Law, Policy, and The Convergence
and Computing Technologies
March 7-9, 2001
March 9, 2001 PROCEEDINGS
Wireless Communications and the Emerging Mobile Commerce Space
DEAN JEFFREY S. LEHMAN: Welcome everyone back to the third day of the Park Foundation Conference. We have three wonderful panels in store today. I want to ask that in honor of the first panel, which is on wireless technology, I'd like to ask anyone with a wireless device to set it to vibrate rather than to ring. And I'm going to turn things over now to my colleague, the Dean of another co-sponsor of this conference, Steve Director who's the Dean of the College of Engineering.
STEVE DIRECTOR: Thanks Jeff. And since this is a wireless session I am going to turn off my cell phone, I'm going to turn off my Blackberry device, and make sure that my OmniSky device is on, though. Silence.
I'd like to welcome all of you to this session on Wireless Communications and the Emerging Mobile Commerce Space. Let me introduce the presenter and the discussants and then they'll all come up and speak in turn. I've asked the discussants to keep their remarks to between five and 10 minutes and our presenter will speak for 25 to 30 minutes so there ought to be sufficient time for questions.
The main presenter this morning is David Pine who's a graduate of Dartmouth College and the University of Michigan Law School. He began his career with a Silicon Valley law firm representing startup and high-growth technology companies and has also served as a state representative in the New Hampshire legislature. He has served as senior vice president and general counsel for Home Corporation, and also is vice president and general counsel for Radius Inc. In May 2000, he became vice president and general counsel of Handspring, an innovator in the hand-held computer industry.
The first discussant, somebody didn't pay attention (cell phone rings), is Ann-Marie Anderson who is vice president and general counsel and corporate secretary of Neomar, a company that develops and delivers wireless solutions, specifically for the enterprise market.
Next is Ronald Mann who's a professor at the University of Michigan Law School where he teaches various courses related to real estate transactions, commercial transactions and intellectual property. His current research focuses on software development, letters of credit and payment systems used in electronic commerce.
And finally George Vinyard who's a graduate of the University of Michigan Law School and is a partner of Sachnoff and Weaver, Ltd. in Chicago where he's the Chair of the Intellectual Property, Internet and Technology Practice Group. So welcome all of you and let me turn it over to David.
DAVID PINE: Thank you very much. I'm very happy to be here and have the chance to participate in the conference. It's been a long time since I've been at the University of Michigan and it's really a great pleasure.
In thinking about convergence I ran across this interesting photograph of a typewriter tied to a cell phone. So I think that's a type of convergence. But there's a lot of convergence going on in the industry, the wireless industry as computing power, wireless spectrum and stronger processors all come together to enable a whole host of new devices that we'll see in the years ahead. This next slide just shows some renditions of what things might look like some day. Very Star Trek-like in their depiction. Wrist watches with video, all kinds of interesting form factors. But I actually brought some technology today, which I thought I might show you. It will only take a minute or two, because I think it's a great example of convergence. If you forgive me for showing my company's own product, I'd like to show it to you. It'll just take a second.
This is the HandSpring Visor, PDA (Personal Digital Assistant). And what's neat about this PDA it has this slot in back where you can insert other hardware devices to expand the capability of the device. You can put in a music player or a global positioning system or a modem, and our most interesting one, let's first just see if I can do this. Here's the device today. Your normal PDA, which I'm sure many of you are familiar with. It runs the palm operating system. But the neat thing I wanted to show you today was our new module called the VisorPhone where you take this little module, here. This is the phone and we're going to see convergence now. You slide the phone into the back of the device and it immediately becomes a telephone. And the cool thing about it is that it really kind of gives the user a whole new user experience. Phones haven't changed a lot in terms of their keyboards in a long, long time. You can do a lot of things on your mobile phone but it's hard to do, hard to store numbers, hard to conference with people, it's very hard to access the Internet. So this is an early attempt by Handspring to try to integrate these devices. So I'll show you a little functionality and we'll get back to the presentation. I'm turning the phone on now and hopefully it will get service here, it's looking for voice stream. We are connected. So with a PDA of course as you know you have thousands of addresses. For example if I wanted to call my cell (there's my list of numbers, it's a little hard to see). I could go to my work number, hit it with my stylus and then hit dial, (I'm calling my office in California at the moment). And when this comes up I'll show you just how easy this thing is to operate. What it allows you to do is to pick some really interesting conferencing and putting people on hold and things of that sort. These buttons are a little hard to make out but I can put this call on hold and then I can try a second call, just as quickly as I'm moving the stylus around. I can look up someone else and call them up in my address book and I'll dial another number. My other call's on hold and this is dialing a second number. And once this comes up I can connect these calls together, I can talk in between the two calls. It looks like it's come up and we'll move on to the next feature. It's a little hard to see but I have two calls now. I could start a three-way conference by hitting one button. It's pretty hard to do on your normal cell phone. Another cool thing about this device is, it also has, let me hang up, something called SMS (Short Message Service). How many people are familiar with so-called SMS messages? Not too many. Well in Europe today in the month of December, last December, there were 15 billion short messaging system emails sent over telephones. And this device would allow you to do that as well. There's an SMS functionality built right in. I'll just show that and then we'll go back to the presentation. Well actually there's another thing. I'll show you this and move on. You can also have your wireless Internet, again very hard to see, but you could again connect wirelessly. So again an example of convergence today.
STEVE DIRECTOR: What was that first device called?
DAVID PINE: It's the Handspring Visor. The name of the device is the Visor. So yesterday at the luncheon Rick Snyder talked about the state of the technology environment and was wondering what the next big thing might be. Well a lot of people think it's this. They think it's wireless. I came across this quote from Morgan Stanley. It's just unbelievable; it's like the Internet all over again. Saying, "The mobile Internet is the most radical development since Marconi invented telegraphic radio communication in 1884. A confluence of technical leaps and devices, networks and applications is setting the stage for wireless to become the ultimate media." So there's a lot of excitement about this new technology.
Just to give you some sense for the numbers here because they really are quite astounding. Today voice is really the killer application on these devices. By the year 2002, 2003 a billion people in the world will use cell phones. Today in this country 110 million people or so use cell phones. In some countries in Europe, more people use cell phones than use wired line phones. Now the next phase is this emergence of data. We've already seen this to a great degree in Europe and Asia to date. I mentioned the SMS messages. In Japan, you may have heard about this i-mode service that they offer, which is wireless email and Internet access. Nineteen million people in Japan use that and it's a service just introduced in February of 1999. They add 50,000 people a day. In Japan more people access the Internet over telephone than they do over a PC. The emergence of data is happening.
And then the ultimate phase is when bandwidth becomes more available and people start to think about really intensive use of video and more broadband data. But one caveat, it does, after going through the Internet years, give one pause as to whether the hype is ahead of the reality. Because people still need to make money on all these technologies and it's a very expensive undertaking. When the major carriers in Europe bid for spectrum recently in the United Kingdom and Germany, they had to spend $35 billion and $45 billion in those two countries just to get the wireless spectrum rights. Then they have to build these networks. Meanwhile their phone revenues have been going down because voice has become much more of a commodity. So there are a lot real questions about how people will, use an Internet word, monetize these new technologies. But the technology is moving ahead as it always does and we'll see if the business models can stay up.
So the issues I wanted to cover today in terms of law and policy are threefold. I wanted to talk about first the role of standards in the wireless industry. I wanted to talk also about the scarcity of spectrum that we're facing in the United States, and also touch on privacy as it applies in a wireless world.
So when we talk about the standards, this becomes a real alphabet soup. It may be hard to read these little balloons but there's a lot of lingo and jargon in the wireless industry. I'll go through this relatively quickly, but it can be hard to digest. The first question I wanted to address is, why are standards important? Every time a new technology emerges there's a pressure for a standard to emerge. I think later George will speak some about the intellectual property issues pertaining to standards and I know Ann-Marie knows a lot about new, emerging wireless browsers that also has a lot of competition for what technology will emerge as the leader. But the benefit of standards, of course, is that consumers can have a similar experience no matter where they are. Manufacturers can build devices that will work on different networks. There are tremendous economies of scale when you have a standard. When a company like mine, Handspring, wants to develop a product like I showed you, today it only works on one network, the so-called GSM (Global System for Mobile Communications) network, which is the predominant network in the world but is not so here. It's actually quite arduous for us to develop a product for these multiple standards.
But I'd like to just go over those a little bit and tell you where some of these standards are going. When we talk about wireless technology these are some of the key terms: analog versus digital. Everything, of course, is moving to digital today and there's two types of digital standards, so-called TDMA (Time Division/Domain Multiple Access), which is time division multiple access where you share the spectrum based on time, versus so-called CDMA (Code Division Multiple Access), which is a different type of standard where messages are coded. Similarly, a key distinction in voice and data. All the wire line phone systems are based on so-called circuit switch systems. That means you have a dedicated line every time you talk to someone. On a packet switch system, which is the emerging system for communications and we've seen it today with cable modems and DSL, it's very different. You share the network, you share the information. So these are key standards as we go forward.
I'd like to just briefly review kind of where we are and how we got there. You may have heard the words 1G, 2G and 3G. 1G is the analog cellular phone; those are what started in the very beginning. Today we're in 2G, so-called digital cellular, and you see there, there's a variety of standards. The first one, CDMA, is a standard developed by QualCom and they have extensive, extensive intellectual property rights on this standard, which make it very difficult for other companies in the field. The remaining standards on the page are all standards based on the so-called time division of the code. So in the '80s we were in the analog world, in the '90s we started to move to digital. Going forward in 2001 where we are now, we're moving in to a new phase, so-called 2.5. This is where this packet notion will come in. I'll talk a little bit about that. And then ultimately you may have heard this word 3G or third generation; this is where the broader spectrum will come to be.
In the United States, again there are these different standards that have been adopted depending on what carrier you use. This is very much unlike most of the rest of the world. This graph will show you in the yellow, that's the GSM carriers, GSM subscribers. You can see that's really a dominant standard worldwide. But in the United States it isn't. We have these three standards, TDMA, CDMA and GSM.
So I wanted to pause for a second and really ask us how did we get here and what does it say about regulation of telecommunications? In Europe there was, in the early days, there were a lot of competing different standards in the analog side of the business when it first emerged. And there was a real concerted effort by industry and government to get rid of these disparate standards and really unify around one. So in the late 1980s the European carriers, with some prodding by their governments, adopted this single standard, the GSM standard. The results were much more rapid adoption in Europe in the early days of the telecommunications industry. Now the United States on the other hand, we would never do that. It's the Wild West. Every standard for themselves and let the market rule. So we just let the standards fight amongst themselves and the result is we have non-interoperable standards in the United States. Now with the passage of time that has become less of a concern because many of these carriers have built networks that are nationwide in coverage. But it was an issue in the beginning of the deployment of these technologies.
Going forward, again this next step is this 2.5G, I won't spend too much time with all this detail, but the whole notion behind 2.5G is that you have persistent access, that you're always connected. Today when you want to reach the Internet from your home or from a wireless device you have to dial up. But this 2.5G will allow you to always be connected, so you can have information pushed to you or you can use the resources when you need them. It will also bring greater bandwidth. Today's world it's 9.6 kilobits, 14 kilobits. We're going to move to a road with more like 64 to 100 kilobits and there's additional technologies in this phase that will take that even further. So that's really where we're kind of heading now.
Then the final phase is again this so-called 3 G where two standards are emerging. The so-called WCDMA (Wideband Code Division Multiple Access), which is wide band CDMA, and the CDMA 2000. Again this is a standard and it's really emanating from QualCom's work. So at the end of the day we'll still have two flavors of systems. Analysts foresee that the WCDMA standard will be adopted in Japan and Europe while the CDMA standard will be more popular in the United States and Korea.
I'll let Ann-Marie speak to some of these notions, but just like there are competing standards for phone protocols, there are competing standards for wireless browsers. HTML is of course the language of the Internet, Hypertext Markup Language. But there's a whole new standard that's developed which has quite a bit of following called the Wireless Application Protocol (WAP). And there are other protocols such as in Japan with i-mode. So, again, we see a lot of different standards trying to emerge.
So just to sum up this section. Again, I think it's an interesting case study in how technology has evolved and the pressures that are in the system to create standards. It's interesting to observe how different government regimes have reacted to those evolutions. A very much hands off approach in the United States while a little more active approach in other parts of the world.
DAVID PINE: My next topic is spectrum scarcity. Recently, former chairman of the FCC (Federal Communications Commission) calls this the most important issue facing the wireless Internet today. Now spectrum, or radio frequency, is a finite resource. You can't simply dig up the ground and put more wires in the ground. And we use a lot of it. We have TV stations, radios, wireless phones, satellites, military uses. And there's a lot of concern about whether we're going to run out. And there's also a lot of concern about the need to harmonize with, again on the standards issue, to harmonize with some protocols and standards that have been developed on an international level. Importantly, the World Radiocommunications Commission, last summer, they adopted a number of proposed standards for this new three 3G network. But sure enough for the United States it turns out that most of these spectrums are already occupied. For example, analog cellular carriers are in some of the key spectrum that the world body suggests that we use. The military, very importantly, takes up a large segment of this very desired spectrum and, of course, they're not terribly eager to move off that. Similarly, fixed wireless operators have some of this spectrum and universities and churches have some of this spectrum, too, which led one analyst to say that when push comes to shove, universities and churches may not have the lobbyists they need to go up against some of these other interests. And then finally, you may recall from years past, the debate about high-definition television. Well that's yet another piece of spectrum that many people feel is given away to the broadcasters. The deal that was basically struck was that the broadcasters argued that they had this need for this additional spectrum and they would return spectrum once they migrated their systems from analog to digital. Well, as we all know HDTV (High Definition Television) hasn't gone very far and nothing will be happening there in the near term, so there's a great deal of spectrum there that is idle but is essentially locked up with broadcasters. So there's great political battles going on about that. When you think about this spectrum scarcity and these competing interests it really points to the political nature of these allocation issues. But this is a critical, critical matter for the United States as we go forward.
So to try to solve this a couple things have happened. President Clinton a couple weeks before he left office, probably in between doing some pardons or something, passed a executive order which urged the executive branches to work together to try and solve this problem. In the United States it's particularly complicated because there's two different government agencies that deal with spectrum. There's the FCC that deals with commercial spectrum and there's the National Telecommunications and Information Administration (NTIA) that deals with the military spectrum. So the goal of this order was to get these organizations to work together to see if they could figure out a way to allocate this spectrum. The issues that the government is now considering are, can you really relocate people from one spectrum to another and how would you deal with the economics of that or could these bands potentially be shared? The technical issues there can be quite complex.
Of course, there's always the private market again. Some interesting ideas have begun to emerge there. Chairman Kennard during his tenure encouraged the rule making that would encourage a private market for spectrum. So that it could be traded. This would help in terms of making sure spectrum is utilized efficiently. It might not help in making sure that our standards are compatible with the rest of the world. But there's also technical solutions. For example ultra wideband wireless is a new technology where you use a lot of spectrum but the power of your signal is so slight it appears that other signals would be background static. But it's just a very ingenious way of dealing with spectrum shortage.
So this is an issue that you may not read too much about in the press but it's going to be a critical, critical one here in the next years. And one thing that's very unclear is how the Bush administration will deal with it. In particular, there may be some tension between the Bush administration's support of a stronger military and the desire to free up some of the spectrum because, again, a lot of the spectrum is dedicated to military purposes.
My final topic, which we heard quite a bit about yesterday and I'll just touch on briefly, is privacy. There's some very interesting and special privacy concerns when technology is wireless and people are mobile. This also can be entitled the law of unintended consequences.
The FCC was concerned about people in emergency situations. It turns out that about a third of emergency calls are generated by cell phones. So rules were passed that said within timeframes evolving over the next few years that everyone carrying a cell phone, their location has to be known to emergency service providers and you have to be able to identify somebody's location within 300 feet with 95 percent accuracy. So it was a noble idea because you are really serving a social good. And interestingly enough of course the carriers thought this was terrible and they resisted it because they were fearful of all the extra cost it would entail. But they've changed their mind now because all of a sudden people realize that data about where you are is extremely, extremely valuable. So an industry is emerging to try to commercialize this. I'll talk a little bit about some of the ideas people have. For example you could be going by a Starbucks and get a coupon that maybe you should go in an buy yourself a discounted coffee or maybe a friend of yours is a block away and you get an alert that your friend is there suggesting that you get together and go to some local restaurant. Other ideas of course are travel-based information. When you're on the road and you're looking for hotel reservations or weather reports or driving instructions, these are all things that are very localized in nature. One, again it's amazing what people think of, there's a company called Digital Angel and their idea was that they would put little chips in people, in children so that you'd always know where your children are. People didn't like that idea so they're going to try and use wristwatches now.
But the fear here is, what's going to happen to all this data? Where you spend your time is very sensitive. Could someone in industry compile a profile of you based on where you go? In a recent New York Times article there was a story about a small businessman who ran a fleet of trucks in a city and he had these GPS (Global Positioning System) systems in all his trucks and he told his people basically "I know where you go." So I guess one of these guys didn't believe him because one time when he was supposed to be delivering goods he was at some kind of a strip show of some sort; boss saw it--gone. So this data is very personal and people have an expectation of privacy about it. So what will happen? There have been responses of course by industry and government already. And I think it's illustrative to observe the degree to which industry has learned from past experiences. You're probably all familiar with the opt-in versus opt-out notion when it comes to privacy rights. Industry associations in the wireless world are basically saying this has to be opt-in. You have to agree that this data can be collected. In fact, the wireless advertising association has gone so far as to say that it should be a confirmed opt-in, which means that once you give your consent the carrier would have to send you a notice confirming that you did indeed do that. So industry's trying to preempt legislation in this area. But already, of course, legislation has been submitted in this field as well.
So those are my remarks. I hope I gave you some taste for the industry and some of the unique problems that it presents. I appreciate your time.
ANN-MARIE ANDERSON: Hi, I'm Ann-Marie Anderson, Vice President, General Counsel, Corporate Secretary of Neomar. David did such a brilliant job of covering all of my issues that I thought for a bit and I think it was a good thing. My route, obviously I'm a somewhat recent law school graduate, 1994, is pretty interesting. So I'm going to share a little bit of that with you, tell you about my company, what we do and then hit upon probably what's the most important issue that my company Neomar actually solves, which is security end-to-end for wireless transactions that David touched on a little bit.
My background, I'm one of yours. I grew up in Lansing, MI, Phi Beta Kappa from Albion College, Michigan Law School, followed my father and my sister to Michigan Law School but never did I expect to be in Silicon Valley, which explains my casual dress. I guess I'm the only true representative of Silicon Valley here today. I followed the big firm route. I was at Squire, Sanders and Dempsey until recently. It's about 1000 or 1100 lawyer firm and caught, the high-tech fever and have become evangelic on it. Read Andy Groves' "Only the Paranoid Survive" and "Silicon Boys" and was just convinced that the new economy was driving everything and wanted to find a way to combine my interest in law, kind of a DNA (Deoxyribonucleic Acid) thing in my family, high-tech and business. So I headed out to Silicon Valley and joined Neomar and at the time that I joined the company we were under 30 employees and that was just nine months ago. In the last nine months we've tripled in size, tripled in valuation and nearly tripled in revenues, which is a lot. In addition to my GC (General Counsel) role I also hold most of the functions for COO (Chief Operating Officer) and CFO (Chief Financial Officer) so you can imagine it's been quite a ride and exciting but a little overwhelming. I got to see it all. I rely on our outside counsel heavily you can imagine, Wilson Sonsini. We've done the pounding of the pavement on Sand Hill Road trying to convince investors that our wireless technology is really great. It's worked. I've been involved in raising $20 million to date and that's just in the last 10 to 11 months. I just closed a round of $15 million so hopefully developing a lot of new skills.
