Posts from policy

What A Week

I’m on an eight hour flight back from Europe today and have plenty of time to write so I’m going to skip video of the week this week (but not entirely) and write down some thoughts about the week that was in the US.

Three important things happened this week.

The first was the Supreme Court rejecting the argument that the Affordable Care Act should be struck down because the federal government was subsidizing health care in states that refused to set up their own insurance exchanges. This was a big legal victory for the Affordable Care Act (the second one at the Supreme Court) and could be the thing that seals the deal for this legislation. The Affordable Care Act is performing much better than most people, even its proponents (including me), thought it would. Many more americans are insured, insurance rates have not skyrocketed, nor has the budget deficit, and it is hard to find any indications of job losses resulting from it. Every year that it remains the law of the land make it more likely that it will remain the law of the land. It has become more popular as it has become better understood and people are actually getting affordable health care insurance when they can’t get it from an employer.

The second was another ruling by the Supreme Court. This one on marriage equality. You could feel this coming for a while now. As more and more gay people have come out of the closet over the past thirty years, more and more people know and love gay people. And we want them to enjoy the fruits of life the way we enjoy them. It is only natural that society would come to this place and it is wonderful that our Supreme Court got there in more or less the same time. If you haven’t read Justice Anthony Kennedy’s closing paragraph in the majority ruling, you should. It says it well.

The third was The President delivering a moving rendition of Amazing Grace at the funeral for Clementa Pinckney.

This wasn’t noteworthy because of the President’s voice. It is good but not great. It was noteworthy because it showed his considerable leadership skills and ability to connect with compassion in a time of national healing. Say what you will about Barack Obama, and it has all been said again and again in the comments to this blog, he is a very talented leader and politician and has grown into the role nicely in his second and final term. He was not just singing for those murdered in a church in Charleston last week. He was singing for America to find a way to come back together and heal the racial wounds that have been front and center in this country for much of the past year.

I particularly like the way he emphasized and paused at the word United as he was saying United States of America at the end of that clip. He was sending a message and I got it loud and clear.

It was a good week for Barack Obama and it was a good week for America. I’m landing in America in a few hours. I’ve missed it. It is my home and I love it dearly, particularly this week.

Getting To Broadband For All

Ryan asked me what I thought about the news that the FCC is going to expand the Lifeline program, which provides a $9.25/month subsidy for phone (wired and wireless) to the poor, to include broadband.

In the short term it makes a ton of sense to me to say “you can use your $9.25/month subsidy to get broadband in addition to cell service” but I’m wondering if there isn’t more systemic and sustainable way to deal with the fact that 30% of US citizens still don’t have broadband at home.

The Lifeline program costs $1.7bn and is paid for by telecom service providers. It currently services 12mm households in the US.

There are roughly 330mm residents of the US, so approximately 100mm of them do not have broadband at home.

The Lifeline program alone is not going to solve this problem.

Part of the problem is that broadband is not available in certain rural locations. We have a home in Utah where there is no cable service and the best Internet we can get is 1.5 megabit DSL. And that connection is flaky at best. The minimum speed to qualify for “broadband” designation is currently 25 megabit and it is super hard to get that out of copper. This is not a new problem. There was a similar problem getting phone service out to rural locations in the last century.

Part of the problem is that broadband is too expensive for people living off very low incomes or no income. Time Warner Cable provides 15down/1up for $35/month. And that isn’t even technically “broadband”.

And some of those 100mm that don’t have broadband at home don’t want it. They either don’t have Internet, they have dial-up, or they use their phones when they want the Internet.

But if we look forward twenty or thirty years, the percentage of people who are going to want to live without broadband at home will likely decline to near zero. So coming up with some way to address this issue is an important policy issue and one that I’ve thought a lot about.

It seems to me that wireless is the way forward. It avoids the cost of running cable to every home and it also recognizes that people need broadband wherever they are.

