Economics

I’ll See Your Hayek and Raise You a Friedman

by on May 12, 2012 · 7 comments

Tim Lee responds to my last post on net neutrality by invoking one of my favorite economists, Friedrich Hayek. As a matter of logic, a perfectly price discriminating monopoly can be as efficient as a competitive industry, at least in a static sense, but Tim wonders if any firm can ever know enough to price discriminate well, and whether in a dynamic sense these outcomes can really be equated.

In short, a market involving numerous competing over-the-top video providers will be fundamentally, qualitatively different from a market in which one or two large broadband incumbents decides which video content to provide to consumers. In the long run, the open Internet is likely to offer a radically broader range of video content than any single cable company’s proprietary video service, just as is true for text and audio content today. But Eli’s model can’t accomodate this difference, because it requires us to treat content as homogenous and service providers as omniscient in order to make the math tractable.

It’s a fair point that a basic price discrimination model like a simple graph with demand and marginal cost is not going to capture the texture of economic change over time. Nevertheless, I think Tim’s criticism is misplaced, and in fact it’s in a dynamic sense that laissez-faire really shines. Here are a few reasons:

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Real Talk on Net Neutrality

by on May 9, 2012 · 659 comments

A lot of people are talking about this New York Times article on net neutrality, which highlights the effect on Netflix of Comcast launching its own video platform on the Xbox that is exempt from Comcast’s bandwidth limitations. While this policy may indeed result in more customers for Comcast’s video services and fewer for Netflix’s in the short run, I don’t think that critics are seriously thinking through the economics of Internet service before they speak.

The economics of running a large ISP is one of fixed costs. When you introduce large fixed costs, a lot of consumers’ ordinary economic intuition becomes worse than useless. If Comcast incurs a lot of fixed costs from building a network, someone has to pay for it. Suppose that the fixed cost is currently divided between TV subscription and advertising revenue and Internet service revenue. If Comcast’s TV revenues collapse because everyone is switching to Netflix, where will Comcast get the revenue to pay its high fixed costs? You guessed it, they will have to raise the price of Internet service.

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Toward a Greater Understanding of Internet Activism through Public Choice, Economics

by on May 7, 2012 · 1 comment

In the lead essay for the “Cato Unbound” symposium this month, I analyze recent political movements that have been aided by Internet-based communication by positing a set of questions,

Activists played important roles in bringing down dictators in the Arab world, stopping the Stop Online Piracy Act (SOPA) in Congress and electing Barack Obama—just to name a few examples. But how much did the Internet matter in making these watershed events possible? How effective is it likely to be in the future? And how would we measure whether activism “works” for society—not just the activists?

I respond to the concerns raised by Evgeny Morozov in his iconoclastic 2010 book, The Net Delusion: The Dark Side of Internet Freedom (summarized in his short essay in TechFreedom’s free ebook The Next Digital Decade: Essays on the Future of the Internet).  In general, I suggest that we simply do not yet understand the Internet’s effect on activism well enough to make strong normative judgments about it.  But applying Public Choice theory can help us understand how developments in communication technologies are changing the relationship between an individual and the group in social movements. A few highlights:

  • Social media lower organizational costs, especially of recruiting members, but also noticeability: “members’ ability to notice each other’s actions.” Even in 2003, there was little way to tell whether your friends actually followed through when you asked them to help join a cause. But today, it’s easy to encourage them to re-share material on Facebook or Twitter—and to “notice” whether they’ve done so.
  • Social media allows members of large groups—think Twitter followers—to be continuously bombarded with propaganda about the worthiness of the cause creating social pressures not entirely unlike those that can be generated in a face-to face group.
  • The Internet empowers large, dispersed groups (like dedicated Internet users) to organize against small but concentrated interests. As anyone who works in technology policy in Washington can attest, SOPA’s implosion made Congress more cautious—at least about Internet regulation, where fear of a digital activist backlash is greatest. Continue reading →

