What Google’s book settlement means

Google Book Search
Image via Wikipedia

From Robert Darnton’s “Google & the Future of Books” (The New York Review of Books: 12 February 2009):

As the Enlightenment faded in the early nineteenth century, professionalization set in. You can follow the process by comparing the Encyclopédie of Diderot, which organized knowledge into an organic whole dominated by the faculty of reason, with its successor from the end of the eighteenth century, the Encyclopédie méthodique, which divided knowledge into fields that we can recognize today: chemistry, physics, history, mathematics, and the rest. In the nineteenth century, those fields turned into professions, certified by Ph.D.s and guarded by professional associations. They metamorphosed into departments of universities, and by the twentieth century they had left their mark on campuses…

Along the way, professional journals sprouted throughout the fields, subfields, and sub-subfields. The learned societies produced them, and the libraries bought them. This system worked well for about a hundred years. Then commercial publishers discovered that they could make a fortune by selling subscriptions to the journals. Once a university library subscribed, the students and professors came to expect an uninterrupted flow of issues. The price could be ratcheted up without causing cancellations, because the libraries paid for the subscriptions and the professors did not. Best of all, the professors provided free or nearly free labor. They wrote the articles, refereed submissions, and served on editorial boards, partly to spread knowledge in the Enlightenment fashion, but mainly to advance their own careers.

The result stands out on the acquisitions budget of every research library: the Journal of Comparative Neurology now costs $25,910 for a year’s subscription; Tetrahedron costs $17,969 (or $39,739, if bundled with related publications as a Tetrahedron package); the average price of a chemistry journal is $3,490; and the ripple effects have damaged intellectual life throughout the world of learning. Owing to the skyrocketing cost of serials, libraries that used to spend 50 percent of their acquisitions budget on monographs now spend 25 percent or less. University presses, which depend on sales to libraries, cannot cover their costs by publishing monographs. And young scholars who depend on publishing to advance their careers are now in danger of perishing.

The eighteenth-century Republic of Letters had been transformed into a professional Republic of Learning, and it is now open to amateurs—amateurs in the best sense of the word, lovers of learning among the general citizenry. Openness is operating everywhere, thanks to “open access” repositories of digitized articles available free of charge, the Open Content Alliance, the Open Knowledge Commons, OpenCourseWare, the Internet Archive, and openly amateur enterprises like Wikipedia. The democratization of knowledge now seems to be at our fingertips. We can make the Enlightenment ideal come to life in reality.

What provoked these jeremianic- utopian reflections? Google. Four years ago, Google began digitizing books from research libraries, providing full-text searching and making books in the public domain available on the Internet at no cost to the viewer. For example, it is now possible for anyone, anywhere to view and download a digital copy of the 1871 first edition of Middlemarch that is in the collection of the Bodleian Library at Oxford. Everyone profited, including Google, which collected revenue from some discreet advertising attached to the service, Google Book Search. Google also digitized an ever-increasing number of library books that were protected by copyright in order to provide search services that displayed small snippets of the text. In September and October 2005, a group of authors and publishers brought a class action suit against Google, alleging violation of copyright. Last October 28, after lengthy negotiations, the opposing parties announced agreement on a settlement, which is subject to approval by the US District Court for the Southern District of New York.[2]

The settlement creates an enterprise known as the Book Rights Registry to represent the interests of the copyright holders. Google will sell access to a gigantic data bank composed primarily of copyrighted, out-of-print books digitized from the research libraries. Colleges, universities, and other organizations will be able to subscribe by paying for an “institutional license” providing access to the data bank. A “public access license” will make this material available to public libraries, where Google will provide free viewing of the digitized books on one computer terminal. And individuals also will be able to access and print out digitized versions of the books by purchasing a “consumer license” from Google, which will cooperate with the registry for the distribution of all the revenue to copyright holders. Google will retain 37 percent, and the registry will distribute 63 percent among the rightsholders.

Meanwhile, Google will continue to make books in the public domain available for users to read, download, and print, free of charge. Of the seven million books that Google reportedly had digitized by November 2008, one million are works in the public domain; one million are in copyright and in print; and five million are in copyright but out of print. It is this last category that will furnish the bulk of the books to be made available through the institutional license.

Many of the in-copyright and in-print books will not be available in the data bank unless the copyright owners opt to include them. They will continue to be sold in the normal fashion as printed books and also could be marketed to individual customers as digitized copies, accessible through the consumer license for downloading and reading, perhaps eventually on e-book readers such as Amazon’s Kindle.

After reading the settlement and letting its terms sink in—no easy task, as it runs to 134 pages and 15 appendices of legalese—one is likely to be dumbfounded: here is a proposal that could result in the world’s largest library. It would, to be sure, be a digital library, but it could dwarf the Library of Congress and all the national libraries of Europe. Moreover, in pursuing the terms of the settlement with the authors and publishers, Google could also become the world’s largest book business—not a chain of stores but an electronic supply service that could out-Amazon Amazon.

An enterprise on such a scale is bound to elicit reactions of the two kinds that I have been discussing: on the one hand, utopian enthusiasm; on the other, jeremiads about the danger of concentrating power to control access to information.

Google is not a guild, and it did not set out to create a monopoly. On the contrary, it has pursued a laudable goal: promoting access to information. But the class action character of the settlement makes Google invulnerable to competition. Most book authors and publishers who own US copyrights are automatically covered by the settlement. They can opt out of it; but whatever they do, no new digitizing enterprise can get off the ground without winning their assent one by one, a practical impossibility, or without becoming mired down in another class action suit. If approved by the court—a process that could take as much as two years—the settlement will give Google control over the digitizing of virtually all books covered by copyright in the United States.

Google alone has the wealth to digitize on a massive scale. And having settled with the authors and publishers, it can exploit its financial power from within a protective legal barrier; for the class action suit covers the entire class of authors and publishers. No new entrepreneurs will be able to digitize books within that fenced-off territory, even if they could afford it, because they would have to fight the copyright battles all over again. If the settlement is upheld by the court, only Google will be protected from copyright liability.

