HBR: Platforms Should Become Information Fiduciaries
Harvard professor Johnathan Zittrain writes in HBR that large internet platforms should have a fiduciary duty to users: “Like doctors, lawyers, and financial advisers, social media platforms and their concierges are given sensitive information by their users, and those users expect a fair shake — whether they’re trying to find out what’s going on in the world or how to get somewhere or do something.” It’s an idea increasing in popularity among academics; we’ll see if it gains traction in policy rings, or if politicians remain content with Committee hearings and grandstanding.
Report: How the right uses YouTube to influence and “sell” a political ideology.
A new Data & Society report analyzes how political influencers adopt the techniques of brands to build audiences and sell them a political ideology. Of note: “YouTube is a principal online news source for young people. Which is why it is concerning that YouTube… has become the single most important hub by which an extensive network of far-right influencers profit from broadcasting propaganda to young viewers. Social networking between influencers makes it easy for audience members to be incrementally exposed to, and come to trust, ever more extremist political positions.”
⌚️ Watch out: Hodinkee’s got a review of the Apple Watch Series 4 after a week on the wrist. The cult classic Ikepod watch (perhaps most recognizable now because its strap design is used on the aforementioned Apple Watch) is also back, starting at less than $400. Quartz for now, but since the Kickstarter has already blown past its goal, those hoping for an automatic version may have something to look forward to in 2019.
🌮 A Financial Times columnist reflects on the enduring regionalism of cuisine, writing, “To eat out is to see through the world-as-village conceit. Except at the lowest price point (McDonald’s) and the highest (Nobu), a global dining scene — in which each cuisine is, like an iPhone, consistent across the world — remains not just elusive but unimaginable.”
🤑 Forbes’ interview with Bezos. One of the best quotes from the $160 billion man: “Friends congratulate me after a quarterly-earnings announcement and say, ‘Good job, great quarter,’ and I’ll say, ‘Thank you, but that quarter was baked three years ago.’ I’m working on a quarter that’ll happen in 2021 right now.”
🍾 A week of anniversaries: WIRED turns 25 and the Economist turns 175, with the requisite reflective essays to accompany the milestones.
📱 Apple v. Kanye. The Financial Times points out that two industries historically poles apart – fashion and tech – will go head-to-head on Friday. Adidas’ Yeezy line will have its biggest drop yet, while Apple will debut the first of its new phone line. Apple has always gladly straddled the line of luxury brand disguised as tech company (or is the other way around?), while Kanye has declared a goal of democratizing high-end fashion. His $220 sneakers are a good start.
🦁 Please Feed the Lions: Designer Es Devlin, who has in the past found herself in the good graces of Kanye West and Beyonce, is behind a new project titled Please Feed the Lions. Visitors to the sculpture in London’s Trafalgar Square “feed” the lion a word via tablet. The lion then uses AI to create a poem using the word.
Tuesday brought decisions from both patent cases argued in front of the Supreme Court this term, Oil States Energy Services v. Greene’s Energy Group and SAS Institute v. Iancu. At issue in both cases was the process of inter partes review (IPR), which was instituted in 2012 after the passage of the America Invents Act. The process allows a competitor to bring call for an IPR, which, if institute, initiates a trial-like process engaging both parties. The USPTO has the sole discretion in reconsidering and potentially invalidating the patent at issue.
In Oil States v. Greene’s Energy, the question before the Court was whether the adjudication of IPR petitions by the USPTO is an exercise of the “judicial power” that under Article III of the Constitution can be exercised only by courts. The Supreme Court’s resident patent expert, Justice Clarence Thomas, wrote the opinion, holding that IPR does not violate the Constitution. Thomas wrote that because patents are a public right and the IPR process is simply a reconsideration of that grant, Congress has the authority to conduct the reconsideration. There has long been an academic argument about whether patents are public (e.g. statutorily created) rights or private (e.g. common law) rights, with Justice Thomas falling on the former side of that debate. But, Thomas was careful to articulate that the decision should not be misconstrued as suggesting that patents are not property for purposes of the Due Process Clause or Takings Clause.