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Book Review: Infrastructure: The Social Value of Shared Resources, by Brett Frischmann

by on April 25, 2012 · 8 comments

The folks at the Concurring Opinions blog were kind enough to invite me to participate in a 2-day symposium they are holding about Brett Frischmann’s new book, Infrastructure: The Social Value of Shared Resources. In my review, I noted that it’s an important book that offers a comprehensive and highly accessible survey of the key issues and concepts, and outlines much of the relevant literature in the field of infrastructure policy.  Frischmann’s book deserves a spot on your shelf whether you are just beginning your investigation of these issues or if you have covered them your entire life. Importantly, readers of this blog will also be interested in the separate chapters Frischmann devotes to communications policy and Net neutrality regulation, as well as his chapter on intellectual property issues.

However, my review focused on a different matter: the book’s almost complete absence of “public choice” insights and Frischmann’s general disregard for thorny “supply-side” questions.  Frischmann is so focused on making the “demand-side” case for better appreciating how open infrastructures “generate spillovers that benefit society as a whole” and facilitate various “downstream productive activities,” that he short-changes the supply-side considerations regarding how infrastructure gets funded and managed. I argue that: Continue reading →

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Why Do ISPs Impose Data Caps?

by on April 24, 2012 · 14 comments

There is a Senate Commerce Committee hearing today on online video, and our friends at Free Press, Consumers Union, Public Knowledge, and New America Foundation argue that it should be used to investigate ISP-imposed data caps.

If data caps had a legitimate economic justification, they might be just a necessary annoyance. But they do not have such a justification. Arbitrary caps and limits are imposed by multichannel video providers that also provide broadband Internet access, because the providers have a strong incentive and ability to protect their legacy, linear video distribution models from emerging online video competition.

As someone who uses an ISP with a data cap and who is a paid subscriber to three different online video services, you might think that I too would concerned about these caps. But to the contrary, I think there are some legitimate economic reasons ISPs might impose data caps, and I don’t see a reason to stop ISPs from setting the price and policies for the services they offer.

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Antitrust & Innovation in the New Economy: The Problem with the Static Equilibrium Mindset

by on April 16, 2012 · 0 comments

In this new Money Morning article, “The Antitrust Curse: What Apple Can Learn From Microsoft, IBM,”  David Zeiler wonders whether the antitrust lawsuit filed against Apple and several book publishers by the U.S. Department of Justice last week could open the door to a broader case against Apple or, at a minimum, simply become a major distraction to the firm and it’s ability to innovate going forward. He uses IBM and Microsoft as case studies in this regard and notes that, “the problem with being in the DOJ’s gunsight is that it distracts management, makes the company hesitant to innovate, and blemishes the company’s public image.  While antitrust woes may not have been entirely responsible for Microsoft and IBM ceding their dominant positions in tech, they were clearly a major factor,” he says. “And worse for Apple, the e-book case could be just the beginning.”

Quite right. I raised the same concern in my recent Forbes column,”Regulatory, Antitrust and Disruptive Risks Threaten Apple’s Empire,” which Zeiler was kind enough to quote in his essay. In that piece, I argued:

Even if Apple beats back [the eBooks] investigation, broader questions are being raised about the company’s power that could invite a much broader investigation. The danger for Apple is that antitrust becomes an omnipresent threat that must be factored into all ongoing business decisions. Antitrust is a particular danger to Apple because the firm is highly vertically integrated and that integration is the source of many of their innovations.  As earlier tech titans like IBM and Microsoft learned, when antitrust hangs like the Sword of Damocles, every decision about how to evolve and innovate becomes a calculated gamble.

