Category Archives: Information Economics

The end of software ownership




My article for CNET this morning, “The end of software ownership…and why to smile,” looks at the important decision a few weeks ago in the Ninth Circuit copyright case, Vernor v. Autodesk.  (See also excellent blog posts on Eric Goldman’s blog. Unfortunately these posts didn’t run until after I’d finished the CNET piece.)

The CNET article took the provocative position that Vernor signals the eventual (perhaps imminent) end to the brief history of users “owning” “copies” of software that they “buy,” replacing the regime of ownership with one of rental.  And, perhaps more controversially still, I try to make the case that such a dramatic change is in fact not, as most commentators of the decision have concluded, a terrible loss for consumers but a liberating victory.

I’ll let the CNET article speak for itself.  Here I want to make a somewhat different point about the case, which is that the “ownership” regime was always an aberration, the result of an unfortunate need to rely on media to distribute code (until the Internet) coupled with a very bad decision back in 1976 to extend copyright protection to software in the first place.

The Vernor Decision, Briefly

First, a little background.

The Vernor decision, in brief, took a big step in an on-going move by the federal courts to allow licensing agreements to trump user rights reserved by the Copyright Act.  In the Vernor case, the most important of those rights was at issue:  the right to resell used copies.

Vernor, an eBay seller of general merchandise, had purchased four used copies of an older version of AutoCAD from a small architectural firm at an “office sale.”

The firm had agreed in the license agreement not to resell the software, and had reaffirmed that agreement when it upgraded its copies to a new version of the application.  Still, the firm sold the media of the old versions to Vernor, who in turn put them up for auction on eBay.

Autodesk tried repeatedly to cancel the auctions, until, when Vernor put the fourth copy up for sale, eBay temporarily suspended his account.  Vernor sued Autodesk, asking the court for a declaratory judgment (essentially a preemptive lawsuit) that as the lawful owner of a copy of AutoCAD, he had the right to resell it.

A lower court agreed with Vernor, but the Ninth Circuit reversed, and held that the so-called “First Sale Doctrine,” codified in the Copyright Act, did not apply because the architectural firm never bought a “copy” of the application.  Instead, the firm had only paid to use the software under a license from Autodesk, a license the firm had clearly violated.  Since the firm never owned the software, Vernor acquired no rights under copyright when he purchased the disks.

The Long Arm of Vernor?

This is an important decision, since all commercial software (and even open source and freeware software) is enabled by the producer only on condition of acceptance by the user of a license agreement.

These days, nearly all licenses purport to restrict the user’s ability to resell the software without permission from the producer.  (In the case of open source software under the GPL, users can redistribute the software so long as they repeat the other limits, including the requirement that modifications to the software also be distributed under the GPL.)  Thus, if the Vernor decision stands, used markets for software will quickly disappear.

Moreover, as the article points out, there’s no reason to think the decision is restricted just to software.  The three-judge panel suggested that any product—or at least any information-based product—that comes with a license agreement is in fact licensed rather than sold.  Thus, books, movies, music and video games distributed electronically in software-like formats readable by computers and other devices are probably all within the reach of the decision.

Who knows?  Perhaps Vernor could be applied to physical products—books, toasters, cars—that are conveyed via license.  Maybe before long consumers won’t own anything anymore; they’ll just get to use things, like seats at a movie theater (the classic example of a license), subject to limits imposed—and even changed at will—by the licensor.  We’ll become a nation of renters, owning nothing.

Well, not so fast.  First of all, let’s note some institutional limits of the decision.  The Ninth Circuit’s ruling applies only within federal courts of the western states (including California and Washington, where this case originated).  Other circuits facing similar questions of interpretation may reach different or even opposite decisions.

Vernor may also appeal the decision to the full Ninth Circuit or even the U.S. Supreme Court, though in both cases the decision to reconsider would be at the discretion of the respective court.  (My strong intuition is that the Supreme Court would not take an appeal on this case.)

Also, as Eric Goldman notes, the Ninth Circuit already has two other First Sale Doctrine cases in the pipeline.  Other panels of the court may take a different or more limited view.

For example, the Vernor case deals with a license that was granted by a business (Autodesk) to another business (the architectural firm).  But courts are often hesitant to enforce onerous or especially one-sided terms of a contract (a license is a kind of contract) between a business and an individual consumer.  Consumers, more than businesses, are unlikely to be able to understand the terms of an agreement, let alone have any realistic expectation of negotiating over terms they don’t like.

Courts, including the Ninth Circuit, may decline to extend the ruling to other forms of electronic content, let alone to physical goods.

The Joy of Renting

So for now let’s take the decision on its face:  Software licensing agreements that say the user is only licensing the use of software rather than purchasing a copy are enforceable.  Such agreements require only a few “magic words” (to quote the Electronic Frontier Foundation’s derisive view of the opinion) to transform software buyers into software renters.  And it’s a safe bet that any existing End User Licensing Agreements (EULAs) that don’t already recite those magic words will be quickly revised to do so.

(Besides EFF, see scathing critiques of the Vernor decision at Techdirt and Wired.)

So.  You don’t own those copies of software that you thought you purchased.  You just rent it from the vendor, on terms offered on a take-it-or-leave-it basis and subject to revision at will.  All those disks sitting in all those cardboard albums sitting on a shelf in your office are really the property of Microsoft, Intuit, Activision, and Adobe.  You don’t have to return them when the license expires, but you can’t transfer ownership of them to someone else because you don’t own them in the first place.

Well, so what?  Most of those boxes are utterly useless within a very short period of time, which is why there never has been an especially robust market for used software.  What real value is there to a copy of Windows 98, or last year’s TurboTax, or Photoshop Version 1.0?

Why does software get old so quickly, and why is old software worthless?  To answer those questions, I refer in the article to an important 2009 essay by Kevin Kelly.  Kelly, for one, thinks the prospect of renting rather than owning information content is not only wonderful but inevitable, and not because courts are being tricked into saying so.  (Kelly’s article says nothing about the legal aspects of ownership and renting.)