According to Court documents, the IPR process has been used to invalidate some 1,300 patents since 2012. Tech companies are largely please with the decision, as it allows them to continue to use the IPR process to challenge patents instead of having to undergo long, drawn out litigation against alleged patent trolls.
But, pharmaceutical and biotech companies are more worried about the ruling, fearing it may open the door for competitors to more easily (and cheaply) invalidate patents through IPR. This gets to the difficulty of treating two fundamentally different industries (tech/internet companies and pharm/biotech companies) with different business models the same when it comes to intellectual property.
For modern tech companies, potential returns are much greater. Modern internet companies are driven by network effects that can generate massive returns to scale for innovation. They’re able to spread fixed costs over a massive user base that can scale quickly. Meanwhile, Moore’s Law (yea, I went there) implies that R&D cost, on a per unit basis, continues to decline for computing-based R&D.
On the other hand, evidence suggests that biotech and pharmaceutical R&D is only getting more difficult and more costly. Some have even referred to drug discovery as operating under a “reverse-Moore’s law,” and while machine learning may facilitate the drug discovery process, this promise is largely unfilled as of yet.
The Constitution gave Congress the power to “promote the progress of Science and and useful arts,” but the reality is spurring innovation requires different tactics in different industries. We can quibble about how strong patents should be in the biotech and pharmaceutical industries, but the heavy capital investment required to innovate in these sectors necessitates some statutory protection. But, the case for government-granted monopolies (patents) for software innovations is much more tenuous.
While we wait for the merging of software and biology (or, for software to eat biology), it’s important to recognize the different capital structures at play for different industries and structure incentives accordingly. We don’t need the government to incentive investment in the next “one-click buying” patent, but we do need to incentivize continued commercial investment in biological R&D. Government-granted monopolies are an impure means to an end (innovation), and it’s important to critically evaluate when and where they should actually be issued.
The second, less exciting opinion held that when the USPTO institutes an IPR process to review an already issued patent, it must decide the patentability of all claims the petitioner has challenged.
🎧 SPOTIFY THE HITMAKER
On April 24, Spotify announced its new free tier with a few major changes. First, it’ll recommend music to users on the fly using its machine learning. Second, and more importantly, it’ll let free-tier users listen on-demand to whatever song they want, as many times as they want, if the song appears on one of Spotify’s 15 personalized discovery playlists. These playlists account for about 750 tracks in total.
As I wrote after Spotify filed its F1, its success depends largely on its ability to cut out the music labels, whose content currently accounts for 87% of content streamed on Spotify. With the overhaul of its free tier, Spotify is attempting to mint new hints, allowing the 90 million users of its free tier to listen to certain songs, selected by Spotify, as often as they want. Spotify’s success depends in large part on its ability to serve as a platform for new or up-and-coming artists, helping users discover new artists while at the same time helping new artists get discovered. It’s a beneficial relationship for both listener and musician, with Spotify sitting in the middle taking a cut of the transaction. Providing free users access to unlimited listening of select songs drastically increases Spotify’s ability to be a hitmaker.
Apropos the patent discussion above, note that while Spotify has patents related to its machine learning and recommendation algorithms, these may not be essential to its business. The fact that it has 160 million total users makes the cost of acquiring these patents relatively trivial. Either way, the data Spotify continues to gather on its users is much more valuable (and protectable) than any patent it may or may not have acquired.
🎬 NETFLIX THEATRES?
From one subscription media business to another. Reports have emerged that Netflix is looking for ways to get into the movie theatre business. While it may not be interested in Mark Cuban’s Landmark Theatres anymore, it sounds like Netflix wants to get some of its productions in theatres so it can qualify for awards. Jeff Bezos has long been obsessed with garnering awards with his Prime Video service, so it seems he’s not the only one with a complex (the Prime Video section of his shareholder letter is basically one long sentence about how awesome Prime is because of all the meaningless awards its various shows received).
