competition law’s focus on horizontal relationships, Wu desires a reinvigorated regulatory enforcement that addresses “the corrupting effects of vertically integrated power” in the information sectors.He is particularly concerned about private threats to free speech arising from such vertical integration.The solution, he says, is preventing vertical mergers in the information economy and the mandatory divestiture of vertically integrated companies. To implement this, Wu proposes a Separations Principle for the information economy, which would segregate information providers into three buckets, which we have labeled information creators, information distributors, and hardware makers.This article outlines Wu’s separations proposal, explains why his fears regarding vertical relationships should be rejected by regulatory and antitrust policymakers, and illustrates the legal and practical problems his Separations Principle poses. Wu justifies his Separations Principle by citing monopolies and market power in the information economy. He also advocates using U.S. antitrust authorities to enforce his Principle. We argue that the antitrust harms he fears are not present, and we highlight scholarship on the accepted benefits of vertically integrated firms. We show that Wu’s remedies are policy preferences wrapped in the language of competition law. In fact, the information economy is largely competitive and does not warrant interventionist regulatory enforcement. Since much of American economic vitality flows from the information economy and technology, policymakers should reject a radical antitrust remedy like Wu’s preemptive Separations Principle.

The paper can be downloaded from the Mercatus website, SSRN, or Scribd.

Is competition really a problem in the tech industry? That was the question the folks over at WebProNews asked me to come on their show and discuss this week. I offer my thoughts in the following 15-minute clip. Also, down below I have embedded a few of my recent relevant essays on this topic, a few of which I mentioned during the show.

• “On Fast Firms, Slow Regulators, Antitrust & the Digital Economy,” Technology Liberation Front, July 6, 2012
• “The Rule Of Three: The Nature of Competition In The Digital Economy,” Forbes, June 29, 2012.
• “Sunsetting Technology Regulation: Applying Moore’s Law to Washington,” Forbes, May 25, 2012.
• “Of “Tech Titans” and Schumpeter’s Vision,” Forbes, August 22, 2011.
• “Bye Bye BlackBerry. How Long Will Apple Last?” Forbes, April 1, 2012.
• “Gary Reback’s Antitrust Love Letter,” Technology Liberation Front, September 20, 2009.
• “What is “Optimal Interoperability”? A Review of Palfrey & Gasser’s’“Interop,’” Technology Liberation Front, June 11, 2012.

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

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

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

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

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

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

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

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

Social Networks as Public Utilities [Adam Thierer]

The debate over the imposition of sales tax collection obligations on interstate vendors is heating up again at the federal level with the introduction of S. 1452, “The Main Street Fairness Act.” [pdf]  The measure would give congressional blessing to a multistate compact that would let states impose sales taxes on interstate commerce, something usually blocked by the Commerce Clause of the U.S. Constitution.  Senator Dick Durbin (D-IL) introduced the bill in the Senate along with Tim Johnson (D-SD) and Jack Reed (D-RI).  The measure is being sponsored in the House of Representatives by John Conyers (D-MI) and Peter Welch (D-VT). At this time, there are no Republican co-sponsors even though Sen. Mike Enzi was rumored to be a considered co-sponsoring the measure before introduction.

Without any Republicans on board the effort, the measure may not advance very far in Congress. Nonetheless, to the extent the measure gets any traction, it is worth itemizing a few of the problems with this approach. My Mercatus Center colleague Veronique de Rugy and I have done some work on this issue together in the past and we are planning a short new paper on the topic. It will build on this lengthy Cato Institute paper we authored together in 2003, “The Internet Tax Solution: Tax Competition, Not Tax Collusion.” The key principle we set forth was this: “Congress must.. take an affirmative stand against efforts by state and local governments to create a collusive multistate tax compact to tax interstate sales.” “It would be wrong,” we argued, “for members of Congress to abdicate their responsibility to safeguard the national marketplace by giving the states carte blanche to tax interstate commercial activities through a tax compact. The guiding ethic of this debate must remain tax competition, not tax collusion.”

Proponents of simply extending current sales tax collection obligations to interstate sales will claim that the so-called “Streamlined Sales and Use Tax Agreement” (SSTUA) they want Congress to bless has solved the compliance cost and complexity problem associated with taxing “remote” interstate sales. Yet, as I pointed out in my recent Forbes essay, “The Internet Taxman Cometh,” this 200-page “simplification” effort remains a Swiss cheese tax system, however, riddled with loopholes and complexities that could burden vendors, especially mom-and-pop operators. America’s estimated 7,400 local jurisdictions still have many different definitions and exemptions that complicate the sales tax code. For example, is a cookie a “candy,” (which is taxed in most jurisdictions) or a “baked good,” (which is typically tax-exempt)? Thus, forcing online vendors to collect local taxes would create significant burdens on interstate commerce.

This is not to say there aren’t some legitimate tax “fairness” arguments in play here. It really is unfair that “Main Street” vendors are burdened with significant tax collection responsibilities while others are not. But “fairness” cuts many ways. It’s also unfair and unconstitutional to require out-of-state vendors to collect sales taxes on behalf of a jurisdiction where they have no physical presence. After all, at least in theory, those who are taxed should expect to receive some benefit for it. Interstate vendors receive no benefit but bear all the cost.

To the extent we want to “level the playing field,” therefore, one approach is to cut or eliminate sales taxes on in-state vendors. Of course, that’s a tough pill for many states and localities to swallow. If they got their profligate spending habits under control, however, that might be easier.

Another alternative would be the creation of a national Internet sales tax that would avoid the complexity problem by imposing a single rate and set of definitions on all vendors. But that just opens the door to a new federal tax base, which would grow to be burdensome in other ways at a time when American consumers and companies are already over-taxed. I doubt the idea would get much traction in Congress, anyway.

