What If?

Public infrastructure and private entrepreneurship are the twin pillars of our emerging information economy. Academic scholars have given us the tools to understand what building an infrastructure involves—and to appreciate the impact that infrastructure can have on private ventures.

The post-bubble Internet showed the importance of retiring the New World view in favor of its wiser New Channel counterpart. New Channel thinking provides half of the groundwork for the information sector’s future by helping us see how winners can become winners, how the Inter­net can help us move closer to a more efficient world of reduced trans­action costs, and how life in the information sector can make us all richer one transaction at a time. But that’s only half the story. And though New Channel businesses will undoubtedly tell the more visible half of the story, they also will form the less important half. The more significant, though more obscure, half is the infrastructure upon which those New Channel businesses will rest. And perhaps the critical element of that infrastruc­ture lies within the realm of IP—where IP law meets IP policy.

We’ve already seen the record companies use their IP rights to retard digital-music distribution. They argued, persuasively, that IP law granted them the right to prohibit Napster’s free-for-all. From a legal perspective that’s certainly the right argument, but the policy argument is more intriguing, and more fundamental.

But unintended consequences are latent in every bargain. Siva Vaid- hyanathan, for example, described an unanticipated situation in the United States that persisted through much of the nineteenth century. Our early copyright laws protected only American authors. But British authors like Lewis Carroll, Charles Dickens, Mary Shelley, and Oscar Wilde, to name but a few, also wrote fine stories in English. Because American copyrights didn’t protect their work, American consumers could buy their books without paying them any royalties—making books by British authors less expensive here than books by American authors. At the same time, because British copyrights didn’t protect American authors, American authors could hardly earn a living from their books sold abroad. That imbalance may have been great for consumers, but it posed quite a challenge to American authors. And so Mark Twain launched (and eventually won) a crusade to strengthen copyright law— including a reciprocal-rights treaty with England—to make it easier for American authors to make money on their writing.¹

Now, Vaidhyanathan didn’t tell this story with much admiration for Twain. In fact, he saw Twain’s crusade as an important step down a per­fidious path of ever-increasing IP rights that stifles contemporary expres­sion and threatens creativity. And from a cultural perspective, he may be correct. From an economic perspective, however, the situation that moti­vated Twain’s crusade is simply one example of the unintended conse­quences of our IP bargains.

We may be at a similar juncture today. When the record companies shut down Napster, they did more than eliminate the Internet’s most popular music-swapping site. They also drove P2P development underground—and offshore. And P2P may be the most important information-sector innovation since the Web; broadband-intensive P2P applications have the potential to eliminate the illusory “bandwidth glut” that’s often cited as a drag on the telecom sector, if not on the broader economy. But many potential innovators have been scared off because IP law made P2P development unnecessarily expensive. And the loopholes that have kept successor music-swapping sites in business are unlikely to offer developers much solace. Do we really want to force our innovators to set up multijurisdictional offshore corporations? Talk about transaction costs!

The unintended consequences of our IP laws are wending their way throughout our contemporary technology industries. Numerous sectors—pharmaceuticals, microchips, and biotechnology, to name but a few—have encountered discrepancies between the workings of an IP system designed for an industrial economy and the practical necessities of their own postindustrial businesses. Some of these discrepancies mirror the challenge of entertainment industries—traditional forms of protection no longer seem to protect. Others mirror the lesser challenge of the software industry—traditional forms of incentives do not seem to motivate. But the greater challenge of software remains unique: only a sui generis regime can provide adequate motivation and protection.

These two challenges to software are interrelated. The inability of tra­ditional copyrights and patents to motivate software development—a shortcoming that we encountered in theory in chapter 2, and met in prac­tical terms in both Bill Gates’s open letter and the open-source contor­tion of copyleft in chapters 5 and 6, respectively—made a unique protective regime inevitable.

In many ways, we let Congress off the hook. We never pushed Congress to ask how to best motivate software development and enable software businesses at the lowest cost to the public. Instead, we let Con­gress, the administrators of the Copyright Office and of the Patent and Trademark Office, and the courts, lard on all known forms of protec­tion. Today, we protect software as an unprecedented combination of patents, copyrights, and trade secrets. And upon closer scrutiny, the sit­uation is even worse. Any program resident on your computer may possess six different legal protections: algorithm patents, source-code copyrights, source-code trade secrets, object-code copyrights, shrink­wrap or click-through licenses and a handful of trademarks. Congress has crafted a unique protective regime for software and digital prod- ucts—a critical component of industrial policy—apparently without ever thinking through either the regime’s nature or its consequences to the economy and to society. Such an abdication of analytic responsibility could not help but have far-reaching unintended consequences.

Of course, “unintended” doesn’t necessarily mean either “undesir­able” or “avoidable.” After all, most people recognize that our existing IP laws do serve the important public-policy goal of promoting innova­tion. Though we may detect costs that we’d never expected to bear, we may also detect benefits that we’d never expected to earn. Even if we decide that the IP rights that we’ve granted are more expensive than anticipated, that hardly means that we’d be better off scrapping the system.

Fortunately, we don’t have to make that choice.

bend—consequences that we can avoid only by adopting their preferred reforms today. Many of their discussions are a bit abstract; though they may be right, they’re not always helpful.

Their discussions, however, do highlight a key difference between entertainment and software. The entertainment industry’s existing busi­ness models will have to change; more and more observers are advocat­ing a split of control from compensation. One way or another, in the not too distant future, these “content providers” may be forced to free their products to drift throughout the ether, and be satisfied with some sort of aggregate compensation scheme. Or at least, that’s what one currently popular school of thought foresees. But other approaches appear possi­ble in the software industry.

We recognized the challenge of protecting software rights a long time ago. Many people have written about it: Bill Gates and Richard Stallman; congressional advisory committees and the Supreme Court; various IP reformers. Together, they’ve given us the views from practical software developers, from legislators who write laws and judges who interpret them, and from priests of academe who worry about their broader consequences.

The Microsoft trial, and the various interactions among Microsoft, its competitors, and the government, conveyed a wealth of useful empirical information about a software industry protected by the current IP regime. Somewhat surprisingly, though, we’ve spent little time digesting these lessons and comparing the empirical evidence with theoretical pre- dictions.³ So we get to play “what if... ” Specifically: What if... we had different IP laws protecting software? What if... Microsoft had started with a different set of rights? How might things have evolved dif­ferently? And would we be better off today?

We must create parallel universes and consider the fate of those who dwell within them. And though we could never expect to learn lessons general enough to extend throughout the entire tech sector, the exercise may help to break us out of a dangerous trap—a trap that transcends the boundaries of IP policy and goes to the heart of public policy as a whole. One of the most dangerous pitfalls for citizens is the conserva­tive assumption that things must be as they are. We tend toward this conservatism even when we believe that things are not as they should be; better the devil we know than the devil we don’t. But in truth, it’s a trap. The devil we know may well be worse than an alternative devil of our choosing. And so, by exploring these alternative universes of soft­ware rights, we may expand our thinking to understand, to address, and to resolve the many policy debates that we can expect to encounter as the information sector continues to grow into a full-blown information economy.