Regarding the earlier impact that antitrust Sword of Damocles had on Microsoft, Zeiler unearthed this terrific 2005 quote from Mark Kroese, a general manager of information services at the Microsoft Network, who described the impact of the MS antitrust case on innovation at the firm as follows: “Working at Microsoft today vs. five years ago is different,” Kroese said. “If anyone thinks the antitrust case hasn’t slowed us down, you’re wrong. If I want to meet with a products manager for Windows, there needs to be three lawyers in the room. We have to be so careful, we err on the side of caution. We are on such a fine line of conduct.” Regarding how antitrust chilled IBM, Zeiler cites veteran tech journalist Steve Wildstrom of Tech.pinions who noted,  “Twelve years of litigation were an enormous distraction in a time of rapid technological and business change. IBM management became cautious and over-lawyered, constantly looking over its shoulder-a condition that persisted for years after the case ended. The antitrust case was almost certainly a major cause of the serious decline of IBM in the late 1980s and early 90s,” Wildstrom said.

Of course, it is impossible to scientifically determine to what degree antitrust harassment contributed to either IBM or Microsoft’s inability to innovate and adapt to the rapidly changing market conditions. And let’s be clear: both IBM and MS have found ways to rebound and innovate in other ways. But one wonders what was lost in the process as the threat of antitrust constantly loomed and potentially chilled innovative efforts that could have kept both firms on the cutting-edge. Continue reading →

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LightSquared and Dish: What Would Coase Do?

by on March 22, 2012 · 2 comments

On CNET today, I have a longish post on the FCC’s continued machinations over LightSquared and Dish Networks respective efforts to use existing satellite spectrum to build terrestrial mobile broadband networks. Both companies plan to build 4G LTE networks; LightSquared has already spent $4 billion in build-out for its network, which it plans to offer wholesale.

After first granting and then, a year later, revoking LightSquared’s waiver to repurpose its satellite spectrum, the agency has taken a more conservative (albeit slower) course with Dish. Yesterday, the agency initiated a Notice of Proposed Rulemaking that would, if adopted, assign flexible use rights to about 40 Mhz. of MSS spectrum licensed to Dish.

Current allocations of spectrum have little to do with the technical characteristics of different bands. That existing licenses limit Dish and LightSquared to satellite applications, for example, is simply an artifact of more-or-less random carve-outs to the absurdly complicated spectrum map managed by the agency since 1934. Advances in technology makes it possible to successfully use many different bands for many different purposes.

But the legacy of the FCC’s command-and-control model for allocations to favor “new” services (new, that is, until they are made obsolete in later years or decades) and shape competition to its changing whims is a confusing and unnecessary pile-up of limitations and conditions that severely and artificially limit the ways in which spectrum can be redeployed as technology and consumer demands change.  Today, the FCC sits squarely in the middle of each of over 50,000 licenses, a huge bottleneck that is making the imminent spectrum crisis in mobile broadband even worse. Continue reading →

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The Internet’s philosopher-king

by on March 15, 2012 · 0 comments

tumblr_m04g8byWGw1qdu5t4o1_500The cover story of this week’s *The New Republic* is [a review by Evgeny Morozov](http://www.tnr.com/print/article/books-and-arts/magazine/100978/form-fortune-steve-jobs-philosopher) of Walter Isaacson’s [biography of Steve Jobs](http://www.amazon.com/exec/obidos/ASIN/1451648537/jerrybritocom/ref=nosim/). In 10,000 words it is more illuminating about what made Steve Jobs tick than Isaacson’s 656 pages of warmed-over anecdotes and Wikipedia glosses. Morozov gets it right when he draws the connection between Bauhaus and Apple–functionalism and simplicity über alles. But he doesn’t seem to like where this takes Apple or Jobs.

He calls Jobs’s adherence to the Bauhaus ideal “a kind of industrial Platonism” in which products have a true form or essence that must be discovered and revealed by a designer. What consumers *think* they want is irrelevant; they will know what they want when it is presented to them. That’s true as far as it goes, but Morozov is the real Platonist here.

Morozov’s ultimate indictment of Apple is that it refuses to consider the externalities its technologies impose on “society.” One may love one’s Apple products and how they have improved one’s life, but, Morozov says,

>We need to identify the other moral instructions that may be embedded in a technology, which it promotes directly or indirectly. And this fuller analysis requires going beyond studying the immediate impact on the user and engaging with the broader–let us call it the “ecological”–impact of a device. (“Ecological” here has no environmental connotations; it simply indicates that a technology may affect not only its producer and its user, but also the values and the habits of the community in which they live.)