Perhaps the best alternative would be to switch the sourcing methodology for state sales tax collection obligations from destination-based to “origin-based.”  Stated differently, the rule would be “you can tax your own exports, not the imports from other states.” Here’s how Veronique and I summarized an origin-based solution in our old Cato paper:

under an origin-based sourcing rule—also referred to as a “seller state,” “vendor-state,” or “source-based” rule by some scholars—all interstate sales through all channels (traditional stores or cyber-retailers) would be taxed at the point of sale (meaning the company’s “principal place of business”) instead of at the point of destination, if the state or locality chooses to impose a tax. All goods within a given state or locality would be taxed at the locally applicable rate no matter how they were purchased and no matter where they were consumed.  This option would take care of most of the problems posed by the destination-based methodology that is favored by most state and local policymakers today.

Specifically, an origin-based sourcing rule would have the following advantages:

• Minimize the burden on sellers by requiring sellers to know and abide by the tax rates and regulations within their principal place of business instead of the rates and definitions of thousands of different taxing jurisdiction.
• Ensure tax parity between Main Street vendors and interstate sellers.
• Do away with the need for a multistate collection arrangement such as the SSTUA by eliminating any need to trace interstate transactions to the final point of consumption.
• Remove nexus uncertainties and constitutional concerns, because only companies within a state or local government’s borders would be taxed.
• Largely remove any need for continued reliance on the use tax because all transactions would henceforth be sourced to the origin of sale and collected immediately by the vendor at that point.
• Respect buyers’ privacy rights by eliminating the need to collect any special or unique information about a buyer, and  by not using third-party tax collectors to gather information about buyers.
• Respect federalism principles and enhance jurisdictional tax competition  by permitting each state to determine its  own tax policies and encouraging healthy state-by-state tax rivalry.
• Preserve local jurisdictional tax authority where a harmonization proposal like the SSTUA plans would create a de facto national sales tax system and run roughshod over local governments.
• Because it is more politically / constitutionally feasible it may maximize the amount of tax collected for states by making compliance easier and incorporating activities that are currently untaxed.

Please see the old Cato paper for more details and answers to potential objections, but I hope it’s clear why an “origin-based” solution offers a sensible way to break the current logjam and achieve tax “fairness” in the process.

Some states officials will object to the vigorous tax competition spawned by an origin-based sourcing rule. But that’s a feature, not a bug! Tax competition is good for consumers and the continued vitality of American federalism. A multistate tax compact, by contrast, would encourage tax collusion and let states too easily raise rates on interstate sales.

Moreover, I think it bears repeating that state officials have been at this for 15 years and still not found a way to truly simplify their sales taxes and get around constitutional limitations on the taxation of interstate activity. An origin-based system, therefore, may offer them the only way for them to finally tax the Internet and interstate sales.  I’d prefer they scale back their taxing ways, of course, but to the extent they insist on pushing out the boundaries of their tax authority, an origin-based solution — not the “Main Street Tax Fairness Act” — is the only sensible, constitutional way for them to do so.

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

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

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

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

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

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

Cyber-capitalism works, when you let it.

[Cross-posted at Truth on the Market]

[UPDATE:  Josh links to a WSJ article telling us that EU antitrust enforcers raided several (unnamed) e-book publishers as part of an apparent antitrust investigation into the agency model and whether it is “improperly restrictive.”  Whatever that means.  Key grafs:

At issue for antitrust regulators is whether agency models are improperly restrictive. Europe, in particular, has strong anticollusion laws that limit the extent to which companies can agree on the prices consumers will eventually be charged. Amazon, in particular, has vociferously opposed the agency practice, saying it would like to set prices as it sees fit. Publishers, by contrast, resist the notion of online retailers’ deep discounting.

It is unclear whether the animating question is whether the publishers might have agreed to a particular pricing  model, or to particular prices within that model.  As a legal matter that distinction probably doesn’t matter at all; as an economic matter it would seem to be more complicated–to be explored further another day . . . .]

A year ago I wrote about the economics of the e-book publishing market in the context of the dispute between Amazon and some publishers (notably Macmillan) over pricing.  At the time I suggested a few things about how the future might pan out (never a good idea . . . ):

And that’s really the twist.  Amazon is not ready to be a platform in this business.  The economic conditions are not yet right and it is clearly making a lot of money selling physical books directly to its users.  The Kindle is not ubiquitous and demand for electronic versions of books is not very significant–and thus Amazon does not want to take on the full platform development and distribution risk.  Where seller control over price usually entails a distribution of inventory risk away from suppliers and toward sellers, supplier control over price correspondingly distributes platform development risk toward sellers.  Under the old system Amazon was able to encourage the distribution of the platform (the Kindle) through loss-leader pricing on e-books, ensuring that publishers shared somewhat in the costs of platform distribution (from selling correspondingly fewer physical books) and allowing Amazon to subsidize Kindle sales in a way that helped to encourage consumer familiarity with e-books.  Under the new system it does not have that ability and can only subsidize Kindle use by reducing the price of Kindles–which impedes Amazon from engaging in effective price discrimination for the Kindle, does not tie the subsidy to increased use, and will make widespread distribution of the device more expensive and more risky for Amazon.

This “agency model,” if you recall, is one where, essentially, publishers, rather than Amazon, determine the price for electronic versions of their books sold via Amazon and pay Amazon a percentage.  The problem from Amazon’s point of view, as I mention in the quote above, is that without the ability to control the price of the books it sells, Amazon is limited essentially to fiddling with the price of the reader–the platform–itself in order to encourage more participation on the reader side of the market.  But I surmised (again in the quote above), that fiddling with the price of the platform would be far more blunt and potentially costly than controlling the price of the books themselves, mainly because the latter correlates almost perfectly with usage, and the former does not–and in the end Amazon may end up subsidizing lots of Kindle purchases from which it is then never able to recoup its losses because it accidentally subsidized lots of Kindle purchases by people who had no interest in actually using the devices very much (either because they’re sticking with paper or because Apple has leapfrogged the competition).

