The Bandwidth Dipstick
Yesterday, Prof. Tim Wu of Columbia Law School published an Op-Ed in the New York Times on the subject of bandwidth. In the article, he compares bandwidth to oil in terms of its percentage of the average household’s expenditures and in terms of the cartels which produce it. He says:
Like energy, bandwidth is an essential economic input. You can’t run an engine without gas, or a cellphone without bandwidth. Both are also resources controlled by a tight group of producers, whether oil companies and Middle Eastern nations or communications companies like AT&T, Comcast and Vodafone. That’s why, as with energy, we need to develop alternative sources of bandwidth.
While Prof. Wu’s might be right in his conclusions, I have to take exception to some of the points he makes along the way, particularly regarding cost of bandwidth.
To begin with, the price of oil is based, to some large measure, on the cost of its production and not necessarily the cost of its consumption. The cost of production includes the cost to pump the oil out of the ground, refine it, and distribute it. The cost of consumption would include the societal cost of pollution such as global warming caused by greenhouse gasses. Here in Europe where a gallon of gasoline exceeds $9, most of which is tax, the retail price may better reflect the cost to society not only production but consumption as well. The cost of the production of bandwidth includes both network CapEx and OpEx. The cost of its consumption includes the negative effects of congestion felt by competing would-be users at times of peak use. It is effectively zero, when use is non-rivalrous. The price of bandwidth, as well as other resources subject to high negative externalities, should reflect the cost its production and consumption. This maximizes the benefits which society obtains from the resource.
This is precisely why, contrary to Prof. Wu’s assertions, the FCC is working on such ideas. FCC: OSP Working Papers #41, #42, and #43, on which I am a proud coauthor/collaborator, look at precisely these issues. We designed and tested a system which instead of assigning spectrum in static blocks, would co-ordinate use of the spectrum to an efficient optimum. Beyond the overly simplistic bandwidth dipstick, the FCC work also modeled other dimensions of performance, such as latency, and could be extended to include jitter, reliability, robustness, etc. Nonetheless, the economic congestion protocols we developed would allocate bandwidth in real-time based on willingness to pay when there is congestion and it would be free otherwise.
To be fair, a business model which relies solely on congestion-based prices for its economic logic would not be sustainable. Imagine an airline which would allow its passengers to fly for free, unless more passengers show up than there are seats, in which case it will charge all the passengers based on their willingness to pay. One would expect such an airline to have very small planes, or, more likely, very large seats in its planes. Without a way to ensure rivalry among its passengers for its capacity (i.e., seats), such an airline would surely go out of business. Thus, a sustainable price for bandwidth must reflect the cost of both production and consumption of the resource.
Insight: I continue to tout these papers in my blog because they are important, cutting-edge work. We sought to lay the groundwork for a better system which incorporates the best of the licensed and unlicensed approaches to spectrum access. This system would be, to use Eli Noam’s words, would be “open, but not necessarily free.” As such, it would maintain sufficiently low barriers to entry, which would make it sufficiently difficult to obtain monopoly rents. It would be nice if Prof. Wu would put forward some of the available solutions to “alternative supplies of bandwidth” in addition to pointing out the problems.
July 31st, 2008 at 11:28 am
i really appreciate your work in this area & am impressed by the reading I have recently discovered via Prof. Farber’s IP … “willingness to pay” has been the focus of much of our research in the area as has the notion of bandwidth securitization (not to be misconstrued with Enron contracts trading) to assist with liquidity, transparency & confidence for some equitable notion of a “marketplace” for information - whatever the structure and however a network may be construed … including “bandwidth as currency” (a invited paper I authored which was published in IEEE MultiMedia 2002-2003 & better techniques at matching information value (aesthetic or functional) to the cost of a network, again as that can be conceptualized equitably … ROI is quite fuzzy in a market[s] that cannot attribute value to a bit in any bit per time calculation (”bandwidth” being a unit of information divided by a unit of time) … I have only been able to read some of your recent working papers but am very impressed by the increasingly rigorous treatment of working definitions of what constitutes a network … attribution remains an open and problematic issue for information and has perhaps many obvious associations with the notion of a “willingness to pay” … would like any suggestions concerning other work in the field … thank you in advance! Excellent work!
