Adam Thierer's Blog, page 139

Some Random Thoughts on AT&T / T-Mobile Merger

Here are some quick thoughts on the proposed AT&T – T-Mobile merger, mostly borrowed from my previous writing on the wireless marketplace. First, however, I highly recommend this excellent analysis of the issue by Larry Downes, which cuts through the hysteria we're already hearing and offers a sober look at the issues at stake here.  Anyway, here are a few of my random thoughts on the deal:

The deal will likely be approved: First, to cut to the chase.. After much wrangling, the deal will probably be approved primarily because of two factors, both of which help political officials as much as AT&T: (1) The deal delivers upon the National Broadband Plan promise of getting the country blanketed with wireless broadband; and (2) it "brings home" T-Mobile by giving an American company control of a German-held interest. As Larry Dignan of ZNet says, it is tantamount to "playing the patriotism card."

One reason it might not be approved: Some Administration critics, especially from the more liberal part of the Democratic base, could make this a litmus test for Obama Admin's antitrust enforcement efforts. In the wake of the Comcast merger approval — albeit after several pounds of flesh were handed over "voluntarily" to get the deal approved — some of the Administration's base will be looking for blood. I remember how the Powell FCC was under real heat to "get tough" on mergers back in 2001-02 and during that time blocked the proposed DirecTV-EchoStar deal, possibly as a result of the pressure. The same thing could happen to AT&T – T-Mobile here.

It's all about spectrum: From AT&T's perspective, this deal is all about getting more high-quality spectrum, which is in increasingly short supply. Indeed, as Jerry Brito noted earlier, this merger should serve as another wake-up call regarding the need to get spectrum reform going again to ensure that existing players can reallocate their spectrum to those who demand it most. (Hint: Incentivize the TV broadcasters to sell... NOW!) But, in the short-term, this deal helps AT&T built out a more robust nationwide wireless network. Over the long-haul, that should help T deliver better service to its customers.

For T-Mobile… it survives!: What's in the deal for T-Mobile and its customers?  Well, at this point, the company must just be relieved they made it this far and that someone wanted to buy them! Seriously, did anyone think T-Mobile would make it this long as a stand-alone operator?  I certainly didn't. And many industry analysts have express surprise that it to this long for Deutsche Telekom to put them on the table and find a buyer. If the DOJ moves to block the deal, would it be on the hope of T-Mobile continuing to be a stand-alone #4 competitor?  That seems like a very risky proposition to me.  I suppose the better argument would be to block the deal based on the hope that T-Mobile might eventually hook up with Sprint to create a more formidable #3 operator. But, on that point…

Standard compatibility helps: AT&T is a good fit for T-Mobile going forward because of the mutual reliance on HSPA+ for wireless broadband. That should smooth the integration process. Sprint, by contrast, would have made a lousy merger partner in this regard because of the different standards the firms have picked for next-generation wireless broadband.

The market will still be quite competitive: I can't see there being a major antitrust problem here in light of lower HHI's in U.S. compared to international markets. As I noted in my essay on "Wireless Networks & Lemonade Stand Economics," surveys have shown that the U.S. wireless market is much more competitive than most Asian and European markets. Even with this merger the HHI's will still likely be much lower than those other countries.

We need to accept the fact that the market is maturing. But as I also made clear in that "lemonade stand" essay last year, in a high fixed cost, low margin cost industry like broadband, it's impossible to have hundreds (or even dozens) of competitors. This is particular true for the wireless sector. Rolling out a sophisticated and reliable wireless architecture is incredibly costly and labor-intensive. Just siting all the towers, for example, can be cumbersome and get quite expensive.  And then there are the endless "truck rolls" to fix tiny problems and upgrade facilities. Thus, like so many other mature industries, the "Rule of Three" was bound to kick in for wireless. From baby food to burgers, from candy bars to credit cards, and from tennis shoes to blue jeans, the story is the same: almost every mature industry usually shakes out to just a handful of providers. There are usually two or three large operators serving the entire sector, and then a few niche providers.  In this sense, AT&T and Verizon are the Coke and Pepsi of wireless broadband. And as with the soda market, there will be other smaller competitors and entrants at the margin, but none with the size the deliver the underlying product across the nation in a ubiquitous, highly competitive fashion. Thus, Sprint, US Cellular, Cricket, and MetroPCS will be the niche players of wireless, serving unique regions or offering unique plans (like Metro's recent announcement of a lowest-cost wireless plan announced to date, but with various limitations on service). This is the way capitalism works.

