Virulent Word of Mouse

January 15, 2011

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.

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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…. (more…)

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…)

July 16, 2010

Digitization and Value Creation

Often, the simplest economic questions are the hardest to answer. Consider these: How much economic value did the massive decline in the cost of digitization in the last two decades create? And, would a similar level of decline in the next decade create the same amount of value?

These are surprisingly difficult questions to answer. Do not get me wrong. Obviously, large cost declines create new value. How much value? We can look deeply at the past but still find it hard to answer that question with any precision. Many factors enhance or limit the extent of value created. If we cannot analyze the past, surely predicting the future is fraught with challenges.

(more…)

April 27, 2010

Bleeding Edge Mass Market Standards

To have a large impact, bleeding-edge mass market standards must do two things: diffuse widely and provide new functionality. Curiously, however, while these standards often get built from very advanced technologies, they cannot deploy on a wide scale without building upon other widely deployed routines or less-advanced processes.

Successful deployment of a bleeding-edge mass market standard can bring about enormous change. Consider what happened after the design of USB2 became available. Interested parties monitored the upgrade to USB, understanding that their near rivals did the same. All these parties subsequently made products compatible with USB2 and differentiated along the dimensions in which they had competitive advantage. Consequently, a range of innovative products emerged—storage devices, printers, cameras, keyboards, … you name it.

There is something paradoxical about this pattern: A standard at one layer enables more novelty on another. And a change to the standard—upon which many others build—can enable an even wider range of innovative services.

This issue’s column discusses the determination of new standards in mass markets, an event that shapes such paradoxical outcomes and hence market structure and firm strategy. It is worthwhile to take a moment and examine the patterns. (more…)

January 23, 2010

Pass the password

In case you missed it, many passwords are not safe. Not just a little bit. It is a hacker’s paradise out there.

Recent headlines made the point ever so clear. The most popular password in America turns out to be “123456”. Might as well leave the keys to the automobile in the driver-side door, where a thief can easily find it. That is the sort of favor many users are doing for hackers.

This is what passes for news in the Internet today. If you read between the lines, very little about this fact is news. That is worth a comment or two.

More to the point, computer scientists like to observe that the Internet has scaled well. That is not exactly right, and they know it. The technology scaled well at the level of transport infrastructure, but not at the access layer, where most of the passwords are. Internet access is an example of a technology in which the very characteristics that make it popular at small scales are precisely those that make it ill suited to large scale use.

This will take some explaining.

(more…)

October 25, 2009

After Baby Einstein’s first steps: innovation with ambiguity.

How would most parents react to the following product? If they buy a DVD and show it to their babies, the babies will get smarter, raising their chances of getting into Medical School.

If that seems too good to be true, then perhaps you never have heard of the Baby Einstein Company. I am exaggerating their claims, but their products have attracted attention from consumer protection groups.

Believe it or not, the observation has something to do with high tech.

babyeinstein1Baby Einstein’s tale illustrates how markets quickly develop new opportunities opened by scientific research, even when the research has a flimsy foundation. Market behavior cannot be described as “Steady, aim, fire.” It is more like “Fire, aim, steady.”

More to the point, this episode illustrates a tendency of markets to introduce new innovative products that take advantage of ambiguous scientific discovery. The phenomenon is pervasive in pharmaceuticals, biotech, and genetically modified organisms, not to mention many other medical device markets. Baby Einstein just happens to be easier to understand, so it makes for a great illustration of the process. (more…)

September 24, 2009

Illustrating the destructive part of creative desctruction

I love creative destruction. But, truth be told, it is more fun to ignore the destructive part and focus on the creative part.

Ah, but sometimes we should be sober. Like most economists, I believe in the power of uncoordinated competitive interplay among firms. Except when it goes real sour. Which it does occasionally.

And that gives me some pause.

Here is a story spotted by Kennedy Elliott. It is a sour story, told by Chris Anderson, editor of Wired. This events are straightforward enough. Three newspapers — one of them very new and digital, etc — got into a destructive price war, which turned into a war of attrition in which nobody quit. With very ugly results. It is impossible to read without flinching and saying “ouch!”

Worth a read if you are in the right mood.

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…)

September 11, 2009

Rural broadband and economic growth – a flu shot with vitamins.

Building rural broadband will bring a modest amount of economic growth. That is what economic research suggests.

Building rural broadband is like getting a flu shot. It might help prevent some problems. It might sting at first. It might make some recipients stronger in the long run, but it is just as likely that it will not make any difference. All in all, it is better to get the shot than not.

Hmm, that first metaphor needs modification. Building rural broadband is like a flu shot laced with vitamins.

Why does the metaphor matter? For better or worse, policy in DC gets made by those who find the best sound bites. I am trying to keep up.

More to the point, some people are convinced that broadband is more like a flu shot laced with economic steroids, as if rural broadband will be a big factor in bringing about economic growth. This is partly due to a misreading of research, and maybe due to some willful misrepresentation by lobbyists. This is just wrong, and very misleading. As I have said before, this (mis)perception needs to be fixed in order to generate sound policy. (more…)

September 1, 2009

Broadband’s contribution to economic growth, who is a contrarian?

Let me begin this post by declaring – without reservation – that I just love what technology and innovation can do to an economy. No, that is not a strong enough declaration. Let me say it this way: I am a card carrying member of the club that believes a substantial amount of economic growth in developed countries build on a wide and solid foundation of innovation and technological change.

What can I say? Among economists I am a technological enthusiast.

It turns out, however, that I am out of step with some of the telecom policy community in Washington D.C..  I have not changed, but the yardstick inside D.C. is just different. I was reminded of this recently after a paper of mine was presented in DC. Several other economists and I were subsequently described as contrarians in a post by Paul J. Feldman, who writes a blog about communication policy.

(more…)

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