It appears, nevertheless, that Amazon has indeed been pursuing this pricing strategy.  According to this post from Kevin Kelly,

John Walkenbach noticed that the price of the Kindle was falling at a consistent rate, lowering almost on a schedule. By June 2010, the rate was so unwavering that he could easily forecast the date at which the Kindle would be free: November 2011.

There’s even a nice graph to go along with it:

So what about the recoupment risk?  Here’s my new theory:  Amazon, having already begun offering free streaming videos for Prime customers, will also begin offering heavily-discounted Kindles and even e-book subsidies–but will also begin rescinding its shipping subsidy and otherwise make the purchase of dead tree books relatively more costly (including by maintaining less inventory–another way to recoup).  It will still face a substantial threat from competing platforms like the iPad but Amazon is at least in a position to affect a good deal of consumer demand for Kindle’s dead tree competitors.

For a take on what’s at stake (here relating to newspapers rather than books, but I’m sure the dynamic is similar), this tidbit linked from one of the comments to Kevin Kelly’s post is eye-opening:

If newspapers switched over to being all online, the cost base would be instantly and permanently transformed. The OECD report puts the cost of printing a typical paper at 28 per cent and the cost of sales and distribution at 24 per cent: so the physical being of the paper absorbs 52 per cent of all costs. (Administration costs another 8 per cent and advertising another 16.) That figure may well be conservative. A persuasive looking analysis in the Business Insider put the cost of printing and distributing the New York Times at $644 million, and then added this: ‘a source with knowledge of the real numbers tells us we’re so low in our estimate of the Times’s printing costs that we’re not even in the ballpark.’ Taking the lower figure, that means that New York Times, if it stopped printing a physical edition of the paper, could afford to give every subscriber a free Kindle. Not the bog-standard Kindle, but the one with free global data access. And not just one Kindle, but four Kindles. And not just once, but every year. And that’s using the low estimate for the costs of printing.

Until recently, Amazon and its Kindle were the only real e-reader game in town. This allowed them to force on publishers an arguably arbitrary (and low) price of $9.99 for bestsellers. With the introduction of Apple’s iPad, however, publishers now have a viable competitor to which they can defect. The result will likely be higher e-book prices in the near term, and this has prompted some point out that this is a case where more competition resulted in higher prices for consumers.

The key phrase in the previous paragraph, however, is “near term.” It’s interesting to see that five years after it began offering video in the iTunes store, Apple is apparently pushing TV producers to lower their prices by half from $1.99 an episode to 99¢. Market processes–especially those surrounding new technology and distribution channels–can be less than instantaneous, but they have a way of ultimately conforming to economic reality.

Reporting on the ongoing negotiations with Apple, the New York Times says, “Television production is expensive, and the networks are wary of selling shows for less.” But the economic reality they’re missing is that TV production is a fixed cost, and as my friend Tim Lee has pointed out many times, the marginal cost of digital distribution is basically zero. As a result, I wouldn’t be surprised if five years from now, we’ll see Apple badgering book publishers to cut their prices in half.

Over at Silicon Alley Insider, Gregory Galant has a wonderful post about “18 Awesome Tech Things We Didn’t Have 10 Years Ago.” It serves as another great example of the amazing technological progress we have witnessed over the past decade.  He’s asking people for suggestions for what else should be on the list, so head over there and let him know. Seems like wi-fi technologies should be on there somehow. FiOS deserves a shout-out, too. And where’s Firefox & Chrome? Also, I’ll put in a special word for some amazing new home theater technologies: high-def flat-screens and projectors; media servers & Windows Media Center; BluRay; and 3 incredible gaming / media consoles (Wii, PS3, & XBox). Anyway, here’s Galant’s list:

Wikipedia Gmail Facebook YouTube Twitter AdWords Amazon AWS RSS (started in ‘99 but didn’t catch on till the ’00s) Meetup iPod Google Maps Podcasts Mint Skype/VOIP iPhone Google Docs Creative Commons Flickr

Business Insider reports that, sometime next year, Scribd will launch a “seamless” interface that allows users to access Scribd docs on their Kindles.  That’s a major step forward for the startup, which aims to be the “YouTube for print”—and which Adam and I use to make all our PFF papers available online in an embeddable Flash viewer that’s much quicker to load than the full PDFs.  But it also represents a serious potential long-term challenge to Amazon, since Scribd is “quietly developing a strong e-book storefront to match its hoard of user generated content,” as Business Insider notes, and because:

If Scribd can put its books on the Kindle, this number should only grow, especially since it offers publishers a better business deal than Amazon.  Amazon reportedly offers a 50/50 sales split. Scribd only keeps 20% and allows publishers to set their own price.

So much for “The coming Kindle monopoly” the cranks over at Oligopoly Watch warn us about!

It would be more accurate to say that Scribd will be “Kindling” e-book competition within the base of Kindle users, and of course, competing devices like  Barnes & Noble’s Nook offer cross-platform competition, just as satellite television competes with cable.   In both cases, the platform operator has a strong incentive to compete for users by offering as much content (books/video programming) as possible at attractive prices.

On the one hand, one might say that inter-platform competition is stronger in the case of video delivery platforms, because users generally lease equipment on a month-to-month basis, while e-book users must buy their $250+ device up-front (making it therefore harder to switch from Amazon to Barnes & Noble, if one decides one doesn’t like the offerings or prices for e-books on the Kindle).  But on the other hand, if Scribd can compete head-to-head with Amazon in offering e-books on Amazon’s Kindle (and perhaps on the Note, too, someday soon), users don’t need to switch devices at all: They can just switch e-book providers. Furthermore since e-books are bought on an à la carte basis, users don’t have to switch completely, they can just switch for any particular book—meaning that Amazon needs to compete for every additional purchase they can get, which means lower prices and more choices for consumers.