Google’s record suggests that it will not abuse its double-barreled fiscal-legal power. But what will happen if its current leaders sell the company or retire? The public will discover the answer from the prices that the future Google charges, especially the price of the institutional subscription licenses. The settlement leaves Google free to negotiate deals with each of its clients, although it announces two guiding principles: “(1) the realization of revenue at market rates for each Book and license on behalf of the Rightsholders and (2) the realization of broad access to the Books by the public, including institutions of higher education.”

What will happen if Google favors profitability over access? Nothing, if I read the terms of the settlement correctly. Only the registry, acting for the copyright holders, has the power to force a change in the subscription prices charged by Google, and there is no reason to expect the registry to object if the prices are too high. Google may choose to be generous in it pricing, and I have reason to hope it may do so; but it could also employ a strategy comparable to the one that proved to be so effective in pushing up the price of scholarly journals: first, entice subscribers with low initial rates, and then, once they are hooked, ratchet up the rates as high as the traffic will bear.

Steve Jobs on mediocrity & market share

From Steven Levy’s “OK, Mac, Make a Wish: Apple’s ‘computer for the rest of us’ is, insanely, 20” (Newsweek: 2 February 2004):

If that’s so, then why is the Mac market share, even after Apple’s recent revival, sputtering at a measly 5 percent? Jobs has a theory about that, too. Once a company devises a great product, he says, it has a monopoly in that realm, and concentrates less on innovation than protecting its turf. “The Mac user interface was a 10-year monopoly,” says Jobs. “Who ended up running the company? Sales guys. At the critical juncture in the late ’80s, when they should have gone for market share, they went for profits. They made obscene profits for several years. And their products became mediocre. And then their monopoly ended with Windows 95. They behaved like a monopoly, and it came back to bite them, which always happens.”

What happens to IP when it’s easy to copy anything?

From Bruce Sterling’s “2009 Will Be a Year of Panic” (Seed: 29 January 2009):

Let’s consider seven other massive reservoirs of potential popular dread. Any one of these could erupt, shattering the fragile social compact we maintain with one another in order to believe things contrary to fact.

2. Intellectual property. More specifically, the fiat declaration that properties that are easy to reproduce shouldn’t be reproduced.

Declaring that “information wants to be free” is an ideological stance. A real-world situation where information can’t be anything but free, where digital information cannot be monetized, is bizarre and deeply scary. No banker or economist anywhere has the ghost of clue what to do under such conditions.

Intellectual property made sense and used to work rather well when conditions of production favored it. Now they don’t. If it’s simple to copy just one single movie, some gray area of fair use can be tolerated. If it becomes easy to copy a million movies with one single button-push, this vast economic superstructure is reduced to rags. Our belief in this kind of “property” becomes absurd.

To imagine that real estate is worthless is strange, though we’ve somehow managed to do that. But our society is also built on the supposed monetary worth of unreal estate. In fact, the planet’s most advanced economies are optimized to create pretty much nothing else. The ultimate global consequences of this situation’s abject failure would rank with the collapse of Communism.

US government makes unsafe RFID-laden passports even less safe through business practices

From Bill Gertz’s “Outsourced passports netting govt. profits, risking national security” (The Washington Times: 26 March 2008):

The United States has outsourced the manufacturing of its electronic passports to overseas companies — including one in Thailand that was victimized by Chinese espionage — raising concerns that cost savings are being put ahead of national security, an investigation by The Washington Times has found.

The Government Printing Office’s decision to export the work has proved lucrative, allowing the agency to book more than $100 million in recent profits by charging the State Department more money for blank passports than it actually costs to make them, according to interviews with federal officials and documents obtained by The Times.

The profits have raised questions both inside the agency and in Congress because the law that created GPO as the federal government’s official printer explicitly requires the agency to break even by charging only enough to recover its costs.

Lawmakers said they were alarmed by The Times’ findings and plan to investigate why U.S. companies weren’t used to produce the state-of-the-art passports, one of the crown jewels of American border security.

Officials at GPO, the Homeland Security Department and the State Department played down such concerns, saying they are confident that regular audits and other protections already in place will keep terrorists and foreign spies from stealing or copying the sensitive components to make fake passports.

“Aside from the fact that we have fully vetted and qualified vendors, we also note that the materials are moved via a secure transportation means, including armored vehicles,” GPO spokesman Gary Somerset said.

But GPO Inspector General J. Anthony Ogden, the agency’s internal watchdog, doesn’t share that confidence. He warned in an internal Oct. 12 report that there are “significant deficiencies with the manufacturing of blank passports, security of components, and the internal controls for the process.”

The inspector general’s report said GPO claimed it could not improve its security because of “monetary constraints.” But the inspector general recently told congressional investigators he was unaware that the agency had booked tens of millions of dollars in profits through passport sales that could have been used to improve security, congressional aides told The Times.

GPO is an agency little-known to most Americans, created by Congress almost two centuries ago as a virtual monopoly to print nearly all of the government’s documents … Since 1926, it also has been charged with the job of printing the passports used by Americans to enter and leave the country.

Each new e-passport contains a small computer chip inside the back cover that contains the passport number along with the photo and other personal data of the holder. The data is secured and is transmitted through a tiny wire antenna when it is scanned electronically at border entry points and compared to the actual traveler carrying it.

According to interviews and documents, GPO managers rejected limiting the contracts to U.S.-made computer chip makers and instead sought suppliers from several countries, including Israel, Germany and the Netherlands.

After the computer chips are inserted into the back cover of the passports in Europe, the blank covers are shipped to a factory in Ayutthaya, Thailand, north of Bangkok, to be fitted with a wire Radio Frequency Identification, or RFID, antenna. The blank passports eventually are transported to Washington for final binding, according to the documents and interviews.