Don't forget about Clearwire & the cable guys: Seems like a lot of folks are writing off Clearwire and WiMax technology already, but that could be a mistake. It's a unique consortium approach to next-gen wireless and includes investment from major cable operators Comcast, Time Warner Cable, and Brighthouse.  Of course, Sprint is a major partner in Clearwire and this could be the company's chance to do something really exciting with those deep-pocketed backers in the cable industry.  There's no guarantee it will pan out, but with names (and money) like that involved, I wouldn't write it off just yet.  And their very presence in this landscape helps ensure that the market remains contestable.

Don't forget about Apple, Google, Microsoft, BlackBerry etc:  The mobile ecosystem is remarkably dynamic and features many different layers and players. A recent report by Mary Meeker and Matt Murphy of Kleiner Perkins Caufield & Byers on "Top Mobile Internet Trends" revealed that roughly 10 Billion mobile Internet devices will soon be upon upon us. That's truly amazing.  What's equally amazing to me is how all the innovation in this space is changing the competitive dynamics of the wireless marketplace. In particular, the most interesting thing about today's mobile marketplace is how the network infrastructure guys cower in fear of the big OS guys — Apple and Google in particular.  The providers of the underlying infrastructure who supposedly have all the power sure don't seem like it when it comes time to line up new smartphones.  As the iPhone wars make clear, the carriers are falling all over themselves in a scramble to land the best devices out there and would pretty much do whatever Apple and Google want them to in order to get them. And don't forget about the actual device makers, like Motorola and HTC! And the chipmakers! And the app makers! The reason this is important is because those providers in other layers of the mobile ecosystem increasingly exert enormous pressure on the network providers and act as a check on their power.

Expect some Net neutrality "voluntary concessions": The FCC will use the approval process to engage in some good 'ol fashion merger extortion and force all sorts of "voluntary concessions." Some sort of Net neutrality provision(s) will likely be among them. Because AT&T has attempted to impose some limits on tethering and has recently crafted new data plans, you can expect that NN advocates with lead with sweeping restrictions on T's ability to manage their service offerings and they might even push for formal price controls on new tiering or metering schemes.

Markets are better at sorting out good vs. bad deals through experimentation: I have elsewhere written about the hysteria that so often accompanies media and communications mergers.  There's always a Chicken Little crowd that tells us the sky will fall.  Reality usually plays out quite differently.  To the extent the sky falls, it isn't on consumers but on the companies themselves. Many mega-deals unravel or never live up to their initial billing.  Sometimes that's simply because the merging entities can't unearth those oh-so-illusive "synergies" that they are looking for.  But usually those deals don't pan out as hoped because markets are ongoing experiments and others — other rivals, new entrants, investors, consumers, etc — respond to those experiments and innovate around incumbents.  Do you remember the phone you carried around in your pocket just a few years ago? It made calls and it… well… it made calls. Think about how far we've come in such a short time. I am giving serious consideration to canceling my home wireline broadband plan once Verizon comes out with the right 4G smartphone for me.  Hell, the 3G phone I carry around right now in my pocket is close to becoming my primary computer as it is. I already use it to write blog posts, to Tweet, to text, to email, schedule events, play games, and sometimes I even use it to make phone calls! The degree of innovation in this space never ceases to amaze me.  Thus, when it comes to deals like AT&T – T-Mobile, we should avoid the static snapshot mentality and should instead be patient and see how things play out.  It isn't the end of the story, it's just another chapter in what has so far been an amazing journey.

Additional Reading:

Wireless Innovation is Alive & Well: Two New Reports Set the Record Straight
CTIA's Refutation of Tim Wu's 2007 Wireless Net Neutrality Paper
Just How Dynamic is the Mobile Internet Marketplace?
Progress on Spectrum Inventory…if Only Illusory
Good news from House Energy & Commerce on spectrum
The MetroPCS Net Neutrality Hullabaloo

 

 

AT&T/T-Mobile highlights artificial spectrum scarcity

Many folks will no doubt be writing a lot about the competitive issues surrounding the announced AT&T/T-Mobile merger, so instead I thought I'd weigh in on what I know best: spectrum.

To the extent you're worried about the concentration of the wireless market, you should really be concerned about the government policies that make entry and expansion so difficult.

First, if a carrier wants to acquire more spectrum to meet consumer demand for new services, it can't thanks to the artificial scarcity created by federal policies that dedicate vast swaths of the most valuable spectrum to broadcast television and likely inefficient government uses. It's gratifying to see the FCC now confronting the "spectrum crunch," but waiting for a deal to be brokered on incentive auctions is a luxury carriers don't have. So, buying a competitor might be the only way left for them to acquire more spectrum.

Second, if a carrier wants to put up a new tower, or add antennas to existing towers, it has to get permission from the local zoning board. This can be an extremely onerous process as different localities will have different reasons to hold up the process. Buying a competitor is therefore also an obvious way to get access to more towers.

