Have we technophiles utterly deluded ourselves? Worse, instead of enjoying an Age of Innovation, are we actually stuck in a technological Dark Age? One that explains our stagnating living standards and general economic “disarray”? This is the possibility economist Tyler Cowen (George Mason, Marginal Rev, Mercatus) raises in The Great Stagnation, a pithy and provocative  new e-book essay. Here is my Forbes column on the topic: “Tyler Cowen’s Techno Slump.” I don’t know how much I agree with Cowen, but I think he’s given a big boost to an important conversation.

See my new commentary at CircleID — “How to Manage Internet Abundance”:

The Internet has two billion global users, and the developing world is just hitting its growth phase. Mobile data traffic is doubling every year, and soon all four billion mobile phones will access the Net. In 2008, according to a new UC-San Diego study, Americans consumed over 3,600 exabytes of information, or an average of 34 gigabytes per person per day. Microsoft researchers argue in a new book, “The Fourth Paradigm,” that an “exaflood” of real-world and experimental data is changing the very nature of science itself. We need completely new strategies, they write, to “capture, curate, and analyze” these unimaginably large waves of information. As the Internet expands, deepens, and thrives—growing in complexity and importance—managing this dynamic arena becomes an ever bigger challenge. Iran severs access to Twitter and Gmail. China dramatically restricts individual access to new domain names. The U.S. considers new Net Neutrality regulation. Global bureaucrats seek new power to allocate the Internet address space. All the while, dangerous “botnets” roam the Web’s wild west. Before we grab, restrict, and possibly fragment a unified Web, however, we should stop and think. About the Internet’s pace of growth. About our mostly successful existing model. And about the security and stability of this supreme global resource.

Accommodating this epochal shift will be a challenge for the world’s best scientists, engineers, and business leaders. It will require individual initiative, entrepreneurial genius, and global collaboration. Rather than engaging in clever debates about how to divide up a zero-sum pie, we should be thinking about the investment inputs and innovation outputs of a rapidly growing pie. One way we will handle this information abundance is to expand the Internet. Yes, we need ever more capacious networks and data storage facilities. But we also need to expand the logical—or virtual—space of the Internet itself. We need more Internet addresses. Fortunately, scientists and engineers have been thinking about this for a long time. We are in the midst of a transition from an old version that has served us well . . . to the next, much larger version that should last for a very long time. As CircleID readers know, the older version, which still dominates the world’s Internet infrastructure and address space, is IP Version Four. The new model is IP Version Six. The engineers who developed IPv6 gave it 340 trillion trillion trillion (3.4 x 1038) unique addresses. In the famous analogy, if today’s total Internet space (IPv4) is a golf ball, the next generation Internet (IPv6) is the Sun. IPv6 should serve us well. But it is no trivial task to manage this abundance. A new report from Arbor Networks found that a “‘perfect storm’ of IPv4 address exhaustion, IPv6 deployment, DNSSEC deployment, and 4-byte ASN support” presents substantial security challenges. In this fast-changing environment, carriers, data centers, and content providers will find it difficult “to operate, maintain, secure, and defend their networks.” Just as we embark on this new era, however, a number of government and non-government critics are calling for more power to allocate and manage this new address space. They complain that developing nations might not be getting a fair share of the address space, nor input into the process. They want national governments or the UN’s International Telecom Union to “compete” with the existing private-sector-led administrator, ICANN. But as far as I can tell, the complaints are mostly empty. IPv6 is so vast, there is plenty for everyone. No one that I can find has ever been denied a legitimate request for address space. ICANN has given the five Regional Internet Registries large initial IPv6 allocations, and the process is running smoothly. ISPs across the globe are getting what they need, and likewise end-users. Except—and this is the important exception that proves the point—when nations intervene, as in the recent case of China’s domain crackdown. Setting up alternative, competitive, or parallel allocation and governance mechanisms would only sow confusion and possible corruption. Complicating Internet governance just as the network explodes in complexity would be foolhardy in the extreme. Given the openness of the Net, new government or UN controls over the most basic Internet resources could only serve to reduce access to the Net; possibly harm the stability and security of this global utility; and create obvious opportunities for political favoritism and even fraud. Consider that:

• The Internet is spreading across nations and working its way into every business process and cultural nook.
• We are introducing huge numbers of new multilingual country-level and generic domain names.
• The number of network nodes and the diversity of its protocols and media streams are growing exponentially.
• So is the proliferation of attached devices and virtual spaces.
• Completely new Web architectures may be needed to handle the coming wave of interactive high-resolution video.
• Cyber-security threats are more numerous and sophisticated than ever.

With so many changes happening so fast, the need for a stable core is greater than ever. If we want experimentation and growth in network infrastructure and in Web outlets, products, services, and content, we need predictability in the fundamental map of the Internet. The current bottom-up process where global stakeholders develop consensus best-practices and plan for future needs is working well. It is a process of reason, consultation, and technical cooperation. Allowing volatile politics to destabilize this quietly effective process could undo decades of progress. Let’s not underestimate just what we’ve achieved. The existing private-sector-led cooperative arrangement has yielded something every bit as historic as the Industrial Revolution. Two hundred fifty years ago we unlocked the secrets of physical power and launched an unprecedented improvement in living standards across much of the globe. Today, the Information Revolution is unlocking the vaults of knowledge and removing the barriers of physical distance to extend material well-being and freedom around the globe. Why derail this fast-moving train when, on either side of the tracks, botnets and bureaucrats are ready to pounce? Written by Bret Swanson, President of Entropy Economics. Visit the blog maintained by Bret Swanson here.

This morning, the Technology Committee of the New York City Council convened a large hearing on a resolution urging Congress to pass a robust Net Neutrality law. I was supposed to testify, but our narrowband transportation system prevented me from getting to New York. Here, however, is the testimony I prepared. It focuses on investment, innovation, and the impact Net Neutrality would have on both.

“Net Neutrality’s Impact on Internet Innovation” – by Bret Swanson – 11.20.09

As you’ve no doubt heard, Washington D.C. is angling for a takeover of the . . . U.S. telecom industry?!

That’s right: broadband, routers, switches, data centers, software apps, Web video, mobile phones, the Internet. As if its agenda weren’t full enough, the government is preparing a dramatic centralization of authority over our healthiest, most dynamic, high-growth industry.

Two weeks ago, FCC chairman Julius Genachowski proposed new “net neutrality” regulations, which he will detail on October 22. Then on Friday, Yochai Benkler of Harvard’s Berkman Center published an FCC-commissioned report on international broadband comparisons. The voluminous survey serves up data from around the world on broadband penetration rates, speeds, and prices. But the real purpose of the report is to make a single point: foreign “open access” broadband regulation, good; American broadband competition, bad. These two tracks — “net neutrality” and “open access,” combined with a review of the U.S. wireless industry and other investigations — lead straight to an unprecedented government intrusion of America’s vibrant Internet industry.

Benkler and his team of investigators can be commended for the effort that went into what was no doubt a substantial undertaking. The report, however,

• misses all kinds of important distinctions among national broadband markets, histories, and evolutions;
• uses lots of suspect data;
• underplays caveats and ignores some important statistical problems;
• focuses too much on some metrics, not enough on others;
• completely bungles America’s own broadband policy history; and
• draws broad and overly-certain policy conclusions about a still-young, dynamic, complex Internet ecosystem.

The gaping, jaw-dropping irony of the report was its failure even to mention the chief outcome of America’s previous open-access regime: the telecom/tech crash of 2000-02. We tried this before. And it didn’t work! The Great Telecom Crash of 2000-02 was the equivalent for that industry what the Great Panic of 2008 was to the financial industry. A deeply painful and historic plunge. In the case of the Great Telecom Crash, U.S. tech and telecom companies lost some $3 trillion in market value and one million jobs. The harsh open access policies (mandated network sharing, price controls) that Benkler lauds in his new report were a main culprit. But in Benkler’s 231-page report on open access policies, there is no mention of the Great Crash.

