Ian Brown and Christopher T. Marsden’s new book, Regulating Code: Good Governance and Better Regulation in the Information Age, will go down as one of the most important Internet policy books of 2013 for two reasons. First, their book offers an excellent overview of how Internet regulation has unfolded on five different fronts: privacy and data protection; copyright; content censorship; social networks and user-generated content issues; and net neutrality regulation. They craft detailed case studies that incorporate important insights about how countries across the globe are dealing with these issues. Second, the authors endorse a specific normative approach to Net governance that they argue is taking hold across these policy arenas. They call their preferred policy paradigm “prosumer law” and it envisions an active role for governments, which they think should pursue “smarter regulation” of code.

In terms of organization, Brown and Marsden’s book follows the same format found in Milton Mueller’s important 2010 book Networks and States: The Global Politics of Internet Governance; both books feature meaty case studies in the middle bookended by chapters that endorse a specific approach to Internet policymaking. (Incidentally, both books were published by MIT Press.) And, also like Mueller’s book, Brown and Marsden’s Regulating Code does a somewhat better job using case studies to explore the forces shaping Internet policy across the globe than it does making the normative case for their preferred approach to these issues.

Thus, for most readers, the primary benefit of reading either book will be to see how the respective authors develop rich portraits of the institutional political economy surrounding various Internet policy issues over the past 10 to 15 years. In fact, of all the books I have read and reviewed in recent years, I cannot think of two titles that have done a better job developing detailed case studies for such a diverse set of issues. For that reason alone, both texts are important resources for those studying ongoing Internet policy developments.

That’s not to say that both books don’t also make a solid case for their preferred policy paradigms, it’s just that the normative elements of the texts are over-shadowed by the excellent case studies. As a result, readers are left wanting more detail about what their respective policy paradigms would (or should) mean in practice. Regardless, in the remainder of this review, I’ll discuss Brown and Marsden’s normative approach to digital policy and contrast it with Mueller’s since they stand in stark contrast and help frame the policy battles to come on this front.

Governing Cyberspace: Mueller vs. Brown & Marsden

Mueller’s normative goal in Networks and States was to breathe new life into the old cyber-libertarian philosophy that was more prevalent during the Net’s founding era but which has lost favor in recent years. He made the case for a “cyberliberty” movement rooted in what he described as a “denationalized liberalism” vision of Net governance. He argued that “we need to find ways to translate classical liberal rights and freedoms into a governance framework suitable for the global Internet. There can be no cyberliberty without a political movement to define, defend, and institutionalize individual rights and freedoms on a transnational scale.”

I wholeheartedly endorsed that vision in my review of Mueller’s book, even if he was a bit short on the details of how to bring it about. But it is useful to keep Mueller’s paradigm in mind because it provides a nice contrast with the approach Brown and Marsden advocate, which is quite different.

Generally speaking, Brown and Marsden reject most forms of “Internet exceptionalism” and certainly reject the sort of “cyberliberty” ethos that Mueller and I embrace. They instead endorse a fairly broad role for governments in ordering the affairs of cyberspace. In their self-described “prosumer” paradigm, the State is generally viewed as benevolent actor, well-positioned to guide the course of code development toward supposedly more enlightened ends.

Consistent with the strong focus on European policymaking found throughout the book, the authors are quite enamored with the “co-regulatory” models that have become increasing prevalent across the continent. Like many other scholars and policy advocates today, they occasionally call for “multi-stakeholderism” as a solution but they do not necessarily mean the sort of truly voluntary, bottom-up multi-stakeholderism of the Net’s early days. Rather, they are usually thinking of multi-stakeholderism as what is essentially pluralistic politics; it’s the government setting the table, inviting the stakeholders to it, and then guiding (or at least “nudging”) policy along the way. “We are convinced that fudging with nudges needs to be reinforced with the reality of regulation and coregulation, in order to enable prosumers to maximize their potential on the broadband Internet,” they say. (p. 187)

Meet the New Boss, Same as the Old Boss?

