Adam Thierer's Blog, page 161

Violent Video Games Head to Supreme Court

Today, the U.S. Supreme Court will hear arguments in Schwarzenegger v. EMA, a case that challenges California's 2005 law banning the sale of "violent" video games to minors. The law has yet to take effect, as rulings by lower federal courts have found the law to be an unconstitutional violation of the First Amendment.

There's little doubt that banning the sale of nearly any content to adults violates the protections of Free Speech, including, as decided last year, video depictions of cruelty to animals.

But over the years the Court has ruled that minors do not stand equal to adults when it comes to the First Amendment. The Court has upheld restrictions on the speech of students in and out of the classroom, for example, in the interest of preserving order in public schools.

And in the famous Pacifica case, the Court upheld fines levied against a radio station for airing the famous George Carlin monologue that, not-so-ironically, satirizes the FCC for banning seven particular words from being uttered over the public airwaves.

The basis for that decision was that children could be negatively influenced from hearing such language. And children have easy access to radio and TV, while parents had no effective way to keep particular broadcasts out of the house.

In today's argument, California's legal arguments center largely on another case, the Supreme Court's 1968 decision in Ginsberg. There, the Court upheld state restrictions on the sale of pornography to minors, even though the material was protected speech for adult purchasers.

In Schwarzenegger v EMA, California is urging the Court to extend Ginsberg's reasoning to include content that meets it definition for violent video games. The statute defines "violent video games" as those "in which the range of options available to a player includes killing, maiming, dismembering, or sexually assaulting an image of a human being, if those acts are depicted" in a manner that "[a] reasonable person, considering the game as a whole, would find appeals to a deviant or morbid interest of minors," that is "patently offensive to prevailing standards in the community as to what is suitable for minors," and that "causes the game, as a whole, to lack serious literary, artistic, political, or scientific value for minors."

Ginsberg, the state argues in its brief, upheld a ban the sale of sexual content to minors because such content is dangerous to their development. So too, they argue here, with violent video games. (Parents and other adults, of course, could still buy the games for minors if the statute were to go into effect.)

Indeed, the state argues that such material has as much if not more of a negative impact on the development of children than does sexual material.

That, of course, is a question open to considerable debate. After the fact, the state cites a number of academic studies that find a correlation between violent video game exposure (including games, such as Super Mario Brothers, well outside the the California definition) and anti-social behavior. But, as excellent reply briefs from the Entertainment Merchants Association and a joint brief from the Electronic Frontier Foundation and the Progress and Freedom Foundation point out, the methodology in these studies has been roundly criticized.

Moreover, California doesn't seem to understand that the statistical significance of a correlation does not necessarily translate to real-world behavior—correlation is not the same as causation, no matter how strong the statistics. And even the authors of the studies most relied on by the state recognize that it isn't clear in which direction the correlation moves—are children who play violent video games more likely to have violent thoughts because they played the game, or are pre-existing violent thoughts what attracts them to the games?

Why Video Games? Why Now?

The Court may focus on those studies in its decision, but I have a different question. Why are California and other states picking on video games, and why now? That, to me, is the more interesting problem, one that gets little attention in the briefs and, I would guess, in the Court's eventual decision.

Perhaps the why is obvious: as EMA's brief points out, similar attacks have accompanied the rise in popularity of every new form of media to emerge throughout U.S. history.

The California statute … is the latest in a long history of overreactions to new expressive media. In the past, comic books, true-crime novels, movies, rock music, and other new media have all been accused of harming our youth. In each case, the perceived threat later proved unfounded. Video games are no different.

The EFF/PFF brief goes farther, accusing California legislators of succumbing to "moral panic, as lawmakers have so often done when confronted with the media of a new generation."

Examples as varied as Greek classics, the Bible, the Brothers Grimm and Star Wars all suggest, EMA points out, that extreme–even gruesome–violence has always been a favorite subject of literature, often aimed specifically at children. As federal appellate judge Richard A. Posner wrote in rejecting a similar Indiana law, "Self defense, protection of others, dread of the 'undead,' fighting against overwhelming odds—these are all age-old themes of literature, and ones particularly appealing to the young."

But why now? The answer is, not surprisingly, Moore's Law. Laws regulating the content or distribution of video games are a classic example of the conflict I described in The Laws of Disruption.

As technology has made video game graphics more realistic and lifelike, they have captured the attention—and here the nightmares—of regulators in the real world who equate what they see on the screen with behaviors that would clearly violate laws and norms of the real world. They don't like what they see in games including Grand Theft Auto and Resident Evil, and their impulse is to find a way, somehow, to stop it, even if it's only a simulation.

It was not that long ago—in my life time, in any case—that video games were still in their Neolithic Era. Consider Pong, the first home video game from Atari in 1975. It would take an imagination greater than mine to think of the batting of a block of monochrome pixels by a bar of pixels to be violent enough to corrupt youth; likewise the breaking of a wall of pixels one at a time in the follow-on game Breakout.

But a few years later, consider the commercial (courtesy of YouTube) for Activision's ice hockey game.

The game promises to be one of the "roughest" video games ever, "battling for the puck" with "fierce body checking" and "ruthless tripping." Just watching the players fight it out drives a meek-looking Phil Hartman into a frenzy; within a few seconds he seems ready to attack the clerk who teases him that he's not yet ready for it.

But despite an ad that explicitly suggests a connection between playing (or even watching the game) and becoming violent, the actual graphical quality of the violence is so disconnected from visual reality that it never occurred to any state legislature to ban or otherwise restrict it.

Now fast-forward just a few short decades later to the imminent release of Xbox 360's Kinetics and one of the games that takes advantage of it called Kinectimals.

Using Microsoft's new sensor technology, realistically-rendered animals can be controlled simply by issuing voice commands or by mimicking the desired movements by standing in front of the images. It hardly seems possible that the same beings who invented Pong could have advanced to Kinectimals within the span of one human lifetime. But we did.

