Water, Air, and Wetting One’s Pants

November 17th, 2010

A few weeks ago, Anssi Vanjoki, who is the outgoing head of Nokia’s smartphone division, offered this gem:  He stated that using the open source Android operating system as the basis for a smartphone is like Finnish boys who “pee in their pants” to keep warm in the winter.  It affords temporary relief, but leaves you in a worse position in the end. I have been thinking about this approach and am convinced it is not the right question.

First as a metaphor, it is totally broken.  A brief aside into the second law of thermodynamics and neuroscience: When you urinate in your pants, you do not warm yourself; you only move the heat from inside your body to the outside.  It only feels warm because your heat-sensing nerves are on your skin, not inside your body.

The substantive issue is whether one can make a commercially viable product and sustain competitive advantages using open source software which is freely available to all comers.  The good news about using open source is that one can develop an operating system, without the time and the cost of developing our own from scratch.  The bad news is so can your competitors.  The worse news is since the software is available for free, your customers might not pay for it.

EANx 36

My rig, when I used to dive doubles.

When I was at CITI,  I developed a set of materials on managing intellectual property assets, including open source software.  I always started the open source section with the question, “would someone pay for something that is free?”  “No,” was the standard response.  “Maybe I ain’t too bright, but every weekend in summer, I buy water and air.  The two most abundant substances on the planet, and I am paying for them.”  On weekends, I would go to the dive shop and get my SCUBA tanks filled with air.  Then, I would get a few bottles of water to take on the dive boat.  I was not really paying for the air, but the filtration, dehumidification, pressurization, and occasionally some hospital-grade oxygen to make EANx for extended bottom time.  The take away is that people will pay for things that are normally free, if those things have been improved in some way which holds value for them.

Insight:  Mr. Vanjoki cannot wish Android away.  It is out there and he will never get that genie back in the bottleneck.  Going forward, the question is whether he can make a better product using the open source software, rather than a proprietary OS.  One could spend a billion dollars to develop an OS and there is no guarantee that it will be better.  An existing OS is a sunk cost, so if building on it will not produce better product it can just be abandoned.  Further, Android code carries an Apache license, so some extensions to the code may be proprietary.  So, it is not totally share-alike.  In the final analysis, the question is not about peeing to stay warm but whether you can maintain a competitive advantage in an increasingly competitive market place – this is independent of your individual choices.  Open source software will continue to make the marketplace increasingly competitive, whether one chooses to use it or not.

Defining the Open Internet

November 5th, 2010

Earlier this week I was contacted by Seth Johnson who was organizing a response to the FCC’s Further Inquiry into Two Underdeveloped Issues in the Open Internet Proceeding.  Seth asked if I would consider signing on in support of joint comments which urge the FCC to consider appropriate distinction between the open Internet and “specialized services” in light of changes in the market. As I said in previous Cool Stuff, both basic packet Internet and specialized services are important components of a robust and diverse market place.  I jointed the statement along with 31 other distinguished experts in this field.

Here is what some of my cosigners have said in their blogs:

I am not going to rehash all of the bright, insightful things these experts have said – I will not do them justice.  I do recommend that you read them, though.

Insight: Both the open Internet and specialized services exist in the market, and have for some time.  However, this is an important juncture to define: 1) where one begins and the other ends and 2) what are the appropriate measures necessary to preserve competition and fair play.  I joined on the comments because it does not advocate a particular policy outcome.  Rather, we urge the FCC that by “addressing this distinction in itself enables the analysis and pursuit of policy goals to proceed with a profound new level of clarity.”  This is of particular national importance.  The Internet is an American invention.  It is and will continue to be an important ingredient to economic development and global competitiveness.

Rethinking the White Spaces decision

September 23rd, 2010
Manneken Pis

Unlicensed operation in the yellow spaces.

I watched the FCC’s monthly agenda meeting today where it unanimously adopted its Second Memorandum Opinion and Order which will enable unlicensed operation in the TV White Spaces.  As I have said in a previous Cool Stuff,  I do not think given the way in which operation will be permitted will be truly unlicensed.  However, what I found most interesting about the meeting was what the Chairman and Commissioners said and did not say in their comments from the dais when voting out the item.

Almost universally the five:

  • Thanked Julie Knapp and his staff (This is to be expected.  I used to work down the hall from Julie, Alan and Hugh, and they are a bunch of really great, really smart fellows);
  • Stated that the Order would unleash a wave of innovation, broadband access, “Wi-Fi on steroids,”  and other Really Cool Stuff (RCS); and
  • Acknowledged, however, we have to protect the incumbent users such as broadcast TV and wireless microphones.

