An Honest Policy Wonk

Captured regulators routinely take the blame for the ills of regulatory policy in electricity, telephony, and broadcasting. “Captured regulator” has been a pejorative term in these industries for decades.

It’s hard to say when it happened exactly, but this conversation migrated into electronics and the commercial Internet in the past decade, as both industries melded with communications and media businesses. Pieces of the topic even show up in the net neutrality debate.

Quite a bit of nuance got lost in the migration. While many episodes in the history of telephony and broadcasting illustrate regulatory capture, even the theory’s proponents know about exceptions—namely, situations that ought to have been captured but were not. For example, consider the Internet’s birth. There were numerous opportunities for regulatory capture in the Internet’s transfer out of government hands, and, yet, capture theory only explains part of the events and not the entire outcome.

I will refer to other episodes below, but for now, take that example as motivation for modifying the popular theory of regulatory capture. When does the regulatory environment work despite the tendencies toward regulatory capture? As best I can tell, the explanation has something to do with the presence of an honest policy wonk.

Two graphs show newspaper revenue decline

What happened to newspaper revenue? This short post contains an answer in two graphs. The graphs show the growth and decline in aggregate newspaper revenue.

More to the point, the graphs illustrate the timing of the decline in revenue and also the acceleration in decline. The graphs provide useful information about changes in the composition of revenue, which helps explain why revenue declined.

The graphs come to this space from my esteemed colleague, Tom Hubbard, who is the John L and Helen Kellogg Professor of Management & Strategy. Tom teaches a class on advanced strategy for MBAs, and had compiled the data for a module in the class.

In brief, Tom read a previous post in this space about the decline in newspaper revenue, and we got to talking about how a small amount of well chosen data can illustrate insightful analysis.  He showed me what he had collected and I was impressed. He graciously offered the graphs as additional evidence for the conversation.

Did one invention lead to the decline of newspapers?

Did one invention lead to the decline of newspapers? What is economic myth and what is true?

Don’t get me wrong. The decline of newspapers is NOT an economic myth. The business continues to lose more revenue each year, and so does other advertising-supported media, such as magazines. Much of this happened in the last decade. It is  unclear if executives at any newspaper have any good strategic choices. None of this is a secret.

But one invention and one firm did not produce this outcome. The typical story blames Google and Internet search, and does so a little too blithely. There is a grain of truth in the common story, but it misses a lot. While it is correct that the firm to profit the most from this trend is Google, Google alone did not kill the newspaper.

This post is not an apology for Google. Rather, it presents a broader economic history than typically found in public discussion. As more issues get debated in public it important not to premise decisions on a distorted view of how we got here. 

The Open Internet Order

After a year of hearings and considerable public discussion, the Federal Communications Commission (FCC) adopted the Open Internet Order on December 21, 2010.

Fireworks flared on the blogosphere almost immediately. Net neutrality advocates cried that the order betrayed and sold-out sacred principles, while Tea Party supporters heaped scornful criticism at government activism. Both sides made intemperate and grim forecasts about the Internet’s future.

Levelheadedness left the political sphere as well. Pushed hard by Tea Party sympathizers, the House of Representatives passed House Joint Resolution 37 in April 2011, largely along party lines, disapproving of the order. As of this writing, the Senate hasn’t yet taken up the measure. President Obama promises to veto it.

Frankly, this conversation needs a calm and considered middle ground, not utopian visions abutting practical considerations. The Internet has never lacked government oversight, and Internet participants have occasionally compromised on neutrality to function. There are subtle economic issues to debate here, and simplistic absolutes don’t contribute much to finding reasonable economic solutions.

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.

What do you mean it was Hiybbing?

I was sitting at my computer one afternoon several days ago staring at a blank screen, when the news walked in. If a computer screen could blare a headline, then it blared something incomprehensible.

Google accused Bing of copying its results, implying the hint of scandal. Google  uncovered the conduct through some clever sleuthing, and was proud of itself. Bing responded with indignity and complete disregard, accusing its rival of exaggerating.