Renting is better for consumers, Kelly says, because ownership of information products introduces significant costs and absolutely no benefits to the consumer.  Once content is transformed into electronic formats, both the media (8-track) and the devices that play them (Betamax) grow quickly obsolete as technology improves under the neutral principle of Moore’s Law.  So if you own the media you have to store it, maintain it, catalog it and, pretty soon, replace it.  If you rent it, just as any tenant, those costs are borne by the landlord.

Consumers who own libraries of media find themselves regularly faced with the need to replace them with new media if they want to take advantage of the new features and functions of new media-interpreting devices.  You’re welcome to keep the 78’s that scratch and pop and hiss, but who really wants to?  Nostalgia only goes so far, and only for a unique subset of consumers.  Most of us like it when things get better, faster, smaller, and cheaper.

In the case of software, there’s the additional and rapid obsolescence of the code itself.  Operating systems have to be rewritten as the hardware improves and platforms proliferate.  Tax preparation software has to be replaced every year to keep up with the tax code.  Image manipulation software gets ever more sophisticated as display devices are radically improved.

Unlike a book or a piece of music, software is only written for the computer to “read” in the first place.  You can always read an old book, whether you prefer the convenience of a mass storage device such as a Kindle.  But you could never read the object code for AutoCAD even if you wanted to—the old version (which got old fast, and not just to encourage you to buy new versions) is just taking up space in your closet.

The Real Crime was Extending Copyright to Software in the First Place

In that sense, it never made any sense to “own” “copies” of software in the first place.  That was only the distribution model for a short time, necessitated by an unfortunate technical limit of computer architecture that has nearly disappeared.  CPUs require machine-readable code to be moved into RAM in order to be executed.

But core memory was expensive.  Code came loaded on cheap tape, which was then copied to more expensive disks, which was then read into even more expensive memory.  In a perfect world with unlimited free memory, the computer would have come pre-loaded with everything.

That wouldn’t have solved the obsolescence problem, however.  But the Internet solved that by eliminating the need for the physical media copies in the first place.  Nearly all the software on my computer was downloaded in the first place—if I got a disk, it was just to initiate the download and installation.  (The user manual, the other component of the software album, is only on the disk or online these days.)

As we move from physical copies to downloaded software, vendors can more easily and more quickly issue new versions, patches, upgrades, and added functionality (new levels of video games, for example).

And, as we move from physical copies to virtual copies residing in the cloud, it becomes increasingly less weird to think that the thing we paid for—the thing that’s sitting right there, in our house or office—isn’t really ours at all, even though we paid for, bagged it, transported and unwrapped it just as do all the other commodities that we do own.

That’s why the Vendor decision, in the end, isn’t really all that revolutionary.  It just acknowledges in law what has already happened in the market.  We don’t buy software.  We pay for a service—whether by the month, or by the user, or by looking at ads, or by the amount of processing or storage or whatever we do with the service—and regardless of whether the software that implements the service runs on our computer or someone else’s, or, for that matter, everyone else’s.

The crime here, if there is one, isn’t that the courts are taking away the First Sale Doctrine.  It’s not, in other words, that one piece of copyright law no longer applies to software.  The crime is that copyright—any part of it—every applied to software in the first place.  That’s what led to the culture of software “packages” and “suites” and “owning copies” that was never a good fit, and which now has become more trouble than it’s worth.

Remember that before the 1976 revisions to the Copyright Act, it was pretty clear that software wasn’t protected by copyright.  Until then, vendors (there were very few, and, of course, no consumer market) protected their source code either by delivering only object code and/or by holding user’s to the terms of contracts based on the law of trade secrets.

That regime worked just fine.  But vendors got greedy, and took the opportunity of the 1976 reforms to lobby for extension of copyright for source code.  Later, they got greedier, and chipped away at bans on applying patent law to software as well.

Not that copyright or patent protection really bought the vendors much.  Efforts to use it to protect the “look and feel” of user interfaces, as if they were novels that read too closely to an original work, fell flat.

Except when it came to stopping the wholesale reproduction and unauthorized sale of programs in other countries, copyright protection hasn’t been of much value to vendors.  And even then the real protection for software was and remains the rapid revision process driven by technological, rather than business or legal, change.

But the metaphor equating software with novels had unintended consequences.  With software protected by copyright, users—especially consumers—became accustomed to the language of copies and ownership and purchase, and to the protections of the law of sales, which applies to physical goods (books) and not to services (accounting).

So, if consumer advocates and legal scholars are enraged by the return to a purely contractual model for software use, in some sense the vendors have only themselves—or rather their predecessors—to blame.

But that doesn’t change the fact that software never fit the model of copyright, including the First Sale Doctrine.  Just because source code kind of sort of looked like it was written in a language readable by a very few humans, the infamous CONTU Committee making recommendations to Congress made the leap to treating software as a work of authorship by (poor) analogy.

With the 1976 Copyright Act, the law treated software as if it were a novel, giving exclusive rights to its “authors” for a period of time that is absurd compared to the short economic lifespan of any piece of code written since the time of Charles Baggage and Ada Lovelace.

The farther away from a traditional “work of authorship” that software evolves (visual programming, object-oriented architecture, interpretive languages such as HTML), the more unfortunate that decision looks in retrospect.  Source code is just a convenience, making it easier to write and maintain programs.  But it doesn’t do anything.  It must be compiled or interpreted before the hardware will make a peep or move a pixel.

Author John Hersey, one of the CONTU Committee members, got it just right.  In his dissent from the recommendation to extend copyright to software, Hersey wrote, “software utters work.  Work is its only utterance and its only purpose.”

Work doesn’t need the incentives and protections we have afforded to novels and songs.  And consumers can no more resell work than they can take home their seat from the movie theater after the show.