In short, there’s no reason to think that competition won’t work in this market.  But, then again, it works pretty darn well in the video programming delivery market, too, and yet we still see the Federal Communications Commission trying to uphold outdated regulations based on supposedly ” gatekeeper power” that cable providers lost roughly 15 years ago, when satellite television became an alternative to cable for essentially all Americans. If the general activist direction of antitrust enforcement under this administration is any indication, I fear we may soon see this kind of stasist thinking applied to the very competitive new market of e-books. And if recent tech history is any guide, innovative, scrappy startups like Scribd will simply be dismissed out of hand by regulators incapable of imagining what’s just around the corner.

The disabled have much to give thanks for this year—but contrary to common assumptions, it’s not for paternalistic government accessibility mandates, regulations or subsidies (see, for example, the FCC’s November 6 Broadband Accessibility workshop), but for the good ol’ fashioned private sector ingenuity that has made America great. Five broad categories of examples suggest how constantly-improving computing power and innovation can make life easier for many, if not all, disabled users—and how market forces empower the disabled along with everyone else.

Video transcription. Last week, Google announced “the preliminary roll-out of automatic captioning in YouTube, an innovation that takes advantage of our speech recognition technology to turn the spoken word into text captions.” Google uses the same speech recognition technology it refined with its free Goog-411 and Google Voice services to automatically transcribe video dialog (which can also be automatically translated using Google’s translation engine). Why? Not because of any government mandate, but because of some combination of three factors: (i) it’s an easy way for Google to invest in its “reputational capital,” (ii) the underlying technologies of transcribing videos make videos easier to use for all users, not just the hearing-impaired, and (iii) those technologies also make it possible to contextually target advertising to the verbal content of videos.

It’s worth noting that Hulu currently offers closed captioning for some of its television programming but notes that “closed-captioning data that’s used for broadcast TV isn’t easily translated for online use.” The online television clearinghouse promises to offer more closed-captioning soon. Perhaps they ought to license Google’s algorithmic transcription?

Voice recognition for direct consumer use—most notably, Dragon NaturallySpeaking 10, the latest version of the leading voice recognition software, which was released in summer 2008 but only recently seems to have really hit critical mass. By many accounts, and my own personal experience over the last few months (having lost the use of my left hand due to cartilege damage), Dragon 10 is the first speech recognition program that is really “ready for prime time”—good enough that I will very likely continue using it, at least sometimes, even after my wrist heals in the coming months. (I used it to write this post.) It offers non-disabled consumers functionality like dictation-on-the go and points to a day when everyone gets their own personal transcription secretary—think: 1950s office culture meets artificial intelligence.

While Dragon standard currently retails for $50.99 on Amazon (list Price: $99.99), Microsoft’s new Windows 7 includes voice-recognition functionality that is not terribly far behind Dragon in quality among its built-in accessibility features (although, when it comes to voice-recognition, small differences in quality are well worth the cost).

Jon Morrow (Associate Editor of Copyblogger), whose muscular dystrophy rendered him quadriplegic, provides a definitive guide to speech recognition for bloggers, focusing on Dragon:

Voice recognition for search. Google Voice Search, initially launched on the iPhone a year ago, and more recently made available on other mobile devices. By allowing users to search from their phones without typing, the program makes search just that much more accessible for users who have difficulty typing—something I was very grateful for as I recovered from my wrist surgery, with only my Droid to keep me (and my one good hand) company—and allow me to blog! While this is a small step, it foreshadows a day in which all mobile devices will have the kind of speech recognition capability Dragon makes possible on the desktop today.  Given the rapid and constant increase in computing power made possible by Moore’s Law, it’s just a matter of time before this dream comes true.

What these first three product categories have in common, besides speech-to-text functionality, is that they are not exclusively geared to the disabled. Instead, each also offers functionality to a broader market.

Text-to-speech functionality. This is one of the accessibility highlights of Windows 7. Adobe has also improved the screen reader functionality in its Acrobat Reader 9 software. While these features are primarily geared towards the disabled, the quality of text-to-speech automation has improved to the point that it is actually being used for a mass-market.

• Exhibit A: AudioDizer, a service that aims to “enable newspapers, magazines, and blogs to distribute their content in MP3 format for every single article published.” While AudioDizer won’t replace good human readers anytime soon, such software will increasingly remove the absolute necessity—and cost—of having someone read text material you want to podcast. This, in turn, will revolutionize podcasting by making it nearly costless and effortless to put text into audio form.  The quality is probably not acceptable for most people yet, but for many other hard-core “listenists” (people who consume audio content as voraciously as the most dedicated readers), it’s simply revolutionary to have access to a library of audio content potentially as large as the text-Internet itself.  For me, this means I can make better use of the time I spend puttering around the house—or, in my two-arm days, folding laundry, going to the gym  or riding my bike. (I am a particularly big fan of the MIT Technology Review podcast, which will give you an idea of the quality of AudioDizer.) But for the visually impaired, AudioDizer could be far more profoundly important.  In either case, the “killer app” for text-to-speech will be the level of quality finally achieved in speech-to-text by Dragon NaturallySpeaking 10.
• Exhibit B: the text-to-speech capability in Amazon’s Kindle 2 reader device. While the Kindle itself is difficult for the visually impaired or blind to use, the mainstreaming of such functionality will ultimately benefit such disabled users by increasing the incentive to improve text-to-speech functionality. Sadly, after receiving (debatable) copyright complaints from the Author’s Guild, Amazon decided to turn this functionality off  for all books, unless activated by the publisher (an opt-in). If the technology were actually good enough to be a substitute for an audiobook, the Authors Guild’s complaint would be more understandable. Unfortunately, such an opt-in will probably delay the popular acceptance of text-to-speech functionality by average users.

Open source & open platforms.  Their growing success in the marketplace (not because of government, mind you!) likely means that disabled consumers will have more choices.