I'm going to tell you a little bit about Neomar. Founded in July of 1999, couple of PhDs in pharmaceutical chemistry and a couple physics majors who decided that wireless technology was imperative, I've got my RIM Blackberry wireless device here; I know that Dean Lehman swears by his as well. Dean Lehman and I trade messages on our RIM Blackberrys. Always on, was the device to have. So they got together and developed the browser a la Mark Andriessen but for the wireless device as well as the translation gateway. So we are really a two-product company. We've got the gateway and the browser. The way that works is that signals are sent out from the Internet, go through our gateway either located at our NOC, (Network Operations Center), or a NOC on the customer's site. For example one of our clients is CSFB, (Credit Swiss First Boston), and the NOC could be located there. It's translated, turned into wireless markup language, we are open standard so we use WAP (Wireless Application Protocol) where it could be any standard. I think David Pine talked about that. After it goes through the gateway, it then looks for our browser which is embedded on this RIM Device. Our browser is RIM compliant and Palm compliant. Probably be operable on WIN CE and other devices soon as well.
So that's kind of the history of our company and what we're doing. I'm going to try and walk you through, I'm not an expert at doing this but, give you a little feel for Neomar. This is not my laptop so hold on. I've got so much I can talk about I'm just going to keep on talking. You get a feel for our website and you can pull it up if you like, www.neomar.com.
I'm going to talk a little bit about security. Neomar, I believe, I'm pretty confident in saying this, is the only company that has end-to-end security, which is what people really clamor for. Yankee Group, the big Boston consulting and analysis firm has said that 75 percent of all folks who do online brokerage transactions say that the most important thing, and the biggest thing missing, is having a secure transaction. The way security works end-to-end is, again, you need it on both ends. You need security, and security's defined as the software that scrambles and unscrambles through an elliptical curve, the data and information as it comes in. It comes in through the gateway, and then has to get scrambled in between the web and the gateway. Then as it leaves the gateway it has to get scrambled and unscrambled again before it actually goes out to the browser. Sounds easy but it's really not that easy apparently because we're the only ones that are doing it and that's probably the biggest concern right now.
I want to differentiate a little bit about what we do versus mobile commerce. I know this segment is dedicated to mobile commerce, which is really the deployment of consumer applications out to consumers to purchase goods and services. What we do at Neomar is critical business applications to enterprise consumers so it's browsing the Internet but also the corporate Intranet to get out critical information to company employees who are out in the field.
The last thing I'll talk about really quickly is what I think are about the nine or ten hurdles that are going to have to be faced in the next few years. David talked about some of them, to get universal acceptance and deployment of wireless Internet. I think the first one is better and faster coverage. I'm thrilled with my Blackberry but obviously it's not the fastest thing in the world. The packet switching networks, which are just being deployed, David talked a little bit about that. It's the burst of packetized data that go through different channels and allow you to have the always-on experience; are going to improve things but again better coverage and faster speed are going to be a big issue. Two, multiple technologies. We've talked about this a little bit. There's so many different standards, so many different devices, operating systems providers that there's going to have to be some kind of convergence or unification I think to get a mass deployment. Third, is the spectrum issue and I think we talked about that in great detail. Four is the big initial capital outlays. In addition to starting a new business, which I've just learned all about in nine months. In order to get a spectrum license you have to pay a great deal of money. I think that some folks estimate that to get a broad spectrum license might be in the high hundreds of millions, maybe closing in on a billion dollars.
The last important one is limiting mobile Internet content. The user experience on PDAs right now or mobile devices is not incredible. You get kind of limited access, some of it is web clipping, it's not a full stream web or Internet access like you would have on your wired computer. That benefits some companies if they want to have proprietary knowledge or ownership over their customers by owning certain content but I think we've got to get away from that. I think that companies like Neomar and others that are trying to get out more information on the Internet and a wider experience may lose money in the short run but clearly would attract more users with widespread Internet use. It's going to be improved. That's it. Thank you.
RONALD J. MANN: What I'm going to talk about is, builds on part of David Pine's talk about mobile commerce and I'm going to talk a little bit about the place where you can see mobile commerce really as a significant part of the economy already to get a sense for what we might see here in few years when we start to have it here. This is basically what I did this fall because I spent the fall in Japan and this is the main thing that I studied over there. So the first thing, not to disagree with David, maybe I got my statistics two weeks later than him. It's growing so fast. There are now about 30 million people in Japan that have Internet-enabled mobile phones. This is in a country with a population of about 125 million. We're very proud and self-congratulatory that 58 percent of the people in the United States can access the Internet. Okay, well a quarter of their people access the Internet over mobile telephones and I would suspect that not anyplace near 10 percent of the people in this room, which is not really a representative slice of the United States, have Internet-enabled mobile devices already. It's just a completely different world.
And of those people, and not of the 30 million because this was several months ago, and several months ago there were probably only 10 million people on i-mode, about half of them are buying things so this is a market for Japan, more people buy things on cell phones on the Internet than buy things from computers on the Internet. Now the reason for that has to do with the fact that their land-line telephone costs are several multiples of what they are here, so ordinary people who aren't multi-millionaires can't have Internet access at their home. So for most people their only experience with the Internet, aside from the desktop computer at their office, is their cell phone. They buy things with it constantly. Obviously, as someone suggested, one of the main things they buy is information. Here the primary Internet merchants are people who are selling to people who sit at their desktops in their offices, their houses. People who sell information have not really succeeded very much yet. Not that they aren't going to succeed, it's just been very slow. And there are a variety of reasons for that--some of which have started to recede but which have hindered it in the past. One is there just is this obvious free-rider problem, which is if you sell someone a piece of information if it's really, really valuable then fairly quickly they can just sell it to someone else and it's hard for you to really capture the market of everybody that wants to buy it from you. Sort of the flip side of that problem is that information isn't valuable for very long. You can't charge somebody a lot for something today and then sell the same piece of information tomorrow for the same price. The price is going to degrade very rapidly. A related problem, which is one that I think is really going away, but was a problem in the design of these things, is the value of information that you're selling to people given these problems is going to be fairly low. And until very recently the payment systems for paying for things that might cost 50 cents or a dollar or two dollars were just really not compatible even with desktop computers, much less with a cellular telephone.
Now, in Japan information merchants are very successful. And this is not because they have cell phones that provide a very rich Internet experience. It's much like the previous speaker suggested, it's even more clipped. The screen on an i-mode, it is bigger than a thumbnail, but it's about the size of the mouse pad on this computer. It's a very small screen, it is a very impoverished experience, but people still pay for it. Since it's Japan certainly the highest revenue that people get is purchasing information about these various characters. Sanrio characters, the children's cartoon characters, and you can laugh and say that's not really Internet commerce but that's easy for you to say because you're not making the money. The people that sell this stuff, five million people in Japan buy this stuff every single day, well, then it's a significant market. People also buy up-to-the-minute news information. They get stock market information, various things. I don't know what I was thinking when I did this slide--the thing that all the people in my office did is many people do all of their banking, there's a lot of financial services that's done by mobile phones, this has to do also with the fact that in Japan so much of payments are made by bank transfers because people don't use checks, and you can do this all from your cell phone. Very few people in the United States, I think, now conduct their banking at all over their cell phone. In Japan, for executives this is just very common. All the people in the office that I worked with did most of their banking and paying bills either with their cell phone or with some similar type of device. Potential markets, many of the things that Ann-Marie talked about, these things as simple as getting directions to places, this all hinges on global positioning systems and similar things. The location data is very valuable and people in Japan are already starting to use it some. Reservations at restaurants is another application that seems to be making headway there.
Now as this develops what you see is that in Japan the Internet is developing somewhat differently than it is here as far as the commerce for consumers because a much larger share of it is mobile than there is here. For my particular area of research the most interesting thing is what this says about payment technologies. There's a much more urgent demand in Japan for some way to pay for things by micropayments than there is here because not very many of us are buying things with our cell phones. We aren't paying for those things very much. And in Japan there's millions of people that are doing that. So they've had to respond to that problem earlier than we have.
The other thing's that's most interesting is, it affects the design of the cell phone. The cell phones in Japan, not only does everybody have them, but they're very small. It has to do also with they're very stylish and they come in pastel colors of various kinds and they're not going to get bigger I think. The problem is they're so small that it really rules out using a traditional credit card or debit card as a payment device because they're so small you can't put a slot into them to use a card reader. The cell phones in Europe, which many of you will be familiar with, those are a perfect size for using credit cards and indeed the cell phones in France already have a slot into which you can insert your credit card and, with the proper encryption technology, you can use your credit card to pay for something on a cell phone. That's not going to be able to work in Japan because their phones are just too small. They will have to go to some alternate device. That's really all I had to say.
GEORGE A. VINYARD: My name is George Vinyard. I want to thank Dean Lehman and Dean Director and the other sponsors of the conference for the opportunity to speak here. It's so far been a tremendous experience, and the interdisciplinary aspect is good for reasons that I'll go into. As an overview, I'll try to make some general observations. I, too, agreed with most, if not all, of what David had to say, and the other discussants. Along the way I'll try to throw in some specific comments about the presentation but I will focus most of my remarks on standards and intellectual property.
One of the things, by way of general observation, that I've noted and I always thought this but it's really been brought home here, is that this topic is huge and it's complex. It's very difficult to get any kind of overview and get your arms around it. It's always nice, I think, when confronted with that kind of situation to have a nice pithy statement that has the ring of profundity about it to kind of sum things up, at least superficially. The one that came to mind for me, in this context, contemplating the way our inevitable limitations in our own personal experiences and perceptions, perspectives and knowledge restrict our vision, I heard from an engineer, very appropriately. I forgot his name but he said something like "if your only tool is a hammer every problem (he could have said every opportunity), begins to look like a nail." I think this is even more true if you happen to make your living as a carpenter.
I'm not a carpenter, but I'm a lawyer, I used to be a corporate lawyer, maybe still am. I'm now an intellectual property lawyer who never prosecuted and has barely read any patents, but that doesn't stop me. More relevant for this purpose, I took a little detour in 1994 when Ann-Marie was graduating. I went to work at a company called U.S. Robotics at a very exciting time. At that point it was already a $200 million a year company, an overnight success after 17 years in business. During my first year it accelerated to $500 million and three years later when 3Com bought us it was at a run rate of about $2.25 billion a year. That's probably less now because of Moore's Law and the pressure to decrease cost in the industry and the greater integration of the industry. But that gives me a unique perspective, I think, on some of the issues relating to standards and intellectual property that I'll talk about a little bit later and generally a perspective on the industry from the network equipment side.
Another thing I've observed, generally, is that the use of language is really treacherous in this kind of discussion. It's easy to get caught up in the hype and the excitement of it and the title of our little presentation here about wireless communications and the mobile-commerce space reflects this. I'm glad to hear there is some wireless mobile commerce somewhere, I think it's in Japan. And even in the title of the conference generally, the reference to convergence suggests an imprecision that's probably understandable for a lot of reasons, but we need to keep it in mind when we're really trying to figure out what's going on. Convergence versus integration. I learned about convergence talking about the convergence of functions onto a single network. Take the data network and the phone network in an enterprise and put them over the same network; put those functions on the same network you don't have to duplicate. That's a little different for me than integration of products. Putting more features and functions into ever smaller, more portable boxes. And I don't know whether that makes a real difference but it is a technical imprecision in the use of the language.
Privacy versus data protection. It's instructive to me that in Europe they talk about data protection laws. In the U.S. I think for political reasons, we have a rhetorical device. Privacy rings bells with people, so we call everything privacy even if we're talking about public records of public acts. Somehow we have a privacy expectation or we want to make people think that it is there, and of course there's very good reason to be very concerned about protection of data. Calling it privacy may work politically, but it may obscure some of the analysis.
Hype is everywhere. Everything's bigger, faster, more profound and the danger there is you're focused on what's hot and the next big thing, and you lose track of some of the basics. And buzz gets stated as fact. One of the tip-offs for me is the short list of applications that people give and I'm glad to hear there are more things happening in mobile commerce. But for a long time, when we at U.S. Robotics bought Palm before it had launched a product, we had a vision of taking a handheld device, making it important and then making it mobile, using a modem of course. It took a while for that to develop but it's finally here. Along the way you kept hearing over and over that people can be anywhere and do anything at any time. But mainly the examples that were given were that you can get sports scores or you could get stock quotes. So I kept thinking, "well how big is the market of day traders?" Turns out it was bigger than anybody expected, Mobile day traders. Still I'm not sure. How big is the market for sports scores? Well there are sports nuts and then there are gamblers. Now we talk about travel directions and global positioning, and that's the market of lost people. It may be a bigger market than we think, too, I don't know.
Wireless is clearly huge; it's all over. And the number of cell phones is staggering. It's not clear exactly what's emerging though and it's not clear how much wireless commerce there will be, but what seems clear is that it's contextual. Part of it is what you want and need from the wireless system. These different standards are also different technologies of transmission and they have different capabilities to some degree and they may or may not be adaptable for what we want. What we want may be accessibility, may be flexibility. Wireless is inside the enterprise, too. If you can use infrared to communicate between devices then you don't have to build in wiring, you've got a lot more flexible space. Just the use of the word "space" in the title--"Internet commerce space" is a little bit fanciful. I think the most relevant consideration today may be physical space. Getting back to discussions the other day about clothing and chairs, we had speakers who said the real thing is what kind of chair you're sitting in or what kind of clothes you wear when you're on the Internet. I think in mobility it's the shirt pocket. The real thing is that the device has to fit in your shirt pocket. In Japan, aside from the cost of the network, more people may be mobile because they have less space at home to spread out with that population crammed on small islands. Really important, wireless is going to be huge in places where there are no wires at all. That's where it's the cheap way to enable communications.
So two final things in the way of general observations. One is that Moore's Law doesn't apply to everything in nature and power consumption and storage is something that's important in this area. There's a small company in Chicago that I would have worked with. This is a prototype of their product--a holster for your cell phone that doubles the talk time by doubling the power. It also manages the power consumption. A lot of things in wireless phones even within the home, a lot of the failures, have to do with people not understanding how the power consumption works. A lot of the returns early on when those products were launched had to do with battery problems.
Finally, I don't know what the implications may be, but we haven't spent very much time at this conference talking about tax systems and the policy implications of all of this for taxes. There's been a lot of activity. States are very concerned just about capturing sales tax. I don't know if the added element of mobility even makes that more dramatic, but you can imagine with more people telecommuting and just being mobile, this may affect sales taxes and even income taxes. People will start having remote offices near states where there are heavy income taxes; put your employees in the state next door and let them work remotely.
Standards. A lot of it was very well covered by David and I don't have a tremendous amount to add but I'd like to reinforce it. Standards are hugely important in everything we do, but they're often invisible. They're most noticeable either when they're lacking or they're dysfunctional. We wind up confronting stupid old standards. When I was in Chicago they replaced the feed from the water main to my house and they did it with lead pipe. And that was because it was required by the plumber's union, in effect, because it's required by the building code. That didn't make me happy, but most standards are very functional and they're invisible because they work. And they're essential because they accelerate market growth; they reduce product cost many different ways; they increase, actually, competition in certain areas in terms of innovation in things that are peripheral to the standards, encourage people to bring in complementary products. And there are economies of scale. They can save lives. You want high standard bolts in your airplane, holding it together.
And in a network environment, they're absolutely essential because of the importance of connectivity and interoperability. At some level, the systems just won't work at all if there aren't standards. Where do they come from? There are two big categories. De facto standards, some of which are prehistoric, have to do with the size of people's hands, what the convention is on how they put buttons on clothes and pockets and so forth. They are commercially successful, basically, just winning the race to be first and to establish what becomes a standard. Sony Betamax and VHS (Vertical Helix Scan), are illustrative of that. This is also illustrative of the fact that having a standard is often more important and more valuable than having the best standard. At least that's the way it's characterized. And at some point customers require certain standards to be met. Customers set the standards.
The government also does that a lot. There are government standards established for contracting and these influence whole industries. These are de jure standards. They might be private collaborations enforceable by contract, also, and I would like to say more about this in a second. IP driven standards, open source type standards, where the enforcement mechanism is essentially intellectual property law. There are quasi-official standards established by trade and professional groups. And then there are official standards, some of which are voluntary and some of which are legally mandatory. Building codes are mandatory, the International Telegraphic Union (ITU) recommendations are theoretically legally voluntary but once they're set, because they're international and it's important to have telephone communications worldwide, they become commercially mandatory.
The legal policy questions are multitudinous, and I think, are going to get more important and get more attention going forward. Who sets the standards, what processes are used, who enforces them, how they're enforced and how they get changed? One of the things about standards is they can be a bar to innovation in certain areas and they're very difficult to change because so many people get so much invested in them and the number of people who have a motivation and a will to change them is much smaller. What's the proper role of government in establishing, enforcing and changing standards as a customer, as a legislative forum and as a judicial arbiter? Standards play a role in tort liability, and, of course, they have implications for antitrust law.
And finally, there's intellectual property law. What is the impact of standards on intellectual property law, and what are the implications for standards that come out of intellectual property law? I think it's mostly a patent game, in this area at least, but there may also be copyright impacts.
A couple things about copyright that I think are interesting. There was a comment the other day about how maybe we should have shorter duration for copyright protection for software. One of the things to consider in looking at that is whether that would weaken the movement toward open source standards, Linux and others where you get it for "free" but basically if you want to use it you have to agree to do certain things in terms of how you share developments. A long period of intellectual property protection that gives an enforcement mechanism to the people who want to keep the source open against those who might try to "game" the system is worth contemplating. There are some problems too, of course, in copyright law having to do with clarity about what counts as a derivative work when you're talking about software, and confusion in general about works made for hire and third-party creation.
In patents, there's a lot of impact on this whole area generally and on standards in particular. Patents are a very high-stakes game with tremendous uncertainty about the scope of coverage, valuation, and enforcement against other competitors. Who owns it; what are their motives? There's incredible complexity in this area. A lot of patent thinking appears to be based on a fairly simple commercial model, like pharmaceuticals where there's one patent, one product, one-to-one coverage, that's it. In communications systems the technology is massively complex, the markets are new and developing, very complicated and difficult to understand. The substantive patent law, of course, is complex, but you get an added effect of stacking. A PC is an incredibly complex device--You hook it up to a network, it's an even more incredibly complex system and there are literally hundreds of patent holders and thousands of patents implicated. And then standards are changing so fast that what may be an important feature today that helps sell the machine becomes a secondary feature later on but it still needs to be there for backwards compatibility or for basic functionality. So how do you value that?
Well, when it comes to making standards it's an incredibly complex game that gets played. The people who are the players often have big patent portfolios. There's a lot of jockeying back and forth because the question is if a particular piece of technology gets built into a standard, so that everybody has to use it in order to comply with the standard, what does that do to their vulnerability to patent attack. Many of the standards organizations don't really try to answer the question of valuation, they simply want to guarantee access. So the International Telecommunications Union, for example, will require participants to disclose whether they have a policy of licensing their patents that are essential to the practice of standards on a non-discriminatory and reasonable basis. And everybody, of course, says yes, but they won't tell you what they think reasonable is. Sometimes they don't know because the patents haven't issued yet because the patent system is bogged down and underfunded and understaffed. So you wind up with the standard getting set and three years later the patent's issued and you figure out then what counts. And of course a lot of the standards are fairly arbitrary so there's a lot of back and forth horse trading about which big patent holders get their technology into the standards. And then what do they do with it, what do they think is reasonable?
