John Deere, Connected Products, and the Problem with Licensing

I wonder whether Deere & Company, colloquially known as John Deere, ever get bored of having to stand in as poster child for all that’s wrong with copyright, licensing, and assorted other ills that befall our world where, increasingly, hardware and software merge.

John Deere, if you remember, was at the heart of the Electronic Frontier Foundation’s (EFF) battle for an exemption of section 1201 of the Digital Millennium Copyright Act (DMCA) for land-based vehicles, which ultimately was successful. But John Deere has gotten a lot of flak for its position.

In a particularly spectacular display of corporate delusion, John Deere—the world’s largest agricultural machinery maker—told the Copyright Office that farmers don’t own their tractors. Because computer code snakes through the DNA of modern tractors, farmers receive “an implied license for the life of the vehicle to operate the vehicle.”

In Nebraska’s current ongoing legislative push dubbed Right to Repair, which, among other things, would prohibit manufacturers from granting any kind of exclusive access to diagnostics tools and software. The relevant sections articulate that if you sell in Nebraska, you better be prepared to give your customers and independent service businesses the same kind of access to your repair documentation and diagnostics tools as your authorized dealers and repair shops, imbuing quasi-FRAND licensing requirements on any supporting software.

The proposition is heavily supported by the EFF, repair.org, iFixIt (whom Wien serves as CEO), and others. Similar legislative proposals are pending in several other US states, and are opposed by manufacturers like John Deere, or as notably mentioned in the press, Apple.

What does Ownership mean?

The position of proponents is fairly straightforward to understand. You purchase a product from a manufacturer, so you might reasonably assume that you gain control over all aspects of the product. This is how things used to work for as long as we can remember. If you buy something, you can do whatever you damn well please with it. Sometimes there are other legal restrictions around that: you shouldn’t shoot people with your gun, you shouldn’t modify your car so it becomes unsafe to operate. But in principle, there’s nobody stopping you rewiring the audio system in your car, or retrofitting it with parts that aren’t officially sanctioned from the supplier. It is your car, after all. (Also, you’re free to sell it on, which turns out to be a rather important part.)

With the advent of software, a lot of this changed. Because software is disembodied, you generally do not own what you purchase. You’re paying a license fee and are granted a license to use the software subject to licensing terms. Those might be labelled Terms of Service, End User License Agreement, or similar, and cover what you can and cannot do with the software the license gives you access to. This is distinctly different from ownership, where limitations on how you use the product you bought generally can only be imposed by statute and law, not by the seller.

License agreements, on the other hand, give broad powers to the seller of the license. And generally speaking, those sellers have an incentive to restrict what you’re able to do with that license. We’re all familiar with the battles the music industry fought to retain some semblance of control over who got access to the music they distributed. It was just files, after all, and so they were easily copied. But you probably did agree, in a license agreement, not to copy those music files.

The extent to which the music industry went to enforce licensing agreements over their now disembodied goods shows the desperation with which they defended their business model. They had very strong economic incentives to pursue a very restricted licensing regime, and enforce that licensing regime drastically. The Digital Millennium Copyright Act is evidence of that.

We’ve slowly come around to accepting that software is different from physical goods, and that we only ever purchase a license to access it. But where the John Deere case and the whole right to repair issue cuts to the bone is that increasingly, software can be found in everything we buy. A tractor is not just a tractor anymore, it’s a computer on wheels. And that’s where expectations come to a loggerheads. If you buy a tractor, do you really expect to sign a licensing agreement? So far, you could do with that tractor what you damn well pleased, as long as you adhered to the law. Suddenly, the manufacturer imposes restrictions on what you can do with the tractor, because those restrictions are part of the license. We’ve talked about the Internet of Things you don’t really own before.

But why would a company like John Deere go to such lengths to impose its licensing agreement? The answer, of course, lies in economics.

