Archive for May, 2010

Research Roundup #2

Wednesday, May 26th, 2010

It’s time for another edition of the Research Roundup, with a fresh set of papers by authors outside of TPI.  In recent weeks we’ve seen a wealth of articles relating to patent and copyright, so today’s group is a bit heavy on intellectual property.  Additionally, a few interesting papers deal with online business models.  Take a look.

(Click through to the full post to see the list of papers and abstract excerpts)

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Social Networking Privacy Practices – Giving Behavioral Advertising a Good Name

Monday, May 24th, 2010

Ever since Facebook introduced its new personalization programs, users, privacy groups, and lawmakers have complained that Facebook’s privacy controls are overly complex and change too frequently.  Thus, users who are not sufficiently alert may unintentionally release personal information to people who shouldn’t have that information.  A lot of people are rapidly becoming more alert.

In response to the flurry of criticism and, perhaps, to forestall government action, Facebook just announced that it will introduce new privacy controls that it hopes will be more transparent and easier to navigate. Google, faced with a similar problem a few months ago with its new feature, Buzz, also changed its privacy controls in response to vocal criticism.

So we see companies and users struggling to find where social networking ends and privacy intrusions begin.  The question for those of us concerned with public policy is whether the government can be helpful in this type of situation – for example, by providing guidelines as suggested by Senator Schumer.

Whatever one thinks of Facebook’s actions, it’s hard to envision how the FTC or any government agency could do anything that wouldn’t seriously interfere with the ability of businesses in young and fast-changing industries like social networking to introduce new services and try new business models.  The exception would be if Facebook misrepresents to its users what it is doing.  In that case, the FTC might have reason to bring an enforcement action under the current law.

So, despite the missteps, Facebook’s privacy practices are best left to be worked out between the site and its users.  Notwithstanding its rapid growth, the company ultimately will not succeed if it isn’t responsive to its users’ privacy concerns.

What is interesting about the recent Facebook and Google Buzz privacy episodes is that the discussions have mostly not been about the use of information for targeted advertising.  This strikes me as a positive development in that perhaps it will make people more aware of the real differences between information on social networking sites and the use of information for targeted advertising.  People are understandably concerned about the unintentional dissemination of personal information about themselves, including potentially to people they know, and they therefore need to pay close attention to the privacy controls.  That particular concern is not present with targeted advertising, because advertisers use information anonymously (see article by Paul Rubin and myself).  Indeed, even the latest news about Facebook and other social networking sites sending information to advertisers about the last webpage a user visited before clicking on an ad, which could be the user’s profile page, is not particularly a cause for concern.  (In any event, the sites have addressed the problem).  The process of targeting advertising based on users’ interests does not involve human beings looking at any individual’s data.  It is entirely automated.

I am not suggesting that targeted advertising has no connection to the new features being introduced by Facebook, Google and others for whom advertising is the major, often the sole, revenue source.  These companies are trying to increase the number of eyeballs, the amount of time the eyeballs spend on their sites, and the quality of information available in order to better target advertising and thus increase revenues.  Presumably, however, the information people make available is valuable for targeted advertising only when it is used anonymously.

Electronic Health Records: Should We Subsidize Activities That Would Take Place Anyway?

Monday, May 24th, 2010

The American Medical Association and the American Hospital Association along with some 50 smaller health groups have protested that the government’s proposed definition of “meaningful use” is too hard to achieve.  At issue are $14 billion to $27 billion in federal incentive payments for qualifying health care providers, i.e. those who meet all requirements for meaningful use. The groups say the proposed criteria push for too much, too soon and the program should reward providers for steps they already are taking to streamline record keeping.

Whatever one’s views about the merits of various program goals, it wouldn’t seem to be good policy to subsidize activities that are taking place anyway. The subsidies for electronic health records in the economic stimulus legislation were intended to induce new investment and new advances in health information technology, not to pay for activities already underway. My colleague Scott Wallsten proposed evaluating the broadband stimulus plan from a similar perspective by measuring the degree to which the stimulus money funded initiatives that would not have been undertaken in its absence.