Coupled with new 3D technology and increasingly large, high-fidelity displays, video games have in the course of only a few decades and a few cycles of Moore's Law, advanced to the point of challenging the cinematic qualities of movies. Indeed, games and films are converging, and now use much of the same technology to produce and to display. A new sub-genre of user-produced content involves taking the cinematic interludes within the games and using them to produce original films. After all, video game users today not only control game play but also lighting, camera angles, and point of view.

Why not? As Nicholas Negroponte would say, bits are bits.

So now that video games offer fidelity in imagery and movement that is comparable to film, the law has awakened to both their positive and negative impacts on those who interact with them. Since the First Amendment clearly doesn't allow interference with the sale of violent content to adults, California focused on children. But it's clear from the tone of the state's brief that they just plain don't like certain video games, just as they didn't like certain movies and certain books in an early age of mass-market technologies. As before, they would like, if they could, to turn the clock back.

Of course that is always the response of the law to new technologies that challenge our conceptions of reality. The only difference between the comic book burnings of the 1950's and the emotional responses of legislators today is the speed with which those new technologies are arriving. The killer apps come faster all the time. And with them, the counter-revolutionaries.

Frozen in Time, Lost in Relevance

Which is why the California statute suffers from another common and fatal flaw of laws attempting to hold back new technologies: early obsolescence. Even if the Supreme Court upholds the law, its effect will be minimal at best.

Why? Lost in the legal arguments (and reduced to a mere footnote in the EMA brief) is the impending anachronism of the California statute. It assumes a world, disappearing almost as quickly as it arrived, in which video games are imported into California as physical media in packages, and sold in retail stores.

Consider, for example, Section 1746.2:

Each violent video game that is imported into or distributed in California for retail sale shall be labeled with a solid white "18″ outlined in black. The "18″ shall have dimensions of no less than 2 inches by 2 inches. The "18″ shall be displayed on the front face of the video game package.

But sales of video games in media form are rapidly declining as broadband connections make it possible for game developers and platform manufacturers to transport the software over the Internet. So even if the law is ruled constitutional, it will apply to an ever-shrinking portion of the video game market. There will soon be no "retail sale" and no "front face" of a "package" onto which to put a label in the first place.

These industry changes, of course, aren't being made to evade laws like California's. Digital distribution reduces costs and eliminates middlemen who add little or no value (the retailers, the packagers, the truckers). More to the point, they allow the companies to establish on-going relationships with their customers, which can be leveraged to selling add-on chapters and levels, on-line play, and the sale of related product and content, including films and movies.

The industry, in other words, is not only evolving in terms of sophistication and realism of the product. The same technologies are also scrambling its supply chain. And what is emerging as the new model for "games" is something in which California and other states have almost no regulatory interest.

So it seems an odd time to target legislation at a particular and disappearing version of the industry's content and retail channels. Even if the Court upholds the California law, it will likely have little impact on the material at which it is aimed.

But that's often the case with laws trying to manage the unpleasant social side effects of new technologies just as they become visible to the outside world. The pace of legal change can't hope to keep up with the pace of technological change, making this law, like many others, out-of-date even before the ink is dry.

Which is not to say that the Supreme Court's decision in this case won't matter. Another feature of statutes like this, unfortunately, is a high likelihood of unintended consequences. The potential for the Court's decision—pro or con–to do mischief in the future, however, to unrelated industries and dissimilar content, is legion.

For example? As the EFF/PFF brief points out, California and other states may try to extend the ban on sales to minors to online channels. But it isn't so easy to determine the age of an online buyer as someone in your brick-and-mortar store. "Applying the law online would likely require mandatory age verification of all online gamers because the law prohibits any sale or rental to a minor," EFF/PFF argues, "even if the vendor had no evidence that the buyer was a minor."
That feature of an earlier federal effort to control pornography online was the undoing of the statute.

But in the Supreme Court, and the lower courts who interpret its decisions, anything can happen, and usually does.

Private Media Providers Shouldn't Be Forced to Fund Public Media

I sincerely hope it was a Washington Post editor, and not New America Foundation president Steve Coll, who picked the title for his editorial today, "Why Fox News Should Help Fund NPR."  After all, Coll certainly must be smart enough to know that there is no law or regulation on the books today that gives the Federal Communications Commission (FCC) or any other agency the ability to force private media providers to fund their public media competitors.  Moreover, it takes a lot of chutzpah to try to spin NPR's recent Juan Williams fiasco into an excuse for private media providers like Fox News to fund NPR, but, shockingly, that's exactly what Coll does. "The Williams imbroglio is teachable, but its lessons actually point in the opposite direction: America's public media system, including NPR, requires more funding, not less."  Hmm… that's not exactly the lesson most of the rest of the world took away from this episode!

Coll first argues it makes sense for private media funds to be transferred to NPR becuase "In this time of niche publications and cable networks that thrive on ideological anger, we should be seeking to strengthen NPR's role as a convener of the public square, a demagogue-free zone where all political and social groups — including conservatives and others opposed to federal funding of public media — should be welcome on equal terms."  This is indicative of the all-too-common "progressive" impulse to force media upon us that we don't want or even find offensive.  To be clear, I am not one of those people who finds NPR to be a hopelessly biased bastion of Leftist thinking.  While I think it's clear to everyone that many of NPR's stories and reporters do lean that direction, I also think there's some outstanding reporting to be found there.  But if Steve Coll and his colleagues at the New America Foundation want to see NPR get more funding, they should do the same thing I do:  Open up their wallets and make the voluntary choice to fund it. To force everyone else to do so is despicable.

Second, Coll wants to pretend he's doing private media providers a favor by forcing them to fund NPR.  "Continuing to force profit-seeking licensees to tack public interest work onto their commercial enterprises is a fool's errand. It would be far more rational to let commercial enterprises respond to market incentives as they see fit, while leaving the construction of public interest journalism to organizations and leaders who want to do nothing else – among them, NPR."

How arrogant. Coll is basically saying there's no other good news out there besides what's on NPR.  Perhaps he's just not listening to anything else?  Moreover, to suggest that private media providers should welcome the opportunity to fund their public media competitors because that will take a burden off their shoulders is absurd.  That's not Steve Coll's decision to make and it certainly shouldn't be the government's either. Whether he feels his preferred mix of views is accurately represented elsewhere is utterly irrelevant.  That does not justify forcing those other media providers to fund the one outlet he feels does provide the right mix.