I believe it is time for the US to rethink our wireless strategy. Currently we auction off spectrum to the highest bidder, raising tens of billions for the US Treasury, and then tax the winners a small portion of their revenue to provide a small benefit ($9.25/month) that doesn’t even come close to getting us to universal access. If you think of the annual cost of Lifeline ($1.7bn per year) over a decade, that is in the ballpark of what a wireless carrier will pay for a big band of licensed spectrum.

What if, instead of auctioning off spectrum to the highest bidder, we took some of our best spectrum and made it available to everyone to innovate on, like the Wifi spectrum is? And what if we provided tax subsidies to entrepreneurs who want to build out rural broadband companies using that unlicensed spectrum? And what if we provided free real estate for cell towers on our public housing projects, our school buildings, and our libraries in return for providing open and public networks in and around those tower locations?

We need to change the basis of competition in the wireless broadband industry if we want to get to universal access. We can’t keep maintaining a small oligopoly in wireless in this country and think that somehow we are magically going to get to universal access. We must create policy frameworks that allow thousands of new wireless telecommunications companies to get started in the coming years and we need to create economic incentives for these new entrants to build out networks where it is less attractive to do so. That will have the additional result of causing the incumbents to decide to compete in these less attractive areas as well. We’ve seen that with Google Fiber and some muni fibers efforts already.

I don’t buy into the conservative argument that we cannot afford to provide benefits to those who can’t afford them. I don’t buy into the liberal argument that we must tax and spend our way into solving these problems. I buy into the capitalist argument that if we create the right economic structures and incentives, entrepreneurs can and will solve these problems in a sustainable way. And I think that is the answer with universal broadband.

The Great Decoupling

I saw this chart in a Harvard Business Review piece called The Great Decoupling earlier this week:

decoupling

 

The “decoupling” is the divergence between labor productivity and employment/wages that happened in the US in the 1980s and has become quite pronounced over the past thirty years. During the great postwar boom, productivity and wages grew in lockstep in the US. Of course, we don’t see any data from the 19th century and the first half of the 20th century so it’s not clear that labor and wages have always grown in lockstep. But something certainly changed in the 1980s and the result has not been good for median family income which has been stagnant in the US for almost thirty years now.

The chart and the HBR piece is the focus of work done by Erik Brynjolfsson and Andrew McAfee, faculty members at the MIT Sloan School of Management. They attribute this great decoupling to the emergence of “digital technologies.” I would imagine the initial decoupling had as much to do with globalization and the pressure on wages that global competition for jobs in many sectors created. But, as we’ve discussed here before, the mechanization of information work, which Brynjolfsson and McAfee call “The Second Machine Age“, will accelerate this trend and it already seems to be doing that.

When I showed this piece to may partner Albert, he responded with disappointment for the policy ideas that the professors put forth as potential solutions. Those ideas are; education, infrastructure, entrepreneurship, immigration, and basic research. Albert is right that those are not new or original policy ideas and though I spend a fair bit of time and money on three of them, I do wonder if they will not be enough. So does Albert and here’s a policy idea he has been suggesting.

The PATENT Act

Regular readers know of my longstanding concerns and frequent posts on the topic of patent trolls. They are a scourge on the startup sector, where patent trolls wreak havoc, and the innovation sector more broadly. The Senate has been working to address these issues via a non-partisan bill called the PATENT Act and a companion House bill called The Innovation Act. These are both good bills and everyone in the startup sector should support them enthusiastically. Julie Samuels of Engine wrote an excellent post about the PATENT bill in the Senate and I’m going to cut and paste it below instead of trying to do better (because I can’t).

————————–

Today, Sens. Grassley, Leahy, Cornyn, Schumer, Lee, Hatch and Klobuchar introduced the PATENT Act, an important piece of legislation targeting a serious patent troll problem. Engine is proud to support that bill.

