Today marks the 10th anniversary of the launch of the Apple iPhone. With all the headlines being written today about how the device changed the world forever, it is easy to forget that before its launch, plenty of experts scoffed at the idea that Steve Jobs and Apple had any chance of successfully breaking into the seemingly mature mobile phone market.

After all, those were the days when BlackBerry, Palm, Motorola, and Microsoft were on everyone’s minds. Perhaps, then, it wasn’t so surprising to hear predictions like these leading up to and following the launch of the iPhone:

• In December 2006, Palm CEO Ed Colligan summarily dismissed the idea that a traditional personal computing company could compete in the smartphone business. “We’ve learned and struggled for a few years here figuring out how to make a decent phone,” he said. “PC guys are not going to just figure this out. They’re not going to just walk in.”
• In January 2007, Microsoft CEO Steve Ballmer laughed off the prospect of an expensive smartphone without a keyboard having a chance in the marketplace as follows: “Five hundred dollars? Fully subsidized? With a plan? I said that’s the most expensive phone in the world and it doesn’t appeal to business customers because it doesn’t have a keyboard, which makes it not a very good e-mail machine.”
• In March 2007, computing industry pundit John C. Dvorak argued that “Apple should pull the plug on the iPhone” since “There is no likelihood that Apple can be successful in a business this competitive.” Dvorak believed the mobile handset business was already locked up by the era’s major players. “This is not an emerging business. In fact it’s gone so far that it’s in the process of consolidation with probably two players dominating everything, Nokia Corp. and Motorola Inc.”

A decade after these predictions were made, Motorola, Nokia, Palm, and Blackberry have been decimated by the rise of Apple as well as Google (which actually purchased Motorola in the midst of it all). And Microsoft still struggles with mobile even though they are still a player in the field. Rarely have Joseph Schumpeter’s “perennial gales of creative destruction” blown harder than they have in the mobile sector over this 10 year period.

The lesson here is pretty clear. As Yogi Berra once quipped: “It’s tough to make predictions, especially about the future.” But there’s more to it than just that. These mistaken predictions serve as a classic example of those with a static snapshot mentality disregarding the potential for new entry and technological disruption to shake things up. “In dealing with disruptive technologies leading to new markets,” says Clayton M. Christensen, author of The Innovator’s Dilemma, “researchers and business planners have consistently dismal records.”

This has implications not only for business forecasting but also for public policy, which is notoriously shortsighted when it comes to the potential for new technological innovations to shake up existing markets. Just because you think a particular firm or sector it the proverbial “King of the Hill” one day, it doesn’t mean they will be able to sit on that lofty perch forever. Likewise, policymakers cannot neatly “plan progress” by incessantly intervening in the hope of directing markets and technologies toward some supposedly better end. Picking winners and losers–or even just trying to stimulate more “winners”–will likely end very badly.

In his book,  The Year 2000: A Framework for Speculation on the Next Thirty-three Years, the futurist Herman Kahn wisely noted that:

History is likely to write scenarios that most observers would find implausible not only prospectively but sometimes, even in retrospect. Many sequences of events seem plausible now only because they have actually occurred; a man who knew no history might not believe any. Future events may not be drawn from the restricted list of those we have learned are possible; we should expect to go on being surprised.

But we can only “expect to go on being surprised” by leaving plenty of breathing room for the evolution of markets and technology. While all social and economic experiments are accompanied by a great deal of unpredictability and disruption, history indicates that most of those experiments will result in greater progress and prosperity–just as the iPhone did. But developments such as these are almost impossible to predict or plan beforehand. We have to get the environment for innovation right and then let creative minds work their magic.

Adam Thierer, Senior Research Fellow at the Mercatus Center discusses his recent working paper with coauthor Brent Skorup, A History of Cronyism and Capture in the Information Technology Sector. Thierer takes a look at how cronyism has manifested itself in technology and media markets — whether it be in the form of regulatory favoritism or tax privileges. Which tech companies are the worst offenders? What are the consequences for consumers? And, how does cronyism affect entrepreneurship over the long term?

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Related Links

• A History of Cronyism and Capture in the Information Technology Sector, Thierer
• Video: A History of Cronysim and Capture in the Information Technology Sector, Thierer
• Adam Thierer Biography, Mercatus Center
• Adam Thierer on Anti-Tech Grump Evgeny Morozov, Thierer

In the upcoming issue of Harvard Business Review, my colleague Paul Nunes at Accenture’s Institute for High Performance and I are publishing the first of many articles from an on-going research project on what we are calling “Big Bang Disruption.”

The project is looking at the emerging ecosystem for innovation based on disruptive technologies.  It expands on work we have done separately and now together over the last fifteen years.

Our chief finding is that the nature of innovation has changed dramatically, calling into question much of the conventional wisdom on business strategy and competition, especially in information-intensive industries–which is to say, these days, every industry.

The drivers of this new ecosystem are ever-cheaper, faster, and smaller computing devices, cloud-based virtualization, crowdsourced financing, collaborative development and marketing, and the proliferation of mobile everything.  There will soon be more smartphones sold than there are people in the world.  And before long, each of over one trillion items in commerce will be added to the network.

The result is that new innovations now enter the market cheaper, better, and more customizable than products and services they challenge.  (For example, smartphone-based navigation apps versus standalone GPS devices.)  In the strategy literature, such innovation would be characterized as thoroughly “undiscplined.”  It shouldn’t succeed.  But it does.

So when the disruptor arrives and takes off with a bang, often after a series of low-cost, failed experiments, incumbents have no time for a competitive response.  The old rules for dealing with disruptive technologies, most famously from the work of Harvard’s Clayton Christensen, have become counter-productive.   If incumbents haven’t learned to read the new tea leaves ahead of time, it’s game over.

The HBR article doesn’t go into much depth on the policy implications of this new innovation model, but the book we are now writing will.  The answer should be obvious.

This radical new model for product and service introduction underscores the robustness of market behaviors that quickly and efficiently correct many transient examples of dominance, especially in high-tech markets.

As a general rule (though obviously not one without exceptions), the big bang phenomenon further weakens the case for regulatory intervention.  Market dominance is sustainable for ever-shorter periods of time, with little opportunity for incumbents to exploit it.

Quickly and efficiently, a predictable next wave of technology will likely put a quick and definitive end to any “information empires” that have formed from the last generation of technologies.

Or, at the very least, do so more quickly and more cost-effectively than alternative solutions from regulation.  The law, to paraphrase Mark Twain, will still be putting its shoes on while the big bang disruptor has spread halfway around the world.

Unfortunately, much of the contemporary literature on competition policy from legal academics is woefully ignorant of even the conventional wisdom on strategy, not to mention the engineering realities of disruptive technologies already in the market.  Looking at markets solely through the lens of legal theory is, truly, an academic exercise, one with increasingly limited real-world applications.

Indeed, we can think of many examples where legacy regulation actually makes it harder for the incumbents to adapt as quickly as necessary in order to survive the explosive arrival of a big bang disruptor.  But that is a story for another day.

Much more to come.

Related links:

1. “Creating a ‘Politics of Abundance’ to Match Technology Innovation,” Forbes.com.
2. “Why Best Buy is Going out of Business…Gradually,” Forbes.com.
3. “What Makes an Idea a Meme?“, Forbes.com
4. “The Five Most Disruptive Technologies at CES 2013,” Forbes.com

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

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

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

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

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

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

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

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

Social Networks as Public Utilities [Adam Thierer]

The National Transportation Safety Board recommended yesterday that states ban all non-emergency use of portable electronic devices while driving, except for devices that assist the driver in driving (such as GPS). The recommendation followed the NTSB’s investigation of a tragic accident in Missouri triggered by a driver who was texting.

Personally I don’t see how someone can pay attention to the road while texting. (I’m having a hard enough time paying attention to a conference presentation while I’m typing this!) But the National Transportation Safety Board’s recommendation is a classic example of regulatory overreach based on anecdote.  The NTSB wants to use one tired driver’s indefensible and extreme texting (which led to horrific results) as an excuse to ban all use of portable electronic devices while driving – including hands-free phone conversations.  Before states act on this recommendation, they should carefully examine systematic evidence – not just anecdotes — to determine whether different uses of handheld devices pose different risks. They should also consider whether bans on some uses would expose drivers to risks greater than the risk the ban would prevent.

For CNET this morning, I have a long article reviewing the sad recent history of how local governments determine the quality of mobile services.

As it  turns out, the correlation is deeply negative.  In places with the highest level of user complaints (San Francisco, Washington, D.C.), it turns out that endless delays or outright denials for applications to add towers and other sites as well as new and upgraded equipment is also high.  Who’d have thought?

Despite a late 2009 ruling by the FCC that put a modest “shot clock” on local governments to approve or deny applications, data from CTIA and PCIA included in recent comments on the FCC’s Broadband Acceleration NOI suggests the clock has had little to no effect.  This is in part because the few courts that have been asked to enforce it have demurred or refused.

Much of the dithering by local zoning boards is unprincipled and pointless, a sign not so much of legitimate concerns over safety and aesthetics but of incompetence, corruption, and the insidious influence of  outside “consultants” whose fees are often levied against the applicant, adding insult to injury.

For example, in El Cerrito, CA, about a mile from my house, officials sat for two years an on application to site a tower disguised as a tree on a Boy Scout camp , then passed a two-year moratorium on any new facilities.  (I know that camp well–it is in the midst of a giant chain of parks that run the ridgeline of the Berkeley Hills, thick with invasive, non-native trees that have an unfortunate tendency to explode during fire season.)   In Berkeley, CA, where I live, even applications to collocate new antennae on existing towers require a full review and hearing.

Other city and county boards simply delay or deny, or introduce bizarre requirements, including that any new equipment must be shown to benefit only residents of the jurisdiction.

The “shot clock” rule also banned a common practice among many communities of denying any application for new equipment if an existing mobile provider already served the area.  Yes, that’s right.  With all the hand-wringing and crocodile tears over mobile competition and the danger of the AT&T/T-Mobile merger, many parts of the U.S. prohibit new competitors from entering.

Some communities are still enforcing that rule, and the few court cases that have interpreted the FCC ruling haven’t always embraced it.

Why does this matter?  There are two principal inputs to a cellular network that determine quality of service for customers:  spectrum and cell sites.  Both are under the thumb of government control and constraint.  (Geoff Manne’s recent rant on spectrum is well worth reviewing.)  Over the last five years, the four major providers have invested billions in new infrastructure, and would have invested more, as the FCC acknowledges, were it not for the interference of local governments.   In 2009 alone, over $20 billion was invested, representing 13% of total industry revenue.

Capital Expenditure by Carrier

Source:  Federal Communications Commissison

If service is poor in some parts of the country, we have only ourselves to blame. But as one commentator to my article put it, it’s so much more fun to blame the device or the carrier.

Or, not so funny, to take a “principled” stand on behalf of competition to block a merger designed to evade these increasingly dangerous roadblocks,

Two data points in the news over the past 24 hours to consider:

• A new report on “Smartphone Adoption & Usage” by the Pew Internet Project finds that “one third of American adults – 35% – own smartphones” and that of that group “some 87% of smartphone owners access the Internet or email on their handheld” and “25% of smartphone owners say that they mostly go online using their phone, rather than with a computer.”
• According to the Wall Street Journal, the “Average iPhone Owner Will Download 83 Apps This Year.” That’s up from an average of 51 apps downloaded in 2010. (At first I was astonished when I read that, but then realized that I’ve probably downloaded an equal number of apps myself, albeit on an Android-based device.)

As I explain in my latest Forbes column, facts like these help us understand “How iPhones And Androids Ushered In A Smartphone Pricing Revolution.” That is, major wireless carriers are in the process of migrating from flat-rate, “all-you-can-eat” wireless data plans to usage-based plans. The reason is simple economics: data demand is exploding faster than data supply can keep up.

“It’s been four years since the introduction of the iPhone and rival devices that run Google’s Android software,” notes Cecilia Kang of The Washington Post. “In that time, the devices have turned much of America into an always-on, Internet-on-the-go society.” Indeed, but it’s not just the iPhone and Android smartphones. It’s all those tablets that have just come online over the past year, too. We are witnessing a tectonic shift in how humans consume media and information, and we are witnessing this revolution unfold over a very short time frame.

Unsurprisingly, therefore, “unlimited” wireless data plans are probably on the way out since, as I observe in my Forbes piece:

That model created unsustainable network traffic burdens and it’s surprising unlimited plans have lasted this long. With smartphone users increasingly using their mobile devices to access the Internet and consume more cloud-based services and mobile video than ever, the “all you can eat” data buffet eventually had to end.

But critics are far too quick to suggest this is some of nefarious, anti-consumer conspiracy. In reality, I argue:

Tiered and metered pricing schemes are a sensible way to price demand for bandwidth-intensive users and applications and, in the process, alleviate network congestion, encourage new investment, and ensure that average costs for consumers are more reasonable over time.

Using usage data provided by Nielsen, I document the dramatic traffic growth that carriers are struggling to deal with but also show how most average consumers will do better under the new tiered plans. That’s because, even with a significant uptick in wireless data demand, the vast majority of users will not exceed the lowest tier of service (2 GB) that carriers are pricing at $20-$30. That’s less than most of them pay today. Thus:

It’s only the most rapacious mobile data consumers who’ll pay the higher tier prices. Doesn’t it make more sense that the most intensive network users pay more instead of raising average costs for all consumers? Why should minimal data users subsidize the big eaters?

Instead of repeating it all here, I’d just encourage you to bounce over to Forbes to read my entire essay.

The interesting policy question raised by all this is whether critics and policymakers will give network operators the freedom to innovate and employ creative business models so market experimentation can determine which pricing schemes will best calibrate supply and demand while also ensuring optimal network investment. You may recall that usage-based pricing has already become a flashpoint in the Net neutrality wars, and just last Friday I wrote about Netflix’s shameless attempt to get the feds to regulate usage-based pricing on the wireline front.

So, stay tuned. This fight could really heat up. Perhaps it’s time to dust off the old books and papers about how to fight off government price controls!

Related Reading:

• Netflix Falls Prey to Marginal Cost Fallacy & Pleads for a Broadband Free Ride (July 8, 2011)
• Why Congestion Pricing for the iPhone & Broadband Makes Sense (October 7, 2009)
• The (Un)Free Press Calls for Internet Price Controls: “The Broadband Internet Fairness Act” (June 17, 2009)
• Free Press Hypocrisy over Metering & Internet Price Controls (June 18, 2009)
• Once Again, Why Not Meter Broadband Pipes?  (September 7, 2007)
• Why Not Meter? (March 12, 2007)
• The Real Net Neutrality Debate: Pricing Flexibility Versus Pricing Regulation (October 27, 2005)

I spaced out and completely forget to post a link here to my latest Forbes column which came out over the weekend.  It’s a look at back at last week’s hullabaloo over “Apple, The iPhone, and a Locational Privacy Techno-Panic.” In it, I argue:

Some of the concerns raised about the retention of locational data are valid. But panic, prohibition and a “privacy precautionary principle” that would preemptively block technological innovation until government regulators give their blessings are not valid answers to these concerns. The struggle to conceptualize and protect privacy rights should be an evolutionary and experimental process, not one micro-managed at every turn by regulation.

