Big Ben
The details do not yet exist, but we know this about the deficit reduction package that will emerge from the Administration’s negotiations with the Congress: it will be too much, too soon, and too unbalanced as to be fair, at least by my standards. That much seems likely. But what strikes me as even more certain is that it will put the nation’s hopes for a sustained recovery squarely on the shoulders of Ben Bernanke, and when you wear the economy on your shoulders, you can be sure that there’s a target on your back.
There are two stories here –the fiscal one and the monetary one. The fiscal negotiations are in one sense going the way they should, with both sides developing what would ordinarily be construed as caricatures of their positions, in anticipation of doing the dance that leads to splitting the difference.
The President is not yet ready to discuss major reforms of Medicare and Social Security, but he’s happy to cut back our military presence and to raise
takes on the rich.
And so am I. Sitting above the $250,000 line that makes you rich, I intend to suck it up with a smile worthy of Warren Buffett or Bill Gates, Sr., who have argued that they can’t take it with them, so why not let their money go to Mammon when their souls go to God?
The Republican side’s proposal, authored by House Budget Committee Chair Paul Ryan, is similarly skewed. It’s major component – the one leg on which it stands – is to turn Medicare into a voucher program and set the elderly loose on the tender mercies of insurance market, creating a great opportunity for Robert Wagner, Wilford Brimley, and – were that he was alive to savor this hour! – Ed McMahon – the traditional television spokespeople for the Inadequate Insurance Company For The Very Old. These coots – and a few cootesses – will be haunting the ad time on the evening news and the Judge Judy/Judge Joe programs, pushing Metamucil, dental crème, and robot insurance into a guerilla viral marketing mode. Imagine Wilford looking up from
his fishing rod, sighing, and letting fly with the pitch: So you’ve lost your Medicare! Well, nobody wants government insurance anyway! Just take that check they sent you and take it over to The Here Today Health Insurance for the Elderly, which they will, of course, even if the lucky customers figure out later they’ve just made a down payment on a pine box. Oh, that’s going to be wild.
How’d you like to be 80 and looking for coverage?
Tell me what I’m missing.
Like Obama’s approach, Ryan’s hope is to avoid a discussion of Social Security, but then to parry any sentiment for tax increases with a call for corporate and personal tax reform that lowers the rate, broaden the base, and is pitched as being “revenue neutral,” although a tax reform that lowers rates to 25 percent would have to be offset by all of the Big Daddy tax preferences now found in the code, like IRAs or the deductibility of home mortgages, neither of which is in the cards. (He actually hasn’t said which tax expenditures he’d use to offset the revenue loss, but the loss is so great that the answer must be “all of them.”) Obama’s tax plan, again, is to line up everybody in the country in order of income and then have everyone starting with me raise their hands, and no frontsie-backsies.
The problem with this negotiation is that Obama and his side are playing chess, and Ryan, as the representative of his, is on a buffalo hunt. The interface between the two is going to be a bitch.
I say that because Obama is trying to chivy his adversary into the obvious equilibrium in the middle, the real solution to the deficit problem. It involves aggressive cost controls and some means testing on Medicare, cutting and deferring Social Security, weed out nasty or peripheral domestic spending (farm programs, NPR, and don’t forget the National Institute of Peace), and run Obama’s (and my) soak-the-rich view of progressivity, although I’d rather scrap the current system and go to a VAT. The president’s objective is to balance the budget, to wage what the Committee on Economic Development called, in its
landmark 2003 study on how to bring the budget into balance, a “war on all fronts,” – meaning entitlements, defense, taxes, and discretionary spending.
But is Ryan doing the same? I doubt it. He’s not that interested in reducing the deficit, never has been. He’s voted for a series of tax cuts that brought the nation out of the miraculous fiscal balance it inherited from Clinton, has gone unperturbed about fighting prolonged military adventures without sacrifice, and his plan does what’s hard to do – shut down Medicare – while not picking up the relatively easier jobs (the incremental fixes that would keep Social Security whole).
So I read into this that Ryan’s objective is not Obama’s, but the objective of the Conservative Jesuits, as personified by Grover Norquist, who are straightforwardly not as interested in reducing the budget as they are in rendering the state useless to the average citizen.
And the center of this effort right now is Medicare. In a sense, it will be one day be more important to the average American than is Social Security today, as a generation more affluent than their predecessor lives longer, has more income, but faces a wide array of treatments that can extend life and preserve its quality, but at great cost. Social Security will give tomorrow’s retirees a supplement to their income. Medicare will give them what they won’t be able to get otherwise – insurance against the last volley of shocks the flesh is heir to. And, to the Republican Jesuits, raising taxes – even on Midas and Croesus – only brings in revenue, and revenue doesn’t help, since it balances the budget and makes it less important to cut whatever the state is doing with the exception of going to war and producing ethanol. The objective is not to create fiscal balance – it’s to strip the ability of the state to improve the lot of its citizens. It’s dressed up as “freedom” or “liberty” or “tough love” or any number of semantic finesses, but it comes down to that – if people can’t get medical care from the government, and then, after we’ve settled that, retirement payments from Social Security, then what good is the state to them? Building
infrastructure, regulating the environment, extending the broadband Internet, or overseeing financial markets would be next in the firestorm against state
competence.