I'm running over so I'll stop now, but suffice it to say that there's a tremendous amount of uncertainty and unsettled areas of law in terms of what the remedies are when you have patent coverage of essential standards. And you have a very uneven playing field in terms of the patent holder who wants to enforce against somebody who's already adopted the standard and is required commercially to follow it. If the patent holders have the ability to shut somebody down or extract a high price pretty soon in this area you could have the intellectual property cost vastly outpacing the actual cost of production of the product. And that is something that I think will need to be resolved. Thank you.
STEVE DIRECTOR: We have several questions. The first one is, how do you see the emergence of interaction or interactivity between mobile and stationary devices, i.e. in particular Handspring device and the television? What are the standards emerging in this area and what kind of regulations are involved in terms of spectrum and any other.
DAVID PINE: When I think about the Handspring devices, we're so focused today on mobility of the device, we really look at it as a separate piece of hardware than as something that you'd have on your desk. I'm sure many of you know you see people always trying to add more to the small Palm or Handspring device. Like an expandable keyboard to make it more like something you might have on your desk. In my experience I really see these devices going in a separate direction from those devices on your desktop. And those devices, I think, will have very different purposes. The wireless world in my opinion will never catch up with the type of capability you can have with a wire into your home. There's tremendous data rates possible there so I think there will always be some distinction. I think they'll have different purposes.
STEVE DIRECTOR: Do you expect Handspring devices or others like it to use Bluetooth technology?
DAVID PINE: Blue tooth is an interesting concept, which basically creates what people are now calling a personal area network where devices can communicate to each other so that if you look here in front of the room with all these wires everywhere, you can barely walk, that would go away. The devices would have, again, another standard so that they could communicate. That actually is an interesting point in that there's an example of where the mobile device would be linked to a more stationary device. There's some beginnings of that today, like at some airports, as I understand it, there are these wireless "stations" where you can essentially link your PDA to these special networks. So there is some of that coming.
STEVE DIRECTOR: Technology is becoming global but government law and spectrum are all local or at least national. What steps are being taken internationally to address this convergence of global commerce and technology? It's an open question to anyone on the panel.
GEORGE A. VINYARD: I don't know what steps are being taken but there is a kind of infrastructure that could be used. With the proliferation of standards and technologies, there's also a proliferation of standards bodies, or ad hoc groups, a lot of which are pretty international but there are some that are officially so. The International Telecommunications Union has been around for a long time. It was there for the telephone network which, had to be interoperable at some level internationally. The biggest problem is, it's a cumbersome process and it's also one that, perhaps it's a problem, is fairly dominated by a few very large companies that have people to send to all these meetings and have a long history of very successfully navigating the waters there. There are a lot of games that get played using intellectual property as leverage and basically in some cases using stalling tactics. Frankly, there's a big advantage in being to market early and so sometimes it's in the interest of companies not to have a standard very fast because they need to catch up if they happened to bet on the wrong technology earlier. There's just a lot of that kind of stuff that goes on behind the scenes. Maybe looking at those and trying to develop better processes and a little bit more governmental regulation from the standpoint of having an open process that's more timely and less dominated by industry, although with plenty of industry participation, would be something that would be worth doing. There's been some talk, but pretty much just talk, about developing some kind of a mechanism for sorting out the intellectual property aspects on a collaborative basis and if that were done, if there were structure for that, it might speed things up a little bit.
STEVE DIRECTOR: Okay I'm going to read this question the way I think it was meant. If not the person who wrote it please jump up and correct me. Can you distinguish Smart Card payments versus credit card payments? I think the criteria that they'd like that distinguished is timing, in terms of timing of funds transferred, the players involved, the card readers that are used and government regulation.
RONALD J. MANN: Not in five minutes. But I can say a little bit. There's really two separate concepts for smart cards when you use that term. Literally, a smart card is just a card which normally, for obvious reasons, tends to be precisely the same configuration as a credit card, which is enhanced with a microprocessor. So, for example, you could say that my University of Michigan identification card is a smart card because it has a chip in it. If you purchase something with this card, the payment would be made effectively with what is a stored-value system. You could buy something at the Wendy's in the Union across the street. In that transaction, the way that the funds are being transferred is essentially the person has loaded the money onto the card by giving the money to an entity related to the university. And then when Wendy's provides the transaction data--which is some bits that they get off of your card--to that entity they'll get the money for it. There's relatively little government regulation of that transaction and in particular there's currently no regulation whatsoever on the people who are allowed to store the value, which is to say that it's not required to be banks, which is to say that there's no deposit insurance or other protection for the people that put the money onto the systems. It's also true that the systems are not commercially successful and that the largest systems currently are ones like this that are limited to very small environments almost entirely located on universities or military bases. In the short run, the likelihood that there would be a larger commercial use of smart cards relates to credit cards. In this country in the last three months, several of the largest issuers have started to issue enhanced credit cards. Fleet, Providian and First USA. So I got my Fleet smart card just the other day. Unfortunately the software really doesn't work with Windows 2000 and I suspect that's a problem for them since you can't use the software apparently on Internet Explorer. That's sort of a problem for its wide use at the moment. On that card, the integrated circuit is a device to enhance the security of the credit-card transaction.
Credit cards in this country are overwhelmingly the dominant source of payments on the Internet. In other countries they're a large, not dominating source, but they're also wildly insecure. Visa and MasterCard don't really promulgate the data widely because it doesn't reflect very well on their systems, but the rate of fraud on Internet transactions is probably around 10 to 15 percent. Compare that to a face-to-face retail rate of fraud on credit cards of about six-tenths of one percent. So six cents on a hundred dollars and a rate for debit cards of about 0.3 cents on a hundred dollars and $15 of fraud on the Internet is just very difficult. And merchants have to pay for all that because that's just the way the system's set up. If you have a smart, a chip-enhanced credit card with which you make the payment, the idea is that the person when they put the card into a card reader, which I have attached to my computer, you will enter a PIN (Personal Identification Number) and then the card will only activate and allow the transaction to proceed if the PIN that you enter matches the PIN on the card. It might be easy in a few years to use a biometric identification device but the point is that the chip in the card allows you to authenticate the transaction and it's expected that it would lower the fraud rate to something like the rate on debit cards, which is 1/20th the rate of credit cards and perhaps a thousandth the rate of fraud on Internet transactions. But those transactions are just processed like credit-card transactions and so they have the regulations credit-card transactions do, which is principally the Truth-In-Lending Act (TILA).
STEVE DIRECTOR: Okay, thanks. Do you see a new e-commerce/military board being established to work along with the FCC to cover the spectrum cost and compatibility issues that were discussed today?
DAVID PINE: I'll comment on that. I'm not optimistic that there's going to be in the end a lot of cooperation just because of the highly politicized nature of the issue. It actually was quite historic that the Department of Defense would even give any consideration to sharing their bandwidth. But I don't know if at the end of the day whether that, they'll yield much ground. One thing about a resource, when you don't have to pay for it you probably don't use it too well. To date the military has not had to pay for their spectrum. I think the political forces are going to make it difficult for some real convergence there.
STEVE DIRECTOR: Okay. The last question that I have is what role will satellites play in wireless communications? Will more have to go up?
GEORGE A. VINYARD: First, some are coming down or have come down. I think it's pretty clear the satellites that are already up are making a big difference. This global positioning thing is all off of satellites and if that system hadn't been put in place and then made available for private use a lot of the potential applications that people envision as helping to drive the commerce and mobile space wouldn't be there. But then there's always the Iridium experience where several billions of dollars were spent putting up satellites to enable a handful of CNN reporters to make phone calls from out of doors on the Steppes of Central Asia or the Amazon rain forest and they found out nobody wanted it or needed it. It all went down the tubes.
STEVE DIRECTOR: Okay, I have another question and actually this is a really interesting one because it opens up, in my mind, the whole issue of the interaction between technology and policy. Why not rely on technical solutions to multiple standard problems? Interoperable systems and multiband telephones can let consumers hedge their bets while proceeding along parallel and competitive paths. Each of you touched on that to some degree.
GEORGE A. VINYARD: Well, I think it's clear that technical solutions in some circumstances may be a problem and there's kind of a mantra that says choice is what consumers want. The stumbling block comes with the massive investment that's required. It's not just inventing the technology; it's deploying it. There are certain constraints. Money is one, power consumption is another. And the other thing is just consumer inertia or user inertia. Until there's a standard, until it's clear what's going to be offered and how many people are going to support what's offered with complementary products, people don't make the investment. U.S. Robotics was trying to launch a 56K modem and had it ready to go and had one that worked great, but the standard was delayed for several months because other people weren't quite ready. So there were two competing modem standards. I can tell you we sold a lot of modems during that period but we would have sold a hell of a lot more if there had been an accepted standard. Everything in the press was, "Don't buy one until you find out what the standard is." Basically people just don't have time or the inclination to deal with multiple standards. Unless you make the investment to make the technological solution to multiple standards and interoperability invisible, behind the scenes, and people aren't inclined to do that, especially if there are proprietary systems where they might be buying a law suit, then it's going to be hard to persuade people to actually jump into the market and participate fully.
ANN-MARIE ANDERSON: I agree. We won't have mass adoption until there's some agreement on standards. You probably followed over the summer the WAP fracas. You know WAP is the Wireless Application Protocol. It's the standard that most of the wireless devices are working on now. The headlines in the Wall Street Journal were "Is WAP dead," "WAP is dead," and so on and so forth. Really that's the predominant language right now. I think it was Nokia, Ericsson, it was the Finnish companies that started that standard in 1997. They took a risk and I think it's going to involve, as George mentioned, a huge capital outlay and a lot of confidence and exposure to risk and appetite for risk to go with a standard whether it's the translation standard or operating standard or browser or device.
GEORGE A. VINYARD: Let me just add one thing. You may have heard in the various Microsoft reports, the endless amount that's been written about that, the term "FUD." I hadn't heard about FUD until I got into the corporate world. It's fear, uncertainty and doubt. If you don't think it is a weapon of competition or, in some cases, restraint on competition, you're sadly mistaken. Because there will be fear, uncertainty and doubt, the real thing you get from standards is certainty in terms of opening a market.
STEVE DIRECTOR: This will be the last question. It's pretty focused so David be prepared. Mobile commerce misframes the question. The question is how to connect everyone to everyone else whether through commerce or not. I-mode is exactly the wrong example. Metrocom's Ricochet and Apple's AirPort are much more interesting. Why isn't an equipment manufacturer like Handspring pushing for license free solutions that free them from reliance on spectrum owners and lowers costs of deployment?
DAVID PINE: I've followed the Ricochet over the last few years and it's an incredibly promising, impressive technology and impressive solution that they offer. But, they haven't been able to deploy it. It's only offered in a few metropolitan areas and currently their financial situation is quite dire. A company like Handspring actually we have limited resources and kind of, like it or not, to a certain degree we really have to go where the biggest market is. And that's why our first wireless product is based on the GSM standards, the most commonly adopted standard. So I think the example Ricochet points out how hard it is for an upstart technology to actually get momentum. I-mode managed to do that, but Ricochet hasn't. So that makes it a challenging situation for equipment manufacturers.
STEVE DIRECTOR: Okay. Well please join me in thanking our panel. Jeff you have something to say? Time for the next panel.
Global Consolidation and the Future of Competition
DEAN JEFFREY S. LEHMAN: This panel is on Global Consolidation and the Future of Competition. The panel leader is James Young who earned both undergraduate and law degrees from the University of Michigan. He started his career at a firm in Washington, D.C. and joined Bell Atlantic in 1983 where he moved up the ranks to become Executive Vice President and General Counsel, a post which he held for eight years. During his tenure with Bell Atlantic the company became the largest wireless carrier in the country. He is now a telecommunications and legal consultant in Washington, D.C.
Next to him is Robert Howse who's a professor at the University of Michigan Law School. Previously a member of the law faculty at the University of Toronto. His work has ranged over a wide variety of subjects with an emphasis on international trade and related regulatory issues.
Next to him is Michael Mathews who, among other things, is the Chairman of the Board of Telecomputing, an applications service provider founded in Norway that provides Windows-based applications delivery and computing services that extend from the server to the desktop for customers worldwide.
And our final discussant is Marshall Van Alstyne who's an assistant professor at the University of Michigan's School of Information. His research focuses on the measurement and management of information capital, an endeavor that becomes increasingly critical as global economics shift from physical toward non-physical goods.
So let's begin with Jim Young.
JAMES R. YOUNG: Good morning. As I was listening to the last panel's discussion, particularly to David Pine's discussion, it dawned on me that we would know when convergence was here when we all started to use a common set of acronyms. It reminds me of when I started to work in telecommunications almost 20 years ago. A colleague told me that one of the most annoying things was that we had a TLA for everything. And I looked at him and I said, TLA, what's that? He said, "Three-letter acronym." It grows on you, doesn't it?
This morning we've been given a very, very broad topic to talk about. Convergence, global consolidation and the future of competition. Now the way we're going to go at this is, the premise of this discussion is that it's extremely difficult to make point estimates about where particular industries are going to go. What's a lot more productive, we think, is to talk about some general considerations that will apply over a range of outcomes. Now just to give you a little bit of background, this panel, at least my part of it, will probably be a little more historic than some of the other panels. In part because I'm older than most of the other discussants. But I think it's important to sort of give a little bit of background to explain why it is that we are so humble and modest in approaching the issue of predicting the future of competition, particularly when it comes to convergence. I have been at meetings, conferences, discussing the general topics of convergence and consolidation for almost 20 years. I feel a little like Bill Murray in Groundhog Day. That is I'm doomed to keep doing this until I get it right. We have thought at so many occasions that we really understood this.
If you roll back the clock to the time when I started in telecommunications people thought they understood what convergence was. Convergence was this great emerging confrontation between AT&T and IBM. People really believed this. As a matter of fact, government policy was made with this assumption in mind. If you looked to see what the Department of Justice had to say at the time that the decree was entered that broke up the Bell System, the Department of Justice said, on a number of occasions, that by freeing AT&T from the older 1956 consent decree what you were allowing was AT&T with all this expertise in digital computers, because that's what the switches in telecommunications networks had become, digital computers. AT&T with all this experience in digital computers was going to be able to take on IBM in these digital computers. And IBM was going to be able to take on AT&T in telecommunications. Why? Because the assumption then was that competition to the wire line monopoly, the Bell System, would come through the air. The M in MCI stands for Microwave. And, as you remember, IBM had invested in satellite business systems, SBS, another TLA. Whoever laughed, thank you. And that was how all of this was going to happen. And, of course, it never did.
One of the most interesting codas to all this got very little fanfare. A few years ago IBM finally got completely out of the communications business by selling its worldwide computing network. And, show of hands, anyone know who they sold it to? To AT&T.
Okay, roll forward a few years. About six-and-a-half years ago I spoke at a conference here at the law school. It was a joint conference between the law school and the business school, also talking about convergence. Again, we thought we understood what it was. Convergence was telephone networks being capable to do video and voice on a fiber-optic platform, a digital fiber-optic platform that would be all things to all people. And cable was going to do the same thing.
And, of course, it was that idea that was behind, among other things, the litigation you saw in the early 1990s, in which companies like mine pushed First Amendment theories to get into video. And the same idea was behind the proposed and unlamented deal Bell Atlantic had to merge with TCI. Again, convergence didn't happen. The most that did happen with cable and telephone was that some companies started deploying the cable wire and the telephone wire in the same trench.
Even here at the conference today, one of the things that struck me, is the fact that although we take convergence as a common place, we still have very, very different definitions of what convergence means. A number of people, Donn Davis for example, and some of the people who focused on the end-user devices, have talked about convergence as the integration, in one device, of several functions now performed by separate devices.
I have to tell you; I have a lot of skepticism about that. I think the history, particularly of consumer appliances in this country, shows there's a long tradition of claiming that this kind of integration will occur. Think about how microwaves were initially pitched, as things that would do all kinds of cooking and baking and all this sort of thing. And in the end the microwave has become a device, really just to warm up frozen foods and to do popcorn. Or VCRs, remember all the hype that surrounded the introduction of VCRs? All the things that they were going to be able to do, time switching and so on and so on and so on, educational devices. They've really become a device to play movies.
But whatever the merits of this kind of convergence, for people like me who've spent their time on the network side, convergence really means something very, very different. This is an area that the last panel really teed up nicely. Convergence to us really means that all communications are moving toward computer-type communications networks, packet data networks. So that voice and video and everything else travels over very high-speed, very efficient communications networks. And as the last panel showed, that's what happening in wireless, and it's also what's happening on the wire line side. In part because of the tremendous growth in data and in part because these networks are an order of magnitude more efficient than the old circuit switch traditional telephone networks. Everything on the telephone network is going that way. If you want a real oversimplification, what's going on today is you have the old time telephone network and it's having the life sucked out of it from two ends. Mobile is taking all the voice out because it's terrifically efficient and effective and convenient and as the price points drop, everyday it becomes a better and better substitute for traditional local telephone service. On the other side, the data and some of the voice is being sucked out by these very high-speed packet data networks. So even now we don't have complete agreement on what convergence is.
Globalization is another topic where it seems to me you have to approach this with a tremendous amount of humility. Why do I say that? Again, when I was here in Ann Arbor six-and-a-half years ago we thought we had that one figured out, too. Then what did globalization mean? Globalization, at least in these circles, meant the rise of these tremendous international alliances. The French Telecom and the Deutsche Telecom joining together with Sprint in the Global One Consortium. AT&T, through a series of partners ultimately ended up with British Telecom (BT) in concert. I can tell you at the time the rest of us were absolutely petrified. Remember when you were in fifth grade and recess and they were picking out sides for the softball team and you were afraid you weren't going to get picked? Well this was how a lot of us felt when we saw these great alliances coming together. We thought we were going to be shut out and that this was really the future of global communications. Well you know what's happened there, too. AT&T and BT are today, openly talking about completely dissolving the consort alliance. And the French and the Germans have already parted ways on Global One. I guess the French have already announced that they're going to do it and if the rumors are rife the Germans will do it, too, are going to unload their interests in Sprint. So that kind of globalization has sort of fallen apart. But it's still going on. It's going on in very different ways now.
I think when you look at the MCI Worldcom combination, one of the best ways to understand that, yes it was to some extent it was the combination of traditional long distance networks but not really. Really, the way to understand that is one of the most important things about that is that it was the combination of international high-speed data networks. That was real globalization going on there. It was also one of the things that lay at the heart of the now failed Sprint/MCI Worldcom transaction.
Globalization is also going on apace in wireless. My old company, used to be known as Bell Atlantic, now Verizon, of course has struck up a series of alliances with Vodaphone to try to put together a much more global arrangement. A global arrangement that will be greatly facilitated if and when we ever get to 3G. You've seen AT&T and its investment, its joint arrangement with DoKoMo, which is one of the companies that does this really terrific i-mode service you've heard so much about this morning. There's a lot of that going on on the wireless side as well.
But I thought probably to help us understand this better Michael, who is sort of at the heart of globalization but in a somewhat different form, in a non-U.S. centric form has been greatly involved in this so I want to turn the floor over to Michael for a few minutes to talk about exactly what's going on.
