InfoTech & Public Policy

A recent article in the Washington Post describes how Google and other ad networks use typosquatting to generate revenue. In brief, somebody buys up a domain name that’s a likely misspelling of another website’s URL, relying on typograhical errors for site visits. It’s a win-win situation for Google’s booming ad network, which provides the ads for these sites, and the cybersquatters themselves, who leverage the low fixed cost of individual domain names to make a handsome profit.

As with any flow of easy money, this makes some people very angry. Trademark lawyers insist the typosquatters are eating into advertising profits that should belong to the victim site. Many consumer advocacy minded figures, such as Harvard researcher Ben Edelman, indicate the practice of profiting from user error is just plain evil. I want to examine whether current policy applies to this case, and whether there’s a need for new cybersquatting laws.

Legal action is established in three major cases:
(1) The content is of an adult nature, in a domain name that gives no indication of such content. The site’s owner is in violation of the The Protect Act and liable to fines or 2-4 years if imprisonment. The Google AdSense Program Policies explicitly prohibit this as well, so we can rule out this case - most of the sites are blank except for ads and links.

(2) The content is harmful to users, containing viruses or spyware that downloads itself onto the host computer. Both Yahoo and Google’s ad programs forbid this. Nevertheless Yahoo was recently accused of trying to use its relationship with ad-ware sites to generate extra revenue around earnings time. Let’s assume Google sticks to its own policies, but leaves harmless ad-filled pages alone.

(3) The domain name and content violate trademark law. Existing law has developed through two major allegations, trademark infringement and dilution. The Berkman Center for Internet and Society provides a summary:

Elements required for trademark infringement:
1. Prior rights in the trademark - through use or registration.
2. Commercial use
3. Likelihood of confusion

Elements required for trademark dilution (added by Congress in 1995 and reinforced in 1999)
1. Marks must be famous
2. Commercial use
3. Protects against blurring or tarnishment
* Blurring: blurring occurs when the defendant’s use of the plaintiff’s mark causes the public to no longer think only of the plaintiff’s product upon seeing the famous mark, but rather to associate both the plaintiff and defendant with the mark.
* Tarnishment: tarnishment occurs when an association of a famous mark with inferior quality or unsavory products tarnishes the mark.

I agree with Google’s trademark lawyers that “obvious” misspellings, such as “BistBuy” instead of BestBuy and “blgospot” instead of BlogSpot, are confusing to nobody, ruling out trademark infringement claims. Given the uniform apperance of these ad pages, it’s usually obvious you have come to the wrong place, so there’s no question of trademark dilution - although I personally have wondered whether a truly “professional” company wouldn’t be sure to buy up any domain names that are common misspellings, and have them redirect to the company’s website (try orbits.com, gooogle.com).

Google likes to claim it has no control over possible trademark violators using the Ad-Sense network, which I find hard to believe:

Hagan, Google’s trademark lawyer, said that software formulas aren’t smart enough to identify trademark infringements.
“It’s subjective when you look at domain names to decide how many letters off does it have to be to form a trademark or conjure up that trademark,” she said.

(The Web’s Million-Dollar Typos)

My fellow students who are more familiar with the inner workings of Google should check me here, but I think Google’s algorithms have this one down, particularly since the Google’s service Oingo.com specializes in domain parking and generates lists of common misspellings automatically. Additionally, I’ve noticed the efficiency with which Google regulates click fraud, and closes Ad-Sense accounts when traffic to the site has suspicious patterns. I think the company could easily control this practice if necessary, but its current practice of simply removing the sites if a trademark owner complains generates a lot more revenue in what is, if Google truly follows its policy of removing infringing sites, a victimless transaction.

The argument that Google’s domain parking and partnership with typosquatters generates profits “unfairly,” ignores the nature of “websurfing.” In my mind a user who misspells a domain is like someone who has gone down the wrong alley on his way to a store. Though the victim site’s owner may have a claim to all the revenue once a web user reaches his site, he has no claim to revenues generated along the way. Of course this all changes if the site knowingly imitates the victim website, of which phishing is an extreme example, emphasizing the need for Google to police such actions.

