Convergences

Necessities of Life

A Research Brief at Media Post looks at how people are saving money in this tough economic climate. Among the findings: Of the 2576 adults surveyed, 63% have purchased more generic drugs and 45% have brown-bagged instead of lunching out, but only 17% have changed or cancelled cell phone service. And 52% won't even consider a cell phone change.

Those least likely to cut back on cell service are the "Matures" (65+), at 11%. (Hm, I used to be old -- I am happy to see that I have reversed course to Mature')

Morgan Stanley's Mobile Internet Report

Investment bank Morgan Stanley has released a report on the mobile internet -- actually, three reports. You can pick any or all of:

1) “The Mobile Internet Report Setup”– a 92-slide presentation that excerpts highlights of the key themes from the report.

2) “The Mobile Internet Report Key Themes” – a 659-slide presentation that drills down on thoughts covered in “The Mobile Internet Report.”

3)“The Mobile Internet Report” – a 424 page report which explores 8 major themes in depth and includes the two aforementioned slide presentations + related overview text.

Net neutrality gets little discussion, mentioned (in the 424-pager) only at pp. 397, 399-402, 413, with a casual assumption that "If mobile operators are not allowed to block or degrade bandwidth-intensive applications – so-called 'net neutrality' – innovation and investment in new applications, services, and content are likely to follow." (p. 413)  The carriers' view is presented at p. 402.

It is always interesting to see a Washington issue through the prism of the financial analysts. 

Open Video Systems as Net Neutralty: And How Did That Work Out for You?

In a 2006 paper, Solveig Singleton recalled the outcome of the FCC's 1990s experience with Open Video Systems:

A colleague of mine a few days ago referred to net neutrality proposals as "common carrier" regulation for the Internet. And one proponent of net neutrality, answered, in effect, yes, nothing wrong with that. Ah, but wait. Who now remembers video dialtone?

Travel back with me to when the phone companies' main interest was getting into the cable television business. The late 1980s and early 1990s. The FCC, always anxious to encourage competition, were ready to let the telcos in, provided of course, that they operate their video networks so as to allow equal access and reasonable charges and no exclusivity and/or discrimination... on and on. With the 1996 Act video dialtone was swept away and replaced with a regime of open video services, a model requiring operators to reserve two-thirds of their channel space for unaffiliated content. And despite deregulatory intentions it still went nowhere, especially after the federal courts ruled that OVS operators needed local franchises as well as federal approval.

These brave egalitarian proposals never bore fruit. There were a few trials here and there. But basically nothing. It wasn't just that the Internet came along, and interest in getting into the one-way video delivery business waned. The whole regulatory apparatus and process inspired by common carriage was just way too cumbersome and slow, and promised far too little return on investment. If there hadn't been so much delay and complication on the regulatory front, telcos and others could have moved into the video business with some alacrity, before the Net. It was no mere accident of timing that investment moved into then much-less-regulated networks. Investment will always go there.

Right now there are huge opportunities for growth and expansion of broadband networks and services, including content. And problems as well, from spam to capacity limits, from authentication problems to quality of service issues. Hopefully these issues all have technical solutions, but deploying those solutions is going to take some capital. Do we really want to narrow the business models that can be used to raise and recover that capital down to... video dialtone for the Net? Ugh.

A sampling from the FCC's 1996 Final Rule on OVS:

Net Neutrality

At The American: How to Think About Net Neutrality (Sept. 26, 2009). One key point:

[The FCC's] approach assumes that each customer should have only one connection to the Internet (or perhaps two, one fixed and one mobile), and this connection must provide access to everything. Why should this be so? Perhaps a better model would be for every consumer to have several connections, and for each of these to carry unique and proprietary content.

Another:

Is the FCC seriously thinking of applying openness obligations to wireless, with its multitude of providers and exploding usage? If so, why? And if this article were a diagram, an arrow would now point back to [the] point [above].

FCC & Broadband Policy: Learning from History

As the FCC strains to produce a National Broadband Plan, it should recall some history, and be humble.

[I]n 1872, a committee on railroad amalgamation was appointed. . . . [A]fter taking a vast amount of evidence, they proceeded to review the forty years of experience. . . .  They showed with grim precision how, during that period, the English railroad legislation had never accomplished anything which it sought to bring about, nor prevented anything that it sought to hinder. The cost to the companies of this useless mass of enactments had been enormous, amounting to some L80,000,000; for these were 3,300 in number and filled whole volumes.
   -- Charles Francis Adams, Railroads: Their Origin and Problems (1878), pp.89-90.

The decision was made not to borrow trouble, as the old phrase goes, but to let the system "develop itself in its own way," and act only in response to actual problems, which worked quite well.

In Praise of Google Books

Since I have an interest in that great American epic,the building of the transcontinental railroad, and in the parallels between current public policy debates and earlier railroad controversies, Google Books is wonderful. It provides access to many obscure sources that were formerly available only at major libraries, and difficult to find even then unless one knew exactly what one sought.

Who knew that the 1870 Report of the Commissioner of the U.S. Land Office contains crucial information on railroad construction costs, or that The Political Reformation, a pamphlet put out by the Democrats in 1884, contains cheerfully cynical insights into the venality of the U.S. Congress by Collis P. Huntington, one of the founders of the Central Pacific'?

One benefit of the improved access should be an improvement in knowledge of history. A great problem is that the story of an era gets written a time or two, and then everyone cribs from this work, until, perhaps, a new paradigm is written, and everyone cribs from that. Very few people have access to the sources, and thus the ability to challenge the narrative is limited. The digitization of great libraries is changing this, expanding access and opening up the process to all.

Speaking of Net Neutrality . . .