MICHAEL MATHEWS: Thanks, Jim. I bring a different perspective to today's conference. It's a pleasure to be back in Hutchins Hall. I haven't been here for a very long time. For the benefit of the students in the room, to tell you what it was like 36 years ago, Kennedy was assassinated when I was in law school. It was a long time ago. My law school of about 350 students had seven or eight women and one black. It's a little different today, fortunately. The one black happens to be Harry Edwards and he is making his way currently in this area and we're as proud of him as we are of anyone in our class.
When I was in law school we had Saturday classes, which seems an anachronism in today's world. When I started on Wall Street I had a starting salary of $7,800. That was per year not per month. So I do bring a historic perspective.
One thing I have learned is that anyone who attempts to predict the future is rarely going to get it right. I recall forecasts of oil and gas sector that we would be clearly out of oil by the year 2000. Thirty years ago the environmentalists were absolutely convinced that there wouldn't be any. I'm vice chairman of a New York Stock Exchange-listed company called Petroleum Geo-Services, which is a marine seismic company that helps oil and gas companies find new reserves. Talk about convergence of technologies. When the satellite navigation system was released by the federal government at the end of the Cold War in 1991, a group of Norwegians figured out that that would help give us the ability to track a streamer. Marine seismic is basically towing a streamer behind a boat and recording a sound wave in order to map the sea floor. So with satellite navigation we could put 12 streamers behind a boat with a microphone every 16 inches and record data every five seconds and have a massive amount of data. Well that was beyond, in 1992, anything that anybody could deal with. The data incoming, we had more computers than NASA (National Aeronautics and Space Administration) and there's nothing you can do with the data until Intel and massive parallel processing; we could actually have on board processing of this data into a library, which we joint ventured with IBM in order to manipulate the data. And now it soon will be web and seismic engineers can access our data over the Internet. The company went from a $15 million investment in 1991 to a market cap in excess of $3 billion by 1998.
So there are a lot of ways to play technology and convergence. About the same time, I was in Finland and there was a company that was a conglomerate that I really didn't like the management of very much so I never paid too much attention to them. There's a little company, well it's not a little company then it was just not a very focused company. It was Nokia and they had a little thing called a cell phone and I was so smart in those days that I said absolutely why does anybody need a cell phone in the United States. We're wired already so we don't need this. They need it because it's a rural country, etc. The rest is history.
But I do want to encourage everyone here to recognize what Professor Mann said about what was going on in Tokyo and my own observations in Norway and Finland; there's an awful lot happening out there. My question yesterday related to the digital divide and how were we going to get the Third World up to, let's say, First-World standards. That of course is a problem. But let's not lose sight of the fact that there are a lot of other first-world countries out there that are racing very rapidly with some very interesting technologies and we should not be Valley-centric.
The decisions that one makes in investing are often--20/20 hindsight is obviously a great help. I remember that IBM was a one-decision stock in the 1970s. It was simply, you bought it and you put it away and you never thought about trading it or selling it. Well, if you bought it in 1975 and held it still in 1995, it was a brain dead decision because it never went anywhere, up or down. It had its run. I would venture to say that I'm not smart enough to know whether Microsoft, it'll be here 20 years from now, but the share price may be at or close to where it is today. There is no reason to take a chart, as was put on this board yesterday, and say it went up for 20 years, it's likely to resume its path up. I love Microsoft, but I don't know where the stock's going to go.
Recently I became chairman of the board of a company called TeleComputing, a Norwegian ASP (Application Service Provider). The hype 18 months ago, was that the ASP industry was the future. Steve Ballmer at Microsoft said they expected 40 percent of their customers to be doing IT with outsourced application service provider. There was a rush to build capacity. We raised and invested a lot of money. The stock in Norway was a market cap of about $130 million when I became chairman. And I of course thought I was brilliant when six months later it was $1.3 billion, tenfold increase. Except I was the one constantly being quoted in the press in Norway that trees don't grow to the sky, this is, I didn't use the word bubble but it was so clear, so clear to anyone that this was a very dangerous rise. But it's done the round trip. It's back down to $130 million. The good news is we are a lot stronger. We are actually turning the profit corner. Probably the only ASP in the world and I believe this is a correct statement, that is actually with pure ASP revenues going to be profitable in the second quarter of this year in the Norwegian/Scandinavian business. So there is a business; it just has not yet been recognized in the United States. The customers in the U.S. do not want to let go of their data. They don't want to have it off premise. It's wild that they can have data winging around via credit cards and everything else that we've been talking about, but the individual business manager, the partner of the law firm who has 70 lawyers will pay an enormous price for an IT (Information Technology) department in his law firm when he could outsource that for a fraction of the cost. Basically lease his software. And yet they somehow want to have their own IT guy and have the server on premise down the hall. It will happen. It will change. I'm absolutely confident of it and we expect to be one of the survivors.
One other brief anecdote is what you really want to avoid in investing, and I know this is not an investor conference, but since I'm a private equity investor it's kind of where my mind runs. You want to avoid the "gee-whiz" technologies. I invested together with a very good friend of mine who is the past president of Time Warner. We thought that game content would be where it was. Clearly computer games was where most of the techies were spending their spare time and a lot of their time generally. So we created a company called Zombie and Zombie was virtual reality, three-dimensional entertainment company in Seattle. And as a founding seed investor we got our money back. It went nowhere and the reason it went nowhere was not because it wasn't absolutely a brilliant company and a brilliant idea with brilliant people. We were just too brilliant. It was a company that the games were too sophisticated and aimed at such a small market, the top end of the gamer market, which we did a lot of demographic studies on and was about a 20,000 person market. And that's a pretty small, esoteric market.
I really agree very strongly with what Joel Klein said in his opening remarks about the market. The market is the driver and one of the things the conference is discussing, and I think I'll just weigh in and close with, is that the government and regulation needs to understand where the markets are going and help but not get in the way. Change is happening very quickly. What the government really needs to do and what I think the people charged with supervising the playground if you will is to understand as best they can where this is all going. And then give guidance and direction but not get in the way. To my way of thinking government regulation should be somewhat like coaching. Provide the structure, you teach the rules of the play but then get out of the way and let the players play the game.
JAMES R. YOUNG: Okay so we've set the stage here. We all agree the future is terribly uncertain and talking about the future of competition it's very difficult to make these sort of point estimates. We come to the point now where we start talking about at least some of the generalizations we can make. Let me just start with a few and then I'm going to turn this over to Marshall who has spent a great deal of his time thinking about these things.
It seems pretty clear to me, yes, the wireless future is going to be tremendously important because of computer, basically packet networks, that are order of magnitude more efficient than what we've seen. Wire line communications today are going to migrate to the same technologies. What that tells you is something very similar to what you've seen on the computer side-- At least the operating system side. And that is, these are segments that are characterized by enormous economies of scale and scope and so you will continue to see very large players, and probably in several of these segments, dominant players going forward.
Another thing that seems fairly clear is that these networks have some unique aspects that competitive analysis is going to have to bend itself toward. One of the best examples of that, if you've looked at the way the EU analyzed both the MCI Worldcom transaction and the Sprint/MCI Worldcom transaction, one of the big issues there was the consolidation of Internet backbones. But, of course, one of the critical issues there wasn't just the mere size of each backbone. As you know it's very, very difficult. These aren't like long distance networks. It's hard to get market share information. But even with best estimates about size the analysis was different than it would have been just looking at combining traditional long distance networks because the unique aspect of these Internet backbones is that the very large backbones at the highest level have peering arrangements. That is, the interchange of traffic is roughly equivalent. And that means that there is no charge for interchanging traffic between networks. It's free back and forth. That is a very important characteristic of the Internet and it became a very important characteristic of the antitrust analysis about combining these backbones. Because when you get one set of backbone networks up to a size that might not worry you for traditional antitrust purposes if you're talking about traditional networks, it still worries you a lot when you're thinking about the particular aspects of the Internet. Why? Because if you get too much traffic concentrated in one Internet backbone then it can start to shove the other large networks off those peering arrangements. And then it can start on the path to becoming the really dominant Internet backbone, which is what everybody was concerned about in the MCI Worldcom transaction and the MCI Worldcom/Sprint transaction.
But that, of course, is only scratching the surface. As I said Marshall has spent a great deal of his time thinking about these problems, thinking about what industry structures will be like when you're talking about new information projects. So right now I'd like to turn the floor over to Marshall. Since he has a presentation, we're going to clear out of the way so he can use the screen.
MARSHALL VAN ALSTYNE: Thank you. We'll see if we can use the technology a little bit and use some graphics perhaps to make up for the lack of content. I'd really like to introduce a couple of different ideas. Most of my effort is spent on information economics and the use of information goods, in market places and how you extend the influence of those information goods both among your own complimentary products and to influence the market place vis à vis your competitors. We can ask some interesting questions then about what globalization might mean for information goods. I'm going to see if I can submit to you four different observations about information goods in general. A couple of these will be things we've seen before; a couple will be things that will be quite unique to information. I'm also going to argue that I believe these will actually have interesting influences for the kinds of things that Joel Klein talked about, in particular, it makes it a little more complex to define what a barrier to entry means. And it's also going to mean that penetration pricing, or rather predatory pricing, gets a little bit harder to define for information goods. And since those are two of the key elements of the government's case it's actually going to be a bit more interesting.
Now I'm going to do this again as an economist so I'm going to try to do this entirely through graphics. I'll convince you of a few things. Nothing up my sleeve, but I suppose I should really put my left hand behind my back so the economist can't say, "But on the other hand." So we shall do this. The first of these is actually a very straightforward observation. Information goods have this high first copy cost but a negligible second copy cost. So what does this do for the average cost of the good? Well, the average cost curve must, therefore, be declining. And this then leads to a natural monopoly. Now this kind of thing is not something that we haven't seen before. In fact we have seen it. AT&T was a recognized natural monopoly. It made no sense whatsoever to run multiple copper cable to the household. It didn't make sense at all. That was even enshrined in law for a while and AT&T was regulated. But we get this even in greater spades perhaps with information goods where a marginal cost of reproduction is almost zero. So what does this mean for the information good? If you can actually set a price that is at or below the average cost for your competitor, but it happens to be above your own average cost you can make a profit but keep your competitor from making any profit whatsoever. So it tends to lead toward natural monopolies in information goods. So that's the first point.
Second one. This is more of the conventional wisdom on information goods. The idea here was that if you build it, referring to a website, they will come, referring to the consumers. And what I've got here is simply a plot of the goods ordered from left to right. Imagine 20 information goods sorted one to 20 left to right. Access is going to increase from the local neighborhood to the region to the nation to the global community. So the original impression was that, the probability of a sale would then increase over time as you manage to reach larger and larger and larger markets. That, in fact, the rising e-commerce tide would float all boats and we would all be awash in cash.
Well what's the reality? Let me give you a different chart. What happens, in fact, if you don't want a third-rate version of Pachelbel's Canon in D? What happens, in fact, if there's only one or two really high-quality items in the market place that you want to reach? Well, in that case, you're only going to buy a couple of them. And the lowest quality folks drop out of the market. What we've effectively done is to place long-distance competitors into local competition by going global. In fact, there's a marvelous Kurt Vonnegut story about a local musician who was a community treasure but effectively went out of business when put into global competition with the world's best performers. Actually I had an interesting example of this. A couple of years ago I had the pleasure of listening to a lecture from Richard Feynmann. I know this wasn't by séance and I'm not 75 years old. These were videotapes. What's interesting is at MIT a large number of the physics students preferred to attend Richard Feynmann's lectures instead of physics classes. Talk about reach, this is posthumous reach. So that's really very impressive. If you've got an information good that can compete then in fact because of the zero marginal cost reproduction possibility your cost of extending it once you have the access to the market is almost zero. So that was the second point.
Now I want to convince you of something else. And this is a good audience for this. How many of you actually use Lexis Law Service? Pretty substantial number. Now how many of you actually pay for that service. I see no hands rise up at the moment. Okay, well what I want to submit to you there is there are good reasons for doing that. As a matter of fact most of you will probably have on your computers things like WinZip, Internet Explorer, Acrobat Reader and maybe even such things as Lexus-Nexus access and all of these are free information goods. Now this is going to raise an interesting question from the perspective of the government in terms of predatory pricing. How are we going to define predatory pricing when goods are being given away to you for free? And what I'd now like to do is present to you the economic argument as to why this might actually make sense even in the absence of competition. And if you then reintroduce competition it actually has devastating effects on potential competitors. If you look at simple Economics 101 we can define a very standard demand curve. Well how do you price a traditional good? You price it at effectively half its value and for a very simple reason. If you price it higher you make more per unit but you sell too few units. If you price it below that you will sell more units but you won't make enough per unit. But what happens if the markets are coupled or complimentary, as are Acrobat Reader and Acrobat Distiller for example? What do you suppose optimal price of a coupled good might be? Well in this particular case due to an increase or an externality effect you may actually increase the size of the market in one by dropping the price on the other. Imagine trying to sell Acrobat Distiller, this is the tool that creates the portable document format files that you and I consume when we use Acrobat Reader. How much would they be able to charge for that if consumers also had to pay for the reader? They would have almost no market whatsoever. So what's interesting is that they may actually be able to increase profits by giving away, perhaps even subsidizing that information good. And we can see numerous instances of this in things such as advertising and coupled goods, in WinZip, in Acrobat, and other products of that sort. So my argument here is this gets to be particularly problematic because even in the absence of competition the profit maximizing price on the good whose distribution cost may be zero may also be zero due to the complimentarity effect in another market.
Now, okay, I'd like to introduce another idea with apologies to the Microsoft folks in the audience. I want to now see if I can explain to you why Microsoft Office is such a successful product. How many of you, this is a particularly good audience in the law community, how many of you use Microsoft Word? My goodness that's actually even more than I anticipated. You know, of course, Word Perfect was the dominant word processing package in the law community for quite some time. Well, perhaps, can we explain some of these phenomena particularly given that there has been a transition from Word Perfect to Word? We might argue that from the time Microsoft Office was introduced, a suite of four different products, which included word processing and spreadsheet and PowerPoint, which is actually a very fine product, and email, that it might not necessarily have been considered best of breed, certainly not in all products but possibly not in most of them. It might have been best of breed in one maybe. You might have been able to assemble a best of breed office suite of, for example, Lotus 1-2-3 for the spreadsheet, Word Perfect for the word processor, possibly Aldus Persuasion for the presentation software and perhaps some other email package as an example of that. What I now want to argue to you is what happens when you simply change the product strategy. And notice before that the optimal price on a normal good is to sell it for half its value. Well if we simply then pair two simple goods, in this particular illustration we have a word processing good and a spreadsheet good. The word processing good runs on the X axis, we can hypothetically say the value for that might be zero to 100 bucks so you price it at approximately $50. Numbers in this case are irrelevant. What's really important is going to be the relative sizes and shapes of these particular figures here. What happens if you price this independently? If you price the goods independently for word processing, you set it at half its value for exactly the same reasons as before, and you would sell to approximately half the market. In this case you might make 25 on a particular good. You do the same thing in spreadsheet and what happens? Independent pricing exactly analogous. You price it at half the value, you sell to half the market and you make approximately 25 on the good. Now what happens if Lotus Notes wants to come into the market place? Well they sell it at 49, they undercut your price by a little bit and potentially take that market, particularly since they actually had a very fine product in that market space. If you multiply it out, 49 times out, you might increase the market share slightly by selling to a few more people, multiply it out you get something again that's very, very close to 25 in that particular example. We can modify the information good to actually do something to make Lotus' job much more difficult. Independent profits, by the way, have fallen, because they've now had profits--the original firm had profits of 25 in each market and they've now lost one market so they are now only making of 25. Now look at what happens if instead they bundle into the office product. Now what they do is, they price at a hundred for both products as opposed to 50 for each. In this case, you again sell to half the market, you sell to those people who value the combination of the two goods at or above 100 as opposed to the independent people who value each one at or above 50 in this particular case. So we're now selling to the upper right-hand portion here. But now look what happens when Lotus comes in and tries to price at 49. In the previous slide, notice what their market and profit was, now I'm going to use a bundling strategy, notice what the market and profit is going to be. They're only going to sell to one-half of the previous market. Why? Well, I would ask you that question. If, in fact, what you're doing is you need word processing or you need spreadsheet, and the only place you're going to be able to get it is a bundle then you buy the bundle but by that time you've already got the word processing so you shut the other firm out of the market. Anyone who values the good that's outside the bundle or that's only available inside the bundle will buy the bundle and therefore they don't need to go back and buy the other product because they've already got it as part of the bundle. What then happens is, that you cut that market share in half. The effective losses to the bundler drop dramatically. It's actually an argument that's been presented rather nicely by Yale economist Barry Nalebuff. Here's a graphical analysis as to how the bundling of the information good makes sense because it actually helps to create a barrier to entry. What's interesting then is it's easy to argue that we can open up systems if what we're granting access to is a packet or circuit switch backbone. What does it mean if you then want to grant access to somebody else's property rights in a specific information good so that they might be able to bundle it with their product? That gets to be much more difficult in this particular case.
Okay, so with that I basically wanted to leave with a couple of points. In particular, I wanted to suggest there are some things that we have seen before such as the infrastructural questions that we had seen even with AT&T. We do get, in fact, some natural monopolies and information goods lend themselves to that quite easily.
The second point was, in effect, that information goods, lend themselves quite naturally to winner-take-all markets. So that's another attribute of the information market place or the information economy, which might actually be interesting and relevant to the discussion. For information goods it gets to be more problematic.
The third thing is that simply by doing clever product design we can observe phenomena, which appear to be predatory pricing but may not be because folks are actually maximizing profits even in the absence of competition. If you then introduce competition in the good where they're introducing the good for free it's very hard to make profits.
Then fourth if you're also trying to compete with a company that has bundled products where they have some other product that's unique and they put it into the bundle then it gets very difficult to compete with that particular company. So with that, I'd be delighted to turn it back over to the panel.
JAMES R. YOUNG: All right, we've had an opportunity to explore at least some of the characteristics of markets going forward taking into account globalization, taking into account that there will be enormous economies of scale and scope. I've been in at least some segments of these convergence markets going forward. I'd like to turn now to sort of a second common characteristic, a second cut-across characteristic that we're going to have to deal with going forward and that's this.
One of the remarkable things that has happened in the course of the last 10 years is the rise of antitrust authorities and merger supervision regimes around the globe. It used to be that antitrust was sort of a unique American institution. Not so anymore. There are perhaps 60 of these regimes around the world, maybe more than that now. And what that's done is to globalize the scrutiny of international mergers, tele-communications and computer technology mergers, in a way that has been quite startling. Again if you look at the MCI Worldcom transaction really some of the most important decisions about that transaction were made in the EU. Similarly, in the Sprint Worldcom MCI transaction, again, some of the most important pieces of that decision were made not in the United States but in Europe. It's not just the telecommunications issue obviously. Those of you who have been following the GE/Honeywell deal for example and the great consternation that GE is having these days, this is another reflection of the fact that antitrust issues and particularly merger reviews are no longer a completely domestic, American institution.