The stop in Thailand raises its own security concerns. The Southeast Asian country has battled social instability and terror threats. Anti-government groups backed by Islamists, including al Qaeda, have carried out attacks in southern Thailand and the Thai military took over in a coup in September 2006.

The Netherlands-based company that assembles the U.S. e-passport covers in Thailand, Smartrac Technology Ltd., warned in its latest annual report that, in a worst-case scenario, social unrest in Thailand could lead to a halt in production.

Smartrac divulged in an October 2007 court filing in The Hague that China had stolen its patented technology for e-passport chips, raising additional questions about the security of America’s e-passports.

Transport concerns

A 2005 document obtained by The Times states that GPO was using unsecure FedEx courier services to send blank passports to State Department offices until security concerns were raised and forced GPO to use an armored car company. Even then, the agency proposed using a foreign armored car vendor before State Department diplomatic security officials objected.

Questionable profits

The State Department is now charging Americans $100 or more for new e-passports produced by the GPO, depending on how quickly they are needed. That’s up from a cost of around just $60 in 1998.

Internal agency documents obtained by The Times show each blank passport costs GPO an average of just $7.97 to manufacture and that GPO then charges the State Department about $14.80 for each, a margin of more than 85 percent, the documents show.

The accounting allowed GPO to make gross profits of more than $90 million from Oct. 1, 2006, through Sept. 30, 2007, on the production of e-passports. The four subsequent months produced an additional $54 million in gross profits.

The agency set aside more than $40 million of those profits to help build a secure backup passport production facility in the South, still leaving a net profit of about $100 million in the last 16 months.

GPO plans to produce 28 million blank passports this year up from about 9 million five years ago.

Wikipedia, freedom, & changes in production

From Clay Shirky’s “Old Revolutions, Good; New Revolutions, Bad” (Britannica Blog: 14 June 2007):

Gorman’s theory about print – its capabilities ushered in an age very different from manuscript culture — is correct, and the same kind of shift is at work today. As with the transition from manuscripts to print, the new technologies offer virtues that did not previously exist, but are now an assumed and permanent part of our intellectual environment. When reproduction, distribution, and findability were all hard, as they were for the last five hundred years, we needed specialists to undertake those jobs, and we properly venerated them for the service they performed. Now those tasks are simpler, and the earlier roles have instead become obstacles to direct access.

Digital and networked production vastly increase three kinds of freedom: freedom of speech, of the press, and of assembly. This perforce increases the freedom of anyone to say anything at any time. This freedom has led to an explosion in novel content, much of it mediocre, but freedom is like that. Critically, this expansion of freedom has not undermined any of the absolute advantages of expertise; the virtues of mastery remain as they were. What has happened is that the relative advantages of expertise are in precipitous decline. Experts the world over have been shocked to discover that they were consulted not as a direct result of their expertise, but often as a secondary effect – the apparatus of credentialing made finding experts easier than finding amateurs, even when the amateurs knew the same things as the experts.

The success of Wikipedia forces a profound question on print culture: how is information to be shared with the majority of the population? This is an especially tough question, as print culture has so manifestly failed at the transition to a world of unlimited perfect copies. Because Wikipedia’s contents are both useful and available, it has eroded the monopoly held by earlier modes of production. Other encyclopedias now have to compete for value to the user, and they are failing because their model mainly commits them to denying access and forbidding sharing. If Gorman wants more people reading Britannica, the choice lies with its management. Were they to allow users unfettered access to read and share Britannica’s content tomorrow, the only interesting question is whether their readership would rise a ten-fold or a hundred-fold.

Britannica will tell you that they don’t want to compete on universality of access or sharability, but this is the lament of the scribe who thinks that writing fast shouldn’t be part of the test. In a world where copies have become cost-free, people who expend their resources to prevent access or sharing are forgoing the principal advantages of the new tools, and this dilemma is common to every institution modeled on the scarcity and fragility of physical copies. Academic libraries, which in earlier days provided a service, have outsourced themselves as bouncers to publishers like Reed-Elsevier; their principal job, in the digital realm, is to prevent interested readers from gaining access to scholarly material.

Why American car companies are in trouble

From Paul Ingrassia’s “How Detroit Drove Into a Ditch” (The Wall Street Journal: 25 October 2008):

This situation doesn’t stem from the recent meltdown in banking and the markets. GM, Ford and Chrysler have been losing billions since 2005, when the U.S. economy was still healthy. The financial crisis does, however, greatly exacerbate Detroit’s woes. As car sales plunge — both in the U.S. and in Detroit’s once-booming overseas markets — it’s becoming nearly impossible for the companies to cut costs fast enough to keep pace with the evaporation of their revenue. All three companies, once the very symbol of American economic might, need new capital, but their options for raising it are limited.

In all this lies a tale of hubris, missed opportunities, disastrous decisions and flawed leadership of almost biblical proportions. In fact, for the last 30 years Detroit has gone astray, repented, gone astray and repented again in a cycle not unlike the Israelites in the Book of Exodus.

Detroit failed to grasp — or at least to address — the fundamental nature of its Japanese competition. Japan’s car companies, and more recently the Germans and Koreans, gained a competitive advantage largely by forging an alliance with American workers.

Detroit, meanwhile, has remained mired in mutual mistrust with the United Auto Workers union. While the suspicion has abated somewhat in recent years, it never has disappeared — which is why Detroit’s factories remain vastly more cumbersome to manage than the factories of foreign car companies in the U.S.

Two incidents in 1936 and 1937 formed this lasting labor-management divide: the sit-down strike at GM’s factories in Flint, Mich., and the Battle of the Overpass in Detroit, in which Ford goons beat up union organizers. But the United Auto Workers prevailed, and as the GM-Ford-Chrysler oligopoly emerged in the 1940s, the union gained a labor monopoly in American auto factories. As costs increased, the companies routinely passed them on to U.S. consumers, who had virtually no alternatives in buying cars.