Which takes us to Standard & Poors rating agency, which this week put out a notification that the U.S. readiness to repay its debts was still AAA, but had its view of that rating had gone from “stable” to ‘negative,” which mean, technically, that it might fall in the next two years or, more thematically, like the old joke says, “Mom’s on the roof.”
S&P is the first among the agencies to take this view. Whether they truly believe it, or want to play a productive, patriotic role by highlighting what’s at stake, or want to protect themselves from looking as blind to the risks of sovereign debt as they did to those of mortgage backed securities, I don’t know. Fitch, a smaller and often more heads-up counterpart, puts it this way: “Ultimately, the recognition of the dire consequences of failing to raise the debt ceiling in a timely manner will prevail over differences on the more fundamental issue of how best to place U.S. public finances on a sustainable path 0ver the medium- to long-term”
They might be right. But the dire consequences are also the anti-state right’s most formidable weapon; their argument is that if we don’t negotiate a shutdown of the beast, we’ll blow it up.
Which means that the best we can hope for in a compromise is a round of deep cuts and an agreement to take the matter to the voter in the 2012 election. In fact, that’s probably been Obama’s strategy from the start; he made last year’s deal extending the Bush tax cuts for two years so that they would appear on the agenda during the 2012 campaign. If Obama can’t win re-election on a program of taxing incomes higher than mine, he might as well go back to
wherever he was born.
Well, that’s the fiscal story, and I said earlier there were two stories, a fiscal one and a monetary one. The fiscal one, just told, ended with two sides at a table negotiating two very different agendas. Whatever the outcome is, it’s going to be bad for growth. If it leads to a government shutdown, the specter of a default on federal debt will loom over markets. If there is a deal, the federal government will join state and local governments in taking spending out of the system just as the recovery is leaving its chrysalis.
Which leads to the monetary story. The Fed’s program of buying financial assets in order to keep interest rates down, called Quantitative Easing, or QE2, is now the major stimulative program at work right now, and it is sorely needed. And there are plenty of…well, plenty of people with incredibly bad judgment who oppose it, because they regard it as a harbinger of imaginary inflation.
A leading such voice is Richard Fisher, President of the Dallas Fed. In an interview here, he calls for curtailing the program because “my gut tells
me” firms may soon start passing through rising input prices, and “this will result in some unpleasant general price inflation numbers in the next few
reporting periods.”
Well, those are some finely-tuned guts. Because there are no such signs today, unemployment is still high and wages stagnant - I mean, his guts are downright clairvoyant. Maybe they speak in tongues. The only inflation we’re seeing is in food and fuel, both of which are being driven by exogenous events. Should we make a point of deflating – the nice word for shrinking – the rest of the economy because of that? Do Fisher’s guts see wage settlements rising in response? Has anyone told his guts that a lower percentage of the workforce is at a job than anytime in almost 30 years?
Obviously not, but with fiscal policy set to contract, it will be up Bernanke to manage this kind of dumb talk and to champion ongoing expansionary monetary policy. In fact, to get the Congress to the sensible middle on deficit reduction, Bernanke should be speaking now, loudly and visibly, about his commitment to keep QE2 and a new round of QE3 in place to substitute for the effects of any budget agreement. All he needs to say is "If marekts believe the deficit reduction is real, and react accordingly, I'm not going to stand in their way."
And I think he should get started on that now, because the guns will soon be trained on him. An orchestrated chorus of conservative voices has gone after Bernanke for his aggressive pursuit of a growing economy using novel means – the widespread asset purchases of the QE2 . It’s worth considering whether some of these critics, for partisan reasons, may yet want the economy to fail. Bernanke should talk about using monetary policy to offset the budget reduction deal underway, in order to assure markets and keep growth expectations in place.
If we ever do get a budget compromise, we will, more than ever, need Chairman Bernanke to be Big Ben.
Chicken and Dumplings
Between the budgetary Perils of Pauline, Japan’s evolution into a radioactive theme park, and Whatever It Is in Libya – War? Mission? Police Action? – there’s plenty of news flying under the radar (ironic Libya references notwithstanding). But here’s one story that flew by the other day that is absolutely
mind-boggling – the Federal Communications Commission, last Thursday, voted to let other mobile data service providers have the right to let their users roam the AT&T and Verizon mobile data networks at a government-specified price in order to reduce their customers’ roaming charges.
