Competition

The strangely named Rockstar Consortium has been in the news again, in part because some of its members just formed a new lobbying group, the Partnership for American Innovation, aimed at preventing the current political furor over patent trolls from bleeding into a general overhaul of the U.S. patent system. Yet Rockstar is perhaps the most aggressive patent troll out there today. Hence the mounting pressure in Washington, DC for the Justice Department’s Antitrust Division — which signed off on the initial formation of Rockstar two years ago — to open up a formal probe into the consortium’s patent assertion activities directed against rival tech firms, principally Google, Samsung and other Android device manufacturers.

Usually the fatal defect in antitrust claims of horizontal collusion is proving that competing firms acted in parallel fashion from mutual agreement rather than independent business judgment. In the case of Rockstar — a joint venture among nearly all smartphone platform providers except Google — that problem is not present because the entity itself exists only by agreement among its owner firms. The question for U.S. antitrust enforcers is thus the traditional substantive inquiry, under Section 1 of the Sherman Act, whether Rockstar’s conduct is unreasonably restrictive of competition.

Rockstar Consortium logo

Despite its cocky moniker, Rockstar is simply a corporate patent troll hatched by Google’s rivals, who collectively spent $4.5 billion ($2.5 billion from Apple alone) in 2012 to buy a trove of wireless-related patents out of bankruptcy from Nortel, the long-defunct Canadian telecom company. It is engaged in a zero-sum game of gotcha against the Android ecosystem. As Brian Kahin explained presciently on DisCo then, Rockstar is not about making money, it’s about raising costs for rivals — making strategic use of the patent system’s problems for competitive advantage. Creating or collaborating with trolls is a new game known as privateering, which allows big producing companies to do indirectly what they cannot do directly for fear of exposure to expensive counterclaims. Essentially, it’s patent trolling gone corporate. As another pro-patent lobbying group said at the time, Rockstar represents “a perfect example of a ‘patent troll’ − they bought the patents they did not invent and do not practice; and they bought it for litigation.” Predictiv’s Jonathan Low put it quite well in his The Lowdown blog:

The Rockstar consortium, perhaps more appropriately titled “crawled out from under a rock,” is using classic patent troll tactics since their own technologies and marketing strategies have fallen short in the face of the Android emergence as a global power. Those tactics are to buy patents in hopes of finding cause, however flimsy, to charge others for alleged violations of patents bought for this purpose. Rockstar calls this “privateering” in order to distance itself from the stench of patent trolling, but there are no discernible differences.

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(Cross-posted from Patent Progress)

Apple has been an odd player in the patent debate. On the one hand, it’s the company that gets sued by patent trolls more than any other. As a result, it supports most of the patent reform bill, and Apple uses the Covered Business Method (CBM) program far more than any other company. (As of today, Apple has filed 17 CBM petitions, while the next biggest user of CBM, Liberty Insurance, has filed only 10 CBM petitions.)

On the other hand, Apple is using its own software patents to go after Samsung. And Apple strongly opposed any expansion of the CBM program, apparently for fear that Samsung might use it to challenge Apple’s patents.

This schizophrenic approach to patents might explain why Apple didn’t file an amicus brief in the Alice v. CLS Bank case: Apple is victimized by software patents more than anyone, but it needs its software patents to try to crush Android.

Apple’s whole approach seems strange. In its case against Samsung, Apple is demanding around $40 per phone, even though all the accused features are part of Android. Android is free. And the software patents Apple is using are questionable at best.

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At the end of 2013, Project DisCo hosted its first physical world event, The Disruptive Competition Policy Forum.  Over the next few days, we are going to post the videos of the great panels and keynotes here.

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Google’s competitors “are locked in hand-to-hand combat with Google around the world and have the mistaken belief that criticizing us will influence the outcome in other jurisdictions.” — (Former) FTC Chairman Jon Leibowitz, Jan. 2013

The coalition of companies that for years has unsuccessfully been pressing antitrust complaints against Google for search “abuse” — FairSearch.org — insists Google must be restrained for fear the Mountain View company will steer search users to its commercial products, like flight bookings. The group’s most recent publicity event, held at the ABA’s Antitrust Section annual spring meeting last week, repeated those same claims. FairSearch ventured as well into new ground, attacking what it terms Google’s unreasonably restrictive Android licensing practices.

There are four straightforward reasons FairSearch is wrong.

