InfoTech & Public Policy

The French Government is currently considering controversial new legislation that may cause Apple to remove its iTunes service from the country.

Last month, the French National Assemble passed legislation that was meant to prevent one company, via Digital Rights Management (DRM), from dominating the online music market. The legislation would force Apple, Sony, Audible.com and other companies offering DRM music to share their DRM technologies so competitors can offer music playback devices and online music stores that worked with the DRM software. The bill requires providing the DRM source code to allow conversion from one form to another.

Apple was very concerned with the new legislation, calling the bill “state-sponsored piracy.”

“The French implementation of the EU Copyright Directive will result in state-sponsored piracy. If this happens, legal music sales will plummet just when legitimate alternatives to piracy are winning over customers. iPod sales will likely increase as users freely load their iPods with ‘interoperable’ music which cannot be adequately protected. “

Apple does not want to provide its DRM technology and is threatening to vacate the French market with its iTunes and iPod products if the bill is passed in this form.

I can see inter-operability as a valid objective. Companies often use DRM as a way to lock consumers into a specific line of products, like iTunes music store and iPod music player. DRM increases the cost of switching to another music player because the new music player will unlikely play the music purchased from iTunes. Also, the iPod will be unlikely to play music purchased from other online music sites with DRM.

Conversion between different DRM technologies is a difficult (if not impossible) process. Putting aside the technical difficulties, different DRM technologies may provide different features. If one version (A) does not allow copying, but version B allows copying the file 3 times and version C allows unlimited copying within 2 weeks, how should copying be managed when converting between A, B, and C?

Just last week, in the French Senate, a similar bill was proposed. This new bill would require basically the same sharing of DRM compatibility, but has a significant clause that would allow companies to avoid sharing.

The new bill would create a new French authority to handle compatibility disputes. This agency would have the ability to enforce compatibility between specific DRM music formats. The significant change is that the agency would only do so if the DRM causes operational issues “additional to, or independent of, those explicitly decided by the copyright holders.”

Basically, Apple (and others) can alter the contract with the copyright holders of the music to specifically state that the DRM and corresponding compatibility issues are acceptable to the copyright holders. I’m not sure how difficult it will be to amend the contracts of online music sold to the French iTunes, but it seems that if this version passes, additional paperwork would be better then vacating the market.

Just today, the Senate passed its version of the DRM compatibility bill. Now, representatives from the two houses of government will meet to compromise on the differences between the bills.

As we’ve discussed in class, a pair of consortia, led by Sony and Toshiba with Blu-ray and HD-DVD respectively, are competing to position their next generation technology as the market leader in portable data storage. HD-DVD is going to hit the market first, be cheaper and easier to produce, and posts entertainment heavyweights like Paramount, Warner Bros and Universal Studios on its side. Blu-ray, on the other hand, will have a greater storage capacity (50gbs compared to 30), an army of hardware manufacturers (Dell, HP, Hitachi, LG, Mitsubishi, Panasonic, Philips, Samsung, Sharp, Sony, Thomson &c.) as well as its own team of content providers (Sony Pictures, Metro-Goldyn-Mayer, Disney, EA and Vivendi Universal) and the advantage of being tied into the Playstation 3. Yet, lost in the wild speculation over which system will prove to be the alpha male and which will be the Beta, is the question: is this manner of competition good for consumers?

Competition should only be encouraged insofar as it produces positive outcomes for consumers. The Beta/VHS war illustrates that the best product may not necessarily win out and that consumers will be shortchanged throughout the fight because they may end up with obsolete equipment. But the most galling aspect of this whole competition is the content providers who are lining up on one side or the other, limiting competitors’ access to their media in order to bolster the prospects of their chosen technology.

While Sony and Toshiba should be free to compete on quality, price, time to market, customer support, backwards compatibility and any number of things related to the data storage technology, competing on the basis of content should be prevented by antitrust regulators. Lining up exclusive rights to studio content in return for a cut of the royalties prevents consumers from enjoying content they otherwise would without purchasing both devices. And the particular content that is being restricted has no inherent compatibility with Blu-ray or HD-DVD; it is as if Sony managed to line up VISA to ensure that customers hoping to buy their HD-DVDs could only pay with Mastercard.

