HELLERSTEIN TELECOM & TECHNOLOGY REVIEW- June 1, 1999- Insight on Electronic Commerce

Welcome to the June 1999 issue of the HELLERSTEIN TELECOM & TECHNOLOGY REVIEW, a monthly freenewsletter covering significant industry and regulatory developments in the telecommunications and technology industries. The newsletter is published by Hellerstein & Associates, a telecommunications and technologyresearch group that provides its clients with a competitive edge through market research, competitive intelligence,and regulatory analysis of broadband access and competition policy issues.

NOTE: The Hellerstein & Associates Website is located at www.jhellerstein.com. Please keep the suggestionscoming and send all comments or suggestions to Judith Hellerstein at Judith@jhellerstein.com.

This month's issue will focus on some of the insight gained at a recent Berkeley Roundtable on the InternationalEconomy (BRIE) conference held on May 27, 1999. The BRIE conference provided an international dimension tothe May 25-26 Department of Commerce's Understanding the Digital Economy: Data, Tools, and Research. One of the most interesting topics discussed at the BRIE conference were the problems of applying traditional intellectualproperty (IP) laws, such as patent and copyright protection, to a digital economy. Another interesting topicdiscussed was on how work on APIs (application program interfaces) are changing the future of communicationsand information exchange.

Intellectual property rights, specifically the granting of patents and copyrights, were created to protect the creatorsof intellectual property in a society that was basically agrarian and manufacturing. In the US one of the goals ofintellectual property laws is to guarantee and protect property rights to information to encourage market actors tocreate and disseminate information. Hand in hand with this policy is the federal, state, and local government'sdirect participation in the generation and dissemination of information. Information policy in both of these areasreflects the tension between the problems and issues inherent in the marketplace and the needs of the governmentfor abundant and widely available information from a variety of sources. IP laws secure investments in theproduction and dissemination of information. Without this protection, free riders would benefit from investmentsmade by the initial creator. Ultimately, if no protection is given, there would be no incentives for investments in theproduction of new information products. IP law places significant limits on the duration and the scope ofproprietary control of information, insisting that the bulk of privately generated information must ultimately be inthe public domain.

Pamela Samuelson, a Professor at Berkeley, discussed the several challenges that the US faces in moving to adigital economy. The first challenge the US faces is whether the patent systems as it is constructed today is validfor today's digital economy. Recent laws have resulted in a fundamental shift toward what can best be termed thecommodification of information. As a result, we are seeing the gradual erosion of what information is in the publicdomain in favor of more expansive private control over information. Although, some protection of information isneeded in a society that is becoming more and more centered around information, and as technological advancesthreaten the ability of creators to protect informational assets; However, we seemed to have moved too far and toofast, threatening the creativity and innovation of many individuals and companies. Today's information policyappears to be moving towards a more market based regime where access to information is increasingly predicatedon market transactions--what you can and are willing to pay for. This action threatens the creativity and innovationthat have brought us into todays digital economy. More and more, people are seeking and gaining patents forprocesses or ways of using information that had been previously in the public domain. The granting of patents onthese traditional means of using information threatens to stifle creativity and innovation. Information is not just acommodity but an integral component along with knowledge, and innovation that are central to US democraticvalues. Microsoft is guilty of this in seeking and obtaining a patent on style sheets, a technology that is basically aset of interfaces describing how documents are presented on the Web. Rather than continue to work with theindustry trade group, the World Wide Web Consortium, which was close to finalizing a publicly available standardfor these very same type of style sheets, Microsoft decided to circumvent the process and obtain a patent covering asimilar process.

If this trend continues and if the Patent and Trademark office continues to grant patents on more and moreinformational processes, the US could witness a severe slow down in the growth of electronic commerce as peopleeverywhere will not be able to experiment and try out new ideas without having to worry if they are trampling onsomeone else's IP rights. A patent has the effect of slowing down competitors and with the Internet, slowing downa competitor for a year is equivalent to putting them out of business or preventing them from going ahead with theiridea. Moreover, even if companies are aware of the existing patents, companies or individuals will have toreallocate essential capital that is critical to their invention's or start-up success to purchase rights to use differentprotected processes, instead of putting that money directly into the business. These issues highlight the urgency inupdating current intellectual property laws to reflect the new public policy goals of a digital economy.

