Yes, Of Course Drug Patents Drive Up Drug Prices; Why Is This Even Up For Debate?

Patents

from the as-obvious-as-obvious-can-be dept

The idea that there is a link between the exclusivity period on patents and higher drug prices is about as noncontroversial as a view can be. It is the easy question on an ECON 101 exam on monopolies, supply and demand. Yet, somehow, this has come under attack thanks to big PhRMA and their minions. Unfortunately they have found a sympathetic advocate in the Senate who believes the unbelievable.

Sen. Thom Tillis has taken a host of actions trying to unlink the obvious connection between patents and high drug prices, and he is trying to force both the FDA and the USPTO to agree with him that the link is a “false narrative.” This assertion, of course, is ludicrous. Patents are the backbone of the pharmaceutical industry, and the reason why drug companies make significantly more than other large public companies. Patents give these companies a guaranteed monopoly period, in which monopoly profits are intended to reward them for the risk and investment spent in bringing new drugs to market. These monopoly periods eventually expire, as required by the constitution, and the resulting influx of competition lowers drug prices by about 80% on average.

This social contract is well understood, and almost everyone thinks this is good for society. So I will give Sen. Tillis the benefit of the doubt and interpret his statement as suggesting that there is no link between gaining an extra, and unintended, monopoly period and high drug prices. But even here the body of evidence to the contrary is extensive. I collected a lot of this evidence in a recent tweet thread. However, it is important to understand a little more about the background of what has quickly become an industry practice.

The story of patent thicketing starts with AbbVie. AbbVie created the patent thicket in much the same way Apple created the smartphone – there may have been others before, but none were as successful or as emulated since. AbbVie’s drug Humira was the best selling drug for almost 10 years, but they faced a problem. Internal estimates showed they would lose their exclusivity as early as 2017. They needed a strategy to stall generic entry for as long as possible, and they hired the extremely controversial consulting company McKinsey to help come up with a plan. While several strategies were presented, the patent strategy quickly became the most successful. As one biotech patent attorney put it: if you have a $16 billion-a-year drug, “every month is a good month that you’re on market alone. So you’re going to spend whatever it takes to be as aggressive as possible and get as many patents as possible.”

The strategy is simple even if it sounds like it should be impossible: find as many ways to patent an existing product as possible. This can include creating a staggered rollout of patent applications around formulations, dosing regimen, route of administration (for example, using the drug in an injector pen), dosing regimen for new indications (i.e. new diseases the drug can treat), and manufacturing processes. As one AbbVie internal document put it: “in the eye of biosimilar makers, how would they manufacture Humira?” AbbVie just needs to patent those manufacturing processes, even if they aren’t using them, and biosimilars won’t be able to make the drug.

All of these documents show that drug companies are trying to get new patents, with later expiration dates, on existing drugs for purely financial reasons. This alone proves Sen. Tillis wrong. But is there widespread failure of the patent system that demands a response? Again there is ample evidence that there is.

One study showed that 78% of new patents were associated with existing drugs, not new ones. The same study found that most of the companies who were successful doing this once would try again, with 50% becoming serial offenders. Another study found that most of the patents used to block generic and biosimilar entry represented minimal-to-no additional benefits to patients using the drug. 

These delays have costs. One study found that Medicare spent an average of $109 million a year extra due to delayed generic entry. The main cause of delayed competition? Patent litigation. Another study found that one year of improved patent examinations on secondary and tertiary drug patents, to catch bad patents before they issue, saves $8.7 billion in the future. And when Humira went generic in Denmark in 2018, residents saw their prices drop by 82.8%. In the US we’ve faced regular price increases on Humira because it remains patent protected.

These abuses of the patent system may carry additional costs to innovation and safety. A recent study of R&D competition around Covid drugs found that whenever a firm finds it profitable to invest in developing a minor modification, R&D for radical follow-on innovation goes down. This could mean that the incentives created by the availability of patents for existing drugs may actually lower R&D investment in new drugs, as resources chase lower risk and more immediate profits. Some researchers have even found startling signs of negative innovation, or innovation that promotes riskier and less beneficial treatments. This happens when the better treatments are unpatentable. The study shows a company pursuing a treatment that overdoses patients because more appropriate doses were considered obvious under prior art. Overdosing, however, was patent eligible because it was considered non-obvious.