That is, Sprint, or T-Mobile, or any of the smaller rural carriers, or any other carriers (like Cricket), can have access to national wireless data networks without ever having to invest in them.
From the moment they entered the front door, the current leadership at the FCC has had two mantras – the first was the need for competition, the second the need to expand the broadband network to create ubiquitous, high-speed Internet access. But, like Jeff Goldblum’s sublime moment in Annie Hall, the FCC forgot its mantra.
Skip for a second the realities that first, the market was pretty competitive and that broadband was racing ahead – in fact, the two went hand in glove. When the current FCC crew walked in the door, carriers were investing tens of billions annually in infrastructure and high-speed broadband was quickly being adopted – a recent Nielsen study found that U.S. consumers are now second only to the Swiss in having a “super-fast” connection.
And look past the FCC’s confusions over how these goals related. In the name of “neutrality,” the FCC tried to impose a regulatory regime on service providers that disallowed them from offering premium services to those who needed an uniterruptable signal to offer new services, and that let Big Video – YouTube and the other Internet-choking video providers – hog up the system’s bandwidth without having to face the true cost of doing so. Somehow, the reality that you can’t force mandates on the networks and expect them to continue to expand nonetheless got lost on the FCC.
But now we’re moving onto the next level. Earlier this year, a Coalition of the Unwilling, comprised of just about every mobile service provider except those
that have actually built a national network, approached the FCC and asked that it provide them with the right to force roaming agreements on the two national networks for data services.
Here’s what Charles McKee, federal affairs vice president for Sprint, had to say when explaining why the FCC should force Verizon and AT&T to give his system the right to roam their networks at a government-specified price:
“The expectation of consumers is their smart hone is going to work wherever they go. Data is not just an abstraction for onsumers now. They use it every day and rely on it more and more instead of voice.”
Or here’s the president of the Rural Cellular Association explaining without pretense why he should be able to glom on to somebody else’s investment and keep his job, country club membership, and standard of living: “This really is getting to be a matter of survival for many of our companies out there .”
As Arlo Guthrie said at the draft board, you got a lot of damned gall, Sergeant.
Here are companies that are unwilling or unable to compete by building infrastructure – note the words “compete” and “build,” the avowed dual goals of the FCC – and instead, they figure that the mood over there is pretty hostile to the big carriers and why not take a pass at being given access to the data networks?
I suppose you can’t fault a lad for trying – if I was Sprint (or a small, rural carrier) and I could force my way onto somebody else’s network, essentially giving my customers mobile data access without ever providing it myself, I’m not sure that my moral compass would point True North.
But the FCC surely knows better. Imagine being either of the two biggest networks and having spent a king’s ransom getting 4G technology – download speeds of as much as 12 mbps, wireline speed on a device in your pocket -- out in the field, only to be told that you now had to cut deals with the companies that said “not me” back when it was time to put up real money. Why would you continue to invest in infrastructure under those terms? In fact, we had precisely this kind of regime in the telephone world in the late 1990s and early 2000s and companies refrained from investing because of it – companies that built Internet infrastructure had to resell it at government-determined prices. That’s how all the DSL carriers appeared back then – they could free ride on the companies who created the infrastructure and live off their competitors’ investments by government edict. And it’s how those companies disappeared as well, because they made no investments, produced no innovation, did nothing but hitch a suckerfish ride on the whales who did the real work. Unsurprisingly, companies wouldn’t build more hostage infrastructure under those circumstances. But when the courts reversed the policy, high-speed infrastructure burgeoned.
And now, we’re heading back to an explicit policy of allowing – encouraging -- free riders on the high-speed wireless networks. What stops Sprint, or Comcast, or Cox, or Green Acres Mobile Data Services from offering 4G services without ever spending a dime on their provision? Sure, the “expectation of consumers” is that they can get data services wherever they go, but Sprint, to use the self-selected example, has made little effort to give their consumers what they want.
At some point, the infrastructure builders have to look up and think, why are we bothering? That’s particularly true for rural areas, where mobile access is going to be the dominant path to high-speed connectivity (despite some pretty silly statements to the contrary). These areas aren’t built out yet because
they’re not very profitable – duh. There’s little incentive to sink costs into low-density areas. The Administration at one point offered a National Broadband Plan that created incentives to get this activity going, but now they’re acting in ways that will bring that build-out to a halt – or expand
dramatically the budgetary cost of further subsidies to get the job done.
Moreover, these “data roaming” agreements are commonplace in the market. Voice roaming is already mandated by the FCC, because the law specifies that “telephone service” have this kind of “common carrier” approach. But the law very explicitly distinguishes between “voice service” and “data service,” and for good reasons, since “telephones” were regulated going back to the original communications acts, and the (old) telephone infrastructure was built by franchised monopolies in exchange for guaranteed returns. So the telephone system has a public legacy. But high-speed data networks like the ones the FCC seems intent on communalizing were built by private entities with risk capital in a competitive market. And if you build these networks, and Green Acres Mobile Data Services wants to use them, there’s certainly a price at which you’ll make a deal -- that’s why the deals are commonplace. In fact, the big
networks like these deals, because the carriers they’re dealing with help the big guys expand their own access to consumers.
