Economics of Technology – Page 101

Woodrow Wilson: The Automobile is “a Picture of the Arrogance of Wealth”

It is the common characteristic of new products from creative destruction that new products are first so expensive that only the rich can afford them, but then fairly soon, usually within a few years at most, the price falls to the level that ordinary people can afford. At that point, what the rich gets are added features, at a high premium, but the basic product is widely available. Consider the automobile:

(p. 193) The autos of the time were a luxurious novelty. One model even offered electric curlers in the back seat for on-the-go primping. They were unreliable and expensive, costing around $1,500, twice the average annual family income. And they were enormously unpopular. Anticar activists tore up roads, ringed parked cars with barbed wire, and organized boycotts of car-driving businessmen and politicians. Public resentment of the automobile was so great that even future president Woodrow Wilson weighed in, saying, "Nothing has spread socialistic feeling more than the automobile . . . a picture of the arrogance of wealth." Literary Digest suggested, "The ordinary ‘horseless carriage’ is at present a luxury for the wealthy; and although its price will probably fall in the future, it will never, of course, come into as common use as the bicycle."

Source:

Kim, W. Chan, and Renée Mauborgne. Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant. Boston: Harvard Business School Press, 2005.

(Note: ellipsis in original. Also, the book provides sources for each quote in the passage above.)

Bush Should Take Lab Coat Off

Decisions about which new technologies to develop should be left to the market, not the government. One reason is that markets generally make the more efficient choice. Another reason is that when technological risks are taken in the market, they are taken with voluntary private money; when risks are taken by the government, they are taken with your money that has been coerced from you through taxation.

With all due respect, President Bush should take the lab coat off.

(p. A16) FRANKLINTON, N.C., Feb. 22 — President Bush put on a white coat and visited a laboratory here Thursday to promote his goals for making alternative fuels from switch grass, woodchips and other plant waste.

After touring the laboratory, which is developing enzymes to make cellulosic ethanol, fuel distilled from plant byproducts, Mr. Bush spoke buoyantly about new technologies that may reduce the nation’s thirst for foreign oil.

For the full story, see:

EDMUND L. ANDREWS. "Bush Makes a Pitch for Amber Waves of Homegrown Fuel." The New York Times (Fri., February 23, 2007): A16.

Would Consumers Be Better Off with No Satellite Radio?

Source of graphic: online version of the NYT article cited below.

It appears as though the market for satellite radio may not be big enough for two firms to profitably survive, although one merged "monopoly" firm might survive. But the antitrust government authorities appear to seriously be considering to forbid the merger.

If they do so, they will be presuming to tell the consumer that she is better off with no satellite radio, than with one merged "monopoly" satellite radio.

Note the secondary issue of whether it’s appropriate to call a merged company a "monopoly." If the "industry" is defined as "satellite radio," then the merged company would be a monopoly. If the "industry" is more broadly defined as "broadcast radio," which would include AM, FM, and internet stations, then the merged firm would be a long way from a monopoly.

But either way, the government should stay out of it.

(NYT, A1) The nation’s two satellite radio services, Sirius and XM, announced plans yesterday to merge, a move that would end their costly competition for radio personalities and subscribers but that is also sure to raise antitrust issues.

The two companies, which report close to 14 million subscribers, hoped to revolutionize the radio industry with a bevy of niche channels offering everything from fishing tips to salsa music, and media personalities like Howard Stern and Oprah Winfrey, with few commercials. But neither has yet turned an annual profit and both have had billions in losses.

. . .

Questioned last month about a possible Sirius-XM merger, the F.C.C. chairman, Kevin J. Martin, initially appeared to be skeptical, but later said that if such a deal were proposed, the agency would consider it.

In a statement yesterday, Mr. Martin acknowledged that the F.C.C. rule could complicate a merger but said the commission would evaluate the proposal. “The hurdle here, however, would be high,” he said.