I agree, however, that the proposed definition of meaningful use needs to be simplified and achievable. Indeed, the complex and evolving criteria could actually slow investment in electronic systems, as I discussed in comments I submitted on the proposal.  Uncertainties about qualifying for the payments have led to confusion about which systems will become standard and have increased investment risk. This could slow innovation and technical change in electronic health records and increase health costs.

The FCC’s New Wireless Competition Report: The Right Way to Look at the Industry

Saturday, May 22nd, 2010

“If we had any more innovation [in wireless] I think our heads would explode.”
– Professor Gerald Faulhaber, comment at wireless conference in Berkeley, April 2010.

Hats off to the FCC for its new approach to evaluating wireless competition.  Its latest report on wireless competition explicitly recognizes that wireless services now include such a broad range of industries, activities, and linkages to other sectors that it no longer makes sense to think of wireless as a single, overarching “industry.”  Many observers believe—happily or indignantly, depending on who they are—that by failing to apply the phrase “effective competition” to everything wireless the FCC is sending a signal that it sees reasons to be concerned.

Perhaps that is the Commission’s intent.  Perhaps not.  I’ll leave divining its intentions to the Kremlinologists.  Instead, let’s step back and take a look at some of the economics underlying the analysis and the report’s central conclusions.

Until the 1980s economic analysis relied on the so-called “structure-conduct-performance paradigm” (SCPP) in which market structure was taken as given and a concentrated market was assumed to allow firms to behave as monopolists and therefore raise prices and reduce output.  Therefore, a small number of firms was, by itself, cause for concern.  It sounds reasonable, and policymakers still seem implicitly to embrace the SCPP.  But a funny thing happened along the way to testing this seemingly obvious theory.  The empirical relationship between market structure and firm performance turned out to be weak.

It remains true that it is easier for a smaller number of firms to collude to raise prices and lower output than it is for a larger number of firms, so estimating market concentration can be a useful starting point for analysis.  However, economists realized in the 1980s that analyses of competition had to recognize that there is no straight line between market structure and performance, other factors are involved, and, indeed, firm performance itself plays an important role in determining market structure.  That means analyses of competition must focus on firm behavior and actual market outcomes to determine whether an industry is competitive.

Which brings us back to the FCC’s latest wireless competition report.

The report compiles lots of data on both market structure and the various aspects of behavior and performance of firms related to wireless.

Any concerns about the industry must come from certain features of market structure.  In particular, the report notes that the weighted average national Herfindahl-Hirschman Index increased to 2848, which indicates a concentrated industry, though the indicator varies widely across geographic areas.

Key indicators of behavior and performance in the industry—and therefore the most relevant features to evaluating its competitiveness—are eye-opening.

  • Churn (a measure of how many people switch providers and therefore an indicator of switching costs): increased slightly from 1.9% to 2.1% per month.  A recent study suggests that this rate of churn is higher than the average across industries.
  • Prices: The annual cellular consumer price index (CPI) decreased by 0.2% from 2007-2008, while the overall CPI increased by 3.8% during the same time period.
  • Pricing plans: New pricing plans emerged, based on prepaid and unlimited models, in addition to the more standard post-paid “bucket” of minutes.
  • Average Revenue per User (ARPU): ARPU has been flat, in nominal dollars, for years at about $47.
  • Profit margins: The report notes, “While the seven largest mobile wireless service providers all had EBITDA margins over 20 percent during the second quarter of 2009, only four – AT&T, MetroPCS, T-Mobile, and Verizon Wireless – had EBITDA margins greater than 30 percent, and the two largest providers had the highest EBITDA margins.”  The weighted average EBITDA for 2008 Q4 (the latest data the report provides that allow us to create the weights) is about 35 percent, down slightly from about 36 percent three years earlier.
  • Investment inputs: Wireless providers invested somewhere between $20-$25 billion in their networks in 2008 (the report notes that different sources had different estimates), which represents either a small decrease or increase from the previous year and a decrease in terms of investment as a share of revenue.
  • Investment outputs: The number of cell sites increased from about 18,000 in 2007 to almost 29,000 in 2008.
  • Advertising: In 2008 the wireless industry was the sixth-highest spender on advertising among product categories.  It was the second-highest spender of advertising on Spanish-language television.
  • Handsets: Between 2006 and 2009 the number of manufacturers selling mobile handsets in the U.S. increased from 8 to 16, and the number of available handset models increased from 124 to 260.
  • Device innovation: In addition to the rise of smartphones, the report notes that entirely new wireless devices, like mifi cards that receive a cellular wireless signal and transmit a wifi signal, and machine-to-machine hardware are emerging.
  • Entry and exit: We see lots of both, with entry by providers like Leap, Metro PCS, and Clearwire, and exit through mergers.
  • Call quality: Problems per hundred calls decreased to its lowest level ever in 2008 and remained there in 2009.  Moreover, the gap in quality across providers decreased.