• Software: There are a slew of accessibility-oriented add-ons for the Firefox browser, and Mozilla makes it easy to find such tools by allowing users to group related add-ons into “Collections” such as this one. In particular, the Firefox Accessibility Extension has been downloaded nearly 150,000 times.
• Hardware: The success of open operating systems such as Google’s Android should make it easier for device manufacturers to build devices with specialty features, say, for the visually-impaired. Certainly, it would be easier to do so than to build such functionality into all iPhones. At the very least, a diversity of form factors will create more real options for the sometimes very specific needs of the disabled.  For example, I simply could not have typed effectively with one hand on my old HTC XV6800, but my new Motorola Droid, with its superior on-screen keyboard and different form factor allows me to type fairly effectively with just one hand (as does my partners iPhone).

Tying It All Together

That’s really the key lesson here: While many advocates for the disabled may complain that the iPhone isn’t as accessible as they might like, mandating accessibility features for all devices comes at a real costs for users: There’s only so much you can fit into a single device. If government mandates additional features, something has to give, because we live in a world of trade-offs: price, bulk, weight, etc. But a world with many devices and competing operating systems is a world in which niche markets are increasingly being served—primarily because Moore’s Law increasingly makes it cost-effective to do so.

The “disabled” are not a monolith but represent a wide spectrum of interface needs along the long tail of human ability-diversity. Rather than trying to stunt the functionality of all devices in the name of “fairness,” we ought to be focusing on the ways in which falling prices, increasing processing power and the increasing efficiency of small-scale consumer electronic device manufacturing make possible an increased degree, and diversity, of functionality previously inconceivable. We also ought to look for ways to make sure that government doesn’t inadvertently get away this ongoing process, such as through cumbersome device testing requirements or by restricting the exclusive handset arrangements that make it possible for wireless carriers to subsidize the cost of expensive devices. The latter is especially important for achieving the kind of scale in adoption of a device that could help make it worthwhile to develop and bring to market specialty devices—say, for the visually-impaired.

The offerings for the disabled will probably always lag behind those for average consumers, but complaining about that is a lot like complaining about the fact that the rich tend to be the only ones who can initially afford new inventions—from air travel to air conditioning to refrigerators to personal computing.  Just as the wealthy tends to fund the investments in these technologies, to the benefit of “average” consumers, so, too, will the mass market for functionalities like speech-to-text and text-to-speech drive the perfection of these technologies, which are particularly important for disabled users.

Of course, there are are indeed some accessibility functionalities necessitated by certain disabilities that may not have such ready dual-use among a mass audience. But I suspect that accessibility functionalities will become increasingly indistinguishable from tools developed for average users.  The main distinction will lie in the fact that for the disabled, these tools may be a life-changing “necessity,” while for most users, they may merely be “cool” or simply “useful.”  Case in point: the volume level on my new Droid’s speakerphone is so loud that it will likely make the phone “accessible” for many heart-of-hearing users who simply couldn’t hear previous smartphones. For me, it’s a nifty feature (and sometimes even annoyance), while for them it may be a fantastic relief.

More generally, it’s important to recognize the diversity of incentives that makes possible this diversity of functionalities for a diversely-capable citizenry: For some companies, like Nuance (maker of Dragon NaturallySpeaking) the disabled are a key market. And anticapitalist critic might claim that “they’re just in it for the money.”  But as Adam Smith said, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” In other words, it’s a good thing that there are companies out there who try to meet the needs of the disabled. (The Internet has made it easier than ever before for disabled consumers to find products that meet their needs.  Just Google the keywords “disabled products” and you’ll get over 57 million hits.) For some companies, the motive to  invest in accessibility innovation may be “philanthropic”—i.e., a down payment on consumer goodwill. And for other companies, the motive may be more mixed: Google clearly gains additional advertising audience by reaching the disabled, and also uses its accessibility technologies to serve ads better and making it easier for all users to conduct searches.

As for the broader subject of “neuro-diversity” (the broad spectrum of human cognitive abilities and not necessarily a “disability”), I highly recommend Tyler Cohen’s new book Create Your Own Economy (reviewed by Adam here), which celebrates the Internet as a great emancipating force for the neuro-diverse.

The Internet is massive. That’s the ‘no-duh’ statement of the year, right?  But seriously, the sheer volume of transactions (both economic and non-economic) is simply staggering.  Consider a few factoids to give you a flavor of just how much is going on out there:

• In 2006, Internet users in the United States viewed an average of 120.5 Web pages each day.
• There are over 1.4 million new blog posts every day.
• Social networking giant Facebook reports that each month, its over 300 million users upload more than 2 billion photos, 14 million videos, and create over 3 million events. More than 2 billion pieces of content (web links, news stories, blog posts, notes, photos, etc.) are shared each week. There are also roughly 45 million active user groups on the site.
• YouTube reports that 20 hours of video are uploaded to the site every minute.
• Amazon reported that on December 15, 2008, 6.3 million items were ordered worldwide, a rate of 72.9 items per second.
• Every six weeks, there are 10 million edits made to Wikipedia.

Now, let’s think about how some of our lawmakers and media personalities talk about the Internet.  If we were to judge the Internet based upon the daily headlines in various media outlets or from the titles of various Congressional or regulatory agency hearings, then we’d be led to believe that the Internet is a scary, dangerous place. That ‘s especially the case when it comes to concerns about online privacy and child safety. Everywhere you turn there’s a bogeyman story about the supposed dangers of cyberspace.

But let’s go back to the numbers. While I certainly understand the concerns many folks have about their personal privacy or their child’s safety online, the fact is the vast majority of online transactions that take place online each and every second of the day are of an entirely harmless, even socially beneficial nature.  I refer to this disconnect as the “problem of proportionality” in debates about online safety and privacy. People are not just making mountains out of molehills, in many cases they are just making the molehills up or blowing them massively out of proportion.

