Russ Roberts

Hazlett on Apple vs. Google

EconTalk Episode with Thomas Hazlett
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Thomas Hazlett of George Mason University talks with EconTalk host Russ Roberts about the growing rivalry between Apple and Google. It is commonly argued that Apple with its closed platform and tight control from the top via Steve Jobs is making the same mistake it made in its earlier competition with Microsoft. Google on the other hand is lauded for its open platform and leveraging of a large number of suppliers for its Android phone, for example. Hazlett, drawing on his recent article in the Financial Times, argues that these arguments fail to recognize the different competitive advantages of Apple and Google and the implications of those advantages for the companies' respective strategies. The conversation concludes with a discussion of the move to application-based web browsing such as Facebook, Twitter, and the implications for Google.

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0:36Intro. [Recording date: October 20, 2010.] Financial Times article: Standard view of Google and Apple's business strategies misses the point: criticizes Apple for being a closed system and praises Google for its openness. Interesting schism you see a lot in the tech press--widespread criticism of Apple for being proprietary or closed-platform. Multiple level accusation. In the United States, Apple only markets its iPhone for use on one of the four competing national networks: exclusive contract with AT&T. Seen to be an exclusive approach that denies the customers of the Apple products the benefits of competition. When you buy an Apple product, you are stuck in an Apple-organized world. Easy to go to iTunes but hard to go anywhere else if you want to buy music. Go to Apple app store to buy applications. So Apple takes care of a lot of organization and sets the rules for developers. There are a lot of developers, independent, come in through Apple and agree to work on Apple's terms and conditions. Apple takes, at last report, 30% of the revenues generated in the app store. Other deals for iTunes, negotiated with the content owners. Idea many people have is that that is a vertical control issue that is very dirigiste; artifact of an old, industrial age; new wave brought to us courtesy of the Internet and advanced technology is represented by a company like Google. Google, seeing the success of a company like Smart Phone platforms, predecessor Rim/Blackberry platform and other competitors, comes into the market with a Smart Phone innovation of its own. But they only produce the software. It's the Android. Grab a mobile operating system, reportedly paid $50 million, tweak that and put that out. Create an ecosystem where any hardware maker can grab the software, put it on their machine--of course, they have to abide by terms and conditions as established; but there is a licensee that transfers without dollar payment. Just gives Google market share. Make good software, make it free, do promotion on the back end; organize an app store; Google also takes 30%--they thought that was a good number--on the Android application store. Lots of choices if you want an Android phone. Companies like Samsung, Motorola, Sony Ericsson make the phone; offered on various networks from T-Mobile to Sprint to Verizon to AT&T. Many fewer restrictions ostensibly on the marketplace. Do you have either an Android or an iPhone? Hazlett: Yes--looking at my iPhone right now. Russ: I have a Motorola Razr, sort of like carrying a crank phone that they used to have in the early 20th century. When it came out, it was cutting edge. I look like something of a dinosaur, primitive keyboard. I do have an iPad--purchase of it and writing about it got me interested again in this topic.
6:38Some might argue that you are biased--you are a Mac guy so you can't view this issue clearly. That would be a funny sort of bias. I think the causation runs the other way: I like the product and there's no conflict about what I believe about the marketplace. I was a late iPhone adopter--got it about a year ago. Not particularly excited about the applications. I like it because it's a good phone; I actually make voice phone calls on it. Don't know if any of your listeners understand that application, but it's quite an exciting one. Primitive use of an advanced technology. One way to state the standard view is that Apple, through this platform, is making a mistake. The other view is a little more negative--that somehow it's anti-capitalist or anti-freedom or anti-Hayekian to support Apple because they have this top-down strategy; and Google has this eco-system, more emergent, less controlled, more out of control--which is a virtue in a Hayekian world often, though not always. Reflects a lack of understanding of the real mega-competition that is actually taking place and under-appreciation for the adaptive nature of capitalism. This is a standard competition between business models. If you dig down below the surface, to call one open and one closed puts a spin on it that makes some sense--a germ of truth or more in saying Apple is controlling certain aspects of their environment more than Google might. Google playing more to the partnership aspect. But to say that one is capitalist and one anti-capitalist really fails to see what Schumpeter and the great philosophers of capitalism talked about in terms of creative destruction and the competition, not just between products or services, but between modes of production. You are seeing rival structures compete in the market place and offer consumers value in a very innovative discovery process. Fascinating to watch as an observer and wonderful to participate in as a consumer. Should also add that the developers, another side of this, quite interesting. Many in tech community, have standard view of the situation; but many others love the Apple platform, vertically provided by Apple to push its ecosystem farther more aggressively than others might. In many respects Google has learned from the Apple experience. Much of their marketing is really trying to assert some vertical coherence, coordinated sense to pushing that platform forward. Also delivering great value to their developers. They've had to shape that and give up some of that laissez faire attitude of just let everybody else carry the ball. One of the things we're seeing is the old Apple-Microsoft rivalry play out, from 25 years ago. That was a time when Apple had the killer operating system. Which they did not develop themselves--got it from Xerox. As opposed to Microsoft and old DOS system, which they bought for a small fee and then tweaked and developed. In 1985, world in which Mac had the graphical user interface (GUI); that was, as we've seen for the last 25 years, the killer approach to operating systems. The better product. Bill Gates then flew to Cupertino--had to go see them: in 1985 Microsoft wasn't even a public company. He tried to talk Apple, and Steve Jobs, into going the licensing route on the operating system and taking on all the companies in the computer world as partners--from Hewlett Packard to IBM, all the box-makers. In a 3-page letter that has now been published in some books on the matter, Gates laid out the idea that as good as Apple was in marketing its own products and creating new ideas and new platforms, they could never bring to bear the great inventiveness of a whole market of innovators. He supplies names and phone numbers for contacts at these computer makers. These people want to make products with your Apple software; please allow them to do it. Clear that the money maker for Microsoft in those days was not the DOS operating system: their first killer application was the Excel spreadsheet. That's what they wanted to push. Would be great to get that on a higher plane. The more desktops they were on, the better. Not clear that DOS, and later Windows, were going to be the moneymakers for Microsoft. Windows did later borrow the GUI from the market--copied. Apple rejected the notion. Didn't want others to make computers for them. Did maintain vertical integrity, so to speak. Cost them severely; almost cost them the company. When Microsoft takes off and Windows dominates the world in the 1990s, Apple gets very close to the margin; gets saved in effect by Microsoft.
15:29Fast forward: Microsoft does this interesting thing where they are just the software. They have also the applications and Office suites, but primarily just a platform. They take on thousands of partners, in the sense of opening their system to computers--the boxes--underneath them. All the other application software that rides on top of them. Fanatical on taking on those partners; want to be that slice of a vertical stack. Do that to perfection. Standard view of that is that Apple made a strategic blunder by staying with a closed system. Because they didn't, Microsoft cleaned their clock, almost knocked them out of business and in some sense really did; but at the last minute Apple survives and somehow manages not just to rebound but to dominate using this same strategy that failed them before. So, here we are in 2010, saying Apple was right. They are doing incredibly well; should kick yourself for not buying Apple in 2002. A few days ago--recording Oct. 20, 2010--their value was the highest public-valued company on the stock exchange, correct? Went down a little, but they are doing something right. In 1985, I purchased a "classic" Mac, could hold up to a 12-page document. Not as powerful as the DOS--IBM was the main competitor at the time. I found the green print on the black screen or white print that was the IBM was not aesthetic; the Mac appealed to me. Classic 1984 commercial that aired during the Super Bowl around that time. Why did it fail before, why so successful this time, will it fail again? Working now but not a great strategy? We have two arms for a reason. Not that you can predict one model over the other, but at some points in time Apple has been very well served by what some would call a fanaticism for vertical control. Checking the market--Apple about $280 billion; as we talk today, a little under $220 billion and Microsoft a little under $200 billion. In many senses what almost killed Apple 20 years ago is now allowing it to soar. Has to do with these unpredictables, gales of creative destruction that sweep over markets. Sometimes the innovation, in any epoch, is quite unpredictable. Part of that innovation is the market structure. What Apple is doing now is competing with other market structures. You've got Microsoft on one side and the more exciting competition now is with Google. Would cringe to hear is the "openness of Microsoft"--extended model beyond what came from Redmond. Perhaps in many senses they have; remarkable things with the Android platform, doing well in market share.
20:54But they are not running a charity. Talk about the myth aspect, the romance of this contrast that's misleading. What's motivating this, on the one sense it's funding--this enormous ability of Google to respond. The Smart Phone revolution in one sense pioneered by Apple even though they weren't the first. Funding, the ability of Google and incentivizing their resources in the direction of these new innovations. Google--obviously a private company and a very successful one, market cap of $200 billion--a company now 12 years old, only public since about 2004--this company has developed a facility unparalleled in the modern economy. That is an ability to monetize Internet traffic through an extremely efficient advertising model. Google is notoriously hungry for new applications that can drive traffic through its search engine. When you say Google has an open model with the Android, we think we know what that means but in terms of being philosophically or ideologically different in some stark sense from the model being pursued by Apple, it's spurious. Party! Not willing to share their payment on the advertisers' side. Have exploited a two-sided model. We've seen many of these models before: newspaper business, broadcasting business. Build an audience and you sell the audience to advertisers. Google, almost without a serious rival now, has figured out how to take millions of tiny transactions that involve eyeballs flowing through websites and selling those glimpses to advertisers; and summing those transactions through advertisers into a $200 billion market cap. People thought that search was really all solved when Google started out or that it couldn't be done right because of all the gaming going on--search one thing and get a lot of links to porn sites. Google has creatively created a franchise that allows it to be utterly dominant in that sector. Pioneer innovations that allow new traffic to come into its search platform and create new profits. Wonderful dynamic. Apple wants to sell you an iPhone and make money on the iPhone. The hardware, physical device; expanding that device space, pantheons to consumerism, iTouches, iPads, iPhones. Making real money on the hardware. All the apps; make money on the apps as well. Google approach: not in the hardware business, not even much in the software business. They are in the services business and search engine business; all these other offshoots--over 150 applications offered on google.com now--all dependent on the search engine for the revenue, massive majority of them. Well over 90% of the revenue dependent on search.
26:09You are suggesting that strangely enough, Google is like Apple: they are trying to make money. You might think because they have their business model trying to let everybody have access to everything--and Apple is mean. They make you play by their rules. But they have different strategies, different products they are selling. Misleading to think of it as the good guys versus the bad guys. Bringing value to society; rewarded for it is a positive outcome of the capitalist process. Have no axe to grind against Google; glad the Android has come along, will put pressure on the next generation of iPads. Google search phenomenal. Something cited in a paper sitting on my hard drive--I will go to Google and search the web rather than find it on my hard drive. Sometimes not intentionally. Not just an algorithm. Combination. Doing everything right and praying you get the market timing right. You do have people who see them as controlling on their aspect of the ecosystem, the search engine. You do hear vendors complain that they squeeze them out, price rapaciously, make it hard to generate traffic for your site unless you pay them. Painting this as good guy/bad guy in the popular press; but both guys have image issues. These are costs that inevitably are going to be there as you try to make money. Challenges faced by a company like Google--privacy. Google has made some obvious mistakes; approach they had to Google Buzz a few months ago was a disaster; quickly retraced their steps. But they have created this brand--another aspect of capitalism so strongly seen in this new competitive environment in the communications marketplace. The "Don't be evil" motto, brand. Mocked. Such a high standard. Hitler didn't think he was evil, either. Nobody says "let's do something evil" unless you are Dr. Evil, caricature. Did take the standpoint that if you are going to search, how would you like the search to work? Had a very fair search page, didn't bombard you with banners or lots of options. And did it very fast. Physical network always been lightening speed--enormous consumer value. Building brand and living up to the brand. A lot of people have tried to philosophize about this; the Google folks themselves have tried to make that argument. But the more you know about capitalism, the more you know about Google, the more you see them as a vested capitalist enterprise, and a very successful one.