Other data are more ambiguous.  The report notes, for example, that some providers have increased early termination fees, but that those increases seem to be associated with higher handset subsidies.  The report further notes that the same handsets are available without early termination fees at much higher prices.

In short, we see in wireless an excellent example of why economists have largely abandoned the SCPP approach to evaluating competition in favor of looking at actual outcomes.  Thus, even if we accept the premise that the market for wireless providers has become more concentrated, we nevertheless see an incredibly dynamic market that is yielding new devices, new services, and lower prices.  Professor Gerry Faulhaber remarked at a conference on wireless in Berkeley last month, “if we had any more innovation I think our heads would explode” (see video at 9:35).

The FCC made a smart decision to gather lots of data about the myriad components of wireless and to focus most of its efforts on examining outcomes.  This approach will allow the Commission to make changes to its reports almost in real-time—a necessity given the rate of change in the industry itself.

FTC Clears Google-AdMob Deal

Friday, May 21st, 2010

The FTC today cleared Google’s acquisition of AdMob – a good decision – stating that “the Commission voted unanimously to close its investigation of Google’s acquisition of AdMob because it lacked reason to believe that the transaction would likely result in a substantial lessening of competition, especially in light of marketplace developments that occurred during the course of its investigation….In any nascent market there will be uncertainty about the path of competition and the durability of early leads in market share.”  This is the difficulty of applying the merger guidelines in such markets.  It’s good that the Commission came to this decision and did so unanimously.  To the extent that this sends a signal to other start-ups in similar situations, it is a pro-innovation signal, as I discussed in an earlier piece.

Farewell to Limewire?

Thursday, May 20th, 2010

Last week, a federal court found Limewire guilty of intentionally inducing widespread copyright infringement.   Some reports claim the Limewire suit was a futile exercise if the goal is to stop the rampant copyright infringement that occurs on p2p networks. However, Limewire Group has found itself at the center of many dramas over the past few years and the possible shuttering of the company has been a long time coming.

 The history of Limewire is not pretty, involving inadvertent filesharing, identity theft, Congressional hearings, and even leaked national security secrets.    Filesharing first came to Congress’ attention in 2003 when two high-profile hearings were held on the subject.  Distributors of peer-to-peer filesharing software responded to the criticism heaped upon them by launching a trade association, P2P United, of which Limewire was a founding member.   The organization drafted a code of conduct, in part addressing inadvertent sharing, to which members promised to comply. 

In 2007, the USPTO issued a report calling out Limewire for continuing to include features in its program to induce users to inadvertently share files on their computers.  One could assume that this perpetuation of inadvertent sharing could be in order to make more popular –and probably copyrighted – media available to other users, thus making Limewire more appealing to users.  This report led to yet another Congressional hearing, reactions of shock from the head of Limewire, and promises to do more to correct the problematic features identified.  Again, Limewire proved itself to be untrustworthy, failed to fix the problematic features and, as a result, again was the source of more highly publicized instances of inadvertent sharing.  The outcome?  Another Congressional hearing in 2009 and the introduction of a bill to ban p2p software on government computers.

My list above is surely not exhaustive but it should give the reader a taste of how those at LimeWire Group have a solid track record of thumbing their nose at those who have the power to make life quite difficult for the company.  And, while this certainly isn’t the end for online filesharing, it could mark the end of one very bad actor in the p2p sphere.  Maybe the recent court ruling will give those who distribute p2p software pause regarding how their operations are run.

(For a more thorough analysis of Limewire and how it actively perpetuated inadvertent filesharing, see “Inadvertent File-Sharing Re-Invented: The Dangerous Design of LimeWire 5,” authored by my former coworker, and co-author of the above mentioned USPTO report, Tom Sydnor.  Tom’s testimony at one of the Congressional hearings is also worth a read.)