Again, I'm not sure this merger will have a negative effect on competition. Many high sunk costs industries are perfectly competitive with just two or three players. (I'm look forward to a good analysis on that question, perhaps from our own Geoff Manne of Josh Wright.) What I do know is that if you are worried about competition, antitrust policy is not going to solve the long-term issue of artificial scarcity, which is the real problem here.

Entry is possible. In fact, a new entrant in the wireless market is waiting in the wings in the form of the cable industry with the spectrum they acquired in the AWS auction. Before they can start offering services, however, they must move incumbent users of the bands they acquired. There is also Clearwire, part owned by Comcast, Time Warner, and Google–serious competitors to the Bells.

If we really got serious about reallocating broadcast and inefficiently used federal spectrum, we might not have to worry competition. We'd likely see new entry, and access to spectrum would be less of a reason to acquire a competitor.

AT&T and T-Mobile: The Anti-Antitrust Terrorists

In the rush of ink that flowed yesterday over AT&T's announced merger with T-Mobile USA, I posted a long piece on CNET calling for calm, reasoned analysis of the deal by regulators, chiefly the Department of Justice and the FCC.

Since the details of the deal have yet to be fleshed out, it's hard to say much about the specifics of how customers will be affected in the short or long term. My CNET colleague Maggie Reardon, however, does an excellent job laying out both the technical and likely regulatory issues in a piece posted today from the CTIA conference.

My point was simpler. Within hours of the deal's announcement, and without any relevant facts, public interest groups including the Media Access Project, Public Knowledge and Free Press had already issued press releases condemning it–Public Knowledge, in fact, called the merger "unthinkable."

That, I'm sure, was just rhetorical excess, but it does underscore a modern tendency among some advocates to react emotionally rather than rationally to any kind of asset combination. They assume any change in the competitive landscape that reduces competition in the literal sense (fewer competitors) is by definition an antitrust violation, and conflate that with what is in fact much more complex antitrust analysis that regulators undertake.  No need to think about it–it's just evil.  (Please re-read Adam Thierer's paper on merger terror, "A Brief History of Media Merger Hysteria.")

What will be significant in this deal, I suspect, is who takes the lead. The Department of Justice has repeatedly indicated it believes there is robust competition in mobile services, and that an accelerated push to 4G (the point of this merger) could improve competition overall by creating a viable alternative to wireline broadband.

(See the DoJ's letter to the FCC as part of the National Broadband Plan–which also, by the way, found robust competition in wireless, though the FCC has since back-tracked in an unconvincing manner.)

The FCC, on the other hand, has gone off the rails recently in its antitrust analyses, as evidenced by the painful, drawn-out review of Comcast's takeover of NBC Universal and the crazy quilt of largely-unrelated conditions imposed on the deal in a nearly 300-page Order.

Worse, there's still that nagging Paragraph 78 of the Open Internet order, where a majority of Commissioners explicitly rejected the idea that traditional antitrust measures of harm to consumers would guide their application of the net neutrality rules. (They offered no alternative criteria, even worse.)

Left to the FCC, the AT&T/T-Mobile deal will take forever to complete, and will be left shouldering regulatory pet projects for years. Left to the Department of Justice, something more reasonable and timely might happen.

But that's just more thinking about the "unthinkable." Pardon my logic.

The Quest to Find Privacy Market Failure

I guess the search for market failure in the privacy area is interesting to me. I wrote about it the other week too. It's nice that those who prefer regulation feel obligated to justify that preference. It's acknowledgment of the fact, increasingly well-accepted worldwide, that functioning free markets do a better job of discovering and satisfying consumers' interests than any other method for organizing societies' resources.

A recent market failure blog post called "Privacy and the Market for Lemons, or How Websites Are Like Used Cars," seems to have piqued Adam's interest. (See the comments.) In it, privacy and anonymity researcher Arvind Narayanan makes the case for privacy market failure. (Evidently, it's an argument that others have made before.)

"In the realm of online privacy and data collection," he says, "information asymmetry results from a serious lack of transparency around privacy policies. The website or service provider knows what happens to data that's collected, but the user generally doesn't." Several economic, architectural, cognitive and regulatory limitations/flaws "have led to a well-documented market failure—there's an arms race to use all means possible to entice users to give up more information, as well as to collect it passively through ever-more intrusive means."

Alas, there's no link at "well-documented." I would like to see that documentation. But more importantly, what Narayanan appears to be speaking of as market failure—an arms race to get more information from Web users—is not one. That's market action that Narayanan doesn't like.

So where's the market failure? Is it in the "impossibility" of navigating the Web aware of the privacy policies of each Web site? That's certainly very hard to do. The premise is that markets need information symmetry for them to function. There's a profoundly difficult question lurking here: Just how symmetrical does information have to be? 42?