This evidence shows a widespread problem in need of a policy response. Indeed, those calling for reform now include the New York Times, the Department of Health and Human Services, former Trump cabinet member Alex Azar, and many researchers and public interest advocates. Whoever is advising Sen. Tillis on this issue needs to include the full evidence on drug prices and patents. Especially since the Senator appears to be engaging in good faith around efforts to improve patent quality and stop various abuses of the patent system. But without good information, I fear bad policy may result.

Matthew Lane is a Senior Director at InSight Public Affairs where he specializes in competition and IP issues.

Filed Under: biosimilar, drug patents, drug prices, economics, fda, generics, humira, monopolies, patent thicket, patents, thom tillis, uspto
Companies: abbvie

Famed Law Professor Richard Epstein's Ever Changing Claims About How Many People Will Die From COVID-19

Say That Again

from the armchair-epidemiology dept

Richard Epstein is a very famous law professor, known for his “libertarian” take on the world. Lots of people who know him insist he’s a brilliant legal mind… who seems to think that his brilliance in that area allows him to be brilliant in fields where he has no experience at all. For years, I’ve followed him being just ridiculously wrong when it comes to internet law and (even more so) on any issue related to copyright or patents, which he views as identical to tangible property. He has long refused to even consider that he might be wrong about that. Still, it was pretty shocking last month to see him jump into the deep end of the debate over the seriousness of COVID-19 by writing a piece claiming that he expected US deaths to top out at 500 tops. This was on March 16th, at which time California and Washington were already shutting down and it was blatantly clear many more people would die. Still what he initially wrote was:

[I]t seems more probable than not that the total number of cases world-wide will peak out at well under 1 million, with the total number of deaths at under 50,000 (up about eightfold). In the United States, if the total death toll increases at about the same rate, the current 67 deaths should translate into about 500 deaths at the end.

Remember, Epstein is a law professor, not an epidemiologist, not a statistician, and not an economist (though he often acts as if he is one). That pronouncement, which bolstered the claims coming from the White House and Trump’s supporters at the time that COVID-19 was still no big deal, quickly made its way to the White House, because clueless powerful people love an echo chamber.

As the death toll quickly passed 500, Epstein hastily revised his article to say he actually meant 5,000 US deaths, and that he regretted what he called “a simple stupid error” in his calculations. Epstein was roundly mocked for all of this, and continues to appear painfully unwilling to recognize his own ignorance in this issue, as was evidenced in this truly incredible interview Epstein gave with the New Yorker’s Isaac Chotiner in which he tries to defend his indefensible argument, and comes off like a total condescending asshole who assumes that because he’s a law professor he somehow knows more about epidemiology than a journalist who he insists must know nothing at all.

I know, but these are scientific issues here.

You know nothing about the subject but are so confident that you?re going to say that I?m a crackpot.

No. Richard?

That?s what you?re saying, isn?t it? That?s what you?re saying?

I?m not saying anything of the sort.

Admit to it. You?re saying I?m a crackpot.

I?m not saying anything of the?

Well, what am I then? I?m an amateur? You?re the great scholar on this?

No, no. I?m not a great scholar on this.

Tell me what you think about the quality of the work!

O.K. I?m going to tell you. I think the fact that I am not a great scholar on this and I?m able to find these flaws or these holes in what you wrote is a sign that maybe you should?ve thought harder before writing it.

What it shows is that you are a complete intellectual amateur. Period.

O.K. Can I ask you one more question?

You just don?t know anything about anything. You?re a journalist. Would you like to compare your r?sum? to mine?

No, actually, I would not.

Then good. Then maybe what you want to do is to say, ?Gee, I?m not quite sure that this is right. I?m going to check with somebody else.?

Of course, Chotiner did check with many other people and added multiple fact checks to his interview, quoting actual experts who respond with things like saying that what Epstein is saying is “completely inaccurate.”

Incredibly, earlier this week, Epstein tried again, with a new piece complaining that governors are overreacting with their lockdown decrees. Incredibly, he uses the evidence that these lockdowns are working and bending the curve to decrease the number of deaths as evidence that we should end the lockdowns, and that magically businesses will be able to handle the rest.

