Topic: Telecom, Internet & Information Policy

Toward Open Wireless Networks

One of the hottest issues in tech policy this year is the regulation of wireless networks. The transition to digital television is almost complete, and the FCC is planning to conduct an auction next year to determine who will get to use the old analog television spectrum once the television stations are done using it. Some scholars have argued that the FCC should impose a variety of regulations on the winner of that auction to promote competition in the market for wireless services.

I’m skeptical of this argument, but I do think the critics are right about one thing: in the long run, open networks (like the Internet) do tend to be more innovative than closed ones (like AOL). This is true for much the same reason that free markets are superior to central planning; open networks facilitate decentralized decision-making and low barriers to entry for entrepreneurs. The people who founded Netscape, Google, eBay, Yahoo, and dozens of other successful Internet businesses didn’t have to ask anyone’s permission to do so.

Right now, the wireless networks are not as open as many people in the technology industry would like. Someone wanting to create a new cell phone or a new wireless application or service has to go through a long and cumbersome negotiation process with each wireless carrier. There are good reasons to think this is slowing down the pace of innovation in the wireless market. However, the big debate is over what to do about this. Some people think the FCC should step in and mandate open access to wireless networks. For reasons I laid out in TechKnowledge last month, I think that’s a bad idea. My view is that the wireless industry is still in its infancy, and that market forces will drive carriers to gradually open their networks over time.

Last week, we saw two examples of how this might happen. First, Ed Felten, a computer science professor at Princeton, had a great post pointing out one way the iPhone could shake up the wireless marketplace:

An open system would provide more benefit overall, but most of that benefit would accrue to consumers. The carriers would rather get a big share of a small pie, than a small share of a big pie. In most markets, competition keeps this kind of thing from happening, by forcing producers to account for consumer preferences. You would expect competition to have forced the mobile networks open by now, whether the carriers liked it or not. But this hasn’t happened yet. The carriers have managed to keep control by locking customers in to long contracts and erecting barriers to the entry of new devices and applications. The system seemed to be stuck in an unstable equilibrium. All we needed was some kind of shock, to get the ball rolling downhill.

Only a company with marketing muscle, design mojo, and a world-historic Reality Distortion Field could provide the needed bump. Apple decided to try, in the hope of selling zillions of the new, more capable devices. The real significance of the iPhone, whether it succeeds or fails in the market, is that it will trigger the transition to more open networks. Once people see that a pretty good phone can be a pretty good mobile computer, they won’t settle for less anymore; and mobile networks will be pried open.

One of the issues that critics of the wireless carriers often cite is the fact that American carriers have refused to support cell phones with built-in WiFi connections, which could save consumers money by allowing them to save money on their calling plans by making free calls over the Internet. Critics charge that carriers refuse to allow that because they want to force you to make every call over their network, allowing them to soak you with per-minute usage fees. Today David Pogue has an article in the New York Times describing a new offering from T-Mobile that allows consumers to do just that: when the phone detects an Internet connection nearby, it will automatically route calls via the WiFi network, and the customer isn’t charged for the call. As Pogue points out, this is a direct result of T-Mobile’s desire to get a leg up on the competition:

Have T-Mobile’s accountants gone quietly mad? Why would they give away the farm like this?

Because T-Mobile benefits, too. Let’s face it: T-Mobile’s cellular network is not on par with, say, Verizon’s. But improving its network means spending millions of dollars on new cell towers. It’s far less expensive just to hand out free home routers.

Furthermore, every call you make via Wi-Fi is one less call clogging T-Mobile’s cellular network, further reducing the company’s need to spend on network upgrades.

T-Mobile has the smallest market share of the four national wireless carriers, so they have the least to lose and the most to gain from a shake-up of the market. As a result, they’ve proven most willing to take risks in order to gain market share. If this service proves to be a hit, as I suspect it will, it will force the larger carriers to follow suit or risk losing market share.