Technology and Taxes

Monday, May 17th, 2010

Tax scholars debated policy issues affecting technology and innovation at the National Tax Association’s Spring Symposium May 13 and 14.

Among the presentations, Peter Merrill of PricewaterhouseCoopers argued that to alleviate economic distortions the U.S. should reduce corporate taxes and place less reliance on the taxation of worldwide income.  Merrill emphasized the growing importance of intangible assets. Harvey Rosen of Princeton University and former Chairman of the Council of Economic Advisers said economists widely agree that a value added tax is equivalent to a tax on wages. Jason Furman, Deputy Director of the National Economic Council, argued that the President’s policies would improve the long-term budget outlook once they addressed the immediate problems of strengthening job growth.

Janet Holtzblatt explained tax and health models behind Congressional Budget Office estimates of health reform and Joseph Antos of the American Enterprise Institute analyzed the merits of alternative subsidy schemes for health insurance. Antos argued, contrary to many analysts who believe they are equivalent, that limiting the tax exclusion for health insurance would increase tax progressivity while the “Cadillac tax” enacted in health reform is regressive.

Joseph Bankman of Stanford University advocated that the IRS use technology to simplify tax filing and reduce taxpayers’ burdens by providing pre-prepared returns with information it already has. Nina Olson, the National Taxpayer Advocate, recommended that Congress require the IRS to study the proposal’s resource and feasibility implications, noting IRS administrative constraints and the need to move up deadlines for third-party information filing.  See TPI’s event “The Boundaries of Government in a Digital Age: Should the Government Prepare Personal Tax Returns?” and stay tuned for a forthcoming paper on this topic.

Research Roundup #1

Thursday, May 13th, 2010

Today we kick off the Research Roundup, a new feature on the TPI blog. This semi-regular series highlights recently published articles and working papers related to our research interests by authors outside of the Technology Policy Institute.

TPI scholars do not necessarily agree with all the articles featured here—in fact, some of us may disagree completely with authors’ arguments or conclusions. Nevertheless, we believe that promoting literature on different sides of these debates encourages well-rounded and informed discussion.

These papers are typically culled from new postings on SSRN, but we will include new papers from multiple sources. If you are the author of a newly authored research paper relating to technology policy and wish to be included in a future entry, please send it our way.

The articles are organized loosely by category and are listed only once though they may relate to multiple topics. Enjoy!

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Regulating the Internet

Thursday, May 6th, 2010

So much for data-driven policy:

The Third Way

Google’s Acquisition of AdMob

Wednesday, May 5th, 2010

A decision by the FTC on whether to allow Google’s acquisition of AdMob to go forward is imminent and Tech Daily Dose today referenced a blog post by mobile app developer Wertago about its experience with the FTC staff investigating the deal.  Its a very interesting little essay and I recommend it to anyone interested in how the antitrust agencies review mergers in the technology sectors.   Wertago is a customer in this market, so they would be expected to be concerned if the proposed acquisition was anticompetitive.

One of the things the essay emphasizes is the importance of maintaining vigorous competition in the market to acquire innovative new start-ups:

Just imagine, as a thought experiment, what would happen if Google explicitly stated that it would buy up every start-up ad network that reached some minimum level of ad revenue. The FTC might think that’s presumptively anti-competitive, but we’re not sure that’s necessarily correct. The incentive might spur more entrants into the ad network business, just as the ADC prize money incentivized us to create the great nightlife app that is Wertago. As we pointed out to the FTC staff members we spoke to, many ad networks likely start out tacitly HOPING to one day be bought out by Google, just as app developers tacitly hope to be bought out by this or that category-dominant player. Blocking the AdMob deal could actually remove one (very lucrative) exit possibility and thereby effectively reduce the returns on the risky enterprise of starting a business. As a result, blocking the deal could actually REDUCE incentives to compete in the ad network space.

This is an extremely important consideration that I also emphasized in a recent Forbes.com oped.  A policy that takes the biggest, most successful companies out of the acquisition market is not good for innovation.   It’s not clear how, or even whether, the antitrust agencies incorporate this type of consideration into their analysis, but they need to.