Category Archives: Antitrust

Apple v HTC: The Plot Sickens

I’m quoted briefly in a story today in E-Commerce Times (see “Apple’s Patent Attack:  This Too May be Overhyped” by Erika Morphy) about the patent lawsuit filed this week by Apple against rival mobile device maker HTC.

Apple, of course, produces the iPhone, while HTC makes Google’s Nexus One and other devices that run on Google’s Android operating system.

So right from the start this case looks less like a simple patent dispute and more like a warning shot over Google’s bow.  The two companies are increasingly becoming rivals.  In August of last year, Google CEO Eric Schmidt resigned from Apple’s board.  Apple CEO Steve Jobs wrote at the time, “Unfortunately, as Google enters more of Apple’s core businesses, with Android and now Chrome OS, Eric’s effectiveness as an Apple Board member will be significantly diminished….”

The apocalyptic rhetoric from analysts that accompanied the lawsuit (see Marguerite Reardon’s piece on CNET, “Is Apple Launching a Patent War?”), however, is both under and overselling the story.  It’s both much worse and not as bad as it seems.

The Undersell

The war is actually already going on, and ranges far beyond Apple and HTC.  The mobile device industry is deeply embroiled in prolonged legal battles over patents, with perhaps dozens of complaints and counter-claims flying back and forth.  Nick Bilton of The New York Times this week produced a simplified chart of who is suing whom, which he described as a “patent lawsuit Super Bowl party.”

As I write in Law Eight of The Laws of Disruption, patent litigation has “evolved” from being a last resort in the protection of proprietary technology to the first step in protracted negotiations between industry participants over how to divide up a rapidly-growing pie.  Here’s how it works.  Everyone flood the Patent Office with applications, drafted as broadly as possible.  The over-burdened examiners, who are incentivized to process applications quickly, find it is easier to say yes than to say no, and grant a large percentage of patents that are far too generous and clearly don’t meet the legal requirements for protection.

As I wrote last year in The Big Money, patent grants are out-of-control, one of the many symptoms of what most legal scholars agree is a system that has become utterly broken.  (The U.S. Supreme Court is currently reviewing a case that could see the end of so-called “business method” patents and perhaps even patents for software.  See “Can You Patent a Cat and a Laser Pointer?”)

Meanwhile, the parties all sue each other, and after years of poring over each other’s documents during discovery, figure out, more-or-less, who’s really invented what.  They wind up cross-licensing everything to everybody else and agreeing to mutual defense pacts against future challenges to the good and bad patents.  Apple says it has no interest in licensing its technology, but simply wants to stop competitors from ripping off their property.  We’ll see.

It is very likely that many of these patents, if recent history is any guide, are absurdly overbroad and would not survive full litigation. And full litigation is neither likely nor the goal of the parties. The real point of all this legal posturing is to obtain cross-licenses that will ultimately deter new competitors from entering the market.

There is a better way to protect invention without years of expensive litigation.  In some industries, subject to government approval, the major players simply pool their patents and establish open terms under which anyone can license them.  Sprint, Cisco, Intel and Nextel, for example, have pooled their WiMax patents to ensure a single standard emerges.  A mobile device pool would have been harder to fashion, but would also have avoided a lot of bloodshed (and legal fees).  In the end I suspect the results will be the same.

The Oversell

At the same time, the stakes aren’t quite as life-or-death as many commentators believe.  For example, the E-Commerce Times story quotes Greg Sterling on what a loss for Apple in the suit against HTC would mean:  “It would mean open season on any IP — anything could be copied.”  Hardly.  All it would mean is that the particular patents Apple is claiming either don’t hold up under careful scrutiny or, if they do, that HTC is found not to have infringed them.

More to the point, patent protection is only one way—and perhaps the least effective—that competitors secure competitive advantage in rapidly-growing and rapidly-evolving markets for new technology.  Offering superior service, an ever-growing menu of new options and features, and competitive pricing also works just fine.

Apple in particular has a significant advantage that has nothing to do with its patent portfolio:  the thousands of third-party 3G apps it sells to its customers.  The iPhone’s popularity today has little to do with proprietary technology, and everything to do with the enormous network of third-party software developers Apple has wrangled to write apps for its devices.

The apps drives network traffic, of course, but also drives what economists call “network effects.”  The more people use their iPhones the more people who don’t have one feel nudged to get one. Even if Apple loses the litigation, the network is unaffected.

