Talk:Lecture 1
Contents
Lecture 1 Discussion
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Article on 'hijacking' of cumulative innovation
Interesting article from First Monday:
-- Tapan
Additional Readings
The following readings contain additional information on last night's material:
1) On Whether Patents are Good for Software Development:
James Bessen & Eric Maskin, Sequential Innovation, Patents, and Innovation, (Jan. 2000), available at http://www.researchoninnovation.org/patent.pdf
2) On the Liberality vel non of IBM’s Licensing Policy:
Ronald Mann, The Myth of the Software Patent Thicket (2004), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=510103
3) Prof. Scotchmer's forthcoming book: Suzanne Scotchmer, Innovation & Incentives (MIT Jan. 2005). (The book is available at http://mitpress.mit.edu/catalog/item/default.asp?sid=872E36D5-2D83-4889-B3C4-DDB4DEF36AE3&ttype=2&tid=10277)
4) Finally, just for fun, two Golden Oldies. As far as I know, nobody has noticed them before. The first (I claim) shows that the key Internet technology of packet switching already existed in the Soviet Union ca. 1948. The second presents an anecdote describing IBM's experiences with "the anticommons" during the 1950s.
A Great Novelist Foresees the Internet
"Clipping, damping, amplitude compression, electronic differentiation and integration of normal human speech were engineering desecrations comparable to the dismemberment of a southern resort area like Novy Afon or Guzuf into little fragments of matter, stuffing them into a billion matchboxes, mixing them all up, flying them to Nerchinsk, sorting them out and reassembling them in their new location so that the result could not be distinguished from the original -- a recreation of the subtropics, the sound of waves on the shore, the southern air and moonlight." A I Solzhenitsyn, The First Circle (Harper & Row: NY: 1968). T. P. Whitney, Trans.
The Anticommons at IBM:
“At an August 1955 meeting with key engineers in Poughkeepsie, Watson Jr., chided them from hesitating to use ferrite cores in commercial products because of Wang’s patents. He quoted his father as saying, ‘That’s the most ridiculous reason for not moving into a new area that I’ve ever heard of because, one way or another, we can negotiate with Wang.’
“Indeed, the company was able to obtain rights to Wang’s patent for the reasonable fee of several hundred thousand dollars. . .
“Watson’s confidence that rights to any patent could be obtained at a reasonable fee, or the patent circumvented, appeared to be justified. But by the end of the decade, his confidence was deeply shaken. [Jay W.] Forrester had filed a a patent application under which MIT (through its patent management firm, Research Corporation) was demanding royalties of 2 cents for every magnetic core used in a coincident-current memory. This demand, made in November 1959, was quickly rejected for IBM by James Birkenstock who noted that ‘in our core storage units we employ seven of our own patents, as well as having acquired licenses under five patents from outsiders which were necessary to make the Forrester patent usable.’ If a royalty of 2 cents per bit were demanded under each of these patents, the cost per bit for royalties alone would be 26 cents, making core storage economically infeasible. Based on this analysis, Birkenstock concluded that a royalty of 2 cents per bit was ten to twenty times too much. But Research Corporation indicated it had already rejected an offer of 1 cent per bit, so an impasse resulted.”
[In an October 1960 interference proceeding, Forrester lost its ten broadest claims to a rival patent held by RCA. IBM had a cross-license to RCA’s patents.] “The jubilation was short-lived, however, as Research Corporation continued to demand royalties of 2 cents per core and initiated a civil action to regain the lost patent claims. Thus while IBM engineers were developing cost-effective memory designs and improving manufacturing techniques, litigation between RCA and MIT plodded slowly in the courts toward a settlement that would have profound ramifications on IBM and the entire data processing industry . . .
[IBM experimented with several other technologies, including “the Flute.”] “The experience with the Flute helped to emphaisize that there was no attractive alternative to coincident-current 3D selection ferrite-core memories. IBM had obtained rights to use all relevant patents except Forrester’s – and the validity of that patent was still being argued in the courts.
“Meanwhile, IBM engineers cointued to develop improved ferrite-core memory design and manufacturing methods as customers ordered more and larger memories. By the end of 1963, the company’s annual production of ferrite cores exceeded 1 billion; a royalty of 2 cetns per core would alone have cost more than $20 million per year. With the IBM System/360 slated for announcement in early 1964, the situation was intolerable. In February, 1964, an agreement was finally reached in which the company agreed to pay a on-time fee of $13 million for the use of Forrester’s patent if at least one of the claims was upheld in the litigation between MIT and RCA. The following month RCA and MIT reached an agreement in which the validity of Forrester’s patent was affirmed, and IBM made its payment to MIT. Larger than any previous payment it was nevertheless dramatically cheaper than the requested royalty of 2 cents per bit.”