The PATENT Act, and the Innovation Act, its House counterpart, are effective because they are comprehensive in scope. Each contains a package of incentives that, taken together, insert balance back into patent litigation, giving troll targets the tools to fight back and ensuring that patent holders act responsibly. Importantly, they are carefully crafted to ensure that a patent holder with a high-quality patent and a legitimate claim of infringement will face no barriers to making that claim.

To understand the way these bills work, you have to understand a bit about the patent troll problem. Patent trolls are primarily armed with two weapons: low-quality, impossible-to-understand patents and the outrageous costs of patent litigation, which can easily cost a defendant well into the millions of dollars. So imagine you are a small startup, cash-strapped and hungry, and you get a patent demand from a company you’ve never heard of, claiming it owns some seemingly basic technology. (This really happens. Often. See here, here, here, and here, for example.) Your choices are: hire a lawyer and spend valuable time dealing with the problem or pay the troll to go away, usually for a sum far smaller than what it would cost to hire that lawyer or go to court.

The good news is that the Supreme Court has been busy trying to fix the problem of low-quality patents. The bad news is that we still have a long way to go. Patent litigation remains outrageously expensive and one-sided, giving a patent owner who is willing to take advantage of loopholes in the system the ability to run roughshod over defendants.

This is where Congress, and specifically today’s introduction of the PATENT Act, comes in. Its provisions help right the imbalance in patent litigation through a series of reforms:

  • Transparency and Heightened Pleading: Currently, someone can file a patent suit without providing almost any basic details about his or her case, information like how a patent is infringed, what products allegedly infringe it, and even who owns that patent. This information is easily known to any patent holder at the outset of a case, especially those who engage in a responsible amount of due diligence prior to filing a case. However, getting this information can cost a party being sued tens or even hundreds of thousands of dollars. The PATENT Act would fix that, requiring patent holders to provide this basic information at the outset of litigation and also require patent holders to tell the Patent Office when they transfer a patent. Only with this basic information can parties make informed decisions about how they should proceed. If a party legitimately cannot find some of this information after making a “reasonable inquiry”, it may still file a suit, an important caveat protecting the responsible patent holder.
  • Fee-shifting: Currently, little incentive exists for a party to defend itself in court. After years and millions of dollars spent litigating, a successful party will often be sent on its way with nothing more than a Pyrrhic victory. The PATENT Act remedies this by awarding fees to a winning party when a court determines that a losing party’s position was not “objectively reasonable”. This provision carefully strikes a balance between deterring those who bring crappy, unsubstantiated lawsuits and those who bring reasonable, good-faith cases. It also includes important provisions that would effectively end the practice of using shell companies with little or no assets to avoid responsibility. Specifically, a party who doesn’t make or sell anything with its patents will have to show that it can pay for fees if they are awarded. Only with this incentive can many startups afford to take on a troll threat, discouraging those trolls from bringing frivolous cases.
  • Demand Letter Reform: Currently, trolls send vague demand letters full of legalese, targeting small businesses and even individuals. Because this takes place before a lawsuit is even filed, there is no public record of how often it happens. We know it is common practice, so we also know that we can’t even properly understand the scope of the entire patent troll problem. The PATENT Act will help fix this by requiring that such letters include certain basic information about the infringement claim and that they do not make false claims about the patent holder’s rights with regard to the patent. Only with these requirements will startups be able to make informed decisions about whether they should respond to or ignore a demand letter and whether they should hire a lawyer.
  • Discovery Reform: Currently, discovery is by far the most expensive part of litigation for any party facing suit. For a patent troll who doesn’t make or sell anything, the cost of discovery is next to nothing. However, it can use abusive discovery practices to drive the costs of litigation even higher than they already are. The PATENT Act would curb some of the worst of these practices by staying discovery until a party has had a chance to try to have a case dismissed. It also makes further recommendations to shift some of the discovery burden from the party producing information to the party requesting it. Only with these reforms can small companies and startups afford to litigate.
  • Customer Stay: Currently, trolls love to target a company’s customers, claiming that by using off-the-shelf technology those customers are liable for infringement. This can put enormous pressure on companies that provide products and services (e.g., every company). The PATENT Act provides tools to both the customers and the companies in this dangerous situation, allowing the company to fight the litigation on behalf of its customers. Only with this provision will startups be able to protect their customers.

