FC: Andrew Odlyzko replies on DMCA and "chipping away at competition"

[Declan McCullagh <declan () well com>]

[I enjoyed Robert's warning (http://www.politechbot.com/p-04390.html), but 
he's looking at "chipping" like a lawyer instead of through the lens of 
economics. It seems clear to me that if some manufactures sufficiently vex 
people by "chipping," then their customers will turn elsewhere to 
non-chipped products. And competitors will advertise "unchipped" 
alternatives, as we saw in the Yahoo case 
(http://www.wired.com/news/news/business/story/20568.html). It's not like 
there's a lack of competition in the laser printer, car, coffee maker, 
dishwasher, or other markets Robert cited. --Declan]

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Date: Sat,  1 Feb 2003 12:12:31 -0600 (CST)
To: declan () well com
From: odlyzko () dtc umn edu (Andrew Odlyzko)
Subject: Re: FC: Robert Ellis on how DMCA is "chipping away at competition"
Cc: rellis () internet-attorneys com

Declan,

A few comments (which you should feel free to distribute to the politech
list) about Bob Ellis's posting.

1.  Bob Ellis is undoubtedly right that the Lexmark case is just
the camel's nose in the tent.  We do seem to be moving to a future
of "disposable products ... shifting the profit to captive parts and
consumable sales."

2.  A more important question is, is that really bad?  Bob Ellis
seems to think such a move involves "unfair competition, price-fixing,
and deception."  Why is that so?  As long as there are many suppliers
of those "little digital copier[s] that automatically [shut] down when
[they decide their] toner cartridge is empty," what is wrong with that?
Unless he gets some special joy from purchasing toner cartridges at
low prices, he is probably like most people, and cares only about
the cost of all the copies he makes, which consists of a combination
of cost of the copier and cost of the consumables.

3.  There are very strong economic reasons why it makes sense to
charge a lot for printer consumables and sell ""disposable printers"
inexpensively.  As one of those ludicrously simple economic models,
suppose that you run the McCullagh Copier, Inc., and that you have
just two potential customers, Ellis & Venable LLP, and Smith LLP.
Suppose that it costs you $10,000 to do the development, tooling,
etc. to produce a new copier, and each copier will cost you $500 in
parts, labor, etc. to build.  Let's assume that each copier will
last exactly one year (perhaps as a result of the kind of built-in
"technical obsolescence" that modern technology makes feasible and
that Bob Ellis is so concerned about).

Suppose next that each toner cartridge for the copier will cost
the McCullagh Copier company $10 to produce (the development and
tooling costs for cartridge production being covered by the $10,000
already mentioned).  Suppose next that Ellis & Venable LLP wants to
have 3 copiers in its offices and will make enough copies to use up
200 toner cartridges, and is willing to pay up to $13,000 for this.
Suppose Smith LLP needs just 1 copier, will use 20 toner cartridges,
and is willing to pay up to $2,000.  If McCullagh Copier decides to
price each copier at $3,100 and each cartridge at $11, Ellis & Venable
LLP will purchase 3 copiers and 200 cartridges, which will bring in
revenues of $11,500, while Smith LLP will buy nothing.  Hence total
revenues will be $11,500, while expenses are $13,500, pushing
McCullagh Copier into bankruptcy.  On the other hand, if McCullagh
Copier gives the copiers away, 3 to Ellis & Venable LLP and 1 to
Smith LLP (or charges some minor amount), and charges $65 per toner
cartridge,  Ellis & Venable LLP will pay $13,000, while Smith LLP will
pay $1,300, for total revenues of $14,300.  This will be barely
above the expenses of $14,200 ($10,000 fixed costs, $2,000 for
production of copiers, and $2,200 for production of cartridges),
perhaps enough for the transaction to take place.  Note that this
works only if McCullagh Copier can prevent the "after market"
manufacturers from coming in and exploiting the huge profit margin
in toner cartridges.

In general, increasing fixed costs and decreasing marginal costs
produce very strong incentives to engage in such tactics.  At the
same time, technology is making such tactics easier to implement.
In general, the key issue is that of price discrimination, charging
not according to costs (which are impossible to determine, especially
when they are fixed costs that have to be allocated among many
goods and services) but according to willingness to pay.  That is
the key issue in pricing of pharmaceuticals (politically the hottest
pricing issue we have right now) as well as in open access to networks,
and a score of other issues.

Interestingly enough, essentially the same issues were faced over
a century ago in connection with railroad pricing (the key concern
of American popular politics of the last third of the 19th century).
Earlier capital-intensive public goods, such as river navigation
projects, turnpikes, and canals, had some price discrimination, but
it was limited to tolls.  (Canals could not own the boats that
carried the goods and passengers on the canals, etc., but tolls
did depend on the nature of the cargo, with the complexity of toll
schedules growing with time.)  With railroads, end-to-end service
became the norm, which led to extreme forms of price discrimination,
which then led to wide public hate of the railroads, extensive political
protests, and finally government regulation.  I have been investigating
these questions for a while, and it is a fascinating topic.  I do
not yet have any papers written about this, but the slides from a
lecture entitled "The New Economy and old economics: What 19th century
railroads can tell us about the future of ecommerce" are available in
.ppt and .pdf formats at

   <http://www.dtc.umn.edu/~odlyzko/talks/index.html>

A key lesson is that the issues are not simple, and it is not clear
how they will be resolved.  There is strong tension between the
incentives for goods and service providers to price discriminate and
the public's visceral dislike of such practices.  In particular, one
should not expect the government to step in and resolve the issue
in favor of privacy and publicly acclaimed "fair prices," since the
government has strong interests in promoting greater production,
which often requires price discrimination.  (As a simple example,
note that American colleges and universities practice an extreme
form of price discrimination, with high tuitions combined with
financial aid for those less well off.  This practice is aided by
federal financial aid forms which require parents to reveal very
detailed information about their finances, and providing false
information on such forms is a federal crime, not just a civil
matter between the college and the parents.)

