Intellectual Property

Exclusivity is the Mother of Invention

by Jack O'Connor on July 15, 2009

in Intellectual Property, Regulation, Tech & Telecom

The web is all aflutter in the debate over handset exclusivity. Harold Feld of Public Knowledge describes in a recently posted video how exclusive deals prevent competition between handsets and raise prices. Wayne Crews and Ryan Young of CEI have fired back, pointing to a handset market with literally dozens of competing devices.

The notion that exclusivity necessarily precludes competition is simply absurd. Apple’s deal with AT&T is precisely the opposite of monopoly. Far from cornering the market on smartphones, Apple has openly refused to sell the iPhone to most of its potential customers. If anything, nonexclusive sales would have discouraged competing handsets, undercutting the incentive for Verizon and Sprint to pay for their exclusive rights to the Blackberry Storm and the Palm Pre. Mr. Feld bemoans that these top-tier phones aren’t competing within any single provider, but this is just like stating that Coke and Pepsi don’t compete because they are sold in separate vending machines.

On the second point, though–that exclusive deals raise prices–Mr. Feld and other pro-regulation advocates have a point. AT&T pays Apple a hefty sum not to make the iPhone available to customers of other providers. That means the phones cost AT&T more than they would’ve otherwise, and customers in turn pay more for them. High prices are a signal to new entrants, of course, but Mr. Feld would certainly push the point. Could Congress really lower prices for consumers, without price controls or their attendant shortages, in one stroke of the regulatory pen?

Well, yes and no. It is likely that the price of the iPhone would fall if government forced Apple to abandon its agreement with AT&T. Prices would fall further still if regulators subpoenaed Apple’s schematics and source code and revoked its patent claims. But while critics attack exclusivity in the margins of Apple’s profits, no one questions the the very core of those profits: the intellectual property and corporate secrets that make the the iPhone so valuable. Why such different reactions to essentially the same business practice? Because novelty is scary. Apple’s sole production rights to the iPhone are nothing special, but its deal with AT&T is somewhat new.

We’re not used to seeing exclusive monopolies in established products, and for good reason. A monopoly is extremely difficult to maintain, and usually only possible with the help of government. It would certainly be unusual if steel, bananas, or personal computers were controlled by a single manufacturer, and it was terrible for consumers when Ma Bell—with great help from the FCC—owned the entire American telephone industry. On the other hand, there’s nothing unusual at all about Scholastic’s sole publishing rights to Harry Potter, or Amazon’s exclusive ownership of the Kindle. Why are we so accustomed to monopolies in some sectors, but wary of them in others?

The answer is that exclusivity can be perfectly natural, and sometimes even essential, for new and innovative products. Every invention starts out exclusive to its creator. Only by leveraging that exclusivity can the creator make a profit. Once a product is well-established, only an act of government can restrict its supply. It took several acts for the FCC to entrench the Bell monopoly, and it would take another to stop Apple’s competitors from building a better smartphone. Good things come to those who wait.

Ultimately, what Mr. Feld is advocating is a textbook case of the broken window fallacy. Whenever a new product is invented, society can always gain by revoking the creators exclusive rights, if we look only at that product in isolation. But it’s like cheating at poker: eventually your friends learn not to play. Prohibitions on exclusivity create shortages just like any other price control, even if these innovation shortages don’t make the evening news. Prominent benefits and hidden losses are a magnet for bad policy, and they can fool even economically literate folks like Mr. Feld who should know better.

Federally Sanctioned Propaganda Machine

by Gary Howard on December 11, 2008 · 1 comment

in Bailout Watch, Economy, Intellectual Property, Nanny State, Odds & Ends, Privacy, Regulation, Tech & Telecom

 

Apple's 1984 "Big Brother" commercial.

Apple's 1984 "Big Brother" ad

An article over at Ad Age brings up an angle on the whole auto industry bailout probably not considered much before.  The fact that a yet-to-be-appointed “car czar” will have control over a multibillion dollar advertising budget for the big three.  Under the guise of “oversight,” this would effectively “Create World’s Most Powerful Marketing Exec[utive].”  