What is this negative externality Apple’s technology is inflicting on the value and habits of our communities? It’s that apps will kill the open Internet, except not for the reasons we think. Morozov cites and dismisses Jonathan Zittrain’s [“generativity” critique](http://www.amazon.com/exec/obidos/ASIN/0300124872/jerrybritocom/ref=nosim/) saying that Zittrain is concerned only with the threat to innovation. Morozov, on the other hand, is concerned with loftier “ethical and aesthetic considerations.” Namely, that Apple’s app paradigm “may be destroying the Internet in much the same way that the automobile destroyed the sidewalks and the playgrounds.”

>The point is not that we should forever cling to the shape and the format of the Internet as it exists today. It is that we should (to borrow Apple’s favorite phrase) “think different” and pay attention to the aesthetic and civic externalities of the app economy. Our choice is between erecting a virtual Portland or sleepwalking into a virtual Dallas. But Apple under Steve Jobs consistently refused to recognize that there is something valuable to the Web that it may be destroying.

After reading [a competing cover story about Portland](http://www.weeklystandard.com/articles/insufferable-portland_631919.html?nopager=1) in another newsweekly, I’m not sure the choice is as clear as Morozov thinks it is. But the message is clear: like Portland’s planners do about a “livable city,” Morozov has a vision of what is the Internet’s pure form, and it’s not one left to messy markets.

Morozov quotes a *Newsweek* interview with Jobs just a few years after the Web was invented. Jobs sees it as “the ultimate direct-to-customer distribution channel.” He essentially predicts that you’ll be able to buy books online and that the bookstore will know what you like.

>That the Web did become a shopping mall fifteen years after Jobs made his remark does not mean that he got the Web right. It means only that a powerful technology company that wants to change the Web as it pleases can currently do so with little or no resistance from anyone. If one day Apple decides to remove a built-in browser from the iPad, as the Web becomes less necessary in an apped world, it will not be because things took on a life of their own, but because Apple refused to investigate what other possible directions—or forms of life—“things” might have taken. For Jobs, with his pre-political mind, there was no other way to think about the Internet than to rely on the tired binary poles of supply and demand.

The notion that Apple turned the web into what it is today singlehandedly is laughable. Apple was moribund until 2000, didn’t introduce the iTunes Store until 2003, and has never had a strong presence on the web. The web has become what it is today because the convenience of getting any book you want, whenever you want it, and cheaply [beats little bookstores stocked by proprietor’s whims](http://www.slate.com/articles/technology/technology/2011/12/independent_bookstores_vs_amazon_buying_books_online_is_better_for_authors_better_for_the_economy_and_better_for_you_.single.html), however aesthetically pleasing they may be–which they’re often not. And for the record, I hope we can all agree the web is more than a shopping mall.

More to the point, though, Jobs was not as much a Pied Piper as we’d like to think he was. Depite all his marketing moxie, he was constrained by the market. If Jobs ever thought there was a true essence of a computer, it was the Power Mac G4 Cube. As Isaacson says, “it was the pure expression of Jobs’s aesthetic.” And it was a flop. “Jobs later admitted that he had overdesigned and overpriced the Cube, just as he had the NeXT computer.” Remember the NeXT cube? How about the iPod Hi-Fi? The buttonless iPod shuffle? Ping? Those tired poles of supply and demand told Jobs “no” time after time, but we might just as easily dismiss gravity or entropy as tired.

If Apple were to remove the browser from the iPad today, there would be, shall we say, less demand for the tablet. If at some future date there is no more demand for a web browser, and Apple removes it to little fanfare, then what is the harm?

I guess it is some Platonic Internet that we’d lose. A *pure* internet that we don’t know we want. One that only philosopher-kings can see. One they will discuss at “Berlin-based think tanks” and in the pages of “quarterly magazines,” as Morozov praises Google for sponsoring. And it’s an Internet the philosopher-kings would plan for us the same way Neil Goldschmidt and his friends planned Portland.