Although the report is subtitled “A review of broadband Internet  transitions and policy from around the world” (emphasis added), Benkler does not correctly review the most pronounced and obvious transition in the very nation for whom he would now radically remake policy. Benkler writes that the U.S. successfully tried “open access” in the late-1990s, but then

the FCC decided to abandon this mode of regulation for broadband in a series of decisions in 2001 and 2002.  Open access has been largely treated as a closed issue in U.S. policy debates ever since. [p. 11]

This is false.

In fact, open access and other heavy-handed regulations were rolled back in a series of federal actions from 2003 to 2005 (e.g., ’03 triennial review, ’05 Brand-X Supreme Court decision). And then between 2006 and 2009, a number of states adopted long-overdue reforms of decades-old telecom laws written for the pre-Internet age. (The Supreme Court even decided a DSL “line-sharing” case as late as February 2009.) If we had in fact ended open access regulation in 2001, as Benkler claims, perhaps the telecom crash would have been less severe.

Benkler would like to show that America’s “decline” in broadband corresponds to its open-access roll-back. But the chronology doesn’t fit. In fact, American broadband took a very large hit in the open-access era. In 2002, at the end of this open access experiment, George Gilder estimated that South Korea — first to deploy fiber-to-the-X and 3G wireless — enjoyed some 40 times America’s per capita bandwidth. Our international “rank” may have appeared better at the time, but we were far worse off compared to our broadband “potential.” Because the U.S. invented most of the Internet technologies and applications, we were bound to lead at the outset, in the mid- and late-1990s. Bad policy stalled our rise for a time, and other nations moved forward. But today we are back on track. The U.S. broadband trajectory is steep. In the last few years, U.S. broadband has swiftly recovered and begun closing, or eliminating, the international gap. The depth of the “gap” then (2002) was far more pronounced — and relevant — than the “ranking differential” now (2009). Our wired and wireless broadband capabilities, services, and innovations now rival or exceed many of the world’s best.

In a June 2009 report, I attempted to quantify the rise of American broadband. I found that by the end of 2008, U.S. consumers enjoyed 717 terabits per second of communications power, or bandwidth, equal to 2.4 megabits per second on a per capita basis. Today, bandwidth per capita approaches 3 megabits per second, an almost 23-fold increase since the dawn of deregulation in 2003.

This rise was possible because U.S. info-tech investment in 2008, to pick the most recent year, was $455 billion, or 22% of all America’s capital investment. Communications service providers alone invested some $65 billion. And this is real investment. As you can see in the graph below, there was another peak in 2000. But much of that era’s investment was due to (1) Y2K preparations; (2) the concentrated build-out of long-haul optical networks (too much capacity at the time, but useful over the, pun intended, “long haul”); and (3) wasteful duplication by communications service providers employing regulatory arbitrage strategies designed to exploit the very type of open access policies Benkler urges again. This new U.S. surge in info-tech investment looks to be far more sustainable, based on real businesses and sound incentives, not some centralized policy to pick “winners and losers.”

A number of other problems plague the Benkler report.

As George Ou explains, the international data on broadband “speed” and prices are highly suspect. Benkler repeats findings from the oft cited OECD studies that show the U.S. is 15th in the world in broadband penetration. Benkler also supplements previous reports with apparently corroborating evidence of his own. But Scott Wallsten (now at the FCC) adjusted the OECD data to correct for household size and other factors and found the U.S. is actually more like 8th or 10th in broadband penetration. South Korea, the consensus global broadband leader, is just 6th in the broadband penetration metric. The U.S. and most other OECD nations, moreover, will reach broadband saturation in the next few years. Average download speeds in the U.S., Wallsten found, were in line with the mid-tier of OECD nations, behind Korea, Japan, Sweden, and the Netherlands. But Ou thinks there is yet more evidence to question the quality of the international data and thus the argument the U.S. is even this small distance behind.

US broadband providers deliver the closest actual throughput to what is being advertised, and it is well above 90% of the advertised rate.  When we consider the fact that advertised performance is often quoting raw signaling speeds (sync rate) which include a typical 10% protocol overhead and the measured speeds indicate payload throughput, US broadband providers are delivering almost exactly what they are advertising.  By comparison, consumers in Japan are the least satisfied with their broadband service despite the fact that they have the fastest broadband service.  This dissatisfaction is due to the fact that Japanese broadband customers get far less than what was advertised to them.  The Ofcom data is further backed up by Akamai data which provides the largest sample of real-world performance data in the world.  When real-world speeds are compared, the difference is nowhere near the difference in advertised speeds. Cable broadband companies in Japan don’t really have more capacity than their counter parts in the United States yet they offer “160 Mbps” service.  While that sounds even more impressive than the Fiber to the Home (FTTH) offerings in Japan or the U.S., it’s important to understand that the total capacity of the network may only be 160 or 320 Mbps shared between an entire neighborhood with 150 subscribers.  Even if only 30 of those customers in a neighborhood takes up the 160 Mbps service, just 2 of those customers can hog up all the capacity on the network. While Verizon may charge more per Mbps for FTTH service than their Japanese counter parts, they aren’t nearly as oversubscribed and they usually deliver advertised speeds or even slightly higher than advertised speeds.  More to the point, Verizon’s 50 Mbps service is a lot closer to the 100 Mbps services they offer in Japan than the advertised speeds suggest.  Oversubscription is a very important factor and it is the reason businesses will pay 20 times more per Mbps for dedicated DS3 circuits with no oversubscription on the access link.  If Verizon were willing to oversell and exaggerate advertised bandwidth as much as FTTH operators in Japan, they could easily provide “100? Mbps or even “1000? mbps FiOS service over their existing GPON infrastructure.  The risk in doing this is that Verizon might lose some customer satisfaction and trust when the actual performance (while higher than current levels) don’t live up to the advertised speeds.

Even absent these important corrections and nuances, we should understand that in today’s world — with today’s computers, today’s applications, today’s media content, and, importantly, the rest of today’s Internet infrastructure, from data farms and content delivery networks to peering points and all the latency-inducing hops, buffers, and queues in between — there is no appreciable difference for even a high-end consumer between 100 Mbps and 50 Mbps. A Verizon FiOS customer with 50 Mbps thus does not suffer a miserable “half” the capability of a Korean with “100 Mbps” service and may in fact enjoy better overall service. But some of the metrics in the Benkler report suggest the “100 Mbps” user is 100% better off.

Another important market distinction: The U.S. has by far largest cable TV presence of any nation reviewed. Cable has a larger broadband share than DSL+fiber, and has since the late 1990s. No nation has nearly the divided market between two very substantial technology/service platforms. This unique environment makes many of the Benkler comparisons less relevant and the policy points far less salient. In a market where the incumbent telecom provider is regulated and is subject to far less intermodal competition (as from the ubiquitous U.S. cable MSOs), the regulated company earns a range of guaranteed returns on various products and may also be ordered to deploy certain network technologies by the regulator.

In France, just three DSL operators comprise 97%-98% of all DSL subscribers. DSL subscribers, moreover, are nearly all of France’s broadband subscribers. So how the open access regulations Benkler lauds lead to a better outcome is unclear. Presumably, the key virtue of open access is “more competition” at the service, or ISP, layer of the network. But if there’s not more competition, what is the open access mechanism that leads to better outcomes? What is the link between “open access” policies and either investment and/or prices? And thus the link between policy and “penetration” or “speed” or “quality”? It is easy to see how open access can by force drive down prices for existing products and technologies. But how open access incentivizes investment in next generation networks is never explained. Several steps are missing from Benkler’s analysis.

Perhaps most notably in the end, Benkler does not address actual innovations, applications, consumer services, devices, and Internet traffic. These are real measures of Internet usage, health, progress, and ability to plug in and innovate. The U.S. achieves in all these areas and leads in most. Huge numbers of broadband-intensive apps and services originated and blossomed in the U.S. For example, Google, YouTube, blogs, Hulu, Vonage and other VoIP services, iTunes, Flash apps, iPhone, BlackBerry, Wikipedia, Netflix, content delivery networks (CDNs), cloud computing, Facebook, etc., etc. The U.S. generates substantially more Internet traffic than Europe. How is all this possible if the U.S. broadband arena is so backward?

