Tim Lee

The Cost of the Closed Xbox

Related to last month’s series on platform monopolies, here’s an interesting article on Microsoft’s baby steps toward opening up the Xbox:

With the hobbyist release, the software giant is hoping to lay the groundwork for what one day will be a thriving network of enthusiasts developing for one another, something akin to a YouTube for games. The company, however, is pretty far from that goal.

In the first incarnation, games developed using the free tools will be available only to like-minded hobbyists, not the Xbox community as a whole. Those who want to develop games will have to pay a $99 fee to be part of a “Creators’ Club,” a name that is likely to change. Games developed using XNA Game Studio Express will be playable only by others who are part of the club.

Next spring, Microsoft hopes to have a broader set of tools that will allow for games to be created that can then be sold online through Microsoft’s Xbox Live Arcade. Microsoft will still control which games get published, and it’ll get a cut of the revenue.

Down the road, probably three to five years from now, Microsoft hopes to have an open approach, where anyone can publish games, and community response helps separate the hits from the flops.

Just so we’re clear, the obstacles to an open Xbox are legal and financial, not technical. If Microsoft’s goal were simply to make Xbox development tools more widely available, they could do that in a matter of months, just as the PC platform is open to development by anybody. What Microsoft wants to do is open up Xbox development to a wider audience of gamers without relinquishing their monopoly on access to the platform for developers. That way they can be sure to get a cut on each game released.

Now, you can make a plausible argument that such a strategy is necessary for Microsoft to recoup the fixed costs of creating the Xbox. But what can’t be denied is that Microsoft’s strategy imposes a real dead-weight cost on the overal value of the platform. There will be games that don’t get made because the prospect of developing new games for a few thousand other hobbyists won’t be as attractive as developing a game for millions of ordinary Xbox users. And there will be games that are made, but which ordinary users will be prevented from playing by Microsoft’s platform restrictions.

Whatever advantages a closed platform strategy might have, they need to be weighed against these very real disadvantages. Microsoft’s restrictions on entry into the Xbox market is shrinking the economic pie relative to how large it would be if anyone was free to create games and publish them for anyone else to play. Obviously, if that’s the cost of getting the Xbox in the first place, that’s probably a price worth paying. But if Microsoft would have been able to turn a profit on the Xbox without those restrictions, which I think is pretty likely, then enacting laws like the DMCA that make closed platforms easier to maintain is bad public policy.

August 14, 2006 | Comments |

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    ***Microsoft's strategy imposes a real dead-weight cost on the overall value of the platform. There will be games that don't get made...and there will be games that are made, but which ordinary users will be prevented from playing... Microsoft's restrictions on entry ...is shrinking the economic pie relative to how large it would be if anyone was free to create games and publish them for anyone else to play.***

    Wow, sounds like Microsoft is really distorting the market for games. With all the inefficiency and lost innovation, this sounds like the perfect opportunity for another company to create an open gaming platform and force Microsoft to follow Tim's "open" strategy. I'd consider why this hasn't happened before generalizing the hypothesis as far as having implications on the DMCA.
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    I discuss this point at length in my platform monopoly series, which I linked to above. Open platforms create more wealth over all, but the creators of proprietary platforms are able to capture less of that wealth for themselves. See my post here:

    http://www.techliberation.com/archives/040215.php
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    ***interoperability increases societal wealth but it reduces the profits of the firm that previously had exclusive control over its platform.***

    OK. Your point is that innovation and consumer wellfare will increase in the gaming market if companies act in ways they don't have direct incentive for, but that the proposed actions would be better on the whole for the industry and consumers; further, rather than propose some kind of govt regulation forcing the opening of protocols or compulsory licensing you posit that simply peeling away at the DMCA would effect your Newtonian gaming market. Is this right?

    The gaming industry seems to be doing fine; consumers are happy, companies are making money and there are a number of solid competitors in the market. Even if its not optimal, why not let the market run its course, why disturb it?
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    Tim, I think the real issue here is that this not about interoperability per se. I don't see a free market justification for allowing someone to use Microsoft's libraries to develop content for the XBox. I can see arguments for allowing people to port over OpenGL and use alternatives on top of the OS, but as the copyright holder, they should enjoy protection over their libraries.


    However, the hardware and firmware are totally different stories. I see no legitimate capitalist arguments for telling people that they cannot build their own OS and libraries that runs on the XBox hardware. They all smack of the typical utilitarian bull$hit that says "in the name of the greater good we have to make the hard choice to take away this group's rights."

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    OK. Your point is that innovation and consumer wellfare will increase in the gaming market if companies act in ways they don't have direct incentive for, but that the proposed actions would be better on the whole for the industry and consumers;


    Not exactly; what he is saying that there exist real profits to be made from an open platform, but that the prospects of monopoly profits, enabled by the DCMA, cause companies to seek monopolies. Therefore, the DMCA has distorted the market, inducing monopoly seeking-behavior in companies that might otherwise adopt different strategies. The DMCA has so distorted the market that legitimate business plans have been marginalized, in this analysis. I find this logic compelling, and I have a general faith in the inherent efficiency of certain market mechanisms, to the extent that those who propose market distortions have a burden of proof.


