Capitalisn’t: Taylor Swift, Ticketmaster, and Chokepoint Capitalism
- December 19, 2022
- CBR - Capitalisnt
Why were so many Taylor Swift fans unable to secure tickets for her upcoming US tour? Possible explanations vary, but many have pointed to market power concentration in creative industries, and how it affects the creative class and consumers. Consider Amazon’s influence in book publishing, Google/Facebook’s advertising duopoly effect on news media, or in Swift’s case, Ticketmaster’s control of ticketing and venues for artists. In a new book (coauthored with University of Melbourne’s Rebecca Giblin), writer and activist Cory Doctorow calls this ‘capture’ of creative labor markets “chokepoint capitalism.”
On this episode of the Capitalisn’t podcast, Doctorow joins hosts Bethany McLean and Luigi Zingales to discuss the negative effects of concentration, why the doctrine that gave us these market effects is inadequate, and what could be done to return more power and profits to creative workers.
Cory Doctorow: Even though the creative industries have increased their profitability in real terms over the last 40 years, the share of income going to creators, both pro-portionally and in real terms, has declined over those last 40 years.
Bethany: I’m Bethany McLean.
Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?
Luigi: And I’m Luigi Zingales.
Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.
Bethany: And this is Capitalisn’t, a podcast about what is working in capital-ism.
Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?
Luigi: And, most importantly, what isn’t.
Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.
Bethany: Luigi, I have a 13-year-old daughter and an 11-year-old daughter, but I have to ask you, do you know who Taylor Swift is?
Luigi: I’m embarrassed to admit that the only reason why I know who Taylor Swift is is because of the brouhaha about the sales of tickets for her new show, The Eras Tour. What happened is that they tried to identify fans and presell some of the tickets to fans, but the com-puter crashed, the fans could not get in, and as a result, everybody got really, really pissed.
Bethany: Oh, believe me, I know. I don’t know that “really, really pissed” even begins to describe the crushing demand. We talk a lot on this podcast about market power and how market power can create the opposite of what a market is supposed to create. Instead of increasing choice and freedom, it reduces choice and freedom. Why is this episode with Taylor Swift such a great example of that?
Luigi: Actually, I think we should discuss with an expert whether it is a good example, because some people say, “Look, this is a really good example of mismanagement. The fact that a top company could not handle some demand is really evidence that they are incompe-tent.” Is that evidence of market power? That’s something we want to discuss.
Bethany: The question, of course, is how much the government should inter-vene in order to make sure that the market really is competitive. This is an issue, I think, that di-vides both the traditional left and the traditional right.
Luigi: To exploit the spirit of the season, it’s a little bit like in a soccer game. If the referee intervenes too much, you really destroy the game and you distort the game. But if you intervene too little, you also distort the game in favor of the people or the team who is more aggressive and violates the rules with more gusto. So, this is something that we have discussed a lot, but I think it’s going to be fun to discuss it within a particular context, which is the context of artists and the market for creators.
Bethany: To discuss this question today, we have Cory Doctorow to discuss the new book he’s written with Rebecca Giblin, which is called Chokepoint Capitalism. It happens to be incredibly timely, given the deserved furor over the sale of Taylor Swift tickets.
Essentially, Chokepoint Capitalism argues that the driving factor in the modern economy is corporations using various forms of power—from the lack of antitrust enforcement to the complex laws surrounding digital rights—to crush competition and lock in customers. “Thus, a cornerstone of free-market capitalism that firms would compete fairly and thus drive prices down has been corrupted in practice,” Giblin and Doctorow argue.
As corporations get more and more power, they take more and more of the economics that arguably should flow to creators or workers. Or, as they write, they are creating chokepoints that separate producers from consumers, so they can capture a disproportionate share of the value from other people’s work.
As an aside, I really love this term that Rebecca and Cory use in the book, which is squatting. They say that corporations squat in the middle between consumers and producers. There’s some-thing about that word that is incredibly evocative.
Of course, the point they make that resonated the most with me is that for book authors, ad-vances have been cut by more than half since the great financial crisis of 2007-2008. In addition, news publishers once got almost all the money from ads on their content, but that’s fallen to as little as 30 cents on the dollar. And so, these examples that Doctorow and Giblin raise really, really resonated with me. So, here to join us on our show is Cory Doctorow.
Luigi: Let me start with the title of your book. In economics, we define mar-ket power as the ability to manipulate either the supply or the demand of a product to increase economic profits. In what ways is chokepoint capitalism different from the simple notion of market power?
Cory Doctorow: Well, I think that chokepoint capitalism specifically refers to the way that the creative labor markets respond to monopsony, to buyer power, in that the major tool that is meant to give creative workers power over their working conditions, which is copy-right, is extraordinarily useless when brought to bear in monopsonistic, concentrated markets. If you have to go through five publishers or four movie studios or three record labels to reach your audience, giving you more copyright is like giving a bullied kid extra lunch money. It just doesn’t matter how much lunch money you give that kid; the bullies are going to take it all.
Bethany: You talk about a living wage for creators. How would you determine what a fair wage for a creator is? I mean, obviously, if I were to attempt to produce an album, I should not make what Taylor Swift does, given that I can’t carry a tune to save my life. So, how do you think about what fair is?