Astonishingly, Coll never addresses the fundamental unfairness of his proposal to private providers.  After all, in case he didn't notice, many private media operators are fighting for their lives right now in the hyper-competitive modern media marketplace.  Coll not only ignores that but he then somehow rationalizes what would, in essence, be a new discriminatory media tax that would undercut private media operations at a time when they can ill afford it.  This raises fundamental fairness issues. Not only has public broadcasting and non-commercial media been siphoning off more and more market share from private news media in recent years, but, by placing such a tax on private media to fund its competitors, Coll's proposal would essentially put private operators in double jeopardy.  It's hard to see how that's in "the public interest."  It's like the government signing the death warrant for private media.

Elsewhere, I've written much more about how such discriminatory private media taxes are seriously misguided.  See, for example, this paper I wrote on what's wrong with using broadcast spectrum fees as a slush fund for public media.  Also, similar discriminatory tax and regulatory schemes are critiqued in this 79-page filing that my former colleagues Berin Szoka, Ken Ferree, and I submitted to the FCC as part of its "Future of Media" proceeding.

Needless to say, their won't be much of a "future of media" — at least for private media providers — if Congress took Steve Coll's advice and imposed this massive media income redistribution scheme on the market.  Again, fund your own media.  Make your own choices.  Don't try to impose your choices on others.

Thoughts on Wu, Part 5: What Ultimately Separates the Cyber-Libertarian & Cyber-Collectivist

I want to thank Tim Wu for continuing to engage in a discussion here about his book, The Master Switch, with his various comments to my ongoing rants.  After pouring out about 15,000 words over the past 4 days, I suspect I'm beginning to sound a bit like his cyber-stalker!  I feel a bit bad about this because I really do like Tim a lot and find him to be one of the all-around coolest and most laid-back guys in the Net policy business.  But, as I've noted in my ongoing series [see parts 1, 2, 3, & 4], we have profoundly different worldviews when it comes to information history and policy. And some of the recent comments he made to my 3rd post deserve a serious response.

In one of those comments he asks, "The question, then, is how you get, essentially, limited, controlled government in regulatory affairs; how you duplicate, in some sense, the limits imposed on other dangerous gov't functions like the army. I don't think this is having things both ways; I think this is trying to learn from what has gone wrong in the past."  In the other, he says: "The question I'm asking in the end of the book is whether we can do better; try to have rules against the worse forms abuse without a creeping regulation that turns into capture. I suspect you think that's impossible, but I don't."

So, here's my response (and I'm making it a new, dedicated post here instead of just a comment in an old thread because I feel we are getting to the heart of the difference between cyber-libertarians (like myself) and cyber-collectivists (or whatever Tim would call himself).

To be clear, I don't think corporations are angels or that there is never a time when a market can't be naturally subject to a great deal of control by one company or a handful of companies.  The difference between us comes down to two things primarily.

First, as I have already noted in a couple of these essays (especially this one), I believe regulatory capture, mismanagement, or other shenanigans have more to do with creating and / or maintaining "monopoly" or lasting / harmful "market power" than nature market forces.   By definition, a "purely economic laissez-faire approach" does not exist in markets characterized by regulatory capture and bureaucratic mismanagement.  And you won't ever get less regulatory capture and bureaucratic mismanagement by increasing the scope of government control over a market.

Second, to the extent that any company or set of companies is able to achieve "market power" is a largely natural fashion (think IBM in 70s or Microsoft in late 90s), I believe that markets can and do act to evolve around those situations quite rapidly, even more rapidly when the market is built on code.

I spent time developing these points in detail in this two-part debate [1, 2] with Lawrence Lessig, which I hope Prof. Wu will take the time to read since I went to great pains to clearly delineate the differences that separate our worldviews.  Ultimately, as I said there in response to Prof. Lessig, what really separates the cyber-libertarian and cyber-collectivist schools of thinking comes down to a belief that "market failures" or "code failures" are ultimately better addressed by voluntary, spontaneous, bottom-up, marketplace responses than by coerced, top-down, governmental solutions. Moreover, the decisive advantage of the market-driven approach to correcting code failure comes down to the rapidity and nimbleness of those response(s).

Does that mean cyber-libertarians believe everything will be all wine and roses in a truly free marketplace?  Absolutely not.  There will be short term spells of what many of us would regard as excessive market power.  The difference between us comes down to the amount of faith we would place in government actors versus market forces / evolution to better solve that problem.  We cyber-libertarians would obviously have a lot more patience with markets and technological change, and would be willing to wait and see how things work out.  We believe, as I have noted in my previous responses to Wu, that it is during what some regard as a market's darkest hour when some of the most exciting disruptive technologies and innovation are developing.   We are bullish on what I have called experimental, evolutionary dynamism.  People don't sit still; they respond to incentives, including short-term spells of "market power."

Is this blind faith in the market?  I suspect Prof. Wu and others would accuse us of that.  But I would argue it isn't blind faith but informed fact.  It's interesting, for example, that one of the "information empires" Wu doesn't spend much time on in his book is IBM.  Back in the 60s and 70s, (as I have documented here before) IBM was the big, bad dog of the computing world, with significant "market power" in mainframes — the only computers that really counted at the time.  Big Blue's market power was achieved in a fairly nature way, however.  Importantly, there isn't much regulatory capture or interference I could point to that helped cause or maintain the power IBM had. So, it's certainly a better case study than others Wu uses in his book, most of which were subject to early meddling by government that tipped the balance in unnatural directions.

Anyway, back in the 1960's, some folks at the time feared IBM might "leverage" their significant market power into new fields. As a result, the Department of Justice opened an antitrust case against Big Blue in 1969 that would become a 13-year quagmire, with little to show for all the legal wrangling by the time the case was abandoned in 1982.  Here's how CNet staff writer Rachel Konrad summarized the fiasco back in 2000:

In January 1969, the government began a sweeping antitrust investigation into IBM's dominance and attempted to break it into smaller companies that would compete against one another. During the six most critical years of the trial, from 1975 to 1980, the parties called 974 witnesses and read 104,400 pages of transcripts, according to Emerson Pugh's 1995 book "Building IBM: Shaping an Industry and Its Technology."

