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.

[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.

I’m pretty rough on all the Internet and info-tech policy books that I review. There are two reasons for that. First, the vast majority of tech policy books being written today should never have been books in the first place. Most of them would have worked just fine as long-form (magazine-length) essays. Too many authors stretch a promising thesis into a long-winded, highly repetitive narrative just to say they’ve written an entire book about a subject. Second, many info-tech policy books are poorly written or poorly argued. I’m not going to name names, but I am frequently unimpressed by the quality of many books being published today about digital technology and online policy issues.

The books of Harvard University cyberlaw scholars John Palfrey and Urs Gasser offer a welcome break from this mold. Their recent books, Born Digital: Understanding the First Generation of Digital Natives, and Interop: The Promise and Perils of Highly Interconnected Systems, are engaging and extremely well-written books that deserve to be books. There’s no wasted space or mindless filler. It’s all substantive and it’s all interesting. I encourage aspiring tech policy authors to examine their works for a model of how a book should be done.

In a 2008 review, I heaped praise on Born Digital and declared that this “fine early history of this generation serves as a starting point for any conversation about how to mentor the children of the Web.” I still recommend highly to others today. I’m going to be a bit more critical of their new book, Interop, but I assure you that it is a text you absolutely must have on your shelf if you follow digital policy debates. It’s a supremely balanced treatment of a complicated and sometimes quite contentious set of information policy issues.

In the end, however, I am concerned about the open-ended nature of the standard that Palfrey and Gasser develop to determine when government should intervene to manage or mandate interoperability between or among information systems. I’ll push back against their amorphous theory of “optimal interoperability” and offer an alternative framework that suggests patience, humility, and openness to ongoing marketplace experimentation as the primary public policy virtues that lawmakers should instead embrace.

Interop is Important, but Often Difficult & Filled with Trade-Offs

Palfrey and Gasser begin by noting that “there is no single, agreed-upon definition of interoperability” and that “there are even many views about what interop is and how it should be achieved” (p. 5). They set out to change that by developing “a normative theory identifying what we want out of all this interconnectivity” that the information age has brought us (p. 3).

Generally speaking, Palfrey and Gasser believe increased interoperability — especially among information networks and systems — is a good thing because it “provides consumers greater choice and autonomy” (p. 57), “is generally good for competition and innovation” (p. 90), and “can lead to systemic efficiencies” (p. 129).

But they wisely acknowledge that there are trade-offs, too, noting that “this growing level of interconnectedness comes at an increasingly high price” (p. 2). Whether we are talking about privacy, security, consumer choice, the state of competition, or anything else, Palfrey and Gasser argue that “the problems of too much interconnectivity present enormous challenges both for organizations and for society at large” (p. 2). Their chapter and privacy and security offers many examples, but one need only look around at their own digital existence to realize the truth of this paradox. The more interconnected our information systems become, and the more intertwined our social and economic lives become with those systems, the greater the possibility of spam, viruses, data breaches, and various types of privacy or reputational problems. Interoperability giveth and it taketh away.

When Does “the Public Interest” Demand Interoperability Regulation?

So, how do we know when increased interoperability is good for us or society? How do we strike a reasonable balance? And, most controversially, when should government intervene to tip the balance in one direction or another?

Palfrey and Gasser return to these questions repeatedly throughout the book but admit that their answers will be dissatisfying since “there is no single form or optimal amount of interoperability that will suit every circumstance” (p. 76). Thus, “most of the specifics of how to bring interop about [must] be determined on a case-by-case basis (p. 17). They elaborate:

That can feel unsatisfying. But it is an essential truth: the most interesting interop problems relate to society’s most complex and most fundamental systems. Their answers are never simple to come by, nor are they easy to implement. This characteristic of interop theory is a feature, not a bug. … The price to be paid for striving for a universal principle at the level of theory is that such a theory is full of nuances when it comes to application and practice (p. 17-18).

Fair enough. Yet, Palfrey and Gasser also make it clear they want government(s) to play an active role in ensuring optimal interoperability. They say they favor “blended approaches that draw upon the comparative advantages of the private and public sector” (p. 161), but they argue that government should feel free to tip or nudge interoperability determinations in superior directions. “If deployed with skill,” they argue, “the law can play a central role in ensuring that we get as close as possible to optimal levels of interoperability in complex systems” (p. 88).

That phrase — “optimal level of interoperability” — pops up repeatedly throughout the book. So, too, does the phrase “the public interest.” Palfrey and Gasser argue that governments must look out for “the public interest” and “optimal interoperability” since “market forces do not automatically lead to appropriate standards or to the adoption of the best available technology” (p. 167). Here they introduce two additional amorphous values that complicate the debate: “appropriate standards” and “best available technology.”

The fundamental problem this “public interest” approach to interoperability regulation is that it is no better than the “I-know-it-when-I-see-it” standard we sometimes at work in the realm of speech regulation. It’s an empty vessel, and if it is the lodestar by which policymakers make determinations about the optimal level of interoperability, then it leaves markets, innovators, and consumers subject to the arbitrary whims of what a handful of politicians or regulators think constitutes “optimal interoperability,” “appropriate standards,” and “best available technology.”

On the Limits of Knowledge

Palfrey and Gasser’s framework feels more than just “unsatisfying” in this regard; it feels downright insufficient. That’s because it is missing a major variable: the extent to which state actors are able to adequately define those terms or accurately forecast the future needs of markets or citizen-consumers.

Surprisingly, Palfrey and Gasser don’t really spend much time discussing the specific remedies the state might impose to achieve optimal interoperability. I would have liked to have seen them develop a matrix of interop options and then outline the strengths and weaknesses of each. But even absent a more detailed discussion of possible regulatory remedies, I would have settled for more concrete answers to the following questions: Why are we to assume that regulators possess the requisite knowledge needed to know when it makes sense to foreclose ongoing marketplace experimentation? And why should we trust that, by substituting their own will for that of countless other actors in the information technology marketplace, we will be left better off?

The closest Palfrey and Gasser get to defining a firm standard for when and why such state intervention is warranted comes on page 173 when they are discussing the need for the state to establish sound reasons for intervention. They argue:

The objective should not be interoperability per se but, rather, one or more public policy goal to which interoperability can lead. The goals that usually make sense are innovation and competition, but other objectives might include consumer choice, ease of use of a technology or system, diversity, and so forth (p. 173).

This is a bit better, but it still doesn’t fully grapple with the cost side of the cost-benefit calculus for intervention. Palfrey and Gasser are willing to at least acknowledge some of those problems when they remark that “the state is rarely in a position to call a winner among competing technologies” (p. 174). Moreover,

Lawmakers need to keep in view the limits of their own effectiveness when it comes to accomplishing optimal levels of interoperability. Case studies of government intervention, especially where complex information technologies are involved, show that states tend to be ill suited to determine on their own what specific technology will be the best option for the future (p. 175)

Quite right! Yet, that insight does not seem to influence their calls elsewhere in the book for regulatory activism. That’s a shame since the admonition about policymakers recognizing the “limits of their own effectiveness” should be able to help us devise some limiting principles regarding the state’s role.

Toward an Alternative Theory: Experimental, Evolutionary Interoperability

Allow me to offer a different theory of optimal interoperability that flows from these previous insights. It’s based on a more dynamic view of markets and the central importance of experimentation in the face of uncertainty. Let me just go ahead and articulate the core principles of what I will refer to as  “experimental, evolutionary interoperability theory.” Then I’ll explain it in more detail

• Experimental, evolutionary interoperability : The theory that ongoing marketplace experimentation with technical standards, modes of information production and dissemination, and interoperable information systems, is almost always preferable to the artificial foreclosure of this dynamic process through state action. The former allows for better learning and coping mechanisms to develop while also incentivizing the spontaneous, natural evolution of the market and market responses. The latter (regulatory foreclosure of experimentation) limits that potential.

Palfrey and Gasser would label this a “laissez-faire” theory of interoperability and oppose it since they believe “a pure laissez-faire approach to interop rarely works out well” (p. 160). But they are wrong, at least to the extent they include the sweeping modifier “rarely” to describe this model’s effectiveness. In reality, the vast majority of interoperability that occurs into today’s information economy happens in a completely natural, evolutionary fashion without any significant state intervention whatsoever. In countless small and big ways alike, interconnection and interoperability happens every day throughout society. Yes, it is true that interoperability often happens against the backdrop of a legal system that allows court action to enforce certain rights or address perceived harms, but I would not classify that as a significant direct state intervention to tip or nudge interconnection decisions in one direction or another. And when interoperability doesn’t happen naturally, there are often good reasons it doesn’t and, even if there aren’t, non-interop spawns beneficial marketplace reactions and innovations.

Experimental, evolutionary interoperability theory flows out of Schumpeterian competition theory and the related field of evolutionary economics, but it is also heavily influenced by public choice theory (which stresses the limitations of romanticized theories of politics, planning, and “public interest” regulation). This alternative theory begins by accepting the simple fact that, as Austrian economist F.A. Hayek taught us, “progress by its very nature cannot be planned.” The wiser man, Hayek noted, “is very much aware that we do not know all the answers and that he is not sure that the answers he has are certainly the right ones or even that we can find all the answers.”

Ongoing experimentation with varying business models and modalities of social and economic production allows us to see what consumer choice and trial and error experimentation yields naturally over time. Ongoing experiments with flexible, voluntary interop standards and negotiations also allows us to determine which technological standards seem to benefit consumers in the short-term while also encouraging innovators to leap-frog existing standards and platforms when they become locked-in for too long or seem sub-optimal.

In the short-term, it is entirely possible that such voluntary, evolutionary interop experiments “fail” in various ways. That is often a good thing. Failures are how individuals and a society learn to cope with change and devise systems and solutions to accommodate technological change. As Samuel Beckett once counseled: “Ever tried. Ever failed. No matter. Try Again. Fail again. Fail better.” Progress depends upon an embrace of this uncertainty and acceptance of a world of constant upheaval if we are to learn how to cope, adapt, and move forward.

In this model, technological innovation often springs from the quest for the prize of market power.  Palfrey and Gasser generally reject this Schumpeterian vision of dynamic competition, but they at least do a nice job of describing it:

firms may have a stronger incentive to be innovative when low levels of interoperability promise higher or even monopoly profits. This sort of competition… creates incentives for firms to come up with entirely new generations of technologies or business methods that are proprietary (p. 121).

They reject this approach based on (1) the mistaken notion that the quest of the prize of market power ends in the attainment and preservation of that market power; and (2) the belief that policymakers possess the ability to set us on a better course through wise interventions.

In a moment, I’ll prove why that is misguided by examining a few real-world cases studies. For now, however, let’s return to Palfrey & Gasser’s central operating principle and contrast it with the vision I’ve articulated here. Recall that they argue “it is important to maintain and facilitate diversity in the marketplace. We simply want systems to work together when we want them to and to not work together when we do not.” Again, there is no standard here if one is suggesting this as the principle by which to determine when state intervention is desirable . But if one is looking at that aspirational statement as a description of the natural order of things — namely, that we do indeed “want systems to work together when we want them to and to not work together when we do not” — then that is a perfectly sound principle for understanding why state intervention should be disfavored in all but the most extreme circumstances. To reiterate: We should not allow the state to foreclose interoperability experiments because (a) those experiments have value in and of themselves, and (b) state action is likely to have myriad unintended consequences and unforeseen costs that are not easily remedied or reversed.

There are moments in the book when Palfrey and Gasser appear somewhat sympathetic to the sort of alternative “evolutionary interop” theory I have articulated here. For example, they note that:

The web is a great equalizer for technology firms. As consumers, we have come to expect that everything will work together without incident or interruption. We think it bizarre when something in the digitally networked world does not mesh with something else, perceiving whatever it is to be broken, in need of repair. This high degree of expectation is a powerful driver of interoperability. Market players are increasingly responding to this consumer demand and making these invisible links work for their customers without any government intervention” (p. 28) [italics added]

You won’t be surprised to hear that I agree wholeheartedly! Moreover, what it really proves is that ongoing marketplace experimentation and the evolution of norms and standards generally solve interoperability problems as they develop. That doesn’t mean markets are perfectly competitive or always produce perfect interoperability. But, again, why should we believe state intervention will do a better job? And isn’t it possible that intervention could negatively counter those natural instincts that Palfrey and Gasser describe about how consumers and market actors interact to make those “invisible links” work out as nicely as they do today?

Interop, Competition & Innovation: Some Cases Studies of Evolutionary Interoperability in Action

To better explain experimental, evolutionary interop theory and how it plays out in the real-world, let’s examine the complex relationship between interoperability, competition, and innovation in the information economy through the prism of three case studies: AOL and instant messaging, video game consoles, and smartphones.

AOL

America Online’s (AOL) case study is probably the most profound example of Schumpeterian creative destruction rapidly eroding the market power of a once “dominant” digital giant. Not long ago, AOL was cast as the great villain of online openness and interoperability. In fact, when Lawrence Lessig penned his acclaimed book Code in the late 1990s, AOL was supposedly set to become the corporate enslaver of cyberspace.

For a time, it was easy to see why Lessig and others were worried. Twenty five million subscribers were willing to pay $20 per month to get a guided tour of AOL’s walled garden version of the Internet. Then AOL and media titan Time Warner announced a historic mega-merger that had some predicting the rise of “new totalitarianisms” and corporate “Big Brother.”

Fearing the worst, several conditions were placed on approval of the merger by both the Federal Trade Commission and the Federal Communication Commission. These included “open access” provisions that forced Time Warner to offer the competing ISP service from the second largest ISP at that time (Earthlink) before it made AOL’s service available across its largest cable divisions.  Another provision imposed by the FCC mandated interoperability of instant messaging systems based on the fear that AOL was poised to monopolize that emerging technology.

Palfrey and Gasser suggest this was a necessary and effective intervention. “The AOL IM case is another instance in which the role of government was key in establishing a more interoperable ecosystem” and they credit the FCC’s action with cutting AOL’s share of the IM (p. 68-9). That’s a huge stretch. The reality is that markets and technologies evolved around AOL’s walled garden and decimated whatever advantage the firm had in either the web portal business or instant messaging market.

First, despite all the hand-wringing and regulatory worry, AOL’s merger with Time Warner quickly went off the rails and AOL’s online “dominance” quickly evaporated. Looking back at the deal with TW, Fortune magazine senior editor Allan Sloan called it the “turkey of the decade” since it cost shareholders hundreds of billions. Second, AOL’s attempt to construct the largest walled garden ever also failed miserably as organic search and social networking flourished. Consumers showed they demanded more than the hand-held tour of cyberspace.

Finally, the hysteria about AOL’s threat to monopolize instant messaging and deny interoperability proved particularly unwarranted and also serves as a cautionary tale for those who argue regulation is needed to solve interoperability problems. At the time, well-heeled major competitors like Yahoo and Microsoft already had significant competing IM platforms, and others were rapidly developing. Interoperability among those systems was also spontaneously developing as consumers demanded greater flexibility among and within their communications systems. The development of Trillian, which allowed IM users to see all their various IM feeds at once, was an early precursor of what was to come. Today, anyone can download a free chat client like Digsby or Adium to manage multiple IM and email services from Yahoo!, Google, Facebook and just about anyone else, all within a single interface, essentially making it irrelevant which chat service friends use.

In a truly Schumpetrian sense, innovators came in and disrupted AOL’s plans to dominate instant messaging with innovative offerings that few critics or regulators would have believed possible just a decade ago. Progress happened, and nobody planned it from above. The FCC’s IM interoperability provision was quietly sunset less than three years after its inception since the evolution of technology and markets had rapidly eliminated the perceived problem. That mandate, as it turned out, wasn’t needed at all, and all it probably accomplished during its short life span was to hobble AOL’s ability to find a way to remain relevant in the increasingly competitive Web. 2.0 world.

Video game consoles

At first blush, the video game console wars might seem like the ideal case study for those who favor greater interoperability regulation. After all, in a static sense, why do we really need several competing video game platforms that prevent consumers from playing their games on more than one system? The lack of console interoperability also drives up development costs for game makers. Many of those developers would prefer to just code games for a single, universal gaming platform. Therefore, isn’t this the perfect excuse for state intervention to ensure “optimal interoperability”?

To the contrary, this is another example of why government should generally avoid intervening to try to achieve some sort of artificial optimal interoperability. This market has undergone continuous, turbulent change and witnessed remarkable pro-consumer innovation despite a lack of interoperability.

The video game console wars have raged since the late 1970s. The first generation of consoles was dominated Atari (2600), Mattel (Intellivision), and Coleco (ColecoVision). By the mid-1980s, the industry saw a new cast of characters displace the old players. Nintendo (NES), and Sega (Genesis) took the lead. Atari attempted a rebirth with its “Jaguar” console but failed miserably.

