[rumori] even more from the WSJ

From: Steev Hise (steevATdetritus.net)
Date: Thu Jul 27 2000 - 11:27:12 PDT

July 24, 2000

The Outlook


New Economy fans portray the Internet as a purer form of capitalism. So
many imperfections in physical markets -- barriers blocking new
competitors, geographic boundaries for buyers and sellers, limited
information for consumers -- fade in cyberspace.

Yet the Web can be a force for undermining free markets as well. Witness
the mounting controversy over the definitions and defenses of intellectual
property: the Napster Inc. music-pirating flap and the parallel
film-industry lawsuit filed last week against Scour.com; eBay Inc.'s
efforts to protect its auction-price data; Amazon.com Inc.'s attempts to
block competitors from mimicking patented "business methods."

Though these may sound like technical legal battles, they go to the
foundation of any economy, new or old. "The functioning of an economy
depends on the definition of property rights and their enforcement," says
University of Chicago economist Ronald Coase, who won a Nobel Prize for
establishing that theorem bearing his name.

E-commerce is now sowing confusion over such long-settled matters as the
way information is owned and shared. Napster, which allows people to swap
digital-music files online free of charge, raises the specter that
protections will crumble as technologies make it far easier for people to
make high-quality copies of songs, photos and movies and distribute them
widely while evading copyright restrictions.

Napster's opponents argue that without copyrights, authors and artists
lose their financial incentive to create, and output falls. "The Napster
model threatens the livelihood of the people who create music as well as
the viability of legitimate Internet music business," Edward Murphy,
president of the National Music Publishers Association, said on asking
last month for a court injunction.

There are also dangers for the free market in making property rights too
restrictive. And the response to piracy favored by many companies --
imposing new limits on the spread of electronic information -- can have
its own economic costs. "The greater risk is that we're actually creating
rules &hellip that make it harder to get legitimate access to
information," says Mark Lemley, director of the Center for Law and
Technology at the University of California, Berkeley.

Mr. Lemley cites the contrast between conventional and electronic
publishing. "If I buy a physical copy of a book, I can do what I want with
it -- I can lend it to people, I can read it five times, I can resell it
to a used-book store, I can throw it away," he says. "The law treats the
sale of this copy as the transfer of certain property rights."

Electronic books, in contrast, can come with detailed contracts declaring
that "you don't have the right to transfer it to somebody else, you don't
even have the right to copy portions for uses that would be considered
fair under copyright law," Mr. Lemley says.

Besides, just as some technologies make it easier for users to circumvent
copyrights, others make it easier for producers to enforce property
restrictions by, for example, permitting close monitoring of who is
reading the e-book and when.

"The more complex you make the rules," Mr. Lemley says, "the more
difficult it is for markets to work."

The issues go beyond transferring property rights for products such as
books and records to electronic media. Fights are breaking out over
whether the New Economy is creating new forms of property worthy of
rights. In eBay's lawsuit against Bidder's Edge Inc., an "auction service"
that provides price, quantity and bidding data from multiple auction Web
sites, eBay claims such information as its property. In May, it won a
preliminary injunction in federal court defending its right to prevent
Bidder's Edge from disseminating it without paying a fee.

Such disputes will become a lot more common as information-based and
research-based products claim an ever-greater share of the economy.
Intellectual property has always been trickier to define than
physical-property rights. Economists call physical goods "rival
goods." There's a clear limit to how many people can share an ice-cream
cone. It's hard to imagine an efficient market unless a customer has a
clear ownership guarantee.

Information, especially in the Internet age, doesn't face those
constraints. As Napster shows, there's no physical limit to how many
people can enjoy the same digitized recording. Intellectual-property
rights are granted for the benefit of the sellers, to give them a
financial incentive to innovate.

Some economists note, however, that intellectual-property protections
don't always boost innovation. A recent Massachusetts Institute of
Technology study concluded that research and development in the software
industry actually leveled off after new protections were implemented in
the 1980s. The authors argued that certain information-based industries
benefit more from open sharing and competition.

"If you look at the explosion of the Internet, it's just laughable to say
that there are insufficient incentives, and we need to go out and create
more with intellectual-property rights," says Lawrence Lessig, a professor
at Stanford Law School and a leading crusader against new Internet patent
and copyright protections.

Mr. Lessig knows he is waging an uphill battle against entrenched beliefs
about how capitalism should work. After he gave a recent speech railing
against intellectual-property rights, a man in the audience rose and
declared: "I thought communism was dead."

-- Jacob M. Schlesinger
Write to Jacob M. Schlesinger at jacob.schlesingerATwsj.com1

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