2011 04 27

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Feature Cast for 2011-04-27

(00:00:17.188) Intro

(00:03:21.616) Hacker Word of the Week: flash crowd

(00:04:18.876) Rant: Innovation Tax

  • Quite a few people linked to a Harvard Business Review piece
    • That tries to highlight the risks inherent in an intellectual monopoly maximizing regime
    • http://blogs.hbr.org/cs/2011/03/big_content_is_strangling_amer.html
    • James Allworth exposes a trend with which copyfighters are already well familiar
    • Hollywood has almost always had an adversarial relationship with technology
    • He quotes Jack Valenti from the charged rhetoric around the earliest days of the VCR
    • You know the line, relating home taping to the Boston Strangler
    • This fear goes back to piano rolls and even printing presses
      • As successive waves of them became cheaper, more accessible
    • Technology is an easy focus though for a concern that is more diffuse
    • Innovation invariable disrupts markets, usually driven by technology
      • But really as a consequence of changes in behavior
    • Technology merely enables those new behaviors
      • But not all new devices and mechanisms catch on in ways that upset the apple cart
    • What Allworth really describes in the article is one aspect
      • Of well funded market incumbents being able to extrude a pseudopod
        • Outside of the established sphere in which they dominate
        • Into emerging markets, based on those new behaviors
          • To try to still disruptions that might weaken
          • Their otherwise predictable bottom line
    • The manifestation of this reach in this instance if regulatory capture
    • The deep pockets of Hollywood allow it to buy influence
      • That way outstrips what innovators can afford
      • And even steps on the influence that should from from constituents
        • Who may be fans and cheer leaders of new technologies and offerings
          • That better match their expectations, such as free access to music, device shifting, etc.
  • The sense of entitlement flowing from market incumbents insidious
    • Dominant position in some sector often induces an expectation
      • That the market will always remain, statically as it is for the top of the top
    • When you put it that bluntly, it is of course rather silly
    • Without exception, every company that enjoys a substantial market share
      • Was at one time themselves an innovator breaking into a new market
    • Some such players, like Hollywood and Microsoft, have been ensconced for so long
      • That we forget their earliest history as disruptive innovators
    • In the case of Hollywood, they originally were in conflict with Edison
      • And his regime of extensive and controlling patenting practices
        • Including the earliest forms of film and audio recording
    • Game theory informs a lot of this behavior
    • I learned this by way of a simple heuristic when learning the game of Cribbage
    • After the cards are dealt, you have to select a couple of cards to give up
      • That form part of the current dealer's extra or bonus hand
    • Neither you nor your opponent know what the other is going to give up
      • So you really only have your relative scores to guide our choice
    • When you are losing, you have nothing to lose and everything to gain
      • So your best play is to take larger risks
    • When you are winning, risk plays into your opponents favor
      • Giving them a chance to catch up with you
    • The aversion to risky gambles is pretty apparent in many of the actions of market leaders
    • Take Hollywood as an example, one that has been chewed over quite a bit recently
    • Cory Doctorow linked to an interview with Francis Ford Coppola recently
    • http://www.boingboing.net/2011/01/29/francis-ford-coppola.html
    • Here is a film maker who is very well regarded and undoubtedly immensely successful
    • As an artist, he clearly wants to take chances, to try new things
      • As experimentation is key to learning and keeping his art lively
    • It is the studios that reject his desire to attempt novel projects
    • They want what they know, at least based on past performance, will profit
    • It doesn't matter that Coppola has a core audience that will come regardless
    • In order to justify the budgets with which movie studios deal
      • They cannot tolerate less than spectacular takes at the box office
    • The hoot is that even the films they deem safer are just as risky
    • Audience often tire of remakes and me-too efforts and vote with their wallets
    • I suspect that studio execs over-emphasize the game theory inspired rhetoric
    • A poorly performing title clearly doesn't wipe out their coffers
    • None of this makes it any easier, however, for creative risk takes
      • The equivalent in more artistic pursuits to innovators in market oriented parallels
  • BREAK
  • Where the value of innovators is more or less self evident
    • Law makers have stepped in and enacted compulsory licenses
    • This is an after the fact and explicit acknowledgment of value