The demise of Atari’s 2600 console was particularly notable. When it debuted in 1977, the system revolutionized the home game market on its way to selling more than 30 million units.  For a few years, it utterly dominated the console market and the company “rushed out games, assuming that its customers would play whatever it released,” notes New York Times reporters Sam Grobart and Ian Austen. But demand rapidly dried up as other consoles and personal computers took the lead with more powerful, flexible platforms and games. In the end, “millions of unsold games and consoles were buried in a New Mexico landfill in 1983. Warner Communications, which bought Atari in 1976 for $28 million, sold it in 1984 for no cash.”

The next generation of machines was dominated by Nintendo and Sega. But by the turn of the century, more new faces appeared and disrupted the second generation of market leaders. Sony (PlayStation) and Microsoft (Xbox) introduced powerful new consoles that continue to evolve to this day. Both consoles have already cycled through three iterations, each increasingly powerful and more functional. Sega dropped out of the console business and refocused on game development. Nintendo managed to survive with its innovative “Wii” system, but has fallen from its perch as king of the console market. Many also forget Apple’s failed run at the console business with its “Pippin” system in the late 1990s. Steve Jobs killed off the console when he returned to once again lead Apple in 1997. Ironically, just a decade later, with the rise of the iPhone and the Apple App Store, the company would emerge as a major player in the gaming market as smartphone gaming exploded.

Of course, PC gaming existed across these generations and handheld gaming devices and now smartphones are also providing competition to traditional consoles. Arcade games also existed both then and now. Thus, the video game market has always been broader than just home gaming consoles.

Nonetheless, at no time during the turbulent history of this sector have major consoles interoperated. The result has been a constant effort by major console developers to leap-frog the competition with increasingly innovative and powerful consoles and peripherals. Would Microsoft have developed the Kinect motion-sensing device if Nintendo had not previously developed their game-changing Wii motion controllers? It’s impossible to know but it would seem that non-interoperability had something to do with that beneficial development. Microsoft needed a game-changing peripheral of its own to meet the Nintendo challenge since Nintendo was not about to share its innovations with the competition. Meanwhile, Sony has developed its own motion-based “Move” system to compete Microsoft and Nintendo.

This is a highly dynamic marketplace at work. Could policymakers have determined that 3 major non-interoperable home consoles would have produced so much innovation? Would they have judged that to be too much or too little competition?  Would they have been able to foresee or help bring about the disruptive competition from portable gaming devices or smartphones? What sort of interop regulation would have made that happen?

As Palfrey and Gasser suggest in their book, there really “is no single form or optimal amount of interoperability that will suit every circumstance.” The video game case study seems to prove that. Yet, their framework leaves the door open a bit wider for state meddling to determine “optimal interop.” I have little faith that state planners could have given us a more innovative video game marketplace through interop nudging. And I also worry that if the door had been open for regulators at the FCC or elsewhere to influence interoperability decisions, it might have also opened to the door to content regulation since many lawmakers have long had an appetite for video game censorship.

Smartphones

The mobile phone handset and operating system marketplace has undergone continuous change over the past 15 years and is still evolving rapidly. There are some interoperable elements, such as the ability to make connecting calls and send texts and IMs. But other parts of the smartphone ecosystem are not interoperable, such as underlying operating systems or apps and app stores.

In the midst of this mixed system of interoperable and non-interoperable elements, innovation and cut-throat competition have flourished.

When cellular telephone service first started taking off in the mid-1990s, handsets and mobile operating systems were essentially one in the same, and Nokia and Motorola dominated the sector with fairly rudimentary devices. The era of personal digital assistants (PDAs) dawned during this period, but mostly saw a series of overhyped devices, including Apple’s “Newton,” that failed to catch on. In the early 2000s, however, a host of new players and devices entered the market, many of which are still on the scene today, including LG, Sony, Samsung, Siemens, and HTC. Importantly, the sector began splitting into handsets versus operating systems (OS). Leading mobile OS makers have included: Microsoft, Palm, Symbian, BlackBerry (RIM), Apple, and Android (Google).

The sector continues to undergo rapid change and interoperability norms have evolved at the same time. Looking back, it’s hard to know whether increased interoperability would have helped or hurt the state of competition and innovation.

Consider Palm, Blackberry, and Microsoft which all limited interoperability with other systems in various ways. Palm smartphones were wildly popular for a brief time and brought many innovations to the marketplace, for example. Palm underwent many ownership and management changes, however, and rapidly faded from the scene.  After buying Palm in 2010, HP announced it would use its webOS platform in a variety of new products.  That effort failed, however, and HP instead announced it would transition webOS to an open source software development mode.

Similarly, RIM’s BlackBerry was thought to be the dominant smartphone device for a time, but it has recently been decimated. BlackBerry’s rollercoaster ride has left it “trying to avoid the hall of fallen giants” in the words of an early 2012 New York Times headline.  The company once commanded more than half of the American smartphone market but now has under 10 percent, and that number continues to fall.

Microsoft also had a huge lead in licensing its Windows Mobile OS to high-end smartphone handset makers until Apple and Android disrupted its business. It’s hard to believe now, but just a few years ago the idea of Apple or Google being serious contenders in the smartphone business was greeted with suspicion, even scorn by popular handset makers such as Nokia and Motorola. This serves as another classic example of those with a static snapshot mentality disregarding the potential for new entry and technological disruption. Just a few years later, Nokia’s profits and market share have plummeted and a struggling Motorola was purchased by Google. Meanwhile, again, Palm seems dead, BlackBerry is dying, and Microsoft is struggling to win back market share it has lost to Apple and Google in this arena.

It would seem logical to conclude that the ebbs and flows of interoperable and non-interoperable elements of the smartphone world have created a turbulent but vibrantly innovative sector. Has the lack of interoperable operating systems or apps and apps stores hurt smartphone consumers? It’s hard to see how. Mandating interoperability at either level could lead to an OS or app store monopoly, most likely for Apple if such a policy were pursued today.

While Apple has had great success and earned endless kudos for their slick, user-friendly innovations from consumers and tech wonks alike, some critics decry their proprietary business model and more “controlled” user experience. Apple tightly controls almost every level of production of its iPhone smartphone and iPad tablet. Interoperability with competing systems, standards, or technologies is limited in many ways. Is that bad? Some critics think so, suggesting that greater “openness” — presumably in the form of greater device or program interoperability — is needed. But so what? Consumers seem extremely happy with Apple devices. Moreover, well-heeled rivals like Google (Android) and Microsoft continue to innovate at a healthy clip and offer consumers a decidedly different user experience. As with video games consoles, non-interop has had some important dynamic effects and advantages for consumers. It’s hard to know what “optimal interoperability” would even look like in the modern smartphone marketplace and how it would be achieved, but it’s equally hard to believe that consumers would be significantly better off if regulators were trying to achieve it through top-down mandates on such a dynamic, fast-moving market.  [For more on this topic, see my 2011 book chapter, “The Case for Internet Optimism, Part 2 – Saving the Net From Its Supporters,” from the book, The Next Digital Decade.]

Case Study Summary & Analysis

These case studies suggest that defining “optimal interoperability” is a pipe dream. In some cases, consumers demanded a certain amount interoperability and they got it. But it seems equally obvious that they did not demand perfect interoperability in every case. Few consumers are tripping over their own feet in a mad rush to toss out their XBoxs or iPhones just because they are not perfectly interoperable. On the other hand, since the days of the old “walled garden” hell of AOL, CompuServe, Prodigy, and so on, it would seem that information technology markets are growing more “open” in other ways. You can’t completely lock-down a user’s online experience and expect to win their business over the long haul.

Palfrey and Gasser make that point quite nicely in the book:

Increasingly, though, businesses are seeing the merits of strategies based on openness. A growing number of businesses are pursuing models that incorporate interoperability as a core principle. More and more firms, especially in the information business, are shedding their proprietary approaches in favor of interoperability at multiple levels. The goal is not to be charitable to competitors or customers, of course, but to maximize returns over time by building an ecosystem with others that holds greater promise than the go-it-alone approach (p. 149).

Quite right, but let’s not pretend that any mass market information platforms or systems will ever be perfectly “open” or interoperable. There will always be some limitations on how such systems are used or shared. And that’s just fine once you embrace a more flexible theory of evolutionary interoperability.  Ongoing experiments will get us to a better place.

Conclusion: Let Interop Experiments Continue!

So, let me wrap up by restating my alternative theory of optimal interoperability as succinctly as possible: When in doubt, ongoing, bottom-up, dynamic experimentation will almost always yield better answers than arbitrary intervention and top-down planning. Again, that is not to say that all interoperability experiments will leave society better off in the short-term. Some interoperability experiments and resulting market norms or outcomes can create challenging dilemmas for individuals and institutions. There may be short-term spells of “market power,” for example, and some standards may get locked in longer than some of us think makes sense. If, however, we have faith in humans to solve problems with information and technology, then still more experimentation — not state intervention — is the answer. And that is especially true once you accept the fact that those seeking to intervene have very limited knowledge of all the relevant facts needed to even make wise decisions about the future course of technology markets or information systems.

Some will find my alternative theory of optimal interoperability no more satisfying than Palfrey and Gasser’s since they may find the experimental interop framework too inflexible when it comes to state action. Whereas the frustration with Palfrey and Gasser’s theory will likely flow from their failure to define a coherent standard for when intervention is warranted, my approach solves that problem by suggesting we should largely abandon the endeavor and instead let ongoing market experiments solve interop problems over time. For me, we would need to find ourselves in a veritable whole-world-is-about-to-go-to-hell sort of moment before I could go along with state intervention to tip the interop scales in one direction or another. And, generally speaking, this is exactly the sort of thing that antitrust laws are supposed to address after a clear showing of harm to consumer welfare. Stated differently, to the extent any state intervention to address interoperability can be justified, ex post antitrust remedies should almost always trump ex ante regulatory meddling.

This alternative vision of evolutionary, experimental interoperability will be rejected by those who believe the state has the ability to wisely intervene and nudge markets to achieve “optimal interoperability” through some sort of Goldilocks principle that can supposedly get it just right. For those of us who have doubts about the likelihood of such sagacious state action — especially for fast-paced information sectors — the benefits of ongoing marketplace experimentation far outweigh the costs of letting those experiments run their course.

Regardless, we should be thankful that John Palfrey and Urs Gasser have provided us with a book that so perfectly frames what should be a very interesting ongoing debate over these issues. I encourage everyone to pick up a copy of Interop so you can join us in this important discussion.

Additional Reading:

• the official book site
• buy the book on Amazon or Barnes & Noble
• Follow the authors on Twitter: @JPalfrey & @UGasser
• a video of their Harvard book launch follows:

It’s my great pleasure this week to be participating in a 2-day symposium on “Competition in Online Search” that is being hosted by the Antitrust & Competition Policy Blog.  Daniel Sokol, Associate Professor of Law at the University of Florida Levin College of Law, was kind enough to invite me to join the fun. Professor Sokol is the editor of the Antitrust & Competition Policy Blog. Others participating in this symposium include: James Grimmelman (NY Law); Eugene Volokh (UCLA); Marvin Ammori (Stanford Law); Mark Jamison (Univ. of Florida); Eric Clemons (Wharton School); Dan Crane (Michigan Law); and both Marina Lao and Frank Pasquale (Seton Hall); and more.

My entry is now live. In it, I focus on how dynamically competitive and innovative the digital economy has been over the past 15 years and question to need for intervention at this time, especially of the “public utility” variety. I’ve re-posted my entry below, but make sure to head over to the Antitrust & Competition Policy Blog to read all the contributions to this excellent symposium.

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If you blink your eyes in the Information Age you can miss revolutions. Let’s take a quick walk back through our turbulent recent history:

• Just five years ago, MySpace dominated social networking and had The Guardian wondering, “Will MySpace Ever Lose Its Monopoly?” A short time later, MySpace lost its early lead and became a major liability for owner Rupert Murdoch. Murdoch paid $580 million for MySpace in 2005 only to sell it for $35 million in June 2011.
• Just six to eight years ago, the mobile landscape was ruled by Palm, BlackBerry, Nokia, and Motorola. Palm is now all but dead and BlackBerry is trying to stay afloat while Nokia and Motorola had to cut deals with Microsoft and Google respectively in order to survive.
• Just 10 years ago, AOL’s hegemony in online services was thought to be unassailable, especially after its merger with Time Warner. But the merger quickly went off the rails and AOL’s online “dominance” quickly evaporated. Losses grew to over $100 billion and the entire deal unraveled within just a few years as AOL’s old dial-up, walled-garden business model had been completely superseded by broadband and the new Web 2.0 world.
• Just 12 years ago, Yahoo! and AltaVista were the go-to companies for online search. No one turns to them first today when they go looking for information online.
• And just 15 years ago, Microsoft was on everyone’s mind. Today, the firm is struggling to remain part of cocktail party chatter when the topic of modern Tech Titans is discussed. For example, a recent Fast Company cover story on “The Great Tech War of 2012” only mentioned Microsoft in passing. The rise of search, social media, and cloud computing represented disruptive shifts that Microsoft wasn’t prepared for.

The graveyard of tech titans is littered with the names of many other once-mighty giants. Schumpeter’s “gales of creative destruction” have rarely blown harder through any sector of our modern economy. And so now we come to the question of Google’s dominance in the field of search. Should we be worried? Some say yes, and the rhetoric of public utilities and essential facilities is increasingly creeping into policy discussions about the Internet, including the search layer. A growing cabal of cyberlaw experts—Tim Wu, Dawn Nunziato, Frank Pasquale, among many others—argue that some sort of regulation is needed.

But the recent history I recounted above makes it clear that patience and humility are the more sensible policy prescriptions. Calls for regulation or public utility classification are particularly premature and problematic. As I argued in my recent white paper, “The Perils of Classifying Social Media Platforms as Public Utilities,” search and social media platforms do not resemble traditional public utilities and there are good reasons why policymakers should avoid a rush to regulate them as such.

First, there has not been any serious showing of monopoly power in the search or social media sectors in which Google operates. It’s also impossible to find any way in which consumer welfare is currently being harmed by Google. All their products are free and constantly evolving. New technologies and rivals continue to emerge. DuckDuckGo, for example, differentiates itself in search by stressing privacy above all else. Meanwhile, the contours of these markets are constantly evolving in a dynamic way, making market definition challenging. Is Facebook a search company? Signs are good that it soon could soon become a formidable one.

These market-definition considerations are especially important because of how long it takes to formulate regulations or impose antitrust remedies. In a market that changes this rapidly, taking several months or even years to complete rulemakings or litigate remedies will almost certainly mean that most rules will be completely out of date by the time they are implemented. And once implemented, there will be very little incentive to rework them as rapidly as the market contours change. Regulation could retard innovation in search and social media markets by denying firms the ability to evolve or innovate across pre-established, artificial market boundaries. Second, treating these digital services as regulated utilities would harm consumer welfare because public utility regulation has traditionally been the archenemy of innovation and competition. Public utility regulation has a long, lamentable history that has been well-documented by economists and political scientists. That’s why it is usually considered the last resort, not the first option. Moreover, the traditional goals of public utility regulation — universal service, price competition, and quality service — are already being achieved without intervention. And as Marvin Ammori and Luke Pelican outline in a new study, all the proposed antitrust remedies to deal with Google in particular also have serious downsides. Almost all the cures would be worse than whatever disease it is critics hope to solve with antitrust intervention.

Third, treating today’s leading search and social media providers as digital essential facilities threatens to convert “natural monopoly” or “essential facility” claims into self-fulfilling prophecies. The very act of imposing utility obligations on a particular platform or company tends to lock it in as the preferred or only choice in its sector. Public utility regulation also shelters a utility from competition once it is enshrined as such. Also, by forcing standardization or a common platform, regulation can erect de jure or de facto barriers to entry that restrict beneficial innovation and the disruption of market leaders.

Fourth, 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. As Eugene Volokh noted in a recent white paper, social media providers should possess the editorial discretion to determine how their platforms are configured and what can appear on them.

Will Google meet the same fate as earlier Tech Titans? It’s impossible to know. But with the wrecking ball of creative digital destruction doing such a fine job of keeping competition and innovation thriving, we’d be smart to reject heavy-handed, top-down regulation of such a dynamic segment of our economy at this time.

In this new Money Morning article, “The Antitrust Curse: What Apple Can Learn From Microsoft, IBM,”  David Zeiler wonders whether the antitrust lawsuit filed against Apple and several book publishers by the U.S. Department of Justice last week could open the door to a broader case against Apple or, at a minimum, simply become a major distraction to the firm and it’s ability to innovate going forward. He uses IBM and Microsoft as case studies in this regard and notes that, “the problem with being in the DOJ’s gunsight is that it distracts management, makes the company hesitant to innovate, and blemishes the company’s public image.  While antitrust woes may not have been entirely responsible for Microsoft and IBM ceding their dominant positions in tech, they were clearly a major factor,” he says. “And worse for Apple, the e-book case could be just the beginning.”

