Perry Chen, co-founder and CEO of Kickstarter, an online platform for funding creative projects, discusses the enterprise.  Chen talks about the inspiration behind Kickstarter and its business model, how project creators convince backers (not investors) to fund them, funding success rates, and the most interesting projects funded so far.

Related Readings

• How to Use Kickstarter to Launch a Business, at Inc.com
• The Kickstarter Effect: Fundraising as Game Theory, at documentary.org
• At Play: Kickstarter is a Web site for the starving artist, at the Washington Post
• The Kickstarter Blog

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photo credit: mark knol

How much happiness does Google search bring you every day?   How many times a day do you visit the homepage or harness the power of the G through its embedded search bars?  (And I haven’t even mentioned the happiness gained from chuckling at Google doodles that show up on holidays or other special occasions.)

Last week the New York Times ran an editorial suggesting that Google’s search algorithm should be subject to government oversight or possibly even regulation. Unfortunately, the Old Gray Lady came across more like an Old Gray Hag. To sum up her primary argument: it’s not fair that, because of its market share of search and subsequent tremendous power to determine search result rankings, Google wields immense authority over a company’s success — or even whether one flies or flops.

Search engine guru Danny Sullivan brilliantly satirized the editorial:

The New York Times is the number one newspaper web site. Analysts reckon it ranks first in reach among US opinion leaders. When the New York Times editorial staff tweaks its supersecret algorithm behind what to cover and exactly how to cover a story — as it does hundreds of times a day — it can break a business that is pushed down in coverage or not covered at all.
[. . .]
Some early suggestions for how to [ensure the paper doesn't play favorites] include having the New York Times explain with some specified level of detail the editorial policy that guides what it decides to covers [sic], what it doesn’t decide to cover, why it chooses to write a particular headline with a particular angle, to show all versions of a newspaper story that is written from start to finish, to reveal what’s been edited out. Another would be to give some government commission the power to look at all these aspects, perhaps the power to reside within the newsroom and ensure fairness.

Marissa Mayer, Google’s Vice President of Search Products & User Experience, weighed in in the Financial Times:

. . . The proponents of “search neutrality” want to put an end to [search competition], introducing a new set of rules in which governments would regulate search results to ensure they are fair or neutral.

Here the practical challenges would be formidable. What is fair in terms of ordering? An alphabetical listing? . . . Without competition and experimentation between companies, how could the rules keep up? There is no doubt that this will stifle the advance of the science around search engines.
[. . .]
But the strongest arguments [sic] against rules for “neutral search” is that they would make the ranking of results on each search engine similar, creating a strong disincentive for each company to find new, innovative ways to seek out the best answers on an increasingly complex web.

Incentives for search companies “to find new, innovative ways to seek out the best answers on an increasingly complex web” is what led (and continues to lead) Google to develop an excellent search product that brings millions of people copious information, knowledge, and happiness.  It’s obvious even to internet-surfing grandmothers everywhere that search neutrality would stifle innovation and limit potential future happiness brought to all of us who regularly harness the power of the G.

I wonder why it’s seemingly so easy to see the negative unintended consequences of regulating search, yet most people are blind to similar consequences from government regulation of other stuff.  I think one reason is because proponents of regulation can yell about fairness and “leveling the playing field,” which sounds intuitive and appealing, so most people never realize that there’s potential for unintended consequences.  Let alone what the costs and benefits of those consequences might be.

One example is cybersecurity certification.  It sounds so great and intuitive — government sponsored certification (“We must protect this networks!”) will lead to better information security — that most people wouldn’t bother to consider whether such certification would keep up with technological advance, hamstring innovation, or discourage security investment outside the scope of the certification.

Search neutrality would prevent creative innovation that could change the status quo.  In general, people who like the status quo are either afraid that in the future they won’t be able to innovate as well as their competitors or already getting fat, happy, and rich and don’t see why they should expend time and energy to innovate further.  Ultimately, the masses suffer with less-innovative and often more expensive products.

Neutrality neuters innovation.  The playing field is level, it’s just that Google’s algorithm keeps smacking the Jabulani into the upper 90s while the competition can’t stop kicking it out of bounds when trying to make a simple square pass, all while the New York Times whines about not knowing how Google is kicking the ball.

You may have seen this recent article about Lila Kerr and Lauren Theis — two Rice University undergraduates who figured out how to turn a kitchen “salad spinner” into a centrifuge that can separate blood into plasma and red cells in about 20 minutes.  The inventors hope it will have a lot of applications in developing countries, because it will allow clinics to check blood samples for anemia on location and in real time, instead of transporting blood samples miles to the nearest facility with a centrifuge.

If the field tests go well, the inventors surely deserve to be lauded for the lives their invention will save. 

But I also think the students should be recognized for another aspect of their feat — namely, they figured out how to turn a really lame and pretty useless kitchen device into something useful! We have one of these (someplace). One attempted use was enough. I’m glad they found a way to unlock the true potential of this technology.

Catherine White, graduate student at New York University’s Interactive Telecommunications Program, where she is researching productive participatory discussion, talks about her thesis on the Noisy Idiot Dilemma.  White explains the dilemma — how to foster productive online conversation when certain speakers exhibit noisy, unproductive, or unhelpful behavior — and discusses her research on various online forums, weblog comments, effects of humor, anonymity, and empathy online, and characteristics of elastic, oily conversation.

Related Readings

• The Noisy Idiot Dilemma: How To Make Participatory Online Conversation Easier , first two chapters of White’s thesis
• White’s Ignite NYC presentation on the Noisy Idiot Dilemma
• White’s ITP thesis presentation

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The Federal Communications Commission has an open proceeding in which it seeks advice on how to repurpose universal service subsidies for phone service in high cost areas to subsidize broadband instead. The FCC apparently wants to subsidize broadband with a minimum download speed of 4 megabytes per second (mbps) and upload speed of 1 mbps. These are the goals proposed in the commission’s National Broadband Plan.

I’m no lawyer, but I wonder if the FCC can do this legally. Section 254 of the Telecommunications Act of 1996 lays out criteria the FCC is supposed to consider when it decides whether to provide universal service subsidies for new services in addition to phone service. One of the criteria is that the new service must be subscribed to by a “substantial majority” of residential consumers.

Sixty-five percent of Americans have broadband at home. (National Broadband Plan, p. 167)  But a minority of residential customers subscribe to broadband that meets the FCC’s 4 mbps/1 mbps definition. According to the FCC’s Omnibus Broadband Initiative technical report on the “Availability Gap” (p. 43), 48 million subscribers have download speeds of 4 mbps or higher. More subscribers – 53 million – have broadband download speeds of 3 mbps or lower. And 35 percent of Americans have no broadband at all. These figures imply that a “substantial majority” of Americans have not subscribed to broadband that meets the National Broadband Plan’s proposed definition.

Based on figures in the technical report, I calculated that approximately 59 percent of Americans subscribe to broadband with a download speed of 768 kbps or higher. Perhaps this figure qualifies as a “substantial majority,” but surely the 4 mbps/1 mbps definition does not.

A reasonable person might also question whether even 59 percent counts as a “substantial majority” for the purpose of declaring broadband a service eligible for subsidy. Surely Section 254 requires a “substantial majority” in part to ensure that consumers who have chosen not to subscribe to a service do not bear the injustice of having to subsidize the provision of that service to others. It is clear from the FCC’s figures that most of the 35 percent of American households without broadband have it available but choose not to subscribe. Therefore, subsidizing even 768 kbps broadband would force many consumers to pay universal service assessments to provide others with a subsidized service that they themselves have decided is not worth the cost.

Wait and see how the FCC addresses this issue once it starts creating a universal service program for broadband.

Eric Frank, Co-Founder and President of Flat World Knowledge, the leading publisher of commercial, openly licensed college textbooks, discusses the company and its business model, which he compares to that of Red Hat. In the podcast Frank addresses moral hazards of the traditional college textbook publishing model, the company’s genesis, products and services it offers, how it makes money, and why it appeals to students, professors, and authors.

Related Readings

• Building a Better Model: Eric Frank on Flat World Knowledge (.pdf)
• “Flat World schools textbook publishers with free Web editions”, at Ars Technica
• “Textbook case”, Westchester County Business Journal
• “Flat World Knowledge: The Textbook Case for Disruption”, at bNET

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National Economic Council Director Lawrence Summers made a major policy speech yesterday at the New America Foundation, announcing the adminstration’s plan to find an additional 500 megaherz of spectrum for wireless broadband service by the end of the decade. The spectrum will come from two places: federal agencies who currently under-utilize their spectrum, and commercial users who volunteer to participate in “incentive auctions.”

In an incentive auction, the current spectrum user receives part of the proceeds in exchange for making the spectrum available for reallocation. Within the current US system of spectrum allocation, it’s about as close as we can come to allowing spectrum holders to sell their spectrum licenses to someone else who can put the spectrum to a more valuable use. 

Summers even mentioned broadcasters specifically, noting that a local television station with a few hundred millions of dollars of revenue may currently control spectrum worth hundreds of millions of dollars. Federal agencies would get to use some of the proceeds to adopt “state-of-the-art communications.” Presumably this would include new equipment that doesn’t use so much spectrum.

In his speech, Summers gave appropriate credit to the Federal Communications Commission, which surfaced many of these ideas in its National Broadband Plan. Even more appropriately, the former Harvard University president and academic economist assigned proper credit for the original source of the idea: 

Most of the freed-up spectrum will be auctioned off for use by mobile broadband providers. As the great law and economics scholar Ronald Coase originally pointed out, auctions ensure that spectrum is devoted to its most productive uses because it is determined by investors’ willingness to pay for it.

There are, of course, a few unanswered questions. How much of the spectrum will actually get auctioned for mobile broadband, rather than reserved for unlicensed use? Will the buyers have to use the spectrum for mobile broadband, or will the license be sufficiently broad that they could use it for other forms of personal communication that perhaps haven’t even been invented yet? Do we really have to wait ten years for this? Will the Ronald Coase Institute get any royalties for the government’s use of its namesake’s intellectual property? (Academics will recognize the joke in the last question.)

For now I’ll just say, “Bravo, Dr. Summers!”

Tim Stevens, PhD candidate in the Dept. of War Studies, King’s College London, where he researches the politics of cybersecurity and cyberwarfare, and regular contributor to The Guardian, Forbes’ cybersecurity blog The Firewall, and Current Intelligence discusses cyberwar.  Stevens talks about the current cybersecurity climate; nuances between cyberespionage, cybercrime, and cyberwar; the balance between roles of government and private sector; and differences in cybersecurity attitudes in the U.K. and the U.S.

Related Readings

• “The US is not at cyberwar“, Stevens at guardian.co.uk
• “Has Cyberwar Become A ‘Tea Party Issue’?“, Stevens at The Firewall
• “Dark Visions? Cyberspace In Words and Warfare“, Stevens at Current Intelligence
• ubiwar, Stevens’ blog about “conflict in n dimensions”

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Adrian Johns, professor in the Department of History at the University of Chicago, expert on the history of science and the history of the book, and author of the new book, Piracy: The Intellectual Property Wars from Guttenberg to Gates, discusses the history of intellectual property and piracy.  He discusses origins of copyright law in London, the first pirates, and today’s digital piracy.  He also addresses the future of books and potential tipping points that could prompt changes in copyright law, citing the Google Books project and pharmaceuticals in the developing world.

Listen to other episodes and remember to subscribe to the podcast using RSS or iTunes.

This is a post for all those broadband fans out there who want to talk about something today besides the Federal Communication’s Commission’s decision to take comments on which legal classification it should use to regulate broadband.

A recent FCC survey revealed that 80 percent of home broadband users do not know the speed of their broadband service. I can easily imagine how this statistic could be spun to “prove” that consumers are woefully uninformed and the broadband market must be plagued with “market failures” because consumers do not have even the basic information they need to make intelligent decisions.

Before we go down that road, let me explain, based on my own experience, why this is a non-issue.