So the other carriers aren’t after access – they can get access – they just want the government to muscle the networks and get them a better price. And ultimately, this doesn’t help consumers and doesn’t get infrastructure built, it just transfers profits from the companies who built the network to the suits who run the free riding companies.
Like its forays into “net neutrality,” the legal basis for the FCC’s decision strikes me – a practicing non-attorney (hell, my biggest legal career aspiration is to avoid being a defendant) – as tenuous at best. Do they really think a court is going to look up and say that “data” services ought to be regulated as are
“telephone” services because some “consumers expect it?” It’s like Pepsi asking for access to the formula for Coke because folks like Coke! If you didn’t know better, you’d think the FCC has decided that its best tactic is to promulgate regulations and let the court throw them out – it’s the regulatory equivalent of the lipstick scrawl on the motel mirror saying “stop me before I kill gain.” This makes the chorus of groups” (and, much to my regret, Senator Al Franken, who’s got this all fabulously wrong) that linger outside the FCC’s doors happy, while protecting us from the real repercussions of what the groups want. That can’t be what they’re thinking, but that’s the pattern.
The FCC has decided to rewrite the old story about the Lttle Red Hen. In the original, of ourse, the Hen’s idler cohorts sit on their duffs while she mills the wheat and bakes the bread. And when they all want to eat, she tells them to stick it – no work, no eat . The FCC’s petitioners smell what’s in the oven and are licking their chops. But in the FCC’s version of the story, the Pig, the Cat, and the rest of the menagerie not only take the Hen’s wheat, but take the Hen as well, and have a tasty dnner of chicken and dumplings.
The Tempest And The Teapot
Two things happened this month that have bearing on the course of the evolution of the broadband network. One was seen as momentous but, to me, is ultimately a non-event, a tempest in a teapot. The other was regarded as a manic sideshow, but is an important landmark in the profoundly competitive and innovative broadband market’s ongoing transformation.
The inconsequential event was the proposed merger of ATT and T-Mobile.
The manic landmark was the release of the iPad 2.
Maybe I’ll get to the merger today, maybe I’ll let it go a few days. Why not? For one, the issue isn’t going away, but more importantly, when we look back at March, 2011 years from now, the fact that ATT and T-Mobile merged (presuming they will) will be regarded as an afterthought, much the way we now regard the merger of Price Waterhouse and Cooper & Lybrand, or perhaps Sprint an Nextel, or perhaps, more autobiographically, Burroughs and Sperry. I’d spend time explaining my nonchalance, but there are more important things to do.
Like talk about the iPad. Of course, I don’t have one. Younger people do. People wonder why older people don’t get this stuff, and I can tell you why. It’s not technology aversion. It’s that if you have an iPad you can do cool stuff and older people don’t do cool stuff. And it’s a shame, because now, for the first time, the full functionality of (personal) computing and information processing look to be mobile – it’s one of the two great Rubicons that everyone ever involved in information technology has always anticipated – computing on the fly (check), and voice activation and recognition (not yet, but Jack Donaghe’s working on it with remote controls). And if that’s where we are – if we now have a device that makes computing mobile, bridging the wired and wireless worlds, then we need to consider a new model of competition in a new, multi-dimensional, integrated market for broadband services and applications.
When I was at Unisys, our Chairman, a very solid, self-possessed guy from South Dakota named Jim Unruh, once told me, as if sharing a grim joke, “Every time we sell a computer, two companies make money – unfortunately, they’re Intel and Microsoft.” Let’s see, how have Unisys, Microsoft, and Intel done in those intervening 20 years? – OK, write one down for Jim.
His remark, back then, was an eye-opener, because for most of the commercial computer’s life to that point, computational power was the miracle, let alone the product. But the paradox was that as compute power burgeoned, compute power became less important to its user, much like aluminum was once regarded as a precious metal until they found a whole bunch of it. Value migrated “up the stack” from compute power to actual “solutions” that made that power do stuff.
Signal is going the same way. The central paradox of broadband is that the more signal innovates and the better it gets, the more it encourages other innovations that compete with it to create value. The more there is of it, and the better it is, the more that rests on top of it and intermediates its relationship with the consumer. And the iPad lies at the heart of that.
Long ago in the Dark Ages – say, the beginning of this decade – the selling point of wireless was signal quality – “Can you hear me now?”, the sound of a pin dropping, that was the pitch. Well, signal today is by-and-large incredible – quality, coverage, reliability, all continue to improve. A decade ago, we were thrilled by 144 kbs. But 4G now delivers 5 to 12 mps or better – faster than a wire to the home a few years ago. So the companies that invested tens of billions to make that happen must be raking in the chips, right?