Insight: What was universally not said was that broadcast TV and wireless microphones are not the future.  Granted, regulators want to provide regulatory certainty and are loathe to picking winners and losers; however, this glaring absence begs the question: if all of the innovation, job growth, and economic development will come from the unlicensed use of the White Spaces, why aren’t we protecting those uses?  I cannot help thinking that we might have done this wrong and have locked in the wrong incentives for the next 40 or 50 years.

Spectrum Auctions in Japan?!

September 22nd, 2010

I was not the first to advocate for spectrum auctions, only the most vociferous.

The Japanese wireless market must be for Evan Kwerel akin to what the Duck-billed Platypus is for Charles Darwin. The Platypus is an egg-laying, venomous, duck-billed, beaver-tailed, otter-footed mammal, and would seem defy evolutionary theory.

The Japanese wireless market is well developed, with at least 5 competitors offering some of the lowest priced, highest speed, and most advanced networks of anywhere in the world. Yet, according modern economic theory, this should not be. The Japanese government has never held an auction to assign spectrum licenses. Economic theory suggests that auctions are more efficient (see, Cool Stuff) at assigning spectrum rights to their highest monetary value use than other means such as comparative hearings (currently used in Japan) or lotteries. If you are interested in auctions in Tokyo have been in Tsukiji –  the 5 AM fish market – has traditionally been your best bet.

Charles Darwin

If it walks like a duck, and talks like a duck… this makes no sense, it can’t be a mammal.

I have head rumors that the reason the Japanese government has never held spectrum auctions was not for fear of creating distortions in the market but so as not to upset the balance of power among the various ministries (i.e. Finance, Industry, Posts and Telecommunications). The US Treasury and the FCC got along fine once the FCC started sending enormous checks.

That might all change as the government of Japan is considering how it might employ spectrum auctions. A friend in Tokyo sent me a recently published copy of the Cabinet’s decision on a new strategy for growth.  Item 35 on page reads as follows:

電波の有効利用のための制度の見直し (1)割り当て済みの電波について、より必要性の高い用途に利用できるよう、既存の利用者を他の周波数へ速やかに移行させ、迅速かつ円滑に周波数を再編するための方策について平成22年度に検討、結論を得、平成23年度に措置する。 (2)再編に要するコストについて、再編後の周波数を新たに利用する者が、市場原理を活用して負担する等、オークション制度の考え方も取り入れた措置について平成22年度に検討、結論を得、平成23年度に措置する。

Tsukiji

Maguro auctions at Tskiji.

My Japanese is not so strong, but if you read this in context as Kasumigaseki Bungaku (roughly, “Beltway Literature”), as I was admonished, you can interpret this mean that the Cabinet is directing the Ministry of Information and Communications to review how market forces can be employed to rapidly and efficiently reassign radio usage rights. According to my vague understanding of what is suggested, the MIC will pursue a limited use of auctions to reassign spectrum licenses. Auction prices will be limited to the costs of relocating the existing users from the band. The MIC will then auction participant’s bids as part of its analysis in some sort of comparative hearing. License winners will have to pay their bid eventually.

Auction Theory in Tsukiji

Ken, we want you to rework the Part 15 Rules for sashimi - we'll call it “Unlicensed and Uncooked.”

Insight: To be fair, I think this is a really clever idea, but am not convinced it will work. For my Next Generation Spectrum Policy study,  I considered a very similar idea, whereby the spectrum management authority would have access to pricing information to make band-planning determinations. This idea is, in fact, the origin of the term I coined for the study, “price-guided policy.” I eventually rejected the idea before concluding the study because I became convinced that as long as you are going through the trouble to hold the auction, you might as well have it do all of the hard work up to and including assignment. I am very curious to see how this develops. I am not sure whether auctions will make the Japanese wireless market more advanced, or whether they will simply screw things up. I will keep you posted.

That’s not the Internet

August 27th, 2010

In my last Cool Stuff, I mused about the Google Verizon proposal on Network Neutrality and its implications pricing incentives and a two-tiered Internet.  The post received quite a bit of attention in blogsfera italiano (here, here, and here).  Since posting, I have continued to think about a tiered Internet.  I conclude that managed services already exist in the market place, but it is not the Internet.

Hovey Slide

Rich Hovey's Genius Slide

I keep coming back to a slide I stole have been using with permission from Rich Hovey for about four years .  While a triple play network may appear to be a single network, it is really three sharing the same wire or fiber.  Indeed, there might be three completely separate sets of network equipment attached at either end of the line – Internet modem, cable box, and phone terminal.  The video programming component is not neutral and certain shelf-space on the network have been reserved, and prioritized for certain applications.  But, that’s not the Internet.

