Editorial on Internet Business

Date: Thu, 5 Nov 1998 10:36:52 -0800 (PST)
From: Phil Agre (pagre@alpha.oac.ucla.edu)
To: "Red Rock Eater News Service" (rre@lists.gseis.ucla.edu)
Subject: [RRE]Digicash bankruptcy
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[With the bankruptcy of Digicash, it is time to assemble the definitive
list of underperforming Internet technologies.  The received wisdom is
that the Internet lies at the vortex of a historically unprecedented era
of intensive and disruptive technological change.  A sober reading of the
evidence, however, supports something much closer to the opposite thesis,
viz, the Internet is a modest and useful new tool that, despite itself,
has given rise to an astonishingly wasteful mania whereby perfectly 
good capital is plowed into one ill-conceived technology after another.
Consider: interactive television, VRML, Active X, network computers,
"push" technology, agents, "social" interfaces, resource visualization,
cryptographic payment mechanisms (aka "electronic commerce"), and others
that I hope you'll remind me about.  Each of these has been the object
of a frenzy that has compelled all manner of smart people, and a whole
lot of dumb ones such as myself, to say things like, "boy oh boy, the
world is going to be completely different a year from now".  This has
been going on continuously since the PR hype that accompanied the run-up
to the (failed) Communications Act of 1994 and then the (passed but then
catastrophically failed) Communications Act of 1996.  It has been fanned
by Wired magazine, whose capitulation to Conde Nast has ended an era that
should never have begun, and now it is marked by the bankruptcy of David
Chaum's Digicash.  All right-thinking people were in favor of Digicash,
whose technologies were as intellectually elegant as they were socially
responsible.  The problem is that the Digicash people were living in the
world of Alice and Bob -- a place where a mathematical proof can change
the world in perfect defiance of the dynamics (if you can call them that)
of large, highly integrated institutions.  Like many Internet-related
startups, Digicash existed only to the precise extent that the press was
writing about it, and now it doesn't exist at all.  So right now would
be an excellent time for us to renounce the false idea that we are living
in a time of unprecedented technical change.  Yes, the Web has been going
through a period of exponential growth.  But no, that growth is not at
all unprecedented, and in fact it is running behind the penetration rates
that earlier technologies such as the radio and gas cooking achieved once
they started being adopted on a mass scale.  (See, for example, Ronald C.
Tobey's scholarly and absorbing "Technology As Freedom: The New Deal and
the Electrical Modernization of the American Home", Univ. of California
Press, 1996.)  Nor has the underlying Internet changed at all quickly.
The Internet protocols that we use today are unchanged in their essentials
from about 1982.  In fact, once the real history of this era is written,
I think that 1982 will shape up as the true annus mirabilis, and 1994 will
simply be seen as the era when the innovations of ten to fifteen years
earlier finally caught public attention and reached the price point that
was needed to achieve the network externalities required for its large-
scale adoption.  If we get out the rake and drag away all of the detritus
of the underperforming technologies that I listed above, and compare our
times on an apples-for-apples basis with other periods of technological
innovation -- including the Depression era, for heaven's sake -- then I
think we will have a much healthier perspective going forward.  As it is,
people the world over have been propagandized into a state of panic, one
that encourages them to abandon all of their experience and common sense
and buy lots of computer equipment so that they will not be scorned by
their children and left behind by the apocalypse that is supposedly going
to arrive any day now.  No such apocalypse is going to occur, and all of
the TV preachers who have been announcing this apocalypse should apologize
and give the people their money back.  Yes, the world is going to change.
Yes, information technology will participate, and is already participating,
in a significant overhaul of the workings of most major social institutions.
But no, those changes are not going to happen overnight.  The sad line-up
of underperforming technologies should be understood not as serious attempts
at innovation but as a kind of ritual, an expensive and counterproductive
substitute for the chants and dances that healthy societies perform when
they are placed under stress.  Maybe once we get some healthy rituals for
contending with technological change ourselves, we will be able to snap out
of our trance, cast off the ridiculous hopes and fears of an artificially
induced millennium, and take up the serious work of discussing, organizing,
and contesting the major choices about our institutions that lie ahead.]

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Date: Wed, 4 Nov 1998 18:02:08 -0500
From: Robert Hettinga (rah@shipwright.com)
To: Digital Bearer Settlement List (dbs@philodox.com), dcsb@ai.mit.edu,
        e$@vmeng.com, cryptography@c2.net, cypherpunks@cyberpass.net
Subject: DigiCash Inc. to File Reorganization, Seeks Partners to Drive eCash Forward



Contrary to my own previous -- and painfully recent -- opinions on the matter,
Digicash, Inc., is, more or less, in play again, or it will be if there is
enough money chasing it. Whatever "enough" means.

Putting on my Gordon Gekko hat, here, I'm interested in finding out a few
things. Yes, I have seen the greater fool theory of the blind signature patent
operate more than a few times, but I am, nonetheless, driven to think about
this, and I might as well be public in my musing, at least for the time being.