Of course, Netflix (and to a lesser extent, Prime Video), are successful illustrations of the “laddering up” strategy that Spotify is now pursuing. That is, they built businesses off of licensing copyrighted content from TV and movie studios, building a war chest to invest in their own original content and cut out the middle man.
But, there may be differences between music and video that make this strategy harder for Spotify. Namely, old music still holds a ton of value, while old TV shows and movies are less valuable. I love to bump the Beatles, but only watch I Love Lucy when I’m home during the holidays and my mom makes me.
🦅 Bird’s Eye View.In China, facial recognition technology was used to spot a man in a crowd of 60,000 concert goers.
💡 From the Printing Press to the Internet. A chart showing productivity from 1440 printing press to today. Other academics have studied causes of the productivity slowdown since 2004, illustrating it’s more than just a “measurement problem” (Business Insider, Marginal Revolution).
From Spotify to Apple News, bundles are back; are they better than ever?
One of the business world’s great apocryphal sayings goes something like this: “there are only two ways to make money in business: One is to bundle; the other is unbundle.” Netscape founder Marc Andressen attributes it to his buddy Jim Barksdale.
A recent spate of bundling news makes it clear that a new age of bundling is upon us:
Hulu and Spotify announced a $12.99/ mo bundle that includes unlimited access to both services. It’s a nice savings, as Hulu (with ads) cost $7.99/ mo and Spotify premium costs $9.99/ mo. It’s an expansion of the two companies’ partnership: last year, they offered a student bundle for $4.99/ mo.
On the heels of acquiring Texture, “the Netflix of magazines,” there are now reports that Apple is working to launch a subscription news in its Apples News app later this year. Apple has recently been pushing to bring in more revenue from its Services (think App Store and Apple Music), so this move fits in line with its broader strategy. Speaking of Apple Music, it was also recently reported that Apple Music now has 40 million subscribers, creeping towards Spotify’s 70 million.
Comcast and Netflix announced that customers will soon be able to add a Netflix subscription to new and existing Comcast Xfinity packages.
Medium’s Ev Williams wrote about the Medium model, bragging that it’s “one of the largest bundles of original content of its type, so it’s a great value for readers.” Medium launched its subscription model a year ago, and apparently it’s going great (graph without a y-axis be damned).
Jeff Bezos revealed in his annual shareholder letter that Amazon Prime – the bundle of all bundles – has over 100 million subscribers. By tacking on benefits at recently acquired Whole Foods, the scope of the Prime bundle continues to expand.
In addition to Netflix and Spotify proving that subscription bundles can work, the recent fire Facebook and other ad-driven companies have come under has give the bundle even greater tail winds.
Meanwhile, with the official launch of ESPN+, the sports broadcasting giant has dipped its toes in the water of the over-the-top future, albeit cautiously. ESPN won’t offer many of its flagship sporting events on ESPN+, indicating a reluctance to fully embrace a digital future. Despite staff upheaval and non-stop talk of “cord cutters,” ESPN’s cable TV business remains profitable. Further, ESPN owns (and continues to bid on future) rights to sporting events, meaning it has an intellectual property moat that others don’t necessarily have. Sporting events need to be seen live, while very few other events do. As such, ESPN doesn’t want to make the shift to digital too soon, thereby undercutting its existing cable business before it needs to do so.
Really though, the pendulum swinging from bundled to unbundled and back again is a reflection of the underlying technology: in the early 2000s we all carried around individual songs on our iPods. They took forever to update – and we had to hardwire the iPod into our PC – so it was fine if we just bought a few songs. Then, as cloud storage and streaming became technically (and economically) feasible, consumers shifted to streaming services. Chris Dixon has a great explainer on bundling economics here, but the conclusion is this: in the end, bundling is beneficial for buyers and sellers.