    So, Noel, show me why we need the DMCA. please....?


    further, rather than propose some kind of govt regulation forcing the opening of protocols or compulsory licensing you posit that simply peeling away at the DMCA would effect your Newtonian gaming market. Is this right?


    The gaming industry seems to be doing fine; consumers are happy, companies are making money and there are a number of solid competitors in the market. Even if its not optimal, why not let the market run its course, why disturb it?


    Well, the market is disturbed. I am pretty disturbed that my First Amendment Rights have been abridged to enable someone's wet dream of a business plan. I am disturbed that Ed Felten was threatened with jail for presenting his research. I am disturbed that Dmitry Skylarov's experience with America was one of incarceration, not one of empowerment. I am disturbed that there are those who think that my compiling DeCSS libraries on my own computer is a crime. I am disturbed because DVD Jon was prosecuted. I am disturbed that a technology that has substantial non-infringing uses, such as Bit torrent is under legal attack.


    I am pretty disturbed that my legislators think that taking away freedom is OK.

    If you take a look at Electronic Frontier Foundation and read some of the cases there, you might end up being disturbed, too.


    But, what I am most disturbed about is that someone could say why not let the market run its course, why disturb it?

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    http://www.joystiq.com/2006/08/14/microsoft-pla...

    The $99 subscription grants you access to the (tentatively titled) "creator's club," which will also offer downloadable sample games to help would be game developers get started. Unfortunately, these sample games will not be available outside of the subscription service to entice curious coders to participate, but they are a launching point for the most exciting, innovative, and (understandably) long-term goal of this project. A community-powered Xbox Live Arcade gaming space. Scott Henson, Director of the Game Development Group at Microsoft, told us:

    "In the future -- we don't have a specific time frame -- we envision investing in the infrastructure to create a friction-free distribution environment very similar to what you see with YouTube. You've got these really cheap accessible tools, now wouldn't it be really cool if you had a way to share this stuff with people online, potentially sell it in time to people online, and what if we, Microsoft, created the platform and the distribution mechanism as a part of the Xbox Live service so you could do that. So our vision and our ambition is to actually create a community-powered arcade."


    Satisfied?
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    Yeah Enigma, you are looking out for how Microsoft can pull better profit by openning the Xbox platform. Rigghtt, suureee. Yeahhhh.

    Enigma: what he is saying that there exist real profits to be made from an open platform, but that the prospects of monopoly profits, enabled by the DCMA, cause companies to seek monopolies. Therefore, the DMCA has distorted the market, inducing monopoly seeking-behavior in companies that might otherwise adopt different strategies.

    Richard Poster: ...competition to obtain a monopoly is an important form of competition. The more protection from competition the firm that succeeds in obtaining a monopoly will enjoy, the more competition there will be to become that monopolist; and provided that the only feasible or permitted means of obtaining the monopoly are socially productive, this competition may be wholly desirable. A firm that will have the protection both of intellectual property law and of economies of scale in consumption if it is the first to come up with an essential component of a new-economy product or service will have a lucrative monopoly, and this prospect should accelerate the rate of innovation...Antitrust Law Journal 2001 Symposium: Antitrust at the Millennium (Part II) ANTITRUST IN THE NEW ECONOMY, 68 Antitrust L.J. 925. Richard A. Posner.
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    Noel, As I argued in my series on platform monopolies, the "only feasible or permitted means of obtaining the monopoly are socially productive" caveat is not satisfied by by monopolies in technological platforms. Many of the methods used to obtain, maintain, and monetize monopolies are socially harmful.
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    Please explain why seeking monopolies for platforms is inherently socially harmful, specifically the methods to obtain and sustain monopolies.

    And how do you define monopoly? I didn't see that in your series. Do you mean economic monopoly, close vertical integration of a platform and peripherals,etc?

    As long as we're talking about gaming platforms would you say Sony, Nintendo and Sega are monopolies?
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    Funny you should argue that monopolies are good here, Noel. I seem to recall Windows being a piece of trash prior to Linux and OSX becoming serious competition. Windows 2000 was a mediocre desktop. Do you really believe that Windows XP would have been what it was without the threat of MacOS X and desktop Linux? No one who has actually done any programming would even seriously argue that Java was better before .NET than it is now that the Java platform is seriously threatened.


    I'll take biology over economics. Competition is good for forging strength in the flesh, and work is good for the soul. Monopolies attack both by insulating incumbents.

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    Noel, for the sake of argument, would you care to draw a clear line where you think the platform monopoly should begin an end? Hardware, software and firmware? Or some other combination?
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    Noel, I wrote 10 posts on the subject. I don't think I can explain it any better than I did there. And I think I was pretty clear what I meant by a monopoly. As just one example, Apple computer has a legally enforced monopoly on devices that can play music from the iTunes Music Store.
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    MikeT,

    I'm not arguing for monopolies per se, I'm arguing, and you seem to agree, that competing to become a monopoly generates innovating activity. Hence, you cite the Mac and Linux forcing MS to improve, and .Net and Java. However, if you have the case that a monopoly already exist (here distiniquish between levels of monopoly), unless its an illegal one I still don't think there's sufficient grounds for forcing it open. That will preserve incentive for competitors to beat the monopolist by creating something new.