31:25This argument that somehow because of Steve Jobs's control nature, his top-down authoritarianism is somehow not consistent with loving freedom or Hayek or emergent order--interesting interview with John Sculley, CEO of Apple for 10 years--nice insights into Jobs's perfectionism and personality. Not "normal"--great blessing, has some costs; obsession with elegance, design beauty has a cost but comes with some great benefits. Idea that somehow because he's so controlling, Apple is not a free company, is misleading. Hayek was not against planning. It's a question of who plans. Can't sit around and hope that your company, your products will emerge from it. You have to order folks around. Hayek saw the competitive process as islands of control and planning competing with each other. The beauty is they are in competition with each other and other models. We don't know who is going to win. The idea you shouldn't buy Apple stock--which I've actually heard people say--because it's immoral because he's so controlling, is bizarre idea. Not sure where it comes from. Some from the freedom of the Internet. On my blog page, Cafe Hayek, we have open comments; run with Don Boudreaux. Don't edit them; rarely cut them out--except if there is obscenity or people who are deliberately trying to ruin the page. Free-for-all. If you suggest to the people who comment there that it's my blog, they resent that. It's like saying in my back yard you should be free to saunter by and eat the hotdogs I'm grilling. Idea that somehow private property belongs to everybody, web belongs to everybody--not consistent with good outcomes. Other point: seemingly disastrous strategy for Apple now turning out so well, at least for now, related to Jobs's control-freak nature. Quality of products he is generating now, through pipeline, designers--stunningly great. In old days, wasn't stunningly great, just beautiful. Struggled relative to the competition. Always going to be see-saw battle as these two models go back and forth. No reason to think Steve Jobs wouldn't thrive as the head of Google and the head of Google wouldn't thrive as the head of Apple. Functions of their personalities, skills, and the competitive environment they are in. You had me all the way till you suggested you could switch the leaders of the companies. Said you could not. Serendipity involved. Has to be right combination at the right time and place. Sculley tells story in article: Meeting at Apple, designers walk in to start, everybody goes silent because they are the most important people. At the Microsoft meeting he was in recently, no designers even in the room. All engineers. Totally different mindset, strategy. Sometimes disastrous, sometimes great. Don't know any of this in advance.
36:45Strange issue in passing: idea, partly created by the companies themselves, that somehow it says something about you if you buy an Apple product, or a Zune from Microsoft; we are what we wear, eat, surf with, call on. People have an emotional reaction to Apple's business model. On Cafe Hayek, when I wrote about this, people said, "I'm not going to buy that as long as it's not compatible with Flash!" Could be an error, mistake. If you don't like the device, don't use it. But why would you get angry. Like saying I test-drove a Ford Fiesta the other day, don't like their drink holders, remind me of Satan, evil company. If I test drove a Corvette; we use these consumer products to signal, where we live, house, clothes, watch--now an iPhone. Junior-high-schoolish. My 12-year-old daughter lives in the text-message world; I buy the iPhone for phone calls; signaling. If you are out there and you look at people grouping themselves socially: it's the adaptive nature of society. Same old instincts. Years ago impressed with Thomas Sowell's Knowledge and Decisions, 1980. One of the things striking: he says in any consumer market, the experts in the field despise the mass-market product. He's a photography buff, in the marine corps as a photographer early in life. Would go through the various types of cameras you've never heard of that are just what you have to have if you are a photographer. Of course, all the real photographers hated Kodak. They didn't just hate it because it wasn't the camera they didn't use. They didn't like Kodaks, they thought it said something about you, thought it was a bad company; had all kinds of moral tones, that there would be a company out there that was actually producing a product you could use easily. People vest themselves. Lot of folks knowledgeable about specific aspects of this evolving marketplace; they want to take pride in the fact that they know those aspects. While they may not know too much about Voice Over Internet technology, they really may be an expert in other technologies for some software that they've been working on. Want to run that out a little bit, want to tell you what kind of software is good, consumer device is good, hang a lot on that. Social thing to do. There is a lot of irrationality out there. I grew up in Los Angeles; to this day I'll root for the Los Angeles Dodgers. Even with great animosity for the players, owners, that to me represent a problem in my life. How I can rationalize being totally rational about everything and being a sports fan and have allegiance to a team I'm highly critical of all the time--society. Good place to squirrel away your neurotic tendencies. Better there than your family life. Hope you don't root for the Lakers! Did grow up a Lakers fan.
42:25Chris Anderson, Wired Magazine, recently wrote article, "The Web is Dead." What did he mean? There is something revolutionary going on in how we use the Internet these days. Parts of it that make sense are good common sense. Basic idea: More platforms coming out that are one stop shopping. Self-contained. Go into Facebook, not spending a lot of time hopping from site to site on the World Wide Web. Go to Facebook; then pop out, Tweet, Twitter, spend time there. Not so good for Google. Should be, because Google wants to direct you around. When you go into Facebook, you are leaving the world of Google. Doesn't to me seem to be a terrible threat to Google. Google able to tap in to YouTube, either by communication or buying it. The article seems to violate the title--say that this has been going on for a long time, go back to the 1990s, browser war. Netscape Navigator, Internet Explorer. Like referencing the 30-Years' War. For many of our listeners, those names are unfamiliar. Wonder how many have heard of Netscape Navigator under the age of 25; but they were doing pretty well for a while. Browser jihad, Department of Justice liked to call it, Microsoft email. Battle for dominance through the browser. We thought the browser would control the Internet traffic; part of what that Dept. of Justice case in 1998 was about. But at the same time what was developing and putting tens of millions of new customers online was America On-Line (AOL). 1996 was called the year of the carpet-bombing, when they dropped 250 million sign-up disks--you couldn't go into a record-shop without getting a signup disk, or a department store. They took dial-up subscriptions into 40 million households or so, very quickly. Didn't have to be a techie to be online. Would go to the proprietary content of AOL. Came to be criticized as the walled garden. They provided it to people to sign up and pay subscription fees to AOL. Prodigy business model and model of CompuServe and some of the very early online sites. But a lot of content developed outside of AOL; in a very short space of time they had to open up access to those other sites; and their business model had to morph into something different. By the end of the last century they were taking people just to Web. The walled garden collapsed of its own weight. Great way for AOL to take people online, create mass investments. What's not to like? New walled gardens are being crated all the time. The wireless world, nothing new here--the real use of wireless for mass market and data services developed in Japan, 1999-2000 with Docomo, still called a walled garden. Data flows and revenues; very strict rules about how the wireless has to come into the space and use the wireless abilities, network, spectrum to make the user experience top-notch. Billing done routinely by the cellular carrier; they take 9-10%. That's a model that has been architected by the carriers. A lot of vertical control, highly successful, particularly in Japan where commute times are long and you get a lot of people who want to have their handheld sets do a lot for them--access to entertainment and applications. Given way to other models, Rim Blackberry, Apple iPhone, Google Android. Being old enough to remember when IBM was the giant everyone was afraid of: IBM was going to dominate the computer world, they were dangerous, big antitrust suit against them; eventually it withered away. By the time it came to court it was pretty moot. The famous IBM antitrust case was filed on the last day of the Johnson Administration, 1969. Dropped. Had been to a District Court. Dropped by Reagan Administration on January 8, 1982. Roughly 13 years later; didn't reach an opinion. A lot of economists got rich. Excellent social purpose. Microsoft case in 1998. At the time everyone just knew Microsoft was going to dominate the computer world. They had a huge market share. Their browser, Internet Explorer (IE) was this gateway to a wonderful new product, was offensive in Justice Department and to many commentators that they could put that in their boxes, computers, their software going to other people's boxes. We had to do something about it! Now, looking back on it, it seems comically unimportant, because it did not foresee the evolution of Google and now Apple. But now of course Google is the scary thing; as their market share and success continues to grow, they will be the object to slow them down; Apple's success forestalling that.
52:39Lack of imagination and appreciating creative destruction process--amazing thing. May 1998, Department of Justice filed suit against Microsoft, only a handful referenced but one of the anti-competitive deals that was allowing Microsoft traffic to monopolize with its browser was between IE and the CBS Sports Online site. Have to scratch your head. At what point in time was the CBS Sports site dominating anything? Wanted to point out, IBM example, immediately trigger important evolutionary idea: Back in the 1960s and 1970s, no doubt, IBM was the computer company in terms of market sales, highly dominant. Structure of that industry was highly vertically integrated. IBM built those computers--the frames, software, and components by and large and took them out into the market. When the desktop, microcomputer, comes out, late 1970s and early 1980s, and companies are scrambling to participate--including IBM--they have to act rapidly. That's why IBM did not write the DOS software but farmed that out to Microsoft; and Microsoft turned that into this exceptionally lucrative franchise. IBM lost out on the next round of riches. The entire structure of the industry spontaneously changes; the industry becomes fare more vertically disintegrated. Chip makers, box makers, software operating system makers, application software makers. Not because of antitrust or regulation. Natural process; economies of the marketplace demanded vertical integration at one time--heavy coordination--and then, as the industry matured and the technologies great more powerful, got ability for standardization of interfaces to be created and for coordination to exist without ownership. A whole ecosystem evolved out of that. Even more fascinating when you fast-forward to today, when you see that Apple is still fighting that trend. Apple does have a lot less vertical integration today than IBM did. But still remain very vertically dominant, some would say controlling; make sure their purchases get into the Apple product. Fighting the trend while using these competitive suppliers. Designers get to design them, not the engineers. Different than many other companies like Microsoft. Can tell it by looking at the boxes their products come in. Sculley interview: Steve Jobs is obsessed with how the box looks, how the manual unfolds. Japan story: manual upside down when you open the box, Japanese didn't like it. Americans don't care; Japanese had different sensibility about it. Apple doesn't have a factory here in the United States but they monitor that process differently than other companies.
57:54Regulatory environment. Competition and capitalism not always what you see on the surface, meta-issues. How much of the nature of that competition comes from the regulatory environment and is therefore not what we would observe in a different regulatory environment? Good or bad? No doubt that in many markets we get these regulatory interventions that are very sticky. If you look at the television marketplace, broadcasting created through the spectrum allocation process, been with us 60 years now, had a lot of effect. Nice thing about looking at the Internet--or, the network of networks, as I prefer to call it--you really have a largely deregulated environment. Mistakes we make are generally looking at market outcomes and seeing them as somehow either mistakenly the result of some policy intervention--as in the case of thinking the Internet is a government project that came from DARPA, which is really a common view that I think is quite misguided. Why? The DARPA network had a lot of inputs that became useful in modern networks, but the network of networks today is all these products--computers, chips, software, wireless, applications. Not master crafted on some blueprint by the Department of Defense, nor designed to withstand nuclear attack, by the way. Vision incorrect. The idea that networks are open end to end, control only at the edges of the network: that's in some sense an optical illusion. There is control that takes place at the core, but to the extent the illusion is correct there is an incentive for a lot of standardization within the core of the network in pushing innovation out toward specialized innovations. What does that mean for regulation--we should enforce rules like network neutrality that maintained that the only kind of innovation that can take place in terms of structure has to be on the edge--and that again is a misreading. Consumer products--the edge--content and applications, Mass market customers have access to directly. Google is highly integrated with core networks in terms of how it transports its applications around the world; world more productive for that. Many other edge applications integrating into faster transit to make their products better for end users. Akamai specializes in speeding up delivery, allowing all these application providers to avoid the traffic or congestion of the Internet. You want competition to not only deliver new products but new structures. Sometimes experimentation is going to be vertically oriented. That is not a sacrilege--just a religious belief, not one founded in economics. Example: head-to-head phone competition in the United States, sprung up just in the last 5-6 years, fixed, not wireless. More than 90% of U.S. households now get to choose between two fixed operators: the cable company and the phone company. Where did the cable companies come from? They are Voice Over Internet Protocol (VOIP), but the cable modem service that is reserved for high quality, low interference voice as sold by the local cable operators. The cable operator carves out capacity for that last mile service: Vonage, Skype do not have access to this. Excellent substitute for voice, fixed voice. Highly competitive. Country trying for 25 years to get that competition jump started, and now that we've got it, we don't care, because why? Because we are all moving to wireless. Competition is coming to the market through that vertical structure that is highly non-neutral. Just one example. That kind of innovation with business structure is something you do get out of a healthy capitalist system. Previous podcast with you on this subject and another with Benkler. Similarly to our conversation about strategy, idea that we can design a regulatory environment that would ensure competition is problematic. Challenging. Received wisdom of those who follow the way this plays is the regulator should be very circumspect and as general as possible; careful about going further than antitrust policy and about antitrust policy, respectful of consumer, careful about dynamic efficiencies that can result from things like the browser war or the Google/Apple war. Battle of the giants fighting it out over rival business models: enormously productive innovation that comes out of that. Seen it time after time. Trying to micromanage the direction of competition--that is what we have to avoid.