To be certain, the PATENT Act is not perfect. There are a number of areas where the bill could be made stronger. For instance, we wish the discovery reforms went farther, clearly providing in-statute limits on discovery to those documents directly related to the litigation and requiring a party seeking documents to cover the costs of getting those documents. We’d also like to see the bill more directly address venue and make it easier for parties to move a case out of the Eastern District of Texas, where so many cases are brought and where judges are notoriously plaintiff-friendly. Likewise, we remain concerned that the current customer stay provision only kicks in when the manufacturer is already involved in litigation. We think improvements could be made to make it any easier for that manufacturer to actively step in on behalf of its customers. Finally, we think the bill could also make it easier and cheaper for parties to challenge low-quality patents at the Patent Office through a process called inter partes review (IPR). For many parties, seeing a case all the way through to a final decision is not an economic reality, even with the above-discussed reforms. IPR provides a valuable means for a startup or party with limited financial resources to invalidate or narrow the scope of an otherwise overly broad patent.

All that said, we remain proud to support this bill. The heart of it—the litigation reform provisions—represent a hard-fought compromise, spearheaded by Sens. Schumer and Cornyn, who tirelessly worked to get this done. We will continue to work to improve the PATENT Act where we think it needs improvement, and fight off any efforts to water down its provisions. We look forward to seeing this become law.

Why be civically engaged if you’re in tech?

Tomorrow, Ron Conway and I are going to kick off Disrupt NY 2015, with a fireside chat with Kim-Mai Cutler. We plan to discuss philanthropy and civic involvement. I’m looking forward to this talk. I think folks in the tech sector need to embrace philanthropy and civic involvement and I look forward to making the case for that.

I’ve been working in the VC business since the mid 80s. And for most of that time, I’ve felt that the tech sector was surprisingly uninterested and uninvolved in things outside of the tech sector. That’s a great strength of the tech sector, it’s is focused on innovation, making things, and building companies. And it does not get distracted by things outside of that realm.

But we know that the things we make and the companies we build have great impact on those outside of the tech sector. It can be for the good, like building cars that don’t use carbon fuels and showing the auto industry that it can be a good business to do that. It can be for the bad, like automating away jobs that once paid the way for a middle class lifestyle.

It feels to me that our economy and our society is now deeply entwined with technology and being significantly impacted by it. If that is true, I believe it is shortsighted to avoid getting engaged in the discussions and debates about what kind of world we need to work toward. I think one way or another the tech sector is going to get pulled into these debates. It will be one thing if that happens thoughtfully and positively and another if the tech sector is pulled into them kicking and screaming.

Regular readers of this blog know that my partners and I have been involved in these discussions since we started USV over a decade ago. We spend our time, energy, and capital in areas like policy debates, philanthropy, and civic engagement. There are others in the tech sector who do the same. Ron Conway comes to mind as someone who has spent a similar amount of time, energy, and capital on this stuff. And I am thrilled to share the stage with him tomorrow as we discuss these issues.

We go on stage at 9:05am eastern tomorrow. I’m hoping the talk will be livestreamed and you can watch it live. If it is, it will be somewhere like here.

The Lesson Of Title II and Time Warner Cable: Markets Have Two Sides

On thursday of this past week, I attended a small gathering of academics and policy makers who follow the technology sector. During that gathering, the news came out that the Comcast acquisition of Time Warner Cable was falling apart due to regulatory opposition. The conversation turned to the reasons why this happened.

I surmised that the reason for both the failure of Comcast/Time Warner Cable and the success of the Title II debate several months ago is that regulators and policy makers now understand that markets have two sides and you can’t just look at the consumer facing side of a market.

