Transcript Document

Economic Principles for a Sound
Internet Policy: The Prequel
or
What Would Alfred Marshall Say?
John W. Mayo
Georgetown University
[email protected]
(202) 687-6972
United States Senate
February 16, 2007
The Telecommunications Policy Debate in 2006:
Loud Voices of the The Extremists

“The telecommunications industry is really
trying to destroy our Internet!”

“Telecommunications markets are perfectly
contestable… we can be confident that
broadband competition will continue to
flourish and increase in the future.”
2007: A More Cerebral Approach?
“If we knew what we were doing, it wouldn’t be called
research, would it?”
Albert Einstein
Today’s Policy Debate in Perspective

Telecommunications Act of 1996 –
– “To promote competition and reduce regulation in order to secure
lower prices and higher quality services for American
telecommunications consumers and encourage the rapid
deployment of new telecommunications technologies.”
– “The FCC and states shall “encourage the deployment on a
reasonable and timely basis of advanced telecommunications
capability to all Americans … by utilizing, in a manner consistent with
the public interest, convenience, and necessity, price cap regulation,
regulatory forbearance, measures that promote competition in the local
telecommunications market, or other regulating methods that remove
barriers to infrastructure investment.”
A quick look: How are we doing?
BROADBAND DEPLOYMENT IN THE UNITED STATES
Broadband Deployment in the U.S.
Millions of Households
70
60
50
40
30
20
10
0
2000
Source: FCC
2001
2002
2003
2004
2005
2006
High Speed Line Growth 1999-2005
60
50
Satellite and Wireless
Fiber
Millions
40
Cable Modem
30
SDSL and Traditional Wireline
ADSL
20
10
0
1999
2000
2001
2002
2003
Source: FCC's High Speed Services for Internet Access Report, July 2006
2004
2005
WIRELESS SUBCRIBERS IN THE UNITED STATES
Wireless Subscribers in the U.S.
250,000
Thousands
200,000
150,000
100,000
50,000
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
0
Source: FCC
Rates for Communications Services (1995 - 2005)
2
100%
Cable
CPI
Telephone Services
Land-line Interstate
Land-line Intrastate
Wireless
Avg Rev/Min Wireless
1.8
Normalized Price
1.6
1.4
1.2
1
Cable
2005
$43.04
80%
60%
40%
20%
Cable
1995
$22.37
0%
0.8
-20%
0.6
-40%
0.4
-60%
0.2
-80%
1995
Source: FCC
1996
1997
1998
1999
2000
Year
2001
2002
2003
2004
2005
Cable Television Rates
Cable Rates and the CPI, 1995-2005
2.00
100%
Cable Price (basic-plus-expanded basic)
Cable
2005
$43.04
Normalized Price
CPI
80%
1.60
60%
1.40
40%
1.20
Cable 1995
$22.35
20%
1.00
0%
0.80
-20%
1995
1996
1997
1998
1999
2000
Year
Source: FCC (December 2006)
2001
2002
2003
2004
2005
Beyond Telecommunications:
What’s at Stake?

Cost savings of $100-230 billion associated with Internet
related productivity gains.

Productivity gain - .43% (approximately ½ of the projected
productivity gain)

Expected financial Impact through 2010 of Internet
Business solutions in U.S.:
– Revenue increases - $1.55 trillion
– Cost savings of $.528 trillion

Failure to improve broadband performance could reduce
productivity growth by 1%
Sources: Litan and Rivlan (2001), Ferguson (2002),Varian, et al, (2002), Lehr (2005)
What to do next: An Assessment?

Today’s debate makes your head spin:
– Intelligence on the inside or outside of the Net
– Duopoly, conscious parallelism, contestable markets
– Trinko, Brand X, Deep Packet Inspections, peering,…

Complication (obfuscation) is the friend of selfserving argumentation.

An enunciation of, and adherence to, basic
economic principles holds the promise of
providing the basis of sound policy (and
minimally promotes the “do no harm” principle)
Back to the Basics:
Alfred Marshall
“The Father of Supply and Demand”
"Economics is the study of
mankind in the ordinary
business of life."
Alfred Marshall
“Insatiable” Consumer Demands:
the Internet or otherwise

“He desires not merely larger quantities of the things he has been accustomed
to consume, but better qualities of those things; he desires a greater choice of
things, and things that will satisfy new wants growing up in him.”
– Alfred Marshall, Principles of Economics, Book III, 1890.

