For all the hoopla, the cloud is a work in progress, with different companies offering variations in what they store, and how easy it is to access and share content. Cloud storage has been around for a while, in the form of online backup services like Carbonite and Dropbox. What’s new – and what’s changing the game – is the entry of major integrated IT/entertainment vendors including Microsoft, Google, Amazon, Facebook and now Apple.

So, what’s not to like? Once again, money is the root of all evil.

We kid, of course: Somebody has to cover the costs of all those petabytes of secure storage capacity in servers around the globe – not to mention all the computer power to manage the data efficiently. But the way the providers plan/hope to make money will certainly affect what economists think should matter most: the value to consumers.

All the new high-profile cloud storage services want to sell you something – or perhaps many things. Google is selling storage capacity beyond a free taste; Amazon offers a lot of free space, provided you buy some music; Microsoft is selling business software and entertainment hardware (Xboxes) to complement its storage.

Which brings us to the subject of Apple and the concept of the “walled garden”—the technology-driven barriers to moving off the platform. Apple wants you to play and work in its cloud using only hardware sold by Apple and (in a concession to commercial reality) PCs as long as they have Apple’s iTunes on board to sell entertainment. Oh, and did we mention, that Apple will allow only apps approved by Apple?

Walled gardens can have several advantages. They can improve user security and lower the costs of getting information, and they encourage firms to innovate by allowing them to keep more of the profits from innovation. Note, however, that walled gardens have downsides. In particular, they can affect the ease with which other companies can entice people – and, in the case of the cloud, people’s data — to move outside of the garden.

It’s tempting to give government a role in deciding what’s kosher within the garden and what’s not. We think the burden of proof should certainly be on those who want to regulate them. But there are gray areas – for example, when the garden owner attempts to foreclose options for competitors. Think of Apple not permitting apps on the iPhone that compete with Apple services, or a cable company barring access to specific VoIP services on the Internet. The test, in the end, ought to be whether the consumer benefits of a walled garden exceed the consumer costs.  

If, for example, an Internet Service Provider keeps suspect web sites off the platform to enhance security or the general user experience, this may not be a bad thing. The same is true of applications on the iPhone. In this case, competition from other phone providers should keep the company honest.

Should we stop worrying and learn to love yet another neat (and ultimately, expensive) innovation from Apple? Yes, as long technological change and ferocious competition offer alternatives to Steve Jobs’ sometimes-smothering embrace.

(This post was also published on Forbes.com)

Clever, but a tad shaky. Google operates in a “two-sided” market in which both advertisers and users of Google services are needed to make money. Without eyeballs on Google pages, the space is worthless to advertisers. But without advertising, Google couldn’t afford to give away services ranging from Google search to gmail to Google Docs.  

Google, moreover, is in no position to take its rank-and-file users for granted. While the Don’t-Be-Evil company still garners the majority of Internet searches, Microsoft’s Bing (and its ally, Yahoo!) have picked up about 30 percent of all search traffic in the United States. And there’s no reason to believe Google’s dominance would survive a serious decline in consumer goodwill, since the quality of the Bing search engine is plenty good enough – and sometimes better — than Brand G.

So, while it’s true Apple’s special place in supercool-gadget-loving hearts gives it very good reasons not to alienate the public, Google’s behaviour is also constrained by the market. We’re not claiming that either company’s incentives to balance gross commerce against high minded principle are perfectly disciplined by Adam Smith’s invisible hand. But neither are the incentives of those who would regulate them. For now, anyway, we think it makes the most sense to insist that all Internet companies make their privacy policies very clear, and let consumers decide what they think of them.

Some consumers have long complained about Apple’s practice of locking iPhones so that they could only work on AT&T’s network, and Apple’s practice of deciding what applications could and could not be installed on the phone. They argue that the arrangement minimizes competition and limits their choices. But, as Bob Hahn and Hal Singer documented in a study published last fall [Download Here], the exclusivity agreement has likely spurred others to accelerate their own innovations and provided consumers with a wide range of smartphone alternatives, some of which are arguably superior to the iPhone.

If we’ve learned anything from the technology marketplace of recent years–change happens overnight and apparent dominance ends fast. Or, perhaps you’ve forgotten that AOL once seemed to have an iron grip on Internet access, Microsoft was the favorite target of antitrust zealots, Google was once just a mathematical expression, and Apple was a struggling afterthought in a computer market dominated by the Wintel partnership.

As Hahn and Singer wrote in September 2009: “Although casual observers have often claimed that a particular innovation was here to stay, they commonly are proven wrong by unforeseen developments in this fast-changing marketplace. We argue that exclusive agreements can play an important role in helping to ensure that another must-have device will soon come along that will supplant the iPhone, and generate large benefits for consumers.”