I also am old enough to remember dial-up to online services such Prodigy, CompuServe, and AOL. Each service provider would offer its own content, plus some backdoor way, such as gopher or email, way into the public Internet. However, those online service providers were not the “Internet”.

The Internet is an interconnected, end-to-end, packet switched network.

Insight: There is nothing inherently anticompetitive about broadband service providers marketing managed services.  There is also nothing new about it.  However, it would be false advertising to claim it is the Internet.

Taking the Roof off of the Internet

August 18th, 2010

The recent legislative proposal on Network Neutrality proposed by Google and Verizon would “allow broadband providers to offer additional, differentiated online services, in addition to the Internet access and video services (such as Verizon’s FIOS TV) offered today.”  Some critics have argued that that the deal would create a two-tiered Internet, one upper tier for differentiated services and one lower tier for commodity packets.  The first could swallow the second, as ISPs try to up-sell their customers to higher margin products.  So, in short, the basic Internet will get crappier and the managed Internet will get more expensive and less open to competing sources of content and applications.

There is some strong precedent for this criticism since it is not a new economic phenomenon.  Emile Dupuit observed of the French rail system in 1849:

It is not because of the few thousand francs which would have to be spent to put a roof over the third-class carriage or to upholster the third-class seats that some company or other has open carriages with wooden benches … What the company is trying to do is prevent the passengers who can pay the second-class fare from traveling third class; it hits the poor, not because it wants to hurt them, but to frighten the rich … And it is again for the same reason that the companies, having proved almost cruel to the third-class passengers and mean to the second-class ones, become lavish in dealing with first-class customers. Having refused the poor what is necessary, they give the rich what is superfluous.

As I wrote in a previous Cool Stuff, I am not inherently opposed to two tiered pricing.

Stevenson's Rocket

Sometimes even an economist will spend £5 to ride in an open carriage, if it makes his kid happy.

Even in common carriage networks there has been tiering and prioritization, such as business and economy classes in rail and air transport, for example.  In traditional a telephone networks, there was tiering. Although every one got VGS (voice grade service), under the Bell System there was still business and residential classes of service.  The network was capable of certain forms of call prioritization in emergencies, calls to 911, calling out prioritization over calling in, and GETS (Government Emergency Telecommunications Service).  There was also prioritization based on first-in-time.  The telephone network was designed to handle only fraction of capacity, and on occasion, you might get an “all circuits are busy” message when your call was blocked.

More troubling than a two-tiered Internet is the in the way which the deal could misalign economic incentives.  The Google-Verizon deal could change to the way networks compensate one another for carrying traffic to their respective customers, if the content or application provider is paying for better service on the enduser’s network.  There are basically three ways networks can compensate one another: calling-party-pays; receiving-party-pays; and bill-and-keep.  Money changes hands as their names suggest.  Bill-and-keep is the way most Internet traffic is exchanged (peering).  It works well when the networks are roughly equivalent in size, traffic flows, and cost-causation.  Receiving party pays is how most cell phone networks exchange traffic in the US.  It provides pretty good economic incentives.  The problem with the Google-Verizon deal is that it could be, in effect, a calling-party-pays arrangement.  Without regulation, these arrangements provide the opportunity for carriers to shift costs to rival networks and engage in other system-gaming.  When dealing with a “termination monopoly” such as an Internet connection, traffic should be exchanged under receiving party-pays or bill-and-keep arrangements.  The termination monopoly exists anytime there is only one network which can terminate traffic to a network end point.  It is surprisingly durable.  Even when there is a healthy number of competitors in access networks (fixed or wireless), once a subscriber chooses a particular network, he forecloses all other ways for other network participants to send him traffic.  It is in the termination network’s interest to keep prices low for its subscribers and charge high costs to other networks’ subscribers. In the current case, this fact is Okay for Google because it has lots of cash.  However, its competitors and start-ups might not be able to pay for such termination.  In this way, the Google-Verizon deal could in the long run serve to limit others from the market place.

In the end, either competition or regulation has to constrain this behavior.