Andrew

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Date: Fri, 31 Jan 2003 15:03:31 +0000 (UTC)
From: Bill Nash <billn () billn net>
To: Declan McCullagh <declan () well com>
cc: politech () politechbot com
Subject: Re: FC: Robert Ellis on how DMCA is "chipping away at competition"

While this may not be the best solution with RFID tags, for that copier
problem, if it's just checking for the presence of the chip, and not
counter data IN the chip, but even then ;)..

Examine the toner cartridge to determine where the chip is.
Based on the location of the chip, determine where in the copier the chip
reader lives.
With a reasonably sharp or suitably applicable tool, remove the chip from
the exhausted toner cartridge.
If you're feeling brave, disassemble your copier, unmount the chip reader.
Tape the chip to it. Resecure chip reader to some unobtrusive location.
Commence purchasing whatever cartridges you wish.

I'm fairly sure this method is safe under the DMCA (don't ask me about
your copier warrantee or service plan, though) since you haven't broken
any digital encryption technologies or circumvented any duplication
safeguards. It's much akin to wedging the door sensor on your car to stop
the annoying buzzer while you're installing your aftermarket stereo. If
that's not legal, I'm moving.

- billn

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Date: Fri, 31 Jan 2003 17:26:19 -0500
From: "Paul Levy" <PLEVY () citizen org>
To: <declan () well com>
Subject: Re: FC: Robert Ellis on how DMCA is "chipping away at
        competition"

A colleague to whom I forwarded this note asks whether the restrictions
about which Robert Ellis expresses concern would constitute illegal
tying arrangements.  Personally I do not have the antitrust expertise to
comment, but perhaps a Politechnical would?

Paul Alan Levy
Public Citizen Litigation Group
1600 - 20th Street, N.W.
Washington, D.C. 20009
(202) 588-1000
http://www.citizen.org/litigation/litigation.html

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From: "Np" <noah () paulsonsoft com>
To: <declan () well com>
Subject: RE: Robert Ellis on how DMCA is "chipping away at competition"
Date: Fri, 31 Jan 2003 14:17:09 -0800

Wow, we had the same problem at my company 2 days ago.
We used a refill kit for our hp cp1700 inkjet. The printer
wouldn't accept the cartriges because the chip in it that
checks the level won't register a level increase, only a
decrease. So then we put new cartriges in and the would not
work. Hp told us that the printer would not accept any
more cartriges, refilled or no, until we sent it in for
service.

What if cars were the same way? change your oil, use an
after market filter and your car is disabled? Could happen.

noah

---

Date: Fri, 31 Jan 2003 17:21:01 -0500
From: Davis King <kingd () cc gatech edu>
To: declan () well com
Subject: Re: FC: Robert Ellis on how DMCA is "chipping away at competition"

Quoting Declan McCullagh <declan () well com>:

Why, exactly, would any consumer choose to replace their existing coffee 
makers
and light sockets with chipped models that restrict your behavior?

I chose to buy a $150 photo-quality printer with expensive toner refills,
because it's cheaper than film processing and better than the smudgy old
printer in my closet. I'll choose to buy a chipped coffee maker when it's
cheaper and better than Starbucks, and I'll be greatful for the improvement.

Davis King

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X-Originating-IP: [64.125.93.20]
From: "Thomas Leavitt" <thomasleavitt () hotmail com>
To: <declan () well com>
References: <5.1.1.6.0.20030131163954.0276e130 () mail well com>
Subject: Re: Robert Ellis on how DMCA is "chipping away at competition"
Date: Fri, 31 Jan 2003 16:43:41 -0800

Of course, the argument will be that sufficiently draconian measures on the
part of industry will lead to new competition emerging that supplies
printers and other equipment without these restrictions... or that the value
of the restrictions will ultimately be driven to near zero by competitive
forces.

Maybe... but, given the oligarchical nature of much of the commercial
environment, I'm inclined to think that, in fact, something along the lines
of what Bob Ellis contemplates will be the ultimate outcome. Strategies like
this substantially complicate price comparisions, and thus price based
competition - if market signaling information is sufficiently opaque,
consumers will lack the ability to make informed judgements, and thus their
choices will become much more randomized.

Further, the fact is, if there isn't a product that meets your requirements,
you can't "vote" your dollars that way - it may well be that consumers, in
general, accept these kind of restrictions, and that those of us who dislike
them intensively, may simply be stuck living with them, if no vendor desires
to serve our needs.

Regards,
Thomas

--
Thomas Leavitt -- thomasleavitt () hotmail com, Sr. Systems Admin For Hire
Resume at http://www.thomasleavitt.org/personal/resume/

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Date: Fri, 31 Jan 2003 23:35:20 -0700
From: Jerome Borden <jcborden () earthlink net>
X-Mailer: Mozilla 4.75 [en] (Win98; U)
X-Accept-Language: en
MIME-Version: 1.0
To: declan () well com
Subject: Re: FC: Robert Ellis on how DMCA is "chipping away at competition"

Declan,

You just illustrated why I have been advising my son to look at older cars that
don't have onboard tattletales.  And, if it is old enough to have a Kettering
ignition, it can't be zapped into submission with an EMP.

Jerome from Layton

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