James Boyle: Bipolar economics

By James Boyle © 2004

Published: Financial Times Online August 27 2004 (The Financial Times is enlightened enough to agree that I can keep copyright in my articles - and thus share them under the terms I choose. That is one of the key reasons I write for them. Please be sure to credit them if you copy or quote this article and look at www.ft.com/techforum for some of the other interesting work they publish)

We appear to have a kind of bipolar disorder in our view of the state. When it comes to breaking up high tech monopolies we say the state will create a mess that even the Invisible Hand cannot sweep clean. But when it comes to setting up some of those same quotas, limits and monopolies in the first place - in this case, by overly broad intellectual property rights - we are much more sanguine

Tom Hazlett frames the issue absolutely correctly. Sometimes we need to give innovators property rights that allow them to prevent second-comers from free riding on their efforts. We have to do so because it is necessary to encourage future innovation. On the other hand, sometimes we not only allow the second comer to free-ride, we positively encourage it, believing that this is an integral part of competition and that there are adequate incentives to encourage innovation without the state stepping in. Intellectual property policy, indeed a large part of the policy behind all property rights, is about drawing the line between the two situations. Too far in one direction and innovation suffers because potential investors realise good ideas will immediately be copied. Too far in the other direction and monopolies hurt both competition and future innovation.

Imagine you are the first person to invest in getting the public to eat burritos for breakfast, or to place a petrol station at a certain crossroads, or to clip papers together with a folded bit of wire. In each case we give you some property rights. The fast food vendor may own a trademarked phrase or jingle that the public learns to associate with his product. Since the patent office has recently issued a patent for a sealed and crimped "peanut butter and jelly" sandwich (I am not making this up) even a patent is not out of the question if your disgusting concoction is sufficiently novel and non-obvious. But we should not allow that person to have a patent over all burritos, or burritos for breakfast, still less over the idea of fast food. As for the paper clip maker, there might be a patent over the particular shape, but the idea of folding wire to secure paper stays in the public domain. The owner of the petrol station gets physical ownership over the land, but cannot stop a second-comer from setting up shop across the road, even if it was his labour, capital and effort that proved that the location is a good one. We positively encourage follow-on imitation in those cases.

In one view, the state is a bumbling idiot, in the other a scalpel-wielding genius, carving just the right pound of flesh to satisfy our debts to creators without shedding a drop of the blood of competitors and future innovators. Can this be the same state we are talking about?

Now how about the case in point? What does Apple get in the way of property rights? Well, they can get patents over those aspects of the iPod - both hardware and software - that are sufficiently innovative. Patents are what we use to protect inventions. They also get a copyright over the various pieces of software involved, though that protects them only against someone who copies their code, not someone who writes code to do the same thing. Copyrights are what we use to protect original expression. They get trademarks over the name and perhaps parts of the design of the product - though that is a bit more complex. All of these rights, plus being the first to break into the market in a big way, the brilliance of the design, and the tight integration between the hardware and the service, produce a formidable competitive advantage. The iPod is a very good product. Now if a competitor infringes any of Apple's rights, for example by making a literal copy of the code, using their trademark in a way the law does not allow, or by infringing one of their patents, then Apple can shut them down and extract hefty damages. Quite right, too. But in their bundle of rights do they, or should they, get a right to prevent someone from making an interoperable product, provided they do not violate any of these existing rights in the process? (Remember the example of the razor maker, who wants to prevent generic blades being sold, or the printer maker who wants to shut down generic replacement toner cartridges.)

There the answer ought to be easier. American copyright law cases in the early 1990s (which is about a century ago in New Economy time) made it clear that reverse engineering and "decompilation" to achieve interoperability count as "fair use". The courts explicitly discussed where the line between property and competition should be drawn and concluded - rightly in the view of most legal scholars and economists who have studied the question - that you should not be able to use copyright law to prevent reverse engineering or "decompilation" of software code. In the years since those decisions, I do not think we have seen a stagnating marketplace in digital products. Do you? In fact, one of the driving forces in dynamic innovation of the type Tom Hazlett lauded in his recent article about Google mail, is the fact that copyright cannot be used to block interoperability. Interoperability, whether in open code e-mail systems or reverse-engineered proprietary word processing programs, is a good thing. We have all benefited from the rules that allow competitors to attempt reverse engineering for the purposes of compatibility. This is particularly true for Mac-users - who frequently rely on Windows "emulators" and other software products that have been produced in the shadow of this rule - either directly under the reverse engineering privilege, or in licenses negotiated in the knowledge that copyright law may not be used to prevent such attempts. In fact users of a minority product such as the Mac ought to be exceptionally solicitous of the rules that help protect interoperability. Many Apple afficionados wrote me e-mails which could be summarised as "but Apple is the good guy, and we ought to be able to use the law to lock out minority competitors." People, I love my iPod too, but remember that the rules you write for the iPod will apply to your Mac as well.

