The FCC appears to be dragging the TV industry, which is increasingly app- and Internet-based, into years of rulemakings, unnecessary standards development and oversight, and drawn-out lawsuits. The FCC hasn’t made a final decision but the general outline is pretty clear. T he FCC wants to use a 20 year-old piece of corporate welfare, calculated to help a now-dead electronics retailer, as authority to regulate today’s TV apps and their licensing terms. Perhaps they’ll succeed in expanding their authority over set top boxes and TV apps. But as TV is being revolutionized by the Internet the legacy providers are trying to stay ahead of the new players (Netflix, Amazon, Layer 3), regulating TV apps and boxes will likely impede the competitive process and distract the FCC from more pressing matters, like spectrum and infrastructure.

In the 1996 Telecom Act, a provision was added about set top boxes sold by cable and satellite companies. In the FCC’s words, Section 629 charges the FCC “to assure the commercial availability of devices that consumers use to access multichannel video programming.”  The law adds that such devices, boxes, and equipment must be from “manufacturers, retailers, and other vendors not affiliated with any multichannel video programming distributor.” In English: Congress wants to ensure that consumers can gain access to TV programming via devices sold by parties other than cable and satellite TV companies.

The FCC’s major effort to effect this this law did not end well. To create a market for “non-affiliated equipment,” the FCC created rules in 1998 that established the CableCARD technology, a module designed to the FCC’s specifications that could be inserted into “nonaffiliated” set top boxes.

CableCARD was developed and released to consumers, but after years of complex lawsuits and technology dead ends, cable technology had advanced and few consumers demanded CableCARD devices. The results reveal the limits of lawmaker-designed “competition.” In 2010, 14 years after passage of the law and all those years of agency resources, fewer than 1% of pay-TV customers had “unaffiliated” set top boxes.

It’s a strangely specific statute with no analogues for other technology devices. Why was this law created? Multichannel News reporting in 1998, representative of other reports at the time, has some clues.

[Rep.] Bliley, whose district includes the headquarters of electronics retailer Circuit City, sponsored the provision that requires the FCC to adopt rules to promote the retail sale of cable set-top boxes and navigation devices. 

So it it was a small addition to the Act, presumably added at the behest of Circuit City, so that electronics retailers and device companies could sell more consumer devices.

The good news is that by the law’s straightforward terms and intent, mission: accomplished. Despite CableCARD’s failure, electronics retailers today are selling devices that give consumers access to TV programming. That’s because, increasingly, TV providers are letting their apps do much of the work that set top boxes do. Today, many consumers can watch TV programming by installing a provider’s streaming TV app on their device of their choice, manufactured and sold by dozens of companies, like Samsung, Apple, and Google, and retailers. Unfortunately, Circuit City shuttered its last stores in 2009 and wasn’t around to benefit.

But the new FCC proposal says, no, mission: not accomplished. There’s some interpretative gymnastics to reach this conclusion. The FCC says “devices” and “equipment” should be interpreted broadly in order to capture apps made by pay-TV providers. Yet, while “devices and equipment” is broad enough to capture software like apps, it is not broad enough to capture actual devices and equipment, like smartphones, smart TVs, tablets, computers, and Chromecasts that consumers use to access pay-TV programming.

This strained reading of statutory language will create a regulatory mess out of the evolving pay-TV industry, that already has labyrinthine regulations.

But if you look at the history of FCC regulation, and TV regulation in particular, it’s pretty unexceptional. Advocates for FCC regulation have long seen a competitive and vibrant TV marketplace as a threat to the agency’s authority.

As former FCC chairman Newton Minow warned in his 1995 book, Abandoned in the Wasteland, the FCC would lose its ability to regulate TV if it didn’t find new justifications:

A television system with hundreds or thousands of channels—especially channels that people pay to watch—not only destroys the notion of channel scarcity upon which the public-trustee theory rests but simultaneously breathes life and logic into the libertarian model.

Minow advocated, therefore, that the FCC needed to find alternative reasons to retain some control of the TV industry, including affordability, social inclusiveness, education of youth, and elimination of violence. Special interests have manufactured a crisis in TV–“monopoly control” [sic] of set top boxes by TV distributors. As Scott Wallsten and others have suggested, bundling a set top box with a TV subscription is likely not a competitive problem and the FCC’s remedies are unlikely to work. 

The FCC’s blinkered view of the TV industry is necessary because the US TV and media marketplace is blossoming. Consumers have never had more access to programming on more devices. More than 100 standalone streaming video-on-demand products launched in 2015 alone. T he major TV providers are going where consumers are and launching their own streaming apps. The market won’t develop perfectly to the Commissioners’ liking and there will be hiccups, but competition is vigorous, output and quality are high, and consumers are benefiting.

The FCC decision to devote its highly-educated agency staff and resources (which will balloon when challenged in court or during the app specification proceedings) to an arcane consumer issue with such cynical origins is a lamentable waste of agency resources.

This an agency that for decades has done a hundred things poorly. In an increasingly competitive telecom and media marketplace, it should instead do a handful of things well. (Commissioner Pai has proposed useful infrastructure reforms and Commissioner Rosenworcel has an interesting proposal, that I’ve written about, to deploy federal spectrum into commercial markets). Let’s hope the agency leadership reassesses the necessity the this proceeding before dragging the TV industry into another wild goose chase.

Related research: This week Mercatus released a paper by MA Economics Fellow Joe Kane and me about the FCC’s reinvention as a social and cultural regulator: “The FCC and Quasi–Common Carriage A Case Study of Agency Survival.”

For decades Congress has gradually deregulated communications and media. This poses a significant threat to the FCC’s jurisdiction because it is the primary regulator of communications and media. The current FCC, exhibiting alarming mission creep, has started importing its legacy regulations to the online world, like Title II common carrier regulations for Internet providers. The FCC’s recent proposal to “open up” TV set top boxes is consistent with the FCC’s reinvention as the US Internet regulator, and now the White House has supported that push.

There are a lot of issues with the set top box proposal but I’ll highlight a few. I really don’t even like referring to it as “the set top box proposal” because the proposal is really aimed at the future of TV–video viewing via apps and connected devices. STBs are a sideshow and mostly just provide the FCC a statutory hook to regulate TV apps. Even that “hook” is dubious–the FCC arbitrarily classifies apps and software as “navigation devices” but concludes that actual TV devices like Chromecast, Roku, smartphones, and tablets aren’t navigation devices. And, despite what activists say, this isn’t about “cable” either but all TV distributors (“MVPDs”) like satellite and telephone companies and Google Fiber, most of whom are small TV players.