That’s how competition works–it steadily forces companies to offer more consumer-friendly products and services whether they like to or not. It’s frustratingly slow for people who are used to the rough-and-tumble of the promiscuously open Internet. But it’s moving in the right direction, and given the FCC’s poor track record when it comes to protecting consumers, I think it would be a mistake for Congress or federal regulators to try to “fix” it.

Let a Hundred Flowers Bloom

The most fascinating story in the world is China today, as the world’s most populous country struggles toward modernity.

The Chinese rulers seem to be trying to emulate Singapore’s success in creating a dynamic modern economy while maintaining authoritarian rule. But can a nation of a billion people be managed as successfully as a city-state? Since 1979 China has liberated its economy, creating de facto and even de jure property rights, allowing the creation of businesses, and freeing up labor markets. The result has been rapid economic growth. China has brought more people out of back-breaking poverty faster than any country in history.

And, as scholars such as F. A. Hayek have predicted, the development of property rights, civil society, and middle-class people has created a demand for political rights as well. Every week there are reports of actual elections for local posts, lawyers suing the government, dissidents standing up and often being jailed, labor agitation, and political demonstrations. It’s reminiscent of the long English struggle for liberty and constitutional government.

And it would be great if it turns out that modern technology can make that struggle shorter than it was in England. A hopeful example was reported this week. According to the Washington Post, hundreds of thousands of “text messages ricocheted around cellphones in Xiamen,” rallying people to oppose the construction of a giant chemical factory. The messages led to “an explosion of public anger,” large demonstrations, and a halt in construction.

Leave aside the question of whether the activists were right to oppose the factory. The more significant element of the story is that, as the Post reported, “The delay marked a rare instance of public opinion in China rising from the streets and compelling a change of policy by Communist Party bureaucrats.”

Cellphones and bloggers fighting against the Communist Party and its Propaganda Department and Public Security Bureau — and the “army of Davids” won. Reporters and editors afraid to cover the story followed it on blogs, even as the censors tried to block one site after another. This isn’t your father’s Red China.

Citizen blogger and eyewitness Wen Yunchao

said he and his friends have since concluded that if protesters had been armed with cellphones and computers in 1989, there would have been a different outcome to the notorious Tiananmen Square protest, which ended with intervention by the People’s Liberation Army and the killings of hundreds, perhaps thousands, in the streets of Beijing.

The cause of freedom is not looking so good in Russia these days. But in China a hundred flowers are blooming, a hundred schools of thought contending.

The Libertarian Case for Free Software

One of the most interesting trends in tech policy over the last decade has been the emergence of free software as a major force in the computer industry. For example, some of our readers probably use the Mozilla Firefox web browser, which was developed by a team of volunteers collaborating over the Internet. And in fact, you’re using free software right now! Cato’s own web servers use the Linux operating system and the Apache web server to serve up Cato’s website. Both Linux and Apache are free software, developed by volunteers and made available for free to the general public.

Free software has caught some flack among libertarians who fault it for its failure to rely on the traditional mechanisms of the market. In the latest edition of Cato’s TechKnowledge newsletter, I argue that this criticism is misguided.

Free software is precisely the kind of decentralized, voluntary cooperation that libertarians should be holding up as an alternative to the coercive power of the state. Free software is produced by volunteers donating their time, without a government program in sight. If that’s not a libertarian success story, I don’t know what is.

So why do we see so many libertarians criticizing such peaceful, but noncommercial, forms of social organization? Many are taking the bait offered by the subset of free software proponents who have adopted the rhetoric of the left to promote their goals. We’re used to arguing with these people, who advocate using the state to impose communal forms of organization. Libertarians criticize forcing employees to join unions, prohibiting organ donors from becoming organ sellers, and requiring children to attend government schools. In each case, we hold up markets, business, and money as the tools of voluntary alternatives to coercive government programs.