The question is why Cuomo thinks that doubling down on government restrictions is justified by the science and data. His own daily report of April 17 indicates that the rate of new infections is down and that the number of hospital discharges in the state now far exceeds the number of new admissions. Further data prepared by the New York Times reveals that the rate of infection is now slowing down rapidly throughout the United States. It also shows that new cases peaked at about 35,000 on April 3, with an erratic decline since that time.

That’s because of the lockdown. If we lift the lockdown too soon, those infection and death rates go back up.

Still, when the article came out, I went to go look for the original Epstein piece claiming only 500 deaths, and was surprised to find that the link now contains this:

[Correction & Addendum as of March 24, 2020:

My original erroneous estimate of 5,000 dead in the US is a number ten times smaller than I intended to state, and it too could prove somewhat optimistic. But any possible error rate in this revised projection should be kept in perspective. The current U.S. death toll stands at 592 as of noon on March 24, 2020, out of about 47,000 cases.

So… uh… what? Everything about that appears to be gas lighting. First off, the original estimate was 500 deaths, not 5,000. And he claims that was due to a “simple stupid error.” But now that we’re rapidly approaching 50,000 deaths, he’s claiming that it was the 5,000 that was the “original erroneous estimates” and that he “intended to state” 50,000? Really?

I was confused and really wondered what happened to that original 500 estimate, and thankfully John Macke figured it out making use of the Internet Archive’s Wayback Machine, and it appears that someone did some tricky shit to try to hide the original estimate — whether it was Epstein directly or someone else at the Hoover Institution:

As Macke dug into how the original article changed over time, he found that in early April, after the original hubbub died down, Epstein (or someone else at the Hoover Institution) appeared to change the “correction” from one that admitted the original estimate was 500, to the one that claimed it was actually 5,000.

As plenty of others have pointed out, this is “beyond academic fraud”:

Of course, now that those revisions have been caught and started to go viral, with little fanfare (and it appears to have happened while I was writing this post, someone quietly added a new correction to the old corrected correction (got that?):

[APRIL 21, 2020 EDITOR’S NOTE: DUE TO AN EDITING ERROR, THE CORRECTION & ADDENDUM ABOVE IS INACCURATE. IT SHOULD STATE:

That estimate is ten times greater than the 500 number I erroneously put in the initial draft of the essay, and it, too, could prove somewhat optimistic. But any possible error rate in this revised projection should be kept in perspective. The current U.S. death toll stands at 592 as of noon on March 24, 2020, out of about 47,000 cases. So my adjusted figure, however tweaked, remains both far lower, and I believe far more accurate, than the common claim that there could be a million dead in the U.S. from well over 150 million coronavirus cases before the epidemic runs its course.

WE REGRET THE ERROR AND ANY CONFUSION IT HAS CAUSED]

But again, that “editing error” was only introduce weeks later after the “correct” error message was there. What would make them go back and change an error message that was shown for two weeks and make it false? Is it possible that an editor somehow went in and changed around the correction to take it from accurate to false? Perhaps, but it still seems… quite odd.

Of course, the bigger question is why should anyone ever take Epstein’s ideas on all this seriously, given his dreadful track record, and lack of expertise in this particular field?

Filed Under: covid-19, economics, epidemiology, law, rewriting history, richard epstein

Everyone's Got A Pet Project: Patent Maximalist Says We Need Longer Patents To Incentivize Coronavirus Vaccines

Patents

from the oh-shut-the-fuck-up dept

Adam Mossoff is one of the most vocal IP maximalist law professors around. He’s never seemed to have met a form of artificial monopoly that he didn’t want to expand. His latest is that he’s claiming, laughably, that we should be extending patent terms in order to incentivize the creation of coronavirus vaccines. His argument is based on a misleading complaint that has been raised by plenty of pharmaceutical companies: they need to file their patent applications at the point of discovery, but they can’t market a drug until it receives FDA approval, and that can take years, which cuts into the years over which they hold a monopoly and can extract insane monopoly rents.

Mossoff says that now is the time to revisit that and to roll back the law that made it so the clock started so early, and to enable patent extensions to incentivize drug makers to create a coronavirus vaccine.

