August 18, 2009

A Boston jury has found a student liable to pay $675,000 for "downloading and sharing 30 songs", John Schwartz tells us (*). To turn this remarkable conclusion into a Pyrrhic victory for the Recording Industry Association of America, Professor Neeson and his poor client sorely need to appeal successfully to the public at large. Yet as we witness the Information Revolution, where is our Dickens?

Meanwhile US Federal agencies seem to have awaken from their previous regulatory apathy. After David Vladeck's inspiring words at the FTC Consumer Protection Bureau and according to Saul Hansell (**), it is the turn of Julius Genachowski, the new chairman of the FCC, to wonder "whether new rules are needed to govern cellphone handsets". For public officials, rightful indignation of course cannot replace objective doctrine.

"Please, Sir, I want some more" may seem strangely hypocritical coming from multibillion dollar corporations. Yet can one blame CEO's for asking? Being second best reminds them of Carthage's fate. Being dominant gives them Gothic nightmares. In a capitalist society, fear drives hunger and greed cannot be satiated. Rare indeed are those who can say with confidence today their future is secured by a sustainable business model.

Not Rupert Murdoch, chairman of News Corporation. Echoing his wish, a competitor calls for "some sort of consumer pay model" online, prompting David Carr to write "there was something vaguely oracular and final about [this] statement, as if saying it might make it so" (***), what the French calls la méthode Coué (1). Certainly not the media brands developing iPhone "apps". Stephanie Clifford quotes a Gannett executive as musing "is there a subscription model here, is it an advertising model, is there a monthly recurring stream, is it a onetime payment model?" (****).

Not even Google when it comes to its plan to digitize all books held in US libraries. As it could create monopolistic rents as well as disenfranchise foreign authors and publishers, Richard Waters reports both the US and Europe will subject its business model to legal scrutiny (*****)(******).

In these unsettled circumstances, can a public commissioner objectively "rule that customers are harmed by lack of competition"? Expect on the contrary every proposed regulation to come under fire for decreasing competition. Innovators and laggards alike will claim to be robbed of great expectations they consider to be well-deserved rewards. To fight back on principle, four factors should be investigated when preparing a new rule.

Start by checking the minimum scale for sustainability. Successful startups often invest billions of dollars before reaching profitability. Amazon.com took seven years to reach breakeven point and carried over a billion dollars in cumulative deficit thirteen years after its creation (2). Profitability came much quicker to Google's original contextual search business. Still cumulative investments ran in the billions.

Nevertheless both Amazon.com and Google had a clear online business model, one based on shipping direct from large distribution centers, the other from making advertisers bid up the price of limited contextual ad space. What should worry commissioners is the Micawber business model adopted by so many wouldbe competitors. "If I grow enough, something will turn up and make me profitable". When this model is played on a large enough scale, it is positively dangerous and society has the right to draw onerous rules to defend consumers from unsustainable flights of fancy.

Other businesses, with a long history of success, are likewise improvident. Something did turn up and destroy their business model based on physical reproduction of cultural goods in high volume. Yet they resist any revision in the associated legal framework. The more intellectual property laws are used to prop up outdated large scale businesses, the less consumers benefit from native digital businesses that are intrinsically lower scale.

Mr Micawber would do no evil. For a more realistic character, turn to Mr Merdle, Dickens' Madoff. When pressed by improvidence and greed, CEO's tend likewise to abuse naive consumers. Offer bundling is their preferred tactic, whether to coerce consumers into giving away their confidential profile or locking in their future purchases. The industry packages its bundling as convenience. And truth to tell, it is. Consumers for instance are both lazy and loath to spend online if they can avoid it. For Randall Picker, behavioral tracking neatly circumvents the difficulty and should be upheld as a reasonable barter assuming competition ensures freedom of choice.

In Dickens' day, the debtors' prison and the workhouse were also viewed as convenient remedies to combat reluctance to pay via the former, lazyness via the latter. Taking a hint from their progressive disappearance, commissioners should be well advised to wonder if consumers should not be similarly protected from convenience with too many adverse side-effects.

To libertarian fundamentalists, state paternalism is anathema. Without such principles though, can one deny a citizen the right to sell oneself into slavery? I do not want to trivialize slavery. Yet so-called privacy policies pertake in the same sweeping submission to the acquirer's certain self-interest and possible mercy. Worse. Lost, freedom can be regained. Confidentiality, once broken, cannot be recovered.

The most promising factor to consider is the delivery of recommendations (3). Isn't personalized advertising a form of self recommendation? Paid blogging, which Stephanie Clifford reports to be under FTC investigation (*******), is another. On David Gelles' beat (********) (*********), the dance between Facebook, shoppers and advertisers may lead to yet another. Find how to pay recommenders in an ethical way and you will define an attractive and sustainable business model. Innovation may be best left to competition. Technological progress though, demands to clarify the principles concerned.

Explicit business model sustainability, consumer protection against sugar-coated abuses, ethical recommendation schemes together make a sound basis for new regulations. But why not confront the issue of scale heads on? "Please, Sir, I want some more" may be a natural and universal demand. Yet Mr Bumble does not deserve more generous a response than Oliver Twist. Exemptions to anti bundling rules should always be limited in scope and time. The fruits of intellectual creation should account for sharing rights.

And when it comes to lovely songs and orphan books, beware the self-interested, self-appointing guardian!

Philippe Coueignoux

• (*) ................. Tilting at Internet's Barriers, Stalwart is Upended in Court, by John Schwartz (New York Times) - August 11, 2009
• (**) ............... F.C.C. Weighs Need for New Cellphone Handset Rules, by Saul Hansell (New York Times) - August 10, 2009
• (***) ............. For Murdoch, It's Try, Try Again, by David Carr (New York Times) - August 10, 2009
• (****) ........... There's an App for That. But What About a Revenue Stream?, by Stephanie Clifford (New York Times) - August 10, 2009
• (*****) ......... A plan to scan, by Richard Waters (Financial Times) - August 13, 2009
• (******) ....... European publishers target Google, by Richard Waters, Ben Hall and Andrew Edgecliffe-Johnson (Financial Times) - August 13, 2009
• (*******) ..... Notice Those Ads on Blogs? Regulators Do, Too, by Stephanie Clifford (New York Times) - August 11, 2009
• (********) ... Facebook could be a hit with shoppers, by David Gelles (Financial Times) - August 5, 2009
• (*********) . Facebook clicks with advertisers by offering connection with users, by David Gelles (Financial Times) - August 10, 2009
• (1) see la méthode Coué in the French Wikipedia
• (2) see Amazon in the Wikipedia
• (3) see recommendations in the main theme index of these fillips.