From the Mises blog. Archived comments below.
My post The Perils of Centralized Innovation concerned a fascinating excerpt from The Master Switch by Tim Wu (excerpts on scribd and google books). I have since downloaded and begun to read this fascinating book. I noticed that it contains some illuminating discussions of the effect of patent and copyright on the development of the American movie industry. One of the points of Wu’s book is how dominant information-based firms often resort to state help when their dominance is threatened. As Wu observes (quoted here in a post by Cory Doctorow):
The problem is that dominant firms are like congressional incumbents and African dictators: They rarely give up even when they are clearly past their prime. Facing decline, they do everything possible to stay in power. And that’s when the rest of us suffer.
AT&T’s near-absolute dominion over the telephone lasted from about 1914 until the 1984 breakup, all the while delaying the advent of lower prices and innovative technologies that new entrants would eventually bring. The Hollywood studios took effective control of American film in the 1930s, and even now, weakened versions of them remain in charge. Information monopolies can have very long half-lives.
Declining information monopolists often find a lifeline of last resort in the form of Uncle Sam. The government has conferred its blessing on monopolies in information industries with unusual frequency. Sometimes this protection has yielded reciprocal benefits, with the owner of an information network offering the state something valuable in return, like warrantless wiretaps.
Wu’s description of the evolution of Hollywood’s rise to dominance and the role state monopolies played in its structure is fascinating. In ch. 4, he notes how in France one Louis Lumière invented a working camera and projector in 1895. The same year, Charles Francis Jenkins in the US invented a projector called the “Phantoscope.” Edison then entered the market with the “Vitascope,” basically the same as the Phantoscope except for the name. He managed to procure Jenkins’s patent rights for $2500. But then another company, Biograph, entered the market, leading to almost a decade of patent litigation. The patent holders finally decided to settle and form the Motion Pictures Patent Company, a cartel known as the Film Trust. The Film Trust comprised the large film producers and the largest manufacturer of film stock, Eastman Kodak. The Trust pooled sixteen key patents, leading to the blocking of film imports and price fixing at every stage of the film production and exhibition process. The Trust had a series of meetings to establish rules that would permit only Trust members to make or import films into the US; those who didn’t comply would be sued for patent infringement. Theater owners had to pay license fees, distributors had to comply, and so on.
One man, Carl Laemmle, challenged the trust and became an “Independent,” and tried to enlist others to fight the “film octopus.” Eventually the response to the patent-wielding Film Trust led Laemmle and Wilhelm Fuchs (later Fox) to form their own studies (now Universal Studios and Fox Features). “Thus the Hollywood studio was born, not out of choice, let alone glamour, but of brutal necessity.” So here we see the distorting and monopolizing effects the patent system itself had on the movie industry and Hollywood itself.
A recent article by Thaddeus Russell, 7 Ways the Mafia Made the U.S. a Better Place: ‘Renegade History’, contains further fascinating background on this episode:
Soon after he invented the motion picture camera and projector, Thomas Edison formed his own movie production and distribution company. In 1908, Edison joined with nine other film companies to form the Motion Picture Patents Company, a monopoly that attempted to control the making, distribution, and showing of all movies in the United States. Edison and “The Trust” pledged to make only movies that promoted wholesome, Christian, and “American” values. But on the Lower East Side, a group of entrepreneurial Jewish immigrants used Edison’s inventions to produce and screen their own films, which were shown in thousands of nickelodeons – five-cent movie theaters – in working-class neighborhoods all over the country. These “outlaw” filmmakers started out as vaudeville and burlesque promoters, and many of their movies were sexier, more violent, and far more entertaining than the bland fare put out by the Edison monopoly.
The great inventor was furious that “Jewish profiteers” were stealing his patent, getting rich from it, and using it to spread “smut” across America. So too were law enforcement officials. In 1907 a judge in Chicago wrote that the nickelodeons “caused, indirectly or directly, more juvenile crime coming into my court than all other causes combined.” Shortly thereafter the Chicago city council passed an ordinance granting power to the chief of police to censor motion pictures played in the city. In New York in 1907, soon after the police commissioner recommended that nickel shows be wiped out entirely, Mayor George McClellan was so moved by the evidence of immoral motion pictures polluting the minds of his citizens that on Christmas Day he ordered that all of the illicit motion picture houses be shut down.