Quite right. I raised the same concern in my recent Forbes column,”Regulatory, Antitrust and Disruptive Risks Threaten Apple’s Empire,” which Zeiler was kind enough to quote in his essay. In that piece, I argued:

Even if Apple beats back [the eBooks] investigation, broader questions are being raised about the company’s power that could invite a much broader investigation. The danger for Apple is that antitrust becomes an omnipresent threat that must be factored into all ongoing business decisions. Antitrust is a particular danger to Apple because the firm is highly vertically integrated and that integration is the source of many of their innovations.  As earlier tech titans like IBM and Microsoft learned, when antitrust hangs like the Sword of Damocles, every decision about how to evolve and innovate becomes a calculated gamble.

Regarding the earlier impact that antitrust Sword of Damocles had on Microsoft, Zeiler unearthed this terrific 2005 quote from Mark Kroese, a general manager of information services at the Microsoft Network, who described the impact of the MS antitrust case on innovation at the firm as follows: “Working at Microsoft today vs. five years ago is different,” Kroese said. “If anyone thinks the antitrust case hasn’t slowed us down, you’re wrong. If I want to meet with a products manager for Windows, there needs to be three lawyers in the room. We have to be so careful, we err on the side of caution. We are on such a fine line of conduct.” Regarding how antitrust chilled IBM, Zeiler cites veteran tech journalist Steve Wildstrom of Tech.pinions who noted,  “Twelve years of litigation were an enormous distraction in a time of rapid technological and business change. IBM management became cautious and over-lawyered, constantly looking over its shoulder-a condition that persisted for years after the case ended. The antitrust case was almost certainly a major cause of the serious decline of IBM in the late 1980s and early 90s,” Wildstrom said.

Of course, it is impossible to scientifically determine to what degree antitrust harassment contributed to either IBM or Microsoft’s inability to innovate and adapt to the rapidly changing market conditions. And let’s be clear: both IBM and MS have found ways to rebound and innovate in other ways. But one wonders what was lost in the process as the threat of antitrust constantly loomed and potentially chilled innovative efforts that could have kept both firms on the cutting-edge.

It’s not just Apple that faces similar threats today. Google is obviously another company increasingly mentioned as an antitrust target. Commenting of the dangers of a potential case against Google, Bernstein Research senior analyst Carlos Kirjner argues that “even if regulatory proceedings come to naught, the process has the potential, in the most extreme circumstances, to consume so much of the company’s energy that it can lead to important strategic missteps: many believe that Microsoft missed the boat on the Internet, and IBM on the importance of the personal computer, in large part because their management teams were focused on defending against the DoJ’s antitrust efforts.”

The better approach to disciplining tech firms and markets is to rely less on intervention and more on Schumpeter’s “perennial gales of creative destruction,” which are blowing harder than ever in our modern high-tech economy. In markets built largely upon binary code and governed by Moore’s Law, the pace and nature of change has become hyper-Schumpeterian: unrelenting and utterly unpredictable. Innovative risk-takers are constantly shaking things up and displacing yesterday’s lumbering, lethargic giants. Just ask some of the players that have been largely left in the dust, including AOL, AltaVista, MySpace, Palm, and others. Of course, there’s my favorite recent case study: Research In Motion’s BlackBerry smartphone.  As I noted in my recent column, “Bye Bye BlackBerry. How Long Will Apple Last?” BlackBerry was virtually synonymous with “smartphones” and was considered one of the tech titans that seemed destined to dominate for many years to come. But now the BlackBerry’s days appear numbered and its parent company Research In Motion Ltd. is struggling for its very survival.

Too many tech industry pundits today ignore these dynamic realities and instead rely a myopic analytical approach to the information economy that is fundamentally static in character. Many static equilibrium scholars in both the legal and economic profession tend to adopt a snapshot view of markets and innovation. Such critics often express an overly nostalgic view of the technological past while adopting an excessively gloomy view of the present and the chances for future progress.

But, a la Schumpeter, modern tech markets are highly dynamic. There is no static end-state, “perfect competition,” or “market equilibrium” in today’s information technology marketplace. Change and innovation are chaotic, non-linear, and paradigm-shattering. Schumpeter said it best long ago when he noted how, “in capitalist reality as distinguished from its textbook picture, it is not [perfect] competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization… competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. This kind of competition is as much more effective than the other,” he argued, because the “ever-present threat” of dynamic, disruptive change “disciplines before it attacks.”

By contrast, the static equilibrium mindset is myopically fixated on short-term market share and price competition while ignoring “competition for innovation,” which is what matters most in the more dynamic Schumpeterian model. “Schumpeterian competition is primarily about active, risk-taking decision makers who seek to change their parameters,” note economists Jerry Ellig and Daniel Lin. “It is about continually destroying the old economic structure from within and replacing it with a new one.” Thus, while static or “perfect competition” models assume away innovation and are preoccupied with equilibrium, dynamic models revolve around disequilibrium and assume that the only constant is change. What is most important to economic progress, therefore, is the ongoing process of constant experimentation and spontaneous discovery that allows new business models and organizational structures to emerge in response to market signals.

The other danger of the static equilibrium mindset is that the same new innovators and innovations that obtain success and scale quite rapidly as a result of this process are sometimes thought to possess problematic market power. Accusations of “monopoly” quickly follow. As Nobel Laureate Ronald Coase noted, “if an economist finds something—a business practice of one sort or another—that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of understandable practices tends to be very large, and the reliance on a monopoly explanation, frequent,” he argued.  Of course, non-economists are just as likely—perhaps more likely—to make that same error. This is why a short-term fixation on market share and market power is so problematic.

Moreover, as Schumpeter also taught us, it is essential that uneven entrepreneurial gains be tolerated so that innovation can occur and be continuously incentivized. Economies need innovators to take risks because progress is born from it. Penalizing the risk-takers by trying to “level the playing field” through rash regulation or antitrust interventions will simply sap the entrepreneurial spirit from the marketplace, limit technological innovation, and diminish the possibility of progress and prosperity over the long-haul.

If you’d like a better understanding of this dynamic conception of competition and an explanation of why the static equilibrium mindset — especially in the antitrust field — is so horribly misguided, then I strongly recommend you begin your investigation with the following readings:

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]

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

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

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

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

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

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

On Market Definition

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

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

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

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

On Harm

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

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

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

On Remedies

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

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

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

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

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

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

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

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

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

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

Wu’s “Threat Regime” Model of Internet Governance

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

The use of threats instead of law can be a useful choice — not simply a procedural end run. My argument is that the merits of any regulative modality cannot be determined without reference to the state of the industry being regulated. Threat regimes, I suggest, are important and are best justified when the industry is undergoing rapid change — under conditions of “high uncertainty.” Highly informal regimes are most useful, that is, when the agency faces a problem in an environment in which facts are highly unclear and evolving. Examples include periods surrounding a newly invented technology or business model, or a practice about which little is known.

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

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

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

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

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

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

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

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

Understanding Forced Access Regulation

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

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

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

New Frontiers for Forced Access Regulation?

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

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

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

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

Adverse Possession & API Neutrality for Twitter?

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

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

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

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

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

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

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

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

But Isn’t Twitter a “Monopoly”?

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

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

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

The Principle of the Matter

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

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

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

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

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

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

But Consider This… (on API Neutrality and Disincentives)

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

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

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

Avoiding Static Snapshots

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

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

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

“Splitting the Root”

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

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

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

Conclusion

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

Now excuse me while I get back to Tweeting!

Tim Wu was kind enough to comment on my general overview and critique of his new book, The Master Switch: The Rise and Fall of Information Empires.  That essay will be the first of many I plan to pen about Wu’s important book.  I appreciate Prof. Wu being willing to engage me in a debate over some of these issues since I’m sure he has better things to do with his time. Some of the points he raised in his comment will be addressed in subsequent posts.

In this post, I want to respond briefly to his assertion that I was “missing the point of the book” which is “to describe the world we live in.” He says that his book, “suggests that we tend to go through open and closed cycles in the Information Industries, and that, roughly, both have their strengths and weaknesses, and both become popular at different times for various reasons.”  But he fears there are “greater risks in the closed periods.”

Contrary to what he suggests, I certainly understand that’s the point of his book, it’s just that I don’t fully agree with his analysis or conclusions. Let me be clear about a crucial point, however: I accept that almost every industry goes through “cycles” of some sort and that, typically, after a “Wild West” period of greater “openness” and more atomistic competition, some degree of “consolidation” or more “closed” (or proprietary) models often sets in.  (A somewhat different and far more descriptive interpretation of such cycles can be found in Deborah Spar’s 2001 book, Ruling the Waves: Cycles of Discovery, Chaos, and Wealth from Compass to the Internet. She outlines a more refined 4-part cycle of: Innovation, Commercialization, Creative Anarchy, and Rules.)

My primary beef with Prof. Wu is that, contrary to his assertion yesterday in commenting on my post, his book seems to regard the progression of “the Cycle” as mostly linear and one-directional: straight down toward a perfectly closed, corporate-controlled, anti-consumer Hell.  By my reading of his book – much like Lessig and Zittrain’s work – Wu is painting an overly pessimistic portrait of technologies being subjected to the “perfect control” of largely unfettered markets.

I believe history – especially recent history — teaches us something very different.  While information technology markets certainly go through cycles, they tend to oscillate between open and closed more fluidly than Wu suggests – and that dynamic is accelerating today.  Moreover, during periods which Wu regards as more “closed,” things aren’t always as closed as he suggests.  Or, more importantly, the “closed” models typically spawn more innovation than Wu and others bother acknowledging. It’s during what some regard as a market’s darkest hour when some of the most exciting forms of disruptive technologies and innovation are developing.  Finally, to the extent some markets are completely locked-down for a time, it’s more often than not due to public policies that facilitate that lockdown or the “closing” of systems.

I spent a great deal of time making these points in the second essay I submitted to the recent Concurring Opinions symposium about Jonathan Zittrain’s The Future of the Internet. In my essay, “On Defining Generativity, Openness, and Code Failure,” I argued that what separates our worldviews primarily comes down to the more static (or “stasis”) mindset that Lessig, Zittrain, and Wu adopt in their work.  They take static snapshots of markets at what seems to be their darkest hour and then suggest there’s little chance of escaping that Hell.

Of course, how one defines Hell is important. What Wu does in his book, following the lead set by Lessig and Zittrain, is to “define-down” market failure.  If you regard proprietary business models, property rights, or the success of a small handful of companies as the enemy of “openness” and innovation, then it’s easy to see why you might buy into the notion that market failure is ubiquitous and that “steps must be taken” to correct it.   If, on the other hand, you understand that markets are in a constant state of flux, and that those other variables listed above are not necessarily at odds with openness and innovation, then, like me, you’re more cautious about calling in the Code Cops to steer markets and outcomes in other directions.

But the really important point here is that markets evolve. Moreover, that evolution takes place at a much faster clip in the digital arena than it does in other markets. Innovators don’t sit still. People innovate around “failure.” Indeed, “market failure” is really just the glass-is-half-empty view of a golden opportunity for innovation. Markets evolve. New ideas, innovations, and companies are born.  And things generally change for the better—and do so rapidly.

Consider my two favorite case studies from recent times: the AOL-Time Warner merger and the supposed Microsoft monopoly.

The AOL Case Study

When Lessig penned Code a decade ago, it was AOL that was set to become the corporate enslaver of cyberspace. For a time, it was easy to see why Lessig and others might have been worried.  25 million subscribers were willing to pay $20 per month to get a guided tour of AOL’s walled garden version of the Internet.  Then AOL and Time Warner announced a historic mega-merger that had some predicting the rise of “new totalitarianisms” and corporate “Big Brother.”

But the deal quickly went off the rails. By April 2002, just two years after the deal was struck, AOL-Time Warner had already reported a staggering $54 billion loss. By January 2003, losses had grown to $99 billion. By September 2003, Time Warner decided to drop AOL from its name altogether and the deal continued to slowly unravel from there.  In a 2006 interview with the Wall Street Journal, Time Warner President Jeffrey Bewkes famously declared the death of “synergy” and went so far as to call synergy “bullsh*t”!  In early 2008, Time Warner decided to shed AOL’s dial-up service and then to spin off AOL entirely.  Looking back at the deal, Fortune magazine senior editor at large Allan Sloan called it the “turkey of the decade.” The formal divorce between the two firms took place in 2008. Further deconsolidation followed for Time Warner, which spun off its cable TV unit and various other properties.

(The hysteria about AOL’s looming monopolization of instant messaging—and with it, the rest of the web—seems particularly silly: Today, anyone can download a free chat client like Digsby or Adium to manage multiple IM services from AOL, Yahoo!, Google, Facebook and just about anyone else, all within a single interface, essentially making it irrelevant which chat service your friends use.)

In the larger scheme of things, AOL’s story has already become an afterthought in our chaotic cyber-history. But we shouldn’t let those old critics forget about their lugubrious lamentations.  To recap: the big, bad corporate villain of Lessig’s Code attempted to construct the largest walled garden ever, and partner with a titan of the media sector in doing so—and this dastardly plot failed miserably.

To Wu’s credit, he acknowledges that AOL-Time Warner was “a surprising wreck” and that “AOL was [a] dinosaur limping into the new age” before the mass Internet. (p. 262-3) [Of course, there’s no mention in the book of the dire prognostications some of his academic compatriots made a decade ago about AOL or its deal with Time Warner.]  Surprisingly, however, Wu suggests that what ultimately undermined the deal was Net neutrality! He argues that, in order for the merger to achieve the perfect Hell of a giant corporate walled garden, AOL Time Warner would have needed to “subdue Google, Yahoo! and their many cousins. In short, to be viable, the firm would have needed to overturn the net neutrality principles at the core of the Internet’s design.” (p. 267)

Now, isn’t that interesting since, quite obviously, there have been no Net neutrality laws on the books despite the fact that critics like Wu have been hollering for their supposed need!  In a similar vein, Wu recently told Forbes magazine “If there were no net neutrality, Skype would have already been suppressed.”  Again, there is no formal Net neutrality law in place today, so what Wu is essentially saying is that market norms, not regulatory edicts, ensured that new applications came online and that market power was checked.

Even more interesting is the fact that Wu continues on to essentially make the libertarian case against formal Net neutrality regulation when he argues:

The only entity that has so far really succeeded in such a mission [of overturning the net neutrality principles at the core of the Internet’s design] is the government of mainland China, as we saw in 2010, when it drove an exasperated Google out of its sovereign territory by demanding extensive control over what Google let users find.  Indeed, the feat requires such power and resources as belong uniquely to the state: access to the very choke points of a nation’s communications infrastructure, its Master Switch. AOL Time Warner, however vast, did not have police power—it could not imprison Google’s executives for failing to block Wikipedia or Disney content. (p. 267)

Exactly right; it really does come down to that profound difference between who has coercive police power (the State) and who does not (corporations).  It’s not just a difference of degree but a difference of kind.   So, welcome to libertarian movement, Tim Wu!  I plan on citing that block quote in every paper I write from now on regarding why we don’t need preemptive Net neutrality regulation!

The Microsoft Case Study

I want to also briefly mention the Microsoft case study since it is quite instructive in this regard.

It’s suddenly quite easy to forget just how much hand-wringing took place in the late 1990s and early 2000s over Microsoft’s dominance of the web browser market.  Dour predictions of perpetual Internet Explorer lock-in followed.  For a short time, there was some truth to this.  But, yet again, innovators weren’t just sitting still; exciting things were happening.  In particular, the seeds were being planted for the rise of Firefox and Chrome as robust challengers to IE’s dominance—not to mention mobile browsers.

Of course, it’s true that roughly half of all websurfers still use a version of IE today.  But IE’s share of the market is falling rapidly as viable, impressive alternatives now exist and innovation among these competitors is more vibrant than ever.  That’s all that counts. The world changed, and for the better, despite all the doomsday predictions we heard less than a decade ago about Microsoft’s potential dominance of cyberspace.  Moreover, all the innovation taking place at the browser layer today certainly undercuts the gloomy “death of the Net” or “death of openness” thesis set forth by Zittrain and Wu.

Indeed, as Tim O’Reilly argues, this case study illustrates the power of markets to evolve and “route around” market failure or excessively closed systems even during what appears to be a certain sector’s darkest hour:

Just as Microsoft appeared to have everything locked down in the PC industry, the open Internet restarted the game, away from what everyone thought was the main action. I guarantee that if anyone gets a lock on the mobile Internet, the same thing will happen. We’ll be surprised by the innovation that starts happening somewhere else, out on the free edges. And that free edge will eventually become the new center, because open is where innovation happens. […] it’s far too early to call the open web dead, just because some big media companies are excited about the app ecosystem. I predict that those same big media companies are going to get their clocks cleaned by small innovators, just as they did on the web.

Lessons Learned – Or Ignored?

From these case studies, one would hope that the Openness Evangelicals would have gained a newfound appreciation for the evolutionary and dynamic nature of markets and come to understand that, especially in markets built upon information and digital code, the pace and nature of change is unrelenting and utterly unpredictable.  Indeed, contra Lessig’s lament in Code that “Left to itself, cyberspace will become a perfect tool of control,” cyberspace has proven far more difficult to “control” or regulate than any of us ever imagined.  The volume and pace of technological innovation we have witnessed in information sectors over the past decade has been nothing short of stunning.

