Russell's Blog

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They're called principles

Posted by Russell on February 16, 2006 at 11 p.m.
I have some sympathy for Google, Yahoo, Microsoft and Cisco. I really do. Given how little America seems to appreciate human rights these days, it's difficult to see how the folks running these companies could have acquired an aversion to the abuse of human rights. In a way, it really is unfair to expect commercial enterprise to understand or protect the civic institutions that permit them to prosper. Firms are established for the singular purpose of making money; it is supposed to be up to the individual citizen to worry about civic duties like protecting human rights.

As anyone who has worked in a tech company knows, control of intellectual property is absolutely key. The critical intellectual property of tech companies like those sitting before the Congressional inquiry today includes not just technical information, but brand and reputation. In order to prosper in this business, corporations must be ruthless about protecting their intellectual property. However, it is surprising how little attention is paid to the ethical consequences of this behavior. The actions required to defend intellectual property include forcing employees to sign non-disclosure agreements that promise stern legal and financial reprisal if breached, terminating employees who speak unfavorably of the company outside of work, and closely monitoring the correspondence of employees. To prevent brand dilution, companies are often forced to sue fan groups out of existence, thus humiliating their most loyal customers. To prevent "piracy," tech companies frequently cripple their products, making life unpleasant for all their customers.

As industries go, software and other technology products are produced on a very peculiar revenue model. When a company is making automobiles, or gasoline, or asparagus, or razor blades, or providing landscaping services, or operating a fleet of jet aircraft, the company can easily operate profitably at a variety of scales. Of course, in most cases there is some advantage to a larger operation -- it costs slightly less per unit to make 10 million cars than 1 million -- but such advantages tend to saturate. The profitability of most companies will cease to improve once their operations reach a certain size. Once this state has been reached, the incremental cost of producing an additional unit is linear with the number of units. This is one of the key assumptions that goes into the theory of a well-behaved market.

For software, this model is turned on its head. Developing a word processing application costs about the same whether the company sells ten, ten thousand, or ten million copies. This is even true for much of the hardware field, since these days a hardware product is typically nothing more than a platform on which to run a specific piece of software (Cisco's routers and switches are a good example of this trend). Thus, staying profitable can be a dangerous game; there is a critical revenue level below which the business simply cannot survive, and to support a sophisticated product, this number is often quite high. In contrast, when revenue falls, a landscaping firm can always shrink to fit the demand by laying off a few people, and an oil company can always scale down operations. For this reason, technology companies fear the idea of their products becoming a commodities above anything else. They fear commoditization even more than the Sherman Act, the hatred of their customers, and the stagnation of their particular niche of the technology industry, the industry as a whole, or even the stagnation of the whole economy.

Some people criticize them for placing profits over human rights, but I think this quite misses the point. Cisco, Google, Microsoft and Yahoo! could each continue to do business in China without bowing to the demands of its oppressive government. It might require a bit of extra cleverness, but none of these firms are short on this particular talent. When one considers how the technology sector behaves in this country, we should hardly be surprised that they are so eager to comply with the demands of oppressive governments. Culturally speaking, they find more in common with the civic philosophy of the People's Republic than with that of the United States.

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