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COMMENTS (60 to date)
Robert Kennedy writes:

I think a very important aspect of the business dynamics was mostly missed in this discussion. That is how reliability & stability & consistency & security is impacted by open vs closed technologies. The evidence is pretty clear that closed technologies produce more reliability, more stability, more consistency, and better security. There is a cost to that, of course, which primarily comes in the form of less innovation & higher costs.

I think Apple recognized that the more control that they could keep on how the hardware & the software & the applications interacted, the more that they could offer a user experience was reliable & stable & consistent & secure. I presume most folks, including DOS/Windows proponents, will embrace that the Mac is better at all of those aspects.

The cost of that decision by Apple, in terms of personal computers, was that they almost inherently had to charge a premium for their product because they could not enjoy the cost reductions that come from innovation and competition between suppliers along the chain. That decision doomed Apple to be more a niche suppliers in personal computers. As it turns out, the personal computer market valued innovation & lower costs over reliability & security.

On the other hand, that business model has served them well with phones & music players, as Russ & Thomas acknowledged. They've tweaked that business model enough to keep their costs down and nurture innovation with applications but still kept enough control over the hardware & the operating system to provide reasonable reliability, stability, consistency, and security.

IBM, to their credit, has evolved to a mix of both open & closed technologies. Their closed technologies, mostly their still viable mainframe computers, are still valued by larger customers for the reliability & security that they still offer. Their open technologies, mid range servers that can run Linux & Windows & such, are valued by other customers for their price performance & innovation. (Disclosure: I work for IBM...)

Steve Fritzinger writes:

Expanding on Robert's comment above, there are many trade-offs between open and closed (or vertically and horizontally integrated) business models. Apple does have much more control over the end-user experience and industrial/aesthetic design than Microsoft does. OTOH, Microsoft has benefited enormously from the riot of hardware, software and application development which occurred on Windows because it was the more open of these two platforms.

Interestingly, the relative advantages of open and closed change over time. The more unsolved problems there are, the better it is to be open. That's why, for decades, PCs were cheaper than Macs. PCs benefited from hardware competition for processors, memory, disks, peripherals and every other component.

During this time, Apple survived on their aesthetic design, their strong position in graphics design, publishing and other niche markets and a large segment of ABMers (Anybody But Microsoft).

But over time, the core problems of designing personal computer hardware were solved and Microsoft lost that advantage. As design decisions like memory architectures, disk connectors, peripheral connectors, etc. became standardized and simplified (compare the back of your PC today to one from 15 years ago), Apple was able to incorporate all these improvements into the Mac.

And that made Apple's core competencies in design, user experience and reliability even more valuable. Apple gets the same performance and speed at the same cost as a PC because all the costs of standardization were born by the PC market.

Today the physical Mac is essentially just a PC. A beautiful, elegant, incredibly well designed PC, but strip away all that lovely aluminium and its all the same processors, memory, connectors and components used in the cheapest no-name PC.

Steve Fritzinger writes:

P.S. I wrote my previous comment while listening to the podcast. Hazlett makes roughly the same point near the end of the podcast when he says that Apple is fighting this trend while taking advantage of it.

I disagree that Apple is fighting the trend of standardized components and architectures. That misses what is really happening.

The really big thing is that the focus of innovation has changed. The hardware is now so powerful and so cheap that innovation there doesn't really matter anymore. It's not that Apple is fighting against standardized components, it's that these components just aren't that interesting. For Apple to fight against these standard parts would be like fighting against 60Hz/110 volt power.

Instead, Apple is playing a higher level game, a game which is made possible by standardized components. They're concentrating on design, user experience, integration with consumer and communications devices and the whole bundle of the on-line world.

David writes:

> Hating ipad for lack of flash.

Consumers hate artificial limitations, especially blatantly obvious ones. The ipad hardware can run flash just fine. Steve Jobs decided that he didn't want flash to run on the device. That is what rubs people the wrong way.

> The evidence is pretty clear that closed technologies produce more reliability, more stability, more consistency, and better security.

I think the history of windows vs nix has shown the exact opposite. Open has been more secure and more reliable.

Jeremy writes:

Does anyone have a link to the 3-page letter mentioned in talk?

David writes:

With hindsight we think Apple is so closed but at the time of release they have an openness advantage in key locations on their very successful products. They are closed in relation to the PC industry but they are open in relation to the industry they are entering.

With the iPod it was the openness of the iTunes store compared to others that drew people in. The open music catalog is the real interesting part.

With the iPhone it was vastly more open than other phones that were being provided from the carriers. We forget that old phones could not communicate at all with our other devices or install anything without paying the carrier ridiculous amounts of money.

Robert Kennedy writes:

David writes:

"> The evidence is pretty clear that closed technologies produce more reliability, more stability, more consistency, and better security.

I think the history of windows vs nix has shown the exact opposite. Open has been more secure and more reliable."

Point taken on Windows vs. Unix/Linux/whatever. My clumsy attempt here was comparing the relative openness of Windows vs Mac in terms of the supply chain. There are, of course, a variety of reasons why the Windows platform has been less secure & reliable than Mac or Unix/Linux or various IBM & other platforms.

I do think my point still stands on consistency & user experience. when Apple or any other vendor can exert more control over the platform, the user experience is more likely to be more consistent & consumable. Thomas & Russell make that point regarding AOL.

Brendan O'Donohoe writes:

Interesting Times article pursuant to the App developers in differences between Apple and Google- apparently Apple makes it easier to get paid.

http://www.nytimes.com/2010/10/25/technology/25android.html

[Link changed to permanent link--Econlib Ed.]

MH writes:

Another entertaining podcast. However, Hazlett's quick dismissal of the significance of regulatory changes as early enablers of Internet development can only be read as intentionally deceptive, as there is no doubt that knows the relevant facts. Of course DARPA diktats were not the final cause for the success of the Internet -- but thanks for reminding us of that, since so many people stubbornly cling to that belief! But seriously, had the FCC not revoked AT&T's "liberty" to refuse service to potential commercial competitors in 1976 (and had Congress not rejected the "Bell Bill" that sought to restore that prerogative in 1978), the Internet would likely never have grown beyond its then-current status as a minor, (literally) exceptional, intercampus-only experimental system.

More generally, the not-even-vaguely-subtle subtext of the discussion -- i.e., that complaints about predatory commercial practices and anticompetitive exercises of monopoly power are the exclusive preserve of short-sighted fools and unscrupulous market rivals -- is so wrong as to border on the offensive. Not all such complaints are equally valid -- but much more importantly, not all real-world instances of closed markets and/or anticompetitive practices are equally salient. The state of openness/non-openness of Apple's vs. Google's wireless handheld devices (and the browser wars, and the matchup between plain-old voice service and VoIP, etc., etc.) might be great fodder for biz school case studies, but each of those contrasts only exists because some degree of competition -- a.k.a. shared participation/exploitation -- is possible at a "higher" level of market abstraction -- or in these cases, within the critical input market(s) upon which the very possibility of each of these pairings depends (e.g., wireless spectrum, terrestrial right-of-way, OS APIs, etc.). Monopolize or otherwise close off such bottleneck resources, and the subordinate markets disappear overnight. Sure, in some cases "cross-platform competition" may eventually emerge if one is prepared to wait, indefinitely, but the notion of "vibrant facilities based competition" as a universal panacea has been falsified by real-world history (or at least by real world history "to date"). Of course there are still plenty of countries around the world where such liberty-crushing changes were never imposed, and where the Internet has yet to take hold to any significant degree. Folks living in such places have only been waiting (and migrating, and offshoring all of their Internet production activities to oppressive markets like the US) for thirty years now... perhaps they'll still come out ahead if only they wait a little longer.