The 13-year investigation, which required IBM to retain 200 attorneys at one point, fizzled in the early '80s as the computing landscape shifted from mainframes to personal computers. The government abandoned the tainted effort entirely in 1982, as clones of the IBM PC eroded Big Blue's dominance. But the company, still fearful of the watchful eye of the Justice Department, took pains to avoid the appearance of a monopoly long after it relinquished its hold on the market. People who worked for IBM in the '80s and early '90s said the company routinely fell victim to "pricing death strategy"–a reluctance to lower prices below cost, even on products that weren't selling–to avoid what the government would call predatory pricing. By the mid-'80s, the company was in bad shape. The antitrust troubles, combined with ill-timed product failures such as the Future System, pinched revenues. The company began a nearly decade-long financial slide. In retrospect, the antitrust case against IBM seemed laughable.

IBM had become the victim of a classic "disruptive technology" paradigm shift that few could have foreseen in 1969.  As Peter Pitsch noted in his 1996 PFF book The Innovation Age, "In 1981 the Department of Justice was still pressing their case against IBM while market forces were about to lay waste to the company." Pitsch continued:

IBM certainly did not expect to see PCs erode the market share and profitability of its venerable mainframe computers, but the fall of the old "big iron" machines was rapid and spectacular. The revenue of IBM's mainframe unit fell from roughly $9 billion in 1990 to an estimated $4.5 billion in 1994… [T]he parties destined to become players in the PC revolution were unknown when the PC was introduced, and the experts' predictions of a much-ballyhooed computer face-off between IBM and AT&T never materialized. Innovative companies that did not exist at the beginning of the revolution rose rapidly. Few people had ever heard of a small company named Microsoft. Nor had they heard of Intel, Novell, Compaq, Dell, or Netscape.

Pitsch went on to summarize how IBM's manufacturing capacity was slashed in the years that followed and also notes that, astonishingly, "in the space of five years after 1987, IBM lost two thirds of its market value — more than $70 billion."  In sum, new marketplace innovation and competition handled the short-term market power concern that antitrust regulators had about Big Blue.  Pitsch goes on to explain what the antitrust regulators missed:

A dominant firm can lose its "King of the Hill" status in two ways. First, if it does not continually improve, it will lose market share and profits to low-cost imitators. For example, the ability of low-end PC manufacturers to make IBM clones fostered robust price competition in the PC market. Second, today's market leaders must worry that some established and well-financed competitor or possibly an upstart produce a technical breakthrough that will displace them. This situation reflects [the] fact that gains from innovation are so powerful and beneficial to consumers that they outweigh the higher prices dominant firms can charge. Indeed, attempts to eliminate these high profits by regulating prices would almost certainly disserve consumers even if the regulations dampened the incentives for innovation only slightly.

What Pitsch is talking about here is dynamic competition, not the static competition. And what the history of IBM shows is the power of evolutionary dynamism in action.  Markets are a learning experience; a "discovery process" as Austrian economists have taught us. Those of us who believe in dynamic competition and evolutionary dynamism 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. Experimentation and evolution happen if you let them happen.

Others, however – and I suspect this includes Prof. Wu – would argue that's not good enough. They want action, and they want it now!  Every short-term hiccup deserves a policy response in the name of protecting "the public interest," however they define it through regulation.  But what about the costs and trade-offs associated with early, preemptive, or prescriptive regulation?  What of the danger of regulation steering markets in unnatural or inefficient directions? The possibility of picking technological winners and losers, or technological lock-in?  The possibility of regulatory capture and the creation of a special interest, lobbying hell inside the Beltway?

Somehow these factors often go out the window for those who subscribe to the more static, snapshot-oriented view of markets and competition that is so prevalent in cyber-collectivist circles.  But the cyber-libertarian can't let those go.  Those factors lie at the core of the problem, we would argue. Actions have consequences. Regulations have costs. And those costs typically outweigh the benefits of preemptive strikes by the State.

And that, at root, is what separates the cyber-libertarian and cyber-collectivist worldviews when it comes to concerns about "market power" and what to do about it.

Thoughts on Tim Wu's Master Switch, Part 4 (on Regulatory Capture)

After posting the first three installments of my ongoing look at Tim Wu's important new book, The Master Switch: The Rise and Fall of Information Empires, [see parts 1, 2, & 3], I've heard back from some readers as well as Prof. Wu himself that I may be going a bit hard on him, or that I am under-appreciating some of his valid critiques.  In particular, Wu and others have claimed I've ignored or downplayed his admission that the problem of regulatory capture is a prime culprit of "the cycle" he addresses in his book.  So, let me address that point here today.

I have acknowledged that Prof. Wu's book includes some occasional references to the problem of regulatory capture or bureaucratic bungling throughout the history of communications and media policy.  In a comment to my previous post, Wu itemizes a couple of those instances, most of which I'd already cited before. But here's probably the best passage from the book on this point:

Again and again in the histories I have recounted, the state has shown itself an inferior arbiter of what is good for the information industries. The federal government's role in radio and television from the 1920s through the 1960s, for instance, was nothing short of a disgrace…. Government's tendency to protect large market players amounts to an illegitimate complicity … [particularly its] sense of obligation to protect big industries irrespective of their having become uncompetitive. (p. 308)

I agree.  And, as I also noted in my previous essay, I very much appreciated this footnote in chapter 3 of Wu's book: "The technical term for such a system is 'corporatism': in its extreme manifestation it is called 'fascism."  Wu is absolutely right.  I applaud him for labeling this system what it really is.

But here's what's so damn peculiar about Wu and his book when it comes to the problem of regulatory capture and bureaucratic mismanagement: as soon as he raises it, he immediately walks away from it.  There's seemingly never any serious lesson drawn from it.
Indeed, sometimes within a line or two of raising such concerns, Wu seem to dismiss them entirely and propose giving the State far more power to play games within the information sector. If Wu really believed in what he said about the dangers of regulatory capture, he wouldn't also be so eager to empower the State to do even more meddling in these sectors. Indeed, as we'll see in the next installment of this series, Wu goes on in his book to propose a truly audacious regulatory regime for America's information sectors. It is a breathtaking information industrial policy.