Luckily, markets don't require information symmetry. They work because both parties to nearly every transaction make themselves better off by their own reckoning. In the aggregate, market transactions make everyone better off without making anyone worse off. As with the information symmetry ideal, there's no need for perfection in transacting, either. If some actors regularly make "bad" trades, but still end up better off on the whole, the market is working for them, too. (Their consistent failure to perceive their own self-interest may ultimately require them to seek the charity of those of us who do, but think carefully before depriving all consumers of the market's opportunities just to protect some small number of incompetents.)

This logic is not defeated when a consumer gets less in a transaction than he or she thought, or bears a cost he or she didn't know about. ("I thought I was getting a car that gets 35 mpg, but it only gets 31," or "I thought the site would collect no information, but it associated my browser and IP address with an interest in golf.") It is only defeated when the systematic operation of the market will reach sub-optimal results.

Will a series of transactions drive someone to their death of starvation or some other harm or ruin? Will the gears of commerce freeze? Market failure occurs when the rules, signals, and sanctions in and around a given marketplace would cause preference- and profit-maximizing actors to reach a sub-optimal outcome.

Narayanan believes there is a sub-optimal outcome—people are giving up too much privacy unaware of the consequences. I agree that people do not protect their privacy enough online. But correlating market behavior we rue to an "information asymmetry," where every last detail of what happens to data isn't clear, has not made the case for market failure.

The same "asymmetry" exists in the real world. I have no idea what my neighbors will do with the information they observe about my comings and goings or what my friends will say behind my back. Does this social market failure demand or justify a regulatory solution? Should I get a privacy notice detailing their plans? No. I'm on notice that stuff like that can happen with anyone and everyone I encounter. I go outside, subjecting myself to observation, because I am better off for doing so even though I pay an unknown privacy cost. Likely, Web surfers are similarly better off by their own reckoning despite paying a similar, unquantified privacy cost. The fact that they could pay less is imperfection, not failure.

As you can see, I love analogical thinking, but the analogy between the online environment and a used car market does not work for me. I also don't see that the theory of the "lemons market" has borne itself out, either online or in the market for used cars. A lemons market should lead to stagnation—a no-trade equilibrium—but we have a robust online information environment and used car sales continue to flourish (in part because of market innovations).

In the end, Narayanan's post is . . . a lemon. That is not a market failure—just a computer scientist who I think has hashed the economics a bit. It's not my field either, so I welcome comments that educate and elucidate things for all of us.

Congress Should Reject Privacy-Killing Do Not Track Mandate

Today, the U.S. Senate Commerce Committee held a hearing on "The State of Online Consumer Privacy."

The push for online privacy regulation has real momentum, as proposed privacy legislation from numerous lawmakers, a Department of Commerce report proposing a compulsory Do Not Track mechanism to regulate business marketing practices, and the Obama Administration's proposed "Privacy Bill of Rights" all indicate.

However, Congress should be very wary of such proposals. A politically defined Do Not Track regime risks undermining targeted advertising, impeding business transactions that occur between strangers, and stifling mobile ecosystems that are barely out of the cradle. Rattling consumers needlessly by encouraging them to opt-out of largely beneficial information collection is an especially unwise idea in our uncertain economic climate – especially when major industry participants are developing such mechanisms on their own.

The opportunity to undermine online marketing – wrongly called "surveillance" – appeals to some, but such privacy purists have no right to call the shots for anyone but themselves and those who agree with them. The right to use information acquired through voluntary transactions is no less important than the right to decide whether to disclose information in the first place.

Competitive pressures to secure our personal information include rivals who promise more security, capital markets and business partners (like upstream suppliers and downstream customers who demand information security as a condition of doing business). Like all other technologies, privacy-enhancing services – from consulting to liability insurance to network monitoring – benefit from competition. Contracts to surf anonymously while paying a nominal fee to an ISP, a notion noted recently in a Wall Street Journal piece, are merely one example of such market innovations.

In light of such pressures, the term "self-regulation"—heard often in hearings such as today's—is a misnomer: no business has that luxury in free enterprise.

Market participants will make mistakes, but these pale in comparison to the mistakes made by government. Privacy regulation will grow so entrenched that it will preclude superior alternatives as it distorts the evolution of the digital marketplace. Attempts by politicians to define privacy are a dangerous business.

In this era of TSA body imaging, mass surveillance, the push for National ID, and ill-defined protections from governmental access to our mobile devices and cloud-stored data, what we really need isn't for Washington to try and protect our privacy—we need Washington to allow it.

Rather than Do Not Track, a "Do Not Regulate" stance remains appropriate, for the sake of improved privacy.