The real winners in the mobile device patent war will be based not on patents but on the ability to build a robust network with compelling consumer offerings.  As it should be.

Protecting consumers from Moore's Law: CNET

intel_logo

I write today on CNET News.com (see “FTC’s new strategy:  kick ’em when they’re down”) that the FTC’s decision yesterday to attack Intel seems oddly-timed.

Regular readers of this blog will recall that only a month ago, I wrote that Intel’s settlement of long-standing disputes with rival AMD (see “The Intel/AMD Settlement:  Watch What Happens”) was likely to mean the end of government-sponsored litigation against Intel, or at least a toning down of the rhetoric.  I was, clearly, wrong.

It’s hard to know the real background here, but piecing together bits and pieces it appears that the FTC and Intel were close to resolving issues related to how the company sells CPU chips for personal computers when, perhaps at the urging of Nvidia and other graphics processing unit makers, the FTC began looking at the GPU market as well.  Intel flinched, the FTC got mad, and filed a complaint that recites all over again the issues that appear in most of the other litigation, plus the GPU complaints.

Hell hath no fury, it seems, like a regulator scorned.

Aside from the addition of GPU complaints, there are several important differences between the FTC’s action and the rest of the pending or already-completed litigation.  Most disturbing is the proposed remedy.  Instead of money damages and fines, the FTC is proposing, should it make its case, to dramatically redesign the way Intel–and therefore the rest of the semiconductor industry–does business.  Some of the relief the agency is seeking is, truly, draconian.  Intel would be essentially run by an outside monitor, and would need to pre-approve most transactions and even advertising with the FTC.

The FTC is charged with protecting consumers from fraudulent practices–false advertising, for example, or inadequate cigarette warnings, or misleading terms in credit card applications and the like.  It’s hard to see how it has anything to offer here by way of expertise in the chip market, which only affects consumers after-the-fact.  The likelihood that the agency’s actions will help consumers seems very very low.

It’s also hard to see what the harm to consumers (harm to competitors aside) can be.  As I write in The Laws of Disruption, the continued operation of Moore’s Law means that computing power gets faster, cheaper and smaller all the time–indeed, on a predictable schedule.  The PS3 that now sells for $299 is the rough equivalent of enough early-era computers to fill the state of Washington.  Today’s cell phones have more processing power than yesterday’s supercomputers.  And so on.

Well, the FTC replies, maybe if Intel didn’t have a monopoly on PC CPUs those prices would fall even faster.  Maybe, doubtful, but in any case, don’t they have bigger problems and more broken industries to mess with?

Memo to Andrew McLaughlin: Read the *** Constitution

In response to an earlier post on Net Neutrality, a reader asks if my “position changed since John McCain introduced his ‘Internet Freedom Act of 2009.’”  That bill, introduced as the FCC was announcing its proposed Neutrality rulemaking, is only one page long.  If passed, it would mean that the Commission could not “propose, promulgate, or issue any regulations regarding the Internet or IP-enabled services.”

The reader goes on:  “Essentially, McCain wants to make it so FCC has zero regulatory powers of the internet. So, if COMCAST wants to block Hulu…or charge usuers [sic] extra, then they can and will. It seems all that separates us from a doomsday scenario with the internet is a Republican controlled government, which will happen eventually.”

The short answer is that the McCain bill does not change my position at all.

First of all, I doubt that the bill, or the opposing “Internet Freedom Preservation Act of 2009,” have much chance of passage.  The focus of activity is clearly on the FCC’s proposed rulemaking.  If that fails, or if the courts determine that the Commission doesn’t have the authority to pass neutrality rules absent new powers from Congress, than the action may shift to the legislature.  If it does, I suspect something more substantive would be offered.  The McCain bill seems to have been offered as a sign of unhappiness over the FCC’s rulemaking rather than as a genuine effort to pass a law.

Even if the McCain bill did pass as written, by the way, it’s not entirely correct to say that the FCC would have “zero regulatory powers of the Internet.”  Even in a one-page law, McCain included a number of exceptions to the general prohibition, and the bill also makes clear that any regulations related to the Internet already in place at the time of the bill’s passage would not be superseded.  If, in other words, the FCC had already enrolled the new neutrality rules before the McCain bill became law, those rules would stay in place.

But there’s a much bigger point here I want to make.  The reader believes that absent the FCC’s meddling hands, we face an imminent “doomsday scenario with the Internet.”  It’s true that there would be no law to stop Comcast from blocking Hulu, nor a law that would stop Comcast from charging extra to users who wanted that content.  But that wouldn’t mean Comcast would or could do either of these things.  Even if they did, I don’t understand the hyperbole that doing so constitutes the end of the world as we know it.

