Economics of Technology – Page 102

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

Evan Williams Spurns Bad Money

Evan Williams (on left) with Noah Glass, co-founded Odeo. Source of photo: http://www.nytimes.com/2005/02/25/technology/25podcast.html?ex=1267419600&en=b80f1d3808f556cc&ei=5088

Evan Williams’ story illustrates Christensen and Raynor’s advice that disruptive innovators need to seek good money, and spurn bad money. Good money is patient for growth, but impatient for profit. Bad money is the opposite.

EVAN WILLIAMS recently bought his freedom. It cost him a bit more than $2 million, and he says it was worth every penny.

I’m not talking about paying off a big debt to one of Tony Soprano’s loan-shark underlings. Mr. Williams is a serial entrepreneur, one of those Silicon Valley characters who start company after company. And he purchased his freedom from the venture capitalists and others who financed his company, Odeo. Mr. Williams dug into his pockets and gave them back their money. He got to keep his struggling podcast company and renamed it the Obvious Corporation.

In the process, Mr. Williams, who is 34, has become something of a cause célèbre among a small group of mostly young entrepreneurs who seem determined to turn their back on venture capitalists. They say they yearn for a new entrepreneurship model. They talk about building ”sustainable companies” suggesting something idealistic in their quest. With comments on blogs urging Mr. Williams to ”keep up the goodness,” it feels a bit like the birth of a mini-movement in the Valley.

. . .

In candid posts on his blog, Mr. Williams chronicled Odeo’s story, warts and all. He admitted to making mistakes. Getting too much venture money too early was one of them. It made it harder to persuade the board and the company’s 14 employees to change course when, for example, Apple Computer introduced a competing product that cut into Odeo’s prospects. ”It’s a bigger ship to turn,” Mr. Williams said.

For the full story, see:

MIGUEL HELFT. "STREET SCENE: VC NATION; Yearning for Freedom From Venture Capital Overlords." The New York Times (Fri., November 24, 2006): C5.

(Note: ellipsis added.)

The reference for the Christensen and Raynor book is:

Christensen, Clayton M., and Michael E. Raynor. The Innovator’s Solution: Creating and Sustaining Successful Growth. Boston, MA: Harvard Business School Press, 2003.

“Smart People Can’t Come Here”

Several years ago, I got up in the middle of the night to call the United States embassy in Beijing, in order to beg an embassy official to issue a visa to our best applicant for our open Research Assistant position. He did not want to do so, solely on the grounds that she might not return to China. The woman we wanted to hire had sky-high credentials by every measurable criterion, and based on letters of recommendation, was exceptional by the non-measurable criteria too.

How bizarre is the immigration policy of the United States when we view it as a problem that such a person might honor us by wanting to stay in the United States?

PALO ALTO, Calif. – Some of technology’s biggest names shared the stage at Stanford University last week to discuss the future of American innovation.

Yahoo co-founder Jerry Yang and Kleiner Perkins Caufield & Byers venture capitalist John Doerr were among the members of two panels at a technology summit at the university.

The third annual innovation summit, where industry leaders talked about emerging trends and government technology policy, was organized by TechNet, an advocacy group that lobbies on behalf of tech executives.

. . .

The executives also lamented government policies limiting student and work visas, warning that this shuts out people like Google co-founder Sergey Brin and former Intel chief executive Andrew Grove.

"We have this crazy policy in the U.S. that says smart people can’t come here. I think we all agree it makes absolutely no sense," Yang said. "Are people going to want to build a company in the U.S. . . . or in the new talent centers?"

For the full story, see:

SAN JOSE MERCURY NEWS. "Technology summit sees risks for U.S." Omaha World-Herald (Sunday, November 19, 2006): 7D.

(Note: the ellipsis between paragraphs was added; the ellipsis in the Yang quote was in the original article.)

Cheap, Easy, Transparent Property Rights Institutions Are Key to Developing Long Tail

Chris Anderson points out that the main thing currently holding back the long tail, are legal restrictions in the form of clearing copyrights. This is somewhat analogous to how the legal restrictions to starting up a small business, end up protecting the larger incumbent companies, a la Hernando de Soto’s The Other Path.

Figuring out how to quickly and cheaply process small intellectual property rights claims is the key. The assumption that this could and would be done was an underpinning of Bill Gates’ prediction of the key importance of content in his The Road Ahead.

If Gates’ vision could be realized, it would provide the consumer much greater variety (and much closer matches between what is sought and what is found); and it would provide many more producers of content, the opportunity to support themselves through their productive activities. (As opposed to the current situation where most such producers must produce as a part-time, labor-of-love, while they support themselves by their unrelated ‘day job.’)

Books mentioned:

Anderson, Chris. The Long Tail. New York: Hyperion, 2006.

Gates, Bill. The Road Ahead. New York: Viking Penguin, 1995.

Soto, Hernando de. The Other Path. New York: Harper and Row, 1989.

Does Focus on Scarcity, Blind Us to Abundance?

Chris Anderson ends chapter 8 of his stimulating The Long Tale, with a provocative jab at economists:

(p. 146) Finally, it’s worth noting that economics, for all its charms, doesn’t have the answer to everything. Many phenomena are simply left to other disciplines, from psychology to physics, or left without an academic theory at all. Abundance, like growth itself, is a force that is changing our world in ways that we experience every day, whether we have an equation to describe it or not.

The reference to Anderson’s book, is:

Anderson, Chris. The Long Tail. New York: Hyperion, 2006.

Examine Your Assets and See If, and Where, They Can Add Value

In Gerstner’s book, there is an intriguing passage in which he defends turning IBM into an integrated services firm. As an aside, he says that it might not now have made sense to build up IBM’s diverse assets, but now, having them in existence, it made sense to use them. And he points out that even in the age of modularity, many customers needed, and were willing to pay for, a company that was able and willing to put everything together for them.

At first glance, this comment might seem at odds with the economist’s dictum that "sunk costs are sunk." But Gerstner was not advocating the integration of IBM services because IBM had historically invested a lot in building up the parts of the organization. He was pointing out that diverse parts, if properly integrated, would provide substantial added-value to an important sub-group of customers.

Here is the relevant passage from Gerstner:

(p. 61) Unfortunately, in 1993 IBM was rocketing down a path that would have made it a virtual mirror image of the rest of the industry. The company was being splintered—you could say it was being destroyed.

Now, I must tell you, I am not sure that in 1993 I or anyone else would have started out to create an IBM. But, given IBM’s scale and broad-based capabilities, and the trajectories of the information technology industry, it would have been insane to destroy its unique competitive advantage and turn IBM into a group of individual component suppliers—more minnows in an ocean.

The reference to the book, is:

Gerstner, Louis V., Jr. Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change. New York: HarperCollins, 2002.