Nissan, Toyota and other Japanese car companies soon started building factories in America, followed by German and Korean auto makers. There are now 16 foreign-owned assembly plants in the U.S., and many more that build engines, transmissions and other components.

Several years ago Ford even considered dropping cars altogether because they weren’t profitable, and focusing entirely on trucks. Then in 2005, Hurricane Katrina and growing oil demand from China and India sent gasoline prices soaring and SUV sales plunging. GM lost $10.6 billion that year. Ford topped that by losing $12.7 billion in 2006. Last summer Daimler gave up on Chrysler, selling it to private-equity powerhouse Cerberus for about one-fourth of what it had paid to buy Chrysler. Last fall the UAW approved significant wage and benefit concessions, but they won’t kick in until 2010. That might be too late. GM lost $15.5 billion in this year’s second quarter, Ford lost $8.7 billion, and further losses are coming. (Closely held Chrysler, of course, doesn’t report financial results.)

More on Fordlandia

From Mary A. Dempsey’s “Fordlandia” (Michigan History: July/August 1994):

Screens were just one of the Yankee customs transported to Fordlandia and Belterra. Detroit physician L. S. Fallis, Sr., the first doctor sent from Henry Ford Hospital to run the Fordlandia medical center, attempted to eradicate malaria and hookworm among Brazilian seringueiros (rubber gatherers) by distributing quinine and shoes. The quinine was accepted but shoes were an unwelcome novelty. It is an exceptional photo that shows the shirtless seringueiros, machetes in hand, shod only with floppy rubber-soled sandals; their children went shoeless. The jungle dwellers also found Fordlandia’s two-family homes hopelessly hot and ugly and the idea of bathrooms repulsive. Even today, plumbing is a rarity in the jungle.

At the same time, Ford’s 6:00 A.M. to 3:00 P.M. work schedule was unpopular with plantation employees accustomed to slashing trees several hours before dawn, then resuming the work at sunset for piecemeal pay. But the promise of free housing and food, top-notch health care for the workers and their families, and a salary of thirty-seven cents a day—double the regular wage—kept the seringueiros on the job. …

Generally, the company-imposed routine met hit-and-miss compliance. Children wore uniforms to school and workers responded favorably to suggestions they grow their own vegetables. But most ignored Ford’s no liquor rule and, on paydays, boats filled with potent cachaca—the local sugar-can brew—pulled up at the dock. Poetry readings, weekend dances and English sing-alongs were among the disputed cultural activities. …

Former Kalamazoo sheriff Curtis Pringle, a manager at Belterra, boosted labor relations when he eased off the Dearborn-style routine and deferred to local customs, especially when it came to meals and entertainment. Under Pringle, Belterra buildings did not contain the glass that made the powerhouse at Fordlandia unbearably hot, and weekend square dancing was optional. Alexander said Henry Ford balked at building a Catholic church at Fordlandia—even though Catholicism was the predominant Christian religion in Brazil. The Catholic chapel was erected right away at Belterra. …

Alexander said of the long-closed but impeccably maintained facility that once boasted separate wards for men and women, thirty nurses, a dentist, three physicians and a pharmacist, who also administered anesthesia during surgery.

Henry Ford’s debacle in the jungle

From Alan Bellows’s “The Ruins of Fordlândia” (Damn Interesting: 3 August 2006):

On Villares’ advice, [Henry] Ford purchased a 25,000 square kilometer tract of land along the Amazon river, and immediately began to develop the area. …

Scores of Ford employees were relocated to the site, and over the first few months an American-as-apple-pie community sprung up from what was once a jungle wilderness. It included a power plant, a modern hospital, a library, a golf course, a hotel, and rows of white clapboard houses with wicker patio furniture. As the town’s population grew, all manner of businesses followed, including tailors, shops, bakeries, butcher shops, restaurants, and shoemakers. It grew into a thriving community with Model T Fords frequenting the neatly paved streets. …

But Ford’s effort to transplant America– what he called “the healthy lifestyle”– was not limited to American buildings, but also included mandatory “American” lifestyle and values. The plantation’s cafeterias were self-serve, which was not the local custom, and they provided only American fare such as hamburgers. Workers had to live in American-style houses, and they were each assigned a number which they had to wear on a badge– the cost of which was deducted from their first paycheck. Brazilian laborers were also required to attend squeaky-clean American festivities on weekends, such as poetry readings, square-dancing, and English-language sing-alongs.

One of the more jarring cultural differences was Henry Ford’s mini-prohibition. Alcohol was strictly forbidden inside Fordlândia, even within the workers’ homes, on pain of immediate termination. This led some industrious locals to establish businesses-of-ill-repute beyond the outskirts of town, allowing workers to exchange their generous pay for the comforts of rum and women. …

Workers’ discontent grew as the unproductive months passed. Brazilian workers – accustomed to working before sunrise and after sunset to avoid the heat of the day – were forced to work proper “American” nine-to-five shifts under the hot Amazon sun, using Ford’s assembly-line philosophies. And malaria became a serious problem due to the hilly terrain’s tendency to pool water, providing the perfect breeding ground for mosquitoes.

In December of 1930, after about a year of working in a harsh environment with a strict and disagreeable “healthy lifestyle”, the laborers’ agitation reached a critical mass in the workers’ cafeteria. Having suffered one too many episodes of indigestion and degradation, a Brazilian man stood and shouted that he would no longer tolerate the conditions. A chorus of voices joined his, and the cacophony was soon joined by an orchestra of banging cups and shattering dishes. Members of Fordlândia’s American management fled swiftly to their homes or into the woods, some of them chased by machete-wielding workers. A group of managers scrambled to the docks and boarded the boats there, which they moved to the center of the river and out of reach of the escalating riots.