Thus, despite the new gloss, their “prosumer law” paradigm ends up sounding quite a bit like a rehash of traditional “public interest” law and common carrier regulation, albeit with a new appreciation of just how dynamics markets built on code can be. Indeed, Brown and Marsden repeatedly acknowledge how often law and regulation fails to keep pace with the rapid evolution of digital technology. “Code changes quickly, user adoption more slowly, legal contracting and judicial adaptation to new technologies slower yet, and regulation through legislation slowest of all,” they correctly note (p. xv). This reflects what Larry Downes refers to as the most fundamental “law of disruption” of the digital age: “technology changes exponentially, but social, economic, and legal systems change incrementally.”

At the end of the day, however, that insight doesn’t seem to inform Brown and Marsden’s policy prescriptions all that much. Theirs is a world in which policy tinkering errors will apparently be corrected promptly and efficiently by still more policy tinkering, or “smarter regulation.” Moreover, like many other Internet policy scholars today, they don’t mind regulatory interventions that come early and often since they believe that will help regulators get out ahead of the technological curve and steer markets in preferred directions. “If regulators fail to address regulatory objects at first, then the regulatory object can grow until its technique overwhelms the regulator,” they say (p. 31).

This is the same mentality that is often on display in Tim Wu’s work, which I have been quite critical of here and elsewhere. For example, Wu has advocated informal “agency threats” and the use of “threat regimes” to accomplish policy goals that prove difficult to steer though the formal democratic rulemaking process. As part of his “defense of regulatory threats in particular contexts,” Wu stresses the importance of regulators taking control of fast-moving tech markets early in their life cycles. “Threat regimes,” Wu argues, “are best justified when the industry is undergoing rapid change — under conditions of ‘high uncertainty.’ Highly informal regimes are most useful, that is, when the agency faces a problem in an environment in which facts are highly unclear and evolving. Examples include periods surrounding a newly invented technology or business model, or a practice about which little is known,” Wu concludes.

This is essentially where most of the “co-regulation” schemes that Brown and Marsden favor would take us: Code regulators would take an active role in shaping the evolution of digital technologies and markets early in its life cycle. What are the preferred regulatory mechanisms? Like Wu and many other cyberlaw professors today, Brown and Marsden favor robust interconnection and interoperability mandates bolstered by antitrust actions as well. And, again, they aren’t willing to wait around and let the courts adjudicate these issues in an ex post fashion. “Essential facilities law is a very poor substitute for the active role of prosumer law that we advocate, especially in its Chicago school minimalist phase” (p. 185). In other words, we shouldn’t wait for someone to bring a case and litigate it through the courts when preemptive, proactive regulatory interventions can sagaciously steer us to a superior end.

More specifically, they propose that “competition authorities should impose ex ante interoperability requirements upon dominant social utilities… to minimize network barriers” (p. 190) and they model this on traditional regulatory schemes such as must-carry obligations, API interface disclosure requirements, and other interconnection mandates (such as those imposed on AOL/Time Warner a decade ago to alleviate fears about instant messaging dominance). They also note that “Effective, scalable state regulation often depends on the recruitment of intermediaries as enforcers” to help achieve various policy objectives (p. 170).

The Problem with Interoperability Über Alles

So, in essence, the Brown-Marsden Internet policy paradigm might be thought of as interoperability über alles. Interoperability and interconnection in pursuit of more “open” and “neutral” systems is generally considered an unalloyed good and most everything else is subservient to this objective.

This is a serious policy error and one that I address in great detail in my absurdly long review of John Palfrey and Urs Gasser’s Interop: The Promise and Perils of Highly Interconnected Systems. I’m not going to repeat all 6,500 words of that critique here when you can just click back and read it, but here’s the high level summary: There is no such thing as “optimal interoperability” that can be determined in an a priori fashion. Ongoing marketplace experimentation with technical standards, modes of information production and dissemination, and interoperable information systems, is almost always preferable to the artificial foreclosure of this dynamic process through state action. The former allows for better learning and coping mechanisms to develop while also incentivizing the spontaneous, natural evolution of the market and market responses. The latter (regulatory foreclosure of experimentation) limits that potential.

