Virulent Word of Mouse

September 4, 2011

The Lexicon of Networking Economics

Filed under: Internet economics,Uncategorized — Shane Greenstein @ 12:27 am

Economics rarely improves with reference to etymology, but an exception should be made for the economics of networks. Many valid but distinct definitions of “network economics” compete for attention. That causes confusion in academic writing and in public discourse.

There are many symptoms of this confusion. Consider this one. When the late Senator Ted Stevens inarticulately referred to the Internet as a “series of tubes” it earned him derision from younger denizens of the Internet. To many youngsters it was unthinkable that the ranking Senator on the committee for regulating Internet commerce conflated the physical network – local area networks, backbone lines, access lines – with its applications – email, web surfing, electronic commerce.

To be fair to Senator Stevens, however, such a conflation is rather understandable. Stevens used a habit of mind common in monopoly provision of local electricity and telephony. It came into conflict with another and newer habit of mind, one that lives online. Only recently have these twains begun to meet regularly.

How did this happen? In brief, public discourse typically uses three distinct economic meanings for the term “network” and, without making due distinction, applies these to the same situations.  Let’s  get straight on the meaning of words. This post explains the lexicon of networking economics.
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July 11, 2011

Did one invention lead to the decline of newspapers?

Filed under: Considering topical questions,Internet economics,Short observations — Shane Greenstein @ 7:50 pm

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.  (more…)

March 14, 2011

The Internet and Wage Inequality

What has the Internet Done for the Economy?

The puzzling spread of the commercial Internet could explain wage inequalities

It is hard to overstate how much the business world relies on the Internet. Powerhouse retailers like Target and Wal-Mart can simultaneously manage their changing inventories, warehouses, distribution routes, and sales. FedEx and UPS can code every shipment online so that customers can find out exactly where their packages are and what time they will arrive at their doors. Buying a wedding gift? Just pull up the couple’s online registry and browse the items that have not been purchased yet. Shopping for insurance? You can get quotes quickly via secure online chats with company representatives.

None of that was possible before 1995, when the large, government-controlled networks somewhat begrudgingly opened their lines for commercial use. Advanced Internet technologies spread rapidly in businesses across the country—in small cities, sprawling suburbs, and dense urban hubs. Although this sparked wage and employment spurts everywhere, the gains were far more striking in regions that were already well off, according to a study to appear in the American Economic Review….To read more, click here.

Kellogg Insight provides summary of research articles. This is a summary of “The Internet and Local Wages: A Puzzle,” by Avi Goldfarb, Chris Forman and Shane Greenstein. For more about this topic on this blog see “Will the iPad Flatten us all?”

January 24, 2011

Planes, Payments, and the Vast Muddle

Filed under: Considering topical questions,Internet economics — Shane Greenstein @ 10:40 pm

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. (more…)

November 6, 2010

Making podcasts and creation costs

Filed under: Amusing diversions,Internet economics — Shane Greenstein @ 4:17 pm

I made some podcasts and learned a few things while making them.

To be sure, it was not too hard. But, then again, I had help from someone, Tim DeChant. Though it was the first time either of us had made a podcast, Tim had more of a clue about what to do than I did. Still, we did not cruise through it either,  and the reasons illustrate some lessons about creating content in the digital era.

Anyway, before I get any further, here is a little plug, namely, a link to the pod casts. You also can go to i-tunes and put in my name. A couple (free) pod casts will come up (and more as a new one is released each month). Enough plugging… back to the topic.

What did we learn about the costs of making pod casts? At one level, not much. The cliche’s are really true. The costs of creating information have declined in the digital age. After all, creating content is so easy today that my 13-year old son creates videos for You-Tube. It is not so surprising, therefore, that a couple of PhDs can create a podcast.

I did learn, however, that it pays to invest in high quality equipment. And it sure helps to have somebody around who knows what they are doing like Tim DeChant. There is a learning curve, and his help got us down that curve much faster than if I had done this by myself. (more…)

October 19, 2010

Gateway economics

It has become fashionable among Internet and Web watchers to notice threats on the horizon to the open Web. For example, in garish colors, Wired magazine’s September 2010 issue declared the open-access Web dead. Jonathan Zittrain’s 2008 book, The Future of the Internet and How to Stop It, developed a related thesis in great detail (as well as much more).

Economics tends not to take such an alarmist approach to the future of the web, viewing it with more equanimity or acquiescence, depending on your perspective. Today I want to illustrate that approach by discussing a specific practice, gatekeeping, which is an anathema to many openness advocates.

Gatekeeping encompasses two related activities. In one case, a vendor controls and manages a user’s access to proprietary content, charging a fee for access. Famous recent practitioners include Rupert Murdoch, whose company, News Corp, owns the Wall Street Journal. His company does not allow unrestricted viewing of online articles from the Journal. From time to time Murdoch publicly mutters a threat to block search engines from indexing his site if such blocking could lead to more revenue.

In a second type of gatekeeping, a vendor uses proprietary code to control and manage a user’s, developer’s or advertiser’s experience. The most famous practitioner of this approach was Bill Gates. Recently Steve Jobs, whose rules for iPhone app developers change frequently, has been getting all the attention for restrictive practices.

Let’s take a closer look. (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…)

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.

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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.

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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!

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