May 25, 2017

Archives for May 2009

European Antitrust Fines Against Intel: Possibly Justified

Last week the European Commission competition authorities charged Intel with anticompetitive behavior in the market for microprocessor chips, and levied a €1.06 billion ($1.45 billion) fine on the company. Some commentators attacked the ruling as ridiculous on its face. I disagree. Let me explain why the European action, though not conclusively justified at this point, is at least plausible.

The starting point of any competition analysis is to recall the purpose of competition law: not to protect rival firms (such as AMD in this case), but to protect competition for the benefit of consumers. The key is to understand what is fair competition and what is not. If a firm dominates a market, and even drives other firms out, but does so by producing better products at better prices, they deserve applause. If a dominant firm takes steps that are aimed more at undermining competition than at serving customers, then they may be crossing the line into anticompetitive behavior.

To do even a superficial analysis in a single blog post, we’re going to have to make some assumptions. First, for the sake of this post let’s accept as true the EC’s claims about Intel’s specific actions. Second, let’s set aside the details of European law and instead ask whether Intel’s actions were fair and justified. Third, let’s assume that there is a single market for processor chips, in the sense that any processor chip can be used in any system. A serious analysis would have to consider carefully all of these factors, but these assumptions will help us get started.

With all that in mind, does the EC have a plausible case against Intel?

First we have to ask whether Intel has monopoly power. Economists define monopoly power as the ability to raise prices above the competitive level without losing money as a result. We know that Intel has high market share, but that by itself does not imply monopoly power. Presumably the EC will argue that there is a significant barrier to entry which keeps new firms out of the microprocessor market, and that this barrier to entry plus Intel’s high market share adds up to monopoly power. This is at least plausible, and there isn’t space here to dissect that argument in detail, so let’s accept it for the sake of our analysis.

Now: having monopoly power, did Intel abuse that power by acting anticompetitively?

The EC accused Intel of two anticompetitive strategies. First, the EC says that Intel gave PC makers discounts if they agreed to ship Intel chips in 100% of their systems, or 80% of their systems. Is this anticompetitive? It’s hard to say. Volume discounts are common in many industries, but this is not a typical volume discount. The price goes down when the customer buys more Intel chips — that’s a typical volume discount — but the price of Intel chips also goes up when the customer buys more competing chips — which is unusual and might have anticompetitive effects. Whether Intel has a competitive justification for this remains to be seen.

Second, and more troubling, the EC says that “Intel awarded computer manufacturers payments – unrelated to any particular purchases from Intel – on condition that these computer manufacturers postponed or cancelled the launch of specific AMD-based products and/or put restrictions on the distribution of specific AMD-based products.” This one seems hard for Intel to justify. A firm with monopoly power, spending money to block competitor’s distribution channels, is a classic anticompetitive strategy.

None of this establishes conclusively that Intel broke the law, or that the EC’s fine is justified. We made a lot of assumptions along the way, and we would have to reconsider each of them carefully, before we could conclude that the EC’s argument is correct. We would also need to give Intel a chance to offer pro-competitive justifications for their behavior. But despite all of these caveats, I think we can conclude that although it is far from proven at this point, the EC’s case should be taken seriously.

The future of high school yearbooks

The Dallas Morning News recently ran a piece about how kids these days aren’t interested in buying physical, printed yearbooks. (Hat tip to my high school’s journalism teacher, who linked to it from our journalism alumni Facebook group.) Why spend $60 on a dead-trees yearbook when you can get everything you need on Facebook? My 20th high school reunion is coming up this fall, and I was the “head” photographer for my high school’s yearbook and newspaper, so this is a topic near and dear to my heart.

Let’s break down everything that a yearbook actually is and then think about how these features can and cannot be replicated in the digital world. A yearbook has:

  • higher-than-normal photographic quality (yearbook photographers hopefully own better camera equipment and know how to use their gear properly)
  • editors who do all kinds of useful things (sending photographers to events they want covered, selecting the best pictures for publication, captioning them, and indexing the people in them)
  • a physical artifact that people can pass around to their friends to mark up and personalize, and which will still be around years later

If you get rid of the physical yearbook, you’ve got all kinds of issues. Permanence is the big one. There’s nothing that my high school can do to delete my yearbook after it’s been published. Conversely, if high schools host their yearbooks on school-owned equipment, then they can and will fail over time. (Yes, I know you could run a crawler and make a copy, but I wouldn’t trust a typical high school’s IT department to build a site that will be around decades later.) To pick one example, my high school’s web site, when it first went online, had a nice alumni registry. Within a few years, it unceremoniously went away without warning.