Joshua Gans put his finger on one key aspect of this situation in a recent post, and I would like to take the spirit of his suggestion and push it further. Gans believes we need a new word to describe what happened. I concur.

To be frank, at first this was not obvious to me. With a few days gone, however, calm returned, I began to look back on this episode and grin. There is something rather amusing and absurd about this spat. In the first place, in the greater scheme of things the details behind this episode will not amount to much, so they did not deserve the hyperbole that either Google or Bing brought to their public pronouncements.

Yet, there is something rather engaging about the way Google set a little trap. They used a made-up word, Hiybbprqag, and planted it on the web to catch Microsoft imitating Google’s search results.  I cannot shake the amusing image. Twenty engineers sat in their homes, with instructions to enter some made up words, such as hiybbprqag, and then they anxiously waited two weeks to see if Bing would take the bait.

<sarcasm alert> Just think of what a good Hollywood script writer could do with this material. If you had asked me last year I would not have thought it was possible to make an entertaining Hollywood movie about a self-centered Harvard undergraduate who implements a social networking site more successfully than a few others classmates, but I was wrong. If that movie could work, then  Google’s antics have so much more potential. This is the fodder for a trilogy of movies about high-tech competitive intrigue. Nerd wars here we come. But I digress. <end of alert>

Anyway, let’s all lighten up. It is just a little spat between rivals.

Gans’ observation mixes a serious bit of analysis with tongue-in-cheek amusement (which is Gans usual disposition towards life, and the primary reason he is good for an extended conversation on any occasion. But I digress once again). He observes that our language for competitive rivalry is not appropriate for what we all observe in this spat. That is part of the problem with the news reports about the episode. What we observe is neither imitation in the usual sense, nor quality competition in the usual sense. It is something else, something slightly different, something in need of a new label.

Bravo, Joshua. The spirit of this observation is right. That said, I do not entirely agree with Gans’ implementation, and that is the point of this post. I would like to suggest a new word.

Planes, Payments, and the Vast Muddle

What do Starbucks and American Airlines have in common? Recently they each made a major strategic decision regarding their online networking presence. In each case, this decision brought the firm closer to the vast economic muddle.

Let me explain. At any point in time a network will find itself in roughly one of three states: Frozen disaster; Vast muddle; and Blissful connectivity. The first and the last of these define dystopian and utopian outcomes, respectively. The vast muddle defines what actually occurs the majority of the time.

For reasons that are somewhat mysterious to the average person, for the last two decades the world’s major networks managed not to be frozen disasters or vast muddles. For many of us with a sense of history, this state of things seemed remarkable, almost unreal, and very fragile. There always seemed to be a danger that blissful connectivity would not last.

Recent events, such as those illustrated by American Airlines and Starbucks, suggest that these concerns might have been on target. Through one step or another, society seems to be returning to the vast muddle.There are some interesting economic lessons in that experience.

Will the iPad flatten us all?

This article appeared in the Financial Times on January 14, 2011. It was written by Gillian Tett (pictured on the right, photo credit to the Financial Times). It refers to research by yours truly, Chris Forman and Avi Goldfarb. The specific paper she discusses is titled “The Internet and Local Wages: a Puzzle.” Check it out.

**********************************************************

Will the iPad flatten us all?

As you trudged back to work this month, did you head to an office in a large urban centre, be that Baltimore, Bristol or somewhere else? Or did you sit down at your computer – or with an iPad – in a pleasant ski lodge, beach house or even a simple house in a poorer rural region, such as Arkansas or Wales?

Right now those questions matter not just for your own well-being, but to wider social and economic policy, too. More than a decade ago, the US author Thomas Friedman caused a stir by suggesting that the internet was turning the world “flat”: by connecting everyone, new technologies were creating competition and opportunities across borders, enabling many jobs to migrate….

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.