I’m part of that 80 percent. I do not know the speed of my broadband service at home.  I know that when I signed up several years ago, I selected the slowest and cheapest broadband speed the provider offered.  I also know that this speed is still plenty fast for anything we need to do at home (and usually faster than the speed at my university office). I remain blissfully ignorant of the actual speed, even though it would be very easy for me to find out by looking at the materials I received when I signed up or checking the provider’s web site online.

In economic jargon, I am “rationally ignorant” of my home broadband speed. I don’t know (or remember) the speed, but to me this information is not worth the 45 seconds it would take me to find out. And that also means any FCC initiatives to “improve consumer information” or “educate” me about it will not, for me, be worth the time and money the FCC might spend on them.

If some of our Internet applications were not working in a satisfactory manner, we would probably do an online speed test, check to see what other speeds our provider offers, and check offers from competing providers. All of these steps would be easy and would require no FCC policy initiatives to facilitate (beyond making sure that the providers aren’t lying about what speeds they will provide).

I’m probably not alone.  The same survey reveals that 50 percent of Americans are satisfied with their broadband speeds, and another 41 percent are “somewhat satisfied.” So, 91 percent of consumers are more or less satisfied, even though 80 percent don’t know their speeds.

It would have been quite useful and instructive if the FCC survey had included an additional question: “Is your broadband speed adequate for the Internet applications you want to use?” And then cross-tabulate the responses with the responses on knowledge of broadband speed. Wanna bet that a substantial majority of people who do not know their speed would also have said that it is adequate?

Surely there are some broadband customers who use applications that require specific (fast) speeds, and these customers have a greater need to know what speed they’re receiving. That’s why providers tell prospective customers what speed tiers they offer. And that’s why one can find multiple web-based speed tests. This information is not hard to find if you want it.

But for some of us, it just ain’t worth it. And shame on anyone who tries to use my willful ignorance as an excuse for some new policy initiative. Rational ignorance is bliss, and I’m a bliss-ter.

Clay Shirky, adjunct professor at New York University’s Interactive Telecommunications Program, discusses his new book, Cognitive Surplus: Creativity and Generosity in a Connected Age.  Shirky talks about social and economic effects of Internet technologies and interrelated effects of social and technological networks.  In this podcast he discusses social production, open source software, Wikipedia, defaults, Facebook, and more.

Related Readings

• “Does the Internet Make You Smarter?” Shirky at WSJ.com
• Here Comes Everybody, Shirky’s first book about organizing without organizations
• Clay Shirky’s Writings About the Internet
• Shirky talk from Web 2.0 Expo NY on information overload versus filter failure

Listen to other episodes and remember to subscribe to the podcast using RSS or iTunes.

Nicholas Carr, bestselling author who writes on the social, economic, and business implications of technology, discusses his new book, The Shallows: What the Internet Is Doing to Our Brains.  Carr posits that the internet is changing not only they way we consume information but also the biological and neurological workings of our brains.  He addresses the internet’s effect on attention span and the ability to think deeply, neuroplasticity, multitasking, reading books v. snippets, Google, commonplaces, and much more.

Related Readings

• “Is Google Making Us Stupid?” by Nicholas Carr in The Atlantic
• The Shallows: What the Internet Is Doing to Our Brains by Carr
• “Yes, the Internet is rotting your brain”, Salon.com on The Shallows
• Review of The Shallows from Financial Times
• Rough Type, Carr’s blog

Listen to other episodes and remember to subscribe to the podcast using RSS or iTunes.

Pundits are foaming at the mouth about AT&T’s just-announced end to unlimited data packages for smartphones. Here is Jeff Jarvis calling the move “cynical,” “retrograde,” and “evil.” However, he provides no evidence that this is anything but AT&T facing economic reality. The iPhone was a revolution, and how much data people consume given an awesome device turned out to be much more than AT&T was ready for. Now they’re asking their customers who use the most data to pay more, and this is evil?

Not only is it not evil, it’s incredibly fair. Most people will probably pay less for service. The cheapest of AT&T’s new plans is $15 for 200 MB of data. That’s $15 cheaper than their current $30 for unlimited iPhone use. According to AT&T, 65 percent of their customers use less than 200 MB of data a month. I consider myself a heavy iPhone user, and I just came back from a trip to NYC on which my iPhone was the only device I took with me, and yet with 2 days left in my billing cycle, I’ve used 154 MB of data. So, AT&T’s change will actually be a price-cut for me and the majority of AT&T customers.

Yup, real evil.

photo credit: Andrew Feinberg

Facebook’s latest review of their privacy policy reminded me of the old joke about that guy who enters a bookstore in London asking for a copy of the French constitution, to which the bookseller replies: “sorry, we don’t do periodicals.” Just as ever changing laws are troubling in real life, ever changing terms of service make an unpleasant user experience–and thus jeopardize Facebook’s user base.

As Jerry pointed out, users will hardly trust Facebook with their data ever again, for irrespective of what rules are in place at a particular point in time, changes may always be behind the corner. So why did Mark Zuckerberg announce an improvement that might have a negligible effect on the reputation of the service?

Recent political initiatives might have played a minor role. I think, however, that market pressure explains pretty much everything about the new privacy settings. In fact, it is helping in two different ways: by spreading information about the risks of oversharing and by favoring a more reliable access to social networking. Let me give a few examples.

1. A number of campaigns were launched to raise privacy awareness, including the Quit Facebook Day, scheduled for today, May 31: so far almost 30,000 people have pledged to close down their profiles. That’s just a drop in the sea, but many more are quitting in a less visible fashion.

2. Openbook is exposing the weaknesses of Facebook’s data management by searching through the most embarrassing public status updates. The overall effect of such initiatives seems to be positive, as it’s been reported that Facebook user growth dropped significantly in the last few weeks, while there was a spike in Google searches on how to delete one’s account.

3. New services emerged to grant users the opportunity to review their privacy settings in a very simple way. ReclaimPrivacy is one such tool. It provides a bookmarklet that checks your settings and marks them as green (secure), orange (requires caution) or red (unsecure). ProfileWatch does a similar job, by retrieving all your public content and grading your privacy efforts.

4. More importantly, alternative networks are being created. The most talked about one is Diaspora, which markets itself as “the privacy aware, personally controlled, do-it-all distributed open source social network.” Still under development, the project looked for funding on Kickstarter, with a goal of $ 10,000. It raised $ 193,000, with one day left. People want control over their data, and they are willing to pay for it.

Gina Trapani, blogger, author, software developer, and creator of ThinkTank, and Anil Dash, director of Expert Labs and blogging pioneer, talk about Expert Labs, an organization that seeks to improve government by letting policy makers tap into the collective wisdom of the public, and ThinkTank, an open source tool that the White House is using to crowdsource and sort policy ideas, insights, and recommendations offered through social media platforms like Twitter and Facebook.

Related Readings

• “The Next Apollo Project in 140 Characters” at Miller-McCune Online
• Smarterware, Trapani’s blog about how to work smarter with digital tools
• Dashes.com, Dash’s blog about making culture
• This Week in Google podcast with Leo Laporte, Jeff Jarvis, and Gina Trapani
• Six Apart, blogging services for many of the world’s most influential websites, where Dash served as chief evangelist
• Lifehacker, tips and downloads for getting things done, where Trapani served as founding editor

Listen to other episodes and remember to subscribe to the podcast using RSS or iTunes.

We all pay “universal service” assessments on our phone bills.  It’s even broken out separately; go look. It’s probably just a matter of time before the Federal Communications Commission proposes to slap universal service assessments on broadband service to help pay for universal service subsidies for broadband service. The national broadband plan, after all, calls for “broadening” the universal service funding base.

If the commission reclassifies broadband as a “Title II” telecommunications service, this will be virtually automatic because the Telecommunications Act of 1996 says telecommunications providers must contribute toward the FCC’s universal service fund. If the commission doesn’t reclassify broadband, it could still require contributions — just like it imposed universal service assessments on VOIP without classifying VOIP as telecommunications.

After the FCC starts using universal service funds to subsidize broadband for poor people and rural households, the logic will be seductively compelling: “Broadband receives subsidies, so it’s only fair that broadband pays into the fund.”

Forget the ensuing howls about “taxing the Internet.”  I want to talk about another aspect of this.  Would imposing universal service assessments on broadband actually further the FCC’s goals in its national broadband plan?

Photo by nawtydawg.

The FCC wants to make broadband available to all Americans, regardless of where they live. Ideally, the FCC would like us all to subscribe, regardless of our income or where we live. The problem with imposing universal service assessments on broadband is that this would increase the price, leading subscribership to be lower than it would otherwise be.

This effect might be big or it might be little. But before making a decision about imposing universal service assessments on broadband, the FCC ought to know the size of the effect and how it compares to the increase in subscribership that would result from the subsidies.

To figure out how universal service assessments might affect broadband subscribership, we need to know how responsive broadband subscription is to changes in price. Economists call this the “price elasticity of demand.” The most recent study I’ve seen – and the only one cited in the FCC’s technical paper underlying the national broadband plan — estimates the elasticity of broadband demand was about -0.69 in 2008. That means a 1 percent increase in price would lead to a 0.69 percent decrease in subscribership. Other, earlier studies find much higher demand elasticities. But to be conservative, let’s use -0.69.

Current universal service assessments on interstate telecommunications are about 15 percent.  About 66.6 million households had broadband in 2008. A 15 percent increase in the price of broadband would reduce subscribership by about 6.9 million households (15% times -0.69 times 66.6 million.)

If the FCC imposed universal service assessments on broadband, it might be able to lower the rate since it would be collecting assessments from a broader base than just telephone service. Suppose the FCC could lower the assessment to 10 percent, more in line with the historical norm.  A 10 percent increase in the price of broadband would reduce subscribership by 4.6 million households (10% times -0.69 times 66.6 million).

So we’re going to reduce broadband subscribership by 4.6-6.9 million households in order to provide subsidies to increase broadband subscribership.  If the funds currently spent to subsidize phone service in rural areas were spent on broadband, that would be enough money to close the “funding gap” and make broadband available to the 7 million homes the FCC  says currently are unserved or under-served. 

Not all of them will susbcribe, so we can’t assume these subsidies will increase subscribership by 7 million.  About 65 percent of Americans currently have broadband at home.  If 65 percent of unserved or underserved households choose to subscribe once broadband becomes available, that would be  4.55 million new subscribers.

In short, it looks like subjecting all broadband to universal service assessments to pay for rural broadband subsidies would either be a wash or reduce subscribership on net. Paying for universal broadband service with assessments on broadband service will give the FCC a lot to do, but it won’t advance the subscribership goals of the national broadband plan. 

There are other ways to raise the money without this perverse effect. Historically, local telephone subscription has been very insensitive to price, so one option would be for the FCC to simply impose a universal service charge per phone number instead of the current percentage fee.  (Low-income households who have “Lifeline” service or use low-cost prepaid wireless plans could be charged a lower fee without sacrificing much revenue.)

Another option would be for Congress to earmark some revenues from upcoming spectrum auctions to fund universal broadband service, and reduce the universal service assessments on our phone bills accordingly.

Reasonable people can differ on whether, or by how much, the federal government should subsidize broadband where it is not currently available. But if we’re gonna do it, there’s no sense in funding it with a mechanism that reduces broadband subscription elsewhere.

photo credit: Balakov

Many of my free market friends have been making the case that government action is unnecessary to address the privacy trouble in which Facebook has recently found itself. I agree with them completely. The reason is that I believe that the given choice, individuals acting in the market will act to discipline unscrupulous or stupid companies. This is precisely what we’ve begun to see happen to Facebook.

It therefore bothers me when folks go beyond mere defense of free market to pretending that corporations can do no wrong. Facebook, for example, has committed a terrible breach of trust against its users, and it should pay the price. Still, on the NetChoice blog, Steve DelBianco writes this about Facebook’s new privacy options:

Facebook is making these moves partly to placate a handful of professional privacy critics, as we described on our post this week.  But as with most moves made in reaction to critics, there’s a chance Facebook might have moved too far.

