Online Monopolies: Virtue or Vice

Overview

Session Date: April 13, 2009

Organized by: ADK and DAL

Topic: Online Monopolies Virtue or Vice

Featuring: Professor Jonathan Zittrain and special guest Peter Thiel with closing remarks provided by Professor Terry Fisher

Content: Video of the session is here: Can Monopolies Save The Internet? hosted by Big Think

back to syllabus

Technology + Incentives = High Quality Content

The premise of our session was that quality content can be created through the proper use of technology and incentives irrespective of the content. Please edit the below formula if you find improvements in the future.

There are 6 main ingredients in this equation:

1) An interesting topic with two reasonable viewpoints

2) Two intelligent and articulate discussion leaders

3) An engaged classroom. 3 sub-ingredients:

a) No Laptops

b) Name placards.

c) Required preparation with threat of "cold-calling". (Note: we did not have to resort to "cold-calling" because the class was engaged and prepared).

i) To execute cold-calling, we suggest a random-name generator designed in Microsoft Excel with the following formula:

=VLOOKUP(RANDBETWEEN(StudentNum1,StudentNumN),StudentNum1:StudentNamesN,2) <--- This function then refers to a two column list. StudentNum = List of #'s 1 to N (N = # of students). StudentNames = List of student names.

MS Excel Template for Name Generator Random Name Generator

4) Live video streaming. (We recommend: UStream)

5) Live Twittering. 4 students "tweeted" on Twitter throughout the class to engage the outside audience. This yielded participation and comments in the Q+A period.

6) Course Format: Introduction; Debate; Question & Answer; Closing Remarks

Topic - Online Monopolies: Virtue or Vice

Introduction

• Numerous examples of Monopoly Power exist on the Internet: Facebook, Google, Skype, PayPal, Amazon

-Find a Powerpoint Presentation summarizing these monopolies here: Monopoly Power PPT(via Scribd)

• Issue: What should be done to help or hinder these Online Monopolies? Overall are they more of a virtue or a vice?
• Format: Moderated Debate with the following parameters:

-15 minute introduction - each side presented
-30 minute debate
-40 minute Q+A
-10 minute closing remarks

Class Takeaways

Peter Thiel

• Globalization happens through technology

- Globalization often results in greater inequality, not greater equality

o Globalization does not necessarily mean that the world will become increasingly flat

- Globalization often results in massive financial bubbles

o South Sea bubble

o Railroad, car, and radio bubbles (20th century)

o Technology bubble (early 21st century)

- Most recently, globalization fostered three bubbles

o Housing

o Finance
o Emerging markets

- Recent history demonstrates that markets are not necessarily getting more efficient

• The Internet as a mission-critical 21st century technology

- The U.S. government should massively subsidize the Internet in any and all imaginable ways

o The U.S. government should foster the Internet in a manner that is analogous to the role it played in massively subsidizing the mission to put a man on the moon

o Bailing out Internet companies after the technology bust in the early 21st century would have been far more profitable for America and the American peopleon a dollar-by-dollar basisthan the trillions of dollars that the government is currently spending to bail out financial services companies

# The U.S. government failed to develop or slowed innovation among promising Internet companies by not bailing out the industry in the early 21st century

# Instead, the U.S. government created a nation of professionals instead of a nation of entrepreneurs

+The financial services companies get the bailout because the nation is run by finance professionals and not by technology entrepreneurs

- The Internet has become a key strategic asset that is essential to the U.S. competing more effectively with the world

o The U.S. would be wise to not handicap through regulation a key, strategic industry in which it has a competitive advantage

• Internet companies like Google and Facebook are effectively competing against governments that are trying to regulate them

- Bigger Internet companies have more power to push back against corrupt, human rights-violating governments

- Enormous economies of scale to Internet companies and their profitability

• Anti-trust law should be less stringently applied to Internet companiescompared to more stale industriesbecause there is more innovation and disruption in the Internet space

- A car company monopoly (or monopoly that requires significant capital expenditure) is more socially harmful (in terms of deterring innovation) than an Internet company monopoly

- By the time that government becomes aware of Internet monopolies and attempts to regulate them, the problem is likely passed vis-à-vis disruptive innovation
- In order for America to remain a technology leader in the 21st century it either must allow companies to achieve significant profits or it must subsidize companies that produce strategically important technologies

Jonathan Zittrain

• Unintended consequences of business v. unintended consequences of government planning

- Unintended consequences of business = innovation

- Unintended consequences of government planning = negative externalities

• Instead of having monopoly power Internet companies, perhaps there is more social utility and just as much profitability in promoting Internet companies that aggregate small tail transactions in a more federated model

- Facebook owns the platform = inhibits innovation through its monopoly power because of the tremendous network effects that are inherent in its business

- Creative Commons = does not own the platform = acts as an aggregator = encourages innovation

William Fisher

• History demonstrates our inability to predict economic booms and busts

- According to economic historians, economic crashes occur every 19-years

- These 19-year cycles may be the result of sun spots, which also occur in 19-year cycles

o Sun spots affects harvests which, in turn, affects economic productivity!

* Should we subsidize Internet businesses because of their technologically transformative characteristics?

- There is a stronger subsidization argument for Internet infrastructure (e.g., fiber optic lines, public WiFi) as opposed to Internet superstructure (e.g., Facebook)

- There is precedent for government subsidization of infrastructure in the transportation, communication, etc. industries

o Infrastructure can help supply fundamental human needs

- Natural economies of scale → acquire disproportional bargaining power

• What action should government take in regulating mission-critical Internet companies?

