[DMCA-Activists] Hal Varian on DRM/NY Times, July 4, 2002

[Seth Johnson]

(Forwarded from Digital Copyright in Canada list.  Article
text pasted below.  -- Seth)


-------- Original Message --------
Date: Tue, 12 Nov 2002 14:37:56 -0500
From: "tOM Trottier" <address@hidden>
To: address@hidden

"At the level of bits, censorship and digital-rights
management are technologically identical."

> http://www.nytimes.com/2002/07/04/business/04SCEN.html

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> http://www.nytimes.com/2002/07/04/business/04SCEN.html


New Chips Can Keep a Tight Rein on Consumers


By HAL R. VARIAN
July 4, 2002


As chips get cheaper, products get smarter. Sometimes they
can get too smart for their own good.

Consider the following examples of products that are capable
of limiting how they are used:

Some inkjet printers have chips in their ink cartridges that
prevent operation if the cartridge has been refilled.
 
Cellphones sometimes come with chips in their batteries that
prevent operation if the battery isn't the right brand.

Compact discs can have copy-protection systems that keep
them from being played in personal computer drives.

Until recently, the after-purchase use of a product has been
crudely controlled via contracts, licensing or mechanical
design, but now it can easily be controlled through chips
and cryptography.

Microsoft recently announced Palladium, a plan for creating
secure computing platforms. The Palladium architecture
creates an operating environment that allows only digitally
signed software to be executed. That should, in principle,
help eliminate computer viruses and other sorts of security
problems.

But Palladium can also be used for digital-rights management
on your PC. This means that only certified programs could be
run, and only certified content could be displayed. At the
level of bits, censorship and digital-rights management are
technologically identical.

Ross Anderson, a computer security expert at the University
of Cambridge, described some of the implications of
Palladium at a recent conference in Toulouse, France.

What are the economic implications of technologies that can
control after-purchase use? The answer depends on how
competitive the markets are. Take the inkjet printer market.
If cartridges have a high profit margin but the market for
printers is competitive, competition will push down the
price of printers to compensate for the high-priced
cartridges. Restricting after-purchase use makes the
monopoly in cartridges stronger (since it inhibits refills),
but that just makes sellers compete more intensely to sell
printers, leading to lower prices in that market. This is
just the old story of "give away the razor and sell the
blades." 

But if the industry supplying the products isn't very
competitive, then controlling after-purchase behavior can be
used to extend a monopoly from one market to another. The
markets for software operating systems and for music and
video content are highly concentrated, so partnerships
between these two industries should be viewed with
suspicion. Such partnerships could easily be used to benefit
incumbents and to restrict potential entrants, a point made
by Mr. Anderson.

But there is another set of problems associated with
controlling after-purchase use: these technologies can
reduce innovation.

Eric von Hippel, a professor at the Sloan School of
Management at the Massachusetts Institute of Technology, has
documented the importance of "user innovation" in industries
as diverse as integrated circuits and mountain biking.

Professor von Hippel's surveys show that roughly a quarter
of the users of computer-aided-design software report
developing innovations for their own use. One-fifth of
mountain bike users do the same thing.

Manufacturers invest heavily in research and development to
discover new uses for their products. But the users are
often better innovators. After all, the users are closer to
the problem: they rely on the products every day for a
variety of tasks in a variety of environments, so it is not
surprising that they come up with uses the manufacturer
never thought of.

Professor von Hippel argues that user innovation is such a
strong force that companies should provide tool kits that
allow users to experiment with their products.

Such innovation may be sharply curtailed if manufacturers
are able to control after-purchase use. Consider the three
examples previously mentioned.

A hot area of computer-chip research design involves taking
off-the-shelf inkjet printers, loading the cartridges with
magnetic ink and squirting integrated circuits onto
metalized plastic. That technology may revolutionize
integrated circuit production ?but it definitely requires
using products in ways the manufacturer didn't intend.

What about cellphone batteries? There are now hand pumps
that allow you to produce enough juice to charge your own
batteries. Inventors are experimenting with putting such
pumps in your shoes so you can charge your cellphone by
merely walking around. This would be great for users, but it
is hard to experiment with such technologies if you can use
only certain power sources in your cellphone.

Digital-rights management can also reduce innovation. The
No. 1 song in England today is a remix of a 30-year-old
Elvis B-side single, "A Little Less Conversation." Nike
commissioned a Dutch disc jockey, JXL, to do the remix for
its World Cup ad campaign. He tweaked the instrumental
balance and added a techno back beat to create a fresh new
sound.

That sort of thing will be simply impossible if digital
rights management becomes commonplace.

One might argue that impediments to user innovation could be
overcome by negotiation. After all, Nike got permission from
Elvis's estate to do the remix. Surely companies will see
that it is in their interest to encourage customers'
innovations?

Maybe not. Typically, innovators need to experiment before
they approach manufacturers or rights owners. But once they
have made the investment to figure out whether the
innovation is promising, their bargaining power is reduced.
At that point, the rights' owners hold all the cards, and
they can choose licensing fees to extract most of the
benefits of the innovation. That, of course, reduces the
incentives for user innovation in the first place.

Could the innovators approach rights owners before they
experiment? Well, anyone can claim to be an innovator. How
would the rights owners know who should get permission to
circumvent their technology?

Either way, innovation is discouraged, hurting not only
consumers but also producers. Too much control can be a bad
thing, particularly when innovation is a critical source of
competitive advantage.