IPcentral Weblog: May 2004 Archives

May 2004 Archives

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05.28.2004

Kill Jack (as in Valenti)

And while we are on the subject of corporate gamesmanship (see the last post), I just saw an email from a group called Protect Fair Use urging support for H.R.107, and pressing me to "Tell Congress You're No Pirate," and to fight against the "big movie studios" that are trying to "take away your fair use rights." The gist of the pitch is that I should be able to make back-up copies of DVDs, and that only a greedy poltroon could oppose this.

I was touched by this concern for the little man, this uprising of the digital masses. But years in Washington have made me cynical. So I noted that the site was sponsored by 321 Studios, which sells software that cracks the encryption protecting DVDs, and that stands to make much money if this product is legalized. And the site was designed by e-advocates, a group which describes itself as:

"[T]he nation's premier, full-service Internet and grassroots advocacy consulting firm backed by the commitment and expertise of Capitol Advantage, the nation's top provider of cyberlobbying technology. e-advocates helps organizations harness the power of the Internet to achieve legislative and political objectives, offering clients a full range of advocacy consulting services. Our campaigns generate online grassroots action and off-line legislative wins."

Is it possible, do you think, that e-advocates and Capitol Advantage charge money for their services? That they will share in the booty if they persuade Congress to redefine property rights so as take them away from the motion picture industry and give them to someone else, such as 321? And that this Internet demonstration has all the spontaneity of Red Square as of about 1950?

The scope of proper fair use rights is an interesting, difficult, and important question. But I have seen no evidence that large numbers of DVDs are defective or that there is any particular need to back them up. I do know that legalizing the de-encryption of DVDs would make it very difficult to control piracy, which is certainly not in the interests of consumers as a class. This interest is in having everyone pay for their DVDs so that they share the costs and everyone gets the products as cheaply as possible.

So once again, in my view, the moral balance is the reverse of where the opponents of property rights and markets would have you believe -- it lies with those of us who defend these institutions.

posted by James DeLong @ 9:25 AM | General

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Kill Bill (as in Gates)

Forbes (June 7, 2004)(subscription required), has an article "Kill Bill: IBM Takes on Microsoft." The piece is about the billions of dollars that IBM is putting into open source software, particularly Linux.

At PFF, we are acolytes of Schumpeter's view that the gales of creative destruction unleashed by capitalism constitute its greatest virtue -- a colleague calls it Schumpeter's Trumpet. In consequence, we view contests between corporate giants as sporting events. If IBM wants to bet that the way to go is to commoditize the operating system and sell services and hardware, while Microsoft and Sun think it better to make the software so robust that services are unnecessary -- well, folks, we've got a ball game going tonight.

But there is a deeper import to this news of IBM support. The Free Culture Movement holds up open source software as a model of production that can be replicated in other areas, ranging from books to music to pharmaceuticals. Indeed, in his recent and highly-praised (though not by me) book Free Culture, Larry Lessig pays tribute to Richard Stallman, the most anti-market of the founders of the open source movement, a man who believes that using proprietary software is immoral: "[A]s I reread Stallman's own work . . . I realize that all of the theoretical insights I develop here are insights Stallman described decades ago."

In my view, the idea that we can dispense with the market system for the production of creative products and rely instead on cooperatives funded via some unspecified other mechanism, perhaps a tax on hardware, is dangerous and demented. Others disagree with me -- that, too, is what makes ball games. But, I submit, if in reality the open source software movement is increasingly dependent on IBM, then the moral pretensions of the Free Culture Movement to be achieving something beyond the morality of the marketplace stand discredited. And this is important, because it allows us to see the contest for what it is -- an economic and business debate over the best way to produce the proper mix of software, hardware, and services, not the dawning of Cyberman, a new species devoid of greed and selfishness.

posted by James DeLong @ 8:21 AM | General

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05.27.2004

Cato Program on P2P

The Cato Institute will hold its 8th Annual Tech & Society conference on Thursday, June 17. The topic is: The Law and Economics of File Sharing & P2P Networks.

The program is not yet final, but it will feature Jack Valenti of MPAA, who has some strong views on the topic. As a counterweight, Congressman Rick Boucher, the sponsor of H.R. 107 (see here and here), has been invited. Confirmed panelists include Koleman Strumpf of the University of North Carolina, author of a recent study arguing that file sharing does no harm; Stan Liebowitz of the University of Texas, who is critical of the Strumpf study; and Michael Weiss, CEO of StreamCast Networks/Morpheus.

More detail in a day or two.

posted by James DeLong @ 11:21 AM | General

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05.26.2004

Micropayments: A Trillion Ripples Could Make a Hell of a Tsunami

A serious barrier to the growth of online commerce are the transaction costs involved in making small payments. Credit card companies charge minimums of 25 cents on up to process a deal, so the overhead of selling anything for a buck or two is prohibitive. And selling for 10 or 25 cents is impossible.