I guess we're all extremely lucky that the myth of "vibant facilities-based competition" did not emerge until much later -- after all, who could honestly argue that the breakup of AT&T was necessary when a vibrant world of CB radio-based voice and data communications was already open to us all?

Brad Hutchings writes:

Here's the Gates letter.

I'm calling strawman from the beginning. Nobody I know who has skin in the Apple/Google game thinks of Apple as anti-capitalist. It's about how you compete in the personal computing market. Despite the name change from Apple Computer to just "Apple", these devices are all personal computers. They just fit in your hand and incorporate a cellular radio or get wedged into a tablet form factor.

The biggest indictment of how Apple does business is Steve Jobs' Thoughts on Flash. It is full of outright lies and bullying, the kind of which we really aren't used to in the computing industry. (This is not a "mistake". Read the letter Russ, and see why people are angry. 1.2 million professional third party Flash developers being told to pound sand.)

1 year ago, Android had less than 2% of US sales, while iPhone had 30%. Today, Android is over 30% while Apple is south of 25%. In just one year. If the integrated, vertical approach were so powerful, it should not have allowed this.

Well anyway, this sounded more like a fan discussion from two people I really respect. Russ, you seem to have forgotten the Buchheit discussion when Hazlett brought up "don't be evil".

As for why I am no longer buying Apple stuff (after being a true "fan" from 1980 until 2009). It has nothing to do with "freedom" vs. "control". It has to do with costs. Apple is always imposing new costs on its users. As a developer, this past decade, Apple asked developers to make no fewer than 4 major, *expensive*, revolutionary platform changes. By contrast, Microsoft took an evolutionary approach to its platform. A decade later, Mac OS X 10.6 and Windows 7 are a toss up on ease of use and functionality.

Oh well, I've rambled enough. I don't respect you less because of the Apple obsession. I just know that when I ditched my iPhone for a Nexus One, it was like upgrading from a Fisher Price toy to a real communications tool.

Peace!

Ray writes:

Which is better seems to miss the more central point to Apple; that is the very same thing has worked to their near disastrous disadvantage, and now to it's fantastic market ruling advantage.

Everything else is speculation, but what we do know is that up till now it has worked particularly well for Apple. And their near disaster can be - and this open to argument I admit - but their lean years were as much or more a product of bad management rather than the closed model itself.

Ford versus Chevy kind of stuff perplexes me as well. It's a pet peeve of mine so I was digging that aspect of the podcast.

Fred Stahl writes:

The discussion about people's emotional reaction to individuals' possession of Apple or non-Apple devices might have benefited from the concept of cult. A news item in today's WSJ (20101025, p. B4) mentions Apple's "cult-like adoration." There is more to market competition than capitalist business plans.

nethy writes:

I enjoyed this episode, but I think there are some aspects that neither Russ nor Thomas' approaches are great for looking at.

On Google as a Charity

I think an economists' instinct is to reduce the behaviors of consumers and companies to utility/profit seeking augmented by a few other (possibly reducible) incentives like signaling. Even if these behaviours can be reduced, that doesn't mean it is the most useful way of looking at things.

Companies do have an ethic that is part of their culture, stated or unstated. You might poke fun at "don't be evil" but in the tech world (where Google and its employees live) it has a relatively precise meaning. You could reduce this to the profit motive: Google retains better staff, Google attracts developers to its platforms more easily, Google gets positive PR... I'm sure that Google executives believe the ethic to be consistent with profit maximizing. However, I think this yields less insight than taking Google's statement at face value. Even if it is directly derived from profit seeking, once in place it is a permanent abstraction. Googlers are thinking in terms of non-evilness for its own sake. They don't have to think of its consequences as much.

Apple has a similarly powerful driving ethic (or possibly aesthetic: beauty. They want to make beautiful things. Again, you can call it a strategy, but I think it is less useful and will give you less insight into the company.

I think Apple vs Google is actually better understood in these terms. Google is driven by the ethics of the tech world's (or a certain segment of the tech world's) understanding of good & evil. vertical control, openness, pen source, censorship etc. are all part of that moral philosophy. Apple are driven by a desire to build beautiful devices. Vertical integration is the way they think they can achieve this. They don't want Apple software on ugly phones on phone plans that don't include great 3g access. The idea that carriers would add their own crappy software to iphones as they do to androids would genuinely bother Apple employees (and consumers). This isn't because they are thinking "this will ultimately hurt Apple profits".

These are obviously profit seeking entities, not charities. That isn't in question. The people who think of this as good vs bad are thinking at the abstraction layers where those terms make sense.

Why consumers are angry at Apple about flash or similar

I think thinking of this as signaling is a mistake.

You may enjoy an after work coffee with George. One day you hear George taking credit for something Lisa did. You now don't like to go for coffee with George. His conversation is still just as good and the coffee is still as good.
People are equipped to deal with other people. When they interact with non human things, they bring that equipment to the table. That person is angry with Apple because feel Apple acted badly.* That may not affect his enjoyment of the product at all but he doesn't like Apple now.
To give a personal example, I now pay an extra 20% for worse internet access because the cheaper company (I was customer was for years) uses small print clauses to charge you unexpected amounts and lock you in for long periods. I think I can avoid these charges but I don't want to do business with this company for an irrational reason: I don't like them.


* Russ,
I think that in many cases your tendency to think in terms of policy and regulations puts you on the attack prematurely. Just because someone thinks a company is acting badly doesn't mean regulation. Many things are bad (eg too much sugar) but shouldn't be and aren't illegal. Net neutrality is, I believe, existent largely through the non regulatory efforts of people who support the principle. Many people dislike Apple's closed approach yet think they should be allowed to try it.

Ray writes:

Another way of looking at the difference in models is through the strength of the product or line of products themselves.

The better the product, the more it can withstand the closed model.

The more bland or indistinguishable the product, the more it needs an open model in order to draw in more and more input.

Thomas Hazlett writes:

Many in this discussion raise provocative extensions and offer important nuances. Thanks to Brad Hutchings for the link to the Gates-to-Sculley letter; I should have at least mentioned the citation. The letter is found on pp. 40-43 of Jim Carlton's excellent 1997 book, "Apple: The Inside Story of Intrigue, Egomania, and Business Blunders." The volume is a treasure trove, and perhaps even more enlightening today when the issue is not to explain the "blunders" of Apple but its runaway success. If any one story reveals the variance in the adaptability of "closed" or "open," perhaps it's this tale told 13 years later.

The comments on Apple's contribution with the iPod reminds me of an excellent commentary on the subject. Jack Goldsmith & Tim Wu's 2005 "Who Controls the Internet," includes a discussion of the manner in which online music download markets were -- wracked by piracy, viruses, and a mess of problems -- rationalized by Jobs' iTunes. Antitrust authorities in Europe attacked Apple for the vertical 'foreclosure' embedded in the "closed" product chain, but the market rewarded Apple which began its incredible climb to new fortune with the innovation.

Fred Stahl's interesting "concept of cult" would surely be a factor in explaining the performance of several old and new models, although I see them as safely nested within "capitalist business plans." Branding has long been about getting customers to respond if not with "cult-like adoration," then at least with something more than an emotion-free information transfer. If it came off, btw, that I am of the cult, then I emitted misbranded vibes. I am impressed with Apple's entrepreneurship, however, as I am of other innovative sectoral survivors -- including Microsoft, IBM, Intel, and the emergent Google.

I am curious about MH's comment that I gave a "quick dismissal" to the idea that regulatory changes played a part in Internet development. I do not recall that we even got to the regulatory questions. Surely, the opening of markets from monopoly to competitive modes was triggered in large part by policy liberalization, of which the case of U.S. v. AT&T was a connected, if parallel, development. The predation there at stake, however, was hardly a market phenomenon; the FCC was an active sponsor of the Bell monopoly. One of the motivations of pushing an antitrust remedy was that industry regulator was itself hostile to real reform. With that litigation, and with the "deregulation wave" of the 1970s, circumstances changed markedly. Limited long-distance competition from an upstart inter-modal rival -- Microwave Communications, Inc. (MCI) -- emerged in the early 1970s. The "open skies" policy, circa 1975, allowed private firms to undercut Comsat's monopoly (partly owned by AT&T), an under-appreciated breakthrough that permitted video (key to the emergence of cable TV networks) to travel cheap; cable was then deregulated and permitted to compete with broadcasting. A duopoly in cellular -- a radical departure from the telecoms monopoly -- then seemed feasible, and was adopted in 1982.

At the same time, FCC rules were being pushed to allow more access by non-Bell firms to Bell local lines (the Computer Inquiries). This was a departure from regulated monopoly and a pivot point towards market-based rivalry. The application of "common carrier" rules on a firm granted a monopoly to be a common carrier -- that constituted reform, which tells us how the system had been operated. For all this, the ability of telecoms regulators to jump-start competition by actively managing network sharing arrangements has been very limited. See Gerald Faulhaber's very useful "Policy-Induced Competition: The Telecommunications Experiments," Information Economics & Policy (2003).

Conversely, "facilities-based competition" has played the central role in bringing new markets to the fore -- in satellite telecommunications, cable v. broadcasting, wireless v. fixed telecommunications, fixed voice (cable VoIP v. POTS), residential broadband (cable v. DSL/fiber), business broadband, and in Internet backbone build-out (which owed much to long distance competition).

FWIW, I have written on market predation -- see Hazlett, "Predation in Local Cable Television Markets," Antitrust Bulletin (Fall 1995). The article offers empirical evidence of strategic pre-emption. Regulation is/was part of that story (through local cable franchises), but not all. It is interesting to note that such markets have -- via facilities-based entry from satellite and telco TV rivals -- changed dramatically over the past 15 years.

dan lundmark writes:

An insightful episode, and I think the comparison of the current App Stores to the 'walled-gardens' of Compuserve and Prodigy content is right on. To take that comparison further, I predict an open web HTML5 app cross-platform ecosystem will largely replace the platform specific app store verticals we see now. A glimpse of this can bee seen in the efforts of Mozilla's Open Web App Ecosystem (blog and video) here http://blog.mozilla.com/blog/2010/10/19/prototype-of-an-open-web-app-ecosystem/ as well as in other projects that see this larger opportunity emerging.
- Dan Lundmark, Appr.TV

Anonymous writes:

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BZ writes:

Regarding vertical integration and proprietary technology, a little history may be instructive.