Furthermore, there’s no legitimate claim that typosquatting takes revenue away from the trademark owner. Because no confusion or trademark dilution has occurred, it’s unlikely that the appearance of a misspelled site will stop the user from continuing to the site he intended to go to.

A popular allegation is that typosquatter profit is “unfair” because it relies on aggregating, through buying many domain names, the profits earned by accidental clicks on ads. Yet I don’t think anyone would disagree that content websites also pay-per-click, maybe more, based on users who click accidentally. Profiting from user error is perfectly legal so long as a reasonable effort is made to inform the user against this error. And it’s this “reasonable effort” that I wonder couldn’t lead to a few “rules and regulations”

For example, typosquatters and domain parking services that knowingly generate misspellings of a trademark, could be required to redirect to the real site in a clearly visible manner. They could also be required to declare that they are not this website. I think a mere “did you mean to go to www.BestBuy.com?” could prevent a great deal of litigation.

Thanks to Mozilla Firefox extensions Adblock Plus and Filterset.G Updater, I surf an internet free of pop-ups, banner ads, flash ads, and even text-based Google ads. In 2004-2005, this type of software was a popular thing to cry foul about. Advertising giant DoubleClick warned “publishers would have to start charging for content.” Companies like Falk eSolutions produced anti-ad-blocker technologies in what seemed the start of an internet ad arms race. This post in the Spring 2005 COS 491 blog has an interesting discussion of whether browser ad blockers are contributory copyright infringers.

No legal battles ensued. This is particularly interesting because it’s been the most pivotal year in the software’s confusing history. When I downloaded the predecessor, Adblock, in Summer 2005, it would block images through filters the user defined manually. You could right-click on an image and click “Adblock” to block the image and (optionally) all images from that source. The ads would load, and only be hidden when the page was fully loaded. From a policy perspective, the significant thing about earlier versions of Adblock is what they didn’t do. They did not automate the advertisement filtering and blocking process, nor provide the users many ways to block ads without hand-picking. To benefit, a user had to be highly motivated to avoid ads, so people who used the extension arguably woudn’t respond to advertising anyway.

In the past year, the tool has become more sophisticated, offering:

(1) Compatibility with the Filterset.G Updater
This tool automatically updates a well-maintained set of filters and regular expressions every 4-7 days. Once a user has this installed along with Adblock Plus, few ads make it through. This “block by default” possibility has the potential to become a hot issue, since the ease of installation may tempt even the users responsive to ads. Few users like ads on the internet, and if the feature becomes popular enough it may seriously disrupt advertising revenue.

(2) Ads are blocked, not hidden
In the last few versions of the software, pages load without ever displaying the ads. Advertisers argue that this reduces consumer choice, since they don’t know what is being blocked. Technically that isn’t true - clicking the “Adblock” button in the corner of the browser generates a list of blocked elements - but it requires an active decision to view the ads.

(3) Whitelisting
This feature enables users to mark sites and domains on which they don’t want blocking. It’s convenient when a site has a lot of graphics, animations, and other “false positives” the plugin may pick up, or when a user actively wants to view ads. I think this actually makes the software more threatening to advertising revenue. One of the top complaints about Adblock was its tendency to block relevant site content. Now that this issue is fixed, the software is much more useful. It also weakens advertisers’ main argument, that software might over-zealously block ads against a user’s will.

(4) The “Support Website” Option
I discovered this interesting addendum while searching through the preferences just now:

The purpose of Adblock Ad Hiding is to allow you to support your favorite web site. By adding to your favorite site on the list below the adverts will be downloaded and detected by the site as having been viewed. Since sites, except those who only earn per click, earn revenue for the number of times the ads are viewed this will help them financially.

Interesting. It’s a minor feature in Adblock yet it points to one of the major flaws of the Pay-Per-View advertising model - that what’s detected as a “view” isn’t necessarily one. The move to pay-per-click is wise, but until all advertisers do this, features like this weaken advertisers’ “pity the poor web developer” arguments.