The proposed merger, first report-(p. C2)ed yesterday by The New York Post, promises to be a test of whether regulators will see a combination of XM and Sirius as a monopoly of satellite radio communications or whether they will consider other audio entertainment, like iPods, Internet radio and HD radio, to be competitors.

“If the only competition to XM is Sirius, then you don’t let the deal through,” said Blair Levin, managing director of Stifel Nicolaus & Company and a former F.C.C. chief of staff. But Mr. Blair said he expected the F.C.C. to approve the merger.

For the full NYT story, see:

RICHARD SIKLOS and ANDREW ROSS SORKIN. "Merger Would End Satellite Radio’s Rivalry." The New York Times (Tues., February 20, 2007): A1 & C2.

(Note: ellipsis added.)

(WSJ, p. A1) But because XM and Sirius are the only two companies licensed by the Federal Communications Commission to offer satellite radio in the (p. A13) U.S., the deal is likely to face significant regulatory obstacles.

Broadcasters said yesterday that they will fight the proposed merger, and FCC Chairman Kevin Martin released an unusually grim statement saying that the two companies will face a "high" hurdle, since the FCC still has a 1997 rule on its books specifically forbidding such a deal which would need to be tossed. The transaction also requires the Justice Department’s blessing.

Indeed, XM and Sirius may be rushing into a deal because they sense the regulatory terrain will only get tougher. People close to the matter said that the two companies acted because the climate is already changing with the election of a Democratic-controlled Congress. Future developments — such as the possibility of a Democratic president — could make it even harder for the proposed merger to pass muster.

In their strategy, the two companies may be subtly acknowledging the risks before them: By conceiving their deal as a merger of equals and declining to say which company name would emerge ascendant, they minimize the business risks should the deal fall through. If, for example, the combined company were to be dubbed Sirius, XM could be vulnerable to a decline in sales during a regulatory review period that could last a year. A person familiar with the negotiations said the two companies have set March 1, 2008, as their "drop-dead date," after which either side can walk away if approval is not granted.

The coming regulatory battle is likely to focus on the definition of satellite radio’s market. The two companies are expected to argue that the rules established a decade ago, which require two satellite rivals to ensure competition, simply don’t apply in today’s entertainment landscape.

Since 1997, a host of new listening options have emerged, making the issue of choice in satellite radio less important for consumers. Executives cite a new digital technology called HD radio, iPod digital music players, Internet radio and music over mobile phones as competitors that didn’t exist when the satellite licenses were first awarded.

For the full WSJ story, see:

SARAH MCBRIDE, DENNIS K. BERMAN and AMY SCHATZ. "Sirius and XM Agree to Merge, Despite Hurdles For Regulators, Deal Pits Competition Concerns Against New Technology." The Wall Street Journal (Tues., February 20, 2007): A1 & A13.

(Note: ellipsis added.)

Source of graphic on left: online version of the NYT article cited above. Source of graphic on right: online version of the WSJ article cited above.

New Book on Wiki (Quick) Process

Source of book image: http://ec2.images-amazon.com/images/P/1591841380.01._SS500_SCLZZZZZZZ_V37439749_.jpg

A new book is out on the wiki ("quick") phenomenon. Chris Anderson has some stimulating comments on this phenomenon in his The Long Tail. The Wikinomics book appears to be less profound, but may still be of interest. (It appears to be a quick-read, management guru-jargon type book.)

The wiki issue that interests me is how wiki collaboration processes might substitute for rigorous editing and peer-review, as a way to get a lot of high-quality information out there fast. (This is what Anderson claims, and the more I use the Wikipedia, the more plausible I find the claim.)

The reference to the book is:

Tapscott, Don, and Anthony D. Williams. Wikinomics: How Mass Collaboration Changes Everything. Portfolio, 2006.

Pay Rebounds in Silicon Valley

Source of graphic: online version of the WSJ article cited below.

Silicon Valley’s nascent economic recovery gathered steam last year, with the nation’s technology capital adding more than 30,000 jobs and showing gains in areas such as average annual wages and household income.