Congress can easily fix this mistake in innovation policy. It can enact legislation that reverses the changes made in 1993 and increases the patent term extensions. Instead of attacking patents, Congress should pass legislation providing more protections. It is an easy fix that will save countless more lives from cancer, diabetes, and viruses like the coronavirus.

This is utter nonsense on so many different levels. It assumes — incorrectly, though a core to all of Mossoff’s thinking — that the ridiculous monopoly profits are the only thing that incentivize creation. Given that tons of companies are already researching coronavirus cures, knowing full well that the reason to do so is to save millions of lives and that governments will easily pay handsomely for such a vaccine, it’s difficult to say with a straight face that these companies need more monopoly rents to work on these kinds of solutions.

Even more to the point, there’s an obvious fundamental flaw in Mossoff’s reasoning. A patent only goes to those who get there first. Every one else trying to create the same drug still has the same capital expenditure upfront to try to develop the drugs or technologies — but can get blocked by whoever gets to the PTO first. If we take Mossoff’s simplistic model that only if a company is guaranteed monopoly rents will they invest in the first place, his own model breaks down, because so many players will invest heavily and get nothing in return, because they were a day or week late.

It seems that a much better model is the way most of the economy works: if you build a good product people and companies and governments pay you for the product, and you don’t need the government to step in and say no one can compete with you for two decades (or more, if Mossoff got his way).

Especially at a time when we see patent-related price gauging around COVID-19, all the evidence suggests we should be moving in the other direction — opening up the ability for more companies to innovate and compete in a free market. Indeed, if Mossoff actually wanted real incentives that also compensates drug developers, you’d think he’d be much more supportive of the innovation prize approach, that basically gives a ton of cash over to those who develop breakthrough drugs in a prize format, but then still allow the drugs to be offered to those who need them at a reasonable price. Then you actually have people who can afford the drugs to stay healthy, rather than just acting as a siphon to drain people’s bank accounts to pay off pharma companies who bought most of the research off of smaller labs who did the actual work with government funding in the first place.

Filed Under: adam mossoff, coronavirus, economics, incentives, patent terms, patents, vaccines

The Subtle Economics Of Private World Of Warcraft Servers: Anarchy, Order And Who Gets The Loot

Economics

from the economics-and-gaming dept

“I got a recording. I got a recording of this idiot.” A Scandinavian-accented voice declares over voice chat. “Can someone tell the people from [the other player’s guild] what he just did?”

That was the subject of a Reddit post giving a “daily reminder that Sharphealz is a ninja.” Instead of shuriken-wielding shadow warriors, “ninja” is here slang for a thief of valuable in-game items. The above video was taken from a private World of Warcaft (WoW) server, emulating the 2006 iteration of the popular online game, soon to be officially re-released by Blizzard as World of Warcraft Classic.

Yet, the bootleg version of the massively-multiplayer icon is a special beast beyond just game mechanics. Some of its core social dynamics serve as excellent – if accidental – microcosms of real-world phenomena.

These servers are third-party clones of proprietary software, and hence are of questionable legality. Taking advantage of spotty IP protections, most are hosted overseas – in Russia, for example. They are typically organized into non-profit “projects,” or amateur initiatives to create versions of the 2006 iteration of the game. Each private server project hosts at least a couple of “realms” or instances of the game world in which players can interact.

Most large private servers carry thousands of people, and tend to be radically weighted towards a single primary realm in population. Players from around the world fight, banter, organize and develop a virtual social system in their free time. It is a fairly close-knit group, but only lightly moderated by volunteer Game Masters. Players themselves must play a role in this community moderation if they wish to coexist productively.

The mixture of old-school WoW’s original quirks, private servers’ laissez-faire ethos, and their small but dense populations render them petri dishes for “natural” social experiments. At issue is how near-total strangers are able to make their own rules and institutions, and cooperate effectively and on the fly for common rewards.

Servers may have their share of delinquents – okay, a large share – but the anarchy is more orderly than you’d anticipate, given the difficulty of developer-side rule enforcement. In fact, the conditions that allow for unplanned cooperation among strangers are extremely important topics among the big debates in social sciences and public policy. Political scientist Mancur Olson identified problems in the real world in which individuals’ conflicting interests impede common goals as “collective action problems.” Concern with such dilemmas dates back to philosophers David Hume and Thomas Hobbes.