As part of this change, Facebook is making it trivial for users to stop applications and websites from knowing anything about you.  If lots of users select this option, I’m afraid it could restrict Facebook’s use of targeted advertising (those ads on the right side of your Facebook pages) and their new instant personalization program.  Here’s why we should all be concerned if everyone opts-out of sharing anything:

First, we’ll still see ads, only they won’t be so relevant[.] … Second, and far more concerning, is the effect on Facebook’s ad revenue[.]

I’m not a “professional privacy critic,” yet I know I’ll never trust Facebook with any of my data ever again. I hear the same sentiment from many of my friends, acquaintances, and other regular folks I follow online. Sometimes, companies react because they made a dumb mistake (or perhaps in this case a repeated one that makes one wonder whether it’s a mistake at all), not only in response to privacy advocates. I know Steve’s saying Facebook’s only partly reacting to critics, but I believe that any such fraction is very small.

Next, yes, people might choose to restrict access to their data so much that it might diminish the relevance of ads served to them and threaten Facebook’s revenue stream. To the first matter, the whole point of a market is that consumers get to have choice. More privacy traded for less relevant ads is a choice I’m happy to see individual users make if they think that’s what’s best for them. I think users are smart enough to make those choices, and we see that they’re happy to make a trade of less privacy for more relevant ads when they trust a company. I don’t see Google facing the same kind of user backlash Facebook perennially faces.

To the second point, Facebook is not entitled to any revenue whatsoever. Might a user revolt kill their service and squelch their ability to innovate? Yes, but as long as this fate is the result of the choices of individuals made in a free market, that’s perfectly fine. In fact, it’s what markets are for. If Facebook can’t make money, then what does this tell you about how much users value the service?

I for one find little useful or desirable about Facebook’s “instant personalization” or “social plugin” technologies. To my mind they are vastly inferior to open web standards. If they go the way of the Dodo, I wouldn’t think it a tragedy. And as long as regulation is kept at bay, innovation won’t suffer because users will take their eyeballs and their trust to other services. We don’t need Facebook to keep innovating.

Adam Thierer, president of The Progress & Freedom Foundation and the Director of its Center for Digital Media Freedom, discusses the future of media.  He explains recent proposals to subsidize journalists and media companies.  Thierer outlines problems with the proposals, such as threats to free speech and separation of press and state.  He also addresses newspapers as non-profits, shared experiences vs. diversity, and journalism ethics in the context of the recently scooped iPhone.

Related Readings

• Progress & Freedom Foundation comments on the FCC’s Future of Media proceeding (.pdf) by Adam Thierer, Berin Szoka, and Ken Ferree
• FCC’s Future of Media proceeding
• Adam Thierer on Media Regulation at Technology Liberation Front

Listen to other episodes and remember to subscribe to the podcast using RSS or iTunes.

Back on St. Paddy’s Day, I offered a few comments on the “funding gap” identified in the FCC’s just-released national broadband plan. Since then, the FCC has put out a notice of proposed rulemaking and notice of inquiry seeking public comment on reforms that would allow its universal service fund to subsidize broadband. The FCC has also released a 137-page technical paper that details how the staff calculated the broadband “availability gap” and funding gap.

So, now there’s more to chew on, and another round of online mastication would be timely given the open FCC proceeding.  Here are three big issues:

1. Definition of broadband

The plan announced a goal of making broadband with actual download speeds of 4 mbps available to all Americans.  In the plan, this goal appeared to be based on the actual average speed of broadband service (4 mbps), even though the median speed is just 3.1 mbps (p. 21). The technical paper, however, also projects that, based on past growth rates in broadband speed, “the median will likely be higher than 4 mbps by the end of 2010.” (p. 43)  Contrary to what I thought back in March, it appears the FCC is justifying the 4 mbps goal based on the median speed, not the average. 

The technical report also argues that 4 mbps is necessary to run high-speed video, which a “growing portion of subscribers” (not including me) apparently use. (p. 43) So, if the broadband plan achieves its goals, every Amercian will have the opportunity to subscribe to Internet access capable of delivering high-quality porn! Fortunately, the technical report uses a different and more productive example — streamed classroom lectures. 

Reasonable people could still question whether the median is the appropriate benchmark to guide government actions intended to equalize broadband access opportunities.  The technical report includes a helpful graphic that shows the most common broadband speed users actually buy is 2 mbps, and 38 percent of all subscribers have speeds of 2 mbps or less. (p. 43) The FCC staff’s model calculates that if the goal were set at 1.5 mbps, the number of “unserved” households would fall from 7 million to 6.3 million, and the required subsidy would fall from $18.6 billion to $15.3 billion. (p. 45) 

If almost half of broadband subscribers have decided that something less than 4 mbps is perfectly adequate, that suggests 4 mbps may go far beyond what is necessary to ensure that all Americans have access to basic broadband service. So, that 4 mbps goal is still questionable.

2. Omission of 3G wireless

The 4 mbps goal allowed the FCC to ignore third generation wireless when it estimated the “availability gap.” The technical paper shows that 95 percent of households have 4 mbps broadband available. About 3 percent of households have no broadband available, while 2 percent have broadband available at speeds ranging from 384 kbps – 3 mbps. (p. 17)  That 2 percent probably includes households with slow DSL and 3G wireless.

The technical paper also revealed that it did not include service from fixed Wireless Internet Service Providers due to data availability. (p. 25) These serve 2 million subscribers in rural areas (p. 66), so the omission potentially accounts for a large chunk of the households considered “unserved.” No telling how many, since apparently the data aren’t available.

Back in March, I guesstimated that the 7 million household “availability gap” might overstate the size of the problem by more than half, simply because 3G wireless is available to 98 percent of American households. Looks like my guesstimate is pretty much in line with the more detailed figures in the FCC technical paper.

 3. Role of satellite

The broadband plan did not count satellite broadband when assessing availability. The technical paper (pp. 89-94)provides a much more detailed explanation of the capacity constraints the FCC staff believes will prevent satellite broadband from serving more than a couple million subscribers.   (The current satellite subscriber base is approximately 900,000.)

The technical paper pointed out that satellites are expensive and take three years to build. (p. 92) To put the time frame in perspective, that’s about as long as the FCC and the Federal-State Joint Board on Universal Service have been discussing universal service subsidies for broadband. Lord knows we shouldn’t make consumers wait that long!

There is, however, something a little asymmetrical about the way the FCC staff treated satellite and other forms of broadband. The point of estimating the broadband availability gap was to determine how much of a subsidy would be required to induce the private sector to build the infrastructure to close the gap. But while the study assumed that the subsidies would call forth the requisite cable, DSL, and wireless infrastructure within some unnamed but acceptable time frame, it decided that three years is just too long to wait for satellite infrastructure to expand. So, satellite plays a minimal role in the FCC’s plan.

Yet even this minimal role has a big impact. To its credit, the technical paper calculated how satellite broadband could dramatically slash the cost of serving the most expensive 250,000 homes. It estimated (pp. 91-92) that the net present value of subsidies required to serve these homes with satellite would range between $800 million and $2 billion — compared to a $13.4 billion subsidy required to serve these homes with terrestrial broadband. (This implies an annual subsidy of $105-255 million, which is pretty close to my March 17 guesstimate of $100-200 million.)

So, satellite broadband could help prevent costs from skyrocketing, even assuming it plays only the limited role envisioned in the FCC staff’s analysis.

David Post, the I. Herman Stern Professor of Law at the Beasley School of Law at Temple University and author of In Search of Jefferson’s Moose: Notes on the State of Cyberspace, discusses the general state of the internet.  He contrasts a decentralized Jeffersonian approach to the internet with a more centralized Hamiltonian one and also addresses netizenship, open vs. closed source, and online global relations.

Related Readings

• In Search of Jefferson’s Moose: Notes on the State of Cyberspace by David Post
• Law and Borders – The Rise of Law in Cyberspace by David Johnson and David Post
• Blog posts by David Post at The Volokh Conspiracy

Listen to other episodes and remember to subscribe to the podcast using RSS or iTunes.

photo credit: Mikey G Ottawa

A few weeks ago, ten privacy authorities from countries including Canada, France, Germany, Italy and the United Kingdom, addressed an open letter to Google (.pdf), asking that the company “like all organisations entrusted with people’s personal information, incorporate fundamental privacy principles directly into the design of new online services.” As Gabriel Okolski reported, the US Senate is also hearing discussions on regulating privacy on social networks, prompted by the new Facebook Open Graph. It seems quite clear that we’re facing a wave of privacy paternalism.

I see this approach as deeply flawed. The basic idea is that users aren’t aware of the issues arising from sharing their personal data. However, there is plenty of information available out there on the matter: just look at this Electronic Frontier Foundation’s timeline or at the beautiful infographic realized by Matt McKeon. In fact, a new survey shows that Facebook users do care about their privacy, as “nearly three out of four users have not become friends with their boss via the site. And 77 per cent report that they use the privacy settings of the site actively”.

A different problem with privacy paternalism is its failure to grasp the economic value of personal data, as embodied in the business model of companies such as Google and Facebook–allowing them to provide their services for free. Also, from the user perspective, there is a trade-off between privacy and customization. In other words, personal data are the price users pay for the service, in the first place, and for an enhanced user experience.

Of course, privacy is a relevant competitive factor in the opposite way, too. There certainly is a demand for stricter privacy policies and there are companies trying to appeal to those privacy concerns: think, for instance, at how Microsoft pledged not to scan the content of Hotmail messages unlike Google does for the purpose of targeting advertising.

One final point: this sort of debate betrays the whole meaning of entrepreneurship, by diverting attention from users’ expectations to buraucrats’ expectations. One prominent example would be Facebook hiring former FTC chairman Tim Muris to defend their privacy practices from regulatory allegations. We want internet companies to compete in the marketplace, not in courts and government buildings.

The UK’s Daily Mail reports that Phil Bissett, a 62 year old former gravedigger, transformed a steel casket into a street-legal single-seat automobile that does 100 mph, using the engine from his daughter’s 1972 VW. He acquired the casket — you guessed it — on ebay.

Now here’s where it gets interesting. The casket originally cost 1500 British pounds. He got it for just 98 pounds — about $146 at today’s exchange rate.  That’s 93 percent off!  The article doesn’t say how much he paid for the assorted spare parts from other vehicles needed to turn the casket into an automobile, nor does it explain what his daughter is doing for transportation now that the engine from her car powers his deathmobile.  Still, it’s a nice-looking little sports car, and I’ll bet it cost less and is more reliable than that fine piece of British automotive engineering I used to own, an MG Midget.

Bissett told the reporter, “I’ve learned never to go on the internet when you’ve had a drink. My friend said I’d never be able to turn it into a car but I knew I could.”

This must be what the wonks mean when they say the Internet is an “enabling technology.”

(Be sure to check out the Daily Mail link above to see the cool photos!)

Peer-to-Peer lending businesses have had their share of changing regulatory requirements over the past few years. The SEC began regulating Prosper in 2008, resulting in the company shutting down business for a few months while they met compliance. Other companies, like Lending Club, seemed to adjust more quickly and easily but still had to learn how to comply with their new regulator.

The SEC treats P2P borrowers more like companies seeking funding through the secularization of bonds than as consumers seeking loans for debt repayment, education, and business ventures. Along these lines, the SEC requires P2P companies to disclose borrower information, like it requires companies to disclose their portfolios. On the other hand, banks who facilitate loans are not regulated under the SEC and are not required to track consumer information in such a way.

Given the strange and arbitrary nature of current regulatory practices, it is no surprise that action is being taken to authorize a different agency to regulate P2P. Title IV, Subtitle C, Section 4315 of the House finance reform bill is an attempt to do just that: the section defines Peer-to-Peer lending as an internet based platform that facilitates loans between natural persons and determines it exempt for federal securities regulation. Under these changes, regulatory authority would be shifted to the Consumer Financial Protection Agency (CFPA).