The Net, Info Overload, & Our Fragmented Attention Spans

My thanks to Linton Weeks of NPR who reached out to me for comment for a story he was doing on the impact of the Internet and digital technology on culture and our attention spans. His essay, "We Are Just Not Digging The Whole Anymore," is an interesting exploration of the issue, although it is clear that Weeks, like Nick Carr (among others), is concerned about what the Net is doing to our brains. He says:

We just don't do whole things anymore. We don't read complete books — just excerpts. We don't listen to whole CDs — just samplings. We don't sit through whole baseball games — just a few innings. Don't even write whole sentences. Or read whole stories like this one. We care more about the parts and less about the entire. We are into snippets and smidgens and clips and tweets. We are not only a fragmented society, but a fragment society. And the result: What we gain is the knowledge — or the illusion of knowledge — of many new, different and variegated aspects of life. What we lose is still being understood.

After reading the entire piece I realized that some of my comments to Weeks probably came off as a bit more pessimistic about things than I actually am. I told him, for example, that "Long-form reading, listening and viewing habits are giving way to browse-and-choose consumption," and that "With the increase in the number of media options — or distractions, depending on how you look at them — something has to give, and that something is our attention span."

Luckily, however, Weeks was kind enough to also give me the last word in the story in which I pointed out that it would be a serious mistake to conclude "that we're all growing stupid, or losing our ability to think, or losing our appreciation of books, albums or other types of long-form content." Instead, I argued: "We just don't spend as much time with them as we used to. It's the cost of life in an age of information abundance." However, "I'll take that over life in the past age of information poverty any day of the week. More people have more access to more information than at any time in human civilization. That's a victory, even if it does come with some growing pains."

Anyway, make sure to read the entire essay by Weeks. Also, for those interested in more, I have discussed this issue — and my fundamentally bullish outlook on matters — here at length in past essays including:

The Case for Internet Optimism, Part 1: Saving the Net From Its Detractors [best overview]
Book Review: Nicholas Carr's The Shallows
Coping with Information Overload: Thoughts on Hamlet's BlackBerry by William Powers
Can Humans Cope with Information Overload? Tyler Cowen & John Freeman Join the Debate
Some Thoughts on PBS "Digital Nation" Documentary
Are You An Internet Optimist or Pessimist? The Great Debate over Technology's Impact on Society

 

 

The Pretense of Judicious Deliberation on the Rush to Impose Privacy Regulation at Any Cost

National Journal reports that the Department of Commerce (NTIA) will, at a Senate Commerce Committee hearing today, call for a "consumer privacy bill of rights"—a euphemism for sweeping privacy regulation:

"Having carefully reviewed all stakeholder comments to the Green Paper, the department has concluded that the U.S. consumer data privacy framework will benefit from legislation to establish a clearer set of rules for the road for businesses and consumers, while preserving the innovation and free flow of information that are hallmarks of the Internet," [NTIA Administrator Larry] Strickling said in his prepared testimony obtained by Tech Daily Dose.

In other words: "We've taken the time to think this through very carefully and have reluctantly come to the conclusion that regulation is necessary." Sorry, but I'm just not buying it—not just the wisdom of the recommendation but the process that produced it. Let's consider the timeline here:

October 27, 2010 – NTIA Administrator Strickling announces Green Paper is coming but says nothing about timing and little about substance
December 16, 2010 – NTIA/Commerce releases its Privacy Green Paper
January 28, 2011 – deadline for public comments (28 non-holiday business days later)
??? – Commerce decides regulation is necessary
March 16, 2011 – Commerce is ready to ask Congress for legislation (31 non-holiday business days later)

The Commerce Department gave the many, many interested parties the worst four weeks of the year—including  Christmas, New Year's and Martin Luther King Day—to digest and comment on an 88 page, ~31,000 tome of a report on proposed regulation of how information flows in our… well, information economy. Oh, and did I mention that those same parties had already been given a deadline of January 31, 2011 to comment on the FTC's 122 page, ~34,000 word privacy report back on December 1 (too bad for those celebrating Hanukkah)? In fairness, the FTC did, on January 21, extend its deadline to February 18—but that hardly excuses the Commerce Department's rush to judgment.

Now, does this timeline suggest that either agency—but particularly Commerce—was really serious about gathering substantive comments on its report? Or that the agency really had time to carefully consider the comments that were filed in the short time it allowed? It should be pretty obvious to anyone what a mockery this process has made of transparency. The Commerce Department's pretense of judicious deliberation is a pretty thin cover for its clearly premeditated rush to regulation.