The draft rescue plan for Detroit sent to the White House by Congress yesterday calls for the appointment of a “car czar” who will oversee the Big Three automakers’ expenses over $25 million — which, by extension, would include media buys. Based on Advertising Age’s estimates of spending by General Motors Corp., Chrysler and Ford Motor Co., that would give the as-yet-unnamed car czar control over some $7.3 billion in marketing spending in the U.S. alone.

The most disturbing thoughts about this (particularly to those concerned with liberty) are provoked here: 

The car czar would wield a budget more than double those of AT&T, Verizon, Unilever and Johnson & Johnson, which round out the nation’s top five marketing spenders, and give the car czar more clout with media and agencies than such famed names in marketing as Walmart Chief Marketing Officer Stephen Quinn and Anheuser-Busch VP-Marketing Dave Peacock.

…If the bailout goes through, agencies that work for the Big Three will essentially be toiling on a government account, with all the associated red tape and strictures that involves.

So there you have it.  We should all be concerned about this for many reasons.  As mentioned, the large ad budget that comes with a czar-controlled U.S. auto industry will allow a government bureaucrat to wield unbalanced and unchecked influence over not only who gets ad contracts, but what media outlets get ad money. The czar can simply refuse to give business to an advertising agency who works for a foreign competitor of the big three (or a “non-compliant” corporation), or refuse to pay money to show ads on outlets that they deem “unfriendly” to the administration or its mission.   This will be an unequivocal disaster.  We have already seen the lengths to which administrations (and pre-administrations) have gone to influence and/or silence media they do not like.  What kind of power plays do you think are possible when the administration’s appointee controls a major source of media outlets’ ad revenue? Whatever it ends up being, it won’t be pretty.

Claim of consumers’ fear of auto bankruptcy a canard in bailout debate

by John Berlau on December 8, 2008 · 6 comments

in Bailout Watch, Economy, Intellectual Property, Legal, Mobility, Politics as Usual

Eli, in answer to the blog post you phrased as a question, the argument from the individual you heard, echoed by other Big 3 execs, is not a valid point in support of a bailout.

Their claim that consumers won’t buy from an automaker in bankruptcy is a specious argument. Yes, some won’t, but many consumers also are not going to buy cars from companies perceived to be so weak that they have to beg for a bailout from the government. A company’s clutching to a government lifeline to keep from going bankrupt wouldn’t be that much different for many car buyers than an actual bankruptcy.

This is particularly true if the government forces the companies, as a condition of the bailout, to make “environmentally correct” cars that no one really wants. A company emerging from a Chapter 11 bankruptcy, by contrast, has a chance to win consumers back by making products that they want.

I also addressed your argument that “If the manufacturer no longer exists, then the car parts might not” in a previous Open Market entry (that was cited in a brilliant Washington Times editorial on Thursday). That entry noted the thriving reproduction parts industries for DeLoreans and Studebakers, both made by automakers long defunct (DeLorean went bankrupt in the ’80s and Studebaker folded up shop in the ’60s). The fact of these industries’ existence cuts in favor of consumers in a Big 3 bankruptcy. Given that there would be millions more Big 3 cars on the road than DeLoreans and Studebakers, entrepreneurial firms would rush to acquire the intellectual property rights that a bankruptcy court could easily award so that new parts could be made for consumers. Warranty claims could also be given priority by the bankruptcy court, as the Times editorial noted, and those are usually backed up by the insurance company of the warranty issuer, anyway.

It looks like to tide the companies over, Congress is going to vote this week to let them use money already appropriated for “green cars” for general operating purposes. From a free-market perspective, this action is neutral and may even be a net positive, as it reduces the promotion of a state-directed “green agenda.”

But when Congress comes back next year, bankruptcy must be on the table for both big automakers and big banks, as it is for small businesses every day. Otherwise, the economy may never get out of “Reverse.”

DeLorean disproves domsayers in debate over auto bankruptcies

by John Berlau on November 28, 2008 · 8 comments

in Bailout Watch, Economy, Intellectual Property, Mobility, Politics as Usual

In the debate about bailing out the Big 3 automakers, it is said that we just can’t allow a bankruptcy. Despite the fact that Chapter 11 bankruptcies have taken place for retailers such as Circuit City and many airlines such as U.S. Airways, autos are said to be different because of the duration of time that people hold on to their cars for.