    • A royalty rate to incumbents is set at a level that is deemed to not over burden new entrants
      • But acknowledges that at least some of their efforts are based
        • On what has come before, some times very directly
    • Examples of this includes the lack of a performance royalty for radio play of songs
      • And the fixed rate cable TV paid to include terrestrial broadcast content in their packages
    • Rationally such capped revenues are money that incumbents wouldn't have realized
      • If new players hadn't entered the space, using novel technology
    • The ultimatum game, another bit of interesting sociological research
      • Perhaps illustrates why receivers of money from compulsory licenses aren't happy
    • The game is an experiment in decision making between two parties
    • One gets to decide how to divvy up ten dollars between them
    • The other can veto the deal if they think it isn't fair
    • In strictest terms, the veto holder shouldn't ever exercise it
    • Any amount they get is money they wouldn't get otherwise
    • When the experiment is run with real people, however
      • The result is that deals that deviate too far from a 50-50 split get rejected
    • The finding highlights how a sense of fairness, even if it contravenes the simple bottom line
      • Can completely override rational decision making
    • I think there is more to it than this simplest form
      • But that the notion of what incumbents think is fair does factor very heavily into it
    • The innovator doesn't just passively receive revenue, they work, sometimes quite hard
    • Worse, there isn't anything preventing incumbents from entering the market
      • Effectively double dipping their own offering and any fees they can collect
        • From access to their assets and resources
    • In this latter case, I am thinking of the ill fated whole sale provisions for telcos in the US
    • My own decision to finally give up on a competitive DSL provider
      • Was strongly motivated by how hobbled that company was
        • In comparison to Verizon, the local incumbent
    • I had to give up benefits that Verizon simply doesn't offer
      • Like Unix shell access on the ISPs servers, a static IP address and other techie benefits
        • Out of frustration over the poor service I had to endure and the higher fees
  • More often than not, small innovators have to pay a tax directly to existing players
    • Some times this is in the form of licensing, whether that is compulsory
      • Or negotiated on a case by case basis
    • Arriving at rates through the market or an industry body
      • Severely limits the rate at which new competitors can enter a space
    • Online, streaming video services have to negotiate with content creators
    • Netflix's library has swelled and shrunk over time as a consequence
      • Of how the studios perceive its innovation
    • Initially they were reluctant, most likely due to their over inflated sensitivity to piracy
    • For a very brief period the popularity of Netflix and its early traction
      • Allowed it to broker deals, perhaps even playing incumbents off each other
        • On the premises that streaming availability might be an advantage in existing spaces
        • So that producers had to think seriously about whether their titles should be absent
    • As consolidation continued with the NBC-Comcast merger that has started to change
    • NBC has a toe in the water of streaming, some of their titles have been pulled
      • Back out of Netflix's catalog
    • The problem with this is that the competitive offering is far from that
    • The mindset of the incumbents when they do try to match innovators
      • Is informed by Siva Vaidhyanathan's idea of "if value, then right"
    • If there is value in streaming, then the incumbents see it as a right of action
      • Comparable to copyright and the ability that confers to strongly exclude others
    • Now not only do innovators need to raise the necessary and legitimate capital to get going
      • But they have to pay off those who didn't have the foresight to pursue new opportunities
    • When those existing players are able to ensconce their original value as a right
      • They can even simple deny innovators access altogether, leaving them to die on the vine
    • A right in some form, whether that is a negotiated rate or a compulsory license
      • Along with other considerations may encourage this sort of extraction of rents
    • If an incumbent does come up with a competitor to an innovator
      • I suspect it may open them up to antitrust complaints
        • More explicitly leverage their original position to their advantage
        • And the detriment of a new competitive space
    • There are certainly other forms of taxation on innovators
      • In space with incumbents or where incumbents have influence than straight up licensing
    • The practice of defensive patenting can also raise the bar to entry for new players
      • And lead to disproportionate value going to larger, existing companies