Let’s take a deep breath before we let Washington topple another industry — a healthy, growing one at that.

— Bret Swanson

(cross-posted from Maximum Entropy)

In Monday’s Wall Street Journal, I address the once-again raging topic of “net neutrality” regulation of the Web. On September 21, new FCC chair Julius Genachowski proposed more formal neutrality regulations. Then on September 25, AT&T accused Google of violating the very neutrality rules the search company has sought for others. The gist of the complaint was that the new Google Voice service does not connect all phone calls the way other phone companies are required to do. Not an earthshaking matter in itself, but a good example of the perils of neutrality regulation.

As the  Journal wrote in its own editorial on Saturday:

Our own view is that the rules requiring traditional phone companies to connect these calls should be scrapped for everyone rather than extended to Google. In today’s telecom marketplace, where the overwhelming majority of phone customers have multiple carriers to choose from, these regulations are obsolete. But Google has set itself up for this political blowback. Last week FCC Chairman Julius Genachowski proposed new rules for regulating Internet operators and gave assurances that “this is not about government regulation of the Internet.” But this dispute highlights the regulatory creep that net neutrality mandates make inevitable. Content providers like Google want to dabble in the phone business, while the phone companies want to sell services and applications. The coming convergence will make it increasingly difficult to distinguish among providers of broadband pipes, network services and applications. Once net neutrality is unleashed, it’s hard to see how anything connected with the Internet will be safe from regulation.

Several years ago, all sides agreed to broad principles that prohibit blocking Web sites or applications. But I have argued that more detailed and formal regulations governing such a dynamic arena of technology and changing business models would stifle innovation.

Broadband to the home, office, and to a growing array of diverse mobile devices has been a rare bright spot in this dismal economy. Since net neutrality regulation was first proposed in early 2004, consumer bandwidth per capita in the U.S. grew to 3 megabits per second from just 262 kilobits per second, and monthly U.S. Internet traffic increased to two billion gigabytes from 170 million gigabytes — both 10-fold leaps. New wired and wireless innovations and services are booming.

All  without net neutrality regulation.

The proposed FCC regulations could go well beyond the existing (and uncontroversial) non-blocking principles. A new “Fifth Principle,” if codified, could prohibit “discrimination” not just among applications and services but even at the level of data packets traversing the Net. But traffic management of packets is used across the Web to ensure robust service and security.

As network traffic, content, and outlets proliferate and diversify, Washington wants to apply rigid, top-down rules. But the network requirements of email and high-definition video are very different. Real time video conferencing requires more network rigor than stored content like YouTube videos. Wireless traffic patterns are more unpredictable than residential networks because cellphone users are, well, mobile. And the next generation of video cloud computing — what I call the exacloud — will impose the most severe constraints yet on network capacity and packet delay.

Or if you think entertainment unimportant, consider the implications for cybersecurity. The very network technologies that ensure a rich video experience are used to kill dangerous “botnets” and combat cybercrime.

And what about low-income consumers? If network service providers can’t partner with content companies, offer value-added services, or charge high-end users more money for consuming more bandwidth, low-end consumers will be forced to pay higher prices. Net neutrality would thus frustrate the Administration’s goal of 100% broadband.

Health care, energy, jobs, debt, and economic growth are rightly earning most of the policy attention these days. But regulation of the Net would undermine the key global platform that underlay better performance on each of these crucial economic matters. Washington may be bailing out every industry that doesn’t work, but that’s no reason to add new constraints to one that manifestly does.

— Bret Swanson

Leviathan Spam

Send the bits with lasers and chips See the bytes with LED lights

Wireless, optical, bandwidth boom A flood of info, a global zoom

Now comes Lessig Now comes Wu To tell us what we cannot do

The Net, they say, Is under attack Stop! Before we can’t turn back

They know best These coder kings So they prohibit a billion things

What is on their list of don’ts? Most everything we need the most

To make the Web work We parse and label We tag the bits to keep the Net stable

The cloud is not magic It’s routers and switches It takes a machine to move exadigits

Now Lessig tells us to route is illegal To manage Net traffic, Wu’s ultimate evil

The FCC in Oh Eight bought into the theory And Comcast, the Chairman determined to bury

Then on Nine Twenty One Genachowski declareth Thou shalt not give primacy Networks, you must shareth

The Net’s great virtue was decentralization But Julius from on high decreed concentration of power and decisions over all peers Substitute bureaucrats for Net engineers

You may not Shall not Cannot cap It’s discrimination! Don’t you know that?

You may not give the bits a weighting No matter importance, voice or data

You may not Shall not Cannot charge Even though the bytes are large

In what other sector is pricing illegal? All for nothing as business model is laughably feeble

Silicon, wires, software glue It takes tens of billions to make bits move

You cannot charge You cannot price You cannot cap It won’t suffice

No, no, they say, to bit analysis Though it may lead to Net paralysis

We will not tolerate Q. O. S. Not Weighted Round Robin Nor flow-based service

Not Q-in-Q Not PBT Nor SLAs at Layer Three

Storewidth and caching to speed the bits through Akamai, Limelight cut latency to you Though the result is customer speed Don’t you get it? You may not give priority

Content, conduit, Googleplex This neutrality thing may lead to bit wrecks

We thought all was well 3G, 4G, then WiMax! But the once free Net suffered bureaucratic attacks

When zetta visual bits and mobile nets collide Will the Chairman answer his phone? . . . Or run and hide?

Out: speed, gadgets, quantum innovation In: lobbyists, lawyers, mass litigation

Come to Washington Ask us permission Don’t they know it’s abundance they’re missin’?

But abundance is over Scarcity is cool We thought the Web was different Now who’s the fool?

Moore’s law transcends the cramped, dire fears of misnamed Free Press They’re no high tech seers

Mr. Chairman, please might you cut us a break? Should D.C. micromanage the guts of cyberspace?

If you ban the codes that make the Net work DiffServ, IPsec, and Dual Leaky Bucket Net investors may revolt and with fury say ————!

Who knows what the Web will bring Which business models or networks will reign With Net traffic growing at 60 percent Shouldn’t techies experiment?

With fiber and cable to bandwidth enable Googleplex servers a giant content stable

We do useful things like BRED and Draft Martini But once Neutrality is loosed, might we never bottle this genie?

What about MPLS and Inter Frame Gap? Utopians now rule Get used to that fact

Traffic, apps, digital value exploding So tell me, FCC What the heck is the problem?

The Net keeps on giving Like water to wine No artificial limits Abundance sublime

But D.C. takes this great bounty for granted Reap others’ rewards, assume innovation planted

Tera, peta, exa, zetta So long free Net, see ya later

Miracle though the Net may be The global telecosm is not free

— Bret Swanson

There are two key mistakes in the public policy arena that we don’t talk enough about. They are two apparently opposite sides of the same fallacious coin.

Call the first fallacy “innovation blindness.” In this case, policy makers can’t see the way new technologies or ideas might affect, say, the future cost of health care, or the environment. The result is a narrow focus on today’s problems rather than tomorrow’s opportunities. The orientation toward the problem often exacerbates it by closing off innovations that could transcend the issue altogether.

The second fallacy is “innovation assumption.” Here, the mistake is taking innovation for granted. Assume the new technology will come along even if we block experimentation. Assume the entrepreneur will start the new business, build the new facility, launch the new product, or hire new people even if we make it impossibly expensive or risky for her to do so. Assume the other guy’s business is a utility while you are the one innovating, so he should give you his product at cost — or for free — while you need profits to reinvest and grow.

Reversing these two mistakes yields the more fruitful path. We should base policy on the likely scenario of future innovation and growth. But then we have to actually allow and encourage the innovation to occur.

All this sprung to mind as I read Andy Kessler’s article, “Why AT&T Killed Google Voice.” For one thing, Google Voice isn’t dead . . . but let’s start at the beginning.

Kessler is a successful investor, an insightful author, and a witty columnist. I enjoy seeing him each year at the Gilder/Forbes Telecosm Conference, where he delights the crowd with fast-paced, humorous commentaries on finance and technology. Here, however, Kessler falls prey to the innovation assumption fallacy.

