Uncle Sam and the digital economy

Whether or not one believes that Napster is breaking the law, the entire controversy raises the question: When is it appropriate for Congress and the executive branch to intervene by establishing the standards that guide the digital economy--and when should government stay out?

Napster emerged as a technological innovation that enabled the development of peer-to-peer sharing on an enormous scale. While people argue whether the technology is being used in a way that violates the law, the foundation of the dispute is a technology that standardized one way to share information, at high speed, instantly.

Whether we realize it or not, standardized technologies, products and systems influence our lives considerably. Your light bulb shines because the light bulb manufacturer and lamp maker agreed on a standard technology. In the 19th century, standards ensured that cars from one railroad could run on the track of another--thereby linking a patchwork of railroads into a national system that still powers some sectors of the economy today.

And in the digital economy, standards have changed the way we work and the way we relax, making possible the instant transmission of text, data, video and music across the globe and across a wide variety of telecommunications lines, wireless systems, software programs and consumer electronics.

Standards can be set by industries anticipating or reacting to market needs, or by governments seeking to maximize the public good or otherwise meet policy agendas. In the industry scenario, a large player with enormous market share can effectively set the standard for its industry (think Microsoft, though this type of "de facto" standard-setting is possible without running afoul of antitrust laws).

Another option is having standards set by an industry consortium or other voluntary group. In the government scenario, an entity like the federal government, which has a long history of standard setting on its own or in concert with other governments or industry members, sets the rules.

While they make life easier, standards carry some very real pitfalls--two of which have received a great deal of attention recently.

• Competition. In a word, Microsoft. But even setting aside antitrust laws, standards carry significant business implications. Although voluntary, once a standard is adopted by a company with a significant market share, or by a significant number of industry players, it is a daunting business proposition to split from the pack. If your lamp does not work with the most widely available bulbs, consumers will steer away from your product--even if it is a better invention.

• Respect for property rights. Again, Napster is a creative new standard that permits easy and fast access to and distribution of music. Unfortunately, it may also involve stealing someone else's property.

If standards pose such a threat to competition and property rights, why isn't it obvious that the government--the watchdog for consumers, the protector of property--should set standards?

From time to time, government is invited to become involved in ways that seem impossible to refuse for apparently compelling public policy reasons. The issue, though, is how can government distinguish those cases where it really should say no--no matter how cogent the reasons for involvement may appear? In the case of the emerging digital marketplace, a framework for assessing governmental involvement that asks the following questions should serve as a guide:

• What is the governmental interest? In other words, how high are the stakes to the general public? Public health and safety are areas of high concern; access to entertainment might be less so.

• What is the threat of a stalemate? Digital Television (DTV) required the viewing public, consumer electronics manufacturers, and broadcasters to move together. If one did not move, the others could not act either. Here the government played an important role in breaking a potential stalemate. However, in implementing provisions of the transition (such as receiver and set-top box compatibility), the government should stay out because market forces will spur resolution. Customer needs, and the tremendous financial incentive of being the one to resolve this well and soon, will spur resolution.

• What is the nature of the involvement? Different roles are possible for the government: observer, adviser, manager of the process, or ultimate arbiter. In the DTV example, the government had the choice of affirmatively stepping in or taking a more managerial role to keep the doors open and the process moving.

• How competitive is the current market? Where the market is small and competitors are few, the customer may need protection.

• Are timing issues important? This is perhaps the least important differentiating question, because while some would argue that timeliness is a factor that works against the government, I would note that a standard-setting industry consortium can face the same timeliness problems. When commercial stakes are high, competitive interests are diverse, or when it is in the interest of one or more factions to delay a final outcome, these negotiations can take a day longer than forever.

• Are the rights of an individual being threatened? There is a compelling argument to be made that government should become involved in standard setting when an individual's rights are being violated. Many feel this is the case with Napster.

The Clinton administration took a very hands-off approach to setting standards to govern the digital economy. One can expect that the Bush administration and the Republican Congress will take a similar approach.

In the emerging digital economy, that appears to be the wisest approach. Technologists should determine the technology; lawyers and policy-makers should intervene only when the uses of that technology infringe on the rights of others.