No, wrong – because the better these signals became, the greater the rush to create value using them, starting with the handset. The handset is now competing with the network as the prime value-generating part of the total signal-device-application-service package. And it was the iPhone that changed all that, that allowed the device to exist on par with the signal ; there’s no greater proof of this proposition that people willingly signed up with ATT to have it. It was like the old joke about the Klopman Diamond – a woman is on an airplane and she’s wearing a magnificent diamond pendant, and her seatmate admires it; “Oh, that’s a remarkable diamond,” says the seatmate. “Well, yes, it’s the Klopman Diamond,” the woman answers, and then adds, soto voce, “But it has a curse!” “Really!” says the seatmate – what is the Klopman Diamond curse?” And the woman answers confidentially, “Mr. Klopman.” ATT was Mr. Klopman to the iPhone Klopman Diamond – the curse that came with it. It was such an obvious issue that Jon Stewart went nuts about it when Verizon cut its deal to bring the iPhone to its network.
But two points ought to be made about ATT’s network problems. The first is that they demonstrate that while signal quality and coverage still count, but they’re not the sole concern. The second is that the surge of traffic ATT realized once the iPhone and its bit-eating applications forced ATT to improve itself, and ended up making it a better competitor, and forced ATT’s competitors to keep innovating as well. The iPhone did to ATT – and to all signal providers – what a textbook competitor does – forced them to invest, innovate, and create more customer value.
And if the iPhone set in motion a virtuous circle in which innovation in devices led to innovation in applications and improvement in networks, which then allowed applications to burgeon (a $4 billion industry that didn’t exist five years ago) and led the cycle to start all over again, the iPad takes us into hyperspace. With its longer battery life, ability to handle video, the power to do what laptops and desktops (remember them?) can do – the iPad offers a way for consumers not only to stay connected with today's high speed wireless networks but to “compute” in a way not really possible even with bulky and more battery-constrained laptops, netbooks, or whatever else. But the iPad, Xoom and other tablets, along with the introduction of 4G networks that make video better and easier, now offer a real alternative to fixed wire broadband networks, and they will transform competition even more dramatically than the iPhone did. It will make video and gaming apps even more important, will make the “cloud” even more important, and force signal providers to stay on the treadmill of investment, innovation, and improvement. And the consumer is again in charge -- the apps, the devices, the operating systems and the networks can be mixed and matched in countless ways. And as consumers sort this out, the circle keeps spinning – better devices lead to better networks, which lead to better applications (I’m still trying to figure out who’s watching a movie on their phone, but the point is you can), which lead to networks expanding, which permits more applications and better devices on which to run them.
The iPad, therefore, is a major step forward in the ongoing transformation of the broadband market, and the best way to state that transformation is this -- where once the consumer decided how to approach the wireless world by deciding who had the best signal at the best price, there are now many different players at many different levels vying for the right to be the consumers’ gateway to this integrated package of signal, devices, and applications and services. Do you pick a signal carrier and then a device? Or do you pick a device and then a signal carrier? Or will you end up picking an application – Facebook? Google? – and then picking the device and, therefore, signal that best hosts it?
This changes the terms of competition – signal, devices, and applications all compete to capture the lion’s share of the value they create in combination. And when each improves, the others must race to fill the gap, lest their competitors do – whether it’s apps that sit on improved devices or devices that use up faster and more reliable signal, or signal that improves to entice more sophisticated devices. We used to think about competition as being like a track and field event, with the race going to the swift. But that image doesn’t fit what’s going on today in a multidimensional market for signal, devices, and applications. If there’s a metaphor for it, it’s one of those theatrical (to use a nice word) wrestling cage matches in which a dozen guys go into a cage and wail on each other until someone’s left standing. The wrestlers immediately go about forming and reforming alliances, alternatively co-operating and beating on each other -- and while they form these transient alliances, they ultimately all compete, because that’s how they win. The only difference is that in the broadband competition world, the match continues forever as the wrestlers, like Sisyphus, never reach the end of their labor, and new wrestlers – be they Facebook or Clearwire, or new wrestling moves – be they Xoom or Pandora – keep entering the cage.
That’s what’s going on in the broadband world today. There’s still vigorous competition among signal carriers – heck, the U.S. market is singular in that it has competition among signal platforms – telcos, cable, and wireless – but there’s then the device manufacturers, the competing operating systems behind them, and the giant applications, starting with Facebook and Google (and Google’s stepchild, YouTube), all of whom compete for a larger share of the value generated by the integration of all the parts. Like wrestlers in a cage match, they form and reforms alliances, but ultimately have interests that put them at odds with everyone in the group.
