Category Archives: Antitrust

Announcing "VC/DC," a new webcast series for Forbes

 

This week, Forbes Senior Online Editor Kashmir Hill and I launched a new video series, “VC/DC,” where we review the latest developments at the accident-prone intersection of technology and policy. The first two episodes are embedded below.

We’ve envisioned the series as a regular look at the policy issues technology companies and investors should be paying attention to but probably aren’t.

Kashmir and I each bring a unique perspective to technology and policy. A former D.C. resident, Kashmir relocated to the Bay Area a few years ago to cover privacy, security, digital currency and other cutting edge topics.

As a Silicon Valley veteran who now spends nearly half my time in Washington at the Georgetown Center for Business and Public Policy, on the other hand, I am working to bridge the gap between disruptive innovations and the regulators who sometimes love them to death.

The program will cover a wide range of topics, and won’t be limited just to developments inside the beltway. As our inaugural episodes makes clear, we’re also looking closely at how technology businesses are affected by local and international laws, as well as developments in the courts and the legal system overall.

I hope you like the series and find it interesting enough to subscribe.  We’d be grateful for your feedback in any case, as well as suggestions for future episodes.

 

Episode 1:  “The Accident-Prone Intersection of Innovation and Policy”

 

Episode 2:  “Security Standards and the Patent Crisis”

Big Bang Launch of "Big Bang Disruption"–and a Note on Regulatory Implications

In the upcoming issue of Harvard Business Review, my colleague Paul Nunes at Accenture’s Institute for High Performance and I are publishing the first of many articles from an on-going research project on what we are calling “Big Bang Disruption.”

The project is looking at the emerging ecosystem for innovation based on disruptive technologies, following up on work we have done separately and now together over the last fifteen years.

Our chief finding is that the nature of innovation has changed dramatically, calling into question much of the conventional wisdom on business strategy and competition in information-intensive industries–which is to say, these days, every industry.

The drivers of this new ecosystem are ever-cheaper, faster, and smaller computing devices, cloud-based virtualization, crowdsourced financing, collaborative development and marketing, and the proliferation of mobile everything (including, increasingly, not just people but things).

The result is that new innovations now enter the market cheaper, better, and more customizable than products and services they challenge.  (For example, smartphone-based navigation apps versus standalone GPS devices.)  In the strategy literature, such innovation would be characterized as thoroughly “undiscplined.”  It shouldn’t succeed.  But it does.

So when the disruptor arrives and takes off with a bang, often after a series of low-cost, failed experiments, incumbents have no time for a competitive response.  The old rules for dealing with disruptive technologies, most famously from the work of Harvard’s Clayton Christensen, have become counter-productive.   If incumbents haven’t learned to read the new tea leaves ahead of time, it’s game over.

The HBR article doesn’t go into much depth on the policy implications of this new innovation model, but the book we are now writing will.  The answer should be obvious.

This radical new model for product and service introduction underscores the robustness of market behaviors that quickly and efficiently correct many transient examples of dominance, especially in high-tech markets.

As a general rule (though obviously not one without exceptions), the big bang phenomenon further weakens the case for regulatory intervention.  Market dominance is sustainable for ever-shorter periods of time, with little opportunity for incumbents to exploit it.

Quickly and efficiently, a predictable next wave of technology will likely put a quick and definitive end to any “information empires” that have formed from the last generation of technologies.

Or, at the very least, do so more quickly and more cost-effectively than alternative solutions from regulation.  The law, to paraphrase Mark Twain, will still be putting its shoes on while the big bang disruptor has spread halfway around the world.

Unfortunately, much of the contemporary literature on competition policy from legal academics is woefully ignorant of even the conventional wisdom on strategy, not to mention the engineering realities of disruptive technologies already in the market.  Looking at markets solely through the lens of legal theory is, truly, an academic exercise, one with increasingly limited real-world applications.

Indeed, we can think of many examples where legacy regulation actually makes it harder for the incumbents to adapt as quickly as necessary in order to survive the explosive arrival of a big bang disruptor.  But that is a story for another day.

Much more to come.

Related links:

“Why Best Buy is Going out of Business…Gradually,” Forbes.com.

“What Makes an Idea a Meme?“, Forbes.com

“The Five Most Disruptive Technologies at CES 2013,” Forbes.com

 

Updates to the Media Page

We’ve added over a dozen new posts to the Media page, covering some of the highlights in articles and press coverage for April and May, 2012.

Topics include privacy, security, copyright, net neutrality, spectrum policy, the continued fall of Best Buy and antitrust.

The new posts include links to Larry’s inaugural writing for several publications, including Techdirt, Fierce Mobile IT, and Engine Advocacy.

