Issue: April 2002
http://www.business2.com/articles/mag/0,1640,39186,FF.html
W. Brian Arthur, Andy Grove, and Lawrence Lessig speak at Business 2.0 Live! event in San Jose.
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CARTER: The Commonwealth Club Silicon Valley and Business 2.0, brought to you from the Tech Museum of Innovation in downtown San Jose. My name is Dennise Carter, and I will be your chair for this evening. We would like to welcome the listeners of WBSU-FM 89.1 in Brockport, N.Y., one of the more than 225 stations joining us nationwide for America's longest-running radio program. Now it is my pleasure to introduce Ned Desmond, editor and president of Business 2.0, who'll be introducing our guest speakers, and he will be the moderator for this evening's discussion. Ned.
DESMOND: Thank you, Dennise.
DESMOND: Before we get started, I'd like to thank the Commonwealth Club Silicon Valley and the Tech Museum of Innovation for their generous assistance in making this evening possible. Our subject tonight: "Is the Information Revolution Dead?" Now regardless of what we decide, I can assure you that our panel is alive and kicking, engaged, and ready to weigh in on this topic. So let me introduce them for you. On my far side is Brian Arthur. Brian is an economist, and he's a pioneer of the theory of increasing returns. He's a professor at the Santa Fe Institute, and he's author of the essay that appeared in Business 2.0, the March issue, on the subject that is the inspiration for this evening. To his side is Andy Grove, the chairman of Intel and a co-founder of that remarkable corporation. And to my right, Larry Lessig, a professor at the Stanford Law School. Larry is an expert on constitutional law and legal matters relating to the Internet. His most recent book, The Future of Ideas, was published just last year. Gentlemen, welcome.
DESMOND: So let's get down to our discussion. I think we all agree that the late 1990s and the first part of this century saw a remarkable boom in the technology world. There was an astonishing crop of startup companies; there were dramatically overvalued stock prices, in particular for tech companies; there was ravenous corporate IT spending; and there was a vast industry of pundits, like me, who predicted the glories of the future of technology. And all of a sudden, just like that, in a matter of months it seems that all of that magic has gone away. In Santa Clara County, unemployment today is 7.5 percent, up from 1.7 percent just a year ago. Tech investors are a disgruntled group of people who've lost billions of dollars and don't have much faith in technology, at the moment. Even as the economy recovers in the United States, it seems that big tech companies just aren't keeping pace with that; they're still lagging behind. And skepticism abounds. Even Peter Drucker was quoted recently as saying -- in Business 2.0 -- "The information business as a business really isn't going anywhere." And yet, in his essay in Business 2.0, Brian Arthur argues that numerous examples from economic history suggest that information technology has yet to see its best innings. The future, Brian argues, is still ahead of us and not behind us. So I'd like to begin with Brian and ask, how does economic history support this optimistic outlook?
ARTHUR: Well, there have been about four major revolutions -- technological revolutions -- before this one in information technology: The early Industrial Revolution, where factory and mill system was brought in; this one was in England. A so-called British revolution in railways in the early and mid-1800s. Another one that historians have identified -- steel and the coming of electrification of factories, a huge revolution in the late 1800s; this was in Germany and the U.S. And still another one the beginning of the 20th century until about 1950, '60, 1970 -- mass production and the coming of cars. If you look at those previous revolutions -- now, by the way, we're in what you might loosely call an information revolution -- if you look at those previous revolutions, you see that they go in recognizable phases. I wouldn't say we want to clock them with a stopwatch, but typically they work -- they start from a fairly primitive set of technologies. The amazing thing is that the technology works at all. Early in 1825 early railways that were introduced in Britain -- there were still carriages drawn on rails by horses. Ten years later there's a massive back and forth in technology, lots of inventors and promoters getting in the business -- a time of real turbulence. Then the press catches on around 1840, the late 1830s, and starts to talk about almost a new economy -- new prospects for the economy. It would be a very different economy. By the mid-1840s and the railway revolution in Britain, people had started to invest big-time. There were lots of promotions going on, little branch lines were being put in everywhere, scrip -- which is shares that are parceled up into tiny units -- they were being sold in alleyways. Everybody and his brother and his uncle was getting in on a massive investment spree. So there's a huge mania in 1845 and then a crash -- 1847 -- almost predictable. The Economist magazine was around at the time and had predictably forecast that there would be a crash and predictably said, "I told you so," afterward. Then, of course, you go into a phase where people are looking for scapegoats -- there's government committees and so on. But, interestingly, in that revolution and the others that I've looked at, it's not dead after the crash. The technology doesn't come to a halt. You go into a massive buildout of technology after that. That's when railways really started to take off in Britain, and 10 years later in the United States -- huge buildouts, still enormous investments, and that initial technology that had got everybody overexcited and then crashed everybody's hopes goes on to be a driver of the economy, brings in a huge amount of prosperity and growth. You enter a golden age. And then sooner or later, in this case around 1870, 1880, and a little bit later in the U.S., the technology gets tired; all the investments have pretty well taken place; foreign competition comes in -- if you have railroad money, you want to invest it in Argentina or Russia or somewhere else -- and the technology, then, is mature. What interests me is that in this period where there's huge excitement about a new economy, new things happening, a mania, and a crash, things don't stop there. That's when the interesting things start. And after that there isn't so much massive investment. You don't see huge manias after that; in fact, there's little bits of excitement. What you see is a very sober time, a time of buildout, a time of people saying, "Yes, let's get serious about this technology." Large companies start to take over, and it's a time of quiet buildup but huge buildup and always of prosperity. And this, I think, is the time that we're entering now with respect to the information revolution. We've had our mania, we've had our crash, and I believe what we're seeing is that the technology is starting to mature. The actual tech, the base technologies, are in place, and I'm expecting the next 5, 10, 15 years to be periods of buildup into a new period of prosperity and growth for the U.S. economy based upon information technology itself.