While regulators would not typically permit a monopolist to tie his product in exclusively with another in hopes of capturing some royalties from that secondary market (hold your Microsoft jokes), studios are typically thought to operate in competitive markets without monopoly power. Regulators need to realize that media is not so perfectly substitutable and is in some ways an addictive good (which has increasing marginal returns with consumption, as opposed to diminishing ones). As such, there is an important role for them to play in making sure studios are neutral in their provision of content, a role they seem to be shirking from in the Blu-ray / HD-DVD battle.

As we discussed in class a month or so ago, the first Microsoft anti-trust case in the US involved Microsoft’s alleged unfair use of its operating system monopoly to push the use of Microsoft’s internet browser Internet Explorer. The second Microsoft anti-trust case was in the Europe Union and involved Microsoft’s alleged unfair use of its operating system monopoly to push its own brand of video player Microsoft Media Player. The EU forced Microsoft to offer a version of its operating system without the Microsoft player. They also fined Microsoft for its behavior, and that fine is currently under appeal.

I want to talk about the recent Google complaint that Microsoft is bundling its MSN search engine as the default search engine in the new version if Internet Explorer (IE7). Google complained :

“We don’t think it’s right for Microsoft to just set the default to MSN on install,” Marissa Mayer, vice president for search products and user experience at Google, said then.

This may start to sound like the previous two antitrust cases, but there are a few key differences. Google is complaining about the default setting in the internet browser, not the Windows operating system. While IE is the most popular browser, Microsoft does not have as strong a monopoly in the internet browser market as it does in the operating system market. Aside from pure market share, the burden to users switching browsers is much lower. This weakens the monopoly claims because users are not locked into just one browser.

The Department of Justice looked into the claims of unfairness with regards to the default search engine. Just recently the DOJ concluded that the default search engine is easy to change, so does not represent a problem.

The court document noted that personal computer makers are free to set the default search engine to any service they choose. …[the browser] included “a relatively straightforward method for the user to select a different search engine from the initial default.”

To me, this seems like the right decision. Google, however, is still unsatisfied and commented that if Microsoft wanted to make it easy for users to switch, they could have made the default search box configurable with just one click.

I want to talk a bit about the television advertisements. It seems to be a very popular in posts over the past few weeks – debating if the 30-second advertisement is dead or if in-show placements are the future. I want to focus on actually measuring viewer and the predominant company behind making those measurements: Nielsen Media Research.

Nielsen was founded in 1926 by Author Nielsen, first doing product testing and later moving into market research as a way to determine how products were selling. In 1936, it purchased the technology for an “Audimeter:”

the machine was capable of making a minute-by-minute record of when a radio was on and where the dial was set.

Does that device sound familiar? In 1942, Nielsen launched the Nielsen Radio Index based on data collected from Audiometers placed nationwide in 800 homes. Flash forward three decades, and in 1973, Nielsen Media Research launched

a new metering technology called “Storage Instantaneous Audimeter” for nationwide service. The new Audimeter automatically recorded and stored minute-by-minute tuning records for channel, time of day, and duration of tuning.

Currently, Nielsen uses a combination of user diaries (where the members of a household record what and when they watch television) and these home set top boxes. Recently, there have been a few new methods to monitor the way in which people are watching television, and I’ll explain those in a bit. I was amazed that until a few years ago, the technology and methodology used to measure television viewers, which in turn is used to determine advertising costs (a $70 billion industry), was essentially developed in 1926.

It was just last year (in 2005) that Nielsen began taking DVRs into account when tracking television viewers. They began to break down the viewers into “Live” and “Live Plus Same Day” and “Live Plus Seven Days.” As Andrew pointed out in his post, 70% of viewers are still viewing live TV, but what does that really mean in terms of advertisement viewers?

Also in 2005, Nielsen began releasing the minute-by-minute viewing habits of its samples which allows for analysis of specific commercials in specific programs. The minute-by-minute analysis has been collected since the first Audimeter in 1926, yet it was only released (or able to be purchased) beginning last year.

Nielsen also has been reluctant to offer “commercial ratings.” These ratings would show the effectiveness of commercials and have a huge impact on advertisement pricings (they would take into affect the DVR aspects and aggregated minute-by-minute viewings). The current thought is that these commercial ratings will be released by for the beginning of next season’s television.