Joel talked about this a little bit on Wednesday and he referred to a group that he had put together in, I think, 1997. The ICPAC (International Corporation for Assigned Names and Numbers) and don't ask me what that stands for because I can't remember. But it was a blue ribbon group headed by Jim Rill former head of the antitrust division to look at these issues and talk about some of the implications. And how are we going to deal with trying to allow efficient business consolidations to go forward and not be hamstrung by these multiple levels of merger review. I guess I'd say one other word in terms of preface, anybody who's looked at these cases can sort of generalize about how EU merger reviews are different than the United States. And I think it's easy to overemphasize the differences. When you read one of these EU decisions I think one of the things that strikes you is that pretty much they're talking in the same micro economic language that we use for merger analysis in this country. The basic issues about definitions of markets and all that. It's pretty much the same.
There are, however, some differences. I guess I'd suggest that the U.S. has gotten a little more lenient on vertical arrangements than the EU currently is. I'd suggest, particularly when you look at matters like General Electric and Honeywell, you'd also probably conclude that some of the traditional big is bad and predation kind of arguments that are somewhat less in favor in the United States are perhaps a little more in favor in the EU. I think they probably listen to the arguments of competitors, perhaps, a little more. This is one of the things that Joel talked about on Wednesday. I've been on both sides. I've been somebody trying to get a merger approved and I've been a competitor complaining about other people trying to get their transactions approved. I think the U.S. agencies have developed a pretty healthy skepticism to the arguments of competitors. But, in any event, my point in going through all this is to simply set up a second important fact about the competitive future. This is no longer an American institution. This is an international institution and an international set of reviews we're going to have to be looking at and an international set of antitrust principles. So at this point I'd like to turn it over to Rob, who's thought to a great deal about the international aspects of this, to ask him to comment.
ROBERT L. HOWSE: Thanks very much. In many respects I'm participating in this conference as a learner. I work and my work focuses on a rather different world than most of you operate in. This is the world of intergovernmental organizations that deal with international trade and related economic matters. Now these organizations, however, are increasingly getting into issues that affect the world or worlds that are central to the themes of this conference and the preoccupations of many of you. I'd like to talk a bit about it and perhaps try and raise some issues and problems that are likely to arise as a consequence of that interface, or if one wanted to put it more negatively, intrusion.
The main organization that I deal with in my work is the World Trade Organization and there are many good things about it as there were with its predecessor the GATT (General Agreement on Tariffs and Trade)--negotiated the removal of many barriers or restrictions on trade, tariffs, quotas and so on. More recently an agreement on basic telecommunications where many, many countries in the world made liberalization commitments of some significance and agreement on information technology products that really limits many kinds of protectionist barriers to trade in those products. So these are all good things. But increasingly the focus has shifted to creating global regulation as opposed to simply working on negotiated removal of barriers and I want to sound something of a warning about the increasing tendency of the World Trade Organization, and certainly other international organizations but primarily the WTO, to get into this in a big way. One area where there's support for it in Europe and certain other countries is competition policy. Now listening to Jim speak it's clear that there are lots of trans-boundary dimensions to competition policy, mergers and so on today. However, the fact that there are trans-boundary dimensions doesn't necessarily mean the way to deal with it is through global regulation, trying to harmonize domestic policies or create a new level of regulation that is produced and supervised by an international organization. I actually support the approach that the U.S. has generally taken which is that more decentralized regulatory cooperation is the better way to go. I'd like to talk to you a little bit about why I think that's the case.
I think first of all you have to understand how the World Trade Organization operates. It operates primarily through the periodic creation of rules in what are called rounds of trade negotiations. Between those rounds not much happens except for dispute settlement, which now is something that could be characterized as a quasi-judicial process. Negotiating the rules is not easy. It involves today getting a consensus among 140 countries and it involves many, many linkages between issues that there's no consensus as to whether those linkages make sense or not. But there's a certain opportunistic dimension to saying, "Okay you want to negotiate on e-commerce. We'll only do it if you negotiate on agricultural subsidies" or something like that. Now because the WTO doesn't have any regulatory commission in that sense, it's very different from the European Community, there's little that can be done to evolve or tailor these rules to changing circumstances between rounds of negotiations.
To give you an example, there is a contradiction between two very technical rules in the accord that was negotiated on dispute settlement in the Uruguay round five or six years ago. Almost everyone agrees that this is just a mistake. There are two provisions that almost contradict each other, but it's been impossible to make any change to the rules, despite the fact that almost everyone agrees, because whenever that possibility is proposed someone wants to link it to opening up some other issue. So even on very minor matters where you realize you've made a mistake, or the world is changing, it's really, really very difficult to do any change or alteration to the rules on a short-term basis. And here we're talking about within a five and 10-year period and we're dealing with a rapidly evolving area. You could be stuck with basically anachronistic rules very, very fast and no easy way to change or modify them.
Now you might think that dispute settlement would be that way. Those familiar with the common law tradition would obviously recognize that the courts or tribunals can often flexibly interpret and evolve rules. But to the extent that the Appellate Body, the new appeals court of the WTO has tried to do that, there's been a tremendous reaction against it by a lot of countries that have said this isn't the role for the judicial branch. So you really are left with a fairly rigid kind of system. So this brings us to the competition or antitrust issue. I think as Jim suggested, regulatory cooperation, for example, between the U.S. and EU authorities has worked fairly well. Even in something where there was a real divergence of views like the Boeing/McDonnell Douglas merger, eventually there was a negotiated solution among regulators. I don't think that creating rules in the WTO is really much of a substitute for that kind of regulatory negotiation and cooperation between domestic authorities. In fact, I think it's a much more cumbersome practice. And whether you look at the MCI/Sprint/ Worldcom transaction that Jim has already referred to or McDonnell Douglas, it's very hard to think of ex-ante rules that would provide good solutions. You really need intelligent and competent regulators who can sit down and look at that particular problem given the current juncture with respect to technology, with respect to the way that markets are segmented and make a determination as to whether the broad concerns that animate antitrust policy are really engaged by that transaction or not given where we are today. The other feature that I think is quite problematic of this initiative in the WTO to create global competition policy is the idea that this is also the way for every country to get a competition policy or an antitrust regime. And people simply assume it's a good thing. But, in fact, in many contexts there isn't the expertise and understanding to implement such a policy, what it really just becomes is a new way of government managing the market place. I worked in one country that was being transitioned from a central planning type system to a market economy and one of the things they were being told to do was to create an antitrust policy. And the way of doing it was to take the people who, under the previous central planning system had been fixing prices administratively and turn them into the competition tribunal. The basic notion being that this must be the way that the capitalist economies figure out how to decide which businesses they like and which they don't like and therefore which deserve to survive in the market place and which not. Now that's an extreme example, but the fact is that this initiative to globalize domestic competition law in many cases is just creating another layer of government regulation and isn't often very useful, even if it's not harmful, to actually creating greater competition. It would be much better to focus on simply removing many constraints to competition rather than trying to regulate according to antitrust principles.
Now the WTO has also tried to get into electronic commerce. Here, again, there are a lot of problems with a system that's based upon the idea of fairly inflexible interpretation of static or relatively static ex-ante rules. What I wrote, the first version of my co-authored treatise on intellectual trade law just when the new rules on services in the WTO were being negotiated around 1995, my co-author and I warned that it's not always so easy to make a distinction between what is a good and what is a service. So you need to have some guidelines for that and we were concerned that there were no real guidelines. Now it turns out that progress on e-commerce with the WTO was to some extent paralyzed because there's a group of people who think, for example, when you deliver a book as an e-book it's still a product, it's still a good, and then a bunch of people who say no, now it's been converted into a service. To give an example of another area I know something about, electricity deregulation. Electricity has always been assumed to be a "good." But when you get rid of electricity monopolies and you have a power pool and then you have various kinds of distributors and the people who are doing the metering and so on, well, it's not such an easy matter to say that X should be regulated by a good and Y as a service. Well that's fine, you can deal with those issues if you have a system that's relatively flexible. But if you have these kinds of categories that are sort of congealed in rules that it's very, very difficult to change except in a five or 10-year timeframe, you could be in a lot of trouble in effectively addressing some of these issues.
So what is the answer? Well one answer might be to make these institutions operate somewhat differently. That's a very, very difficult task. They're not very accountable to stakeholders. They're not very transparent and they're not very accessible and responsive. And we could discuss the reasons for that and, in fact, these are some of the reasons why people were marching in Seattle. But they're also some of the reasons why businesses ought to be concerned about certain matters being regulated in the WTO as well. Another kind of possibility is where you're dealing with issues that genuinely involve international harmonization or at least reconciliation or cooperation is to do it through more informal transnational regulatory networks, which there's some legal academics who are doing interesting scholarship on.
And here there really is some promise of new methods of accountability. One example is ICANN (Internet Corporation for Assigned Names and Numbers), which some of you will know about. It's a very controversial organization that deals with the management of domain names and instead of being an intergovernmental organization it's private-sector based. It has a very different kind of accountability mechanism that some people have criticized; accountability doesn't go through national governments. There's a membership and the membership at large, which is anyone who's concerned with ICANN can actually vote for at least five members of the board of directors. But they're attempting to develop new forms of accountability in global governance. There's a group that's devoted to attacking ICANN, ICANN Watch, that says that it's not transparent enough. But it's vastly more transparent than places like the WTO. So I think we should watch carefully these kinds of experiments and particularly also in the standards area, which is related to this and was discussed in the last panel. I totally agree with what was said about the International Tele-communications Union. Again we might need to develop alternative methods of transnational governance to deal with those kinds of issues.
JAMES R. YOUNG: You know I think this is another area, too, where to echo something that Michael said a few minutes ago, this dialogue, this international dialogue that the globalization of antitrust has led to, this is not just about other people learning to do it the way the Americans do. I think one of the very beneficial aspects of this dialogue is to throw a bit of a light on shortcomings on the American side of the process. For example, one of the very good things about EU review of mergers is that it's centralized and decisive. Merger review in the United States, by contrast, is very decentralized. I know this from hard experience. After you have gone through a year of losing sleep and gaining weight trying to get the Department of Justice to approve your merger, now you get to go to the FCC and go over exactly the same issues. This is a little wacky, I think. So one of, I think, one of the interesting byproducts that's come out of these reviews of international merger reviews is a push toward more consolidation, more streamlining of the American merger review process.
So we hope that we've had the opportunity to at least present a few general considerations about what globalization and the convergence and the future of competition may hold for us. Issues about at least the general character of the markets. Issues about how the globalization is going to affect the analysis and review of those markets. And I think we'll hold it there and Jeff, we'll see what we have by way of questions. Thank you very much.
DEAN JEFFREY S. LEHMAN: I have a few questions here and there are people with blue cards for people who would like to pose more. I'd also like to remind people, please in your folders there are the yellow sheets. And it is now time for members of the audience also to be doing their part in answering the questions that are posed there as we try to build on the work that's being done in the conference. These are the questions about your perspectives on the most important issues about law and policy that are arising in this area.
First question I have here is: do the possibilities of winner-take-all markets increase the risk that instead of getting out of the way, in Mike's words, governments will subsidize inferior technologies?
MARSHALL VAN ALSTYNE: I'll guess that was directed at me. I'm actually not necessarily sure that that would be a problem. The phenomena of winner-take-all markets are pretty much there regardless of whether or not it's the government that designed that particular technology. My own background originally was in computer science and I actually worked for a defense contractor for a long time. At that time the government required us to write code in ADA. I don't know how many of you have actually done that or how popular that is in the market place any longer. So I wouldn't necessarily assume that government endorsement of a particular standard would lead to its effectiveness. Rather the very virtue of an information good being higher quality tends to make it more successful. So I would tend to think that wouldn't be as much of a problem.
DEAN JEFFREY S. LEHMAN: Anybody else have comments about the subsidies issue, government subsidies? Okay. What measures exist to battle piracy outside the United States? Which are most effective and how do we expect the fight against piracy to evolve in the future? Again, talking about free information goods and the problems that are associated with that.
MARSHALL VAN ALSTYNE: Let me challenge the assumptions of the questions just a little bit. First of all you have to ask the question, why is piracy really a problem? There's actually some very good reason to believe that piracy leads people to experiment with software, to adopt it, to create the very network externalities that lead to a successful information good. Many of you may recall that in the '80s most of the discs that you got were copy protected. All of that's been dropped. Why is that? Typically the producers actually benefit in some ways from getting that. You really cannot simply add up the sales and then multiply that by the piracy rate and then assume that those are lost revenues of the organization. As a matter of fact, I returned from Microsoft research only a couple of weeks ago and heard a marvelous quote from Bill Gates with respect to the piracy of software in China. It was a marvelous quote. It was really just, "As long as they're stealing our software." And I think actually there's a lot of wisdom and insight in that. Now this was heard secondhand; I didn't hear it from Bill so it may merely be hearsay. But, I think that insight is actually quite powerful. So that would be the first question.
The second observation I might make, is that the United States was a terrible pirate nation with respect to intellectual capital for a very long time. It wasn't until we became a more industrialized society that we really acknowledged property rights in information. We should look to our own knitting in terms of what some of the history has been. Some of the developed world actually can get quite significant benefits from adopting software and it's not altogether clear to me that countries particularly where folks are living on a couple bucks a day would have bought the software even if property protections were in place. Now it may in fact be laying a foundation for something more successful. So this is a long-winded answer for having begged the question.
MICHAEL MATHEWS: I'd like to throw a plug in for the ASP model. In this area it guarantees virtually that the software vendor receives all the licensing fees that are due because every seat is recorded by the ASP and licensing fees are paid. For example, PeopleSoft loves to see their products sold through an ASP model because they know it's not being copied and they know how many seats we report to them or how many seats are using the product.
ROBERT L. HOWSE: I would just add that the concern about "piracy" was a major reason why intellectual property got onto the WTO agenda. I share Marshall's skepticism about a simplistic approach to this. There can be welfare losses from enforcing intellectual property protection in certain circumstances just as, of course, there can be welfare gains in others. I don't think that the approach of putting this in the WTO has been very successful simply because it turns out that many countries in the world aren't, whether you think it's a good idea or bad idea, intentionally setting out to encourage piracy. They just aren't deciding to put a lot of law enforcement and administrative resources into dealing with the problem. So now there is a massive task of actually figuring out how to, since they've signed onto this intellectual property agreement, how to help developing countries actually do the enforcement and it turns out the WTO has a handful of people who know anything at all about intellectual property and WIPO, the World Intellectual Property Organization, has a lot more. So it's being done mostly through WIPO and it's very difficult to do on the ground and when this agreement was signed it was held out as kind of a magic solution to this problem and nobody gave any thought to the kind of court system you might have in a lot of developing countries and how you might have to basically reform a country's judiciary in order to get any real value out of this kind of agreement.
DEAN LEHMAN: Next question is: does the Third World really have a chance to compete in this global information economy?
JAMES R. YOUNG: Well let me start. I think that the answer is abundantly yes, of course, it depends on how you define third world. If you look at the advances that have been made in information technology, let me take a simple example, a few years ago a very bright Indian engineering firm came up with an idea for roaming software, that is the software that controls how a mobile system knows where a particular subscriber is so a call can be routed to them, came up with an algorithm for a different kind of roaming software which is orders of magnitude more efficient than anything in use in the United States, it's been adopted here, it's become a standard here and those people have become extraordinarily wealthy. I think it's one of the neat things about globalization. That there are those kind of opportunities. I don't know what other observations others might have.
MARSHALL VAN ALSTYNE: Actually, if I could show one slide, . . . one of the most interesting things about third world countries, what they really have that is interesting to offer, would be unique cultures. How do you find out about unique cultures except through things like tele-communications or multimedia phenomena, or using something with global technology reach? It really makes it possible to offer something that is truly unique and original and sample it and use that as a draw for tourism, use it as a draw for selling local crafts or products or things of that sort. One of the things I'd want to point out, this is just some of the data from the world bank that suggests the degree of openness actually correlates quite strongly with growth and domestic product. Growth of rich countries has been about the same as growth in poor countries that are open. Growth in poor countries that are closed, however, is dramatically behind. So I would hope to suggest that the answer is yes, that there should be ways of taking advantage of it. Sure they are not going to be producing microchips, but you may be able to use the technology to actually promote some of the unique indigenous aspects that are in fact there.
DEAN JEFFREY S. LEHMAN: Okay, this is a different kind of question. Why is the United States a member of most international intellectual property organizations, Paris, the Berne Convention, etc., which also protect fair competition, but why does the U.S. at the same time dislike an international competition regime? That's for you Rob.
ROBERT L. HOWSE: Well, I fear that I may not have been persuasive because if you wrote that question after my talk obviously my explanation was not sufficient. In terms of the Paris and Berne conventions, these are very, very old legal instruments. I have to admit that I'm not exactly sure about the debates that revolved around the decision of the United States to be part of those conventions. In the case of the TRIPS regime, the WTO trade-related intellectual property rights regime, the U.S. was the main mover behind getting that into the WTO and particularly those industries that felt that they could greatly benefit in global competitiveness if their intellectual property was better protected outside of the United States. Up to that time, there had been a tendency to use unilateral U.S. trade law remedies, section 301-type remedies, to press a number of developing countries in particular on their lack of protection for certain kinds of intellectual property rights. And so you had this global negotiation where the U.S. was in the lead and we have as a result an agreement that has a complex set of balances. For example, those of you who have been following the debate about access to AIDS drugs in South Africa will know that, in fact, although the pharmaceutical industry was a big mover behind this agreement on intellectual property rights with the WTO, there is a provision in the agreement that allows compulsory licensing under certain circumstances, which allows you to supply to your own domestic market, for example low-cost medications. What the agreement won't allow you to do, is to try and out-compete the patent holder in third markets. So that's the kind of balance that you have in that agreement. But, it's going to cause a lot of problems for the WTO, again, because you've got some kind of delicate balance that has to be enforced in a dispute settlement. The rules themselves can't be easily changed so when the adjudicator decides how broad or narrow those justifications for compulsory licensing are going to be someone is going to be very, very upset. Either primarily but not exclusively U.S. interests that pushed for global patent protection under TRIPS or developing country interests and other social interests who thought of the compulsory licensing exception as part of the fundamental balance in the agreement. So that will be a real challenge to the legitimacy of the system. I was a skeptic about putting intellectual property rights into the WTO and my prediction is that this skepticism is likely to turn out to be well founded. I had many debates with economists about this. Jagdish Bhagwati, he used to be the advisor, was the advisor to at least one director general of the GATT when these negotiations were in place, didn't seem to be dissenting from the idea that we should have intellectual property in the WTO. A week ago, I read in the Financial Times a letter by Jagdish saying it never should have happened and it should be taken out of the WTO entirely. I think that there were good reasons why it might not have been put there in the first place and I think I mentioned some of them.
On competition, I'm not going to repeat what I've already said. That kind of global regime is not going to be very effective if it's created in an institution that is not very transparent, that is not responsive, that operates by creating ex-ante rules that can't be changed very easily and where there isn't a lot of accepted legitimacy on the part of the judiciary to evolve rules in response to changed circumstances and adjust the learning curve.
JAMES R. YOUNG: Just one other very quick observation, is the D.C. circuit decision, last week, in cable on horizontal limits and vertical limits shows. There are some great differences in the American tradition of regulated markets. There's a very important First Amendment principle, which is different than a lot of European institutions. I'm not saying that ought to be the central reason but I think it's one other reason why American review might want to tend to be different going forward.
DEAN JEFFREY S. LEHMAN: We're running out of time so what I'm going to do is I'm going to bow in Professor Van Alstyne's direction, I'm going to bundle three questions together. They're all about bundling and I guess in keeping with what you suggested you can pick whichever one you find most useful and not pay any attention to the others.
