Bandwidth Cartels, Public and Private

by on August 1, 2008 · 24 comments

[A guest post from Tim Wu]

Well its always fun to have two people you respect read your work and such is the case with Tim and Adam, though to be honest I probably enjoyed Tim’s analysis a little more.

Adam’s reaction is too strong, and doesn’t really get at the main points in the op-ed. The main point was this: that bandwidth has become an essential input in an economy that depends heavily on moving information. For that reason we must gain a sensitivity to the issues of supply and demand surrounding it. If anyone disagrees with that, I’d love to hear why.

I use the comparison to gas and energy because we all know that when gas prices go up or down, large parts of the economy are affected, from tourism through, say, bowling alleys. What I am saying is that bandwidth may have a similar nature: that if prices are high, it effects all of the information-related markets in interesting ways, from startup video services through google. It is still early in the age of the internet economy, so this may be less obvious at this point.

If you agree with this, you must care about industry structure and government’s role in suppressing or helping competition in that market.

Meanwhile, while the OPEC example may be a tad dramatic, harping on the fact that OPEC is comprised of nation-states, as opposed to firms, is a mistake. From an economic perspective, why do we care if it is, say, a worldwide private conspiracy setting prices as opposed to a conspiracy of nation states? The effect on prices is the same whether its four firms setting food prices (like in the 1990s, with the Archer-Daniel Midlands price-setting cases), as opposed to four foreign governments. It is harder to stop the governments, because they rarely respond to lawsuits — but the economic consequences, so long as the price-fixing conspiracy lasts, is no different.

A point made in the comments is also true – which is that telecom tends to be in the realm of state-supported or regulated monopoly, and so there is some confusion as to whether what we are talking about are really private actors in a pure sense. This is a point Hayek made quite well. If government helps create a monopoly, as it has in cable and telephone markets – then being concerned about the consequences of that monopoly makes much sense.

Finally, on Tim Lee’s post – I take much less issue. I’d just like to point out that I am also an advocate of greater propertization as well as more dedication to the commons—its the stuff in the middle I don’t care for. For example, as Tim knows, I would like to see the development of ways for people to own their own fiber connections (homes with Tails). I also believe that, in broad spectrum reform, there should be more propertization of the airwaves. The only silly position, it seems to me, is to maintain on principle that either a commons or private property is of no use whatsoever.

  • http://linuxworld.com/community/ Don Marti

    The US government gave out railroad/telegraph rights of way to common carriers, and fiber runs on those rights of way today. Phone and cable companies can take advantage of eminent domain to install their fiber. The usual TLF crowd looks pretty ridiculous complaining about government interference in telecoms when the carriers are sitting on those assets.

    The only packets that any carrier has a right to treat non-neutrally are those that only pass over property bought from a willing private seller. Otherwise it’s just the techliberation.com house rule: “socialism when I want something from the government, free markets when anyone wants something from me.”

  • http://www2.blogger.com/profile/14380731108416527657 Steve R.

    In short, the spectrum should not be privatized. However, when one advocates privatization there is potential ambiguity. Is it the outright fee ownership of spectrum sections or is simply greater leasing opportunities? (Usually it means fee ownership.) I have no problem with the government leasing spectrum. In fact, I would encourage the government to pursue this economic opportunity. However, as a “commons” the government should retain complete ownership of the spectrum.

    I would be interested in Tim and Adam posting an overview of how a spectrum that is privately owned would function so that readers can obtain a better understanding.

  • http://linuxworld.com/community/ Don Marti

    The US government gave out railroad/telegraph rights of way to common carriers, and fiber runs on those rights of way today. Phone and cable companies can take advantage of eminent domain to install their fiber. The usual TLF crowd looks pretty ridiculous complaining about government interference in telecoms when the carriers are sitting on those assets.