Kessler argues that Google Voice, a new unified messaging application that combines all your phone numbers into one and can do conference calls and call transcripts, is going to overturn the entire world of telecom. Then he argues that Apple and AT&T attempted to kill Google Voice by blocking it as an “app” on Apple’s iPhone App Store. Why? Because Google Voice, according to Kessler, can do everything the telecom companies and Apple can do — better, even. These big, slow, old companies felt threatened to their core and are attempting to stifle an innovation that could put them out of business. We need new regulations to level the playing field.

Whoa. Wait a minute.

Google Voice seems like a nice product, but it is largely a call-forwarding system. I’ve already had call forwarding, simultaneous ring, Web-based voice mail, and other unified messaging features for five years. Good stuff. Maybe Google Voice will be the best of its kind.

There are just all sorts of fun and productive things happening all across the space. It was the very AT&T-Apple-iPhone combo that created “visual voice mail,” which allowed you to see and choose individual messages instead of wading through long queues of unwanted recordings.

But let’s move on to think about much larger issues.

Suggesting we can enjoy Google’s software innovations without the network innovations of AT&T, Verizon, and hundreds of service providers and technology suppliers is like saying that once Microsoft came along we no longer needed Intel.

No, Microsoft and Intel built upon each other in a virtuous interplay. Intel’s microprocessor and memory inventions set the stage for software innovation. Bill Gates exploited Intel’s newly abundant transistors by creating radically new software that empowered average businesspeople and consumers to engage with computers. The vast new PC market, in turn, dramatically expanded Intel’s markets and volumes and thus allowed it to invest in new designs and multi-billion dollar chip factories across the globe, driving Moore’s law and with it the digital revolution in all its manifestations.

Software and hardware. Bits and bandwidth. Content and conduit. These things are complementary. And yes, like yin and yang, often in tension and flux, but ultimately interdependent.

The beauty of digital networks is the ability to create micro-custom applications for macro-scale markets. Bits are bits. Anyone can “plug in” to the network. But what if there were no network to plug into?

Kessler  assumes the existence of the vast, expensive, powerful networks that Google uses to deliver its search, email, and video applications. How would all our terrific digital content work without the hundreds of billions of dollars worth of new broadband networks that have been deployed over the last several years?

Take away the long-haul fiber-optic networks that connect American cities and the globe. Take away new last-mile fiber-optic, DSL, and digital cable networks to homes and businesses. Take away fast 3G wireless, 240,000 cell phone sites – and hundreds of thousands of Wi-Fi nodes. (Kessler says Wi-Fi can replace mobile networks, which is very unlikely. But regardless, who does he think operates most of the public Wi-Fi hot-spots?) Take away Apple’s iPhone, which uses Google as its chief built-in search engine.

Take away the network, and how useful are Silicon Valley’s awesome Web-based applications? You might as well travel back to 1983, when you were loading five-inch floppy disks onto your Commodore 64.

Kessler says the telecom business is dying. (“For the latest quarter, AT&T reported local voice revenue down 12%, long distance down 15%.”) But the service providers are also charging too much and making too much money. (“Margins in AT&T’s Wireless segment are an embarrassingly high 25%.”) Which one is it?

Mobile phone subscribers in the U.S. use more minutes and pay lower prices than in any other OECD nation. The average price per minute in the U.S. is just 6 cents versus an international average of 16 cents. U.S. subscribers thus consume  more than four times the wireless minutes (815 minutes per month) of their international counterparts (185). In the past dozen years, U.S. mobile phone voice prices have fallen by more than 87%.

It’s obvious for all to see: as old products like copper-based residential voice quickly erode, new markets like mobile data and fiber-optic video are ascendant. Are communications companies forbidden from adapting — and innovating — in this highly dynamic and unpredictable market? Can they not replace failing low- or negative margin products with successful high-margin products? Google has mastered a variant of this strategy: it subsidizes all its free products like Gmail and Voice with its super-high-margin search-and-advertising business. Good for them. Good for us.

Kessler wants to get rid of spectrum ownership, which has been a chief driver of massive investment in wireless networks. He says the  approximately $70 billion in spectrum auction payments from the big mobile carriers “all gets passed along to you and me in the form of higher fees and friendly oligopolies that don’t much compete on price.” But prices are low, falling fast, and show no signs of deterring our intense mobile phone culture. Just look around. It’s true that new technologies like smart antennas, software radios, and frequency sharing could yield a new model of spectrum management in the future. But we’re not there yet.

In place of mobile phones, Kessler writes that “Google Voice is the new competition.” But Google Voice doesn’t compete with service providers along most market axes. It’s a useful app that emulates a sliver of their product set while relying on their infrastructure.

Suggesting innovation is being stifled, Kessler asks, “How many productive apps beyond Google Voice are waiting in the wings?” Who knows all the great stuff in the pipeline? But in just 13 months, the Apple App Store has delivered an astounding 100,000 new applications. Before the iPhone, hardly any mobile apps existed. Phones were phones. Now they are true mobile computers. Zero to a hundred thousand apps in a year. With tens of new smartphone designs from a couple dozen handset makers all leapfrogging each other. Doesn’t sound remotely like a stagnant sector to me.

Oddly, Kessler wants to ban the practice that launched Apple into the mobile phone and App Store markets just two short years ago. He wants to prohibit exclusive handset deals like the AT&T-Apple iPhone or the Sprint-Palm Pre. So in the name of some abstract notion of openness, he would block the type of  actualinnovation represented by the iPhone phenomenon that has transformed not just the mobile phone world – but perhaps the entire computing and Internet landscape – more than any other.

Kessler’s last point is to “encourage faster and faster data connections to homes and phones.” Hear, hear! He says network speeds should roughly double each year, yielding residential broadband of 100 megabits per second by 2017. Wonderful. But does Andy think that prohibiting network providers from making any money will encourage this goal? This is a grand case of assuming magical innovation without supporting actual innovation.

It’s like insisting Google absolutely must find a way to read my mind by 2015 but capping its advertising rates such that it can’t invest in the research that would make such an amazing thing possible.

Silicon Valley innovation in digital applications is not dependent on the death of Internet service providers. Quite the opposite.

The health of the two are intimately intertwined. Innovation in the network spurs innovation in digital apps, and vice versa. Innovation yin and yang.

____

Related content:

• “Bandwidth Boom: Measuring U.S. Communications Capacity from 2000 to 2008”

• “Biting the handsets that connect the world”

See my new Forbes.com commentary on the Microsoft-Yahoo search partnership:

Ballmer appears now to get it. “The more searches, the more you learn,” he says. “Scale drives knowledge, which can turn around and drive innovation and relevance.” Microsoft decided in 2008 to build 20 new data centers at a cost of $1 billion each. This was a dramatic commitment to the cloud. Conceived by Bill Gates’s successor, Ray Ozzie, the global platform would serve up a new generation of Web-based Office applications dubbed Azure. It would connect video gamers on its Xbox Live network. And it would host Microsoft’s Hotmail and search applications. The new Bing search engine earned quick acclaim for relevant searches and better-than-Google pre-packaged details about popular health, transportation, location and news items. But with just 8.4% of the market, Microsoft’s $20 billion infrastructure commitment would be massively underutilized. Meanwhile, Yahoo, which still leads in news, sports and finance content, could not remotely afford to build a similar new search infrastructure to compete with Google and Microsoft. Thus, the combination. Yahoo and Microsoft can share Ballmer’s new global infrastructure.

The supposed top finding of a new report commissioned by the British telecom regulator Ofcom is that we won’t need any QoS (quality of service) or traffic management to accommodate next generation video services, which are driving Internet traffic at consistently high annual growth rates of between 50% and 60%. TelecomTV One headlined, “Much ado about nothing: Internet CAN take video strain says UK study.”

But the content of the Analysys Mason (AM) study, entitled “Delivering High Quality Video Services Online,” does not support either (1) the media headline — “Much ado about nothing,” which implies next generation services and brisk traffic growth don’t require much in the way of new technology or new investment to accommodate them — or (2) its own “finding” that QoS and traffic management aren’t needed to deliver these next generation content and services.