Critics like Zittrain and Wu, however, wants to keep beating the cyber-sourpuss drum.  So, the face of corporate evil has to change. Today, Steve Jobs has become the supposed apotheosis of all this closed-system evil instead of AOL.  Jobs serves as a prime villain in the books of Zittrain and Wu and in many of the essays they and other Openness Evangelicals pen. But their enemies list is growing longer.  Today, according to the narratives in Zittrain and Wu’s books, it’s not just one of two corporate titans we need to worry about, but just about every major player in the high-tech ecosystem—telcos, cable companies, wireless operators, entertainment providers, Facebook, and others.

Even Google — Silicon Valley’s supposed savior of Internet openness — is not spared their scorn.  “Google is the Internet’s switch,” Wu argues. “In fact, it’s the world’s most popular Internet switch, and as such, it might even be described as the current custodian of the Master Switch.” More ominously, he warns, “it is the switch that transformed mere communications into networking—that ultimately decides who reached what or whom.” (p. 280)

It seems, then, that the face of “closed” evil is constantly morphing.  But shouldn’t that tell us something about how dynamic these markets are?!  I look forward to reading the next edition of Tim’s book to see who the new villains are and whether he’s drawn any lessons from the constantly changing cast of characters.

Conclusion

In sum, history counsels patience and humility instead of Chicken Little-ism and incessant calls for preemptive regulation to serve some amorphous, politically-defined “public interest.”  More generally, history counsels what we might call “technological agnosticism.” In particular, we should avoid declaring “openness” – especially of the mandated variety — a sacrosanct principle and making everything else subservient to it without regard to cost or consumer desires.  As Wired’s Chris Anderson notes, “there are many Web triumphalists who still believe that there is only One True Way, and will fight to the death to preserve the open, searchable common platform that the Web represented for most of its first two decades (before Apple and Facebook, to name two, decided that there were Other Ways).”  The better position is one based on a general agnosticism regarding the nature of technological platforms and change.  In this view, the spontaneous evolution of markets has value in its own right, and continued experimentation with new models—be they “open” or “closed,” “generative” or “tethered”—should be permitted.

Importantly, one need not believe that the markets are “perfectly competitive” to accept that they are “competitive enough” compared to the alternatives—especially those re-shaped by the sort of regulation Wu and others advocate.  “Market failures” or “code failures” are ultimately better addressed by voluntary, spontaneous, bottom-up, marketplace responses than by coerced, top-down, governmental solutions.  Moreover, the decisive advantage of the market-driven, evolutionary approach lies in the rapidity and nimbleness of those responses compared to regulatory alternatives.

Thus, in closing, Tim Wu’s assertion yesterday that I was “missing the point of the book… [which is] to describe the world we live in,” is based on his belief that he has accurately described our world, its history, and the forces that move it.  As I’ve suggested here, there’s a very different way of looking at things.  In my opinion, Wu’s Master Switch is just too hung up on the static snapshot mindset and a bit too obsessed with the supposed One True Way of doing things.

[ Note: In the next installment, I will address Wu’s mistaken claim that purely free markets have guided America’s communications and media sectors over the past century and his assertion that “the purely economic laissez-faire approach… is no longer feasible.”]

Tim Wu’s new book, The Master Switch: The Rise and Fall of Information Empires, will be released next week and it promises to make quite a splash in cyberlaw circles.  It will almost certainly go down as one of the most important info-tech policy books of 2010 and will probably win the top slot in my next end-of-year list.

Of course, that doesn’t mean I agree with everything in it.  In fact, I disagree vehemently with Wu’s general worldview and recommendations, and even much of his retelling of the history of information sectors and policy.  Nonetheless, for reasons I will discuss in this first of many critiques, the book’s impact will be significant because Wu is a rock star in this academic arena as well as a committed activist in his role as chair of the radical regulatory activist group, Free Press. Through his work at Free Press as well as the New America Foundation, Professor Wu is attempting to craft a plan of action to reshape the Internet and cyberspace.

I stand in opposition to almost everything that Wu and those groups stand for, thus, I will be spending quite a bit of time addressing his perspectives and proposals here in coming months, just as I did when Jonathan Zittrain’s hugely important The Future of the Internet & How to Stop It was released two years ago (my first review is here and my latest critique is here).  In today’s essay, I’ll provide a general overview and foreshadow my critiques to come.  (Note: Tim was kind enough to have his publisher send me an advance uncorrected proof of the book a few months ago, so I’ll be using that version to construct these critiques. Please consult the final version for cited material and page numbers.)

The Master Switch & the Cyber-Collectivist Trilogy of Terror

As I noted in my essay on “Two Schools of Internet Pessimism,” what I find most lamentable about the state of cyberlaw and high-tech policy debates today is the foreboding sense of gloom and doom that haunts so many narratives.  To crack open most Net policy books these days is to step into a world of corporate conspiracies, nefarious industry schemers, closed systems, “kill switches,” squashed consumer rights, and so on.  Let’s face it, Chicken Little doesn’t need an agent; pessimism sells. The world loves a good tale of villainy and misery, and that’s exactly what Columbia Law School professor Tim Wu delivers in his new book, The Master Switch: The Rise and Fall of Information Empires.

Wu’s book is important if for no other reason than he is considered one of the intellectual godfathers of modern cyberlaw and The Master Switch is best understood as the final installment in an important trilogy that began with the publication of Lawrence Lessig’s seminal 1999 book, Code and Other Laws of Cyberspace and then was continued on in Jonathan Zittrain’s much-discussed 2008 book, The Future of the Internet & How to Stop It.

To better understand where Wu wants to take us in The Master Switch, we must first return to the central tenant of Lessig’s Code:  “Left to itself,” Lessig predicted, “cyberspace will become a perfect tool of control.” (pg 5-6)  Code quickly became a sort of cyber-collectivist Bible and today Lessig’s many disciples in academia and a wide variety of public policy regulatory advocacy organizations continue to preach this gloomy gospel of impending digital doom and “perfect control.”  Zittrain and Wu are Lessig’s most notable intellectual descendants; the Peter and Paul of the Church of Cyber-Doom that he founded.  And despite their insistence that they really aren’t all that pessimistic—or, more humorously, that they are actually libertarians in disguise—this crew persists with frightful tales and lugubrious warnings that unless someone or something—quite often, the State—intervenes to set us on a better course or protect those things that they regard as sacred.

Zittrain’s Future of the Internet, for example, brought Lessig’s Code up date by giving us a fresh set of villains.  Gone was Lessig’s old foil AOL and its worrisome walled gardens. Instead, the new face of evil became Apple, Facebook, and TiVo.  Zittrain worries about “sterile and tethered” digital “appliances” that foreclose digital generativity and the rise of “a handful of gated cloud communities whose proprietors control the availability of new code.”

Wu simply extends this narrative in The Master Switch when he ominously warns that there are “forces threatening the Internet as we know it” (p. 7) and then goes on to craft an enemies list that reads like a “Who’s Who” of high-tech corporate America. No one, it seems, can be trusted—at least not if that someone has a “.com” behind their name.  Wu hopes to convince us that history proves that concentrations of private power in information industries are inevitably follow a period of openness and competition.  He refers to this as “The Cycle.” Thus, he trots out the old collectivist saw that freedom is really slavery — slavery to The Man:

If the stories in this book tell us anything… it is that the free market can also lead to situations of reduced freedom. Markets are born free, yet no sooner are they born than some would-be emperor is forging chains.  Paradoxically, it sometimes happens that the only way to preserve freedom is through judicious controls on the exercise of private power.  If we believe in liberty, it must be freedom from both private and public coercion. (p. 310)

This is the heart of Wu’s critique in The Master Switch: The real threat is not Big Brother but Big Corporate Brother. It’s certainly not a new critique. Wu is simply steering the Lessig-ite, cyber-collectivism school of cyberlaw in line with traditional “progressive” perspectives and recommendations.  Indeed, although he and other so-called progressives don’t always come right out and say it, they often suggest that private power – however defined – is so insidious and threatening that greatly amplified State power to counter it becomes essential, even a good.

The cyber-collectivist movement that Lessig began with Code and Zittrain and Wu continue in their books, is fueled by that dour, depressing “the-Net-is-about-to-die” fear. Again and again their message comes down to this: “Enjoy the good old days of the open Internet while you can, because any minute now it will be crushed and closed-off by corporate marauders!”  This crowd want us to believe that the corporate big boys are — someday very soon — going to toss the proverbial “master switch,” suffocating Internet innovation and digital freedom, and making us all cyber-slaves within their commercialized walled gardens.

We might think of this fear as “The Great Closing,” or the notion that, unless radical interventions are pursued — usually of a regulatory nature – a veritable Digital Dark Age of Closed Systems will soon unfold, complete with myriad AOL-like walled gardens, “sterile and tethered devices,” corporate censorship, and consumer gouging. Again, it’s really just a restatement of the old Lessig vision of an unfettered cyberspace leading to “perfect (corporate) control.”  In other words, most information systems, networks and devices will be bottled up by corporate “gatekeepers” if markets aren’t steered in a better direction by wise philosopher-regulators.  And these “Openness Evangelicals,” as I will call them, believe they are the sagacious chosen few who will serve as the self-appointed janissary of the supposed dying order of openness.

My critique of this cyber-collectivist thinking and “Great Closing” thesis was more fully developed in these two essays [1, 2] and will be more robustly developed in a chapter for an upcoming book that will be published shortly.  Much of what I’ll have to say in response to Wu’s new book will be drawn from those essays as well as my two-part exchange [1, 2] with Lessig upon the 10^th anniversary of the publication of Code. Basically, I do not buy – not for one minute – the notion that “the Internet is dying” or that “openness” is evaporating.  The Internet has never been more vibrant or open.  Again, please read those previous essays for my completely response.  I’ll be teasing out some of those themes in future essays here.

More specifically, my response to Wu’s new book comes down to this:

1. Rarely is there any discussion of the nature of the respective forms of “power” or the coercive nature of State power, in particular.  The fact that the State has a monopoly on force in society and, thus, can penalize or even imprison, is either ignored or treated as irrelevant compared to the supposed “power” of private actors.
2. Rarely in their analysis — and never in Wu’s book — is there a serious cost-benefit analysis of the trade-off associated with an aggrandizement of State power in the name of countering the supposed evils of private power.  The solutions offered – to the extent they rise above amorphous calls to “do something” – are presented as cost-free options.
3. There isn’t enough focus on the dangers of “regulatory capture” or the massive inefficiencies associated with the sort of regulatory regimes that progressives and modern cyber-collectivists like Wu would substitute for market mechanisms.

In my next installment, I’ll take on Wu’s critique of the fictional “purely economic laissez-faire approach” he derides – an approach that has never existed in American communications or media markets.  In a forthcoming installment, I’ll also be challenging Tim to a Simon-Ehrlich wager on this front and ask him to put his money where his mouth is to see just how serious he is about his dour worldview and extreme technological pessimism!  So, stay tuned.

[Jump to Part 2 in the series.]

“It was then, and is now, the largest merger in American business history,” notes Tim Arango of the New York Times about the AOL-Time Warner mega-merger, which happen ten years this month. And yet, as he points out in his essay, “How the AOL-Time Warner Merger Went So Wrong,” things didn’t end up going so well for this marriage:

The trail of despair in subsequent years included countless job losses, the decimation of retirement accounts, investigations by the Securities and Exchange Commission and the Justice Department, and countless executive upheavals. Today, the combined values of the companies, which have been separated, is about one-seventh of their worth on the day of the merger. To call the transaction the worst in history, as it is now taught in business schools, does not begin to tell the story of how some of the brightest minds in technology and media collaborated to produce a deal now regarded by many as a colossal mistake.

Arango goes on to interview several of the principals involved in the deal to get their take on why things unfolded so miserably and, ultimately, came to an end this year. I highly recommend the essay because it should serve as a cautionary tale to those worrywarts who are constantly predicting that the sky is going to fall if we allow a truly free media marketplace–including freedom for firms to structure themselves as they wish.  Reality usually plays out quite differently.  As I argued in my recent paper, “A Brief History of Media Merger Hysteria: From AOL-Time Warner to Comcast-NBC,”

The point here is not that media mergers are inherently good or always make sense. Indeed.. mergers sometimes prove to be huge blunders. But the hysteria sometimes heard before media mergers are consummated rarely bears any relationship to reality once the deals move forward. Media markets are extremely dynamic and prone to disruptive change and technological leap-frogging. Mergers are often one response to that turbulence… Given how difficult it is to predict the future course of events in this chaotic sector, humility—not hubris—is the sensible disposition when it comes to media merger policy.

I just finished Ken Auletta’s latest book, Googled: The End of the World As We Know It, and I highly recommend it. Auletta is an amazingly gifted journalist and knows how put together a hell of good story.  It helps in this case that he was granted unprecedented access to the Google team and their day-to-day workings at the Googleplex. I’m really shocked by the level of access he was granted to important meetings and officials–over 150 interviews with Googlers, including 11 with CEO Eric Schmidt and several with founders Sergey Brin and Larry Page.  That’s impressive.

The book shares much in common with Randall Stross’s excellent Planet Google: One Company’s Audacious Plan to Organize Everything We Know, which I reviewed here earlier this year.  Both books recount the history of Google from its early origins to present. And both survey a great deal of ground in terms of the challenges that Google faces as it matures and the policy issues that are relevant to the company (privacy, free speech, copyright law, etc).

What makes Auletta’s book unique is the way we taps his extensive “old media” world contacts and integrates such a diverse cast of characters into the narrative — Mel Karmazin (former Viacom, now Sirius XM), Bob Iger (Disney), Howard Stringer (Sony), Martin Sorrrell (WPP), Irwin Gotlieb (Group M), and even the Internet’s “inventor”–Al Gore!   Auletta interviews them or recounts stories about their interactions with Google to show the growing tensions being created by this disruptive company and its highly disruptive technologies.  There are some terrifically entertaining anecdotes in the book, but the bottom line is clear: Google has made a lot of enemies in a very short time.

Indeed, the book is as much about the decline of old media as it is about Google’s ascendancy.  What Auletta has done so brilliantly here is to tell their stories together and ask how much old media’s recent woes can be blamed on Google and digital disintermediation in general. “If Google is destroying or weakening old business models,” Auletta argues, “it is because the Internet inevitably destroys old ways of doing things, spurs ‘creative destruction.’ This does not mean that Google is not ambitious to grow, and will not grow at the expense of others. But the rewards, and the pain, are unavoidable,” he concludes. Google is essentially just the tip of a giant wave of digital disintermediation that is tearing through the media landscape, Auletta argues. But because it is the biggest and most visible part of this wave, it invites greater scrutiny and scorn.  And then there are more profound questions about Google and the digital disintermediators: “What we don’t know is whether the new digital distribution systems will generate sufficient revenue to adequately pay content providers.”  Auletta isn’t just talking about old media giants, but about content creators in general. It’s the “digital sharecropper” concern that Nick Carr has articulated in his book about cloud computing, The Big Switch. [reviewed here]  In the relentless pursuit of greater efficiencies, do digital disintermediators destroy the cross-subsidization methods that have traditionally funded the creation of news, information, and entertainment? If so, are we better off because older, “less efficient” ways of doing business are replaced with better ones. Or are we instead left with less high-quality journalism and entertainment because of funding streams are drying up or being siphoned off by the new digital disintermediators?

Those are heated question frequently debated by Internet optimists and pessimists. It’s a great debate, and one that will no doubt continue to rage for many years to come. The problem for Google — as the interviews Auletta conducts with others in the book makes clear — is that it will increasingly become the scapegoat for every problem under the digital sun. “To blame Google is to prescribe a cure from the wrong illness,” Auletta notes.  Nonetheless, as the biggest and most visible of the digital disruptors, it’s clear the company will have a target on its back for many years to come.

Worse yet for Google, Aulleta states, is that the company is “waking the government bear,” not just because of its growing size but also because of the sheer amount of information it collects and puts at the world’s disposal.  Privacy, child safety, defamation, and copyright are just a few of the concerns raised by Google’s mission “to organize the world’s information and make it universally accessible and useful.”  Google has gone to great pains to address these concerns, but it’s unlikely to ever be enough to satisfy government officials, who will be fielding increasing complaints from disgruntled competitors and activist groups at the same time.

These concerns could play into the hands of those who think antitrust action against Google is needed. Indeed, I fear that’s on the way given the myopia of Washington. As I pointed out in my lengthy review of Gary Reback’s ode to antitrust regulation, Free the Market: Why Only Government Can Keep the Marketplace Competitive, the static competition, fixed-pie mindset that rules Washington leads many to support antitrust crusades against the tech giants of the day.  In the 70s it was IBM. In the 90s it was Microsoft.  In the next decade it will likely be Google.