I conclude the piece by noting that:

Public pressure and market norms also encourage companies to correct bone-headed mistakes like the locational info retained by Apple.  But we shouldn’t expect less data collection or less “tracking” any time soon.  Information powers the digital economy, and we must learn to assimilate new technology into our lives.

Read the rest here. And if you missed essay Larry Downes posted here on the same subject last week, make sure to check it out.

I’ve written a long article this morning for CNET (See “Privacy panic debate:  Whose data is it?”) on the discovery of the iPhone location tracking file and the utterly predictable panic response that followed.  Its life-cycle follows precisely the crisis model Adam Thierer has so frequently and eloquently traced, most recently here on TLF.

In particular, the CNET article takes a close and serious look at Richard Thaler’s column in Saturday’s New York Times, “Show us the data.  (It’s ours, after all.)” Thaler uses the iPhone scare as occassion to propose a regulatory fix to the “problem” of users being unable to access in “computer-friendly form” copies of the information “collected on” them by merchants. 

That information, Thaler assumes, is a discreet kind of property and must, since it refers to customer behavior, be the sole property of the customer, “lent” to the merchant and reclaimable at any time.

Information can certainly be treated as if it were property, and often is under law.  Personally, I don’t find the property metaphor to be the most useful in dealing with intangibles, but if you’re going to go there you need to understand the economics of how information behaves in ways very different to physical property.  (See my chapter on the subject in “The Next Digital Decade.”)

Thaler’s “proposed rule” is wrong on the facts (he doesn’t seem to know how cell phone bills really look, and he certainly doesn’t understand how supermarket club cards operate–and these are his leading examples of the “problem”), wrong on the law, and even wrong on the business and economics.  (Other than that, it’s a pretty good article!)

This kind of intellectual frivolity is par for the course with many academic economists.  Thaler is at the University of Chicago’s business school, and describes himself as an economist and behavioral scientist.  That means instead of throwing around calculus all day, he devises toy experiments with a few subjects–or reads the findings of other behavioral scientists who have done the same.

Not only is the article bad privacy policy, it’s bad economics.  The latter is certainly the more serious concern.  Nearly 70 years after Ronald Coase called on economists to put down the pencil and paper methods and do actual empirical research in how markets actually work, the profession has if anything become more insular.  There are exceptions, of course, but they stand out in a field of mediocrity.

Which is too bad.  We need good economists now, more than ever.

There’s a nice piece of reporting from Ian Shapira in today’s Washington Post entitled, “Once the Hobby of Tech Geeks, iPhone Jailbreaking Now a Lucrative Industry.” In the article, Shapira documents the rise of independent, unauthorized Apple apps (especially tethering apps) and points out that what was once a small black market has now turned into a booming, maturing business sector in its own right.  In fact, Sharpia notes, there are already “market leaders” in the field:

At the top of the jailbreaking hierarchy sits Jay Freeman, 29, the founder and operator of Cydia, the biggest unofficial iPhone app store, which offers about 700 paid designs and other modifications out of about 30,000 others that are free. Based out of an office near Santa Barbara, Calif., Freeman said Cydia, launched in 2008, now earns about $250,000 after taxes in profit annually. He just hired his first full-time employee from Delicious, the Yahoo-owned bookmarking site, to improve Cydia’s design. “The whole point is to fight against the corporate overlord,” Freeman said. “This is grass-roots movement, and that’s what makes Cydia so interesting. Apple is this ivory tower, a controlled experience, and the thing that really bought people into jailbreaking is that it makes the experience theirs.”

In another sign this black market is now going mainstream, advertisers are apparently flocking to it:

In what might be the ultimate sign that the jailbreak industry is losing its anti-establishment character, Toyota recently offered a free program on Cydia’s store, promoting the company’s Scion sedan. Once installed, the car is displayed on the background of the iPhone home screen, and the iPhone icons are re-fashioned to look like the emblem on the front grill.

Interestingly, however, some people now complain that Cydia is getting too big for its britches and has come to be “as domineering as Apple is in the non-jailbreak world.”  What delicious irony! Yet, I do not for one minute believe that Cydia has any sort of “lock” on the “unlocking” marketplace. This is an insanely dynamic sector that is subject to near-constant fits of disruptive technological change.

Anyway, I feel a bit vindicated when I read articles like Shapira’s since I have spent the last few years pushing back against the theories set forth by various scholars, such as Jonathan Zittrain and Tim Wu, who claim that online openness or “generativity” are dying.  They often cite Apple as the big, bad boogeyman of closed code and claim that Steve Jobs is hellbent on destroying digital generativity and the open Internet as we know it.

Of course, it is certainly true that Jobs and Apple prefer a more “closed” model that grants them more control over their products, such as the iPhone and iPad. And they make some good arguments why a certain amount of control is a good thing. It helps to have a more standardized platform for developers, for example, by avoiding fragmentation. A certain degree of control can also help to crack down on malicious apps in the App Store. And without a certain amount of control it becomes hard to honor warranties when phones or apps break.

Despite those excuses, Apple is still just a bit too domineering for some of us.  I don’t own any of their products.  Never have; never will. If it’s not tinker-friendly right out of the box, it’s just not for me.  I cannot even begin to count how many times I have rooted and installed new ROMs on my Droid OG.  (Thank You CyanogenMod!) And I bricked my last Windows Mobile 6 phone after repeated hacking.

And, yet, Apple is still wildly successful and has millions of extremely happy customers who — for reasons that still boggle my mind — are willing to line up in the wee hours of the cold morning around the block in front Apple Stores to get their hands on the latest goodies the company has to offer.  (Seriously, what is wrong with you people!)

But this gets back to the point I have reiterated in my debates with Zittrain, Wu, and the other “openness evangelicals”: Even if I share their general love of more “open” and “generative” platforms or devices, there’s no reason to be nearly as worried as they are about them “dying.”  And there’s certainly no need for drastic action, especially of a regulatory nature, to work this out.  The market for openness is working marvelously. Innovation continues to unfold rapidly in both directions along the “open” vs. “closed” continuum. Moreover, there certainly isn’t any shortage of digital “generativity” taking place on both open and closed platforms today. Again, even though Jobs and Apple try to control their platform and App Store, some amazingly generative things are happening there every day and consumers absolutely adore their Apple devices.

Anyway, I discussed all these issues in much greater detail in my chapter on “The Case for Internet Optimism, Part 2 – Saving the Net From Its Supporters,” which was included in the book, The Next Digital Decade: Essays on the Future of the Internet (2011). Simply stated, things are getting more open all the time and there’s just no putting the generativity genie back in the bottle.  Here’s a short section that appears on page 149 of the book related to the issues discussed here:

______________________

Things Are Getting More Open All the Time Anyway

Most corporate attempts to bottle up information or close off their platforms end badly.  The walled gardens of the past failed miserably.  In critiquing Zittrain’s book, Ann Bartow has noted that “if Zittrain is correct that CompuServe and America Online (AOL) exemplify the evils of tethering, it’s pretty clear the market punished those entities pretty harshly without Internet governance-style interventions.”^[1] Indeed, let’s not forget that AOL was the big, bad corporate boogeyman of Lessig’s Code and yet, just a decade later, it has been relegated to an also-ran in the Internet ecosystem.

There are few reasons to believe that today’s efforts to build such walled gardens would end much differently.  Indeed, increasingly when companies or coders erect walls of any sort, holes form quickly. For example, it usually doesn’t take long for a determined group of hackers to find ways around copy/security protections and “root” or “jailbreak” phones and other devices.^[2] Once hacked, users are usually then able to configure their devices or applications however they wish, effectively thumbing their noses at the developers.   This process tends to unfold in a matter of just days, even hours, after the release of a new device or operating system.

Number of Days Before New Devices Were “Rooted” or “Jailbroken” ^[3]

Of course, not every user will make the effort—or take the risk^[4]—to hack their devices in this fashion, even once instructions are widely  available for doing so.  Nonetheless, even if copyright law might sometimes seek to restrict it, the hacking option still exists for those who wish to exercise it.  Moreover, because many manufacturers know their devices are likely to be hacked, they are increasingly willing to make them more “open” right out of the gates or offer more functionality/flexibility to make users happy

[1] Bartow, supra note 17 at 1088, www.michiganlawreview.org/assets/pdfs/108/6/bartow.pdf

[2] “In living proof that as long as there’s a thriving geek fan culture for a device, it will never be long for the new version to be jailbroken: behold iOS 4.1. Most people are perfectly willing to let their devices do the talking for them, accept what’s given, and just run sanctioned software. But there are those intrepid few—who actually make up a fairly notable portion of the market—who want more out of their devices and find ways around the handicaps built into them by the manufacturers.” Kit Dotson, New iOS for Apple TV Firmware Released, Promptly Decrypted, SiliconAngle, Sept. 28, 2010, http://siliconangle.com/blog/2010/09/28/new-ios-for-apple-tv-firmware-released-promptly-decrypted

[3] Original research conducted by author and Adam Marcus based on news reports.

[4] Rooting or jailbreaking a smartphone creates the risk of “bricking” the device—rendering it completely inoperable (and thus no more useful than a brick). Additionally, hacking devices in this fashion typically voids any manufacturer warranty.

I dashed off a piece for CNET today on the Copyright Office’s cell phone “jailbreaking” rulemaking earlier this week.  Though there has already been extensive coverage (including solid pieces in The Washington Post, a New York Times editorial, CNET, and Techdirt), there were a few interesting aspects to the decision I thought were worth highlighting.

Most notably, I was interested that no one had discussed the possibility and process by which Apple or other service providers could appeal the rulemaking.  Ordinarily, parties who object to rules enrolled by administrative agencies can file suit in federal district court under the Administrative Procedures Act.  Such suits are difficult to win, as courts give deference to administrative determinations and review them only for errors of law.  But a win for the agency is by no means guaranteed.

The Appeals Process

What I found in interviewing several leading high tech law scholars and practitioners is that no one was really clear how or even if that process applied to the Copyright Office.  In the twelve years that the Register of Copyrights has been reviewing requests for exemptions, there are no reported cases of efforts to challenge those rules and have them overturned.

With the help of Fred von Lohmann, I was able to obtain copies of briefs in a 2006 lawsuit filed by TracFone Wireless that challenged an exemption (modified and extended in Monday’s rulemaking) allowing cell phone users to unlock their phones from an authorized network in hopes of moving to a different network.  TracFone sued the Register in a Florida federal district court, claiming that both the process and substance of the exemption violated the APA and TracFone’s due process rights under the Fifth Amendment.

But the Justice Department, in defending the Copyright Office, made some interesting arguments.  They claimed, for example, that until TracFone suffered a particular injury as a result of the rulemaking, the company had no standing to sue.  Moreover, the government argued that the Copyright Office is not subject to the APA at all, since it is an organ of Congress and not a regulatory agency.  The briefs hinted at the prospect that rulemakings from the Copyright Office are not subject to judicial review of any kind, even one subject to the highly limited standard of “arbitrary and capricious.”

There was, however, no published opinion in the TracFone case, and EFF’s Jennifer Granick told me yesterday she believes the company simply abandoned the suit.  No opinion means the judge never ruled on any of these arguments, and so there is still no precedent for how a challenge to a DMCA rulemaking would proceed and under what legal standards and jurisdictional requirements.

Should Apple decide to pursue an appeal (an Apple spokesperson “declined to comment” on whether the company was considering such an action, and read me the brief statement the company has given to all journalists this week), it would be plowing virgin fields in federal jurisdiction.  That, as we know, can often lead to surprising results—including, just as an example, a challenge to the Copyright Office’s institutional ability to perform rulemakings of any kind.

The Copyright Office Moves the Fair Use Needle…a Little

A few thoughts on the substance of the rulemaking, especially as it shines light on growing problems in applying copyright law in the digital age.

Since the passage of the 1998 revisions to the Copyright Act known as the Digital Millennium Copyright Act, the Register of Copyrights is required every three years to review requests to create specific classes of exemptions to some of the key provisions of the law, notably the parts that prohibit circumvention of security technologies such as DRM or other forms of copy protection.

The authors of the DMCA with some foresight recognized that the anti-circumvention provisions rode on the delicate and sharp edge where static law meets rapidly-evolving technology and new business innovation.  Congress wanted to make sure there was a process that ensured the anti-circumvention provisions did not lead to unintended consequences that hindered rather than encouraged technological innovation.  So the Copyright Office reviews requests for exemptions with that goal in mind.

In the rulemaking completed on Monday, of course, one important exemption approved by the Register was one proposed by the Electronic Frontier Foundation, which asked for an exemption for “jailbreaking” cell phones, especially iPhones.

Jailbreaking allows the customer to override security features of the iPhone’s firmware that limits which third party applications can be added to the phone.  Apple strictly controls which third party apps can be downloaded to the phone through the App Store, and has used that control to ban apps with, for example, political or sexual content.  Of course the review process also ensures that the apps work are technically compatible with the phone’s other software, don’t unduly harm performance, and aren’t duplicative of other apps already approved.

Jailbreaking the phone allows the customer to add whatever apps they want, including those rejected by or simply never submitted to Apple in the first place, for whatever reason.

In approving the exemption, the Copyright Office noted that jailbreaking probably does involve copyright infringement.  The firmware must be altered as part of the process, and that alteration violates Apple’s legal monopoly on derivative or adapted works.  But the Register found that such alteration was de minimis and approved the exemption based on the concept of “fair use.”

Fair use, codified in Section 107 of the Copyright Act, holds that certain uses of a copyrighted work that would otherwise be reserved to the rights holder are not considered infringement.  These include uses that have positive social benefits but which the rights holder as a monopolist might be averse to permitting under any terms, such as quotations in a potentially-negative review.

EFF had argued initially that jailbreaking was not infringement at all, but the Register rejected that argument.  Fair use is a much weaker rationale, as it begins by acknowledging a violation, though one excused by law.  The law of fair use, as I note in the piece, has also been in considerable disarray since the 1980’s, when courts began to focus almost exclusively on whether the use (technically, fair use is an affirmative defense to a claim of infringement) harmed the potential commercial prospects for the work.

Courts are notoriously bad at evaluating product markets, let alone future markets.  So copyright holders now simply argue that future markets, thanks to changing technology, could include anything, and that therefore any use has the potential to harm the commercial prospects of their work.  So even noncommercial uses by people who have no intention of “competing” with the market for the work are found to have infringed, fair use notwithstanding.

But in granting the jailbreaking exemption, the Copyright Office made the interesting and important distinction between the market for the work and the market for the product or service in which the work is embedded.

Jailbreaking, of course, has the potential to seriously undermine the business strategy Apple has carefully designed for the iPhone and, indeed, for all of its products, which is to tightly control the ecosystem of uses for that product.

This ensures product quality, on the one hand, but it also means Apple is there to extract fees and tolls from pretty much any third party they want to, on technical and economic terms they can dictate.  Despite its hip reputation, Apple’s technical environment is more “closed” than Microsoft’s.  (The open source world of Linux being on the other end of the spectrum.)

In granting the exemption, the Copyright Office rejected Apple’s claim that jailbreaking harmed the market for the iPhone.  The fair use analysis, the Register said, focuses on the market for the protected work, which in this case is the iPhone’s firmware.  Since the modifications needed to jailbreak the firmware don’t harm the market for the firmware itself, the infringing use is fair and legally excused.   It doesn’t matter, in other words, that jailbreaking has a potentially big commercial impact on the iPhone service.