To me, the biggest hole in the neutrality-or-apocalypse argument is the idea that the best–indeed, the only–defense against corporate interference with Internet content is the federal government, and specifically the Federal Communications Commission.  Often that argument comes from those who are otherwise, and rightly, skeptical of the motives or abilities of the federal bureaucracy to look out for consumer interests.

But somehow when it comes to neutrality, all of the disappointments, suspicions, and failures of government, in particular the FCC, are put aside.  The government—or anyway the current administration—believes in the open network, the argument goes, so we can trust them to regulate it in our best interests.

I’m not willing to suspend my disbelief in the face of so much evidence to the contrary, visible in communications policy and everywhere else.  But for those who need more evidence that the federal government is less likely to preserve the open network than the communications industry, look no farther than the White House.

As reported two days ago by the Washington Post’s Cecilia Kang, White House Deputy Technology Officer Andrew McLaughlin told attendees at a recent conference that the Obama administration is committed not only to neutrality but to global free speech, and that indeed, neutrality “underlies free speech on the Web.”  The two are “intrinsically linked,” according to McLaughlin, because without neutrality, there is the possibility of censorship.

“If it bothers you that the China government does it, it should bother you when your cable company does it,” McLaughlin, whose was previously responsible for global policy for Google, was quoted as saying.

The First Amendment, in other words, ought to apply to Internet access providers, and the White House sees Net Neutrality as the mechanism for ensuring that it does.

There’s just one problem with this description of the administration’s plans:  it has utterly no basis in the U.S. Constitution.

As any first-year law student (or, indeed, any reader of The Laws of Disruption) knows, the First Amendment protects citizens from interference of their speech by the government. There is no legal basis to McLaughlin’s view that it applies to private actors, whether cable companies, employers, or your mother-in-law.

Private censorship of specific content, of course, is bad.  But it is not a “free speech” problem.

(McLaughlin might be excused from this gaffe by the fact that he was speaking at a conference rather than in writing.  But no, the White House Office of Science and Technology Policy has since defended the comments.)

There are very good reasons why the First Amendment applies only to the government.  The government is the only body that has the coercive power of the military, and the power to deprive individuals of their liberty through imprisonment.  The Founding Fathers had good reason to fear interference with political speech by those with that kind of power.  So under the First Amendment, you can say all you want about McLaughlin’s views.  All he can do is refer you to the NSA for secret surveillance.  Oops.

But there is no right to free speech that U.S. citizens or their government can assert against private actors.  You have no right to proselytize your religion in the office.  You cannot stage a protest on behalf of native plants in the middle of the Safeway.  You don’t get to walk into the local newspaper and demand they print your version of the news on page one.  Your five year old cannot practice foreign curse words in school without fear of being suspended.

As those examples suggest, extending the First Amendment to everybody to assert against everybody else would be catastrophic.  Democratic society depends on a “marketplace of ideas” free of government interference.  But free of private restrictions, the marketplace becomes noise and the participants a mob.

Internet access providers can, do, and should limit what their customers do in a variety of ways for a variety of reasons.  They can limit the amount of shared bandwidth a customer can use at any given time.  They can block applications for wireless customers that the wireless network doesn’t have the capacity to handle.

And yes, they can even decide that certain websites aren’t suitable for their customers based on whatever misguided reason they have.  (Many local cable companies do in fact limit the channels their subscribers can watch based on personal morality.)  Doing so would be bad business, but it would not be a violation of “free speech.”

McLaughlin has it backwards.  The First Amendment protects even bad business decisions from interference by the government.  “Free speech” doesn’t underlie the open network.  Rather, it restricts the FCC from telling access providers what content they can or cannot promote or block.

Thank goodness it does.  Because there’s absolutely no doubt what the government would do if it had that power.  In the last ten years, administrations under both Republican and Democratic control have passed three different laws banning “indecent” content from appearing on the Internet.  (President Clinton signed the first and worst of these, “The Communications Decency Act.”)  State governments have tried even more offensive “experiments” with controlling Internet content, as I describe in Law Three, “Social Contracts in Digital Life.”

The Supreme Court rejected two of the federal laws as violations of the First Amendment; the third was narrowly upheld as a restriction on libraries accepting government funding.  The FCC, meanwhile, still relishes its narrowly-allowed content control powers over broadcast television to ensure errant nipples and swear words don’t appear on live broadcasts.

