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4.30.2004
Patents in the 21st Century
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The National Academy of Sciences has made available on-line a pre-publication version of A Patent System for the 21st Century, the final report of the Committee on Intellectual Property Rights in the Knowledge-Based Economy, which is part of the Board on Science, Technology, and Economic Policy (STEP).
posted by James DeLong : 4/30/2004 03:46:37 PM
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4.28.2004
P2P and the FTC
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CapAnalysis, which is the economic analysis wing of the law firm Howery Simon et. al., is submitting a paper to the FTC entitled Peer-to-Peer Software Providers' Liability Under Section 5 of the FTC Act (April 27, 2004). Prepared for the RIAA in connection with the FTC's April 19 workshop on spyware, the paper focuses on P2P providers' failure to disclose risks of spyware, adware, viruses, litigation for copyright violations, and the possibility that a computer user can become a recipient or unwitting distributor of porn or other offensive materials.
RIAA/CapAnalysis advocates an FTC investigation of P2P software providers.
The FTC issued a Consumer Alert on potential problems of P2P in July 2003.
posted by James DeLong : 4/28/2004 01:11:21 PM
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4.16.2004
Hibernation
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Not many entries will appear between now and April 28, unless they are on the glories of Montana, where I will be vacationing.
posted by James DeLong : 4/16/2004 05:47:32 PM
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Digital Audio Broadcasting (DAB)
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The FCC is moving to finalize the rules that will allow radio broadcasters to go digital, thus providing listeners with CD quality over the airwaves, and a new crisis is at hand for the music industry.
A digital audio radio system can be built with the capability to execute a set owner's request to seek a particular song. Key in the request and presto! The ether will be scoured until the piece is found and recorded.
The broadcasters do not see this as a serious threat to their model of sponsored broadcasting. Listening to the radio is connected with driving, and the broadcasters think that a captive audience will keep listening to the drive time mixed format shows and will take pot luck on the music. The recording industry is more concerned, because, obviously, this would be an easier way to acquire music than going to the CD store, logging on to iTunes, or even messing around with KaZaA.
The existence of technology that can identify a particular song amidst all the babble of the electromagnetic spectrum means that another capacity exists, however -- the capability to tag those songs that are copyrighted and deny access to them if the copyright holder objects. The RIAA thinks this blocking technology should be made part of the standard for digital audio broadcasting (DAB).
The FCC Notice of Inquiry, which was approved a couple of days ago and will be public next week, requests information on this issue. The parties have lined up in their usual positions, with the Consumer Electronics Association and such "consumer groups" as Public Knowledge adamantly opposed to any protection.
It is a difficult issue. The logical solution would be for the music copyright holders to refuse to allow transmission of their works unless the broadcasters protected them, and the parties could then hammer it out. This would be the appropriate free market solution. But this is broadcasting, which took a wrong turn toward comprehensive government regulation in the 1920s, and has never since found its way back to rationality.
The FCC has granted a monopoly over DAB to iBiquity, a consortium of broadcasters, so the music copyright holders lack capacity to bargain with various broadcasters to see who will give them a reasonable deal on protection. And if the FCC must be the one to impose any protection, it has always been subject to the winds of politics and pressure more than the realities of the market.
The idea of imposing standards that limit a technology to less than its utmost is unappealing. But what is the alternative? The idea of having technology run so rampant that it destroys all possible ways in which producers of creative work can get paid is even less appealing, at least if one likes to actually listen to music rather than simply contemplate the Platonic ideal of all the wonderful music that would be available over this medium if only anyone had an incentive to produce it.
The question is also coming before the courts, which are being asked to rule that a failure by a conduit of IP to impose available technological measures to protect copyright holders may make the conduit liable for contributing to any copyright violations. See Bill Adkinson's fine paper on Liability of P2P File-Sharing Systems for Copyright Infringement By Their Users (March 2004).