For example, AM acknowledges in one of its five key findings in the Executive Summary:

innovative business models might be limited by regulation: if the ability to develop and deploy novel approaches was limited by new regulation, this might limit the potential for growth in online video services.

In fact, the very first key finding says:

A delay in the migration to [British Telecom’s next generation] 21CN-based bitstream products may have a negative impact on service providers that use current bitstream products, as growth in consumption of video services could be held back due to the prohibitive costs of backhaul capacity to support them on the legacy core network. We believe that the timely migration to 21CN will be important in enabling significant take-up of online video services at prices that are reasonable for consumers.

So very large investments in new technologies and platforms are needed, and new regulations that discourage this investment could delay crucial innovations on the edge. Sounds like much ado about something, something very big.

On the QoS question, AM appears to make a number of important oversights/omissions. I have only done a quick reading, but upon first examination:

— AM considers only downstream non-interactive video, such as download-and-cache, streamed medium quality services like YouTube, and high-end video like IPTV.

— AM does not consider two-way interactive real-time video, such as obvious applications like video-calling, video-conferencing, and Telepresence, or less obvious but still important future applications like 3D gaming, Cinema 2.0 interactive movies, high-resolution interactive virtual worlds, and a whole host of cloud-based services we cannot even imagine.

— These real-time interactive video applications and services impose more severe restrictions on bandwidth, latency, and jitter than static downstream video applications.

— The report does not appear to address the importance that QoS will play in the wireless/mobile realm. In the necessarily more bandwidth constrained environment of wireless, QoS is like to play a very important role in delivering video-calling, gaming, and other interactive services.

— Throughout the report, AM also acknowledges the key role content delivery networks (CDNs) play in delivery of video and other content. CDNs are NOT a bandwidth solution. They are a caching solution that improves “QoS” through hop-reduction and latency-reduction. They are in fact a bandwidth-saving device, and also a topological mechanism to cope with the, alas, finite speed of light.

— The mere fact AM spends so much time on CDNs undermines its own headline saying we can accommodate all new video traffic with more bandwidth.

— Bandwidth is a very big part of the equation. But so are CDNs, QoS, and a range of other technological, topological, and architectural strategies.

— I also have not yet found in the paper a detailed or persuasive rationale for the “finding” that bandwidth is ALWAYS a better solution than QoS. Bandwidth is indeed a good substitute for switching and/or QoS, but not always. And it is not always the most economically efficient solution.

I may revise and extend these observations, but upon first glance, the headlines don’t reflect the substance, and in a few cases, like its analysis of QoS, real-world substance doesn’t support the findings.

Very happy to see the discussion over The Wall Street Journal‘s Google/net neutrality story. Always good to see holes poked and the truth set free.

But let’s not allow the eruptions, backlashes, recriminations, and “debunkings” — This topic has been debunked. End of story. Over. Sit down! — obscure the still-fundamental issues. This is a terrific starting point for debate, not an end.

Content delivery networks (CDNs) and caching have always been a part of my analysis of the net neutrality debate. Here was testimony that George Gilder and I prepared for a Senate Commerce Committee hearing almost five years ago, in April 2004, where we predicted that a somewhat obscure new MCI “network layers” proposal, as it was then called, would be the next big communications policy issue. (At about the same time, my now-colleague Adam Thierer was also identifying this as an emerging issue/threat.)

Gilder and I tried to make the point that this “layers” — or network neutrality — proposal would, even if attractive in theory, be very difficult to define or implement. Networks are a dynamic realm of ever-shifting bottlenecks, where bandwidth, storage, caching, and peering, in the core, edge, and access, in the data center, on end-user devices, from the heavens and under the seas, constantly require new architectures, upgrades, and investments, thus triggering further cascades of hardware, software, and protocol changes elsewhere in this growing global web. It seemed to us at the time, ill-defined as it was, that this new policy proposal was probably a weapon for one group of Internet companies, with one type of business model, to bludgeon another set of Internet companies with a different business model. 

We wrote extensively about storage, caching, and content delivery networks in the pages of the Gilder Technology Report, first laying out the big conceptual issues in a 1999 article, “The Antediluvian Paradigm.” [Correction: “The Post-Diluvian Paradigm”] Gilder coined a word for this nexus of storage and bandwidth: Storewidth. Gilder and I even hosted a conference, also dubbed “Storewidth,” dedicated to these storage, memory, and content delivery network technologies. See, for instance, this press release for the 2001 conference with all the big players in the field, including Akamai, EMC, Network Appliance, Mirror Image, and one Eric Schmidt, chief executive officer of . . . Novell. In 2002, Google’s Larry Page spoke, as did Jay Adelson, founder of the big data-center-network-peering company Equinix, Yahoo!, and many of the big network and content companies.

This interplay between bandwidth, storage, and latency, caching, content, and conduit, was the very point of the conference. What are the technical and economic trade-offs? Where will the Net be modular? And where will it be integrated? Where will content be stored, and who will pay? In many ways, the conference was ahead of its time. And my humble view is that Schmidt and Page may have even adopted some of the key insights of these conferences and turned them into some of Google’s most successful applications and architectures. A talk by Yale computer scientist David Gelernter in particular, I remember, seemed to have a profound impact on the way attendees visualized this coming “cloud” that would enable the death of the desktop. Remember, at the time, Google was still just a search engine company that hosted its then-thousands of servers in the data centers of Equinix and a few other hosting companies. Today, Google, with its global cloud platform and desktop killing apps, has become the supreme storewidth company.

I offer this background because some of us have been thinking about these topics for a (relatively) long time. When we first began analyzing this new “network layers” and then “network neutrality” policy concept five or more years ago, we did so with these profound architectural questions in mind. The Net, and the bits and applications traversing it, moves so fast, that we need all these technical solutions — routing, switching, QoS, CDNs, etc. — to make it work, let alone make it fast and robust.  

So yesterday’s Wall Street Journal story was not noteworthy for exposing some brand new network technology or architectural scheme. No, it seemed noteworthy (again, pending the accuracy of the reporting and the follow-on assertions) because (1) it highlighted the reality of this already existing architecture — something a few of us have been trying for years to expose and highlight as a shortcoming of the neutrality concept — and (2) suggested Google and others were softening their stance on the net neutrality policy issue. 

Now it’s perfectly possible the article is mistaken, that no one is softening on the push for net neutrality regulation. Let’s have the truth, indeed. But it is a good thing that we are getting deeper into the technology and architecture of the Net because a clearer understanding will expose net neutrality’s big flaws. As Gilder and I surmised five years ago, net neutrality, as ill-defined as it still is after all this time, seems one group’s attempt to get the upper hand on competitors using the heavy hand of government. My networks, good; your networks, bad. My content delivery bandwidth-saving latency-reducing fix, good; your content-delivery bandwidth-saving latency-reducing method, “evil.”

More to come. . . .

Correction: The issue of the Gilder Technology Report I referred to was of course titled “The Post-Diluvian Paradigm.” The meaning of this title was that after the flood of bandwidth — or capacity — was deployed, we would still need latency- and hop-reducing and other performance-enhancing technologies and architectures to make the cloud function robustly.

Big news in these parts.

The celebrated openness of the Internet — network providers are not supposed to give preferential treatment to any traffic — is quietly losing powerful defenders. Google Inc. has approached major cable and phone companies that carry Internet traffic with a proposal to create a fast lane for its own content, according to documents reviewed by The Wall Street Journal. Google has traditionally been one of the loudest advocates of equal network access for all content providers.

TLFers and commenters: Go.

See my comparison of the state of technology in 2008 versus 1992, during the last Democratic presidential transition.