Horrific senarios are painted of consumers not being able to get parts for their automobiles if manufacturers are no longer in existence. But of all the many admittedly complicated aspects of a bankruptcy of General Motors (the company the Congressional hearings established was in the most trouble), these consumer issues provide the least reason for worry.

In a Chapter 11 bankruptcy, GM would most likely be reorganized into a new company, sans the current management and heavy costs. This is something that has proved impossible so far due to lax management, generous union contracts, and state dealer franchise laws that make car companies pay an arm and a leg to sever a relationship with a car dealer. A bankruptcy could finally force the tackling of these tough issues.

But even if no reorganized company emerges, the production of parts for consumers with existing GM models will almost certainly continue. All that would need to occur is the relatively simple process of the bankruptcy court transferring the GM’s intellectual property rights to a company that wants to manufacture its parts. To see how this would work, it is instructive to look at thriving reproduction parts industry for a car that hasn’t been made since the ’80s: the DeLorean.

The DeLorean Motor Company operated from the mid-’70s to the early ’80s. The company filed for bankruptcy protection in 1982 and the company went into liquidation instead of reorganization, and no new DeLoreans have been made since.

But there is still an active interest in the cars, and the sporty DeLorean DMC-12 was immortalized in the 1985 movie “Back to the Future” and its sequels. According to Wikipedia, “A very large number of the original cars are still on the road after over 25 years; most estimates put it at 6,500 cars surviving out of just over 9,000 built.”

So what happens when these cars need a new part, with the company that makes the cars no longer in business. Well, their drivers can get original and reproduction parts from the new DeLorean Motor Company. This is a new firm with entirely different owneship that acquired the trademark to the original company’s name as well as the rights to its designs.

According to the new DeLorean Motors’ web site, “when the supply of any part is exhausted or becomes no longer available, we endeavor to have the parts remanufactured using our set of the original engineering drawings.” They even sell “new build” DeLoreans using a combination of original and reproduction parts.

Going back even further, one can even buy new reproduction parts for a Studebaker, a car last made in the ’60s. An Indiana company called Studebaker International Inc. performs, according to its web site, “drilling, machining and assembly of parts” for nearly all models of Studebaker.

Of course a lot more people have GM cars than DeLoreans or Studebakers, but this fact cuts in favor of GM consumers. If there can be a thriving business in parts for cars that exist in this limited amount, entrepreneurs will rush to fill the needs of the owners of millions of GM cars on the road.

Resolving warranties is slightly more complicated, but a bankruptcy court would likely award warranty service contracts priority among the debts to be paid. And most warranties are backed by insurance companies, anyway, in the case of a firm’s bankruptcy. More on this in another post.

No “Technology Czar,” Please

by Wayne Crews on November 5, 2008 · 8 comments

in Economy, Intellectual Property, Nanny State, Personal Liberty, Privacy, Tech & Telecom

Like everybody else in town, we’re pondering the implications of the transition to the Obama Administration for various policy areas here at CEI. On the technology/Internet front, CNet’s Declan McCullagh has a superb overview today.

On the high-technology front, president-elect Obama has indicated he’d appoint a Chief Technology Officer. The role seems federal-government-focused: The tech “czar” would manage government technology policy with respect to matters like cybersecurity, privacy and Internet policies–basically securing governement networks and keeping government agencies on the cutting edge of communications technology.

The role as described seems limited to “bringing government into the 21st century.” But would the role remain circumscribed? “Czars,” like commissions of various sorts, are tempting for politicians, and can end up as barriers and stumbling blocks to non-political solutions to normal problems and challenges. A drug czar wages a hugely expensive war on drugs; An education czar ends up supporting funding of education programs from Washington, D.C.

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DMCA takedown notices should take fair use into consideration

by Ryan Radia on August 21, 2008

in Intellectual Property, Tech & Telecom

A U.S. district judge got it right yesterday when he refused to dismiss a lawsuit against Universal, ruling that copyright holders should take into account fair use prior to issuing DMCA takedown notices. The dispute arose last year when a woman received a takedown notice over a YouTube video featuring a kid dancing to a Prince song owned by Universal.