More importantly, when interoperability is treated as sacrosanct and forcibly imposed through top-down regulatory schemes, it will often have many unintended consequences and costs. It can even lock in existing market power and market structures by encouraging users and companies to flock to a single platform instead of trying to innovate around it. (Go back and take a look at how the “Kingsbury Commitment” — the interconnection deal from the early days of the U.S. telecom system — actually allowed AT&T to gain greater control over the industry instead of assisting independent operators.)

Citing Palfrey and Gasser, Brown and Marsden do note that “mandated interoperability is neither necessary in all cases nor necessarily desirable” (p. 32), but they don’t spend as much time as Palfrey and Gasser itemizing these trade-offs and the potential downsides of some interoperability mandates. But what frustrates me about both books is the almost quasi-religious reverence accorded to interoperability and open standards when such faith is simply not warranted after historical experience is taken into consideration.

Plenty of the best forms of digital innovation today are due to a lack of interoperability and openness. Proprietary systems have produced some of the most exciting devices (iPhone) and content (video games) of modern times. Then again, voluntary interoperable and “open” services and devices thrive, too. The key point here — and one that I develop in far greater detail in my book chapter, “The Case for Internet Optimism, Part 2 – Saving the Net From Its Supporters” — is that the market for digital services is working marvelously and providing us with choices of many different flavors. Innovation continues to unfold rapidly in both directions along the “open” vs. “closed” continuum. (Here are 30 more essays I have written on this topic if you need more proof.)

Generally speaking, we should avoid mandatory interop and openness solutions. We should instead push those approaches and solutions in a truly voluntary, bottom-up fashion. And, more importantly, we should be pushing for outside-the-box solutions of the Schumpeterian (creative destruction / disruptive innovation) variety instead of surrendering so quickly on competition through forced sharing mandates.

The Case for Patience & Policy Restraint

But Brown and Marsden clearly do not subscribe to that sort of Schumpeterian thinking. They think most code markets tip and lock into monopoly in fairly short order and that only wise interventions can rectify that. For example, they claim that Facebook’s “monopoly is now durable,” which will certainly come as a big surprise to the millions of us who do not use it all. And the story of MySpace’s rapid rise and equally precipitous fall has little bearing on this story, they argue.

But, no matter how you define the “social networking market,” here are two facts about it: First, it is still very, very young. It’s only about a decade old. Second, in that short period of time, we have already witnessed the entire first generation of players fall by the wayside. While the second generation is currently dominated by Facebook, it is by no means alone. Again, millions like me don’t use it at all and get along just fine with other “social networking” technologies, including Twitter, LinkedIn, Google+, and even older tech like email, SMS, and yes, phone calls! Accusations of “monopoly” in this space strain credulity in the extreme. I invite you to read my Mercatus working paper, “The Perils of Classifying Social Media Platforms as Public Utilities,” for a more thorough debunking of this logic. (Note: The final version of that paper will be published in the CommLaw Conspectus shortly.)

Such facts should have a bearing on the debate about regulatory interventions. We continue to witness the power of Schumpeterian rivalry as new and existing players battle in a race for the prize of market power. Brown and Marsden fear that the race is already over in many sectors and that it is time to throw in the towel and get busy regulating. But when I look around at the information technology marketplace today, I am astonished just how radically different it looks from even just a few years ago, and not just in the social media market. I have written extensively about the smartphone marketplace, where innovation continues at a frantic pace. As I noted in my essay here on “Smartphones & Schumpeter,” it’s hard to remember now, but just 6 short years ago:

• The iPhone and Android had not yet landed.
• Most of the best-selling phones of 2007 were made by Nokia and Motorola.
• Feature phones still dominated the market; smartphones were still a luxury (and a clunky luxury at that).
• There were no app stores and what “apps” did exist were mostly proprietary and device or carrier-specific; and,
• There was no 4G service.

It’s also easy to forget just how many market analysts and policy wonks were making absurd predictions at the time about how the telecom operators at the time had so much market power that they would crush new innovation without regulation. Instead, in very short order, the market was completely upended in a way that mobile providers never saw coming. There was a huge shift in relative market power flowing from the core of these markets to the fringes, especially to Apple, which wasn’t even a player in that space before the launch of the iPhone.