1.  Predictions of Foreclosure Have Proven Totally Baseless.

When Google purchased travel software maker ITA in 2011, FairSearch maintained that Google would exploit its control over the ITA tools that power other online travel agencies, along with many of the airlines’ own sites, to usher competing search services off the stage, then jack up ad rates for travel queries and favor flights from particular airlines. google-eu-antitrust Three years later, nothing like that has happened. In fact, Google Flight Search is not among the top 100 or even the top 200 travel listing sites. Rather, it’s in 244th place, behind Hipmunk, with just .04% of travel queries. Real-world experience, in other words, reveals that the predicted competitive risks on which FairSearch bases its advocacy are both hypothetical and fanciful. MORE »

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This article concludes our mini-series on the opportunities and challenges of cloud computing in the developing world. Previous posts covered the following topics:

Having discussed the potential of cloud computing for development and the downsides of forced localisation, let’s now look at the communication strategy of the Internet industry on these issues.

For some time, the US and Western business community has warned against the dangers of local hosting requirements in international trade fora. They did so for the right reasons and they did it forcefully. However, in light of continued US dominance of the cloud and in the wake of the surveillance revelations, I would argue that their approach may, in fact, be counterproductive. The problem here may not be the message but the messenger.

On a general level, a narrow focus on forced localisation by Western industry can sound to policymakers in the developing world like a bumper sticker slogan, which fails to address legitimate policy concerns. To (ill informed) Governments it can sound like a pretext to further cement US dominance of the Internet or, worse, an attempt to circumvent local laws. Also, advising developing countries to stay away from forced localisation can come across as deceptive since many Government agencies in the West actually demand their data to be hosted locally (e.g. Google vs City of Los Angeles).

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This post is part of a series on the opportunities and challenges of cloud computing in the developing world. Previous posts covered the following topics:

ICTs are generally among the most restricted of all industries when it comes to forced localisation. They suffer from virtually all types of localisation barriers, from local production requirements to local content requirements. With regards to the cloud, the two most relevant localisation barriers are IT infrastructure requirements and data storage requirements (e.g. forced localisation). The use of those two barriers increased significantly in the past few years.

Local IT infrastructure requirements are designed to force Internet companies to establish data centres and other infrastructure within the country as a condition to be granted access to the local market. A number of countries have adopted such laws or are considering them, including Brazil, China, Indonesia, Nigeria, Norway, Malaysia and Vietnam.

Norway and Denmark, for example, introduced laws in 2010 that stop municipalities from using cloud services unless the servers are located in-country. Meanwhile in Brazil, the original draft of the ‘Marco Civil da Internet’ included a provision to force Internet companies to “install or use structures for storage, management and dissemination of data in the country”. That’s similar to a new law introduced by the Vietnamese Government this summer, which will require Internet companies to keep at least one server in Vietnam to service the local market. Indonesia, on the other hand, intends to go one step further than that: If adopted, a proposed new law will mandate all data carriers including foreign banks operating in Indonesia to establish local data centres.

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This post is part of a series on the opportunities and challenges of cloud computing in the developing world. The previous post covered the transformative potential of the cloud and the different types of cloud services.

Let us now turn to the economics behind the cloud. It’s a tough, fast-moving business involving substantial investments, and, most importantly, cloud services are effectively competing in a global marketplace. The ‘borderless’, instantaneous nature of online communications means that cloud services can be provided from anywhere in the world, creating almost perfect markets in some areas. At least technically, competition is just a click away. That’s particularly relevant in an environment where many of the competing services are “free” to end-users (supported through ads, donations or other business models).

At the heart of any cloud business is computing power and this is where the economics of data centres come into play. To be able to offer high performing, global services, cloud providers need to be able to exploit economies of scale. Having fewer, larger data centres increases operational and hardware efficiency because the larger a data centre, the less inefficiencies it creates in power and cooling. Also, larger data centres tend to allocate staff resources more efficiently.

Let’s first look at energy, which is one of the fundamental cost factor of data centres. In an average facility, power consumption contributes up to 40% of the annual operating budget. What makes this particularly relevant is that unlike other inputs, such as hardware, which are effectively global commodities, the price and quality of energy varies widely. Not surprisingly, then, energy considerations are one of the main drivers in the selection of data centre locations.

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This post is the first in a series of articles on the opportunities and challenges of cloud computing in the developing world.

It’s worth reminding ourselves that innovation is an inherently uncertain business. Its disruptive potential depends to a large degree on the social and economic context into which it is born. Groundbreaking inventions remain unsuccessful because no market has developed yet or because people simply don’t see the value. “Television won’t be able to hold on to any market it captures after the first six months. People will soon get tired of staring at a plywood box every night”, film mogul Darryl Zanuck of 20th Century Fox famously said in 1946. At the time, 8000 U.S. households had a TV set. By 1960, that number had climbed to 45.7 million.