    The only packets that any carrier has a right to treat non-neutrally are those that only pass over property bought from a willing private seller. Otherwise it’s just the techliberation.com house rule: “socialism when I want something from the government, free markets when anyone wants something from me.”

  • http://www2.blogger.com/profile/14380731108416527657 Steve R.

    In short, the spectrum should not be privatized. However, when one advocates privatization there is potential ambiguity. Is it the outright fee ownership of spectrum sections or is simply greater leasing opportunities? (Usually it means fee ownership.) I have no problem with the government leasing spectrum. In fact, I would encourage the government to pursue this economic opportunity. However, as a “commons” the government should retain complete ownership of the spectrum.

    I would be interested in Tim and Adam posting an overview of how a spectrum that is privately owned would function so that readers can obtain a better understanding.

  • http://www.codemonkeyramblings.com MikeT

    OPEC was a bad example for the same reason that all state-owned entities that operate in the market are bad: they skew the market in their favor. When you have the backing of a government, you have a lot of resources to protect you ranging from bail-out assistance, to the possibility of your government using some of its ability to use force in your favor. American oil companies cannot go into these regions without capitulating to the governments’ demands, and puts a whole different spin on the relationship.

  • http://www.codemonkeyramblings.com MikeT

    OPEC was a bad example for the same reason that all state-owned entities that operate in the market are bad: they skew the market in their favor. When you have the backing of a government, you have a lot of resources to protect you ranging from bail-out assistance, to the possibility of your government using some of its ability to use force in your favor. American oil companies cannot go into these regions without capitulating to the governments’ demands, and puts a whole different spin on the relationship.

  • http://bennett.com/blog Richard Bennett

    Let me just throw something out here as long as we’re talking about monopolies: the only monopoly in the Internet economy is Google, so the interesting analysis of the FCC’s action today is to see what it does to reinforce Google’s market dominance.

    It may be neutral, but I suspect it’s going to ad fire to the move to have Congress pass a law that prevents ISPs from offering a transit service that would enable companies like Cuil from getting a cheaper alternative to the Billion Dollar Server Farm that maintains Google’s monopoly.

  • http://bennett.com/blog Richard Bennett

    Let me just throw something out here as long as we’re talking about monopolies: the only monopoly in the Internet economy is Google, so the interesting analysis of the FCC’s action today is to see what it does to reinforce Google’s market dominance.

    It may be neutral, but I suspect it’s going to ad fire to the move to have Congress pass a law that prevents ISPs from offering a transit service that would enable companies like Cuil from getting a cheaper alternative to the Billion Dollar Server Farm that maintains Google’s monopoly.

  • http://enigmafoundry.wordpress.com eee_eff

    The main point was this: that bandwidth has become an essential input in an economy that depends heavily on moving information. For that reason we must gain a sensitivity to the issues of supply and demand surrounding it. If anyone disagrees with that, I’d love to hear why.

    This reasoning is very cross-disciplinary–looking how process in one field affect those in others. Your insights are similar in that respect to some of Amartya Sen’s–for example his observation of how democracy and the free press are strongly linked to a lack of famines–and as such your thinking is systemic and wholistic rather than compartementalized.

    My observation is that some libertarians get caught just looking at a legal frame of reference within completely subsuming technical, social, economic realities. This leads frequently, to conclusions that are, perhaps very unintentionally, anti-freedom.

    In what regard do you hold works such as Development as Freedom by Amartya Sen?

  • http://enigmafoundry.wordpress.com eee_eff

    The main point was this: that bandwidth has become an essential input in an economy that depends heavily on moving information. For that reason we must gain a sensitivity to the issues of supply and demand surrounding it. If anyone disagrees with that, I’d love to hear why.

    This reasoning is very cross-disciplinary–looking how process in one field affect those in others. Your insights are similar in that respect to some of Amartya Sen’s–for example his observation of how democracy and the free press are strongly linked to a lack of famines–and as such your thinking is systemic and wholistic rather than compartementalized.