No thanks. I prefer a Steve Jobs, pursuing a functionalist ideal with little care for the consequences, yet checked by those tired poles and the “perennial gale of creative destruction” that will someday catch up with Apple.

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Is there a market failure in cybersecurity? It’s not an open and shut case

by on January 24, 2012 · 1 comment

Cybersecurity is one of the issues that the President may touch upon tonight in his State of the Union speech, and Senate Majority Leader Harry Reid has said he is ready to move on comprehensive cybersecurity legislation soon. This all raises the question: what is the problem we’re trying to fix?

In an important new working paper for the Mercatus Center at George Mason University, Eli Dourado asks if there is a market failure in cybersecurity that requires a government response. He concludes that policymakers may be jumping to conclusions a little too hastily.

Proponents of cybersecurity regulation make the case that private network owners do not completely internalize cyber risks. The reason, they say, is that a loss stemming from a cyber attack, against a financial network for example, will affect not just the network owner, but thousands of consumers as well. As a result, private network owners won’t spend the socially optimal amount on to meet that risk. That is a market failure, they say, and only government intervention can ensure that we get the right amount of cybersecurity.

In his paper, however,Dourado shows that the presence of an externality does not necessarily mean that there is a market failure. Externalities are often internalized by private parties without government intervention. This is true both generally and in the realm of cybersecurity. Policy makers, he says, should therefore be careful not to enact cybersecurity legislation just because they observe an externality. Regulating when there is no market failure will likely have dire unintended consequences.

You can download the paper at Mercatus.org.

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Are Rogue Websites Really So Bad After All?

by on January 23, 2012 · 6 comments

In the ongoing debate over SOPA, PIPA, and rogue websites legislation, most commentators have focused on what Congress should and shouldn’t do to combat these sites. Less attention, however, has been paid to the underlying assumption that these rogue websites represent a public policy problem. While no one has defended websites that defraud consumers by deceptively selling them fake pharmaceuticals and other counterfeit goods, many consumers who frequent “rogue websites” do so for the express purpose of downloading copyright infringing content.

As Julian Sanchez explains over on Cato-at-Liberty, how the latter category of rogue websites (including The Pirate Bay and, until last week, MegaUpload) affects the U.S. economy and social welfare is hotly contested in the economic literature:

[I]t’s become an indisputable premise in Washington that there’s an enormous piracy problem, that it’s having a devastating impact on U.S. content industries, and that some kind of aggressive new legislation is needed tout suite to stanch the bleeding. Despite the fact that the [GAO] recently concluded that it is “difficult, if not impossible, to quantify the net effect of counterfeiting and piracy on the economy as a whole,” our legislative class has somehow determined that . . . this is an urgent priority. Obviously, there’s quite a lot of copyrighted material circulating on the Internet without authorization, and other things equal, one would like to see less of it. But does the best available evidence show that this is inflicting such catastrophic economic harm—that it is depressing so much output, and destroying so many jobs—that Congress has no option but to Do Something immediately? Bearing the GAO’s warning in mind, the data we do have doesn’t remotely seem to justify the DEFCON One rhetoric that now appears to be obligatory on the Hill. The International Intellectual Property Alliance . . . actually paints a picture of industries that, far from being “killed” by piracy, are already weathering a harsh economic climate better than most, and have far outperformed the overall U.S. economy through the current recession.

Julian makes several great points, and his essay is well worth reading in its entirety.

Nevertheless, in my view, rogue websites dedicated to the infringement of U.S. copyrights pose a public policy problem that merits not only serious congressional attention, but also prompt (albeit prudent) legislative action. While I’m relieved that the flawed SOPA and PIPA bills seem unlikely to pass in their current forms, I also think it would be unwise for Congress to dither on rogue sites legislation for years in search of “credible data” about how such sites impact our economy.

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