So here they are. The first is, Marshall doesn't your product bundle example assume that the competing products are perfect substitutes when they rarely are? Secondly, the Word Perfect suite sells for $99 and includes the ability to write PDF files, the Acrobat readable files. The Microsoft suite sells to anyone who wants to buy it for much, much more, at least twice as much, yet the Microsoft suite now dominates the office suite market. This does not seem to fit into a competitive model. Please discuss. And finally, bundling is at the root of the general Microsoft issue. DOS, the PC operating system, was migrated into Windows; Microsoft Word was bundled in. Word Perfect was unable to bundle due to proprietary information in the operating system. Excel was bundled into Office, Explorer bundled into Windows '95. Now, Microsoft is trying to lock up Java. Is this predatory? Is it brilliant? Is it legal, is it not?
MARSHALL VAN ALSTYNE: The world according to Garp. All of economics in three minutes. All right. Tackling as much as I can remember in order. The imperfect substitutability of the arguments does, in fact, weaken it somewhat. But, if there's any complementarity among the products that are bundled, then, in fact, you actually get an overwhelming effect. You might get some imperfect substitutability between say Lotus and Excel, but the fact that Excel is interoperable with Word in ways it may not be with a competitor's product actually reinforces it in the opposite direction. So in that particular case, bundling would actually then be much, much stronger.
Now with respect to a couple of the other competitive issues, you have to desegregate some of the bundling and some of the network externality issues. Sometimes, again, it really makes sense to. Okay let's pick up on the why it is that you may get additional functionality in others now that they're trying to compete. Once a standard is in place, how many of you are actually willing to switch from Word to Word Perfect after you've actually learned that? You've got a switching cost in terms of your interface design, it's effectively lock-in, that may cause you to incur quite substantial costs to learn a new package. So the fact that you may get some additional functionality, in this case the PDF file capability, may still not be sufficiently overwhelming to you to cause you to switch. To carry the metaphor further, if on the other hand you were to receive $1000 a lot of you probably would switch. It's just a matter of switching costs. At some point it's worth it. And if there are enough of your colleagues that are also compatible in that form then the network externality would move in the other direction. There' s a good question of momentum versus inertia. When does a community adopt a technology too fast and when does it adopt that technology too late? Network externalities often tend to cause a technology to be adopted too late, particularly because of some of these switching costs.
Now with respect to Java, it's clear to me that there are strong efforts to try to undermine Java. My understanding is, from reading Judge Jackson's findings of fact, that Java was perhaps one of the biggest threats. And why Internet Explorer was really put out there was a way to try to prevent Netscape from disseminating Java. Because what it did was it weakened the applications barrier to entry on the Windows operating system platform. If you could write an application once that would run anywhere, then Java actually made it. Java lowered that barrier to entry. In some sense, it lowers the switching cost. So from a consumer's perspective you really would prefer to see a standardized Java, one which did not have its standards undermined because you would then perhaps get some additional functionality. So I'll hope that's at least the majority of the answers. If there are others, I'm happy to pick them up later.
DEAN JEFFREY S. LEHMAN: It's the end of this panel. Please join me in thanking our panelists. We now have a lunch break. Lunch is served in the Lawyer's Club cafeteria, which is the building directly behind me.
Producing, Owning, and Using Intellectual Property
DEAN JEFFREY S. LEHMAN: This panel is entitled "Producing, Owning, and Using Intellectual Property." There has been a change in the composition of the panel. Hank Barry was initially supposed to be here, the interim CEO of Napster. There's been insistence on the part of a judge that he be elsewhere and so we have with us instead vice president from Napster, Manus Cooney. Mr. Cooney is a graduate of Villanova University and University of Baltimore Law School. He has served as chief counsel and staff director at the United States Senate Judiciary Committee where he was the principal legal and policy advisor to the Chairman Senator Orrin Hatch. He is currently the Vice President for corporate and policy development at Napster. He is responsible for setting the company's strategic course on legislative policy issues that affect the company, its users and artists. He represents the company before Congress and the administration.
Our three panelists will speak in the following order. Moving from Manus towards that end we have Yochai Benkler who is an associate professor at the New York University School of Law where he teaches Communications Law, Information Law and Policy in the Digital Environment and Law in the Information Economy and Society. His research focuses on the regulation of the digitally networked environment.
Rebecca Eisenberg is a professor at the University of Michigan Law School where she has taught a variety of courses about intellectual property and the regulation of science and the Human Genome Project. Her research focuses on patent laws applied to biotechnology and the role of intellectual property at the public/private divide in research science.
Randal Picker is a professor at the University of Chicago Law School where he teaches courses in antitrust, network industries, technology, innovation and society and the legal infrastructure of high-tech industries. His research has concerned competition policy and regulated industries. So we'll begin with Manus Cooney.
MANUS COONEY: Well, thank you. Sitting in for Hank Barry is an honor but I've seen the look on your faces before. It was my first and only blind date and when the door opened and she was expecting someone different, the look on your faces was similar to what I saw.
This is a fascinating conference and I'm very happy to have the chance to speak with you all. I'm with you here on behalf of Napster.
We are the world's largest file-sharing community. We are, as you all know, the center of some considerable controversy and interest. You may have seen over the last weekend that Napster announced that in a first step in our on-going effort to comply with the three-judge panel's decision, we began implementing a screening technology to block access to certain files. We will block access to files where a copyright holder has complied with a notice requirement of the district court's preliminary injunction submitted by the trial judge earlier this week.
Although we are appealing the decision of the three-judge panel of the Ninth Circuit Court of Appeals, we respect the court's authority and we are working to comply with its decision. Our screening initiative comes on the heels of several months of repeated settlement offers by Napster and which the record labels have, to date, rejected.
The topic for today is producing, owning and using intellectual property. That's quite a bit to take on in a few minutes, but perhaps we can focus our discussion, at least my area of discussion, on one important part of intellectual property and that area is copyright.
Napster presents important questions for the legal profession, policy makers and the general public--as far as the intellectual property debate is concerned. One question is: is copyright law and the content community's interpretation thereof suitable for the basic infrastructure for our world's information policy? It is important when discussing Napster that you keep in mind that Napster is not being sued for copyright infringement. Rather, the record labels claim we have committed contributory and vicarious infringement. Their theories of liability rest entirely on their view that Napster's users are infringing and that Napster is facilitating that infringement. Whether tens of millions of Americans are, to use the record industry's terminology, pirates is a question which scholars are increasingly beginning to question.
Professor Jessica Litman asserts in her new book, Digital Copyright, that the 205-page copyright act does not address this issue. According to Litman and others, should the three-judge panel's decision be permitted to stand, there needs to be serious public dialogue over this issue before we make consumers liable for unauthorized receipt, viewing and hearing of infringing copies of works. Indeed the rules embodied in the copyright act ought to be updated and made clearer.
At best, the record labels are using ambiguities in the law to advance a strategy of ruinous litigation aimed at having the courts decide these consumer liability issues before the public is wise to what is taking place. That is why I believe that Congress will not sit quietly by while the media establishment advances through the courts a technology paradigm for the future that leaves American consumers with less power and without the resources to make legitimate uses of technology information. Whether every citizen needs permission for each act of reading, viewing or learning from material protected by copyright is the core question that will define the nature of our information society and perhaps that is why the record industry, the motion picture industry and the media establishment have seemed so willing to plow seemingly unlimited dollars into fighting the copyright wars. Whether to impose a copyright based legal paradigm on individual consumer activity over the Internet is an important question. Resolving it requires that we must decide what we have a copyright law for. Is it to give creators complete and absolute control over the use, dissemination and access to a work? Or is copyright about striking a balance between the interests of the public at large and the creators?
Professor Litman argues that we're steaming headlong into a world where consumption will be controlled by a pay-per-use or permission-per-use arrangement and this will significantly decrease access to and use of copyrighted works by making access and use more burdensome and much, much more expensive. Let's be honest as well. Refusing to require the consumers to pay at all for personal consumptive use may well reduce the incentive to create and distribute new works, which in turn could well decrease consumers' demands for the use of those works and consumer opportunities to access those works. In my opinion, this is not a public policy path to the future that should be resolved by the courts which are applying judge-made theories of liability and relying on statutory, in the words of Professor Litman, "linguistic fortuity."
Let me ask you a simple question. How many people here in the audience have actually used Napster? Thank you, you all are in very good company. As of last week, our software had been installed more than 64 million times. Each day more than 10 million people use the Napster service. So what is Napster? Napster is a community of people who love and buy music. They share MP3 (Moving Picture Experts Group Layer-3 Audio) files by posting a list of the files they wish to share to Napster servers. They send messages to each other to talk about music and they look at our featured music artists section and each other's file lists to find new music. That is all Napster has been and is. It is a community of music lovers built around a list of files. Napster does not make MP3 files. It does not copy files. And Napster does not transfer files. The users of the service do these things and they share files one at a time, person to person, without any expectation of consideration. And Napster is a great promotional tool. Fully two-thirds of our users say they use Napster to try out and sample music before buying. Maybe this is one reason why the record industry had its best year ever selling over 785 million units in the United States alone. That's over 30 million units more than last year in 1999 and $500 million more than in 1999.
There is something in our legal system called copyright and the principle underlying copyright is a sound one. Let me be very clear on that. Although we disagree with the court of appeals decision, Napster respects copyright law. Napster believes the artists should be paid for their creativity and we believe that those guiding principles can coexist and have coexisted with changing technologies for hundreds of years. And in every case to the benefit of the copyright owner. Today we as a company and we as a society must ask however, as we did with the piano rule, the VCR and the Xerox machine, how will we apply this law to new technology. Will new technologies be built around an absolute definition of copyright law? A policy of absolute and complete control over creative works? How do we balance the limited monopoly we give to authors in order to encourage original expression with the limitations that are on that monopoly that society must, must have so that we as a whole can share, grow and build and grow upon one another's creativity.
We need to build systems and processes that work right now so that we can have a system that will work well in five years. If CDs (Compact Discs) are eventually to head the way of the dinosaur and be replaced by MP3s, the record companies have time to develop consumer-friendly technologies and Napster would support and work with them in doing that. But time is our common enemy, so we ought to be getting busy fixing the problems now. But even if we reach a settlement with the record labels, there may be policy implications or legislative requirements. And this brings me to a final issue that I would like to discuss.
Before I joined Napster, I spent over a decade working on these and many other issues on Capitol Hill for the Senate Judiciary Committee. I'd like to share with you a few key observations on how businesses and those interested in technology can best approach the interplay between technology, public policy and the like. The enthusiasm the general public has for Napster has spread to the halls of Congress and the executive branch. Does every member of Congress appreciate the distinction between an MP3 file and a Windows Media file? No, of course not. But they do understand that the technology at use in Napster has been unleashed. They understand that its scale is unprecedented and the understand 64 million users. And they do not believe that millions of their constituents are pirates. Napster is a technology issue that actually resonates with the public. It's a technology issue that while we hope it doesn't prove necessary, many feel is ripe for a legislative solution. And Napster is a technology issue which cuts across political ideology. Conservatives, moderates, and liberals all love music.
Washington is also learning how Napster's helping to drive demand for broadband Internet connections. According to Rob Chen, CEO PC Pitstop, using Napster helps people realize the usefulness of having broadband connections in their home. Those of you who are students who have access to broadband here on campus are going to expect, no you're going to demand, the deployment and access to broadband when you leave campus. Napster is the demand generator for the consumer broadband market. It is also increasingly a demand generator for the PC market place. OEMs (Original Equipment Manufacturer) have all amended their financial forecasts and are turning their attention to generating consumer demand for their products. Napster, in my view, is the PC industry's ultimate demand generator.
I'm a father who this past Christmas had a choice between buying a $500 Internet appliance or a $2000 PC with a ton of memory, a CD burner and a Pentium 3 processor. I also have three daughters. Guess which product I purchased?
In short, policy makers are beginning to see Napster and a favorable resolution of the issues surrounding us, as a spur to the development of peer-to-peer industry and thereby prompting continued investment in Internet companies. And Napster provides a true market challenger to the established media, which creates benefits for artists and consumers alike. The threat that tens of millions of Napster users and countless other beneficiaries of this competition in the recording industry will lose the benefits they currently enjoy is far greater today than it was six months ago as evidenced by the recent demise and downsizing of many online digital media and digital music companies. Just to name a few, Scour, Riffage, Music Maker, Listen.com, EMusic, Myplay and many, many others. In conclusion we should let history be our guide. Every time a new technology makes it easier for listeners to discover, enjoy and share music, the copyright holders, the artists, and publishers end up benefiting. Digital media should be no different. But it requires that we have a discussion, a public discussion, of these issues and that we do not leave these matters to the courts or to "linguistic fortuities" of a statute written before Sean Fanning and the technology he unleashed were born or contemplated. Thank you.
DEAN JEFFREY S. LEHMAN: As our discussants respond there will be two people in the audience passing out blue cards to collect questions from the audience for later. Please fill them out. Also, in your registration packets, once again, please remember to fill out the yellow sheet of audience participation questions to return in the hall in the basket after the panel. So with that we'll go to Yochai Benkler.
YOCHAI BENKLER: Thank you and thanks for inviting me here. It's great to have Napster make stuff that's not so sexy be sexy and mean a lot to a lot of people. But it is a symptom of a much broader phenomenon, and I would like to spend a few minutes just locating it in that context.
The first thing to object to in this panel, though is its name. "Producing, Owning and Using Intellectual Property." Only lawyers produce intellectual property. Other people produce information, culture, knowledge, music, poems. Lawyers produce intellectual property and so we tend to think about it. And this name is symptomatic of a broader concern. The real policy question is how we further information production, cultural production. Intellectual property is one heavily studied but poorly understood institutional mechanism to do this. So what I'd just like to do for the next couple of minutes is identify for you mechanisms of producing information that have nothing at all to do with intellectual property other than to suffer from it, and then talk about the implications of recognizing these mechanisms.
Let's start with Slashdot, which I mention these here to mark two things. First Linux and Open Source software development smack in the middle of our information economy. Some of the most robust pieces of software are written by a few, maybe a few dozen, and up to over 10,000 people collaborating. No one asserting a property right other than to claim that no one else can take, improve and then not let you share the software. Second, and more important things that are less often focused on. People producing, for example, news. On Slashdot, for example, people post news about an area that they share. Nobody is being paid to post. People are contributing. Well, you say, how do we know that it's worth anything? Well this is a tough one. What we see developing is peer review. Well you say, maybe it's just the techies. Maybe it's just the people who are sitting in front of their computers.
Let's look at The Vines. It has articles about history, books, home and garden, movies, music, pets, there's also poetry. People contributing because people want to write, people want to talk to each other and have been living in an economic context that makes it impossible to publish. So what do we have here? We have people who read and then rate. Everybody reads and then rates. How do we know what's good? Well it depends on what other people who have read say is good. And so we find stuff that other people liked sooner, more easily. We can go to other things that other people liked and accordingly will get things that those other participants think are good. So, for example, you get ratings if you look here on the bottom, you'll get ratings based on what it is that people like. Again, what do we have here? We have culture, information, commentary being produced, not in a proprietary model. And then we have relevance and accreditation produced by common reading, not on a proprietary model. But even this seems to me to be too narrow. What we might be thinking of is just the web. The amount of information that is available out there on a non-proprietary model that we take for granted. I just took Google. And the reason I took Google by the way is what makes Google much better than all other web searches is it does one thing substantially better than anyone else. It tells you which is going to be the best source. And it knows which is going to be the best source because it counts how many other people linked to the pages. So people vote by linking to a page and Google tells you this is the stuff that other people on the web thought worthwhile linking to. Again, people vote by linking to something, not on a proprietary model, but as a function of using it. So if you look at who writes about Viking Ships you'll find things all over the place, not necessarily commercially produced, a wide variety of academic and commercial and just amateur, not property based. And perhaps, the most intriguing, the open mind initiative that's actually trying to get people to participate in developing very complicated software projects where the model of collaboration, if you compare to open source, uses non-technologists to perform functions like querying software, working with it, teaching it, collecting thousands of people to work together on a project, giving what it is that they have to give.
Okay, now imagine that this is how software is actually produced, this is how poetry can be produced. What does that tell us? What does it tell us that in the context of an environment that is so pervasively covered by non-propriety information, we nonetheless talk about "Producing, Owning and Using Intellectual Property." The first thing to understand is that in an environment where information is produced not because of IP (Intellectual Property), IP only makes using information harder. That's all it does. The only time that IP starts helping is when it brings in those who wouldn't produce otherwise. But when you're in the context of a world where so much non-proprietary production is going on, the tradeoff of IP is very different.
Now, the blindness to non-proprietary production and its centrality to the production of information, knowledge and culture in our society is widespread. When we look at it politically, what we see is a systematic imbalance in the political economy of intellectual property law because all of the benefits of such laws are concentrated in a small number of industries, in a small number of companies. So Hollywood and the recording industry push copyright and its neighboring rights for example. Elsevier pushes the database protection right. What we see is very heavily concentrated private benefits on the side of IP and very diffuse costs to all of these thousands of people who could be producing in all of these ways on the other side. When you get this kind of imbalance, you get a lot of protection.
Intellectually, we also see a very poorly understood mechanism, intellectual property. Poorly understood in the sense that the economics of it are very difficult, that the traditional welfare economics of it would suggest there is such a thing as too much intellectual property and we may well be there already. The few empirical studies that exist, such as recent studies by Wesley Cohen's study for Carnegie Melon, Josh Learner at the Harvard Business School, Adam Jaffee's survey of empirical studies, in specific industries as well as across industries systematically fail to find an effect that increasing patent protection increases innovation. Maybe I'm overstating the case, but the current studies don't show a very strong effect. Nonetheless, the absence of evidence the IP does what it's supposed to do, is not part of our conversation.
What we do have, when we look at the past five years on the legal side, is a pervasive enclosure movement in all dimensions of intellectually property. We see more, and easier to get patents in business methods and in software, which we didn't see in business methods at all or in software as much, in the past. We see trademark moving from a confusion concept and a consumer protection like concept to a good will or proprietarian type concept. We see the attempt to create database rights, rights in raw data that didn't exist before.
Copyright in particular, is where Napster then stirred so many hearts. We have seen the extension to individual use as a core aspect of enforcement, which it never was. In particular, we see expanded criminalization, "Pirates" is one word, but actually making millions of users into felons is quite another matter. And when you're talking about No Electronic Theft Act, if you read the Ninth Circuit opinion in Napster, you might be talking about millions of felons in the technical legal sense. That's a problem.
Most importantly, we see dramatic expansion of private ordering through the digital millennium copyright act and the uniform computer information transactions act. Two pieces of legislation that effectively permit owners of inventories of copyrighted materials, in fact, even non-copyrighted materials, in fact, even non-copyrighted materials, to close them up technologically and contractually well beyond anything that we in the past did in copyright. And this is potentially displacing intellectual property, displacing the public balance between access and incentives with a private set of constraints imposed by those whose business model it is to charge for every access. And that is a serious policy problem, a policy problem that we will not begin to address unless and until we overcome the intellectual barriers of understanding that intellectual property could be bad not only good and should be limited based on public policy concerns. And it is a problem we will not begin to solve until we solve the systematic political imbalance that pushes us to increase as intellectual property protection without really accounting for the cost side of it properly.