By the time the Brazilian military arrived three days later, the rioters had spent most of their anger. Windows were broken and trucks were overturned, but Fordlândia survived. …

In 1933, after three years with no appreciable quantity of rubber to show for the investment, Henry Ford finally hired a botanist to assess the situation. The botanist tried to coax some fertile rubber trees from the pitiful soil, but he was ultimately forced to conclude that the land was simply unequal to the task. The damp, hilly terrain was terrible for the trees, but excellent for the blight. Unfortunately no one had paid attention to the fact that the land’s previous owner was a man named Villares– the same man Henry Ford had hired to choose the plantation’s site. Henry Ford had been sold a lame portion of land, and Fordlândia was an unadulterated failure. …

Be that as it may, Ford’s perseverance might have eventually paid off if it were not for the fact that scientists developed economical synthetic rubber just as Belterra was establishing itself. In 1945, Ford retired from the rubbering trade, having lost over $20 million in Brazil without ever having set foot there.

Word of the day: creative destruction

From Wikipedia’s “Creative destruction” (13 July 2006):

Creative destruction, introduced by the economist Joseph Schumpeter, describes the process of industrial transformation that accompanies radical innovation. In Schumpeter’s vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power. …

There are numerous types of innovation generating creative destruction in an industry:

New markets or products
New equipment
New sources of labor and raw materials
New methods of organization or management
New methods of inventory management
New methods of transportation
New methods of communication (e.g., the Internet)
New methods of advertising and marketing
New financial instruments
New ways to lobby politicians or new legal strategies

Wal-Mart’s monopsony power damages its vendors

From Barry C. Lynn’s “The Case for Breaking Up Wal-Mart” (Harper’s: 24 July 2006):

Instead, the firm is also one of the world’s most intrusive, jealous, fastidious micromanagers, and its aim is nothing less than to remake entirely how its suppliers do business, not least so that it can shift many of its own costs of doing business onto them. In addition to dictating what price its suppliers must accept, Wal-Mart also dictates how they package their products, how they ship those products, and how they gather and process information on the movement of those products. Take, for instance, Levi Strauss & Co. Wal-Mart dictates that its suppliers tell it what price they charge Wal-Mart’s competitors, that they accept payment entirely on Wal-Mart’s terms, and that they share information all the way back to the purchase of raw materials. Take, for instance, Newell Rubbermaid. Wal-Mart controls with whom its suppliers speak, how and where they can sell their goods, and even encourages them to support Wal-Mart in its political fights. Take, for instance, Disney. Wal-Mart all but dictates to suppliers where to manufacture their products, as well as how to design those products and what materials and ingredients to use in those products. Take, for instance, Coca-Cola [… Wal-Mart decided that it did not approve of the artificial sweetener Coca-Cola planned to use in a new line of diet colas. In a response that would have been unthinkable just a few years ago, Coca-Cola yielded to the will of an outside firm and designed a second product to meet Wal-Mart’s decree.]. …

Wal-Mart and a growing number of today’s dominant firms, by contrast, are programmed to cut cost faster than price, to slow the introduction of new technologies and techniques, to dictate downward the wages and profits of the millions of people and smaller firms who make and grow what they sell, to break down entire lines of production in the name of efficiency. The effects of this change are clear: We see them in the collapsing profit margins of the firms caught in Wal-Mart’s system. We see them in the fact that of Wal-Mart’s top ten suppliers in 1994, four have sought bankruptcy protection.

Antitrust suits led to vertical integration & the IT revolution

From Barry C. Lynn’s “The Case for Breaking Up Wal-Mart” (Harper’s: 24 July 2006):

As the industrial scholar Alfred D. Chandler has noted, the vertically integrated firm — which dominated the American economy for most of the last century — was to a great degree the product of antitrust enforcement. When Theodore Roosevelt began to limit the ability of large companies to grow horizontally, many responded by buying outside suppliers and integrating their operations into vertical lines of production. Many also set up internal research labs to improve existing products and develop new ones. Antitrust law later played a huge role in launching the information revolution. During the Cold War, the Justice Department routinely used antitrust suits to force high-tech firms to share the technologies they had developed. Targeted firms like IBM, RCA, AT&T, and Xerox spilled many thousands of patents onto the market, where they were available to any American competitor for free.

The mirror of monopoly: monopsony … which may be worse

From Barry C. Lynn’s “The Case for Breaking Up Wal-Mart” (Harper’s: 24 July 2006):

Popular notions of oligopoly and monopoly tend to focus on the danger that firms, having gained control over a marketplace, will then be able to dictate an unfairly high price, extracting a sort of tax from society as a whole. But what should concern us today even more is a mirror image of monopoly called “monopsony.” Monopsony arises when a firm captures the ability to dictate price to its suppliers, because the suppliers have no real choice other than to deal with that buyer. Not all oligopolists rely on the exercise of monopsony, but a large and growing contingent of today’s largest firms are built to do just that. The ultimate danger of monopsony is that it deprives the firms that actually manufacture products from obtaining an adequate return on their investment. In other words, the ultimate danger of monopsony is that, over time, it tends to destroy the machines and skills on which we all rely.

Examples of monopsony can be difficult to pin down, but we are in luck in that today we have one of the best illustrations of monopsony pricing power in economic history: Wal-Mart. There is little need to recount at any length the retailer’s power over America’s marketplace. For our purposes, a few facts will suffice — that one in every five retail sales in America is recorded at Wal-Mart’s cash registers; that the firm’s revenue nearly equals that of the next six retailers combined; that for many goods, Wal-Mart accounts for upward of 30 percent of U.S. sales, and plans to more than double its sales within the next five years.

… The problem is that Wal-Mart, like other monopsonists, does not participate in the market so much as use its power to micromanage the market, carefully coordinating the actions of thousands of firms from a position above the market.