It’s more than a little ironic that the White House is accusing cable companies of Chinese-style censorship for twice blocking bandwidth-hogging peer-to-peer applications.  All the evidence we have is that it is the government that would have done the real damage to the free flow of information on the Internet.  Would have, that is, if they hadn’t been blocked by the First Amendment.

In any case, it’s not as if all that stands between Internet users and the gaping abyss is an empowered FCC.

Who else will protect consumers from misguided or even evil corporations?  How about the consumers themselves?  Many would be unhappy with any significant interference with the free flow of information imposed for financial or other reasons by an Internet access providers.  Believe it or not, even communications companies have to be responsive to customers sometimes.

At least for the past 200+ years of American history, most complaints and disagreements between service providers and their customers have been resolved efficiently and quickly by market forces.  If consumers don’t like restrictions imposed by a service provider, they are free to find a more enlightened or more generous provider, or pay higher fees to use more resources, or work with their local municipality to implement free WiFi service.

You can even start your own ISP—and if you do, the FCC will make sure the phone company leases its entire network to you at bargain basement prices.

If the market is broken—if real censorship takes place, and consumers find they have no other choices, and structural problems exist that make it unlikely other choices will emerge—the government already has the overused and misunderstood tool of antitrust to fix it.

But before you start storming the Bastille demanding the micromanagement or nationalization of the communications industry, consider for a moment not the odd examples where the system doesn’t work but all the times when it does.

And then consider how much worse it might be if the FCC took over “enforcement” of the open network principle.  The current administration might have one set of priorities about what constitutes “open,” but the rules will live on much longer than that.  The FCC’s proposal is not to establish specific rules in any case, but to evaluate complaints of non-neutral behavior on a “case-by-case” basis.  You know, like they do with broadcast content today.  How’s that working out for us?

We don’t need “free speech” to protect us from access providers.  We need it to protect us from the wolves in sheep’s clothing who claim to be working for our best interests.

The Intel / AMD Settlement: Watch What Happens

intel_logoIntel and AMD announced today that they were settling their many antitrust and patent disputes, with Intel to pay $1.25 billion and the two companies to cross-license the affected patents. Intel also agreed to “a set of undisclosed new business practrices,” as The New York Times puts it.

Let’s be clear what this agreement doesn’t do. It doesn’t erase the pending antitrust actions taken by the European Union and elsewhere against Intel, or the recently filed antitrust lawsuit filed in federal court in the U.S. by New York attorney-general Andrew Cuomo. (Recall that in May the EU fined Intel $1.45 billion, a judgment the company is appealing.)

The announced settlement of the private litigation, indeed, will have no effect on the EU case, at least according to EU antitrust commissioner Neelie Kroes.

I will make a bold prediction, however, that over the next twelve months both the EU and New York State antitrust enforcement actions will quietly disappear. Intel will not pay $1.45 billion to the Europeans, or face the wrath of Andrew Cuomo who, after 23 months of investigation, has found evidence that he claims proves Intel has bribed and blackmailed its major customers.

These state-sponsored antitrust actions were undertaken at the urging of AMD, and AMD has agreed to withdraw all of its regulatory complaints as part of the settlement.

That doesn’t mean the various governments suing Intel will have to stop their enforcement actions. Indeed, antitrust at the state level is only supposed to be initiated when it’s clear that consumers, not rival companies, are being harmed by anti-competitive business practices. And the rhetoric of both the European and New York regulators is all about harm to consumers.

What harm is that exactly? Thanks to Moore’s Law, the principle first enunciated by Intel founder Gordon Moore in 1965, semiconductors get faster, cheaper and smaller all the time, a function of miniaturization technologies and scale production.

As I write in The Laws of Disruption, there is more computing power in a Sony Playstation III than in 660 million Univac I’s–the first commercial computer ever sold, back in the stone age of 1955. To buy that many Univacs in 1955 would have taken more money than exists in the world today. In 2009, you can get it for $199.

As the driving commodity of the information revolution, the faster-cheaper-smaller principle is what makes the information revolution a revolution.

Moore’s Law also makes the computing industry a particularly bad fit for Antitrust Law. How can consumers be harmed when prices fall, products get better, and functionality improves by leaps and bounds?  Cuomo argues halfheartedly that consumers would have had even lower prices and even better products if Intel hadn’t used its dominance in the PC market to force manufacturers to use its chips instead of those from AMD. The EU likewise claims that consumers have been harmed, but the evidence is, to say the least, extremely thin.