One of the largest and most consequential collective action problems is the “Player vs. Environment” (PvE) raiding scene in the game. Old-school WoW has several large “raid” dungeons pitting 20 and 40-player teams against powerful computer-controlled monsters. These encounters are typically the most difficult end-game challenges, but also the most rewarding. Not only is the loot found within among the best around, but “raid gear” confers a sort of prestige, and obviously, we all want to saunter around Ironforge with shinier stuff than the next guy.

So there’s huge incentive to raid, but you might have to spend often upwards of six hours in the crucible of high-end PvE with 39 other people, many of whom desperately want the same valuable stuff you do. They are also probably total strangers.

That’s basically what Blizzard left us with in 2004, and it sounds like a powderkeg of potential disputes over who deserves loot, or whom is at fault for getting everyone killed. Yet, players have overcome these challenges, using a variety of creative avenues.

With nobody officially in charge at the outset, leaders come out of the woodwork to direct these complex operations. Some raid leaders do it for the joy of accomplishing something difficult or for the bragging rights provided by a “server first” boss kill, while some experienced players may behave entrepreneurially by putting together raids for in-game money. In a scenario of mutual efforts but uncertain, scarce rewards, one of the first things that must emerge is a rule system. This is a de facto necessity – even “first-come-first-serve” is a rule system. Since the infancy of this gaming genre, enterprising players have invented various systems of their own, with no one system being “official.” It’s a marketplace of institutions in which players converge on the rulesets that that benefit them most.

Eventually, a few dominant systems rose from the massively-multiplayer gaming community. The iconic DKP system is a points-currency scheme, where players receive “Dragon Kill Points” for participating in raids, which they can save or spend in player-organized auctions for loot, whereas “gold-bid” systems use in-game currency (the proceeds of which often provide income for those “entrepreneurial” leaders).

Most raids, especially informal pick-up-groups, tend towards “Need Before Greed” (NBG) systems. Players can roll the virtual dice against each other for items their characters genuinely need for advancement, as opposed to items that are more of a luxury. Since what constitutes real need is frequently disputable, secondary rule systems dictating priority in cases of competing claims on a given item may crop up in NBG raids as well.

Sometimes new, influential raiders can introduce rule schemes. On one server, the status quo consisted mostly of Need Before Greed and auctions, but after a merge with another server, a large influx of experienced raiders became the new kids on the block. Having many successful dungeon runs under their belt, they imported the “Wishlist” system, in which each raider may reserve one item for themselves. If multiple players reserve the same item, they then roll the dice on it. The efficiency of this idea soon became obvious, and within a few weeks Wishlist (and the players that imported it) took over the raiding scene.

Joining a raid group is a significant investment, in time, effort and in-game resources. Players are putting a lot on the line, and expected rewards can be highly uncertain. Given this investment risk, players have sought out means to ensure not only the use of fair loot rules, but institutional mechanisms to make sure they can complete the dungeons regularly and smoothly. Hardcore raiders’ best tool for this is the game’s Guild system, offering built-in organizational features such as a common chat channel and active roster of members. A competent raiding guild offers members a chance to clear dungeons in an organized manner with skilled leadership, and to win items in a loot system that is reliable and fair.

Like “Sharphealz,” the ninja looter in the video, there is a strong incentive to abscond with others’ items, or to just coast on everyone else’s efforts in the heat of battle. To hedge against this behavior, guilds offer ingredients to reduce the likelihood of cheating: longevity and reliability, accountability, as well as simple bonds of friendship. Guilds frequently expel members who violate rules or behave boorishly, and a player without a guild is one at a big disadvantage. A player can get to know and care for their guildmates’ welfare, and everyday social interaction builds rapport between members. It’s tough enough to be kicked from a guild, tougher still to lose your in-game friends.