Okay, what about Facebook? At this point, almost a third of my graduating class is on Facebook, and I’m sure the numbers are much higher for more recent classes. Some of my classmates are digging up old pictures, posting them, and tagging each other. With social networking as part of the yearbook process from the start, you can get some serious traction in replacing physical yearbooks. Yearbook editors and photography staff can still cover events, select good pictures, caption them, and index them. The social networking aspect covers some of the personalization and markup that we got by writing in each others’ yearbooks. That’s fun, but please somebody convince me that Facebook will be here ten or twenty years from now. Any business that doesn’t make money will eventually go out of business, and Facebook is no exception.

Aside from the permanence issue, is anything else lost by going to a Web 2.0 social networking non-printed yearbook? Censorship-happy high schools (and we all know what a problem that can be) will never allow a social network site that they control to have students’ genuine expressions of their distaste for all the things that rebellious youth like to complain about. Never mind that the school has a responsibility to maintain some measure of student privacy. Consequently, no high school would endorse the use of a social network that they couldn’t control and censor. I’m sure several of the people who wrote in my yearbook could have gotten in trouble if the things they wrote there were to have been raised before the school administration, yet those comments are the best part of my yearbook. Nothing takes you back quite as much as off-color commentary.

One significant lever that high school yearbooks have, which commercial publications like newspapers generally lack, is that they’re non-profit. If the yearbook financially breaks even, they’re doing a good job. (And, in the digital universe, the costs are perhaps lower. I personally shot hundreds of rolls of black&white film, processed them, and printed them, and we had many more photographers on our staff. My high school paid for all the film, paper, and photo-chemistry that we used. Now they just need computers, although those aren’t exactly cheap, either.) So what if they don’t print so many physical yearbooks? Sure, the yearbook staff can do a short, vanity press run, so they can enter competitions and maybe win something, but otherwise they can put out a PDF or pickle the bowdlerized social network’s contents down to a DVD-ROM and call it a day. That hopefully creates enough permanence. What about uncensored commentary? That’s probably going to have to happen outside of the yearbook context. Any high school student can sign up for a webmail account and keep all their email for years to come. (Unlike Facebook, the webmail companies seem to be making money.) Similarly, the ubiquity of digital point-and-shoot cameras ensures that students will have uncensored, personal, off-color memories.

[Sidebar: There’s a reality show on TV called “High School Reunion.” Last year, they reunited some people from my school’s class of 1987. I was in the class of 1989. Prior to the show airing, I was contacted by one of the producers, wanting to use some of my photographs in the show. She sent me a waiver that basically had me indemnifying them for their use of my work; of course, they weren’t offering to pay me anything. Really? No thanks. One of the interesting questions was whether my photos were even “my property” to which I could even give them permission to use. There were no contracts of any kind when I signed up to work on the yearbook. You could argue that the school retains an interest in the pictures, never mind the original subjects from whom we never got model releases. Our final contract said, in effect, that I represented that I took the pictures and had no problem with them using them, but I made no claims as to ownership, and they indemnified me against any issues that might arise.

Question for the legal minds here: I have three binders full of negatives from my high school years. I could well invest a week of my time, borrow a good scanner, and get the whole collection online and post it online, either on my own web site or on Facebook. Should I? Am I opening myself to legal liability?]

Sizing Up "Code" with 20/20 Hindsight

Code and Other Laws of Cyberspace, Larry Lessig’s seminal work on Internet regulation, turns ten years old this year. To mark the occassion, the online magazine Cato Unbound (full disclosure: I’m a Cato adjunct scholar) invited Lessig and three other prominent Internet scholars to weigh in on Code‘s legacy: what it got right, where it went wrong, and what implications it has for the future of Internet regulation.

The final chapter of Code was titled “What Declan Doesn’t Get,” a jab at libertarians like CNet’s Declan McCullagh who believed that government regulation of the Internet was likely to do more harm than good. It’s fitting, then, that Declan got to kick things off with an essay titled (what else?) “What Larry Didn’t Get.” There were responses from Jonathan Zittrain (largely praising Code) and my co-blogger Adam Thierer (mostly criticizing it), and the Lessig got the last word. I think each contributor will be posting a follow-up essay in the coming days.