Thus, after reading Wu's book, one is forced to conclude that he is asking us to accept this rather silly syllogism:

Premise #1: Information industries are prone to "cycles" that generally advance from "open" to "closed" and from competition to monopoly.
Premise #2: Regulatory capture and bureaucratic mismanagement are major culprits.
Conclusion: Therefore, the solution to the problem is to empower the State to take more, or better, steps to correct for this "market failure."

That logic just doesn't add up.  But that's exactly what Wu asks us to accept in The Master Switch.

Regrettably, therefore, one is forced to conclude that Wu either has a complete disregard for public choice theory, or, worse yet, he is the victim of the stunning naive belief that his new vision or his new team of benevolent-minded, technocratic philosopher kings can save the day and will be immune to the problems of corporatism, regulatory capture, and bureaucratic mismanagement. Excuse me, but I've heard that one before, and I'm still not buying it.

Moreover, if one understands that the history of information sectors is indeed littered with examples of regulatory capture and bureaucratic bungling, one cannot also then conclude, as Wu does in his book, that a "purely economic laissez-faire approach" to information industries must be rejected.  By definition, a "purely economic laissez-faire approach" does not exist in markets characterized by regulatory capture and bureaucratic mismanagement.  And you won't ever get less regulatory capture and bureaucratic mismanagement by increasing the scope of government control over a market!

You can't have it both ways, Professor Wu.

ITA: Too good to be acquired?

A coalition of online travel sites, including Kayak, Expedia, and Travelocity, has recently formed in opposition to Google's purchase of travel search services firm ITA, according to the WSJ. The group is "launching a lobbying blitz on Capitol Hill, making the case to members of Congress that the deal would allow Google to dominate the online air-travel market by giving it control over the software that powers many of its rivals in the travel search business." Microsoft also opposes the deal, noting that its Bing search engine relies on ITA information. Alas, I don't think we'll ever see an end to corporations trying to use the antitrust laws to protect themselves with no benefit to consumers.

Let's be clear about what exactly ITA is, which is a search company. Airlines publish their flights, inventory, prices, and fare rules to computer reservation systems like Worldspan, Sabre, and Apollo. What ITA brings to the table is search technology that lets users sift through that information to find the best flights to suit their needs. They have developed industry-leading algorithms that look at the fare rules and pricing and show you what different flights can be combined to offer the best fare. ITA does not sell anything to consumers. Instead, they license their search technology to companies like Kayak and Orbitz. Unbeknownst to consumers, they use the ITA search engine on those sites and book there.

**ITA does not control any necessary input.* There is no barrier to entry for new competing travel search services firms. They just need to get the flight data from airlines or computer reservation systems. In fact, there are several other competing firms. ITA just happens to be the best one. And there is no guarantee that it always will be. A day after Google acquires the company, some small developer in a garage may unveil a competing algorithm that blows ITA out of the water. That is what is so wonderful about the internet. So what incentive will innovators have if they know that if they become too successful, their clients will incite the state to prevent them from cashing in on their hard work? What incentive will the Bings of the world ever have to innovate or acquire better travel search technology if they can get the government to guarantee them access to the best?

Congress, don't fall for it.

Thoughts on Tim Wu's Master Switch, Part 3 (What is "Laissez-Faire"?)

This is the third installment in a series of essays about Tim Wu's new book, The Master Switch: The Rise and Fall of Information Empires.  As I noted in my first essay, Wu's book promises to make waves in Internet policy circles, so I'm devoting some space here to debunking what I regard as some of the myths that drive his hyper-pessimistic worldview regarding the supposed death of openness.  In my second essay, I challenged Wu's view of technological "cycles" and "market failure" and noted that he paints an overly simplistic portrait of both. In a similar vein, in this installment I will address Wu's mistaken claim that purely free markets and "laissez-faire" have guided America's communications and media sectors over the past century.

Wu's narrative in The Master Switch is heavily dependent upon his retelling of the histories of several major sectors: telephony, film, broadcast radio, and cable television.  After surveying the history of those sectors throughout the past century, Wu concludes that "the purely economic laissez-faire approach… is no longer feasible" (p. 303) and that a fairly sweeping new regulatory regime – which I will address in a forthcoming post – is necessary to address the imperfections of the free market.

As any serious historian of the past century of information industries knows, however, we've never had anything remotely resembling a "purely economic laissez-faire approach" to communications, media or information policy in this country.  We've had a mixed system that allowed a certain degree of market activity accompanied by very heavy doses of "public interest" regulation.  Indeed, the story of 20th century communications and media markets is one of artificial barriers to entry, government (mis-)allocation of key resources (like spectrum), price controls, rate-of-return regulations, speech controls and mandates, regulatory capture, and good 'ol boy corporatism.

History Grade: Incomplete

Sadly, Wu ignores much of that history in The Master Switch or fails to properly diagnose the root causes of "market failure."  Consequently, as a work of industrial history, his grade is: Incomplete.

Part of the problem here is that, far too often in the book, Wu dwells on intentions. Like so many other so-called progressive scholars who view most corporate leaders like the satanic spawn of Gordon Gecko or Mr. Burns from "The Simpsons," Wu often wants to base his indictment of markets on a moralizing view of corporate bad intentions.  He gives us selective juicy bits of boardroom shenanigans and corporate scheming that would make for a good John Grisham novel.  If one's indictment of free-market capitalism is based on the desires of corporate leaders, however, then it is hardly unsurprising they would conclude that it is a failure.  After all, Adam Smith taught us long ago that every businessman longs for a monopoly over trade in their field.