Corporate consolidation reigns in American business, & that’s a problem

From Barry C. Lynn’s “The Case for Breaking Up Wal-Mart” (Harper’s: 24 July 2006):

It is now twenty-five years since the Reagan Administration eviscerated America’s century-long tradition of antitrust enforcement. For a generation, big firms have enjoyed almost complete license to use brute economic force to grow only bigger. And so today we find ourselves in a world dominated by immense global oligopolies that every day further limit the flexibility of our economy and our personal freedom within it. There are still many instances of intense competition — just ask General Motors.

But since the great opening of global markets in the early 1990s, the tendency within most of the systems we rely on for manufactured goods, processed commodities, and basic services has been toward ever more extreme consolidation. Consider raw materials: three firms control almost 75 percent of the global market in iron ore. Consider manufacturing services: Owens Illinois has rolled up roughly half the global capacity to supply glass containers. We see extreme consolidation in heavy equipment; General Electric builds 60 percent of large gas turbines as well as 60 percent of large wind turbines. In processed materials; Corning produces 60 percent of the glass for flat-screen televisions. Even in sneakers; Nike and Adidas split a 60-percent share of the global market. Consolidation reigns in banking, meatpacking, oil refining, and grains. It holds even in eyeglasses, a field in which the Italian firm Luxottica has captured control over five of the six national outlets in the U.S. market.

The stakes could not be higher. In systems where oligopolies rule unchecked by the state, competition itself is transformed from a free-for-all into a kind of private-property right, a license to the powerful to fence off entire marketplaces, there to pit supplier against supplier, community against community, and worker against worker, for their own private gain. When oligopolies rule unchecked by the state, what is perverted is the free market itself, and our freedom as individuals within the economy and ultimately within our political system as well.

Macaulay in 1841 on the problems on the copyright monopoly

From Thomas Babington Macaulay’s “A Speech Delivered In The House Of Commons On The 5th Of February 1841” (Prime Palaver #4: 1 September 2001):

The question of copyright, Sir, like most questions of civil prudence, is neither black nor white, but grey. The system of copyright has great advantages and great disadvantages; and it is our business to ascertain what these are, and then to make an arrangement under which the advantages may be as far as possible secured, and the disadvantages as far as possible excluded. …

We have, then, only one resource left. We must betake ourselves to copyright, be the inconveniences of copyright what they may. Those inconveniences, in truth, are neither few nor small. Copyright is monopoly, and produces all the effects which the general voice of mankind attributes to monopoly. …

I believe, Sir, that I may with safety take it for granted that the effect of monopoly generally is to make articles scarce, to make them dear, and to make them bad. … Thus, then, stands the case. It is good that authors should be remunerated; and the least exceptionable way of remunerating them is by a monopoly. Yet monopoly is an evil. For the sake of the good we must submit to the evil; but the evil ought not to last a day longer than is necessary for the purpose of securing the good. …

For consider this; the evil effects of the monopoly are proportioned to the length of its duration. But the good effects for the sake of which we bear with the evil effects are by no means proportioned to the length of its duration. A monopoly of sixty years produces twice as much evil as a monopoly of thirty years, and thrice as much evil as a monopoly of twenty years. But it is by no means the fact that a posthumous monopoly of sixty years gives to an author thrice as much pleasure and thrice as strong a motive as a posthumous monopoly of twenty years. On the contrary, the difference is so small as to be hardly perceptible. We all know how faintly we are affected by the prospect of very distant advantages, even when they are advantages which we may reasonably hope that we shall ourselves enjoy. But an advantage that is to be enjoyed more than half a century after we are dead, by somebody, we know not by whom, perhaps by somebody unborn, by somebody utterly unconnected with us, is really no motive at all to action. …

Dr Johnson died fifty-six years ago. If the law were what my honourable and learned friend wishes to make it, somebody would now have the monopoly of Dr Johnson’s works. Who that somebody would be it is impossible to say; but we may venture to guess. I guess, then, that it would have been some bookseller, who was the assign of another bookseller, who was the grandson of a third bookseller, who had bought the copyright from Black Frank, the doctor’s servant and residuary legatee, in 1785 or 1786. Now, would the knowledge that this copyright would exist in 1841 have been a source of gratification to Johnson? Would it have stimulated his exertions? Would it have once drawn him out of his bed before noon? Would it have once cheered him under a fit of the spleen? Would it have induced him to give us one more allegory, one more life of a poet, one more imitation of Juvenal? I firmly believe not. I firmly believe that a hundred years ago, when he was writing our debates for the Gentleman’s Magazine, he would very much rather have had twopence to buy a plate of shin of beef at a cook’s shop underground. Considered as a reward to him, the difference between a twenty years’ and sixty years’ term of posthumous copyright would have been nothing or next to nothing. But is the difference nothing to us? I can buy Rasselas for sixpence; I might have had to give five shillings for it. I can buy the Dictionary, the entire genuine Dictionary, for two guineas, perhaps for less; I might have had to give five or six guineas for it. Do I grudge this to a man like Dr Johnson? Not at all. Show me that the prospect of this boon roused him to any vigorous effort, or sustained his spirits under depressing circumstances, and I am quite willing to pay the price of such an object, heavy as that price is. But what I do complain of is that my circumstances are to be worse, and Johnson’s none the better; that I am to give five pounds for what to him was not worth a farthing.

Developing nations stand up to US/UN bullying on copyright

From “Statement by India at the Inter-Sessional Intergovernmental Meeting on a Development Agenda For WIPO, April 11-13, 2005” (emphasis added):

“Development”, in WIPO’s terminology means increasing a developing country’s capacity to provide protection to the owners of intellectual property rights. This is quite a the opposite of what developing countries understand when they refer to the ‘development dimension’. The document presented by the Group of Friends of Development corrects this misconception – that development dimension means technical assistance.