That distinction is the notable feature of this decision in terms of copyright law.  Courts, and now the Copyright Office, are well aware that technology companies try to leverage the monopoly rights granted by copyright to create legal monopolies on uses of their products or services.  In essence, they build technical controls into the copyrighted work that limits who and how the product or service can be used, than claim their intentional incompatibilities are protected by law.

A line of cases involving video game consoles, printer cartridges and software applications generally has been understandably skeptical of efforts to use copyright in this manner, which quickly begins to smell of antitrust.  Copyright is a monopoly—that is, a trust.  So it’s not surprising that its application can leak into concerns over antitrust.  The law strives to balance the need for the undesirable monopoly (incentives for authors) with the risks to related markets (restraint of trade).

As Anthony Falzone put it in a blog post at the Stanford Center for Internet and Society, “The Library went on to conclude there is no basis for Apple to use copyright law to ‘protect[] its restrictive business model’ and the concerns Apple articulated about the integrity of the iPhone’s ‘ecosystem’ are simply not harms that would tilt the fair use analysis Apple’s way.”

The exemption granted this week follows the theory that protecting the work itself is what matters, not the controlled market that ownership of the work allows the rights holder to create.

The bottom line here:  messing with the firmware is a fair use because it doesn’t damage the market for the firmware, regardless of (or perhaps especially because of) its impact on the market for the iPhone service as Apple has designed it.  That decision is largely consistent with case law evaluating other forms of technical lockout devices.

The net result is that it becomes harder for companies to use copyright as a legal mechanism to fend off third parties who offer replacement parts, add-ons, or other features that require jailbreaking to ensure compatibility.

Which is not to say that Apple or anyone else trying to control the environment around copyright-protected software is out of luck.  As I note in the CNET piece, the DMCA is just one, and perhaps the weakest arrow in Apple’s quiver here.  Just because jailbreaking has now been deemed a fair use does not mean Apple is forced to accommodate any third party app.  Not by a long shot.

Jailbreaking the iPhone remains a breach of the user agreement for both the device and the service.  It still voids the warranty and still exposes the customer to action, including cancelling the service or early termination penalties, that Apple can legally take to enforce the agreement.  Apple can also still take technical measures, such as refusing to update or upgrade jailbroken phones, to keep out unapproved apps.

Contrary to what many comments have said in some of the articles noted above, the DMCA exemption does not constitute a “get out of jail free” card for users.

It’s true that Apple can no longer rely on the DMCA (and the possibility of criminal enforcement by the government) to protect the closed environment of the iPhone.  But consumers can still waive legal rights—including the right to fair use—in agreeing to a contract, license agreement, or service agreement.  (In some sense that’s what a contract is, after all—agreement by two parties to waive various rights in the interest of a mutual bargain.)

Ownership Rights to Software Remain a Mystery

A third interesting aspect to the Copyright Office’s rulemaking has to do with the highly-confused question of software ownership. For largely technical reasons, software has moved from intangible programs that must of necessity be copied to physical media (tapes, disks, cartridges) in order to be distributed to intangible programs distributed electronically (software as a service, cloud computing, etc.).  That technical evolution has made the tricky problem of ownership has gotten even trickier.

Under copyright law, the owner of a “copy” of a work has certain rights, including the right to resell their copy.  The so-called “first sale doctrine” makes legal the secondary market for copies, including used book and record stores, and much of what gets interesting on Antiques Roadshow.

But the right to resell a copy of the work does not affect the rights holders’ ability to limit the creation of new copies, or of derivative or adapted works based on the original.  For example, I own several pages of original artwork used in 1960’s comic books drawn by Jack Kirby, Steve Ditko, and Gene Colan.

While Marvel still owns the copyright to the pages, I own the artifacts—the pages themselves.  I can resell the pages or otherwise display the artifact, but I have no right until copyright expires to use the art to produce and sell copies or adaptations, any more than the owner of a licensed Mickey Mouse t-shirt can make Mickey Mouse cartoons.

(Mike Masnick the other day had an interesting post about a man who claims to have found unpublished lost negatives made by famed photographer Ansel Adams.  Assuming the negatives are authentic and there’s no evidence they were stolen at some point, the owner has the right to sell the negatives.  But copyright may still prohibit him from using the negatives to make or sell prints of any kind.)

Software manufacturers and distributors are increasingly trying to make the case that their customers no longer receive copies of software but rather licenses to use software owned by the companies.  A license is a limited right to make use of someone else’s property, such as a seat in a movie theater or permission to drive a car.

As software is increasingly disconnected from embodiment in physical media, the legal argument for license versus sale gets stronger, and it may be over time that this debate will be settled in favor of the license model, which comes with different and more limited rights for the licensee than the sale of a copy.  (There is no “first sale” doctrine for licenses.  They can be canceled under terms agreed to in advance by the parties.)

For now, however, debate rages as to whether and under what conditions the use of software constitutes the sale of a copy versus a license to use.  That issue was raised in this week’s rulemaking several times, notably in a second exemption dealing with unlocking phones from a particular network.

Under Section 117 of the Copyright Act, the “owner of a copy” of a computer program has certain special rights, including the right to make a copy of the software (e.g. for backup purposes, or to move it from inert media to RAM) or modify it when doing so is “essential” to make use of the copy.

Unlocking a phone to move it to another network, particularly a used phone being recycled, necessarily requires at least minor modification, and the question becomes whether the recycler or anyone lawfully in possession of a cell phone “owns a copy” of the firmware.

Though this issue gave the Copyright Office great pause and lots of pages of analysis, ultimately they sensibly hedged on the question of copy versus license.  The Register did note, however, that Apple’s license agreement was “not a model of clarity.”

In the interests of time, let me just say here that this is an issue that will continue to plague the software industry for some time to come.  It is a great example of how innovation continues to outpace law, with unhappy and unintended consequences.  For more on that subject, see Law Seven (copyright) and Law Nine (software) of “The Laws of Disruption.”

Better late than never, I’ve finally given a close read to the Notice of Inquiry issued by the FCC on June 17^th.  (See my earlier comments, “FCC Votes for Reclassification, Dog Bites Man”.)  In some sense there was no surprise to the contents; the Commission’s legal counsel and Chairman Julius Genachowski had both published comments over a month before the NOI that laid out the regulatory scheme the Commission now has in mind for broadband Internet access.

Chairman Genachowski’s “Third Way” comments proposed an option that he hoped would satisfy both extremes.  The FCC would abandon efforts to find new ways to meet its regulatory goals using “ancillary jurisdiction” under Title I (an avenue the D.C. Circuit had wounded, but hadn’t actually exterminated, in the Comcast decision), but at the same time would not go as far as some advocates urged and put broadband Internet completely under the telephone rules of Title II.

Instead, the Commission would propose a “lite” version of Title II, based on a few guiding principles:

• Recognize the transmission component of broadband access service—and only this component—as a telecommunications service;
• Apply only a handful of provisions of Title II (Sections 201, 202, 208, 222, 254, and 255) that, prior to the Comcast decision, were widely believed to be within the Commission’s purview for broadband;
• Simultaneously renounce—that is, forbear from—application of the many sections of the Communications Act that are unnecessary and inappropriate for broadband access service; and
• Put in place up-front forbearance and meaningful boundaries to guard against regulatory overreach.

The NOI pretends not to take a position on any of three possible options – (1) stick with Title I and find a way to make it work, (2) reclassify broadband and apply the full suite of Title II regulations to Internet access providers, or (3) compromise on the Chairman’s Third Way, applying Title II but forbearing on any but the six sections noted above—at least, for now (see ¶ 98).  It asks for comments on all three options, however, and for a range of extensions and exceptions within each.

I’ve written elsewhere (see “Reality Check on ‘Reclassifying’ Broadband” and  “Net Neutrality and the Inconvenient Constitution”) about the dubious legal foundation on which the FCC rests its authority to change the definition of “information services” to suddenly include broadband Internet, after successfully (and correctly) convincing the U.S. Supreme Court that it did not.  That discussion will, it seems, have to wait until its next airing in federal court following inevitable litigation over whatever course the FCC takes.

This post deals with something altogether different—a number of startling tidbits that found their way into the June 17 ^th NOI.  As if Title II weren’t dangerous enough, there are hints and echoes throughout the NOI of regulatory dreams to come.  Beyond the hubris of reclassification, here are seven surprises buried in the 116 paragraphs of the NOI—its seven deadly sins.  In many cases the Commission is merely asking questions.  But the questions hint at a much broader—indeed overwhelming—regulatory agenda that goes beyond Net Neutrality and the undoing of the Comcast decision.

Pride:  The folly of defining “facilities-based” provisioning – The FCC is struggling to find a way to apply reclassification only to the largest ISPs – Comcast, AT&T, Verizon, Time Warner, etc.  But the statutory definition of “telecommunications” doesn’t give them much help.  So the NOI invents a new distinction, referred to variously as “facilities-based” providers (¶ 1) or providers of an actual “physical connection,” (¶ 106) or limiting the application of Title II just to the “transmission component” of a provider’s consumer offering (¶ 12).

All the FCC has in mind here is “a commonsense definition of broadband Internet service,” (¶ 107) (which they never provide), but in any case the devil is surely in the details.  First, it’s not clear that making that distinction would actually achieve the goal of applying the open Internet rules—network management, good or evil, largely occurs well above the transmission layers in the IP stack.

The sin here, however, is that of unintentional over-inclusion.  If Title II is applied to “facilities-based” providers, it could sweep in application providers who increasingly offer connectivity as a way to promote usage of their products.

Limiting the scope of reclassification just to “facilities-based” providers who sell directly to consumers doesn’t eliminate the risk of over-inclusion.  Some application providers, for example, offer a physical connection in partnership with an ISP (think Yahoo and Covad DSL service) and many large application providers own a good deal of fiber optic cable that could be used to connect directly with consumers.  (Think of Google’s promise to build gigabit test beds for select communities.)  Municipalities are still working to provide WiFi and WiMax connections, again in cooperation with existing ISPs.  (EarthLink planned several of these before running into financial and, in some cities, political trouble.)

There are other services, including Internet backbone provisioning, that could also fall into the Title II trap (see ¶ 64).  Would companies, such as Akamai, which offer caching services, suddenly find themselves subject to some or all of Title II?  (See ¶ 58)  How about Internet peering agreements (unmentioned in the NOI)?  Would these private contracts be subject to Title II as well?  (See ¶ 107)

Lust:  The lure of privacy, terrorism, crime, copyright – Though the express purpose of the NOI is to find a way to apply Title II to broadband, the Commission just can’t help lusting after some additional powers it appears interested in claiming for itself.  Though the Commissioners who voted for the NOI are adamant that the goal of reclassification is not to regulate “the Internet” but merely broadband access, the siren call of other issues on the minds of consumers and lawmakers may prove impossible to resist.

Recognizing, for example, that the Federal Trade Commission has been holding hearings all year on the problems of information privacy, the FCC now asks for comments about how it can use Title II authority to get into the game (¶ 39, 52, 82, 83, 96), promising of course to “complement” whatever actions the FTC is planning to take.

Cyberattacks and other forms of terrorism are also on the Commission’s mind.  In his separate statement, for example, Chairman Genachowski argues that the Comcast decision “raises questions about the right framework for the Commission to help protect against cyber-attacks.”

The NOI includes several references to homeland security and national defense—this in the wake of publicity surrounding Sen. Lieberman’s proposed law to give the President extensive emergency powers over the Internet.  (See Declan McCullaugh, “Lieberman Defends Emergency Net Authority Plan.”)  Lieberman’s bill puts the power squarely in the Department of Homeland Security—is the FCC hoping to use Title II to capture some of that power for itself?

And beyond shocking acts of terrorism, does the FCC see Title II as a license to require ISPs to help enforce other, lesser crimes, including copyright infringement, libel, bullying and cyberstalking, e-personation—and the rest?  Would Title II give the agency the ability to impose its content “decency” rules, limited today merely to broadcast television and radio, to Internet content, as Congress has unsuccessfully tried to help the Commission do on three separate occasions?

(Just as I wrote that sentence, the U.S. Court of Appeals for the Second Circuit ruled that the FCC’s recent effort to craft more aggressive indecency rules, applied to Janet Jackson’s nipple, violates the First Amendment.  The Commission is having quite a bad year in the courts!)

Anger:  Sharing the pain of CALEA – That last paragraph is admittedly speculation.  The NOI contains no references to copyright, crime, or indecency.  But here’s a law enforcement sin that isn’t speculative.  The NOI reminds us that separate from Title II, the FCC is required by law to enforce the Communications Assistance for Law Enforcement Act (CALEA). (¶ 89) CALEA is part of the rich tapestry of federal wiretap law, and requires “telecommunications carriers” to implement technical “back doors” that make it easier for federal law enforcement agencies to execute wiretapping orders.  Since 2005, the FCC has held that all facilities-based providers are subject to CALEA.

Here, the Commission assumes that reclassification would do nothing to change the broader application of CALEA already in place, and seeks comment on “this analysis.”  (¶ 89)  The Commission wonders how that analysis impacts its forbearance decisions, but I have a different question.  Assuming the definition of “facilities-based” Internet access providers is as muddled as it appears (see above), is the Commission intentionally or unintentionally extending the coverage of CALEA to anyone selling Internet “connectivity” to consumers, even those for whom that service is simply in the interest of promoting applications?

Again, would residents of communities participating in Google’s fiber optic test bed awake to discover that all of that wonderful data they are now pumping through the fiber is subject to capture and analysis by any law enforcement officer holding a wiretapping order?  Oops?

Gluttony:  The Insatiable Appetite of State and Local Regulators – Just when you think the worst is over, there’s a nasty surprise waiting at the end of the NOI.  Under Title II, the Commission reminds us, many aspects of telephone regulation are not exclusive to the FCC but are shared with state and even local regulatory agencies.

Fortunately, to avoid the catastrophic effects of imposing perhaps hundreds of different and conflicting regulatory schemes to broadband Internet access, the FCC has the authority to preempt state and local regulations that conflict with FCC “decisions,” and to preempt the application of those parts of Title II the FCC may or may not forbear.

But here’s the billion dollar question, which the NOI saves for the very last (¶ 109):  “Under each of the three approaches, what would be the limits on the states’ or localities’ authority to impose requirements on broadband Internet service and broadband Internet connectivity service?”

What indeed?  One of the provisions the FCC would not apply under the Third Way, for example, is § 253, which gives the Commission the authority to “preempt state regulations that prohibit the provision of telecommunications services.” (¶ 87)  So does the Third Way taketh federal authority only to giveth to state and local regulators?  Is the only way to avoid state and local regulations—oh, well, if you insist–to go to full Title II?  And might the FCC decide in any case to exercise their discretion, now or in the future, to allow local regulations of Internet connectivity?

What might those regulations look like?  One need only review the history of local telephone service to recall the rate-setting labyrinths, taxes, micromanagement of facilities investment and deployment decisions—not to mention the scourge of corruption, graft and other government crimes that have long accompanied the franchise process.  Want to upgrade your cable service?  Change your broadband provider?  Please file the appropriate forms with your state or local utility commission, and please be patient.

