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DRM for Chargers: Possibly Good for Users

July 26, 2007 by

Apple has filed a patent application on a technology for tethering rechargeable devices (like iPods) to particular chargers. The idea is that the device will only allow its batteries to be recharged if it is connected to an authorized charger.

Whether this is good for consumers depends on how a device comes to be authorized. If “authorized” just means “sold or licensed by Apple” then consumers won’t benefit – the only effect will be to give Apple control of the aftermarket for replacement chargers.

But if the iPod’s owner decides which chargers are authorized, then this might be a useful anti-theft measure – there’s little point in stealing an iPod if you won’t be able to recharge it.

How might this work? One possibility is that when the device is plugged in to a charger it hasn’t seen before, it makes a noise and prompts the user to enter a password on the iPod’s screen. If the correct password is entered, the device will allow itself to be recharged by that charger in the future. The device will become associated with a group of chargers over time.

Another possibility, mentioned in the patent, is that there could be a central registry of stolen iPods. When you synched your iPod with your computer, the computer would get a digitally signed statement from the registry, saying that your iPod was not listed as stolen. The computer would pass that signed statement on to the iPod. If the iPod went too long without seeing such a statement, it would demand that the user do a synch, or enter a password, before it would allow itself to be recharged.

How can we tell whether a DRM scheme like this is good for users. One sure-fire test is whether the user has the option of turning the scheme off. You don’t want a thief to be able to disable the scheme on a stolen iPod, but it’s safe to let the user disable the anti-theft feature the first time she syncs her new iPod, or later by entering a password.

We don’t know yet whether Apple will do this. But reading the patent, it looks to me like Apple has thought carefully about the legitimate anti-theft uses of this technology. That’s a good sign.

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Why No Phoneless iPhone?

July 20, 2007 by

I know the iPhone is like so last week, but I want to ask one more question about it: why does Apple insist on users registering for an AT&T account? Officially at least, you have to agree to a two-year contract with AT&T cellular before you can activate your iPhone, even if you will never use it as a phone. (There are ways around this, but Apple seems to wish they didn’t exist.) Which is a shame, because the iPhone is a pretty nice WiFi-enabled portable computer that (to me at least) is less attractive because it’s tied to a two-year AT&T contract.

Of course AT&T is giving Apple a cut of its revenue from the contract. According to rumor, the cut is $3 per month for each user, or $11 per month for users who switch to AT&T from other carriers. Given that about half of iPhone customers switch from other carriers, that’s an average of $7 per month per user, or about $170 total over two years.

But that $170 doesn’t answer the question, because Apple could still sell a phoneless iPhone for, say, $800 while the AT&T iPhone costs $600. If you think Apple still comes out behind at $800, then feel free to pick a larger number. There must be some price point at which Apple is happy to sell a phoneless iPhone, right?

I can see only two reasons why it might be rational for Apple to refuse to offer such a product. It can’t be difficult technically – all they have to do is change the activation procedure so that it doesn’t require the user to sign up for an AT&T contract. But there are two possible reasons.

The first is that the market for a phoneless iPhone is too small, at the price point that they would have to offer. If hardly anyone would buy the device at $800, then it might not be worth the trouble to create another option in the product line. This seems unlikely.

The other reason – the only other possible reason, as far as I can tell – is that the mere existence of a phoneless iPhone makes the original iPhone much less attractive to customers, and that this effect is big enough to offset the extra revenue Apple could get by charging an even bigger premium for the phoneless version.

Why might this be? Maybe Apple thinks the iPhone will look less attractive if the value of the contract lock-in (and hence the cost of lock-in to the customer) is made obvious. Or maybe Apple wants to differentiate the iPhone from other phone handsets by making it the only handset that isn’t obviously subsidized by a carrier. Or maybe Apple is keeping a space in its product line open for a future product introduction. Apple and Steve Jobs are clever enough about these things that there must be some good reason.

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Why Did Universal Threaten to Pull Out of iTunes?

July 11, 2007 by

Last week brought news that Universal Music, the world’s largest record company, was threatening to pull its music from Apple’s iTunes Music Store. Why would Universal do this?

The obvious answer is that the companies are renegotiating their contract and Universal wants to get the best deal they can. Threatening to walk is one way to pressure Apple.

But where digital music is concerned, there is no such thing as a simple negotiation anymore. For one thing, negotiations like this have political ramifications. The major record companies have managed, remarkably, to convince policymakers that protecting their profits should be a goal of public policy; so now any deal that affects the majors’ bottom lines must affect the policy process.

(As I’ve written before, copyright policy should be trying to foster the creation and distribution of varied, high-quality music – which is not the same as trying to ensure anyone’s profits.)

The political implications of Universal’s threat are pretty interesting. For years the major record companies have been arguing that the Internet is hurting them and that policymakers should therefore intervene to protect the majors’ business. iTunes’ success has supplied the major counterargument, suggesting that it’s possible to sell lots of music online.

Walking away from iTunes would cause a big political problem for Universal. How could Universal keep asking government to prop up its online business, when it was walking away from the biggest and most lucrative distribution channel for digital music?

And it’s not just Universal whose political pull would diminish. The other majors would suffer as well; so to the extent that the majors act as a cartel, there would have to be pressure on Universal not to pull out of iTunes.

