Virulent Word of Mouse

September 22, 2010

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. (more…)

September 4, 2010

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. (more…)

August 29, 2010

The Verizon-Google proposal

The other evening I heard a speech by Tom Tauke, the Executive Vice President, Public Affairs, Policy and Communications at Verizon. He tried to explain the Google-Verizon proposal.

Listening to Tauke has motivated me to write a couple comments. In light of all the things that have been said, what more can be said? I want to focus on the economic aspects of this issue, which get far too little emphasis in public discussion.

There are some interesting economics in this proposal, and some open economic questions. Those are the type of points this post will focus on. (more…)

August 1, 2010

Changes in the price of broadband

Filed under: Broadband,Considering topical questions,Internet economics — Shane Greenstein @ 9:58 pm

This post reports the results from a bit of economic sleuthing about broadband prices. It quotes a research paper. The paper is called Evidence of a Modest Price Decline in US Broadband Services, which gives away the punch line in the title. Ryan McDevitt and I wrote the paper.

Let me explain why we did it.

The Internet mass market has grown in two waves. The first wave involved dial-up access to households, typically at $20 per month, give or take.

The second wave involved broadband, involving either DSL or Cable architectures for delivering such speeds. The cost of access in the second wave averages about twice as much, roughly $40 per month, give or take.

In some research we did last year Ryan and I tried to figure out how much households benefited from an upgrade, namely, moving from the first wave to the second one. That is, what is the gain to a household from going from dial-up to broadband?

We expressed the gains in terms of an equivalent decline in price. We figured out that the gain to all users was equivalent to about a 1.6% to 2.2% decrease in price each year between 1999 and 2006 (the last year we had data).

However, we did not examine the experience after the upgrade, nor estimate whether price increased or declined, or quality improved. As more households switch to broadband, the prices for such expenditure becomes more important.

Said another way: broadband is now part of a recurring household expenditure that exceeds $500 a year in many households. According to the latest survey of the Pew Internet and American Life Project, fewer than 10% of US households had dial-up Internet connections by April 2009, while 63% of US households had broadband. That over 70 million households by now.

So we ask: What change in prices did a typical US household experience after installing broadband in their home?

◦       Did prices go up or down in general? By what percentage, if at all?

◦       What is the answer if the prices are adjusted for qualitative improvement?

◦       Did DSL and cable users have a similar or different price experience?

There is a standard economic approach for addressing such questions: construct a price index. So we did just that. This post reports the results. If you want to know all the gory detail, then read the paper.

(more…)

July 22, 2010

A guide to net neutrality lobbying

Here is a short article about net neutrality. It has the provocative title “Where do telecom lobbyists come from?” Actually, the article is not very provocative.  It describes the positions of the main players, and explains a bit about who they have hired to advocate on their behalf. Nothing about it surprised me. Still, it is useful for those who are unfamiliar with how these issues get debated in Washington.

One observation and question. These lobby efforts primarily represent the views of established firms. That is not a surprise, but this issue effects more than established firms. It also effects entrepreneurs and software developers. A few big software developers are represented, Google and Microsoft most prominently. Nobody, as far as this article states, advocates for entrepreneurs, or small software developers. I would be interested to know if there are lobbyists who do represent the views of those groups.

Does anyone know?

June 4, 2010

New pricing for data plans at AT&T

Filed under: Broadband,Internet economics,Short observations — Shane Greenstein @ 5:36 pm

In case you missed the news, AT&T wireless announced a change in its pricing of data plans. This is squarely aimed at iPhone and iPad users. There are lots of different opinions about the announcement, especially among Apple users.

Tim DeChant, who writes a blog about current events and solicits Kellogg faculty opinions for it, put together a great post about the new pricing plan. He describes much of the relevant detail, and how to interpret it.

Well, perhaps I am biased when I say “great”. The post includes several quotes from yours truly.

Go ahead and check it out!

May 12, 2010

The Simple Economics of broadband regulation

There is a simple economic rationale behind the FCC’s recent announcement, made last week by Chairman Julius Genachowski, on May 6th.The FCC had to act. The costs of not acting were too great.

Here is why. Broadband carriers have strong economic incentives to provide services that compete with the applications of others. Yet, those same broadband carriers carry the data of all those applications. These carriers face what is often called “mixed incentives”, and until recently all carriers were forbidden from acting on them. Genchowski wanted to keep things that way, but an appellate court made that hard to do.

Let me make the issue concrete. Just ask your neighbor what they would think of the following: Would they be angry if Comcast blocked Skype from operating and told all users they had to go through an approved vendor of IP telephony? Would your neighbor be unhappy if Google slowed down when the search concerned local car dealers because AT&T broadband had a local search service on which local car dealers advertised? Would your neighbor be frustrated if they could not go to Hulu, but instead had to go to the approved TV distributor who worked with Verizon?

Look, none of that has happened yet, but that is because it was forbidden by regulators until a few weeks ago. It is not anymore, and that illustrates what any sensible regulator should fear. They should fear slowly slouching towards a situation where the mixed incentives of carriers gets in the way of delivering services over the Internet. Households have gotten used to having unrestricted choice online of innovative services, and there would be a minor revolt if narrow firm self-interest got in the way of that.