        • Even when they aren't doing much to building on and really push the matter in their patents
  • BREAK
  • Ideally the playing field needs to be closer to level to encourage fresh thought, experimentation
    • Large incumbents should have to compete on the same merits as innovators
    • There are a couple of factors that inform efforts to unfairly tip the scales
    • Especially in the US, we are seeing the rise of urge to extreme profit
    • It isn't enough to make a tidy profit and maintain the same revenues year after year
    • Many companies seem to see a failure to grow as being tantamount to complete failure
    • Coupled with a drive to expand at all costs is an overblown fear of the competition
    • These are probably two sides of the same coin as flat growth
      • Is likely seen as a sign that competitors are growing at a company's own expense
    • Where this really becomes problematic, as I've touched on
      • Is when large incumbents showing these two traits enter new spaces
    • Success in one realm, say content produced for broadcast
      • Shouldn't convey any rights in other spaces previously unimagined
      • Such as online streaming or novel ways of time, format and place shifting video
    • As if the disproportionate sway in the market isn't enough
      • Incumbents often are able to exert lobbying power well beyond that of new competitors
    • Such influence undoubtedly follows a very similar form as market power spilling into new segments
    • An established company has more experience at working inside the beltway
      • And often has cultivated relationships that can more easily be expanded
    • New endeavors have to try to catch up from a standing start
      • With far fewer cash reserves to spare outside of their core efforts
    • It becomes a lot easier to see why Lawrence Lessig left working on copyright
      • To focus on the undue influence of money on politics
    • Removing or reducing the chance of regulatory capture at least puts the emphasis
      • Back on the market itself where at least a lucky innovator
        • Can possibly catch a swell of support from customers hungry for a break
          • From the more of the same that is often on offer from complacent incumbents
    • I think novelty can account for much, like why Facebook and Twitter rose so fast
      • From such humble beginnings despite the dominant position of say Google
  • Some larger innovators are getting fed up
    • Amazon and even Google have been in the news about pending cloud music services
    • The bit of the coverage that has really jumped out
      • Is that rather than negotiate licenses, Amazon at least seems to be building on a particular case
    • Cablevision is an innovator that won out in a legal fight agains the studios
      • To be able to offer DVR-like capabilities but supported remotely
        • Rather than embedded in a set top box as is the norm
    • Amazon may be banking that they can make similar equivalency argument
      • About the ability of a customer to stream copies of their own music from online storage
    • The whole situation is very similar to the story of MP3.com back in the day
      • Except that bandwidth and storage are now cheap enough
        • That Amazon is hedging their bets by storing distinct copies of the same identical media
          • For each user
    • Before Amazon and Google, Apple does deserve some credit for pushing for the right to innovate
    • Apple arguably refused to be bullied on license rates for iTunes
      • Though circumstance was on their side
    • Initially, the market for the iPod and iTunes may have been too small to be a threat to Big Content
    • Perhaps part of the problem is that they have wised up
    • Tomorrow's heavy hitter could be today's pip squeak and there is no way of telling
    • A safer strategy for the content industry then may be to throttle all up and comers regardless
      • Rather than try to get the cows back into the barn after the door has been left open
    • Seeing it in that light should give everyone pause
      • Whether you are a champion of laissez faire economics
      • Or believe that a market more closely scrutinized is more fair
    • Innovation shouldn't be an opportunity for some incumbent to extract rents
    • We also shouldn't have to rely on larger companies that choose to act more like genuine innovators
      • To push the right to experiment and create back to a more fair middle ground
    • The idea of fostering new endeavors crops up every so often when pundits and legislators talk
      • About trying to stimulate the economy, especially since the large downturn of a few years ago
    • If they are serious about this rhetoric, I think they need to look far more closely
      • At what holds back startups with truly novel ideas beyond pure financial measures
        • Like stimulus checks and tax cuts
    • After all, creating a safer environment for invention and creation
      • Is valuable in and of itself, regardless of whether the economy at a given time
        • Is weak or strong

(00:23:26.240) Outro

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