Go back to those Facebook numbers, for example. 300 million users uploading 2 billion pieces of content each week, plus 45 million user groups.  Now, how many “incidents” do you hear about in the course of an entire year involving privacy and child safety on Facebook? A couple? A dozen?  I doubt it’s that many, but for the sake of argument, let’s be preposterous and say the number of incidents is 10,000.  Doing some quick math: 10,000 “incidents” divided by 2 billion pieces of content shared each week = 0.001%   In other words, there would need to be hundreds of thousands of privacy or child safety “incidents” taking place on Facebook each week before one could legitimately claim the trend was statistically significant in proportion to the total volume of transactions.

Of course, there’s no way to be scientific about this since I can’t crunch the numbers to get an exact calculation for Facebook or the entire Internet since it’s hard to even define or collect info about online “incidents.” And this is not to say there are never any incidents online where some harm might come to an individual or a child.  Defining “harm” can be contentious, however, especially when it comes to what I regard as the conjectural theories about advertising or provocative media content “harming” us or our kids.

Of course, others could claim that the sheer volume of information that we put online about ourselves is problematic for a variety of other reasons. The best argument about potential harm coming of all this information being online is that the sheer volume of data sharing and collection opens up the door to identify theft, or that some government agencies could get their hands on it and use it to do nasty stuff to us.  That first problem can be a legitimate one, and deserves more attention and greater consumer education. But that latter problem should be addressed by putting more constraints on our government(s), not by imposing more regulations on the Internet. Government powers should be tightly limited when it comes to monitoring the habits of websurfers or collecting information about them.

Nonetheless, it is my contention that an infinitesimal percentage of all daily online transactions and interactions involve serious privacy violations or harm to children.  Until they can prove otherwise, we need to demand that our policymakers and folks in the press put these issues into some perspective before they jump to conclusion about online life.  Enough of the fear-mongering and techno-panics!

A recent article by Lisa Carley in the New York Wine Examiner reports that Amazon is suspending plans that would have allowed wine producers to sell direct to consumers.  The culprit? State regulations:

One of the main reasons why this program has been put on hold is the complexity of wine-shipping laws within the United States, and that fact that the major wholesalers spend millions of dollars on the state level to keep it difficult for the consumer to have access to wine they want at good prices.

About 35 states permit some form of direct shipment to consumers, but laws vary greatly. In Virginia, consumers can order wine from any winery or retailer licensed in any state, as long as the seller registers with the state of Virginia and collects taxes. In Maryland, direct shipment of wine to consumers is still a felony. Montana limits the total amount of wine any consumer can order to 12 cases per year, which means most wineries won’t ship there because an individual winery has no way of knowing how much wine the consumer has ordered from other sellers. I’m not making this stuff up; check the Wine Institute’s compendium of state laws.

In several studies, Alan Wiseman and I found that consumers can enjoy significant savings on higher-priced wines if they order online.  (The savings disappear for wines priced under $20 per bottle because of shipping costs.) The Internet also gives consumers access to wines that they might not find by simply walking into a store.   

It would be a shame to see Amazon’s idea die. Currently, a winery or retailer that wants to ship directly to consumers has to figure out and comply with each state’s laws. It makes a lot of sense that a single retail sales portal could consolidate and continuously update this information, then set up a system that lets any seller market its wine direct to consumers in states where that’s legal, in compliance with all state laws.

by Berin Szoka & Adam Thierer, Progress Snapshot 5.11 (PDF)

Ten years ago, Nobel Prize-winning economist Milton Friedman lamented the “Business Community’s Suicidal Impulse:” the persistent propensity to persecute one’s competitors through regulation or the threat thereof. Friedman asked: “Is it really in the self-interest of Silicon Valley to set the government on Microsoft?” After yesterday’s FCC vote’s to open a formal “Net Neutrality” rule-making, we must ask whether the high-tech industry—or consumers—will benefit from inviting government regulation of the Internet under the mantra of “neutrality.”

The hatred directed at Microsoft in the 1990s has more recently been focused on the industry that has brought broadband to Americans’ homes (Internet Service Providers) and the company that has done more than any other to make the web useful (Google). Both have been attacked for exercising supposed “gatekeeper” control over the Internet in one fashion or another. They are now turning their guns on each other—the first strikes in what threatens to become an all-out, thermonuclear war in the tech industry over increasingly broad neutrality mandates. Unless we find a way to achieve “Digital Détente,” the consequences of this increasing regulatory brinkmanship will be “mutually assured destruction” (MAD) for industry and consumers.

New Fronts in the Neutrality Wars

The FCC’s proposed rules would apply to all broadband providers, including wireless, but not to Google or many other players operating in other layers of the Net who favor such broadband-specific rules. With this rulemaking looming, AT&T came after Google with letters to the FCC in late September and then another last week accusing the company of violating neutrality principles in their business practices and arguing that any neutrality rules that apply to ISPs should apply equally to Google’s panoply of popular services. In particular, AT&T accused Google of “search engine bias,” suggesting that only government-enforced neutrality mandates could protect consumers from Google’s supposed “monopolist” control.

The promise made yesterday by the FCC—to only apply neutrality principles to the infrastructure layer of the Net—is hollow and will ultimately prove unenforceable. The reality is that regulation always spreads. The march of regulation can sometimes be glacial, but it is, sadly, almost inevitable: Regulatory regimes grow but almost never contract. Indeed, in some ways, the prediction we made just three weeks ago is already coming true: The basic premise of neutrality regulation is already being proposed for other layers of the Internet—and not just by AT&T in retaliation. One need not agree with all of AT&T’s accusations to recognize that, whatever the FCC might say today, any large online intermediary with a popular platform potentially faces the threat of “network neutrality” mandates—because every platform is essentially a “network,” too. We’re not just talking about “search neutrality” (Google as well as Microsoft) but also about “device neutrality” (mobile handsets), “app neutrality” (Apple’s iTunes store, Facebook’s developers and Google’s Android mobile OS) and so on for social networking, email, instant messaging, online advertising, etc.