Monday's Wall Street Journal (payment required) had an article on micropayments, the concept that people could buy material over the Internet for a few pennies per whack. This is not a new quest; techies have been searching for a good system with an avidity unrivaled since the Spanish explorers sought El Dorado, and the Internet, like the desert of the Southwest, is filled with bleached bones.

Nonetheless, the quest continues, and for good reasons: success is indispensable to the long-term health of the cyberworld, and whoever achieves it will be rolling in gold.

I share the view of Internet guru Jakob Nielson, quoted by the WSJ as saying: "We have been through 10 years of Dark Ages on the web, where useful services have stagnated because they couldn't charge their users."

There is simply no substitute for the market model whereby a producer offers something directly valued by the person paying the bill. In other models, the real product is the consumer. In advertising, for example, the content provider is selling eyeballs to a sponsor, not content to a viewer. How much are my eyeballs worth to a detergent maker? Not much, and this leads to lowest-common denominator programming that aggregates large numbers of viewers each of whom places low value on the content itself, which in turn leads to low-grade content. In contrast, every Sunday night I bless HBO for giving me the opportunity to buy the great shows Sopranos and Deadwood.

Consumers should want to be purchasers rather than products. Nor is a system that makes consumers into products in the real interests of the purveyors of goods and services. Google would be better off, IMHO, and so would its users, if it sold searches directly to consumers instead of developing crafty algorithms to sell eyeballs to advertisers. Search capability is valuable to me, and it is not to my benefit to have the capability limited by the amount that someone is willing to pay to get me to look at an ad.

Google is solving one problem because it is figuring out how to charge advertisers only for those eyeballs that are actually interested in specific ads, which will improve the fit between consumers' interests and the content available. But this advance still does not allow the consumer to adjust his payment to match the intensity of his interest in the actual search, as opposed to his value to someone who wants to sell him something connected to his search.

Micropayments are vital to the future of the content industries. Internet downloading is the wave of the future for movies and music, books and games and software. These industries are seriously threatened by piracy, and they cannot get straightened out until legitimate content is available on the Net at prices that seem fair to consumers, which is a level substantially less than the price of physical distribution. The transaction cost problem stands in the way of this. (For some thoughts on how Apple and other music services sell for 99 cents, see rentzsch.com.)

There are many explorers out seeking this El Dorado. WSJ mentions BitPass and Peppercoin, and other sources add eTelCharge, iPin, and microCreditCard. Other companies that now deal in larger amounts might enter. And of course it is unlikely that the credit card companies will sit idle while their business erodes..

So go to it, entrepreneurs. The fate of cybercommerce and the Internet rests squarely on you. (But, hey, no pressure!)

posted by James DeLong @ 11:22 AM | General

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05.25.2004

More on Do-It-Yourself Socialized Entertainment

From BBC World News:

"Albums and films account for 70-80% of all internet traffic in Europe, traffic filtering firm Sandvine has reported.

"In the US, there has been a small decline of about 5%. But in Europe, file-sharing levels remain as robust as ever," said Sandvine's Chris Colman."

posted by James DeLong @ 9:35 AM | General

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05.24.2004

The Cisco Kid

The tech press today is full of stories about Cisco's new product, code-named HFR for "Huge Fast Router." It is not just a hardware upgrade. Also involved is new software to replace the Internet Operating System that has powered the company for its 20-year existence, but which has grown to include an unwieldy 15 million lines of add-ons and patches.

The announcement prompts several thoughts.

One concerns the malleability of industrial categories. Cisco is regarded as a hardware company, but today's stories seem to invert that, saying its real role in adding value to the world is as a software provider, sort of the Microsoft or the IBM of the Internet. The lines between hardware, software, and services are getting blurrier all the time.

A second thought is something frequently voiced by Ray Gifford, head of PFF: You can talk all you want about how information "wants to be free," and the Internet wants to be open, but the underlying network layer is darned expensive. High-end routers cost up to $500K, and Cisco's 65% market share produces revenue of about $19B per year, which is a lot of routers. The whole enterprise rides on the willingness of telecom investors to keep committing major resources. So Congress and the FCC really need to stop play Lucy-and-the-football to the telecom companies' Charlie Brown, and get the system deregulated, or we may see just how free information is without the equipment needed to send it to its proper destination.

CORRECTION: Only about 40% of Cisco's revenue comes from routers - but that is still a lot of investment.

posted by James DeLong @ 2:35 PM | General

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05.21.2004

Databases and Monopolies (Government Monopolies, That Is)

Stephen Moore, President of the Club for Growth (a political organization dedicated to government fiscal responsibility and deregulation) has a column in today's Washington Times on "Who Needs the NYSE?" His basic point, echoing Richard Baker, the Chair of the Subcommittee on Capital Markets of the House Financial Services Committee, is that the New York Stock Exchange "derives its power not from the marketplace, but from government charter."

A focus of Moore's critique is the information problem: "Perhaps the most harmful monopoly power bestowed on the NYSE is its status as an information cartel for the stock market. Brokerage firms are forced by regulation to send information . . . of great value . . . to the exchange . . . . Those same firms are then forced to buy the aggregated data stream back whem providing a stock quote . . . . This grants the NYSE an information cartel and impairs the liquidity of the stock market."