My ideological sympathies are with Declan and Adam, but rather than pile on to their ideological critiques, I want to focus on some of the specific technical predictions Lessig made in Code. People tend to forget that in addition to describing some key theoretical insights about the nature of Internet regulation, Lessig also made some pretty specific predictions about how cyberspace would evolve in the early years of the 21st Century. I think that enough time has elapsed that we can now take a careful look at those predictions and see how they’ve panned out.

Lessig’s key empirical claim was that as the Internet became more oriented around commerce, its architecture would be transformed in ways that undermined free speech and privacy. He thought that e-commerce would require the use of increasingly sophisticated public-key infrastructure that would allow any two parties on the net to easily and transparently exchange credentials. And this, in turn, would make anonymous browsing much harder, undermining privacy and making the Internet easier to regulate.

This didn’t happen, although for a couple of years after the publication of Code, it looked like a real possibility. At the time, Microsoft was pushing a single sign-on service called Passport that could have been the foundation of the kind of client authentication facility Lessig feared. But then passport flopped. Consumers weren’t enthusiastic about entrusting their identities to Microsoft, and businesses found that lighter-weight authentication processes were sufficient for most transactions. By 2005 companies like eBay started dropping Passport from their sites. The service has been rebranded Windows Live ID and is still limping along, but no one seriously expects it to become the kind of comprehensive identity-management system Lessig feared.

Lessig concedes that he was “wrong about the particulars of those technologies,” but he points to the emergence of a new generation of surveillance technologies—IP geolocation, deep packet inspection, and cookies—as evidence that his broader thesis was correct. I could quibble about whether any of these are really new technologies. Lessig discusses cookies in Code, and the other two are straightforward extensions of technologies that existed a decade ago. But the more fundamental problem is that these examples don’t really support Lessig’s original thesis. Remember that Lessig’s prediction was that changes to Internet architecture—such as the introduction of robust client authentication to web browsers—would transform the previously anarchic network into one that’s more easily regulated. But that doesn’t describe these technologies at all. Cookies, DPI, and geo-location are all technologies that work with vanilla TCP/IP, using browser technologies that were widely deployed in 1999. Technological changes made cyberspace more susceptible to regulation without any changes to the Internet’s architecture.

Indeed, it’s hard to think of any policy or architectural change that could have forestalled the rise of these technologies. The web would be extremely inconvenient if we didn’t have something like cookies. The engineering constraints on backbone routers make roughly geographical IP assignment almost unavoidable, and if IP addresses are tied to geopgrahy it’s only a matter of time before someone builds a database of the mapping. Finally, any unencrypted networking protocol is susceptible to deep packet inspection. Short of mandating that all traffic be encrypted, no conceivable regulatory intervention could have prevented the development of DPI tools.

Of course, now that these technologies exist, we can have a debate about whether to regulate their use. But Lessig was making a much stronger claim in 1999: that the Internet’s architecture (and, therefore, its susceptibility to regulation) circa 2009 would be dramatically different depending on the choices policymakers made in 1999. I think we can now say that this wasn’t right. Or, at least, the technologies he points to now aren’t good examples of that thesis.

It seems to me that the Internet is rather less malleable than Lessig imagined a decade ago. We would have gotten more or less the Internet we got regardless of what Congress or the FCC did over the last decade. And therefore, Lessig’s urgent call to action—his argument that we must act in 1999 to ensure that we have the kind of Internet we want in 2009—was misguided. In general, it works pretty well to wait until new technologies emerge and then debate whether to regulate them after the fact, rather than trying to regulate preemptively to shape the kinds of technologies that are developed.

As I wrote a few months back, I think Jonathan Zittrain’s The Future of the Internet and How to Stop It makes the same kind of mistake Lessig made a decade ago: overestimating regulators’ ability to shape the evolution of new technologies and underestimating the robustness of open platforms. The evolution of technology is mostly shaped by engineering and economic constraints. Government policies can sometimes force new technologies underground, but regulators rarely have the kind of fine-grained control they would need to promote “generative” technologies over sterile ones, any more than they could have stopped the emergence of cookies or DPI if they’d made different policy choices a decade ago.