Last Friday, President Obama signed an executive order announcing the “BuySecure Initiative” to jump-start the adoption of enhanced security measures for financial transactions and sensitive data.  The goal is for financial institutions to implement tools like “chip-and-pin,” which would secure credit, debit, and other payment cards with microchips in lieu of basic magnetic strips, and PINs (like those standard on consumer ATM cards).  While the PIN feature speaks for itself, the microchips soon to be embedded in payment cards allow for dynamic authentication of the card’s validity and account information through strong encryption.

The new executive order was announced during the ongoing National Cyber Security Awareness Month, and comes on the heels of a massive data breach at JP Morgan.  The cyber threat landscape is not pleasant, particularly in the financial sector, but we at DisCo are an optimistic bunch.  We’d like to focus on the silver lining—the proliferation of methods of mobile and online payment, in addition to the long-awaited shift to chip-and-pin, partly spurred by consumer desire for enhanced security in the face of data breaches associated with traditional means of payment.

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Tomorrow night airs the third episode of PBS’s miniseries based on Steven Johnson’s book, How We Got to Now: Six Innovations that Made the Modern World – one of two new books on innovation by best-selling authors that raise interesting questions about the role of intellectual property in promoting technological development. The other is by Walter Isaacson, author of Steve Jobs, who has expanded his scope in The Innovators: How a Group of Hackers, Geniuses, and Geeks Created the Digital Revolution.

Both books place great emphasis on collaborative innovation. And both books place significantly less weight on intellectual property protection than policymakers in Washington. MORE »

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The mainstream media is catching onto the disruption theme we noted in last week’s post on the new HBO and CBS services.

On Friday, we covered announcements from HBO and CBS to offer over-the-top (OTT) video services, independent of cable packages.  Moreover, in addition to HBO and CBS’s recently announced projects, earlier this month ESPN had announced a nine-year deal with the NBA to deliver basketball games via an Internet streaming service, and just this morning Lionsgate and the Tribeca film festival organizer announced their own subscription video-on-demand (SVOD) service.

In all of these packages, the details will matter (and likely vary) greatly, but a review of the headlines shows that journalists have latched on to the potential end of the cable bundle’s reign.

At the New York Times, David Carr writes that the competition and certainty provided by Netflix may have been the catalyst for cable and broadcasting incumbents unpredictably venturing into this new territory:

Netflix pointed a way forward by not only establishing that programming could be reliably delivered over the web, but showing that consumers were more than ready to make the leap. The reaction of the incumbents has been fascinating to behold.

He also used theories about disruptive innovation and competition:

For any legacy business under threat of disruption, the challenge is to get from one room — the one with the tried and true profitable approach — to another, where consumers are headed and innovators are setting up shop.

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In another example of Internet services investing greater resources in protecting content online, Google announced various changes today to search results involving movies and music.  Even as News Corp’s James Murdoch was complaining that Google was not doing more to fight piracy, the search provider was announcing further actions to fight piracy, detailed at length in its updated “How Google Fights Piracy” report.

New developments include Google’s testing of a new ad format to appear directly beneath its search box, which will point users to lawful, authorized platforms for content in the search (assuming, presumably, that there are any).  It has also created a new right-hand panel in search results that points to various options as well.  The company is also tweaking its algorithm to further downrank sites that receive high numbers of DMCA notices, and further limiting what terms and results might appear in “autocompleted” queries. MORE »

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TV is finally catching up with the digital age and catering to new generations of consumers — those who rely on services like Netflix, Amazon, and YouTube for most of their video entertainment.  This week may have been a tipping point for online television, with HBO and CBS announcing over-the-top (OTT) services that don’t require a traditional TV subscription.  HBO’s announcement came on Wednesday, with a product launch expected for 2015, and CBS’s CBS All Access was announced and launched yesterday to 14 cities, with more on the way.  These new offerings should help encourage cord cutting and more competition with established broadcasters and cable companies.

The New York Times has a great run-down of the business and competition issues at stake, even pointing out the classic innovator’s dilemma of whether to cannibalize an existing revenue stream when faced with disruptive innovation and competition:

Television executives are eager to woo those viewers, who often are younger and represent their future audiences. But at the same time, these traditional television networks must perform a careful balancing act to not cannibalize the billions of dollars in revenue they generate each year through existing business models.

The Times also mentioned that this week’s announcements mean that “viewers have more options to pay only for the networks or programs they want to watch — and to decide how, when and where to watch them,” and quoted CBS CEO Leslie Moonves saying that their “job is to do the best content we can and let people enjoy it in whatever way they want.”  But they did not point out that this is the classic formula for reducing piracy.  As DisCo has said over and over (often quoting Kevin Spacey or Netflix executives), making content lawfully conveniently available in the format consumers want reduces piracy.  A stand-alone HBO service is likely to increase the amount of subscribers.  As The Oatmeal explained so well, there isn’t currently a lawful way to watch Game of Thrones for cord cutters.  Giving people what they want — piracy demonstrates market demand — should help convert pirates into customers.  Research confirms this, including studies of Spotify and Netflix entering the market in Norway and Spotify’s introduction in the Netherlands.