Cory Doctorow: In the book, what we do is we strive for more fairness. So, wherever you see bargaining leverage tilted in one direction rather than the other, we try to even it out. We don’t try to prefigure what the fairest deal should be. For example, if you have a royalty arrangement with your publisher or your label or your studio, that royalty could be large or small, and we can argue about what a good rate is and what a good rate isn’t, but one thing that’s mani-festly wrong with those royalty arrangements is that although the contracts as standard allow you to audit the royalty statements that you receive from your publisher, label, or studio, when you find discrepancies, it is normal for those firms to bind you over to nondisclosure as a condition of making good on that discrepancy. And if you can’t, they tell you that you have to sue them. That’s something that most creators can’t afford to do.
And so, most creators end up bound over to nondisclosure, and they can’t tell other similarly situated parties who have been defrauded where they can look for the money that was taken from them. We cite one firm here in Los Angeles that specializes in auditing record-label contracts, and what they found after doing tens of thousands of audits over decades is that in every instance ex-cept one—where they found an accounting error—it was in the favor of the label and not the art-ist. We have no explanation for this. We assume that it’s some kind of terrible localized probability storm. Our heart goes out to the CPAs at the record labels. It must be very hard to operate under those conditions, where every time you flip a coin, it lands on edge and just spins indefinitely.
But this is just clearly bad contract. And contract is a matter of state law. As a practical matter, state laws are easier to amend than federal laws or federal regulations. All of these contracts, to a first approximation, are settled in four states: New York; California; Nashville, Tennessee; and Wash-ington state, because of Amazon and some game studios.
And so, if we were to amend one or all of these statutes to say that as a matter of public policy, nondisclosure cannot be enforced where it pertains to material omissions or errors in royalty statements that were down to the loss of a creative worker, then you could just put more money into the pockets of more creators all over the world than 40 years of copyright term extensions would. We’re not setting a threshold where we say, “OK, well, this is fair, and this isn’t.” What we’re saying is that this makes things fairer if you can do it.
Luigi: Let’s go to Taylor Swift and the problem that she had in selling her tickets. To what extent is this an example of what you describe in your book?
Cory Doctorow: Well, I think that it does connect to what we talk about in our book, not just in the sense that concentrated markets are bad for artists, but also to under-stand how the doctrine that gave us concentrated markets is so bankrupt.
We got rid of the dominant standard for understanding antitrust law, which arose out of land-mark laws like the Sherman Act, where John Sherman said, “If we would not allow a king to rule over us, nor should we suffer an autocrat of trade to rule over us,” that corporate power per se, irrespective of whether it was exercised in our benefit or against us, was itself a danger. Firms that are too big to fail and too big to jail are too dangerous to allow to come into existence.
Starting in the late 1970s and early 1980s, that switched over to the consumer-welfare theory, and for 40 years, we have just exercised enormous forbearance over conduct that would historical-ly have been prohibited, including merging with major rivals, acquiring nascent rivals and killing them before they can grow to become a major competitor, engaging in predatory pricing and other conduct that excludes new market entrants.
And that gave rise to this moment today, this extraordinary moment, where you have a compa-ny like Ticketmaster, which a couple of decades ago was able to merge with Ticketron, acquire 90 percent of the ticketing market, and then merge with Live Nation and acquire nearly every signifi-cant venue in America, as well as promotion for all the major acts in America, which was posed as a merger that would produce, again, these incredible efficiencies, that the geniuses who were run-ning this service—and we could tell they were geniuses because they had so much access to the capital markets, and the capital markets would never entrust them with all the money to do this acquisition if they weren’t incredibly smart—would then run those companies so well that nothing like this should ever happen.
And so, here we are with Taylor Swift launching her first concert in five years. She’s the most popular musician in America. We actually know exactly what the demand is going to be, because the first two rounds of sales are presales, for which we have registered numbers. We actually know exactly how many connections they should expect. So, you have this company that is the largest company of its kind in the world, controls the entire industry, the whole supply chain from top to bottom of live performance, and you tell them exactly what the scope of their challenge is. They had a year’s notice of Taylor Swift’s concert. It didn’t fall on their lap, and they utterly failed. The measures that they put in place to try and manage this, ideas that come out of what is sometimes called economism, like creating spot markets for tickets that drive ticket prices up sometimes, in the case of one BTS ticket, to over $100,000 for a ticket for a floor seat that included the right to dance on stage with the band, that none of those measures actually worked.
And that, moreover, they had completely failed to eliminate the secondary market, which they were supposed to be doing in order to make sure that artists got the greatest share of that income. Instead, what we keep finding over and over again is that they are creating a secret secondary mar-ket that they collude with so that they can sell the original tickets at a low price to confederates who then flip them again in these secondary markets that they themselves operate at a much higher price, and they don’t have to share the commission on that much higher-priced sale with the artist. So, all the sleaze you can imagine wrapped up in one company that was allowed to do something that, according to the law, they shouldn’t have been allowed to do, and then complete-ly failed to deliver the benefits that we were told they would deliver.
Bethany: Given that I have a 13-year-old daughter whose every other word is Taylor Swift, I’m really excited about this, because I might actually be able to get her to listen to this portion of the podcast. But seriously, Luigi, I’d actually love to hear your follow-up for Cory on this, given all of your own work on antitrust. Does this resonate with you, and what would you ask or challenge?