Most likely, Universal was just bluffing and had no real plan to cut its iTunes ties. If this was a bluff, then it was most likely Apple who leaked the story, as a way of raising the stakes. Its bluff having failed, Universal is stuck doing business on Apple’s terms.

One can’t help wondering what the world would be like had the majors moved early and aggressively to build an online business that customers liked. Having failed to do so, they seem doomed to be followers rather than leaders.

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Behind the iPhone Frenzy

June 29, 2007 by

Let me say right up front that I have not accepted the Jesus Phone as my personal Lord and Savior. The iPhone might turn out to be insanely great. It might become the best-selling mobile phone ever. Or it might not.

Either way, the iPhone’s arrival and the attendant frenzy mark the beginning of a new phase in the mobile phone world – a phase based on the radical notion that it’s possible to make a pocket-sized device that is a pretty good phone and a pretty good networked computer at the same time.

From a purely technical standpoint, this isn’t surprising at all. Phones are basically computers, and we know how to cram a decent computer into a small, low-power package. The engineering isn’t trivial but we know it can be done. Apple might have modestly better engineering, and significantly better human-factors design, but what they’re doing has been technically possible all along.

Yet somehow it hasn’t happened, because the mobile carriers don’t want it to happen. They have clung to their walled garden models, offering limited, captive services rather than allowing easy development of Internet applications for mobile devices. An open system would provide more benefit overall, but most of that benefit would accrue to consumers. The carriers would rather get a big share of a small pie, than a small share of a big pie.

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

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

Whether or not the Jesus Phone achieves worldly success, it will succeed in its own way by convincing people that the world can be different.

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Why CEOs and Companies Break the Law

June 28, 2007 by

Ben Horowitz, CEO of Opsware, offers an interesting essay on why so many bigshot CEOs seem to be in legal trouble. Why, he asks, would a rich and powerful executive risk going to prison? The easy answer, greed, is too simple because many of these guys were already tremendously rich and stood to gain little or nothing personally from the illegal acts. There must have been something else driving them.

One answer is pride. Exhibit A is WorldCom CEO Bernie Ebbers (now doing 25 years for fraud and conspiracy).

As WorldCom grew at a rapid pace, Bernie set expectations high. This led investors to give him advance credit, thus boosting his stock, which was the currency he used to build his company. When Bernie saw that WorldCom wasn’t going to meet those high expectations, and that thousands of shareholders to whom he had promised great performance would lose their money, and thousands of employees who he had hired would lose their jobs, he was willing to do anything to make things right. Even if it meant doing things that were wrong.

Like a killer committing his second murder, the decisions to commit fraud must have come easier as Bernie gained experience. In addition, the stakes continued to get higher. He continued to commit fraud, because if he hadn’t, there was a 100% chance that he would let everyone down who mattered to him and he would no longer be the person that he had worked so hard to become. He wouldn’t be Bernie Ebbers #11 in Time Magazine’s Cyber Elite; he’d be Bernie Ebbers, former milkman, bouncer, and disgraced CEO.

If this is right, Ebbers defined himself by the success of WorldCom. If the company failed, then his work – his contribution to society – would evaporate.

Even beyond pride, some executives see themselves as great benefactors, bringing happiness to employees, wealth to investors, and great products at low low prices to customers. If WorldCom’s growth was good for humanity, then it was worth taking risks to defend. And when the time came to take risks, the Great Man stepped forward.

While working on the Microsoft antitrust trial, I read Titan, Ron Chernow’s biography of John D. Rockefeller. Rockefeller saw most things clearly, but he had one blind spot: he honestly saw little distinction between the growth of Standard Oil and the advancement of humanity. Cheap, high quality oil would transform American life, and Standard Oil would be the agent of that transformation. America needed Standard Oil. Rockefeller had an uncommonly strong drive to do good in the world, a drive that was channeled into an intense need to win every business skirmish. His opponents, who were only trying to make money or run a business, were no match for a guy trying to save the world.

One gets the sense that WorldCom grew as big as it did, and the house of cards stood up for as long as it did, because Bernie Ebbers had a Rockefeller-like drive to make it so. He would do almost anything to keep WorldCom afloat, which is what made him dangerous to his employees and investors.

He was a danger, too, to his competitors.

Once WorldCom started committing accounting fraud to prop up their numbers, all of the other telecoms had to either (a) commit accounting fraud to keep pace with WorldCom’s blistering growth rate, or (b) be viewed as losers with severe consequences.

How severe were the consequences for not breaking the law? Well, like a baseball player who refuses to take steroids, CEO Mike Armstrong of AT&T did not keep pace with the cheaters. As a reward for his honesty and integrity, he was widely ridiculed in the press prior to being fired and AT&T, perhaps America’s most valuable brand, was acquired for cheap. Now you see why Barry Bonds needed something to help him keep pace with Mark McGwire.

The steroids analogy helps explain why corporate criminals must face serious punishment. It’s not enough for the average performer to know that the leaders probably aren’t cheating. Given the choice between believing that the other guy is cheating, and believing that he is honestly outperforming you, most people will go for the cheating theory. People need to know that nobody in their right mind would cheat – a lesson that Bernie Ebbers will be teaching us for the next twenty years or so.

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