The Dragon and the Search Bar

by Gabriel Okolski on March 17, 2010 · View Comments

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Creative Commons License photo credit: Peter Fuchs

Chinese Premier Wen Jaibao’s public excoriation of U.S. trade policy was perhaps that country’s most visible confrontation in recent days, but certainly not the only one. The New York Times reported Sunday that China has warned Google’s business partners that they will be responsible for following censorship laws, even for content provided by Google.

All in all, this case promises to provide some interesting observations as to whether other Chinese Web sites will disassociate themselves from the popular search provider, which has been involved in an ongoing dispute with China over censorship of Web hits. In January, Google said it would no longer self-censor its Chinese-site Web searches – a practice mandated by the Chinese government to restrict access to banned sites – because of alleged cyber attacks.

While analysts say Google is almost certain to shut down its Chinese search engine, its partner companies – mostly those that use Google search functionality on their sites – could keep using Google and filter search results on their own until that happens. This may be be unduly complex, however, leading to a breakdown of many such partnerships.

Nonetheless, if the companies continue to use Google’s Chinese-language search function, even in light of its impending shutdown, it would signify the importance of Google to many devoted users in China. While putting pressure on the Chinese government is a remote possibility, this move could indicate that sites may be willing to work around regulations and utilize Google’s U.S. based search engines, or perhaps those in another Asian country.

No matter what the outcome of this latest announcement is, it is still encouraging that Google is willing to extricate itself from a lucrative market that is nonetheless restrictive on Internet openness. While part of this decision may be in its best interest, especially if China has been launching cyber attacks, the burgeoning Asian country is likely a very lucrative market that Google will be foregoing.

Ultimately, Google’s decision underscores the importance of policies that engender a free and open Internet. At the very least, it may inspire some Chinese Web companies to push back against the burdensome policies that are hampering Internet use in their country.

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Cutting the “Broadband Funding Gap” Down to Size

by Jerry Ellig on March 17, 2010 · View Comments

The Federal Communications Commission released the full version of its National Broadband Plan yesterday — all 11+ megabytes of it. A quick read (!) of the 300+ page document reveals that the problem of broadband “availability” is not nearly as big as the numbers highlighted in the plan would lead one to believe. If you’re careful to read the caveats and the numbers in the plan that don’t get a lot of emphasis, the problem of people who lack access to broadband is quite manageable.

The plan states that 14 million Americans lack access to terrestrial broadband capable of delivering a download speed of 4 megabytes per second (mbps). Making broadband of this speed available to all Americans would cost $24 billion more than the likely revenues from sale of the service.

(To calculate the dollar figure, the report’s authors estimated the stream of future costs and revenues from extending 4 mbps broadband to places where it does not currently exist, then “discounted” them to present values to make the costs and revenues comparable.  The $24 billion “funding gap” is thus a present discounted value.)

Several key assumptions drive these estimates.

First, the plan explicitly declined to include satellite when it measured availability of broadband.

Second, even if the plan’s authors wanted to include satellite, the choice of the 4 mbps benchmark also excludes all but the most expensive residential satellite broadband plans.  Perhaps more importantly, the 4 mbps benchmark also allows the plan to ignore “third generation” wireless Internet as an option for households located in places that don’t have wired Internet. 

These are important omissions, because the plan reports that 98 percent of Americans live in places that have 3G wireless Internet. On the other hand, 95 percent of Americans have access to wired broadband capable of delivering 4 mbps downloads. If we include 3G wireless Internet, only 2 percent of Americans live in places where broadband is not available, rather than 5 percent. In other words, including wireless broadband in the calculation cuts the size of the problem by more than half!  If we include satellite, the number of Americans who don’t have broadband available must be truly miniscule.

Why is 4 mbps the goal, anyway? The plan does not explain this in great detail, but it looks like 4 mbps is the goal because that’s the average speed broadband subscribers currently receive in the US. As a result, the plan picked 4 mbps as the speed experienced by the “typical” broadband user in this country. Only problem is, other figures in the plan show that 4 mbps is not the speed experienced by the “typical” US broadband user. The same graph that shows the average broadband speed is 4.1 mbps (on page 21) also shows that the median speed is 3.1 mbps. Half of broadband users have speeds above the median, and half have speeds below the median; that’s the mathematical definition of a median. When the median is 25 percent below the average, it’s simply not accurate to say that the average shows the speed that a “typical” user receives. The typical user receives a speed slower than 4 mbps.

The 4 mbps figure is also way above the goals other nations have set for broadband; the plan shows that other countries typically seek to ensure that all citizens can connect to broadband at speeds between 0.5 and 2 mbps. A goal in that neighborhood would surely allow most 3G wireless services to count as broadband when estimating availability.