For expenses of any new company, it should be pretty clear by now what I would
do with the DigiCash technology portfolio. I would put a real good
intellectual property lawyer on the payroll, keep the cryptographers who would
still consent to stick around, keep or improve whatever software test people
they have left, and do nothing but sell licenses and implementation
certifications, using the the underwiting model at
(http://www.philodox.com/modelpaper.html) as a roadmap.

For this imaginary company's revenue, aside from direct fees for validating a
developer's, and possibly an underwriter's, implementation of the protocol,
the trustee would be the only point of patent royalty collection and payment
from the underwriters and developers to the new patent holder.

As far as the current installed base is concerned, I would probably spin off a
company to support those customers, and give it a non-exclusive license as if
it were any other developer.

This assumes, of course, that DigiCash BV/Inc. didn't issue
exclusive-by-country licenses. While it appears on the surface that they have
done exactly this, I have been met with what seems like incredulity from
various DigiCash folks when I talk about it, so, for the time being, I'll take
them at their word when they tell me it isn't so. Actually, when I think about
it, it may be immaterial, as there are lots of countries on the internet to
park underwriters and trustees in, and they can denominate their bearer cash
instruments in any currency they want.

One way or another, the software side of DigiCash would be gone. We figure out
what the net present value is of the current licenses, and hope that a company
can be formed around that cashflow and spun off into a separate software
development company. If we're lucky, we make money on the spinoff and keep the
patent. If we're not lucky, DigiCash will probably have to get rid of it's
current obligations before *anyone* clueful would step in to pick up the
patents, and just the patents, alone.

Obviously, what has been spent so far building DigiCash, BV or Inc., is
immaterial to any discussion of the future. Just like what happened to Chaum,
et. al., when Negroponte and companies um, executed, the purchase of last
version of DigiCash, we have to completely forget the all the money which
has been spent on Digicash BV, now Digicash Inc., so far, and ignore the
howls of the current investors, as painful as that may be to listen to. :-).
They knew the job was dangerous when they took it, anyway...

Okay, that's a nice story. How about some actual data? I expect the best way
to get a handle of royalties is to start soliciting actual projected royalty
estimates from potential developers and underwriters, but, frankly, I think
that most developers and underwriters, like the rest of us, have no real idea
how much money they're going to make. Nonetheless, if anyone's interested in
telling me, offline, what they think they would would be fair royalty
payments, either as an underwriter or as a developer, I'd like to hear their
estimates. My PGP key is attached.

My own rule of thumb, for cash anyway, is that an underwriter can probably
charge no more than a bank charges to one of their non-customer ATM
transactions. That's probably no more than $3.00 a withdrawl. They also get to
keep the interest on the reserve account, if any, of course. Frankly, if the
royalties are low enough, that may be more than enough revenue to bootstrap a
business with, and   I would personally lobby for as low a royalty structure
as possible. That, of course, is driven entirely by the cost/revenue picture,
but it might be that a majority of the short-term operations can be
bootstrapped out of validation fees.

That leaves all the other potential markets for blind-signature macroscale
digital bearer settlement, everything from long-duration bandwidth purchases
for IP or voice dialtone on up to actual securities transactions themselves.
Most of these potential applications will occur after the patents expire,
but whoever owns these patents should allow not only licenses to all comers,
but, more to the point, should allow all *licensees* to worry about the
legal ramafications of the patents' use.

If a particular licensee can find a legal jurisdiction to offer utterly
anonymous digital bearer instruments backed by totally anonymous reserves,
then, as long as the licensee pays up, god bless 'em. The patents should be
licensed within the law, certainly, but, other than that, their use should be
considered value neutral, like all technology. As in all bearer markets
before them, the digital bearer trustee will be the point of maximum legal
compliance, and, as such, will be the functional "policeman" of the system.  I
leave the interesting solution of bearer-backed trustees for some other day,
probably after the patents have long expired.

Okay. There's lots more to talk about, of course, but I'm kind of tapped out
on this for the time being.

If you're an intellectual property lawyer, and you fancy yourself running the
DigiCash patent portfolio, contact me directly. I'm not sure exactly what I
can do, if anything, but I'd be very interested to hear your thoughts on this,
as the potential core person of this as yet imaginary enterprize, up to, and
including what it would cost for you to sign on for this much fun as at least
in-house counsel, if not the actual CEO. :-).

In addition, if someone has a reasonable non-proprietary(!) estimate of the
projected revenues on all those outstanding ecash contracts, that would be
nice to know as well. The terms of those contracts, are, of course, probably
unknowable at the moment, at least until someone has enough known scratch to
belly up to the table, sign an NDA and take a peek. Of course, then they
couldn't tell us anything anyway...

Isn't this fun?

Bob Hettinga

Version: PGP for Personal Privacy 5.5.5


Here are my PGP keys, for them as want 'em:

Version: PGP for Personal Privacy 5.5.5

Version: PGP for Personal Privacy 5.5.5


Robert A. Hettinga (mailto: rah@philodox.com)
Philodox Financial Technology Evangelism (http://www.philodox.com/)
44 Farquhar Street, Boston, MA 02131 USA

"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'