July 31st, 2008 at 2:39 pm
It’s important not to confuse bandwidth with radio spectrum, which is different. On the spectrum front: The FCC papers make the explicit and incorrect assumption that auctions are an appropriate way to maximize the benefit of spectrum. This is simply not true. Auctions are a mechanism for maximizing revenue, and therefore are fundamentally inconsistent with the goal of maximizing utility. They will always favor those having the greatest ability to raise capital over those who can produce the greatest public benefit. What’s more, the analysis completely disregards the fact that spectrum is not — and, by simple arithmetic, cannot be — worth as much to a new market entrant as it is to an incumbent which can maintain higher prices by foreclosing competition.
In short, so long as auctions are used in any form, we can expect a continuation of spectrum hoarding, pre-emptive bidding, and anti-competitive actions on the part of incumbents.
August 1st, 2008 at 2:51 am
Brett, bandwidth is bandwidth, whether it is in copper, glass, or the ether. There is, however, one notable difference in that wired network operators can decide who can be connected to their networks. In the radio spectrum, the ability to exclude users in not so straight forward, which has the effect of compounding the problems related to the negative impact of competing uses.
Properly designed auctions have been an important step in advancing radio policy, but they are not the last step. Current spectrum auctions apply only to one of the four phases of spectrum policy: assignment. Auctions determine who gets a set of administratively determined rights. Our work at the FCC sought to discover whether auctions could introduce market signal information into the allocation and policy phases of spectrum policy. The Brits will hold an auction shortly which will do exactly that. This will help to reduce the error in the decision making process inherent in administrative determinations. This error is due to the fact that in administrative rulemakings, lobbyists have no disincentive to over report their valuations for certain policy outcomes. When they are required to put their money where there lawyer is, they are incited to reveal their valuation more truthfully.
To your point about auctions leading to spectrum hoarding, since the proposed auction would allow smaller bidders (presumably new entrants) to coordinate against larger ones (incumbents), obtaining lesser rights, it would be harder for each individual to withstand competitive pressures and hoard spectrum. Further, due to the economic congestion protocols we devised, individual users would be able to acquire spectrum access (since no one owns it) at market prices. I am not arguing that our approach will solve all problems, but it is a massive step in the right direction.
August 14th, 2008 at 1:59 am
Thanks for this read of the op-ed. My intuition is that we ought both be on the same side of this debate, namely, interested in spectrum reform as a general matter.
However, I am puzzled why your main point makes you disagree with me. I think I’d suggest that neither the costs of bandwidth, particularly wireless spectrum, nor of oil, are not generally reflective of the prices of production. One reason is the price paid in auctions for the bandwidth, for example (though there are also such costs in the oil world, like the prices to paying for the right to drill). Another is the market structure in both markets. So I’m not 100% clear where this gets you.
As for the FCC working on the problem. Writing papers, which I obviously view as important, is not quite the same thing as enacting rules on spectrum reform, which I think you must agree has not always moved with the greatest possible celerity.
Finally, one response to “It would be nice if Prof. Wu would put forward some of the available solutions to ‘alternative supplies of bandwidth’”
The piece, as you know, suggested various solutions: especially and most importantly, spectrum reform. In other words, the point of the op-ed was to give more attention to proposals like yours.
August 14th, 2008 at 1:46 pm
Tim, thank you for taking the time to comment on my blog. Yes, we do agree on most things. Where we do not, perhaps we can bring the discussion into better focus.
Granted, the retail prices of both oil and bandwidth are determined with respect to the level of demand. Obviously, this price exceeds the average cost of production; otherwise oil and bandwidth producing firms would go bankrupt. My point is simply that this retail price does not necessarily reflect the cost of the externalities of use (e.g., pollution or interference). Next generation policy (both energy and spectrum) would seek to endogenize the cost of those externalities to compensate those impacted by the externality and thereby guide usage to obtain a social optimum benefit from the resource.
To your second point, while spectrum reform has not been a high priority on this Commission’s agenda, it did show a certain amount of forward thinking when it decided to fund and publish the OSP studies. The OPP/OSP work paper series has long been a proving ground for avant-garde ideas which later become accepted as the conventional wisdom - such as using auctions to assign spectrum licenses. It would help to advance next generation spectrum policy to acknowledge that the Commission has some of the resources it needs and must now press these ideas into service in the form of rulemakings.