Price Discrimination

Even though it might sound awful at first, price discrimination is a foundational principle of economics. You’re going to charge different customers different prices according to their willingness to pay. Because you can’t easily tell what a buyers upper limit cost limit for any given transaction is, you’re going to use different features to distinguish different variants of your product. The price difference between products doesn’t really have to have anything to do with the feature comparison. Features are usually only a crude estimate to bucket customers into different pricing tiers.

We’re getting used to that in software. Enterprise versions of software can easily run 10x more expensive than consumer versions, without there necessarily being a 10x increase in functionality. It’s just that enterprises usually are clearer about their willingness to pay for things, compared to individual customers.

Without price discrimination, a lot of the cheap services we take for granted wouldn’t really be possible, as the companies offering them wouldn’t be in a position to make a profit. Take this illustration of how airline seat pricing works out for airlines.

And John Deere works similarly. They have a range of different products that they price differently. Some of those price differences are obvious: you want a bigger tractor, you gotta pay more. But some of those differences are more subtle. You want a more powerful engine? That’s gonna cost some more. But here’s the rub: you don’t actually get a bigger engine in your tractor. It’s the same engine as the lower-powered model, but with restrictions on engine performance removed in software.

This helps John Deere save money in R&D and production. If they only have to equip their tractors with one make of engine, that’s a lot cheaper than developing and producing a lot of different engines. And with the help of software, they can still price performance differently. If you’re more cost-conscious, but need a large tractor, you might want to choose one with a little less horse power. Functionally, that tractor is the same as the pricier model, but the engine’s performance is throttled by software, so as to make price differentiation possible.

In conventional products, variability is costly because it requires variation in physical parts. But the software in smart, connected products makes variability far cheaper. For example, John Deere used to manufacture multiple versions of engines, each providing a different level of horsepower. It now can alter the horsepower of a standard physical engine using software alone.

The catch is that you have to maintain control over your software to be able to do that. Once licensing terms become unenforceable, there’s really nothing you can do to maintain your pricing structure. If the software that throttles engine performance can be easily modified, of course everybody would buy the cheaper version and just change to software to give them full access to the mechanical properties of the product. Short of going back and differentiating via distinct hardware, your pricing has suddenly become untenable.

Trade-offs

The push to control the software that controls equipment has unintended consequences, as the recent story about US farmers using cracked software to circumvent the digital locks put in place by John Deere shows:

To avoid the draconian locks that John Deere puts on the tractors they buy, farmers throughout America's heartland have started hacking their equipment with firmware that's cracked in Eastern Europe and traded on invite-only, paid online forums.

Tractor hacking is growing increasingly popular because John Deere and other manufacturers have made it impossible to perform "unauthorized" repair on farm equipment, which farmers see as an attack on their sovereignty and quite possibly an existential threat to their livelihood if their tractor breaks at an inopportune time.

It’s a tight line to walk between protecting your business model and potentially alienating your customers. Especially in the farming industry, goodwill is hard to come by, and you could argue that John Deere is overstepping the mark with severely curtailing what customers can and cannot do with the equipment they purchased.

As always, there are trade-offs to be made. John Deere would do well in allowing some self-repair and modification of their systems, if that allows them then to keep control over the parts of their systems that’s most valuable to them: maintaining the ability to discriminate on price.

Pushing customers to use unauthorised software, potentially opening them up to malicious actors, cannot be in their interest. But that’s the effect of such a hard-line stance.

The case of John Deere serves to illustrate a broader point that we will increasingly have to reckon with: as Software is Eating the World, as Mark Andreessen famously proclaimed, a lot of our everyday products will come encumbered with licensing agreements, curtailing our optionality in our use of them. And as more and more Things move from being products being sold to services being subscribed to, how we deal with those licenses becomes an ever more important discussion.

What’s at the heart of these discussions is a volatile transition period, in which we move from an economic model primarily based on the sale of goods to a model in which licenses play an ever increasing role. That farmers would be some of the first to have to reckon with this reads like a joke on Everett Rogers.