Protection of property rights and investment in databases is important to the long-term health of the economy and to simple Lockean justice. But the NYSE situation illustrates the problems when the government creates and continues ossified monopolies unrelated to real value added, monopolies that will be defended to the max with political contributions and other forms of influence.

The correct approach is to define the property rights correctly and assign them to the people doing the work -- and this in itself presents exquisitely difficult issues -- and then let the parties deal by private contract. The firms that produce the data, and their customers, should be able to bargain with the aggregators to share the value created.

This "less government action is more" approach is particularly important in a time of great uncertainty over the role of information in the economy and the society and over how information will produce value in the future. Part of the genius of F. A. Hayek was his emphasis on Competition as a Discovery Procedure, a process of learning and feedback rather than the static equilibrium of the academic blackboard.

posted by James DeLong @ 10:02 AM | General

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05.20.2004

The Latest Linux Controversy

A report coming out today from the Alexis de Tocqueville Institution apparently questions the originality of Linux, and has already started a rancorous dispute in the tech press.

I have not yet laid eyes on the study, but I confess to some bafflement over the brouhaha. I did not know that anyone doubted that Linux must be classified as part of the Unix family, a point made by such gurus as Andrew Tannenbaum, Modern Operating Systems (2d ed. 2001) and Abraham Silberschatz, et. al., Operating System Concepts with Java (6th ed. 2004).

Tannenbaum: "Given this history [which the author has just recounted], strict POSIX conformance, and overlap between the user communities, it should not come as a surprise that many of Linux' features, system calls, programs, libraries, algorithms, and internal data structures are very similar to those of UNIX. For example, over 80% of the ca. 150 Linux system calls are exact copies of of the corresponding system calls in POSIX, BSD, or System V." (p. 680)

Silberschatz, et. al.: "In its overall design, Linux resembles any other traditional, non-microkernel UNIX implementation. It is a multiuser, multitasking system with a full set of UNIX-compatible tools. Linux's file system adheres to traditional UNIX semantics, and the standard UNIX networking model is implemented fully. The internal details of Linux's design have been influence heavily by the history this operating system's development." (p. 750)

More Silberschatz, et. al.: "Whereas the Linux kernel is composed entirely of code written from scratch specifically for the Linux project, much of the supporting software that makes up the Linux system is not exclusive to Linux but is common to a number of UNIX-like operating systems. In particular, Linux uses many tools developed as part of Berkeley's BSD operating system, MIT's X Window System, and the Free Software Foundation's GNU project." (p. 748)

This does not detract from the formidable intellectual achievement of Linus Torvalds and his fellows. Writing a great UNIX-family operating system is not easy, and full honor is due.

The sensitivity to the study, I think, comes from its effect in undermining the myth and the politics of open source. If Linux is derivative from UNIX, then the idea that spontaneous swarms of programmers, working without serious economic support, can perform the function of creating and maintaining an important industrial product, is a pipe dream.

Well guys, it is a pipe dream, as I recount here. Sorry.

posted by James DeLong @ 9:34 AM | General

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Promethean Fire

The Competitive Enterprise Institute, a free-market-oriented analytic and activist organization here in D.C., held its 20th anniversary dinner last night. It awarded its PROMETHEUS award to Norman Borlaug, agronomist, creator of the Green Revolution, winner of the Nobel Peace Prize, and holder of over 30 honorary doctorates.

Borlaug is one of the towering figures of the 20th Century (throw in the 21st as well). As writer Gregg Easterbrook said in The Atlantic: "Perhaps more than anyone else, Borlaug is responsible for the fact that throughout the postwar era, except in sub-Saharan Africa, global food production has expanded faster than the human population, averting the mass starvations that were widely predicted . . . . The form of agriculture that Borlaug preaches may have prevented a billion deaths."

Borlaug is also exemplar par excellence of the great truth propounded by the late Julian Simon: The Ultimate Resource(2) in the world is the human mind, the ability of intelligence and creativity to wrest incalculable value from inert soil and water, silicon and copper, coal and oil, iron ore and bauxite.

He is a great choice for an award named for the god who gave humankind the gift of fire.

posted by James DeLong @ 8:05 AM | General

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05.19.2004

FCC Commissioner Abernathy on Property Rights

A post on the general PFF blog describes a recent speech made by FCC Commissioner Katherine Abernathy entitled The Role of Property Rights in Understanding Telecommunications Regulation.

She noted that wireless has been organized into two distinct categories: a property rights model with little regulation for licensed spectrum and a commons model for unlicensed spectrum, and that both are a success. Wireline, on the other hand, has been characterized by a regulatory regime that treats property rights as malleable at the regulatory whim, and the industry and the public have suffered accordingly.

posted by James DeLong @ 1:03 PM | General

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05.19.2004

Yet More Pop Ups

posted by James DeLong @ 12:21 PM | General

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