Moral condemnations and court injunctions didn’t stop the proliferation of nickelodeons that showed unseemly fare and violated Edison’s patent, so the inventor and his colleagues hired squads of thugs to shut them down. They seized film, beat up directors and actors, forced audiences out of theaters, smashed the nickelodeon arcades and set fire to entire city blocks where they were concentrated. But fortunately for the Jewish renegades, they lived and operated in neighborhoods where hundreds of soldiers stood ready and able to protect them – men like “Big” Jack Zelig, “Lefty Louie” Rosenberg, “Gyp the Blood” Horowitz, Joe “The Greaser” Rosenzweig, and the leaders of the notorious Yiddish Black Hand, Jacob “Johnny” Levinsky and “Charley the Cripple” Vitoffsky. There were even women ready for the fight – fierce, well-armed “gun-mols” like Bessie London, Tillie Finkelstein, Birdie Pomerantz, and Jennie “The Factory” Morris.
Cameras, projectors, film, and sound equipment disappeared from the storerooms of Edison companies and showed up on makeshift movie lots on the Lower East Side. Bullets rained down on the Trust’s enforcers from the rooftops of nickelodeons. And massive fires destroyed the Edison distributors’ warehouses in the Bronx, Philadelphia, and Chicago. By 1915 the Trust had disbanded and the outlaw filmmakers moved west, where they could make bigger and better movies. Who were the men who, with the help of their nicknamed friends, fought Thomas Edison and the law and won? They were Marcus Loew of Loews Theatres and Metro-Goldwyn-Mayer, Carl Laemmle of Universal Pictures, Adolph Zukor of Paramount Pictures, William Fox of Twentieth-Century Fox, and the brothers Harry, Albert, Sam, and Jack Warner.
See also: Thomas Edison Drove the Film Industry to California. This flight of the movie industry to California to escape Edison’s patent threats is also described in “Hollywood’s Golden Age,” S2E6 of America in Color (Smithsonian Channel, 2018). Eventually the victims of all of the Edison trust’s patent assaults defended themselves by claiming antitrust violations. Yet another example of the schizophrenic state: it creates monopolies by its policies (granting patents) and then tries to restrict the ensuing monopolies with antitrust law.1
Thus we have the studio system itself and the origins of Hollywood as responses to state-granted patent monopoly. (I observed in Leveraging IP how IP law distorts the market in other ways–leading to Omega to incorporate a copyright-protected design on its watches simply so it can use the state’s arcane copyright rules to prevent price arbitrage and free trade; how printer companies put needless patented circuits in printer cartridges and printers to prevent competition by the use of state patent law; how fashion designers bizarrely incorporate their trademarked logos into the very design of clothing and accessories so that they can use state trademark law to stop competition.)
As Wu notes (ch. 4, pp. 67-68 of the text version):
With the rise of insurgent producers allied with Paramount, the industrial warfare reached a new level of intensity. To distribute films illicitly was one thing; but to produce them was to attack the very heart of the Trust’s legal monopoly. Merely to operate a camera without a license was to violate patents owned by the Trust. Beginning in 1910, the Trust commenced a scorched-earth legal campaign meant to make an example of Laemmle. Over three years, their lawyers would sue him 289 times. Laemmle’s biographer describes the Trust’s strategy thus: “let them flock in from all quarters, let the federal courts and the state courts buzz with them. Scour the country for infringements, set spies on every independent camera, projecting machine, reel of film, that could be found. Let actions breed and multiply …”
Rarely has an essential tension between free expression and intellectual property been laid so bare, made so explicit, as it was in the Trust’s patent suits. The Trust, using its economic power and the patent laws, was able to harness the power of the state in the attempt to destroy its budding competition and their new type of films, leaving them only one choice. Now and again, in the course of the Cycle, a little lawbreaking will prove a useful thing.