But intentions are largely meaningless in the larger scheme of things.  It's the nature of the process and outcomes that give us our real gauge of the worth of a market-based approach. We need answers to questions like:

Have markets given us more or less choice, competition, diversity, etc.?
To the extent there was an excessive concentration of private "power" in a given sector, was it fleeting or lasting?
If it was lasting, were markets to blame, or did government tip the balance in favor or certain actors our outcomes?  In other words, how "free" was this "free market"?
Finally, did markets and new technologies evolve to solve whatever "problems" were ailing certain sectors? If not, what held back that progress?

Sadly, Wu often gives us little more than superficial answers to these questions because, again, he's often too busy attempting to peer inside the minds of corporate leaders to discern what motivated their supposedly wicked ways. In the process, he leaves out plenty of pertinent facts. In particular, despite his insistence to the contrary, he significantly underestimates the importance of regulatory capture or unnatural resource allocation / mismanagement as the key causes of the technological "closings" he cites.  He also downplays or occasionally ignores the trade-offs at work associated with regulatory solutions to the supposed problems he cites.  Finally, he largely fails to appreciate the sweeping nature of technological change that has revolutionized so many of these markets for the better in recent years.

In my post yesterday, I noted how Wu ignored many of these variables when discussing the AOL case study.  Today, I'll jump back 100 years in history and Wu's treatment of the early development in America's communications sector and the rise of the AT&T monopoly.  As we'll see, he makes some crucial oversights and, ultimately, makes an unconvincing case against "the purely economic laissez-faire approach" since no such thing ever existed in this field or the others he surveys.

Wu's Incomplete AT&T Case Study

Wu spends a great deal of time in The Master Switch focusing on the old AT&T / Bell System and its leader Theodore Vail as the paradigmatic example of "the Cycle" in action.  To reiterate, "the Cycle" refers to the closing and eventual monopolization of a sector after a period of openness and competition. That Vail and AT&T were hell-bent on monopolizing the American communications systems is beyond question.  What is in question, however, is to what degree any of this process was the result of Wu's much-lamented "purely economic laissez-faire approach."  The answer: Not much.

Sixteen years ago I penned a short history of how this sad tale unfolded and called it, "Unnatural Monopoly: Critical Moments in the Development of the Bell System Monopoly."   What an accurate reading of that history reveals is that this monopolization was anything but the product of "market forces."  Instead, America's early communications history – as was the case in so many other countries – was very much shaped by political forces.

During the early years of the past century, when competition among independents was still quite vibrant, AT&T's extensive campaign for "One Policy, One System, Universal Service" was a thinly veiled front for complete control of the telephone system under one corporate roof.  But was that goal really achievable absent government assistance?  Most industry historians don't think so.

In his 1994 book, Contrived Competition: Regulation and Deregulation in America, Richard H.K. Vietor of Harvard University noted "Vail chose at this time to put AT&T squarely behind government regulation, as the quid pro quo for avoiding competition. This was the only politically acceptable way for AT&T to monopolize telephony…  It seemed a necessary trade-off for the attainment of universal service." (p. 167, 172, 185) And AT&T's own 1917 Annual Report noted, "A combination of like activities under proper control and regulation, the service to the public would be better, more progressive, efficient, and economical than competitive systems."

Industry historian Robert W. Garnet, author of The Telephone Enterprise: The Evolution of the Bell's Horizontal Structure, 1876-1909, provides further support for Vietor's finding that regulation was the crucial driver of monopolization:

Regulation played a crucial role in Vail's plans. Astute enough to realize that the kind of system he proposed — universal integrated monopoly — would stand little chance of gaining public approval without some form of public control, he embraced state regulation. In doing so, he broke with the company's long-standing opposition to what [AT&T] management had traditionally regarded as an unwarranted intrusion on its prerogatives. But after years of unfettered competition, during which the firm's financial strengths had been sapped and its efforts to build an integrated system had been dangerously undermined, regulation became a much-preferred alternative. Thus, Vail obviously saw government regulation as the way to eliminate competitors: the one-way ticket, not only to universal service, but also to monopoly profits. (p. 130, emphasis added)

The Kingsbury Commitment as Classic Corporatism

With the courtship of state regulators and legislators grew more widespread and successful, the stage was then set for the complete monopolization of the industry by AT&T.  Two crucial decisions at the federal level sealed that result.  First came the "Kingsbury Commitment" of 1913. Named after AT&T Vice President Nathan C. Kingsbury, who helped negotiate its terms, the agreement outlined a plan whereby AT&T would sell off its $30 million in Western Union stock, agree not to acquire any other independent companies, and allow other competitors to interconnect with the Bell System.

At the time, the Kingsbury Commitment was thought to be pro-competitive. Yet, this was hardly an altruistic action on AT&T's part. The agreement was not interpreted by regulators so as to restrict AT&T from acquiring any new telephone systems, but only to require that an equal number be sold to an independent buyer for each system AT&T purchased. Hence, the Kingsbury Commitment contained a built-in incentive for regional monopoly-swapping rather than continued competition. Gerald Brock, author of The Telecommunications Industry: The Dynamics of Market Structure found that, "This provision allowed Bell and the independents to exchange telephones in order to give each other geographical monopolies. So long as only one company served a given geographical area there was little reason to expect price competition to take place." (1981, p. 156)

In their 1992 treatise on Federal Telecommunications Law, Kellogg, Thorne, and Huber summarized the result of the Kingsbury Commitment as follows:

The government solution, in short, was not the steamy, unsettling cohabitation that marks competition but rather a sort of competitive apartheid, characterized by segregation and quarantine. Markets were carefully carved up: one for the monopoly telegraph company; one for each of the established monopoly local telephone exchanges; one for the Bell's monopoly long-distance operations. Bell might not own everything, but some monopolist or other would dominate each discrete market. The Kingsbury Commitment could be viewed as a solution only by a government bookkeeper, who counted several separate monopolies as an advance over a single monopoly, even absent any trace of competition among them. (1992, p. 16-17)

The lesson here is clear: the move toward market-carving and mandated interconnection, while appearing in the independents' favor at first, actually allowed AT&T to gain greater control over the industry. Brock found that "interconnection reduced the Bell's ability to drive the independents out of business but also eliminated the independents' incentive to establish a competitive long-distance system." That is a crucial point, and one that Wu overlooks in his book and that many regulatory activists ignore till this day: Although well-intentioned, interconnection mandates can disincentivize more direct forms of head-to-head competition and disruptive forms of technological innovation.