DESMOND: Thank you, Brian. Andy, did you ever feel you were running a railroad?
GROVE: Sometimes. Sometimes we ran off the track. You want me to comment on this?
DESMOND: I would like you to. Yes, please.
GROVE: As I was listening to Brian, a couple things occurred to me. One is the interrelationship between the different waves of technology, evolution, buildout -- that each had something to do with the next. Railroads made -- didn't start with steel; they started with wooden rails. They propelled the steel industry into big time. The steel industry, in turn, was responsible for the development of the automobile industry. So one industry's growth becomes a platform for another industry. And I think we can see some similarities in technology where semiconductors gave rise to the PC mass-produced computer world; mass-produced computer world gave rise to the Internet -- without PCs there would be no Internet; and hundreds of millions of connected PCs and the Internet is going to give rise to other types of applications that we're not sure of, just the same way as cars were not foreseen at the time the Bessemer furnace was invented. So that's one comment. The other one is a point of difference. The global economy in the last century was confined to England, some parts of Western Europe, and to the United States. Today the economy is really much more globally distributed -- information technology and the growth of information technology is much more worldwide, and the action, in fact, is taking place outside the United States as much or more than in the United States or Western Europe. That's a point of difference that actually favors the speediness of recovery.
DESMOND: I see. Well, Brian is our optimist; Andy adds a little caution to optimism. Larry, you're ...
GROVE: I didn't.
DESMOND: Oh, you didn't. I'm sorry. I misinterpreted.
GROVE: No, I think there's -- what I'm saying is that, first of all, this platform effect, that each wave builds on the other one, fuels the development of the -- that Brian was talking about. So I'm confirming that. And, secondly, the global afterburner that we have in the information technology in today's age wasn't present in his time so that's a plus.
DESMOND: That's going to amplify the effect.
GROVE: Right.
DESMOND: Larry, you're not noted for being an optimist.
LESSIG: No. Pessimism.
DESMOND: Would you buy in to what you've heard today?
LESSIG: Right. So pessimism is my brand. Let me stay on brand here. So I completely agree with Brian in his description of history, but the difference is there were no lawyers then.
LESSIG: And so I think the real question we should be asking here is, Is the information revolution murdered? That's the real question.
LESSIG: And the reason we should ask that question is the significant difference that we're facing now is that using the law and the power that intellectual property of a particular kind is giving concentrated industries -- the future development that you, I think optimistically, point to can be vetoed by last generation's -- by the dinosaurs of the last generation's technology. So the way the 19th and 20th century thought about distributing content gathers a bunch of intellectual property and says, "Ways that are different from our way, and ways that are different, and ways that undercut our monopoly power, we're going to stop." And the difference now is the future technologies that were allowed to rage after the railroad revolution and the car revolution are now illegal. These are illegal technologies we're talking about. And they're talking about making machines that Andy's company builds that don't have copyright police built into them -- illegal technologies. So I think the real question we've got to focus on now is not the great optimism of the pattern of history but particular powerful forces that can intervene and undercut that revival, which, I agree, we should expect but can be destroyed if these trends continue.
DESMOND: That's a very rich subject. It leads me right to my next question, which is what do we need to see happen to usher in the golden era that Brian spoke about and Andy feels is going to be amplified.
GROVE: Shakespeare provided a prescription for that.
DESMOND: And it is ...
GROVE: First kill all the lawyers.
DESMOND: We can just end it right there. It's been nice knowing you.
ARTHUR: Does that include law professors?
DESMOND: I don't know. What would you say, Larry?
LESSIG: Oh, it's such a guilty conscience I have here.
DESMOND: Well, clearly, you're a reformist. You're trying to save the profession from itself.
LESSIG: OK, so now I'm going to defend the lawyers.