That was the conclusion of an annual report from Joint Venture Silicon Valley, a nonprofit group representing businesses and government agencies in the San Francisco and San Jose, Calif., area.

"Silicon Valley is back and it’s rebooting," said Russell Hancock, Joint Venture’s president and chief executive. "This is familiar since the Valley has already done it five or six times over its history. It regroups, then reboots."

The report comes as Silicon Valley, which prospered during the dot-com frenzy in the late 1990s, has struggled to remake itself in the wake of the tech crash in 2000. In the years since, the region has experienced job losses and a slowdown in growth at many tech companies. The area began to turn the corner in 2005 when a net gain of 2,000 jobs was recorded, the first time since 2001 that there had been an overall increase in jobs. Start-up activity has also become widespread again, with Internet firms specializing in online video, social networking and "clean technology" springing up.

For the full story, see:

PUI-WING TAM. "No Longer Down in Silicon Valley Jobs, Wages Show Gains As Bust Fades Further; Small Firms Fuel Rebound." The Wall Street Journal (Mon., January 29, 2007): B5.

A Case Against “Network Neutrality”

Today there is much praise for YouTube, MySpace, blogs and all the other democratic digital technologies that are allowing you and me to transform media and commerce. But these infant Internet applications are at risk, thanks to the regulatory implications of "network neutrality." Proponents of this concept — including Democratic Reps. John Dingell and John Conyers, and Sen. Daniel Inouye, who have ascended to key committee chairs — are obsessed with divvying up the existing network, but oblivious to the need to build more capacity.

To understand, let’s take a step back. In 1999, Yahoo acquired Broadcast.com for $5 billion. Broadcast.com had little revenue, and although its intent was to stream sports and entertainment video to consumers over the Internet, two-thirds of its sales at the time came from hosting corporate video conferences. Yahoo absorbed the start-up — and little more was heard of Broadcast.com or Yahoo’s video ambitions.

. . .

. . . Broadcast.com failed precisely because the FCC’s "neutral" telecom price controls and sharing mandates effectively prohibited investments in broadband networks and crashed thousands of Silicon Valley business plans and dot-com dreams. Hoping to create "competition" out of thin air, the Clinton-Gore FCC forced telecom providers to lease their wires and switches at below-market rates. By guaranteeing a negative rate of return on infrastructure investments, the FCC destroyed incentives to build new broadband networks — the kind that might have allowed Broadcast.com to flourish.

. . .

Messrs. Lessig, Dingell and Conyers, and Google, now want to repeat all the investment-killing mistakes of the late 1990s, in the form of new legislation and FCC regulation to ensure "net neutrality." This ignores the experience of the recent past — and worse, the needs of the future.

. . .

Without many tens of billions of dollars worth of new fiber optic networks, thousands of new business plans in communications, medicine, education, security, remote sensing, computing, the military and every mundane task that could soon move to the Internet will be frustrated. All the innovations on the edge will die. Only an explosion of risky network investment and new network technology can accommodate these millions of ideas.

For the full commentary, see:

BRET SWANSON. "COMMENTARY; The Coming Exaflood." The Wall Street Journal (Sat., January 20, 2007): A11.

(Note: ellipses added.)

Real-Time Pricing Results in More Efficient Electricity Generation

Real-time electricity meters in a building in Central Park West behind resident Peter Funk, Jr. Source of photo: online version of the NYT article cited below.

The article excerpted below gets some of the story right. It should emphasize more that the main benefit from real-time pricing would be that it would reduce the peak load. Generation plants need to be built to handle peak-load. The last generating plants to go on line are the least efficient. if the need for such inefficient, peak-load, plants can be reduced, the costs of generating electricity can be enormously reduced.

There is talk of market competition in the states that have deregulated their electric utility industries. But it should be remembered that even where most deregulated, the result is a long way from a paradigmatic free market. The main point is hinted at in the article below. The ultimate suppliers of electricity to the home remain government-protected monopolies.