In these arguments, progressives often claim they can use state power to create and nurture the rich social structures that typify civil society. But they’re wrong. State intervention almost always results in bureaucratized and politicized institutions that pit us against one another in bitter struggles. For example, a lot of progressives laud the potential of public schools to create more unified communities. But in practice, the opposite is true: our public schools have become one of the most divisive institutions in American society. They’ve sparked pitched battles over what to teach our children about sex, evolution, religion, and many other topics. The reality is that you can’t create civil society by government fiat.

So libertarians are right to criticize policies aimed at accomplishing communal goals via coercive means. But some libertarians have gotten so used to defending the market against those who want to impose collectivism that they start criticizing purely voluntary efforts to organize people on more communal lines. They are forgetting that libertarianism is not necessarily about increasing the role of for–profit enterprise in every aspect of our lives. Commercial activity is one alternative to statism, and an extremely important one. But it’s just one possible mode of cooperation, and it’s not necessarily the best choice in every situation.

Tech and the Environment

Valleywag has an excellent rant on the problems with environmentalists’ blackmailing the technology industry:

To ignore the wider benefits of the digital revolution is obtuse. Here’s the fundamental truth: the more human activity is pursued online, the less the environmental footprint. Apple’s pioneering of desktop publishing did away with much of the filthy print industry; its easy video-conferencing will make some business trips unnecessary; Ebay’s person-to-person marketplace bypasses cumbersome retail logistics; and Google is replacing inefficient physical libraries and filing systems across the world. Frankly, if a few computers end up in dumps, rather than recycled: so what.

I can understand why it would be convenient to go after Apple. Steve Jobs’ computer maker is more easily pressured than most companies, because of its pristine brand, and because so many of its customers are environmentally conscious. Al Gore, the planet’s foremost defender, is on the board. Apple makes things, which are messy. And, given the holy war against climate change, and the political correctness that stifles critical thinking, the company can’t defend itself.

The green lobby may choose to target high-tech companies rather than, say, the oil, coal or auto industries. The ex-hippies in charge of Silicon Valley companies are easy targets. But any victory, in converting them to the cause, will be purely symbolic, useful for fund-raising, maybe, but ultimately meaningless. This campaign against Apple is, at best, moral blackmail and, at worst, a cynical shakedown. Shame on them.

Thanks to Joe for the pointer. There’s a broader point here, that was best articulated by Julian Simon: in the long run, free markets and technological progress are good for the environment, because reducing costs often means reducing waste, and reducing waste often means reducing your environmental footprint. Technological progress and rapid economic growth also allows us to devote more resources to cleaning up the environment. Plus it leads to more people having the luxury to spend their time hectoring companies like Apple for their environmental records.

Google Gets Sucked into the Parasite Economy

The Washington Post reports that Google “does not intend to repeat the mistake that its rival Microsoft made a decade ago.”

Microsoft was so disdainful of the federal government back then that it had almost no presence in Washington. Largely because of that neglect, the company was blindsided by a government antitrust lawsuit that cost it dearly.

Mindful of that history, Google is rapidly building a substantial presence in Washington and using that firepower against Microsoft, among others.

This story just keeps repeating itself. People build companies, and then activists, competitors, and politicians notice that they have deep pockets. It happened to Microsoft, then to Wal-Mart.  When the parasite economy first started lapping at Google last year, I wrote this:

Founders Larry Page and Sergey Brin and many other wealthy officers of the company got rich the only way you can in a free market: by producing something other people want. A lot of brilliant people worked long hours producing computer software that hundreds of millions of people chose to use, in the midst of a highly competitive market that offered lots of other options.

But in our modern politicized economy – which National Journal columnist Jonathan Rauch called the “parasite economy” – no good deed goes unpunished for long. Some people want to declare Google a public utility that must be regulated in the public interest, perhaps by a federal Office of Search Engines. The Bush administration wants Google to turn over a million random Web addresses and records of all Google searches from a one-week period. Congress is investigating how the company deals with the Chinese government’s demands for censorship of search results by Chinese users.