As I noted in concluding that piece last year, these facts should lead us to believe that this is a healthy, dynamic marketplace in action. Not even Schumpeter could have imagined creative destruction on this scale. (Just look as BlackBerry). But much the same could be said of many other sectors of the information economy.  While it is certainly true that many large players exist, we continue to see a healthy amount of churn in these markets and an astonishing amount of technological innovation.

Public Choice Insights: What History Tells Us

One would hope these realities would have a greater bearing on the policy prescriptions suggested by analysts like Brown and Marsden, but they don’t seem to. Instead, the attitude on display here is that governments can, generally speaking, act wisely and nudge efficiently to correct short-term market hiccups and set us on a better course. But there are strong reasons to question that presumption.

Specifically, what I found most regrettable about Brown and Marsden’s book was the way — like all too many books in this field these days — the authors briefly introduce “public choice” insights and concerns only to summarily dismiss them as unfounded or overblown. (See my review of Brett Frischmann’s book, Infrastructure: The Social Value of Shared Resources for a more extended discussion of this problem as it pertains to discussions about not just infrastructure regulation by the regulation of all complex industries and technologies.)

Brown and Marsden make it clear that their intentions are pure and that their methods would incorporate the lessons of the past, but they aren’t very interested in dwelling on the long, lamentable history of regulatory failures and capture in the communications and media policy sectors. They do note the dangers of a growing “security-industrial complex” and argue that “commercial actors dominate technical actors in policy debates.” They also say that the “potential for capture by regulated interests, especially large corporate lobbies, is an essential insight” that informs their approach. The problem is that it really doesn’t. They largely ignore those insights and instead imply that, to the extent this is a problem at all, we can build a better breed of bureaucrats going forward who will craft “smarter regulation” that is immune from such pressures. Or, they claim that “multi-stakeholderism” — again, the new, more activist and government-influenced conception of it — can overcome these public choice problems.

A better understanding of power politics that is informed by the wisdom of the ages would instead counsel that minimizing the scope of politicization of technology markets is the better remedy. Capture and cronyism in communications and media markets has always grown in direct proportion to the overall scope of law governing those sectors. (I invite you to read all the troubling examples of this that Brent Skorup and I have documented in our new 72-page working paper, “A History of Cronyism and Capture in the Information Technology Sector.” Warning: It makes for miserable reading but proves beyond any doubt that there is something to public choice concerns.)

To be clear, it’s not that I believe that “market failures” or “code failures” never occur, rather, as I noted in this debate with Larry Lessig, it’s that such problems are typically “better addressed by voluntary, spontaneous, bottom-up, marketplace responses than by coerced, top-down, governmental solutions. Moreover, the decisive advantage of the market-driven approach to correcting code failure comes down to the rapidity and nimbleness of those response(s).” It’s not just that traditional regulatory remedies cannot keep pace with code markets, it’s that those attempting to craft the remedies do not possess the requisite knowledge needed to know how to steer us down a superior path. (See my essay, “Antitrust & Innovation in the New Economy: The Problem with the Static Equilibrium Mindset,” for more on that point.)

Regardless, at a minimum, I expect scholars to take seriously the very real public choice problems at work in this arena. You cannot talk about the history of these sectors without acknowledging the horrifically anti-consumer policies that were often put in place at the request of one industry or another to shield themselves from disruptive innovation. No amount of wishful thinking about “prosumer” policies will change these grim political realities. Only by minimizing chances to politicize technology markets and decisions can we overcome these problems.

Conclusion

For those of us who prefer to focus on freeing code, Brown and Marsden’s Regulating Code is another reminder that liberty is increasingly a loser in Internet policy circles these days. Milton Mueller’s dream of decentralized, denationalized liberalism seems more and more unlikely as armies of policymakers, regulators, special interests, regulatory advocates, academics, and others all line up and plead for their pet interest or cause to be satisfied through pure power politics. No matter what you call it — fudging, nudging, coregulation, smart regulation, multistakeholderism, prosumer law, or whatever else, — there is no escaping the fact that we are witnessing the complete politicization of almost every facet of code creation and digital decisionmaking today.