This week’s news demonstrates great potential in the market for OTT video, evidenced by Netflix’s meteoric rise and Aereo’s ongoing legal battle.  A recent update from Aereo shows that it is “still standing up for innovation, progress, technology and our consumers,” now willing to even accept MVPD regulation in order to lawfully enter the market for online television.  And on the subject of Aereo, the Times also noted that CBS had been planning this service for more than a year — which means the planning started during the Aereo litigation.  As Moonves told the Times, “I am the old broadcasting guy here,” adding, “I continued to poke holes in it for the last year.”  That’s certainly one way of putting it.

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Even before the landmark United States v. Microsoft Corp. antitrust case, competition law was a bit schizophrenic when it came to the question of interoperability. Monopolists have no general duty to make their products work with those of competitors, but what about the situation where a dominant firm deliberately re-designs products to render them incompatible with others? That is the provocative question raised by several pending antitrust lawsuits filed against Green Mountain Coffee, manufacturer of the Keurig line of single-serve coffee makers and coffee “pod” products.

TreeHouse Foods alleged in a complaint last winter that after its patent on “K-Cups” expired in 2012, Green Mountain:

abused its dominance in the brewer market by coercing business partners at every level of the K-Cup distribution system to enter into anticompetitive agreements intended to unlawfully maintain Green Mountain’s monopoly over the markets in which K-Cups are sold. Even in the face of these exclusionary agreements that have unreasonably restrained competition, some companies, such as TreeHouse, have fought hard to win market share away from Green Mountain on the merits by offering innovative, quality products at substantially lower prices. In response, Green Mountain has announced a new anticompetitive plan to maintain its monopoly by redesigning its brewers to lock out competitors’ products. Such lock-out technology cannot be justified based on any purported consumer benefit, and Green Mountain itself has admitted that the lock-out technology is not essential for the new brewers’ function.

In the consolidated multi-district litigation that ensued, Green Mountain is specifically charged with designing a so-called “Keurig 2.0″ brewer which features technology that allows it to detect whether a coffee cartridge is one of Keurig’s K-Cups or is made by a third party that does not have a licensing agreement with the company. The machine will not brew unlicensed coffee pods.

The federal court overseeing the MDL cases denied the plaintiffs’ motion for an injunction on procedural grounds in September, issuing an opinion which reasoned that commercial success of the “2.0” brewers was uncertain and that coffee competitors would still have open access to some 26 million Keurig “1.0” machines for several years. In other words, the court did not reach the merits of the monopolization claim against Green Mountain.

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So where does that leave Keurig? As Ali Sternburg observed before revelations of its new 2.0 technology, Green Mountain’s prior 20 years of patent protection allowed the company to build a competitive advantage by “cultivating its brand (which likely involves trademark protection), honing its supply chain efficiencies, and generally maintaining its dominance due to having the first-mover advantage.” More than ten years before those patents first issued, moreover, the federal courts had ruled that new product introductions by monopoly firms — in one well-known instance, Kodak — would not be considered an antitrust violation because “a firm that pioneers new technology will often introduce the first of a new product type along with related, ancillary products that can only be utilized effectively with the newly developed technology.”

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Drones are leaving the U.S. for greener pastures, according to several media outlets (e.g., WSJ and Bloomberg).  In response to slow-moving U.S. domestic policy on commercial drone use, innovators are moving abroad, to jurisdictions where regulations have been updated to delineate when drones may be used in the commercial context.  (Keep in mind, we are not talking about fixed wing Predator drones with Hellfire missiles, but aircraft that are already available commercially with much of the same technology already incorporated into our mobile phones.)  Besides smaller companies actually moving abroad to places where they can sell their wares, even the likes of Google and Amazon have moved their drone testing to Australia and India, respectively.

Making matters worse, export control policies are poorly targeted, and prevent some drones made with widely available technology built in the United States from being sold overseas.  In fact, according to the Wall Street Journal, 3D Robotics — a San Diego-based company that specializes in drones with video capability — was only allowed to resume selling some of its products in a number of countries because the drones were manufactured in Mexico:

Export rules prompted 3D Robotics to temporarily halt shipments to 44 countries this spring. It has since secured a new classification from the U.S. Commerce Department, in part because it manufactures its drones in Mexico, allowing it to resume foreign sales.

And for those inclined to view this as a minor development in a niche market, at least one study predicts that allowing commercial drone use in the United States could create 100,000 new jobs and $82 billion in economic impact over the course of the next decade.