Luigi: First of all, I’m not a fan of the consumer-welfare standard. I think that Cory is a little bit too dramatic in his characterization. First of all, standards before were vague. That was part of the problem. They were applied in a very inconsistent fashion that created the scope for political biases, and that was an issue.
The second is, even if you present it in a very radicalized way, there is this issue of not punish-ing success. Think about Taylor Swift herself. She’s a monopolist. At some point, I heard some-where, “Break up Taylor Swift,” because you want more of her so that everybody can see her. But you don’t want to punish her, because she got a monopoly in the good way, by being, really, the best artist and appealing to so many people, et cetera, et cetera.
Now, I am with you that the enforcement . . . and I think your answer seems to suggest that even standard enforcement of the consumer-welfare standard would have prevented these mer-gers from taking place and Ticketmaster from having so much power over Taylor Swift. Whatever standard we want, I think antitrust has been asleep and has been asleep for 40 years. And it’s been asleep because both parties wanted it to be asleep. We don’t want to speak evil of Ruth Bader Ginsburg, but Ruth Bader Ginsburg was an ally of Scalia in all the antitrust decisions. So, there was a bipartisan consensus that we should overlook antitrust enforcement, and that has prevailed in this country for 40 years.
Bethany: Cory, the great and horrible glory of the consumer-welfare standard is its simplicity. And so, is there a simple tell for when there is a chokepoint? Or maybe to ask the question in a slightly different way, how do you draw the line between what is fair and what be-comes unfair? You have a chapter in your book about Amazon. Is there a point at which Amazon should have been halted? Can we see that clearly? Or were the anticompetitive flaws built into it from the get-go?
Cory Doctorow: Well, I don’t think that it is true that consumer welfare is simple. I mean, it sounds simple, but in practical terms, the test for whether there’s a consumer-welfare violation is not, did prices go up, but did prices go up in a way that is provably related to market power according to these abstract models that primarily advocates for forbearance for mo-nopolists are capable of making and interpreting?
If the test before was inconsistent and produced politicized outcomes . . . which I think is just a matter of law, like, where is the law that doesn’t produce politicized outcomes? Do we prosecute all killings the same way irrespective of the politics? If you think that’s the case, I have a lot of people who’ve been shot by the cops who’d like to differ with you. These are highly politicized, subjective ideas, and we do rely on jurists to arrive at a standard that changes over time.
I don’t know that we’ve arrived at a consistent standard unless that consistent standard is just forbearance. I think that when it comes to Swift, we do have antimonopoly measures. Copyright actually has a bunch of antimonopoly measures built into it. For example, anyone can record any Taylor Swift song once Taylor Swift has recorded it, because we have a compulsory license on her work, specifically to avoid the monopoly takeovers that historically took place in the music indus-try. We also have mandatory licenses for live performance of her work. There are a lot of ways in which Taylor Swift’s work is not hers to direct and in which the right to exclude that we think of as a property right is transmuted by law into just a right to compensation that is specifically aimed at balancing not punishing success with not allowing a winner-take-all economy where an advantage early on just translates into a permanent advantage.
In terms of whether you can tell whether you have a chokepoint, there are a few firms that I think are pretty clearly operating chokepoints inasmuch as they’re imposing terms on creators that are both unconscionable and unlawful, and yet it’s very hard for creators to do something about it.
You mentioned Amazon. Amazon owns an audiobook subsidiary called Audible that controls about 90 percent of the market. Amazon requires everyone who sells on that platform to wrap the products that they sell in DRM that permanently locks those files to Amazon’s platform. That’s a form of encryption, digital rights management. So, if you leave Amazon, you can’t authorize your listeners, your customers, to follow you to a rival platform that gives you a better deal.
And then, as we detail in the book, Amazon engages in accounting practices that go from shady all the way to fraud pretty quickly. Not only did they secretly claw back royalties from independent creators whose books had been returned, Amazon was actually encouraging their subscribers to return audiobooks.
When you bought a subscription, you got one audiobook a month. Amazon wanted to make that subscription more valuable to listeners so they wouldn’t defect to a rival service, so when you finished listening to a book, Amazon would send you emails and popup messages and all kinds of alerts saying, “If you didn’t like that book, which you may have listened to three times from end to end and had on your phone for six months, but if you didn’t like it, if you changed your mind about it, we’re such good-natured slobs that we’ll take it back for a full refund and give you another cred-it,” which they were then clawing back from creators secretly without telling them.
But they were also sometimes clawing back the same book two or three times from creators. They weren’t calculating royalties the way they said they were calculating them. One of the people who was an author that was affected by this, a British retired forensic accountant who now writes thrillers about forensic accountants, did a deep dive into it. She estimates hundreds of millions of dollars in wage theft from this alone.
But the authors involved are all bound over to mandatory arbitration and can’t form a class ac-tion to come after Amazon. I think that when you have a firm that is able to engage in practices that are just so manifestly both unethical and unlawful, and when that firm also has 90 percent market share, that feels like an easy call to make.
There are probably harder calls to make in the industry. Thankfully, a lot of the remedies that we propose in the book don’t require that you determine whether something is a chokepoint in order to enact them. Instead, they just act both as a tonic for existing chokepoints and a preventa-tive for the formulation of new ones. For example, in the Digital Single Markets Directive in Eu-rope, there is the right to know how your works are being sold, how the royalties on them are be-ing calculated, and how much money they’re making.