Insight: Google Verizon proposal is not so much a threat to network neutrality (lower case) as it is to network economics.  Part of this is the public face of a private bargaining game. Players in the value chain are using the political and regulatory process as they struggle to gain a larger share of that chain.  It is not evil, merely self-interested.  That is fine.  At some level, Google and Verizon should be lauded for working towards a compromise and to move things forward.  But, they should not get to make public policy.  That is the exclusive domain of Congress and the FCC.  The FCC should take those views into account then offer its own independent decision to impose regulation or not.  Professors Susan Crawford and Lawrence Lessig (both of whom I admire very much) get this exactly right in their Op-Ed last week.  If Google and Verizon want to offer an internet without a roof, the FCC should make sure that another company is able to offer a competing one with a roof.

Solving Network Neutrality

August 12th, 2010

Much has been said in regard to the recent Google-Verizon proposal on Network Neutrality and the collapse of talks at the FCC.  The rough consensus is that the deal would create a two-tiered Internet.

Is a two-tiered Internet a bad thing?

Honestly, I don’t know.  On one hand, it offends my basic sense of fairness.  On the other, my economics training tells me the price discrimination is a good thing (in competitive markets).  I have been thinking, writing, and speaking (in that order) on Network Neutrality for about four or five years.  My work has been published in English, Japanese, and Italian is forthcoming.  The one thing I have consistently said is that Internet subscribers, when well-informed, with real competitive options, and faced with low switching costs, will punish ISP who are not giving them what they want.  Competition is deputizes consumers to vote with their wallets.  If a two-tiered Internet is a good thing, then a competitive market will support it.

Almost all commenters agree that the cause of Network Neutrality issue is the reduction of competition in Internet access in the US.  This follows from a series of FCC decisions which basically eviscerated its local competition rules (mostly in the form of unbundling) in favor of “market solutions”.  The major proceeding which changed these rules was the Triennial Review.  In the proceeding, incumbents told the FCC that unbundled network elements (UNEs) were bad because they discouraged investment.  The competitors argued that UNEs were good because they were necessary for network competition.  I find both of those statements true and not mutually exclusive.  It is possible for a well-intentioned, well-informed regulator could split that baby down the middle, and still throw out the bath water.  In other words, regulators can create an effective unbundling regime which mitigates the disincentives to invest while still enabling competitive entry.  Indeed, nearly every other industrialized country has some form of unbundling for local competition.

What makes this difficult in the current political climate is that UNEs and TELRIC are incredibly dull.  It is much easier to get people excited about a topic like Network Neutrality than long-run incremental costs.  So, you cannot generate the political will for a return to unbundling.

Insight: There is now a unique opportunity to move beyond the Network Neutrality debate.  However, regulators should regulate, not negotiate.  The FCC should take this opportunity to revisit its unbundling rules to craft rules which can enable competition in Internet access networks while mitigating disincentives to invest.  Time to get excited about subloops!!

An MBA’s Thoughts on Taxes and Deficits

August 11th, 2010

Riddle me this.  Why is it that when the predicate contains “common sense”, the conclusion defies logic?

Recently in the United States, a number of so-called “deficit hawks” are advocating an extension of the Bush Tax Cuts while insisting that the deficit be brought down.  This makes no sense to me.

Let me present a model simple enough for me and my MBA colleagues to understand (I am not very good at math). Imagine the erstwhile Kingdom of Carteronia.  Gross Domestic Product (GDP) in Carteronia is CD$ 1,000. The government levies a 30% tax on all economic activity.  (The tax is the same for all income levels and for capital gains, so we don’t have to worry about wealth transfers, incentives or industrial policies).  Thus, revenues are CD$ 300 (1000 x 0.30) and the government has a balanced budget.  Recently, our rulers have decided to reduce the tax rate by three percentage points to 27%.  In order to maintain the same level of government expenditures and not run a deficit, GDP would have to grow in one year to CD$ 1,111.11 (300 ÷ 0.27).  This is an 11.1% growth rate and has to be stimulated by the tax cut and over and above the rate of inflation.

Think an 11.1% growth rate is possible?  Well, it would be nearly 4 times the annualized growth rate of US Real GDP, which was 2.96% between 1945 and 2009.  (It was only 1.70% per capita.) (See, http://www.measuringworth.com/growth/#)  Still think this is possible?  Consider the velocity of money.  Under the tax cut, citizens have a reduced tax liability of CD$ 30. Assume that they spend every last cent in the private sector.  Then every person has to spend every last cent of their reduced tax liability as well as any additional income it might generate several times – in fact about 35 more times in the year.

Insight: I don’t like paying taxes.  No one likes paying taxes.  If you like to pay taxes, you should have your head examined. Nonetheless, we all like the benefits that taxes can buy – the common defense and the general welfare, including: police, courts, highways, national defense, etc.  What the reduce-taxes and reduce-the-deficit augment hopes to do is: 1) dispense with a liability while retaining the attendant asset and 2) achieve an objective by deliberately behaving in a way guaranteed to produce these opposite result.  To an MBA’s mind, this is illogical.