But, bundling can also be used as an anti-competitive mechanism. I recently warned that Google’s Chrome ad-blocker may be an attempt to do this:
This forced tying of products together is what often gets monopolies in trouble with the law, in one way or another. AT&T’s attempt to force consumers to buy its own phones and network attachments was eventually deemed unreasonable and unnecessary by the FCC. Similarly, Microsoft’s attempt to bundle Internet Explorer with the OS eventually caught the DOJ’s attention, leading to a landmark antitrust case. And now Google is attempting to leverage its browser to squeeze the ad blocker market.
Of course, Spotify is nowhere near anti-competitive behavior: it’s not even profitable, and tech giants like Apple and Amazon are nipping at its heels. In fact, the bigger anti-competitive worry is these tech giants that can bundle together any number of services making it almost impossible for startups to compete.
THAT’S NOT (WAY)FAIR
On Tuesday, the Supreme Court heard oral arguments in South Dakota v. Wayfair. It’s a case on whether to overrule a 1992 decision that prohibits individual states from requiring out-of-state retailers that do not have a physical presence in the state to collect tax on sales to state residents. States claim they’re losing massive tax revenue. Online retailers are concerned about a patchwork system of state and local taxes, making it hard for them to efficiently conduct business. Since you asked, Amazon already collects sales tax when it sells its inventory through Amazon.com, but when third-party retailers sell through the Amazon Marketplace, the company leaves it up to them to collect the sales tax. Most probably don’t.
Even this Amazon example illustrates that large companies may be better able to collect local tax revenue, and it might be more difficult for small companies or merchants to collect the sales tax, robbing the smaller merchants of a single national marketplace. Thankfully, it seems as though our President has a handle on the matter:
States and Cities throughout our Country are being cheated and treated so badly by online retailers. Very unfair to traditional tax paying stores!
☁️ Microsoft dismissed, but a cloudy future. With the hasty passing of the CLOUD Act, the Supreme Court dismissed a long-running dispute between Microsoft and the Department of Justice that had made it all the way to the Supreme Court. The CLOUD Act clarifies that warrants for data held by service providers like Microsoft and Google reach data stored anywhere in the world. But, questions over whether Microsoft will challenge the new warrant issued under the CLOUD Act and how foreign governments will react to the new, hastily enacted legislation leaves the potential high for fresh disputes to surface.
The new legislation authorizes the U.S. to enter into bilateral data-sharing agreements for law enforcement purposes, while allowing service providers to move to quash a warrant if they believe there is a “material risk” that the request would violate the laws of a foreign government.
This sets the CLOUD Act on a collision course with international privacy laws like the EU’s forthcoming GDPR. Meanwhile,
Meanwhile, the EU has introduced a similar law, that allow European prosecutors to force companies to turn over data such as emails, text messages and pictures stored online in another country, within 10 days or as little as six hours in urgent cases (Reuters).
👮♂️ FCC adviser arrested. Perhaps taking a cue from her boss, broadband adviser Elizabeth Pierce was arrested on charges of tricking investors to dump $250m into a fiber optic scheme by faking contracts (The Verge).
Internal staff has pushed Mr. Zuckerberg to answer lawmakers’ questions directly, and not to appear overly defensive. Their goal is to make Mr. Zuckerberg appear as humble, agreeable and as forthright as possible, the people close to the preparations said
Zuck will testify before the Senate Commerce and Judiciary committees on Tuesday and the House Energy and Commerce Committee on Wednesday. Expect calls for privacy regulations from the Left, claims of bias in social media from the Right, and a whole lot of nothing in the end. Oh, Wall Street will be watching closely too: Facebook stock is down about 15% since the Cambridge Analytica news broke, mostly on fears that Facebook’s ad-driven business model or data collection practices may finally run up against regulation from Washington.
The Congressional testimony comes a week after Zuckerberg fielded 45 minutes of questions from big-time jouros (basically a dry run for his Congressional testimony). One recurring theme: that Facebook is an “idealistic and optimistic company”, and for the first decade of its existence, it didn’t really think about how its tool could also be used for bad. And in Zuckerberg’s defense, neither did other people: from the ’08 Obama campaign to the Arab Spring and many grassroots efforts in between, social media has been a tool used for good. Even now, the #MarchForOurLives kids have done a great job using social media to mobilize. As Congress contemplates legislation, it’s important to keep this in mind.