LESSIG: The law in this area has traditionally been extremely balanced. We lawyers use the word "intellectual property," but we're licensed to use that word. We're trained that intellectual property is a balance between monopolies granted by the state to create an incentive to produce and access, and fair use guaranteed by the balance the law creates to ensure that follow-on innovators and creators can take advantage of the innovations that have been produced. That's the balance the law has traditionally struck. The problem today is that this word "intellectual property" has become captured by people like my friend Jack Valenti, who goes around talking about intellectual property not as a balance but as an extreme; not as something that we're supposed to be constantly restriking as technologies change to make sure it doesn't stifle innovation, but as a tool that the dinosaurs can use to make sure there are no mammals in the future. So he talks about intellectual property as just like every other kind of property, and real lawyers listen to that and say it kind of rings hollow because it's not like every kind of property. There's nothing that says you have a fair use right to my car, and I guarantee it -- don't touch my car. There's nothing that says that my car will be turned over to the public after a "limited time." But the Constitution guarantees that there's such a thing as fair use to copyrighted materials and guarantees that intellectual property gets turned over to the public after a limited time, and that's not because the framers were communists, it's because they understood that intellectual property is different. And we've lost that sense of difference, and we've allowed very powerful industries therefore, I think, to veto the future that Intel and companies like that would produce.
DESMOND: Brian, in your research, have you encountered a similar sort of roadblock to progress in the course of other technological revolutions?
ARTHUR: Oh, absolutely. At the moment, it appears that Hollywood is in a raging battle with Silicon Valley, and I agree that the dinosaurs are trying to stop the arrival of mammals. Around about 1865, the coach makers and the coaching industry in England passed a law -- the famous Red Flag law -- and it said anybody with an automobile -- in those days they were steam automobiles -- had to, number one, obey a speed limit of 4 miles per hour ...
ARTHUR: ... and you had to have a man walking in front waving a red flag.
ARTHUR: Now, I mean, I have this grand vision of what freeways would look like if we adhered to that law. It did last on the books, though, about 13 years and was gradually modified. I do think that Larry's quite right that you can't let the new revolution fall into the hands of the people who ran the last revolution. That's a legal disaster and it's an economic disaster. You simply can't let the information technology revolution be hijacked or taken over by people from a previous regime. Why? Their interests are at stake, and they will do everything they can to have guys waving red flags in front of information technology.
GROVE: Is there an example that you can think of in history where the progress of technology was more than temporarily disrupted by previous-era representatives blocking it?
ARTHUR: I think every -- my experience is that every good idea always has its skeptics. In this case it's more than skepticism, though. These are powerful economic interests trying to act, quite understandably, in their own interest and, thereby, getting in the way. What strikes me, as an economist, is that every revolution you see in history needs some sort of infrastructure. You need a railroad system to run trains on. You need an interstate highway system to run automobiles and the whole mass-product economy on. And it takes a lot of time and an awful lot of political infighting for this to take place. The first proposals for the interstate highway system, to my surprise, were in 1924. Roosevelt was a big backer in 1938. And it wasn't until Eisenhower came along in 1954, 1956, that the Highway Act finally got passed. I think we're seeing a repeat of this. The huge fight here is over broadband. Broadband is going to be the infrastructure of the Internet and this digital economy we're talking about. Some people say, "Let's get on with the job" -- that's Intel, Silicon Valley. I thoroughly favor that, as an economist. Other people are saying, "Well, hang on. If we put in broadband, I might get ripped off. My industry stands to lose. Let's set up a lot of roadblocks." So it's -- I agree with Larry but it's not just a bunch of lawyers fighting. There's major, major stakes in this one.
DESMOND: Um-hm. Let me ask this question. If you had to assign some weight to the different factors that are slowing down the forward march of technology today, would you say it's principally the lack of dissemination of broadband? Is it the resistance of the dinosaur industries? Is it the lack of real -- what Brian sometimes calls the amenity of technology? I mean, where do these different forces come into play, and how important are they as breaks on our forward motion?
GROVE: I'll take a crack at that. If you think of it at this moment in time, the impediment is the lack of availability of broadband. If you somehow magically made broadband available to everybody who -- let's take in the U.S. economy, in the United States -- everybody who wants it, you would instantly go from maybe something between 6 million and 10 million households being connected to the Internet by a better-than-dialup modem -- we call that broadband, in a bit of a misnomer -- we would jump up to maybe 15 million. After 15 million, things would come to probably a halt because people would be looking for motivation. The next 10 million people would be looking -- "What do I need this for?" or "Why do I want to pay $49 instead of $20? There's nothing on the Internet," so to say. Then we're going to switch over to the content availability. So at the moment there is a pent-up demand for -- that could double the broadband penetration in the U.S. As soon as it doubled, it -- and I'm kind of figuratively thinking of doubling it -- the content availability would come in as a limitation. So they are sequential.