C.J. Bashe, L. Johnson, J. Palmer & Emerson Pugh, IBM’s Early Computers (MIT: 1986), pp. 267-70.
Books Mentioned During Lecture
Two books were mentioned during the lecture by Ed Lazowska and Steve Maurer. One was http://www.amazon.com/exec/obidos/ASIN/087584863X/qid=1096603863/sr=ka-1/ref=pd_ka_1/102-7272045-1856915 Information Rules]. The other is http://mitpress.mit.edu/catalog/item/default.asp?sid=872E36D5-2D83-4889-B3C4-DDB4DEF36AE3&ttype=2&tid=10277
The two books complement one another quite nicely. Varian & Shapiro is already a classic. It tells a lot of stories and helps build intuition about what's going on in the new economy. The approach is in the general tradition of "how-to" business books. Prof. Scotchmer's book is just coming out from MIT next January and can be ordered through their catalog. It follows the economics tradition by starting with a handful of assumptions and working out the consequences through simple models. (Full disclosure, I'm a co-author on 3 of the chapters -- smm) It helps you learn to think about IT problems more abstractly. This is obviously a good approach for policymakers, but I also find that the approach provides nice insights for lawyers or businesspeople trying to design practical transactions. I'd say the technical level is a bit easier than the Procuring Knowledge reading, but the main point is that non-social scientists shouldn't be intimidated. Partly, that's because the book is modular -- i.e., it was deliberately written so that you can skip the formal proofs and not lose the thread. Second, I think it's a good general principle to get in the habit of reading books that are slightly too hard for you. That's equally true for IT people reading social science and for social scientists reading about technology! BTW, social scientists use the same math as the sciences, so many tech folk will find the subject surprisingly transparent even at a formal level.
Discussion of P=MC and entertainment media
From: csep590tu-admin@cs.washington.edu; on behalf of; Walker Duhon [wduhon@windows.microsoft.com] To: James Welle; Stephen Mark Maurer; isking@u.washington.edu csep590tu@cs.washington.edu Subject: RE: [CSE P 590TU] P=MC and entertainment media
That does put an additional wrinkle in -- the sentence should be rephrased in the case of Netflix. The overall point that Netflix's decision to supply a title is dependent not just on the addtional cost but also the revenue it generates still holds, but under Netflix's subscription model it is much harder to quantify the revenue benefit of having the title on hand. Netflix has a big selling point with subscribers in having such broad selection, both of hot titles and obscure ones. Shipping the movie to customers doesn't contribute to revenue, but having the movie available contributes to revenue by attracting and keeping subscribers. It would be interesting to know what the actual decision-making process is in the case of Netflix -- is it based upon some calculation of demand? Do they just supply any movie they can think of to get the overall reputation of selection?
Interesting article.
From: James Welle Sent: Sat 10/2/2004 5:03 PM To: Walker Duhon; Stephen Mark Maurer; isking@u.washington.edu Cc: csep590tu@cs.washington.edu Subject: RE: [CSE P 590TU] P=MC and entertainment media
One thing that presumably happens is that Netflix can afford to hold a DVD in inventory based on total demand across the entire country. That's a nice illustration of how IT can overcome frictions that prevent physical businesses from serving demand that theoretically exists. - smm
There have been several stories on the web speculating on how many movies a customer has to rent before Netflix loses money on that particular customer.
http://www.kuro5hin.org/story/2004/4/18/14547/1054
"Both Blockbuster and Netflix will tend to supply those titles in which the revenue generated from rentals exceeds the ~constant cost of supplying the title."
Is this still true with a subscription model? The fact that you actually shipped the DVD to someone doesn't actually generate revenue and titles that are rented frequently would generate the most shipping and handling costs.
Original Message-----
From: csep590tu-admin@cs.washington.edu [1] On Behalf Of Walker Duhon Sent: Saturday, October 02, 2004 3:25 PM To: Stephen Mark Maurer; isking@u.washington.edu Cc: csep590tu@cs.washington.edu Subject: RE: [CSE P 590TU] P=MC and entertainment media
I don't think that the notion of marginal costs captures what is going on in this case. Marginal cost is the cost of supplying an additional unit of a good. That Blockbuster faces higher marginal costs than Netflix which in turn faces higher marginal costs than streaming is reasonable. It is less reasonable to assume that Blockbuster faces rising marginal costs as it supplies each additional video. It is more likely that Blockbuster faces constant or perhaps even slightly decreasing marginal costs as its stores get bigger -- the price of real estate per unit area is roughly constant, the price of the additional video/DVD is constant, and the price of the employees to run the place is constant or perhaps decreasing per video offered. Given this, it is likely that at all levels of output, price exceeds marginal cost.