Luigi: Let’s speak about audiobooks, because I like to listen to books with my iPhone. I think I bought your book, it’s not on Audible, and I struggled to listen to it. It’s not easy to listen to one episode after the other. It’s not easy to speed it up. So, I spent more than I would have spent with Audible, and I enjoyed it less. So, explain to me why Audible is bad for consumers in general.
Cory Doctorow: When audiobooks started . . . Rather, when mobile phones started and there wasn’t a cloud, there was really extensive tooling to synchronize files with your phone. If you remember, I was an Audible subscriber in the mid-2000s, so in the mid-2000s, when you bought a book from Audible, the client software that came with it automatically synchronized it to your phone, and then on your phone it had all of the things necessary to manipulate an audi-obook as you describe. And you could just take an MP3 audiobook that you ripped from a CD and seamlessly integrate it into the same collection. Now, Audible has a tie-up with Apple. The iTunes Store is just a retailer for Audible, and Apple and Audible got together and basically deprecated all the tools that would allow third parties to easily load files onto phones once they had been trans-ferred to desktop devices.
They also rigged the system so that you couldn’t easily buy a book on an app with iOS or with Android. Both iOS and Android instituted a 30 percent commission on all the files sold on their platform through an app. And so, if you didn’t deliver the file through the web, the retailer had to take 30 percent off and hand it over to Apple or Google. That’s larger than the margin for the books. I’m a retailer for my own audiobooks on behalf of Random House and Macmillan, the other companies that produced my audiobooks. So, I have my own web store where I sell them. My mar-gin on those books as a retailer is 20 percent. So, if you are Libro.fm, and you’re buying books from Macmillan, you’re getting a 20 percent discount. But if you sell them through iOS or Android, you pay a 30 percent commission, so you lose money on every sale.
What that means is that there’s basically no tooling to easily synchronize files from the web to a mobile device, and there’s no profitable way to deliver files directly to a mobile device through an app. And so, Audible may seem great, but it seems great because no one is allowed to compete with it, because two extremely large firms that use a combination of legal and market power to exclude rivals have ensured that no one is allowed to make another service. And so, unless you think that the finger of God came down and touched Jeff Bezos and gave him the final insight into how we should listen to audiobooks for all time, then we should at least suspect that at some point in the future someone might have an idea better than Jeff’s. And that person, if they’re able to en-ter the market, might be able to offer you a better service.
Bethany: As someone who’s still attempting to make her living as a journalist, I was fascinated by an observation you made that seems tangential, but I think maybe is not tan-gential at all. You recount in the book how much of the economics that used to go to publishers are now going to the big tech giants, Google and Facebook. And yet, you have a section in which you argue that the entire online advertising market is essentially fraudulent, which makes it all the more interesting that this came to be. Explain to our listeners why the online sales market is fraudulent and how on earth something that was a fraud came to capture all of the economics.
Cory Doctorow: Well, so north of 80 percent of display advertising and north of 90 percent of search advertising is controlled by either Google or Facebook or both firms to-gether. The firms themselves have been caught colluding. The Texas attorney general’s antitrust case against Facebook documents a secret program Facebook and Google ran called Jedi Blue, where they rigged the auction markets for ads. Facebook has separately defrauded the ad market through things like the pivot to video. The pivot to video was Facebook’s attempt to—
Bethany: Oh, I remember the pivot to video.
Cory Doctorow: Yeah, so, I mean, as a journalist you may have lost a job over the pivot to video. A lot of us did. The pivot to video . . . In 2016, Mark Zuckerberg decided he wanted to compete with YouTube. But, of course, luring in video creators would have required him to move a lot of the surplus that was currently being allocated to either his advertisers or his shareholders to creators. That’s how YouTube lured in creators. They offered them lots of money and favorable rates and so on. It was only once they had dominance that they began to dial down the compensation on offer to those creators. And so, instead, he decided to defraud publishers in-to making videos. He falsely claimed that videos on Facebook performed incredibly well, and in particular, that they performed better when it came to reporting on the news than text articles did. This was not true.
And then he told publishers that because of this, Facebook would be prioritizing video content, and effectively gave them marching orders. If you want to continue to have traffic through Face-book, which had become systemically important to publishers, you are going to have to borrow money or raise money in the capital markets, and you are going to have to retool your newsrooms as video newsrooms. After billions of dollars had been sunk into that venture, it eventually came to light that Facebook had been lying to them about this. Nobody was watching those videos. Nobody watched the videos that they thereafter produced. Dozens and dozens of newsrooms went bust. And that’s just the tip of the fraud market.
Huge amounts of the ads that are claimed to have been seen are never seen. When ads are seen on publishers’ websites, it’s often as a means of eroding the publisher’s rate card. If you think about the real-time bid auction market for ads, if you’re the Washington Post and you put an ad on your website that’s being bid out by multiple advertisers, those advertisers all crowd in and they say, “I will advertise to this person for X dollars.” “Well, I’ll advertise for more, and I’ll advertise for less,” and so on. All those bids are collected. The market maker decides who’s got the winning bid, they usually use second bid, and then they hand over the ad to that person.
But everybody else gets to know your unique identifier and that you’re a Washington Post reader. And then they can go to a bottom-feeding website like Taboola, and they can say, “If you would like to advertise to Washington Post readers, if you would like to tell advertisers that they can reach Washington Post readers, we can give you the unique identifiers of Washington Post readers. And when those readers visit your site, we can sell ads to them for less than you would sell them at the Washington Post.”
