Who Owns the Future? (10 page)

We loved the crazy cheap easy mortgages, motivated by crazed overleveraging. We love the free music, enabled by crazed copying. We love cheap online prices, offered by what would have once seemed like national intelligence agencies. These newer spy services do not struggle on behalf of our security, but instead figure out just how little payment everyone in the chain can be made to accept. We are not benefiting from the benevolence of some artificial intelligence superbeing. We are exploiting each other off the books while those concentrating our information remain on the books. We love our treats but will eventually discover we are depleting our own value.

That’s how we can have economic troubles despite there being so much wealth in the system, and during a period of increasing efficiencies. Great fortunes are being made on shrinking the economy instead of growing it. It’s not a result of some evil scheme, but a side effect of an idiotic elevation of the fantasy that technology is getting smart and standing on its own, without people.

Radiant Risk

A Siren Server can gather information to reduce its exposure to the risks inherent in its operation, which just means radiating those
risks out to the general society, and that includes you. Amazon provides an example.

The usual complaints about Amazon
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come from its competitors, and it’s natural to dismiss them. However, if you’re a smaller competing seller of books, the situation is quite stark.

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Authors and publishers have become afraid of criticizing Amazon. To me, the people who run the big servers like Amazon are just a bunch of techie bums like me, so I know they can take a little criticism. However, once this book was already written, Microsoft, where I do my research, started a partnership with Amazon rival Barnes & Noble, so now I might be perceived as partisan. There is no way for anyone who is deeply engaged in the perversely intertwined world of tech to write about the big issues and not have conflicts of interest. To state it as clearly as I can: I am part of what I criticize. I benefit from time to time by actively participating in the schemes I would like to see ended; it happens as a side effect of doing the things I love to do. However, I don’t want to become an academic or remote observer of tech events. My choice is to be engaged even if that means I am tainted. I live with contradictions, in accordance with the human condition, but do my best not to forget what absurdities are involved. What I can offer is being open about what I think.

A “bot” program in the Amazon cloud monitors the price of books you sell everywhere else in the world; it automatically makes sure Amazon is never undersold. There is no longer a local intelligence advantage for pricing by small local sellers. This leads to bizarre outcomes, such as books being priced for free through Amazon simply because they are being given away as part of a promotion elsewhere.
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Therefore promotions for ordinary, small sellers become more expensive or riskier than they otherwise would be. Information supremacy for one company becomes, as a matter of course, a form of behavior modification of the rest of the world.

The total amount of risk in the market as a whole stays the same, perhaps, but it’s not distributed evenly. Instead the smaller players take on more risk while the player with the biggest computer takes on less. Amazon’s risks are reduced—it won’t lose a sale to someone else’s pricing strategy—while local sellers face increased risks if they want to undertake their own pricing strategies.

This is just one simple example of how information advantages turn into money and power advantages. Every player with a less global information position is forced to take on more risk so that
the player with a superior information position can enjoy reduced risk.

You Can’t See as Much of the Server as It Can See of You

The strange thing is that book consumers also have reason to be concerned, but it can be hard to tell this is so. From a consumer perspective, Amazon would seem to be driving prices down, and that ought to be a great thing. And yet the situation is more complicated than that.

Around the turn of the century Amazon was caught up in a controversy about “differential pricing.” Essentially this means that an online site might charge you more for given items than it charges other people, like your neighbors.
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Amazon stated at the time that it was not really discrimination, but experimentation. It was offering different prices to different people to see what they would pay.

There is nothing special about Amazon in this regard. Another example is the travel site Orbitz, which was found to be directing users of more expensive computers to more expensive travel options.
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Who could be surprised? It is natural for a business to take advantage of a manifest benefit staring it right in the face. We probably don’t know about the vast majority of examples. While customers might become uncomfortable when made aware of these practices, they are generally legal.

Despite the supposed openness of everything in the Internet age, customers don’t necessarily notice differential pricing. Eventually such practices can come to light anecdotally, though we never learn how extensive they really are. In a physical store, you would immediately notice if a cashier eyed you and decided what price you should pay.

Differential pricing is worthy of attention only because of its starkness. Even if differential pricing turns out to be rare, the key point is that it’s hard for ordinary people who interact with Siren Servers to get enough context to make the best decisions. If not differential
pricing, then some other scheme will appear in order to take advantage of information asymmetry. After all, that is what information asymmetry is for.

Waiting for Robin Hood

You might expect a compensatory server to always magically appear on cue. Such a server might, for instance, perform cost comparisons so as to alert consumers to differential pricing or other hazards.

Sometimes the Internet will indeed produce a service that does really help. An example is Flightfox,
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a service that solicits real people to act as travel agents to help customers plan exceptionally difficult itineraries. In that particular niche, the big automated travel services like Orbitz can’t compete.
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A nonautomated niche online service like Flightfox can make good economic sense. The reason is that success is not based on repatterning the world after the server’s general information superiority. Instead there is a specific, local, and limited form of advantage. The word
local
doesn’t necessarily refer to a geographical locality, it can also refer to any abstract information advantage; it can be a spot on an energy landscape instead of on the Earth. In this case, a human specialty in understanding complex travel creates a kind of local advantage.