The limiting factor in Blockbuster's case is not cost but demand. Note that movies are not a uniform product (an assumption of the Micro 101 model) and the demand for each title is different. Both Blockbuster and Netflix will tend to supply those titles in which the revenue generated from rentals exceeds the ~constant cost of supplying the title. Because a Blockbuster store serves a limited geographic area (limiting the customer base) the subset of titles that the individual store supplies on this basis is going to be relatively small. Netflix serves a larger geographic area, and can thus expect to generate sufficient revenue from more obscure titles supplied in small amounts. It is true that since marginal costs are smaller for Netflix (to the extent that this is indeed true) it can supply still more titles, but it is nonetheless (revenue - cost) and not marginal cost alone that governs the decision.
Of course this is too simple as well. There are a lot of other factors that go into the titles supplied at Blockbuster including the organizational and management convenience of having stores roughly uniform in scale and selection.
Walker
From: csep590tu-admin@cs.washington.edu [2] On Behalf Of Ed Lazowska
Sent: Saturday, October 02, 2004 2:43 PM
To: Stephen Mark Maurer; isking@u.washington.edu
Cc: csep590tu - Mailing List
Subject: RE: [CSE P 590TU] P=MC and entertainment media
Just by the way, there is a service that has been rolled out in a few cities that nicely complements NetFlix.
You get something that's pretty much like a Tivo box. It comes pre-loaded with the 100 most recent DVD releases. Using a sub-carrier of the local PBS television station, the company trickles down new DVD releases to the box, displacing older ones -- it's a pure FIFO strategy, so the box always has the 100 most recent releases. When you watch a video, the box logs it, and once a week it calls Master Control and reports your usage; you get a monthly bill. There are only about 30 new releases a month, so the bandwidth requirements are minimal.
The technology comes from a Seattle company; I believe it's Disney that's rolling it out; it's in a few cities at present (but not Seattle).
The cost to "do a city" is only about $100K -- the cost of adapting the TV station to transmit the new releases on the sub-carrier.
VERY clever. Cheap as dirt, and it replaces the "front half" of your neighborhood video store -- the new releases. With no "Crap! All 16 copies have been checked out" problem. NetFlix, as Ian notes, has already wiped out the back half of the store.
Original Message-----
From: csep590tu-admin@cs.washington.edu [3] On Behalf Of Stephen Mark Maurer Sent: Saturday, October 02, 2004 9:41 AM To: isking@u.washington.edu Cc: csep590tu - Mailing List Subject: Re: [CSE P 590TU] P=MC and entertainment media
Dear All,
Ian, thanks for this. BTW, lecture-specific comments should probably go on the Wiki rather than e-mail, particularly when they're nice enough to keep the way this one is.
It sounds like what's happening here is that the bricks and mortar world has MC = Price of Downtown Real Estate = High, and the streaming world will eventually have MC = 0. But in the meanwhile, we have Netflix which still has to pay for real estate in the form of a warehouse in a disreputable part of town, MC = Low, but also gets a significant amount of free space from the fact that its inventory is sitting in the mail and/or people's houses. One interesing question is whether Digital Rights Management (DRM) would be useful here. Lots of businesses give away CDs like a disposable item. Suppose I got the CD but had to telephone Netflix with my credit card number each time I wanted to use it...
So yes, you make a nice point. Here, DWL has a cultural face: Instead of everybody watching the same stuff, people with niche interests can look at their first, best choices. Kind of like what happened between the days when everybody read TIME and NEWSWEEK and the birth of the Web.