Comcast was correct in its assertion that they have very little customer overlap with Time Warner Cable and therefore consumers were not being harmed by the consolidation of the two networks. But if you look on the other side of their networks, to the suppliers of applications (Amazon, Google, Facebook, etc) and content (Time Warner, News Corp, Netflix) you see that the consolidation was going to be very harmful. Netflix was going to have one company standing between it and possibly half of its customers in the US. Same with Facebook. And there is no way that was going to be good for them. They may not have come out publicly in opposition to the merger, but you can bet that they came out in opposition privately.

The same is true of Title II regulation of the last mile Internet access. This was not a consumer story either. Very few advocates of “net neutrality rules” believe that this is a consumer issue. Very few have advocated that Internet access prices should be regulated. The debate has always been about the supply side of the market. The side where applications and content live. And the decision to apply Title II regulation to last mile Internet access was essentially a recognition that both sides of a network matter and that it is bad for the economy, society, and innovation to have a network attain enough market power to control what happens on the supply side of a market.

I don’t know enough about communications policy and antitrust policy history to know whether the two sided market construct has played an important role in the past. I think it may well have been an important factor in breakup of AT&T’s monopoly on wired telephony. And I expect there have been other examples as well.

But the one two punch of Title II and Comcast/TWC is a reminder that both sides of a market matter and competition (or the lack thereof) will have an important impact on how these markets function. I am a fan of both decisions and believe that our regulators and policy makers are thinking about this stuff correctly.

Video Of The Week: Albert’s TEDx Talk

My partner Albert gave this TEDx talk earlier this year. Somehow I missed it until this morning when I was looking around YouTube for something to post. I’ve heard Albert articulate all of these ideas for years. He’s influenced my thinking on them greatly and I’ve gone from dismissive, to skeptical, to supportive of experimenting with them. I suspect you will move in that direction too after watching this short (17mins) talk:

Comments On The Proposed Bitlicense Regulations

Over the past year, the New York State Department of Financial Services (DFS), led by Superintendent Benjamin Lawsky, has been attempting to create a set of regulations for virtual currency services. They called this set of regulations the “Bitlicense.”

I have been following this issue closely and participated in public testimony before the DFS back in January 2014 that was a precursor to creating these new regulations.

While these regulations will only apply to businesses operating in New York State, they will naturally be a precedent for many other states who seek to regulate virtual currency services and as such, we should consider them a potential framework for all state regulation of virtual currency.

The initial proposed Bitlicense regulations were published last year and were subject to a comment period which produced more than 3,700 total comments. The DFS did an excellent job of working through those comments and came back with a revised Bitlicense draft early this year. The comment period for the revised Bitlicense started in late February and will end this friday, March 27th.

This blog post is being submitted as a public comment on the revised Bitlicense regulations and should be read as such.

While the DFS has taken great care to simplify the Bitlicense regulations and reduce the scope of them, there remain two fundamental and important problems with them, both relating to duplication of existing regulatory requirements.

Before I get into the specific issues around unnecessary duplication in the proposed Bitlicense regulations, I would like to speak about the issue of regulation and startups and high growth companies in general.

I believe startups and high growth companies are important to the US economy and US citizens for many reasons, but primarily because they bring important new technologies into our lives and improve them, and because they are engines of economic growth and jobs.

Startups and high growth companies should be required to comply with all existing laws and regulations. They should not be excluded from the laws that apply to all other businesses. However the arrival of new technologies should always be seen as an opportunity to review and update our laws and regulations in accordance with the benefits and challenges brought by these new technologies.

It is also true that startups and high growth businesses often start with a very small base of employees and capital and they cannot afford the compliance and regulatory affairs teams of much larger companies. Because of this, startups and high growth companies are more heavily “taxed” in their efforts to comply with regulations and we should be mindful of this “tax on innovation” that regulations place on the startup sector and high growth companies in general.