Another noteworthy change is that the Firefox web browser has grown in leaps and bounds the past year. The release of Firefox 1.5 in November coincided with the product gaining 10% of the browser market share. From personal experience, 1.5.0.3 has eliminated most of the bugs that plagued the 1.0 versions, creating a product that’s professinal-quality and better than IE by any sane standard. As more people use Firefox, more people will use Adblock, more people will realize they can view an ad-free internet, and chaos will descend upon the internet revenue structure - right? This pleads the question, should policymakers act?

I think the answer is something that can be applied to many of the legally questionable technologies we’ve discussed in class, and it has to do with scaleability. At what point does a technology become significant enough that it makes economic sense to go after it? No more than 10% of Firefox users use Adblock or some variant. So the loss of advertising revenue is negligible.

It is also hard to draw a legal boundary here, as ad blocking can also be accomplished, through customizing the HOSTS file. So outlawing all “ad blocking” would have too wide a scope. What about “all ad-blocking browser tools”? That would take us back to the age before built-in popup blockers, an idea I think causes universal cringing. I suppose forbidding “all ad-blocking browser tools that allow dynamic updating of filters” could work, but it would probably just increase Adblock adoption by giving it what it really lacks - publicity.

While this software may harm advertising revenue in theory, I think it represents a good opportunity for advertisers to re-evaluate their tactics, as they did successfully after blocking pop-up advertising became standard.

Yesterday we briefly discussed a technology called ClearPlay, which enables highly customizable content filtering of DVDs. You buy a ClearPlay-enabled DVD player and download filters for your favorite movies from the ClearPlay website. These contain timestamps for 14 types of offending content and the DVD player uses this information to access the DVD and skip or mute the offending scene. You decide which content you want removed, and can change or remove settings at any time.

There are several interesting things about this technology, copyright battles aside. First, there are the obvious advantages it offers to parents. Not only are standard movie rating systems like the MPAA increasingly nonsensical, but they assume a uniform set of beliefs about what comprises offensive material. Most pro-regulation policymakers agree that such a judgement call is a parent’s job, and ClearPlay is the first solution I’ve heard that leaves room for distinguishing between content types. With MPAA ratings, the most a parent can do is shut a child off from an entire class of movies only because they contain several “inappropriate” scenes, which smacks of censorship. ClearPlay allows a much finer level of control.

The policy implications of ClearPlay are even more interesting. Attempts to regulate explicit content in television and the internet have been around as long as the inventions themselves, and most of them, notably the Communications Decency Act, have come to nought. It seems the general opinion that such problems can only be solved with regulation, since it would be impossible for the free market to provide any sort of incentive to keep people from posting offensive content. But ClearPlay discovered a thriving market of parents who felt, understandably, more tuned in than the government to what their children should or should not view. So while it may be hard to keep offensive content from being created, there are certainly very strong market incentives for the creation of such content-management solutions.

I think the whole minors and explicit content issue is best left to private innovations. Policy solutions are doomed from the start for several reasons, the most obvious that it’s difficult to get around the First Amendment when your aim is to keep certain people from being able to see certain things. Second, it is impossible to gain cooperation from all content producers (especially those outside the US) to follow uniform restrictions. Attorney General Alberto Gonzales recently proposed a mandatory web labeling law that would require websites to place “marks and notices” created by the FTC to indicate the presence of offensive content. This measure, the Child Pornography and Obscenity Prevention Amendments of 2006, would also threaten with imprisonment anyone whose explicit website comes up in searches for innocent phrases, and would prohibit commercial websites from posting explicit content on their websites. It would be impossible, in one post, to list the numerous constitutional, technical, and regulatory problems with this. In brief, it would be a nightmare to implement, generate a surfeit of lawsuits, and probably have no effect on websites outside the US.