If we wanted a truly free market, maybe we should actually allow multple companies to connect to homes, the way we allow multiple television and internet companies to connect their cables to the home. Then some low-cost Wal-Mart of electricty would arise, and blow the stick-in-the-muds away.

(p A1) Ten times last year, Judi Kinch, a geologist, got e-mail messages telling her that the next afternoon any electricity used at her Chicago apartment would be particularly expensive because hot, steamy weather was increasing demand for power.

Each time, she and her husband would turn down the air-conditioners — sometimes shutting one of them off — and let the dinner dishes sit in the washer until prices fell back late at night.

Most people are not aware that electricity prices fluctuate widely throughout the day, let alone exactly how much they pay at the moment they flip a switch. But Ms. Kinch and her husband are among the 1,100 Chicago residents who belong to the Community Energy Cooperative, a pilot project to encourage energy conservation, and this puts them among the rare few who are able to save money by shifting their use of power.

Just as cellphone customers delay personal calls until they become free at night and on weekends, and just as millions of people fly at less popular times because air fares are lower, people who know the price of electricity at any given moment can cut back when prices are high and use more when prices are low. Partici-(p. A14)pants in the Community Energy Cooperative program, for example, can check a Web site that tells them, hour by hour, how much their electricity costs; they get e-mail alerts when the price is set to rise above 20 cents a kilowatt-hour.

If just a fraction of all Americans had this information and could adjust their power use accordingly, the savings would be huge. Consumers would save nearly $23 billion a year if they shifted just 7 percent of their usage during peak periods to less costly times, research at Carnegie Mellon University indicates. That is the equivalent of the entire nation getting a free month of power every year.

. . .

Under either the traditional system of utility regulation, with prices set by government, or in the competitive business now in half the states, companies that generate and distribute power have little or no incentive to supply customers with hourly meters, which can cut into their profits.

Meters that encourage people to reduce demand at peak hours will translate to less need for power plants — particularly ones that are only called into service during streaks of hot or cold weather.

In states where rates are still regulated, utilities earn a virtually guaranteed profit on their generating stations. Even if a power plant runs only one hour a year, the utility earns a healthy return on its cost.

In a competitive market, it is the spikes in demand that cause prices to soar for brief periods. Flattening out the peaks would be disastrous for some power plant owners, which could go bankrupt if the profit they get from peak prices were to ebb significantly.

. . .

The smart metering programs are not new, but their continued rarity speaks in part to the success of power-generating companies in protecting their profit models. Some utilities did install meters in a small number of homes as early as three decades ago, pushed by the environmental movement and a spike in energy prices.

For the full story, see:

DAVID CAY JOHNSTON. "Taking Control Of Electric Bill, Hour by Hour." The New York Times (Mon., January 8, 2007): A1 & A14.

(Note: ellipses added.)

Graph showing the range of variation in hourly electricity rates in different months. Source of graphic: online version of the NYT article cited above.

Level 3 Hangs On

The fiber optic network of Level 3, originally founded in Omaha, Nebraska. Source of map: online version of the WSJ article cited below.

Ex ante, Level 3 seemed to have a plausible business model. When they laid fiber optics, they left room to install more, when demand, or a change in technology, made that profitable. But demand did not rise as expected; and technologists elsewhere found clever ways to cram more bandwidth into existing fiber optics. So, alas for many in Omaha, ex post, the results are in the graph below.

Fiber-optic network operator Level 3 Communications Inc., a high-flyer during the telecommunications bubble, almost went bankrupt after the sector burst in 2000.

Now, it is back, with a stock price that has almost doubled in the past year and bond prices that have risen about 20%.

Behind the gains: Explosive growth in video viewing over the Internet, which requires high-speed networks of the sort Level 3 offers. At the same time, a hearty appetite by investors for risky debt has enabled the company to put itself on firmer footing by refinancing its debt at lower rates. There also are good reasons to believe that Level 3 might be an acquisition candidate, though many feel such speculation is overblown.

