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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...

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.

at&t logoIt's the morning after Chairman Genachowski's impassioned call for new FCC regulations to impose "net neutality" rules on Internet access providers.  No surprise, everyone is reaching for the aspirin.  Communications users have been partying like it's 1974, when U.S. regulators finally began the painful process of breaking up the long-sanctioned AT&T monopolies on long-distance and equipment.

In the interim, the FCC, in the name of de-regulation, has constructed a remarkably complex machinery of new regulation for existing (telephone) and emerging (data) services.  They're always a good ten years behind the march of new technology--including new infrastructure technologies such as cable, satellite, wireless, and fiber, as well as new applications such as the Web, voice-over-IP telephone, and the convergence of voice, data, television and everything else.  And they always will be, no matter how many smart people are working on the problem.  (There are many smart people working at the FCC.)

In a deja vu of the passage of the landmark 1996 Communication Act, within days of Genachowski's speech, everyone was crying foul.  Wireless operators can't understand why they would be included in neutrality regulations, given the relative competitiveness of the wireless industry (new regulations are presumed to be needed when market mechanisms fail to correct anti-consumer behavior).  AT&T reminded us that the wireless spectrum they bought last year (part of what was given up by broadcast television in the switch to digital broadcast) came with no requirement to be open to any device or application.  Verizon bought a block that did come with that requirement, and AT&T paid "many billions more"  to avoid the open rules.  Oops.

Then AT&T complained that Google, a leading proponent of neutrality rules, was itself violating some of the basic principles with its own Google Voice application, which blocks certain services (900 numbers, free conference call services, etc.) that charge high fees to the customer's provider that cannot be passed along.   "Traditional" phone companies can't block those services.  The fees, as the New York Times' Saul Hansell points out, were originally authorized to help subsidize rural telephone service, but everyone understands that the system has now been thoroughly gamed, part of the post-1996 de-regulation of telephony and the end of Judge Greene's oversight of the 1982 breakup of the old AT&T.  (Hate them all you want, but as recently as six months ago, AT&T was losing money on every iPhone customer it signed up under its exclusive deal with Apple.)

Google got into similar trouble in late 2008, when it became known that the company had offered to "co-locate" its own servers at key exchange locations of broadband providers in order to speed up delivery of Google content such as YouTube videos. This "fast lane" service seemed to be precisely what the net neutrality advocates feared most, yet it was coming from one of their chief allies and instigators. Google's defense was that its offer was non-exclusive, meaning any other application provider could make a similar (non-neutral) arrangement.

Reading through some of the comments posted by readers of The New York Times and The Wall Street Journal articles reporting on these developments, one can't avoid the sense that no one really knows what anyone else really means by neutrality.  "Net neutrality is about the Internet, not the telephone network," says one reader.  "Neutrality in general does not apply to telephone companies, nor would it benefit them," says another.

Harold Feld at Public Knowledge, acknowledging that "I do not know how other VOIP providers behave," nonetheless is confident that neutrality is separable from telecommunications regulation.  "[I]t is easy to make [Google Voice] look like a network neutrality question and try to undermine network neutrality than focus on the merits of either the Google Voice question or the network neutrality question."  It is, unfortunately, anything but easy.

All of these stories are conflated for a reason beyond simply trying to muddy the waters as much as possible.  Unfortunately, they really are all hopelessly intertwined. Much as the FCC wishes there was still a clear distinction between "the Internet" and "the telephone network," technology has obliterated that difference.  Internet companies (Vonage, Skype) provide phone service using TCP/IP, "phone companies" offer Internet access over their equipment, while "cable companies" offer the same service over cable--along with phone services and television, which the phone companies also offer.

Under the law, "telecommunications" services are still treated (badly) as common carriers, a significant competitive disadvantage that may or may not still be justifiable.  "Information" services are not.  When AT&T offers Internet, it's a telecommunications service.  When Vonage offers telephony, it's an information service.  The current rules don't distinguish between the two kinds of uses based on the protocol used, the network technology used, or the equipment used.  The current rules distinguish based solely on the historical (that is, pre-1982) business of the provider.  Providers that didn't exist in 1982 (Vonage, Skype, Google) or who weren't in the voice business at the time (Comcast, TimeWarner) are presumed to be offering information services, regardless of what services they are offering.

AT&T's point, hopelessly lost in 25 years of FCC rulemaking, is that regardless of whether it still makes sense to regulate the hell out of their copper-wire phone network, they ought to be held to the same rules as everyone else when offering new services on new infrastructure and new equipment.  Which is to say, far fewer rules than when they are offering POTS (Plain Old Telephone Service).

Pull one strand of this spider web, and every other strand responds.  Unfortunately, net neutrality is bigger than just net neutrality, and not just because Internet providers say it is.  It really is.