REBECCA EISENBERG: I'm Becky Eisenberg and I'm an intellectual property scholar but by no means an expert on either telecommunications or information technology. You notice I'm the only panel member who didn't come here with a laptop today. I'm speaking from hard copy notes here. I write about biotechnology patents. That used to be way over on the other side of the intellectual property universe from information technology, but they've been moving closer together as biotechnology has converged with information technology in any number of ways. So I'm starting to go to more conferences where people like Yochai Benkler and Jessica Litman are talking about information technology and I'm starting to hear about their concerns and their perspectives. Within that community, Napster is quite a hot topic. But their normative bearings are somewhat different from mine. I guess I would quibble somewhat with Yochai's characterization of the empirical literature as offering no support for any positive benefits from intellectual property. I would say that the empirical literature suggests that the impact is quite different in different parts of the economy.
The part that I study is where I think the case for intellectual property is clearest, the biopharmaceutical research area. There's a pretty clear story about the importance of patents in promoting private sector investment in research and product development. That story might be contested in certain places. Certainly academic scientists and increasingly medical practitioners are ambivalent about patents, which often means they feel entitled to pursue their own patents but they feel that their activities should not be touched by the patent rights of others.
But, in any event, you have a strong voice coming from the private sector about the importance of patents in motivating their research and development. In information technology, I think that the story is quite different. Even within the private sector the story is quite different. That is, some firms love intellectually property and pursue it aggressively, talk it up without apology. Others think IP, particularly patents but also copyright sometimes, is just a huge threat to progress, is killing the industry, is strangling the industry. Copyright scholars that I read are by and large skeptical about strong intellectual property claims to information products and that's very interesting to me. It's becoming increasingly relevant to what I study and to what I understand, but it's not really where I'm starting. It's not central to what I'm looking at. So when I hear a generally strong pro-Napster viewpoint coming from that community, from people like Yochai Benkler, I'm impressed and I'm interested. But I'm not ready to join in the chorus necessarily. My normative bearings from the biopharmaceutical research setting tell me that intellectual property rights sometimes do matter, that they motivate socially productive investments and that we shouldn't lightly assume that we lose nothing but shackles when we set them aside.
I have another context for thinking about Napster, however. And that is my kids, who adore Napster. I'm a Napster mom in other words. I think that status has informed my perspective on Napster at least as much as my status as an intellectual property scholar. I don't use Napster myself for a variety of reasons, including that it seems to me I'm probably infringing on other people's copyrights when I do that. I think it's not clear whether Napster is infringing anybody's copyrights, you can make arguments about that, although I guess the Ninth Circuit has given its view on that question. But I think it's a lot harder to make the case that the users are not infringing, and I don't feel like I need to do that and I see no particularly good reason for me doing that. I feel quite differently about the use of copyrighted works in my course packs or in my scholarship, which I think should plainly count as fair use, although it's not clear that courts would agree with me. But my normative bearings are quite different for Napster than they are for course packs.
But I'm not stopping my kids from using Napster, and that's also interesting. I talk to them about it. I guess maybe the chorus of support for Napster from people like Yochai Benkler and Jessica Litman has moved me somewhat, at least to the point where I'm disoriented. I'm not sure that I want to spend a lot of parental capital in prohibiting my kids from using it. So instead we talk.
I would feel quite differently if my kids were going to Tower Records and stealing CDs. I would be very angry and very upset if they were doing that. I wouldn't stand back. I'd go to great lengths to make them understand that they were doing something that was very wrong. I would compel them to pay for what they had taken, to apologize, to promise never do it again. I would restrict their privileges in ways that made it harder for them to do that again.
I'm not entirely sure why I don't feel the same way about my kids using Napster, but I don't. I plainly don't. And the fact that I haven't stopped them from using Napster provides me with a kind of interesting window on Napster culture. I talk to my kids about Napster. My 10-year-old recently wrote a school paper about Napster. I showed him the Ninth Circuit opinion as he was working on his paper, I've talked to other mothers about Napster use, whether their kids are using Napster, how they feel about it, what kind of conversations they're having with their kids, and I just kind of pay generally more attention to what's going on with Napster from the user perspective because it involves my kids. And on the basis of all of the signals I'm getting in my capacity as Napster mom, I think there's an interesting social phenomenon going on here that's quite different from anything that I recall happening around the introduction of earlier copying technologies like cassette tape recorders and video tape recorders. It's kind of fun being middle aged sometimes. You get kind of a longitudinal perspective that makes certain things salient that you wouldn't otherwise notice.
When earlier copying technologies were introduced, I think most people felt that what they were doing when they used those technologies, when they made a tape recording of a record or a TV show or something like that, was perfectly fine. It was probably legal if they thought about it. If they didn't think about it, they thought it should be legal, it's harmless. It's nobody's business. People didn't have the sense that they were violating any important social norms through using those copying technologies.
I don't think that's the case for Napster use. You may disagree, but it seems to me from my perspective that Napster users often believe that they are violating the copyright laws. And they don't mind that. In fact, that's part of what they like about using Napster. Many of the kids who are downloading music with Napster could easily go to Tower Records and buy the CD. Downloading the music for free saves them some trouble, it saves them some money but it's also doing something else for them. It's not simply improving their access to music. It makes them participants in a social movement, a transgressive social movement. A movement of rule breakers. They get a kick out of that by using Napster they proclaim their affiliation with a new generation of Internet-savvy, free music listeners that aren't going to let these ossified copyright laws from an earlier era cramp their style.
When I search for an analogy from my own youth I don't think about cassette tape recorders, which are nothing like this. What comes to mind is transgressive attitudes about sex and drugs. We take it for granted nowadays that you don't need a license to have sex. But 35 years ago many people thought that it was morally wrong, that sexual intercourse outside of marriage was morally wrong. It's almost hard to get back into that frame of mind. And the loosening of that norm began as a transgressive youth movement. Somewhat like what we see happening with Napster today. Various moves by the authorities to tighten the rules against unlicensed sex were ridiculed, protested, evaded, ignored. Very much like the various efforts to clamp down on Napster use.
Smoking marijuana has had a somewhat different history, but it looked, like it was on a similar track 30 to 35 years ago. Everybody on college campuses knew smoking marijuana was illegal, but there wasn't a lot of respect for those laws. The law stopped some people from doing it, but it didn't stop everybody from doing it by any means. These were considered pointless laws of an earlier generation. The metaphor was Prohibition, this was a latter day Prohibition, it was misguided, destined to wither away. Not everybody smoked marijuana, not everybody uses Napster, but you were a traitor to your generation if you called the cops. Right? Nobody wanted to do that either. So you kept quiet, you didn't inhale, and you became a part of the movement in effect. That experience of going along with the prevailing culture, which said that these are rules to be disregarded had the effect of the non-participants in their normative bearings.
I'm not sure what the Napster equivalent of neither calling the cops nor inhaling is, but I suspect there are a lot of you out there who are doing just that. It's sort of like what I'm doing, I suppose, as a mother in allowing my kids to use Napster, and it's hard to stay motionless at the top of that slippery slope. Here's an example of one of the things that happens in my role as Napster mom. One of the favorite things my kids love to download is Weird Al Yankovic parodies of various songs that they've never heard (mostly because these songs were way before their time). And I can't stand it that they're laughing at these parodies without any familiarity with the original. Now, my husband is an Audiophile. He has an extensive music collection, and often we own the original and we can play it for them, and they go back and play the parody again with new understanding. Often we don't own the original, because the original was a really terrible song that was ubiquitous on the airways for three weeks and then disappeared and I don't want to go out and try to buy that song. Well, my son has an idea for where we can get that song. He wants to go look for it at Napster. So you can see how I'm compromised, how you get swept along by the movement if you aren't going to say this is an absolute violation of the rules.
Today, looking back with the benefit of hindsight, the drug laws have regained a lot of their normative luster. I think many people think that drug laws are a good thing, worthy of enforcement. Not everybody. Some people retain their libertarian attitudes. But I think the drug laws are in much stronger shape as a normative force in our society than they were 30 years ago. I don't think that's the case for the sex laws. I think the sex laws have never recovered from the assault on their normative force. Some of us nowadays only practice licensed sex, but you have a hard time getting indignant, morally indignant about people who practice sex without a license.
So what about Napster? Is Napster the new sex or is Napster the new marijuana? I'm not really sure. When the thrill of the transgression wears off, or when the current generation of Napster users moves beyond the age at which they get a thrill out of the transgression alone, will they decide to give up unlicensed sharing of music files and the copyright line? Or, like most of my generation did with the laws about smoking marijuana, will they decide that well these are really good laws and I'm going to abide by them? Or, will they conclude that copyright laws are simply an anachronism, not worthy of their respect? I think this is a very serious question that may determine the future of the copyright laws.
The copyright owners face a challenge, I think, that the opponents of unlicensed sex and the opponents of marijuana smoking didn't have to worry about. And that is that they can't simply rely on the ossified laws, they always need to come back to Congress for more. Maybe the current laws will be sufficient to shut down Napster, I don't know the answer to that. But they're not going to be sufficient to shut down the transgressive movement entirely. They need to keep coming back, and this has been shown repeatedly throughout history; Jessica Litman's work chronicles this for over a century. New technologies require coming back to Congress and seeking stricter laws. They need a new legislative fix in order to preserve their rents as market incumbents. They can't simply rest on their current rights. Whether Congress is going to keep indulging them may, at some point, depend on popular attitudes toward copyright in the information economy. Napster, I think, is playing a formative role in the attitudes of the generation that's currently coming of age. It's a generation that's very comfortable with computers, that's used to getting information for free over the web, that's much more sanguine about the capacity of business models to adapt to that phenomenon.
Last year, I heard a talk by a lawyer from Microsoft who does enforcement against software pirates around the world. And she told kind of an interesting story about efforts by Microsoft to take the pulse of the public, to identify the most appealing arguments against software piracy. They assembled focus groups and threw various arguments at them to see which ones appealed. And to their great surprise, the argument that played the best with the focus groups was that software piracy sets a bad example for our children. That was very interesting to me. With Napster, I think the tables are turned. Now it's our children who are setting the example for us, as they lead us into the use of these new technologies. And that's really a force to be reckoned with.
RANDAL C. PICKER: I think I have the answer to Becky's question which was the equivalent of don't inhale. Manus asked if we used Napster and I dutifully raised my hand. I downloaded, but I never listened. I assume I'm clean.
I want to talk about a variety of issues. I want to say a few words about the Ninth Circuit's opinion; talk a little bit about the future; and then, showing the ability of a law and econ person to take any sexy topic--a topic about whether Napster is the new sex--and make it dull. I want to talk about virtual inventory, which is what I think this case is really about. I think managing and regulating virtual inventory is precisely what's at stake in the Napster situation and I'll try to persuade you why that is.
The Ninth Circuit opinion I think is actually a very interesting opinion. I urge you to read it if you already haven't. As Manus pointed out, obviously it's a two-step process to get to Napster here. The first step is finding the underlying violation by consumers. A second step is taking one of our theories of third-party responsibility and somehow attaching it to Napster. That's a two-step process.
Step one of that process involves this inquiry under fair use. I guess I want to disagree with Manus in saying that this is about "linguistic fortuities" or in some sense ancient ideas. I think the Ninth Circuit is actually quite sophisticated about this. I think it has a good intuitive sense of what's going on here and I think it's fairly simple. They look at the world and they say, "Look, offline fair use doesn't scale online." So things that we accepted in the offline world as being perfectly acceptable, and you can sort of run through the situations--Becky, copying with cassettes--those things might have been perfectly fine as fair use in an offline world, but online when you have lower transaction costs and perfect copying technology, that doesn't scale. It doesn't scale because the commercial consequences of those activities are changed. And it's those commercial consequences which led the Ninth Circuit to conclude, I think correctly, that what otherwise would have been a fair use in an offline world doesn't count as fair use in the online world. So I think actually it's not about "linguistic fortuities." I think the Ninth Circuit was reasonably sophisticated.
Step two of that process was to look at where Napster fit under the Sony decision. And I think what is interesting, is how willing the Ninth Circuit was to in some sense do an end run on Sony. I think that's, when we talk about this kind of thing at lunch at the University of Chicago--we're pretty dull, this is what we talk about at lunch--and my colleagues would say, "Oh, Napster they have to lose." I'd say "well no, not necessarily because the test under Sony merely talks about substantial non-infringing uses." And Napster certainly has a good story about the garage band allowing consensual use. So one might have said if you sort of woodenly apply the Sony decision, Napster would have won. Would have won not because there wasn't a copyright violation--this was the consumer question--but rather when you turn to the third-party question, the substantial non-infringing use test protects Napster.
The Ninth Circuit didn't do that, and, I think, makes a key shift in how this doctrine operates. I think that's important. The key shift is to say "look, unlike the VCR which was out the door once they shipped it and there was nothing to be done. Napster could continue to exercise control." This is the language of the opinion that the Ninth Circuit looks to. And I think that's to embrace a world in which we say design matters. Design decisions matter, software design decisions matter. And if we were to go back to the VCR, maybe VCR design decisions matter. That's a change I think in the doctrine. It's an interesting move. I think it is the right move here, but again it's a switch from where Sony was.
All right, going forward. I want to talk about three issues. I want to talk about music sharing, want to talk a little bit more about third-party liability doctrine, and I want to talk about compulsory access, which will get us to the exotic topic of virtual inventory.
In terms of music sharing, I think we are going to see an interesting response to the Napster decision. I think what's clear from the Napster is that because Napster in some sense was the hub of this peer-to-peer world that that was what gave Napster control and faced them with potential liability. Well, the solution to that, if you read the Ninth Circuit opinion, is to kill off the hub. And we know from a software standpoint that's reasonably straightforward to do. Gnutella and other approaches to this are genuinely peer-to-peer approaches where software sharing or music sharing can take place, where you won't have the hub with the continuing control. And under the Ninth Circuit's opinion, I think read at least narrowly, you won't have liability. I think that's the world we'll embrace.
There are questions about how well Gnutella scales: the fact that we're going to have to look at lots of computers turns out to be fairly clumsy. Napster was a very efficient system in many ways. Having that hub there was quite useful. So it's not obvious that this will be as attractive, but free is attractive and obviously Gnutella will continue to support a free approach to music for Becky's kids.
Second issue here is third-party liability doctrine. I think that that's going to change and I think the natural extension of what the Ninth Circuit has said and I think this gets us to Gnutella being a problem as well, is to say "when you make design decisions you have to accept responsibility for those design decisions." This would create a duty to respect an inexpensive consent technology where a holder of a copyright can effectively wave his or her hand and say "yes I'm in, no I'm out." I think that kind of responsibility is sort of the natural extension of the Ninth Circuit's opinion. An obligation imposed upon creators of these tools to make sure that these tools actually respect copyright. That wasn't an issue at the time of the VCR. That wasn't an issue at the time of the Sony decision, but I think increasingly that's going to be an issue. I think the Ninth Circuit opinion hints at that if it doesn't get there directly.
Finally, the third issue I want to talk about here is compulsory access rules and that will get me to virtual inventory. Manus talked about a congressional solution to this situation and the press has described that as a compulsory licensing solution where the Big Five record labels would be required to license songs to Napster. And the vision here would be that we're going to have a world in which the distribution mechanism online seems very attractive and we can either have that controlled by the Big Five or we can allow entrants like Napster. If we're going to level the playing field between those two groups, we need to give them access to the music. That would be the idea.
I want to talk about compulsory access a little bit. If you've been following the newspapers and Rob Howse mentioned it this morning, there have been two issues of substantial significance in the IP world recently. One is obviously Napster; the other is the possibility of compulsory licensing of AIDS drugs in the Third World. One somehow thinks that's a more compelling situation than the Napster situation. Also, the compulsory access issue that has loomed large in the AOL/Time-Warner merger where the open access issue there is effectively a compulsory access issue. The point of these two examples is to make clear that we're going to see compulsory access emerge as an important issue in situation after situation. These are two of them. The virtual inventory situation is the other one.
Let me talk just a little bit about that. A couple of situations there. One situation where we've seen this already is in the C2C market, in the consumer-to-consumer market, which is basically the world of eBay. The compulsory access issue there, if you've been following this story is, is that there were a number of auction aggregators as they're called; companies that say, "you know, there are lots of websites where you can auction stuff. We'd like to pull all that together in a single site." One-stop shopping. So eBay's got auctions, Yahoo's got auctions, Amazon's got auctions. Pull all those together and put them on a single site. It's called being in the auction aggregation business. eBay didn't like that. eBay is a company which is very successful and has a substantial market share. eBay has been willing in some circumstances to license access but not willing to give non-consensual access. That resulted in litigation where at the end of a day, Bidder's Edge, which was the target of this litigation, died. Died under a virtual trespass theory where the idea was that eBay didn't give access to its computer system, Bidder's Edge was using it non-consensually, that was a trespass to chattels, which I don't think we even teach in law school anymore. Through this virtual trespass theory eBay was able to protect its position and deny Bidder's Edge access. Put differently, eBay had a virtual inventory. Bidder's Edge wanted access to that virtual inventory. eBay was able to prevent that access under this virtual trespass theory.
Version two of this. This hasn't even happened yet. Yet there's been Senate hearings and the Department of Justice supposedly looking at Orbitz. Orbitz, as you may know, is a travel website that is being organized by the airline industry. Where the airline industry will sell seats on the airplanes on their website. Travel agents, as you can imagine, both offline and online are very worried about this website. Why? Well they need access to the same ability to sell if they're going to be in business. That is they need access to the same inventory--that is the airline seats--if they're going to be able to sell. So one of the things they're very concerned about, is neutral rules regarding access to the airline inventory. Again, this is virtual inventory, and if you've purchased an airline ticket online it's a very natural way to do it. Again this is a situation where there's going to be a fight. Senate hearings have taken place already about who controls access to that inventory. And this is a situation where you actually have a history. If you go back and look at the early days, the first virtual inventory case was computerized reservations systems where there ended up being substantial antitrust litigation and ultimately regulation by what was then the Civil Aeronautics Board.
Version three of this is video. Sony's already announced that it intends to sell video directly online at a sight called Moviefly.com. And at least so far the press is reporting that Sony has made a decision--driven again by concern about antitrust liability--that this will not be the exclusive site for Sony content. Instead, they will make Sony content available to other entrants who want to try and sell Sony content online. Again, it's a question about control over the virtual inventory. Sony could take the hard line and say, "We're the sole source of this inventory. We control the delivery online." But for antitrust reasons Sony has chosen not to do that.
Finally that gets us to music, which takes me full circle to Napster. I think Napster's essentially a virtual inventory case. This is a situation where we have this inventory, which has gone online because of the joys of ripping CDs and putting them on your computer. It's a very nice technology, no question about it. To embrace compulsory licensing there would be to take a model which says that we need to have multiple sellers of this virtual inventory to establish a level playing field. I think that, that is the strategy that Napster will take in the next go-round. I think there are three key issues associated with virtual inventory that we need to pay attention to: the feedback loop; scope and bundling issues, which will take us back to this morning's discussion; and finally the question of pricing compulsory access.
eBay's strategy has been very clever. It's a strategy, which says people come to eBay, buyers go to eBay because the sellers are there. Sellers go to eBay because the buyers are there. So it's a winner-take-all situation of the type that Van Alstyne talked about this morning. It's a virtuous circle, self-perpetuating in that way.
Auction aggregators put that model at risk. If I knew that if I picked some obscure website to sell my stuff that it would effectively show up in this combined set of listings because an auction aggregator was taking obscure sites and matching it with eBay, as a seller I have less of a reason to go to eBay and, obviously, I'm going to a competing website as a viewer, a potential buyer. So eBay understood that and in terms of structuring the competition in that market place very much wanted to make sure that it controlled the access to the virtual inventory. Put differently, virtual inventory policies support winner-take-all outcomes. And the consequence of this virtual trespass theory is to give eBay control over its virtual inventory. That's one issue we need to focus on here, consequences of virtual inventory policies for market power.