There are also several new video clips, including Larry’s interview of Andrew Keen, author of the provocative new book, “Digital Vertigo,” which took place at the Privacy Identity and Innovation conference in Seattle.

June was just as busy as the rest of the year, and we hope to catch up with the links soon.

On LightSquared and Dish Networks Use of Spectrum: What Would Ronald Coase Do?

 

On CNET today, I have a longish post on the FCC’s continued machinations over LightSquared and Dish Networks respective efforts to use existing satellite spectrum to build terrestrial mobile broadband networks. Both companies plan to build 4G LTE networks; LightSquared has already spent $4 billion in build-out for its network, which it plans to offer wholesale.

After first granting and then, a year later, revoking LightSquared’s waiver to repurpose its satellite spectrum, the agency has taken a more conservative (albeit slower) course with Dish. Yesterday, the agency initiated a Notice of Proposed Rulemaking that would, if adopted, assign flexible use rights to about 40 Mhz. of MSS spectrum licensed to Dish.

Current allocations of spectrum have little to do with the technical characteristics of different bands. That existing licenses limit Dish and LightSquared to satellite applications, for example, is simply an artifact of more-or-less random carve-outs to the absurdly complicated spectrum map managed by the agency since 1934. Advances in technology makes it possible to successfully use many different bands for many different purposes.

But the legacy of the FCC’s command-and-control model for allocations to favor “new” services (new, that is, until they are made obsolete in later years or decades) and shape competition to its changing whims is a confusing and unnecessary pile-up of limitations and conditions that severely and artificially limit the ways in which spectrum can be redeployed as technology and consumer demands change. Today, the FCC sits squarely in the middle of each of over 50,000 licenses, a huge bottleneck that is making the imminent spectrum crisis in mobile broadband even worse.

Even with the best of intentions, the agency can’t possibly continue to micromanage the map. And, as the LightSquared and Dish stroies demonstrate yet again, the risk of agency capture and political pressure often mean the agency doesn’t do the right thing even when it does act.

Who would be the more efficient and neutral regulator? According to Nobel Prize-winning economist Ronald Coase’s seminal 1959 article, “The Federal Communications Commission,” the answer is the market. In his trademark straight-forward, common sense style, Coase elegantly dismantles the idea that scarce spectrum resources demand a non-market solution of government management.

For one thing, Coase demonstrates how screwed up the system already was over fifty years ago. There’s little doubt that the problems he describes have only gotten worse with time and increased demand on the airwaves by insatiable consumers.

Instead, Coase proposed to treat spectrum like any other industry input–as property. The FCC, he said, should auction spectrum rights to the highest bidder, without licenses, conditions, or limitations on use, and then stand back. (He acknowledged the risk of antitrust problems, but, as in any industry, such problems could be addressed by antitrust regulators and not the FCC.) Spectrum rights would efficiently change hands when new applications and devices created higher-value uses.

Potential interference problems–such as those raised by GPS device manufacturers in the case of LightSquared–would be resolved precisely as they are in other property contexts. Without an FCC to run to, the parties would be forced to negotiate against a backdrop of established liability rules and a safety net of potential litigation. Indeed, LightSquared and GPS offer a classic example of Coase’s later work demonstrating that regardlesss of how property is initially allocated, liability rules ensure that parties will bargain to the most socially-efficient solution to interference.

Of course we’ll never know if the socially-optimal solution here is for LightSquared to protect GPS devices from receiving its signal or for device manufacturers to change their designs to stay out of LightSquared’s bands. The heavy hand of the regulator has foreclosed a market solution, or even an attempt at negotiations.

Instead, we have the disaster of the FCC’s decision in January, 2011 to grant a conditional waiver to LightSquared and then, last month, indefinitely revoking it. Meanwhile, LightSqaured spent $4 billion on infrastructure it may never use, and lost its CEO and key customers including Sprint. No one is happy, and no one reasonably argue this is was an optimal outcome, or even close to one.

For Dish, the NPRM will ensure a more orderly process, but at the cost of months or perhaps longer delay before Dish can begin building its terrestrial network. And in the interim, all sorts of irrelevant issues may interfere with the orderly (and expensive) resolution.

When Coase proposed a property model for spectrum in 1959, the idea was considered too radical. Congress and the FCC have, slowly but surely, taken pieces of the proposal to heart, introducing auctions (but not property rights) in the 1990’s. Yesterday’s NPRM takes a small step toward more flexible use licenses, but this may be too little reform too late. We have all the evidence we need that micromanagement of spectrum can’t possibly keep up with the pace of innovation. Time to try a new, fifty year old, approach.