I. L Sharfman, Railway Regulation (1913), pp. 23-25:

            RAILWAY DISCRIMINATION AND THE PUBLIC WELFARE

The danger as well as the injustice of discriminatory practices cannot be overemphasized. If our industrial life is to reach its natural and most efficient economic development, there must be freedom of enterprise and fairness of treatment for all persons, all sections, and all undertakings. In a sense, transportation is a fundamental industry underlying all others, for it is essential to the conduct of all business and goes far towards determining the direction and conditions of industrial activity. The item of transportation, whatever it may be, is one of the elements in all costs, and the outcome of competition between different producers may be largely affected by any divergence in railway rates which must be paid by each of two or more competitors. It follows clearly, then, that the railway officials who make transportation rates exercise a tremendous power.

By the soundness of their adjustment of rates and by the degree of fairness with which established rates are observed, the railways may profoundly affect—or, even absolutely determine—the prosperity of individuals, of industries, of cities and towns, or of entire sections of the country.

By discriminating between competing shippers, they may destroy the business of one and build up that of another, making one man rich and another poor.

By stimulating or discouraging a particular class of traffic, they may increase or diminish the importance of industries and the extent of production in particular lines of commerce, thus shaping the direction of industrial activity.

By discriminating among cities and towns, they may cause one to grow and another to decay, and thus determine the commercial importance of business centers.

By modifying their rate schedules in special instances, they may determine the location of industries, guide the movements of population, and affect the prosperity and welfare of extensive localities.

By these unfair practices the railways also have it within their power to build up industrial monopoly; and the most powerful of the trusts against which the people are now struggling made their first advances towards control of the market through the agency of special favors in the form of railway discriminations.

Business Talks: Eric Schmidt Gets It Wrong

Google President Eric Schmidt was interviewed for The McKinsey Quarterly. One statement that I found fascinating, because of its utter wrong-headedness, was his embrace of the concept that prices for goods and services should equal their marginal cost:

A rule of economics is that for manufacturing and mature businesses, eventually the price of the good goes to the marginal cost of its production and distribution. Well, in the digital world, for digital goods, the marginal cost of distribution and manufacture is effectively zero or near zero. So, certainly, for that category of goods, it's reasonable to expect that the free model with ancillary branding and revenue opportunities is probably a very good thing.

The concept of marginal cost pricing is useful in abstract analysis and virtually worthless in the real business world. In any enterprise which depends on up-front investment, a category that includes everything except peasants scratching the ground with sticks, marginal cost pricing leads to destruction. Every business, including most emphatically Google itself, schemes night and day to avoid consignment to marginal cost pricing hell.

When pressed, economists always say, "well, we did not really mean it -- everyone knows that the concept of static efficiency with marginal cost pricing is an abstraction with little relevance to business decisions in the real real world." Unfortunately, everyone does not know this -- Eric Schmidt, for one, apparently. But this has real consequences, because it seems to underlie Google's drive to turn all its complements into commodities.

To add to the puzzle, Google has a Chief Economist named Hal Varian, from the University of California at Berkeley, who is a very good and sophisticated thinker. I would be quite surprised if he regards marginal cost pricing as a good thing. If it is, then someone should remind Google that the marginal cost of a click search is almost non-existent, so it should be giving away its services.

For more, and references, see:

William Baumol, Regulation Misled by Misread Theory: Perfect Competition and Competition-Imposed Price Discrimination, AEI (2006)

Solveig Singleton, Is Cheaper Always Better? Misusing the Concept of Marginal Cost in Policy Discussions (July 24, 2008)

James V. DeLong, "Avoiding a Tech Train Wreck," The American (May/June 2008) & "Marginalized," TCS Daily (July 29, 2003)

My Seconds Will Call on You, Sir!

BitTorrent is back in the news:

The alleged problem: The new transmission method uses a channel currently only employed by a handful of applications, like gaming and VoiP. With P2P traffic flooding that transmission line, users' Skype calls or World of Warcraft sessions could get interrupted amidst the P2P noise . . .

Silicon Valley Insider thinks the ISPs can deal with it by download caps. The Register thinks its war:

The internet evolved as a gentleman’s system in the comfortable confines of the ivory towers of academe, but now that it’s an essential part of daily life for more than a billion people, the time has come to get realistic about its management. Some of the people who use this system are spoiled children with no more concern for the greater good than junkies looking for their next fix. They can’t be allowed to spoil it for the rest of us, and the only practical means to prevent their doing so is to unleash effective management upon them.

What's Wrong With Washington

Last Tuesday, at the annual dinner honoring the FCC Chair put on by the Federal Communications Bar Association, a guest looked at the 1500 or so assembled lawyers and lobbyists and commented: "This room is what is wrong with Washington."

He was right. The FCBA has over 3000 members. Their function, mostly, is to write comments and talk to each other endlessly about the correct interpretations of or additions to a body of detailed laws, regulations, and judicial decisions.

The goal is rarely to make the system work efficiently; it is to skew the game toward the benefit of their clients. Above all, it is to freeze the system if any change might occur to the disadvantage of the client. Since everything is to someone's disadvantage, it is rare for things to happen. And if the things that get through the mesh are good things, that is happenstance rather than the design of the system.

The government is the prime culprit here. Congress and the FCC assume that there is some abstract "public good" that can be discerned if only they get one more round of legal comments. When the Commission embraces the free market, it does so only as one tool of central planning -- it thinks the market will produce whatever result is wanted, but should be over-ruled if it goes in another direction, as markets tend to do.

The best thing the FCC did was to resist early pressures to regulate the Internet, which let it grow. But the pressures to meddle are relentless, and most of them were in the room last Tuesday.