Duplicative regulatory requirements are a particularly harmful form of this regulatory burden. If one regulatory body is responsible for making sure that businesses comply with the rules, we should not force companies to comply with a redundant and duplicative set of rules and compliance requirements. This is particularly true of state regulations as duplicative compliance requirements could, at the extreme, require companies to do the same thing 50 times (once for every state). And small high growth companies are the ones who will feel the pain of this duplicative and redundant regulatory burden the most.

So, it is with that backdrop that I wish to highlight two such duplicative and redundant regulatory requirements in the Bitlicense. The first are the anti money laundering (AML) requirements in the Bitlicense regulations. Virtual currency exchangers and administrators  are already required to comply with federal AML regulations.  In many ways this is a good thing. FinCEN (the federal money laundering regulator) set a clear federal standard for all bitcoin companies in March 2013. New York State and all other states should require these virtual currency businesses  operating in their jurisdiction to comply with the federal AML regulations but they should not require duplicative and redundant AML compliance on a state by state basis.

The second duplicative and redundant provision in the Bitlicense is related to state money transmission regulations, which are already in place and are applicable to all virtual currency businesses. The Bitlicense requires similar provisions to what is already in place for money transmitters under state regulations, thus creating duplicative and redundant compliance obligations, which, again, could end up being replicated in all fifty states around the country. A better construct would be to exempt licensed money transmitters authorized by the DFS to engage in virtual currency business activity, just as the BitLicense has done for entities chartered under NY Banking Law.

The New York State Department of Financial Services has made a commendable effort to understand the risks posed by virtual currency and to construct regulations to protect society from them. There has been a lot of great work done in this effort. And it is particularly helpful to the startups and high growth companies operating in the virtual currency sector to know what is expected of them to operate legally and safely. I believe if the DFS addresses these two duplicative and redundant provisions, we will have a much better and more efficient regulatory structure for virtual currency providers and that will be a very good thing for all involved.

The Clinton Email Affair

The fascinating thing about the Clinton Email Affair is that it illustrates a central truth of our time; someone is storing and reading your emails. That someone could be your employer, your government, your email provider, or all of the above. A very small percentage of email users choose to run their own email servers and avoid this fate. It turns out that the woman who wants to be our next President is one of those very few.

What does this choice say about her and how she would approach digital privacy? If Edward Snowden is the person who told us what we always suspected but were in denial about, then Hillary Clinton is the person who opted out of the system and lived to tell us how she did it.

The media wants her to tell us why she did it. As if there is any question about that. She did not want the witch hunters in Washington to have access to her emails. That’s it. She has been there and has the scars to show for it and did what any intelligent person with balls would do. She opted out. And she got away with it for four years.

Of course, this affair could get in the way of her desire to get back to the White House. We will see about that. In which case she will have not gotten away with it.

But even so, I would hope that this affair, along with the Snowden revelations, clarifies things for people. Your emails are not private messages. They aren’t much different than posting on Twitter and Facebook. If you do anything that a lot of people care about, your emails will be read and shared. Unless you run your own email server and encrypt your messages.

Sadly this email affair is playing out like all other Washington scandals when it could be anchoring a much larger national discussion about the privacy of personal communications and what are our rights are in that regard. Maybe if this email affair blows over and Hillary ends up in the White House, she can lead that discussion. She will be well suited to do so.

Video Of The Week: Kara Swisher Interviews Hillary Clinton

I posted an interview that Kara Swisher did with President Obama a few weeks ago. Shortly after that interview, Kara interviewed Hillary Clinton. Kara is on a roll. I hope she interviews Jeb Bush next.

In any case, it is great to see a tech journalist interviewing the major national political figures. There are a host of important national tech issues and it is great to be able to hear these politicians address them.

Sadly the email scandal broke about a week after this interview so Kara was not able to ask about that. But otherwise, this is a great discussion and, as I said, I hope she does more of this.