That $24 billion “funding gap” also deserves comment. That’s the amount of subsidy the plan estimates will be required to make 4 mbps broadband available to all Americans.  If you read the plan carefully, you will also find that a whopping $14 billion of that is required to bring broadband to the highest-cost two-tenths of one percent of American housing units — 250,000 homes  (page 138). That works out to $56,000 per housing unit!

One wonders whether most Americans would be willing to spend $56,000 per home to ensure that these last few folks can get broadband that’s as fast as the FCC’s broadband planners have decided they deserve. Here’s another option. A basic satellite broadband package costs about $70 per month. Giving these 250,000 expensive-to-reach households satellite broadband would only cost about $200 million a year. It would cost less than half of that if we actually expect these consumers to pay part of the cost — maybe the same $40 per month the rest of us pay in urban and suburban areas?

That cuts the broadband “funding gap” to $10 billion, plus maybe $100 million a year for the satellite subscriptions. If we abandon the arbitrary 4 mbps definition of “acceptable” broadband speed, so that 3G wireless counts as broadband, the gap would be maybe half that size (since more than half of the people who don’t have wired broadband available do have 3G wireless available).

 And guess what — the broadband plan identifies about $15.5 billion in current subsidies that the FCC could repurpose to support broadband. In other words, the FCC has the ability to solve the broadband funding gap all by itself, without a dime of new money from taxpayers, telephone subscribers, or broadband subscribers!

I’m surprised the plan didn’t point that out; coulda made the five commissioners look like real heroes.

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Assorted Links

by Jerry Brito on March 16, 2010 · View Comments

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Should the Internet win the Nobel Peace Prize?

by Massimiliano Trovato on March 15, 2010 · View Comments

Nobel Medal and Citation
Creative Commons License photo credit: cstmweb

Last year, a movement to officially nominate the Internet for the Nobel Peace Prize was launched by the Italian edition of Wired magazine. Personalities ranging from Nicholas Negroponte to Giorgio Armani, from Joi Ito to Nobel-laureate Shirin Ebadi joined the effort, and the nomination was accepted in Stockholm this past February.

The possibility that the Internet be awarded the Prize stirred quite a debate and, as is often the case, there are good arguments on both sides. The idea that we should recognize the role played by the Internet in connecting people and making them closer to each other is a persuasive one.

However, a powerful case can be argued against the proposal as well (e.g., see Evgeny Morozov over at the Foreign Policy Net Effect blog). One obvious reason is that the Prize is meant to award persons in flesh and blood, or at least organizations, not only because it should acknowledge discrete contributions, but also for merely practical issues. (In this regard, it has been proposed that the inventors of the Internet receive the Prize, but then again–one might contend–one award for Al Gore is more than enough.)

Secondly, there exist other technologies that would deserve the Prize even more: just think of the huge impact the mobile phone is having on the lives of people in the third world. Thirdly, the Internet is a tool, however powerful. Although it seems quite clear that its overall effect has been largely positive, this ultimately relies on the good intentions of its users.

An argument I don’t buy is that awarding the Internet might undermine the reputation of the Prize. Quite frankly, I don’t see how that would be possible, after some very controversial picks of recent years. One final concern, put forward by Morozov, is that the Prize might lead to favor technology over politics as a way to solve the world’s problems, and most notably to promote peace.

On the contrary, I tend to believe that this would be one of the greatest merits associated with giving the Internet a Nobel prize: to affirm the idea that the preservation of a peaceful social order is not to be left in the hands of politicians, but is much more dependent on us all: on line as well as in real life. The main social value of the Internet, I would contend, is its ability to disintermediate the political process. If a Nobel prize is what it takes to underline this fact, then so be it.

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FCC Releases Executive Summary of Broadband Plan

by Jerry Ellig on March 15, 2010 · View Comments

The FCC today released an executive summary of its National Broadband Plan, which is supposed to be delivered to Congress tomorrow.  Of course, executive summaries by their nature are brief and usually don’t explain the underlying logic and evidence supporting the conclusions. Here are a few highlights, some possible interpretations, and things to look for when the full plan gets released tomorrow:

Recommendation: “Undertake a comprehensive review of wholesale competition rules to help ensure competition in fixed and mobile broadband.” This could signal that the FCC plans to re-impose “unbundling” or “line sharing” regulations, which would require broadband companies to let competitors use their lines and other facilities at regulated rates. Such initiatives would likely undermine broadband deployment and investment.  Economic research by my GMU colleague Tom Hazlett and others finds that broadband investment, competition, deployment in the US took off only after the FCC eliminated line-sharing requirements. Christina Forsberg and I summarized a lot of this research here.

