Does Google get a good ROI in KC?

What in the world is Google doing with its high speed network in Kansas City? Does Goggle expect the revenue to exceed the costs of building the network? Dave Burstein has some numbers to illuminate the question.

Dave Burstein is a communications junky for the major communications junky. He covers many topics in communications markets, and he obsesses over finding the true facts, not merely the sound bites. Last week he provided an outline of the basic economic parameters behind Google’s investment in high speed broadband in Kansas City, and his notes make for interesting reading about the project.

I would guess that most readers of this space are not junkies. I know how to read what Burstein writes. The purpose of this post is to provide a translation.

One gig broadband in Chattanooga

For those of you with an interest in frontier infrastructure, check out this article from Stacey Higginbotham at Gigaom. She wanted to see what *really* high speed fiber looks like in practice, so she went to Chattanooga, which has been running an experiment at the frontier. This quote will give you a feel for the article:

“For the last two years, Chattanooga, Tenn.’s public utility (EPB) has offered customers a gigabit fiber-to-the-home connection costing roughly $300 a month, so I touched base with a group of investors and entrepreneurs who have built a program to try to see what people can do with that fast a connection. So far, the limits of equipment, the lack of other gigabit networks (much of the Internet is reciprocal so it’s no fun if you have the speeds to send a holographic image of yourself but no one on the other end can receive it) and the small number of experiments on the network have left the founders of the Lamp Post Group underwhelmed.”

It is a pretty interesting article. Read the comments too, as some of them disagree with her negative conclusion and offer concrete counter-examples.

Tiered Broadband Pricing

Kellogg Insight’s Editor, Tim De Chant, and I sat down to discuss tiered pricing for broadband. It was a pretty interesting conversation, and Tim distilled it into a blog post. If you are curious to see the original post and other posts by Tim, see his blog, Expertly Wrapped. With Tim’s permission, here is a reposting:

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Consumers and startups to be affected by metered broadband, By Tim De Chant

As more people are looking forward to a future overflowing with data—Facebook, Twitter, Netflix, YouTube, a seemingly limitless number of websites, and more—broadband providers are looking to limit the amount of data they provide. And with those limits will come new—and most likely higher—prices.

Data caps aren’t new—they have been widely implemented by wireless providers—but they haven’t been widely implemented among traditional broadband providers. Now, that seems to be changing. Many providers complain that their network is overloaded, and that the costs of upgrading it to handle the added traffic are prohibitive. To maintain a quality service for their customers, providers say they have to raise prices.

Unfortunately, it’s not that clear cut, said Shane Greenstein, a professor of management and strategy and expert on internet economics. There are a number of issues clouding the matter, one of which is time of day. Overuse “usually does not matter most of the day. It generally only matters between 7 PM and 10 PM, when use is highest,” he said. “The usual justification for usage based pricing (or caps, for that matter) appear quite weak outside the 7 to 10 PM window.”

Limits to broadband diffusion?

The National Telecommunications Information Administration just published the findings from its latest survey about Internet use within US households. In case you missed it, here is a summary: broadband adoption among US households went up, but not by much.

Actually, that is not entirely fair. Viewed at short intervals, broadband adoption will appear to be a slow moving process. However, a little stepping back from the short run headlines reveals good news and bad news in this report. That is the point of this post.

US Broadband in Maps, Graphs, and some Bars

To be sure, most of us do not use government statistical reports as anything more than bedtime reading for inducing soporific reactions. It is cheaper than a sleeping pill.

But those expectations would be too harsh for the most recent broadband report from the FCC. It contains a great deal of data, and it is really quite informative. I would go even further. It is a useful vehicle for learning about the basic economics of broadband. For that purpose, however, it has one drawback: it is a wee bit too long, as in 88 pages.

This post will save you some time. Much of the key insights can be summarized in three pictures — a map, a graph and some bars. The post  will start with the map, then go to the graph, then end with the bars. (For those keeping score at home these pictures are taken from pages 62, 78 and 79 of the report.)

The Direction of Broadband Spillovers

Revenue for US Internet access more than doubled during the first decade of the millennium owing to some simple arithmetic: the number of households using the Internet increased, and prices for broadband access averaged twice those of dial-up. More concretely, in the summer of 2000, while 37.1 percent of US households connected with dial-up, only 4.4 percent had broadband. By October 2009, 63.5 percent of US households connected with broadband.

The upgrade to broadband initially led most US households to spend more time online. At first, much of that new time went into the same activity found in dial-up (for example, checking e-mail, reading news, and shopping). Only gradually did users add activities that dial-up couldn’t handle (such as watching YouTube video, downloading music, or reading many blogs). By now, the transformation is rather apparent: broadband has created more online users and, moreover, these users are more valuable users of electronic commerce and advertising-supported media.

The relationship between broadband’s growth and other online markets is what economists call a growth spillover—that is, growth in one market spilled into another. Spillovers can be negative or positive. For example, broadband’s diffusion produced negative spillovers for the printed magazine and newspaper business, and it produced a positive spillover for online video sharing, such as YouTube.

Spillovers don’t need to be confined to a geographically local area, so they’re often challenging to observe and trace. This column focuses on understanding the geographic direction of the positive spillovers from broadband to online retailers and advertising-supported media, about which we know very little. To whom did the positive gains flow, and where?

The Internet and Innovation: My Testimony to Congress

A couple days ago I had the privilege and pleasure to testify before the House Sub-committee on Communications, Technology and the Internet, which is part of the Committee on Energy and Commerce in the House of Representatives.