The iPad takes that to the next level. It only exists because of the ongoing innovation in signal yet it competes with that signal for the consumer’s attention. It is both is a symbol and trigger of this profound transformation. It has forced imitators to match its new functionality while catalyzing more investment and innovation at every stage of the integrated broadband value proposition and giving consumers a new tool to manage their involvement with both wired and wireless broadband.
While the debate begins over whether ATT/T-Mobile is good or bad for competition (a debate, I’d point out, in which every one of T-Mobile’s and ATT’s customers are on one side – can you imagine having T-Mobile service and being unhappy about it?), the real action is happening not only elsewhere, but all around us. That’s what we’ll remember about this moment years from now. It’s time for the people in the teapot to look up and witness the Schumpeterian tempest.
Robot Insurance
The State of New Jersey is about to take a giant step into the 21st century – on Monday, their State Senate will vote (and, I expect, pass) a bill that will eliminate the regulation of phone service that was born in the day of hand-cranked handset – the State Assembly has already moved the bill forward with a 66-7 vote and a chorus of kumbaya.
In a last stand, however, the opponents of deregulation have commissioned an analysis to support their view that it’s regulation, and not punishing competition, that keeps telephone prices where they are in New Jersey. And that’s worth some discussion. The landline phone systems in most places around the country were built during an age of rate-base regulation. That is, there was a time when our view was there was really only room for one phone company, and that in exchange for that company being given a monopoly franchise, it would receive a “fair” – meaning not too high and more-or-less guaranteed – return.
But, of course, that was then. Today, rather than being a monopoly entrusted to one group of rapscallions, local phone service is a brutally competitive business that involves the legacy phone companies, cable companies, VOIP (voice over internet protocol), and, of course wireless.
Wireless! It’s somewhere between amazing and sad that over a year before this hatchet-job pro-regulation study was released, the Center for Disease Control and Prevention issued a report showing that fully one quarter of U.S. households has cut the cord – taken the landline out of their house and gone completely wireless. That’s more than double the share that did so five years ago, and that was over a year ago! Moreover, one in seven, according to the same study, receives most of their calls by cell phone regardless, leaving their landline phone as an afterthought.
That’s 40 percent of the market that couldn’t give a fig for the legacy, Ma Bell phone that regulation affects. Well, no, that’s wrong, because that “landline” phone might or might not be a legacy phone line. For example, it might be a line delivered to the house over a cable television system. Or it could be VoIP – for the love of gosh, you can buy VoIP for 30 bucks a year that includes caller ID, three-way calling, call forwarding, call waiting, enhanced 911, voicemail, 411 directory assistance, and live technical support.
Now, the opponents of deregulation know that mobile phones exist, or that VoIP exists, to be sure. What do they have to say about them? First, wireless:
Wireless plans are much more expensive than wireline services, so they do not provide a pricing constraint on landline services. Wireless coverage varies based on terrain, foliage and building structure and cannot guarantee calls made indoors.
The price of wireless doesn’t affect the use of landline? Let’s start with this – if wireless were free, would more people leave their wireline phone for wireless? I agree, so we’re only discussing the degree to which they compete. To that point, let’s go back to the CDC study above – 25 percent of households have wireless but not landline. What’s the percentage of households that don’t have wireless? The answer is 15 percent, that’s it. Six out of ten households have both, side by side. How can they not compete?
And are wireless plans – as the report’s authors imply -- an expensive plaything for the bourgeoisie that has the time and inclination to fiddle with these infernal gadgets? In fact, the CDC report says that people living in poverty or near poverty are more likely to use only wireless phones. One-third of adults living in poverty are mobile-only, compared to 19 percent of high-income families and 20 percent of homes with a college graduate. If regulation is helping the poor keep their landline phone, it’s not evident in the data.
Well, then, what about VoIP? Have the pro-regulation analysts been watching those Vonage and Magic Jack television commercials? Again, maybe not:
VoIP services provided over broadband services are not a cost-effective alternative for consumers dependent on landline services. Additionally, since VoIP services require electricity, they do not guarantee service during power outages that the legacy phone services do.
Forget buying a year’s worth of VoIP for a month’s worth of phone bill – what if there’s a black-out? Is that the rationale for the regulatory regime – that the landline system works when the power goes off, so we have to specify prices for it?
In fact, while it gets this stuff wrong, the pro-regulation report emphasizes two important points. The first is that New Jersey ranks number one among the states with 100 percent – not 99.9 percent – of its population having access to broadband speeds equal to or greater than 3 mps. But if they do have that kind of access, then you’d imagine that they have both the ability and the sophistication to shop for telephony among competing alternatives, including VoIP.