Recommendation: “Make 500 Mhz of spectrum available for broadband within ten years … Enable incentives and mechanisms to repurpose spectrum.” This is a fantastic recommendation. A Mercatus Center review of the costs of federal telecommunications regulations found that federal spectrum allocation, which prevents spectrum from being reallocated to uses that consumers value highly (like broadband), is by far the costliest federal regulation affecting telecom and the Internet. This recommendation indicates the FCC leadership would like to auction a lot more spectrum and share the proceeds with existing users (like broadcasters) in order to overcome resistance to reallocation. It’s not quite a market in spectrum, but it might be the closest the FCC can come.

Recommendation: “Broaden the USF contribution base to ensure USF remains sustainable over time.” Uh-oh. I’m not sure what this means, but if means that broadband subscribers will have to start payng into the FCC’s universal service fund (USF), watch out! Most economic studies find that consumer demand for broadband is very price-sensitive. That means if the FCC slaps broadband with universal service fees (which currently exceed 10 percent), we’ll see a big drop in broadband subscribership — maybe by 4-7 million subscribers. This is , of course, precisely the opposite of what the FCC wants to accomplish!

Recommendation: “Reform intercarrier compensation, which provides implicit subsidies to telephone companies by eliminating per minute charges over the next ten years…” Another excellent idea.  “Intercarrier compensation” refers to payments phone companies make when they hand traffic off to each other. Small, rural phone companies usually receive the highest per minute payments — as much as 15-30 cents per minute! This is a huge markup on long-distance phone service — another price-sensitive service!

Recommendation: Provide subsidies so that rural areas can have broadband with download speeds of 4 MB.  It will be interesting to read in the full plan where this 4 MB figure came from. Does it reflect the speed of service that a lot of Americans currently have, so these subsidies are just supposed to help equalize opportunities for rural residents? Or does it reflect some balancing of the costs and benefits of subsidizing broadband in rural areas?  Or is this a magic number experts believe subscribers need, regardless of the choices consumers actually make in the marketplace and regardless of what it costs?

The executive summary also lists a set of goals, such as ensuring that every American has the ability to subscribe to “robust” broadband service, having 100 million households with access to 100 MB broadband, and ensuring that the US has the fastest and most extensive wireless networks of any nation.  When the full plan comes out, look carefully at whether or how the FCC plans to measure accomplishment of these goals.  More importantly, look to see whether the FCC explains how it will quantify how much its own policies actually contribute to these goals over time. The FCC is famous for NOT doing these kinds of things, so let’s see if the broadband plan signals a new era in accountability.

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Thomas Hazlett on telecommunications policy and economics

by Jerry Brito on March 15, 2010 · View Comments

 Episode 10: Play in Popup | Download

Tom HazlettThomas Hazlett, Professor of Law & Economics and Director of the Information Economy Project at George Mason University School of Law, discusses telecommunications policy and economics. The discussion also turns to the history of spectrum regulation, ongoing inefficiencies in the current system, and suggestions for possible improvements.

Related Readings

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Holistic regulation of P2P lending?

by Stefanie Haeffele-Balch on March 11, 2010 · View Comments

In a recent interview with Lending Socially, Prosper Marketplace CEO Chris Larsen revealed that he,

favors a holistic regulator that “has the best interests of both borrowers and lenders in mind.” [...] “We also believe the enormous legal cost involved in registering with the SEC is an extraordinarily high barrier to entry.  Sure Prosper benefits from this barrier given that we survived the experience of registration, but many companies didn’t; and we believe more players would further validate and help grow the industry.”

What would this holistic regulator look like if it is not the SEC? Larsen cites the California Department of Corporations as an example worth replicating for it regulates and oversees both lending and borrowing. The department also deals with licensing investment institutions which can be an extensive and expensive process. The question is whether a federal version of this department could create a license process which would be less burdensome than current SEC registration process.

While a regulatory body that takes all aspects of an industry and its activities into account would surely produce more thorough and well-rounded rules and restrictions, it is uncertain whether those rules would improve or hinder the performance and consumer benefits of the industry. It is also uncertain whether the existence such a regulatory agency is possible. Even the most well-intentioned policymaker cannot know all the aspects of an industry and the thoughts, risks, and benefits of an activity. A more thorough and holistic regulator may produce rules and restrictions that are less burdensome than the current practices of the SEC. Unfortunately, such a regulator may still fall short of encouraging and supporting the peer-to-peer lending industry.

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Debit Card Overdrafts: More Term Substitution

by Jerry Ellig on March 10, 2010 · View Comments

An Associated Press story this morning by Eileen AJ Connelly provides our latest example of Regulatory Whak-A-Mole, known to scholars as “term substitution.” 