Now, the advertisers don’t really want to advertise on the Washington Post. They want to advertise to Washington Post readers. And so, this becomes a mechanism whereby the rate card of the publisher can be eroded. That’s another way in which the fraud takes place.
There’s a very long list of this stuff. It turns out that when you have two firms that dominate a market, and when the entire market is opaque, and when they represent the sell side, the buy side, and the market maker, the opportunities for mischief are limitless and effectively impossible to prevent.
Bethany: I wanted to step back and ask a big-picture question. Do you think you’re opposed to capitalism per se? Our podcast is called Capitalisn’t, because we try to look at the ways in which capitalism is functioning and the ways in which it’s not. Do you think you’re op-posed to capitalism on principle, or are you opposed to the way it’s being practiced today?
Cory Doctorow: OK, well, I will not claim to be capitalism’s greatest defend-er. I would prefer to have more state intervention than pure markets, but I don’t think that mar-kets are useless. I do think that in the absence of state intervention to ensure that firms don’t grow to dominate their markets, that markets always fail, that the only way to have effective markets is to have competition. I think that’s something that has really fallen away from the mainstream of business thought, if not economic thought.
When you have Peter Thiel saying, “Competition is for losers,” when you have Warren Buffett being lionized as he thirstily lusts after firms with wide, sustainable moats, what you have is, not even a tacit, an explicit endorsement of the idea that the smartest businesspeople are the ones who never have to compete. That’s tied up with these cults of personality, where you have every-one from Musk to Jobs to Elizabeth Holmes being lionized for their singular genius and all of us be-ing told, “Well, you lesser mortals have no business telling these people playing their 11-dimensional games of chess how they should comport themselves. You’ll just never understand what they’re up to.”
Luigi: A couple of things. First, reading your book, I got the impression that you actually like regulation in every dimension quite a bit. You want regulated prices for wages or compensation for creators. You want to regulate the job market. You even want to regulate the overall production of money. You seem to buy into the MMT framework. So, that’s one part of what I read in the book.
The other part is that you actually do buy in to one aspect of the Chicago School, which is regu-latory capture and Stiegler’s idea of regulatory capture. So, you’re afraid that the very regulation might serve the purposes of large corporations. So, how do you resolve this tension, because this is not an easy tension?
Cory Doctorow: Given that we are where we are and given that breakups take a long time—from the beginning of the attempts to break up AT&T until 1982 when it was broken up, 69 years went by—I’m not prepared to wait for three-quarters of a century for creators to get a living wage from work that is producing enormous amounts of value in the system. And so, I believe, as a kind of instrumentalist here, the right regulation is the regulation we should have.
And the right regulation is an important idea here, because it’s true that I worry about regula-tory capture, but not in, I think, the Chicago sense, which I find very nihilistic, the idea that inevi-tably regulation is captured, because the firms involved have more of an interest than the general public. Therefore, we really just shouldn’t have regulation, because inevitably regulation will be captured. We should just minimally regulate and only at the margins, because the more power we give to regulators, the more likely they are to be a juicy target for regulatory capture . . .
Promoting a general sense of mission among regulators, promoting a sense of honor and duty among regulators, which is antithetical to this incentives-matter account of human behavior that says that if the system is set up to benefit you by cheating, you almost have a duty to cheat. And then ensuring that the firms themselves are weak enough that they can’t overwhelm the regulator by making sure that there’s pluralism in the sector and then creating a transparency in the regula-tion. While it doesn’t always produce good regulation, it produces better regulation than the Chi-cago conception of minimal regulation, which tends to produce the regulatory capture that it’s meant to prevent.
Luigi: I don’t want to be nihilistic here. I do believe that we need some good regulation. But when you look in practice . . . The GDPR in Europe was started with the best inten-tions in mind, but it ended up creating maybe more problems—I would like to know your opin-ion—but more problems than it solved.
One thing I learned from your book which I thought was incredibly interesting is this little-known aspect of . . . I think it is the Telecommunications Act, that introduced the lock on digital-rights management that really made it much more difficult to have competition. This is a case in which the legislator intervenes, making things strictly worse than they were before. So, how can we prevent that? Even Brandeis used to say, “You have to be careful that when you create some institutions, they might not be captured by the very enemy that you’re trying to fight.”
Cory Doctorow: Those are two subjects I’m very interested in. I’m going to start with the DRM rule, which is actually the Digital Millennium Copyright Act of 1998. Section 12(i) of the Digital Millennium Copyright Act prohibits circumvention. It felonizes commercial traf-ficking in circumvention tools, and it does so without regard to whether there is copyright in-fringement. What that means is that if you slap a digital lock on something and I give you a tool to remove that lock, even if no one ever infringes copyright, giving you that tool can send me to pris-on for five years and a $500,000 fine for first offense.
The legislative history of Section 12(i) of the DMC is really interesting. In 1996, Al Gore set about demilitarizing the internet. He held these national information infrastructure hearings, the so-called information-superhighway hearings. At the time, the copyright czar for the United States was someone who was implicated in what would later become a convicted monopoly. It was Bruce Lehman, who had been the head copyright counsel for Microsoft, who rotated into government in a role where he was overseeing the very same conduct that Microsoft would later be convicted of antitrust violations for.