Back to the Future Station

July 31st, 2010
Back to the Future Station

L - R: Carter, Neumann, Kii, Sato

On my recent business trip to Tokyo, I had the opportunity to have lunch with my good friend Hajime Kii and his family.  I know Kii-san from when he was a senior executive at NTT America and I was working at CITI at Columbia University.  Kii-san was kind enough to arrange a visit to NTT DOCOMO’s Future Station for me and WIK’s CEO Karl-Heinz Neumann while we were in town.  At its Future Station, DOCOMO presents a short film showcasing its high-concept vision of its product and service offerings for the near-term future.

I had mentioned to Kii-san that I had seen it in 2001 as part of a delegation from Columbia University including Eli Noam and Robert Pepper (now at Cisco Systems).  The 2001 version included a short film showed DOCOMO’s vision for wireless communications in the year 2010.  Eli and Pepper kept giggling and looking at me because the kid in the 2001 film was named “Ken”.  Now that it is 2010, I was clearly interested to compare the 2001 film to the 2010 version and to the products currently offered.

Well, aside from the fact that the kid in the film is now called Hiro, many of the ideas in the 2001 film have made their way into current products and prototypes.  After the film we got to tour their showroom.  Granted, the floating touch screens are still science fiction; however, products like ITS (Intelligent Transportation Systems), augmented reality, multimedia handsets, mobile commerce, and location-aware services have made it into their cool new handsets.  My favorite handset comes with a detachable QWERTY keyboard and a projection monitor.  One can use any Bluetooth keyboard (unlike my complaint with the iPhone) and can use the detachable projector to make presentations (movie screen not included).  We also were able to play with a protype handset which does augmented reality, allowing you to see what it would be like to have a new car (you can change the style, color, etc.) in your driveway.  Dr. Neumann was able to use one of display handsets to buy a drink from a vending machine and buy a Big Mac from a McDonald’s mock-up.  Using your cell phone to pay for anything from train tickets to lunch to groceries is completely old hat in Japan.  DOCOMO also showed us two new handsets which have natural wood exteriors.

Hokusai's Great Wave off Kanagawa

Hokusai's Great Wave off Kanagawa

The other cool fact I learned from the 2010 film is that the yukio-e woodblock prints of the master Hokusai Katsushika captured the movement of water at 1/5000 of a second.  (By comparison, most digital SLR cameras are not faster than 1/1000 of a second.)

Insight: DOCOMO’s Future Station is very cool.  While visiting the Future Station, I was like a kid in a candy shop on Christmas morning.  Being there reminded me why I got into telecommunications in the first place – because tomorrow will always a brighter day with bigger (smaller), better, faster and Cooler Stuff.  I will have to go back in 2020.  I will give you an update then.

Report from ITS

July 9th, 2010

ITSEvery once in a while, one comes across something so trivial yet so flattering.  I was fortunate enough to attend the International Telecommunications Society 18th Biennial Conference in Tokyo last week.  I attended the panel on radio spectrum on the last day of the conference.  Two of the four papers presented on the spectrum panel were derived in some way from research I published in 2009.

The first paper was the History and Conceptual Development of Spectrum Commons in the USA by Nattawut Ard-Paru of the Chalmers University of Technology.  The historical treatment of her paper was taken from taken from Coase (1959), Hazlett (1998) and my Unlicensed to Kill: A brief history of the FCC’s Part 15 Rules.  Not bad company to be in!

The fourth paper on the panel was Exclusive Spectrum Rights vs. Spectrum Commons by Dr. Kiyotaka Yuguchi of Sagami Women’s University.  Dr. Yuguchi reviews some of the recent literature in an attempt to synthesize commons and exclusive rights approaches.  He then develops certain extensions to my 2009 spectrum pricing model in my paper Next Generation Spectrum Regulation for Europe: Price-Guided Radio Policy.  Dr. Yuguchi looks at the marginal rate of substitution for technology for spectrum.  This is admittedly only implicit in my interference function.  He makes it explicit. However, this is what I had hoped people would do with the basic model – add complications and refinements which I did not have the resources to do in the original paper.

Insight:  I have been working in radio communications for nearly a decade.  It was so encouraging for me to see that my recent work is having such an important impact on the direction of current research.  If you work hard enough and long enough, you every once in a while you earn bragging rights.