While there is no doubt that Prosper and other internet lending businesses will benefit from this change, there is still a risk that inflexible regulation will lead to unintended consequences for both P2P companies and the consumers they interact with. Such problems include:

1. The strict definition of P2P lending may create a status quo for regulation and hinder further innovation in the industry. For example, institutions that use the P2P model for encouraging small business development will have to lend to natural persons, not businesses, in order to fall within the SEC exemption.
2. They are trading in a known, but arbitrary, regulator for a complete unknown. The CFPA has yet to be created and will no doubt be subject to political pressure to act like other agencies and push certain agendas. Where P2P regulation falls on their priorities is uncertain.

So far, it still seems like the fate of internet P2P lending is in the hands of regulation and political power grabs. Even if they successfully cut ties with the SEC, P2P businesses must face the unknown factor that is the CFPA. It seems likely that regulation will still hinder innovation and restrict this industry’s viable business models, it will just happen in a different way.

Drawing upon the case of the British historian which reviewed anonymously the books of his academic rivals on Amazon, Michael Skapinker suggests in his latest Financial Times column that we should get rid of anonymity on the web.

The internet is an open forum; people can do what they like on their own bits of it. But reputable websites should start insisting people use their names. People may use false ones, of course, but the message will be clear: if you want to speak, please tell us who you are. [...] Demand that people use their names and I suspect both the quality of internet argument and level of civility would rise. In many cases, using pseudonyms online has become a habit rather than a necessity.

Outlets such as the New York Times, the Washington Post, and the Huffington Post are reportedly reconsidering their comment policies along similar lines. This sounds a bit hypocritical. For one thing, virtually all comment systems require at least a working email address and track commentators’ IP addresses. Secondly, users might just provide fake names, and websites couldn’t realistically afford to check the identities of their visitors. Finally, reputation on the internet is most often attached to pseudonyms rather than to real names.

It’s obviously up to individual websites to find the comment policies that best suit their needs. However, then comes a relevant political question: should we ban anonymity on the internet once and for all? This is a very different issue–although not a new one. Lawmakers all over the world have been trying to criminalize anonymous access to the internet. In fact, this is both undesirable and unfeasible. Universal identifiability would imply overcoming huge technical problems through a deep redesign of the internet as we know it. Even if it were achievable, it would be a major wound to free speech rights that are generally respected in real life and should get recognized online as well.

As Bruce Schneier put it,

Attempts to banish anonymity from the Internet won’t affect those savvy enough to bypass it, would cost billions, and would have only a negligible effect on security. What such attempts would do is affect the average user’s access to free speech, including those who use the Internet’s anonymity to survive.

Tyler Cowen, professor of economics at George Mason University, general director of the Mercatus Center, and founder of the popular economics blog Marginal Revolution, discusses how the internet influences and changes practically everything.  The conversation broadly centers on how the web allows us to find, distill, and sort information as never before, which has profoundly affected people’s consumption of culture and creation of their own economies.  During the podcast Cowen touches on Lost and Battlestar Gallactica, the iPad, books, the future of the publishing industry, old and new media, Facebook, Twitter, ChatRoulette, and his favorite things on the internet.

Related Readings

• Marginal Revolution
• The Age of the Infovore: Succeeding in the Information Economy by Tyler Cowen (forthcoming June 2010)
• Create Your Own Economy: The Path to Prosperity in a Disordered World by Tyler Cowen
• Fruitful Decade for Many in the World, Cowen in his New York Times column on recent global prosperity

Listen to other episodes and remember to subscribe to the podcast using RSS or iTunes.

photo credit: ShironekoEuro

An ongoing Federal Communications Commission project, the Future of Media, inquires “whether Americans have access to vibrant, diverse sources of news and information that enable them to enrich their lives, their communities and the democracy.”

In recent years the economic model of news and journalism has been turned on its head.  The internet drastically lowered the costs of disseminating information, encouraging and enabling the creation of myriad online news providers, aggregators, and blogs.  The print newspaper industry and traditional journalism have been on life support ever since.

The government seems concerned that the death of traditional media somehow threatens citizens’ freedom and democracy.  In addition to the FCC proceeding, the Federal Trade Commission recently asked “how will journalism survive the internet age?”, while the Senate has introduced the Newspaper Revitalization Act.

Some strategies the government is considering to resuscitate the sector include:

• taxes on broadband services, mobile phones, or advertisements to subsidize media content
• broadband spectrum fees to fund “public interest” media
• news vouchers
• expansion of postal subsidies
• prop up or bail out of media entities
• direct subsidies for journalists

Each of these approaches is somewhat problematic.  Adam Thierer, President of the Progress & Freedom Foundation and upcoming Surprisingly Free Conversations podcast guest, addresses the issues in a recently released filing on the FCC’s proceeding.

One obvious contradiction is the proposition of taxing broadband to subsidize media while, through its National Broadband Plan, the FCC simultaneously preaches that “[e]very household and business location in America should have access to affordable broadband service.”

As ironic as that is, there’s a greater underlying flaw in the government’s justification of saving old media.  One beauty of the internet is that it allows many more people to share information than ever before because of its extremely low cost relative to historical media.  So, thanks to the internet, the future of media, information sharing, and democracy look brighter, not bleaker.

The structure, business blueprint, and economic model of media have already transformed and will continue to evolve.  But government, and all of us, should be thankful for this “destructive” innovation, rather than vilify it in defense of the old-fashioned, washed up system.

A recent study by Cecil Bohanon and Michael Hicks at Ball State University’s Digital Policy Institute found that statewide cable franchising has increased broadband deployment.

Half of the US states have now enacted legislation that creates statewide cable franchising. These laws allow new entrants into the video business (principally the phone companies) to get permission to offer video from the state, instead of having to deal with local governments to get cable franchises. Previous research, much of it cited here, found that cable competition reduces cable rates and expands the number of channels available to subscribers. Local franchising often delayed or prevented new competitors from entering the market.

Since the same wires get used to transmit video, telephone, and broadband, Bohanon and Hicks reasoned that opening up entry into cable would also increase competition in broadband and hence increase broadband subscribership. And that’s precisely what their econometric study finds. After controlling for other factors, broadband subscribership is 2-5 percent higher in states that have statewide video franchising. Based on this finding, Bohanon and Hicks estimate that statewide video franchising increased broadband subscribership by about 5 million.

Their study covers the years 1999-2008. Maybe some of these 5 million would eventually have gotten broadband anyway. At worst, this study shows that 5 million subscribers got broadband sooner than they otherwise would have.

The study does not test whether the increase in broadband subscribership occurred because statewide video franchising sped up investment and deployment of infrastructure, or if it simply spurred competition in places where phone and cable companies already had the relevant infrastructure deployed.  I don’t know how one would get the confidential data on broadband investment in order to test this.  But given the large amount of new investment related to broadband, I’d be willing to bet that statewide franchising encouraged both new broadband deployment and more intense competition where infrastructure was already in place.

photo credit: [ henning ]

If there is such a thing as a “harmless” terrorist attack, last weekend’s attempted car bombing of Times Square would seem to be it: the bomb failed to detonate, investigators were left with plenty of clues, and the prime suspect is already in custody. Perhaps more harmful than the bomb itself is the ensuing support for urban surveillance systems.

In the wake of the attempted bombing, the media reported that the police quickly picked up a lead from camera surveillance footage collected at the scene of the crime. While police have not disclosed whether the footage actually facilitated the apprehension of the prime suspect, some commentators are already calling for expanded use of surveillance systems in urban areas.

The problem with this argument is two-fold. First, as was the case in Times Square, a security camera cannot thwart an imminent terrorist attack. During last weekend’s incident, a street vendor was the one who brought the smoking SUV to the attention of police. If cameras deployed in one of New York’s highest-risk areas for terrorist did not lead to police notification, the preventative power of such systems cannot be very good.

Second, advocates of cameras suggest that the devices are beneficial because they deter crime and aid police in an ensuing criminal investigation. Unfortunately, there is some evidence that cameras may not be very efficient at this job either. A study of surveillance cameras in London, a city that has deployed them en masse to fight crime, found that only one crime was solved per 1,000 cameras in 2008. Furthermore, a 2002 British Home Office study found that cameras do not have little or no effect on crime in public transport or city center settings, the areas at greatest risk for an attack. Other studies have also asserted that surveillance cameras do little or nothing to deter crime.

Of course, the costs of such systems must also be considered. In terms of money, Britain has spent more than $700 million on security cameras. And governments don’t consider the costs of reducing citizens’ privacy and the potential for abuse of such systems.

While it may be tempting to bolster security efforts in major cities following the failed terrorist attack, calls to install additional security cameras currently amount to little more than a costly knee-jerk reaction.

photo credit: net_efekt

The FCC recently released a Notice of Inquiry (.pdf) that seeks public comment on its proposed “voluntary cyber security certification program.”  The program would certify communication services providers based on standards established by the FCC.  Certified companies could then market their services as compliant with the FCC’s standards, à la Fair Trade branding in the coffee industry and other sectors.

The Notice references the need to improve cyber security of the nation’s critical infrastructure, resources like financial institutions and power grids.  Approximately 90% of such infrastructure is controlled by the private sector.

A potential problem with such a system is that standards won’t be able to keep pace with technological advance.  Today’s FCC security standards will address last week’s — or month’s, or year’s — vulnerabilities.  Given this reality, it’s better to leave private companies free to develop protections from rapidly emerging and evolving threats, rather than encourage them to devote resources complying with outdated standards.

Doug Raymond, head of monetization at Google Asia-Pacific, notes, “The best people to stay ahead of the curve and come up with solutions are those who are on the ground managing those products day to day.”

Flexibility to develop fluid and responsive security measures will promote innovative discovery much more than a rigid standardized program would.  The FCC’s proposed “Fair Trade” certification approach presses companies to comply with inefficient standards, when their focus should be brewing the best security measures possible.

photo credit: Hamed Saber

What is the internet good for?

In a recent article at Foreign Policy, Evgeny Morozov states that the internet has been a disappointment. It hasn’t brought peace and tolerance throughout the land. In fact, the internet is a breeding ground for all views, opinions, passions (yes, of peace, love, and hatred). Morozov remarks:

Well, the Internet as we know it has now been around for two decades, and it has certainly been transformative. The amount of goods and services available online is staggering. Communicating across borders is simpler than ever: Hefty international phone bills have been replaced by inexpensive subscriptions to Skype, while Google Translate helps readers navigate Web pages in Spanish, Mandarin, Maltese, and more than 40 other languages. But just as earlier generations were disappointed to see that neither the telegraph nor the radio delivered on the world-changing promises made by their most ardent cheerleaders, we haven’t seen an Internet-powered rise in global peace, love, and liberty.

Morozov then goes on to detail myths about the internet including: the internet is a  force of good; Twitter stops dictators; Google defends internet freedom; the internet makes governments more accountable; the internet fosters political participation; and that the internet has brought people closer together. While the points within the article are reasonable, I feel the author may be missing the point.

The internet is, and always will be, a subset of the world it was created in. It reflects the moods, attitudes, beliefs, and trends of individuals, businesses, and nations. Yes, it is a faster way to communicate and trade and distribute information. But it is still just an avenue for communication, ideas, and interactions. It has not, and will not, change the mindset of individuals…although it may help speed the evolution of ideas and beliefs.

Furthermore, the advocates of the internet who predicted an upcoming age of tolerance and peace are just a subset of individuals, with their own beliefs and desires. These advocates wanted a world of peace. Others want, and have observed, the ability for all people to have a voice, to discuss ideas, and interact with others. Revolutions and social change may happen through a high-speed connection, but they may not always be peaceful and tolerant. That is life, even on the internet.

The article concludes:

Increasingly, the Internet looks like a hypercharged version of the real world, with all of its promise and perils, while the cyber utopia that the early Web enthusiasts predicted seems ever more illusory.

Again, this is true. But why so pessimistic? Haven’t there always been predictions and desire for a peaceful utopia? Yes, overoptimism may have its faults but the world is made up of all sorts — peace-lovers, rabble-rousers, fundamental extremist, and apathetic bystanders. In order for the internet to continue to be a forum for the masses, it must support the opinions of all, especially from those still hoping for a peaceful utopia.