As it turns out, his prepared remarks – released in advance of his testimony – are similar to remarks from last week’s press conference, with Zuckerberg closing out by saying “I know we’ll look back and view helping people connect and giving more people a voice as a positive force in the world.” Yea, if only he could get the Nazis to stfu in the meantime.
No matter what happens, SNL’s Mark Zuckerberg summed it up best this weekend: “unlike my facial expression, Facebook is going to change.”
🚘 Picture me rollin’
Meanwhile, the FTC has confirmed that it’s already investigating Facebook’s privacy practices. It could a huge ass fine, with some 87 million users having their data exposed and Facebook potentially on the hook for a $40,000 fine per violation. Oh, and now some consumer groups are saying the FTC should investigate Facebook’s collection of face and biometric data. TFW 😱
🚫 Deja CubeYou…
In other (or really, the same) news, CubeYou and its Apply Magic Sauce quiz was suspended from Facebook for doing basically what Cambridge Analytica did. This time it took a CNBC investigation to get Facebook’s attention. So have we really learned anything yet?
👩⚕️ What to ask next time you see your doctor
Wanna check my data too? In the New York Times, Harvard professor Jonathan Zittrain proposes that Facebook, like doctors or lawyers, should be deemed “fiduciaries,” meaning they’re legally obliged to place clients’ or patients’ interests above their own. It kind of makes sense, right? Companies like Google and Facebook have similarly sensitive, and much more, information as compared to our doctor or lawyer (I skipped both those annual check ups this year), and can certainly wield a lot of power over users. And as these companies and their algorithms get better at predicting and shaping our behavior, wouldn’t it be great if they didn’t just use that power to sell us more stuff or place us in little filter bubbles?
Finally, Facebook has formally announced its support for the Honest Ads Act, which would require all digital platforms with more than 50m users to maintain a public file of all election ads purchased by a person or group who spends at least $500 on the platform. Fast forward to 2020 when thousands of Russian accounts are buying $499 worth of ads.
BACKPAGE.COM ON THE FRONT PAGE
The Feds shutdown Backpage.com on Friday, following it up with a 93-count indictment on Monday, charging its two co-founders and five other employees with money laundering and facilitating prostitution. Backpage is a classifieds website (think Craigslist for creeps/felons) that’s faced persistent allegations of facilitating illegal prostitution that law enforcement has been after for years. Importantly, this has nothing to do with Congress passing a crappy bill called FOSTA/SESTA, which, while trying to stop online sex trafficking, will make the problem worse (my explanation). President Trump hasn’t signed the bill into law yet, so color me shocked when a Congresswoman is trying to claim victory for something she didn’t really have anything to do with:
The shutdown is actually the result of long-running court cases in numerous states that have recently found Backpage.com is not entitled to immunity under Community Decency Act § 230, the statute which generally provides for immunity from liability for internet intermediaries.
👮♂️ This week Amazon should…
Call Alexa to the witness stand. This according to a CNet report, where a man’s own pacemaker is being used against him to show he committed arson, and wasn’t asleep – as he’d claimed – when his house caught fire. Of course, it won’t stop at pacemakers. From the law’s perspective, the data is fair game under the 4th Amendment, so if law enforcement gets a warrant, Alexa can be dragged into court. And if it’s Alexa’s word against mine, I don’t like my chances.
📬 I don’t care about your damn emails! In a sign that whitehouse.gov might be as vulnerable as whitehouse.com, a report says that most domains under the purview of the Executive Office of the President aren’t using a certain protocol to protect email addresses from phishing and other hacking attacks (Cyberscoop).
🎭 When is anonymous anonymous? A Texas court may soon have the answer, but not before Big Tech weighs in (Law360).
👾Instructions on how to use Cloudflare’s new 184.108.40.206 to get a truly encrypted DNS service and keep your ISP out of your shit (Ars Technica).