LESSIG: I agree with that, and I would add to it a particular twist that the United States courts have intervened with recently, in contrast to what happened in the past. Historically we've seen many times where new technology has affected the delivery of content and the ability for people to gather revenues. The most important first example is with sheet music and the player piano. Sheet musicians made their money by selling copies of sheet music. Player-piano producers came along, they bought one copy, and then they Napsterized the sheet-music business by then selling many, many copies of piano rolls. The sheet musicians went to court; they said, "We're being Napsterized. Stop them from stealing our stuff." The Supreme Court said, "I'm sorry. The last doesn't apply." So it took Congress to intervene years later to strike a new balance. The same thing happened with cable television, where cable television -- a new technology for gathering broadcast and selling it to their customers. That's the Napsterization of broadcasting. Twice the Supreme Court was asked to shut this down over a period of 15 years. Twice the Supreme Court said the law doesn't apply. It took Congress 20 years later to sit down and restrike the balance. And then in 1976, Universal and Disney launched a lawsuit against Sony for the then current Napsterization technology, which was the VCR. Eight years later the Supreme Court said, "I'm sorry, your content's being Napsterized, but tough. When there's a major technological change, it's not our job to restrike the balance between content protection and access. That's a job for Congress. And so as long as there is at least a substantial, legitimate use, we're going to allow that new technology." The problem now is that courts don't behave like that. The problem now is you have a new technology. You take the replay TV technology -- which is a much better VCR-like technology for recording television shows -- that technology has got to go into a federal court and prove that it's a viable technology that, on balance, will not harm the copyright interests of the broadcasters. They tried to invoke a Napster -- the Napster defense, that would be a real loser ...
LESSIG: They tried to invoke a Betamax defense, saying, "Here's a couple legitimate uses, that should be enough under the Betamax case." But the court said, "No, we're going to require you to prove that this technology, on balance, isn't going to do harm." Now that's like saying they're going to have a bunch of economic experts -- I'm sure they'll be very good, Brian -- but, still they'll be experts hypothecating about what the future is. It's worse than lawyers. And then you'll have a federal judge sitting down and deciding whether the technology would be allowed. Like a Soviet planner, but with better lighting ...
LESSIG: Now this is our innovation policy. Federal courts deciding which innovations will be allowed. And so when you say the next kick is going to be content -- the real problem is the venture capitalists know they're not going to fund any new venture capital project that has to do with the delivery of content unless the dinosaurs approve of it because they'll buy a lawsuit. And, of course, that's the last thing any venture capitalist wants to invest in.
GROVE: You're discounting the possibility of a consumer rebellion.
LESSIG: True. Right. And the last time we saw such a rebellion was ...
DESMOND: Napster.
LESSIG: Right. Where was the rebellion with Napster? I mean, 70 million users were all of a sudden told they were criminals, and what did they do? They said, "OK, we'll switch channels and watch ...
GROVE: Switched to Morpheus.
DESMOND: Switched to Morpheus, that's right.
LESSIG: Right. Well, that wasn't the rebellion that was going to get -- I mean, I hope for it, right. And maybe we can get it going to, say, rationalization here, but I haven't seen it.
DESMOND: We've heard about broadband, and we've heard about content. Have we covered all those bases, Brian, all the impediments?
ARTHUR: No, I think there's another one. I'm sitting here wondering if Larry wants to kill all the economists as well as ...
ARTHUR: ... if Andy wants to kill all the lawyers. There's another one. I thoroughly agree that those are major roadblocks to this buildout. But there is another one and that is that, put very crudely, the Internet as a technology doesn't work. It doesn't work very well. I'm trying to hook up from home yesterday on a standard telephone line -- I'm somewhat of a Luddite or a technology primitive -- and I can't do it. I can't get into my server easily. I get onto the server this morning, it doesn't work very well. The point is that at this stage of these revolutions, the base technologies are in place, but what it takes to make those technologies usable are a thousand and one small what I call amenity technologies. The arrangements that make them all workable. As Andy was saying when we had early trains, say around 1850, they worked on wooden rails covered with iron plate. It wasn't until you get steel railroads around 1870, Pullman cars, airbrakes, switches, signals, telegraph systems from one railroad¿s depot to another one that makes it all work. So the technology needs to meet us as consumers and work. The other thing is that we, as businesses, are users and all these revolutions have to completely upend the way we do business. And completely re-create our businesses. In the 1890s, 1900, dynamos were coming along -- electric motors -- and it looked very easy. You could just put those into the factories that were powered by these enormous steam piston engines with pulleys and wheels and levers and all kinds of gizmos. But it turned out that to make that technology work, to make electrification work, you had to completely redesign factories. Now I think we're in the same position. Not only must the Internet work for us so that I'm not, as a consumer, just standing there, sitting there totally frustrated -- will it work, won't it work, can I get into my bank account, will this take me 10 minutes or can I just get in at the press of a button -- so that the whole technology can be taken for granted and become invisible, as John Seely Brown puts it. But also we have to -- to make this revolution usable, of businesses really speaking to each other and parts of businesses interconnected with each other, is going to require a very different type of business organization and we haven't a clue yet what that's going to be. So all of that's going to take time. It'll take several years. Maybe 5 years, maybe 10, maybe 15. And this is what really draws things out. But as that comes along, there will be, indeed, a massive buildout.
DESMOND: Andy, do you have some comment?
GROVE: Well, first of all, I took the time that Professor Arthur was talking to answer the pop quiz that I got from Professor Lessig.
GROVE: There was a consumer rebellion ...
DESMOND: But that's cheating.