The accountability mechanisms within guilds rely heavily on reputation, much like within the broader game community. Since the vast majority of players are stuck on the same realm, and the community is fairly small, informal social sanctions provide punishment for rulebreaking. Sharphealz’ widely shared video provides documentation of his crimes, and it cemented the player’s reputation as a troublemaker for quite some time. It is not uncommon to hear public shaming in the game’s chatbox, marking various players as cheaters or slackers. A person with a bad reputation doesn’t get invited to groups – a big handicap in an inherently collaborative environment. Indeed, many hotly contest public accusations for this reason.

There are, of course, “troll” players who thrive on infamy. The original ninja looting video was recorded by the thief himself. Indeed, a side effect of this melting pot of a server is that although players may cooperate to achieve certain gameplay goals, large strains of animosity and angry flare-ups run through the community. Many raiding guilds keep “blacklists” of prohibited players for this reason, while others collapse from their own internal strife. Some particularly frustrating raid encounters are wryly dubbed “guild-breakers” for their propensity to spark conflict.

What is clear from the common problem of raid organization is that players can figure it out naturally, overcoming complex challenges of focus and coordination as a hobby. They jerry-rig institutions to provide accountability and avoid disputes, as well as to bring people together in the first place.

The power of community networks, anticipation of future opportunities, and high-value payoffs influences our behavior on Earth in myriad ways, and there is no reason why it would be otherwise on Azeroth.

Anne Hobson is a program manager at the Mercatus Center at George Mason University. Leo Plumer is an MA Fellow at the Mercatus Center at George Mason University.

Filed Under: anarchy, community, economics, order, private servers, world of warcraft

Study Shows Piracy Can Sometimes Be Beneficial To Markets & Consumers Alike

Studies

from the another-form-of-competition dept

If you’ve been around Techdirt for more than a few weeks, you probably know that one of our core arguments is that piracy should be seen as a competitor, not as some kind of mad demon whose antics can only be thwarted by equally demonic countermeasures. As such the solution for piracy isn’t engaging in idiotic, harmful behavior (like copyright troll lawsuits or kicking people off the internet), it’s to compete with piracy by offering better, cheaper products that make piracy less appealing. And no, just because you think “competing with free” isn’t fair, doesn’t mean this entire paragraph isn’t true.

Numerous studies (including our own) have shown that you beat piracy through innovation, not scorched earth tactics. But a new collaborative study out of the University of Indiana highlights how piracy, at least in moderation, can have an actively positive impact on both the health of a market and consumers alike. More specifically, the study highlights how piracy can act as a form of invisible competition that prevents both a manufacturer and a retailer from jacking up prices at an unreasonable rate:

“When information goods are sold to consumers via a retailer, in certain situations, a moderate level of piracy seems to have a surprisingly positive impact on the profits of the manufacturer and the retailer while, at the same time, enhancing consumer welfare,” wrote Antino Kim, assistant professor of operations and decision technologies at Kelley, and his co-authors.

“Such a win-win-win situation is not only good for the supply chain but is also beneficial for the overall economy.”

The researchers are quick to trot out HBO’s hit show Game of Thrones, which has frequently been paraded about as one of the most pirated shows of all time, as a good example. In the researchers’ examples, they note that piracy prevents both the manufacturer (HBO) and the retailer (say, Comcast) from engaging in using their positions of power to jack up rates (double marginalization), since being too aggressive on pricing would simply drive users to cut the cord and engage in piracy, reducing overall revenues.

That said, the full paywalled paper makes it clear they’re not advocating for these companies to suddenly start embracing piracy, just to acknowledge that the impact of piracy on markets is not wholly negative, and therefore heavy-handed anti-piracy efforts may prove counterproductive:

“Our results do not imply that the legal channel should, all of a sudden, start actively encouraging piracy,” researchers said. “The implication is simply that, situated in a real-world context, our manufacturer and retailer should recognize that a certain level of piracy or its threat might actually be beneficial and should, therefore, exercise some moderation in their anti-piracy efforts.?

While HBO has had its missteps on this front (you might recall their efforts to “poison” certain BitTorrent files in a bid to make piracy confusing and untenable), executives have generally understood that piracy isn’t exclusively a negative phenomenon. Time Warner execs, for example, have noted how the piracy of Game of Thrones (and the countless articles breathlessly heralding this reality) is almost “better than an Emmy” when it comes to marketing their product. Much in the same way they see password sharing as a new form of marketing, not as some kind of diabolical evil in need of crushing.