In contrast, let’s look at iShield, a filter that recognizes porn images based on characteristics of the image itself, instead of the text analysis most filters use. I can’t imagine the programming that went into this, but according to PC Mag it works quite well. Like ClearPlay it is highly user-customizable, allowing a parent to control what the they want the browser to do with pages containing offensive images, and to whitelist certain sites. It costs $24.95, and (this should be in the marketing materials) is 100% constitutional issue free! In general, I believe innovative solutions like this put the control where it should be - in the hands of the parents.

On a related and hilarous note, a Utah man recently pushed for legislation restricting porn sites to certain ports in the TCP/IP protocol. The self-described “hard core technology businessman” bemoans the fact that all content viewed over a browser uses port 80. His nonprofit organization “CP80″ (for “Clean Port 80″) wants “adult materials to have their own channel.” Wow, gotta love Utah.

Throughout our class discussions, as well as media buzz surrounding the Net Neutrality bill I struggled to put my finger on what it is that just doesn’t add up. The argument generally goes like this: Telcos invested a lot of money into building this network, and require incentives to provide diversified, high-quality services. Bandwidth is a good, and services like Google and Yahoo should pay network providers like Verizon and SBC for the privilege of using the network. Because the broadband provider market is competitive, pricing will maximize social welfare.

All the economic arguments seem logical on the surface. The fallacy of network discrimination arguments is that they try to pass internet access off as a normal good to which standard notions of competition apply. Terms like “social welfare” and “efficiency” are so ingrained in policymaking it’s easy to throw them around. Social welfare is “the utility of people in the aggregate” - the sum of benefit to producers and consumers in an economy. At the efficient competitive equilibrium, consumers are paying exactly what the good is worth to them, and producers are selling it for what it’s worth. This result allows economists to look at real price levels and assume they reflect true value. When it comes to internet, this interpretation of efficiency is rather perverse, and allows network operators to claim a right to profits when no such right exists.

First of all, telcos and those who support them would have us view the internet as mere infrastructure. The economic problem, by this view, is one where SBC and Verizon are the producers in a “bottleneck” arrangement where service providers are either vertically integrated with them, or must pay to use the infrastructure. As this post correctly notes, SBC’s ambition to have Google and MSN pay them for broadband usage becomes absurd if we depart from the flawed “network as infrastructure” approach. SBC provides the hardware, Google and MSN provide the services - so the two companies could with equal credibility claim that fewer people would use the internet if it weren’t for them, and SBC should be paying them. The interdependencies in the protocol stack render such a myopic approach senseless. Additionally, the value of internet to consumers, as Professor Felten comments lies in free and indiscriminate access to resources - not simply amount of bandwidth used. That’s a difficult thing to price in - once you exclude some content, you lose a huge amount of this value. Something is either “completely open” or it isn’t.

What about the assumption of a perfectly competitive space? Competition does not necessarily drive prices to their true values in the Internet market. Barbara Van Schewick points out that the ability to exclude competitors in this market does not require a monopoly position. In fact, the presence of competitors induces vertically integrated network providers to practice exclusion in their internet services, since they are loath to lose customers by raising a very transparent metric like monthly access fees. Also the costs of switching from one company to another can be very high, as internet access generally requires long-term contracts and sunk costs in setup fees. Demand for high-speed internet access is also increasingly inelastic, which makes the providers’ market power more detrimental to consumer surplus. So I don’t believe that the magic elixir of “competition” can stop network providers from destroying the open nature of the internet by exclusion, as it would in a market where consumers could switch freely.

I also find it interesting that network discrimination proposals seem to be aimed away from determining what consumers want. In perfect economic markets, consumers are assumed to vote with their dollars, and it is beneficial to both parties to know exactly how much a consumer is willing to pay. The neutral network takes this further - a consumer essentially votes with his bandwidth. Because consumers expect a “best effort” service, we can assume the traffic patterns that naturally result reflect preferences. Why would the network operators want to deliberately break down this mechanism by setting up non-transparent agreements with third parties and varying levels of service? This claim by Verizon is particularly confusing:

‘Verizon argues that it needs to take such measures to earn a return on its network investments. The New York giant is seeing steep declines in its traditional telephone market, so it is spending an estimated $10 billion over seven years on new fiber lines to diversify into the TV business. Unless it can deliver seamless, high-quality TV service — a real bandwidth hog — Verizon says it won’t be able to compete against Comcast and other cable rivals. We “give consumers choice for video services,” says Verizon Executive Vice-President Thomas J. Tauke.’