Commodore Business Machines built the worlds first mass-produced home computers for the consumer market. They owned the board designs. They owned the chip designers. They boasted of how vertical integration helped them keep prices down, and ensured stability of their supplies. Back then, all computing platforms were proprietary, so they were not unique in that respect. In 1983-84, Commodore sold more computers than Apple and IBM combined. They laid waste their competitors in the mass-consumer market, including Atari, Tandy, and TI.

By 1993 they were gone. Vertical integration and their proprietary platform killed them. Their video chips could not compete with companies that specialized in video chip making. Their CPUs could not compete with Intel or Motorola. Their sound chips could not compete with Creative Technologies SoundBlaster. Their board designs, being closed, could not take advantage of any of those advances. IBM's board design was open, so it could take advantage of specialization.

A company that at one time was the great innovator in quality and price, and owner of the lions share of the market, quickly became yesterdays news.

NormD writes:

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chitown_nick writes:

nethy's comment (I now pay an extra 20% for worse internet access because the cheaper company (I was customer was for years) uses small print clauses to charge you unexpected amounts and lock you in for long periods. I think I can avoid these charges but I don't want to do business with this company for an irrational reason: I don't like them.) reminded me again of a Maxim of business dealings - business is about something simple: trust.

nethy's extra payment frees up time away from reading all the fine print. It also avoids the possibility of a future change in the small print that cannot be avoided, a change that feels more likely due to a lack of trust. For that, I credit nethy for being more rational than is acknowledged - it is entirely rational to pay a small premium in price for a better trusted relationship.

As this basis of trust is based in experience of personal relationships, and trust is just as often an emotional response as a rational response, it may explain one reason why people react emotionally to company decisions. Dropping Flash deprives the customer of content; it portends censorship; many other reactions that are more or less important to individual consumers. Each of these implications makes the emotional response completely understandable.

MH writes:

Re: Hazlett's Response to my comments

Thanks to Dr. Hazlett for the response. The regulation-related comments that prompted my initial response start @57:54 in the Podcast Highlights section above. For the record, the regulatory matters that I mentioned date back almost a decade before the US v. AT&T action resulted in the AT&T breakup -- back to the years when aspiring new competitors that were closely associated with the emergence of the Internet (Telenet, MCI, et al.), were struggling for survival in the midst of a deeply antagonistic private national monopoly. In that context, the Resale Rule that I alluded to [FCC 2d 60 261 (1976)] was definitely "pro-competitive," but it could hardly be called a "deregulatory" action. Rather it seemed to me (and also, apparently, to AT&T) to be an instance of positive regulation that curtailed the private monopoly's freedom to act in one particular way which happened to effectively preclude the possibility of "rational" competitive entry. On that account, the emergence and persistence of said terrestrial competitors would represent a consequence of the Resale Rule, et al., rather than an alternative explanation for those developments.

Perhaps it's just my limited familiarity with your views on regulation and antitrust, but I find your comment about the FCC as an "active sponsor" of the pre-existing private monopoly somewhat curious. Based on your comments here plus the views you espoused some years before you joined the FCC as Chief Economist [e.g., "Is Antitrust Anticompetitive?" Harvard Journal of Public Policy 277 (1986)], and which you seem to have reaffirmed during or perhaps immediately after your tenure there [c.f., The Legislative History of the Sherman Act Re-Examined," Economic Inquiry (1992)], I am tempted to assume that you're suggesting that the market and technological flourishing that "paralleled" the pro-competitive regulatory shifts of this period would have happened anyway, even if the AT&T's monolithic national market position had been left to evolve organically after 1938 -- i.e., even if the FCC had never existed. But that assumption would only suggest still other puzzling incongruities, so any clarification that you could provide would be greatly appreciated.

As for the benefits of facilities based competition, clearly a case can be made for the substitutability of plain-old voice telephony on any platform, as well as for legacy terrestrial (copper or coax-based) last-mile facilities vs. satellite systems for the distribution of broadcast audiovisual content to end users. Unfortunately, the plurality of consumers who enjoy terrestrial facilities-based competition today are just beneficiaries of a happy accident -- that accident being the fact that demand for television in affluent and/or densely populated parts of US and a few other countries was strong enough to incentivize the complete deployment of a second monopoly facilities platform in the brief period before the broader implications of packet switching were clearly understood by all. Unfortunately, those current beneficiaries are unlikely to get much company in the future, since those advances in switching technology have now made everyone aware that voice, data, and audiovisual content are actually just variants of the same basic service. Meanwhile, advances in transmission technologies have provided a cost-effective means of periodically expanding the capacity and performance of existing terrestrial facilities by large orders of magnitude over and above all other, formerly comparable transmission media -- and in fact orders of magnitude beyond all current or foreseeable near-term human demand. Thanks to that second set of developments, the probability that any additional terrestrial facilities-based access/"last mile" platforms will ever be built where one already exists is approximately zero. And absent the most irrationally exploitive or the most improbably incompetent monopolist (or effective pro-competitive regulation), the probability that a second mover optical access platform would be commercially sustainable is exactly zero.

So, while I agree that facilities-based competition has and may well continue to exert tremendous influence on the U.S. communications service landscape, for me the clearest sign of that influence will be the continued strategic rationing, encumbrance, and under-provision of low cost/high performance/high reliability terrestrial access services. Because if that strategic rationing ever abates, the notion that wireless network access is substitutable, comparable, or even vaguely similar to terrestrial facilities-based access will seem just about as plausible as saying that CB radios were a credible competitive alternative to voice telephony.

Kevin writes:

I think that Russ and Thomas Hazlett were somewhat quick to dismiss anti-Apple sentiment as a religious sentiment or signaling issue. I would have appreciated a deeper analysis of Apple's role in larger changes in producer/consumer dynamic. Technology appears to be heading more toward a licensing model rather than a ownership model. Think of a physical book that you purchase, after reading it is your right to lend it to whomever you wish for any length of time, sell it or burn it if you wish. A book purchased on the Kindle or iPad comes with none of those traditional ownership rights. You are really licensing the book from the publisher or retailer, with very few of the rights that you traditionally associate with a purchase. As least in the case of books there appears to be a modest discount on the purchase price of digital book. That is not always the case in technology.

Apple is starting to follow this licensing model with their computers, which include iPhone, iPads, and iPods. You may spend upwards of $600 for an unsubsidized iPhone, even more for an iPad, but you can not install programs that aren't approved by Apple. You can't view websites or videos that use unapproved technologies. You can't connect the phone to a unapproved cellular data network. It would be akin to being sold a car that could only be filled up at a particular company's gas station. This is a radical change from traditional ownership rights associated with personal computer. Yes, people who are worried about this can avoid buying Apple products, or other licensed products but there is some concern that many consumers don't understand what ownership rights are being lost as we move to a new model. I would liken it to vocally supporting the 2nd amendment despite not owning a gun.

In addition, I think that recognition of the very strong network effects in technology give additional impetus to advocacy for a favored technology. After all, if I buy an Android phone, I gain a very really marginal benefit from each additional Android phone that is sold to someone else. Developers write more, and hopefully better, applications and websites become better optimized for my browser. Conversely if Apple continues to grow in market share, potentially occupying a Microsoft like position in the market, my antipathy toward their business model become much more costly in terms applications and internet browsing.

ohm writes:

Apple had two operating systems. They eventually abandoned the proprietary one that they had developed themselves, because it was a mess. Then they took an open source system developed by volunteers, called FreeBSD, and added a pretty GUI on top of it. That's OS X.

ohm writes:

Google's Android is actually Linux, also an open source system. The difference between FreeBSD and Linux is that the former uses a BSD licence, while the latter uses the GNU licence. Software published under the BSD licence can be modified and republished as a closed source, proprietary system. This would be illegal under a GNU licence. One is allowed to modify and republish a GNU piece of software, but it must remain open. That's why Android is a free, open source system, while OS X is not.

Jim F writes:

Disappointing podcast. Two professional economists create a straw man of Google fanboyism, and proceed to spend an hour tearing it down, seemingly oblivious to their own patently obvious biases. It would have been nice if either of you could have disagreed with an actual person, rather than 'people'.

Justin P writes:

I'm happy to say I was one of those that said I wouldn't buy an iPad because of lack of flash support on Cafe Hayek.

I stand by my assertion. There is nothing fan-boyish about it. It's a consumer preference. As a consumer preference, if I see a product that doesn't cater to my preferences, I'm free to choose a different product that does. Going back to the car analogy, is it any different from say "I won't buy a car unless it has a manual transmission"? Would anyone consider that being overly emotional or fan-boyish?

Both Dr. Hazlett and Dr. Roberts are right that Google vs Apple, is really about two competing business models. Well as a consumer I don't like Apples product, which includes the business model associated with their actual end products, in this case iOS or Android.

But now look at the market. Android has over 30% of the smartphone operating system market, beating iOS. The Android marketplace just surpassed 100,000 apps still down compared to Apples 300,000 apps, but it's catching up fast, only a few months ago the difference was closer to 10 to 1 apps in favor of Apple. It won't be that long before android catches up. So we just have to wait to let the market decide.

About CEO switching companies....I think that hits on a good point, what happens to Apple when Jobs leaves? We already saw it once....they almost went belly up. I think this plays well into the Hayekian question of planning. Is Jobs the only one that can make Apple profitable? It seems that a company or government that has to relay on having the "right person in charge" isn't really a good management model.

ohm writes:

Kevin -- I agree with you entirely. A monopoly in IT and telecommunications is much worse than, say, monopoly in soft drinks. Even if Pepsi were to remain the only player on this market, I wouldn't care much, since I can drink tap water. However, when everybody uses Microsoft Word, and no other program can handle Word files (and Microsoft has always done what it could to make it true), I have no choice. With Apple it's even worse, because in this case even the hardware is proprietary and the user has little control over it, as you correctly point out.

Furthermore, to see software only as commodity, produced to make money, is to miss an important aspect. People who write computer programs are less like workers in a factory than like scientists. Innovation in science depends on openness and free access to scientific results. That's why they are published, so that everybody can read them and use them in their own work. Without this openness, progress in science would be much slower. Imagine that mathematicians only published theorems, but kept their proofs secret. Or imagine that you would need to buy a licence to use a theorem.

It seems that economists rarely understand this point, but many programmers do. That's why programmers are often opposed to software patents and that's why many programmers support free software -- that is, software that everybody is free to examine (source code), to modify and to make freely available to others. Maybe Russ should have a chat with Stallman?