Fear-mongering?  Well, consider a proposal that will be voted on this summer at the annual meeting of the National Association of Utilities Commissioners.  (TC-1 at page 30)  The Commissioners will decide whether to urge the FCC to adopt what it calls a “fourth way” to fix the Net Neutrality problem.  Their description of the fourth way speaks for itself.  It would consist of:

“bi-jurisdictional regulatory oversight for broadband Internet connectivity service and broadband Internet service which recognizes the particular expertise of States in: managing front-line consumer education, protection and services programs; ensuring public safety; ensuring network service quality and reliability; collecting and mapping broadband service infrastructure and adoption data; designing and promoting broadband service availability and adoption programs; and implementing  competitively neutral pole attachment, rights-of-way and tower siting rules and programs.”

The proposal also asks the FCC, should it stick to the Third Way approach, to add in several other provisions left out of Chairman Genachowski’s list, including one (again, § 253) that would preserve the state’s ability to help out.

Or consider a proposal currently being debated by the California Public Utilities Commission.  California, likewise, would like to use reclassification as the key that unlocks the door to “cooperative federalism,” and has its own list of provisions the FCC ought not to forbear under the Third Way proposal.

Among other things, the CPUC’s general counsel is unhappy with the definition the FCC proposes for just who and what would be covered by Title II reclassification.  The CPUC proposal argues for a revised definition that “should be flexible enough to cover unforeseen technological [sic] in both the short- and long-term.”

The CPUC also proposes the FCC add to the list of those regulated by Title II providers Voice over Internet Protocol telephony, which is often a software application riding well above the “transmission” component of broadband access.

California is just the first (tax-starved) state I looked for.  I’m sure there are and will be others who will respond hungrily to the Commission’s invitation to “comment” on the appropriate role of state and local regulators under either a full or partial Title II regime.  (¶ 109, 110)

Sloth:  The sleeping giant of basic web functions – browsers, DNS lookup, and more – The NOI admits that the FCC is a bit behind the times when it comes to technical expertise, and they would like commenters to help them build a fuller record.  Specifically, ¶ 58 asks for help “to develop a current record on the technical and functional characteristics of broadband Internet service, and whether those characteristics have changed materially in the last decade.”

In particular, the NOI wants to know more about the current state of web browsers, DNS lookup services, web caching, and “other basic consumer Internet activities.”

Sounds innocent enough, but those are very loaded questions.  In the Brand X case, in which the U.S. Supreme Court agreed with the FCC that broadband Internet access over cable fit the definition of a Title I “information service” and not a Title II “telecommunications service,” browsers, DNS lookup and other “basic consumer Internet activities” were crucial to the analysis of the majority.  Because cable (and, later, it was decided, DSL) providers offered not simply a physical connection but also supporting or “enhanced” services to go with it—including DNS lookup, home pages, email support and the like—their offering to consumers was not simple common carriage.

Justice Scalia disagreed, and in dissent made the argument that cable Internet was in fact two separable offerings – the physical connection (the packet-switched network) and a set of information services that ran on top of that connection.  Consumers used some information services from the carrier, and some from other content providers (other web sites, e.g.).  Those information services were rightly left unregulated under Title I, but Congress intended the transmission component, according to Justice Scalia, to be treated as a common carrier “telecommunications service” under Title II.

The Third Way proposal in large part adopts the Scalia view of the Communications Act (see ¶ 20, 106), despite the fact that it was the FCC who argued vigorously against that view all along, and despite the fact that a majority of the Court agreed with them.

By asking these innocent questions about technical architecture, the FCC appears to be hedging its bets for a certain court challenge.   Any effort to reclassify broadband Internet access will generate long, complicated, and expensive litigation.  What, the courts will ask, has driven the FCC to make such an abrupt change in its interpretation of terms like “information service” whose statutory definitions haven’t changed since 1996?

We know it is little more than that the Chairman would like to undo the Comcast decision, of course, and thereafter complete the process of enrolling the open Internet rules proposed in October.  But in the event that proves an unavailing argument, it would be nice to be able to argue that the nature of the Internet and Internet access have fundamentally changed since 2005, when Brand X was decided.  If it’s clear that basic Internet services have become more distinct from the underlying physical connection, at least in the eyes of consumers, so much the better.

Or perhaps something bigger is lumbering lazily through the NOI.  Perhaps the FCC is considering whether “basic Internet activities” (browsing, searching, caching, etc.) have now become part of the definition of basic connectivity.  Perhaps Title II, in whole or in part, will apply not only to facilities-based providers, but to those who offer basic Internet services essential for web access.  (Why extend Title II to providers of “basic” information service?  See below, “Greed.”)   If so, the exception will swallow the rule, and just about everything else that makes the Internet ecosystem work.

Vanity:  The fading beauty of the cellular ingénue – Perhaps the most worrisome feature of the proposed open Internet rules is that they would apply with equal force to wired and wireless Internet access.  As any consumer knows, however, those two types of access couldn’t be more different.

Infrastructure providers have made enormous progress in innovating improvements to existing infrastructure—especially the cable and copper networks.  New forms of access have also emerged, including fiber optic cable, satellite, WiFi/WiMax, and the nascent provisioning of broadband over power lines, which has particular promise in remote areas which may have no other option for access.

Broadband speeds are increasing, and there’s every expectation that given current technology and current investment plans, the National Broadband Plan’s goal of 100 million Americans with access to 100 mbps Internet speeds by 2010 will be reached without any public spending.

The wireless world, however, is a different place.  After years of underutilization of 3G networks by consumers who saw no compelling or “killer” apps worth using, the latest generation of portable computing devices (iPhone, Android, Blackberry, Windows) has reached the tipping point and well beyond.  Existing networks in many locations are overcommitted, and political resistance to additional cell tower and other facilities deployment is exacerbating the problem.

Just last week, a front page story in the San Francisco Chronicle reported on growing tensions between cell phone providers and residents who want new towers located anywhere but near where they live, go to school, shop, or work.  CTIA-The Wireless Association announced that it would no longer hold events in San Francisco, after the city council, led by Mayor Gavin Newsome, passed a “Cell Phone Right to Know” ordinance that requires retail disclosure of a phone’s specific adoption rate of emitted radiation.

Given the likely continued lagging of cellular deployment, it seems prudent to consider less stringent restrictions on network management for wireless than for wireline.  Under the open Internet rules, providers would be unable to limit or ban outright certain high-bandwidth data services, notably video services and peer-to-peer file sharing, that the network may simply be unable to support.  But the proposed open Internet rules will have none of that.

The NOI does note some of the significant differences between wired and wireless (¶ 102), but also reminds us that the limited spectrum for wireless signals affords them special powers to regulate the business practices of providers. (¶ 103)  Under Title III of the Communications Act, which applies to wireless, the FCC has and makes use of the power to ensure spectrum uses are serving a broad “public interest.”

In some ways, then, Title III gives the Commission powers to regulate wireless broadband access beyond what they would get from a reclassification to Title II.  So even if the FCC were to choose the first option and leave the current classification scheme alone, wireless broadband providers might still be subject to open Internet rules under Title III.  It would be ironic if the only broadband providers whose network management practices were to be scrutinized were those who needed the most flexibility.  But irony is nothing new in communications law.

One power, however, might elude the FCC, and therefore might give further weight to a scheme that would regulate wireless broadband under Title III and Title II.  Title III does not include the extension of Universal Service to wireless broadband (¶ 103).  This is a particular concern given the increased reliance of under-served and at-risk communities on cellular technologies for all their communications needs.  (See the recent Pew Internet & Society study for details.)

While the NOI asks for comment on whether and to what extent the FCC ought to treat wireless broadband differently and at a later time from wired services, the thrust of this section makes clear the Commission is thinking of more, not less regulation for the struggling cellular industry.

Greed:  Universal Service taxes – So what about Universal Service?  In an effort to justify the Title II reclassification as something more than just a fix to the Comcast case, the FCC has (with some hedging) suggested that D.C. Circuit’s ruling also calls into question the Commission’s ability to implement the National Broadband Plan, published only a few weeks prior to the decision in Comcast.

At a conference sponsored by the Stanford Institute for Economic Policy Research that I attended, Chairman Genachowski was emphatic that nothing in Comcast constrained the FCC’s ability to execute the plan.

But in the run-up to the NOI, the rhetoric has changed.  Here the Chairman in his separate statement says only that “the recent court decision did not opine on the initiatives and policies that we have laid out transparently in the National Broadband Plan and elsewhere.”

Still, it’s clear that whether out of genuine concern or just for more political and legal cover, the Commission is trying to make the case that Comcast casts serious doubt on the Plan, and in particular the FCC’s recommendations for reform of the Universal Service Fund (USF).  (¶¶ 32-38).

Though the NOI politely recites the legal theories posed by several analysts for how USF reform could be done without any reclassification, the FCC is skeptical.  For the first and only time in the NOI, the FCC asks not for general comments on its existing authority to reform Universal Service but for the kind of evidence that would be “needed to successfully defend against a legal challenge to implementation of the theory.”

There is, of course, a great deal at stake.  The USF is fed by taxes paid by consumers as part of their telephone bills, and is used to subsidize telephone service to those who cannot otherwise afford it.  Some part of the fund is also used for the “E-Rate” program, which subsidizes Internet access for schools and libraries.

Like other parts of the fund, E-Rate has been the subject of considerable corruption.  As I noted in Law Four of “The Laws of Disruption,” a 2005 Congressional oversight committee labeled the then $2 billion E-Rate program, which had already spawned numerous criminal convictions for fraud, a disgrace, “completely [lacking] tangible measures of either effectiveness or impact.”

Today the USF collects $8 billion annually in consumer taxes, and there’s little doubt that the money is not being spent in a particularly efficient or useful way.  (See, for example, Cecilia Kang’s Washington Post article this week, “AT&T, Verizon get most federal aid for phone service.”)  The FCC is right to call for USF reform in the National Broadband Plan, and to propose repurposing the USF to subsidize basic Internet access as well as dial tone.  The needs for universal Internet access—employment, education, health care, government services, etc.—are obvious.

But what has this to do with Title II reclassification?  There’s no mention in the NOI of plans to extend the class of services or service providers obliged to collect the USF tax, which is to say there’s nothing to suggest a new tax on Internet access.  But Recommendation 8.10 of the NBP encourages just that.  The Plan recommends that Congress “broaden the USF contributions base” by finding some method of taxing broadband Internet customers.  (Congress has so far steadfastly resisted and preempted efforts to introduce any taxes on Internet access at the federal and state level.)

If Congress agreed with the FCC, broadband Internet access would someday be subject to taxes to help fund a reformed USF.  The bigger the category of providers included under Title II (the most likely collectors of such a tax), the bigger the USF.  The temptation to broaden the definition of affected companies from “facilities based” to something, as the California Public Utilities Commission put it, more “flexible,” would be tantalizing.

***

Other than these minor quibbles, the NOI offers nothing to worry about!

. . . when you realize how much data it can give up to law enforcement and phone thieves. Or maybe one of you smarties will write an app that wipes your iPhone clean, restoring your control over personal and private communications information.

NY venture capitalist Fred Wilson notes eight advantages of using the iPhone’s Safari browser over iPhone apps to access content. Fred’s arguments seem pretty sound to me and help to illustrate the point I was trying to make a few months ago in a heated exchange over Adam’s post on Apple’s App Store, Porn & “Censorship”: Although Apple restricts pornographic apps, it does not restrict what iPhone (or iPad or iTouch) users can access on their  browsers. (And it’s not censorship, anyway, because that’s what governments do!)

As I noted in that exchange, the main practical advantage of apps right now over the browser seems to be the ability to play videos from websites that require Flash—which is especially useful for porn! Apple has rejected using Flash on the iPhone on technical grounds, in favor of HTML5, which will allow websites to display video without Flash—including on mobile devices. But once HTML5 is implemented (large scale adoption expected in 2012), this primary advantage of apps over mobile Safari will disappear: Users will be able to view porn on their browsers without needing to rely on apps—and Apple’s control over apps based on their content will no longer matter so much, if at all.

Of course, it may take several more years for HTML5 to really become the standard, but what matters is that all Apple products, including mobile Safari, already support HTML5. So it’s just a question of when porn sites move from Flash to HTML5. That seems already to be happening, with major porn publishers already starting the transition. The main stumbling block seems to be HTML5 support from the other browser makers. But Internet Explorer 9 supports HTML5, and is expected out early in 2011 with a beta version due out this August. Mozilla’s Firefox 4.0 (formerly 3.7) also promises HTML5 support and is due out this November. Since porn publishers have always been on the cutting edge of implementing new web technologies, I’d bet we’ll start seeing many porn sites move to HTML5 by this Christmas. And by Christmas 2011, as we all sit around the fire with Grandma sipping eggnog and enjoying our favorite adult websites on our overpriced-but-elegant Apple products loading in HTML5 in the Safari browser, we’ll all look back and wonder why anyone made such a big deal about Apple restricting porn apps.

Oh, and if you get tired of waiting, get an Android phone! Anyway, here are my comments on Adam’s February post:

I do understand why, as a practical matter, it’s a real inconvenience for a porn-lover not to be able to get a porn app on the iPhone. I think we can have a legitimate debate about what Apple needs to do to make this limitation transparent to its customers. But, as I noted above, users now have lots of choices for other platforms that either allow apps stores with porn (e.g., Google’s Android) or simply those that support Mobile Flash. Again, the practical importance of the apps store from a user interface perspective will diminish significantly when mobile Flash comes out this year for the various mobile OSes (except Apple, sadly) because users will be able to watch porn video through their mobile browser without needing a porn-specific app. (Of course, it’s still possible that an app might handle scrolling through photos better.)

And:

Now, as a practical matter, it’s not easy to view porn on mobile browsers, especially since they don’t currently support Flash, so video playing is limited to videos you either (i) download or (ii) stream from the web in a special app, such as for YouTube. Since Flash is used by the vast majority of video streaming sites, including for porn, this means that the abundance of online porn isn’t particularly accessible on a mobile phone. Scrolling through images, pornographic or otherwise, isn’t terribly easy either, especially since even fast data networks suffer from much greater latency than fixed broadband services. But Adobe recently announced that Flash 10.1 would be coming to Android, Blackberry, Windows Mobile 7, Nokia S60/Symbian and Palm WebOS. While it appears that Microsoft won’t be rolling out Flash for Windows Mobile 7 anytime soon, it does appear to be planning to do so at some point in the near future, and Google is already hard at work on rolling out Flash for Android sometime soon. Once these platforms roll out Flash, the Apps stores will no longer have any meaningful “gatekeeper” control over easily accessing video content, since users will be able to view or stream whatever they like in the browser. But today, the historical moment when restrictions on Apple’s app store had anything like the censorious effect claimed by Apple’s critics has passed (even assuming one believed “private censorhip” isn’t a contradiction in terms). Specifically, I’d say it passed sometime in the last year, when Android became a more viable option and, even more specifically, on this issue of mobile access to porn, on November 30, 2009, when MiKandi launched. Sure, it’s true, that Android users can’t access  all their favorite porn sites, and MiKandi app offerings are limited, but more are coming—so to speak! And when Android phone gets Flash this year, this important distinction between mobile Internet browsing and desktop Internet browsing will largely disappear. (I only hope the wireless data networks are prepares for the upsurge in video streaming on their networks that will, to be sure, be driven largely by mobile-browsing porn sites.) So… who really cares what Apple does with their app store? Yes, I understand some app users with long-term contracts may be itching for porn right now, and don’t to pay an early termination fee to jump to Android but, well, too damn bad! You may have a right to access porn if you want to, but that certainly doesn’t give you a right to force Apple to offer it to you in the most convenient way possible. Finally, it’s worth noting here that Apple has  not removed sexually-oriented social networking apps, such asGrindr, a mobile gay-cruising app from the iPhone store. I’d be a little more concerned about Apple removing such apps, whose functionality is harder to replicate from the browser, than simply removing apps for viewing pornography.