(Is Verizon A Network Hog?)

If streaming, QoS-assured video is really going to be the next big thing, I’d think Verizon would worry a little less about being able to handle the demands. After all, this is supposed to be timed with the rollout of a new nationwide high-speed network, and most QoS concerns can be solved by simply adding bandwidth. And because so many users will use the paid-content TV service, it will naturally account for a greater proportion of traffic - right? I suspect Verizon has anticipated that demand for this service will be insufficient to justify the investment, and is trying to avoid this point by obscuring the connection between user bandwidth patterns and demand. Troubled by the idea that internet access is inching closer to behaving like a utility, it’s no surprise network providers would frantically try to reassert ownership. I’m interested to see what actually happens.

Network providers function within an economic and legal framework that was always terribly equipped to handle a complex entity like the internet. I get the impression they are in a race with regulators to squeeze out as much revenue as possible before a more appropriate set of standards is established. As law professor Susan Crawford emphasized when she spoke here last Thursday, a debate of this kind is meaningless without an entirely new set of legal tools.

In our class on virtual worlds, we briefly discussed the responsibility developers and operators of MMORPGs take on when they create a forum so sophisticated that the events inside it are hardly “virtual.” Our discussion of the distinction between virtual and real world assets led us to one critical distinction - in the virtual world, totalitarian responsibility ultimately rests with the game’s developers and operator. This leads to many non-trivial questions about whether they should stop in in the event of a “virtual catastrophe” - Linden Labs stepped in when a weapon of mass destruction appeared in Second Life. I think another interesting place this comes up is the question of virtual world “addiction.”

According to Professor Edward Castronova’s Virtual Worlds: A First-Hand Account of Market and Society on the Cyberian Frontier, 20% of EverQuest survey responders consider the world of Norrath their full-time home, 22% would spend all their time on the game if they could, and 40% would move to Norrath permanently if it were a “real” place - and that was in 2001, when these games were significantly less advanced. Non-gamers (and closeted addicts) will scoff at these statistics, but it’s increasingly obvious that the millions of devotees aren’t spending 20 hours a day killing dragons. Instead of again rehashing the dizzying possibilities of virtual worlds (though I put a bunch of links at the end), I’ll summarize and say you can do just about everything except eating, drinking, and sex. Plainly put, I’m not convinced that spending 20 hours per day on the net running a virtual real estate company is any more antisocial than spending the same amount of time creating visually appealing company slideshows. But for the many players who use virtual worlds to escape reality rather than test their business acumen, internet addiction is set to outgrow alcoholism in social costs. It’s bringing up an issue that’s been with us since the dawn of video game violence policy - when gaming causes real-world problems, who is responsible?

In China, where online gaming is a $500 million dollar industry, addiction is seen increasingly as a sort of national epidemic, with a rising demand for addiction clinics. The General Administration of Press and Publication (GAPP), which regulates online gaming, started last year to mandate a “fatigue system” where players are only permitted to play for five hours. After three hours, players experience a cut to in-game benefits and decreasing rewards and experience points, as well as receiving the message : “You have entered unhealthy game time, please go offline immediately to rest. If you do not your health will be damaged and the benefits you can win will be cut to zero.“ They are then not permitted to play the game again before a five hour break. Since online gaming operators need government approval to offer services in China, they have little choice but to comply.

don’t think we are at risk of such overbearing regulation in the United States, but given the frequent and sometimes successful public outcry about violent video games, it will become an increasingly critical policy issue. I believe a great deal of policy decisions concerning virtual worlds will hinge on the question of just how much “real life” importance the government chooses to give them. At some point, we will have to decide whether the income you earn in Second Life is taxable by the IRS and whether business transactions that take place there must be recorded. And if virtual worlds are given this recognition, I think the “addiction problem” should be reconsidered in light of virtual worlds as more than just games.