Lehman also came up with this nutty idea for anticircumvention, the idea that we would pro-tect digital locks and not infringement itself, that we would punish breaking digital locks. To his credit, Al Gore laughed him out of the room. But then Lehman scurried across the ocean to Gene-va. He went to the World Intellectual Property Organization, which is an industry body that later became a UN specialized agency. WIPO was really just an industry talking shop that legitimized it-self by becoming a UN agency. So, it was already concentrated corporate power that bootstrapped itself into a kind of quasi-state power by becoming a UN agency. Lehman went there, convinced them to enact something called the WIPO Copyright Treaty and the WIPO Phonograms and Perfor-mance Treaty, collectively known as the Internet Treaties.
And then he went back to the US, and he said, “We now have a treaty obligation to pass the law that you rejected during the information-superhighway hearings.” And then we got the DMCA. So, that’s the history of that law. It was an instance in which a firm was allowed to engage in anti-competitive conduct, grow to become a monopolist, become structurally important, rotate a key member into government, ignore the expert regulatory finding about its proposals, go to another government body that had been formed by an international cartel of large firms, and then come back and effectively override the legislature.
That’s how we got this terrible law. It’s a really ugly story, but it’s a story that starts with mo-nopolistic conduct. It doesn’t start with regulators who are asleep at the switch. It starts with firms that gained more power than the regulators.
In terms of the GDPR, the GDPR has some clauses in it that I’m not fond of. The right to be for-gotten, I think, is an incoherent mess. But the privacy components of it, the ones that are about consent, they really are well-structured, but they weren’t well-enforced, and there’s a couple of reasons for this. One is the timing. This was really the final accomplishment of the previous com-mission. And when the new commission rotated in, it kind of slept on the GDPR. That was a real problem.
The other problem, though, was choice of venue. Ireland is a captured nation. It decided to become a tax haven as a primary industry, and as a result, its legislature is precaptured. It depends on firms paying extraordinarily low rates of tax to it on very, very large earnings, in exchange for its compliance with those firms’ corporate priorities.
And because of the structure of the EU, these firms were able to move all of the significant GDPR cases to Ireland. The Irish privacy regulator is remarkably underfunded and lackadaisical. Basi-cally, that regulator gets out of bed at noon, never puts on pants, sits around in its pajamas all day eating cereal and watching cartoons, and hears about 17 cases a year, unlike the German regulator, who hears, like, 500 cases a year. And so, it’s not that the law wasn’t violated, and it’s not that there isn’t an ability to enforce it. It’s that the corporate capture of Ireland, combined with the intergovernmental nature of the European Union, made the GDPR hard to enforce.
Now, the Digital Markets Act, which was just passed, includes new language that eases the en-forcement of the GDPR. I think we’ll see better enforcement. I think that most of the objections people have to the GDPR, like, “Oh, I hate all those cookie popups. It’s so confusing and useless and stupid,” that’s not how the GDPR works. That’s not compliance with the GDPR. That is violation of the GDPR. There had previously been a rule about cookies that produced those popups. It was a compromise rule that was brokered by the surveillance advertising industry, and it was so obnox-ious that it brought the whole idea of regulation into disrepute, which I think was the intention.
And so, the GDPR explicitly says, “You can’t just bombard people with stupid consent dialogues. You have to be able to just click and keep going.” If you don’t go and find the button that says, “Please spy on me,” then the firm just can’t spy on you. The fact that firms are continuing to spy on you and throwing up these buttons just tells you that we have an enforcement challenge ahead of us, but it doesn’t tell you about the structure of the rule.
Bethany: Thank you so much for coming on, Cory.
Cory Doctorow: My pleasure. Thank you.
Luigi: Good luck with your book.
Cory Doctorow: Oh, thank you.
Bethany: Luigi, what did you think of the interview?
Luigi: I thought that you asked a brilliant question, and I think the fundamen-tal question about the book is, is the book against chokepoints or against capitalism? I think the book should be titled, The Artist Welfare Standard: What is Good for Artists is Good for the Country.
Bethany: No wonder I might have liked the book more than you did. If it were The Economist Welfare Standard, maybe you would be more enthusiastic.
Luigi: But I don’t want to sound too negative about the book, because I think the book has a lot of super interesting stories. I think that he shows in a very compelling way the evidence that the copyright system, as it is, doesn’t really help the authors very much. They go into very interesting details about how the current giants secure their position. And very often, when you push or you dig deep enough, you find that there is a little law, a little regulation, that gave them an advantage that then they were able to consolidate and at this point make it unassailable. We are in a very tricky situation because at the beginning you could fight against Audible. Today it’s really, really hard.
Bethany: I thought he made some really interesting points. I agree with you that it is, to me, an argument against capitalism as much as it is an argument against chokepoints, and the line as to what’s a chokepoint and what’s capitalism is not really clear.
That said, I thought the answer he gave, which is that in order to make things more fair, you don’t actually have to determine where that line is, you just have to change some of the rules, was actually a pretty fair answer, because one of my big questions in reading the book was, how do you decide what that line is? Should Amazon have been shut down before it started, or was there a point at which it became problematic?
The idea that there could be rules in place that would prevent something from becoming prob-lematic is very appealing to me. But, of course, the idea might be more appealing than the reality. The reality might be messy. I take it you think the reality would be messy.