Thoughts?

Pundits are foaming at the mouth about AT&T’s just-announced end to unlimited data packages for smartphones. Here is Jeff Jarvis calling the move “cynical,” “retrograde,” and “evil.” However, he provides no evidence that this is anything but AT&T facing economic reality. The iPhone was a revolution, and how much data people consume given an awesome device turned out to be much more than AT&T was ready for. Now they’re asking their customers who use the most data to pay more, and this is evil?

Not only is it not evil, it’s incredibly fair. Most people will probably pay less for service. The cheapest of AT&T’s new plans is $15 for 200 MB of data. That’s $15 cheaper than their current $30 for unlimited iPhone use. According to AT&T, 65 percent of their customers use less than 200 MB of data a month. I consider myself a heavy iPhone user, and I just came back from a trip to NYC on which my iPhone was the only device I took with me, and yet with 2 days left in my billing cycle, I’ve used 154 MB of data. So, AT&T’s change will actually be a price-cut for me and the majority of AT&T customers.

Yup, real evil.

By Adam Thierer & Berin Szoka

As we mentioned yesterday, in a new series of essays, we will be examining proposals being put forward today that would have the government play a greater role in sustaining struggling media enterprises, “saving journalism,” or promoting more “public interest” content. With many traditional media operators struggling, and questions being raised about how journalism in particular will be supported in the future, Washington policymakers are currently considering what role government can and should play in helping media providers reinvent themselves in the face of tumultuous technological change wrought by the Digital Revolution. We will be releasing 6 or 7 essays on this topic leading up to our big filing in the FCC’s “Future of Media” proceeding (deadline is May 7^th).

In the first installment of our series, we will critique an old idea that’s suddenly gained new currency: taxing media devices or distribution systems to fund media content. We argue that such media income redistribution is fundamentally inconsistent with American press traditions, highly problematic under the First Amendment, difficult to implement in a world of media abundance and platform convergence, and likely to cause serious negative side effects.  Bottom line: Don’t tax our iPhones or broadband to subsidize media!

We’ve attached the entire text of the piece below. (Installment #2, on broadcast spectrum taxes to subsidize public media, will be released next week.)

The Wrong Way to Reinvent Media, Part I: Taxes on Consumer Electronics, Mobile Phones & Broadband

by Adam Thierer & Berin Szoka*

PFF Progress on Point 17.1 [PDF]

With many traditional media operators struggling, and questions being raised about how journalism in particular will be supported in the future,[1] Washington policymakers are currently considering what role government can and should play in helping media providers reinvent themselves in the face of tumultuous technological change wrought by the Digital Revolution. For example, the Federal Communications Commission (FCC) recently kicked off a new “Future of Media” effort with a workshop on “Serving the Public Interest in the Digital Era.” Likewise, the Federal Trade Commission (FTC) has hosted two workshops asking “How Will Journalism Survive the Internet Age?”  Meanwhile, the Senate has already held hearings about “the future of journalism,” and Senator Benjamin L. Cardin (D-MD) recently introduced the “Newspaper Revitalization Act,” which would allow newspapers to become tax-exempt non-profits in an effort to help them stay afloat.

In a series of forthcoming essays leading up to the May 7 filing deadline for the FCC’s “Future of Media” proceeding, we will discuss and critique some of the leading proposals being put forward that would have the government play a greater role in sustaining struggling media enterprises, “saving journalism,” or promoting more “public interest” content.

In this essay, we discuss an old idea that‘s gained new currency: taxing media  devices or distribution systems to fund media content. We argue that such media income redistribution is fundamentally inconsistent with American press traditions, highly problematic under the First Amendment, difficult to implement in a world of media abundance and platform convergence, and likely to cause serious negative side effects.

The BBC Model: Taxing Devices

Taxing devices to subsidize media content has never gained much traction here in the U.S., but it’s been used by some foreign governments for many decades.  Most famously, taxes on radios, eventually replaced by taxes on televisions, have sustained the BBC in the U.K. since its inception as the world’s first national broadcasting system in 1922. According to the most recent BBC annual report, the annual “fee” was raised to £142.50/year (currently $213.43) as of April 2009.  Failure to pay the fee is, of course, a crime and punished with stiff fines up to £1000 ($1497.75)—and radio emissions from unlicensed televisions can be detected by government vans that rove Britain’s streets looking for violators.  The revenue generated by the tax is then allocated among various BBC media products, with most of it going to the BBC 1 and BBC 2 television channels.

The U.S. has taken a different approach.  We’ve not embedded a tax in the cost of new media devices to pay for the content delivered over those devices.  (Of course, that’s at least partially because we’ve had a strong tradition of free markets in media ever since we revolted against the Brits and mercantilism, their system of state-directed economic planning!)  Generally speaking, private media operators have been expected to pay their own way in this country and not look to government for direct support.

America has had some indirect subsidies in the form of reduced postal rates for print media, as well as tax treatment for advertising.  And taxpayer dollars have been channeled to the CPB/PBS/NPR regime, of course.  But such public subsidy is small potatoes when compared to private media in the U.S.  For example, the Corporation for Public Broadcasting’s 2010 budget is just $400 million.[2] While many look to CPB to fund children’s programming (among its many other activities), its entire budget is no more than a quarter of the total amount of U.S. advertising revenue produced by children’s programming from food and beverages products alone: $1.6 billion in 2006 by the FTC’s most conservative estimates.[3] That comparison illustrates the vital importance of advertising to media,[4] but subscriptions, direct sales, and private patronage have also been major economic engines of media in United States.

But the idea of more direct government support for media (and journalism, in particular) has always been lurking out there.  There’s long been a small but vociferous crowd of academics and policymakers advocating huge increases in government spending on non-commercial or public media.  And some of them have even toyed with a tax on technology to cross-subsidize the media content that flows over those devices or networks.  Most recently, Robert W. McChesney and John Nichols, authors of the new book The Death and Life of American Journalism, have proposed a 4-part tax plan to raise money ($18-21 billion) for a massive $35 billion/year “public works” program for the press (with the remainder coming from other sources):[5]

• a 5% tax on consumer electronics (they estimate it would bring in $4 billion/year)
• a 3% tax on monthly ISP & cell phone bills (estimated $6 billion/year)
• a 2% sales tax on advertising (estimated $5 to $6 billion/year)
• a 7% tax on broadcasters (estimated $3-6 billion/year)

Similarly, Leonard Downie, Jr., Vice President at Large of The Washington Post, and Michael Schudson, a Professor at the Columbia University Graduate School of Journalism, have advocated the creation of a “Fund for Local News” that “would make grants for advances in local news reporting and innovative ways to support it.”[6] The Fund would make grants to news organizations through “Local News Fund Councils” and would be financed by “fees paid by radio and television licensees, or proceeds from auctions of telecommunications spectrum, or new fees imposed on Internet service providers.”[7] (Note: Proposals to impose fees on radio and television licensees will be discussed in a subsequent installment of this PFF series.  But for purposes of this installment, we reference the Downie & Schudson plan because of its call for fees on ISPs as one method of financing media going forward.)

More Platforms, More Taxes

McChesney and Nichols don’t go into a lot of detail about their tax proposals, but the consumer electronics tax they favor appears to be based on the 1967 Carnegie Commission Report, which called for a 5% tax on all new television purchases—a variant on Britain’s annual licensing fee.  But instead of just taxing “televisions”—which would be very difficult in a world of technological convergence where consumers can “watch television” on any number of devices (PCs, mobile phones, portable gaming devices, portable media players, etc.)—they apparently want to tax all consumer electronic devices.  Thus, they seem to recognize the reality of convergence but their answer is to just tax everything!

The British themselves have struggled with technological change: In 1971, the radio fee first introduced in 1922 was abolished, and in 1972, so was the BBC’s radio monopoly, with commercial radio stations being allowed to compete with BBC Radio for the first time.  One might argue that abolishing the radio tax and relying on a single tax (on televisions) to fund the BBC’s television programming (67% of BBC spending) as well as BBC radio (17%) was simply more efficient—since most consumers had a television as well as a radio.  Indeed, actually implementing any media device tax in the U.S. could prove very difficult, since countering evasion would require imposing sales taxes on online retailers ranging from Amazon.com to TigerDirect.com to countless small operators who sell TVs, DVD players, cell phones, and a wide variety of other gadgets.  So much for the Internet sales tax moratorium!

But the evasion problem is a real one. The BBC estimates an 8.7% evasion rate, and it’s not clear how much more (or less) of a problem evasion might be when the tax is imposed at the point of sale (as McChesney and Nichols propose) rather than every year (as in Britain).  But clearly, the problem can’t be solved simply by trying to tax all consumer electronics:  The higher the tax rate, the more likely a black market will develop for discounted devices—with all the problems that generally come with black markets, such as funding organized crime. Whenever someone proposes a single-digit tax rate for anything, it’s worth remembering that the federal income tax started out at 1-7% back in 1913—and, well, we all know how that turned out!  (Top rates rose to 67-73% during World War I, fell again to the mid-20s under Coolidge, then jumped again to 63% by 1933 and didn’t fall below 50% till 1986!)  Maybe McChesney and Nichols realize how ugly black markets would get if tax rates on devices rise in the future—and perhaps that’s why they’re trying to spread the pain around by taxing broadband and wireless service, advertising and broadcasting, too.  But, as discussed next, that’s another problem with the plan.

Taxation’s Negative Disincentives

Taxes distort markets and human behavior.  Long ago, Chief Justice John Marshall taught us that “the power to tax is the power to destroy.”  As the late Clarence B. Carson noted in an article of the same name:

Any level of taxation will make some undertakings unprofitable or submarginal. In practice, any increase in taxes will drive some people out of business, prevent them from going into business, or make it difficult or impossible for them to sustain themselves by whatever they are doing.[8]

This helps us understand why raising taxes on mobile phones and broadband bills would be particularly foolish way of supporting media:  it will distort beneficial behavior by both providers and consumers of communications conduit.

The FCC just recently reported that cost is a major factor for many households who decide not to buy broadband service (even though it’s available).  Why, after the FCC spent 13 months producing a 376-page, Congressionally mandated National Broadband Report on ways to increase the utilization and affordability of broadband, would we want to do anything to boost broadband bills, even in the name of “saving journalism”?  Increased taxes on broadband bills might discourage some broadband providers from rolling out innovative new services as rapidly as planned.  And once the new service tax is passed along to consumers—as all business taxes inevitably are—they might be less likely to adopt broadband, or might even cancel existing service.  How would that benefit media and journalism?

The same goes for mobile phones. CTIA—The Wireless Association estimates that wireless users already pay an average 15% tax (local state and federal) on their cell phone bills.  Moreover, if there is one thing we can count on, it’s that taxes inevitably rise once they get on the books, whatever the intention of their initial architects.  That‘s especially true when the tax creates a new class of subsidy recipients who have a vested interest in keeping the scheme alive and growing. Thus, what starts out as 3-5% tax on phones, broadband, and consumer electronics, will likely grow to be much higher over time.  Pretty soon the FCC will look like the massively inefficient Department of Agriculture, doling out subsides to everybody and his brother who qualifies for media industry corporate welfare.

How Will the Government Spend Your Money?

But the more interesting question about such a media tax may be on the  payout side of the scheme.  Herein lies a fundamental difference between the BBC model and what McChesney and Nichols are proposing: The BBC fees have always been used to fund BBC content only, not for all media.  True, the BBC once held monopolies in radio and television, but those monopolies died long ago, and when they did, the British did not share fee revenue with the BBC’s competitors.  Instead, commercial radio and television in the UK have had to rely on subscription and advertising revenues, just as in the US.  Thus, the British model does not answer a profoundly difficult question: Even if we assume government could create a reasonably effective media tax collection regime, who would qualify for a cut of the money?

In an age of user-generated content and a wide variety of hybrid media products, it would seem that defining eligibility criteria for the subsidy might be significantly more challenging than it was in the past. Would blogs qualify?  What about live reporting via Twitter or photo-journalism via Flickr?  Who gets to decide what qualifies as news worth subsidizing, as opposed to mere opinions or aggregation?  Similarly, the “Fund for Local News” and “Local News Fund Councils” favored by Downie and Schudson would be doubly problematic.  They propose that, “The criteria for grants should be journalistic quality, local relevance, innovation in news reporting, and the capacity of the news organization, small or big, to carry out the reporting.”[9] But, again, who determines “journalistic quality” and “the capacity… to carry out the reporting” or even what constitutes “local” news?

Beyond such practical problems, determining eligibility raises profound First Amendment questions because, as the Supreme Court has held, “in the realm of private speech or expression, government regulation may not favor one speaker over another.”[10] The Court has also held that “Both tax exemptions and tax deductibility are a form of subsidy that is administered through the tax system.”[11] Thus, the government may not pick preferred classes of speakers for subsidies, just as it may not single out disfavored classes for penalties.  For example, a state university may not selectively deny funding to a gay and lesbian students association, because, as the Eighth Circuit has held:

a public body that chooses to fund speech or expression must do so even-handedly, without discriminating among recipients on the basis of their ideology.  The University need not supply funds to student organizations; but once having decided to do so, it is bound by the First Amendment to act without regard to the content of the ideas being expressed.  This will mean, to use Holmes’s phrase, that the taxpayers will occasionally be obligated to support not only the thought of which they approve, but also the thought that they hate. That is one of the fundamental premises of American law.[12]

And there’s also a First Amendment-related concern here associated with the potentially—if subtly—coercive effects of subsidies on the independent editorial discretion of news-gatherers.  Downie and Schudson insist they “understand the complexity of establishing a workable grant selection system and the need for strict safeguards to shield news organizations from pressure or coercion from state councils or anyone in government.”^[13] Yet they hope political pressure can, somehow, be kept to a minimum.  Likewise, McChesney and Nichols largely dismiss such concerns about undue political influence on subsidized entities—even though they cite several examples of politicians attempting to use the purse strings to influence PBS and NPR funding over the past four decades![14]

Regardless, these scholars fail to account for the fact that, going forward, political pressure would likely grow in proportion to dependence of media entities upon such public subsidy and the overall amount of those subsidies.  After all, we’re talking about taxpayer funding for the press on an unprecedented scale here.  Moreover, the more visible these subsidies become—especially then the funding goes to highly controversial media content or outlets ( e.g., involving pornography, vulgarity, politics, religion, abortion, homosexuality)—the more likely the public and politicians are to clamor for rules on who gets what.  We’ve already seen a microcosm of that concern with National Endowment for the Arts funding for controversial art and culture in the past.  Now imagine media subsidies on the scale that McChesney and Nichols envision coupled with Downie and Schudson’s “Local News Fund Councils” sorting out competing claims and concerns.  Media funding will quickly become a political circus—and another front in the ongoing Culture Wars.