Interesting links:
U2 Unwittingly Gives Second Life Concert
Virtual Worlds Raise Money for Katrina Victims
Sexual Inequality Issues in V.W.
Virtual world teaches real-world skills: Game helps people with Asperger’s practice socializing

Recently we drafted possible responses to the FCC’s call for comments on legal actions that could better protect customer proprietary network information (CPNI), most notably the cell phone records, collected by carriers and widely exploited by data brokers. Our group discussed a possible universal “opt-out” consumer-set password policy, which would require consumers to set up a password upon account activation limiting CPNI. The password would be consumer-generated or “shared secret”, with no dependence on social security number, maiden names, or other information that often makes its way into public databases. Customers could opt-out of password protection by submitting a request in writing - this would provide a way out for customers more concerned with ease of use than privacy, but would protect those simply uninformed about privacy risks.

The cell phone carriers don’t like this plan at all. In the FCC Notices of Proposed Rulemaking, Verizon Wireless is quoted as asserting that password systems obstruct legitimate business and do not sit well with customers. CTIA claims they increase the instance of fraudulent requests for “lost” passwords - a rather counter-intuitive point, since having no password at all puts consumers at much greater risk. After thinking about the economic tradeoffs involved in carriers’ security systems, I believe this reluctance should give the FCC even more incentive to take legal action requiring all carriers to implement strong password protection of CPNI.

Let’s think intuitively about why phone carriers would oppose such a mandate. Any new security scheme imposes on them the costs of relevant technology updates, training, customer service, and implementation. It imposes similar burdens on customers, who must deal with changes in a service they rely on for everyday use. Verizon is correct in saying customers don’t like passwords - most customers put much greater weight on ease of use than security. It would be reasonable for a carrier to claim that making such a scheme puts it at a competitive disadvantage - along with the sunk costs of implementing the password protection, the firm may lose customers to competitors whose services are less secure but easier to use. And so I strongly believe that the carriers will not be independently motivated to implement stringent, new security measures unless legal action is taken requiring them all to do it. After all, what’s in it for them?

It’s a pretty central question - one I’d like to address first by contrasting secruity developments in the cellular phone service industry with those in consumer banking. They have progressed much more rapidly in the latter, as anyone who regularly deals with the increasingly stringent password protection of online banking will know. The Gramm-Leach-Bliley act of 1999 effectively prohibited pretexting for financial data, while pretexting for phone records was not covered under federal law until this February. Banks are also more eager to increase security because a breach is sure to involve significant capital losses and bad press. In an attack on a bank, every customer is a potential goldmine, while for cell phone records, very few customers are desirable candidates for phone scamming - it is the few high-profile candidates who bear the most risk. Carriers find it more cost-efficient to deal with the costs of any troublesome breach than to implement a solution. But this compromises the perhaps small percentage of customers who are highly concerned with their CPNI. This sort of situation, where the economically viable solution fails to protect the minority, is one where legal action would be most useful. A universal password protection mandate ensures that no carrier is at a disadvantage, because all are required to make the changes - and it protects consumers from dangers they are not aware of.

Let’s end with an interesting illustration of the tradeoffs phone companies face between economic costs and consumer protection.
Law Professor Susan Drummond, a customer of Canada-based Rogers Wireless, returned from a monthlong trip to Israel to find a cell phone bill totaling $12,237.00 in calls to Pakistan, Syria, Libya and Russia. Her phone had been cloned, and Rogers was holding her liable for the enormous charges. The investigation she and partner Harry Geffen undertook showed that even Rogers company executives were repeatedly “cloned” by terrorist groups who used their information to make overseas calls. Rogers’ fraud management system detects highly irregular call patterns and alerts the company, which then attempts to notify the owner and then decides whether or not to active the phone - on the basis of information they won’t reveal. Why were company executives such popular targets? A manager within Rogers says it’s because nobody wanted to be the person to deactivate the company CEO’s phone. Evidence indicates that Rogers tends to let the meter run when a user has excellent financial history, thus leaving him liable for covering all the charges incurred. Had Rogers aknowledged that Drummond’s phone was compromised and shut it off, the company would have absorbed the charges. As is, they can protect themselves by claiming they didn’t want to cut off a legitimate user. Better security isn’t necessarily cost effective for Rogers, since cases like Drummond’s are rare. I find this to be an excellent illustration of the need for clear legal mandates.