Dorian Taylor writes:

Software is unique in that it reflects the opinion of its designer more than any other kind of product. We can imagine this is the case because there are few if any other conditions that intervene with the experience of the product, such as the variable cost and quality of materials or (often) physical engineering constraints.

An artifact of software can be understood as a formal expression of a business process which is both precise and exhaustive enough to be executed by a machine. This, in combination with the above observation, would enable us to suggest that investing into an artifact made of (or driven by) software is ultimately to delegate the handling of certain business processes to the product's designer.

I submit then that the principal currency of commerce around software is not money but user attention. Money travels in the direction of the entity in question as a byproduct of this attention, through a mechanism which looks a lot like patronage in the case of Apple, and the mediation of a two-sided market in the case of Google. But what draws the patrons to Apple is its consideration, care and tight integration of hardware and software, and what draws advertisers to Google is the extreme confidence of its user base in the objective and relevant results of its search product.

(I should also acknowledge that this has not always been the case, and that once upon a time software came in a box which you bought off a shelf in a store, a strategy that earned Microsoft its position as a commodity platform that was largely agnostic toward the hardware upon which it ran. Of course, Microsoft is extremely controlling over what happens on top of its platform, arguably more so than Apple, at least since OS X.)

To turn our attention to the companies' respective mobile platforms, again the issue reduces to a matter of executive opinion, otherwise known as business strategy. Apple is unambiguously playing the role of taste-maker whereas Google is steamrolling along in search of new sources of behavioural data and advertising canvas. I agree with the assessment that the strategies are divergent, even though the pool of customer, user and developer attention is largely the same.

(It is also plausible that Apple's exclusive deal with AT&T was an expedient to bring about what would have been an unprecedented move for a computer company, and it should be noted that agreement is set to expire.)

Daigle writes:

Russ,

Could you interview Frederic Mishkin about inflation targeting and monetary policy?

Here's a recent article he's written for the FT entitled "The Fed must adopt an inflation target"

And surely he has plenty of stuff to hype like his textbooks and a book he has entitled "Monetary Policy Strategy"

Thanks!

Russell writes:

Sorry to be off topic but does anyone remember if there was an episode of econtalk that mentioned the pay to bid auction site swoopo, or another site similar to that?

Hi, Russell.

I can't remember any podcasts exactly on pay-to-bid sites, but possibly it was mentioned in Vernon Smith on Experimental Markets or Sunstein on Infotopia, Information and Decision-Making. Those two podcasts discussed various kinds of auction and prediction markets in detail. They are good places to start for understanding any additional wrinkles offered by pay-to-bid sites.

Bob Layson writes:

Schumpeter was a great economist and it's a great thing to quote but 'creative destruction', when thrown around by many modern economists, must often only cement anti-marketeers in their prejudices as it suggests lantern jawed and flinty hearted Randian lords of industry looking out for nothing but commercial success and unconcerned with the cost to others.

For, in truth, producing better or newer things in better or newer ways literally destroys nothing. Outmoded products shunned by the consumer are just as good as ever but have lost market value. Innovation creates new industries and causes workers and suppliers to turn from older ones. But previous methods now abandoned have not been destroyed.

Economic progress is a story not of destruction but of redundency.

Tim Lee writes:

Russ,

I'm a long-time EconTalk listener, and I have to say this podcast fell far short of your usual standards. One of my favorite things about the podcast is that when you and a guest agree about a topic, you usually try pretty hard to provide a fair and sympathetic account of the "other side," so that listeners can get a realistic idea of the shape of debate and decide for themselves which side is right. You didn't do that here. To the contrary, on at least two occasions you expressed confusion and a bit of exasperation about those of us who advocate open technologies. You and Tom suggested that Apple's critics were emotional, irrational, and even religiously motivated.

Tom gives the impression that capitalism was the only form of spontaneous order that Hayek focused on, but this is an unduly narrow view of Hayek's work. He talked about a variety of social and economic systems as spontaneous orders, including language, money, and social customs. It doesn't seem like much of a leap to try to extend the framework Hayek pioneered to try to understand the spontaneous order that is the modern Internet. Google and Apple may be equally capitalist firms, but it may nevertheless be the case that Google's business model is more Hayekian.

I believe you when you say you're baffled by this kind of argument, that you find it irrational, etc. But rather than heap scorn on people whose views you don't understand, maybe you should worker harder to understand them? You could talk to, and maybe even invite on your show, someone who can explain the argument to you? For example, you seemed baffled that geeks are so emotionally invested in what seems to you a relatively trivial business model difference. If you talked to an actual computer programmer, he might have pointed out to you that differences that seem trivial to end users like you matter a lot more to people who may rely on one of these platforms for their livelihoods.

Russ Roberts writes:

Tim Lee (and others),

I'm not sure what the other side is that I'm supposed to be more open to. Perhaps there's some confusion about what the issues are and what Tom and I were interested in talking about.

In general, I don't believe that a business strategy is a moral issue. Nor do I use it as a criterion for buying a product. I might think a company is following a stupid strategy. But that won't stop me from enjoying their product. In particular, when Amazon began, a lot of people thought their strategy would fail--they'd never make any money. I was agnostic. I didn't know whether they would make it or not. But I liked buying books on the web, so I bought a lot of them.

Similarly, I have no idea about the Steve Jobs issue with Flash. Maybe he's a fool. Or an egomaniac. Or maybe there's a sensible reason for why he's hostile to Flash. It seems to reduce the usefulness of the iPad. As a user, that makes an iPad less attractive. But if it remains an attractive product, I'm not going to boycott Apple because Jobs has an irrational thing against Flash.

That's all. Not much more. I like Apple's products a lot. I've bought many of them. I love Google and have written many times about how the existence of Google has enriched my life. But I don't see the competition between the two companies as a moral issue. I do understand that some business victories can mean that products that we love can get destroyed or be unavailable and that can be frustrating. But I don't root for Apple or against them in any way akin to how I root for a sports team or a particular political outcome.

THe purpose of this podcast was to think about how different strategies compete against each other and that some strategies that look more open or closed may not actually be. Certainly, all strategies are designed to make money and leverage the differing strengths of each organization. And some strategies that seem brilliant and sensible can turn out to be mistakes for all kinds of reasons, including internal strife within a company.

I also understand that there are policy issues that companies try to influence. I am open to learning more about this and we've done a number of podcasts on these topics, of course.

FInally, we as individuals have our own strengths and weaknesses. My dad, who is 80, would have a hard time using a Linux-based operating system. So if Linux triumphed and there wasn't room in the marketplace for an os that is more friendly to the non-savvy user, he'd be hurt. I can see him rooting for one outcome over the other. But I don't feel that's what people are talking about when they get angry about a company's strategy.

Happy to learn more. Please share if I'm missing something important here.

Brad Hutchings writes:

Russ,

The Jobs/Flash episode this past spring was intellectually akin to when so-called "liberals" decry anyone opposed to their various agendas as racist or sexist. Ah heck, I'll go Godwin with it and say it was like Hitler blaming the Jews for all of Germany's ills. Jobs did exactly that with Adobe, blaming them (and other third party development technologies) for all of the ills that ever afflicted the Mac platform in the past decade. Never mind that Apple made four monumental changes to the Mac platform and demanded that developers invest in supporting those changes post haste. Meanwhile, the Windows platform evolved incrementally in the same time period, and did not require monumental investments just to stay in good standing with the platform.

As Apple shipped the iPad without Flash support in the browser, Adobe shipped tools that enabled Flash developers to create "native" apps, basically indistinguishable from apps created with Apple's own development tools. Although "free", Apple's tools are more costly to master and more error prone that Adobe's. Apple reacted by banning apps not made with Apple's tools. This not only affected Adobe but many other third party tools. Remember, all iPad apps must be shipped through Apple's App Store. There are no other legitimate (i.e. legal) venues for publishing or obtaining iPad software.

The Apple policy did not do you as an iPad user any good. Wired and Adobe had to spend a couple million dollars to adapt Wired's publishing platform to meet Apple's new requirements, when they had a working app shortly after Apple announced the iPad. Condé Nast, the publisher that owns Wired recently announced that it's going back to a standard Adobe publishing platform for all its periodicals to reach all desktop and mobile platforms. They can do this and save a whole bunch of money and be able to reach all their customers in a platform agnostic basis because Apple modified its development tools policy in September. Why did Apple modify it? Because EU regulators threatened action. Re-read Jobs' anti-Flash screed and see if you can find any room for him to change his mind absent the threat of government action. I'm certainly not saying that I agree with regulators making such threats or even this one in particular. And that's why I instead ask Apple customers to consider what they are buying into. Apple wants you locked into their platform, and they will make you and software suppliers pay more for the privilege. It's that simple. I totally understand the value many people get from buying into a myth. Just make sure it's the myth you really think it is :-).

Tim Lee writes:

Russ,

Thanks for the prompt and thoughtful response!

There's a fairly large community of people who subscribe to what might be broadly called an ideology of openness, the view that open technologies are superior to closed technologies. The specifics vary; some people couch the argument in "moral" terms and try to shame those who patronize closed technologies. Others take a more pragmatic view and simply predict that open technologies will (given fair conditions of competition) tend to triumph in the marketplace. And there's a Hayekian gloss on this argument that says open technologies tend to beat closed technologies for the same reasons that free markets beat central planning.

I took Tom's original op-ed, and his comments in the podcast, as a critique of these views. And so I was expecting one of you to spend a bit of time explaining the worldview that underlies the critique of Apple. You make it clear that such people exist, but you never really explain their views. One gets the impression that perhaps they're driven by some kind of irrational anti-capitalist ideology, but someone who's new to the issue wouldn't really come away with any real grasp of why some people might think Apple's policies are either foolish (e.g. a bad business strategy) or immoral (e.g. hostile to its customers).

I don't see anything wrong with a podcast where you "think about how different strategies compete against each other." But you spent a lot of time talking about the motivations (much more than the arguments) of Apple's critics. For example, at 22:28, Tom says we "think we know" what it means for Android to be open, but he doesn't actually explain what people who say that do, in fact, mean. Instead, he moves straight to critiquing this view, and you chime in with mockery at 22:50. At 31:10, Tom suggests that Google has "tried to philosophize and said 'we've gone beyond capitalism,'" which isn't an argument I've ever heard Google make, and in any event he doesn't elaborate on this supposed Google argument and instead launches into attacking it. Starting at 33:15 you compare Apple critics to people who steal hot dogs from your backyard. And at 41:30, Tom suggests that being pro-openness is either elitism like owning an expensive camera or irrationalism like rooting for the Dodgers.