🎧 What’s a stream cost? Music licensing is complex and expensive (unless you’re YouTube. A graph comparing artist revenue, users, and loss per user of major streaming platforms (Information Is Beautiful).
Cambridge Analytica was bad, but Facebook’s collection of data is just the way the government wants it
It’s been almost two weeks since the Cambridge Analytica scandal broke for the third time since 2015, so it’s time to zoom out a bit and look more broadly at privacy law in the United States, and what those laws mean for a company like Facebook.
Like many stories that coastal elites and thought leaders make a fuss about, this one begins at that school in Cambridge, Massachusetts.
The idea of a “right to privacy” or “right to be left alone” all began in 1890 when two elitist Harvard law students were concerned about the intrusions upon their lives in high society posed by journalists and the fancy new instantaneous camera. Basically, they were worried their dinner parties would be ruined; so worried, in fact, that they wrote a law journal article about it that I assume at least four people have read. This article laid the foundation for the modern formulation of a “right to privacy.”
Let’s walk across the Harvard Yard (is that what people call it?) and skip forward 110 years to the dorm room of a computer science prodigy known by his Live Journal name Zuck On It. Mark Zuckerberg created Facebook for precisely the opposite reason as those snobby law students: he was an awkward computer geek and just wanted a way to meet girls. So even at first conception, we see the right to privacy (snobby law students) and Facebook (nerdy computer geeks) are fundamentally at odds. Remember, before Facebook, Zuckerberg got himself in trouble for making Facemash (think hot or not), which he built by hacking into the database of each Harvard house and taking the photos from each face book.
Together, Spotify and artists have killed the album, perhaps bringing music copyright down with it
Analysis of Spotify’s F1 filing for its impending IPO have all rested on the fundamental assumption that power in the music industry flows from copyright control, and for Spotify to achieve sustained success, it’ll need to either gain leverage such that it can negotiate better copyright licensing deals or it’ll need to acquire its own copyrights.
This is incorrect. In fact, the long-term success of truly disruptive startups has long depended on upending old business models and creating value in new ways.
Spotify lost $1.5 billion in 2017, illustrating the current music industry dynamics that have made it nearly impossible for any digital music startup to build a sustainable business. The “problem” with Spotify has always been that the record labels own the copyright to the music, forcing Spotify to pay nearly 70 percent of its revenue to them in royalties.
Thus, Spotify’s margins are completely at the mercy of the record labels and the deals Spotify must cut with them. Generally, new music is granted a copyright for the life of the artist plus 70 years. The labels’ power stems first from their control of copyright on new albums. From this, they control distribution, marketing, and sales. But, both Spotify and artists may be pushing towards a future—inadvertently or not—where the album format, and thus copyright itself, is no longer relevant. This puts the labels in a precarious position and gives the streaming companies and artists an opportunity to explore new, innovative business models.
Amazon wants to own your home; Ring’s IP gives it the opportunity to do just that
By now, everyone has heard the news of Amazon’s $1+ billion acquisition of smart-home startup Ring, most famous for its video-enabled doorbell and “failed” Shark Tank appearance.
It’s become apparent that the $50 billion home security market is the first real use case or potential “killer app” for the smart home. With the Ring purchase and its recent purchase of another smart home startup, Blink, Amazon is positioning itself to win the space. But for Amazon, “winning” a space doesn’t simply mean gaining a few customers and selling them a bunch of stuff. Time and time again, they’ve executed against a very specific strategy:
Invest in a market with massive fixed costs but the potential to benefit from economies of scale
Build an integrated solution, justified by the fact that Amazon itself will use it
Open up the integrated solution to third parties, providing the “primitives” for continued development on top of the Amazon platform
The Amazon Marketplace (the core ecommerce offering) and Amazon Web Services are the two most prominent and realized exercises of this strategy, but it is actively pursuing the strategy in logistics, food services, and now, the smart home. Notably, Amazon’s moves into all of these markets feed off each other. For instance, its moves into logistics—particularly its goal to solve the “last mile problem”—is directly strengthened by its effort to own the smart home, particularly the home security system.