Luigi: No, look, I don’t disagree with some of his predictions. I think that the guy is brilliant. Not only does he write very well, he is very effective, and he knows a lot, and I learned a lot reading his book. I am an academic at heart, so it’s not a balanced book, it’s an advo-cacy book. There is no attempt to explain things. It’s just an attempt to ridicule the opponent out of existence.
Also, I don’t think he’s very clear about what the problems are. There are a lot of problems with capitalism. There are a lot of problems with the artist world. There are a lot of problems with any industry. He puts them all together, shakes them up, and has a very powerful cocktail. But if we are not there to make a splash or get drunk, but to actually try to figure out what is going on, I would like to divide them and understand how to address each one of them separately. Maybe . . . and he’s argued in this interview, maybe they’re not separable, but I would like to at least give it a try.
Bethany: What did you think of his points around digital-rights management? Were those convincing to you?
Luigi: Yeah, I thought that was brilliant. First of all, the history, I didn’t know the history of it. And if he’s right, the fact that an industry group can become a UN agency and, as such, basically impose its own rules as an international treaty, is the ultimate example of corpora-tions becoming overly powerful and really, really destroying the market. Because I cannot create something that is compatible with Audible, because the risk is five years in jail. If he had written just this in the book, I would just go and scream how brilliant he is.
Bethany: Yeah, yeah, I agree with you.
What did you make of the points that he makes on antitrust? And coming back to the Ticket-master question, I found the points he made about antitrust to be correct, if fairly well known at this point, where the enforcement has broken down. I found the Ticketmaster example fairly com-pelling, that this deal that they did to merge with Live Nation actually went through despite the fact that the Justice Department under President Obama did this lengthy antitrust investigation and required the merged company to comply with all these conditions. And then despite all of this, it seems to say something very compelling about the state of antitrust that none of that seemed to accomplish very much.
That said, I’m not sure that any of this connects with Taylor Swift, and I’m not sure that Taylor Swift is a great example with which to make his point, given that you cannot exactly label her a starving artist, right?
Luigi: No, but forget the starving component. I think there is a link, and I think he gave a pretty good answer in our interview, but it’s not as straightforward as people will expect. I am 100 percent with you. I think that the disproportionate power that Ticketmaster has gained is problematic per se.
Now, this power is not necessarily or obviously linked with the Taylor Swift disaster, because there was nothing specifically linked to the monopoly. However, you can make two arguments in his favor. The first one is that you expect that you are going to let firms become big in order to be-come more efficient. This is a proof of blatant inefficiency—not only blatant inefficiency, but bla-tant inefficiency that you find difficult to fix, because one of the problems of monopolies is that you don’t have freedom of choice. You are stuck with Ticketmaster. There is no alternative. If they screw up this time, next time Taylor Swift cannot go anywhere else. So, that’s the number one ar-gument.
The second, which is even more subtle—and I wish we had more time to have him go deeper into this—but as you know, there is a big issue about how to extract all the surplus from, basically, your daughter, who is passionate about Taylor Swift. And one of the issues that any sort of ticket-selling agency should resolve is how much you want to extract all this surplus upfront by putting very high prices on a young fan like your daughter, and to what extent you want to keep the prices relatively low so that your daughter goes to the concert, falls even more in love with Taylor Swift and will remain a Taylor Swift fan all her life. Imagine that the ticket was $2,000. Then either you or her or both are going to hate Taylor Swift for the rest of your life—you for sure, but maybe even her indirectly, because of how many bad words you’re going to use. This is the short-term profit-maximizing strategy. It is not a long-term profit-maximizing strategy. One of the issues is how you deal with that.
My understanding from Cory’s answer is that Ticketmaster did an intermediate mechanism that actually was selling some of the tickets to known scalpers that will take advantage of the lower prices. So, the problem of pricing the ticket too low is that not only is your daughter going to bid for it, but also ticket scalpers are going to buy them in large quantities and then charge even more and not rebate that benefit to Taylor Swift.
The accusation I heard Cory say is that they screwed up, whether on purpose or not on pur-pose, this aspect in order to help some other companies where they get some rebates or some-thing like this, rather than extracting all the surplus up front. Because in an auction where you do extract all the surplus, you shouldn’t see lines. You shouldn’t see anybody left disappointed, be-cause you raise prices up to the market-clearing price so that there is no demand left.
Bethany: Yeah, that’s interesting. It raises a whole set of interesting ques-tions or observations to me, one being that perhaps if Ticketmaster weren’t such a monopoly, they would be able to do something to prevent the presence of ticket scalpers. That that is a fixable problem, selling huge quantities of tickets to scalpers and the fact that Ticketmaster doesn’t want to do that, or isn’t able to do that, perhaps might be evidence, too, that they’re too big.
But then I was thinking, too, that it is really interesting, I’ve never thought of lack of antitrust enforcement as having contributed to short-termism, which is a huge problem that we’ve discussed often on this podcast. Your comments around upfront profit maximization versus keeping a fan over the long term are a form of the short-termism that afflicts American business today. I think there’s a really interesting link between that and lack of antitrust enforcement.
Luigi: Yeah, but I don’t think that there is necessarily a link. What I was say-ing is that there is a tension in how you design the auction, and there is a conflict between the artist who has a long-term view and the Ticketmaster organization, or whoever is selling the tickets, who has a much more short-term view.