First, the entire push for the proposal is based on the baseless notion that “charging monthly STB fees reveals that cable companies are abusing their market power.” I say baseless because cable companies have lost 14 million TV subscribers since 2002 to phone and satellite companies’ TV offerings (Verizon FiOS TV, Dish, Google Fiber, etc.), which suggests cable doesn’t have market power to charge anticompetitive prices. This is bolstered by the fact that the rates cable companies charge are consistent with what their smaller phone and satellite competitors charge for STBs. In fact, the STB monthly rates cable companies charge are pretty much identical to what municipal-owned and -operated TV stations charge. Even competing STB companies like TiVo charge monthly fees.

Second, as I’ve written, the FCC’s plans simply won’t work. The FCC tried “opening up” cable boxes for years with CableCard. That debacle resulted in ten years of regulations and FCC-directed standards and had only a marginal effect on the STB market. At conclusion, under 5% of the STB market went to “competitive” STB makers like TiVo. This latest plan has an even smaller chance of success because the FCC is not simply regulating cable boxes, but also boxes from satellite TV and IPTV distributors and their apps. The FCC is telling these hundreds of companies using dozens of technologies, codecs, and standards to develop interoperable standards so that other companies can retransmit the TV programming the MVPDs have bundled. It’s impractical and likely to fail, as Larry Downes noted in Recode, which is why the FCC provides few details about how this will work.

Third, what little progress the FCC does make in forcing MVPDs to make their TV programming accessible to competitors’ video apps and devices will tend to make broadband and TV less competitive. What the FCC is trying to do is force, say, Comcast’s TV programming to be available to certain application makers who want to retransmit that programming. So whatever streams to the Comcast Xfinity app will need to also work on competing apps if a competitor wants to re-bundle that programming.

The problem is that TV packages are how these companies compete and FCC rules will hinder that competitive process. TV distributors, including Netflix, purchase rights for sports and other programming to steal subscribers away from competitors. For instance, DirecTV attracts many customers solely because they have NFL Sunday Ticket and Amazon and Netflix original programming is a huge draw to their video services. TV programming and bundling that programming drives the competitive process. The Google Fiber folks likewise found out the importance of TV programming to compete. They planned originally to offer only broadband but came to find out there was little market for a broadband-only provider. Most people want TV packaged with broadband and Google was compelled by market forces to go out and purchase TV programming to attract customers. (On the other hand, some cable companies like Cable One are getting out of the TV game because programmers have significant leverage.)

Even non-MVPDs like mobile carriers and tech companies, including Twitter, Yahoo, and Facebook, are using TV programming to compete and they are investing big into video programming. Verizon Wireless has exclusive NFL programming, T-Mobile recently gave its subscribers a year of streaming access to most baseball games via a MLB.TV deal, and AT&T is giving mobile subscribers access to DirecTV programming. The point is, companies compete by experimenting with different service and program bundles. By forcing programming onto competing applications, devices, and platforms, the FCC short-circuits these competitive dynamics.

Fourth, speaking of purchasing rights, there is misinformation spreading about what TV access consumers are entitled to. For instance, there’s a recent Public Knowledge post that simply distorts the economics and law of TV licensing. Notably, the post says the FCC’s proposal “makes it easier for subscribers to control their own experience when accessing the programming that they…have paid for and to which they have lawful access.” This is simply false. Just because Walking Dead has been licensed for viewing on your television does not mean it’s lawful (or beneficial) for a TV competitor to take that same programming and send it to you via their own app.

Copyright holders re-sell the same programming to different distributors, sometimes several times over. Programmers have exclusive licensing deals with various distributors and device makers, so just because your cable contract allows you to watch it on your TV does not mean you have lawful access anywhere. For instance, the NFL has licensed Thursday Night NFL games to CBS and NBC for broadcast TV viewing, to the NFL Network for cable TV viewing, to Verizon Wireless for smartphone viewing, and to Twitter for computer viewing. Same programming, four different distribution technologies and five different companies. When programming can be easily repurposed, as the FCC would like, that upends entire business models of hundreds of media companies and distributors.

Further, it injects the FCC into copyright licensing issues. Put aside for the moment the debates, that the Public Knowledge post touches on, whether copyright holders are too restrictive. Whatever your views, reforming program licensing should come from Congress and the courts–not the FCC through this convoluted proposal. In fact, change via the courts is what Public Knowledge implicitly endorses. It was the courts–not the FCC–that made VCRs, DVRs, and DVR cloud storage legal in the face of copyright holder opposition. When the FCC last got involved in intervening in TV rights assignments in the 1960s and 1970s, the agency created broadcast retransmission rights, which have plagued communications and copyright law with complexity and lawsuits to this day.

Quite simply, the FCC is coercing companies to make their contracted-for TV content available to others who didn’t contract for it. This proposal will create a mess in television when implemented. It’s an unnecessary intervention into a marketplace–video programming–that is working. We are in what many media critics regard as the Golden Age of Television. That’s because there are so many TV distributors competing for programming. It’s a sellers’ market. The supposed problems here–high STB prices and copyright restrictiveness–are problems for competition agencies and the courts, respectively, not the FCC. The FCC wants to fix what’s not broken and start regulating apps and online video. It does nothing to improve the television market and simply makes more tech and media companies dependent on the FCC’s good graces for competitive survival.

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]

Today the Federal Trade Commission released a new report entitled, “Mobile Apps for Kids: Current Privacy Disclosures Are Disappointing,” which concludes that “confusing and hard-to-find disclosures do not give parents the control that they need in this area. The FTC argues that “parents need consistent, easily accessible, and recognizable disclosures regarding in-app purchase capabilities so that they can make informed decisions about whether to allow their children to use apps with such capabilities.”

It’s hard to be against the FTC’s “the more disclosure, the better” policy recommendation and I’m not about to come out against it here. But the question is: how much disclosure is enough? Reading through the report and seeing how hard the FTC hammers this point home makes me think the agency wants our app store checkout process to be littered with the pages of fine print disclosure policies that now accompany our credit card statements and home mortgage payments! Seriously, would that make us better off?

As a parent of two kids who both download countless apps on my Android phone, my wife’s iPhone, and our family’s Android tablet, I appreciate a certain amount of disclosure about what sort of information apps are collecting and how they are using it. I think Google’s Android marketplace strikes a nice balance here, providing us with the most crucial facts about what the application will access or share. Apple could do more on disclosure but the company also prides itself (to the dismay of some!) on its rigorous pre-screening process to make sure the apps in the App Store are safe and don’t violate certain privacy and security policies. Yet, as the FTC correctly points out, “the details of this screening process are not clear.” Of course, most Apple users simply don’t give a damn. They’re all too happy to let Apple just take care of it for them even if they’re not really sure what’s happening to their data behind the scenes. The more privacy-sensitive crowd wants greater disclosure and control, of course, and I’m sympathetic to that plea.  But again, how much disclosure is enough? Are you going to wade through pages of disclosure policies and privacy opt-ins before downloading that latest iteration of “Angry Birds” or “Cut the Rope”? Yeah, I didn’t think so.