And the second impressive finding was that New Jersey was, again, number one in the country with 74.4 percent of its households having access to three or more wireline service providers. That sounds like a prima facie case of competition to me, being number one in the country and all, but it’s even more important because the report’s authors make a great deal out of how telephone prices rose in California when that state passed a deregulation five years ago. Now I don’t know much about what happened in California, but I do know that if I keep going down the list of states with the greatest access to wireline providers that these authors provide, I’ll see that California is 35th among the states with regard to the same measure – only one in ten Californians has access to the same three or more wireline service providers that three-quarters of Jerseyans do. In fact, Jersey is perfectly situated to have a competitive market – it’s the most competitive market in the country by this measure, in contrast to California. So what does one experience have to do with the other?
I think there are two embedded points in the undue and misleading noise the opposition to this phone deregulation bill has generated. The first is that the report’s authors, and many on the sidelines, still see household telephone as a product unto itself, with its own, isolated market. It’s not. Your phone call is just one component of the flow of information in and out of your house, no different from an e-mail from Grandma, or a downloaded video, or an episode of Glee, or the traffic in and out of a home office. Regulation or deregulation has almost nothing to do with the price of a landline phone. Instead, for the companies like Comcast or Cox or ATT or Verizon, phone is an entrée into the household that allows the company to try to sell them television and broadband access. And there are plenty of companies selling television – telcos, cable companies, Dish and DirecTV, and so on. And there are plenty of companies trying to sell you broadband, from the telcos and cable companies to the wireless providers who are now knocking each other over to get 4G to the consumer. The household phone is almost an afterthought – the interesting thing about it isn’t the phone, it’s the household. The companies selling local phone into the household aren’t going to price themselves out of the relationship. In fact, one important aspect of the Jersey deregulation bill is that it releases the phone companies from filling out forms and jumping through hoops that cable, or wireless, or VoIP competitors don’t have to mess with; for example, only phone companies have to tell the State how they addressed each service quality complaint they received. In this environment – with 2 out of every five households viewing landline phones as either incidental or irrelevant -- what’s the rationale for that? All it does is take hold one competitor back in this larger competition to bring information services and applications to the household.
And, last, who’s behind this report? I don’t know who paid for it, but it was released by the AARP. Look, I’m an old guy – I’ve been eligible for AARP membership for over a decade, but I don’t have the card yet, for fear that my wife will see it and find out I’m not as young as I told her I was. But this kind of scare tactic reminds me of a Saturday Night Live routine I once saw about an insurance company that sold old people insurance against robot attack. (“And when they grab you with those metals claws, you can’t break free, because they’re made of metal, and robots are strong.”) It’s pure and simple a scare tactic.
My old man was like that. When medical emergencies forced him out of his apartment – he was 89, this was in 1999 – I went there to close the place up, and found he was still renting his rotary phone for two dollars a month -- he’d have bought robot insurance if they let him. It wasn’t NYNEX’s best moment. But now the shoe’s on the other foot. If AARP really wants to help seniors (if that’s what I, an AARP-eligible person, am), it would help them get educated about their options in a competitive market for their business, one that offers them any and all levels of service and any and all price points, and quit trying to scare them about robots.
Letter to the Editors (2)
The old saw – first attributed, to my recollection, to Howard Dean – goes like this; Democrats love jobs but hate the people who create them. For many Democrats, it’s true. But an editorial in this week’s New York Times confirms a close corollary – liberals (certainly more than Democrats) love the Internet, but hate the people who built it.
The Times editorial decries a suit filed by Verizon and Metro PCS that challenges the Federal Communications Commission’s right to impose “net neutrality” rules on the Internet. Once again, “net neutrality” is the proposition that everything that travels the Internet must do at the same speed and on the same terms. Nothing else on Earth works that way, of course, because individual needs and circumstances are always different consumers everywhere else are allowed – encouraged – to match up price and quality. But the Times seems to buy the garbles logic of the neutrality crowd, particularly in remarks like these:
The suits could potentially free Internet service providers from regulation — allowing them to treat their own content better than that of rivals, and block content that they didn’t like or competed with. Verizon and AT&T have about 60 percent of wireless subscribers. And 80 percent of Americans live in areas with only two wireline broadband providers.
You get this often – now that it owns NBC, Comcast will stop you from watching Modern Family or Glee on your cable-based broadband, or that cable and telcos like Verizon will block content like Hulu or Slingbox, the current vehicles for Over-the-Top television that threaten cable-type operations. Or that they won’t let you see either Keith Olbermann, or Glenn Beck or, ideally, both.
The idea that consumers would tolerate this kind of nonsense seems firmly embedded in the Times editorial board’s mind, but not in the reality of markets as we know them. Yes, most people live in areas with two wire-based broadband options. And yes, Verizon and ATT have a combined market share of 60 percent of wireless. But with 4G penetrating the market, we are quickly approaching a state in which the vast majority of households have access to two wired and four wireless broadband providers. And, unlike almost every other nation, the U.S. market has competition among platforms – among large, fixed cost systems that have to drive use and yield to recoup their massive investments. That’s entirely different from places where the several broadband “competitors” all rent space from the national phone company, as happened in the U.S. during the DSL era, when no one invested and the entire wave of “competitors” disappeared in an instant.