There's a simple solution to all this, one that might make a rational conversation about net neutrality possible.  And that is to eliminate the distinction between common carriers and everyone else.  Hold everyone to the same rules regardless of what information they are transporting--whether voice, video, television, data.   Because regardless of who's doing what, these days it's all bits.  There is no rational reason to regulate the bits based on who is transporting them.  The FCC doesn't even try to justify the distinction anymore.  Let's just get rid of it.

We need, as I say in Chapter 6 of The Laws of Disruption, a cure for the common carrier.  We need to eliminate most if not all of the FCC's byzantine sets of taxes, rules, funds, rate-setting, and (for broadcast but not cable TV) content oversight.  When the 1996 Communications Act was signed into law, Congress predicted it would signal the end of the FCC, much as the deregulation of the airline industry ended the reign of terror of the Civil Aviation Board.

Today, the FCC's budget is bigger than ever.  And in the thirteen years since deregulation, American consumers have fallen behind in every conceivable metric their counterparts in much of Europe and Asia.  We pay more and get less, even as Moore's Law makes everything faster, cheaper, smaller and Metcalfe's Law converges all the networks and protocols and applications into a single glorious buffet of information.

True consumer interests are absent from the picture here.  So even when they win, they often lose.  And what constitutes a win is anyone's guess.

Consumer activists and consumers themselves would do well to channel their anger and energy away from individual providers and individual problems and focus on the real devil.  Let's really deregulate the communications industry.  Let's put the squeeze on the only group that actually makes a profit here--industry lobbyists and lawyers.

By the way, understanding the impact of federal regulation on the infrastructure industry (which no one does, or can) is only part of the puzzle.  Phone, cable, and wireless providers are also subject to local regulations, many of which add to and subtract from the perverse incentives that  dictate  industry behavior.  We need to get the almost entirely corrupt local agencies out of the regulatory business altogether.

Ready for that hangover helper now?

oracle logo

Lovers of freedom and protectors of keeping out-of-print books out of print are dancing with glee at the announcement yesterday from Google and the trade associations who sued the company that they are renegotiating their settlement. This in light of the torrent of objections received by the court, notably a last-minute (technically after the deadline) tirade from the Justice Department that the deal raised serious antitrust concerns.

As I write in Chapter 7 of "The Laws of Disruption," invocations of antitrust have a nasty habit of boomeranging against those who chant its doctrines, especially when they don't really understand how dangerous a body of law it is. Most of the IT industry was thrilled (secretly or otherwise), when the Justice Department came down on IBM, AT&T, and more recently, on Microsoft and Intel. What could be better than having a major competitor distracted, perhaps for years, by the 19th century machinery of litigation against the federal government?

Of course some of the loudest braying on behalf of inserting the government into the structure of the computer industry came from Oracle. CEO Larry Ellison famously cheered on the Justice Department's pursuit of Microsoft; that is, until the Antitrust Division challenged his takeover of PeopleSoft in 2004. Oops.

The Obama Justice Department has promised to put more teeth into antitrust enforcement and it clearly has Google in its sights. This despite the fact that the feds understand nothing of the very different economic properties and behaviors of information. There seems to be something, well, Unamerican about being so successful. We love scampy underdogs, but when they win, we turn on them pretty much immediately as oppressive tyrants. It's why the Rocky movies never really worked once he won.

Justice is already poking holes in the Bing-Yahoo deal, for example, as Lance Whitney reported the other week. This despite the fact that Google enjoys an enormous majority of the search market (which it got how, exactly? Oh yeah, innovation) and despite the fact that consumers, ten years into the Web revolution, continue to pay NOTHING for search services.

Oracle itself is again is in the antitrust cross-hairs, this time in Europe for its attempt to takeover Sun. U.S. antitrust regulators are misguided; the E.U.'s current class of clowns are just plain mean, setting a new low in undefining a legal standard for "harm to consumers." (Mostly they just mouth the words as they go after companies who aren't European enough for E.U. Antitrust chief Neelie Kroes.) Regulators must "examine very carefully the effects on competition in Europe," Kroes said earlier this month, "when the world's leading proprietary database company proposes to take over the world's leading open-source database company."

Yes, Oracle will take over Sun and then proceed to destroy what's left of its assets, that is, MySQL, which has .4% of global DBMS revenues. Good business sense there.

Gartner Group's Donald Feinberg has another explanation. Again, Lance Whitney at CNET has the story. "It's a political agenda," Feinberg says bluntly. "[I]t is the re-emergence of protectionism...The EU is looking for how it can protect the companies in Europe."

Antitrust started out as political. Then it became grounded in economics. Now, with the emergence of a new kind of economy, it's lost its way and gone back to being political.

Which should serve as a powerful warning to those who get in bed with antitrust regulators. Today, the Google Books settlement and the Oracle-Sun and Yahoo-Bing deals. Tomorrow, when the political winds change, it will be you.

That's about the only thing predictable about antitrust these days.