Bank of America announced that it will discontinue charging overdraft fees on debit cards. This comes in response to new regulations that prohibit banks from charging overdraft fees unless the consumer has consented to the fee.  Since the bank has no way of getting your consent when you walk into Starbucks and perpetrate an overdraft while buying your latte macho grande and muffin, it simply won’t let the transaction go through.

Wa-Hoo, another victory for consumers. Well, not quite. Customers who place a high value on not being embarrassed in Starbucks are arguably worse off. (How do you return a latte macho grande if you find out you don’t have enough money to pay for it after your coffee concierge has mixed it?) More seriously, customers who might want to use an overdraft for a more substantial purchase will no longer have this option.

I wonder about the argument that regulators are saving hapless, uninformed consumers. The AP article reveals that 93 percent of overdraft fees are generated by 14 percent of customers — “serial overdrafters.” That means there are a lot of folks out there who repeatedly try to use their debit cards as a source of credit, albeit an expensive one. I don’t know about you, but it would only take one or two overdraft fees before I’d realize it’s cheaper to keep a $25 balance in my account than to pay more than that in multiple overdraft fees. If most overdrafters have done this more than once, they must know they will be charged a fee and have decided that’s the lesser of multiple evils. So why take this choice away from them?

Point-of-sale overdrafts may not be the only casualty of this regulation. The article quotes banking analyst Robert Meara’s prediction that banks might curtail free checking, which many apparently offer as a loss leader to generate fee income. A smaller stream of fee income makes “free checking” less attractive for banks.

Which consumers does this ultimately hurt? I can think of one group: people with low incomes who can’t afford checking account fees and  use debit cards responsibly.  

Somehow I doubt that was the regulators’ intention.

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Ethan Zuckerman on internet censorship and the limits of circumvention

by Jerry Brito on March 8, 2010 · View Comments

 Episode 9: Play in Popup | Download

Ethan ZuckermanEthan Zuckerman, Senior Researcher at Harvard University’s Berkman Center for Internet & Society, discusses internet censorship and the limits of circumvention technology. The discussion also turns to censorship in China and other countries, Twitter’s role in last year’s disputed Iranian elections, and online public spaces.

Further Readings

Listen to other episodes and remember to subscribe to the podcast using RSS or iTunes.

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Broadband Availability: The Dog that Didn’t Bark

by Jerry Ellig on March 3, 2010 · View Comments

I was slow to adopt broadband. So maybe it’s also appropriate that I was slow to read John Horrigan’s highly informative survey on broadband adoption released by the Federal Communications Commission on February 23. Or maybe it’s fortuitous, because the delay let me take a look to see what messages the news media took away from this survey.

Two clear messages appear in the news coverage.  The first is a variant of the screaming headline the FCC put on its own press release: “93 Million Americans Disconnected from Broadband Opportunities.” You’ll find this as the headline or lead paragraph in coverage by the New York Times and AFP.

The second type of message highlights the main reasons one-third of the population does not subscribe to broadband. “FCC Survey Shows Need to Teach Broadband Basics,” notes the headline on an Associated Press story. According to the survey, the three main obstacles to broadband adoption are cost, lack of digital literacy, and non-adopters’ perception that broadband is not sufficiently relevant to their lives.  (I got a chuckle when I saw that non-adopters said they would be willing to pay $25, on average, for broadband; that’s the magic price that finally induced me to give in and sign up!)

But whoa, what’s missing here?  Our old friend Availability. Broadband was supposed to be some kind of noveau public works project that would take hundreds of billions of dollars to bring to fruition, because many Americans lack access to broadband. “Build it and they will come!” “Pour that concrete information superhighway!” “Stimulate the economy!”

The FCC survey tells an interesting story about availability:

Of the … non-adopters, 12 percent say they cannot get broadband where they live. This translates into a 4 percent share of Americans—on the basis of their reports on infrastructure availability in their neighborhood—who say they are unable to obtain broadband because it is not available. This means that 31 percent of all Americans can get service but do not. (p. 5)

The survey also notes that 10 percent of rural respondents say broadband is not available where they live.  I don’t mean to sound insensitive, but that’s all?  Heck, I’d have guessed a higher percentage than that.   

To put the numbers in perspective: 4 percent of Americans say they don’t have broadband because it isn’t available, while almost three times as many – 10 percent – lack broadband because they think the Internet is irrelevant to their lives.

Is availability a problem in some places?  Sure. But the FCC survey shows it isn’t nearly the size of problem we’d been led to believe. So let’s hope the National Broadband Plan’s discussion of availability is similary circumscribed and appropriately targeted.

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