- Rather than simply breaking up all monopolies, historical analogies recognize the economies of scale efficiencies of large businesses while simultaneously draping them in requirements that promote competition and innovation; examples include

o Common carriage and interoperability requirements in telecommunications

o Regulation of pharmaceutical prices
o Privacy protections or disclosure obligations

Class Observers: Twitter Feed

• An extensive log of student observations during the class discussion could be found following the class by searching Twitter Search using the "hashtag" #iif

• Outside participants also chimed in with questions during the Q&A portion of the discussion

• Students have used the #iif hashtag throughout the semester. Thus, a current search yields mixed topics as seen here Twitter '#iif' Search

• A MSWord document of "Tweets" sent during the Online Monopolies class discussion can be found here IIF Tweets on Scribd. Highlights include:

-@danray: #iif I'm a designated Twit for IIF class tonight, in which @zittrain debates Paypal founder Peter Thiel. Webcast: [1]
-@danray: #iif Facebook, Google, Paypal, Amazon, and Skype could be called monoplies in their respective core markets
-@debbierosenbaum: #iif @zittrain FTW: "Peter [Thiel], have you ever been introduced by anyone as the person on his far left?" lulz
-@Conor_Kennedy: #IIF The world will reapproach successful Globalization--i.e. a lasting growth in productivity around the world--only through technology -PT
-@Conor_Kennedy: #IIF: Housing, Finance & Emerging Markets the three bubbles of the 90's: Thiel links them all to Globalization
-@Conor_Kennedy: #IIF: Regulatory responses "penalize" the system. Thiel would be happiest if the gov't neither subsidized nor regulated the net.
-@Conor_Kennedy: #IIF: JZ: Adam Smith->Out of entirely self-interested actions there could come an incidental but large social surplus for society at large.
-@danray: Burke: you can't try to change society top-down classic conservatism #iif
-@danray: why no tech bailout? No failed tech company was "too big to fail" #iif
-@debbierosenbaum: #iif did the tech bubble lead to less risk taking and set us up for the housing and LBO bubbles... and their explosion?
-@vranieri: #iif did the tech bubble mean that risky ppl who invested in tech just become the risky ppl in finance? (@zittrain interpreting Thiel)
-@danray: @Zittrain: "Maybe it's not pajama time." #iif
-@Conor_Kennedy: #IIF: JZ worries that the massive power which Google has might have horrible consequences: Google could stop all Google links to Pirate Bay.
-@debbierosenbaum: #iif "it's unclear that small is really always better than big." --PT
-@danray: PT: Big>Small. e.g., Facebook less likely to cave to Iran to release Iranian users' details than small site in Iran itself. (We assume) #iif
-@Conor_Kennedy: #IIF: Peter Thiel might not realize that while AT&T was more than willing to give the NSA wiretap access, Qwest Communications did not
-@arcticpenguin: Google, not Microsoft, is the new evil. #iif
-@debbierosenbaum: #iif "i don't know much about antitrust. all i know is that everything microsoft does is wrong."-- Jason
-@Conor_Kennedy: #IIF: There's a random number generator that decides who is going to get called on for ?s-our organizers have given us all cold call numbers
-@danray: Q: Can't we just look at Facebook's community like a company town, using current law? #iif
-@Rafaelcorrales: @davealevine here's a q for #iif : does thiel see people's longtail actions coming back to haunt them? i.e. hundreds of tweets, emails, etc
-@Rafaelcorrales: Big thanks to @davealevine for asking my question to Peter Thiel. He had a great response, hoping for a more tolerant future, etc #iif
-@debbierosenbaum: #iif: theme 1: booms and busts and frequency. business historians notice depression every 19 years. why? sunspots?
-@debbierosenbaum: #iif: theme 2: subsidize internet businesses? types of businesses? subsidies for infrastructure, not superstructure.
-@Conor_Kennedy: #IIF: Does PT straightjacket the Internet with a hyperrational, economic equation absent any account of the ineffable forces at play online?
-@danray: There are a lot of ways less severe than "break-up" to regulate internet companies price ctrls, IP rights, common carriage commitment #iif

Readings

Required Readings

In preparation for our class discussion, please do the following required readings:

http://www.hoover.org/publications/policyreview/14801241.html The Optimistic Thought Experiment - By Peter Thiel

http://www.theatlantic.com/doc/200905/imf-advice The Quiet Coup - By Simon Johnson

News items/blog posts on Facebook and monopoly power/anti-trust issues:

http://venturebeat.com/2009/04/08/trying-to-analyze-facebooks-latest-statistics-more-status-updates-more-content-sharing/

http://www.facebook.com/topic.php?uid=54964476066&topic=7960

http://www.facebook.com/topic.php?uid=67758697570&topic=7569

http://venturebeat.com/2009/03/31/is-the-big-facebook-advertising-experiment-working/

http://www.thedailybeast.com/cheat-sheet/item/facebook-owns-us-all/friended/

http://www.ft.com/cms/s/0/c62b0e4c-2243-11de-8380-00144feabdc0.html

Additional Reading

Review Professor Zittrain's, The Future of The Internet: And How to Stop It - Future of The Internet

Old Outline

Prior to the class, students had access to this outline: The Internet, Industry and Investing. The original framework for the course discussion was broader, but in planning the course we realized that narrowing the discussion would be beneficial