In mid-2008, the four-gigabyte (or 4,096 megabytes) flash memory chip in an iPod Nano cost $25. Late in 2008, four-gigabyte flash cards and USB drives are selling for $14.99. But back in 1992, four gigabytes of flash memory would have cost $500,000. This means a hypothetical iPod Nano circa 1992 would have set back the teenage Nirvana or Boyz II Men fan around $3 million. Apart from research scientists and a few early adopters of Compuserve and AOL, the Internet essentially didn’t exist in 1992. Monthly Internet traffic was four terabytes. All the data traversing the global net in 1992 totaled 48 terabytes. Today, YouTube alone streams 48 terabytes of data every 21 seconds. . . . The dramatic centralization of money, power, information and influence now under way seriously threatens the entrepreneurial revelations and technological revolutions that drive long-term growth. If we quasi-nationalize the energy, finance, auto and health care markets, and possibly bar dynamic new business models on the Internet, as with possible network neutrality regulation, we will close off many of the most promising paths to needed efficiencies and, more important, new wealth.

See the whole article at Forbes.com: “How Techno-Creativity Will Save Us.”

The venerable Economist magazine has made a hash of my research on the growth of the Internet, which examines the rich media technologies now flooding onto the Web and projects Internet traffic over the coming decade. This “exaflood” of new applications and services represents a bounty of new entertainment, education, and business applications that can drive productivity and economic growth across all our industries and the world economy.

But somehow,  The Economist was convinced that my research represents some “gloomy prophesy,” that I am “doom-mongering” about an Internet “overload” that could “crash” the Internet. Where does The Economist find any evidence for these silly charges?

In a series of reports, articles (here and here), and presentations around the globe — and in a long, detailed, nuanced, very pleasant interview with The Economist, in which I thought the reporter grasped the key points — I have consistently said the exaflood is an opportunity, an embarrassment of riches.

I’ve also said it will take a lot of investment in networks (both wired and wireless), data centers, and other cloud infrastructure to both drive and accommodate this exaflood. Some have questioned this rather mundane statement, but for the life of me I can’t figure out why they deny building this amazingly powerful global Internet might cost a good bit of money.

One critic of mine has said he thinks we might need to spend $5-10 billion on new Net infrastructure over the next five years. What? We already spend some $70 billion a year on all communications infrastructure in the U.S. with an ever greater portion of that going toward what we might consider the Net. Google invests more than $3 billion a year in its cloud infrastructure, Verizon is building a $25-billion fiber-to-the-home network, and AT&T is investing another $10 billion, just for starters. Over the last 10 years, the cable TV companies invested some $120 billion. And Microsoft just yesterday said its new cloud computing infrastructure will consist of 20 new “super data centers,” at $1 billion a piece.

I’m glad  The Economist quoted my line that “today’s networks are not remotely prepared to handle this exaflood.” Which is absolutely, unambiguously, uncontroversially true. Can you get all the HD video you want over your broadband connection today? Do all your remote applications work as fast as you’d like? Is your mobile phone and Wi-Fi access as widespread and flawless as you’d like? Do videos or applications always work instantly, without ever a hint of buffer or delay? Are today’s metro switches prepared for a jump from voice-over-IP to widespread high-resolution video conferencing? No, not even close.

But as we add capacity and robustness to many of these access networks, usage and traffic will surge, and the bottlenecks will shift to other parts of the Net. Core, edge, metro, access, data center — the architecture of the Net is ever-changing, with technologies and upgrades and investment happening in different spots at varying pace. This is not a debate about whether the Internet will “crash.” It’s a discussion about how the Net will evolve and grow, about what its capabilities and architecture will be, and about how much it will cost and how we will govern it, but mostly about how much it will yield in new innovation and economic growth.

The Economist and the myriad bloggers, who everyday try to kill some phantom catastrophe theory I do not recognize, are engaging in the old and very tedious practice of setting up digital straw men, which they then heroically strike down with a bold punch of the delete button. Ignoring the real issues and the real debate doesn’t take much effort, nor much thought.

About 10 days ago I gave a presentation to a D.C. business group on “Innovation: The End? Or a New Beginning?” We got into a discussion of high-end immigration and were in general agreement that we should grant easy green cards to all STEM PhDs educated in the U.S., among other enticements to smart immigrants. One commenter then suggested this was a kind of a zero-sum race between the U.S., China, and India for the world’s human capital.

I replied, however, that the technological, economic, and political advance of China and India is a good thing. Innovation anywhere in the world benefits us, too, if we are open to the global economy. For hundreds of years, North America attracted much or most of the world’s financial and human capital because (1) though imperfect, we were an attractive realm of freedom and (2) much of the rest of the world was so inhospitable to innovation, entrepreneurship, education, and was generally politically intolerant. This massive tilt in our direction is now over. Other parts of the world present more opportunities for entrepreneurship and education, and we’re not going to get all the smart people, no matter how open our immigration laws. Doesn’t mean we shouldn’t try to get the smartest people. Just that there’s going to be lots of innovation and new enterprise in new non-U.S. places, and that overall that’s a good thing.

So I was intrigued when an Economist article on this very topic hit my radar yesterday. Turns out Amar Bhidé of Columbia Business School has written a whole book on the subject: The Venturesome Economy.

So does the relative decline of America as a technology powerhouse really amount to a threat to its prosperity? Nonsense, insists Amar Bhidé of Columbia Business School. In “The Venturesome Economy”, a provocative new book, he explains why he thinks this gloomy thesis misunderstands innovation in several fundamental ways. First, he argues that the obsession with the number of doctorates and technical graduates is misplaced because the “high-level” inventions and ideas such boffins come up with travel easily across national borders. Even if China spends a fortune to train more scientists, it cannot prevent America from capitalising on their inventions with better business models.

That points to his next insight, that the commercialisation, diffusion and use of inventions is of more value to companies and societies than the initial bright spark. America’s sophisticated marketing, distribution, sales and customer-service systems have long given it a decisive advantage over rivals, such as Japan in the 1980s, that began to catch up with its technological prowess. For America to retain this sort of edge, then, what the country needs is better MBAs, not more PhDs.

A lot to agree with. The addition of China and India to the world economy, with new minds and new centers of research and innovation, make it more likely that new general purpose technologies like the integrated circuit or laser will be invented — maybe the next one will be in the field of biotech or energy, who knows. It will be good for humanity, at least for those open to these inventions and, yes, the commercializers. But how does clustering — like Silicon Valley, where a whole ecosystem of talent, firms, and infrastructure spiral virtuously upward — come into play? Does clustering mean as much as it used to in the age of instant global broadband communication? If technology and the corresponding innovations rapidly diffuse everywhere — and they do — it’s largely a matter of who earns the profits. Who sets the standards. And which governmental jurisdictions get to tax the innovations and entrepreneurs. In nationalist terms, where military and political power derive from economic power, it is largely a competition for tax revenues.

But I think Bhidé, at least in this article (I’ve yet to read the book), still underplays the importance of PhDs or their equivalents who not only make the once-in-a-generation breakthroughs but also do help manufacture and commercialize these inventions. And Bhidé probably overplays the the importance of MBAs, who he says are key to our “consumer” culture. Consumers don’t drive the economy. Entrepreneurs do. Yes, MBAs are good at cleaving consumers from their wallets. But consumption is a function of growth and growth expectations, which depend on entrepreneurial confidence. Supply creates its own demand.

If we had a perfectly globalized, flat, frictionless world — it’s true, the “where” of innovation wouldn’t matter much. And we should basically be shooting for that type of world. But until we get there, the “where” of innovation probably matters more than Bhidé would like.

In this game, it’s the farsighted innovators and consumers, who want free trade and tax competition, against the all-too-often shortsighted politicians, who seek the short-term advantage of protectionism, tax gouges, and “energy independence” campaigns. It takes real wisdom to understand that China’s or India’s gain is also our own.

My friend Louisa Gilder’s brand new book The Age of Entanglement: When Quantum Physics Was Reborn arrived in the mail from Amazon today.

Matt Ridley, author of  Genome, says:

Louisa Gilder disentangles the story of entanglement with such narrative panache, such poetic verve, and such metaphysical precision that for a moment I almost thought I understood quantum mechanics.

The cover art alone is spectacular. Can’t wait to crack it open tonight.