Issue two is entry scale, scope and bundling. Obviously with regard to the scale issue there's a standard issue here: Napster could go into the music business directly. I could say to Manus right now, "I'm a great singer, it turns out. Let me sing now. Sign me up, promote me and distribute me." They could go into the music business, maybe they're thinking about going into the music business. They certainly could do that. They could do the whole thing. That obviously changes the scale of entry. They can't merely go into a distribution business, but they have to go into the full promotion business and that' s obviously a more complicated undertaking. If we want to simply facilitate competition and distribution, then it's useful to say to Napster, "Napster you only need to enter that sort of area you think you can compete on best. If you think that's distribution let's have you do it. And to do that we need to give you access to this virtual inventory." So again our virtual inventory policies have consequence for the scale of entry.
More interestingly--and I think for this issue the discussion this morning by Van Alstyne of Barry Nalebuff's work, was quite useful--there's also the bundling issue. Turns out to be very valuable. The economics, he went through it nicely; I think it's reasonably straight forward. It's valuable to be in a situation where you can bundle intellectual property goods together. That means having lots of pieces is useful because you can put the pieces together in an intelligent way. An entrant is going to have very few pieces to put together. And if we again want to facilitate entry into the music business, we may need to give access to more pieces to make that possible. That is we'll have multiple bundlers in this situation and Napster would emerge as a bundler. The good thing is, the Internet makes that easier. The lower transaction costs of the Internet means it's really possible to have many bundlers. Again in the offline world, pre-Internet, bundling was done by getting 16 songs on a CD, that was a form of bundling. Now in an online world, it's fairly easy to have many kinds of bundles, many bundlers, so long as they have access to the virtual inventory. So again our virtual inventory policy is going to have important consequences and the bundling literature suggests that bundling has important social consequences. So I think we're going to need to think about that issue as well.
And finally, and I think more traditionally, if Napster's going to get a compulsory license, we've got to figure how to price that. Pricing these things historically has turned out to be quite tricky. We have to worry about investment incentives. Yes, there's certainly a world of people happy to create stuff for free, but there's also a world of people who aren't so willing to do that. I'm happy to have people who want to create for free. I'm happy to have copyleft. But I also think we probably need copyright and I worry about that here. So I think virtual inventory is the future. It's not very sexy, but I think it turns out most economic things aren't that sexy. I think that's the world we're going to embrace.
DEAN JEFFREY S. LEHMAN: Okay we have time for some questions. Let me begin which is a general question for the panel and this is a question about how we go about resolving these disputes. And I guess the implicit question is whether courts are a good place for this. It seems that we need a new procedure for resolving IP (Internet Protocol) disputes on the Internet, such as ICANN's domain name dispute resolution policy does for domain names. What do you recommend and are any such alternative procedures being discussed?
MANUS COONEY: Well I don't think it's best to leave it entirely to the courts. We heard some defense of the Ninth Circuit's decision. It's worth noting the Ninth Circuit also found the Sony Betamax to be infringing and had ordered the trial court in that case, I believe, to enjoin Sony from distributing, making available, the Betamax. Fortunately, the Supreme Court eventually took the case and Sony was never enjoined from selling the Betamax. But one can only ponder what our culture would be like today, whether we would have the videotape machine, whether the benefits that the motion picture industry has received as a result of the videotape machine, had as in the case of Napster, had the plaintiffs in that case been able to obtain a pretrial preliminary injunction essentially ordering Sony and all other videotape machine distributors to stop selling their product. I don't think that courts applying, as in the case of Napster, a judge-made theory of liability (contributory and vicarious infringement is not in the copyright act) to a statute, which was written before Sean Fanning was born, is the way to resolve these important technology and access to information issues that, frankly, are going to have a profound effect on our economy and the development of technology.
YOCHAI BENKLER: I'd say that it's not a process question. It's not an institutional competence question. It's a question of getting a very, very, very difficult question right. I think intellectual property is difficult under technologically stable conditions and I think it gets even more complicated when a lot of the parameters around which certain settlements have congealed change. I think there are systematic problems with Congress as I mentioned when I talked about political economy. There are systematic problems with judges who are professional IP lawyers, many of them, who sit on these cases and have a certain bias to try to normalize events to fit their understanding. Certainly, pushing it into an organization like ICANN is not necessarily going to make it better. Within each of these institutions there are advantages and disadvantages and we need to try to make the best arguments possible in there. But it's not a question of institutional competence. Both of the relevant players, both courts and the legislature, have internal resistance to seeing or evaluating completely neutrally the skeptical or the critical positions that more IP is good and it is a hard question. I don't think that it is a simple question and therefore I'm not sure it's an institutional competence question.
DEAN JEFFREY S. LEHMAN: Okay, well staying in the process domain just one more level, this is a question about globalization. Napster serves an international community. It's a global Internet. U.S. copyright law might not reach worldwide. Why doesn't this lead to some kind of international competition that would lead Napster or an overseas version of Napster to emerge in a jurisdiction with less restrictive copyright law?
RANDAL C. PICKER: I think that's a real issue and I'm curious to know if Napster's thinking about doing that. I think the ability to choose different regimes is very important here. I go to international websites not as often as I go to U.S. websites, but I go to them frequently.
YOCHAI BENKLER: U.S. industrial or trade policy has a very heavy component of making sure that other countries if they want to participate in the general trade system enforce intellectual property. Actually it's closer to your area, when you're talking about India and generic drugs, that's the closest place where a very large and important industry is being squelched by a country that has no interest in squelching it. It's an internal interest simply because of international trade pressure. And I wouldn't be surprised if the same thing happens with something like Napster.
REBECCA EISENBERG: But that's strictly as a matter of trade pressure, I think, rather than a matter of U.S. intellectual property law reaching beyond its borders.
DEAN JEFFREY S. LEHMAN: Manus you are invited.
MANUS COONEY: Napster is a United States company; we're an American company. But the point that Randal makes, in so far as the departure of the Ninth Circuit from the Supreme Court's decision in Sony and that is that third parties, technology companies, may very well be liable for their technology. That has profound implications for Internet service providers. It would not surprise me one bit that the next step that the content community would take, were there to be a Napster-like company established in some Third World nation, that they would seek (we heard from Peter Chernin and other heads of motion picture studios and the like that the time has come) to put the burden and liability on Internet service providers and the Internet backbone companies. They could have the obligation to police the Internet for the content community. And, again, that is the road you head down when copyright law serves as the foundation around which our information policy is developed. It is filled with problems and I don't think that the public, frankly, is aware of the consequences of a failure to engage in a meaningful discussion of these issues.
YOCHAI BENKLER: Bucking the question's queue and picking up on this, I really thought the most concerning aspect of your presentation, Randal, was the focus on liability for non-copyright friendly design. The idea that you would be liable if given a menu of design choices you chose to design your service not in the way that makes it easiest to enforce copyright. Or in this case, to enforce consent. This is something that I don't know I wrote about five or six years ago on making sure that the ISP (Internet Service Provider) liability cases go not in the direction that enforces design liability, but in a way that is neutral as between designs and enforces liability to the extent that you structure your design as something where you add value by exerting control. Or not impose liability when you're adding value by eliminating controls. The DMCA (Digital Millennium Copyright Act) itself has essentially resolved legislatively, at least, that level by trying to give the core ISPs, the backbone and carriage ISPs, carrier immunity in order not to force them to go there.
RANDAL C. PICKER: Yes, assuming they meet certain standards obviously. Yes, obviously.
REBECCA EISENBERG: Once you decide you're going to have contributory infringement, you really have taken a big step in that direction, it seems to me, if you decide that we're going to hold people liable for enabling others to infringe copyrights. That's the big analytical move. Liability for design choices that facilitate or impede copyright enforcement seems like a much smaller step.
YOCHAI BENKLER: And because of that, that's essentially when you get from '91 CompuServe essentially to '94, you get the ISP liability cases on information and copyright. And you get this concern that, effectively law is going to force a particular design; a design that's about controlling. And with the DMCA, the ISPs come back and stop it in a very minimal way. But this does suggest a much broader concern. The copyright industries are involved today in the standard-setting process for hard drives. They are trying to persuade the entire equipment world to be designed around a particular business model rather than wherever it is the technology seems to be most effective for a variety of uses. That's a problem.
RANDAL C. PICKER: I confess I don't know what I think about the merits ultimately. I think it's a hard issue. But I think the Ninth Circuit opinion is one which clearly looks at this idea of design control and responsibility for it.
MANUS COONEY: That's why I believe that there is good chance that we'll be heard en banc and it'll be heard by the Supreme Court. They departed from Sony. And the Ninth Circuit's record on contributory infringement isn't a very strong one.
RANDAL C. PICKER: I confess I usually assume the Ninth Circuit is wrong.
DEAN JEFFREY S. LEHMAN: But if I could just go one further step with this. I do think one could have read Sony as saying the Supreme Court was really straining very hard to find the existence of non-infringing use there. Mr. Rogers assumes a very large, large role in that opinion. It seems to me that in the Napster case, the Ninth Circuit is taking the opposite line and is ignoring the possibility of a wide variety, as Yochai's been talking about, of non-infringing uses. The suggestion that Randy made about an explanation for this, was a technological shift and that the notion is that here there's the possibility of unlimited free identical copying and that might account for the difference in posture. I'm curious if the other panelists think that's a plausible account for what seems to be a very strong difference in orientation behind the opinions.
REBECCA EISENBERG: That might be the underlying real politic. I think there's a question as to what you do in a circumstance, suppose that events have changed to the point where the analytical approach we took earlier now has vastly different consequences. What do you do about that? Where does the burden of inertia lie? Do we need to go back to Congress and see if they really like this concept of vicarious liability and want to expand it or not? The Ninth Circuit, I think, was viewing this, again getting back to my model of Napster as the new marijuana or sex, I think they view this as an enormous college prank. That's sort of the tone of the opinion. You need to figure out a way of preventing these people from outsmarting the rules, in effect. They look to this as people outsmarting the rules, rather than technology moving in a way that doesn't fit the rules. Maybe we need to go back and revisit the rules.
MANUS COONEY: There are some assumptions built into your theory that I have to disagree with. Number one is that most of the people who use Napster somehow don't intend to pay and don't want to pay for music. We've done extensive polling of our users and a majority of our users would pay and want to pay for access to Napster. They're incredibly loyal to the Naspter service as well. I also question the notion that these are all young people, 42 percent of our users are over the age of 30. The notion that this is all a bunch of high school kids is crazy. I'd say 80 percent of the people here raised their hand when asked if they have used Napster. I think that a lot of the policy makers over the age of 40, perhaps, who aren't using Napster, their only familiarity with it is the fact that their children are using it. But it's much more than children who are using the service. And I think you have to ask yourself whether Napster would be what it is today if the content community of the recording industry was serving the needs of consumers. I don't believe that Napster would exist on the scale it does today were it not for the fact that the record labels are not making their content available online. I worked in the United States Senate for several years. Year after year after year the recording industry and the motion picture industry came to Congress asking for this change or that change in copyright law in order to incentivize the deployment of content online. Congress responded and that simply hasn't happened. Instead they have used the changes in copyright law and any modifications there too to bluntly assail anyone who threatens to enter the industry without their approval. Any nascent technologies, any upstart companies that threaten to disintermediate them, the ultimate, traditional aggregators of these pieces of plastic that people pay $20 for, the notion that someone would step in and remove them from the process, remove them from their entitled role to distribute the content as they see fit, they will fight it as they are today. They're using lawyers, a mountain of lawyers and a ton of lobbyists to shut Napster down. And you have to ask yourself an important question. Where would we be today if it wasn't for Napster? The fact that Riffage is gone, Scour is gone, that EMusic is dying for lack of oxygen, that Myplay is dying for lack of oxygen. None of these companies have been licensed. The fact is that there are companies that have played by the RIAA (Recording Industry Association of America) and its member companies rules and they're going out of business. They're not being licensed. The RIAA has no intention to embrace the Internet on anyone else's schedule but their own. And the fact of the matter is, when Napster was sued, it was 10 kids with black T-shirts and a two-room office. And they thought they'd be able to shut it down in a matter of months. They didn't count on investment from Hummer, Winblad. They didn't count in October of this year of Bertelsman investing in Napster and keeping Napster around. Right now Napster is the only thing standing between the environment, the world that the content community wants. A world where Wall Street and investors will not invest in technologies that are not designed in a way that is satisfactory to the content community. And a world where copyright powers will be used to control the development of technology and, in turn, affect what consumers are able to access, how they will access it and what they will have to pay to access information.
YOCHAI BENKLER: Another point that came up here that I think is important. This is technology control litigation. In other words, if you imagine the post-Bertelsman deal, I have no inside information about the deal, so I'll just imagine. Imagine a situation where Napster competes with free. There are all sorts of services for free out there but for $4.95 a month, the 64 million people get a better search engine, easier scalability than Gnutella, perhaps advance sales of tickets, etc. For $4.95 a month. People today pay $21.95 a month for AOL when they can get Internet access for $4.95. That's a much bigger price differential that people are willing to pay for potentially degraded service as opposed to paying for better service with all sorts of good stuff. Let's say that ends up being what emerges from a settlement in one form or another. That shifts us from a situation where you buy things in which a certain preset order of songs are embedded, usually in some mix of desirable and undesirable, to a situation, where you pay a monthly fee for unlimited access to anything you might want. That is enabled by a particular technological shift introduced by a particular company, that makes, potentially, everybody better off. The problem with technology control litigation is that it raises the cost for any new technology to compete with the incumbent business model. This affects investment incentives, and potentially causes us to lose. No one was thinking about peer-to-peer sharing before Napster, now everybody is thinking about peer-to-peer sharing and distribution systems. That's a big social cost if the threat of litigation prevents companies from going forward and trying to do such things.
RANDAL C. PICKER: But is it your contention that the only way that works is if we start by sharing peer-to-peer someone else's stuff as opposed to sharing our own stuff peer-to-peer?
YOCHAI BENKLER: I'm just talking about the specific historical event here.
RANDAL C. PICKER: I'm trying to understand what the general point is. I accept the history, but the question is if we had said up front, "Oh, no, you can't share other people's stuff peer-to-peer, you want to share your own stuff go to it, but not other people's stuff." Would that have killed off peer-to-peer sharing?
YOCHAI BENKLER: I'm not sure we would have been able to develop that law because we would have had to have first imagined the situation that we disallow. And that's the concern. The concern is that if the expectation in the investment community is that when a new idea comes around, if it threatens certain existing business models, it will be shut down; then you don't get the experimentation with all sorts of ways of doing things. I'm not sure. I don't think actually we wouldn't have gotten peer-to-peer if that statement were made in advance. I just don't think we know always in advance, what it is that we want to block.
RANDAL C. PICKER: Your talk emphasizes that there's a flourishing, robust community of people who aren't driven by commercial IP concerns and that world, I suspect, is happy to experiment and play with peer-to-peer and I take it it would have taken place there, absent Napster.
YOCHAI BENKLER: Yes, and the truth is, one reason why I tried to pull our eyes away from Napster is because my concern is more general and it is about specifically the concern where you get a particular set of industries with a particular set of business models in mind trying to shape the equipment, the entire network architecture around the concept that there's an inventory that gets delivered to consumers as opposed to a sharing system. And in a sense, as I said, I started out by saying Napster's great because it made this issue sexy but the stuff in a sense that's interesting, I'm sorry I don't want to offend you, is well beyond this particular company or for that matter, well beyond this particular industry that is very copyright dependent, as opposed to other industries that claim to be copyright sensitive but are not as copyright sensitive.
DEAN JEFFREY S. LEHMAN: Let me try one more question and this can go in a variety of directions. When you say the organizing principle of the question here is the CD burner. It begins with the observation that a year ago Hank Berry was here and he said that the majority of Napster's users download an MP3, listen to it and then dump it off their hard drives. Obviously they have limited space on their hard drives. Then comes the CD burner, since he was last here and many people would speculate that that's no longer the case. That now we have a separate independent technology produced by someone not associated with Napster. So two questions here. The first question is, absent the CD burner technology, Napster's case might be stronger than it is given the presence of the CD burner technology. How should the interaction between the two affect the way we think about the doctrinal question of whether Napster is itself a violator in a world where there was limited space, it really was just time shifting or sampling or something like that? The second question is, why then does the recording industry choose to pursue Napster rather than the manufacturers of CD burners who as far as we know have not been sued? Anybody want to go with any of that?
REBECCA EISENBERG: It seems to me that the CD burners would look a lot more like VCRs. It would be a lot harder to distinguish from the Sony case. I would guess that. But I don't know. Maybe not. Maybe when analyzing the effect of the new technology on existing markets, you would take into account the factor of Napster.
MANUS COONEY: The problem with this, let's just back up a little bit. The problem with this whole discussion is its premise that this is all a battle about copyright law. And it's not. The reason why manufacturers aren't being sued is because Sony Electronics also now owns Sony Records. What we're really talking about here are multimedia companies. We're not talking about the record labels. We're talking about the Vivendi Universal, a telecommunications company which owns a ton of content. We're talking about AOL-Time Warner, an Internet company, which owns a ton of content now. We're talking about Sony, an electronics manufacturing company that owns a ton of content. The chairman of AOL was quoted in the Washington Post two weeks ago saying that Aimster users aren't doing anything illegal. Aimster, now why are Aimster users not doing anything illegal but Napster users are? I submit to you that the reason why AOL takes that position is because Aimster's built on AOL's proprietary instant messaging service. And they see an opportunity to invest in and perhaps purchase Aimster and take advantage of a market and invest in a market and deploy this technology for their own purpose in the market place. There are other file sharing companies out there that aren't being sued. The reason why Napster's being sued is because it's an aggregated market place of unprecedented scale of unprecedented reach, that they don't control period.
YOCHAI BENKLER: I think there might also be something more specific than that. We had in a sense the CD burner case. It's the Diamond Rio and MP3 files and the recording industry lost. I imagine that if Napster weren't so well tailored to sharing music, but were designed from the start as a file sharing system that was equally used by researchers in the Human Genome Project to share their data as music fans to share music, it would have been a much harder question for the Ninth Circuit. And I think that that has a lot to do with it.
DEAN JEFFREY S. LEHMAN: Please join me in thanking the panel. I want to urge everyone once again to please fill out their yellow sheets and leave them as they go and I want to express all of our gratitude to all of the panelists and speakers over the past three days for a wonderful conference and for the audience for their very thoughtful questions. We look forward to continuing discussion of what is obviously a critical set of issues for law and policy and technology, for our country and for the world.
END OF SYMPOSIUM
- Green Technology and Economic Revitalization
in Michigan (2011)
- The Law and Economics of
Drug Development (2008)
- 21st Century Copyright Law in the Digital Domain (2006)
- Life Sciences, Technology, and the Law (2003)
- Law, Policy, and
The Convergence of Telecommunications and Computing Technologies (2001)
- Challenging Traditional Legal Paradigms: Is Technology Outpacing the Law? (1999)
- Redefining Access to Information: Power, Politics, Law, and the New Technology (1997)
- Advising Businesses in an Online Digital World: The Risks and Rewards of Electronic Commerce (1996)
- Policing the Internet:
Jake Baker and beyond (1995)
- Competition and the Information Superhighway (1994)