But there are reasons to be wary: The company remains saddled with debt, it is in a business that still has excess capacity, and it has reported a quarterly profit just once in its more than 20-year history. With the stock and bonds at lofty levels, it could be that any future possible good news already is priced in.

For the full story, see:

LI YUAN and GREGORY ZUCKERMAN. "HEARD ON THE STREET; Level 3 Regains Luster Amid Web-Video Boom." The Wall Street Journal (Thurs., December 21, 2006): C1 & C4.

(Note: the above version is the online version, and differs some from the print version, though not in substance, as far as I noticed.)

Level 3 stock prices. Source of graphic: online version of the WSJ article cited below.

The Mere Threat of “Hillary-Care” Reduced Investment in Drug R&D

CEO of drug company Eli Lilly. Source of image: online version of WSJ artcle cited below.

NEW YORK — Is the future of your health riding on what happens in Washington? Sidney Taurel thinks it might be. The Eli Lilly CEO ticks off a list of former "death sentences" being cured or turned into chronic conditions — "AIDS, leukemia, Hodgkins, hopefully solid tumors within the next few years. The potential for medical research is unlimited. We just need to make sure we don’t interdict it by the wrong policies."

And what might those "wrong policies" be? Anything, it would appear, that reduces the financial incentives for drug companies to invest in research and development. Mr. Taurel points without hesitation to the mere threat of HillaryCare in the early 1990s as an episode that reduced investment in R&D, as drug makers, including his own, redirected money toward the purchase of pharmacy benefit management companies. As another example, he offers the anti-drug industry crusade of Sen. Estes Kefauver in the late 1950s and early ’60s:

"At that point companies started to diversify. We bought Elizabeth Arden, we went into animal health and agricultural chemical products, later on in medical instruments and so forth. All other companies did similar things. And for a while after that we saw fewer new products. When this threat subsided the companies focused again on R&D and we saw a golden era in the ’80s and ’90s with a lot of new products and breakthroughs."

For the full interview, see:

ROBERT L. POLLOCK. "THE WEEKEND INTERVIEW with Sidney Taurel; Of Politics and Pills." The Wall Street Journal (Sat., December 2, 2006): A8.

Risk Diversification Only Works If Risks are Random

Source of book image: http://www.inbubblewrap.com/2006/08/should_i_do_it_should_i.php

According to Mr. Apgar, managing director of the Corporate Executive Board and a former McKinsey consultant, the problem is that our traditional tool set deals only with random risk. Equity prices, interest rates, natural catastrophes — all operate, more or less, as perfect markets, distributing risk with equal probability among all the players. No one consistently knows more about what drives these phenomena than anyone else. We can bear or hedge these risks in the secure sense that competitors don’t have an inside lead on the future.

. . .

In real business, though, many of the risks that can potentially wipe us out are non-random — what Mr. Apgar calls "learnable risks" — involving customers, technologies, marketing strategies, supplier relationships and so on. The challenge is not just to learn, quickly, enough about them to survive but to determine whether someone else can learn about them even faster and thus put us out of business.

. . .

. . . Mr. Apgar also explains how to perform a "risk audit," judging a company’s current projects by how they diversify total risk or demonstrate risk intelligence. Here is where his program differs most widely from conventional wisdom — because, as he notes, risk diversification is no virtue if the risks are non-random and we have little intelligence of any of them. If you don’t know much about poisonous snakes, keeping several different species won’t make you any safer.

Like liberty, risk intelligence demands eternal vigilance — and for the same reason: threats evolve. Mr. Apgar’s analysis of the life cycle of a business risk is particularly fruitful. He notes that a successful company needs to maintain a risk pipeline, constantly probing into areas where it has higher risk intelligence and opportunities for real diversification — just as technology and pharmaceutical companies need a proportion of blue-sky research to innovate into the future.

For the full review, see:

MICHAEL KAPLAN. "BOOKS; The Hazards of Fortune." Wall Street Journal (Fri., December 8, 2006): W6.