Paul Allen: When a Patent Troll is an Enigma

I don’t have a great deal to add to coverage of last week’s big patent story, which concerned the filing of a complaint by Microsoft co-founder Paul Allen against major technology companies including Apple, Google, Facebook and Yahoo. Diane Searcey of The Wall Street Journal, Tom Krazit at CNET News.com, and Mike Masnick on Techdirt pretty much lay out as much as is known so far.

But given the notoriety of the case and the scope of its claims (the Journal, or at least its headline writer, has declared an all-out “patent war”), it seems like a good opportunity to dispel some common myths about the patent system and its discontents.

And then I want to offer one completely unfounded theory about what is really going on that no one yet has suggested. Which is: Paul Allen is out to become the greatest champion that patent reform will ever know.

Continue reading →

Meditations in a Privacy Emergency

Emotions ran high at this week’s Privacy Identity and Innovation conference in Seattle.  They usually do when the topic of privacy and technology is raised, and to me that was the real take-away from the event.

As expected, the organizers did an excellent job providing attendees with provocative panels, presentations and keynotes talks—in particular an excellent presentation from my former UC Berkeley colleague Marc Davis, who has just joined Microsoft.

There were smart ideas from several entrepreneurs working on privacy-related startups, and deep thinking from academics, lawyers and policy analysts.

There were deep dives into new products from Intel, European history and the metaphysics of identity.

But what interested me most was just how emotional everyone gets at the mere  mention of private information, or what is known in the legal trade as  “personally-identifiable” information.  People get enervated just thinking about how it is being generated, collected, distributed and monetized as part of the evolution of digital life.  And pointing out that someone is having an emotional reaction often generates one that is even more primal.

Privacy, like the related problems of copyright, security, and net neutrality, is often seen as a binary issue.  Either you believe governments and corporations are evil entities determined to strip citizens and consumers of all human dignity or you think, as leading tech CEOs have the unfortunate habit of repeating, that privacy is long gone, get over it.

But many of the individual problems that come up are much more subtle that that.  Think of Google Street View, which has generated investigations and litigation around the world, particularly in Germany where, as Jeff Jarvis pointed out, Germans think nothing of naked co-ed saunas.

Or how about targeted or personalized or, depending on your conclusion about it, “behavioral” advertising?  Without it, whether on broadcast TV or the web, we don’t get great free content.  And besides, the more targeted advertising is, the less we have to look at ads for stuff we aren’t the least bit interested in and the more likely that an ad isn’t just an annoyance but is actually helpful.

On the other hand, ads that suggest products and services I might specifically be interested in are “creepy.”  (I find them creepy, but I expect I’ll get used to it, especially when they work.)

And what about governments?  Governments shouldn’t be spying on their citizens, but at the same time we’re furious when bad guys aren’t immediately caught using every ounce of surveillance technology in the arsenal.

Search engines, mobile phone carriers and others are berated for retaining data (most of it not even linked to individuals, or at least not directly) and at the same time are required to retain it for law enforcement purposes.  The only difference is the proposed use of the information (spying vs. public safety), which can only be known after data collection.

As comments from Jeff Jarvis and Andrew Keen in particular got the audience riled up, I found myself having an increasingly familiar but strange response.  The more contentious and emotional the discussion became, the more I found myself agreeing with everything everyone was saying, including those who appeared to be violently disagreeing.

We should divulge absolutely everything about ourselves!  No one should have any information about us without our permission, which governments should oversee because we’re too stupid to know when not to give it!  We need regulators to protect us from corporations; we need civil rights to protect us from regulators.

Logical Systems and Non-Rational Responses

I can think of at least two important explanations for this paradox.  The first is a mismatch of thought systems.  Conferences, panel discussions, essays and regulation are all premised on rational thinking, logic, and reason.  But the more the subject of these conversations turns to information that describes our behavior, our thoughts, and our preferences, the more the natural response is not rational but emotional.

Try having a logical conversation with an infant—or a dog, or a significant other who is upset–about its immediate needs.  Try convincing someone that their religion is wrong.  Try reasoning your way out of or into a sexual preference.  It just doesn’t work.

Which raises at least one interesting problem.  Privacy is not only an emotional subject, it’s also increasingly a profitable one.  According to a recent Wall Street Journal article, venture capitalists are now pouring millions into privacy-related startups.  Intel just offered $8 billion for security service provider McAfee.  Every time Facebook blinks, the blogosphere lights up.

So the mismatch of thought systems will lead to more, not fewer, collisions all the time.

Given that, how does a company develop a strategic plan in the face of unpredictable and emotional response from potential users, the media, and regulators?  Strategic planning, to the extent anyone really does it seriously, is based on cold, hard facts—as far from emotion as its practitioners can possibly get.  The patron saint of management science, after all, is Frederick Winslow Taylor who, among other things, invented time-and-motion studies to achieve maximum efficiency of human “machines.”

But the rational vehicle of planning simply crumples against the brick wall of emotion.

As I wrote in an early chapter of “The Laws of Disruption,” for example, companies experimenting with early prototypes of radio frequency ID tags (still not ready for mass deployment ten years later) could never have predicted the violent protests that accompanied tests of the tags in warehouses and factories.

Much of that protest was led by a woman who believes that RFID tags are literally the technology prophesied by the Book of Revelations as the sign of the Antichrist.  Assuming one is not an agent of the devil, or in any case isn’t aware that one is, how do you plan for that response?

The more that intimacy becomes a feature of products and services, including products and services aimed at managing intimate information, the more the logical religion of management science will need to incorporate non-rational approaches to management, scenario planning and economics.

It won’t be easy—the science of management science isn’t very scientific in the first place and, as I just said, changing someone’s religion doesn’t happen through rational arguments—the kind I’m making right now.