In general -- “[C]onsumers always prefer more of any good to
less…consumers are never satisfied or satiated…”
–

R. Pindyck and D. Rubinfeld
Microeconomics, 2005
Internet -- “Video content once reserved to limited distribution and schedule is
now readily available - on demand - on Internet properties big and small. The
rush of video content online has been met with near insatiable consumer
demand…”
BurstMedia, December 2006
The Coming “Exaflood”

“One of the key possibilities for 2007 is that the
Internet could be approaching its capacity.”
– Deloitte Telecommunications Predictions, TMT Trends
2007.

At the Amsterdam Internet exchange -“Daily traffic
exceeded one petabyte in February 2006, and by
October 2007 the exchange is forecast to be handling
two petabyte per day… equivalent to one trillion
pages of standard printed text.”
Sources of Demand Growth

Downloading one hour sitcom consumes 1700 times the
Internet bandwidth as pulling up an average website.

A one hour HD TV show would require 17,000 times the
Internet bandwidth as pulling down a website.

Downloading a single high definition movie consumes
more bandwidth than does the downloading of 35,000 web
pages.

February 2007
– Time Warner begins marketing cell phone-based television service
– TiVo and Amazon announce plans to sell downloaded TV and
videos to TV sets via Broadband. (Reuters Feb 6th)
Infrastructure and Content:
“Ketchup and Hot Dogs”
Internet Infrastructure
Contents and Applications
Broadband Infrastructure
and Content are largely
Demand-side complements
Supply
$/Q
Supply
Enticing more supply is costly
Q/t
Broadband infrastructure is extraordinarily
expensive and Economically sunk

Cable
– $100b to move from one-way to two-way networks

Fiber
– To the home:Verizon $18b
– To the curb: AT&T $5b

WiMax
– Sprint
» $3b in 4g, “First to market next generation network advantage”
» 100 million people in 2008

Cost per home of next generation broadband
(fiber) facilities = $1,400 per home.
Demand Can outstrip Supply

Without an incentive to economize on usage, congestion
can become quite serious. Indeed, the problem is more
serious for data networks than for many other congestible
resources because of the tremendously wide range of usage
rates. On a highway, for example, at a given moment a
single user is more or less limited to putting either one or
zero cars on the road. In a data network, however, single
user at a modern workstation can send a few bytes of email or put a load of hundreds of Mbps on the network.
– Jeffrey K. MacKie-Mason and Hal Varian
– “Economic FAQs About the Internet”
– Journal of Economic Perspectives
The Role of Technology and/or Entry
$/Q
S1
S2
P
Q1
Q2
Q/t
How to ensure that Demand is met?

The Alternatives
– National ownership & central planning
» “The Internet is just too important to leave to the market”
– Total Laissez faire
– Promote supply, entry with fundamental reliance on market
mechanism with antitrust and regulatory backstop
How to ensure that demand is met?
The Role of the Price mechanism

Consumers prefer low (zero) prices

Supply is simply unforthcoming in the
absence of prices that exceed costs

Prices ration demand and send positive
signals to suppliers regarding the value that
consumers place on a good or service.
Two-sided Markets
Magazines, Newspapers
Stuff Providers
Households &
Businesses
Internet Infrastructure
Households &
Businesses
Content and Applications
Providers
Alfred Marshall on solving shortages

“When therefore the amount produced (in a
unit of time) is such that the demand price is
greater than the supply price, then sellers
receive more than is sufficient to make it
worth their while to bring goods to market
to that amount; and there is at work an
active force tending to increase the amount
brought forward for sale.”
– Principles of Economics, 1890, Book V,
Chapter 3
The Adequacy of the Current
Internet Pricing Models
[T]here is a real problem for the continued exponential growth
of the traffic and the markets' current attraction to … flat
rate pricing…provisioning continual investment
to address the real growth in traffic is not an obvious outcome
that's going to indeed happen, and that if that were to be forestalled
I believe that would have deleterious effects for the whole
Internet value chain.
William Lehr, MIT
February 13, 2007
Policy Options

Current Frame Imposes regulation on treatment of bits based
on concern over competition and fear of discrimination or,
alternatively, leave policy as is.

These options are predicated on a certainty that doesn’t exist.
– Potential for upgrading policy
» Policy fast lane (enhanced and expedited
complaint/enforcement process regarding competition)
» Reduce barriers to entry into intermodal competition
 Municipal Franchise reform
» Remove capacity constraints (Barriers to entry) in
alternative wireless technologies
» More, detailed international benchmarking
» Promote, as possible, new technologies (BPL)
Conclusion
“Whereas we have grafted the Internet onto our lives,
[our children] are growing up in it and have never
known otherwise and they will shape it ultimately into
something that we can't fathom. Our job in the
meantime is to not screw it up.”
Deborah Platt Majoras
Chairman, Federal Trade Commission
Feb. 13, 2006