An open letter sent to FCC Chairman Julius Genachowski this week by 28 founders and CEOs of leading application providers—including Amazon, Google, Facebook, Netflix, Craigslist, Sony and Twitter—speaks generally about the need for the FCC to enforce a “guarantee of neutral, nondiscriminatory access by users.” While many of these signatories may have in mind ISPs as the network “gatekeepers” that need to be reined in by the FCC, the more successful among them are likely to find this letter used against them in the future—perhaps even by co-signatories—to advance a broad conception of what the government must do to ensure “openness” and “access” for platforms at all layers of the Internet.

Dumb Networks, Dumb Devices

The intellectual foundations for this regulatory creep have already been laid by groups like Free Press and Public Knowledge and law professors like Columbia’s Tim Wu, Harvard’s Jonathan Zittrain and Seton Hall’s Frank Pasquale. As originally conceived by Tim Wu in 2003, “network neutrality” is not unique to broadband networks: “the basic economic problem found in the network neutrality debate (a form of ‘platform exclusion’ or ‘vertical foreclosure’) can be found in many other markets.” Indeed, Wu’s popular Net Neutrality FAQ declares:

The promotion of network neutrality is no different than the challenge of promoting fair evolutionary competition in any privately owned environment, whether a telephone network, operating system, or even a retail store. Government regulation in such contexts invariably tries to help ensure that the short-term interests of the owner do not prevent the best products or applications becoming available to end-users.

Zittrain picked up where Wu left off in The Future of the Internet and How to Stop It—attacking, as the enemies of innovation, not ISPs but the supposedly “closed” platforms of Apple, TiVo and Microsoft’s Xbox. Zittrain warns 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.

Zittrain’s general solution is “API [Applications Programming Interface] neutrality:” If you create a platform (whether hardware or software) and begin allowing third-party contributions (“generativity”), you will lose all control over devices or applications that can run on that platform.

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…. [N]etwork neutrality ought to be applied to the new platforms of Web services that, in turn, depend on Internet connectivity to function.

Clearly, if Zittrain and his allies have their way, the sort of neutrality mandates envisioned by the FCC or some Congressmen for ISPs will eventually cover companies such as Apple, Google, Facebook, Myspace, Twitter and Amazon—all singled out by Zittrain in a New York Times op-ed in July:

If the market settles into a handful of gated cloud communities whose proprietors control the availability of new code, the time may come to ensure that their platforms do not discriminate. Such a demand could take many forms, from an outright regulatory requirement to a more subtle set of incentives — tax breaks or liability relief — that nudge companies to maintain the kind of openness that earlier allowed them a level playing field on which they could lure users from competing, mighty incumbents.

Frank Pasquale agrees on the need to restrain all “the dominant players at all layers of online life,” but focuses on his demand for a Federal Search Commission to control supposedly “biased” search results. While the FCC wrings its hands over “managed services” offered by ISPs, search engines are increasingly offering their own value-added services by “blending” algorithmically-derived results with special features like maps, videos, books or music depending on what the search term suggests the user is interested in. “Artificially” ensuring that these features appear on the first page of search results is clearly non-neutral, and necessarily involves search engines making ”managed” decisions as to whose features to include. Yet such features also clearly benefit users—dramatically improving the usefulness of search engines and helping to sustain struggling business models like music retailing.

But one need not resort to the works of “ivory tower” academics to see the slippery slope we’re already tumbling down with the infinitely elastic principle of “neutrality.” The prospect of the FCC gradually transforming into a “Federal Information Commission” becomes more apparent when one reads the Wireless Innovation and Investment Notice of Inquiry recently released by the FCC:

As other approaches, such as cloud computing, evolve, will established standards or de facto standards become more important to the applications development process? For example, can a dominant cloud computing position raise the same competitive issues that are now being discussed in the context of network neutrality? Will it be necessary to modify the existing balance between regulatory and market forces to promote further innovation in the development and deployment of new applications and services?

One can imagine how some might use such language to accuse Google of being in “a dominant cloud computing position” such that “the context of network neutrality” will be applied to cloud service (like Google Voice) to “modify the existing balance between regulatory and market forces” through regulation. Indeed, that’s precisely what AT&T has suggested in recent letters (September 25 ^th and October 14 ^th) to the FCC.

AT&T’s partner Apple has already been the subject of such attacks for its decision to block the Google Voice app earlier this summer. The incident marked the beginning of open warfare between Google and AT&T/Apple. The FCC quickly jumped into the mix, first questioning how Apple manages its iTunes apps store for the iPhone, then questioning how Google runs its free Voice application. What legal authority the FCC has over either service is far from clear, but Apple seems to have gotten the message: It recently approved the Spotify music streaming app for the iPhone, which could be a serious competitive threat to the iTunes music store. This small incident highlights how easily regulators can impose their will through informal mechanisms like open-ended investigations even without clear authority to issue rules or bring enforcement actions. Yet none dare call it what it is: regulatory blackmail.

The Inevitability of Regulatory Capture

No doubt, other industry players will cheer on such regulatory harassment of the titans of tech—and maybe even demand more of it. Regulatory creep is driven by more than the self-interests of every bureaucracy to expand its own mission, budget and staff. As the Electronic Frontier Foundation has noted, “Experience shows that the FCC is particularly vulnerable to regulatory capture.” While lobbyists play an important role in defending business from government, all too many businesses naively look at government as a beast that can be tamed, trained, and turned to one’s own advantage, and often try to use the expanding regulatory apparatus to their own advantage or simply throw their competitors under the bus to save themselves. The result is a Hobbesian regulatory “war of all against all” within industry.

As Professor Alfred E. Kahn explained in his 2-volume opus, The Economics of Regulation, all regulation—however high-minded—is inevitably captured by special interests because:

When a commission is responsible for the performance of an industry, it is under never completely escapable pressure to protect the health of the companies it regulates, to assure a desirable performance by relying on those monopolistic chosen instruments and its own controls rather than on the unplanned and unplannable forces of competition. […] Responsible for the continued provision and improvement of service, [the regulatory commission] comes increasingly and understandably to identify the interest of the public with that of the existing companies on whom it must rely to deliver goods.