“Today, Google appears impregnable,” Auletta notes, “But a decade ago so did AOL, and so did the combination of AOL Time Warner.”  Indeed, I have written extensively about that deal and many others that critics predicted would bring on a techno-apocalypse.  Of course, we know how the story ended in those cases. Markets and technologies evolved while the old giants rested on their laurels. Dynamic competition and innovation are the rule; the static mindset crowd that pretends today’s giants are the end of the story just don’t have history on their side.

But that doesn’t mean Google will be able to avoid a massive regulatory onslaught. In fact, I have pending bets going right now with several friends that, before the Obama Administration leaves office, it will launch the biggest, most costly antitrust jihad in U.S. history against Google.  I can’t tell you how much I am hoping to lose those bets.

P.S. I have enjoyed many of Auletta’s earlier articles and books, especially Backstory: Inside the Business of News (2003),  but I highly recommend that you check out the latest essay he posted on his blog about “Media Maxims.”  Outstanding insights.

As I noted in my recent paper, “A Brief History of Media Merger Hysteria: From AOL-Time Warner to Comcast-NBC,” every time a media merger is proposed we hear all sorts of silly Chicken Little predictions of impending doom. Among the more entertaining claims we hear are conspiracy theories about supposed nefarious schemes to take over the media universe and control our minds,  predictions of the death of journalism or democracy, or just good ol’ fashion screw-the-consumer price hikes. But, as I showed in my paper, those predictions have always proven to be bunk once the historical record is in–which usually only takes a few years. While most media mergers do end in misery–it’s for the merging firms and their shareholders, not the public. Unforeseen technological innovations and expanding media marketplace options typically doom most media mergers, while the viewing and listening public enjoys the fruits of continued marketplace evolution.

But the critics never acknowledge any of this. And, sadly, history repeats. The media worrywarts just keep mouthing the same lines and conveniently avoid any reference to their past predictions. No one bothers looking back and trying to match up those past predictions with present day facts. I’m out to change that.  I am going to attempt to keep a running inventory all the Chicken Little predictions about the Comcast-NBC Universal deal so that, a few years from now, we can look back and see how well those predictions match up with reality.  I suspect that, as was true of those earlier case studies, reality will look quite different than the rhetoric we are hearing today.

To kick things off, here are some rather outlandish comments from someone who should know better — Dan Gillmor, author of the excellent 2006 book, We the Media: Grassroots Journalism by the People, for the People, which I have cited quite favorably in much of my own work through the years.  But when it comes to the Comcast-NBCU deal, Gillmor has gone off the deep end in an essay entitled, “Comcast-NBC: The Road Toward Control Over What We Create.” He argues:

A Comcast-NBC combination is brazenly anti-competitve and anti-democratic. It would give one company far too much ownership over not just professionally produced media but also the ways media consumers can receive it. Worse, if approved, it could mark the tipping point in Big Media’s push to take control over the Internet itself. That’s where we need to focus our attention.

But wait, there’s more…

it will be in Comcast’s financial interest to clamp down as much as possible on Internet data use when it conflicts with its cable-TV business, which is to say on a constant basis.

Oh my. This is quite a scary story. A Hollywood script could be born of all this! But, then again, Comcast-NBCU would quash that script and forever bury it from our sight, right?

I fear Gillmor has been drinking up some of the “perfect control” fantasies bandied about by his Harvard Berkman Center colleagues Lawrence Lessig and Jonathan Zittrain, which I have documented here before. These guys have claimed that a variety of digital players–AOL in the ’90s and Apple today–would crush our digital liberties and snuff out competition and dissent.

These tales are all fiction, of course. In my paper, I document just how quickly the much-ballyhooed AOL-Time Warner merger fell apart. When AOL-Time Warner announced their mega-merger, critics forecast “servitude,” “ministries of propaganda,” and “new totalitarianisms.” Just two years after the deal was announced, AOL-Time Warner had lost over $100 billion in shareholder value and Time Warner decided to drop AOL from its name altogether. And AOL is now being spun off altogether. So much for “perfect control.”

But what about Gillmor’s claim that Comcast will clamp down on all content that conflicts with its cable TV business model?  Rubbish. If they were going to do that, wouldn’t we have seen some evidence by now? And good luck trying even if they really wanted to do so.  It’s impossible for them to lock down content flows. There’s always another way for information and content to flow in our modern media marketplace. Indeed, Gillmor completely undercuts his own argument on this point when noting:

Keep in mind that Comcast wouldn’t be the first company to have this kind of vertical content and distribution structure. Time Warner owns some cable franchises along with CNN and other media properties; Cablevision has its own content business. Phone companies have some projects under way, too.

Yes, Dan, and what do those experiments tell us?!   Have you been subjected to some sort of sadistic mind control by the nefarious media overlords who own both content and conduit?  Or did you somehow just avoid the brain-washing because you have access to super-secret information sources outside their control? Please, do tell us. I am dying to know the “truth” that our wicked media overlords are keeping from us!

Sorry to be so snarky, but I am just really tired of this nonsense.  There has been no “takeover” over the media marketplace or our minds by these media companies.  Hell, these media companies can’t even figure out how to tie their own digital shoelaces most days of the week. They are scrambling to find something– anything–that works to counter to tsunami of digital devices, online options, and so on, that they were largely unprepared for. Mergers and alliances are one response to this storm, but there is no guarantee they will pan out. Most don’t. But, again, they typically don’t work out for the companies and their shareholders; the public largely ignores their pain and continues to benefit from a marketplace of rapidly expanding options and alternatives.

Anyway, please help me continue to document claims such as these so I can build a record and then match it up with reality later down the road.  It’s important that public policy be based on facts, not fanaticism.

I’ve just released a new PFF white paper looking at the hysteria that has often accompanied major media mergers and then taking a look at the marketplace reality years after the fact.  Here‘s the PDF, but I have also pasted the entire thing down below.

_____________________________

A Brief History of Media Merger Hysteria: From AOL-Time Warner to Comcast-NBC

by Adam Thierer

Although the pending union of Comcast and NBC Universal has not yet made it to the altar, Chicken Little-esque wails about the marriage have already begun in earnest. For example, the pro-regulatory media organization Free Press has already set up a website to complain about the deal.[1] And Jeff Chester, executive director of the Center for Digital Democracy, has called it “an unholy marriage.”[2] The fever only promises to spread once the deal is formally announced, and a lengthy fight over the deal is expected at the Federal Communications Commission (FCC) and whichever antitrust agency reviews the deal.[3]

But reality tends to play out somewhat less dramatically than the script penned by the media worrywarts. It’s worth looking back at some of the more prominent examples of media merger hysteria in recent years to understand why such panic is unwarranted, and why a deal between Comcast and NBC Universal is unlikely to lead to the sort of problems that the pessimists suggest.[4]

AOL-Time Warner: From the “New Totalitarianism” to Digital Divorce Court in Less Than a Decade

When the mega-merger between media giant Time Warner and Internet superstar AOL was announced in early 2000, the marriage was greeted with a cacophony of righteous indignation and apocalyptic predictions.  When referring to the dangers of the deal, syndicated columnist Norman Solomon, a longtime associate of the media watch group Fairness & Accuracy In Reporting, summoned the ghost of Aldous Huxley when he and referred to the transaction in terms of “servitude,” “ministries of propaganda,” and “new totalitarianisms.”[5] Similarly, USC Professor of Communications Robert Scheer wondered if the merger represented “Big Brother” and claimed, “Diversity is out, niches are gone, it’s Skippy peanut butter time. AOL is the Levitown of the Internet, mom and apple pie, ‘50s boredom, conformity and dullness as a virtue: A Net nanny reigning in potentially restless souls.”[6]

Such pessimistic predictions proved wildly overblown. To say that the merger failed to create the sort of synergies (and profits) that were originally hoped for would be an epic understatement.[7] The titles of two popular books about the deal summed up the firm’s troubles: One was entitled Fools Rush In (by Nina Munk) and the other, There Must Be a Pony in Here Somewhere (by Kara Swisher and Lisa Dickey).[8]

The numbers were mind-boggling. By April 2002, just two years after the deal was struck, AOL-Time Warner had already reported a staggering $54 billion loss.^[9] By January 2003, losses had grown to $99 billion.^[10] By September 2003, Time Warner decided to drop AOL from its name altogether and the deal continued to slowly unravel from there.^[11] In a 2006 interview with the Wall Street Journal, Time Warner President Jeffrey Bewkes famously declared the death of “synergy” and went so far as to call synergy “bullsh*t”!^[12] In early 2008, Time Warner decided to shed AOL’s dial-up service^[13] and now is set to spin off AOL entirely.[14] Looking back at the deal, Fortune magazine senior editor at large Allan Sloan called it the “turkey of the decade”:

The day the deal was announced, Jan. 10, 2000, Time Warner closed at the equivalent of $184.50 a share. After almost 10 years of travail, the $184.50 has shrunk to about $42.25, consisting of one Time Warner share and a quarter of a Time Warner Cable share. The 77 percent decline is triple the decline in the Standard & Poor’s 500-stock index over the same period.[15]

And the Time Warner-AOL split wasn’t the end of this messy divorce process. In 2008, Time Warner Cable and Time Warner Entertainment decided to split.^[16] Time Warner has even spun off some of its oldest properties. In 2006, it announced that it was putting 18 of the 50 magazines in its Time magazine division up for sale.^[17]

As is always the case, these divestitures and down-sizing efforts garnered little attention compared with the hullaballoo and hysteria that accompanied the announcement of the deal back in 2000.^[18]

News Corp/DirecTV: Murdoch’s “Digital Death Star” Blows Up

No media industry personality attracts more attention (or angst) than News Corp. Chairman and CEO Rupert Murdoch. The popular leftist blog The Daily Kos has likened him to “a fascist Hitler antichrist.”[19] And CNN founder Ted Turner once compared the popularity of the News Corp.’s Fox News Channel to the rise of Adolf Hitler prior to World War II.^[20] Alternatively, Murdoch has been accused of being a Marxist.[21] Meanwhile, Karl Frisch, a Senior Fellow at Media Matters for America, speaks of Murdoch’s “evil empire”^[22] and a recent MSNBC poll has asked people to vote on the question: “Is Rupert Murdoch evil?”[23] In 2003, when asked by talk show host Chris Matthews, “Would you break up [News Corp.-owned] Fox?” then Democratic presidential candidate Howard Dean answered, “On ideological grounds, absolutely yes.”^[24] And in their book Our Media, Not Theirs, John Nichols and Robert McChesney took the Murdoch-as-evil-overlord storyline to its logical extreme when they suggested Hollywood was on to something by scripting a media tycoon like Murdoch as the bad guy in a James Bond movie: “No wonder conspiracy theories are so popular in America; no wonder, when the makers of James Bond movies look for believable villains these days, they eschew Eurotrash bad guys for more credibly threatening villains such as the Rupert Murdoch-like media baron of 1997’s Tomorrow Never Dies.”^[25]

These Murdochian fears came to a head in 2003 when News Corp. announced it was pursuing a takeover of satellite television operator DirecTV.  Paranoid predictions of a pending media apocalypse followed.  A group of regulatory activists filed joint comments to the FCC claiming that if News Corp. and DirecTV were allowed to merge, “the result will be unprecedented concentration within all aspects of the television marketplace, as well as increased prices for consumers of cable and satellite television.”[26] Similarly, then-FCC Commissioner Jonathan Adelstein worried that the deal would “result in unprecedented control over local and national media properties in one global media empire. Its shockwaves will undoubtedly recast our entire media landscape.” He continued; “With this unprecedented combination, News Corp. could be in a position to raise programming prices for consumers, harm competition in video programming and distribution markets nationwide, and decrease the diversity of media voices.”[27]

Not to be outdone, full-time media fussbudget Jeff Chester predicted that Murdoch would use this “Digital Death Star” as the base of a nefarious scheme to conquer the media universe:

Murdoch will use DirecTV as a ‘death star’ to force his programming on cable companies by threatening a price war unless they give Fox favorable access. Since News Corp will control cable TV’s principal multichannel competitor, it will easily create new channels—unlike anyone else in the TV business.  Rather than engage in open combat and competition, cable powerbrokers such as Comcast and AOL-Time Warner will likely accommodate Murdoch and add his new channels to their own services. Imagine Fox News on steroids. Worse, with DirecTV’s capacity to ‘spotbeam’ channels to serve distinct communities, localized versions of Fox programs could be available in major cities across the nation.[28]

Imagine the horror of new, “spotbeamed” local media competition!  However, unlike the destruction of the planet Alderaan by the Death Star in Star Wars,[29] no one was harmed in the making of the News Corp-DirecTV marriage.  Indeed, the rebels would get the best of Darth Murdoch since his “Digital Death Star” was abandoned just three years after construction.  In December 2006, News Corp. decided to divest the company to Liberty Media Corporation in an effort to win back more controlling News Corp. stock.^[30]

Ironically, many of the same groups that had vociferously protested the original News Corp-DirecTV deal again found reason to complain when the deal was being undone! The FCC’s failure to implement various restrictions as part of the license transfer, they claimed, would “result in continuing control by News Corp. over content distribution, harming competition in both the programming and distribution markets, reducing consumer choice and raising cable prices.”^[31] Unsurprisingly, little mention was made of the previous round of pessimistic predictions or whether there had ever been any merit to the lugubrious lamentations of the media critics.

Sirius-XM: “Merger to Monopoly” or Prelude to Bankruptcy?

Some of the most entertaining and wrong-headed predictions about the future of the media marketplace often come from media moguls themselves. For example, back in 2003, when he was still President and Chief Operating Officer of Viacom, Mel Karmazin said in reference to Microsoft, AOL Time Warner, and Comcast: “I can’t imagine being a competitor with any of these guys.”[32] Just six years later, however, plenty of others are competing with those companies. Microsoft finds itself in a heated war with Google on all fronts, AOL-Time Warner has fallen apart, and Comcast is squaring off against telco (e.g., Verizon’s FiOS and AT&T U-Verse) and online video competitors (e.g., YouTube, Hulu) that were unfathomable in 2003—not to mention the traditional satellite TV competitors they still face. Meanwhile, Karmazin abandoned Viacom and is now struggling to find a way to make subscription-based satellite radio survive the ongoing digital music bloodbath caused by the rise of online music services and a little thing called the iPod.

Of course, hysteria ran rampant when Sirius and XM were merging, too.  Critics called it a “merger to monopoly” and predicted a variety of coming calamities.[33] National Association of Broadcasters Vice President Dennis Wharton described the merger as a “monopoly platform for offensive programming” that would be “anti-consumer.”^[34] Mr. Wharton later remarked that the merged firms “will raise prices, won’t improve their technology and will limit their offerings.”^[35] A coalition of six non-profits claimed that the merger was “perhaps the worst offense against the basic principle that competition is the consumer’s best friend” and, if approved, “a tsunami of mergers could ripple through the digital space at the worst possible moment.”^[36] They predicted that “once the competition is eliminated, prices will rise over time,” “innovation will slow to the pace preferred by the monopolist and consumers will be much worse off in the long run.”^[37] Another coalition argued that the new company would “abuse consumers, artists and other input suppliers in the satellite radio market.”[38]

In the end, the merger took an astonishing 500-plus days for the FCC to finally approve[39] and was conditioned with a lengthy set of “voluntary concessions” to supposedly rectify these potential harms—including pricing constraints that could limit the firm’s ability to cover costs and pay down debt over time.

Unsurprisingly, things haven’t turned out so well for Sirius XM. When the merger was finally approved by the FCC in August 2008, Commissioner Copps dissented vigorously on various grounds but specifically insisted that, “We must assume that the marketplace can support two financially viable competitors.”[40] Unfortunately for Commissioner Copps—as well as Sirius XM—it’s not even clear that the market can sustain one satellite radio provider. The company’s stock went into freefall following completion of the deal and, at one point, its stock fell below 10 cents per share. The company flirted with bankruptcy in February of this year as “satellite radio failed to win over many younger listeners, and competition from other sources slowed subscriber growth.”[41] In March 2009, Karmazin orchestrated a cash-for-stock swap with Liberty Media to get a $530 million lifeline and avoid bankruptcy.[42] But even with the cash infusion Sirius XM faces an uncertain future with stiff competition.[43] “Sirius is girding for slower growth than in the past,” notes Olga Kharif of Business Week, “and analysts remain concerned about the company’s ability to control costs.”[44] Former stockbroker and RealMoney.com contributor Tim Melvin predicts the overleveraged company “will disappear from the landscape. The subscribers will go to another tech or entertainment company in bankruptcy proceedings. Subscription radio just does not have that much appeal to most people.”[45]

Whether Melvin’s dour forecast for satellite radio proves accurate remains to be seen. What’s clear, however, is that the fears bandied about by critics when the Sirius-XM deal was pending have not come to pass.