That said, the researchers did note that with AT&T now owning HBO in the wake of its $86 billion acquisition of Time Warner, AT&T’s effectively now the manufacturer and the retailer in this equation. As such, it may be incentivized to crack down harder on piracy than HBO did previously (in fact it already is). Still, the researchers were quick to point out that there’s still other perks to piracy AT&T shouldn’t ignore:

?However, there are other positive effects of piracy such as positive network effect (i.e., the more people use the product, the more valuable it becomes) and learning (i.e., pirate users may learn about the product and buy the legal version later on),? Kim added. ?These are older insights from other papers. What we find here is in addition to those.”

Given this is AT&T we’re talking about, whether it gets the message is far from certain.

Filed Under: benefits, competition, copyright, economics, monopoly, piracy, studies

All The Mergers In The World Apparently Can't Save AT&T From Cord Cutting

Failures

from the old-school dept

Over the last five years AT&T and Verizon have been desperately trying to pivot from stodgy, protectionist old telcos — to sexy new Millennial media juggernauts. And while this pivot effort has been notably expensive, the net result has been somewhat underwhelming. Verizon, for example, spent billions to gobble up AOL and Yahoo, but its lack of savvy in the space has so far culminated in a privacy scandal, a major hacking scandal, a quickly shuttered website where reporters couldn’t write about controversial subjects, and a fairly shitty Millennial streaming service that even Verizon’s own media partners have called a “dud.”

Verizon’s new CEO Hans Vestberg appears to have gotten the message (that stodgy old telcos kind of suck at disruption and innovation) and has been shifting Verizon back toward its core competency: running networks.

AT&T’s efforts have been notably more expensive than Verizon’s, but just as underwhelming. The company first decided to shell out $70 billion for a satellite TV provider (DirecTV) on the eve of the cord cutting revolution. And, after a lengthy DOJ lawsuit, shelled out another $89 billion for Time Warner in a quest to gain broader media and advertising relevance. That was paired with the launch of a new streaming service, DirecTV Now, which the company hoped would help it beat back the tide of cord cutting.

Despite hundreds of billions in acquisition costs and debt, it’s not working. The company saw a another net loss of 297,000 TV customers last quarter as the company’s traditional TV services (DirecTV and AT&T’s IPTV service) lost 346,000 subscribers, and the company’s shiny new DirecTV Now service only added 49,000 subscribers during the third quarter. To be fair, AT&T actually is more forward thinking than a lot of other cable operators in that it’s embracing cheaper streaming alternatives fully. But the company still couldn’t help itself when it came to quickly pushing price hikes, the primary reason for last quarter’s dip:

“In July, AT&T raised DirecTV Now prices by $5 per month across the board in hopes of making the service profitable. More importantly, AT&T also stopped offering incredible device deals to new subscribers. Until this summer, new customers could get a free Roku Streaming Stick (regularly $50) with a month of $35 prepaid service, or a free Apple TV 4K (regularly $180) with three months of prepaid service at $105. There was nothing stopping customers from signing up, immediately canceling, and walking away with a new streaming device at far below retail prices.”

On the plus side, AT&T’s strategy of getting out ahead of the streaming revolution isn’t entirely unsound. You’d rather be ahead of a trend and take some early hits, than be utterly blindsided while sticking to old habits (oh hi ESPN, didn’t see you standing there). But AT&T being, well, AT&T, you just know it won’t be able to help itself when it comes to nickel-and-diming its users, something that’s going to be made immeasurably easier if it’s successful at gutting both federal and state consumer protection authority.

Filed Under: cord cutting, economics, mergers
Companies: at&t, verizon

Nobel Econ Award Goes To Two Economists Who Have Greatly Shaped My Thinking On Economics Of Innovation

Economics

from the good-to-see dept

Let’s get this out of the way upfront: if you’re one of those people who pedantically feels the need to sneeringly point out that the economics Nobel is “not a real Nobel Prize,” shut up: no one cares.