If Internet regulation follows the same course as other industries, the FCC and/or lawmakers will eventually indulge calls by all sides to bring more providers and technologies “into the regulatory fold.” Clearly, this process has already begun. Even before rules are on the books, the companies that have made America the leader in the Digital Revolution are turning on each other in a dangerous game of brinksmanship, escalating demands for regulation and playing right into the hands of those who want to bring the entire high-tech sector under the thumb of government—under an Orwellian conception of “Internet Freedom” that makes corporations the real Big Brother, and government, our savior.

Toward a Less MAD World: Digital Détente

Sincere defenders of real Internet Freedom—that is, freedom from government techno-meddling—recognize that there will always be disputes over how companies deal with each other online across all layers of the Internet. The question is not whether we need a technical coordinating mechanism for handling such disputes. Someone should mediate conflicts over alleged deviations from abstract neutrality principles. But should that arbitrator be an inherently political body like FCC? Or should we instead look to truly independent, apolitical arbitrators like the Internet Engineering Task Force or collaborative efforts like the Network Neutrality Squad? Such alternative dispute resolution mechanisms and fora need not have the power of law to be effective: The weight of their expert opinion, based on careful investigation of the facts, would likely resolve most disputes, because companies have strong reputational incentives to comply with reasoned rulings by truly neutral experts. And the white hot spotlight of public attention has a way of disciplining marketplace behavior as well.

Government would still have a role to play, of course, in enforcing antitrust laws where anticompetitive harm to consumers can be proven, and in enforcing the promises companies make to consumers. Ultimately, however, certain business models and technologies require non-neutral treatment, and the best remedy for concerns about non-neutrality is competition itself: In the high-tech sector more than any other, disruptive innovation makes it difficult for even the most successful companies to stay on top forever. Competitive entry—or even the threat of new entry—provides a powerful check on the power of so-called “gatekeepers,” but even more important is the prospect that today’s leaders will be tomorrow’s laggards: There’s little reason to think Google (search and advertising), Apple (smart phones and music) and Facebook (social networking) won’t someday find themselves playing catch-up, just as IBM (computers), Microsoft (desktop software and search), Friendster and MySpace (social networking), and Yahoo! and AOL (web portals) have had to do.

“Digital Détente” would require that all parties concede something and work constructively toward a more “peaceful” ( i.e., less regulatory) resolution. And yet, no Internet company wants to disarm unilaterally, foreswearing politics as a continuation of competition by other means. Only through multilateral disarmament could they break out of the current cycle of regulatory one-upmanship: If the companies in the Internet ecosystem could form a united front against increased government regulation and in favor of removing existing regulatory obstacles to competition, they could all return to their core competencies of creativity and innovation.

The alternative is a regulatory “nuclear winter”: high-tech titans turning their political fire on each other, catching innocent third parties in the cross-fire and bringing a dark cloud of government regulation over the entire Internet. Such increased regulation would stifle investment and innovation throughout the Internet ecosystem. Thus, it is consumers who will ultimately suffer most from the tech industry’s suicidal impulse, as their choices and digital lives are impoverished. For their sake, we hope all industry players will step back from the brink to avoid such high-tech mutually assured destruction.

Some of the most prominent Internet companies sent a letter yesterday asking for protection from market forces. Among them: Facebook, Google, Amazon, and Twitter.

A Washington Post story summarizes their concerns: “[W]ithout a strong anti-discrimination policy, companies like theirs may not get a fair shot on the Internet because carriers could decide to block them from ever reaching consumers.”

No ISP could block access to these popular services and survive, of course. What they could do is try to charge the most popular services a higher tarriff to get their services through. Thus, weep the helpless, multi-billion-dollar Internet behemoths, we need a “fair shot”!

Plain and simple, these companies want regulation to ensure that ISPs can’t capture a larger share of the profits that the Internet generates. They want it all for themselves. Phrased another way, the goal is to create a subsidy for content creators by blocking ISPs from getting a piece of the action.

It’s all very reminiscent of disputes between coal mines and railroads. The coal mines “produced the coal” and believed that the profitability of the coal-energy ecosystem should accrue only to themselves, with railroads earning the barest minimum. But where is it written that digging coal out of the ground is what creates the value, and getting it were it’s used creates none? Transport may be as valuable as “production” of both commodities and content. The market should decide, not the industry with the best lobbyists.

What happens if ISPs can’t capture the value of providing transport? Of course, less investment flows to transport and we have less of it. Consumers will have to pay more of their dollars out of pocket for broadband, while Facebook’s boy CEO draws an excessive salary from atop a pile of overpriced stock holdings. The irony is thick when opponents of high executive compensation support “net neutrality” regulation.

Another reason why these Internet companies’ concerns are bogus is their size and popularity. They have a direct line to consumers and more than enough capability to convince consumers that any given ISP is wrongly degrading access to their services. As Tim Lee pointed out in his excellent paper, The Durable Internet, ownership of a network service does not equate to control. ISPs can be quickly reined in by the public, as has already happened.

A “net neutrality” subsidy for small start-up services is also unnecessary: They have no profits to share with ISPs. What about mid-size services—heading to profitability, but not there yet? Can ISPs choke them off? Absolutely not.

Large, established companies are not known for being ahead of trends, for one thing, and the anti-authoritarian culture of the Internet is the perfect place to play “beleagured upstart” against the giant, evil ISP. There could be no greater PR gift than for a small service to have access to it degraded by an ISP.

The Internet companies’ plea for regulation is bogus, and these companies are losing their way. The leadership of these companies should fire their government relations staffs, disband their contrived advocacy organization, and get back to innovating and competing.