So, like Microsoft and other companies before it, Google has decided it will have to start playing the Washington game. It has opened a Washington office and hired well-connected lobbyists. One of the country’s top executive search firms is looking for a political director for the company.

What should concern us here is how the government lured Google into the political sector of the economy. For most of a decade the company went about its business, developing software, creating a search engine better than any of us could have dreamed, and innocently making money. Then, as its size and wealth drew the attention of competitors, anti-business activists, and politicians, it was forced to start spending some of its money and brainpower fending off political attacks. It’s the same process Microsoft went through a few years earlier, when it faced the same sorts of attacks. Now Microsoft is part of the Washington establishment, with more than $9 million in lobbying expenditures last year.

Google has become a brilliantly useful company. We can’t imagine how we got along without it. I can’t even imagine how I got along without Google Desktop. Some of us appreciate that; others believe that becoming indispensable imposes obligations on a company. Google has started to find out how it feels to be the most flagrantly successful company in America.

Alas, Google seems to have taken to Washington all too enthusiastically. As the Post notes,

In its first major policy assault on a competitor, Google’s Washington office helped write an antitrust complaint to the Justice Department and other government authorities asserting that Microsoft’s new Vista operating system discriminates against Google software. Last night, under a compromise with federal and state regulators, Microsoft agreed to make changes to Vista’s operations.

So Google’s brilliant staff are now spending some of their intellect thinking up ways to sic the government on Microsoft, which is once again forced to give consumers a less useful product in order to stave off further regulation. The Post’s previous story on Google’s complaint called it ”allegations by Google that Microsoft’s new operating system unfairly disadvantages competitors.”

Bingo! That’s what antitrust law is really about–not protecting consumers, or protecting competition, but protecting competitors. Competitors should go produce a better product in the marketplace, but antitrust law sometimes gives them an easier option–asking the government to hobble their more successful competitor.

Recall the famous decision of Judge Learned Hand in the 1945 Alcoa antitrust decision. Alcoa, he wrote, “insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connection and the elite of personnel.” In other words, Alcoa’s very skill at meeting consumers’ needs was the rope with which it was hanged.

I look forward to more competition between Microsoft and Google–and the next innovative company–to bring more useful products to market. But I’m saddened to realize that the most important factor in America’s economic future – in raising everyone’s standard of living – is not land, or money, or computers; it’s human talent. And some part of the human talent at another of America’s most dynamic companies is now being diverted from productive activity to protecting the company from political predation and even to engaging in a little predation of its own. The parasite economy has sucked in another productive enterprise, and we’ll all be poorer for it.

Bill Gates’s Flip-Flop

In today’s New York Times, I make the case against software patents, comparing a 1991 memo by Bill Gates to today’s battle between Verizon and Vonage:

[Microsoft general counsel Brad] Smith has argued that patents are essential to technological breakthroughs in software. Microsoft sang a very different tune in 1991. In a memo to his senior executives, Bill Gates wrote, “If people had understood how patents would be granted when most of today’s ideas were invented, and had taken out patents, the industry would be at a complete standstill today.” Mr. Gates worried that “some large company will patent some obvious thing” and use the patent to “take as much of our profits as they want….”

It’s not surprising that Microsoft — now an entrenched incumbent — has had a change of heart. But Mr. Gates was right in 1991: patents are bad for the software industry. Nothing illustrates that better than the conflict between Verizon and Vonage.

Vonage developed one of the first Internet telephone services and has attracted more than two million customers. But last year, Verizon — one of Vonage’s biggest competitors — sued for patent infringement and won a verdict in its favor in March.

The Times has strict word-count limits, so I didn’t have the space to discuss some of the details of my argument. Here is an in-depth analysis of Verizon’s patents. And here is a longer discussion of Microsoft’s change of heart on software patents.