The real “development” imperative is ensuring that the interest of Intellectual Property owners is not secured at the expense of the users of IP, of consumers at large, and of public policy in general. …

The legal monopoly granted to IP owners is an exceptional departure from the general principle of competitive markets as the best guarantee for securing the interest of society. The rationale for the exception is not that extraction of monopoly profits by the innovator is, of and in itself, good for society and so needs to be promoted. Rather, that properly controlled, such a monopoly, by providing an incentive for innovation, might produce sufficient benefits for society to compensate for the immediate loss to consumers as a result of the existence of a monopoly market instead of a competitive market. Monopoly rights, then, granted to IP holders is a special incentive that needs to be carefully calibrated by each country, in the light of its own circumstances, taking into account the overall costs and benefits of such protection. …

The current emphasis of Technical Assistance on implementation and enforcement issues is misplaced. IP Law enforcement is embedded in the framework of all law enforcement in the individual countries. It is unrealistic, and even undesirable to expect that the enforcement of IP laws will be privileged over the enforcement of other laws in the country. Society faces a considerable challenge to effectively protect, and resolve disputes over, physical property. To expect that the police, the lawyers and the courts should dedicate a sizable part of society’s enforcement resources for protecting intangible intellectual property, is unrealistic. …

In conclusion, it is important that developed countries and WIPO acknowledge that IP protection is an important policy instrument for developing countries, one that needs to be used carefully. While the claimed benefits of strong IP protection for developing countries are a matter of debate – and nearly always in the distant future – such protection invariably entails substatial real an immediate costs for these countries. In formulating its IP policy, therefore, each country needs to have sufficient flexibility so that the cost of IP protection does not outweigh the benefits.

Early attempts to control phone usage

From R. W. Kostal’s Law and English Railway Capitalism, 1825-1875 (quoted in Andrew Odlyzko’s “Pricing and Architecture of the Internet: Historical Perspectives from Telecommunications and Transportation“):

In Britain in 1889, postal officials reprimanded a Leicester subscriber for using his phone to notify the fire brigade of a nearby conflagration. The fire was not on his premises, and his contract directed him to confine his telephone “to his own business and private affairs.” The Leicester Town Council, Chamber of Commerce, and Trade Protection Society all appealed to the postmaster-general, who ruled that the use of the telephone to convey intelligence of fires and riots would be permitted thenceforth.

Monopolies & Internet innovation

From Andrew Odlyzko’s “Pricing and Architecture of the Internet: Historical Perspectives from Telecommunications and Transportation“:

The power to price discriminate, especially for a monopolist, is like the power of taxation, something that can be used to destroy. There are many governments that are interested in controlling Internet traffic for political or other reasons, and are interfering (with various degrees of success) with the end-to-end principle. However, in most democratic societies, the pressure to change the architecture of the Internet is coming primarily from economic concerns, trying to extract more revenues from users. This does not necessarily threaten political liberty, but it does impede innovation. If some new protocol or service is invented, gains from its use could be appropriated by the carriers if they could impose special charges for it.

The power of price discrimination was well understood in ancient times, even if the economic concept was not defined. As the many historical vignettes presented before show, differential pricing was frequently allowed, but only to a controlled degree. The main con- cern in the early days was about general fairness and about service providers leveraging their control of a key facility into control over other businesses. Personal discrimination was particularly hated, and preference was given to general rules applying to broad classes (such as student or senior citizen discounts today). Very often bounds on charges were imposed to limit price discrimination. …

Openness, non-discrimination, and the end-to-end principle have contributed greatly to the success of the Internet, by allowing innovation to flourish. Service providers have traditionally been very poor in introducing services that mattered and even in forecasting where their profits would come from. Sometimes this was because of ignorance, as in the failure of WAP and success of SMS, both of which came as great surprises to the wireless industry, even though this should have been the easiest thing to predict [55]. Sometimes it was because the industry tried to control usage excessively. For example, services such as Minitel have turned out to be disappointments for their proponents largely because of the built-in limitations. We can also recall the attempts by the local telephone monopolies in the mid-to late-1990s to impose special fees on Internet access calls. Various studies were trotted out about the harm that long Internet calls were causing to the network. In retrospect, though, Internet access was a key source of the increased revenues and profits at the local telcos in the late 1990s. Since the main value of the phone was its accessibility at any time, long Internet calls led to installation of second lines that were highly profitable for service providers. (The average length of time that a phone line was in use remained remarkably constant during that period [49].)

Much of the progress in telecommunications over the last couple of decades was due to innovations by users. The “killer apps” on the Internet, email, Web, browser, search engines, and Napster, were all invented by end users, not by carriers. (Even email was specifically not designed into the ARPANET, the progenitor of the Internet, and its dominance came as a surprise [55].)

Railroads & tolls

From Andrew Odlyzko’s “Pricing and Architecture of the Internet: Historical Perspectives from Telecommunications and Transportation“:

Railroads were the dominant industry of the 19th century. … Early railroad charters, in both England and the U.S., were modeled after canal and turnpike charters, and almost uniformly envisaged that railroad companies would not be carriers themselves. Instead, they were expected to offer their facilities for use by carriers that would carry goods and passengers in their own wagons over the rails. Still, these charters specified tolls that varied greatly depending on the nature of the cargo. … For example, the very first parliamentary act for a railway was enacted in 1801. (Previous railways had been on private property, but in this case, as in subsequent ones, promoters were asking for the right of eminent domain to acquire the necessary land.) Between the endpoints of the railway, “chalk, lime and other manures were charged at the rate of three-pence per ton per mile; coals, corn, potatoes, iron and other metals, fourpence; and all goods not specified, sixpence” (p. 45 of [13]). …

Although some railroads did operate with other companies’ equipment on their rails for decades (and modern ones do so extensively), there was a relatively quick shift in the 1830s and 1840s towards railroads being exclusive carriers. There were technical reasons promot- ing such a shift (safety was jeopardized with multiple operators and primitive technology), but there is evidence that desire for greater control over pricing by railroads was also a major consideration [64]. Once railroads became carriers, they could engage in much more extensive price discrimination than allowed by the toll structure in their charters. And, propelled by the economics of their industry, with high fixed costs, railroads did engage in massive price discrimination, including personal discrimination. The result was massive political movements leading to government regulation [62,65].