    My observation is that some libertarians get caught just looking at a legal frame of reference within completely subsuming technical, social, economic realities. This leads frequently, to conclusions that are, perhaps very unintentionally, anti-freedom.

    In what regard do you hold works such as Development as Freedom by Amartya Sen?

  • http://www2.blogger.com/profile/14380731108416527657 Steve R.

    I finally had the time to read “Toward Property Rights in Spectrum The Difficult Policy Choices Ahead”by Dale Hatfield and Phil Weiser. It was a good read and I am pleased that they had not taken the extreme privatization position that I feared. Please see my response to “Radio Propagation and Frequency

  • http://www2.blogger.com/profile/14380731108416527657 Steve R.

    I finally had the time to read “Toward Property Rights in Spectrum The Difficult Policy Choices Ahead”by Dale Hatfield and Phil Weiser. It was a good read and I am pleased that they had not taken the extreme privatization position that I feared. Please see my response to “Radio Propagation and Frequency

  • http://www.formortals.com George Ou

    Tim,

    Your claims on the New York Times that bandwidth costs almost as much as energy and that bandwidth costs are rising were so outrageously wrong that it is an academic disgrace. You should apologize and retract your claims if you have any semblance of integrity.

    Here are the facts
    From the Bureau of Labor Statistics data, household energy which includes natural gas and electricity in the most recent month of June 2008 was $214 which is a 72% increase from June 2000. During that same period, monthly gasoline expenditures increased 150% to $347, telephony service (wired and wireless) increased 2.9% to $101, and Internet services declined 23% to less than $74 per month. This adds up to an average of $561 for energy compared to $175 for all telephony and internet services. Even if we counted Video and Audio entertainment services of $102, your creative definition of “bandwidth” is still less than half the cost of energy.

    Furthermore, it’s funny that you cite Utah as an example of Muni-fiber. Utah’s UTOPIA and iProvo projects have been disastrous (http://www.heraldextra.com/content/view/263223/18/). UTOPIA is facing serious shortfalls and asking their 11 member communities to increase their sales tax pledge of $202 million over 20 years to $504M over 33 years. So in order for a small percentage of the population to benefit from fiber, the local population as a whole must subsidize those fiber customers to the tune of half a billion dollars.

    Even with that massive tax payer subsidy, UTOPIA is considering a one-time fee that averages $2300 for all of its current and future subscribers. The community fiber pilot tests in Ottawa for example will cost home owners up to $3000 to bring the fiber to the home. These types of connection fees are common in these public fiber projects and the other Utah fiber project in Provo is no exception. Provo was recently forced to sell (http://www.heraldextra.com/content/view/271917/) its iProvo municipal fiber network to a private company Broadweave Networks under a plan where Broadweave assumes the cities bond payments and takes ownership of the network.

    Your claim that the cable and Telcos are restricting supply is simply wrong. Wireless Internet adoption in America is already leading the world along with Japan. With the easing of open access requirements, telecoms no longer need to share their infrastructure with their competitors and this has spurred Verizon in to laying enough fiber to pass 10 million homes with 2 million customers. AT&T is laying Fiber To The Node (FTTN) which allows existing copper phone cables to have 25 Mbps of dedicated capacity or soon 50 Mbps when both pairs of copper cables are bonded. Cable companies like Comcast fearing the competition from the telecoms have announced aggressive plans to deploy DOCSIS 3.0 cable broadband technology.

  • http://www.formortals.com George Ou

    Tim,

    Your claims on the New York Times that bandwidth costs almost as much as energy and that bandwidth costs are rising were so outrageously wrong that it is an academic disgrace. You should apologize and retract your claims if you have any semblance of integrity.

