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My Remarks to the California Commonwealth Club on May 10, 2006

I was invited to address the Business and Leadership Forum of the California Commonwealth Club on May 10, 2006. I spoke of serfs and lords and explored the changing nature of property and property rights in the digital era.

Introduction

Good evening and thank you for inviting me to speak to you tonight. I'm a technology geek, and it's rare that I'm allowed to address a mainstream audience. Tonight I'll share some observations on the impact of digital technology on society, with a special focus on individual liberties like property rights.

The Internet

The big thing in the last ten or fifteen years has been "the Internet", and it's easy to fall into the mistaken belief that "the Internet" sprang forth fully formed as some kind of product or service of some company or combine. That belief would be very mistaken, however. The Internet industry as we now know it was an outgrowth of a bunch of earlier events including the1960's counterculture, advances in communication and computer technology including some well funded academic and military networks, free or open source software, and of humanity's unending desires to tinker, to share, to show off, to make money, and to discover. Slapping a label like "the Internet" on it is a marketing exercise, and a quite successful one, but it doesn't change any facts. The thing we currently call "the Internet" is the middle of, not the beginning or end of, a much longer story.

Wealth

While I'm exploring popular myths, let's talk about the nature of wealth. A lot of kids and more than a few otherwise-grownups think that if you win the lottery, or rob a bank, or IPO an Internet company, and thus get your hands on a truckload of money, it makes you wealthy. And maybe it will, if the truck is large enough, and if you don't spend or lose the money within your own lifetime, and if hyperinflation or some other outside force doesn't devalue your stash. But wealth-- real wealth-- according to the experts is the ownership of cash flow, not just cash. Owning an asset is great, but you can only sell it once and so the amount of cash it can generate for you is limited unless you can employ that asset as a revenue generator-- like renting it to someone or using it in a business. When a silicon valley venture capitalist hears an investment pitch, her big question is usually "how will this make money?" and not "how cool is the basic idea?" or even "how soon could we IPO?"

Which brings me to tonight's word: monetize. Great wealth throughout history has come to those people who can make money from the natural or sometimes inevitable activities of other people. The extent of that wealth often depends on one's ability to make activities inevitable, or the vision to see what activities are natural or will become natural. Darker examples include copyrighting the "Happy Birthday To You" song or patenting the candle or choking off a competitors' supply or investment. In what I call "meatspace" (as against cyberspace, it's where the meat is), there's a whole system of antitrust laws designed to prevent inappropriate monetization, where "inappropriate" means "bad for the consumer" which really means "in opposition to individual liberties." Our society as a whole almost always wants the greatest good for the greatest number, but recognizes that each individual has to have the right to choose and pursue whatever "good" means. Individuals, as a rule, prefer to sit with their feet up watching professional sports on TV, and to have their food brought to them. And if you want other people to work for you instead of you working for them, you have to figure out how to monetize their activities better than they can monetize yours. And that's tonight's word.

(with obvious apologies to the Stephen Colbert writing team.)

Inertia, according to the dictionary, is the tendency of an object in motion to remain in motion, or of an object at rest to remain at rest. Money has a kind of inertia. It's easier to keep cash flowing than to start it flowing in the first place. But just the same, cash flows have to come from somewhere-- some set of assets, conditions, raw materials, tools, and processes that produce more value than they consume. If you want the cash to continue flowing, you have to keep feeding the monster. Much human action is toward the goal of keeping cash flowing, whether it's getting up and going to work in the morning, or buying low and selling high, or buying out a startup whose technology you don't need but your competitors could have used to eat your lunch.

Examples

Tonight I'm going to explore the ways in which the nature of property rights are changing in the face of digital technology. Some of what I'll say might seem a little bit paranoid, but please bear with me.

Digital Rights Management

At home I have a moderate collection of audio CD's mostly containing music. It's not a mammoth collection like some of my friends have-- just a couple hundred classics I've picked up in the time since vinyl records and cassette tapes started dying off back in the 1980's. I own these CD's, and by "own" I mean in the dictionary sense: I have the right to use and/or dispose of them as I see fit. In this case "dispose" probably means "sell" but I could I suppose run them through a shredder. My ownership is limited by copyright law-- I can sell the CD as long as I destroy any copy of it. I can make copies for personal use as long as I don't play it on more than one player at a time. The same rules apply to the cover art, and for that matter they apply to books, magazines, and anything else I can "own" the physical media for but only have a "right to use" the content carried by that media. It's a fair system and it's made a lot of money for a lot of artists, record companies, publishers, and so on. It's also put a lot of great music and literature into the hands of billions of people who might never have otherwise heard or seen or read it by going to concerts or visiting libraries or museums.