Wendy Seltzer, a fellow at the Silicon Flatirons Center for Law, Technology, and Entrepreneurship at the University of Colorado and at the Berkman Center for Internet & Society at Harvard Law School discusses copyright infringement and the Digital Millennium Copyright Act.  She also addresses the relationship between copyright law and free speech protected by the First Amendment.

Related Readings

• Free Speech Unmoored in Copyright’s Safe Harbor: Chilling Effects of the DMCA on the First Amendment (.pdf) by Wendy Seltzer
• DCMA takedowns: trampling on free speech rights?, Ars Technica on the DCMA and Seltzer’s recent paper
• The Politics of Internet Control and Delegated Censorship by Wendy Seltzer
• Chilling Effects, founded by Seltzer to “study and combat the ungrounded legal threats that chill activity on the Internet”
• Google on the Digital Millennium Copyright Act

Listen to other episodes and remember to subscribe to the podcast using RSS or iTunes.

The Washington Post carried an article earlier this week by Cecilia Kang that noted the Federal Trade Commission could gain enforcement power over online businesses as a result of the financial services legislation under discussion in Congress. Ms. Kang contrasted the possibility of an empowered FTC issuing fast-track regulations against the recent experience of the Federal Communications Commission, which has become bogged down in its search for legal authority to issue net neutrality regulations. 

The comparison is insightful, but not for the reasons you might expect. Part of the debate over the FTC revolves around language in the House financial services bill that would repeal the “Magnuson-Moss” provisions that govern FTC promulgation of consumer protection regulations. (The name comes from the fact that these restrictions on FTC rulemaking were included in the Magnuson-Moss Warranty Act, which got the FTC into the business of regulating car warranties.)

If the FTC wants to regulate some type of general business practice under the FTC Act, it has to establish a factual record substantiating that there is actually a systemic problem that regulation can solve, hold a public hearing, allow cross-examination on factual matters, and conduct an economic analysis of the regulation’s effects.  In short, the commission has to do the homework necessary to demonstrate that its proposed regulation will actually solve a widespread problem that actually exists.

When Tim Muris directed the FTC’s Bureau of Consumer Protection in the early 1980s, he authored an article in Regulation magazine pointing out that when the FTC does careful analysis before issuing a rule, the rule is more likely to benefit consumers, more likely to be upheld in court, and more likely to be issued expeditiously. He contrasted the evidence-based eyeglass rule, which took three years to issue, with the anecdote-based funeral rule, which took ten. Muris noted wryly, ”Some critics of my position charge that it is revolutionary to ask a body of lawyers and economists not to impose its own view of proper regulation on the world without first systematically evaluating the problem.” Muris went on to serve as chairman of the FTC between 2001-04, and last month he defended the Magnuson-Moss restrictions in testimony before Congress.  

What does this have to do with the FCC?  The FCC lost its case against Comcast on appeal, precisely because the FCC tried to take shortcuts. The FCC tried to promote net neutrality by enforcing a set of “principles” that originated in a former chairman’s speech and were never promulgated in a notice-and-comment rulemaking. The FCC commissioners endorsed these principles without investigating whether there was a systemic problem (ie, more than a few anecdotes of misbehavior). Indeed, Chairman Martin’s Notice of Inquiry on “Broadband Industry Practices” that was launched around the same time the FCC took its enforcement action against Comcast turned up no evidence of a systemic problem. If the FCC now tries to impose net neutrality by reclassifying broadband as a “Title II” common carrier, it will have to do the difficult but necessary work of demonstrating, with real factual evidence, that broadband is more like a common carrier than like the lightly-regulated “information service” the commission previously decided it was.

We don’t need Congress to free the FTC from Magnuson-Moss. Instead, Congress should impose the same requirements on the FCC. Sometimes, taking the time to do your homework leads to better decisions, sooner.

photo credit: williambrawley

I hear the same, inevitable conversation just about once a month: Facebook is not protecting users privacy and should change its policies to better do so. But Democratic Senator Chuck Schumer has made an argument I haven’t heard to this point: government needs to regulate social networking sites’ privacy policies. It is unclear, however, whether the benefits of regulation would outweigh the damage done to the freedom that has made social networking sites so vibrant.

Apparently, Schumer’s main problem deals with sites like Facebook, Twitter, and MySpace not giving its users ample controls over their privacy settings and not providing clear disclosure of privacy policies. The New York Senator suggests that the Federal Trade Commission ought to issue guidelines about privacy disclosures, and if it cannot (or will not) he will offer legislation.

This recent attention seems to come in the wake of Facebook unveiling new features that allow for connectivity with other sites around the Internet. While there appear to have been no changes to the site’s privacy features, which allow users to control what portions of their profiles will be shown to which groups (eg. family, friends, friends of friends), some users have reported that Facebook still makes certain data publicly available without users’ consent.

For what it’s worth, I find Facebook’s privacy settings incredibly easy to use. More important than my own opinion, however, is the fact that the site has been highly responsive to users’ concerns. In addition to hosting groups and pages dedicated to privacy issues, Facebook has quickly bolstered its security settings after past upgrades to the site angered users.

Another point is that the issue of privacy is a very salient one and even users who aren’t aware of the policies are likely seeing numerous media reports about social networking privacy issues. More importantly, however, is that these sites are ultimately private businesses that clearly disclose their privacy policies and terms of service (Facebook’s is available from its splash page) to potential users.

While these sites may underprovide information to certain groups, relative to what would be socially optimum, government regulation may have the unintended effect of harming innovation of new applications and features, and may lead to expanded regulation in the future. Ultimately, it is a freedom from burdensome rules and the potential to share data that has led to social networking sites becoming such vibrant and versatile technologies.

It is insufficient for policymakers to claim that privacy information is not disclosed well enough without some strong showing about the harms currently being borne. Given users’ ability to easily stop using social networking sites, and their prior willingness to address individuals’ concerns, it appears as if a government rule may only do more harm than good.

Jerry Ellig, a senior research fellow at the Mercatus Center at George Mason University and contributor to the Surprisingly Free blog, talks about the National Broadband Plan.  He also discusses network economics, railroads, and electricity distribution.

Related Readings

• The FCC’s National Broadband Plan
• Public Interest Comment on the National Broadband Plan by Jerry Ellig and Christina Forsberg
• Cutting the “Broadband Funding Gap” Down to Size by Jerry Ellig
• Spare us the broadband plan at The Washington Times

Listen to other episodes and remember to subscribe to the podcast using RSS or iTunes.

Wine (and beer) lovers who want to order hard-to-get vintages online have benefited greatly from federal court decisions that say state alcohol laws cannot discriminate against out-of-state sellers. Federal legislation introduced last week could threaten electronic commerce as it further entrenches middlemen who normally profit from every bottle of alcohol that passes from producers to consumers.

To understand what’s going on, you have to know something about Commerce Clause litigation. I’m not a lawyer, though I once played the teetotaling William Jennings Bryan character in a high school production of Inherit the Wind.  This proves my motives are pure. And since a lot of lawyers practice economics without a license, I figure I’ll return the favor.

The Commerce Clause of the US Constitution says that Congress, not the states, can regulate interstate commerce. A longstanding judicial interpretation, the “dormant” Commerce Clause, holds that if Congress has not chosen to regulate some aspect of interstate commerce, that means Congress doesn’t want the states to regulate it either.  So, normally a state can regulate interstate commerce only if Congress has given explicit permission.

If state law discriminates against out-of-state sellers who compete with in-state sellers, the state is regulating interstate commerce.  A state is not allowed to do this unless it can prove the discrimination is necessary to accomplish some clear state purpose that cannot be accomplished in some other way. States have to present evidence that proves these points, not just make arguments. 

The 21st Amendment, which repealed Prohibition, gave states the right to regulate alcohol.  Recent court cases involving direct wine shipment clarified that when states regulate alcohol, they must still obey the Commerce Clause. This makes good sense. Imagine if the 21st Amendment freed states from the rest of the Constitution when they regulate alcohol. The police could break into your house without warning if they imagined you might give your 20-year-old a beer, but they’d still need a search warrant if they thought you were cooking meth. 

In Granholm v. Heald (2005), the Surpeme Court said that states could either allow in-state and out-of-state sellers to ship wine directly to consumers, or prohibit it for both, but states couldn’t ban direct shipment for out-of-state sellers and allow it for in-state sellers. In response, most states have liberalized their direct shipment laws rather than making them more restrictive. In Family Wine Makers of California v. Jenkins (2008), federal courts said that an ostensibly neutral law that had a discriminatory effect on out-of-state sellers was also unconstitutional. Massachusetts had enacted a law that allowed only wineries producing 30,000 gallons or less to ship directly to consumers; the production cap was large enough to allow all in-state wineries to direct ship but small enough to exclude 637 larger out-of-state wineries that produce 98 percent of all wine in the United States.  The judge’s opinion essentially said, “By their fruits you shall know them,” and it reserved special grapes of wrath for the blatantly protectionist motives voiced by advocates of the law. Massachusetts appealed this decision to the First Circuit Court of Appeals, lost, and on April 12 decided not to appeal to the Supreme Court.

On April 15, Massachusetts Rep. Bill Delahunt introduced federal legislation that would turn alcoholic Commerce Clause litigation sideways. The legislation makes four big changes in the rules of the game:

1. It says that states may not “facially discriminate without justification.” This standard might reverse Granholm, because the state laws were clearly discriminatory but the states offered justifications. It would likely reverse Family Wine Makers, because the law was “facially” neutral but had discriminatory effects. (Of course, if this thing passes, I’d be delighted to see a consumer or winery plaintiff prove me wrong.)
2. It repeals the “dormant” Commerce Clause for alcohol by stating that congressional silence on interstate commerce in alcohol should not be interpreted as a prohibition on state regulation of interstate commerce in alcohol.
3. It shifts the burden of proof by requiring that anyone challenging a state alcohol law must prove “by clear and convincing evidence” that the law is invalid. Normally, states have the obligation to present evidence that a discriminatory law accomplishes a state purpose and is no more discriminatory than necessary.  
4. Any state law that burdens interstate commerce or contradicts any other federal law (!) would be upheld unless the person challenging it proves that the state law has no effect on temperance, orderly markets, tax collection, the structure of the distribution system, or underage drinking.  Since there’s plenty of economic evidence that state alcohol laws increase prices, a state could argue its laws reduce consumption and promote temperance, and the law would be upheld.  In other words, any state alcohol law that harms consumers by increasing prices would automatically be OK, even if it blatantly conflicted with other federal laws (such as antitrust laws, which are intended to protect consumers from the high prices associated with monopoly) or the Commerce Clause.

Word on the street is that the biggest pushers of this legislation are the beer wholesalers. Since most of this litigation has involved wine, what’s going on here?

The real goal of this legislation is not harrassing wineries that want to ship a few bottles to out-of-state customers. The real goal is to preserve anti-competitive state laws that force brewers, wine makers, and distillers to market most of their product through beer, wine, and spirits wholesalers, instead of marketing directly to retailers and restaurants. The proposed legislation would effectively insulate these state laws from challenge under the Commerce Clause, federal antitrust laws, or any other federal laws that might give alcohol producers and consumers some leverage to break the wholesalers’ lock on the market.

Call it states’ rights kool-aid with a chaser of economic protectionism.  A strange brew indeed.

The banking system (though it has its share of problems) has proven to be a worthy system which efficiently provides capital to those who meet its standards. Yet, there are many people who want or need to access funds outside of this system.  That is where alternative and more personal forms of lending come in. Under this system, lenders may be more charitable or may be seeking a high interest rate (and high risk), non-monetary dividends, or a personal transaction. Additionally, alternative lending encompasses many forms: ancient lending forms such as Hawala, peer-to-peer lending companies like Prosper and Lending Club, philanthropic lending to developing nations (Kiva), or lending mechanisms for artists of all varieties.