And, from personal experience in the U.K. where the iPhone is sold by multiple carriers, we can tell you that having a choice in carriers does not deliver iPhone nirvana. There is something of an iPhone price war that makes the phone more affordable, but the user experience once you own the phone is not all that rosy. Reception is quite spotty in the countryside when traveling on trains, and dropped calls from London to Manchester are the rule rather than the exception. And that’s with a provider that’s reputed to have a very good network.

Still, our personal experience is not the key issue. What counts for decision makers is the relative benefits and costs of exclusive agreements. The primary benefits of banning an exclusive iPhone-type agreement would be greater price and non-price competition in the mobile device market. But competition in this market is already intense. From BlackBerry to Droid, new smartphones are coming out all the time. Even Google has produced its own branded phone. Are consumers better off with identical iPhones from every carrier or from a wide variety of smartphone models competing to distinguish themselves with an expanding array of capabilities, applications and designs?

Barring exclusive agreements carries significant costs. Carriers would have weaker incentives to aggressively promote new devices and ensure network quality. They would also have fewer incentives to innovate, such as developing new and better networks, like the “4G” networks that are coming online now to handle exploding data demands by consumers and businesses.

The real question for policymakers and the courts is the underlying structure of the market and whether a dominant player forecloses competitive choice or new entrants. In the smart phone market, it is hardly the case that the iPhone is dominant. Apple is a major player, but Research in Motion (BlackBerry) and Nokia outsell it. A long view of this market shows that competitors have risen and fallen over time–exactly what one would expect in a market that is changing rapidly. And the available choices are enough to make your head spin.

The mobile device marketplace in the U.S. is remarkably robust. That dynamism makes it easy for regulators to pick the right economic policy: namely, a light-touch regulatory approach that allows device makers and networks to innovate. Consumers will be better off if the courts appreciate the fundamental economics of the market and follow regulators’ lead. If they want continued innovation and expanding choices, this class action against Apple and AT&T is one that consumers should pray that they lose.

(This blog post was published earlier on Forbes.com.)

Remember why the Antitrust Division brought an antitrust case against Microsoft in 1998? In a nutshell, the feds contended that Bill Gates’ monster so dominated the market for key information technology (the PC operating system) that rivals couldn’t compete without a little help from Uncle Sam.

Fast forward to June 2010. Microsoft has lost 40% of the market in Internet browser use — Google‘s Chrome browser and the “open source” Mozilla Firefox browser control one-third of the market along with 100% of the media buzz. And in spite of years of effort, Microsoft owns a mere 3% of the search market worldwide, compared with 84% for Google. Indeed, the notion that Microsoft can use its dominance in operating systems as leverage to push other software makers off their own turf is such a non-starter (to everyone but regulators) that the world barely noticed when the company started giving away terrific anti-malware software to Windows users.

Microsoft isn’t killing on other fronts, either. It barely qualifies as a major presence in smartphone platforms or in music players. (Remember the Zune: Someday, it will be a show stopper on trivia quizzes). And even Microsoft’s near-monopoly in office productivity software is finally being challenged, as Google and others offer free applications that live entirely on “the cloud.” The move has forced Microsoft to match their free Web offerings, accelerating the erosion of the traditional market for Office.

So now that the king is dead, should we be worrying about the anticompetitive behavior of the pretender to the throne? The Federal Trade Commission thinks so: It is investigating Apple for its efforts to leverage its market power in digital music and mobile devices to other services. But look more closely and Apple’s quasi-monopoly begins to resemble that of Microsoft’s a decade ago. Practically since the introduction of the iPhone, it’s been conventional wisdom that Apple had a hammerlock on high-end smartphones because it had created an incontestable lead in mobile apps. Yet, in a matter of months, Google’s Android managed to build an online store with 70,000 apps, and one forecaster thinks Android devices have a good shot at passing iPhone sales in the next few years. Arguably more ominous from Apple’s perspective, Android users are already clicking on more mobile ads than their iPhone counterparts.

So what does that mean? The markets for information technology products are, often as not, highly concentrated. But concentration doesn’t equal true market power the way it does in, say, steel or air travel because IT is changing so rapidly. Indeed, a competition policy that uses share of total sales as the cue for antitrust investigation in any technology-driven market may actually undermine competition. For without the prospect of huge profits associated with temporary market dominance, investment in expensive, long-shot technologies would surely diminish.

To be clear, there’s a place for antitrust regulation in protecting consumers from the abusive practices of companies that gain and keep market power by what the law calls “restraint of trade.” But where market power follows from innovation, the burden of proof ought to be on those who argue that dominance will endure.

(This blog post was published earlier on Forbes.)