Here’s another concern: Will this scheme lead to more or less media competition?  It would be misguided to argue that such a tax system couldn’t fund some quality journalism and even entertainment.  After all, there’s some wonderful stuff on the BBC.  But without having run the numbers for all countries, there seems to be a correlation between the level of government investment in media and the overall number of media outlets at the public’s disposal.  When visiting Europe, one is struck by how even the largest European countries have so few choices compared to what we have here in the States, and that’s true across media (video, audio, print, online).  Could that be because government spending / investment in media has had a crowding-out effect on private media?  That possibility is at least worth considering as some look to broaden public support for media here in the U.S. Government simply doesn’t have a very good track record of creating innovative, competitive businesses and markets.

How the Death of Private, For-Profit Media Becomes a Self-Fulfilling Prophecy

Which leads to a final concern: There’s just a gut-level discomfort many of us would have with the idea of government imposing even more taxes on us to support industries or interests we might find distasteful or not deserving of corporate welfare.  It’s one thing to say that the government should play a role at the margin funneling some money into public broadcasting efforts via the CPB for limited purposes, but it’s quite another to suggest that this should be the new model upon which all media should rest.  That’s essentially what McChesney and Nichols propose in their book, on the grounds that “the old order is collapsing” and private media is dead.

Of course, it’s virtually a self-fulfilling prophecy that private media operators will fail if you impose a smorgasbord of new tax burdens on them and related devices and distribution channels—and then channel the money to “public media” competitors!  As will be discussed in a future installment in this series of essays, taxing advertising is particularly harmful because those taxes come straight out of the advertising revenues upon which most publishers depend for their lifeblood.

But raising prices of innovative consumer electronics like readers ( e.g., Amazon’s Kindle, Barnes & Noble’s Nook, Sony’s Reader or Apple’s iPad) and the wireless broadband services that connect them isn’t such a bright idea either at a time when traditional publishers are hoping that new media distribution and consumption technologies will also allow them to experiment with new business models (like selling subscriptions for magazines or newspapers tailored for these devices).  Unlike the British annual license fee, a tax imposed at the point of purchase would discourage users from buying new devices.  This, in turn would slow adoption of new technologies and retard innovation in a market that has seen consumers move increasingly towards replacing their old devices every few years, due to the constant increased in processing power and functionality made possible by Moore’s Law.

Taken together, these tax proposals are a sure-fire way to achieve McChesney’s true radical end: the destruction of private, commercial media and journalism.  Let’s not forget, after all, that McChesney has argued (during this interview with the Canadian-based “Socialist Project”) that “the ultimate goal is to get rid of the media capitalists,” and that, “unless you make significant changes in the media, it will be vastly more difficult to have a revolution.”[15] And in his book with Nichols, he concludes by noting that “We have responded in a time of crisis not with tinkering reforms but with revolution.”[16]

Indeed they have!  But such radicalism must be rejected if we hope to sustain a truly free press and uphold America’s proud tradition of keeping a high and tight wall of separation between Press and State.  Americans would do well remember to remember the (other) Golden Rule: “Whoever Has the Gold, Makes the Rules!”[17] The more control politicians have over funding media, the more control they will inevitably have over media itself.

Related PFF Publications

• Testimony at FCC’s Hearing on “Serving the Public Interest in the Digital Era ,” Adam Thierer, March 2010.
• Public Option for Press Should Get the Red Pen, Adam Thierer, The Daily Caller, Jan. 2010.
• Chairman Leibowitz’s Disconnect on Privacy Regulation & the Future of News, Adam Thierer & Berin Szoka, Progress Snapshot 6.1, Jan. 13, 2010.
• Socializing Media in Order to Save It, Adam Thierer, City Journal, March 2009.
• A Manifesto for Media Freedom , Adam Thierer & Brian Anderson, 2008.
• Media Ownership Proceedings, W. Kenneth Ferree, Testimony before the Federal Communications Commission, Nov. 3, 2009.
• Media Myths: Making Sense of the Debate over Media Ownership, Adam Thierer, June 2005.

[1] The Pew Project for Excellence in Journalism reports that: “The numbers for 2009 reveal just how urgent these questions are becoming. Newspapers, including online, saw ad revenue fall 26% during the year, which brings the total loss over the last three years to 43%. Local television ad revenue fell 22% in 2009, triple the decline the year before. Radio also was off 22%. Magazine ad revenue dropped 17%, network TV 8% (and news alone probably more). Online ad revenue over all fell about 5%, and revenue to news sites most likely also fared much worse. Only cable news among the commercial news sectors did not suffer declining revenue last year.” Pew Project For Excellence in Journalism, Introduction, The State of the News Media 2010, March 2010, www.stateofthemedia.org/2010/overview_intro.php.

[2] Corporation for Public Broadcasting, FY 2010 Operating Budget, www.cpb.org/aboutcpb/leadership/board/resolutions/090915_fy10OperatingBudget.pdf.

[3] See FTC’s 2008 report, Marketing Food to Children and Adolescents: A Review of Industry Expenditures, Activities, and Self-Regulation, at ES-1-2, www.ftc.gov/os/2008/07/P064504foodmktingreport.pdf.

[4] Adam Thierer & Berin Szoka, The Progress & Freedom Foundation, The Hidden Benefactor: How Advertising Informs, Educates & Benefits Consumers, PFF Progress Snapshot 6.5, Feb. 2010, www.pff.org/issues-pubs/ps/2010/ps6.5-the-hidden-benefactor.html.

[5] Robert W. McChesney & John Nichols, The Death and Life of American Journalism (2010) at 210-11.

[6] Leonard Downie, Jr. & Michael Schudson, The Reconstruction of American Journalism, Columbia Journalism Review, Oct. 20, 2009, at 92, available at www.scribd.com/doc/21268382/Reconstruction-of-Journalism.

[7] Id.

[8] Clarence B. Carson, The Power to Tax is the Power to Destroy, The Freeman, Vol. 26, No. 10, Oct. 1976, www.thefreemanonline.org/featured/the-power-to-tax-is-the-power-to-destroy.

[9] Downie & Schudson, supra note 6 at. 93.

[10] Rosenberger, 515 U.S. 819, 828 (1995).

[11] Regan v. Taxation with Representation of Washington, 461 U.S. 540, 544 (1983).

[12] Gay & Lesbian Students Assoc, 850 F.2d 361, 362 (8th Cir. 1988).

[13] Id.

[14] McChesney & Nichols, supra note 5 at 193-99.

[15] Socialist Project, Media Capitalism, the State and 21st Century Media Democracy Struggles: An Interview with Robert McChesney, The Bullet, Socialist Project, E-Bulletin No. 246, Aug. 9, 2009, www.socialistproject.ca/bullet/246.php.

[16] Id.

[17] The Big Apple, Golden Rule (“He Who Has the Gold Makes the Rules”), June 13, 2009,  www.barrypopik.com/index.php/new_york_city/entry/golden_rule_he_who_has_the_gold_makes_the_rules.

Wrong Way to Reinvent Media Part 1 – Media Taxes [Thierer & Szoka – PFF] http://d1.scribdassets.com/ScribdViewer.swf

I’m quoted briefly in a story today in E-Commerce Times (see “Apple’s Patent Attack:  This Too May be Overhyped” by Erika Morphy) about the patent lawsuit filed this week by Apple against rival mobile device maker HTC.

Apple, of course, produces the iPhone, while HTC makes Google’s Nexus One and other devices that run on Google’s Android operating system.

So right from the start this case looks less like a simple patent dispute and more like a warning shot over Google’s bow.  The two companies are increasingly becoming rivals.  In August of last year, Google CEO Eric Schmidt resigned from Apple’s board.  Apple CEO Steve Jobs wrote at the time, “Unfortunately, as Google enters more of Apple’s core businesses, with Android and now Chrome OS, Eric’s effectiveness as an Apple Board member will be significantly diminished….”

The apocalyptic rhetoric from analysts that accompanied the lawsuit (see Marguerite Reardon’s piece on CNET, “Is Apple Launching a Patent War?”), however, is both under and overselling the story.  It’s both much worse and not as bad as it seems.

The Undersell

The war is actually already going on, and ranges far beyond Apple and HTC.  The mobile device industry is deeply embroiled in prolonged legal battles over patents, with perhaps dozens of complaints and counter-claims flying back and forth.  Nick Bilton of The New York Times this week produced a simplified chart of who is suing whom, which he described as a “patent lawsuit Super Bowl party.”

As I write in Law Eight of The Laws of Disruption, patent litigation has “evolved” from being a last resort in the protection of proprietary technology to the first step in protracted negotiations between industry participants over how to divide up a rapidly-growing pie.  Here’s how it works.  Everyone flood the Patent Office with applications, drafted as broadly as possible.  The over-burdened examiners, who are incentivized to process applications quickly, find it is easier to say yes than to say no, and grant a large percentage of patents that are far too generous and clearly don’t meet the legal requirements for protection.

As I wrote last year in The Big Money, patent grants are out-of-control, one of the many symptoms of what most legal scholars agree is a system that has become utterly broken.  (The U.S. Supreme Court is currently reviewing a case that could see the end of so-called “business method” patents and perhaps even patents for software.  See “Can You Patent a Cat and a Laser Pointer?”)

Meanwhile, the parties all sue each other, and after years of poring over each other’s documents during discovery, figure out, more-or-less, who’s really invented what.  They wind up cross-licensing everything to everybody else and agreeing to mutual defense pacts against future challenges to the good and bad patents.  Apple says it has no interest in licensing its technology, but simply wants to stop competitors from ripping off their property.  We’ll see.

It is very likely that many of these patents, if recent history is any guide, are absurdly overbroad and would not survive full litigation.  (I’ve reviewed none of the patents at issue in this case so far.)  And full litigation is neither likely nor the goal of the parties. The real point of all this legal posturing is to obtain cross-licenses that will ultimately deter new competitors from entering the market.

There is a better way to protect invention without years of expensive litigation.  In some industries, subject to government approval, the major players simply pool their patents and establish open terms under which anyone can license them.  Sprint, Cisco, Intel and Nextel, for example, have pooled their WiMax patents to ensure a single standard emerges.  A mobile device pool would have been harder to fashion, but would also have avoided a lot of bloodshed (and legal fees).  In the end I suspect the results will be the same.

The Oversell

At the same time, the stakes aren’t quite as life-or-death as many commentators believe.  For example, the E-Commerce Times story quotes Greg Sterling on what a loss for Apple in the suit against HTC would mean:  “It would mean open season on any IP — anything could be copied.”  Hardly.  All it would mean is that the particular patents Apple is claiming either don’t hold up under careful scrutiny or, if they do, that HTC is found not to have infringed them.

More to the point, patent protection is only one way—and perhaps the least effective—that competitors secure competitive advantage in rapidly-growing and rapidly-evolving markets for new technology.  Offering superior service, an ever-growing menu of new options and features, and competitive pricing also works just fine.

Apple in particular has a significant advantage that has nothing to do with its patent portfolio:  the thousands of third-party 3G apps it sells to its customers.  The iPhone’s popularity today has little to do with proprietary technology, and everything to do with the enormous network of third-party software developers Apple has wrangled to write apps for its devices.

The apps drives network traffic, of course, but also drives what economists call “network effects.”  The more people use their iPhones the more people who don’t have one feel nudged to get one. Even if Apple loses the litigation, the network is unaffected.

The real winners in the mobile device patent war will be based not on patents but on the ability to build a robust network with compelling consumer offerings.  As it should be.

So, do I need to remind everyone of my ongoing rants about Jonathan Zittrain’s misguided theory about the death of digital generativity because of the supposed rise of “sterile, tethered” devices? I hope not, because even I am getting sick of hearing myself talk about it. But here again anyway is the obligatory listing of all my tirades: 1, 2, 3, 4, 5, 6, 7, 8 + video and my 2-part debate with Lessig and him last year.

You will recall that the central villain in Zittrain’s drama The Future of the Internet and How to Stop It is big bad Steve Jobs and his wicked little iPhone. And then, more recently, Jonathan has fretted over those supposed fiends at Facebook. Zittrain’s worries that “we can get locked into these platforms” and that “markets [will] coalesce [around] these tamer gated communities,” making it easier for both corporations and governments to control us.  More generally, Zittrain just doesn’t seem to like that some people don’t always opt for the same wide open general purpose PC experience that he exalts as the ideal. As I noted in my original review of his book, Jonathan doesn’t seem to appreciate that it may be perfectly rational for some people to seek stability and security in digital devices and their networking experiences—even if they find those solutions in the form of “tethered appliances” or “sterile” networks, to use his parlance.

Every once and awhile I find a sharp piece by someone out there who is willing to admit that they see nothing wrong with such “closed” platforms or devices, or they even argue that those approaches can be superior to the more “open” devices and platforms out there. That’s the case with this Harry McCracken rant over at Technologizer today with the entertaining title, “The Verizon Droid is a Loaf of Day-Old Bread.” McCracken goes really hard on the Droid — which hurts because I own one! — and I’m not sure I entirely agree with his complaint about it, but what’s striking is how it represents the antithesis of Zittrainianism: 

Yesterday, Google announced Google Earth for Android. It looks neat–and it requires Android 2.1, so it won’t run on the less-than-four-months-old Droid. That’ll get fixed when Verizon rolls out an update for the Droid, which may happen soon. But it points out frustrating, potentially crippling issues with Android: The platform is splintering, and it’s changing so rapidly that the majority of Android handsets feel stale. Even the Droid–I’m not sure if it’s a coincidence that Amazon is selling it for fifty bucks, or one-quarter of Verizon’s original after-rebate price. Over at InfoWorld, Galen Gruman has a good post with more evidence of Android’s fractured nature. There are multiple, incompatible versions of the OS out there, and I don’t know of any good reason to think the situation’s going to get better rather than worse. Google surely isn’t setting a good example by releasing an Android version of Google Earth which won’t run on most Android phones.

But wait… doesn’t Android represent an example of near Nirvana in terms of Zittrainian generativity? Isn’t this the model we should all be hungry to have dominate all devices? McCracken sure doesn’t think so. He’s all aboard the Steve Jobs “Screw Openness” Express:

Do I need to recap the situation with Apple’s iPhone OS? It gets only one major upgrade a year, instantly available to all owners of existing devices, and all software works on any iPhone OS gizmo that has the proper hardware. Android will never be like that, of course: It’s an open-source product that runs on an array of gadgets with varying hardware specs and capabilities. But how big a bummer is it going to be if it takes a nerdish interest in version numbers to determine if a given app works on your phone? Isn’t it a problem if the hot Android phone of the 2009 holiday season feels stale by February, even if the situation is somewhat temporary? In short, wouldn’t it be healthy for Android if it evolved a little more slowly, and everyone responsible for its fate agreed that compatibility is a key goal?

Now isn’t that interesting! Here, in essence, we have an argument that generativity and openness are bad for us.  McCracken is praising Apple’s “you’ll get your OS upgrades when we let you” model versus the wild west approach of rolling upgrades for Android devices. Are you OK with that? Personally, I’m not. But more on that in a moment.

Part of what McCracken is actually getting at here is something I talked about in an old essay here wondering what constitutes “Too Much Platform Competition.” That is, how many platforms or operating systems are too many? Do we really need dozens of video game consoles? I don’t know about you, but I personally wouldn’t want to buy more than the 3 consoles I have already spent way too much money on. And game developers absolutely hate having to code for multiple platforms. The same is now true for mobile application developers. They are not particularly fond of the sudden proliferation of mobile operating systems and apps stores using competing standards. It’s just more development expense from their perspective.