I haven’t finished Wu’s book yet but get the sense from the parts I’ve read he hasn’t given the IP issue much radical or principled thought, nor does he (as far as I can tell) have any sort of explicitly anti-IP or IP abolitionist (or even IP reform) views–but he views the effects of IP with open eyes and quite clearly sees its anti-competitive and censoring effects–how it is used to enlist the state to hurt your competition.
His discussion in chapter 17 of how copyright has also distorted the film industry is also worth reading. That chapter contains a fascinating discussion of changes in the movie industry in recent decades–how the film industry now relies on viewing the film as “a property”–based on copyright protection of “characters” and so on–and thus there are nowadays so many sequels and remakes. So for example, of the most expensive films of the 2000s, almost all were remakes or sequels, anchored to some underlying “intellectual property”–e.g, the Harry Potter or Batman “characters”. The chapter’s conclusion implies that copyright is at least partly to blame for modern movie mediocrity: “Mediocrity safely begets mediocrity; behold the true miracle of the modern entertainment industry.”
Update: See Tim Lee’s guest post on The Technology Libertarian Front, How Should Libertarians Think about The Master Switch?
See also Why Europe Has No Hollywood: The >ollywood dominates: 1. patents, 2. WWI.
November 28, 2010 at 4:39 pm-
Great, more examples of how the IP system needs reform.
Excellent find.
November 29, 2010 at 3:37 am-
lol. It is impossible to reform a dead horse. Dead is dead. Just throw it away. If you want to prove that your “reformism” will work, go to local mafia and reform it into charity organization. Then I will believe that it is possible to reform state’s monopoly. Until then, live in your imagination land.
November 28, 2010 at 6:00 pm-
One of the most egregious examples is the way that statists delayed pretty much any revolutionary advancements in radio technology, keeping the system at 1920s levels until, well, today. Cell phones, maybe, with their frequency-hopping, could fairly be considered the first systemic advance in radio-based communications in about 75 years.
Statists don’t care about communications per se. They care about whatever you and I care about, and if that is communications, transportation, food, sports, education, or medical services, then so be it — that’s what they will seek to control. They will call it a “public good, and take it over.
November 28, 2010 at 7:15 pm-
The next generation radio technology is here today… it’s called software radios.
Of course nobody can use it except for a privileged few.
Basically computers are getting fast enough that they can emulate radio signals using math on the processors in real time. You take those signals and pipe them out to the proper hardware interface then you can use any frequency or any radio protocol you could imagine. The main limitation is just the different types of antennas you can carry around with you.
This is budding technology. We are just getting to the point were general purpose computers have the processing capacity to do this.
You could theoretically use the same station to do GSM cell phone transmissions, wifi, AM radio, FM radio, short wave, satellite communication, HDTV signals, etc etc. Anything. Just program the radio to do what you want, get the proper interface board and antenna and you can do it. Using this technology we can have adaptive radios that will be able to adapt themselves on the fly to different sorts of broadcasts to avoid conjugation, maintain long links, do high speed local links.
Here is the build guide for compiling a radio from source code:
http://gnuradio.org/redmine/wiki/gnuradio/BuildGuide
All of it was created free of almost all copyright restrictions. You can download and compile it and run it right now. No copyright fees, no patent fees. It was all done by independent hobbyists and professionals working together to make a tool to make their lives easier and more enjoyable.Both the software that runs on the computer and the FPGA logic for the hardware is available.
