The permit is one of the oldest business models. First, the government issues some prohibition. Then, for a fee, the prohibition is partially lifted. Usually, the government collects the fee. But in the days of public-private partnership in security matters, some private entity does. CLEAR is one of those business models. After 9/11, the government encumbered the freedom of movement for air travelers, inconveniencing millions in the name of heightened security at airports. Now, a CLEAR pass for $128/year, lets you cut in front of the security line. CLEAR thus monetizes the loss of civil liberties. The beauty of the business model is that it is entirely independent of whether it contributes to security or not. Its sine qua non is the existence of a government restraint on certain freedoms, not whether the restraint serves any useful purpose. CLEAR is admittedly a somewhat extreme example, because it makes no bones about its implicit assumption that everyone who doesn’t have a pass is a potential security risk. It is a harbinger of a world in which we live by permission, not by right, a world in which the default is control, not freedom, a world in which prosecutorial discretion, not the rule of law, protects liberties.
There are other business models that in more subtle ways require legislative restraints on freedoms. For example, prior to the enactment of the DMCA, reverse engineering, the “freedom to tinker,” was part of the set of civil liberties that everyone enjoyed and took for granted. In such a world, every technology is open in the long run. Users are free to break open black boxes and put them to uses that their designers did not intend and could not foresee. Discovering the unintended uses and thus the secret lives of artifacts is a creative act, and the history of art has long recognized it as such. Where the freedom to tinker is unrestrained, businesses spring up to support user demand for unlocking their technological environment. The issue is that in such a high-civil liberties environment, certain business models won’t work, or at least, they won’t work particularly well.
Suppose a firm is selling a piece of computer hardware below cost to increase penetration and adoption, in the hope of making money by selling the rights to develop software for the platform to third party developers. This is a now common multi-sided business model, as described in detail by Schmalensee and Evans. The model is based on the premise that developers can’t access the platform without some form of an access payment to the maker of the box. That, of course, is perfectly fine. If a developer wants to use my copyrighted API, then they have to pay me for the privilege. However, another condition with much more significant impliactions is that users won’t hack their equipment, thus opening it up (en masse) for third party development, e.g., by installing a free OS on the device, for which developers could then code applications without access payments to the maker of the box. That second condition requires government intervention in the form of restraints on the rights of the users to unbox technology. It is the need for that particular enabling restraint, which brings us to the civil liberties v. consumer welfare trade-off. Note that the trade-off is, as always, marginal. That is, are we willing to give up some measure of liberties in order to make the environment more hospitable for certain welfare enhancing business models? Choosing between totals is easy, choosing between marginals is hard. Note, moreover, that I am perfectly willing to concede (at least arguendo) that a multi-sided business model as described above may increase consumer welfare by putting more hardware into the hands of people who could not otherwise afford it.
In the end, we are left with the realization that certain business models, crude ones such as CLEAR and more sophisticated ones such as some multi-sided platforms, are based on government restraints on civil liberties. Any complete economic or policy analysis of a practice should take its impact on civil liberties into account. Some trade-offs in favor of consumer welfare may well be worth making. Others are most certainly not. This is a discussion that we should be having — and it is one to which lawyers can make a genuine contribution.
UPDATE: Here’s a related post on TLF.