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Economic Principles for a Sound Internet Policy: The Prequel or What Would Alfred Marshall Say?

Economic Principles for a Sound Internet Policy: The Prequel or What Would Alfred Marshall Say?. John W. Mayo Georgetown University mayoj@georgetown.edu (202) 687-6972. United States Senate February 16, 2007. The Telecommunications Policy Debate in 2006: Loud Voices of the The Extremists.

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Economic Principles for a Sound Internet Policy: The Prequel or What Would Alfred Marshall Say?

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  1. Economic Principles for a Sound Internet Policy: The PrequelorWhat Would Alfred Marshall Say? John W. Mayo Georgetown University mayoj@georgetown.edu (202) 687-6972 United States Senate February 16, 2007

  2. 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.”

  3. 2007: A More Cerebral Approach? “If we knew what we were doing, it wouldn’t be called research, would it?” Albert Einstein

  4. 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.”

  5. A quick look: How are we doing?

  6. BROADBAND DEPLOYMENT IN THE UNITED STATES Source: FCC

  7. High Speed Line Growth 1999-2005

  8. WIRELESS SUBCRIBERS IN THE UNITED STATES Source: FCC

  9. Rates for Communications Services (1995 - 2005) Source: FCC

  10. Cable Rates and the CPI, 1995-2005 2.00 100% Cable Price (basic-plus-expanded basic) Cable 2005 $43.04 1.80 CPI 80% 1.60 60% 1.40 Normalized Price 40% Cable 1995 $22.35 1.20 20% 1.00 0% 0.80 -20% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year Cable Television Rates Source: FCC (December 2006)

  11. 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)

  12. 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 self-serving 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)

  13. 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

  14. “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

  15. 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.”

  16. 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)

  17. Infrastructure and Content:“Ketchup and Hot Dogs” Internet Infrastructure Contents and Applications Broadband Infrastructure and Content are largely Demand-sidecomplements

  18. Supply $/Q Supply Enticing more supply is costly Q/t

  19. 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.

  20. 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 e-mail 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

  21. The Role of Technology and/or Entry $/Q S1 S2 P Q/t Q1 Q2

  22. 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

  23. 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.

  24. Two-sided Markets Magazines, Newspapers Stuff Providers Households & Businesses Internet Infrastructure Households & Businesses Content and Applications Providers

  25. 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

  26. 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

  27. 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)

  28. 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

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