Murdoch’s Wall Street Journal Quest

In 2007, Rupert Murdoch announced his desire to purchase The Wall Street Journal.  Once again, a great deal of hand-wringing ensued. “This takeover is bad news for anyone who cares about quality journalism and a healthy democracy,” argued Robert McChesney. “Giving any single company—let alone one controlled by Rupert Murdoch—this much media power is unconscionable.”[46] And FCC Commissioner Copps warned that “It will create a single company with enormous influence over politics, art and culture across the nation and especially in the New York metropolitan area.”[47]

Today, however, the Journal keeps humming along and continues to produce some of the finest journalism on the planet. Meanwhile, “politics, art and culture” seem largely unaffected by the deal—either in New York or the nation.

And the deal certainly hasn’t made Murdoch or News Corp. any richer. “His purchase of The Wall Street Journal is widely seen as one of the worst moves of his career,” notes Michael Wolff of Vanity Fair.[48] News Corp. has already taken a whopping $3 billion write-down on the deal.  Considering the $5 billion price tag Murdoch paid two years ago, one wonders if he’ll hold on to this property any longer than he did DirecTV.

Comcast-NBC Universal: Debunking the Fears Preemptively

No doubt we’ll soon be hearing many of these same apocalyptic predictions about the Comcast-NBC deal. Free Press has said the new entity “will have an incentive to prioritize NBC shows over other local and independent voices and programs, making it even harder to find alternatives on the cable dial.”[49] And Free Press Executive Director Josh Silver has called for the Obama Administration to block the deal saying “it would further starve Americans of [media] diversity.”[50] Even competitors are complaining. Liberty Media Corp. Chairman John Malone, which owns DirecTV, has suggested that they might push the government to reject the deal.[51] Many other rivals will likely join that bandwagon.

These critics will likely raise vertical integration fears and claim that Comcast will act as a “gatekeeper” by limiting the ability of independent voices to get a slot on cable distribution systems, or by withholding NBC-Universal content from other platforms and providers. But there’s little historical evidence that suggests this will be a problem. As the adjoining exhibit illustrates, the overall number of video programming channels available in America has skyrocketed, from just 70 channels in 1990 to 565 channels in 2006, the last year for which the FCC has made data available.

More importantly—and despite claims to the contrary—vertical integration in the video marketplace has plummeted over the past two decades. While many more cable and satellite networks are available today than ever before, the greatest share of the growth in the multichannel video marketplace has come from independently owned video networks. Since 1990, the number of cable-owned or affiliated channels has increased slightly, but it pales in comparison with the growth of independently owned and operated video networks. In real terms, therefore, the percentage of the overall video marketplace controlled (i.e., owned and operated) by cable companies has plummeted—from 50% in 1990 to just 14.9% in 2006. Moreover, in the wake of the Time Warner Cable and Time Warner Entertainment divorce, vertical integration in the cable sector has probably fallen into the single digits. Even if the merger of Comcast and NBC-Universal results in slight increase in industry vertical integration, it almost certainly will not surpass 20 percent.  Consequently, as far as vertically integrated industries go, it is impossible to conclude that this market could be characterized as being controlled by “gatekeepers.”

It is difficult to imagine that Comcast would buck these trends and begin restricting independent options on its systems or withhold its content from others.  Video distributors don’t make money by restricting choice. Consumers would flock to alternative video providers and media services if Comcast played such games. The great thing about the modern media marketplace is that there is always another place for consumers to turn to find something they want.[52] Sports programming could be an exception to the rule, and is the one issue that Comcast may need to bargain over with FCC regulators or antitrust officials since they own regional sports networks that other video distributors want access to.^[53] But traditional concerns about access to over-the-air broadcast signals (namely, the NBC local broadcast television properties) shouldn’t be as much of an issue today as it was the past.  Frankly, local broadcasters need all the eyeballs they can get these days. Thus, it’s unlikely that Comcast would try to withhold those stations from other video distributors, especially since a great deal of NBC programming is already available through other means. And intense competition exists for some of the most important news and informational services that NBC offers, such as local news, weather, and traffic.

Overall, therefore, it’s hard to see the case for the FCC rejecting the deal. Regulators need to be forward-looking about what is driving this deal.  This deal isn’t about protecting old markets but instead about building new ones. “The real motivation behind this deal,” argues Mike Berkley, former CEO of SplashCast Media, “is survival.”

Comcast understands that the price point for distributing TV into homes is going to fall dramatically in the coming years. Comcast’s 3 distribution products, Voice – TV – Internet, are collapsing into just one, single product: Internet. This poses a huge threat to Comcast’s top line. As such, Comcast is hedging through diversification into content, moving up the media value chain. Comcast will be looking to replace lost revenue in distribution with revenue from content (advertising, subscriptions, etc).[54]

Similarly, Wall Street Journal business columnist Holman Jenkins points out that Comcast is scrambling to find a way to rework their business model as the era of set-top box-delivered video slowly gives way to a world of ubiquitously available online video:

This would be a merger, after all, of two businesses that seem headed toward some combination of the fates of newspapers, music CDs and the old wireline telephone business. Customers want the product for free. Comcast’s lifeblood, the $100-a-month cable bill and the $50-a-month broadband bill, increasingly look like duplicative expenses. And so on. True, the number of households that have actually dropped their cable subscriptions in favor of subsisting on TV streamed or downloaded from the Internet is not yet large. But for the Roberts family and its Comcast property, their worst fears lurk just around the corner—being reduced to a “dumb pipe,” subject to commodity pricing while somebody else (Google) makes all the money. Yet an escape route is vexingly hard to envision. Time Warner and Comcast have been talking up plans to make their respective cable lineups available by computer—as long as you keep paying your cable bill. This is a stopgap, especially appealing to anyone who owns two homes but wants to pay only one cable bill. Never mind, too, that hundreds of shows are already available online for free, via Web sites operated by none other than Comcast and the TV networks themselves.[55]

In light of such technological upheaval and marketplace uncertainty, it’s important that regulators proceed cautiously when reviewing this deal or future deals.

Conclusion: Let Markets Evolve

The point here is not that media mergers are inherently good or always make sense. Indeed, as the examples discussed above illustrate, mergers sometimes prove to be huge blunders.[56] But the hysteria sometimes heard before media mergers are consummated rarely bears any relationship to reality once the deals move forward. Media markets are extremely dynamic and prone to disruptive change and technological leap-frogging. Mergers are often one response to that turbulence.

But mergers are no panacea, and they often fail to produce the “synergies” hoped for. A 2004 survey by McKinsey & Co. found that “Nearly 70 percent of the mergers in our database failed to achieve the revenue synergies estimated by the acquirer’s management.”[57] Perhaps, therefore, the best argument for blocking media mergers is not their potentially pernicious effect on markets or consumers, but rather to save the merging firms (and their stockholders) from a miserable marriage!

On the other hand, experimenting with alternative business models and ownership structures is an important part of any dynamic market, because markets are not static but represent and ongoing processes of entrepreneurial “discovery.”[58] Thus, policymakers would be wise to avoid micro-managing mergers and instead let things run their course.  Sometimes collaboration makes a great deal of sense, especially when the significant costs of providing a media service becomes impossible absent a partnership. Indeed, federal officials and agencies are currently exploring how (or whether) journalism can survive an era of seeming perpetual media upheaval.[59] Healthy media companies certainly must be part of the answer and new ownership arrangements might be part of the solution.

Given how difficult it is to predict the future course of events in this chaotic sector, humility—not hubris—is the sensible disposition when it comes to media merger policy. At a minimum, policymakers should insist that ongoing debates are governed by facts instead of fanaticism, because, if the past decade is any guide, discussions about media mergers have been more often rooted in hyperbolic rhetoric and unsubstantiated hysteria.

[1] www.freepress.net/comcast

[2] Quoted in Cecilia Kang, Public Interest Groups Rail against a Comcast and NBC Merger, Washington Post, Post Tech Blog, Nov. 9, 2009, http://voices.washingtonpost.com/posttech/2009/11/for_example_were_advancing_tv.html

[3] “For regulators, a deal like this is a gift; an occasion to impose their will upon needy companies that would otherwise be outside their regulatory reach.” Craig Moffett, Bernstein Research, Comcast: Snatching Defeat from the Jaws of Victory? Oct. 23, 2009, at 14.

[4] Cecilia Kang, A New Kind of Company, A New Kind of Challenge for Feds, Washington Post, Nov. 26, 2009, at 1, www.washingtonpost.com/wp-dyn/content/article/2009/11/26/AR2009112602500.html

[5] Norman Soloman, AOL Time Warner: Calling The Faithful To Their Knees, Jan. 2000, www.fair.org/media-beat/000113.html

[6] Robert Scheer, Confessions of an E-Columnist, Jan. 14, 2000, Online Journalism Review, www.ojr.org/ojr/workplace/1017966109.php

[7] Looking back at the deal almost ten years later, AOL co-founder Steve Case said, “The synergy we hoped to have, the combination of two members of digital media, didn’t happen as we had planned.” Quoted in Thomas Heath, The Rising Titans of ’98: Where Are They Now?, Washington Post, Nov. 30, 2009, www.washingtonpost.com/wp-dyn/content/article/2009/11/29/AR2009112902385.html?sub=AR

[8] Nina Munk, Fools Rush In: Steve Case, Jerry Levin, and the Unmaking of AOL Time Warner (New York: Harper Business, 2004); Kara Swisher and Lisa Dickey, There Must Be a Pony in Here Somewhere: The AOL Time Warner Debacle and the Quest for a Digital Future (New York: Crown Business, 2003).

[9] Frank Pellegrini, What AOL Time Warner’s $54 Billion Loss Means, April 25, 2002, Time Online, www.time.com/time/business/article/0,8599,233436,00.html

[10] Jim Hu, AOL Loses Ted Turner and $99 billion, CNet News.com, Jan. 30, 2004, http://news.cnet.com/AOL-loses-Ted-Turner-and-99-billion/2100-1023_3-982648.html

[11] Jim Hu, AOL Time Warner Drops AOL from Name, CNet News.com, Sept. 18, 2003, http://news.cnet.com/AOL-Time-Warner-drops-AOL-from-name/2100-1025_3-5078688.html

[12] Matthew Karnitschnig, After Years of Pushing Synergy, Time Warner Inc. Says Enough, Wall Street Journal, June 2, 2006, http://online.wsj.com/article/SB114921801650969574.html

[13] Geraldine Fabrikant, Time Warner Plans to Split Off AOL’s Dial-Up Service, New York Times, Feb. 7, 2008, www.nytimes.com/2008/02/07/business/07warner.html?_r=1&adxnnl=1&oref=slogin&adxnnlx=1209654030-ZpEGB/n3jS5TGHX63DONHg

[14] John Letzing, AOL, On The Verge Of Independence, Weighs On Parent, Wall Street Journal, Nov. 4, 2009, http://online.wsj.com/article/BT-CO-20091104-718782.html

[15] Allan Sloan, ‘Cash for . . .’ and the Year’s Other Clunkers, Washington Post, Nov. 17, 2009, www.washingtonpost.com/wp-dyn/content/article/2009/11/16/AR2009111603775.html

[16] Tim Arango, Time Warner Spinning Off Cable Unit, New York Times, April 30, 2008, www.nytimes.com/2008/04/30/business/30warner-web.html?ref=technology

[17] Carolyn Pritchard, Time Inc. to Sell 18 Magazine Titles, MarketWatch, Sept. 12, 2006,  www.marketwatch.com/News/Story/Story.aspx?guid=%7B94967C37%2D9B4A%2D4C1A%2D8AC0%2D64904C1267A1%7D&dist=rss&siteid=mktw&rss=1

[18] “Break-ups and divestitures do not generally get front-page treatment,” notes Ben Compaine, author of Who Owns the Media?  See Ben Compaine, Domination Fantasies, Reason, Jan. 2004, p. 28, www.reason.com/news/show/29001.html

[19] www.dailykos.com/story/2009/9/7/778254/-Rupert-Murdoch-is-a-Fascist-Hitler-Antichrist

[20] Jim Finkle, Turner Compares Fox’s Popularity to Hitler, Broadcasting & Cable, Jan. 25, 2005, www.broadcastingcable.com/CA499014.html

[21] Ian Douglas, Rupert Murdoch is a Marxist, Telegraph.Co.UK, Nov. 9, 2009,  http://blogs.telegraph.co.uk/technology/iandouglas/100004169/rupert-murdoch-is-a-marxist

[22] Karl Frisch, Fox Nation: The Seedy Underbelly of Rupert Murdoch’s Evil Empire? MediaMatters.org, June 2, 2009, http://mediamatters.org/columns/200906020036

[23] www.msnbc.msn.com/id/19817142/

[24] Dean Vows to ‘Break Up Giant Media Enterprises,’ The Drudge Report, Dec. 2, 2003, www.drudgereport.com/dean1.htm; Bill McConnell, Dean Threatens to Break Up Media Giants, Broadcasting & Cable, Dec. 3, 2003, www.broadcastingcable.com/index.asp?layout=articlePrint&articleID=CA339546.

[25] John Nichols and Robert W. McChesney, Our Media, Not Theirs: The Democratic Struggle against Corporate Media (New York: Seven Stories Press, 2002) at 31.

[26] Consumers Union, Consumer Federation of America, Center for Digital Democracy, and Media Access Project, Comments In the Matter of News Corporation/Fox Entertainment Group Merger with Hughes Electronics Corporation/DirecTV, MB Docket No. 03-124, July 1, 2003, www.consumersunion.org/pdf/0701-DirecTV.pdf

[27] Dissenting Statement of Commissioner Jonathan S. Adelstein, Re:  General Motors Corporation and Hughes Electronics Corporation, Transferors, and The News Corporation Limited, Transferee, MB Docket No. 03-124, Jan. 14, 2004, http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-03-330A6.doc

[28] Jeff Chester, Rupert Murdoch’s Digital Death Star, AlterNet, May 20, 2003, www.alternet.org/story/15949

[29] Destruction of Alderaan, Wookieepedia: The Star Wars Wiki, http://starwars.wikia.com/wiki/Destruction_of_Alderaan

[30] News Corporation and Liberty Media Corporation Sign Share Exchange Agreement, News Corp Press Release, Dec. 22, 2006, www.newscorp.com/news/news_322.html.  A frustrated Murdoch referred to DirecTV as a “turd bird” just before he sold it off. See Jill Goldsmith, Murdoch Looks to Release Bird, Variety, Sept. 14, 2006, www.variety.com/article/VR1117950090.html?categoryid=1236&cs=1

[31] Consumers Union, Consumer Federation of America, Free Press, and Media Access Project, Comments In the Matter of Authority to Transfer Control of DirecTV, MB Docket No. 07-18, March 23, 2007, www.mediaaccess.org/file_download/177

[32] Richard Linnett, Media Rivals Backslap at Cable Conference, AdAge.com, June 10, 2003.

[33] Dissenting Statement of Commissioner Michael J. Copps, Applications for Consent to the Transfer of Control of Licenses, XM Satellite Radio Holdings Inc., Transferor, to Sirius Satellite Radio Inc., Transferee, MB Docket No. 07-57, Aug. 5, 2008, http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-08-178A3.pdf

[34] Dennis Wharton, National Association of Broadcasters, NAB Statement in Response to Sirius/XM Proposed Merger, Feb. 19, 2007, www.nab.org/AM/Template.cfm?Section=Search&template=/CM/HTMLDisplay.cfm&ContentID=8258.

[35] Peter Whoriskey and Kim Hart, Justice Dept. Approves XM-Sirius Radio Merger, The Washington Post, Mar. 25, 2008, www.washingtonpost.com/wp-dyn/content/article/2008/03/24/AR2008032401645.html.

[36] The XM-Sirius Merger: Monopoly or Competition from New Technologies: Hearing Before the Senate Committee on the Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, 3 & 6 (March 20, 2007) (statement of Common Cause et. al), www.hearusnow.org/fileadmin/sitecontent/2007_-_0320_Public_Interest_GroupsStatement-_Senate_Judiciary.pdf

[37] Id. at 6.

[38] Common Cause, Consumer Federation of America, Consumers Union, Free Press, Comments in the Matter of Consolidated Application for Authority To Transfer Control of XM Radio Inc. and Sirius Satellite Radio Inc., MB Docket No. 07-57July 9, 2007, at 1, www.hearusnow.org/fileadmin/sitecontent/xm-sirius_comments.pdf

[39] James Gattuso, Day 505: The XM-Sirius Circus Is Finally Over, Technology Liberation Front Blog, Aug. 7, 2008, http://techliberation.com/2008/08/07/day-505-the-xm-sirius-circus-is-finally-over

[40] Dissenting Statement of Commissioner Michael J. Copps, Applications for Consent to the Transfer of Control of Licenses, XM Satellite Radio Holdings Inc., Transferor, to Sirius Satellite Radio Inc., Transferee, MB Docket No. 07-57, Aug. 5, 2008, http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-08-178A3.pdf

[41] Andrew Ross Sorkin & Zachery Kouwe, Sirius XM Prepares for Possible Bankruptcy, New York Times, Feb. 10, 2009,  www.nytimes.com/2009/02/11/technology/companies/11radio.html

[42] Jon Birger, Mel Karmazin Fights to Rescue Sirius, Fortune.com, March 16, 2009, http://money.cnn.com/2009/03/13/technology/birger_sirius.fortune/index.htm

[43] Former stockbroker and RealMoney.com contributor Tim Melvin worries about the “significant competition for the company going forward” He notes:

Most of the younger people I know have iPod docks in their vehicles for listening to music. Smartphones are bringing music and podcasts to mobile consumers. E-reading machines have wireless connections that can eventually deliver content on a subscription or pay-per-use basis. I really do not need the sports channels from Sirius if I can watch and listen to the games I want on my phone. As time goes by, satellite radio will be viewed as a stepping-stone technology that was replaced by smartphones and other portable media devices.

