Parasite Technologies and Non- Creative Destruction

Parasite Technologies and NonCreative Destruction Academic Advisory Council Bulletin 1.2 , March 2006 by Stan Liebowitz *

Old technologies are driven out by new technologies. Horses and buggies were replaced by automobiles, tubes by transistors, and vinyl records by CDs. This is just Schumpeter’s Gale of Creative Destruction, and we are all the better off for it. Because the owners of the old technology are usually harmed by new technologies, they will often attempt to subvert the new technology, frequently with the help of the government. A historical example of such subversion was butter producers championing laws making it illegal for margarine producers to make their spread look like butter by coloring it. Economists are often taught a litany of such attempts to thwart the will of the market and, fortunately, are often trained to excoriate efficiency-inhibiting rent-seeking behavior of this type. Nevertheless, it is undeniable that new technologies generally have both positive and negative impacts. Automobiles, although they were clearly a superior technology, did destroy the horse and buggy industry. The harm to old producers should be included in any ledger of costs and benefits, but for automobiles as well as most other new technologies, the benefits far outweighed the costs. Luddites, of course, might see it differently. Not all new technologies have benefits that outweigh the costs. A new fabric that merely made it more difficult to detection weapons at x-ray facilities, for example, would not improve society’s lot. A new technology that allowed anyone to quickly and cheaply weaponize deadly bacteria would not be an instance of creative destruction, not in the Schumpeterian sense. Nor is it likely that a new technology *

Stan Liebowitz is Professor of Managerial Economics at the University of Texas at Dallas and Director, Center for the Analysis of Property Rights and Innovation School of Management and is a member of the IPcentral Academic Advisory Council. The views expressed are the author's own. Comments on this piece may be sent to [email protected]. Comments and responses may be posted on the IPcentral Weblog.

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capable only of destroying the earth itself would be thought to have the beneficial aspects that we associate with progress. These are examples where technology promotes physical destruction. But there are also technologies that do not cause any physical destruction and yet can be equally devastating. These would be technologies that destroy property rights. What is often not understood is that without property rights, civilization would come to an end. Although this statement may sound extreme, it is important to understand that without property rights there would be no cultivation of crops, no building of factories, and no trade. Why bother to invest and produce when you cannot get to enjoy the fruits of your labor? A hypothetical example to bring clarity to this claim comes from Star Trek. In the original Star Trek, Scottie was always using a ‘transporter’ to beam Captain Kirk down to alien planets and then back up (“Beam me up, Scotty!), and also to move supplies. What if a “physical matter transporter” actually existed? Such a transporter could be a great boon to mankind, replacing, as it should, inferior shipping techniques, such as trucks, railroads, and planes. But what if there was no trace with which to detect the destination of the moved matter? If the transporter were used, as it could be, by a large number of individuals to steal products from retailers, wholesalers, factories, and even other individuals, without payment, the transporter, in this use at least, would destroy property rights. In this use the transporter technology is parasitic. It would threaten the entire economy and carried to its extreme, such a device would lead to the dissolution of the entire economy and modern society as we had hoped to know it. Beam me out of here, Scotty! Of course, it is not just the technology, but the way it is used that would cause such problems. Giving people the ability to steal doesn’t mean that they will steal. Nevertheless, all societies have placed sanctions on theft, because they understood that they could not remain a society if theft were a common way of life. A technology that makes theft anonymous and untraceable, however, would prove difficult for moral suasion and social norms alone to keep in check. Which brings us to the main subject of this little essay. A few months ago I gave a presentation to an audience of economists and lawyers knowledgeable about telecommunications issues. I made what I thought was an innocuous statement about a hypothetical hard-drive based video recorder (lets call it TIVO) that allowed users to virtually remove at zero cost to themselves all commercials from advertising based television. I further assumed, for the hypothetical, that the only use for the TIVO was to record advertising based television. I suggested, making assumptions typical of economists—that market behavior reflects social value— that if such a machine were used by all television viewers to eliminate all television commercials, the commercial elimination component, indeed the 1 444 Eye St reet NW , Sui te 50 0, W ashi ng ton, D C 20 005 | p hone: 2 02- 289-8 928 websi te: h ttp://i pcen tral . i nfo | e mai l : advi sory @i pcent ral . i nfo