A lot of smart people have already said a lot of smart things about the drone situation, so I won’t delve too deeply into the nuances of streamlining commercial drone policy making.  Clearly, there are good reasons why commercial drones can’t take to the sky without some rules, but it is imperative that regulators move efficiently to establish a framework where, for example, a real estate agent or a surveyor can survey a property with a drone (in the same way it is currently legal for a non-commercial user to fly an off-the-shelf drone in her backyard).  That is not happening now.  According to the Department of Transportation’s own Inspector General, the FAA is likely to miss its Congressionally mandated deadline in coming up with rules that allow for the expansion of commercial drone use.

There’s a general point here worth expanding on: even if a country does everything right, creating a fertile environment for research, investment, and innovation (aka the hard stuff), innovation will nevertheless move overseas if outdated regulations impede the lawful sale or use of a product or service.  It does not matter if the United States has the brightest minds, best expertise and easiest access to venture capital; if you can’t sell, test or export drones here, then we will see those jobs and that talent go overseas to more fertile ground.  In fact, this is already happening.  And even if the FAA eventually comes up with a workable set of regulations that allow commercial drone activity, in fast moving industries — where first mover advantage is enormous — bureaucratic delays can be terminal.

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A Few German Publishers Claim that Online Services Have No Choice But to Show a Short Extract… And Pay For It 

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Can you violate someone’s rights by not infringing their rights? According to some German press publishers, this is precisely the case after Google’s announcement that it will no longer display snippets and thumbnails from content owned by publishers who are represented by VG Media, a collecting society. This follows the introduction of the Leistungsschutzrecht, a new ancillary copyright, by the German Government in 2013 (which this blog covered here, here and here).  Under the new ancillary copyright law, the display of news snippets in search is restricted — a departure from international copyright law, which provides for a right to quote.  VG Media, who represents some of the press publishers that most vocally lobbied for the law, has gone as far as saying that the search provider is now ‘blackmailing’ them. MORE »

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The unintended consequences of well-meaning regulation is a theme we discuss frequently here on DisCo.  (Note: This is different than cynical, anticompetitive regulations that are pushed under the guise of well-intentioned “consumer protection”, which is another recurring DisCo topic.)

In that vein, I filed comments on behalf of CCIA discussing the potential impact of new proposed regulations by the Department of Transportation aimed at requiring airlines to disclose the full cost of travel up front (instead of playing hide the ball with a litany of added fees).

The aim of this rulemaking is noble and economically sound. Econ 101 tells us that competition works best when certain conditions are present.  One of those conditions is that “perfect information” is available to consumers and producers.   The principle is that markets work best when everyone involved knows the full price up front and can assess their options before purchasing.  (Obviously, “perfect” is an ideal on one side of a continuum.)  In fact, this is an area where all sides of the political spectrum should agree — at least in theory.  Narrow rules that increase pricing (and quality of service) transparency would help the free market work better, and decrease the need for regulation, as consumers would be better able to discipline market participants with their consumption decisions.  In English that translates to: if airlines are screwing consumers on price or quality, and consumers know that up front, they can purchase a ticket on another airline, making that airline less likely to screw customers.   Hence, the “disciplinary power” of a well functioning market.  (Now, it is an entirely different debate as to whether the airline market is competitive enough given the recent wave of airline consolidation and the market’s unique structure, but that is an argument beyond the scope of this post.  No matter how competitive that market is right now, it is difficult to argue with the contention that better pricing information up front will make it work better.)

However, while “open data” is a good thing, regulations that go further than requiring a standardized output of raw data, governing how data is displayed by third parties, would be unwise.  As the growth of the Internet economy has illustrated, the packaging and display of information to consumers is an important sector of economic activity where new participants and innovation currently abound.  Locking in a particular type of display or presentation would slow growth and harm competition in the metasearch market.

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If you haven’t had your daily fill of irony yet, let me tell you about the Euro-skeptic, free marketeer news organization appealing to European regulators to guarantee “fair returns” in the wake of Internet-driven disruption.

On Wednesday, News Corp released a letter from its CEO Robert Thomson to the EU competition commissioner Joaquín Almunia, criticizing Google and championing regulators to act against the search provider, following similar demands by the news publisher’s European peers.  Unfortunately, Thomson’s letter received about as much fact-checking as a News Corp tabloid.  (Jeff Jarvis has already annotated the letter’s “staggering” “willful blindness to irony” on the News Genius platform).

News Corp publications have championed tech disruption before, but apparently those principles go out the window when News Corp is the one being disrupted.  In fact, News Corp’s own Wall Street Journal previously complained that Google had become its competitors’ “piñata,” who were demanding “a regulatory veto” notwithstanding the fact that they “haven’t demonstrated any economic harm” stemming from the search provider.  Yet this week, News Corp itself jumps into the piñata party, waving the European banner. MORE »

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