Following the trend of alternative lending, stories on funding creative endeavors have filled the columns of the New York Times (for example, museums and bands). Museums have found ways to raise funds for exhibits through websites that offer donation collection for nonprofits, such as FirstGiving and organizations that facilitate collection funds, such as CreateAFund and ChipIn.  Up-and-coming bands have also found new ways to obtain capital, through websites like PledgeMusic.

Yet, one for-profit company in particular, Kickstarter, has substantially contributed to the changing scene of lending by providing an innovation platform for project funding. Kickstarter collects pledges for money for various projects, which are not cashed in until the full funding amount is raised, alleviating the problem of funding only a portion of the project. It also allows individuals to create incentives for pledges, such as a personal concert or prize for top donors.

Unfortunately, policymakers are also becoming more and more interested in alternative lending. Since the financial crisis, Congress has been working to implement more oversight and regulations on financial products and services under the mission of protecting consumers from predatory lending practices. Under such a mission, alternative lending, which often allows riskier individuals to borrow at high interest rates, could be seen as unsavory even when it is not. Also, attempts to standardize financial services will hinder alternative lending because it’s successful hinges on its flexibility and variations in structure.

Senator Christopher Dodd’s proposed bill on financial regulation has taken steps to make standardize the finance industry by changing the way businesses and organization can raise start-up capital. In an article at TechFlash, Bill Carleton and Joe Wallin describe how this could affect angel financing and hinder the activities of many entrepreneurs. While I am uncertain on the specific effects of this section of the bill on alternative lending, there seems ample room in the vague bill to extend protocols from angel financing to alternative lending sources, like Kickstarter, Prosper, and others. This will surely create a substantial burden to entrepreneurs and individuals seeking access to capital.

photo credit: kagey_b

In the wake of Spirit Airlines’ announcement that it would begin charging customers to place luggage in its overhead bins, the past two weeks have been filled with consumer outrage, fiery comments from Department of Transportation Administrator Ray LaHood, and legislation to stop any airline from charging carry-on fees. While Spirit appears to have stirred up a hornet’s nest with its latest fee, there has been little to no debate and rationale as to why government action is needed to curtail this trend.

Those familiar with the industry will recall that Spirit was actually the first U.S. airline to begin charging for the first and second checked bag. The fear in this case appears to be that, as was the case with those pioneering charges, nearly all other airlines would follow suit.

In light of this, some may be breathing a sign of relief that five airlines have pledged not to levy carry-on charges. The reality, however, is that these airlines instituting fees was never too much of a concern. Spirit, a carrier that recently ran a MUFF (Many Unbelievably Fantastic Fares) sale, is a unique airline branding itself as an ultra-low fare carrier – something akin to a Ryanair.

With its rock-bottom philosophy and deal seeking clientele, Spirit is solely interested in lowering the price of travel. Ultimately, higher service airlines are more constrained by customers seeking higher quality who would take their business elsewhere if they felt like they were being nickel and dimed.

The skeptic claims that passengers wouldn’t have a choice because all airlines decided at once to institute the fees – an indication of collusion. Given the losses endemic to the industry, however, it is unlikely that some sort of organized strategy to extract additional profits from unsuspecting consumers is afoot. Perhaps people are just unhappy to accept the fact that their fellow passengers are willing to accept such a pricing arrangement.

This gets to the crux of the flaw with any government action – so long as customers are well informed about fees (media attention makes this easy), a competitive industry allows passengers to vote with their wallets. Protecting consumers from a fee is unnecessary – the government ultimately has no business dictating pricing policies to a company where passengers have competitive options.

People may not like the idea of checked bag fees, but jumping to government action before allowing the market to satisfy consumers’ preferences in this case sets a dangerous precedent.

Bruce Yandle, Dean Emeritus at Clemson College of Business and Behavioral Sciences and Distinguished Adjunct Professor of Economics for the Mercatus Center’s Capital Hill Campus, discusses the rise of national TV broadcasting and the spread of health, safety, and environmental regulation in mid-20th century America. The discussion also turns to the history of regulation in the United States, the decline of common law and the growth of code law, and the death (and return) of good beer in America.

Related Readings

• National TV Broadcasting the Rise of the Regulatory State by Bruce Yandle (pay content)
• Bootleggers and Baptists at Wikipedia
• Raising Railroad Rates: Trying to Stop Ruinous Competition from the October 25, 1881 New York Times
• Regulatory Capture at Wikipedia
• Agency Cost at Wikipedia
• Public Bads and Public Nuisance: Common Law Remedies for Environmental Decline by Karol Boudreaux and Bruce Yandle (pay content)
• Common Law at Wikipedia
• The Rise of the Chicago Packers and the Origins of Meat Inspection and Antitrust by Gary Libecap (pay content)
• Video Killed the Franchise Star: The Consumer Cost of Cable Franchising and Proposed Policy Alternatives by Jerry Brito and Jerry Ellig
• The Common Law and Economic Growth: Hayek Might Be Right by Paul G. Mahoney (pdf)

Listen to other episodes and remember to subscribe to the podcast using RSS or iTunes.

Last week the D.C. Circuit Court of Appeals ruled that the Federal Communications Commission cannot impose net neutrality rules on broadband providers under its “ancillary jurisdiction” under the Communications Act.  If it wants to impose net neutrality, the FCC must first reverse previous decisions and reclassify broadband as a “Title II” common carrier.

Whoa!  The previous two sentences prove that this economist has been spending way too much time around telecom lawyers.

In almost-plain English, the court decision means the FCC cannot impose net neutrality regulations unless it publicly changes its five-headed mind and decides that broadband is much like an old-fashioned telephone monopoly and should be regulated much the same way. 

A lot of regulatory economists pretty much gag at this idea, or worse. Non-economists wonder what triggers this visceral reaction.

Let me explain.  As the recipient of 8 years of excellent Jesuit education, of course I have three reasons.

First, anyone who follows the scholarly literature on economic regulation generally knows that this form of regulation has a pretty checkered track record. In a wide variety of industries, economic regulation has increased prices, inflated costs, stunted innovation, and/or created shortages. In addition, because this regulation transfers enormous amounts of wealth – $75 billion annually in the case of federal telecommunications regulation — it creates enormous incentives for firms to lobby and litigate to bend the rules in their favor. While big corporations may feel they benefit from these expenditures, from a society-wide perspective the fight over wealth transfers is pure waste because it rarely produces anything of value for consumers. 

Utility regulation works best in relatively stangant industries where a company makes a big capital investment, pays a few employees to run it, and doesn’t need to innovate much.  In those kinds of situations, it’s easier for regulators and other outsiders to determine costs, set some rates that let the utility earn a reasonable rate of return, and keep the regulated company from gaming the system too much. If you think this describes broadband, well, good luck. A local water utility is probably the best example.

Second, anyone knowledgeable about the economic theory underlying utility regulation (which includes most economists who specialize in the area, and some lawyers) understands that regulation is supposed to be a last resort for “natural monopoly” industries where it’s cheaper to have one firm serve the entire market. A monopolist protected from competition could increase prices, degrade service, or do other things that increase its profits while harming consumers; economic regulation seeks to prevent those behaviors. But if competition is possible, competition is preferable. 

When phone, cable, wireless, and satellite companies bombard us continually with solicitations to switch to their broadband services, and I can see multiple wires running down the street outside my house when I go up on the roof to adjust the satellite dish, it’s pretty darn obvious that broadband is NOT a natural monopoly, even if competition isn’t “perfect.”  Therefore, broadband lacks a key prerequisite for public utility regulation to possibly increase consumer welfare.  Indeed, the most anti-consumer results of economic regulation have occurred when government created monopolies, cartels and/or shortages by imposing this regulation on industries where competition is possible, such as cable TV, trucking, railroads, airlines, oil, and natural gas.

Third, recent economic studies find that the FCC’s decision to classify cable, DSL, and fiber broadband as a less-heavily-regulated “information service” generated a tsunami of investment and spurred competition. See, for example, this study by my GMU colleagues Thomas Hazlett and Anil Caliskan. Some more cites are available on pp. 17-18 of this comment to the FCC. If you don’t believe economic studies, just keep in mind that the aggressive marketing of dirt-cheap entry-level DSL tracks pretty closely with the FCC’s decision that DSL is an information service not subject to Title II regulation.  Coincidence?

So, please excuse those of us regulatory economists who vomit when the subject of Title II comes up. If you check out the links above, perhaps the reaction will be more understandable.

I have not addressed the question of whether it’s realistic to think that reclassification of broadband under Title II could be a workable mechanism to impose just a limited, targeted, surgical, light-handed, smart, data-driven, evidence-based, transparent, transformative, sustainable, green, hybrid, itsy bitsy teenie weeny yellow polka-dot bikini smidgen of net neutrality regulation to prevent only certain forms of anti-consumer discrimination, without imposing the customary broad panpoly of public utility price and service regulation. Whether that’s possible in theory, or likely in real-world political practice, is a different issue for a different day. (Whether the other name for that kind of regulation is “antitrust” is also a different  issue for a different day.) For the moment, I just wanted to provide some context on the broader Title II issue.

And now I’ll go clean off my shoes.

photo credit: JoshuaDavisPhotography.COM

A post on Slashdot brought my attention to a nifty little tool that a number of city governments have picked up: SeeClickFix, a Web site on which citizens can report and track problems in their locale in hopes of having these issued repaired.

In an interview with O’Reilly radar, SeeClickFix co-founder Ben Berkowitz discussed the private sector roots to this reporting tool. Ultimately, the site rose out of dissatisfaction with dealing with unresponsive government middle men to have small city problems fixed. Locals can post problems requiring repair or further action, with users marking the problem as “fixed” if its is properly addressed.

The results have been impressive thus far: a number of cities have begun using the site and the founders hope to have it integrated into even more localities’ Web pages. In many cases, local officials indicate on the site whether they are addressing a certain problem.

What makes the concept so interesting is that citizens take part of the onus of making local government more transparent, in many ways filling in areas where higher-level officials may lack knowledge of local problems. For example, a pothole may be easy for a road repair crew to spot, but only neighborhood residents can tell whether an intersection’s setup is dangerous for pedestrians.

Despite the gains from transparency, there are other causes for concern. The Slashdot post reports of a case in which SeeClickFix reports led to an arrest of drug dealers in front of a school in New Haven. While keeping criminals off the streets is an admirable goal, low costs of reporting can mean that citizens are more likely to report on people or issues that aren’t truly criminals or causing problems.

Whether this becomes a problem or not (and whether you think that would actually be a problem), low costs of reporting still mean that government may not spend resources on the issues that represent the highest-valued use of local resources. The problem is similar to voting – it is very easy for a user to click his or her mouse a few times, but this does not give any true idea as to how much the user values a certain issue.

Nonetheless, keeping this service on a local level is likely to mitigate, if not eliminate, these problems. And in the end the benefits of better information may far outweigh any costs.

Tim Lee recently responded to my response to his posts responding to my podcast with Tom Hazlett. I’m offering here one more response, if you can believe it. To avoid an infinite back and forth, though, I think this will be my last word for now. Perhaps Tim–who was the inaugural guest on Surprisingly Free Conversations–might come back on the program to have an in-depth conversation on the issue.

To illustrate his point, Tim produces three charts, two of which I reproduce here. Figure 1 shows a world in which all spectrum has been divided up into national licenses and each has been allocated to a different firm. Figure 2, as Tim describes it, shows the “‘WiFization’ of the electromagnetic spectrum. Here the entire electromagnetic spectrum is allocated for unlicensed use on the WiFi model, with regulations to prevent spectrum users from interfering with geographically adjacent users.”

Tim then writes, “If I’m reading Jerry right, he thinks one of these depicts a free-market system based on property rights, while the other is ‘command and control’ regulation.” I’m afraid I wasn’t making myself clear. That is not at all what I believe.

As Tim points out, either of the scenarios that the figures illustrate could develop in either a free market or in a world of full state control of spectrum. On this point we agree.