Some users:
http://gnuradio.org/redmine/wiki/gnuradio/OurUsersHere is the company that sells the USRP
http://www.ettus.com/productsThis is the USB device you hook up to your computer to do the actual input and output for the radio signals. You can purchase various daughter boards that are suitable for different frequencies.
http://www.ettus.com/WBX
This one can range from 50 MHz to 2.2 GHz. According to the FCC’s frequency allocation map that gets you from Amature radio, through broadcast television channels, mobile sattelite, aeronautical navigation, and full coverage of cellular phone radio.Here is a guy developing a open source GSM basestation.
http://openbts.sourceforge.net/See the image on there? Thats the USRP hooked up to a laptop running his software to produce something that you can take any GSM phone and call into a VoIP connection to the internet.
http://aligunduz.org/blog/snapshots_from_gsm_workshop.html
His approach at using software radios with VoIP connections instead of the traditional telecommunications getup the the phone companies use means that he can operate his networks at a vastly lower rates with much higher efficiency and performance. Your looking at a covering costs at about $1 per month for voice communication per user.
The GSM is a ‘IP’ minefield. The first thing that happened when he started the project was that he got sued. Right off the bat.
November 29, 2010 at 9:34 am-
That’s some very cool stuff.
November 28, 2010 at 6:35 pm-
Dave,
It’s not reform that’s needed, it’s utter annihilation. The is no place for any state privilege at any level in a true free market society.
Absolutely on the “excellent find” comment!
November 29, 2010 at 1:53 am-
The problem with Tim Wu is he thinks that monopolies which arise through state action are all well and good. But, gosh darn it, if a firm begins to dominate a market all on its own, through normal market forces, i.e. Google, then we need state action to bring it to heel. And he means state action pronto, before any harm to consumers is even demonstrated.
- November 29, 2010 at 9:46 am
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In this interview Wu laments the loss of power which the FCC once enjoyed:
http://www.boingboing.net/2010/09/24/tim-wu-on-net-neutra.html
There has been an ongoing debate with and about Wu views on Monopoly here:
http://techliberation.com/2010/11/23/whats-an-internet-monopolist-a-reply-to-professor-wu/
December 3, 2010 at 3:40 pm-
“harness the power of the state in the attempt to destroy its budding competition”
Think about it. Without patents, if a small firm or lone inventor bets the house (which they often do) to bring a new product to market, other than a strong patent system, what is to stop a large would be competitor from copying their work and beating them out of the market they created? Nothing! Without a strong patent system no one in their right mind will risk all and take on such odds. The framers of our constitution understood that. Do you?
December 4, 2010 at 12:47 pm-
Why is this argument anything else than a mercantilist fallacy? The economic nature of a phenomenon does not change merely be using a magic word “inventor”.
- December 3, 2010 at 3:45 pm
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“IP reform…”
Just because they call it patent “reform” doesn’t mean it is. Patent reform is a fraud on America.
Please see http://truereform.piausa.org/ for a different/opposing view on patent reform. 
December 4, 2010 at 2:37 pm-
An excellent read. Picked it up at late last night after a long day and couldn’t put it down. Almost an all-nighter.
I am not a techie, so the updates on the techie history was in itself fascinating. I enjoyed Wu’s application of his central theme of closed/open and hierachical/decentralized to techie innovations. His crediting Hayek is a nice touch. His failure to fully jump on the SK-IP bandwagon was disappointing but understandable. As he notes in a quote, empires must fall and fallen empires must reunite; it has always been so. AT&T came, left and is coming back. That simple. The law is a mere instrumentality. No more.
What makes this book a great read for a young thinker is that it inevitably makes you wonder if this applies to other industries, such as maritime, aviation, automobile, education, policing, etc. And if you start to wonder about these things, your inquiries should eventually lead you to Mises.org, and SK’s IP argument.
On a practical level, it makes me want to buy a Droid next year instead of an iPhone.
December 6, 2010 at 4:36 pm-
Surprisingly interesting read
- When Antitrust and Patents Collide (Rambus v. FTC),” Mises Economics Blog (June 15, 2008); “State Antitrust (anti-monopoly) law versus state IP (pro-monopoly) law,” Mises Economics Blog (Nov. 12, 2010); “The Schizo Feds: Patent Monopolies and the FTC,” Mises Economics Blog (Aug. 27, 2006); The Schizophrenic State (Jan. 13, 2006); “IP vs. Antitrust,” Mises Economics Blog (Sep. 8, 2005). [↩]
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