See my take on the election and the prospects for capitalism in today’s Wall Street Journal:

If Barack Obama ran for president by calling for a heavier hand of government, he also won by running one of the most entrepreneurial campaigns in history. Will he now grasp the lesson his campaign offers as he crafts policies aimed at reigniting the national economy? Amid a recession, two wars, and a global financial crisis, will he come to see that unleashing the entrepreneur is the best way to raise the revenue he needs for his lofty priorities?

Coincident with the news of a few days ago that Microsoft is embracing the Web even for its longtime PC-centric OS and apps, The Economist has a big special report on “cloud computing,” including articles on:

• “The Evolution of Data Centres“
• “Software as a Service“
• “Connecting to the Cloud“
• “The Economics of the Cloud“
• The Effect on Business; and
• “Computers without Borders“

Forbes has produced a scintillating special report on the market crash and what comes next. Steve Forbes tells “How Capitalism Will Save Us.” In “Curbing Washington’s Growing Power” economist David Malpass explains the policy mistakes that led here and describes the key threats that could make it worse. Rich Karlgaard compares today’s market to the malaise of the 1970s, but offers hints of optimism bubbling up. And George Gilder, summoning Peter Drucker’s mantra — “Don’t solve problems; pursue opportunities” — previews the technologies that portend a “Coming Creativity Boom” and offers, characteristically, the deepest insights on the nature of capitalism:

Knowledge is about the past; entrepreneurship is about the future. In a crisis the world of expertise pulls the global economy ever deeper into the past, where accountant-economists ruminate on the labyrinthine statistics of leviathan trade gaps, tides of debt and deficits, political bailouts and rebates, regulatory clamps and controls, all propping up the past in the name of progress. The crucial conflict in every economy, however, goes on. It is not between rich and poor, Main Street and Wall Street, or even government and the private sector. It is between the established system and the new forms of wealth rising up to displace it–all the entrenched knowledge of the past and the insurrections of futuristic enterprise and invention. The real source of all growth is human creativity and entrepreneurship, which always comes as a surprise to us, especially in the worst of times, as Rich Karlgaard notes. No amount of knowledge about the present can predict the specific profile and provenance of innovation. From the pits of the crash of 2000, when the Internet and the dot.com siege were famously dismissed as a barren “bubble,” came Google (nasdaq: GOOG – news – people ) and MySpace to rise up and take all the chips and establish a new Internet economy. If creativity was not unexpected, governments could plan it and socialism would work. But creativity is intrinsically surprising and the source of all real profit and growth.

You’ll find lots more economic and investing advice, including a report on “What Ben Graham would do.”

Apologies for the non-technology post, but since the only topics of conversation these days are Wall Street, credit default swaps, and Putin’s flights over Alaska, I thought I’d post my review of Dave Smick’s new book The World is Curved: Hidden Dangers to the Global Economy…the Mortgage Crisis Was Only the Beginning.

                                                                                                            <div style="100%"><a href="http://www.scribd.com/doc/6320801/Not-So-Flat-After-All-Forbescom-092908-by-Bret-Swanson">"Not So Flat After All" - Forbes.com - 09.29.08 - by Bret Swanson</a> - <a href="http://www.scribd.com/upload">Upload a Document to Scribd</a></div>       

In today’s New York Times, Tim Wu writes in favor new regulation of the Internet and uses a number of bad analogies to do so. Let us count the ways.

My colleague Adam Thierer has already noted that OPEC is a group of mostly government-run oil companies whereas U.S. broadband service providers are private companies operating in an intensely competitive environment.

Wu bungles another analogy between oil and bandwidth. Wu writes, “Americans today spend almost as much on bandwidth — the capacity to move information — as we do on energy….If we aren’t careful, we’re going to repeat the history of the oil industry by creating a bandwidth cartel” — implying that bandwidth prices, for lack of competition, are about to skyrocket.

But in the last decade, the nominal price of oil has risen by a factor of 12. In the same time period, the nominal price of U.S. residential bandwidth has dropped by a factor of five or more. Mobile phone bandwidth has dropped in price even more. Thus $10 worth of oil in 1998 now costs around $120. Ten dollars of residential bandwidth in 1998 now costs about $2 or less.

Wu could not have chosen a worse metaphor.

Oil prices are mostly governed by the Fed’s monetary policy (not OPEC, yet another Wu blunder), and we don’t know which way oil prices are headed. But we know for sure bandwidth prices measured in dollars-per-bit-per-second will continue falling dramatically. The imperial forces of Moore’s Law and the equally powerful innovations of fiber-optic, memory, and hard-disk storage technology assure it.

This isn’t to say broadband networks are cheap. No, they are very expensive. They will cost hundreds of billions of dollars over the next five to 10 years. It is to say silicon and optical technologies are massively productive and will deliver ever greater services at ever lower prices. As Wu states, Americans may actually spend more and more dollars on monthly communications services overall. But per bit, they will be spending dramatically less. All this means is communications is becoming a vastly more important part of our lives.

By all means, let us explore and develop “alternative sources of bandwidth” as Wu desires. Unlike natural resources such as oil, which, while abundant, are at some point finite, bandwidth is potentially infinite. The miraculous microcosmic spectrum reuse capabilities of optical fiber and even wireless radiation improve at a rate far faster than any of our macrocosmic machines and minerals. It is far more efficient to move electrons than atoms, and yet more efficient to move photons. Left unfettered, these technologies will continue delivering bandwidth abundance.

But Wu fools no one with his slight of hand — attacking a phantom bandwidth “OPEC” — when his real goal is to establish and further empower his own cartel of scarcity-rationing bandwidth bureaucrats.

Cisco continues to do interesting work estimating the impact of video on Internet traffic. With the release of two new detailed reports, updating last year’s “Exabyte Era” paper, they’ve now created a “Visual Networking Index.” These reports follow my own series  of articles and reports on the topic. 

Cisco’s Internet traffic growth projections for the next several years continue to be somewhat lower than mine. But since their initial report last August, they have raised their projected compound annual growth rate from 43% to 46%. Cisco thus believes world IP traffic will approach half a zettabyte (or 500 exabytes) by 2012. My own projections yield a compound annual growth rate for U.S. IP traffic of around 58% through 2015. This slightly higher growth rate would produce a U.S. Internet twice as large in 2015 compared to Cisco’s projections. Last winter George Gilder and I estimated that world IP traffic will pass the zettabyte (1,000 exabytes) level in 2012 or 2013.

For just one example of the new applications that will drive IP traffic growth, look at yesterday’s announcement by Advanced Micro Devices (AMD). Partnering with my friend, the young graphics pioneer Jules Urbach, AMD previewed its Cinema 2.0 project, which combines the best of cutting edge technology and thinking from video games, movies, graphics processors, and computer generated imaging — with lots of artistic insight and inspiration — to create new kinds of interactive real-life real-time 3D virtual worlds, all powered not by supercomputers but simple video cards that you find in PCs and Macs, or from servers in the “cloud.”

A photorealistic 3D robot and city scene rendered in real time. (AMD; Business Wire)

The huge increases in bandwidth and robust traffic management needed to deliver these new high-end real-time services continue to show why net neutrality regulation and other artificial limitations on traffic management are complete non-starters from a technical perspective.

I’m a big fan of Chris Anderson and his magazine Wired. So I eagerly read his new cover story and preview of his forthcoming book, both entitled “Free!”

Anderson begins with the story of King Gillette, famous for his give-away-the-razor-and-sell-the-blades business model. Anderson classifies this form of “free” as a cross-subsidy.

Over the past decade, however, a different sort of free has emerged. The new model is based not on cross-subsidies — the shifting of costs from one product to another — but on the fact that the cost of products themselves is falling fast. It’s as if the price of steel had dropped so close to zero that King Gillette could give away both razor and blade, and make his money on something else entirely. (Shaving cream?) You know this freaky land of free as the Web.

But why are digital and information technologies fundamentally different than massy goods? And why do they make “free” business models far more widespread, or even dominant?