Tim Melvin, Sirius’ Hopes Keep Slipping Away, The Street.com, Nov. 10, 2009, www.thestreet.com/story/10624757/1/sirius-hopes-keep-slipping-away.html?cm_ven=GOOGLEFI

[44] Olga Kharif, Sirius XM: The Good and Bad Earnings News, Business Week, Nov. 5, 2009, www.businessweek.com/technology/content/nov2009/tc2009115_002716.htm

[45] Melvin, supra 39.

[46] Robert McChesney, Murdoch’s Deal for the Journal: Yet Another Blow for Journalism, Free Press Press Release, July 30, 2007, www.freepress.net/release/260

[47] Michael Copps, Letter to FCC Chairman Kevin Martin, Oct. 25, 2007, http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-277576A1.pdf

[48] Michael Wolff, Rupert to Internet: It’s War! Vanity Fair, Nov. 2009, at 112.

[49] www.freepress.net/comcast

[50] Josh Silver, Too Big to Block? Why Obama Must Stop the Comcast-NBC Merger, Huffington Post, Nov. 13, 2009, www.huffingtonpost.com/josh-silver/too-big-to-block-why-obam_b_356826.html

[51] www.forbes.com/feeds/afx/2009/11/19/afx7143505.html

[52] Adam Thierer and Grant Eskelsen, The Progress & Freedom Foundation, Media Metrics: The True State of the Modern Media Marketplace, Summer 2008, www.pff.org/mediametrics

[53] However, experience with regulation of sports programming suggests that FCC meddling has had negative unintended consequences.  See W. Kenneth Ferree, Competition in the Sports Programming Marketplace, Testimony before the Subcommittee on Telecommunications and the Internet, House Committee on Energy and Commerce, March 5, 2008, www.pff.org/issues-pubs/testimony/2008/030508ferreetestimony.pdf; Barbara Esbin, Unable to Watch the Big Game? Testimony before the National Conference of State Legislatures Communications, Financial Services and Interstate Commerce Committee, Apr. 25, 2008, www.pff.org/issues-pubs/testimony/2008/080425esbinNCSLpresentation.pdf

[54] Mike Berkley, The Comcast-NBC Deal is a Defensive Move by Comcast. It’s about Survival, TV News Stream, Nov. 16, 2009, http://tvnewsstream.com/the-comcast-nbc-deal-is-a-defensive-move-by-c

[55] Holman Jenkins, The Economics of Jay Leno, Wall Street Journal, Nov. 18, 2009, at A17, http://online.wsj.com/article/SB10001424052748704431804574541684183772504.html

[56] Chris O’Brien, Beware the Hype Around Mergers, MercuryNews.com, Nov. 12, 2009, www.mercurynews.com/chris-obrien/ci_13756963?nclick_check=1

[57] Scott A. Christofferson, Robert S. McNish & Diane L. Sias, Where Mergers Go Wrong, McKinsey on Finance, Winter 2004, at 2, http://westportcapital.com/library/McKinsey_Where_Mergers_Go_Wrong.pdf.  The authors noted that, “acquirers face an obvious challenge in coping with an acute lack of reliable information. They typically have little actual data about the target company, limited access to its managers, suppliers, channel partners, and customers, and insufficient experience to guide synergy estimation and benchmarks.”

[58] See, e.g., Israel M. Kirzner, Competition, Regulation, and the Market Process: An “Austrian” Perspective, Cato Institute Policy Analysis No. 18, 1982, www.cato.org/pubs/pas/pa018.html

[59] For example, congressional hearings have been held on this topic and the Federal Trade Commission is holding a workshop on December 1^st and 2^nd asking, “Will Journalism Survive the Internet Age?” www.ftc.gov/opp/workshops/news/index.shtml

I was just digging through some old files and came across a quote that I found entertaining. Back in 2003, when he was still president and chief operating officer of Viacom, Mel Karmazin said with reference to Microsoft, AOL-Time Warner, and Comcast:  “I can’t imagine being a competitor with any of these guys.”  At the time, some media worrywarts made great hay of Mel’s quip and claimed, as Gene Kimmelman of Consumers Union argued at the time, that it proved how “Media moguls themselves admit their desire to avoid real competition within their industry.”

Utter rubbish. In fact, just six years after Karmazin spoke those words, Microsoft finds itself in a heated war with Google on all fronts, AOL-Time Warner has crumbled (even Time Warner Cable and Time Warner Entertainment got divorced!), and Comcast is now squaring off against telco and online video competitors that were unfathomable at the time (not to mention traditional satellite TV competitors.)  In the meanwhile, Karmazin abandoned Viacom and today, as CEO of Sirius XM, is struggling to find a way to make the satellite radio universe survive the ongoing digital music bloodbath thanks to unforeseen competition from online music services and a little thing called the iPod!

It’s proof positive that media markets and digital technologies always evolve faster than most people — even smart industry titans like Karmazin — anticipate.

Over the past couple of years here, I have relentlessly hammered Harvard’s dynamic duo of digital doom, Jonathan Zittrain (see 1, 2, 3, 4, 5, 6) and Lawrence Lessig (see 1, 2, 3), for their extraordinarily gloomy predictions about the Internet creating a world of “perfect control.”  In the hyper-pessimistic Lessig-Zittrain view of things, cyberspace is perpetually haunted by the specter of nefarious corporate schemers out to suffocate innovation, screw consumers, and quash dissent.  In the 1990s, Lessig’s big-bad-bogeyman was AOL.  Today, Zittrain casts Apple in the lead role of Cyber-Big Brother.  The problem with their thesis? In a word: Reality.  As Tim Lee has pointed out before, “Lessig’s specific predictions in Code turned out to be… spectacularly wrong”:

Lessig was absolutely convinced that a system of robust user authentication would put an end to the Internet’s free-wheeling, decentralized nature. Not only has that not happened, but I suspect that few would seriously defend Lessig’s specific prediction will come to pass.

Absolutely correct, and the same is true of the fears and predictions Zittrain tosses around in The Future of the Internet.  And yet, as we saw most recently during my debate with Lessig and Zittrain over at Cato Unbound upon the occasion of the 10th anniversary of the publication Code, neither of them have relented one bit. Indeed, they have actually been escalating their morose rhetoric recently.

The fact that Zittrain casts Apple as the central villain in his drama is particularly interesting because millions upon millions of people absolutely love the company and its amazingly innovative products — even if I’m not one of them.  And there is absolutely no way Zittrain can continue to sell us this story of Apple quashing innovation when, in just one year’s time, there were 1.5 Billion iPhone Store downloads of over 65,000 free and paid apps by consumers in 77 countries.  I mean, seriously, is there any application you cannot get for the iPhone these days?

Apparently not, because over at the Wall Street Journal “Digits” blog,  Andrew LaVallee writes of the latest innovative application to pop up in the Apple iPhone Store, iPot — a tool to help you find dope shops in California!!

Seeing an untapped opportunity in the growing number of legal California dispensaries and limited advertising outlets, app developer NexStudios launched iPot, an application for Apple’s iPhone that lists nearby stores. .. The free version of the app provides basic location information for nearby stores, while the $2 upgrade adds reviews and ratings and does away with advertising. The two apps have been downloaded nearly 100,000 times since their July launch, with about 80% opting for the free one.

Holy smokes, pot on your iPhone!  Geo-located in real time!  With reviews!  Am I living in a “Cheech & Chong” movie?

OK, seriously, let’s get back to that Zittrain-Lessig thesis.  My point here is that, contrary to their belief that the whole digital world is going to hell in a handbasket because of excessive “control” by corporate actors, in reality, things are getting better all the time.  Does Apple exercise some “control” over the iPhone store? Yes. Do they use that control to bock innovation at every juncture, restrict choice, and screw consumers?  Show me the evidence.

And when I say I want to see evidence, it has to be something more than a random anecdote like this “gem” I have heard Zittrain use many times:

Recently Apple got rid of the “I Am Rich” app, which cost the maximum $999.99, and simply featured a glowing red gem on buyers’ screens. Eight people apparently bought it, with several receiving refunds.  (”Category: Lifestyle.”  Heh.)  The app’s author doesn’t yet know whether he’ll get the money from the rest, minus Apple’s 30% vig.

Come on, seriously?  Is that the best you got? Moreover, Jonathan is willing to acknowledge that at least a certain amount of “gatekeeping might help keep malicious or poor quality apps away.”  Indeed, that’s about all the gatekeeping Apple does.  For God’s sake they are apparently not even trying to keep out the potheads anymore!  And finally, it goes without saying that Apple can’t even keep people from jailbreaking their phones in a matter of hours after release when users want to do even more with them.

How all this adds up to the specter of “perfect control” is beyond me.

Adam Thierer & I have just released a detailed examination (PDF) of brewing efforts to expand the Children’s Online Privacy Protection Act of 1998 to cover adolescents and potentially all social networking sites—an approach we call “COPPA 2.0.”

As Adam explained on Larry Magid’s CNET podcast, COPPA mandates certain online privacy protections for children under 13, most importantly that websites obtain the “verifiable consent” of a child’s parent before collecting personal information about that child or giving that child access to interactive functionality that might allow the child to share their personal information with others. The law was intended primarily to “enhance parental involvement in a child’s online activities” as a means of protecting the online privacy and safety of children.

Yet advocates of expanding COPPA—or “COPPA 2.0″—see COPPA’s verifiable parental consent framework as a means for imposing broad regulatory mandates in the name of online child safety and concerns about social networking, cyber-harassment, etc. Two COPPA 2.0 bills are currently pending in New Jersey and Illinois. The accelerated review of COPPA to be conducted by the FTC next year (five years ahead of schedule) is likely to bring to Washington serious talk of expanding COPPA—even though Congress clearly rejected covering adolescents age 13-16 when COPPA was first proposed back in 1998.

We’ll discuss some of the key points of our paper in a series of blog posts, but here are the top nine reasons for rejecting COPPA 2.0, in that such an approach would:

• Burden the free speech rights of adults by imposing age verification mandates on many sites used by adults, thus restricting anonymous speech and essentially converging—in terms of practical consequences—with the unconstitutional Children’s Online Protection Act (COPA), another 1998 law sometimes confused with COPPA;
• Burden the free speech rights of adolescents to speak freely on—or gather information from—legal and socially beneficial websites;
• Hamper routine and socially beneficial communication between adolescents and adults;
• Reduce, rather than enhance, the privacy of adolescents, parents and other adults because of the massive volume of personal information that would have to be collected about users for authentication purposes (likely including credit card data);

• Would likely be the subject of massive fraud or evasion since it is not always possible to definitively verify the parent-child relationship, or because the system could be “gamed” in other ways by determined adolescents;
• Do nothing to prevent offshore sites and services from operating outside these rules;
• Present major practical challenges for law enforcement officials in the face of such evasion by both domestic users and offshore sites;
• Could destroy opportunities for new or smaller website operators to break into the market and offer competing services and innovations, thus contributing to consolidation of online content and services by erecting barriers to entry; and
• Violate the Commerce Clause of the U.S. Constitution, since Internet activity clearly represents interstate commerce that states have no authority to regulate.

Today, the U.S. Department of Commerce’s National Telecommunications and Information Administration (NTIA) announced the members of the new Online Safety and Technology Working Group (OSTWG).  I am honored to be among those chosen to participate in this new task force and I look forward to continuing the work started last year with the Harvard Berkman Center’s Internet Safety Technical Task Force (ISTTF), which I also served on.   I was very proud of the work done by the ISTTF and the impressive final report that Prof. John Palfrey crafted to reflect our findings.  I am eager to investigate these issues further and take a look at the latest research and technologies that can help us better understand how to protect our kids online while also protecting the free speech and privacy rights of Netizens.

The new NTIA working group, which was established under the “Protecting Children in the 21st Century Act,” will report to the Assistant Secretary of Commerce for Communications and Information on industry-implemented online child safety tools and efforts. Within a year of convening its first meeting, the group will submit a report of its findings and make recommendations on how to increase online safety measures.

Below the fold I have listed the complete roster of OSTWG task force members.  I very much looking forward to working with this outstanding group.  And I’m happy to report that my TLF blogging colleague Braden Cox will be joining me on this task force!

Ms. Parry Aftab, WiredSafety Ms. Elizabeth Banker, Yahoo! Inc. Mr. Christopher Bubb, AOL Ms. Anne Collier, Net Family News, Inc./ConnectSafely.org Mr. Braden Cox, NetChoice Coalition Ms. Caroline Curtin, Microsoft Mr. Brian Cute, Afilias U.S.A. Mr. Jeremy Geigle, Arizona Family Council Ms. Marsali Hancock, Internet Keep Safe Coalition Mr. Michael Kaiser, National Cyber Security Alliance Mr. Christopher Kelly, Facebook Mr. Brian Knapp, Loopt, Inc. Mr. Timothy Lordan, Internet Education Foundation Mr. Larry Magid, SafeKids.com/ConnectSafely.org Mr. Brian Markwalter, Consumer Electronics Association Mr. Michael McKeehan, Verizon Communications, Inc. Dr. Samuel McQuade, III, Rochester Institute of Technology Ms. Orit Michiel, Motion Picture Association of America, Inc. Mr. John Morris, Center for Democracy & Technology Mr. Jonathon Nevett, Network Solutions, LLC Mr. Hemanshu Nigam, MySpace/Fox Interactive Media Ms. Jill Nissen, Ning, Inc. Mr. Jay Opperman, Comcast Corporation Mr. Kevin Rupy, United States Telecom Association Mr. John Shehan, National Center for Missing & Exploited Children Mr. K. Dane Snowden, CTIA – the Wireless Association Mr. Adam Thierer, Progress & Freedom Foundation Ms. Patricia Vance, Entertainment Software Rating Board Mr. Ralph Yarro, The CP80 Foundation

• denotes co-chairs of the task force

What would it take to create a more secure Internet?  That’s what John Markoff explores in his latest New York Times article, “Do We Need a New Internet?”  Echoing some of the same fears Jonathan Zittrain articulates in his new book The Future of the Internet, Markoff wonders if online viruses and other forms of malware have gotten so out-of-control that extreme measures may be necessary to save the Net.  Compared to when cyber-security attacks first started growing over 20 years ago, Markoff argues that:

[T]hings have gotten much, much worse. Bad enough that there is a growing belief among engineers and security experts that Internet security and privacy have become so maddeningly elusive that the only way to fix the problem is to start over.

Like many others, Markoff fingers anonymity as one potential culprit:

The Internet’s current design virtually guarantees anonymity to its users. (As a New Yorker cartoon noted some years ago, “On the Internet, nobody knows that you’re a dog.”) But that anonymity is now the most vexing challenge for law enforcement. An Internet attacker can route a connection through many countries to hide his location, which may be from an account in an Internet cafe purchased with a stolen credit card. “As soon as you start dealing with the public Internet, the whole notion of trust becomes a quagmire,” said Stefan Savage, an expert on computer security at the University of California, San Diego.

Consequently, Markoff suggests that:

A more secure network is one that would almost certainly offer less anonymity and privacy. That is likely to be the great tradeoff for the designers of the next Internet. One idea, for example, would be to require the equivalent of drivers’ licenses to permit someone to connect to a public computer network. But that runs against the deeply held libertarian ethos of the Internet.

Indeed, not only does it run counter to the ethos of the Net, but as Markoff rightly notes, “Proving identity is likely to remain remarkably difficult in a world where it is trivial to take over someone’s computer from half a world away and operate it as your own. As long as that remains true, building a completely trustable system will remain virtually impossible.”  I’ve spent a lot of time writing about that fact here and won’t belabor the point other than to say that efforts to eliminate anonymity for the entire Internet would prove extraordinarily intrusive and destructive — of both the Internet’s current architecture and the rights of its users.  There’s just something about a “show-us-you-papers,” national ID card-esque system of online identification that creeps most of us out. That’s why I spend so much time fighting age verification mandates for social networking sites and other websites; it’s the first step down a very dangerous road.

But what if we could apply such solutions in a narrower sense?  That is, could we create more secure communities within the overarching Internet superstructure that might provide greater security?  Markoff starts thinking along those lines when he suggests…

What a new Internet might look like is still widely debated, but one alternative would, in effect, create a “gated community” where users would give up their anonymity and certain freedoms in return for safety.