GROVE: ... in the mid-'70s against Detroit and propelled the foreign car penetration to the United States from the 20 percent to the 50 percent range because people were dissatisfied with the car design that prevailed in the '70s -- the size of the cars, the gas mileage of the cars, the quality of the cars -- most importantly -- and caused a wholesale adjustment of the most entrenched, most traditional business environment, which is the car manufacturers, in the United States, to adjust to that...
LESSIG: OK, but when the consumers rebelled, they weren't called terrorists. When they rebelled, they weren't called thieves and criminals. When they said, "We want a different ..."
GROVE: They were by Lee Iacocca.
LESSIG: Well, by Lee Iacocca.
DESMOND: By Lee Iacocca, right.
LESSIG: But Lee Iacocca didn't have Jack Valenti backing him up. And the point is Valenti et al. have succeeded in painting this debate as a debate between property-loving Americans and thieves with ponytails, typically, right. Thieves who are out there just trying to undermine the American system through these new systems for distributing content.
GROVE: To which the ponytail, 20-somethings have stopped buying CDs, and for the first time in 20 years, the dollar revenue of the music industry has taken a step down to the tune of 5 percent a year.
LESSIG: Right. Which backs up their argument in Washington to say, "We've got to stop the piracy and thievery," and allow Sen. Hollings to hold a committee where he completely, inappropriately, and, I thought, unfairly brutalized your colleague, Les Vadez, who had just asked questions about shouldn't we be thinking about consumer rights here and shouldn't we be letting the technologists work the problems of piracy out without government ban, regulation. The problem is now most Americans think this is about thievery, and we have failed -- those of us who believe in innovation and creativity have failed in framing this not as a battle between those who want to steal and those who want property but about whether we allow the future innovation to take off.
GROVE: Larry, you say most Americans think -- most Americans that matter in this question are the people who make up 80 percent of the music-buying public and I bet they don't think of themselves as thieves.
LESSIG: And they also don't vote. I mean, the fact is there's one, maybe two, maybe three...
GROVE: They vote with their credit cards.
LESSIG: They vote with their credit cards, but the fact is those who are passing laws are not Visa and MasterCard. Those who are passing laws are congressmen who are responding to completely apathetic ponytail people and people buying music who say, "I'm not going to waste my time with politics," and why should they? It's a complete waste of their life. And they're not responding to those people; they're responding to the people who are spending lots of money lobbying Washington to back up their dinosaur industries.
ARTHUR: What I'm hearing from my two colleagues here is if you have a ponytail call your congressman right now.
DESMOND: On that note, let me just make a 15-second interruption for the benefit of our radio listeners. This program is brought to us by the Commonwealth Club Silicon Valley and Business 2.0. The program's title: "Is the Information Revolution Dead?" Our guests are Brian Arthur from the Santa Fe Institute, Andy Grove from Intel, Larry Lessig from the Stanford Law School. My name is Ned Desmond. And let me take that opportunity to wedge a question in here because I can't resist and I told Andy I'd ask him this question. In hearings before the Senate commerce committee, Michael Eisner of Disney said that Intel, Dell, and Apple were basing their future on piracy of goods created by companies like Disney, and he went on to say that he was sick and tired of being finessed by Silicon Valley companies who promised cooperation and didn't deliver. So, Andy, are you a pirate and have you been finessing Michael Eisner?
ARTHUR: Please take off your eye patch before you answer that.
GROVE: Mr. Eisner followed the Jack Valenti school of histrionics in front of the committee. Intel believes in intellectual property; Intel is built on intellectual property; and Intel respects other people's intellectual property, as do I. And as to the question of do we finesse them or do we work with them -- we work with Disney as well as the other entertainment companies for six years trying to forge a consensus on content product technologies and, so far, we have not succeeded.
DESMOND: What do they want from you?
GROVE: Do you know the story about bringing a rock? It's the kind of thing that I tell you, "Ned, bring me a rock." You look a little puzzled, turn around, go to the riverbed, bring me a rock, and I say, "No, not that rock, another rock."
GROVE: Some parts of the entertainment industry are playing "bring me a rock" with us.
DESMOND: Brian?
ARTHUR: Well, we've been making a little bit light of this but I believe, as an economist, I believe this is an extremely serious issue. To an outsider it may appear to be inside baseball or something of a tempest in a teapot where Silicon Valley's pitted against Hollywood, the content providers against the technology providers. But, actually, it is a very serious business because I believe that high technology and the information revolution as exemplified, say, by Intel and other high-tech companies, this technology and this revolution -- is beginning to drive growth and productivity in the entire U.S. economy. This is what's keeping the U.S. economy internationally competitive and keeping the edge of the U.S. economy sharp. If you put up obstacles and roadblocks to innovation in this area as the U.S. government, you do so at your peril. Other countries can take over, and there's plenty of historical precedent for that. In the 1880s, Britain lost its edge and America and Germany started to take over. There was still plenty of prosperity to come in Britain, but they ceased to be leaders. And I worry that if this sort of issue isn't settled in favor of innovation and in favor of buildout and not looking to the past to say what worked in the past and looking to the future, rather, to say what do we need to make all of this work for everyone in the United States, I worry if that's not settled that high tech will gradually lose its steam and just simply go abroad. Manufacturing went abroad in the 1970s and '80s with the rise of Japan and Korea. There's nothing magical about the United States, in my opinion, except its ability to innovate and innovate freely, and that's what this country's all about.