Now, if I were a betting man, I'd wager that these agencies might not have been planning to move so quickly—until, by the time Strickling first mentioned the Green Paper at the end of October, it became clear the Democrats would be hammered in the November elections. Who could blame them for feeling they needed to put their regulatory agenda into high gear? It's not just that the Republicans suddenly took over the House with a 48-seat majority. It's also that people throughout the Administration had finally tasted their first real defeat—a reminder that they, too, might be booted out in November 2012—which means they had a mere 8-10 months to actually "do something" to move privacy regulation forward before everything in Washington shut down for the circus that is every presidential election.

All of that is perfectly understandable, and I don't doubt that the Republicans would think much the same way if the shoe were on the other foot. But let's not kid ourselves about the political reality here: This administration has been pushing to impose comprehensive controls on the collection and use of information long before they came into office: Obama made privacy regulation one of the key planks of his campaign's tech policy statement, for example, and even on election day, the Washington Post was talking about his planned "focus on protecting online privacy."

One might say the FTC staff had started down this path even under the Bush administration. (Indeed, Adam Thiere and I proposed "Principles to Guide the Debate" over online advertising & user privacy back in September 2008.) But the FTC is still "behind" the Commerce Department in terms of being willing to openly call for increased regulation—which is pretty ironic, since the Commerce department is supposed to be the one agency that can be relied on to think about how regulation affects, well, commerce!

Still, the FTC' may be playing a bit coy: Despite repeated public insistence by FTC staff (most recently at last week's IAPP Global Privacy Summit) that the agency was only calling for improved best practices, the Staff report is worded in such a way that the WSJ was able to assert last week (in a story on the "Privacy Bill of Rights" legislation being drafted by Sens. Kerry and McCain) that the FTC had "urged Congress to authorize creation of a 'do-not-track' system." The WSJ later ran a correction to the story—but not on this critical statement, which apparently the FTC didn't really mind… probably because it's exactly what the agency wanted journalists to say!

In my comments on the FTC's preliminary staff report, I pointed out the rather obvious fact that FTC Chairman Jon Leibowitz's term expires this coming September. My hunch that he was using the draft report to gain political capital for his renomination was reinforced when, little more than two weeks after the FTC's comment deadline closed, the President issued the Chairman's renomination. (Some observers had speculated that Obama was dissatisfied with Leibowitz for not "doing more," in terms of earning headlines, for privacy protection, and that the newly appointed Commissioner Edith Ramirez might make an attractive replacement, as the first Latina to head—I believe she would have been—a major regulatory agency. Thus, speculation went, Leibowitz was trying to earn brownie points among those on the Hill who want to do something, anything to "get tough" on privacy regulation, no matter the costs.)

Whatever one says of the FTC, it is, at least in theory, an independent regulatory agency. The Commerce Department, by contrast, is simply an arm of the White House. And it should be pretty clear that, while the FTC has spent a lot of time on roundtables and in thinking through its staff report, the Commerce Department is rarin' to go. with new privacy regulations. That brings me back to my title: How serious could the Commerce Department really be here about collecting and processing public comment to understand the pitfalls of new privacy regulations?

I outline eight broad categories of concerns about privacy regulation in general in my FTC comments, which are equally applicable to the Commerce Department's Green Paper.

my concerns are grounded in a firm belief that sound policymaking can be reduced to a single question: "And then what?"  What do we imagine will the first order consequences of the various changes the  FTC is proposing companies make—or perhaps be required by law to make—be  to the Internet ecosystem?  If the purpose of a "Do Not Track" mechanism is to create a market for privacy users to essentially, but simply and seamlessly, negotiate with websites over how to fund content, how do we imagine that marketplace will work?  ….

These three, deceptively  simple  words—"And then what?"—make much the same point the Nobel Prize-winning economist F.A. Hayek made when he remarked  in  The Fatal Conceit, his damning treatment of top-down government planning, that "[t]he curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.".

So, how much do we really know about the framework for governing data use the FTC has outlined in its Staff Report?  What will be its costs, its effects on competition, its various other unintended consequences?

Adam Thierer has sketched out a number of tough questions that the Senate Commerce Committee should ask at their hearing today, focusing on the paucity of serious economic analysis of the harms that supposedly need regulation, the potential costs of regulation, etc. That's exactly the kind of hard-nosed realism that's been sorely missing from this debate, as Adam and I have repeatedly noted (1, 2, 3).

On behalf of all those who took the time to file thoughtful comments on the Green Paper (sorry, I was busy launching a new think tank and finishing a 575 page book!) on the assumption that the Commerce Department was actually approaching this issue with an open mind and would weigh those comments seriously, I can only cite to that contemporary Blackstone of legal authority—yes, you guessed it, The Simpsons.  Specifically, I direct the court's attention to episode 2F04, Bart's Girlfriend:
Skinner: Congratulations, [Bart] Simpson. You just fell for our sting and won
yourself three months' detention. There's no such thing as
"Scotchtoberfest".
Willy: There's not? Ya used me, Skinner! Yah used me!
The clip is available here.  To paraphrase: "Ya used us, Strickling, ya used us!"