What the iPhone brings, by contrast, is stability, security, and certainty.  People value that even if Zittrain fears it.

But now for the not so dirty little secret I have whispered here before — I hate Apple for all this!!  I am more of Zittrainian than Zittrain!  Jonathan actually carries an iPhone around in his pocket when I wouldn’t consider owning one in a million years.  I want to hack away at my stuff and tweak it to my heart’s content. And when McCracken talks about that “nerdish interest in version numbers to determine if a given app works on your phone,” well, that’s me, baby!  I am the kind of uber-dork that sits around constantly hitting the refresh button on the Droid’s “About Phone” menu to see if new OS upgrades are ready to roll.  (Yes, sad, I know. Do you believe someone actually married a dork like me?) And as far as security and stability go… well I say screw that. I have bricked several phones trying to hack away at them. It doesn’t help that I almost never know what I am doing, but I do have an healthy spirit of digital adventurism!

Anyway, here’s the really important point: We can have the best of both worlds — a world full of plenty of “tethered” appliances and semi-walled gardens, but also plenty of generativity and openness at the same time. And we can have plenty of hybrid solutions, too.  On the “generative-vs.-sterile appliance” spectrum, the range of devices and platforms just continues to grow and grow in both directions.

Moreover, these “open” vs. “closed” notions are always hopelessly over-simplified in digital technology policy debates. It’s rare to find any device or platform that is perfectly open or closed. Indeed, the very notion that Apple is a “closed’ platform is somewhat misleading. As I mentioned just last night, Apple’s App Store alone has over 100,000 apps in 20 different categories (available in 77 countries) to choose from. So, even though Steve Jobs & Co. keep a tight grip on operating system upgrades and Apps Store policies, the reality is that there’s a whole lot of generativity taking place on top of that OS and within that app store. It’s somewhat reminiscent of what happened when supposedly Big Bad Bill Gates pissed off the whole world in the 90s by building a code empire around a proprietary operating system that he tightly controlled:  Countless exciting innovations developed for that platform even if Bill & Microsoft didn’t hand over the keys to OS to the rest of the world so they could tinker away with it.

Again, I am not saying that generativity and openness are overrated; only that they other side of the story rarely gets told.  And the ideal world, of course, is one in which we have options on both sides of the “open” vs. “closed” spectrum from which to choose. Luckily, that is increasingly the world we live in today.

Oh my, here we go again with bogus accusations of “censorship” flying about a private company’s efforts to self-regulate its own media platform. Yesterday over at Silicon Alley Insider, Nick Saint penned a piece on how, “Apple’s War On Porn Is Just Getting Started.” And then over at TechCrunch, Jason Kincaid wrote about “Why Apple’s New Ban Against Sexy Apps Is Scary.” That yielded a flurry of similarly-titled rants about Apple’s supposedly totalitarian ways for taking away our new-found inalienable human right to unfettered porn and adult entertainment applications via our iPhones.  To Mr. Saint, Mr. Kincaid, and the many others who apparently believe Apple is the reincarnation of Big Brother for self-regulating their own Apps Store, all I can say is: Grow up!

Here are a few things they need to consider:

1. What Apple decides to do with its application store, and what it chooses to provide in it, is Apple’s own business—quite literally. Like a traditional bricks-and-mortar retailer, they can make policies about what types of content might be deemed too sensitive for the broad community of customers they serve. WalMart, for example, doesn’t carry certain types of music in their stores.  If customers don’t like what those retailers are doing, there’s always another place for them to take their business and find what they are looking for.
2. When it comes to the Apple controversy, we are generally talking about porn. Note to Mr. Saint and Mr. Kincaid and other whiners… there are plenty of other places to find porn on the Net! Seriously, have you looked?
3. A private company’s decision to self-censor by not carrying something in their store is not even in the same universe as the sort of censorship we see government officials engage in, which blocks all content from all platforms. There is no escape from that sort of all-encompassing censorship. 
4. Did I mention that there’s plenty of porn on the Net? OK, just checking. (Really, there’s lots.)
5. It’s important to realize that if Apple did not take some steps to self-regulate it’s App Store for the really nasty, envelop-pushing stuff, it would lead to enormous pressure from many parents and regulatory advocates for Congress to step in start regulating the Internet ecosystem. Better that Apple and other retailers choose to self-regulate than to have Congress and the nanny state start controlling online speech.
6. Finally, uh… why do you own an iPhone again? You don’t have to, you know.  I’ve been going round and round with Jonathan Zittrain and his disciples about this point over the past couple of years when they complain about Apple’s heavy-handed control of the App Store or the iPhone itself.  Sorry, but I have little sympathy in light of the fact that (a) Apple’s App Store has over 100,000 apps in 20 different categories to choose from, so it’s not like there’s really any shortage of other stuff to choose from and, (b) there are many other non-Apple options on the market from which to choose if you don’t like Apple’s policies on porn apps.  Get yourself a Android-based phone or something else. (Like Apple, Google bars the use of its apps store, the Android Market, for porn apps. But Google does allow users to install a separate apps store for adult apps, called MiKandi. MiKandi promises Blackberry and Windows Mobile marketplaces soon.)
7. (I can’t resist…) Once more, all this whining is about porn! There’s tons of it online! Go get your rocks off somewhere else besides the Apple Apps Store!  Gheesh.

[P.S. Lest I need to prove my First Amendment credentials to repel the eventual attacks from those who might accuse me of being a prude, please read this and watch this.]

Harvard Berkman Center professor Jonathan Zittrain has published another pessimistic, Steve-Jobs-is-Taking-Us-Straight-To-Cyber-Hell editorial building on the gloomy thesis he set forth in his 2008 book, The Future of the Internet and How to Stop It. His latest piece appears in the Financial Times and it’s entitled, “A Fight over Freedom at Apple’s Core. Concerning the recent Apple iPad announcement, Zittrain warns: “Mr Jobs ushered in the personal computer era and now he is trying to usher it out.”

I’m not going to go into yet another lengthy dissertation about what it so misguided about his thesis that cyberspace is becoming more “regulable” and that digital “generativity” is dying because of the rise of devices like the iPhone & iPad, or sites like Facebook.  Instead, I will just point you to the many things I’ve written before explaining just how far off the mark Prof. Zittrain is on this point. [See the complete list down below + video of our debate.]

But let me just say this… Ignoring that fact that he is an iPhone user himself — which makes no sense considering that he thinks of Apple as the font of all cyber-evil — he can’t muster any substantive empirical evidence proving that the Net and digital devices are being more “closed, sterile, and tethered,” as he repeatedly claims in his book and editorials.  And that’s not surprising because the reality is that the digital world is more open and generative than ever, and even if there are some “closed” devices and systems out there, they are actually quite innovative and not perfectly closed as Zittrain suggests. The spectrum of “open vs. closed” systems and devices is incredible diverse and nothing is perfectly “open” or “closed.”  We can have the best of both worlds: many open systems with some partial “walled gardens” here and there (or hybrid systems combining both). Regardless, we are witnessing greater digital “generativity” and innovation with each passing year. Until Zittrain can prove the opposite, his thesis must be considered a failure.

Finally, I want to associate myself with this excellent critique of the Zittrain thesis by Prof. Ed Felten, who points out that Zittrain’s argument doesn’t even work for the iPad, which I would agree is a fairly “closed appliance” in the Zittrainian scheme of the things:

For the iPad to become a Zittrain-type appliance, two things must happen. First, Apple must remain picky about which apps are available in the App Store. Second, Apple must limit the device’s browser so that it lacks the features that make today’s browsers viable application platforms. Will Apple be able to limit their product in this way, despite competition from other, more general-purpose tablets? I doubt it. But even this — even an appliance-style iPad — would not be enough to prove Zittrain’s thesis. Zittrain argued not just that appliances would exist, but that they would replace general purpose computers. Amazon’s kindle is an appliance, but it doesn’t prove Zittrain’s thesis because nobody is ditching their laptop in favor of a Kindle. Instead, the Kindle is an extra device which is used for its purpose, while the general-purpose device is used for everything else. If the iPad ends up like the Kindle — a complement to the laptop or netbook, rather than a replacement for it — this will not prove Zittrain’s thesis. It seems unlikely, then, that the iPad, even if it succeeds, will provide strong support for Zittrain’s thesis. General-purpose computers are so useful that we’re not likely to abandon them.

Exactly right. And here’s a few more things you might want to read to see why Zittrain’s thesis doesn’t add up (the first and the last one probably provide the best overview):

• Review of Zittrain’s “Future of the Internet” (3/23/08)
• Apple, Openness, and the Zittrain Thesis (3/30/08)
• Another Problem for the Zittrain Thesis — Old People! (4/12/08)
• [AUDIO] NPR “On Point” Debate over The Future of the Internet (5/13/08)
• iPhone 2.0 Cracked in Hours… What Was that Zittrain Thesis Again? (7/10/08)
• Enough anti-iPhone rants… just get another phone! (8/11/08)
• Another Review of Zittrain’s “Future of the Internet” (9/20/08)
• [VIDEO] My Debate with Jonathan Zittrain at New America Foundation (11/6/08)
• Zittrain’s Pessimistic Predictions and Problematic Prescriptions for the Net (7/20/09)
• Code, Pessimism, and the Illusion of “Perfect Control” (5/8/09)[1st part of Cato Unbound Debate “Ten Years of Code“ (featuring Lessig, Zittrain, Declan McCullagh, and me]
• Our Conflict of Cyber-Visions (5/14/09) [part 2 of the Cato Unbound debate]
• Cyber-Libertarianism: The Case for Real Internet Freedom (8/12/09)
• You’d Have to Be Smoking Dope to Believe the Zittrain-Lessig Thesis (9/15/09)
• Oh Farts! The Droid, the iPhone & the Lessig-Zittrain Thesis (11/12/09)

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

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

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!

It’s truly amazing how fast mobile broadband demand is expanding. A couple of things caught my eye yesterday that really drove that home.  First, I was reading Bernstein Research’s weekly (subscription-only) newsletter and Craig Moffett, one of America’s top media and communications analysts, summarized the growing mobile bandwidth crunch as follows:

To fully grasp the challenge facing wireless providers as we make the transition from wireless voice to wireless data, it is helpful to put some ballpark numbers around current usage levels. Today, the average voice-only customer consumes something like 50 megabytes of data every month. For that, they pay about $40, or about $0.80 per megabyte. That’s 70% of wireless industry revenues. Text messaging generates another $10 per month for a minuscule amount of data (in fact, arguably no throughput at all, since text messaging travels in a signaling band rather than in the carrier band itself). Let’s call it $1,000 per megabyte. That’s another 15% of industry revenues. On a blended basis, then, that’s $1.00 per megabyte for 85% of industry revenues. And then there’s the iPhone. By some estimates, the average iPhone user consumes as much as 800 megabytes per month. Take out their 50 Mb for voice and you’re looking at 750 Mb of data… for an additional $30. For the mathematically challenged, that’s a princely sum of… wait for it… four cents per megabyte. Worse, we noted that the FCC’s wireless net neutrality policies posed the risk of “bandwidth arbitrage,” where low bandwidth services (at $1.00 per megabyte) would be replaced with free or almost free applications that ride on $0.04 per megabyte data plans, and where carriers’ hands would be tied to prevent it. Taking a business that is currently getting $1.00 per megabyte down to just $0.04 per megabyte is, well, hard. And lest anyone think that this threat is idle fear-mongering, Google’s acquisition last week of Gizmo5, a wireless VoIP specialist, should give one pause.

Those are stunning numbers. And then I saw this new filing by CTIA listing some other statistics about growing mobile broadband demand:

According to the FCC’s most recent data, there were over 59 million mobile wireless high speed lines.

In addition, mobile wireless broadband growth continues to outpace every other broadband platform, with net additions between December 2007 and June 2008 greater than those of DSL and cable modem combined.

Mobile data and Internet traffic will increase 66 times between 2008 and 2013;

By 2010, “mobile broadband penetration will surpass fixed penetration globally.”

The simple task of watching a YouTube video consumes 100 times the bandwidth of a voice call.

The mobile data traffic footprint of a single mobile subscriber in 2015 could very well be 450 times what it was in 2005.

These projections are consistent with mobile broadband providers’ experiences to date. For example, AT&T noted that its wireless data traffic has increased nearly 5,000 percent in the past quarters and other carriers have likewise reported dramatic increases. Similarly, since T-Mobile began offering its G1 smartphone, customers of that device use, on average, 50 times the data of the average T-Mobile customer.

For these reasons, CTIA and others are calling on the federal government to find more spectrum to meet these growing mobile broadband needs.  The question is: Where to find it?  The military is one answer, but good luck getting them to budge and return any of their current spectrum holdings for reallocation.  Thus, as Barbara Esbin and I noted in a recent PFF paper, a lot of people are turning to the broadcast TV sector and hoping to find a way to make a cash-for-spectrum deal with them to get some (or all) of their spectrum back. But it may be unlikely many broadcasters will be willing to hand back their spectrum for alternative uses, even if the cash offer was generous.  Plus, Congress would have to bless any such deal, which raises another set of sticky political issues.

PFF will be hosting a debate about these issues on Tuesday, December 1st at 9am at the National Press Club in Washington, D.C.  The event is called, “Let’s Make a Deal: Broadcasters, Mobile Broadband, and a Market in Spectrum.”  Seating is limited, so reserve your spot now by RSVPing here. We’ve got a terrific lineup for the event, including:

• Blair Levin, Executive Director, Omnibus Broadband Initiative, Federal Communications Commission
• Coleman Bazelon, Principal, The Brattle Group
• David Donovan, President, Association for Maximum Service Television, Inc.
• Paul Gallant, Senior Vice President, Washington Research Group
• John Hane, Counsel, Communications Practice Group, Pillsbury Winthrop Shaw Pittman LLP
• Kostas Liopiros, Principal, The Sun Fire Group

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.

Potentially huge FCC development here, and one they actually has some sense to it. According to Kim McAvoy over at TV News Check.com:

FCC broadband czar Blair Levin earlier this month met with leading TV broadcasters in Washington to discuss the nation’s urgent need for more spectrum for wireless broadband access to the Internet and the possibility of broadcasters’ relinquishing most of their spectrum to help meet that demand. According to sources familiar with the Oct. 8 meeting with the board of the Association for Maximum Service Television (MSTV), Levin suggested broadcasters might want to consider returning their spectrum in exchange for a share in the billions of dollars that would come from the auction of the spectrum to the wireless industry. Broadcasting would retain just enough spectrum so that each station could provide a lifeline standard-definition service to the millions of TV viewers who still rely on over-the-air reception. Broadcasters could no longer offer over-the-air HD and second channels and mobile video would be off the table, but they could continue to provide a single channel of TV to every home in their markets as they do today — in full-blown HD via cable and satellite carriage and SD via the over-the-air lifeline service.

Wow, this is a very big deal, folks, since we are talking about a mother lode of prime spectrum that could be put to any variety of excellent alternative uses.  The problem is, broadcasters will—rightly, in my opinion—protest that they have occupied that spectrum for a long, long time and they have something akin to a property right in their allocations. Of course, paying them to relocate might be a very sensible way to get them off that spectrum voluntarily. But the question is whether they should be forced off of it and whether that is even legal.  No doubt, any attempt to force them off would be held up in court for many years because of inevitable legal challenges.