The Bankruptcy of the Property Metaphor for Information

The second problem that kept hitting me over the head during PII 2010 was one of linguistics.  Which is:  the language everyone uses to talk about (or around) privacy.  We speak of ownership, stealing, tracking, hijacking, and controlling.  This is the language of personal property, and it’s an even worse fit for the privacy conversation than is the mental discipline of logic.

In discussions about information of any kind, including creative works as well as privacy and security, the prevailing metaphor is to talk about information as a kind of possession.  What kind?  That’s part of the problem.  Given the youth of digital life and the early evolution of our information economy, most of us really only understand one kind of property, and that is where our minds inevitably and often unintentionally go.

We think of property as the moveable, tangible variety—cattle, collectibles, commodities–that in legal terminology goes by the name “chattels.”

Only now has that metaphor become a serious obstacle.  While there has been a market for information for centuries, the revolutionary feature of digital life is that is has, for the first time in human history, separated information from the physical containers in which it has traditionally been encapsulated, packaged, transported, retailed, and consumed.

A book is not the ideas in the book, but a book can be bought, sold, controlled, and destroyed.  A computer tape containing credit card transactions is not the decision-making process of the buyers and sellers of those transactions, but a tape can be lost, stolen, or sold.

When information could only be used by first reducing it to physical artifacts, the property metaphor more-or-less worked.  Control the means of production, and you controlled the flow of information.  When Gutenberg perfected movable type, the first thing he published was the Bible—but in German, not Latin.  Hand-made manuscripts and a dead language gave the medieval Catholic Church a monopoly on the mystical.  Turn the means of production over to the people and you have the Protestant Reformation and the beginning of censorship–a legal control on information.

The digital revolution makes the liberation of information all the more potent.  Yet in all conversations about information value, most of us move seamlessly and dangerously between the medium—the artifact—and the message—the information.

But now that information can be used in a variety of productive and destructive ways without ever taking a tangible form, the property metaphor has become bankrupt.  Information is not property the way a barrel of oil is property.   The barrel of oil can only be possessed by one person at a time.  It can be converted, but only once, to lubricants, gasoline, or remain in crude form.  Once the oil is burned, the property is gone.  In the meantime, the barrel of oil can be stolen, tracked, and moved from one jurisdiction to another.

Digital information isn’t like that.  Everyone can use it at the same time.  It exists everywhere and nowhere.  Once it’s used, it’s still there, and often more valuable for having been used.  It can be remixed, modified, and adapted in ways that create new uses, even as the original information remains intact and usable in the original form.

Tangible property obeys the law of supply and demand, as does information forced into tangible containers.  But information set free from the mortal coil obeys only the law of networks, where value is a function of use and not of scarcity.

But once the privacy conversation (as well as the copyright conversation) enters the realm of the property metaphor, the cognitive dissonance of thinking everyone is right (or wrong) begins.  Are users of copyrighted content “pirates”?  Or are copyright holders “hoarders”?  Yes.

(“Intellectual property,” as I’ve come to accept, is an oxymoron.  That’s hard for an IP lawyer to admit!)

It’s true that there are other kinds of property that might better fit our emerging information markets.  Real estate (land) is tangible but immovable.   Use rights (e.g., a ticket to a movie theater, the right to drill under someone’s land or to block their view) are also long established.

But both the legal framework and the economic theory describing these kinds of property are underdeveloped at the very least.  Convincing everyone to shift their property paradigm would be hard when the new location is so barren.

Here are a few examples of the problem from the conference.  What term would make consumers most comfortable with a product that helps them protect their privacy, one speaker asked the audience.  Do we prefer “bank,” “vault,” “dossier,” “account” etc.?

“Shouldn’t consumers own their own information?” an attendee asked, a double misuse of the word “own.”   Do you mean the media on which information may be stored or transferred, or do you mean the inherent value of the bits (which is nothing)?  In what sense is information that describes characteristics or behaviors of an individual that person’s “own” information?

And what does it mean to “own” that information?  Does ownership bring with it the related concepts of being bought, sold, transferred, shared, waived?  What about information that is created by combining information—whether we are talking about Wikipedia or targeted advertising?  Does everyone or no one own it?

And by ownership, do we mean the rights to derive all value from it, even when what makes information valuable is the combining, processing, analyzing and repurposing done by others?  Doesn’t that part of the value generation count for something in divvying up the monetization of the resulting information products and services?  Or perhaps everything?

Human beings need metaphors to discuss intangible concepts like immortality, depression, and information.  But increasingly I believe that the property metaphor applied to information is doing more harm than good.  It makes every conversation about privacy a conversation of generalizations, and generalizations encourage the visceral responses that make it impossible to make any progress.

Perhaps that’s why survey after survey reveals both that consumers care very much about the erosion of a zone of privacy in their increasingly digital lives and, at the same time, give up intimate information the moment a website asks them for it.  (I agree with everything and its opposite.)

There’s also a more insidious use of language and metaphor to steer the conversation toward one view of property or another—privacy as personal property or privacy as community property.  Consider, for example, how the question is asked, e.g.:

“My cell phone tracks where I go”

or

“My cell phone can tell me where I am.”

A recent series of articles in The Wall Street Journal dealing with privacy (I won’t bother linking to it, because the Journal believes the information in those articles is private and property and won’t share it unless you pay for a subscription, but here is a “free” transcript of a conversation with the author of the articles on NPR’s “Fresh Air”) made many factual errors in describing current practices in on-line advertising.  But those aside, what made the articles sensational was not so much what they reported but the adjectives and pronouns that went with the facts.

Companies know a lot “about you,” for example, from your web surfing habits (in fact they know nothing about “you,” but rather about your computer, whoever may be using it), cookies are a kind of “surveillance technology” that “track” where “you” go and what “you do,” and often “spawn” themselves without “your” knowledge.