Also, whereas the potential of disruptive innovations may not be apparent at first, its negative effects, e.g. copyright infringement, are immediately visible and can go against powerful, established interests. Economists call this the ‘innovation asymmetry.’

Other inventions become successful for uses that are different from what they were originally designed for. One such example is the smartphone, branded initially as a status toy for the urban elites, which has become the entry point to the Internet for billions of people in the developing world. The same may be true for cloud computing.

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If you are a reader of DisCo, you undoubtedly know about the fight between Tesla and independent auto dealers.  To sum it up, independent auto dealers have successfully lobbied for laws in nearly every state that prevent manufacturers from operating their own dealerships (i.e. auto manufacturers must use an “independent” dealer to sell cars to consumers) – thus protecting the dealer’s privileged economic position as the middleman in the auto distribution chain.

Therefore, today’s news that the New Jersey Motor Vehicle Commission, with the backing of Governor Christie, reversed its previous course and voted to ban the direct sales of automobiles in New Jersey should not come as a surprise to anyone.  Unfortunately for New Jersey consumers, this puts Tesla’s future expansion in the Garden State in serious doubt and casts a shadow of uncertainty over the two stores it currently operates in New Jersey.  As the company describes the situation in its blog:

Since 2013, Tesla Motors has been working constructively with the New Jersey Motor Vehicle Commission (NJMVC) and members of Governor Christie’s administration to defend against the New Jersey Coalition of Automotive Retailers’ (NJ CAR) attacks on Tesla’s business model and the rights of New Jersey consumers. Until yesterday, we were under the impression that all parties were working in good faith.

Unfortunately, Monday we received news that Governor Christie’s administration has gone back on its word to delay a proposed anti-Tesla regulation so that the matter could be handled through a fair process in the Legislature. The Administration has decided to go outside the legislative process by expediting a rule proposal that would completely change the law in New Jersey. This new rule, if adopted, would curtail Tesla’s sales operations and jeopardize our existing retail licenses in the state.

The larger problem for Tesla is that the independent auto dealer model that has been statutorily enshrined in the majority of states thanks to the political influence of the car dealer lobby does not work well for the company.  As a company that, at least right now, only sells a little more than 20,000 vehicles a year (compared to 15.6 million cars sold annually in the United States), they don’t have the scale to support a nationwide network of dealers.  Furthermore, as Tesla’s CEO has previously referenced, Teslas are competing directly against nearly all the other gasoline powered inventory on the dealers’ lots.  Would independent dealers really be fully vested in disparaging the majority of their inventory in order to sell a few Teslas?  Probably not.

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The Oscars this past Sunday night demonstrate the continuing vibrancy of the film industry, notwithstanding dire declarations of the harm online infringement causes.

The film industry is increasingly global, both in production and distribution. 60% of the industry’s $26 billion total gross in 2013 came from outside of the United States. The international box office is up 32% over the past five years.

Awards and nominees were similarly international. The winning movies 12 Years a Slave and Gravity were helmed, acted, and designed by numerous British and Mexican artists (e.g., Steve McQueen, Chiwetel Ejiofor, Benedict Cumberbatch, Mark Sanger, Alfonso Cuarón, Emmanuel Lubezki, among others). Gravity’s Oscar-winning director and editor, Alfonso Cuarón, delivered part of his acceptance speech in Spanish. Australians like Cate Blanchett won in three categories, and Europeans also dominated the live action and animated short awards.

The film industry is promoting a new generation of actors to appeal to new audiences. While some of the nominees in the best actor categories are industry veterans (e.g., Judi Dench, Meryl Streep, Sandra Bullock, and Julia Roberts), the industry is promoting a new generation of stars to compete for the attention of young audiences. For example, 23 year-old Jennifer Lawrence won the Best Actress award last year for Silver Linings Playbook and was nominated for Best Support Actress this year for American Hustle. At the same time, she starred in the two Hunger Games movies, which have grossed globally over $1.5 billion.

The film industry is embracing new technologies. Director Alfonso Cuarón delayed production of Gravity until technology could be developed to create the stunning visual effects that made the actors appear as if they were drifting weightless in space. Innovative uses of technologies such as 3-D, computer graphics, and digital sound provide audiences with fresh experiences that encourage them to go to the movies. The industry encourages the development of new technologies both through investment and recognition in a special awards ceremony.

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