… but he is still thinking in terms of a replacement model for the entire Internet, which would be misguided for the reasons I stated above.  We don’t want to force a single, intrusive, anonymity-killing replacement model on the entire online universe.  Starting over isn’t even possible in a practical sense.

It’s a shame that Markoff didn’t interview my old colleague Wayne Crews for his story because Wayne has outlined an alternative framework worth considering. For many years, Wayne has been preaching about “spinternets,” or the notion that we need to start thinking about how develop not just one better Internet, but many better Internets. In a visionary piece for Forbes back in early 2001, Wayne argued that the solution to the growth of various online concerns “is more Internets, not more regulations”:

The Internet needs borders beyond which users can escape damaging political resolutions of these battles, which are rooted in the Internet’s nonowned, common-property status. Conflicting legislative visions in a cyberspace populated by exhibitionists at one extreme and would-be inhabitants of gated communities on the other, reveal the basic truth that not everybody wants or needs to be connected to everybody else.

Again, there’s that notion of “gated communities” that Markoff brought up. It’s not for everybody, but those seeking greater security could perhaps find it inside such online communities. Of course, others who wanted a different experience could start a completely different gated community under Wayne’s model.

But the problem with this notion, quite obviously, is that very few people want to stay inside their gated communities all the time. In the physical world of gated communities, for example, members of it still like to get out of there once and awhile to visit shops, events, parks, friends and family, etc.  The same goes for the Internet.  Just ask all those former denizens of AOL’s gated community.  For awhile, many of them — over 25 million strong at the zenith of its popularity — were content to spend most of their digital day inside the walls of Case’s Castle.  Gradually, however, they felt the need to explore outside those walls.  And so they did.  A mass exodus ensued and the walls came crumbling down around AOL’s gated community.

But that doesn’t necessarily mean the idea of online gated communities is entirely dead. There are certainly many closed, tightly-controlled networks out there already — mostly in corporate or government environments — that offer a glimpse of how such a model might work in practice.  Also, smaller social networking sites aimed at kids provide another example since they are usually tightly-controlled walled gardens that offer much greater security.

But Wayne was always thinking of something bigger — much bigger — than just closed corporate / government networks. He was thinking about a world of many different Internet s that didn’t necessarily have a back door to the broader Internet. Think of it as many parallel, but unconnected digital systems and networks, each serving a different set of values and cultures with unique rules.

Wayne envisioned the primary critique of this model in his original piece, noting that “it will be criticized as Balkanization.”  Indeed, Sonia Arrison called it “techno-isolationism, which goes against the very spirit that makes the Internet great.”  Indeed, it certainly would destroy something very precious about the current Internet — universal connectivity and openness.  But that’s sort of the point, isn’t it!  Universal connectivity and openness have given us many wonderful things, but some troubling things, too.  That’s what Markoff was getting at in his NYT piece, and it’s part of what Wayne was aiming to address with his splinternets idea.

But do we really want to encourage a world of multiple Internets where, presumably, they are split right down to the root? In other words, there wouldn’t be a common language for networks to communicate or a way to access many sites and services outside the particular Net you are on at any given time. It would be the equivalent of living on different digital planets that never linked or communicated.

I think it’s unlikely we’ll ever get there, and if we did it would likely be driven by global governments challenging ICANN and existing Internet governance structures. In other words, the DNS root would be completely split by some countries (China?) who didn’t want to play by the same rules as the rest of the interconnected world, or who wanted to try to impose a different vision upon a new, competing global network.

But might there be a way to find a happy middle ground between the Wild West commons of the current Net and the “techno-isolationism” of Wayne’s splinternet model?  Perhaps “Splinternet-lite” is the solution.  Within the confines of the existing Internet superstructure, there are ways to create walled gardens today and limit the number of back doors to the broader Net.  Again, the smaller social networking sites and virtual worlds aimed at kids already do that. Once you’re in there, you’re in a very different world. You have to be fully verified before you’re even let in the door, and once you’re inside their are tight limits on what you say, do, and explore. And you’ll get booted out pretty quickly if you break the rules.  The result is greater safety and peace-of-mind for kids and parents alike. It’s a less clear, however, how that model would “scale up” and apply to the entire universe of online networks.  I think we’ll have to be content with small patches of security within a world of insecurity. That’s the cost of the openness and interconnectivity that the Net current gives us.

In sum, there is no clear answer to John Markoff’s question, “Do we need a new Internet?”  We certainly could do more to address the problems with the current Net, but upending it and starting over isn’t likely an option.  More micro-splinternets within the overarching Net superstructure, however, might help those who are particularly risk-conscious find safe haven from various cyber-security fears. But it won’t shelter them from those problems completely.

This is just a listing of the installments of my ongoing “Media Deconsolidation Series.” I needed to create a single repository of all the essays so I could point back to them in future articles and papers. For those not familiar with it, this series represents an effort to set the record straight regarding the many myths surrounding the media marketplace. These myths are usually propagated by a group of radical anti-media regulatory activists who I call the “media reformistas.” Sadly, however, many policymakers, journalists, and members of the public are buying into some of these myths, too.

In particular, I have spent much time here debunking the notion that rampant consolidation is taking place and that media operators are only growing larger and devouring more and more companies. In fact, nothing could be further from the truth. Over the past several years, traditional media operators and sectors have been coming apart at the seams in the face of unprecedented innovation and competition. The volume of divestiture activity has been quite intense, and most traditional media operators have been getting smaller, not bigger. As a result, America’s media marketplace is growing more fragmented and atomistic with each passing day.

Anyway, here’s the series so far…

• Media Deconsolidation (Part 24): I Read the News Today, Oh Boy
• Media Deconsolidation (Part 23): Cox Selling Most of its Newspapers
• Media Deconsolidation (Part 22): TW spin-off of cable unit
• Media Deconsolidation (Part 21): TW spin-off of AOL
• Media Deconsolidation (Part 20): News Corp spins off 8 TV stations
• Media Deconsolidation (Part 19): IAC/Interactive Corp. divides by 5
• Media Deconsolidation (Part 18): Scripps Splits
• Media Deconsolidation (Part 17): Clear Channel Station Sell-off
• Media Deconsolidation (Part 16): Clear Channel Crackup
• Media Deconsolidation (Part 15): AOL-TW Divorce Near?
• Media Deconsolidation, Part 14: Time Warner Without Time?
• Media Deconsolidation, Part 13: Tribune Considering Major Downsizing
• Media Deconsolidation, Part 12: Time Warner President Calls Synergy “Bull—t”
• Media Deconsolidation, Part 11: Knight Ridder’s Coming Crackup
• Media Deconsolidation, Part 10: Viacom’s Breakup Official
• Media Deconsolidation, Part 9: Viacom’s Split
• Media Deconsolidation, Part 8: Time Warner Spin Off of AOL Likely
• Media Deconsolidation, Parts 6 & 7: Emmis & Disney Divestitures
• Media Deconsolidation, Part 5: “Clear Channel to Dismantle Media Empire”
• Media Deconsolidation, Part 4: Is News Corp. Next to Downsize?
• Still More on Media Deconsolidation
• More on Media (De)Consolidation
• Stop This Insane Media De-Consolidation!

Related reading:

• What the Media Reformistas Really Want
• Your Soapbox is My Soapbox! Thoughts on the Media Access Movement
• BOOK: Media Myths: Making Sense of the Debate over Media Ownership (2005)
• SPECIAL REPORT: Media Metrics: The True State of the Modern Media Marketplace (2008)
• BOOK:  A Manifesto for Media Freedom (with Brian Anderson, 2008).

Sorry if it seems like I am beating a dead horse here, but the folks at the City Journal asked me a pen a review of Jonathan Zittrain’s new book, The Future of the Internet and How to Stop It.  Faithful readers here will no doubt remember that I have already penned a review of the book and several follow-up essays. (Part 1, 2, 3, 4). I swear I am not picking on Jonathan, but his book is probably the most important technology policy book of the year–Nick Carr’s Big Switch would be a close second–and deserves attention.  Specifically, I think it deserves attention because I believe that Jonathan’s provocative thesis is wildly out of touch with reality.  As I state in the City Journal review of his book:

[C]ontrary to what Zittrain would have us believe, reports of the Internet’s death have been greatly exaggerated. […] Not only is the Net not dying, but there are signs that digital generativity and online openness are thriving as never before. […] Essentially, Zittrain creates a false choice regarding the digital future we face. He doesn’t seem to believe that a hybrid future is possible or desirable. In reality, however, we can have a world full of some tethered appliances or even semi-closed networks that also includes generative gadgets and open networks. After all, millions of us love our iPhones and TiVos, but we also take full advantage of the countless other open networks and devices at our disposal. […]

Further, while it’s true that the creators of iPhone and TiVo maintain a high degree of control over the guts of the devices or their operating systems, the technologies themselves are hardly sterile or non-generative. In fact, these devices have amazing uses, and they have both recently become more open to third-party add-ons and applications. Geeks who demand still more are also hacking away at these and other digital devices to get them to do everything but wash their dishes.Most of us want networks and digital devices that work.

Zittrain, by contrast, seems to long for the era when we all had to load floppy disks into our PCs each morning to get our operating systems running. But those were hardly the good old days. Device makers realized that only techno-geeks would tolerate such hassles, and so our PCs and phones now come with more software and services built in to make our lives easier. Nothing stands in the way of those who still prefer the rugged individualist approach to conquering cyber-frontiers and digital devices. But what Zittrain does in The Future of the Internet is generalize his personal preferences to the whole of cyber-society. What’s good for the ivory-tower digerati may not be what the rest of us want or need.

If you are interested you can read the entire review here.  Again, I encourage you to read Zittrain’s entire book and decide for yourself if my critique is unfair.  Despite my criticisms, it’s a very well-written and interesting book.  As with everything Jonathan does, he has a special gift for making nerdy tech policy issues both interesting and entertaining.

By Berin Szoka & Adam Thierer

As we noted in our intro to this ongoing series, Google’s tenth anniversary has passed with Googlephobia reaching new heights of hysteria.

But is Google really too big and dangerous, or are people just too lazy to find other alternatives to each of the wonderful services that Google offers?  If one is truly paranoid about the firm’s supposed dominance, it doesn’t take much effort to live a Google-free life. To prove it, we set out to find alternatives to each of the services that Google provides.  After awhile, we got a little tired of compiling alternatives in each category and just provided links for the additional choices at your disposal.  It’s tough to see what the fuss is about with the cornucopia of choices at our disposal.  If you don’t like Google, then just don’t use it or any of its services.  The choice is yours.

In each case, we’ve listed Google first, even though Google may not be the market leader ( e.g., Google’s relatively unknown social network Orkut).

Search Engines

• Google
• Microsoft Live Search
• Yahoo!
• Ask.com
• AltaVista
• Cuil
• others: en.wikipedia.org/wiki/List_of_search_engines

eMail

• Google Gmail
• MSN Hotmail
• Apple .Mac/MobileMe
• Yahoo!
• AOL
• others: www.emailaddresses.com/email_web.htm

Encyclopedia

• Knol (Google)
• Wikipedia
• Citizendium
• Microsoft Encarta
• Britannica Online
• World Book Online
• others: www.surfnetkids.com/encyclopedia.htm

Instant Messaging

• Google Talk
• Yahoo Messenger
• Windows Live Messenger (Microsoft)
• AOL AIM
• Jabber
• others: en.wikipedia.org/wiki/Instant_messaging#User_base

Web Browsers

• Chrome (Google)
• Firefox (Mozilla Foundation)
• Internet Explorer (Microsoft)
• Safari (Apple)
• Opera
• Flock
• others: en.wikipedia.org/wiki/List_of_web_browsers

Social Networks

• Orkut (Google) – (not popular in the U.S.)
• Facebook
• Myspace
• Bebo
• LinkedIn
• Friendster
• LiveJournal
• others: en.wikipedia.org/wiki/List_of_Social_network_service

Mapping

• Google Maps
• Microsoft Live Search Maps
• MapQuest
• WikiMapia
• Google Earth
• Virtual Earth (Microsoft)
• others: en.wikipedia.org/wiki/List_of_online_map_services

Mobile Search / Portal Services

• Google mobile
• Yahoo! mobile
• Microsoft Windows mobile & Mobile Live Search
• AOL Mobile

Video Hosting

• YouTube (Google)
• Google Video
• Flickr (Yahoo!)
• Yahoo Video
• Vimeo
• Photobucket
• BlipTV
• others: en.wikipedia.org/wiki/List_of_video_sharing_websites

Photohosting

• Picasa (Google)
• Flickr (Yahoo!)
• Apple .Mac/MobileMe
• Photobucket
• Snapfish
• Shutterfly
• Imageshack
• AOL Pictures
• others: en.wikipedia.org/wiki/Photo_sharing#Online_photo_sharing_websites

Document / Spreadsheet Creation

• Google Docs
• Microsoft Office
• OpenOffice
• ThinkFree Office
• EditGrid
• NumSum
• Zoho Sheet
• Zoho Writer
• ajaxWrite
• Glide Write
• others: www.editgrid.com/user/siulung/Web-based_Spreadsheets_Comparison_Matrix

Online File Storage

• Google Docs
• Windows Live SkyDrive (Microsoft)
• Apple .Mac/MobileMe
• Mozy
• Buzzword (Adobe)
• Xdrive
• Box.net
• others: http://www.listible.com/list/online-file-storage

Blog hosting services

• Blogger (Google)
• Wordpress
• Windows Live Spaces (Microsoft)
• Skyrock (based in France, but bigger than WordPress and almost as big as Blogger)
• LiveJournal
• Note: many social networking services also have a blogging component
• others: http://en.wikipedia.org/wiki/Blog_hosting_service#Developer-hosted

RSS blog feed aggregators

• Google Reader
• My MSN
• My Yahoo!
• NewsGator Online
• Bloglines
• FeedBucket
• others: dmoz.org/Computers/Software/Internet/Clients/WWW/Feed_Readers/Web_Based
• others: www.newsonfeeds.com/faq/aggregators

WebClipping Services

• Google Notebook
• Digg
• Del.icio.us (Yahoo)
• Reddit
• Clipmarks
• Zotero
• WebResearch
• ScrapBook
• Diigo

News Aggregators

• Google News
• Yahoo News
• MSN News & MSNBC (Microsoft)
• News Directory.com
• Reuters
• CNN.com
• Digg
• Topix
• others: news.nettop20.com
• others: newsonfeeds.com/faq/aggregators

Calendar Services

• Google Calendar
• Microsoft Outlook
• Lotus Notes
• Lightning/Sunbird (Mozilla Foundation)
• Apple .Mac/MobileMe
• others: www.calendarzone.com

Over on Techdirt, Mike Masnick discusses an interesting new survey that highlights the sharp disconnect between how much we claim privacy matters to us and how far we’re willing to go to safeguard it. America Online polled 1,000 users in the United Kingdom, and the results further reinforce what other recent studies have suggested:

The study found 84% of users say they carefully guard their info online — but when tested, 89% of people actually did give away info in the same exact survey.

The AOL survey brings to mind security guru Bruce Schneier’s insightful quip on privacy from back in 2001:

If McDonald’s in the United States would give away a free hamburger for a DNA sample they would be handing out free lunches around the clock. So people care about their privacy, but they don’t care to pay for it.

When presented with the option of sacrificing a bit of privacy for something of value, like a chocolate bar or a free gift certificate, many users are surprisingly willing to dole out data to third parties for commercial use. And the value of personal details to marketers is massive. As social networking sites and ad-serving networks amass ever greater knowledge of our hobbies, political views, and even our favorite music, these sites are getting better at mining data to tailor ads with pinpoint precision, commanding high click rates while sustaining server farms and original content publishers.

Online ads are often irrelevant, and sometimes even downright annoying, but they don’t have to be. Just ask my colleague Christine Hall, who recently discovered a new band thanks to a Facebook ad that was presumably targeted to her individual preferences:

You see, I’m on Facebook. As I surf around on the site, little targeted ads appear on the left side of the screen. Clearly the ads are accessing, directly or indirectly, information I’ve shared with Facebook – even information that I’ve made “private” from regular viewing. The ads I usually get reference my age or the fact that I am married, but they are generally useless – ‘you’re married? click on this link to win $500.’ Riiiiggghhht. Well, finally, one of these ads caught my interest and attention! It was an ad for a band…one I discovered I actually like – Velvet Code! I surmise that the band submitted an ad to Facebook with a search criteria that included “goofy people who fancy electronic music,” because, well, it found me.

Of course, finding a desirable new product via an ad isn’t quite the same as receiving a free chocolate bar in exchange for personal data. Still, it’s a sign that in the future, we may start to realize more concrete benefits made possible by “smart” ads.

Many people rightly value privacy, but it doesn’t exist in a vacuum. There are often tradeoffs between privacy and targeted marketing, and we often underestimate the importance of advertising as a vehicle for wealth creation in the online world.