Anyway, I don’t want to dwell on that. The more interested findings in the survey relate to price and market dynamics and I am hoping people don’t ignore them. After surveying the price of kids’ apps available in the Android Market and Apple App Store, the agency found that, “While prices ranged from free to $9.99, most of the 960 app store promotion pages listed a price of $0.99 or less. Indeed, 77% of the apps in the survey listed an install price of $0.99 or less, and 48% were free.  Free apps appeared to be the most frequently downloaded.” Here’s the pricing breakdown for both Android and Apple:

Folks, these are astonishing numbers. Almost 100% of the most downloaded kids apps in the Android Market are free… as in ZERO dollars and ZERO cents! And while Apple App Store prices tend to be a bit higher, 93% of apps are $2 or less.  This is one of the great consumer success stories of our time. Consumer welfare is vastly enhanced by the presence of hundred of kids apps that serve almost every interest and desire under the sun, and all for less than what you’d pay for a cup of coffee or a gallon of gas.

But wait, there’s more!!

This incredible success story is even more remarkable because of what the FTC finds next about market structure:

Staff found that hundreds of developers were responsible for the apps in the study. Staff encountered 441 unique developers in this study, only twelve of which had apps on both platforms. Only a handful of app developers were responsible for more than 10 apps in our sample. Developers with one app in our sample were popular, accounting for about 50% of all downloads/feedback ratings, even though they were responsible for only about 30% of the apps. In contrast, those developers with more than 10 apps in our sample accounted for about 1% of the feedback ratings for Apple, (and 20% of the downloads for Android) despite accounting for about 20% of all of the apps in the survey. This finding illustrates the broad and diverse nature of the mobile app marketplace.

“Broad and diverse marketplace,” you say?  That might be the understatement of the year!  I challenge you to find another part of not just our online ecosystem but indeed our entire economy that is this broad, diverse, innovate, competitive, and inexpensive.  I’m not sure that such a radically atomistic, mom-and-pop marketplace of entrepreneurs can last forever, but let’s pause and appreciate the fact that it does exist today.

Now, here’s the really interesting part of this story: This is generally what the world of kids’ online services looked like back in the late 1990s as well. It was incredibly diverse with lots of small mom-and-pop sites catering to kids and parents, often at no charge. And then along came COPPA. [Background here for those who are not familiar.] While COPPA helped address the legitimate problems a small handful of bad apples out there at the time created, it also raised serious compliance costs for that entire sector, including the many smaller mom-and-pop sites. In a letter send to the FTC back in 2005, child safety advocate Parry Aftab claimed that, “The cost of obtaining verifiable parental consent for interactive communications is very high, estimated at more than $45 per child, and even at that price difficult to obtain.” I have no idea how accurate that number was then (I think that was way too high of an estimate), or what the compliance cost per child was in the late 1990s, but let’s be conservative and say it was much smaller, perhaps less that a few bucks per child verified under COPPA.  And let’s assume that if we extended COPPA-like regulatory requirements to app stores that there would be some compliance cost. Again, even if the compliance cost was only a buck per kid, can you see how it devastating that would be to all the small mom-and-pop app developers out there who currently only get a dollar or two for their apps (assuming they charge anything at all)? Yes, it’s true that some of them use ads to offset their costs, but those ads have to pick up the tab for all their labor and development costs.  If you add new regulatory compliance costs to the mix, those mom-and-pop developers will be hit very hard. And then we will have far fewer of them. And the ones that remain will likely charge us more than the couple of bucks we pay per app today.

Further, even if the compliance cost per child gets down to a few cents (or tens of cents) per kid for large operators, it’s probably much higher for smaller operators. In other words, most of the costs here are fixed (hiring an extra employee, having lawyers review your policy, etc.), not marginal (the cost of verifying each additional kid), so it’s really hard to say what the real costs are. And with Apple and Google also taking a cut of the apps sold in the market, you really begin to see how adding on any additional compliance costs could hit the bottom lines of smaller app developers in a big way. When margins are this thin, burdensome regulatory mandates hurt even more. And sometimes they can drive you right out of business.

Which brings us back to the FTC’s role here. It’s clear that the consumer protection side of the agency has an important role to play here when it comes to ensuring consumers are better informed about data collection practices and corresponding privacy issues. But let’s not forget that the FTC was originally created as a competition agency. It’s supposed to care about market structure, competition, and consumer welfare. So, I wonder… are the folks in the FTC’s Bureau of Economics paying any attention to what their colleague are doing here? Because if we start layering on privacy regulations, all the good intentions in the world won’t be able to hold back the likely contraction and consolidation of this vibrant industry that will take place as small mom-and-pops struggle to absorb new regulatory burdens and compliance costs.

Something to think about before regulatory intervention drives up consumers prices and drives out of the market the countless entrepreneurs that make this sector so exciting–especially for parents and kids.

I posted a rant here over the weekend about those who were engaging in what I believed was excessive whining about Apple’s moves to restrict pornographic content in the Apple Apps Store. (see: “Apple’s App Store, Porn & ‘Censorship‘”) It received a surprising number of comments and featured a back and forth between me and our old TLF blogging colleague Tim Lee. Tim has continued the discussion over on his personal blog and argued that:

[T]he key thing to focus on isn’t the abstract question of whether porn on iPhones is good or bad. The key thing to recognize is how fundamentally broken the process itself is. “Overtly sexual content” is a concept that seems clear in the abstract but gets leaky once you have to actually classify tens of thousands of applications. Apple is going to make mistakes, and when they do hapless developers are going to find their apps blocked, often with little explanation or recourse. Also, Apple is going to change its mind periodically, and when they do the affected developers are going to find their hard-earned apps rendered worthless overnight. This is no way to run a technology platform. It’s unfair to developers and it doesn’t scale. And this is precisely why it would be better for everyone if Apple could come up with an application distribution scheme that didn’t require so much central planning.

I followed up with a comment over there, but just thought I would repost it here, in which I argue that Tim is underestimating how difficult this task of defining acceptable content is and that he is also downplaying Apple’s legitimate editorial discretion to establish standards for the community platform they provide. I’m also uncomfortable with Tim’s constant use of “central planning” rhetoric to describe almost any private, proprietary model of institutional governance or platform development he doesn’t seem to agree with, but I have not elaborated on that point here. Anyway, here’s how I responded over on his blog:

So, when you say “Apple could come up with an application distribution scheme that didn’t require so much central planning,” what exactly does that mean? Apple already has Terms of Service, but there are ALWAYS going to be things in ANY terms of service that are fuzzy. “Security,” “stability,” “safety,” etc.. these are not exercises in exact science. So what would you have Apple do in this case?

How about this: “Penetration-based sexual images, videos, and applications shall not be allowed in the Apple Apps Store.” That seems like a pretty easy rule and fairly unambiguous. But everything after hard-core porn gets more and more difficult to define. What about an app that is just completely naked women pole-dancing? It’s not hard-core porn, but I bet Apple would want to keep it off their platform. Writing a rule that covers that but not a Sports Illustrated Swimsuit Edition app might be challenging.