So welcome to the world of DAB, a good candidate for IP policy issue of the year in 2004.
posted by James DeLong : 4/16/2004 03:20:01 PM
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4.13.2004
More Subpoena Wars
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Just before last Christmas, the D.C. Circuit left a lump of coal in the stocking of the content industries when it decided, in RIAA v. Verizon, that copyright holders cannot get the identities of P2P file-sharers from ISPs that are engaged solely in transmitting information rather than storing it. A complaint must first be filed against "John Doe."
The decision was a surprise to most observers, including, it now turns out, the U.S. Department of Justice. In a brief filed in RIAA v. Charter Communications, pending in the 8th Circuit, DOJ characterizes the D.C. Circuit decision as "inconsistent with the text of [the relevant law] and the legislative policies that underlie it," and as one that "directly frustrates Congress's intent."
The odds that there will be a conflict in the circuits, the summum bonum for every lawyer desirous of Supreme Court review, just took a bounce up.
posted by James DeLong : 4/13/2004 05:15:46 PM
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4.12.2004
Liebowitz on the File-Sharing Study
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Ten days ago, I complained that I could not understand the Oberholzer/Strumpf study of file-sharing that got big play in the press. No one accepted my plea for an explanation in plain English.
But Stan Liebowitz of the University of Texas, who does understand technical studies and who is rigorously independent of all sides in this controversy, has posted some questions and reservations of his own.
posted by James DeLong : 4/12/2004 10:24:20 AM
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Marginal Costs & Intellectual Property
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Professor John Duffy of GW Law School has published "The Marginal Cost Controversy in Intellectual Property" in the Winter 2004 issue of the University of Chicago Law Review. (Available through WestLaw with a credit card.)
It is a useful piece. A common refrain of the copyleft is that the marginal cost of a digital copy of an intellectual product is zero, so, therefore, "economics teaches us" that it should be priced at zero. This is a fallacy, as discussed in Marginalized, akin to the logic of the ancient paradox that proves that Achilles can never catch the tortoise. But the fallacy has serious consequences; it underlies current proposals that intellectual property should be made available for free and financed by a tax-and-subsidy scheme.
Duffy puts the issue in the context of earlier economic debates about industries with high fixed costs, pointing out that the current debate is actually a continuation of a controversy that has gone on in the field of public utilities for a century, and that the same overwhelming objections to subsidy schemes that have been developed in the public utility context apply equally to intellectual property.
My only reservation is that Duffy does not examine critically enough the underlying assumption that marginal cost pricing is in fact a normative standard to which we should aspire. In reality, in an investment-heavy economy the concept is so constrained as to be of almost no practical value, and the effort to attain it by, for example, antitrust authorities is Ahabian.
posted by James DeLong : 4/12/2004 09:50:37 AM
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4.9.2004
TV by Internet
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Penelope Paturis of Forbes has a piece looking at the Internet as an alternative to cable and satellite as a channel for content distribution. Her conclusion:
"These endeavors may be long shots now, but what happens when the technology gets to the point where most televisions have high-speed Internet connections? Consumers may start wondering why they should pay $100 a month to DirecTV or Comcast for a bunch of channels they never watch, when they can just maintain their broadband connection at $40 a pop and only watch exactly what they want to watch.
"The cable and satellite systems are at the mercy of the programmers that create and distribute the content. You can bet that as soon as the folks with the keys to the content kingdom decide that there's more money online than on-air, online is where they'll be. "
posted by James DeLong : 4/9/2004 01:17:39 PM
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Porn & the Internet
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Eugene Volokh has a thoughtful post on some of the problems inherent in any government attempt to crack down on the distribution of porn over the Internet.
posted by James DeLong : 4/9/2004 12:52:54 PM
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4.7.2004
Digital Rights Management
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Mike Godwin, Senior Technology Counsel of Public Knowledge, has published What Every Citizen Should Know about DRM, a.k.a. "Digital Rights Management," a useful and sobering primer on the technical and policy complexities of DRM.