(Note: ellipses added.)

T.W. Schultz May Have Been Right to Emphasize Innovation Over Invention

On the left is a photo of Fragment A, the largest of the 82 fragments of the Antikythera Mechanism. On the right is an x-ray (radiograph) of Fragment A. Source of images: http://www.xtekxray.com/antikythera.htm

When I was a young graduate student at Chicago, in the mid-1970s, T.W. Schultz was a gentle, but still active and sharp, old man. I respected him and liked him, but sometimes thought he was a bit naive. For instance, one of his positions was that most useful technology is already out there somewhere—the hard part is figuring out how to efficiently get the useful technologies to market at a price people are willing to pay. (I’m writing this from memory.) In other words, to use Schumpeter’s distinction between invention and innovation: Schultz downplayed the role of invention and emphasized the role of innovation.

The amazing device discussed in the article below, seems like solid grist for T.W.’s mill.

(More grist would be a huge, fancy, ancient Chinese clock that is discussed in Daniel Boorstin’s The Discoverers book.)

Also, do not neglect to pause for a moment to notice the vindication of Derek J. de Solla Price. Few today know his name, but he should be remembered as one of the first (Galton might be the first) to apply bibliometric measures to the study of science.

A computer in antiquity would seem to be an anachronism, like Athena ordering takeout on her cellphone.

But a century ago, pieces of a strange mechanism with bronze gears and dials were recovered from an ancient shipwreck off the coast of Greece. Historians of science concluded that this was an instrument that calculated and illustrated astronomical information, particularly phases of the Moon and planetary motions, in the second century B.C.

. . .

Technology historians say the instrument is technically more complex than any known for at least a millennium afterward. Earlier examinations of the instrument, mainly in the 1970s by Derek J. de Solla Price, a Yale historian who died in 1983, led to similar findings, but they were generally disputed or ignored.

The hand-operated mechanism, presumably used in preparing calendars for planting and harvesting and fixing religious festivals, had at least 30, possibly 37, hand-cut bronze gear-wheels, the researchers said. . . .

. . .

Dr. Charette noted that more than 1,000 years elapsed before instruments of such complexity are known to have re-emerged. A few artifacts and some Arabic texts suggest that simpler geared calendrical devices had existed, particularly in Baghdad around A.D. 900.

It seems clear, he said, that ”much of the mind-boggling technological sophistication available in some parts of the Hellenistic and Greco-Roman world was simply not transmitted further.”

”The gear-wheel, in this case,” he added, ”had to be reinvented.”

For the full story, see:

JOHN NOBLE WILFORD. "Early Astronomical ‘Computer’ Found to Be Technically Complex." The New York Times (Thurs., November 30, 2006): A7.

(Note: ellipses added.)

The reference for the Nature article reporting the new analysis, is:

Freeth, T., Y. Bitsakis, X. Moussas, J. H. Seiradakis, A.Tselikas, E. Mankou, M. Zafeiropoulou, R. Hadland, D. Bate, A. Ramsey, M. Allen, A. Crawley, P. Hockley, T. Malzbender, D. Gelb, W. Ambrisco, and M. G. Edmunds. "Decoding the Ancient Greek Astronomical Calculator Known as the Antikythera Mechanism." Nature 444 (Nov. 30, 2006): 587-91.

The reference to the Boorstin book, is:

Boorstin, Daniel J. The Discoverers. New York: Random House, 1983, pp. 59-61.

On the Chinese clock, the Boorstin book relies on:

Needham, Joseph. Science and Civilization in China. Vol. 4 Physics and Physical Technology. Part II: Mechanical Engineering. Cambridge, England: Cambridge University Press, 1965, Figure 650, p. 449.

One of Derek J. de Solo Price’s most important books, is:

Price, Derek J. de Solla. Little Science, Big Science. New York: Columbia University Press, 1963.

A computer model re-construction of the Antikythera Mechanism. Source of image: http://www.xtekxray.com/antikythera.htm