The point here is that (a) crafting terms of service for acceptable content/conduct on media/communications platforms is always difficult, but (b) Apple and others should have the editorial discretion to do so. If customers don’t like it, they can (and do) complain vociferously. And sometimes companies change their editorial approach in response to such complaints. Other times, however, they will be under just as much pressure from other forces to to the exact opposite.

So, when you say: “The key thing to recognize is how fundamentally broken the process itself is,” you seem to fail to appreciate how this process is pretty damn challenging for any platform developer. The only way this becomes “easy” is if the platform owner just takes any and all content people throw at them. Libertarian-minded people like the two of us probably wouldn’t mind that. But the community of interests that Apple serves is broad and diverse. They are in the same boat as a traditional newspaper editor or broadcaster who was trying to juggle a lot of interests at once and inevitably making some folks unhappy in the process. But that doesn’t mean the process is “broken”; it just means it is difficult.

Apple should be more transparent about what they do and do not allow in the Apps Store and strive for brighter line rules. But even as they do, some folks will still complain. And, luckily, there’s always another place to go for service.

Tim Wu: Not Looking Happy about Being So Wrong

Three years ago this month, Columbia University Law School professor Tim Wu released a controversial white paper in conjunction with the New America Foundation entitled, “Wireless Net Neutrality: Cellular Carterfone and Consumer Choice in Mobile Broadband.” It contained a litany of accusations regarding supposed corporate shenanigans in the mobile marketplace, including: intentional crippling of features and functionality; refusal to allow 3rd party attachments or intentional curtailment of a market for 3rd party application developers; and various concerns about “discrimination” of one sort or another.

Here at the TLF, we responded quite forcefully. I think every one of us piled on this study in one way or another. (ex: Hance, Jerry, James, Tim Lee, me x 2, + a podcast).  I called his proposal “a declaration of surrender” since Prof. Wu was essential calling the game early and raising the white flag on mobile competition. Further, I argued he was essentially asking for “the forced commoditization of cellular networks” which “would necessitate at return to the rate-of-return regulatory methods of the past.”  Others were a bit more kind to him, but we were all pretty skeptical of his gloomy claims. However, each of us here also argued that the wireless market (especially the applications side of the market) was still developing and that we’d have to check back in a few years to see how well the hands-off approach worked out.

Well, thankfully, we now know for certain that Tim Wu’s was much too lugubrious in his outlook and far too quick to call for regulatory intervention to solve a non-crisis. On the occasion of the 3rd anniversary of the release of Prof. Wu’s paper, CTIA-The Wireless Association filed a short paper with the FCC taking stock of just how far the mobile marketplace has come in just three short years. The results are really quite remarkable, as CTIA’s letter notes:

Contrary to the professor’s view of how the ecosystem would evolve, in the absence of regulation, every element of the wireless ecosystem has expanded. Today, the fact that there are over six hundred devices in the U.S. offering hundreds of different capabilities for consumers, over 170,000 applications, more open networks with open developer initiatives and software development kits, the sale of phones through numerous online and retail outlets, multiple operating systems, and the launch of the newest and most innovative handsets first in the United States demonstrates that the mobile wireless ecosystem continues to evolve to serve customers, contrary to Professor Wu’s arguments.

The filing goes on to examine each of the complaints Prof. Wu had articulated and then discusses current marketplace realities. Here’s the summary:

• Professor Wu asserted that carriers had a “near lock” on the retailing of mobile devices that, presumably, would only be altered through regulatory intervention. Today, consumers can purchase handsets from carriers, directly from manufacturers, through brick-and-mortar retail chains, via Internet discounters, and through a healthy secondary market. For example, Best Buy, Target, Wal-Mart, TigerDirect.com, Amazon.com, LetsTalk.com, Apple, Nokia, Google, Motorola and many others all sell handsets directly to consumers. The recent Best Buy catalog alone lists over a hundred wireless devices for sale. • Professor Wu argued that the U.S. market had only “a small fraction of the phones available [elsewhere],” implying that carriers restricted the diversity of handsets. Today, the U.S. market has over 630 devices manufactured by 33 different companies, including the BlackBerry® Tour 9630, Samsung Omnia, HTC TouchPro, Motorola Droid, Apple  iPhone 3GS, Motorola Karma QA1, BlackBerry® Bold, Motorola Cliq, myTouch 3G, G1, BlackBerry® Pearl Flip, HTC Touch Pro2, Palm Pre, HTC Hero, Samsung Instinct S30, Cricket TXTM8, Motorola Evoke QA4, Samsung JetSet, Motorola Hint, Samsung Finesse, Samsung Messager, LG Tritan, Samsung TwoStep, and the LG Rhythm. Of note, almost every one of the phones listed above was first launched in the United States. • Professor Wu painted a picture of a “stalled” application market where developers were unable to create applications for mobile devices. Today, a vibrant “apps” market exists where over 170,000 applications are available for popular operating systems, and where developers as young as age 9 can navigate the approval process to become highly successful. At least seven different companies, none of whom are affiliated with wireless carriers, market the overwhelming majority of these applications. • Professor Wu criticized carriers’ control over handset design. Today, all major carriers, and most of the other carriers in the country, have extensive open network development platforms for devices and software. Intra-industry groups have developed the Open Handset Alliance (which has created the Android operating system), and several other operating systems have moved to an open platform. Additionally, as discussed above, numerous handset manufacturers are selling directly to consumers. • Professor Wu stated that the “oligopoly” in handset sales resulted in a market where consumer-friendly capabilities, such as Bluetooth, Wi-Fi, and picture distribution, were “crippled.” Today, all of these capabilities, and hundreds more that reflect a broad array of consumer desires, are available to U.S. consumers. With the wealth of options, consumers can make buying decisions based on a range of factors. This is exactly the market that consumers want, and regulators should encourage.

Now, I’m sure some folks will say, “hey, we can’t trust industry to report on this stuff,” but these are facts, folks. CTIA hasn’t made anything up here. If anything, I think they’ve actually gone too easy on Tim and underplayed just how revolutionary the changes we’ve seen over the last 3 years have been.

That’s especially the case on the operating system front.  This war among Apple, Google, Microsoft, RIM (Blackberry), Palm, Symbian, and others has actually forced me to ask if we have, “Too Much Platform Competition” in this arena. App developers must now craft their offerings for so many platforms that it has become a significant developmental hassle and expense. But hey, from a consumer perspective, this is great! And it shocking how vibrant that OS-level competition continues to be. (For more details, see Berin’s post on “The Fiercely Competitive Mobile OS & Device Markets.”)