Broadly speaking, the topic was net neutrality. That is what the newspapers said.

Frankly, I hesitated to testify. I am always happy to talk with any government analyst who calls, irrespective of party affiliation. Congressional testimony is different, however, especially in this topic, which tends to yield more heat than light. Moreover, I am neither advocate nor opponent for net neutrality — at least as that phrase commonly gets used in US political debate. Why should I be a neutral voice in someone else’s political fight?

Ah, but I could not say no. Even with reservations, there still exists a professional obligation to show up. It is the right thing to do. Also, and I will admit to this, I was excited.

One other thing made it easy. The hearing did not concern the entire net neutrality debate. It concerned a rather specific question, something called House Resolution 37, which disapproves of the Open Internet Access Order issued by the FCC last December. If passed, the entire order would not take effect — not its provisions for transparency, blocking and discriminatory traffic.

I had testified at the FCC hearings leading up to to the order, and  had testified in favor of transparency provisions, for example. That made it easy. Such a blanket resolution — getting rid of everything — looked like throwing out the baby with the bath water. To me this resolution did not make sense.

One other broad motive shaped my views. I believe there actually is a big economic question on the table, and it gets lost in the popular debate. I hoped to bring attention to that. In a nutshell, if there is anything a government might be able to do, it might be able to foster economic growth by nurturing entrepreneurship on the Internet.

Those expectations were naive (of course), but we will get to that below. Anyway, that is why I agreed to come.

This post will share what I learned about how the existing political debate filters this topic.  Below is a copy of my oral testimony, and a link to my written testimony. After that comes many  observations about what sort of questions arose at the hearing. I hope others find this insightful and useful.

Building Broadband ahead of Digital Demand

Many governments today, especially outside the US, are considering making large subsidies for broadband. Some governments, such as South Korea’s, have already done so, making next-generation broadband widely available.

In the US, debates about subsidizing broadband touch two sets of overlapping issues. One set considers the benefits and costs of an expensive action: building wire-line broadband in low-density areas. A second set considers stretching the frontier for broadband far beyond its present capabilities to enable next-generation Internet applications (typically video).

In the US today, those favoring building ahead of demand are the most dissatisfied, as are those who want to subsidize rural broadband. This column considers the economic origins behind that dissatisfaction.

The broadband price index puzzle

Does a consumer price index for broadband differ much from a producer price index for broadband? Though this question sounds like the final exam question for a real boring graduate class in economic measurement, I urge you to stay with me. There is something puzzling here about measuring innovation. Resolving that puzzle reveals something fundamental about broadband in particular, and about measuring innovation in general.

First, the answer. Why, yes, as a matter of fact, the two indexes can differ, but rarely do. Broadband’s experience in the last decade is an example where they do.

How can that be? How can the consumer and producer price index measure a different rate of improvement for the same phenomenon? They are based on different concepts. While those different concepts do not have to lead to different numerical answers, in broadband’s case they do. That is because a consumer price index ignores much technical improvement (more below), while a producer price index does not necessarily.  The details and reasons expose some puzzling principles for measuring technical change — arguably, explaining why our society undervalues economic improvements in broadband.

(There. Now you know how to get an A on this exam question.)

Indeed, I confess that this post is motivated by all the email I have received recently about a price index I helped make for broadband.  The email asks the same question: “How can a consumer price index for broadband possibly find little movement? Hasn’t there been a lot of innovation?” Well, let’s dive in and find out.

Ubiquitous Internet access in the mountains: what I did on my summer vacation

Just as we have in the past, this August my wife and I took the kids out west for a vacation. These vacations have increasingly become something of a respite from the rhythm and hum of the modern digital life, but they never leave the beat altogether.

Last year we went to Yellowstone and lost all touch with modern communications. As I wrote last year, losing touch became a theme for that trip. A friend, Joshua Gans, informed me that at Yellowstone we had moved off the grid. I liked this phrase so much I used it in my automated email message this year. It read:

“I am sorry, but I will not be able to return your email quickly. I am doing field work in the mountains, observing life off the grid until August 30th. I will try to respond as soon as I can. Thanks for your understanding.”

The automated message obviously affects a tongue-in-cheek tone. Now that I am home, however, I have to say that I did, in fact, do some field work, and learn something about the Internet. I learned about the meaning of ubiquitous access, which is a popular phrase in Internet policy circles. My family’s vacation experience illustrates that ubiquitous access is far too ambitious a goal for policies in low density areas. There is just no reason to have Internet access in every location and all the time if partial access accomplishes enough.

That might sound a bit abstract, so let me say it more concretely. This year my family and I spent time in two locations, Arnold, CA, and Tahoe City, CA. Both are in the Sierra Mountains. (And, no, the town of Arnold was not renamed for the present governor…)

At our main residence in both locations my wife and I could not get mobile phone service (hence, no mobile email), but we found good DSL broadband access (and I brought along a laptop). Phone service also was spotty when we visited underground caves, walked next to tall trees, rode horses through a vineyard, toured cheesy ghost towns, braved white water on a raft, hiked at high elevations and high winds, and listened to the breeze echo off the glacial canyons. In short, we visited many places off the grid, but not all these places were off the grid.

You know what? We did not need constant connectivity. Sure, constant connectivity would have been convenient, but partial connectivity was sufficient for a satisfying experience. In other words, there would have been a gain from having ubiquitous access, but not much.

Let me illustrate.