Assumptions about the meaning of loaded terms such as ownership, identity and what it means for information to be private poison the conversation.  But anyone raising that point is immediately accused of shilling for corporations or law enforcement agencies who don’t want the conversation to happen at all.

A User and Use-based Model – Productive and Destructive Uses

So if the property metaphor is failing to advance an important conversation—both of a business and policy nature—what metaphor works better?

As I wrote in “Laws of Disruption,” I think a better way to talk about information as an economic good is to focus on information users and information uses.  “Private” information, for starters, is private only depending on the potential user.  Whether it is our spouse, employer, an advertiser or a law-enforcement agent, in other words, can make all the difference in the world as to whether I consider some information private or not.  Context is nearly everything.

Example:  Is location tracking software on cell phones or embedded chips an invasion of privacy?  It is if a government agency is intercepting the signals, and using them to (fill in the blank).  But ask a parent who is trying to find a missing child, or an adult child trying to find a missing and demented parent.  It’s not the technology; it’s the user and the use.

Use, likewise, often empties much of the emotional baggage that goes with conversations about privacy in the abstract.  A website asks for my credit card number—is that an invasion of my privacy?  Well not if I’m trying to pay for my new television set from Amazon with a credit card.   On the other hand, if I’m signing up for an email newsletter that is free, there’s certainly something suspicious about the question.

To simplify a long discussion, I prefer to talk about information of all varieties through a lens of “productive” (uses that add value to information, e.g., collaboration) and “destructive” (uses that reduce the value of information, e.g., “identity” “theft”).  Though it may not be a perfect metaphor (many uses can be both productive and destructive, and the metrics for weighing both are undeveloped at best), I find it works much better in conversations about the business and policy of information.

That is, assuming one isn’t simply in the mood to vent and rant, which can also be fun, if not productive.

New white paper from PFF on Title II "sins"

The Progress and Freedom Foundation has just published a white paper I wrote for them titled “The Seven Deadly Sins of Title II Reclassification (NOI Remix).”  This is an expanded and revised version of an earlier blog post that looks deeply into the FCC’s pending Notice of Inquiry regarding broadband Internet access. You can download a PDF here.

I point out that beyond the danger of subjecting broadband Internet to extensive new regulations under the so-called “Third Way” approach outlined by FCC Chairman Julius Genachowski, a number of other troubling features in the Notice indicate an even broader agenda for the agency with regard to the Internet.

These include:

  • Pride: As the FCC attempts to define what services would be subjected to reclassification, the agency runs the risk of both under- and over-inclusion, which could harm consumers, network operators, and content and applications providers.
  • Lust: The agency is reaching out for additional powers beyond its reclassification proposals — including an effort to wrest privacy enforcement powers from the Federal Trade Commission and putting itself in charge of cybersecurity for homeland security.
  • Anger: The “Third Way” may dramatically expand the scope of federal wiretapping laws, requiring law enforcement “back doors” for a wide range of products and services.
  • Gluttony: Reclassifying broadband opens the door to state and local government regulation, which would overwhelm Internet access with a deluge of conflicting, and innovation-killing, laws, rules and new consumer taxes.
  • Sloth: As the FCC looks for a legal basis to defend reclassification, basic activities — such as caching, searching, and browsing — may for the first time be included in the category of services subject to “common carrier” regulation.
  • Vanity: Though wireless networks face greater challenges from the broadband Internet than wireline networks, the FCC seems poised to impose more, not less, regulation on wireless broadband.
  • Greed: Reclassification of broadband services could vastly expand the contribution base for the Universal Service Fund, adding new consumer fees while supersizing this important, but exceedingly wasteful, program.

I’m grateful to PFF, especially Berin Szoka, Adam Marcus, Mike Wendy and Adam Thierer, for their interest and help in publishing the article.

Copyright Office Weighs in on Awkward Questions of Software Law

I dashed off a piece for CNET today on the Copyright Office’s cell phone “jailbreaking” rulemaking earlier this week.  Though there has already been extensive coverage (including solid pieces in The Washington Post, a New York Times editorial, CNET, and Techdirt), there were a few interesting aspects to the decision I thought were worth highlighting.

Most notably, I was interested that no one had discussed the possibility and process by which Apple or other service providers could appeal the rulemaking.  Ordinarily, parties who object to rules enrolled by administrative agencies can file suit in federal district court under the Administrative Procedures Act.  Such suits are difficult to win, as courts give deference to administrative determinations and review them only for errors of law.  But a win for the agency is by no means guaranteed.

The Appeals Process

What I found in interviewing several leading high tech law scholars and practitioners is that no one was really clear how or even if that process applied to the Copyright Office.  In the twelve years that the Register of Copyrights has been reviewing requests for exemptions, there are no reported cases of efforts to challenge those rules and have them overturned.

With the help of Fred von Lohmann, I was able to obtain copies of briefs in a 2006 lawsuit filed by TracFone Wireless that challenged an exemption (modified and extended in Monday’s rulemaking) allowing cell phone users to unlock their phones from an authorized network in hopes of moving to a different network.  TracFone sued the Register in a Florida federal district court, claiming that both the process and substance of the exemption violated the APA and TracFone’s due process rights under the Fifth Amendment.

But the Justice Department, in defending the Copyright Office, made some interesting arguments.  They claimed, for example, that until TracFone suffered a particular injury as a result of the rulemaking, the company had no standing to sue.  Moreover, the government argued that the Copyright Office is not subject to the APA at all, since it is an organ of Congress and not a regulatory agency.  The briefs hinted at the prospect that rulemakings from the Copyright Office are not subject to judicial review of any kind, even one subject to the highly limited standard of “arbitrary and capricious.”

There was, however, no published opinion in the TracFone case, and EFF’s Jennifer Granick told me yesterday she believes the company simply abandoned the suit.  No opinion means the judge never ruled on any of these arguments, and so there is still no precedent for how a challenge to a DMCA rulemaking would proceed and under what legal standards and jurisdictional requirements.