In none of these cases do you or Tom explain the view being criticized in enough detail for the viewer to understand it. For example, there are good, specific reasons, that people say Android is more open than iOS (for example, anyone is free to download and modify the Android source code), but Tom doesn't mention them. Which leaves the uninformed listener no real way to understand the debate or evaluate Tom's argument.

I know you've had more openness-friendly guests, such as Yochai Benkler and Eric Raymond, on the show in the past. Indeed, one of the reasons I was surprised by your seeming hostility to Hayekian arguments for open technologies here is that you seemed more sympathetic to similar arguments when Eric Raymond made them on your show early last year. Perhaps the differing reactions reflects your effort to be courteous to your guests, but in any event I think you were closer to the mark then than now.

Thanks again for the great podcast and thoughtful response!

Darren writes:

It is so weird to hear two economists talk about an industry I have been in my whole life. I keep cringing because I keep seeing how Tom comes from the issue in a very theoretical perspective, but it doesn't quite peg what is really going on in the industry.

For example Tom says that the Apple model is doing so well and that you should be kicking yourself for not buying apple. And yet apple's market share of the smart phone market continues to decline while the android market share increases [1]. The same trend that apple went through with microsoft. The apple model only seems to work if you are the first, and only until competition arrives. I think Russ is correct is pointing out that it is not a very good long term strategy.

Most developers that I have talked to prefer working with Android over Apple. Apple's gatekeeper model is too fickle and arbitrary, not to mention much more expensive to develop for.

Russ, I think the reason you don't see why people are insulted by the controlling nature of Steve Jobs, is because you don't fully realize exactly how arbitrary he is, or for how little he seems to care about the consumer. Just wait until the screen lock button on your ipad changes for no apparent reason. ;-) [2]

Steve doesn't like Flash because it doesn't work well on mac devices. It tends to be a bit bloated and is not very efficient with resources.

What I find really confusing is that Tom is so against net neutrality. I don't think he realizes that you can't have competition on the net without net neutrality. And to call it a religion I think just goes to show you a very disturbing mentality. What I don't think he realizes is that his argument for competition assumes net neutrality. The only reason vonage and skype even stand a change against the comcast in house voice over IP services is because of net neutrality. The idea that comcast can't just block those programs from going through. It's the same philosophy that protects microsoft from making an exclusive deal with comcast to only allow bing traffic and to block google traffic to all comcast internet customers. Net neutrality, if he truly believes in competition, should be his top priority.

Just so you know Russ, your 80 year old dad would do just fine with Linux. The most popular distribution out there right now is Ubuntu and in many ways it is easier to install and use than windows. In fact to get the same software you get for free with Ubuntu, you would have to spend 1000's of dollars with windows. That is why many governments around the world are going to Linux over windows.

Darren

Justin P writes:

@Brad Hutchings

Great comments. Although, I'd say Apple and the Flash thing will ultimately hurt Apple in the long run. I think what Jobs forgets, is that it's the market that dictates what he needs to produce and put on his platform. The market doesn't like not having Flash. Flash is the big reason, why I'm not getting an iPad. Whether or not people think that is a "legitimate" reason is irrelevant to me. That is THE BIG ISSUE.

As I said above, the market is speaking...Android is growing, and growing fast. Faster than iOS right now. The app store is growing, and fast. Let's wait a year and let the market decide...I think Jobs won't be happy with the result.

matt writes:

I don't think apple's opponents are saying they shouldn't be allowed to pursue whatever business model they choose. One problem exists between very technically proficient people and non technically proficient people. Often times when users are experiencing a compatibility issue with an apple product, they are unaware of the fact that it is apple's intentional approach to the market.

Developers and tech geeks are often annoyed because they are trying to support/service the users of apple products, while apple makes their lives difficult. Requests like, "I think my itunes is broken, it won't sync with my ipod which is linked to another machine and locked down" are the type of thing that tech geeks have to deal with. Take the ipad's lack of support for flash, the average user won't understand why a flash based music website that they use, will not work because apple just choose for it to not work.

In the long run, I think people will realize all of the problems that apple causes for them, and they will drift away from apple products. Android based smart phones are gaining market share much more quickly than iphone. Apple's business model will eventually kill itself, or they will change. But in the mean time, I have to explain to my sister that her apple product isn't going to work they way she thinks it should, because apple has tried to lock it down from working with other sorts of media.

Darren above mentioned spending his entire life in "this" industry but I'm not sure what he means. For me, "this industry" began in 1959 with such mighty corporations as RCA, Philco, Burroughs, Sperry UNIVAC, GE, CDC, IBM, etc. and the market was estimated in the 100s. IBM soon dominated this industry and introduced smaller machines carefully constructed to not impinge on larger machines but to serve as peripherals. In Sept of 1981, IBM blessed/endorsed the PC and the industry to which we now seem to be discussing.
IBM dominated the earlier industry with its 360/370 line of computers and a wide range of computer sizes intended to support its vertical integrated business model. The OS was a give-away with its cost included in the price of the computer.
I remember an earlier Gates letter in which he begged computer clubs to stop giving away free copies of his OS. He shortly found the business model of selling a license for his OS to Manufacturers and allowing them to include the OS with the computer.

John Berg

Perhaps a better marker for marking the boundary between the two computer industries: Does anyone remember the date when you could patent software?

John Berg

Russ Roberts writes:

Tim Lee,

I do try to be polite to my guests, especially the ones I disagree with, but I don't think politeness explains the differences between my conversations with various folks about technology. In my conversation with Eric Raymond, I was probably sympathetic to the power of openness because I believe it is very powerful. See here for example. But I was less sympathetic (though I hope still polite) to Benkler. Benkler wants the government to mandate a certain kind of openness. I am unpersuaded by his empirical work and uncomfortable with the idea that the government can steer regulation to create competition, a goal I certainly embrace. I just don't think government knows how to get us there.

So I don't have an ideology for openness. I have an ideology for emergence, generally. Think about Coase's theory of the firm. Sometimes, firms make sense. Sometimes they don't. Coase argued that transaction costs determined when a firm could be viable. Similarly, I don't think it's a debate between open and closed, but a debate between what works and what doesn't. The market will sort that out if we let it.

Seth writes:

I enjoyed the podcast, even though I fell asleep listening to it the first time on a plane trip. I'll attribute that to my previous night's activities. I finally got the second listen in this morning.

For me, I find this discussion similar to the efficient market hypothesis. It's hard, if not impossible, to beat the market consistently, however Buffett has. Google (Brin) is a bit more like the market than Jobs, as the Vanguard 500 (Bogle) is more like the market than Buffett.

I also think it's interesting that Apple is competing with Google in this round and not IBM or Microsoft.

Billiam writes:

My personal experience illustrates the case of disliking one aspect of Apple and extending that dislike to other aspects. I have had a few (just out of warranty) premature failures with specific Apple products (ipod). So to replace them, I did so with (significantly cheaper) non-Apple substitutes. However, because of Apple'e vertical integration, it now means that I have to use cumbersome work-arounds if I want to continue use of an Apple service that I still do like (itunes). The result is that I now would like to see a service I like, itunes, fail in order to boost the lesser competitors that are open to my new ipod substitute.

John Berg writes:

Google provides the answer for when software became patentable as 1981.

John Berg

Keith writes:

Russ,

It is absolutely within Apple's rights to compete and offer products in the way they think best meet market demands.

I think the frustration you are hearing from consumers is that we understand how functional the product could be and are annoyed that they choose to remove (perceived) value from the product.

Think about it as if Apple made a car. The highest quality, sexiest looking, fastest car in the world. You want one. You'd love to buy one. But if you buy one of these cars, you can only drive it on roads approved by Apple, and only 5% of all possible roads are approved. How useful would that be to you? How disappointed might you be if most of your driving is required to be on non-approved roads? Also, if you know that the only reason why those roads are not approved is because Apple doesn't own any gas stations in those areas ... how upset might you be as a consumer?

From a business standpoint it may make perfectly rational sense ... from a consumer standpoint seeing value arbitrary removed is highly frustrating.

On the plus side, I am confident that other players will take up the challenge and offer competing products that meet the demand expressed by potential (and ex) Apple customers.

Time will tell which strategy is more effective in the long run. I suspect that Apple will need to switch gears or risk history repeating itself.

I'd like to echo some of the comments -- I don't think Apple is 'anti-capitalist' at all, and in fact the competition between Google/Apple/Dell/HP/WePad/etc is exactly in the competitive sprit that defines capitalism.

Russ Roberts writes:

Keith,

So why does Apple try to sell you a product that reduces the value you receive from the experience? Why would a carmaker make a car that was less useful than another one that was great?

Keith writes:

Russ,

Apple has a particular business strategy for making money, and they have lots of customers who are willing to buy their product at the price they are charging. I do not dispute that Apple has been very successful, nor that they make high-quality innovative products.

I was trying to provide an example that explains some of the frustration you are seeing from people with respect to Apple.

A different example: Pretend you walk into a department store and purchase a new silverware set. Upon getting home you find out that this set of silverware limits how you can use the spoons. You can only use the spoons for eating cereal, it is forbidden that you use the spoon for eating soup. They have even devised a new technology embedded in the spoon that prevents it from ever being placed into a bowl of soup.

Now, how crazy does that sound? There is simply no functional (keyword is functional) reason why a spoon can't be used for eating soup.

Likewise, there is no functional reason why the iPad hardware can't run flash, or be used like any other personal computer. Now, to an engineer, and possibly an entire upcoming generation, to take away 'assumed' or 'standard' functionally is infuriating.

So, my example is stating that there is an understood, expected set of features and uses of a spoon that the population holds. It would be unacceptable for a company to remove expected functionality simply because they could, to sell you two spoons. I can imagine the silverware lobby funding studies claiming cereal tastes better out of cereal spoons, or there is a health risk if you don't use specially designed soup spoons for soup. Imagine how it would be annoying to reach in the drawer, pick a spoon, then find out later at the table that you picked the soup spoon and not the cereal spoon. Or that all your cereal spoons are dirty. It would be frustrating.

I would submit (but admit I have no data) that most younger people today have a set of expectations around what and how an electronic device can be used. They are simply high tech spoons that should be compatible with any food I want to consume. Sooner or later, if you don't allow me eat all types of food I want with your silverware, I'm going to buy a set that does.

Brad Hutchings writes:

Russ,

With Flash on mobile (iPad, iPhone, Android phone, RIM Playbook, Samsung Galaxy Tab) Apple rejects it because Adobe API's (application programming interfaces -- i.e. how developer's write software) are easier and less expensive to develop to that Apple's "Cocoa" model. Until September, Apple used its market power to make it more expensive for developers to support iOS plus other platforms than to just support iOS. Apple's theory is that developers should develop for Apple products and be able to reuse things for other platforms.