    Here are the facts
    From the Bureau of Labor Statistics data, household energy which includes natural gas and electricity in the most recent month of June 2008 was $214 which is a 72% increase from June 2000. During that same period, monthly gasoline expenditures increased 150% to $347, telephony service (wired and wireless) increased 2.9% to $101, and Internet services declined 23% to less than $74 per month. This adds up to an average of $561 for energy compared to $175 for all telephony and internet services. Even if we counted Video and Audio entertainment services of $102, your creative definition of “bandwidth” is still less than half the cost of energy.

    Furthermore, it’s funny that you cite Utah as an example of Muni-fiber. Utah’s UTOPIA and iProvo projects have been disastrous (http://www.heraldextra.com/content/view/263223/18/). UTOPIA is facing serious shortfalls and asking their 11 member communities to increase their sales tax pledge of $202 million over 20 years to $504M over 33 years. So in order for a small percentage of the population to benefit from fiber, the local population as a whole must subsidize those fiber customers to the tune of half a billion dollars.

    Even with that massive tax payer subsidy, UTOPIA is considering a one-time fee that averages $2300 for all of its current and future subscribers. The community fiber pilot tests in Ottawa for example will cost home owners up to $3000 to bring the fiber to the home. These types of connection fees are common in these public fiber projects and the other Utah fiber project in Provo is no exception. Provo was recently forced to sell (http://www.heraldextra.com/content/view/271917/) its iProvo municipal fiber network to a private company Broadweave Networks under a plan where Broadweave assumes the cities bond payments and takes ownership of the network.

    Your claim that the cable and Telcos are restricting supply is simply wrong. Wireless Internet adoption in America is already leading the world along with Japan. With the easing of open access requirements, telecoms no longer need to share their infrastructure with their competitors and this has spurred Verizon in to laying enough fiber to pass 10 million homes with 2 million customers. AT&T is laying Fiber To The Node (FTTN) which allows existing copper phone cables to have 25 Mbps of dedicated capacity or soon 50 Mbps when both pairs of copper cables are bonded. Cable companies like Comcast fearing the competition from the telecoms have announced aggressive plans to deploy DOCSIS 3.0 cable broadband technology.

  • http://bennett.com/blog Richard Bennett

    I think the iProvo system may actually be a good model for the fiber build-out. Capital is the raw material for bandwidth, in the same way that fossil fuels are the (primary) raw material for the energy we consume as motor fuel and electricity. So it stands to reason that reducing the cost of capital is the most effective way to increase the supply of bandwidth.

    If we want cheap capital, what better way to obtain it than through government-guaranteed bonds? Voters don’t like taking on the obligation for such bonds when the intended recipient is some wicked for-profit company, so the ultimate recipient of the bond money has to be hidden in the early stages. So you talk up a big muni fiber project, con the voters into writing a check, and then give it away to a private company. The private company finishes the installation and runs the service, and everybody’s happy.

    Conning the public into financing private business is in the finest traditions of third-world politics, and we in the USA any better than, say, Indonesia, Bolivia, or Nigeria? Of course we aren’t. So let’s give graft and incompetence a chance, we may all be the better for it.

  • http://bennett.com/blog Richard Bennett

    I think the iProvo system may actually be a good model for the fiber build-out. Capital is the raw material for bandwidth, in the same way that fossil fuels are the (primary) raw material for the energy we consume as motor fuel and electricity. So it stands to reason that reducing the cost of capital is the most effective way to increase the supply of bandwidth.

    If we want cheap capital, what better way to obtain it than through government-guaranteed bonds? Voters don’t like taking on the obligation for such bonds when the intended recipient is some wicked for-profit company, so the ultimate recipient of the bond money has to be hidden in the early stages. So you talk up a big muni fiber project, con the voters into writing a check, and then give it away to a private company. The private company finishes the installation and runs the service, and everybody’s happy.

    Conning the public into financing private business is in the finest traditions of third-world politics, and we in the USA any better than, say, Indonesia, Bolivia, or Nigeria? Of course we aren’t. So let’s give graft and incompetence a chance, we may all be the better for it.

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