Despite my deep reservations about a more politicized cyberspace, Brown and Marsden’s book is an important text because it is one of the most sophisticated articulations and defenses of it to date. Their book also helps us better understand the rapidly developing institutional political economy of Internet regulation in both broad and narrow policy contexts. Thus, it is worth your time and attention even if, like me, you are disheartened to be reading yet another Net policy book that ultimately endorses mandates over of markets as the primary modus operandi of the information age.

Additional Resources about the book:

• the official MIT Press website for Regulating Code
• shorter Brown & Marsden paper on “Prosumer Law” (via SSRN)
• Little Atoms podcast featuring Brown & Marsden discussing Regulating Code
• Ian Brown edited this beefy Research Handbook On Governance Of The Internet, which makes a nice complement to Regulating Code. It offers even more detailed case studies on the major issues featured in the book. A terrific resource (if you can afford it!)
• a video of Brown & Marsden discussing the book at the Oxford Internet Institute (also embedded below):

Other books you should read alongside “Regulating Code” (links are for my reviews of each):

• Milton Mueller’s Networks and States: The Global Politics of Internet Governance
• John Palfrey & Urs Gasser’s Interop: The Promise and Perils of Highly Interconnected Systems
• Rebecca MacKinnon’s Consent of the Networked: The Worldwide Struggle for Internet Freedom
• David G. Post’s In Search of Jefferson’s Moose: Notes on the State of Cyberspace
• Christopher Yoo’s The Dynamic Internet: How Technology, Users, and Businesses are Transforming the Network
• Larry Lessig’s Code (my 2-part exchange with Lessig upon Code’s 10^th anniversary: Part 1, Part 2)

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

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

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

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

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)

The smartphone is arguably one of the most empowering and revolutionary technologies of the modern era. By putting the processing power of a personal computer and the speed of a broadband connection into a device that fits in a pocket, smartphones have revolutionized how we communicate, travel, learn, game, shop, and more.

Yet smartphones have an oft-overlooked downside: when they end up in the wrong hands, they offer overreaching agents of the state, thieves, hackers, and other wrongdoers an unparalleled avenue for uncovering and abusing the volumes of sensitive personal information we increasingly store on our mobile phones.

Over on Ars Technica, I have a long feature story that examines the constitutional and technical issues surrounding police searches of mobile phones:

Last week, California’s Supreme Court reached a controversial 5-2 decision in People v. Diaz (PDF) , holding that police officers may lawfully search mobile phones found on arrested individuals’ persons without first obtaining a search warrant. The court reasoned that mobile phones, like cigarette packs and wallets, fall under the search incident to arrest exception to the Fourth Amendment to the Constitution.

California’s opinion in Diaz is the latest of several recent court rulings upholding warrantless searches of mobile phones incident to arrest. While this precedent is troubling for civil liberties, it’s not a death knell for mobile phone privacy. If you follow a few basic guidelines, you can protect your mobile device from unreasonable search and seizure, even in the event of arrest. In this article, we will discuss the rationale for allowing police to conduct warrantless searches of arrestees, your right to remain silent during police interrogation, and the state of mobile phone security.

You can read the full essay on Ars Technica here. And while you’re at it, I highly recommend watching this informative YouTube video that explains why it’s not a good idea to talk to police:

Worth It?

OK, time for a quick rant. What is all this confusion and consternation over early termination fees (ETFs) for high-end smartphones?  I mean, seriously, how hard is this process to understand?  The FCC has worked itself into a lather over this and is bombarding wireless operators and Google with hate mail letters of inquiry harassing asking them about their ETF policies.  I just don’t get it.  Let’s review some simple realities:

• Smartphones — especially high-end devices like the iPhone, the Droid, and the Nexus One — are basically mobile mini computers.
• Mini mobile computers do not grow on trees; someone has to make them and sell them at a profit or else no one would offer them to begin with.
• But the people who make and sell these devices (and wireless service for these devices) want to ensure rapid, widespread distribution to win over customers and recoup their costs.
• So, they offer a classic business inducement — an upfront subsidy for the product in exchange for monthly payments to amortize the upfront “loan” they have given the customer;
• AND THEN THEY FORM A CONTRACT WITH THE BUYER TO MAKE THE DEAL WORK. And that contract obligates both sides to live up to their end of the deal.
• Hey… did I mention they need to form a contract to make the deal worth it? OK, good, wanted to make sure I got that point across.
• Then they give you a nice shiny new mobile mini-computer that for some reason we Americans still insist on calling a cell phone.
• Then you start paying off the “loan” they’ve given you for that device over the span of the service contract. This is called “prorating.”
• But, if you default on that loan by breaking your contract, you’ll be hit with a penalty — an early termination fee — since it would leave the carrier without a way to recoup the cost of that shiny new mobile mini-computer that they handed you on the cheap when you just absolutely had to have the hot new toy in town.

Is this process really all that complicated? And why is it so controversial? It certainly shouldn’t be. Prorating happens every day in countless ways in a capitalist economy.  And yet in the apparent techno-entitlement society we live in these days, some people seem to think there’s something scandalous about this process when it happens with our beloved mobile devices.  In reality, the smartphone subsidy and prorated contract system is really one of the great pro-consumer accomplishments of our time. With various inducements and buyer loyalty credits, I recently got my Motorola Droid from Verizon for just $99 bucks. Like the iPhone and Google’s new Nexus One, the Droid is worth over $500 bucks, and yet millions of Americans have been able to obtain these spectacular devices because of this system of upfront subsidies and prorating. And it’s not like Lucifer is present at the signing of the contract asking for a blood offering or your first born as part of the exchange. Nobody forces you to buy a $500 phone!

Moreover, if you really want, there are plenty of “unlocked” mobile devices you can pay full freight for and then take to any carrier you want to get service. Needless to say, not a lot of people bother. I think that tells us something. And, again, who can really blame consumers… just look at the prices of these unsubsidized phones! $574.99 for the Droid, $649.99 for the Nexus One, and $909.99 for the Sony Ericsson Xperia!  You could buy a used car for that kind of money.

Look, I can appreciate arguments about “better transparency” in this process to make sure consumers know what they are getting into, but you don’t need a PhD in economics to understand that you’ll have to make some payments over the long haul to pay off what you got up front on the cheap. My guess is that most people who buy an expensive smartphone have likely also has had a car or home loan at some point in their lives–or any loan for that matter.  The principle in all cases is the same: There is no free lunch.

With weather-related travel trauma so prominent on my Twitterscope, and with news that the federal government is banning flight delays, I stopped short when I read this techology pitch:

One of the biggest hassles of travel has to be keeping track of those pesky hotel key cards and then trying to remember which way to fit the darned things in the wide variety of door locks. But that may soon change. New technology’s been introduced and will soon be test marketed in Las Vegas hotels that allows guests to use their cell phones — any cell phone model at all — to unlock their hotel room door.

I’m not persuaded at all. The difficulty of managing hotel keys doesn’t even rate on my list of travel hassles.

The solution offered up is:

a simple system in which a computer generates a unique series of tones (that sounds kind of like those digitized cell phone ringtones used early this decade) that is then sent to the mobile device. When the tone is played outside the designated guestroom, a microphone incorporated in the locking system IDs the tone and unlocks the door.

Ohhhhh-kay.

There might be value to this technology or (more probably) others like it. Getting secure credentials onto people’s phones has a lot of promise.

But this iteration? Should it survive testing, and the easily imaginable failure modes and attacks on it, it might provide a scintilla of convenience in hotels.

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.

Last summer, my PFF colleague Barbara Esbin and I explained that, while many consumers dislike not being able to get popular smartphones like the iPhone on the wireless network of their choice, such exclusive deals actually benefit consumers. Barbara summarizes her testimony (PDF) as follows:

the dynamic created by the exclusive arrangement between Apple and AT&T that produced the iPhone allowed the two companies to bridge the gap between the technologies of today and the disruptive innovations of tomorrow. Moreover, it is undeniable that the breakthrough success of the iPhone has spurred a wave of competitors. If every wireless carrier had been able to sell the iPhone when it was initially released, I noted, it seems unlikely there would have been as much carrier support for developing competing products like the Google G1, RIM Blackberry Storm, Samsung Instinct or Palm Pre.