Hayden: Less secrecy for a public conversation on cybersecurity

One of the arguments I've been making about proposed cybersecurity regulation and legislation is that despite a lot of hype about a massive online threat, there is little evidence to corroborate the dire warnings. Almost every article I've read revealing a breach or cyberattack only quotes anonymous government sources, then defense contractors and politicians point to these articles and proclaim, "If you only knew what we know, you'd be taking action now!"

Fear, however, is poor driver of public policy. Before we start telling private companies how to run their security, we should analyze the threat and asses whether there is a legitimate concern and whether government could do a better job. That's impossible as long as most evidence of a threat is classified.

So I'm glad to see former NSA and CIA chief Gen. Michael Hayden call for less secrecy in order to get better analysis. In the new issue of Startegic Studies Quartley, he writes [PDF]:

Let me be clear: This stuff is overprotected. It is far easier to learn about physical threats from US government agencies than to learn about cyber threats. In the popular culture, the availability of 10,000 applications for my smart phone is viewed as an unalloyed good. It is not—since each represents a potential vulnerability. But if we want to shift the popular culture, we need a broader flow of information to corporations and individuals to educate them on the threat. To do that we need to recalibrate what is truly secret. Our most pressing need is clear policy, formed by shared consensus, shaped by informed discussion, and created by a common body of knowledge. With no common knowledge, no meaningful discussion, and no consensus . . . the policy vacuum continues. This will not be easy, and in the wake of WikiLeaks it will require courage; but, it is essential and should itself be the subject of intense discussion. Who will step up to lead?

Who indeed. Congress may be getting secret briefings that outline a potential cyberthreat. If they are, they should recognize that they may be only getting one view of the issue. Also, the people on whose behalf they are legislating also deserve to have a clear understanding of the risks against which Congress might legislate. "Trust us," is not good enough. By reducing the over-classification Hayden writes about, Congress could allow economists, computer scientists, and other academics delve into the weeds of determine what is the true nature of the threat and whether a market failure exists that calls for government intervention.

Wireless sin taxes discourage cell phone use

Over at Neighborhood Effects, the Mercatus Center's state and local policy blog, my colleague Dan Rothschild compares wireless taxes to sin taxes. His analysis is too good not to reprint here in large part:

The purpose of taxes is to raise money for necessary governmental functions. To that end, economists frequently prescribe that rates be low and broad in order to minimize the impact on consumers' behavior — so-called tax neutrality. This is because taxation should be about raising revenue, not changing behavior.

Some economists tweak this prescription through the Ramsey Rule, which holds (in a nutshell) that the more influenced by tax rates consumers are (demand elasticity) the less something should be taxed (and vice versa).

Sin taxes are the opposite; they're about reducing a behavior that policy makers judge to be morally offensive (like many people view smoking).

Relatedly, Pigouvian taxes seek to bring the costs to society (the social cost) in line with the costs born by a buyer. (For instance, some people advocate higher alcohol taxes on the theory that drinkers impose costs on others, though this argument is fraught with difficulties.)

Cell phone taxes above regular sales taxes levied by states and localities do not fit any of the four rationales provided here. On the one hand, taxing them at over twenty percent of a user's bill is hardly neutral. Nor does it likely fit the Ramsey Rule prescription; consumers respond to cell phone taxes by buying less of it or by avoiding taxes by pretending to move. (Just look around you at how consumer takeup and use of cell phones has changed as prices have fallen over the last decade.) Cell phones are not sinful or offensive. And there's no serious case to be made that the social cost of cell phones exceeds the cost born by users. In short, by any principle of public finance, high cell phone taxes are a bad bad bad idea.

Now here's hoping he takes this awesome analysis and turns it into a paper!

Virginia Postrel Takes on the Zittrain Thesis

On numerous occasions here and elsewhere I have cited the enormous influence that Virginia Postrel's 1998 book, The Future and Its Enemies, has had on me.  Her "dynamist" versus "stasis" paradigm helps us frame and better understand almost all debates about technological progress. I cannot recommend that book highly enough.