I don't agree with all of his policy views -- in particular, I think definitions of fair use should be malleable (both ways) in the light of technological change -- but I share Mike's fear of government regulatory schemes, and I certainly amen his statement: "Most of us believe that artists and authors deserve to be compensated, and even that publishers deserve compensation for bringing them to us. At the same time, it is a natural human impulse to share the creative works we love. . . . The question before us, then, is how to harness both the technical ingenuity behind DRM and the human drive to share the works that we enjoy in a way that leverages the best from both."
posted by James DeLong : 4/7/2004 02:08:37 PM
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Network Effects
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Steve Balmer, CEO of Microsoft, just delivered a speech on computer security. In the course of the Q&A, he noted, with perhaps a certain wryness, that Microsoft's policy is to provide security patches gratis even to people whose software is pirated. Insecure machines do harm to all, so the crucial thing must be to get the flaws fixed.
The three rules of security: firewalls; up-to-date patches; up-to-date virus protection. Most computers do not meet these.
posted by James DeLong : 4/7/2004 02:02:59 PM
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4.6.2004
Stock Options: Its Over Power & Money, Not Good Accounting
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The debate whether stock option grants should be treated as corporate expenses is going badly for the tech world. As expected, FASB is recommending such treatment, so the tech companies are almost to the last ditch, which would be reversal of an FASB rule by Congress -- unlikely, in an election year dominated by demagoguery over evil corporations.
One reason for the defeat is that the tech companies seem to have misunderstood the nature of the fight. They assume it is really about accounting, and that if only they explain often enough that treating options as expenses will not in fact help investors then their opponents will relent.
Sorry, guys. The pro-expense 'em forces do not care about helping investors; they care about discouraging stock options.
In the modern corporation, intangible assets now constitute 70% or so of the value of the company, a shift from 25 years ago, when 75% of the value was in tangible assets. By using options, companies make the creators of these intangible assets into owners, and venture capitalists make the creative classes into partners. Options are a complicated, but quite creative, solution to a number of difficult problems in the valuation of intellect-based assets.
The idea of making the creative classes into owners is not welcomed by old line capitalists, organized labor, public employees, and other power centers. Hence the fight to discourage options.
If you think this view is paranoid, read the whole argument, which appeared in the Milken Institute Review (the deep link is here), along with an earlier background paper.
posted by James DeLong : 4/6/2004 11:16:18 AM
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File-Sharing and Market Power
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Broadly speaking, the debate over music file-sharing's propriety is fought on two fronts, one moral and one economic. The former ground is where the passion comes from; the latter arguments at least admit common set of criteria for discussion. That's why the study purporting to show file-sharing does not affect music sales is welcome. There is at least something to engage beyond a crude emotivism -- "your a thief!" "Culture is too important to be affected by things so crass as the profit motive!"
Let's assume as per the study that file-sharing does not affect music sales; to the contrary, let's posit that it is a positive good for sales. If this is so, then there must be: a) a structural defect in the recording industry preventing the competing firms from adopting a "pro-file sharing" strategy; and, b) reveal incorrigible and durable stupidity on the part of the recording industry. Despite a jejeune enthusiasm from some quarters for this being the case, there is no evidence that it is so.
Now, allegations that the recording industry acts as an effective cartel are common Internet fodder. But the allegations are unavailing. Though concentrated, the recording industry has too many firms, and importantly, is too easy to enter in the Internet age, to act as a unified cartel. There is simply no structural reason to believe that the industry is not competitive. This being so, then the beneficial effects of file-sharing should be adopted by one, and eventually all, competitors. As for the second point, again it must be premised on an unspoken assumption that the recording industry acts as an effective cartel. There is simply no evidence that, even with intent to cartelize the industry, that such a scheme could work -- too many firms, too high coordination costs and too many incentives to cheat for a cartel to work. Further, even if it is a cartel, why wouldn't it adopt an pro-file sharing strategy that maximizes its revenues?