Now, let’s get on to the point: for basically the last decade, I’ve been specifically waiting for Paul Romer to finally win this prize and each year I’ve been disappointed when someone else did. Finally, this year he won it and did so with William Nordhous, which is even better, as I’ll explain shortly. Both Romer and Nordhous have greatly influenced my thinking on many of the things I write about here at Techdirt, specifically when it comes to the economics of innovation, and, more specifically, the economics of information and so-called “non-rivalrous” goods (I prefer to call them “infinite goods”). I’ve reference Romer multiple times in the past, specifically in discussing how innovation creates economic growth in powerful ways. One of my favorite Romer quotes is as follows:

Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material.

Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. The difficulty is the same one we have with compounding. Possibilities do not add up. They multiply.

I have also regularly recommended an absolutely brilliant book by David Warsh, called Knowledge and the Wealth of Nations: A Story of Economic Discovery and I’ll do so again here. I’ve long recommended it to people who are interested in the economics of innovation, because the first half of it is a very entertaining and wonderful history of the economics of information, and the second half is the story of Romer coming up with his own theory of endogenous growth. The book, at times, comes off a bit “hero worshipy” of Romer, but it’s totally worth it, as it puts into place an economic model that helps explain so much of why innovation remains so important. My one disappointment with it is that for nearly the entire book I was nodding in agreement with Romer, except for some stuff on intellectual property, where I felt that Romer gets his own model backwards.

Either way it’s great — and doubly so that Nordhaus is similarly rewarded. Warsh’s book about Romer also talks about Nordhaus, including a section on Nordhaus’ incredible paper on the cost of light throughout human history, which is a stunningly wonderful work of economics that shows just how innovation leads to economic growth. In fact, thanks to Warsh’s book about Romer, and its section on Nordhaus — as well as a few other mentions — that made me go out and pick up a copy of The Economics of New Goods, which is a collection by the National Bureau of Economic Research (NBER) of some of the absolute best papers on economics and innovation. The two books have sat for years next to each other on my bookshelf, and I have revisited Nordhaus’ paper (which is the first in that collection) numerous times in trying to better think through ways to explain the economics of innovation.

So I’m delighted to see Nordhaus and Romer both honored at the same time. And it is doubly timely, seeing as it’s happening just at the moment when we’re facing so much backlash against technology and innovation, and many people trying to argue that the harms from technology somehow outweigh the gains. Reading and understanding the work of both Romer and Nordhaus hopefully will help people get past that belief, and back to recognizing how much overall good comes from innovation. Congrats to both.

Filed Under: economics, economics nobel, growth theory, infinite goods, innovation, nobel prize, paul romer, william nordhaus

'Free' Game Making $300 Million Per Month? But I Thought You Can't Make Money On Free…

Free

from the old-school dept

For most of the first decade of the millennium, we would post over and over again about content business models and how “free” content makes a ton of sense as a component of a business model. And yet, people in the legacy entertainment industry would laugh and laugh, and talk about how “you can’t make money on free.” You even had folks who claimed that if you gave away anything for free it proved you had “no fucking clue” about how to run a business. My favorite may have been Doug Morris, who was boss of Universal Music and then Sony Music, insisting that there was no way anyone in the recording business could make money on “free.”

These days, that’s all looking pretty silly, but just to drive home the point: the insanely popular free video game Fortnite made $318 million last month. Not last year. Last month. And it’s free. Of course, as we’ve always said, the whole point of free is not that free is the business model, but that free is a part of the business model. And that’s exactly how Fortnight works.

Even better, all of that revenue comes from nonessential in-app purchases. You don’t ever need to pay any money to play Fortnite. And, if we went by what the entertainment industry “experts” from years past would tell you, if that’s the case no one will ever pay. Except, obviously, they are, to the tune of over $300 million per month. Why? Because, they’re still buying an actual scarcity: mainly different skins or dances/moves that let them show off. In other words: fashion. Something to make themselves distinct — to stand out. That is a scarcity. Even in a digital world.

So, Fortnite is yet another example of how someone is taking a digital property, and leveraging free to attract a massive audience, and then figuring out ways to charge for a scarcity that people actually want to buy. And people are paying like crazy. So, can we put to rest the idea that you can’t make money off of free yet?

Filed Under: business models, differentiation, economics, fortnite, free, free to play, scarcity