The paper by Professor Stan Liebowitz on parasite technologies recently released by the IPcentral Academic Advisory Council created strong reactions (here, here, here and here). Professor Liebowitz, who had observed the fun from the sidelines, has decided to step in and defend his views.

So, with his permission, here is his response in full:

If anyone doubted my little story about the mixed response I received at the telecommunications conference, I think the almost identical response that this article provoked from thoughtful and educated individuals proves that there is still a need for a debate on these topics.

Unfortunately, these responses contained little actual discussion of my main economic point. My simple point was that it is possible to have technologies that make society worse off. If so, it may be efficient to ban the technology. I am not sure that anyone disagreed with this point, but I cannot really tell.

It would be useful if we could at least agree on that point. Whether it is the Star Trek transporter or the TIVO that eliminates broadcast television, this is the starting point. None of my critics even mentioned the hypothetical transporter, but I would like them to go on record as to whether they prefer to allow it to exist and destroy civilization, or whether they are willing to support a ban. It is only a hypothetical but we need to at least be on the same page before continuing. It is certainly possible to object to the idea of banning any technology, costs be damned. I can respect someone who believes that, even if I wouldn’t want them making any important decisions on my behalf. But as far as economic efficiency goes, it is clear that the technology should be banned.

The case of the TIVO requires a little more insight. Viewers of television funded by commercials reveal, by their behavior, that this is there preferred solution, given their alternatives. Yet this point has been missed by the critics.

Adam Thierer claims that my suggestion that ad-blocking technologies are parasitic “is absurd.” But his analysis of the issue is not worthy of his talents. He says: “What if in the future I programmed a robot to rip out all the ads from a magazine before I decided to read it? Should that robot or activity be banned? More simply, what if someone gets tired of looking at offensive ads on billboards across from their apartment and put a big sheet in their window to block out sight of it? Should we ban those damn parasitic sheets?!”

These two examples are very different and shouldn’t have been commingled. The first example is an instance of what I talked about in the paper. Clearly, the best solution would be to charge you a higher price for the magazine if you are planning to have the ads cut out and see whether you prefer the low priced magazine with ads or the higher prices version without ads. Since magazine sellers are perfectly capable of removing the ads and raising the price, and since virtually none of them have done this, it seems quite clear that people prefer the magazine with ads to the higher priced no ad version. In this case the answer to Adam’s question is likely to be “yes”, that we should ban the robot from removing the advertisements (assuming zero cost of doing so) since that is the only way to achieve the solution that consumers actually prefer.
The second argument is a nice rhetorical flourish but entirely irrelevant. The offensive billboards do not support a third product (programming). Cover them up to your heart’s content. Nowhere do I say that consumer should be forced to watch advertising. Merely that we might want to ban technologies that remove ads when consumers will wind up regretting the consequences of failing to ban such technologies.

More generally, Adam, Ray Gifford, and Tim Lee all fall prey to the very trap that is the focus of my article. My point was that we shouldn’t misunderstand when a superior alternative has come to market, or has failed to do so.

Adam says: “But the real weakness of this argument is that Stan ignores the benefits and innovation that come from commercial avoidance. New business models develop. Most TV shows are going to DVD quicker than ever before. And then there’s NetFlix, video i-Pod, Net downloads (MovieLink), direct-to-home movies from the studios (MovieBeam); a migration of content to pay-per-view / on-demand cable and satellite channels; and so on. These new models were at least partially developed as a response to the changing nature of the market and the evolving nature of consumer expectations about advertising. THIS IS A GOOD THING.”

Tim says: “Even if we assume that TiVo will destroy the broadcast TV model (which seems unlikely) the networks can still sell their shows directly to consumers via the Internet. Or they might come up with more sophisticated advertising strategies, such as placing text ads alongside videos, or embedding advertising within the video. Surviving in a post-TiVo world may require some ingenuity on the part of Hollywood, but that hardly makes TiVo a parasite.”

My response to Adam and Tim: NO IT ISN’T, NOT IF THE NEW MODELS CANNOT WIN WITHOUT THE TIVO ‘SUBSIDY’. If these new business models were superior they would win without the TIVO draining revenues from commercial broadcasters. The fact that they have not won [and commercial television ratings have increased over the last 5 years] implies that commercial television provides a better solution. That is what the market tells us. I would be thrilled to see truly superior models replacing the old, but the forced choice to an inferior position is not a good thing.

Ray says: “TIVO can…..potentially destroy the bargain or diminish the value of the bargain between broadcasters and advertisers. So what?.... it does not necessarily destroy it. Indeed, you can think of it being efficiency enhancing for end-use consumers because through the price system they get to more directly communicate their preferences… what’s the problem?

My response to Ray: The problem is that the current first best solution is prevented. Surely, you do not believe that destruction of an industry is the only evidence of harm? If telcos are forced to make their lines available to competitors at below market prices it probably will not destroy the telcos. Does that mean that no harm is occurring? If class actions bring an industry to its knees, but do not destroy it entirely, has no harm been done? Free TV is important because consumers have chosen it over the available alternatives. Their choice reveals its superiority. While I agree with Ray that advertising-based markets may not produce the programming that consumers want as well as pay television might, that doesn’t mean that pay TV is more efficient. If the total surplus is greater with advertising than with paid content, then advertising is the more efficient system. Since commercial-based cable networks have not tried to give up commercials and move to the ‘pay’ tier we can presume that this has been the case. As technology allows easier distribution of paid television programming (which are sold sans commercials, but only after the original commercial run) we might see this equation change. But so far there is no evidence, nada, none, that commercial television is not the superior system.

Tom Giovanetti provides the only criticism that I think has some merit. In my paper I point out that technologies can be harmful if they weaken property rights. My Star Trek Transporter was such an example. For non-advertising based markets, like a box that unscrambles pay-TV signals, this would also be a correct analogy. For advertising based markets this might not be the best analogy. I put the term “property rights” in quotes in the second sentence in the offending paragraph of the original paper to indicate that it wasn’t exactly a property right but I neglected to put it in quotes in the first sentence, which is my omission. Nevertheless, it doesn’t really matter what you call it. This paragraph could easily have been removed from the article and nothing else would change.

We could say that the hypothesized TIVO should be banned because it leads consumers to an inferior position (without mentioning the term property rights) and that cable descramblers should be banned because they lead to inferior positions because they destroy property rights. Both are parasitic, as described.

The real debate should be about more serious issues, such as whether any of these technologies really have reached a threshold where the parasitic harm is greater than the cost of fixing it. But first we need to achieve some consensus on the preliminaries. I hope we are making some progress.