But the system doesn't work in a digital era. It turns out the only reason the "right to use" system worked at all is that if you made a copy of a book on a photocopier, or made a copy of a vinyl record onto a cassette tape, the quality of the copy would not be as good as the original. Make a copy of a copy, and things are even worse. A copy of a copy of a copy was probably just unusable. Therefore, the technology of the pre-digital era was perfect for the laws of that era-- it wasn't just illegal to make unlimited copies, it was also impractical-- undesireable-- ugly. If you wanted a clean copy you had to buy one, so there wasn't a lot of copying going on. Digital technology changed all that-- every copy is identical to the original. The Internet made it possible to share a single digital copy with an unlimited number of anonymous strangers. That's great if you're trying to amass a large collection of work without paying for it, but it's not so great if you're an artist wondering how to pay the rent so you can go on creating new art without flipping burgers on the side.

Now it's worth mentioning that unless you're Garth Brooks or some other megastar, you'll make most of your money from concert ticket sales, T-shirt sales, direct sales of CD's at concerts, that sort of thing. A lot of musicians give away perfect digital copies of some songs on their web sites because the money they'd get from a record company isn't enough to worry about, they just want to get their names and reputations out on the street so they can sell concert tickets. The big losers from free digital music sharing systems are the record companies, not the musicians. [2015 note: I now have friends in the record industry who have told me that the situation for artists is more nuanced and less unfriendly than I described in 2006-- live and learn!] When you hear about RIAA or MPAA suing another batch of downloaders for copyright violations, that's mostly "big art" flexing its economic muscles-- and the success or failure of those lawsuits won't change the economic outlook for individual artists all that much.

The stages of "big art's" reaction to digital media have been instructive, amusing, and scary. First they said "don't do that!" and demanded that anyone who wanted to see or hear or read licensed material buy a copy. As any of us with teenagers at home could've told them, that's not practical. Eventually they realized this on their own and said "if we can't stop folks from consuming our product in digital form, we can at least make them pay for it." That's sort of where we are now-- if you buy an iTune for your iPod it will only work on that iPod, and so on. But eventually there was a changing of the guard someplace, and the new attitude is "hey! we can make even more money selling it this way!" Except I don't mean, precisely, "sell".

For $25 a month or so, I can rent the right to listen to all the music I want, from Yahoo and several other companies. But there's a catch, several actually. If I stop paying the $25, any music I've downloaded from them stops working. Which means I have to use their player, and their player is a piece of software whose side effects I can't control. At a minimum, their player will report to its mothership every time I play something, since they need that information in order to schedule royalties to the copyright holders (generally "big art"). I might also see a few popup ads. Worse still, I'd have to buy a computer running an Apple or Microsoft operating system, since their player will likely not run well on my Linux homebrew. I'd probably be limited as to which of my laptop or my desktop computers was allowed to play the music. And if I was somehow willing to endure all this, I'd better be prepared to upgrade my Apple or Windows operating system every time another security vulnerability is found, or whenever "big software" decides to release a new version of their operating system. All of which leaves me feeling very monetized, not to mention the loss of privacy and the lost freedom to choose my own players and systems.

I'll tell you what I actually do, though. If I want some new music, I buy it on CD. I copy this CD onto my file server and store the original in a cool dry place. I copy the music to my current laptop and play it using the software of my choice. I do not steal other folks' music by making illegal copies, nor allow anyone to steal music by copying mine. My children say I'm a luddite but frankly they'd be saying that no matter what I did or didn't do, so who cares? I'm in control of "my" music and I know exactly what my rights are and by the end of a few years' time I'll have spent less and heard more than most of the "$25 a month club" crowd. So there.

(If there's time during Q&A I'll tell you my TiVo story.)

Trusted Computing Initiative

Short version-- take everything I said about the $25/month club for music and apply it to all of the documents and spreadsheets on your computer. Let's make sure we're on the same page-- this means you'll be paying for continued access to your own content, the stuff you create, not just to the things you buy or rent from others.