To explain, Anderson goes to the source — of both the technology, literally, and of the imaginative economic concept that propelled the technology far beyond its initial potential. You see, Carver Mead not only did the research behind Gordon Moore’s Law, and named it, but he also (1) created the VLSI manufacturing and design methodology to make very large scale integrated circuits possible and (2) envisioned that Moore’s Law could mean entirely new products, new industries, and even a new quantum digital economy.

Forty years ago, Caltech professor Carver Mead identified the corollary to Moore’s law of ever-increasing computing power. Every 18 months, Mead observed, the price of a transistor would halve. And so it did, going from tens of dollars in the 1960s to approximately 0.000001 cent today for each of the transistors in Intel’s latest quad-core. This, Mead realized, meant that we should start to “waste” transistors. … In economics, the parallel is this: If the unitary cost of technology (“per megabyte” or “per megabit per second” or “per thousand floating-point operations per second”) is halving every 18 months, when does it come close enough to zero to say that you’ve arrived and can safely round down to nothing? The answer: almost always sooner than you think. What Mead understood is that a psychological switch should flip as things head toward zero. Even though they may never become entirely free, as the price drops there is great advantage to be had in treating them as if they were free. Not too cheap to meter, as Atomic Energy Commission chief Lewis Strauss said in a different context, but too cheap to matter. Indeed, the history of technological innovation has been marked by people spotting such price and performance trends and getting ahead of them.

Mead is a friend and hero — and an unsung giant — and I was glad to see Anderson give him his due. Anderson then easily pivots to George Gilder’s key insight from Microcosm: the new economics is about not scarcity but abundance.

Enabled by the miracle of abundance, digital economics has turned traditional economics upside down. Read your college textbook and it’s likely to define economics as “the social science of choice under scarcity.” The entire field is built on studying trade-offs and how they’re made.

All scarcity does not vanish, of course, but often shifts from physical goods to less tangible, but more important, conceptual goods like your time, your lifespan.

There is, presumably, a limited supply of reputation and attention in the world at any point in time. These are the new scarcities — and the world of free exists mostly to acquire these valuable assets for the sake of a business model to be identified later. Free shifts the economy from a focus on only that which can be quantified in dollars and cents to a more realistic accounting of all the things we truly value today.

Another of Anderson’s insights, it seems to me, has major implications for the laws of — indeed, the very concept of — antitrust.

Technology is giving companies greater flexibility in how broadly they can define their markets, allowing them more freedom to give away products or services to one set of customers while selling to another set. Ryanair, for instance, has disrupted its industry by defining itself more as a full-service travel agency than a seller of airline seats (see “How Can Air Travel Be Free?”). The second trend is simply that anything that touches digital networks quickly feels the effect of falling costs. There’s nothing new about technology’s deflationary force, but what is new is the speed at which industries of all sorts are becoming digital businesses and thus able to exploit those economics. When Google turned advertising into a software application, a classic services business formerly based on human economics (things get more expensive each year) switched to software economics (things get cheaper). So, too, for everything from banking to gambling. The moment a company’s primary expenses become things based in silicon, free becomes not just an option but the inevitable destination.

Tying and bundling have always been with us, and I’ve always been a deep skeptic of antitrust, but today the quantity and definitions of — and the boundaries between — features, products, services, and markets are more numerous, fluid, and undefinable than ever. Several years ago the Justice Department tried to prohibit a merger in the crucial “super premium ice cream market.” But if the government is still making such silly definitional decisions in the preposterously narrow market “super premium ice cream,” how can lawyers in Washington ever hope to (1) “correctly” define markets in the far more dynamic digital world and (2) deploy an even remotely “correct” “remedy” before the markets, products, features, buyers, sellers, free-loaders, and free-mongers shift into new roles and new markets.

Last, it’s important to note that Anderson’s Free! is something quite different from Lawrence Lessig’s Free-Culture. One is about new technologies and business models that in the end seek to make money. The other is about the demonization of property and profits. One is about voluntary exchange and creative new ways of doing business. The other is about imposing a radical new utopian and quasi-socialist agenda on our imperfect but highly productive and creative capitalist economy. There may be overlap at the margins of Free! and Free-Culture, but at the core they are very different concepts.

Since I’m new here and since this is the Technology Liberation Front, I’m earnestly reposting some recent thoughts about how technology is driving political evolution in China.

In a long and thoughtful article in the Jan/Feb 08 issue of Foreign Affairs, John Thornton, a former head of Goldman Sachs and now professor at Beijing’s Tsinghua University, details the evolution of democracy in China. Along the way, Thornton describes two striking examples of the way “technologies of freedom” (in my colleague Adam Thierer’s phrase) are making a big difference.

In the past several years, the Internet and cell phones have started to challenge traditional media by becoming channels for the expression of citizen outrage, at times forcing the government to take action. One celebrated instance was the “nail house” incident in the sprawling metropolis of Chongqing, in central China. For three years, a middle-class couple stubbornly refused to sell their house to property developers who, with the municipal government’s permission, planned to raze the entire area and turn it into a commercial district. The neighbors had long ago moved away. The developer tried to intimidate the couple by digging a three-story canyon around their lone house, but the tactic backfired spectacularly. Photos of their home’s precarious situation were posted on the Internet, sparking outrage among Chinese across the country. Within weeks, tens of thousands of messages had been posted lambasting the Chongqing government for letting such a thing happen. Reporters camped out at the site; even official newspapers took up the couple’s cause. In the end, the couple settled for a new house and over $110,000 in compensation. The widely read daily Beijing News ran a commentary that would have been inconceivable in a Chinese newspaper a decade ago: “This is an inspiration for the Chinese public in the emerging age of civil rights. . . . Media coverage of this event has been rational and constructive. This is encouraging for the future of citizens defending their rights according to the law.”

In another example of the marriage of new technology and citizen action, last May angry residents in the southern coastal city of Xiamen launched a campaign to force the city government to stop the construction of a large chemical plant on the outskirts of the city. Their weapon was the cell phone. In a matter of days, hundreds of thousands of text messages opposing the plant were forwarded, spreading like a virus throughout the country. Xiamen authorities, who had ignored popular opposition to the plant before, suddenly announced that construction would be suspended until an environmental impact study could be completed. Dissatisfied with this half measure, citizens again used message networking to organize a march of some 7,000 people to demand a permanent halt to the construction. Although local party newspapers blasted the protest as illegal, it was allowed to proceed without incident, marking one of the largest peaceful demonstrations in China in recent years.

I think capitalism is more important than democracy. Liberty and voting are not the same thing. Representative democracy is thought to be one of the best ways to guarantee liberty, but we should not confuse the two. Democracy can offer the illusion of a distribution of power, but in fact often ends up centralizing and entrenching power.

Capitalism, on the other hand, distributes power, money, resources, ideas, and incentives. Capitalism means competition and innovation. Capitalism means technology, change, and a positive-sum outlook where people are more interested in the growth of their own lives, families, and businesses than they are in politics. China, therefore, can have an undemocratic one party system politically, but its unleashed and decentralized capitalism has created numerous power centers and power people (entrepreneurs) all around the country. The CCP therefore operates in a constrained environment where disparate factions and decentralized forces impose reasonable consensus decisions at the top of the pyramid.

Conversely, India since 1948 has been a democracy — and it enjoyed important blessings like free speech — but for most of this time it was a sclerotic, heavily socialist, corrupt, bureaucratic, and very poor country. Without capitalism, democracy becomes a zero-sum war in which 51% of the people can vote to confiscate a nation’s fixed or dwindling resources. China’s boom has now forced India to open its economy bit by bit, with positive results, but India’s “democracy” still prevents it from undertaking the bold reforms it should.

China still has huge challenges of its own and a very long way to go, as Thornton’s authoritative article makes clear. But it provides a common-wisdom-shattering exhibit for economists and political scientists everywhere.

In the end, I favor political openness and free speech. I favor representative government. But more than those things I favor capitalism.

CORRECTION: As several people have reminded me, “technologies of freedom” is the phrase not of Adam Thierer but of Ithiel de Sola Pool, who wrote Adam’s “favorite technology policy book of all time,” entitled Technologies of Freedom. Adam is so prolific, it is easy to accidentally attribute smart phrases and insights to him. My apologies.