In antitrust law, the rule used to be “no harm no foul.”

But in Europe and Asia, and increasingly in the U.S., signs of a more politicized antitrust, one that protects local industries or pursues national or regional goals rather than correcting serious market failures, have emerged.

Without AMD pushing the regulators on this particular claim, I suspect the rhetoric will dry up and the regulators will move on to greener pastures.

Including, for example, Oracle’s efforts to acquire Sun, about which more later.

This isn’t to say, by the way, that high tech companies aren’t capable of behaving in ways that are dangerously anti-competitive, or that consumers can’t be harmed by the computer industry’s practices.  It’s just to say that given the remarkable ways in which information technology advances, it’s highly unlikely that even market dominators such as Intel or Microsoft could get away with practices that are genuinely harmful.

At least not for very long.

The Year of Thinking Legally

The idea of “The Laws of Disruption” came to me when I noticed how news stories about information technology were increasingly stories about the interference of law and regulation with information technology.

A nice example from yesterday’s Wall Street Journal is Andrew LaVallee’s story, “For Tech Sector, It’s an Antitrust Year.”

Leading technology companies are faced with life-or-death decisions on products, services, operations and even their very existence based on the arcane rules of legal systems forged in the Industrial Revolution.

At the very least, doesn’t this suggest the need for better integration of the legal department with the rest of the executive team? Today, general counsel is the last great bastion of disconnection in most organizations.

Ten years ago, when the Information Revolution reached its tipping point, CIOs learned how to work directly on strategy and operations with their fellow executives. It was painful for everyone, but entirely necessary.

Now it’s time for the lawyers…

Not Again! IBM back in Antitrust Crosshairs

ibm pc

Sources cited by The New York Times indicate the U.S. Justice Department has once again opened an antitrust investigation against IBM.

Remember IBM?

The new investigation concerns allegations that the company has refused to license mainframe software products to third parties.  A refusal to license isn’t necessarily an illegal form of competition, but may be if coupled with other anticompetitive practices.

IBM has come under the gun from anticompetition regulators throughout its history.

Ironically, the case that it won did the most damage.  In 1983, the government dropped an investigation that started in 1969.   But by then IBM had already made significant and possibly life-altering modifications to its operations.

By the late 1970’s, for example, IBM had divided itself into three main divisions, one for mainframes, one for minicomputers, and one for copiers and typewriters.  The groups were kept apart in significant ways.  Indeed, in the event of a breakup of the company (similar to what did occur at AT&T during the same period), the divisions prepared to compete against each other.

The minicomputer division, for example, fully developed a visionary design known as Future Systems that was considered too radical for the mainframe group.  The FS architecture, realized in the IBM System/38 (1981), included virtual memory, built-in relational database management, scalability, security attached at the object level and other features still not fully realized in many computing environments.  FS was intended to compete directly with IBM mainframes in the event of a break-up.

When the government dropped its case, the company was badly splintered.   It found itself unable to move quickly as rapid technological improvements signaled a new computing revolution moving from large businesses to consumers.  The mainframe division ensured that the System/38 remained artificially undersized, for example, depriving the company of the full potential value of FS.

Another unintended consequence was even more disastrous.  When the IBM PC was introduced in 1983, it was marketed by a group that was part of neither the mainframe nor the minicomputer group.  The PC initially had no IBM operating system, but instead ran Microsoft’s DOS operating system (and others).  The computing divisions had no expectation of integrating PCs within networks of IBM mainframe and minicomputer installations, and no design features were included to accommodate that integration.

So, as PCs became more powerful and users demanded more processing capability on the desktop, IBM floundered badly, barely surviving the shift from mainframe-dumb terminal configurations to client-server computing.  IBM’s late-entry in the PC operating system market, OS/2, failed miserably.  What should have been tremendous advantage for the company in technology was undone by the company’s focus on litigation.  Even though it won its case, it nearly lost everything in trying to appease a government that couldn’t have understood the revolution in computing just over the horizon.

It is too soon to say what if any consequences will follow from the Justice Department’s new investigation.  But regulators and even IBM competitors would be wise to review the history in some detail.

The bottom line:  In conflicts between Moore’s Law and Antitrust Law, Moore’s Law always wins in the end.

But a lot of wasted effort and unnecessary carnage usually happens in the interim.