Clearly the real world is doing its best to keep up with our course syllabus - it appears the Department of Justice is investigating possible price-fixing in the online music industry. Rumor has it the DOJ will focus on claims that the four major record labels - Universal Music, Sony BMG, Warner Music and EMI - collude to fix the prices they charge online music resellers such as Apple’s iTunes music store.

A similar investigation by the DOJ in 2001 closed two years later after finding no evidence of collusion. But the scene has changed drastically, with online track sales more than doubling to 352 million in 2005 while CD sales continue to fall.The record labels have repeatedly called for Apple to change its flat 99 cent/song policy and move to a tiered pricing system, where sought-after songs could sell for more than a dollar. Apple has resisted so far, saying the flat pricing is crucial in helping the digital music business take off. The wholesale prices music companies charge to online retailers are between 67-82 cents a song, several in the industry say.

What’s interesting is how these prices are determined. In December 2005, New York State Attorney General Eliot Spitzer issued subpoenas to the same four record companies to investigate ‘most favored nation’ (”MFN”) clauses in the labels’ contracts. These clauses, regularly employed in the entertainment industry, prevent online retailers from granting more attractive terms to rival labels. For example, if Apple’s contract with EMI has an MFN clause, Apple cannot then negotiate a contract with higher prices with Universal. If they do, they must go back and readjust the contract with EMI to grant the same terms. To my legally untrained mind this sounded a little ridiculous, so I checked out the origins of the clause. From the Columbia encyclopedia:

Most Favored Nation- (MFN), provision in a commercial treaty binding the signatories to extend trading benefits equal to those accorded any third state. The clause ensures equal commercial opportunities, especially concerning import duties and freedom of investment. Generally reciprocal, in the late 19th and early 20th cent. unilateral MFN clauses were imposed on Asian nations by the more powerful Western countries (see Open Door). In the late 20th cent. tariff and trade agreements were negotiated simultaneously by all interested parties through the General Agreement on Tariffs and Trade (GATT), which ultimately resulted in the World Trade Organization. Such a wide exchange of concessions is intended to promote free trade, although there has been criticism of the principle of equal trading opportunities on the grounds that freer trade benefits the economically strongest countries.

This to me sounds like a policy that was ideal for the purpose of building a globalized economy, and proves ill-suited when applied to a US industry sector. A most favored nation clause creates transparency - the record labels know the terms their competitors are getting because they’re the same as their own. A more cartel-happy situation is hard to imagine. From basic industrial organization principles, the success of a cartel essentially relies on a few factors. First of all, the probability that anyone who deviates from the fixed pricing will be caught by the rest of the cartel participants - the higher this is, clearly, the stronger the cartel. The MFN clauses raise this probability to 1. Number of firms in the market is also key - it’s much more difficult for a cartel to control 150 firms than ten. Or four, as the with the record labels. Additionally there’s a factor of time value of money, whereby a firm must decide whether the payoff of deviating from the cartel now is great enough to offset the losses in periods to come to the whole industry. Due to the structure of the record industry, where each artist signs with only one label, this factor does not even apply. Online retailers cannot approach a competitor for an artists’ music, so do not get much incentive out of lowering prices.

All this essentially gives the records companies nearly absolute power over digital music distributors. The fortunate catch for Apple and the like is that music companies have an enormous stake in digital music sales to replace their lost album sales revenue, and quite likely this has made them reluctant to rock the boat. But as digital music sales continue to grow, the same factor may very well compel record labels to exercise their power to fix prices unchecked. Investigations like these are crucial in an industry historically ill-suited to responding to changes in the way music is sold.