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When control crushes innovation

By Ezra Klein
Sunday, December 5, 2010; G01

The Master Switch

The Rise and Fall of Information Empires

by Tim Wu

Knopf, 384 pp.

$27.95

In 1876, Western Union, then the most important communications company, joined forces with the Associated Press, then the most important news service, to throw the election to Rutherford B. Hayes.

Hayes was close with executives at the Associated Press (in particular, their political fixer William Henry Smith), and the Republicans, who'd nominated him, had long been allied with Western Union, as much of the telegraph giant's line was laid by the Union Army. With Hayes in the White House, both companies could rest easy that their interests would be looked after.

But first, they had to get him elected. Western Union had a monopoly over telegraph lines, and the only news service they carried was the Associated Press. So the AP ran an endless stream of stories gushing over Hayes and hammering his opponent, Democrat Samuel Tilden. Even so, on election night, it looked as if Hayes had lost. Some accounts say he was prepared to concede.

And maybe he would have, except that Western Union gave the New York Times - then a paper affiliated with the Republican Party - access to telegrams sent by the Tilden camp that showed that a Democratic victory in the South was less certain than had appeared. The GOP immediately shot off its own telegrams instructing its partisans in the region to begin lobbying state electoral commissions, and the Hayes camp declared victory, kicking off a months-long stalemate that ended, most historians think, when House Democrats agreed to elect Hayes in return for removing federal troops from the American South and ending Reconstruction.

This story is usually told as a tale of political hardball. But Tim Wu, a law professor at Columbia and author of "The Master Switch," my pick for economics book of the year, sees it as "a crucial parable for communications policymakers" and an example of "the kind of political advantage a discriminatory network can confer." (My pick for non-economics book of the year, in case you're interested, is Isabel Wilkerson's extraordinary history of the African American migration, "The Warmth of Other Suns.")

In Wu's view, new information technologies follow a predictable pattern that he ominously terms "the Cycle." First, the technology emerges, "bright with promise and possibility." The new world is dominated by enthusiastic amateurs and seems more open, more democratic and more free. Advocates imagine new forms of journalism, education and even government.

But the expansive liberty offered by the new technology can carry a downside for mainstream consumers, who are overwhelmed by content that is, at turns, brilliant, crass and untrustworthy. The service is often unreliable and difficult to use. And for all the medium's promise, no one is making any money.

This gives rise to the next phase in the Cycle: A mogul, or small group of them, emerges to take control of the new service. Importantly, Wu does not deny the benefits of these monopolies. "Delivering a better or more secure product," he writes, "the mogul heralds a golden age in the life of the new technology." Such periods may in fact be necessary for the standardization and popularization of the new technology.

The problem comes later: The quiet cost of the new regime is the loss of "a certain measure of control over the medium's potential for enabling individual expression and technical innovation." Eventually, new innovations or forms of expression threaten the business model, and the moguls use their control over the infrastructure or command over the market to crush the upstarts and set back any advances by rivals, if not kill them altogether.

Wu tracks the Cycle over and again: in the telegraph, with Western Union; in the telephone, with the rise of AT&T; in radio, with the dominance of RCA; in television, with the cartel of NBC, CBS and ABC; in film, with the five major studios. Aside from television, which came under RCA's control almost immediately, all of these mediums had their day of democracy but were not able to preserve it. The costs are perhaps easiest to tally up in the case of AT&T, whose hammerlock suppressed inventions from the answering machine to the Internet.

Few in the book come out looking particularly good - or entirely bad. Government is as likely to partner with monopolies as to shatter them. Corporations drive progress as insurgents and stymie it as incumbents. "Whatever technological reality we live with is the result of tooth-and-claw industrial combat," Wu writes.

And the reality we live with matters, particularly when it's the basis for the way we communicate with one another and inform ourselves. Centralized information industries are easy marks for public and private censors, as Hollywood proved when the major studios came under the thumb of the Catholic Church and the Legion of Decency in the 1930s and '40s. The close ties between monopolists and the government lead to troubling consequences, as when Western Union worked to help Hayes or when major telecommunications companies quietly submitted to the Bush administration's wiretapping schemes. And, of course, the less competition there is, the harder it is for new technologies and ideas to propagate.

Wu's ultimate point is that there is little historical reason to believe the Internet is somehow immune to the Cycle. Indeed, consider the giants that dominate online markets: Google in search, Amazon in retail, Apple in music, Facebook in social networking. The last two are particularly worrying, as they are pioneering closed systems that take people out of the open Internet and lock their data within. And Apple has already shown a censorship streak in its decisions over which iPhone apps to approve - and which to reject. That such efforts have failed in the past (AOL, for instance), doesn't mean they'll fail in the future.

On Wednesday, Julius Genachowski, the chairman of the Federal Communications Commission, proposed a set of rules for "net neutrality" (a term, incidentally, that Wu coined in 2003). The regulations are quite technical, and it's too early to say whether they're sufficient. Worryingly, the initial response can best be summed up as glee from telecommunications giants and dismay from open Internet advocates and content providers such as Google and Netflix and Amazon. It's early yet, but the process bears watching. Those who forget the Cycle are doomed to repeat it.

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