And then there’s the applications market. As I have noted in my essays repeatedly hammering Jonathan Zittrain’s equally dismal view of the digital world, today’s market for 3rd party mobile applications would have been virtually unfathomable just a few years ago. Can you even remember 2005 when we had none of those apps at our disposal? Today, by contrast, Apple’s App Store alone has over 100,000 apps in 20 different categories (available in 77 countries) to choose from. Android and Windows Mobile apps are also exploding. Frankly, I get exhausted trying to filter through the thousands and thousands of apps in the Android marketplace I now have to choose from. Again, we had zip, zero, zilch, nadda, N-O-T-H-I-N-G to choose from just a few years ago.  Folks, that is called progress—insane, amazing, beautiful, miraculous progress!

The following GigaOm chart was intended to show average app prices but also includes total app figures for each of the five leading mobile operating systems:

So, will Tim Wu come out and admit that his pessimism was unwarranted? Somehow I doubt it. But allow me to offer him a way to save face: I remember debating Tim about these issues in New York a few years back and he told me that he really didn’t want to see the feds jump in and start aggressively regulating most high-tech markets. Instead, he just wanted to shake things up and put the fear of God in the hearts of private operators so they would change their ways for the better in an effort to avoid the sledgehammer of federal regulation. (Tim, if you are reading this and have forgetting that conversation, it was at that FOSI dinner in New York where we were also debating who was a bigger Dungeons & Dragons nerd back in our childhood. I think you at least had the better of me in that debate!)

So, to save face here, Tim should declare victory and go home.  He should tell the world he single-handled revolutionized the wireless world with his vociferous agitation for a comprehensive federal regulatory regime for mobile and that it has blessed us one of the great capitalist success stories of our time.

Thank you Professor Wu for making the world a better place!

Arik Hesseldahl has an interesting piece in Business Week about Apple’s control of the iPhone App approval process in which he asks: “Is a smartphone gatekeeper needed?” Plenty of people don’t think so and have raised a stink about Apple trying to play that role for the iPhone. It certainly could be true, as some critics suggest, that Apple is being too heavy-handed on occasion when rejecting apps, but it’s always easy for those of us on the outside of the process to think that.  Hesseldahl notes that:

it’s tempting to consider the implications of a less hands-on approach, as is the case with Macs, Microsoft (MSFT) Windows PCs, or other smartphones, including those running the Google (GOOG)-backed Android operating system. The software market for personal computing has existed in this way for nearly three decades, and while there have certainly been some problems along the way, I’d argue that overall we’re better off without Microsoft or Apple or some other organization approving software applications before they’re released to the market. PC users have learned to be careful about what they put on their computers through unhappy trial and error.

But he also notes that there is another side to the story:

My hunch is that greater vigilance is needed with smartphones, in part because they’re a relatively recent phenomenon. The iPhone has been on the market only 28 months. Users take them everywhere and are quickly inserting them into daily life in ways the personal computer never could have fit. Malware on smartphones could do significantly more damage than malware on a PC. Imagine a nasty application that records every word you speak—both on and off the phone—without your knowledge, and then e-mails the audio to a stranger. Or picture one that surreptitiously tracks your movements and sends them to a stalker.

Hesseldahl interviewed Phil Schiller, Apple’s senior vice-president for worldwide product marketing, for his piece and Schiller confirmed that malware [think iPhone worms] and and other safety & security concerns topped the list of problems that Apple was trying to head-off by managing the applications process. There’s also various types of illegal content that Apple has to contend with.

Anyway, my only interest in bringing this to everyone’s attention is because I have spent the last few years debating a growing crop of academics (Zittrain, Lessig, Wu) and policy shops (Public Knowledge, Free Press, etc) who suggest that proprietary devices and app stores constitute the revival of online “walled gardens” from the early Internet era (like AOL, Prodigy & CompuServe).  Personally, I don’t see any solid evidence that Apple’s model is indicative of a mass trend toward online “gatekeepers.” As Hesseldahl points out, there’s still plenty of other devices and stores out there from which to choose.  Moreover, as I pointed out in my first review of Zittrain’s book The Future of the Internet and How to Stop It, we should be thankful that we have a range of device and store options to choose from.  That’s a great thing. If you don’t like Apple’s style, then don’t get an iPhone.  It’s one of the reasons I didn’t.  Vote with your pocketbooks, people!

Seems like everywhere I turn someone is gushing about their new Droid phone, including my TLF colleagues Berin Szoka, Braden Cox, and Ryan Radia, who all had great fun rubbing their new toys in my nose over the past couple of days. And why not, it’s a very cool little device.  It makes my HTC Touch seems positively archaic in some ways, and it’s only a year old.  Apparently, 100,000 people already picked up a Droid in just its first weekend on the market.

But here’s the first thing that pops in my mind every time I see someone showing off their new Droid: How can a device like this even exist when America’s leading cyberlaw experts have been telling us that the whole digital world is increasingly going to hell because of “closed” devices, proprietary code, and managed networks?  I’m speaking, of course, about the lamentations of Harvard professors Lawrence Lessig, Jonathan Zittrain, and their many disciples.  As faithful readers will recall, I have relentlessly hammered this crew for their unwarranted cyber-Chicken Little-ism and hyper techno-pessimism. (See my many battles with Zittrain [1, 2, 3, 4, 5, 6 + video] and my 2-part debate with Lessig earlier this year).

“Left to itself,” Lessig warned in Code, “cyberspace will become a perfect tool of control.”  He went on to forecast a dystopian future in which nefarious corporate schemers would quash our digital liberties unless benevolent public philosopher kings stepped in to save our poor souls. Code was the Old Testament of cyber-collectivism. The New Testament arrived last year with Zittrain’s The Future of the Internet and How to Stop It. In it, we hear the grim prediction that “sterile and tethered” digital technologies and networks will triumph over the more “open and generative” devices and systems of the past.  The iPhone and TiVo are cast as villains in Zittrain’s drama since they apparently represent the latest manifestations of Lessig’s “perfect control” paranoia.

Apple’s “Angel of Death”

How completely out-of-control has this thinking gotten?  Well, here’s David Weinberger — another Harvard Berkman Center worrywart — talking about that supposed satanic font of all evil, the Apple AppStore:

The AppStore is the seductive angel of death for computing. It enables Apple to keep quality up and, more important, to keep support costs down. But a computer that can’t be programmed except by its manufacturer (or with the permission of its manufacturer) isn’t a real computer. The success of the AppStore is a gloomy, scary harbinger. From controlling the apps that can go on its mobile phone, it’s a short step for Apple to decide to control the apps that can go on its rumored slate/netbook device. And since so much of the future of computing will occur on mobiles and netbooks, this portends a serious de-generation of computing, as predicted by Jonathan Zittrain in The Future of the Internet and How to Stop It.