Have a good weekend!
smm
> All,
>
> There's a good article in this month's (October 2004) Wired magazine
> called "The Long Tail", that is a corollary of the discussion we were
> having about economics when the marginal cost is zero. Basically, a
> bricks-and-mortar outfit such as Blockbuster (to focus on video
> rental) can only carry so many (roughly 3,000) titles because of
> economic limitations that drive physical limitations (i.e. a
> Blockbuster store acres in size would dramatically increase MC through
> overhead); therefore, they carry those titles they believe have the > broadest popularity, to maximize return on their MC (which is cost per
> unit space of real estate to display a DVD). However, a service such > as Netflix can afford to carry titles that may only see 100 rentals in
> a month, or a year - but they can carry a LOT of them, and over half > their business is outside this "major market" catalog (thus, the "long
> tail" of low popularity content). They can afford this because their > MC is lower than that of Blockbuster; if they rent "Forbidden Planet" > once a year, it's revenue above and beyond their overall MC per title > (or they're being stupid and won't be around much longer). Other > forms of media (e.g. streamed/downloaded music) see the same benefit -
> and the article mentions in passing the availability of retro game > software within this same model. > > The moral: if it doesn't cost you anything (extra) to deliver a > product only a minority want, you're still making money on that > minority. If you don't serve that minority, they're your dead weight > loss. -- Ian >
SpaceshipOne wins the X-Prize
Avichal 21:15, 4 Oct 2004 (PDT) Well most of you must know by now that the X-Prize was won by SpaceshipOne [4]. Following our discussion of incentive mechanisms, do people on this group think that this was a successful endeavor?
I would mention a couple of points which caught my attention:
- Their website mentions that how their prize is modeled after the 'Orteig' prize won by Charles Lindenbergh, which is attributed by some to have set the $250 Billion aviation industry in motion, and how they feel that the X-prize would do something similar for space travel. Well I really doubt if that's truly the case, infact I fear that these events will more be inline to the 60s era space race between US & USSR. Once they landed on the moon, it was almost like it was no longer fashionable. But still the X-prize has certainly garnered a lot of attention, atleast in the short term.
- The website mentions that the 'Ortieg' prize of $25000, incited an investment of over $400,000 from the participating teams. Well the X-prize was $10 million, and there were 20 plus teams, with many of them putting in significant investment in this project. So while I do not know the amounts invested by the teams (Does someone?), I wouldn't be surprised if it is in the same ratio as the 'Orteig' prize (i.e. attracted $160mn in investment)
So as far as eliciting participation is concerned, I think they were successful. Also, I must say, in my opinion the value of the prize was set correctly, so as to draw significant participation (which provides a healthy competition), but was not so high to have excessive duplication of effort. Also, looking at the various ideas proposed by the teams (launching from a baloon etc. etc.) , it did spur innovation. Infact it's even possible that more than one idea (besides the winner) goes on to be used in commercial space travel. - The prize was very well backed (as per their website it was even backed by an insurance policy to ensure the full payout till 2005), so clearly they did not have any problem establishing their credibility. This surely contributed in drawing participation from various teams across the world. In prize system this is always an important factor.
- This was a 'targeted' prize, and the field is certainly one I would classify as 'Big Science', where there was not much scope of a commercial gain for participants (except in very long term). Thus I think the 'prize' model was well chosen here. The onnovation that we have with the development of SpaceshipOne would not have happened probably for many years to come, but for this prize.
Update - X-Prize becomes an annual Competition
--Jackr 21:09, 5 Oct 2004 (PDT) According to this CNN article, the X-Prize will become the X-Prize Cup, an annual competition. This seems like a smart move if the goal really is to promote the industry and is another step in trying to mimic the prize environment of the early 20th century and aerospace.
Avichal 13:23, 8 Oct 2004 (PDT)
Good article. thanks! I quote this from the article:
"...Teams will compete in five different categories to win the overall cup: Fastest turnaround time between the first launch and second landing, maximum number of passengers per launch, total number of passengers during the competition, maximum altitude and fastest flight time..."
Well, for one I would be really concerned about safety issues. I mean, NASA pours in money on it's projects, and still has had a few disasters (Columbia, 2003; Challenger 1986). While I admire the fortitude of people flying these aircrafts, I would certainly be concerned about their safety. On a tigther budget, and a shorter deadline, each team may be cutting corners to win that prize.
Still, what will be most interesting to see, is that
- Whether it works! If it really boosts space-travel, and makes it possible for common people to go in space if they want to.
- If it catches on! Whether the idea of fueling innovation by prizes spreads to other fields too.
--Jackr 09:12, 9 Oct 2004 (PDT) I had a friend at work make the comment that American's "value human life too highly". I.e., we're too risk averse. I think there maybe something to that. Airflight progressed at a much more rapid pace than space flights seems to have progressed. Conversely, space flight, at least under NASA, seems to be much safer. Seems were sacrificing progress for safety. And my friends point was other developing countries might not make the same trade off as us and progress much more rapidly than the U.S.