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recording device itself, would be harmful to television viewers and harmful to society. I suggested that under such circumstances society would benefit if such the commercial-avoidance device could be deleted at a reasonable cost (not necessarily the entire TIVO, but the component that made it easy to remove commercials), or if necessary, the TIVO itself removed. Obviously, if there were other uses for the device beyond recording advertising based broadcasts the issue becomes more complex. By couching the example as I did—complete removal of commercials by all viewers, a single use for the product, low cost of removing the offending technology—I thought I had made this conclusion staggeringly simple. After all, it is better to have a market that gives consumers a slightly restricted version of what they wa nt than to have no market at all. Yet many members of the audience did not seem to accept the claim at all. Instead, several individuals claimed that the TIVO was a superior technology that just happened to be making life difficult for that old fuddy-duddy technology called broadcast television and, further, we should celebrate the fact of new technologies replacing old technologies. It was suggested that perhaps I didn’t believe in creative destruction, or that I was really a Luddite disguised as a freemarket economist. [Note that prohibiting parasitic invention is not the paternalism one usually finds, where the government tells people they can’t do what they want to because the government knows what is best for each of them individually, such as mandatory seat belts or requiring prescriptions for drugs. Instead, it is more like a law against going through red lights which presumably benefits us collectively even if not in all individual cases.] But the TIVO is not a replacement for broadcast television and it is not a replacement of an inferior technology with a better one. The hypothesized TIVO can be thought of as a parasite technology, a technology that feeds off another and only exists when the first technology exists. Evolutionary forces normally wipe out parasites that destroy their hosts, but human creations do not follow these evolutionary principles. A technological parasite is more like a lethal virus making its rounds before it mutates into something else. Normally we would think of the TIVO as a complement to television since it enhances the viewing experience and we would also think of television (including broadcasts) as being a complement with the TIVO. But the TIVO is not a complement with the product that is actually transacted in the advertising-based broadcast television market. The product being transacted is the advertiser’s contact with the viewer, not the broadcast itself. The viewers of broadcast television do not pay for broadcast television—advertisers do. The consumers in 1 444 Eye St reet NW , Sui te 50 0, W ashi ng ton, D C 20 005 | p hone: 2 02- 289-8 928 websi te: h ttp://i pcen tral . i nfo | e mai l : advi sory @i pcent ral . i nfo

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the broadcast television market are the advertisers and TIVOs do not enhance the value derived by advertisers. In fact, it is quite the opposite—TIVOs reduce the value to advertisers. Complete use of TIVOs to remove all advertisements reduces the value derived by advertisers to exactly zero. How do we know that viewers are worse off in the TIVO example? The answer is quite simple. Prior to the TIVO, when viewers could not easily avoid commercials, they were willing to accept the inconvenience of commercials in order to experience the benefits of watching the program. Viewers gained net utility from the programs even when the programs contained the commercials, otherwise they would not have watched. Advertisers also gained, or they would not have paid for advertising . The hypothesized use of the TIVO tilts that balance so that everyone loses (except perhaps for TIVO hardware producers). If viewers believed that their individual elimination advertisements would directly set in place a process that would then remove their ability to watch the broadcast signal, they would refrain from eliminating advertisements. In the real world each viewer thinks they can free ride off of other viewers and so each viewer adopts the TIVO because the ideal situation for an individual viewer would be to eliminate commercials and still be able to watch the programming. Of course, someone needs to pay the piper. It is possible to object to a policy forcing the removal of the machine’s ability to delete commercials, based on various political or moral reasons, but the economic conclusion that viewers are better off with commercial deletion deleted is unambiguous. The reason, in economic terms, that the hypothetical TIVO caused such harm, was that it weakened property rights. It eliminated the broadcaster/advertiser ‘property right’ to the audience-contact that otherwise would have been made. All technologies that break the linkage between usage and payment are parasitic in this way. Of course, it isn’t just the possibility that counts; it is the actuality of breaking this linkage. The VCR had the capability of removing commercials on a large scale but the percentage of commercials removed by VCRs turned out to be trivial. Nor do we know with certainty that a TIVO-like device would be used at a sufficiently high rate to cause great damage, although there is some evidence indicating that its use would be far greater than was that of the VCR. Understanding the difference between productive and parasitic technologies is important right now because there are technologies coming round the bend (other than TIVOs) that have some of these parasitic characteristics and that might be used on a large scale.

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The reigning king of parasitic technologies right now is filesharing. Filesharing clearly erodes the property rights of the sellers of creative content. As in the TIVO example above, it could, if it grew much from its current usage by 30% of the potential record buying population, make both consumers and producers of music worse off, as the number of new recordings fell toward zero. The same could happen to movies, software, pay television and books. Unfortunately, there is not yet a low cost method for reducing file-sharing. There are many other potentially parasitic technologies on the horizon including digital terrestrial radio (which does not pay for music use) and satellite radio (which pays very little for music use), each of which could allow listeners to ‘steal’ high quality permanent copies of songs. High definition video has fewer immediate threats, but that is in part due to the much tighter control that movie producers have been given over the usage of their products. But the principle is the same in both cases. How best to avoid parasitic threats? It is easy, even if true, to mouth platitudes like: “rules should be made to allow the productive components of these technologies to thrive, while at the same time minimizing the parasitic elements”. It is hard to put this into practice. Eliminating the parasitic feature from the hardware would seem to be a lower cost endeavor than prosecuting users. Unfortunately, even this has proven difficult. Producers of the technologies with parasitic elements have little or no competitive incentive on their own to reduce the parasitic aspects of the technologies, and often will individually benefit from resisting such rules, raising the costs of eliminating the parasitic element. These are the factors currently leading to the schisms between technology companies and content companies that were evidenced in the various briefs entered into the Grokster case, among others. But we should all, at least, be able to agree that parasitic characteristics of these technologies exist and that such characteristics should be minimized if possible. We should not get caught up in the mistaken impression that fighting parasitic technology is the same as being against productive technology. To do otherwise would be to do ourselves a disservice, since clearly we are all better off if we don’t kill the goose laying the golden eggs.


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