    Even if breaking a "legal" monopoly increases social welfare and overall economic returns within an industry, you have to give a party incentive (perhaps in the form of competitive threat) to "open" up.

    There's no a priori argument for where a monopoly should start or end. Xbox wouldn't be a good example for that debate anyhow. Windows would, so would the Mac.

    Tim, you wrote 10 posts on platform monopolies without describing what a monopoly is. What do you mean by that term? I suggest you look at Professor Henry Chesbrough's new book on open innovation. I think you will see why I'm interested in whether "monopoly" signifies a form of business organization, market share, etc. See here (http://weblog.ipcentral.info/archives/2006/08/o...).
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    Noel,

    By "monopoly," I meant a business with the power to exclude competitors from offering certain kinds of services. In particular, my series considered whether incumbent technology companies should have the legal right to prevent competitors from creating interoperable devices. Apple's control of the XBox, the DVD-CCA's control over the DVD format, and Microsoft's control over "plays for sure" are all platform monopolies backed up by the DMCA. I thought that was pretty clear in the context of my discussions with Prof. Picker.
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    (Obviously, I meant Apple's control of the iTunes platform, not the XBox)
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    OK, that makes sense. You mean not so much a monopoly in terms of economic market share , or reflecting firm/product organization. You mean monopoly in terms of "leverage."
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    Noel, without compatibility in some spaces, there is not going to be adoption of the new platform. OSX and Linux wouldn't have gotten so far were it not for packages like SAMBA. Neither Tim nor I support a law mandating openness, what we want is no law that enforces closeness or openness. Call it Occam's Razor Libertarianism or freedom-is-a-vacuum.
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    Yeah Enigma, you are looking out for how Microsoft can pull better profit by opening the Xbox platform. Rigghtt, suureee. Yeahhhh


    Well, now you're clearly putting words into my mouth. I said no such thing. I would never look out for a particular company, but rather the integrity of the marketplace itself. My point is that I agree with Tim's observation that essentially the DMCA is anti-competitive.


    I like competitive markets that operate efficiently, and clear quickly to encourage innovation, maximize benefits to the consumer and create diversity in the marketplace. I am opposed to monopolies, and am especially opposed to legally enforced monopolies. I do think that the government has in most cases, compelling public policy reasons for not allowing monopolies in many (but not all) industries/services.

    I would like very much to see MS compete in a competitive market for something. That competion helps companies, makes them more efficient, instead of lumbering, bloated bureaucracies. But in the past MS has sought out monopolies, and it was, by being in the right place at the right time, handed an OS monopoly by IBM. It translated that monopoly to an office productivity workspace monopoly. Let's see if it can compete.


    Firms may compete very vigorously to obtain a monopoly, and while that competition continues, consumers will in fact benefit. The problem starts when one firm obtains that monopoly, then starts extracting monopoly rents, and stopping the innovation.


    MikeT said:
    I'll take biology over economics. Competition is good for forging strength in the flesh...


    MikeT: Yes you can have both! Economics and Biology!


    The Economy as an Evolving Complex System II
    W. Brian Arthur, Steven N. Durlauf, and David A. Lane, (Eds.), Proceedings Volume XXVII, Santa Fe Institute Studies in the Science of Complexity, Reading, MA: Addison-Wesley, 1997.


    (Link is to review by Review by Gerald Silverberg, Maastricht.)


    There are some very interesting reasons why the biological metaphors are entirely appropriate when thinking about economics, and the more I study cellular automata, the more I realize that it is not in fact just a metaphor, but a deep structural similarity, caused by similar forces created when many small things, obeying simple rules, interact to create a complex system.

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    One item I want very much to add. I had listed above many examples of cases in which the DMCA limited freedoms.


    Once I have done this, there really is no further reason to debate further the economic effects of the DMCA, for the simple reason that my First Amendment rights are at stake here. Once those freedoms are at stake, everything else--business plans, competition, etc. is irrelevant.


    The First Amendment in my mind comes, well--FIRST!


    It is profoundly troubling to me that there are those who would sell our freedoms so cheaply, after these same freedoms have been gained at such a high cost, as to make the moral equation that would countenance the sale of the Bill of Rights for a what -- a business plan?

    In that regard, yes Noel, I don't care if MS goes belly up. That would be a very small price to pay for our freedoms.


    I would suggest you read some Revolutionary War or Civil War History, so that even if you are inclined to sell my freedoms so cheaply, that you might realize that others had thought them to be of some import, and had shown, by their actions, a singular reluctance to allow these freedoms to be tresspassed.


    -----------------------------------------


    PS Sorry the link above won't work, here is the file location, which you'll have to cut and paste into browser window.

    http://www.santafe.edu/~wbarthur/Papers/Pdf_fil...>

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