Nielsen is also looking at other ways of monitoring viewers, including programming on cellphones, iPods, or via internet broadcasting. They are also looking at a measurement of “engagement.” This would account for how much attention a viewer paid to the show/commercial rather than solely if the television was on. Although an advertisement may be on television, if nobody is actually watching it or retaining information about it, it is not as useful.

It seems that Nielson, so essentially the entire industry, is way behind in being able to measure these new methods of television viewing. Although the DVR technology is only a decade old, minute-by-minute analysis and the corresponding “commercial ratings” could have been released much earlier than last year. Nielsen essentially has a monopoly on the television ratings (when was the last time you heard something other than the Nielsen ratings related to TV?) and that seems to be slowing innovation. In late 2005, erinMedia brought an anti-trust case again Nielsen citing anticompetitive practices to impede innovation, although the case has not gotten very far. Nielsen is under the threat of government scrutiny (see Senate FAIR Ratings Act), although nothing has come from that either. It seems that the introduction of new ways to view television may be threatening the Nielsen monopoly as advertisers are becoming more unhappy (and vocal) about the lack of ratings information, but so far, there have been no significant challengers to the Nielsen monopoly.

I’d like to return to an issue I wrote about earlier this semester, how visa processes affect U.S. technology companies. During President Bush’s trip to India in March, he promoted the benefits of outsourcing. Outsourcing is critical for U.S. businesses, but U.S. industry still needs to attract highly qualified foreign personnel to work inside the United States. The post-9/11 environment has significantly slowed the process of “worker visas” (AKA H-1B visas). Students who previously wanted to study in the U.S. for advanced degrees are now considering other countries because of the difficulty in qualifying for U.S. student visas.

U.S. businesses have been lobbying Congress to increase the caps on the number of H1-B visas that can be issued in a year. According to Information Week, “The United States received the maximum number of allowable petitions for H-1B visas in fiscal 2006 six weeks before the fiscal year even began.” But recent focus on larger questions of immigration has threatened to derail progress on raising the H-1B caps. As a result, last week Texas Senator John Cornyn proposed the “SKIL (Securing Knowledge, Innovation and Leadership) Bill” which will allow industries to continue competitive hiring while the immigration debate rages on. Why should lawmakers address the worker visa issue immediately?

An industry group called Compete America is focuses on promoting competitiveness for American industry. Their website cites the following troubling trends, “Misguided immigration policies for highly educated foreign talent, combined with our foreign competitors’ increased efforts to attract that talent, have resulted in American brain drain. Fewer of the world’s top minds are coming to the United States to study. International applications to U.S. graduate programs are down 23 percent from 2003. Foreign student immigration to Australia has doubled since the year 2000 while the same type of immigration to the United States has not increased at all. After receiving a U.S. graduate degree, fewer foreign students are staying to work and contribute to the United States, finding better opportunities back home. While 25 years ago 70 to 80 percent of foreign students stayed in the United States after receiving a graduate degree, today only 50 percent do.”

The SKIL Bill, according to Compete America, will accomplish the following:
* Exemptions for U.S. educated foreign professionals with a master’s or higher degree from the H-1B and EB quotas so their talent can be retained in the United States.
* Creation of a flexible, market-based H-1B cap so that U.S. employers are not locked out of hiring critical talent.
* Extension of foreign students’ post curricular optional practical training from 12 to 24 months to allow them to go more easily from student to green card.
* Exemptions for spouses and minor children of EB green card professionals from the annual cap, thus making more visas available for the professionals U.S. employers need.

The United States can not afford to stand by idly and watch a brain drain develop. Congress should act now – admittedly difficult during an election year – to insure the next generation of technology is led by U.S. companies and research institutes. Allowing the cap to be lifted while other issues involving immigrations are debated is critical.

A while ago, Cory Ondrejka, VP for Product Development from Linden Labs came to Princeton to talk about Second Life. He argued that the success of Second Life came from two things – freedom and ownership. These two factors have interesting implications for the network neutrality debate. If we see Linden Life as the gatekeeper to the Second-Life network and Verizon and Sprint as gatekeepers to the internet, it is amazing how different their philosophies are toward regulating access.