To his credit, Tim Wu does acknowledge how the Kingsbury Commitment ended up being a disaster in practice. "Superficially a victory for openness and competition, in time the Kingsbury Commitment would prove the insidious death knell of both," he notes. (p. 56)  But Wu doesn't dwell on the gravity of this fatal regulatory decision very long.  Instead, he quickly switches gears and suggests that the problem was that regulators just didn't go far enough. He suggests a preemptive breakup might have been the better way to go and implies that monopolization was inevitable.

Of course, we can never know how differently things might have turned out if that course of action had been pursued. But the problem for Wu is that most of the examples he uses in his book depend on this 'why-didn't-the-government-see-it-coming-and-intervene-earlier' sort of thinking, even though (a) we don't know how much of a difference it would have made in practice, and (b) such interventions could have backfired and had profoundly deleterious unintended consequences, just as the Kingsbury Commitment did.  Such interventions would have just necessitated additional forms of prophylactic regulation to keep the market as atomistic as Wu preferred.  As the Austrian economist Ludwig von Mises taught us six decades ago:

All varieties of interference with the market phenomena not only fail to achieve the ends aimed at by their authors and supporters, but bring about a state of affairs which—from the point of view of their authors' and advocates' valuations—is less desirable than the previous state affairs which they were designed to alter. If one wants to correct their manifest unsuitableness and preposterousness by supplementing the first acts of intervention with more and more of such acts, one must go farther and farther until the market economy has been entirely destroyed and socialism has been substituted for it.  (Human Action, at 858, 3rd ed. 1963, 1949).

(In a moment, we'll see how the market economy was entirely destroyed and socialism substituted for it in this field.)

Again to his credit, Wu is willing to admit that, "it should also be obvious to anyone – one need by no means to be a raving libertarian – that there are some substantial dangers implicit in aligning the immense power of the state with the greatest of information monopolists." (p. 59) Well, I am a raving libertarian, so you can imagine how sympathetic I am to this argument!  More impressively, in a footnote to that line, Wu properly labels this system what it is. "The technical term of for such a system is 'corporatism': in its extreme manifestation it is called 'fascism,'" he notes. Quite right!  What the Kingsbury Commitment represented was the essence of corporatism or what used to be called fascism before the Nazis essentially made the term impossible to use as a descriptor in economic histories or political philosophy.

A final problem with Wu's interpretation of the Kingsbury Commitment: He praises Vail and AT&T for at least agreeing to common carriage obligations as part of the deal. "[I]f we regard the Kingsbury Commitment as having sanctioned the most lucrative monopoly in history, it also made good on the essential goals of common carriage," Wu says. (p. 59) Here he utterly fails to fully appreciate the linkage of common carriage obligations and to the corporatist model of industrial organization.  The imposition of common carriage obligations on a particular company or sector is tantamount to a "Game Over" moment for truly free markets.  Once you make that plunge, you've essential raised the white flag and surrendered on the notion of facilities-based competition. It is the death knell for laissez-faire.  Yet, Wu never makes that connection clear.

World War I and Communications Nationalization

More surprising, however, is the fact that Wu completely ignores the second major federal intervention that sealed AT&T's lock on the communications marketplace. It was World War I, the nation's first major global crisis, that would provide the United States government with a convenient excuse to forcefully gain control over communications and forever change the structure of the telephone industry.  On August 1, 1918, in the midst of World War I, the federal government nationalized the entire telecommunications industry for national security reasons. If, as Wu correctly suggests, the Kingsbury Commitment represented a dose of "fascism," then this was surely a bit of good ol' fashion socialism!  How it escaped Wu's attention is perplexing because its significance cannot be underestimated.

As I noted in my history of the rise of the Bell System monopoly, AT&T executives were initially quite nervous when it was announced that Postmaster General Albert S. Burleson, a long-time advocate of nationalizing the telegraph and telephone industries, would assume control of the telephone system. But, once the benefits of nationalization where made evident to Theodore Vail, his anxieties disappeared. Industry historian George P. Oslin notes when Vail expressed concern over the plan to Western Union President and close personal friend Newcom Carlton, Carlton reassured Vail that the plan was in his interest: "It's your salvation. The government will be able to raise your rates and get you new money." As Oslin argues, "That was what happened. Burleson appointed Vail, rated by Carlton as a genius, to manage the telephone, and Carlton to operate the telegraph."

In his 1939 book AT&T: The Story of Industrial Conquest, Noobar R. Danielian concurred: "There is evidence that Vail appreciated the advantages of Federal control… he was not in much of a hurry in the early part of 1919 to have his System back from nominal government control." (p. 248) This attitude should not be at all surprising since shortly after the industry was nationalized, AT&T's proposed contract establishing the terms of government ownership and compensation was accepted by the postmaster general. Danielian summarizes the deal as follows:

The federal government…  agreed to pay to AT&T 4 1/2 percent of the gross operating revenues of the telephone companies as a service fee; to make provisions for depreciation and obsolescence at the high rate of 5.72 percent per plant; to make provision for the amortization of intangible capital; to disburse all interest and dividend requirements; and in addition, to keep the properties in as good a condition as before. Finally, AT&T was given the power to keep a constant watch on the government's performance, to see that all went well with government operation, by providing that the books of the Postmaster General would be at all times open for inspection. One might well wonder where the real control was lodged. Needless to say, the contract was eminently satisfactory to the Bell System. (p. 252)

In addition, once the nationalized system was in place, AT&T wasted no time applying for immediate and sizable rate increases. High service connection charges were put into place for the first time. AT&T also began to realize it could use the backing of the federal government to coax state commissions into raising rates. Vail personally sent Postmaster General Burleson studies that displayed the need to raise rates. By January 21, 1919, just 5 1/2 months after nationalization, long-distance rates had increased by 20 percent. In addition to being much greater than returns earned during more competitive years, the rates established by the postmaster during the year of nationalization remained in force many years after privatization. Consequently, AT&T's generous long distance returns continued to average near or above 20 percent during the 1920s.