The “angel of death”? A “gloomy, scary harbinger”? Wow, who knew!  In Weinberger’s world, Apple is guilty of the heinous crime of “keep[ing] quality up and, more important, [keeping] support costs down.”  OH MY GOD, how dare they.  Somebody make them stop!  No, seriously, how silly is all this? It’s like those Republicans who, in their zeal to do anything to defeat health care nationalization, decide it’s OK to make up spooky stories about “death panels” hidden deep inside congressional bills.

I find Weinberger’s claim that “a serious de-generation of computing” is looming because of the iPhone to be especially ridiculous. It’s the same sort of rubbish Lessig was spewing in Code when he predicted that AOL’s walled garden model was going to take over the entire cyber-world and ensure “perfect control,” just one of the many things Lessig got wrong in the book.  And it’s the same silliness we see at work in Zittrain’s work when he claims that we’re doomed to live in a world of closed “sterile and tethered” digital technologies and networks. Similarly, last year, Public Knowledge analyst Alex Curtis managed to reach the zenith of this rhetorical insanity when he likened the Apple App Store to an Orwellian Big Brother that was bringing us a “1984 kind of total control.”  You know, because Apple is forcing us all to own iPhones and locking us into re-education camps.  Right.

I Fart, Therefore I Am (Generative)

Which brings me back to the Droid.  If all these dour predictions about the death of digital generativity and the rise of closed networks and walled gardens were true, how in the world does a phone with an open source operating system and a completely open applications process for developers even exist? (Android devices like the Droid don’t require users to rely exclusively on the Android Marketplace for apps; you can run other apps if you like).

Moreover, it’s not just that a remarkably innovative and generative device like the Droid gets widespread release and praise, it’s the fact that there are countless other mobile devices and applications on the market today much like it. On the Zittrainian “generative-vs.-sterile appliance” spectrum, the range of mobile devices just continues to grow and grow in both directions. You can decide exactly what type of device you want.  But here’s the more important point: How much of a difference does it even make how “open” these phones and app stores are?  You’ve got more “closed” systems like Apple’s iPhone and Palm’s Pre on one end of the spectrum and then more “open” systems like the Droid and even many Windows Mobile devices on the other end, but do these competing models really result in many difference in terms of functionality and innovation?  The reality is this: tons of innovation is occurring across all of these devices and platforms regardless of how “open” or “closed” they may be.

For example, when I go to Handango, a terrific mobile application marketplace, and search for “all apps” available for my HTC Touch (which runs a Windows Mobile OS), my senses are assaulted with 6,677 choices.  It’s all a bit overwhelming.  Luckily, a quick search can get me right to the important applications I really need — like the “Pocket Fart” app.  Folks, let me tell you, no “generative” device is worth its salt without a good farting application.  I don’t care how bad of a mood my kids are in, when I fire up a fart app, it puts an instant smile on their faces!

But hey, guess what… that “angel of death,” the iPhone Store, offers fart apps, too!  Dozens and dozens of fart apps, in fact.  In terms of Zittrainian generativity, the iPhone is positively fart-tastic. Just check out that video below. And in addition to those dozens of flatulence apps, the Apple AppStore has another 100,000 apps available for downloading, making it the largest applications store in the world. And back in September, Apple announced that more than two billion apps had been downloaded from the App Store in its short existence. That’s Billion with a “B”.  Does this sound like it “portends a serious de-generation of computing” as Weinberger suggests?  Incidentally, if he’s so frightened that Steve Jobs is the Grim Reaper incarnate he can always go find another phone. Seriously, Steve Jobs doesn’t force anybody to buy one of these expensive toys.

If the iPhone is Good Enough for Zittrain, Why Isn’t It Fine for the Rest of Us?

Incidentally, despite all the fear and loathing about Steve Jobs and the iPhone that one finds in Future of the Internet, I was very entertained to discover that Jonathan Zittrain is an iPhone user himself!  I used some shameless McCarthyite tactics during our debate at New America Foundation last year — “Are you now, or have you ever been, an iPhone user!” — to publicly out him. [Go to the 55:00 minute mark of the video to see.]  But my point to him that day was a serious one: If you so fear the death of generativity because of that little demonic device, than why carry one in your coat pocket?  Why not use a device that lets you break all the rules because it essentially has no rules?  There are multiple open source mobile operating systems and a thriving community of “homebrew” developers. Go spend a few minutes at PCC Geeks or Howard’s Forums and see what I mean.

But the Berkman boys don’t seem content with all that.  And I wouldn’t usually give a damn about the lunacy of these hyper-pessimistic prognostications from the Harvard crew if it was all just harmless cyber-sourpuss ramblings from the ivory tower geeks with too much time on their hands.  But the problem is that these people want regulators to take steps to correct these supposed “code failures,” as Lessig calls them.  Zittrain calls for “API neutrality” in his book, which would force net neutrality-like mandates on digital devices. And in a New York Times editorial this summer entitled “Lost in the Cloud,” he made it clear that cloud neutrality regulation was next on the list. [Others are joining that call.] I’ve got a serious problem with that, as I detailed extensively in earlier essays (here and here), and Berin Szoka and I have discussed how these escalating neutrality wars are bound to lead to the digital equivalent of “mutually assured destruction” within the tech community before it’s all over.

Finally, when the Berkman gang, which is the most respected cyberlaw shop in the land, go around casting these debates with terms like “evil” applications and “angels of death,” then I have a serious problem because the game you are playing becomes hazardous to the health of the digital economy.  This poisons the public policy debate by using absurd moralistic rhetoric about something as fundamentally agnostic as digital platforms and protocols.  These things are neither good nor evil; they are just choices.  They represent different ways of promoting innovation.  And we should be happy that our current digital marketplace is offering us a rich mosaic of business models and options that can fill almost any need and fit almost any picky user’s desires.  If that ain’t progress, I don’t what is.

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

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

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

New Fronts in the Neutrality Wars

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

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

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

Dumb Networks, Dumb Devices

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

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

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

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

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

Those who offer open APIs on the Net in an attempt to harness the generative cycle ought to remain application-neutral after their efforts have succeeded, so all those who built on top of their interface can continue to do so on equal terms…. [N]etwork neutrality ought to be applied to the new platforms of Web services that, in turn, depend on Internet connectivity to function.

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

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

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

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

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

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

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

The Inevitability of Regulatory Capture

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

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

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

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

Toward a Less MAD World: Digital Détente

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

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

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

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

FCC Chairman Julius Genachowski suggested at an FCC field hearing this week that the federal government might create its own “version of iTunes.” Multichannel News reports:

The chairman asked panelists to think about the value of a clearinghouse where best practices could be shared. He suggested that might be a way to spur the spin-off of public-sector apps from private sector initiatives and to prevent reinventing the wheel, rather than tapping into what is already being done. There is not a lot of shared info out there, he said.