Should Apple decide to pursue an appeal (an Apple spokesperson “declined to comment” on whether the company was considering such an action, and read me the brief statement the company has given to all journalists this week), it would be plowing virgin fields in federal jurisdiction.  That, as we know, can often lead to surprising results—including, just as an example, a challenge to the Copyright Office’s institutional ability to perform rulemakings of any kind.

The Copyright Office Moves the Fair Use Needle…a Little

A few thoughts on the substance of the rulemaking, especially as it shines light on growing problems in applying copyright law in the digital age.

Since the passage of the 1998 revisions to the Copyright Act known as the Digital Millennium Copyright Act, the Register of Copyrights is required every three years to review requests to create specific classes of exemptions to some of the key provisions of the law, notably the parts that prohibit circumvention of security technologies such as DRM or other forms of copy protection.

The authors of the DMCA with some foresight recognized that the anti-circumvention provisions rode on the delicate and sharp edge where static law meets rapidly-evolving technology and new business innovation.  Congress wanted to make sure there was a process that ensured the anti-circumvention provisions did not lead to unintended consequences that hindered rather than encouraged technological innovation.  So the Copyright Office reviews requests for exemptions with that goal in mind.

In the rulemaking completed on Monday, of course, one important exemption approved by the Register was one proposed by the Electronic Frontier Foundation, which asked for an exemption for “jailbreaking” cell phones, especially iPhones.

Jailbreaking allows the customer to override security features of the iPhone’s firmware that limits which third party applications can be added to the phone.  Apple strictly controls which third party apps can be downloaded to the phone through the App Store, and has used that control to ban apps with, for example, political or sexual content.  Of course the review process also ensures that the apps work are technically compatible with the phone’s other software, don’t unduly harm performance, and aren’t duplicative of other apps already approved.

Jailbreaking the phone allows the customer to add whatever apps they want, including those rejected by or simply never submitted to Apple in the first place, for whatever reason.

In approving the exemption, the Copyright Office noted that jailbreaking probably does involve copyright infringement.  The firmware must be altered as part of the process, and that alteration violates Apple’s legal monopoly on derivative or adapted works.  But the Register found that such alteration was de minimis and approved the exemption based on the concept of “fair use.”

Fair use, codified in Section 107 of the Copyright Act, holds that certain uses of a copyrighted work that would otherwise be reserved to the rights holder are not considered infringement.  These include uses that have positive social benefits but which the rights holder as a monopolist might be averse to permitting under any terms, such as quotations in a potentially-negative review.

EFF had argued initially that jailbreaking was not infringement at all, but the Register rejected that argument.  Fair use is a much weaker rationale, as it begins by acknowledging a violation, though one excused by law.  The law of fair use, as I note in the piece, has also been in considerable disarray since the 1980’s, when courts began to focus almost exclusively on whether the use (technically, fair use is an affirmative defense to a claim of infringement) harmed the potential commercial prospects for the work.

Courts are notoriously bad at evaluating product markets, let alone future markets.  So copyright holders now simply argue that future markets, thanks to changing technology, could include anything, and that therefore any use has the potential to harm the commercial prospects of their work.  So even noncommercial uses by people who have no intention of “competing” with the market for the work are found to have infringed, fair use notwithstanding.

But in granting the jailbreaking exemption, the Copyright Office made the interesting and important distinction between the market for the work and the market for the product or service in which the work is embedded.

Jailbreaking, of course, has the potential to seriously undermine the business strategy Apple has carefully designed for the iPhone and, indeed, for all of its products, which is to tightly control the ecosystem of uses for that product.

This ensures product quality, on the one hand, but it also means Apple is there to extract fees and tolls from pretty much any third party they want to, on technical and economic terms they can dictate.  Despite its hip reputation, Apple’s technical environment is more “closed” than Microsoft’s.  (The open source world of Linux being on the other end of the spectrum.)

In granting the exemption, the Copyright Office rejected Apple’s claim that jailbreaking harmed the market for the iPhone.  The fair use analysis, the Register said, focuses on the market for the protected work, which in this case is the iPhone’s firmware.  Since the modifications needed to jailbreak the firmware don’t harm the market for the firmware itself, the infringing use is fair and legally excused.   It doesn’t matter, in other words, that jailbreaking has a potentially big commercial impact on the iPhone service.

That distinction is the notable feature of this decision in terms of copyright law.  Courts, and now the Copyright Office, are well aware that technology companies try to leverage the monopoly rights granted by copyright to create legal monopolies on uses of their products or services.  In essence, they build technical controls into the copyrighted work that limits who and how the product or service can be used, than claim their intentional incompatibilities are protected by law.

A line of cases involving video game consoles, printer cartridges and software applications generally has been understandably skeptical of efforts to use copyright in this manner, which quickly begins to smell of antitrust.  Copyright is a monopoly—that is, a trust.  So it’s not surprising that its application can leak into concerns over antitrust.  The law strives to balance the need for the undesirable monopoly (incentives for authors) with the risks to related markets (restraint of trade).

As Anthony Falzone put it in a blog post at the Stanford Center for Internet and Society, “The Library went on to conclude there is no basis for Apple to use copyright law to ‘protect[] its restrictive business model’ and the concerns Apple articulated about the integrity of the iPhone’s ‘ecosystem’ are simply not harms that would tilt the fair use analysis Apple’s way.”

The exemption granted this week follows the theory that protecting the work itself is what matters, not the controlled market that ownership of the work allows the rights holder to create.

The bottom line here:  messing with the firmware is a fair use because it doesn’t damage the market for the firmware, regardless of (or perhaps especially because of) its impact on the market for the iPhone service as Apple has designed it.  That decision is largely consistent with case law evaluating other forms of technical lockout devices.

The net result is that it becomes harder for companies to use copyright as a legal mechanism to fend off third parties who offer replacement parts, add-ons, or other features that require jailbreaking to ensure compatibility.