In reality, if you have a consolidated monopoly, you tend to take the longer-term view, be-cause you think you’re going to be around for the long term, versus in competition you might have a shorter-term view, because you don’t know whether you’re going to be around tomorrow. I’m not so sure that I would go down that path.
Bethany: I don’t know. I wonder if American business of late proves that and if having a longer-term view . . . It does seem on the surface that you would be right, but I wonder, when I think about how business has evolved and the lack of antitrust enforcement, if it is a little bit more counterintuitive. Perhaps the large company that doesn’t have competition is more will-ing to piss off consumers and extract all the value they can at the time, because there’s no place else for people to go. I’m not so sure. I’m at least going to leave this door open to think about it.
Luigi: I think that the point about fraud is very interesting. As an author—not as prolific as you are, Bethany—but as an author who has published a few books, I always wonder who verifies the number of copies, because you get an advance and then you get a royalty on the copies that sell above and beyond the advance you receive. But the number of copies sold is actu-ally determined by the company itself. So, how do you know that they’re not cheating you? As a deeply mistrusting Italian, I did not trust the numbers, and the book suggests that I was right, you shouldn’t trust the numbers. I love the fact that when an accountant looked at their mistakes, all but one mistake was in favor of the publishing company, which seems to defy probability theory and even gravity at this point.
I think that the point is very important. I don’t see it as necessarily linked with market power. Maybe it’s more with political power that you can do that and get away with it, but mostly, it is an issue of fragmentation versus a big organization. The financial industry before the introduction of the Consumer Financial Protection Bureau at many instances was taking advantage of consumers. It was not necessarily an issue of market power; it was mostly an issue that consumers are not partic-ularly sophisticated. They are dispersed. Banks are very sophisticated and very smart. And if you don’t have some form of protection, one side will take advantage of the other.
Bethany: Interesting. Yeah. I also wondered . . . and I liked your questions to him about regulation. I actually think that I liked his answer about regulation, which is that it is ni-hilistic to basically argue that since regulation will ultimately be corrupted, why bother in the first place? I thought it was a really good answer, but I’m still not sure he’s right. I’m not sure that more regulation by more bodies that can ultimately fall to regulatory capture as much as the ones we have is the right way to go. Were you convinced by his answer?
Luigi: No. I do subscribe to the issue that the nihilist position is too strong and wrong. I think that the challenge is how to design regulation that is more robust to this pres-sure. He did mention the sense of mission and raising the sense of mission, which is I think is im-portant. But then when he went into the details of, for example, the GDPR, he suggested that even the GDPR tends to be sort of, at the end of the day, captured. So, I think I’m not so sure that that’s a perfect solution.
The other, which I think he explores to some extent in the second part of the book, is to find alternative ways that are not so dependent on the goodwill of an agency or the details of the law. In my book 10 years ago, I thought that the only regulation possible was the one that was extreme-ly simple, for two reasons. Number one, because it has the political support to pass Congress, and number two, because it has the ability to be enforced, because you could see whether it was vio-lated. And so, it’s anathema for an economist that I prefer it simple even at the cost of being slight-ly inefficient rather than perfectly efficient on paper but easily avoidable in practice.
I think that some issues, like, for example, creating the right to a class action or interoperabil-ity, is something we should discuss more. These are alternative forms of regulation that are less sensitive to the manipulation that existing companies inevitably will do.
Bethany: Yeah, it’s so interesting that you say that, because before we even knew each other, and many, many years ago, I guess our brains were working the same way. I re-member in the wake of the Enron disaster, which is in the news again given FTX, people were often asking me, “Well, isn’t more regulation the answer?” I remember looking at the Enron story and saying, “More rules created more alternatives for people who know how to play games with the rules.” It was almost as if the existence of all these complicated rules shone a light on the spaces between the rules in which you could operate and manipulate the rules, and more rules and more complex rules almost created more opportunity. So, yes, I think I agree with you on the simplicity front.
Luigi: Actually, let me add this element of current events. As you know, Sam Bankman-Fried was on the verge of getting regulation on crypto passed through Congress, having massively donated to the Democratic side and, I read, even to the Republican side through some dark-money organization. So, the chances that regulation in the way it is passed is going to be to the benefit of the little guys, I start to have my own doubts.
Bethany: It is the ugliest part of the SBF story. OK, this is amazing, you guys are going to be so impressed with me. But you know what? I can tie this back to Taylor Swift, be-cause Taylor Swift has a song on her latest album—I can’t believe I know this, but I do—she has a song on her latest album called “Mastermind.” And so, it is possible when you look at SBF’s at-tempts to donate money and get the crypto legislation written in a way that would benefit him, that he’s not just a careless fool who didn’t understand where the money was going, but he actual-ly was a mastermind.
Come on, that was impressive—
Luigi: You are brilliant. We should use that song as our soundtrack.
Bethany: Thank you.
Luigi: But we have to pay the copyright.
Bethany: That’s a problem.
Capitalisn’t hosts Bethany McLean and Luigi Zingales spell out what a changing antitrust landscape could mean for us all.Capitalisn’t: The Evolution of Antitrust—From Brandeis to Biden
Capitalisn’t podcast hosts Bethany McLean and Luigi Zingales sit down with MIT’s David Autor to discuss the impact of technology, labor markets, and immigration on wage inequality and the economy at large.Capitalisn’t: Can Labor Markets Save Capitalism?
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