If all we’re talking about is a clearinghouse that provides easy access to apps for government-developed apps, Google Code or SourceForge may be a better model than iTunes—though perhaps without the instant name recognition by ordinary consumers. Like SourceForge, Google Code allows hosting and management of open source projects, including Google’s own products. iTunes, by contrast, essentially offers consumers finished apps. Also, iTunes is a stand-alone piece of software, of which the Apps Store is  just one part, while I can’t imagine why Genachowski’s “store” need be anything more than a website.

Whatever the analogy, such a “store” could well be a valuable tool for sharing the benefits of software development by government employees, both with the private sector and among federal agencies as well as state, local and even foreign governments. But what, exactly, Genachowski had in mind for the store remains awfully vague: Multichannel News mentions, as examples, “applications that do everything from monitoring heart rates and blood sugar to checking for greenhouse gas levels.” If the idea ever goes anywhere, it should be based on two principles:

1. All apps should be open source and available to all users to use as they see fit.
2. The store should be limited to apps developed by government employees to meet the needs of government agencies.

These principles would maximize the store’s value in making taxpayer-funded software development easily accessible. As a moral matter, it might be appropriate to limit access to U.S. taxpayers, but why bother? Attempting to authenticate users would add unnecessary complexity and raise privacy concerns needlessly: Any app we wouldn’t want to fall into the hands of, say, North Korea, simply shouldn’t be in the store at all. Sharing apps internationally would expand the potential developer base while helping to public and private sectors alike in the U.S. and abroad. If a school district in Sheboygan, WI or a village in Sudan can benefit from an app rather than starting over, so much the better for everyone!

The second requirement, combined with the open source requirement, would also help to reduce direct competition between government coders and private coders. A clearinghouse for apps government truly needs to develop on its own makes a great deal of sense: If we’re already paying a government-employee to write an app so his agency can function more effectively, that  should be shared. But a broader “public option for software” could well harm both for-profit and not-for-profit development of software by the private sector. Unless its mandate were carefully constrained by statute, such a clearinghouse could easily grow into a “public works” program for the digital age, with pressure rising for government to fund software development for as a “public good.” How to draw that line would be difficult, and it’s probably not a task that should be left to the FCC; Congress should address the question.

Keeping government-developed apps open source would allow the private sector to benefit from public sector development, rather than competing with it. But if a private company wants to incorporate a government-developed app into proprietary software, they should be free to do so. The government shouldn’t be prejudicing the private sector’s choice of business models by requiring that its apps stay open source. Nor should the government prevent commercialization of software that springs from federally funded research, as currently permitted by the Bayh-Dole Act.

Perhaps the greatest danger of such a program is that it could become a vehicle for subtle government propaganda—in violation of existing laws against using taxpayer dollars to distribute propaganda inside the U.S. The iTunes store analogy is particularly inapt (no pun intended) because iTunes, of course, provides pure content as well as apps. But apps themselves could come with a particular slant because it is increasingly difficult to distinguish “pure content” from “pure apps.” This danger could be particularly acute if the store turned into a “jobs program,” which would be inherently political, just as FDR’s New Dealers used programs like the WPA Arts Project to advance a certain ideological message, and New Deal programs in general as a way of rewarding supporters and punishing opponents. We certainly wouldn’t a Republican administration, say, trying to take revenge on Google for its support of Democrats by investing public money into direct competitors to Google’s software. Nor would we want to funding for software development to become just another dimension for the culture wars.

With those important caveats, this could be a great idea.

Over at his new blog, our old TLF colleague Tim Lee has an interesting post up about “The Problem with Top-Down ‘App Stores’” in which he argues that “when app store approval becomes mandatory, it becomes a major impediment to the success of high-tech platforms.”  But I have to wonder if the facts support that assertion. Here’s how I commented on his site:

Tim… What I don’t hear you articulating here is your vision of what a “bottom-up” app store would look like and why it would really produce vastly superior results. Nor do I hear you saying anything about the legitimate concerns that the handset makers might have about the security or stability factors associated with certain applications. I’m not saying those problems are extensive, but at the margins they could be real depending on the nature of the program and how it interacts with the handset and/or network. Second, there needs to be some sense of proportionality here, at least about the iPhone (I can’t speak for the Palm experience). In just a little over a year, there’s been 2 billion downloads of over 85,000 apps from over 125,000 developers. So, when you talk about Apple’s approval process being “plagued by.. problems” and “rejections for trivial or non-sensical reasons” and “long delays in the review process have become a staple of the tech blogosphere” I think you are giving the impression that this is somehow the norm when it is very much the exception to the rule. Perhaps you would be willing to itemize the examples for us. Once you do, I’d appreciate you doing the math on what that looks like as a percentage of the total 85,000 apps that are already out there on the market today. I am willing to bet the result is something like 0.000001%. Again, a sense of proportionality is really key here. While I am not an Apple fan and agree they have a bit too much of a control streak for my tastes, it’s hard to argue with results. In this case, a closed, top-down system has produced some fairly spectacular results.

I’m sure Tim will have more to say so head over to his blog for more discussion.

Over at TechDirt, Mike Masnick has an interesting post asking “Why Did Apple Approve Spotify?” which builds on an AdAge column asking a similar question: “Did Apple Sacrifice ITunes With Latest Apps?”  As the title of that AdAge piece suggests, some folks are wondering if Apple shot itself in the foot by approving Spotify, a music streaming app that some regard as a potential iTunes killer.  I don’t really have any comment on the business angle here, rather, I wanted to just comment on Mike’s suggestion that one possible explanation for Apple’s approval of the app is that:

As we noted when the app was approved, Apple appears to be somewhat gunshy, following the FCC inquiry into why it “blocked” Google Voice on the iPhone (and, yes, Apple still insists it didn’t actually block the app, but Google says otherwise). Given the scrutiny, Apple probably realized that it was in for some serious political trouble if it blocked an app like Spotify, which would have received a lot of press attention. Oddly, the AdAge article doesn’t mention this at all.

Indeed, it is odd that AdAge didn’t bother mentioning that fact.  But what I find doubly odd here is that nobody is even blinking an eye at the prospect of such political meddling with — or even possible FCC regulation of — Apple, iTunes, or music streaming market in general!  Seriously, have we gotten to the point now in our Bold New World of Neutrality Regulation that innovative high-tech companies must live in fear of constant regulatory intervention even when they completely lack any statutory authority to play these games?  Moreover, does anyone think that the a bunch of Beltway bureaucrats can micro-manage music and high-tech application markets and give us more options than we have today?

I know the prospect of such meddling makes some academics and regulatory activists groups happy, but I can’t see how this ends well for consumers or high-tech markets more generally.  Regardless, for those of you who laugh when we suggest that the slippery slope of regulation is real, consider this case to be Exhibit A.  Or perhaps it’s Exhibit B since the Google Voice spat with Apple was already moving the FCC in the direction of becoming a device regulator and applying “handset neutrality” principles that have no basis in law.  It’s your anything-goes government at work.