There is another solution: Just give the broadcasters a full, unencumbered property right in their spectrum and let them sell it or use it however they wish. Some will protest that it’s not “fair” and that the broadcasters should never be given a property right in something they did not pay for to begin with. Yet, at some point we have to stop the endless search for what I have referred to as a “spectrum reparations policy” and just get on with life.

I think everyone can now agree that the old command-and-control regulatory regime for “zoning” spectrum has retarded innovation. Imagine if we told Apple back in the 1980s that, because they started in the PC business, they could never leave the PC business and offer other innovations.  That would have been nuts! We’d never have the iPhone today. But that’s U.S. spectrum policy for broadcasting in a nutshell.  As a broadcaster, it is illegal for you to repurpose your spectrum for alternative uses.  Stated different, spectrum innovation is a crime.  How pathetic.

It’s time to change the rules and move forward.  I applaud Blair Levin and the FCC for offering at least one solution, but if it doesn’t work, we should try the other: property rights and flexible use rights in spectrum. And here are 4 or 5 other ways to get the job done.

The smell of high-tech regulation is increasingly in the air these days and many lawmakers and some activist groups now have the mobile marketplace in their regulatory cross-hairs. Critics make a variety of claims about the wireless market supposedly lacking competition, choice, innovation, or reasonable pricing. Consequently, they want to wrap America’s wireless sector in a sea of red tape.   Two important new studies thoroughly debunk these assertions and set the record straight regarding the state of wireless competition and innovation in the U.S. today. These reports are must-reading for Washington policymakers and FCC officials who are currently contemplating regulatory action.

First, Gerald Faulhaber and Dave Farber have a new report out entitled “Innovation in the Wireless Ecosystem: A Customer-Centric Framework.”  Here’s what Faulhaber and Farber find:

the three segments of the wireless marketplace (applications, devices, and core network) have exhibited very substantial innovation and investment since its inception. Perhaps more interesting, innovation in each segment is highly dependent upon innovation in the other segments. For example, new applications depend upon both advances in device hardware capabilities and advances in spectral efficiency of the core network to provide the network capacity to serve those applications. Further, we find that the three segments of the industry are also highly competitive. There are many players in each segment, each of which aggressively seeks out customers through new technology and new business methods. The results of this competition are manifest: (i) firms are driven to innovate and invest in order to win in the competitive marketplace; (ii) new business models have emerged that give customers more choice; and (iii) firms have opened new areas such as wireless broadband and laptop wireless in order to expand their strategic options.

They continue on to address the policy issues in play here and discuss the “consumer-centric” approach they recommend that the FCC adopt:

Having found that all three segments are highly competitive, we ask, where is the market failure? If none, then the principle of customer-centric applies: let customers make the key decisions regarding which products, services, open vs. managed business models, net neutrality, et al. will survive in the marketplace. While there is no shortage of pundits, advocates, lobbyists and academics advising the FCC that it, rather than customers, should be making these decisions and advising the FCC what those decisions should be, a customer-centric FCC must leave these decisions to customers in a competitive marketplace. Should the FCC decide to preempt customers and make choices for them, it follows as does night from day that the result will be (i) less customer choice, and therefore reduced customer well-being; (ii) higher costs for producers and therefore customers; (iii) lower incentives to invest and innovate, harming customers, producers and the American economy. In this case, economics and technology are on the same page: economists advise intervention only in the case of demonstrated market failure, and then only if there is evidence that the intervention will do more good than harm. The technologist’s advice is more pithy and down to earth: if it ain’t broke, don’t fix it!

Amen to that.  Let’s hope our lawmakers are listening.

Second, Everett Ehrlich, Jeffrey Eisenach, and Wayne Leighton have a terrific new paper out entitled “The Impact of Regulation on Innovation and Choice in Wireless Communications,” which reaches similar conclusions to those Faulhaber and Farber found in their report. Here’s the executive summary from the Ehrlich-Eisenach-Leighton report:

Proposals to increase regulation of mobile wireless services, for example, by applying “net neutrality” regulation, are often based on claims that such regulation would enhance innovation and increase consumer choice. In fact, they would have the opposite effect. The business practices that would be banned by such regulation are efficient mechanisms for spreading and reducing risk, lowering transactions costs, and enhancing marketing activities, all of which contribute to innovation and choice. Moreover, product differentiation increases competition and thus contributes both directly and indirectly to consumer choice. While some types of exclusive agreements and other “discriminatory” practices can theoretically harm competition, the precondition for such harm to occur – i.e., market power in one or more of the affected markets – generally is not present in wireless markets. Hence, the proposed regulations cannot be justified on grounds of market failure. Rather than increasing innovation and consumer choice, as promised, they would severely disrupt the wireless sector’s highly successful business model and significantly reduce innovation and consumer choice.

Like the Faulhaber-Farber paper, the Ehrlich-Eisenach-Leighton paper examines the major segments of the wireless marketplace — applications, devices, and networks — and shows them all to be vigorously competitive and experiencing significant innovation. Some of the following tables and charts help to illustrate this.

This first table shows how concentration ratios for the U.S. market (as measured by HHI) are among the lowest in the world.

The next two charts show that U.S. carriers have the lowest revenue per minute (60% lower than the average OECD country) even though average minutes per use are more than twice the amount of the next highest ranked country (Canada).

Finally, this final chart from their report offers a snapshot of mobile Internet penetration in 16 countries showing the U.S. on top:

Incidentally, the Faulhaber-Farber study also does a nice job listing the various mobile application stores out there today:

Device Manufacturer App Stores Apple’s App Store BlackBerry’s App World Palm’s App Catalog Nokia’s Ovi Store Samsung’s Application Store Sony’s PlayNow arena LG’s Application Store

Software Developers Google’s Android Market Microsoft’s Windows Mobile

Carriers AT&T’s MEdia Mall Verizon Wireless’ Tools & Applications Sprint’s Software Store US Cellular’s easyedge Cellular South’s Discover Center Cricket’s Downloads

Independent Stores Handango GetJar

And the Ehrlich-Eisenach-Leighton paper provides some addition perspective on innovation in the handset and applications space:

On the metrics that seem to be of greatest concern to regulation advocates – choice and innovation – the data also show the industry is performing well. For example, CTIA reports there are more than 630 different wireless handsets and devices available in the U.S., compared with only 147 in the United Kingdom, and notes that many of the most advanced handsets introduced in recent months have been launched in the U.S., including (among others) the iPhone 3G, the Google G1, and the Blackberry Storm. Amazon’s highly popular Kindle was also launched in the U.S. with connectivity provided by Sprint – while its European launch was delayed for a full year by Amazon’s inability to reach agreement with a mobile carrier there. As noted above, the number and variety of available applications is increasing rapidly: In addition to the Apple Apps Store, application downloads are now available from the Android Market (Google), the Palm Software Store, Blackberry App World and the Nokia Ovi Store, offering a total of more than 60,000 different applications. On July 14, 2009 Apple announced that more than 1.5 billion applications had been downloaded from its iPhone App Store since its launch in July 2008.

Actually, that number is even higher now.  As I noted here recently, in just a little over a year, Apple reports there’s been 2 billion downloads of over 85,000 apps from over 125,000 developers.  It’s just stunning when you think about it.

I encourage everyone to read both reports cover-to-cover.  They provide a comprehensive look at the reality on the ground — or in the air, as the case may be — in America’s mobile marketplace.

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.

Interesting piece here from Slate’s Farhad Manjoo on why AT&T should dump unlimited data plans and end what he calls the “iPhone all-you-can-eat buffet.”  He notes that: “The typical smartphone customer consumes about 40 to 80 megabytes of wireless capacity a month. The typical iPhone customer uses 400 MB a month. AT&T’s network is getting crushed by that demand.” Because “some iPhone owners are hogging the network” and causing “a slowed-down wireless network,” Manjoo recommends a congestion pricing model as a method of balancing supply and demand:

How would my plan work? I propose charging $10 a month for each 100 MB you upload or download on your phone, with a maximum of $40 per month. In other words, people who use 400 MB or more per month will pay $40 for their plan, or $10 more than they pay now. Everybody else will pay their current rate—or less, as little as $10 a month. To summarize: If you don’t use your iPhone very much, your current monthly rates will go down; if you use it a lot, your rates will increase. (Of course, only your usage of AT&T’s cellular network would count toward your plan; what you do on Wi-Fi wouldn’t matter.) To understand the advantages of tiered pricing, let’s look at AT&T’s current strategy of spending billions to build more network space. Why won’t this work? For the same reason building more roads doesn’t reduce traffic—more capacity increases the attractiveness of driving, which brings a lot more cars to the road, which leads to more gridlock.

Congestion pricing and metering is something I’ve written quite a bit about here in the context of wireline broadband (1, 2, 3), but Manjoo is equally correct that it could be applied for wireless data plans.  It has the added value of taking pressure off lawmakers to impose Net neutrality regulation since pricing of the pipe becomes an effective substitute for most other forms of network management. In other words, price, don’t block bandwidth-hogging customers and applications.  The problem, Manjoo explains:

Of course, users would cry bloody murder at first. The traditional criticism of tiered pricing on telecommunications systems is that it’s too expensive and too annoying for customers; people don’t know how much they’re spending during the month, and then they’re smacked with huge bills. Most Internet companies aren’t big fans of tiered pricing, either. They worry that adding a meter to Internet time will reduce people’s propensity to try out new stuff online—killing innovation on the world’s most innovative communications platform. But tiered pricing on the iPhone doesn’t have to be onerous. I’d call on AT&T to create automatic tiers—everyone would start out on the $10/100 MB plan each month, and your price would go up automatically as your usage passes each 100 MB tier. The key to implementing this policy is transparency. The phone should have an indicator—sort of like the battery bar—that changes color as you pass each monthly tier. That way, people can adjust their usage to suit how much they’d like to pay—limiting surfing if they approach the next tier, or deciding to press on if money’s no object.

What Manjoo is getting at here is what economists refer to as a “Ramsey two-part tariff.” A two-part tariff (or price) would involve a flat fee for service up to a certain level and then a per-unit / metered fee over a certain level. It is widely regarded by most economists as the most efficient and pragmatic solution to high-fixed cost, low marginal cost investment conundrums.  It’s hard to know where the demarcation should be in terms of where the flat rate ends and the metering begins, but that’s for market experimentation to sort out. But the clear advantage of this solution is that it preserves flat-rate, all-you-can-eat pricing for casual to moderate bandwidth users and only resorts to less popular metering pricing strategies when the usage is “excessive,” however that is defined.

Some companies have shown signs of embracing it, but few have formally adopted congestion pricing or metering.  Worse yet, some of the regulation-happy activist groups in D.C. (like the neo-Marxist charlatans as the UnFree Press) have already made ridiculous accusations that metered pricing is somehow “unfair” when, in reality, it is the fairest system under the sun. There’s even been legislation introduced by Rep. Eric Massa (D-NY) that would forbid the practice through the imposition of Internet price controls.  Foreclosing experimentation with such innovative pricing schemes would be a real innovation-killer.

I hope we get there eventually for all high-speed data services, whether we are talking wireline or wireless. Although I generally try to be agnostic about business models, I think this one is worth doing a little cheerleading for because it helps take regulatory pressure off the marketplace.  Pricing also acts as a signal for others innovators and entrepreneurs in the market regarding how to adjust investment strategies or enter new markets.

In a week in which neutrality regulation is making a lot of news, I hope that Robert Hahn and Hal Singer’s terrific new study, “Why the iPhone Won’t Last Forever and What the Government Should Do to Promote its Successor” gets some attention. It provides a wonderful overview of how dynamically competitive the mobile marketplace has been over the past two decades and why critics are wrong to get worked up about the short-term “dominance” of Apple’s iPhone. Here’s the abstract of their paper:

Because of the overwhelming, positive response to the iPhone as compared to other smart phones, exclusive agreements between handset makers and wireless carriers have come under increasing scrutiny by regulators and lawmakers. In this paper, we document the myriad revolutions that have occurred in the mobile handset market over the past twenty years. Although casual observers have often claimed that a particular innovation was here to stay, they commonly are proven wrong by unforeseen developments in this fast-changing marketplace. We argue that exclusive agreements can play an important role in helping to ensure that another must-have device will soon come along that will supplant the iPhone, and generate large benefits for consumers. These agreements, which encourage risk taking, increase choice, and frequently lower prices, should be applauded by the government. In contrast, government regulation that would require forced sharing of a successful break-through technology is likely to stifle innovation and hurt consumer welfare.

“New technologies often seemingly emerge from nowhere, but also frequently lose their luster quickly,” Hahn and Singer go on to argue. As evidence they cite the recent examples of Second Life and MySpace, which were hyped as potentially become dominant providers in their respective areas just a few years ago, but now are subjected to intense competition. “[T]he the mobile handset market is subject to these same disruptive forces,” they argue:

an iconic handset emerges, is quickly crowned the “winner,” and soon thereafter is replaced by another technology that was not even conceived of at the time the “winner” was launched. Many iPhone-inspired smartphones, including the Blackberry Storm and the HTC G1, could unseat the iPhone in the smartphone segment. We argue that heavy-handed regulation of such dynamic markets is likely to reduce welfare on net. The cost of erring through regulatory intervention—for example, by restricting voluntary private agreements that promote risk taking—can be significant. Delaying the benefits associated with innovation in mobile handsets could cost consumers dearly. In sum, exclusive contracts between handset makers and wireless carriers benefit consumers by encouraging innovation by both handset makers and wireless service providers that are vying for market share, and by enabling some handset makers to remain viable. These benefits take the form of greater variety of choices in handsets, greatly enhanced capabilities, and a more affordable range of device options. Banning exclusive contracts could have the unintended consequence of reducing innovation, reducing options, raising prices, and potentially establishing market dominance for an incumbent handset maker.

The End of Innovation?

In their excellent history of handset innovation over the past two decades, Hahn and Singer point out that there were many other “iconic” phones that some felt represented the end of the road in terms of innovation. I just love this quote they unearthed from a 1989 Fortune article about how the release of Motorola’s MicroTAC flip phone represented the apparent pinnacle of handset innovation: “Portable phones won’t get a lot smaller than this one. After all, they have to reach from your ear to your mouth.”

This highlights the myopia that sometimes accompanies technological forecasting and public policymaking.  We sometimes just can’t think “outside the box” and comprehend the ways in which technological devices or services might come along and leapfrog today’s market leaders. It gets back to the point I made in my recent book review of Gary Reback’s over-the-top ode to antitrust regulation, Free the Market:  Those who view markets through the lens of the a static competition, fixed-pie mentality always seem to live in fear of short term “market power” while those of us who believe in dynamic competition see markets in a constant state of flux and expect that sub-optimal market developments or configurations are exactly the spark that incentivizes new form of market entry, innovation, price competition, and so on.  And the real problem with that static competition mentality is that it often leads to knee-jerk regulatory responses.  Here’s how I put it in my recent debate with Larry Lessig:

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.. 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 [market] failures.

In other words, have a little faith and some patience.  Apple’s iPhone is today’s hottest handset, but it’s hardly the end of innovation in this marketplace.  And we certainly don’t need handset regulation or “device neutrality” as a solution to this non-problem.  Read Hahn and Singer’s dynamite new paper for a better understanding of why that’s the case.

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.