DESMOND: So if Jack Valenti were here, he'd say every day 350,000 films are downloaded illegally over the Internet, robbing Hollywood of its revenue and its profits. What does Hollywood need? What should Hollywood be satisfied with in the current environment?
GROVE: Hollywood needs to offer a legal and suitable, legitimate opportunity for downloading movies so the 350,000 people who go through all kinds of contortions that do put your little troubles of getting on the Internet trivialize -- make it trivial in comparison.
GROVE: But they do it because that's their only alternative. What is the legal alternative to doing it illegally? What is the legal alternative of downloading music more than a trivial percentage of the content available? What is the service that they have licensed to provide that legal alternative with? It's not available. So I would say to Mr. Valenti, "You're leaving me no choice. I either curl up and go to Tower Records and buy the $16 CD so I can have the one song that I want, or you drive me to Morpheus or the brothers of Morpheus.
DESMOND: So it's the question of providing a straightforward option to use the Internet to distribute digital entertainment.
GROVE: Right.
DESMOND: Larry, do you have any thoughts on that?
LESSIG: I think we don't really know what the future distribution of content is going to look like in a market where there's going to be intellectual property properly respected and, I, too, agree; I believe in intellectual property but where it's properly respected. We don't know what that's like yet, and we ought to understand we're in a period of transition. And in a period of transition, as Brian was saying, the important thing is just to make sure we move through the transition quickly and easily. Now when we get to the end of this transition, I think we're going to have very different models as John Seely Brown also says, there's -- the different architecture of revenue for these companies will make it look very different from the way it looks right now for them to make money and they will make money in this new business. The diff -- the key reason why it won't be a happy march to this future where everybody's making money once again is that the same people won't be making money. Look in the music industry -- the highly concentrated industry -- five companies control over 80 percent of the distribution of music in the world. One might call that not a healthy industry. One might think it's just too concentrated, and one might say competition that the Internet could provide here would actually improve both quality and diversity of music and also the position of artists. Now if that's what the future delivers, that's going to be social gain -- social welfare gain.
GROVE: Larry, before the personal computer, five companies provided 80 percent of the world's computers.
DESMOND: Before the PC?
GROVE: Right.
DESMOND: Right.
GROVE: And the PC upended the business architecture, to use that quote -- that phrase -- of the computer industry. And I think digitalization and digital distribution is going to change the order and, yes, there is going to be unhappiness just like there was unhappiness in the "computer industry" watching the new upstarts -- the minicomputer and personal computer makers -- take a lion's share of the revenue pie. But it happened and it's going to happen again.
LESSIG: Well, OK, let's remember an important moment in the explosion of the PC revolution. Everybody said IBM made such a terrible mistake in giving Microsoft the operating system and just licensing a version back. But IBM also had in its plan control of the ROM BIOS -- this was the startup chip that would make it so that it was a quote "IBM PC." It was Compaq that went and reverse-engineered that ROM BIOS to, then, establish the PC industry where there could be lots of competition among a lot of different producers all buying Intel chips but, still, lots of competition in the boxes that they produced that gave birth to the PC industry. Now, that reverse-engineering, under some views of intellectual property, is a crime, it was theft. It was theft to the IP that IBM had built into the original ROM BIOS. Now, it was because that view of theft wasn't permitted to capture the birth of the PC industry that we got the birth of the PC industry. And my concern is this idea of theft will take over the lawmakers right now so that we won't get the equivalent of the reverse-engineering of the ROM BIOS that gave birth to the PC industry.
ARTHUR: Larry, if you could, if you had a magic wand and you could wave it and ...
DESMOND: I have one, actually ...
ARTHUR: Excellent. What incentives would you like to see or what legal, not too technical but what legal setup would you like to see in place where everybody could come out ahead? If it's true what I'm saying that there's a massive buildout ahead and there's a golden opportunity and a lot of productive growth available if only roadblocks can be taken out of the way, what incentives would you like to see for Hollywood, for Intel, for Silicon Valley, for content providers where everybody could be better off?
LESSIG: Well, my complaint is the set of roadblocks that are created by legally, government-backed monopolies.
ARTHUR: Right.
LESSIG: And so that's what IP is. Intellectual property is government-backed monopolies. And so I think the balance that we have to strike is one that doesn't allow these government-backed monopolies to be sources of concentrated monopoly power concentrated in these industries. So one reason we've had such an extraordinary concentration of intellectual property is intellectual property basically goes forever even though the framers of the Constitution said it was to be for quote "limited times." Eleven times in the last 40 years Congress has extended the term of existing copyrights basically guaranteeing to Hollywood that none of their work passes into the public domain. Now just think about this. Disney, the only ... you've all heard of the Grimm fairy tales and you sort of have this benign thought about the Grimm fairy tales. The Grimm fairy tales are awful, terrible, terrible stories. The sort of thing that you should never let your children see or read because ... brutal, moralistic ...