What Makes an Idea a Meme?

Ceci c'est un meme.

On Forbes today, I look at the phenomenon of memes in the legal and economic context, using my now notorious “Best Buy” post as an example. Along the way, I talk antitrust, copyright, trademark, network effects, Robert Metcalfe and Ronald Coase.

It’s now been a month and a half since I wrote that electronics retailer Best Buy was going out of business…gradually.  The post, a preview of an article and future book that I’ve been researching on-and-off for the last year, continues to have a life of its own.

Commentary about the post has appeared in online and offline publications, including The Financial Times, The Wall Street Journal, The New York Times, TechCrunch, Slashdot, MetaFilter, Reddit, The Huffington Post, The Motley Fool, and CNN. Some of these articles generated hundreds of user comments, in addition to those that appeared here at Forbes.

(I was also interviewed by a variety of news sources, including TechCrunch’s Andrew Keen.)

Today, the original post hit another milestone, passing 2.9 million page views.

Watching the article move through the Internet, I’ve gotten a first-hand lesson in how network effects can generate real value.

Network effects are an economic principle that suggests certain goods and services experience increasing returns to scale.  That means the more users a particular product or service has, the more valuable the product becomes and the more rapidly its overall value increases.  A barrel of oil, like many commodity goods, does not experience network effects – only one person can own it at a time, and once it’s been burned, it’s gone.

In sharp contrast, the value of networked goods increase in value as they are consumed.  Indeed, the more they are used, the faster the increase–generating a kind of momentum or gravitational pull.  As Robert Metcalfe, founder of 3Com and co-inventor of Ethernet explained it, the value of a network can be plotted as the square of the number of connected users or devices—a curve that approaches infinity until most everything that can be connected already is.  George Gilder called that formula “Metcalfe’s Law.”

Since information can be used simultaneously by everyone and never gets used up, nearly all information products can be the beneficiaries of network effects.  Standards are the obvious example.  TCP/IP, the basic protocol that governs interactions between computers connected to the Internet, started out humbly as an information exchange standard for government and research university users.  But in part because it was non-proprietary and therefore free for anyone to use without permission or licensing fees, it spread from public to private sector users, slowly at first but over time at accelerating rates.

Gradually, then suddenly, TCP/IP became, in effect, a least common denominator standard by which otherwise incompatible systems could share information.  As momentum grew, TCP/IP and related protocols overtook and replaced better-marketed and more robust standards, including IBM’s SNA and DEC’s DECnet.  These proprietary standards, artificially limited to the devices of a particular manufacturer, couldn’t spread as quickly or as smoothly as TCP/IP.

From computing applications, Internet standards spread even faster, taking over switched telephone networks (Voice over IP), television (over-the-top services such as YouTube and Hulu), radio (Pandora, Spotify)—you name it.

Today the TCP/IP family of protocols, still free-of-charge, is the de facto global standard for information exchange, the lynchpin of the Internet revolution.  The standards continue to improve, thanks to the largely-voluntary efforts of The Internet Society and its virtual engineering task forces.  They’re the best example I know of network effects in action, and they’ve created both a platform and a blueprint for other networked goods that make use of the standards.

Beyond standards, network effects are natural features of other information products including software.  Since the marginal cost of a copy is low (essentially free in the post-media days of Web-based distribution and cloud services), establishing market share can happen at relatively low cost.  Once a piece of software—Microsoft Windows, AOL instant messenger in the old days, Facebook and Twitter more recently—starts ramping up the curve, it gains considerable momentum, which may be all it takes to beat out a rival or displace an older leader.  At saturation, a software product becomes, in essence, the standard.

From a legal standpoint, unfortunately, market saturation begins to resemble an illegal monopoly, especially when viewed through the lens of industrial age ideas about markets and competition.  (That, of course, is the lens that even 21st century regulators still use.)  But what legal academics, notably Columbia’s Tim Wu, misunderstand about this phenomenon is that such products have a relatively short life-cycle of dominating.  These “information empires,” as Wu calls them, are short-lived, but not, as Wu argues, because regulators cut them down.

Even without government intervention, information products are replaced at accelerating speeds by new disruptors relying on new (or greatly improved) technologies, themselves the beneficiaries of network effects.  The actual need for legal intervention is rare.  Panicked interference with the natural cycle, on the other hand, results in unintended consequences that damage emerging markets rather than correcting them.  Distracted by lingering antitrust battles at home and abroad, Microsoft lost momentum in the last decade.  No consumer benefited from that “remedy.”

For more, see “What Makes an Idea a Meme?” on Forbes.