Which is not to say that Apple or anyone else trying to control the environment around copyright-protected software is out of luck.  As I note in the CNET piece, the DMCA is just one, and perhaps the weakest arrow in Apple’s quiver here.  Just because jailbreaking has now been deemed a fair use does not mean Apple is forced to accommodate any third party app.  Not by a long shot.

Jailbreaking the iPhone remains a breach of the user agreement for both the device and the service.  It still voids the warranty and still exposes the customer to action, including cancelling the service or early termination penalties, that Apple can legally take to enforce the agreement.  Apple can also still take technical measures, such as refusing to update or upgrade jailbroken phones, to keep out unapproved apps.

Contrary to what many comments have said in some of the articles noted above, the DMCA exemption does not constitute a “get out of jail free” card for users.

It’s true that Apple can no longer rely on the DMCA (and the possibility of criminal enforcement by the government) to protect the closed environment of the iPhone.  But consumers can still waive legal rights—including the right to fair use—in agreeing to a contract, license agreement, or service agreement.  (In some sense that’s what a contract is, after all—agreement by two parties to waive various rights in the interest of a mutual bargain.)

Ownership Rights to Software Remain a Mystery

A third interesting aspect to the Copyright Office’s rulemaking has to do with the highly-confused question of software ownership. For largely technical reasons, software has moved from intangible programs that must of necessity be copied to physical media (tapes, disks, cartridges) in order to be distributed to intangible programs distributed electronically (software as a service, cloud computing, etc.).  That technical evolution has made the tricky problem of ownership has gotten even trickier.

Under copyright law, the owner of a “copy” of a work has certain rights, including the right to resell their copy.  The so-called “first sale doctrine” makes legal the secondary market for copies, including used book and record stores, and much of what gets interesting on Antiques Roadshow.

But the right to resell a copy of the work does not affect the rights holders’ ability to limit the creation of new copies, or of derivative or adapted works based on the original.  For example, I own several pages of original artwork used in 1960’s comic books drawn by Jack Kirby, Steve Ditko, and Gene Colan.

While Marvel still owns the copyright to the pages, I own the artifacts—the pages themselves.  I can resell the pages or otherwise display the artifact, but I have no right until copyright expires to use the art to produce and sell copies or adaptations, any more than the owner of a licensed Mickey Mouse t-shirt can make Mickey Mouse cartoons.

(Mike Masnick the other day had an interesting post about a man who claims to have found unpublished lost negatives made by famed photographer Ansel Adams.  Assuming the negatives are authentic and there’s no evidence they were stolen at some point, the owner has the right to sell the negatives.  But copyright may still prohibit him from using the negatives to make or sell prints of any kind.)

Software manufacturers and distributors are increasingly trying to make the case that their customers no longer receive copies of software but rather licenses to use software owned by the companies.  A license is a limited right to make use of someone else’s property, such as a seat in a movie theater or permission to drive a car.

As software is increasingly disconnected from embodiment in physical media, the legal argument for license versus sale gets stronger, and it may be over time that this debate will be settled in favor of the license model, which comes with different and more limited rights for the licensee than the sale of a copy.  (There is no “first sale” doctrine for licenses.  They can be canceled under terms agreed to in advance by the parties.)

For now, however, debate rages as to whether and under what conditions the use of software constitutes the sale of a copy versus a license to use.  That issue was raised in this week’s rulemaking several times, notably in a second exemption dealing with unlocking phones from a particular network.

Under Section 117 of the Copyright Act, the “owner of a copy” of a computer program has certain special rights, including the right to make a copy of the software (e.g. for backup purposes, or to move it from inert media to RAM) or modify it when doing so is “essential” to make use of the copy.

Unlocking a phone to move it to another network, particularly a used phone being recycled, necessarily requires at least minor modification, and the question becomes whether the recycler or anyone lawfully in possession of a cell phone “owns a copy” of the firmware.

Though this issue gave the Copyright Office great pause and lots of pages of analysis, ultimately they sensibly hedged on the question of copy versus license.  The Register did note, however, that Apple’s license agreement was “not a model of clarity.”

In the interests of time, let me just say here that this is an issue that will continue to plague the software industry for some time to come.  It is a great example of how innovation continues to outpace law, with unhappy and unintended consequences.  For more on that subject, see Law Seven (copyright) and Law Nine (software) of “The Laws of Disruption.”

After the deluge, more deluge

If I ever had any hope of “keeping up” with developments in the regulation of information technology—or even the nine specific areas I explored in The Laws of Disruption—that hope was lost long ago.  The last few months I haven’t even been able to keep up just sorting the piles of printouts of stories I’ve “clipped” from just a few key sources, including The New York Times, The Wall Street Journal, CNET News.com and The Washington Post.

I’ve just gone through a big pile of clippings that cover April-July.  A few highlights:  In May, YouTube surpassed 2 billion daily hits.  Today, Facebook announced it has more than 500,000,000 members.   Researchers last week demonstrated technology that draws device power from radio waves.

If the size of my stacks are any indication of activity level, the most contentious areas of legal debate are, not surprisingly, privacy (Facebook, Google, Twitter et. al.), infrastructure (Net neutrality, Title II and the wireless spectrum crisis), copyright (the secret ACTA treaty, Limewire, Google v. Viacom), free speech (China, Facebook “hate speech”), and cyberterrorism (Sen. Lieberman’s proposed legislation expanding executive powers).

There was relatively little development in other key topics, notably antitrust (Intel and the Federal Trade Commission appear close to resolution of the pending investigation; Comcast/NBC merger plodding along).  Cyberbullying, identity theft, spam, e-personation and other Internet crimes have also gone eerily, or at least relatively, quiet.

Where are We?