Now what about the Digital Millennium Copyright Act, which Apple mentioned in its press releases? The DMCA was passed, among other things, to give extra legal protection to content hidden behind "digital fences" - the song or movie protected by Digital Rights Management technologies for example. Decompilation is clearly fair use. But what if you had to get through a digital fence in order to do it in the first place? Unfortunately, since the DMCA is a poorly thought-out law riddled with bad drafting (one of my colleagues calls it "The Intellectual Property Lawyer Full Employment Act") companies tried to use its broad provisions in the way I described in my article; to make competition in tied services and products illegal. Remember, copyright law is absolutely clear that the act itself is legal; but now companies could use the irrelevant happenstance that there was a digital fence in the way to reopen the issue. Printer manufacturers sued the makers of generic toner cartridges. Companies that made garage door openers sued their generic competitors. Each claimed that digital fences protecting copyrighted content had been breached. Like the petrol station owner claiming that no one else could set up shop close by, or the razor maker claiming that no one should be allowed to make compatible blades, these companies tried to shut down their competitors. But while Congress has made some pretty dumb mistakes in regulating the digital economy, the Copyright Office has reassured us that they did not make that one. Discussing one of the printer toner suits I described earlier, the Register of Copyrights ruled that the DMCA allows attempts to achieve "interoperability [which] necessarily includes...concerns for functionality and use, and not only of individual use, but for enabling competitive choices in the marketplace." In other words, in the US at least, the question Tom Hazlett raises appears to have been settled on the side of permitting attempts at interoperability - though as the Apple/Real controversy shows, the threats continue, and we are yet to have a definitive court ruling on the issue.

So where's the foul? Well, first if you are going to have property rights in anything, you generally want them to be clear and definite so that people can speak, act, invest, and innovate around them. The uncertainty in this area, produced by a largely unnecessary law that was drafted overly broadly, has allowed companies to use fear, uncertainty and doubt to stave off competition and scare off capital that might otherwise flow to new market entrants. I hope that the courts that eventually rule on this issue will side with the Register of Copyrights and the overwhelming weight of academic opinion, but I cannot be sure and that in itself is a harm. Second, laws like the DMCA have been exported internationally through the miracle of treaty "harmonisation." (If this is harmonisation, it should be noted, it is only for sopranos: the harmonies only go upwards towards greater restrictions and higher penalties.) As I noted in my original article, the European Copyright Directive and its implementing legislation had many of the flaws of the DMCA, and in the case of reverse engineering, it was particularly badly drafted. So whatever the situation in the US, the situation in the EU is worse. For a long time to come, we will be seeing threats like the ones Apple made against Real. For the sake of competition (and Mac users) let us hope the law does not back those threats up. Apple will still have lots of ways to lock Real out of its system - each "upgrade" will doubtless undo whatever compatibility that Real has been able to achieve. The point is, however, that Real's efforts to compete should not be illegal.

No one knows the dangers of state intervention in competition better than Tom Hazlett. He and Richard Epstein have written particularly eloquently in these pages about letting the dynamism of markets work and not interfering through antitrust suits, minority ownership quotas or media concentration caps. So here is a puzzle I would like explained - and I address this more to the invisible college of economists than to Tom and Richard, because they have been much more nuanced in their approaches. We appear to have a kind of bipolar disorder in our view of the state. When it comes to breaking up high tech monopolies through antitrust, we are deep sceptics. We point out the unanticipated consequences and deadweight losses to state intervention. We say the state is a blundering second or third best to the genius of the market, its efforts to establish limits and quotas will create a mess that even the Invisible Hand cannot sweep clean. But when it comes to setting up some of those same quotas, limits and monopolies in the first place - in this case, by overly broad intellectual property rights that clog the channels of competition and allow companies to leverage their existing property into a control over tied services - we are much more sanguine. This, after all, is "property", not regulation. Here there seems to be an optimism about unintended consequences, a willingness to believe that vague state regulatory schemes have got it right - even when existing market leaders can twist them to prevent challenges to their position. In one view, the state is a bumbling idiot, in the other a scalpel-wielding genius, carving just the right pound of flesh to satisfy our debts to creators without shedding a drop of the blood of competitors and future innovators. Can this be the same state we are talking about? The irony of contemporary policy in the New Economy is that the state spends a lot of time policing, through antitrust, monopolies that it created itself through poorly designed intellectual property rights. This is the policy equivalent of arm-wrestling with yourself. Whatever one's view of the high tech market, this is a waste and it should stop. If there were a trial on the issue, the DMCA and the European Copyright Directive would be exhibits 1 and 2. Business method patents would be Exhibit 3, but that is the subject for another column.