My intuition is that the default property regime we have now is still superior and will yield different business strategies depending on the artist. For a new act, the labels might be more inclined to "give away" recordings and encourage legal file-sharing to start some buzz; for established acts, whose commercial value is established, the right-holder will demand payment for the permutations of the product. Finally, add the fact that home recording is cheaper and easier than ever, plus the Internet makes distribution nearly-costless, I fail to see how a recording industry bent on bottling up music can succeed.
The default rights that our property system gives to copyright holders still seem superior to a different default rule as a means to stimulate production. In a competitive system, you would expect the holders of that right to act in their long-term interest to maximize revenue. If this means giving away some content or endorsing file-sharing for certain content or certain artists, then it shoud happen.
The genius of the property system is that it entrusts the property-holder--goaded by the market--to do what is in consumers' interests. I simply don't see how the current copyright regime and recording industry don't do that. Copyright can be incrementally improved, to be sure, but eviscerated by expansive fair use interpretations, no.
posted by Ray : 4/6/2004 06:28:12 AM
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4.2.2004
Imperial Canada
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On March 31, a federal court in Canada ruled that Canadian copyright law is not violated when someone who has downloaded a music file makes it generally available for uploading over a P2P network. The link is here, but I cannot make it work, probably because it is overloaded. Summaries of the decision can be found here and here.
Previously, it had been established that Canadian law allows downloading a file for personal use, but the legality of then making it available for uploading had not been determined.
The decision will be appealed, of course. One commenter thinks that it will stand up because of a recent appellate decision holding that a library did not violate copyright law by making a copying machine available, but the logic that this is a precedent for making a file available over a P2P network strikes me as thin. And while liability for contributory infringement can present difficult issues, recently examined by Bill Adkinson of PFF, the uploading case seems pretty clear.
The copyleft is happy, with students bragging about their role. If one protests that unlimited downloading will destroy the commercial music system, they respond that the solution is to levy a tax on blank CDs and/or hardware and then split the money up among creators, possibly by metering downloads. In short, socialized music.
This is an absolutely nutty idea. No socialized system of producing anything has ever worked. And this one is particularly impossible, because it will completely sever the links between revenues, the cost of providing the product, and value to consumers. It will also eliminate differential pricing; a symphony download and the latest gangster rapper would be the same. It would be impossible for a small number of consumers to join together to pay a high price, and everything would become lowest common denominator.
And it is a nutty idea to no purpose. Music is becoming legitimately available online very rapidly. We are on the verge of an explosion of creativity, as long as it is not aborted because of government by juvenile delinquent.
To the argument that there is nothing to be done because the writ of U.S. law does not run in Canada, the answer is, "Oh yes there is." Self-help. If Canadians want to destroy our vibrant market in culture and impose on us some miserable socialized system, then our copyright holders should and will be given the right of self help, and allowed to disrupt the P2P networks.
This is an unpleasant alternative, a continuing war of hackers. But when a legal system ceases to meet its responsibilities, then the productive sectors of society must and will find new ways to protect themselves, and the consumers that depend on them.
posted by James DeLong : 4/2/2004 12:30:35 PM
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4.1.2004
More on File-Sharing Study
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After a couple of hours spent on the recent study on file sharing and CD sales (see March 30), I cannot make sense of it. I cannot tell what hypothesis was tested, and the methodology remains totally opaque.
Not being a statistician, such works are often beyond my ken, but usually I can figure out the basics -- theory, assumptions, hypothesis, approach. On this one, I can't. So I would like to invite, or perhaps challenge is a better word, those journalists, such as WaPo, and bloggers, such as Glenn Reynolds (March 30, item #5), who trumpeted the results to explain the study to me. I will be delighted to post any answers so people can laugh at my ignorance.
posted by James DeLong : 4/1/2004 08:28:27 AM
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