How can that be? Long version. The companies who make the artificial brains inside our laptop and desktop computers know that we're having problems with viruses, worms, and all manner of software that somehow gets into our computers and starts running and takes over and does bad stuff like deleting our files or sending all of our keystrokes to the Soviet Union or stealing our online banking password or sending spam to everybody in our address book. This is a big problem and a lot of big companies are trying to figure out how to solve, by which I mean monetize, this big problem.

Of course, what we, the consumers of this technology, really want is for it to just work better. Stop catching every virus that comes down the web. Give us back control of our property-- let us be the absolute authority over "what software will run on this computer?" But it turns out there's no revenue stream-- no long term sustainable cash flow-- associated with solving that problem. Antivirus companies (of which I note that Microsoft is now one) depend on our continued vulnerability for their continued quarterly earnings. Solving this problem once and for all time makes no economic sense for anybody, it would be like making a razor blade that never got dull-- how would you stay in business?

So we're unlikely to get a solution to our computers' virus problems, well, I mean your computers' virus problems, my homebrew stuff doesn't have virus problems. The solutions offered to us for these kinds of security problems have to be correctly labelled, such as the "Trusted Computing Initiative". We all want our computing to be more trusted, don't we? Well, maybe, maybe not. TCPA will give "big software" the ability to demand royalties from independent software producers who want to market to "big software"'s platform. In other words, to keep us safe from viruses, "big software" will have to know exactly what software our computers should trust. Their only way to do that is if all software we can run is registered (for a fee, naturally) with the whatever company we got our operating system from. Apparently, Microsoft feels they've been losing money every time we buy a game for our Windows computer, unless the game publisher has paid Microsoft a cut of the proceeds. I know this is how the Xbox and Playstation have always worked, but somehow I'm troubled by the change.

But let's talk about your content. I mean your own documents, spreadsheets, things you create. Let me make it clear that "big software" isn't going to try to steal your work or claim joint ownership of it. But what they can do, and will do, is rent rather than sell you the technology you use to create and access your own work. And they'll do this in partnership with "big hardware", so that it'll be super fast and impossible to "work around." If you decline to renew your tithe to your operating system or application suppliers, you could find yourself locked out of your own documents. And if you think you can export them into a more open format before your tithe expires, be careful, they're expecting that. You might be able to export it as an encrypted PDF, fine for viewing and printing but impossible to edit. Listen, though, they don't want much. You pay your other suppliers over and over, don't you? Like your car insurance or your groceries. All your technology vendors want is a cut, a piece of the action. And in exchange for monetizing your activities in perpetuity, they promise to keep you safe.

Yeah, right. So, the reason this hasn't already happened and isn't likely to happen any time this decade is that it's too hard. Just too darned complicated. It's a whole new kind of software, a whole new kind of hardware. It's the holy grail of monetizing human action, and so the folks who want to stand at the receiving end of that cash flow will never give up. But at the moment it appears to be easier to create peace in the middle east or return to a two-party system of government in the United States than to create and debug all that new hardware and new software all at once. Look for it in dribs and drabs. First they'll come for your music. Oops.

(If there's time during Q&A I'll tell you about monoclonal architectures.)

Municipal Wireless Networks

In the years following the great 1906 earthquake and fire, the City of San Francisco built an amazing water system including a dam in the Sierras, 160 miles of pipeline, and all kinds of reservoirs and pumping stations. This gave the city a water supply that was both year-round and potable, whereas the pre-1906 supply had been neither. But it gave the city something even more important: clout. In the hills of San Mateo County and elsewhere there are "watershed lands" owned by San Francisco. Many of the cities along the 160 mile Hetch Hetchy pipeline buy their water from San Francisco. Recently when the San Francisco Giants were being lured out of down by the City of Santa Clara, it turned out that the proposed stadium's parking lot would have sat on land owned by San Francisco, and you can bet that the board of supervisors was in no mood to grant that easement! San Francisco has been the primary economic force in the development of the northern half of the state of California, but it has also wielded considerable clout in shaping the state to this city's advantage. Much of the city's clout within this state comes from our water system.