LESSIG: They're grim, right. They're grim tales.
LESSIG: But you think nice things about them because the Disney corporation took those stories and turned them into extraordinarily beautiful, for their time, retellings of the Grimm fairy-tale stories. They could do that because those fairy tales were in the public domain. Now, this company that made its, an important part of its past on taking stuff from the public domain and making great stuff out of it, believes in an IP regime that says, "Nothing we produce should ever be allowed to pass into the public domain." That there should be no Walt Disney that does to Disney what Disney did to the brothers Grimm. Now I just think that's a radical transformation of our past, of our tradition, and that we ought to have a much more restricted and, I think, very strong but limited set of intellectual property rights that give people incentives for a limited time and then their work passes into the public domain as it always has before the last 50 years.
ARTHUR: So 5 years instead of 95 years, or some such thing?
LESSIG: I actually propose a maximum of 75 years, but in 5-year terms to get renewed every 5 years. So if you don't want to renew it, it passes into the public domain. But this is quibbling about the details. The point is we've got to agree that public domain is an important part of building innovation and creativity, and that's what the past has demonstrated.
DESMOND: Would you not support, then, Jack Valenti's proposal to have copyright deals that can last forever and a day?
LESSIG: No, he said, "Forever minus a day."
DESMOND: Oh, sorry.
LESSIG: That was his -- when Mary Bono introduced the Sonny Bono Copyright Term Extension Act, she said we should perhaps consider -- because her lawyers told her perpetual terms would be illegal under the Constitution -- we should consider forever minus a day. No, I wouldn't support that proposal either. [Chuckle]
DESMOND: So how has this copyright regime been extended? How has it been distorted in the past couple of decades?
LESSIG: Well, you know, before the Internet there was very strong interest in intellectual property providers -- Hollywood and publishers -- who supported the idea of extending rights, and that made sense to them. And on the other side there was basically nobody. There is, in some weird sense, the public, but there was no strong interest on the other side. I think the Internet has changed that. It's changed it for two reasons. One is overly strong intellectual property protections -- as even Michael Powell, the head of FCC, suggested in a speech about broadband -- can actually chill technological innovation. So now, on the other side are very large industries that contribute actually much more to the United States economy than Hollywood does. And the other side of this is that there, because of digital tools many more people can be creators than at any time before. The cost of creativity drops dramatically. And so many more people are affected by this massive increase in regulation that has gone on in the name of intellectual property. So the Internet actually means more people are invested with finding a reason to strike a balance than existed before the Internet. So they got a free ride all the way up to now, but I think we're beginning to see a twisting back of that. In part, the only way we win is if it's a consumer revolution, but the only way we get a consumer revolution is if strong industries stand up to the Hollywood industries, and Intel was the first to do that in this hearing. But it will take more than Intel -- maybe not much more but more than Intel to fuel this revolution, I think.
DESMOND: Thank you, Larry. Let's take a few questions from the audience. Andy? With the lawyers is there a risk that the U.S. might lose its leadership in the information revolution?
GROVE: Oh, I think there's a very real risk, and it has nothing to do with the lawyers. It has more to do with the educational system in the United States as compared to its counterpart in different countries, particularly Asian countries. The rate of development in the technical fields in Asia, in Japan, in China, in Korea, in Taiwan, in Singapore is far faster than the rate of development in the United States. For a period of time we've actually lived off their education system with value added by our education -- our higher-education system on top of theirs. But, in the meanwhile, their education system has grown in capacity and capability both in terms of volume and in terms of higher education, and native industries are developing very, very rapidly. And, probably, it's a fair approximation that two-thirds of personal computer development work -- personal computer design and development work -- is done in Taiwan and China today, and it's an export industry for them. You take that trend that has taken place in the last 10 years and project it for the next 10 years even without any mishaps on deployment, which could be related to what we've been talking on it so far, there's a real danger of continued shift of the center of gravity of technology, technological leadership, from the United States to the Asian countries.
DESMOND: I see. Second question. You alluded to this briefly. In terms of understanding the motivations of Hollywood, are they interested in protecting copyright because they're true believers or do they genuinely feel that there's a competitive threat which could undermine their power in the entertainment world?
GROVE: Well, I think both gentlemen on my side have alluded to the incumbents' natural tendency toward defending the existing business architecture -- I like that phrase -- architecture of business, business models, the rules and technologies that prevail to that. So whether we are talking of the original Luddites or we are talking of the people with the red flags in front of cars or we are talking of people who were fighting VHS, it is self-protection. I know how to do business with today's technology. I know how to do business in today's structure. I know who my competitors are, I play golf with them. I like my life, leave me alone.
GROVE: It's understandable and it has never worked for very long before. I mean, maybe it's worked for 10 years, maybe it's worked for 15 years. In the Internet time, it's going to work for 3 or 5 years but it's not going to work forever. Technology always wins in the end.