In September, EU competition regulators prompted them to change their app acceptance policy, so that, for example, if an app were made from Flash source, it would not be rejected out of hand by Apple. I'm not for that EU action, and I'm sure you're not for that, but the action should indicate that EU regulators thought Apple policies were out of line and perhaps not favorable even to Apple's own customers. I agree with the assessment, though not the use of government force to effect a change.

In short, Apple's policies are costing you, as an Apple customer, money. That money goes straight to Apple's profits. If you're in the business of making sure Apple is profitable, hey, wonderful. But if you're in the business of getting the best value for your money, more open alternatives with less Draconian policies for users and third party developers will necessarily provide superior value. You need only look at Apple's operating margins to estimate how much :-).

Mike Laursen writes:

re: "'creative destruction', when thrown around by many modern economists, must often only cement anti-marketeers in their prejudices"

I don't think I would buy the creative destruction, either, but, as a Software Engineer in Silicon Valley, it's just an integral part of my life, so I'm intimately familiar with what it's like to experience creative destruction from the high-tech worker's point of view.

The downside:

It's never fun to get laid off from your job. It sucks to see your friends get laid off.

It's not fun to work at a startup (or established company) that's going down in flames. I've seen co-founders who were close friends end up not speaking to each other.

The upside:

I've seen very few co-workers who have been laid off who haven't found a job within six months. Those who haven't, really didn't like working in the industry or were really not good at it at all. Pretty much everyone in the industry tries to keep a cushion of cash to carry them through 6-24 months of unemployment.

Through all those layoffs and company failures, I've built up a network of former co-workers at companies all over Silicon Valley. Everyone I know has a similar network. These networks are even stronger now that we all track each other on LinkedIn.

John Strong writes:

Is Openness a Moral Question?

I think I know where a lot of the visceral dislike of Apple comes from: the engineering community.

Engineers like standards & barrier-free technologies, because we benefit from a kind of economy of scale when it comes to the time we invest in learning a new technology. The more universal the technology, the larger the job market. By contrast, if we learn a technology in a narrow niche, we are beholden to a small group of employers. This has consequences for personal freedom and lifestyle choices.

When I was starting my career back in the 1980s, I wanted to learn about VAX operating systems. I asked management for permission to access the manuals on my own time, only to discover that they were locked in a glass case, 4 people had the key, and none felt inclined to share the manuals with me.

Then came UNIX. You could buy all kinds of literature about UNIX technology in a BDalton bookstore (1980s equivalent of Borders). We loved it! You could hear engineers with libertarian economic views refer with contempt to "proprietary technology". There is no "socialist" overtone to this sentiment. But remember, leftists are just liberals who have a false sense of transcendence. They often seek to achieve liberal goals, like "openness", with hair-brained schemes like government intervention. This leads to much confusion.

Adding to the confusion is the fact that information is a non-rivalrous good, so you get the bizarre phenomenon of IT professionals who have a vested interest in a strong intellectual property regime yet who advocate "free software".

I am arguing that ultimately this anarchist ethos (strain) in the programming community has an economic root. It is really a form of enlightened self-interest, I'm for it! But, please, let's leave the government out of this!

Reg writes:

Re: Strong's comment about Apple vs. the engineering community

Not sure *which* engineering community Mr. Strong has in mind, but in the decade or so since Apple adopted a core Unix/Darwin OS, the share of Apple-toting attendees at IETF, NANOG, RIPE, APRICOT, and similar international network engineering conferences has grown from 0.0000x to, in some instances, 50+%.

If Apple's engineering user base is commonly underestimated, it's probably because there seems to be an inverse relationship between engineering-related experience (which in turn correlates with non-dependence on signature apps like iTunes, iPhoto, etc.) and the propensity to complain publicly about Apple's closed platform.

Mike Laursen writes:

Have to concur with Reg. Most Software Engineers I know walk around with a MacBook. One of the biggest reasons they do so: it's BSD under the hood, so you can run all those scripts and XWindow applications.

John Strong writes:

Reg & Mike. You guys are making my point for me. Apple redeemed itself to a significant degree in the eyes of the engineering community WHEN IT EMBRACED UNIX.

John Strong writes:

Openness, Closedness and Standards

One final comment on the issue of the Morality of Openness

When I was in grad school (in Computer Science) an English professor once asked me, "Why are you Americans so attached to standards? You try to standardize everything in the (software) industry."

Over the years I've thought of his question, and I think the answer is that standards offer a means of obtaining economies of scale while preserving all the benefits of competition. As long as the standards regime is voluntary (as opposed to government-sponsored), it represents a positive emergent phenomenon. It is law, not legislation, to use the Hayekian distinction.

Check out William Lewis' discussion of the inefficiencies of the Japanese housing industry in The Power of Productivity.

Homes are ultra-expensive in Japan, because there are no standards by which manufacturers of building materials can achieve economies of scale. Furthermore, in the absence of standards, the Japanese home consumer never has a clear idea of what he is buying. Thus you have an information problem among consumers. Finally, since noone knows how good or bad a construction is, people are afraid to purchase a house from someone else. As a result, there is a very weak secondary market for housing in Japan. Once people buy a house they deem to be of good quality, they cling to it, like a tenant clings to an apartment that is under a rent control regime.

Former Tokyo Resident writes:

That is certainly the most unique* explanation that I've ever heard for why real estate is expensive in Japan. No doubt deficiencies in housing standards play a substantial role in the overall mix of information asymmetries that, taken together, contribute on the margin to Japan's sky-high housing prices. But I suspect that this sub-sub-factor is somewhat less important than the fact that Japan has more than 3x California's population, but less than a third of California's buildable land, which yields an effective nation-wide population density of appx. 6k/sq. mile. Of course once you get close to any nontrivial center of non-agricultural employment, the real population density tends to be double that, if not more (Wikipedia pegs Tokyo at 15.1k). At current prices, an average 1000 sq ft. home in Tokyo would cost about $1.3m... but perhaps this exaggerates the facts, since that's about 25% more space than the current/average Tokyo resident enjoys, which suggests an est price of $860k...


http://www.globalpropertyguide.com/Asia/Japan/Price-History

http://www.stat.go.jp/english/data/jyutaku/index.htm

http://www.stat.go.jp/english/data/handbook/c02cont.htm#cha2_5

Mike Laursen writes:

re: "Over the years I've thought of his question, and I think the answer is that standards offer a means of obtaining economies of scale while preserving all the benefits of competition."

When I first started working in the software industry, I thought it was really odd that you can pick just about any pair of major software companies and find that the two are competing with each other in some areas while simultaneously signing cooperative agreements in other areas.

After a couple of years I learned to relax and enjoy it. Software companies are just like sports teams: you compete hard, you may even use battlefield metaphors to pump up the employees, but at the end of the day you and the guy from the other company are professional colleagues. You can sit down and have a beer, you might be working for the same company next year. It's just a game, and nobody really loses.

David K writes:

This article (admittedly on an unofficial Apple blog) compares and contrasts how open Google's Android really is vs how closed Apple's platform is.

It's an analysis worth reading. Richard Gaywood writes there: "So, the bottom line: it's not entirely accurate to say that Android is entirely open or that iOS is entirely closed, although it is fair to say that the former is far more open than the latter... Apple would have you believe that Android is a hopelessly fragmented user experience. Google would have you believe the iPhone is patrolled by ruthless gatekeepers that are strangling the innovation out of the platform.

Both companies are trying to sell you things. Both companies are a little right and a little wrong.

The real winner here, though, is the consumer. The fierce competition has led to two vibrant platforms characterized by breakneck invention, and it seems likely that the sort of decades-long software monoculture we've seen on desktop computers in the form of Microsoft's 90+ percent market share is unlikely to happen in the smartphone world."

MH writes:

David K makes a reasonable if somewhat oddly constructed observation: fierce competition between wireless handheld platform X and wireless handheld platform Y will likely promote the kind of continuous software-level dynamism, experimentation, and specialization that is unlikely to emerge at this (mid)point in the evolution of the older and more established domain of software for non-wireless, bigger-than-handheld devices.

However one shouldn't assume that that observed contrast is itself a consequence of factors that are endogenous to those two markets. Consider for example the fact that (esp. in the US) the functionality of non-mobile platforms is tied to fixed/terrestrial networks with relatively simple, flat-rate, basically all-you-can-eat service pricing, while the mobile platform depends heavily on wireless network services with finely metered (and often complex and opaque) volume-based service pricing that is appx. 10^5+ more expensive than wired/terrestrial network access on an equivalent per-bit basis. To the extent that consumer access to both kinds of network services is now substantially controlled by the same (very small number) companies -- all of which started out as and continue to operate vertically integrated national-scale terrestrial facilities platforms -- it should be obvious that such companies would like nothing more than to "cannibalize" their old, utility-style network services customer base with their infinitely more profitable wireless services.

Of course, one should expect those same pricing-related incentives to influence the terrestrial side of the market too, albeit in the opposite direction. What possible incentive could induce dominant cross-platform network access providers to enable, much less actively promote higher levels of innovation at the fixed ends of their terrestrial networks? Or rather, what incentive *other* than the equalization of network service pricing at levels that US consumers have seemingly come to accept for wireless data services -- i.e., an effective price hike of up to 10^4 ~ 10^5%...?

One might think of this kind of strategic arbitrage as the active pursuit of adverse selection by other means.

So, while we may all look forward with justified eagerness to an extended renaissance of mobile platform innovation, I for one am not looking forward to the return of aggressive scarcity-based pricing for non-mobile network services. In the end, the technical and economic advantages (and not just current common usage patterns) for the two platforms are probably inherently more complementary than they are overlapping -- so the strategic neglect of terrestrial network access cannot be characterized as a neutral, consequence-free business decision for the rest of the economy. Besides, it's more than just ironic (and IMO rises to the level of "repugnance") to think that extortionate scarcity-based pricing might be imposed once again in a domain where advances in technology have actually created the opposite of scarcity.

John writes:

I have listen to podcast and read everyone comments and no has mention that Microsoft is entering the moblie race soon with windows 7 mobile. It will follow like the windows on Pc, were the software will be sold to companies to put on their hardware kind of like Google Android is. It will make it a Microsoft vs Google vs Apple.
I agree with some about not having flash issue but i have to say that a lot companies are changing their web sites to work on the Apple iphone and ipads, for example YouTube runs on the Apple iphone without flash. I mean we get angry over companies decisions when it happens all the time. Just look at the consoles wars or at retails. And when companies refuse others to sell their applications, software or extra products on the company products, stores or license it can either work for them or/and force companies to change or closed.

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