Siren Servers do repattern the world, however, and conventional business thinking is inadequate to describe how they work. When a big cloud computing service suggests that it has found you the best price, think about what that could mean. Siren Servers have access to tremendous amounts of information about you, about sellers, and about everyone in between. They are not able to offer a bargain because they got lucky, cultivating just the right supplier, or because they have superior knowledge about a little corner of the world.

No, they are able to offer a bargain by applying broad analytic techniques to an automatic gathering of information about everybody. So once again, what does the offer of value to you really mean, relative to everyone else in the world? There can be no such
thing as a universal bargain, any more than everyone can be above average.

From Autocollate to Autocollude

Large, highly automated online businesses can’t help but present some of the problems of monopolies, even when there is no monopoly present. Amazon doesn’t directly go after a smaller bookseller like an old-fashioned monopolist, any more than it might have targeted a particular person for differential pricing due to prejudice or some other malice. It all happens automatically, as a matter of course.

In some cases Siren Servers do tend to become approximate monopolies, as will be discussed later on in the section on the “exclusion principle.” However, in other cases competitive Siren Servers coexist. Amazon coexists with Apple, and Orbitz coexists with Priceline, Expedia, and Travelocity.

It used to be that information superiority was a prize won by becoming a monopoly, but no more. If multiple, similar Siren Server sites coexist, and they each have information superiority over customers but approximate information parity with each other, then they won’t be able to help but act as if they’re colluding; this can be true even though there is no intent or action taken to collude.
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A “bot” which sets prices or otherwise makes decisions in a market, is an interactive process that is continuously altering its reactions based on new data. If there is only one such bot, then the data it is reacting to comes from the world at large. If there are multiple bots, however, some of the data they receive is influenced by each other. This is the way auto-collusion can arise. Nonetheless, others have made accusations of old-fashioned collusion. See
http://www.huffingtonpost.com/2012/08/22/travel-site-class-action-lawsuit_n_1821839.html
.

Old-fashioned collusion was an intentional creation of a specific, illicit channel of information transparency. Transparency is not as universal as it might seem, but nonetheless there is a lot more of it now than there used to be, for those who have the biggest and best-connected computers. There is a lot less intent, however, since so
much about large online business is automated or contrived to take place at an arm’s length. The big picture result ends up being almost the opposite of the immediate small-scale appearance.
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It seems as though online services are bringing bargains to everyone, and yet wealth disparity is increasing while social mobility is decreasing. If everyone were getting better options, wouldn’t everyone be doing better as well?

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This isn’t quite the famous “tragedy of the commons.” That model of tragedy is based on the long-term futility of rational self-interest in certain poorly designed circumstances, and so bears a similarity to the problem of Siren Servers. The Sirenic Age is more a tragedy of the commotion, more mania than myopia. Information technology can cause things to move so fast that there’s a rush, a thrill that distracts. Garrett Hardin’s classic 1968 paper “The Tragedy of the Commons” explained how cows were allowed to overgraze on common property, while private property was well maintained. The cows that overgrazed at least grazed. In our present idea about an information economy, cows get no free grass, but a token few might get famous.

Rupture

The terminology of “disruption” has been granted an almost sacred status in tech business circles. It is ordinary for a venture capital firm to advertise that it is seeking to fund business plans that “shrink markets.”
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To disrupt is the most celebrated achievement. In Silicon Valley, one is always hearing that this or that industry is ripe for disruption. We kid ourselves, pretending that disruption requires creativity. It doesn’t. It’s always the same story.

Technologists repeatedly apply the extreme efficiencies of digital networks in some area of endeavor in such a way that the sources of value, whatever they may be, are left more off-the-books than they used to be, but we end up in control of the server that runs the scheme. It happened to music and other media early on, but the pattern is being repeated everywhere.

When health insurance companies turned into digital networks, general-practice physicians became somewhat marginalized, serving increasingly as nodes in a scheme run by statistical algorithms administered by insurance and, to a lesser degree, pharmaceutical
concerns. Physicians should be empowered by networked information, but instead they are constrained because they didn’t seize control of the servers that connected them as the network age dawned. But why should it have been their job to worry about that?

“Disruption” by the use of digital network technology undermines the very idea of markets and capitalism. Instead of economics being about a bunch of players with unique positions in a market, we devolve toward a small number of spying operations in omniscient positions, which means that eventually markets of
all
kinds will shrink.

CHAPTER 7

Some Pioneering Siren Servers

My Little Window

I had an unusual vantage point on the digital networking of the world as it happened. During the 1990s and early 2000s I was on the consultant circuit, and was called on by every imaginable sort of institution, from nations to companies to churches to nonprofits. I consulted to universities, various intelligence agencies, every stripe of corporation, and every species of financial services entity. In the course of my consulting years I had assignments, either as an individual or as part of a team, with Wal-Mart, Fannie Mae, major banks, and hedge funds. I also helped create a startup that Google bought around the turn of the century and served in the lab that contained the engineering office of Internet2, the academic consortium concerned with the basic research aspect of making the Internet bigger and faster.

What I came away with from having access to these varied worlds was a realization that they were all remarkably similar. Again and again, the same principles of how human clout is expressed and constrained by digital networks would overwhelm or flatter the surprised participants. The big players often gained benefits from digital networks to an amazing degree, but they were also constrained, even imprisoned, by the same dynamics.