In her latest Wall Street Journal column, Postrel considers what makes the iPad such a "magical" device and in doing so, she takes on the logical set forth in Jonathan Zittrain 2009 book, The Future of the Internet and How to Stop It, although she doesn't cite the book by name in her column. You will recall that in that book and his subsequent essays, Prof. Zittrain made Steve Jobs and his iPhone out to be the great enemy of digital innovation — at least as Zittrain defined it. How did Zittrain reach this astonishing conclusion and manage to turn Jobs into a pariah and his devices into the supposed enemy of innovation? It came down to "generativity," Zittrain said, by which he meant technologies or networks that invite or allow tinkering and all sorts of creative uses. Zittrain worships general-purpose personal computers and the traditional "best efforts" Internet. By contrast, he decried "sterile, tethered" digital "appliances" like the iPhone, which he claimed limited generativity and innovation, mostly because of their generally closed architecture.

In her column, Postrel agrees that the iPad is every bit as closed as Zittrain feared iPhone successor devices would be. She notes: "customers haven't the foggiest idea how the machine works. The iPad is completely opaque. It is a sealed box. You can't see the circuitry or read the software code. You can't even change the battery." But Postrel continues on to explain why the hand-wringing about perfect openness is generally overblown and, indeed, more than a bit elitist:

A closed box offends geeks' tinkering impulse, which demands swappable components and visible source code. But most of us aren't looking to hack our own computers. In fact, the very characteristics that empower enthusiasts tend to frustrate and infantilize ordinary users, making them dependent on the occult knowledge of experts. The techies who so often dismiss Apple products as toys take understandable pride in their own knowledge. They go wrong in expecting everyone to share the same expertise.

It also comes down to specialization, she argues:

Even the "maker ethic" of do-it-yourself hobbyists depends on having the right ingredients and tools, from computers, lasers and video cameras to plywood, snaps and glue. Extraordinarily rare even among the most accomplished seamstresses, chefs and carpenters are those who spin their own fibers, thresh their own wheat or trim their own lumber—all once common skills. Rarer still is the Linux hacker who makes his own chips. Who among us can reproduce from scratch every component of a pencil or a pencil skirt? We don't notice their magic—or the wonder of electricity or eyeglasses, anesthesia or aspirin—only because we're used to them.

This is similar to the point I was making in my original review of Zittrain's book when I asked:

Why can't we all just get along? Isn't it a sign of progress that we now have different models that appeal to different types of users? After all, those supposedly "sterile" applications like the iPhone and Tivo are loved by millions. Even calling them "sterile" seems a bit silly to me. After all, those devices have "fostered innovation and disruption" just like PCs and the Net have, just in a different way. Regardless, does Jonathan think all those people would really be better off if they were forced to fend for themselves with completely open iPhones and TiVos? Should the iPhone be shipped to market with no apps loaded on the main screen, forcing everyone to get them for on their own? Should TiVos have no interactive menus out-of-the-box, forcing you to go online and find some homebrew that someone whipped up to give you an open source guide in all its blocky ugliness?

And, like Postrel, I stressed that we have nothing to fear from the "mere mortals" who actually prefer "closed" digital "appliances" like the iPhone or iPad. Even if I generally side with Zittrain regarding which devices are best — the more "open" and tinkerable, the better — this should not be the standard for everyone else:

I fear that Jonathan has spent a little too much time in the ivory tower surrounded by countless people like me who are almost part cyborg in that they use so much technology that they are practically at one with their devices. (If I don't have a laptop in my backpack and a mobile phone in my pocket I start to experience phantom pains, like I am missing appendages). If one finds themselves stuck in an echo chamber with enough of these other cyborg-humans, they can start to fear the consequences of what might happen when the mere mortals start walking in the front door and asking asinine questions about how to boot up their devices or log on to certain websites. But we have nothing to fear from these aliens. They can have their closed systems and we can have our open systems. We can tinker; they can just play with what they are given. We can be highly interactive cyber-goobers; they can be utterly passive couch potatoes. And so on.

Of course, there are many other reasons to question the Zittrain thesis and the other gloomy theories set forth by the group of scholars I have called "Openness Evangelicals." As I pointed out in my recent book chapter making "The Case for Internet Optimism, Part 2 — Saving the Net from Its Supporters," despite all the cyber-Chicken Little-ism coming out of the Ivory Tower these days about the supposed death of "openness," the reality is that things have never been more open, innovative, or "generative" than they are right now.

Additional Reading:

Review of Zittrain's "Future of the Internet" (3/23/08)
Zittrain's Pessimistic Predictions and Problematic Prescriptions for the Net (7/20/09)
On Defining Generativity, Openness, and Code Failure (9/9/10)
The Internet, "Openness" & Commercialization (12/22/10)
The Case for Internet Optimism, Part 2 – Saving the Net From Its Supporters (2/11/11)
Code, Pessimism, and the Illusion of "Perfect Control" (5/8/09)
"Cyber-Collectivism," "Cyber-Progressivism," or What? (2/14/11)