Canals & tolls

From Andrew Odlyzko’s “Pricing and Architecture of the Internet: Historical Perspectives from Telecommunications and Transportation“:

The modern canal era can be said to start with the Duke of Bridgewater’s Canal in England. Originally it was just a means of connecting the Duke’s colliery to Manchester. The parliamentary charter (which enabled him to take over private property, with appropriate compensation) obliged the Duke to carry cargo to Manchester at a maximum charge of 30 pence a ton, and to sell his own coal in Manchester for no more than 80 pence a ton, about half the price that had prevailed before [38,68]. Parliament was determined to obtain substantial benefits for the public from the grant of government powers to the Duke. …

The great financial success of the Duke of Bridgewater’s Canal led to widespread attempts to emulate it. In the early 1790s, there was a canal mania, with a burst of construction that was never to be replicated in Britain. (The U.S. had its canal mania some decades later, following on the great success of the Erie Canal.) The charters of those canals show a general trend towards greater price discrimination. …

Similar toll schedules depending on cargo were also common in the United States. As an example, when parts of the still incomplete Erie Canal were opened in 1820, there was a long list of tolls, concluding with “All articles not enumerated, one cent, per ton, per mile” (Chapter 2 of [81]). The enumerated articles (among those that were measured by the ton) were charged tolls ranging from salt and gypsum at 0.5 cents per ton per mile, to 1 cent for flour, to 2 cents for merchandise, and nothing for fuel to be used in the manufacture of salt (so that it was necessary not only to know the nature of the cargo, but its ultimate use). …

While canal operators were trying to squeeze carriers (who were trying to squeeze merchants, in ways similar to those described below for turnpikes), carriers often attempted to evade tolls. They bribed toll-collectors, misrepresented what the cargo was, or how much there was of it, and in some cases even hid cargo with high toll charges under commodities such as sand for which the fees were low. The countermeasures, just as they are today, and would likely be in the future with electronic communications, were based on both technology and law. Measurements were taken (in many cases there were books available to canal operators, listing canal boats, and the weight of cargo aboard as a function of how deeply in the water they lay), and there were punitive penalties for evasion.

The ACLU on monopoly control by ISPs

From the ACLU’s No Competition: How Monopoly Control of the Broadband Internet Threatens Free Speech:

Common carriage policy requires that a network owner – in this case, a telephone company – not discriminate against information by halting, slowing, or otherwise tampering with the transfer of any data. The purpose of common carriage is to prevent a network owner from leveraging its control over the pipeline for communication to gain power or control over the actual information, products and services that flow through it. This is not a new concept; for well over a century it has been applied in ways that have been central to the economic development of our nation, including canal systems, public highways, and the telegraph. And common carriage has been applied to the telephone system since the early 20th century, requiring it to serve all users in an equitable and nondiscriminatory fashion.

2. Cable networks are not open

Unlike phone companies, cable television providers do not have to provide nondiscriminatory access to their TV subscribers, because cable TV is not subject to the common carrier regulatory regime. As a result, the content that cable TV companies deliver is largely under their control. …

3. Cable providers wield total control over Internet use

… Cable providers are under no obligation to remain a neutral pipe for content over an end-to-end Internet – and have many incentives for interfering with that pipe:

Basic control of the service. Providers of course have control over the fundamentals of a customer’s Internet connection. For example, they can restrict the number of computers that a customer connects to the cable modem through a home network. They can control the overall speed and reliability of a customer’s online experie nce. And they can set the price for various levels of high-speed access.

Control over applications. Providers can block their customers from using particular applications, such as video conferencing, Internet telephony, and virtual private networks …

Control over access to content. Even more frightening is the growing ability of cable providers to interfere with content. … That is like the phone company being allowed to own restaurants and then provide good service and clear signals to customers who call Domino’s and frequent busy signals, disconnects and static for those calling Pizza Hut. …

Ability to force-feed content. Cable providers can also use their monopoly power to force-feed content to customers by requiring them to access the Internet through a particular home page containing material selected by the cable company. …

Ability to violate privacy. Finally, a cable provider’s absolute control over its network gives it the technical capacity to record everything its customers do online, down to the smallest mouse click. In February 2002, the nation’s third largest cable company, Comcast, without notification to its customers, began to track their Web browsing. …

According to data provided by the National Cable and Telecommunications Association, the top five cable companies in the United States control 75% of the market; if the proposed merger between Comcast and AT&T is approved, only four companies will control that 75%, with approximately 35% of all cable in the US controlled by Comcast alone. …

The FCC, meanwhile, decided in April 2002 to classify broadband Internet service over cable as an "interstate information service." That technical redefinition would mean that cable broadband could be completely exempt from federal regulation such as interconnection and common carriage requirements, as well as from oversight by local cable franchising authorities. …

In fact, the Internet would never have exploded into American life the way it has without regulations issued by the FCC that curbed the power of the telephone companies in ways that the agency is now refusing to do for cable:

  • In 1975, the FCC issued a landmark regulation preventing telephone companies from blocking their customers from attaching their own equipment to the phone network. If the agency had decided this issue the other way, regular Americans would not have been able to use computer modems, and the Internet as we know it never could have been created.
  • In 1980, the agency set out rules that required telephone companies to offer "data services" through separate affiliates because they would have had both the ability and the incentive to use their control of the telephone network to discriminate against unaffiliated, competing data services.
  • In 1983, the FCC issued a regulation preventing telephone companies from charging ISPs by the minute for their use of the local telephone network; if they had allowed such charges, consumers would have to pay per-minute fees for Internet access. That would have slowed the growth of the Internet, as such fees have done in Europe.