These issues highlight the inherent tension government officials face between protecting the values that have grownup under past regulatory frameworks and the stated policy goals of promoting the free dissemination of informationas well as competitive and technology neutrality.

A second challenge is how the US can preserve long standing social values in the face of cultural issues, such asprivacy and security of data, and how it can develop protection systems for transnational corporations. Samuelsonurged government officials to recognize that the IP protection systems that worked so well in the past and providedthe needed protection to innovators, are having the opposite effect in today's digital economy. Innovation in thedigital economy is very different than in a manufacturing one and requires a different type of protection framework.She suggested that the government conduct a study to determine the needs of creators and innovators in the digitaleconomy and then create laws that encompasses these specific needs.

Another challenge Samuelson cited is how best to devise an appropriate response to an area that is currentlyunderprotected. Traditionally responses have tended to veer towards overprotection only to be struck down later bythe courts, the Consumer Decency Act is one example. The European Privacy law is another example of a lawwhose goal and aims were correct, but one that went too far in its zeal to protect consumers. Hellerstein &Associates believes that the protection of privacy and security of information are essential and critical, but should bethe responsibility of the industry and not the government. Government intervention in the marketplace distorts theworking of the market and often has the opposite results. The surest road to ensuring protection is to let thecompetitive market function, with the government standing on the sidelines providing guidance and support whennecessary.

A fourth challenge Samuelson mentioned is how to adopt a simple and minimalist approach to protection of IPwhich is technology neutral, relying on rules that are guided by a set of principles, rather than a hard and faststructure. The best laws are ones that are simple and can be adapted, just as one upgrades a computer by addingdifferent parts or components, one can update or modify laws as needed. Samuelson argued that the US appears tobe failing in this matter as it recently adopted a new law that besides being extremely confusing and complicated,also redefines certain key terms differently than they are defined and used in the marketplace.


APIs are the paths into and out of the operating system that programmers must follow for their software--Internet browsers, picture editing, communications, multimedia applications, spreadsheets. The control over APIs is at the heart of the Microsoft antitrust trial and also at the heart of new smart communication devices, ie, mobile devices that integrate voice, data, and multimedia applications that are being created. As we see in the Microsoft trial, competitors to Microsoft have argued that they are at a disadvantage because Microsoft only gives them rudimentary maps of the Windows APIs, thereby making it impossible for them to compete with Microsoft's own programmers in designing new applications. A similar concern was voiced at the BRIE conference. Although US companies are heavily involved in creating many of the APIs that will be used in electronic payments through credit cards and security gateways, they are not active at all in APIs being created for payment systems using smart cards or in smart communicators. Smart cards have never taken off in the US, thus US companies have not gotten involved as they should be in the development of APIs for these type of payment systems. Stuart Feldman from IBM stated that unless US companies begin to become more involved in the development of APIs for these type of electronic payment systems they risk losing their competitive advantage. The Microsoft trial has shown that whoever creates or controls the APIs has the upper hand in creating applications that will use these APIs. Feldman also called for more US company involvement in APIs being created in Europe for smart communicators. In the upcoming years as the convergence of the communications, broadcasting, wireless, computer, satellite, and cable industries is complete these smart communicators will begin to supplant the traditional mobile phones and also PCs for Internet traffic. Feldman is correct in his pleas for more US company involvement in the API creation process. The Microsoft trial has highlighted the enormous first mover advantages that can be gained by being involved in the development of APIs and companies who choose to ignore this lesson will likely suffer the consequences.

Hellerstein & Associates is interested in learning what its readers think of these issues. Please send all comments directly to Judith Hellerstein at Judith@jhellerstein.com. If you would like more information on this topic please e-mailJudith Hellerstein at Judith@jhellerstein.com.

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Hellerstein & Associates is a telecommunications and technology research group that provides its clients with acompetitive edge through market research, competitive intelligence, and regulatory analysis on broadband accessand competition policy issues. We look forward to hearing from you and will strive to meet all topic requests.Redistribution of this newsletter is encouraged provided it includes this paragraph.

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