For example, we can conceive of a world without the FCC, in which spectrum is treated as private property, resulting in an outcome such as the one in Figure 1. Just the same, we can conceive of the FCC making command-and-control allocation decisions that also result in the distribution depicted in Figure 1. (In fact, that’s what the FCC has done historically, which results in a suboptimal allocation of resources as Tim’s third chart shows.)

We can also imagine spectrum commons as depicted in Figure 2 developing in either a free market or a system of state-controlled spectrum. Assuming that by commons we don’t mean an open access regime (sorry to beat a dead horse, but it’s important), then in order for a commons to work, someone has to set the rules of the road. It is the owner of the spectrum that can dedicate its spectrum as a commons, set the rules for the commons, and allow otherwise unrestricted access to its spectrum commons so long as the rules it has set are respected.

In a free market, the owner of the spectrum might be a firm. One can imagine a device maker like Intel or Cisco purchasing spectrum and allowing anyone to use its spectrum so long as they do so with devices that employ the firm’s chips. That is a private commons. Now, imagine a non-profit headed by Tim Lee (with Benkler, Lessig, and Werbach on the board of directors) that–similar to what the Nature Conservancy does with land–purchases a national chunk of the spectrum, sets rules, and dedicates it to public use. That is also a private commons. And boy I’d certainly contribute to that cause!

Now, who is the owner of the spectrum in a state-controlled scenario? Who would set the rules? Why, the government of course! As the recently issued National Broadband Plan makes clear: “The federal government, on behalf of the American people and under the auspices of the FCC and NTIA, retains all property rights to spectrum.” (Page 78.) So it is the federal government, owner of the spectrum, that decides how much of the spectrum should be operated as a commons, which particular chunks, and under what rules.

There’s no one I know who has thought more deeply about the problems of top-down control than Tim, so I take his main critique seriously. He’s absolutely right to point out that a large firm is going to encounter knowledge problems making decisions about allocation of resources just as a government might. But in my mind, there is one critical difference.

In the free market that I envision, firms compete and can go out of business; spectrum can be put to flexible uses; and spectrum can be traded, combined and disaggregated with relative ease. If a commons develops under such a regime (as I have no doubt it would), then wonderful. We’ll know that such a commons was arrived at through a market process that had much more information available to it than the alternative.

What’s the alternative? A single federal government that owns all the spectrum, that can’t go out of business, and that makes decisions about spectrum allocation using FCC regulatory proceedings. It’s competition, not privatization per se, that yields bottom up solutions. You can’t have bottom up solutions without trades.

Perhaps more importantly, Tim also points out that “a system of exclusive national spectrum licenses will always be more friendly to top-down technologies like cellular than bottom-up ones like WiFi.” Choosing to favor one type of allocation, he notes, necessarily compromises the alternative. He’s absolutely right. So the question real question, then, is how do we get the right mix of spectrum allocated for exclusive use and for commons?

In a market, choosing to operate a chunk of spectrum exclusively or as a commons is an economic choice that presents economic trade-offs that are borne by market participants. In a regime of state ownership of spectrum, it is a political decision with political trade-offs. I prefer the former situation. And yes, we should appeal to industry growth in as evidence. PCS and Unlicensed PCS were allocated at about the same time. One had explosive growth while the other lays practically barren. The 3650 MHz band, which I’m currently studying, has been allocated internationally for exclusive use, but as a commons in the U.S. I have a feeling we’re going to find something similar to what happened in PCS.

Finally, Tim might argue that private market participants, because they are biased toward top-down thinking, will not properly value the societal benefits of bottom-up technologies such as Wi-Fi. For example would something as wonderful as Central Park emerge purely through a free market process? Maybe, via something akin to the Nature Conservancy, as I explained above. That probably won’t be the case, though. It’s more likely that what we now know was Central Park would be paved over and covered with more economically sensible skyscrapers.

To me, that’s a terrible idea. I’m glad that New York City owns Central Park and operates it as a commons for all of us to enjoy (subject to certain rules, of course). But notice how we got there. It’s not that the federal government owns all land and decides through a political process how much to allocate for residential, how much for business, how much for parks, etc. Instead, land is private property, and if we, through government, decide we want to create a state-owned commons as wonderful as Central Park, we purchase the land or use eminent domain to acquire it. In either case, we bear the full economic cost of the decision. Unfortunately, that’s not how we got U-PCS and the 3650 commons.

So I’m not constitutionally opposed to government-owned commons, I just want us to be aware of what we’re giving up when we make the decision. Are unlicensed initiatives like Wi-Fi deregulatory? Sure, to the extent they place less restrictions on spectrum than traditional licenses that tell you every detail of what you can and can’t do on a band–up to and including the business model you’re allowed to use. But don’t tell me that we didn’t get the decision through a command-and-control process with only one owner–the federal government–making a political decision.

I am in full agreement with Jerry Ellig’s view that pretty much every argument that could be made for or against net neutrality regulation is already out there. However, Tuesday’s ruling certainly didn’t settle the issue once and for all and it would be very naive to think that the fight is over. In fact, this war is just at the beginning.

First of all, there are ways for net neutrality proponents to overcome the results of the Court’s decision. The FCC could reclassify internet services, that are currently regulated as information services under Title I, and bring them under Title II common carrier rules–although this would imply reversing previous determinations. Alternatively, the Congress might try and pass net neutrality legislation, giving the FCC the powers it lacks. Both these solutions have their shortcomings and side effects, but they’re nonetheless available.

The second point I want to mention was raised by FCC Commissioner Robert McDowell in a brilliant Washington Post op-ed. McDowell asks,

And how will FCC actions be perceived internationally? Countries that regulate the Internet more tend to be less free than those that are hands-off. Not only are some countries waiting for Washington to assert more authority over the Internet to justify their own state interference with the Web, but once government regulation of the Internet starts, it will become harder to pull back.

This is a very reasonable concern. To stick with the military metaphor, the battlefield here is way larger than the US alone. As the internet is a worldwide phenomenon, every piece of regulation has a global impact. Moreover, it should be taken into account that US policies set a precedent.

Europe obviously comes to mind. When the Telecoms Package was approved last year, net neutrality still wasn’t a top priority in the Old Continent and the EU Commission was willing to compromise about it in order to get the whole reform bill passed. But things are changing very quickly and it’s safe to predict that, if the Obama Administration embraced net neutrality, Europe would follow right away.

Then come those countries that already impose their own variety of net neutrality, so to speak, China being the most prominent example. Regulation calls for more regulation and it’s hard to believe how net neutrality advocates would fail to recognize the contradiction between neutrality and freedom. As the internet is such a fragile environment, this is a pretty dangerous misunderstanding.

Evgeny Morozov, Yahoo! Fellow at the Institute for the Study of Diplomacy at Georgetown University and contributing editor for Foreign Policy, discusses the limits of social networks in promoting democracy. The discussion also turns to Morozov’s experience as a promoter of online freedom in Eastern Europe and cybersecurity.

Related Readings

• Net Effects, a blog by Evgeny Morozov
• How Dictators Watch Us on the Web by Evgeny Morozov and reply by Clay Shirky at the Prospect
• How the Net Aids Dictatorships by Evgeny Morozov at TED
• Social Media vs the Dictator, Clay Shirky on the Belorussian Ice Cream flashmob, at YouTube
• Facebook brings protest to Colombia at the New York Times
• Revolution, Facebook-Style at the New York Times
• Ethan Zuckerman on Internet Censorship and the Limits of Circumvention at Surprisingly Free Conversations
• Wikipedia to Color Code Untrustworthy Text at Wired
• Mike McConnell on How to Win the Cyber-War We’re Losing at the Washington Post
• How I Became a Soldier in the Georgia-Russia Cyberwar by Evgeny Morozov at Slate
• Johannes Bauer on Economic Incentives and Cybersecurity at Surprisingly Free Conversations

Listen to other episodes and remember to subscribe to the podcast using RSS or iTunes.

Several years ago at a conference on universal telecommunications service, one panel moderator noted, “Everything that can be said about universal service has already been said, but not everybody has had a chance to say it, so that’s why we still have these conferences.” After hearings and a study by the Federal Trade Commission, a Federal Communications Commission Notice of Inquiry during the previous administration, the National Broadband Plan, the FCC’s still-open Open Internet proceeding, and Wednesday’s extension of the reply comment period in the Open Internet proceeding, net neutrality is starting to have the same vibe.

That’s why, instead of virtually killing some more virtual trees by writing more lengthy comments and replies, Jerry Brito and I signed onto a declaration by telecommunications researchers which explains that there is no empirical evidence of a systemic problem that would justify net neutrality rules, and these rules might actually ban practices that benefit consumers. Since the world probably doesn’t need another blog post rehashing arguments about this issue, I’ll simply point you to the comment here. It was masterfully written by economist Jeff Eisenach, a veteran of the Federal Trade Commission. (The teeming throngs of humanity who are curious to know whether Jerry and I have any original thoughts to contribute to the issue can read this CommLaw Conspectus article.)

Now that I’ve gotten the shameless self-promotion out of the way, let me MoveOn to a broader point. The debate over net neutrality illustrates how important it is to identify and demonstrate the nature of the problem before trying to solve it.  This applies whether the issue is net neutrality or health care or financial market regulation. Two points in particular bear repeating.

First, ensure that there is empirical evidence of a system-wide problem. The arguments for net neutrality are based on concerns about things the broadband companies might have the ability to do – not empirical proof of widespread abuses that have actually occurred. Less than a handful of famous anecdotes support the argument for net neutrality. Sweeping, systemwide policy changes should only occur when a sweeping, systemwide problem actually exists.

Second, understand the actual nature of the problem. Have a coherent theory of cause and effect that explains why the problem occurs with reasoning that is consistent with what we know about human behavior. Ignoring this point has led to some odd decisions on issues far afield from net neutrality. In 2009, for example, the Department of Energy proposed energy efficiency standards for clothes washers to be used in laundromats and apartment buildings. The justification for the regulation assumed that greedy business owners and landlords willfully ignored opportunities to earn higher profits by investing in energy-efficient appliances! One might argue about whether consumers always identify and act on opportunities to save energy, but assuming that businesses will ignore opportunities to save money is a much bigger stretch.

If you don’t get the problem right, you won’t get the solution right!

The nature and activity of commerce is always changing, from general stores, to big boxes, to internet mega-shops and auctions. Now, a new company has found a way to tap into the brand appeal of bloggers.

OpenSky is a system where bloggers can link shops and specific goods to their blogs and receive a portion of the revenue from sales. In other words, they can recommend specific products and make money off of their reputation and influence. In a recent New York Times article, the founder of OpenSky describes this use of individual brands:

“If you look at the power of people brands — authors, celebrities, models, bloggers — they have basically invested in building a brand around their own passion, but there literally was no way for them to build a business,” said John Caplan, OpenSky’s founder and chief executive, who was formerly chief executive of Ford Models. “With OpenSky they are able to complete commerce in a very authentic way.”

The OpenSky founder has used the profitable system of working with influential people to promote more personalized business transactions. Again, in the New York Times article, he states:

“I totally believe the world would be a better place if we bought goods from the people we know and who know us,” he said.

And on their website:

We think shopping has lost the authenticity and relationships that give it meaning. In physical world shopping, everything is the same. Online shopping is efficient, but isolating. What’s missing is the connection between people.

Such statements and philosophies align well with the current “buy local” campaigns but may be more marketing rhetoric than a genuine business model. For purchasing a product from a blogger you admire does not create a personal relationship; the interaction is more one-sided than dynamic. Still, the concept is innovative and sounds like it should be profitable, with or without the marketing of a personal touch to retail.

photo credit: Gord McKenna

Tim Lee has a great couple of posts riffing off of my recent podcast interview with Tom Hazlett. Tim very astutely draws an analogy between the exclusive-licensed vs. spectrum commons debate, and the debate over carbon emissions. Tim writes,

[The debate over carbon emissions] is also a debate over scarcity. One side favors treating the atmosphere’s ability to absorb carbon as a commons (Jerry would probably call it an “open access” regime, but I use the “common” terminology), allowing anyone to emit carbon dioxide without legal restrictions. The other side believes that this will lead to a tragedy of the commons, and so they favor a property-rights-oriented approach. The weird thing is that the left and right in the carbon debate are on the opposite sides from the positions they occupy in the spectrum debate.