There’s one thing that all of the high-volume topics have in common—they are all moving increasingly toward a single topic, and that is the appropriate balance between private and public control over the Internet ecosystem.  When I first started researching cyberlaw in the mid-1990’s, that was truly an academic question, one discussed by very few academics.

But in the interim, TCP/IP, with no central authority or corporate owner, has pursued a remarkable and relentless takeover of every other networking standard.  The Internet’s packet-switched architecture has grown from simple data file exchanges to email, the Web, voice, video, social network and the increasingly hybrid forms of information exchanges performed by consumers and businesses.

As its importance to both economic and personal growth has expanded, anxiety over how and by whom that architecture is managed has understandably developed in parallel.

(By the way, as Morgan Stanley analyst Mark Meeker pointed out this spring, consumer computing has overtaken business computing as the dominant use of information technology, with a trajectory certain to open a wider gap in the future.)

The locus of the infrastructure battle today, of course, is in the fundamental questions being asked about the very nature of digital life.  Is the network a piece of private property operated subject to the rules of the free market, the invisible hand, and a wondrous absence of transaction costs?  Or is it a fundamental element of modern citizenship, overseen by national governments following their most basic principles of governance and control?

At one level, that fight is visible in the machinations between governments (U.S. vs. E.U. vs. China, e.g.) over what rules apply to the digital lives of their citizens.  Is the First Amendment, as John Perry Barlow famously said, only a local ordinance in Cyberspace?  Do E.U. privacy rules, being the most expansive, become the default for global corporations?

At another level, the lines have been drawn even sharper between public and private parties, and in side-battles within those camps.  Who gets to set U.S. telecom policy—the FCC or Congress, federal or state governments, public sector or private sector, access providers or content providers?  What does it really mean to say the network should be “nondiscriminatory,” or to treat all packets anonymously and equally, following a “neutrality” principle?

As individuals, are we consumers or citizens, and in either case how do we voice our view of how these problems should be resolved?  Through our elected representatives?  Voting with our wallets?  Through the media and consumer advocates?

Not to sound too dramatic, but there’s really no other way to see these fights as anything less than a struggle for the soul of the Internet.  As its importance has grown, so have the stakes—and the immediacy—in establishing the first principles, the Constitution, and the scriptures that will define its governance structure, even as it continues its rapid evolution.

The Next Wave

Network architecture and regulation aside, the other big problems of the day are not as different as they seem.  Privacy, cybersecurity and copyright are all proxies in that larger struggle, and in some sense they are all looking at the same problem through a slightly different (but equally mis-focused) lens.  There’s a common thread and a common problem:  each of them represents a fight over information usage, access, storage, modification and removal.  And each of them is saddled with terminology and a legal framework developed during the Industrial Revolution.

As more activities of all possible varieties migrate online, for example, very different problems of information economics have converged under the unfortunate heading of “privacy,” a term loaded with 19th and 20th century baggage.

Security is just another view of the same problems.  And here too the debates (or worse) are rendered unintelligible by the application of frameworks developed for a physical world.  Cyberterror, digital warfare, online Pearl Harbor, viruses, Trojan Horses, attacks—the terminology of both sides assumes that information is a tangible asset, to be secured, protected, attacked, destroyed by adverse and identifiable combatants.

In some sense, those same problems are at the heart of struggles to apply or not the architecture of copyright created during the 17th Century Enlightenment, when information of necessity had to take physical form to be used widely.  Increasingly, governments and private parties with vested interests are looking to the ISPs and content hosts to act as the police force for so-called “intellectual property” such as copyrights, patents, and trademarks.  (Perhaps because it’s increasingly clear that national governments and their physical police forces are ineffectual or worse.)

Again, the issues are of information usage, access, storage, modification and removal, though the rhetoric adopts the unhelpful language of pirates and property.

So, in some weird and at the same time obvious way, net neutrality = privacy = security = copyright.  They’re all different and equally unhelpful names for the same (growing) set of governance issues.

At the heart of these problems—both of form and substance—is the inescapable fact that information is profoundly different than traditional property.  It is not like a bush or corn or a barrel of oil.  For one thing, it never has been tangible, though when it needed to be copied into media to be distributed it was easy enough to conflate the media for the message.

The information revolution’s revolutionary principle is that information in digital form is at last what it was always meant to be—an intangible good, which follows a very different (for starters, a non-linear) life-cycle.  The ways in which it is created, distributed, experienced, modified and valued don’t follow the same rules that apply to tangible goods, try as we do to force-fit those rules.

Which is not to say there are no rules, or that there can be no governance of information behavior.  And certainly not to say information, because it is intangible, has no value.  Only that for the most part, we have no real understanding of what its unique physics are.  We barely have vocabulary to begin the analysis.

Now What?

Terminology aside, I predict with the confidence of Moore’s Law that business and consumers alike will increasingly find themselves more involved than anyone wants to be in the creation of a new body of law better-suited to the realities of digital life.  That law may take the traditional forms of statutes, regulations, and treaties, or follow even older models of standards, creeds, ethics and morals.  Much of it will continue to be engineered, coded directly into the architecture.

Private enterprises in particular can expect to be drawn deeper (kicking and screaming perhaps) into fundamental questions of Internet governance and information rights.

Infrastructure and application providers, as they take on more of the duties historically thought to be the domain of sovereigns, are already being pressured to maintain the environmental conditions for a healthy Internet.  Increasingly, they will be called upon to define and enforce principles of privacy and human rights, to secure the information environment from threats both internal (crime) and external (war), and to protect “property” rights in information on behalf of “owners.”

These problems will continue to be different and the same, and will be joined by new problems as new frontiers of digital life are opened and settled.  Ultimately, we’ll grope our way toward the real question:  what is the true nature of information and how can we best harness its power?

Cynically, it’s lifetime employment for lawyers.  Optimistically, it’s a chance to be a virtual founding father.  Which way you look at it will largely determine the quality of the work you do in the next decade or so.