By the time the industry was returned to private control on August 1, 1919, the regulatory route to competition elimination had paid off handsomely for Vail and AT&T.  Of the estimated $50 million in rate increases approved by the postmaster general during nationalization, approximately $42 million, or 84 percent went to AT&T.  Additionally, the government cut AT&T a $13 million dollar check at the end of the period to cover any losses they may have incurred, despite the fact that none were evident.

You cannot get a better deal than that!  The year of government nationalization was the final nail in the coffin of communications competition, and it was a nail struck with the hammer of Big Government. The lesson: There was absolutely nothing "natural" about this monopoly.   Congress basically blessed the entire farce in 1921 with the passage of the Graham Act, which Wu does cite in his history. As he notes, it "recognized AT&T's monopoly and remov[ed] any remaining obstacles to integration." (p. 59)   But, again, this is Wu implying that there had been something natural about that monopoly, which there most certainly wasn't.

This sad tale of corporatism only grew worse in subsequent years with the initiation of extensive rate regulation and direct barriers to entry and innovation. Rate regulation guaranteed AT&T stable returns and ensured that regulators suddenly had a vested interest in keeping the company healthy and protected from competition so that it could achieve the industrial policy vision of "One Policy, One System, Universal Service."  AT&T had so utterly captured legislators and regulators that its motto became the prime directive and modus operandi for all communications regulation over the next half century.

And this is a pattern – dare I call it "the real cycle" – that we have seen play out in many other sectors that Wu discusses in the book.  Yet, he doesn't seem to fully appreciate just how profoundly public policy makers to have distorted markets in the quest to achieve various social policy goals.  In many regulated sectors, history shows that policymakers often ended up depending upon one firm, or a small handful of firms, to provide all industry output/service. Those favored actors, like AT&T and Vail, became partners with the State.  Consequently, competition was made more difficult, if not impossible, by force of law.  As the dean of regulatory economists Alfred E. Kahn noted in his seminal 1971 treatise The Economics of Regulation:

When a commission is responsible for the performance of an industry, it is under never completely escapable pressure to protect the health of the companies it regulates, to assure a desirable performance by relying on those monopolistic chosen instruments and its own controls rather than on the unplanned and unplannable forces of competition. (p. 12)

Conclusion

In sum, Wu serves up an incomplete history of Theodore Vail and the rise of the Bell System by downplaying the role that governments played in spawning, and then sheltering, the resulting monopoly.  In the case of Vail and AT&T, we can definitively conclude that there was no such thing as a "purely economic laissez-faire approach" allowed after World War I.  It basically became a crime to compete against the company or even attempt to innovate around it.

Thus, the lesson we should take from this case study is not, as Wu suggests, that markets failed but that they were never allowed to function naturally. Interventions pursued in the name of protecting consumers and serving "the public interest" often backfire and become the death knell of competition and innovation. Consequently, they undermine consumer welfare — which should be regarded as the ultimate "public interest" — in the process.

A more cautious historian would have acknowledged that and then questioned whether expanded regulatory inventions would — then or now — improve matters or simply lead to even more deleterious forms of regulatory capture and corporatism.

There is Only One Way… The TLF Way

Technology Liberation Front rebels apparently continuing their subversive ways on the streets of our nation's capital. (Of course, I don't condone this sort of thing.)

Data Formats –> Public Oversight

Rep. Darrell Issa (R-CA) has a terrific op-ed piece on Internet-age government transparency in the Washington Times today:

If agencies used consistent data formats for their financial information, their financial reports could be electronically reconciled. It would be possible to trace funds from Congressional appropriations through agencies' budgets to final use. The same data could flow automatically into USASpending.gov, without the errors and inconsistencies that make it unreliable today.

The idea is simple, if not easy to implement. Put government data in uniform formats, accessible to the public, and let public oversight work its will. Whether you prioritize good government, small government, or both, expect improvement.

Privacy Trumps Taxes—Victory for Consumers in North Carolina…But What About Colorado?

A federal judge sided with privacy over taxes yesterday, signaling a victory for consumers in North Carolina. Now we're waiting to see if this also means victory for consumers and online companies that sell into Colorado.

A U.S. District Court in Seattle blocked North Carolina's Department of Revenue from compelling Amazon to reveal the names and addresses of its customers so that North Carolina could go after them for not paying use taxes on purchases where they did not pay sales tax.

The North Carolina DOR had been auditing Amazon's 2003-2010 sales into the state and had asked for "all information for all sales to customers with a North Carolina shipping address." Amazon provided detailed information about the purchases, but the DOR demanded information about the customers making the purchases. Amazon balked and filed suit, and the ACLU even intervened to support Amazon. And they won.

The court was clear that states cannot compel companies to disclose the purchasing behavior of its citizens:

The First Amendment protects a buyer form having the expressive content of her purchase of books, music and audiovisual materials disclosed to the government. The fear of government tracking and censoring one's reading, listening and viewing choices chills the exercise of First Amendment rights.

What does this have to do with Colorado? Everything and more.

#3 in our latest iAWFUL list of bad laws is Colorado HB 1193, a bill enacted earlier this year that forces out-of-state retailers to send the Colorado Department of Revenue an annual statement of the purchase data for each resident. It's similar to the North Carolina "request" except that it applies to all companies that sell into the state (not just Amazon). It's a much larger and broader attempt to get purchase information so that Colorado can send a tax bill to its citizens that don't pay use tax.

Tax administrators nationwide are looking to duplicate the Colorado approach. But this ruling should send a big chill down the spine of tax administrators who were hoping to copy Colorado's law requiring all out-of-state sellers to report purchases to the state. And hopefully the ruling gives a shot of energy behind the effort to repeal HB 1193.

Thoughts on Tim Wu's Master Switch, Part 2 (On "Cycles" & "Market Failure")

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

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

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

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

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

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

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

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

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

The AOL Case Study

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

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

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

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

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

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

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

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

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

The Microsoft Case Study

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

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

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

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

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

Lessons Learned – Or Ignored?

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

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

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

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

Conclusion

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

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

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

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