DESMOND: What will break the impasse? Considering what's happened in the courts lately, it seems that Hollywood's played the game pretty well.
GROVE: I don't know but my guess is that the continued erosion of the existing order is going to put pressure on the incumbent managements. How many years of sequential 5 percent revenue declines will the music industry take before they're going to scratch their heads and say, "You know, maybe we ought to get serious about digital distribution of music. That's what really people want." And they will discover what is obvious to the ponytail folks.
DESMOND: Brian?
ARTHUR: Well, if I recall right, the film industry opposed videos. This is a story that Larry knows extremely well. And when videos did come in by popular demand -- standard videos we go and rent -- not only did, were consumers better off but the film industry itself made enormous revenues out of videos. So I think that Hollywood, if we're talking about Hollywood as the antagonist here, doesn't realize that they stand to gain from the new technologies a great deal more than they stand to lose. And I think that the impasse could be broken if there was some way to demonstrate that to them. The video industry -- the film industry -- did extremely well out of videos that they had opposed. So I do think that we have to find some way to show Hollywood that they're not going to lose collectively.
GROVE: To illustrate the degree of opposition, the same Mr. Valenti that you've mentioned before called videotapes the Boston Strangler of the movie industry.
LESSIG: Worse. It was a Japanese Boston Strangler because it was a Sony corporation that was ...
ARTHUR: ... Tokyo Strangler.
DESMOND: Tokyo Strangler. This is a question for Larry Lessig. What is the role of antitrust in this? Who stands to lose and gain the most?
LESSIG: Well, I thought that there was a useful role for antitrust to make sure that the platform for development and innovation stayed open and that no single company had the power to control the future of innovation on the PC platform or the Internet platform. And I thought we won that case, but apparently the current government thinks we lost that case, so maybe there is no future for antitrust in this particular context. But I thought it stood for a principle and the principle was in the context of technology justice, in the context of content, the dinosaurs shouldn't be able to call the shots in the future. And open platforms, which is what I think for most of the history of the Microsoft/Intel platform it was, an open platform; it supported lots of innovation without the platform owner controlling the future was the best way to get innovation. And I think to the extent that this lesson has been learned, the dangers in the future I don't think will come from companies like Microsoft who, I think, at least under one version of their next architecture, wants to develop a system which is another open platform that lots of Web services can be built on top of, not necessarily controlled by Microsoft. The real danger will be companies that are not building open platforms but closed platforms that try to marry content and conduit in a way which controls, gives them the power to control, how stuff is delivered or how innovation develops.
GROVE: Just so we give equal time, who do you happen to have in mind?
LESSIG: Well, I'm not yet convinced, but that's the form of businesses like AOL right now.
DESMOND: Very good. Well, there is a question here -- it's an open one ...
GROVE: For the record, AOL is ...
DESMOND: The owner of Business 2.0.
DESMOND: We believe in full disclosure at all times. Actually, it points to the next question. In the audience someone asked, What about AOL, what about Microsoft? How do these two companies play into the discussion we've been having today? I think you can probably all take a pass at this one. Andy, would you like to begin?
GROVE: The bulk of the discussion had to do with entertainment content, and while AOL now owns entertainment content ... But AOL is probably the most progressive on the subject for two reasons. And I'm not saying that because you are the host.
DESMOND: I would never imagine that.
GROVE: AOL, of course, is the epitome of an online company and an Internet company, so they understand the power of digital distribution because they exist because of digital distribution. But even before that, Warner was the most progressive technologically, the most cooperative of the high-tech industries. To this day they continue to be. And without Warner, DVDs wouldn't exist today, I'm quite convinced. So there's a spectrum between the companies and there's more open to change and less open to change, and Warner is on the more open to change spectrum.
DESMOND: I'm glad you let me off the hook. Brian? This will be our last question, by the way.
ARTHUR: I don't have a comment on AOL specifically or Microsoft. I do think that what's extremely important is to keep pathways to innovation open. And some of the great companies like Microsoft have fought valiantly for that principle. The important thing in the United States is to keep innovation free and innovation open, and I think that should be the principle that policymakers have in mind in this area.
DESMOND: Larry, are AOL and Microsoft on the right side of the equation here?
LESSIG: They both could be on the right side of the equation -- AOL and Microsoft. We'll see whether both remain on the right side.
DESMOND: What are you watching?
LESSIG: I'll be watching AOL more closely right now, but I have great faith in your company here.
DESMOND: Well, I'm sure they all read our magazine.
CHAIR: Gentlemen. I hope you have all enjoyed tonight's program of the
Commonwealth Club Silicon Valley and Business 2.0. Again, we would like
to thank Brian Arthur, Citibank Professor at the Santa Fe Institute; Andy
Grove, chairman of Intel; Lawrence Lessig, professor of law at Stanford
University; Ned Desmond, editor and president at Business 2.0; the Tech
Museum of Innovation; our audience here in San Jose; and those of you joining
us on radio. And now this meeting of the Commonwealth Club Silicon Valley,
part of the nation's largest and oldest public affairs forum, is adjourned.