Over at Ars, fellow TLFer Tim Lee has a good overview of the issue in which he explains how the various legal arguments played out. EFF, which represents the plaintiff in the case, offered several compelling reasons why ignoring fair use in a takedown notice might actually constitute “bad faith” under the DMCA.

As Cord discussed a few months ago, my employer, the Competitive Enterprise Institute, recently received a meritless takedown notice for a global warming ad we posted on YouTube which featured about seven seconds from a copyrighted video clip. Our use of a trivial portion of a copyrighted video was clearly both transformative and non-commercial, yet the content owner still deemed it worthwhile to send us a takedown notice.

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Facebook and Scrabulous: Safe Harbor in a Web 2.0 World

by Alex Harris on August 1, 2008

in Intellectual Property, Tech & Telecom

CNET has a great piece on Facebook’s role in the Scrabulous battle. For those unfamiliar with the case, Facebook is a social networking site that allows developers to post widgets that it calls “applications” for users to use on Facebook. One of them was the incredibly popular game Scrabulous, which Hasbro claimed ripped off their board game Scrabble. So, Scrabulous backed down and modified their program, re-releasing it as Wordscraper.

At CNET, Caroline McCarthy asks the important question why Facebook left Scrabulous alone, in the wake of lawsuits like Google-Viacom challenging websites’ status as safe harbors. McCarthy points out that Facebook in fact regulates its applications fairly heavily (though not nearly to the degree of, for example, Apple’s iPhone App Store). Given how popular Scrabulous was – and how much traffic it generated – it is little surprise that Facebook kept it around, in spite of obvious liability concerns.

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Take-Down Notices for Fair Use

by Alex Harris on July 21, 2008 · 1 comment

in Intellectual Property, Tech & Telecom

My colleague Sam Glaser and I have been discussing this article at Ars about take-down notices for fair use. Apparently, Universal’s practice has been to send take-down notices for all use of copyrighted material, whether or not the fair use exemption applies to the material. Universal claims that it cannot determine what use is fair and seeks to assert its rights to material, then figure out whether the use was exempt later. It does not want to be prevented from sending take-down notices just because some use may be fair.

But, Ars points out, “no one wants rightsholders to sue over uses that are 99.5 percent likely to be found ‘fair’ in a court.” In my discussion with him, Sam noted that hosting sites like YouTube have no better way to tell what content is “fair use” than Universal, and so are likely to just take down all uses of copyrighted material, whether exempted or not. This would undermine the whole purpose of fair use.

Thoughts on the issue?

Downloading not Hurting DVD Sales

by Alex Harris on July 15, 2008

in Culture, Intellectual Property, Tech & Telecom

Ars reports that DVD and Blu-Ray sales are up during the first half of 2008, compared to the first half of 2007. Rentals are up even more. Apparently, downloading is not as prevalent as the MPAA would make it seem. Adams Media Research concluded that “there is very little digital downloading going on.” People are still willing to pay Netflix that $17 a month for three DVDs at a time.

A side note: Ars suggests that movie rentals may be an inferior good. In a weakening economy, Ars contends, “perhaps part of consumers’ money-saving efforts involve cozying up to a movie at home for entertainment instead of heading out for a night on the town—or downloading from the Internet.”

Some things are supposed to be private….

by Lene Johansen on March 26, 2008

in Intellectual Property, International, Nano & Biotech, Politics as Usual, Privacy

Anti-biotechnology activists managed to leverage sunshine laws in Europe to get the EU government to release research information that was supposed to be confidential. Now the activists are trying to do the same thing in India, but for now the Supreme Court are debating the issue.

The research information is submitted to the government under the premise of confidentiality. The government has access to the information so it can review the safety and efficacy of new products, but it has made a promise to keep the information confidential for a time period.

The sunshine laws was never meant to give competitors access to proprietary business research, it was meant to give insight into the day to day workings of politicians and bureaucrats. Using it to break down corporate trust in the regulatory system will stymie innovation, which will cost all of us in the end.

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