There are eerie parallels between Second-Life and the Metaverse of Neal Stephenson’s SnowCrash (I swear, I’m not a geek, that’s one of the few sci-fi books I’ve read). The similarities go beyond the way avatars interact with a 3D world to the transportation system for getting those avatars around and the complete customizability of the system (Second Life uses quaternions as datatypes, which is fairly ridiculous). It is the customizability that gives Second Life and the Metaverse their richness and makes them vulnerable. The premise of SnowCrash is that there is an eponymous virus inside the Metaverse (which is also a drug in the real world) that threatens to enslave humanity (yeah, kind of far-fetched). A significant amount of the plot revolves around how the Metaverse is open enough for hackers to plant this virus and also open enough for the protagonist to save the day by hacking. To a large extent, this is how Second-Life works – people are given the freedom to tinker, but that comes at a price. One of the more interesting elements of Cory’s talk was about how two people in Second Life went around as alien avatars in a B-movie spaceship abducting other users and giving them TV-shirts that read “I got abducted by aliens and all I have to show for it is this lousy T-Shirt.” Openess allows Linden Labs to tap the skill and labor of millions of users and enhance the richness of the game at no direct cost. Of course, this openness has great risks: the so-called “W-Hats WMD” (in which objects replicated rapidly enough to shut down servers) is to Second Life what the SnowCrash virus is to the Metaverse.

There are also obvious parallels to the internet, in that the creativity of users to do whatever they could over HTTP has made the internet the vibrant world that it is. This is in stark opposition to the Bell-Head model of networks – in which the default policy is to forbid uses outside of a narrowly defined set. As Susan Crawford noted in her IT policy talk, this has not led to much innovation in phone service over the last fifty years. This dichotomy has parallels to international economics: the telephone system is a typical caricature of European or Indian Bureaucracy; the internet is much more like the open capitalist system the US or Taiwan. Most economists argue that the freer economic systems allow for greater growth. If the telcos are too heavy handed in regulating permissible traffic they could destroy the vibrancy of the internet – the very product they are selling.

But neutrality is not enough – property ownership is another key ingredient. The idea is that to motivate entrepreneurs, one has to let them profit from their creations. In Second Life, the game creators grant property rights to in-game creations. This, Cory claims, has led to a whole slew of businesses: from fashion designers of virtual clothes and notaries (using standard cryptographic techniques). Again, millions of users are enhancing the richness of the game at no cost to Linden Labs. There is a parallel with theories on jump-starting economies in developing nations. Many economists argue that the lack of strong property rights in those countries is one of the key factors inhibiting economic growth. In the network neutrality context, this also argues for a more hands-off approach for the Bellheads. If they charge websites too much for traffic (as they are trying to do), they could destroy the entrepreneurial incentives that make people want to buy internet access in the first place.

Second Life makes a strong case for the Openist perspective toward network neutrality.

Yesterday Apple Computer announced that it will continue to charge 99 cents per song on its popular iTunes music-downloading service. Recently there has been talk that Apple, facing immense pressure from record companies, might move from a uniform pricing model to a variable one (i.e., charge different prices for different tracks). Leading the push for this change have been the music industry’s big four –- Universal, Warner Music, EMI, and Sony BMG –- which are doing virtually everything in their power to offset declining CD sales with new revenues from internet downloads. In particular, these companies want to be able to charge more for new songs from top-selling artists. However, Apple’s CEO Steve Jobs argues that these companies are “getting greedy.” Furthermore, Jobs claims that higher prices will cause consumers to “go back to piracy.” The argument is that prices must be low enough to deter consumers from downloading songs illegally. Given that the iTunes Music Store commands a staggering market share of about 80 percent and thus has a significant amount of leverage over the music industry, it is no surprise that Apple came out of negotiations on top.

But while Apple’s announcement of no change in pricing is being portrayed in the press as a defeat for the music industry, it is not clear that this is so. In fact, the music industry may be benefiting more than it realizes. Jobs has a very good point: higher prices will incentivize consumers to download songs illegally, as opposed to doing so legally using services like iTunes. Therefore, it is possible that record companies might actually lose revenue by raising the price of a song, since many consumers might decide to stop paying for music when they can download it for free (albeit illegally). Plus, differential pricing schemes whereby hot songs cost more money might be considered unfair by consumers, and thus might cause them to download songs illegally in spite of the music industry.