Despite my frequent disagreements with his policy conclusions, Farhad Manjooo of Slate is one of the most gifted tech policy pundits around today and everything he writes is worth reading (and I whole-heartedly agreed with his recent article on the high-tech and antitrust).  Alas, I find myself again disagreeing with him again today.

In his latest column, “The Great iPhone Lockdown: Should the FCC force Apple to sell Google’s apps?” Manjoo responds to a recent essay by TLF contributor Ryan Radia (“Newsflash to FCC: The iPhone is a Closed Platform, and Consumers Love It“). In that essay, Ryan generally argued that: (a) a lot of people own and love the iPhone despite some silly restrictions on certain apps; and (b) if they don’t like that, there are plenty of other options from which they can choose. Consequently, regulation seems unwarranted and likely highly misguided in light of the potential unitended consequences in might yield.  It’s an argument I very much agree with, of course.  Anyway, Manjoo responds:

Radia’s argument isn’t crazy. Just the other day, I argued that the government shouldn’t go after Google for antitrust violations because the tech industry is fluid; companies that are on top today can fall tomorrow. So what if Apple rejects apps capriciously? If its actions are so terrible, consumers will eventually abandon it.

But then Manjoo counters that argument and goes completely off-the-rails with several assertions that I find quite perplexing:

Yet [Radia’s] analysis misses a key point: The iPhone runs on public networks and therefore falls under government jurisdiction. At the very least, the regulators have a duty to ensure fair competition on wireless networks—and by arbitrarily blocking rivals from its device, the iPhone’s software platform simply isn’t fair. We would never accept its rules in other contexts: Imagine if Apple were building cars instead of phones and one day decided that everyone who’d bought an iCar would be banned from listening to any music not purchased from iTunes. Or say that Apple banned all Mac users from downloading Firefox because the browser duplicated the functionality of Safari. Such restrictions sound ridiculous; they wouldn’t pass the barest scrutiny of regulators or consumers. So why should we allow Apple to do the same thing with the iPhone?

Well, let’s begin with a few things he gets wrong here.  First, ” The iPhone runs on public networks and therefore falls under government jurisdiction.”  Uh, no. Last time I checked, AT&T was not running a “public network” owned by the government.  It’s true that AT&T is subjected to some FCC and state rules governing the provision of service, but it isn’t a “public network” like our highway system or inter-coastal waterways.  Thus, AT&T has the right to set terms of service (along with partners like Apple) to achieve both profitability and continue to invest in innovative new networks and services.

Manjoo then asserts that: ” At the very least, the regulators have a duty to ensure fair competition on wireless networks—and by arbitrarily blocking rivals from its device, the iPhone’s software platform simply isn’t fair.” It’s true that there are consumer protection laws on the books, but it’s unclear to me how the FCC has any jurisdictional authority to be regulating Apple or the iPhone.  There simply is none as I noted here in my essay, “Where is FCC Authority to Regulate in Apple-Google Spat?”

Manjoo’s next argument that “We would never accept its rules in other contexts,” uses some very rather strange examples. He asks us to consider what we (or the government, I suppose) might do “if Apple were building cars instead of phones and one day decided that everyone who’d bought an iCar would be banned from listening to any music not purchased from iTunes. Or say that Apple banned all Mac users from downloading Firefox because the browser duplicated the functionality of Safari.”

Well, I think it’s quite clear what we would do: WE WOULD STOP USING APPLE PRODUCTS!  Or at least we could if we didn’t like the terms of the deals they offered.  So, even if it is true that many of us would find such restrictions “ridiculous,” as Manjoo suggests, it certainly does not follow that ” they wouldn’t pass the barest scrutiny of regulators...”  Rubbish. I’m not even sure which agency it is that Manjoo think would be in the business of regulating “iCars” or, for that matter, Firefox and Safari web browsers. (A “Federal Computer Commission?”)

Regardless, it’s a bad idea.  These are activities that are better settled by consumer responses and market backlashes. If you want more innovation and competition in response to bone-headed moves by Apple (or anyone else for that matter), the solution is most definitely NOT the sort of common carriage regulatory regime that Manjoo seems to be suggesting.  That will just lock us into plain vanilla technologies, networks, and services.  Real tech innovation happens when people and competitors get pissed and get off their duffs to do something about it, not when government attempts to micro-manage results by tinkering with yesterday’s platforms.

Again, I want to make it very clear that I am not saying there is no such thing as “market failure” or “code failure.” To the contrary, as I argued in my recent exchange with Lawrence Lessig, I see mini-market failures happening all the time in the technology world.  But:

here’s the amazing thing: I usually wake up the next day, fire up my RSS reader again, and find a world almost literally transformed overnight. I see the power of public pressure, press scrutiny, social norms, and innovation by competitors combining to correct the “bad code” or “code failures” of the previous day. OK, so sometimes it takes longer that a day, a week, or a month. And occasionally legal sanctions must enter the picture if the companies or coders did something particularly egregious. But, more often than not, markets evolve and bad code eventually gives way to better code; short-term “market failures” give rise to a world of innovative alternatives.

Thus, I went on to argue that:

“code failures” are ultimately better addressed by voluntary, spontaneous, bottom-up, marketplace responses than by coerced, top-down, governmental solutions. Moreover, the decisive advantage of the market-driven approach to correcting code failure comes down to the rapidity and nimbleness of those response(s). Of course, this assumes we can agree on a definition of “bad code” and “code failures.” What concerns me about the way Prof. Lessig approaches these issues in Code and in his subsequent work is that he is far too quick to declare the debate over by labeling short-term code hiccups as sky-is-falling market failures. The end result of such myopic techno-pessimism is the inevitable call for governments to intervene and “do something” to correct supposed code failures. The cyber-libertarian instead counsels patience. Let’s give those other forces — alternative platforms, new innovators, social norms, public pressure, etc. — a chance to work some magic. Evolution happens, if you let it.

But, again, such evolution and innovation will most decidedly not happen if you people are always running around crying “market failure!” and calling in the code cops at every juncture, as Manjoo seems to be doing in the Apple-Google spat.  The problem with that think, as I noted in my debate with Lessig, is that it:

creates perverse marketplace incentives by discouraging efforts to innovate or “route around” bad code or code failure. We don’t want the whole world sitting around waiting for government to regulate the mousetrap to improve it or even give everyone better access to it; we should want the world to be innovating to create better mousetraps!

No one is going to build a better mousetrap to compete with Apple if regulators make it too easy for Apple to become the one preferred platform for all mobile apps developers. If Google is pissed about Apple screwing them over on their Google Voice app, that is a great thing: It will give them all the better reason to plow even more resources into Android and other platforms to compete against Apple!  And that’s exactly the sort of serious competition and innovation we should all be rooting for.

How is it that smart people like Manjoo fail to grasp this crucial point?