But wait, there's more. Because the city chose to build the system itself rather than hiring Bechtel or Halliburton (or their equivalents of the day), there has always been alignment between the city's clout and the city's goals. We are in charge of our own destiny. Citizens of this city know that they can expect periodic garbage strikes, power and gas price fluctuations, fly-by-night telephone and cable TV service-- but also that the water will always flow, that the cost of that water will be closely managed in the public interest, and that if they don't like the service they can "vote the rascals out". Other cities took this a step further-- in Palo Alto they operate their own power grid. Palm Springs operated their own phone company for many years (until they IPO'd it.) A city in control of its own infrastructure is a wonder to behold-- it has broader negotiating powers, can serve the needs of its citizens, can shape both the local and regional economy to its own benefit. Of course, it means hiring engineers rather than paying some middleman to do it for you. Seems to be working out rather well so far, even though there's some controversy about whether to blow up the dam for environmental safety reasons.

I am sad to report that the great vision and ambition that helped create the San Francisco water department is nowhere to be found in the current administration. My proof is that when the city decided to offer free wireless Internet service, it put the project out to bid. Never once did we consider the possibility that the same city employees who fill potholes or maintain the Municipal Railway could be trained to hang a bunch of wireless antennas all over town. We have a small amount of municipal fiber optic cable (small compared to Palo Alto's, that is, which is in turn dwarfed by Stockholm's). For a fraction of the cost of building a dam or even re-painting the Pulgas water temple, San Francisco could build its own wireless network. Instead we're outsourcing it to Earthlink and Google. Let me tell you the cost of that decision, the lost opportunities of that decision.

First off, There Ain't No Such Thing As A Free Lunch. There will be two classes of wireless service-- first you can have free, slow, and snooped; or you can pay commercial rates to a monopoly. By "slow" I mean that the free service will be way slower than DSL, more like old-style dialup. By "snooped" I mean that if you use the free service in a coffee shop you're likely to see popup ads for businesses on the same street with you. The whole deal is a give-away to "big network", and the thing that's being given away is the eyeballs (which is what advertisers call Internet users) and cash flows.

Second, there's network neutrality. In telephone service, the government mandates that all companies providing voice-grade telephony interconnect with eachother at preset rates, thus ensuring that any phone can call any other phone and that new phone companies can enter the field to help ensure competition. In Internet service, the government mandates nothing. Recently SBC (I mean AT&T, I think, is it Wednesday?) rattled its sabre and said that Google and other content supplying companies should be paying for the use of SBC's backbone to reach SBC's eyeballs. Most of us said, uh, what? "Aren't SBC's own customers paying SBC to carry that traffic?" Some of us even said "I am not an eyeball, I am a person!" But anyway, from time to time these Internet companies shut down interconnects in hopes of creating new cash flows among eachother, and until the government regulates this, we're all at risk of higher prices or lower service with zero notice. Some well meaning democrats are trying to challenge this with "network neutrality" legislation, but this probably isn't their year. Or their decade.

San Francisco has a government, though. And if San Francisco owned and operated its own wireless Internet plant, we could mandate that any Internet company wishing to do business in this city interconnect at fair and reasonable cost to all other Internet companies wishing to do business in this city. Right now a lot of Internet traffic from one neighborhood to another flows through Palo Alto or San Jose or Sacramento, and our eyeballs are used as negotiating tokens in cash flow wars. We could do away with all of that if folks like Mayor Rolph or City Engineer O'Shaughnessy (who are jointly credited with creating the San Francisco water system) were making our wireless Internet decisions. I grew up in this city, dropped out of Washington High School, and then I went off and helped a few thousand other people build the Internet. I said I was sad to report on our wireless Internet plans and that's the reason. San Francisco as a vassal. Ouch. Was never meant to be.

Conclusions

Every technology change in history has opened new opportunities for smart entepreneurs to create new cash flows or redirect old ones. But the digital era is unique in that it has created new kinds of property and thereby changed the definition of property in some disturbing ways. In a world where some lucky winner can sell ALTAVISTA.COM for $3M, we are all just eyeballs at some level. Where people and cities used to own the infrastructure of their daily lives we increasingly rent it. Choices we used to make are increasingly made by others for their own enrichment. This is natural and normal and does not make digital technology evil in and of itself. But just as we all had to learn how to set the time on our VCR's, we all have to pay attention to the impact this technology has on our lives. My four-year-old daughter has already received e-mail spam, though she can't read it yet. I guess she's just an eyeball at some level. I guess we all are. I'm lucky enough to be able to say "I'm mad as hell and I'm not going to take it anymore!" but not everyone can homebrew their technology the way I do. Most of you are vassals to your hardware and software and internet suppliers. Do you know what they've got planned for you? I hope I've given you something to think about.

Thanks again for inviting me this evening.