I have to note that the reason I insist on using the term “open access regime” isn’t simply for aesthetic effect. What Tim is describing when he says “allowing anyone to emit carbon dioxide without legal restrictions” is not a commons; it is open access. A true commons, by definition, has rules (be they legal, customary, etc.) that govern its users. On this point I would recommend the work of Elinor Ostrom, who won this year’s Nobel Prize in economics for her work on the economics of common-pool resources.

Tim then notes that there is a distinction between the first order determination of whether a natural resource is sufficiently scarce to require exclusive rights or not, and the second order determination, if in fact the resource is scarce, of “whether to employ property rights (like cap and trade or spectrum auctions) or command-and-control (like traditional EPA or FCC regulations).” He then writes,

And so it bothers me when free-market economists conflate the two issues and attack proposals for unlicensed spectrum as command-and-control regulation. The FCC’s decision to allow unlicensed spectrum in certain frequencies is not command-and-control regulation. Quite the contrary, it’s a classic case of deregulation–arguably one of the most libertarian things the FCC has ever done. And as a libertarian, I’m happy to see that it has been extraordinarily successful: Hundreds of millions of WiFi cards have been sold, and the technology is integrated into hundreds of successful consumer products, including iPhones, Wiis, and virtually every laptop on the market.

I think we have to ask ourselves, why do we (both on the left and the right) dislike command-and-control? The main reason, it seems to me, is what Hayek called the local knowledge problem. A central authority like the FCC can’t possibly have all the information it needs to allocate scarce resources efficiently. I would also add that it doesn’t have the incentives, either.

So, Tim is right that the first order debate is whether a resource can be sustainable as an open access regime or not. That may be the debate that is happening over carbon emissions, but it’s not the debate over spectrum. If we are a greed that a resource requires governance in order to make its use sustainable, then we can move on to the next question.

In order to have rules governing a resource, we must have the ability to exclude those who don’t follow the rules. The sustainable use of a scarce resource cannot happen without exclusive rights. Property rights are one way to assign exclusive rights. State control is another. In the first instance, a private owner sets the rules that govern the resource’s use. In the second, it is the state that sets the rules. A commons approach–in which use of the resource is not limited as long as users follow the rules–can develop in either case.

The big difference is this: If the resource is controlled by the state, and it is setting the rules, then the only means available to it for setting the rules is a command-and-control process subject to the knowledge problem noted above. On the other hand, a property rights approach to rule setting is dynamic and bottom-up, something I know Tim will appreciate. So, I don’t think that Tom and I are conflating the first order question with the second order question. I think we are conflating a state-governed commons with command-and-control regulation, because that is in effect how the state creates commons.

Tim understands this because he writes that “[i]t is important for free-market types to attack ‘unlicensed’ spectrum proposals that actually come with a lot of strings attached,” such as the FCC’s “white spaces” proposal. I’m afraid that the difference between the white spaces (which Tim does not like), and wi-fi (which Tim holds up as an exemplar of ‘good’ unlicensed) is one of degree, not of kind. Wi-fi has centrally planned rules governing its use just as the white spaces.

Are unlicensed commons like wi-fi deregulatory? Sure, to the extent that they’re probably more flexible than, say, the type of draconian limitations placed on TV spectrum licenses. Am I happy we have wi-fi and that it’s incredibly successful? Absolutely. But what we can never forget is what is unseen. The opportunity cost of a state-regulated commons is that we use a command-and-control approach to set the rules (thereby precluding other possible sets of rules) instead of using a more bottom-up approach.

There’s a lot more I’d like to say right now–about why wi-fi was successful, about how we might know when we have “enough” state-controlled commons, about the possibilities for private commons–but I think I’ll leave it here and perhaps visit these topics in later posts.

photo credit: MATEUS_27:24&25

Former CIA Director Michael Hayden likens cyberspace to the Wild West.  “Everybody has to defend themselves, so everyone’s carrying a gun.”  He even implies that under the current system everyone must provide their own cyber national defense:  “You wouldn’t go to a post office and ask them how they’re tending to their own ballistic missile defense…but that is the current set-up in cybersecurity” (p.26).

But cybersecurity is not like traditional national defense.  It’s not a public good, at least not in the true economic definition, nor as national defense is one.  A true economic public good is one whose consumption is non-exclusive and non-rivalrous.

The U.S. mainland’s defense against a missile attack from a foreign nation is a public good.  If a Navy warship shoots down an incoming missile, then everyone in the country is protected—there is no way to exclude certain citizens and leave them unprotected (not that anyone would want to).  This case of missile defense is also non-rivalrous.  My consumption of defense—protection from the missile—does not prevent you from also consuming it and being defended simultaneously.  Contrarily, cheeseburgers are rivalrous in consumption.  My eating one prevents you from consuming it.

Viewed through this lens, cybersecurity is not a public good.  It is definitely exclusive.  A firm’s network or a person’s computer will only be protected if someone provides defense for it.  And defending one network clearly does not automatically defend a neighboring one, as is the case with national defense.  Furthermore, there is a limited supply of cybersecurity–security companies can produce and sell only a finite amount of protection services.  Many people who want cybersecurity, therefore, compete with each other in the market for these services, and the quantity provided is rationed by price.  It’s consumption is rivalrous.

To illustrate these concepts, imagine an online corollary to the missile attack.  Because of the dispersed, decentralized nature of the Internet, a foreign nation’s cyber attack on the U.S. would target only specific networks or computers.  The target may be the Pentagon, federal agencies, private companies, individual users, or a combination of these–the attack can vary in scale, as in the 2007 month-long attack on Estonia.  But it is limited in scope and is more concentrated than a traditional missile attack, let alone the extreme example of a nuclear attack.  Protection, therefore, is exclusive to parties who purchase it.  And numerous parties rival each other for a finite supply of protection services.

The only cyber defense that might be comparable to national defense is protection of government and public utility networks.

The McAfee “In the Crossfire” report that quotes Hayden concludes,

As long as major governments desire unimpeded operational freedom in cyberspace, it will continue to be the Wild West.  In the meantime, the owners and operators of the critical infrastructure which makes up this new battleground will continue to get caught in the cross-fire–and may indeed need what amounts to their own ballistic missile defense.

But that simply isn’t true.

James Grimmelmann, Associate Professor of Law at the New York Law School and faculty member of the Institute for Information Law and Policy, discusses online harassment and anonymity. The discussion also turns to a new proposal to combat online harassment and the Google Books settlement.

Related Readings

• The Unmasking Option by James Grimmelmann (PDF)
• “Skanks in NYC” blog post leads to lawsuit against Google at Ars Technica
• Auto Admit Controversy at Wikipedia
• Can You be Sued for Unmasking an Anonymous Blogger? by Brian Solove at Concurring Opinions
• Dog Poop Girl Incident at Wikipedia
• Stolen SideKick Incident
• China’s Cyberposse at the New York Times
• Google Books at Wikipedia
• Google Book Search Settlement Agreement
• Judge Hears Arguments on Google Book Settlement at the New York Times

Listen to other episodes and remember to subscribe to the podcast using RSS or iTunes.

A Business Week article from Wednesday, March 31st describes a recent study about driving while talking on a cell phone. The sneak peek of the University of Utah study, forthcoming in the Psychonomic Bulletin & Review, reveals that most people have reduced reaction time while driving and solving math and memorization problems via cell phone.

About one in 40 people might have a special skill: They can drive safely — at least in a driving simulator — while talking on a cell phone and dealing with complex problems.

The other 97.5 percent of drivers, however, are out of luck. For them, yakking while driving and thinking hard is just a bad idea, a new study suggests. [...]

The researchers reached their conclusions after 200 people took part in simulated freeway driving. In one experiment, they talked on a hands-free phone in a conversation that made them memorize words and solve math problems.

For those who weren’t supertaskers, it took 20 percent longer to hit the brakes when they were talking on the phone. And the distance at which they followed other cars increased by 30 percent.

Is anyone really surprised? Solving math and memorization problems may be difficult task on its own and is sure to slow some drivers down. The studies focus on difficult tasks may be skewing the data. It is unclear whether the study is measuring intelligence or multi-tasking ability. I would estimate, from personal experience, that most phone conversations are not the complicated. It is not surprising that multi-tasking weakens ones ability to react and keep focus.

Still, what does this study tell us? I would hope that the study is interpreted as a reminder for safety and responsibility. Individuals should refrain from endangering themselves and others. On the other hand, this study may be used for policymakers to protect citizens from their own poor multi-tasking skills. In fact, the end of the article foreshadows this by linking to various cell phone and texting laws.

Does this study justify more bans? Could further studies lead to other laws on multi-tasking, like talking to a passenger, listening to the radio, or chewing gum while walking? Unfortunately, studies like this seem to flow easily into more policy instead of more informed and acknowledge individual action. I believe that such studies should be used to increases the emphasis on individual accountability, instead of banning activities that might endanger people.

photo credit: Dunechaser

An online attack on Bank of America could compromise the financial data of millions of customers.  One aimed at Google could result in a Gmail outage affecting millions more.  And it’s been estimated that a cyber attack causing a 24 hour disruption in service of an energy company  could cost as much as $8.4 million.  Secondary and tertiary effects of online attacks could affect millions of users around the globe, especially as cloud computing continues to expand and internet content and traffic become more concentrated.  They could also cost millions of dollars in downtime and service disruptions.  As cybersecurity appears to produce a positive externality, the lack of cybersecurity may produce a negative one.

In the case of distributed denial of service (DDoS) attacks, an unprotected computer poses a risk to every other networked computer because it can be used in such an attack.  A bot herder sees millions of unprotected machines as potential zombies for his next onslaught.

Who is responsible for protecting third party clouds that store critical data and provide services to millions of customers?  Who is liable for damages from DDoS attacks?  Consequently, how should society defend cyberspace?  With cyber national defense?  Private cybersecurity measures?

The answer lies somewhere in the middle, but exactly where is unclear.  Police forces exist to protect and defend, but people still use additional security measures.  And it hasn’t been determined that a police force actually exists that can reliably and effectively protect and defend cyberspace.  Furthermore, in the physical world private security measures, such as alarms and guards, most often actively prevent crime.  Police and courts generally resolve disputes and problems after the fact and are provided by the state.  And this is possible even with the global nature of the internet.  The knowledge that these institutions exist passively serves to protect citizens.  The state, therefore, focuses on passive protection through resolution; the private sector focuses on active protection through prevention.  The same institutional structure–privately produced prevention, state-sponsored resolution–should govern online crime.

Bank of America has every incentive to prevent online customer data or proprietary information from being stolen, just as it has every incentive to keep safe hard copies of sensitive information.  Their reputation as a financial institution is on the line. They have the local, specialized knowledge to know how to best protect against theft and espionage.  Customers know that there’s a risk personal data will be stolen.  They factor that risk into their banking decisions.  The state’s role is to make potential hackers aware that they will be held accountable for attacks, and then hold them accountable through the judiciary.

Within the appropriate institutional structure, secondary and tertiary effects of online attacks are internalized.  Gmail downtime resulting from an online attack isn’t much different than downtime resulting from a glitch.

Regarding DDoS attacks, it’s evident that defending every computer from worms and trojans that plant bots is tremendously difficult and inefficient, if not impossible.  Chances for successful protection greatly increase by defending against a single concentrated offensive.  Instead of promoting publicly provided ubiquitous cybersecurity, it seems much more efficient to concede the small negative externality produced by unprotected computers and focus protection on targets of centralized DDoS attacks.  Targets internalize all direct costs and therefore have enormous incentives to protect their own networks, property, and reputations.

Online attacks illuminate the negative externalities that result from a lack of cybersecurity.  But private defenders acting within the proper institutional structure might be best equipped and motivated to mitigate the externalities efficiently and effectively.