I have no axe to grind with carriers, so let me say that more positively. The country has benefited from allowing carriers freedom to innovate and build, and that was so up to a point, painting a bright line in one clear place, limiting the discretion of carriers to interfere with anybody else’s innovative services.

More to the point, the present limitations have fostered an innovative ecosystem. Software vendors and Internet hosting companies have developed a range of innovative services in anticipation of (1) better infrastructure on which to run it, and (2) sending their applications across broadband lines that behave the same way everywhere.

In other words, application vendors do not worry about which carrier delivers the data to which homes because carriers are not allowed to act on their mixed incentives. Knowing that, application developers innovate in all sorts of ways that users enjoy.

Those simple economics explains quite a bit of regulatory action. If you look beyond all the posturing and public relations, it is not surprising the FCC feared what would happen if it permitted no legal restraint on carrier action.

To be sure, the FCC’s own explanation of its announcement is — *um*, how do I say this nicely? — confusing in its details. Many commentators have tried to figure out the legal subtleties, focusing on legal nuances about what the new regulations will do or will not do. I have yet to read a simple summary (and that is a worrisome).

More to the point, it is fine for commentators to gripe about legal definitions, but I think all the commentary must acknowledge the most primary economic motivation at the heart of the action: the FCC had to clearly signal that it would try to erect a new regulatory mechanisms for enforcing limitations on carriers’ mixed incentives.

That is the point of my post. There were two economic reasons to take action, and both point towards limiting mixed incentives. One has to do with the incentives to act on mixed incentives today, and the other has to do with the long term trends of the evolutions of the network, which reinforces incentives to act on mixed incentives tomorrow.

(more…)

March 23, 2010

The Internet is hiding in the weeds

Filed under: Broadband,Essays,Internet economics and communications policy — Shane Greenstein @ 10:27 pm

The Internet continues to diffuse to households. That trend should not surprise anybody who has been awake this past decade. Some of the details behind the trend might surprise many people, however.

These details never make headlines. Headlines are about new facts, new trends, new developments, and new surprises. The details behind slow moving trends do not make headlines. There are too grinding, too nuanced, and in some cases, just plain boring.

Let me put it this way. Rarely does the diffusion of a new technology appear like an elephant stampede — namely, with lots of thump-thump-thump and distant rumbling that eventually becomes a deafening roar and overtakes everything in its path. Nope, never that loud.

Rather, most technologies spread like the Internet. The Internet spread like a mice or rabbit infestation. The signs were not visible at first, and certainly there was not much noise from any rabbit stampede. The animals crept up on the neighborhood, quietly perhaps, hiding here and there, but traces of their presence appeared all around, never directly in view, but always out of the corner of the eye. They appeared first in one field and then another. Eventually they ended up everywhere.

You heard it here first. The Internet spread like rabbits hiding in the weeds. (Perhaps that is not such a great metaphor, but now that I have written it I am not taking it back.)

More to the point, the details behind the Internet’s diffusion do not get much notice because they are not noisy new factoids or noisy new events. Yet, they actually say a lot about the state of the Internet in the US today, so they are worth a closer look. And that is what I am going to do in this post. We are going to get into the weeds.

(more…)

October 11, 2009

Can a government encourage economic experiments?

Can the US government adopt a policy that encourages innovation in the Internet? I think so. Recently, I got to say so in a public hearing at the Federal Communications Commission. As part of its Congressional assignment to write a broadband plan the FCC has held these hearings. The first half of this post summarizes my views about encouraging economic experiments in the broadband ecosystem, and the second half summarized my response to an interesting email from a listener about whether the government should fund experiments with municipal wifi. (more…)

September 21, 2009

Completing an upgrade to the broadband network

Proponents of a broadband build out should be aware that some subtle economics are missing from their case. The following question needs an answer: What benefit does the spread of broadband to new areas bring to all the other areas in the country that already have broadband?

That type of question does not normally come up in analysis today. For example, I was just reading a very good USDA report about extending broadband to rural areas. It is very thorough and reviews some very interesting analysis (especially in the latter chapters). Broadly construed, the analysis focuses on the benefits broadband brings to areas that did not have such connectivity.

Do not misinterpret me. There is nothing wrong with that type of focus. However, as I have said elsewhere, it leads to one conclusion. Broadband will help a local economy, but its arrival will not – indeed, cannot – perform economic miracles. It is an exaggeration to say otherwise.

More to the point, standard economic analysis does not provide an overwhelming justification for building broadband anywhere in the country, since the expense is enormous. There is an economic kick to installing broadband where there previously had been none, to be sure, but modest gains do not justify large expenses. Limits are limits.

This should give proponents for an expansive policy some pause. Either non-economic issues need to come to the fore or additional economic arguments needs to be formulated. Today I want to consider the latter.

An expansive policy needs to address this challenging question: What difference does it make to a community outside Denver if a community in Appalachians has broadband or not?

Not much, it would seem. But, actually, I am not so sure.

This is actually an open economic question, and that is the point of this post. If the proponents for an expansive policy find a persuasive answer to that question, then they will have a more persuasive case. (more…)

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