Think about where you get your broadband from right now. What if they decided to stop your access to any type of content, or any competing service? Would you keep doing business with them, or would you find alternatives? My guess is the latter, and when you put it that way, competition seems more formidable than the Times makes it out.
Or try this – let’s say Facebook (brief aside: I’ve seen the movie and yes, the guy who played Larry Summers did a better job than my choice for the role – Jon Lovitz. But they shouldn’t have let Jesse Eisenberg be Zuckerburg; they should have given the part to the guy who plays Abed on Community I mean, isn’t he the real deal? Otherwise, the movie wasn’t as interesting as, say, whether Harvard beats Princeton in basketball on Saturday night and goes to the Dance for the firsttime since nineteen thirty seventeen or something… OK, brief aside over, continue sentence) decided to offer you a special network card that picked up a ubiquitous, proprietary national wireless network that allowed you to see “special” Facebook content -- don’t ask me what it is – it’s so special I can’t tell you. But you get the “Facecard” and you get lots of other stuff with it, including mail, a series of cloud applications, and all sorts of other stuff, but not everything – certainly not other social networks, maybe not even Google stuff, since Google and Facebook is the Ali-Frazier fight of the digital future – sooner or later these two guys – both legitimate champions -- are going to slug it out for who gets to be the organizing framework for the entire Internet experience. But Facebook gives you all sorts of “extra” stuff in exchange for being on their network.
Is that anti-competitive? Would the Times oppose it? it’s extra stuff and if you don’t want it, you can cruise down the street. But it violates the Times’ dictum that you can’t have a provider pick and choose what you get to see, so I guess they’d oppose it. It’s open because that’s how consumers want it. So some things can be other than "open" and still pro-competitive. "Competitive" often means open, no doubt about it, but more importantly, it means responsive to consumers. And that's the real meaning of the "facecard" example -- the Internet isn't open because regulators demand it. It's open because that's what consumers want.
Let me use a second excerpt from the Times editorial to make this point. Here we go:
The choice for American consumers is between the open broadband they have come to expect — in which they can view any content from sources big and small — and a walled garden somewhat like cable TV, where providers can decide what we can see, and at what price.
This is a deft piece of writing on the Times’ part. Industry types regularly talk about “a walled garden” as a metaphor for a system that has a policed boundary, but they usually use that phrase about the mobile telephony network. So why did the Times switch the conventional usage and go, instead, to cable television as an example of such a system? My guess is because they – or the advocates they’re talking to – know that consumers like having their mobile phones be a “walled garden.” Do you get endless marketing calls on your mobile phone? Robocalls? Solicitations? No, and the reason why is because that’s how consumers want it. “Open” – meaning no boundaries – works on the Internet, but doesn’t work on mobile phones, and no one complains. Moreover, as phones become the Internet – a point the Times seems to have lost on the way to the linotype machine – they’re going to have to keep customers happy on both sides of the equation – an open Internet and “walled garden” phone co-existing in the same device. And that’s exactly the point – consumers are getting what they want, including the level of openness in the system.
Two last points: if net neutrality were to be dispensed with, broadband providers would, in essence, be operating in a “two sided market,” like credit card companies (which balance charging merchants and charging you) or…give me a minute…wait, I know! The New York Times, which charges advertisers to put “premium content” in the newspaper and then charges crossword puzzle junkies like me to read it. Isn’t that it? If I want my heart monitor to travel across the Internet faster than a video of a cat playing the xylophone, then someone’s got to pay. Or if Netflix wants to dump all the movies ever made since The Great Train Robbery on the net, meaning everyone else’s traffic has to slow down, then they’ll have to pay, too. Stopping my cardiac monitor or allowing Netflix to clog up the system doesn’t make things “fair” – making them “fair” means posting the prices for these services on the wall so that we all know then and whomever wants to pay them has the chance. Just like the price of a newspaper and the price of a full-page ad. For the love of Pete, if advertising in the Times – paying for premium content – was “unfair,” then Bloomingdale’s would be the greatest perpetrator of injustice in civilization.
And the last last point goes to this in the Times editorial – a lament over “a swirl of antiregulatory fervor among Republicans on Capitol Hill.” Whether or not Phillip Corbett thinks this is good writing http://topics.blogs.nytimes.com/author/philip-b-corbett/ is one thing, but it’s poor thinking to lump the debate over “net neutrality” together with the obstructionists who are either in denial over climate change or the pocket of the financial institutions who think Dodd-Frank would be a good thing not to implement. Our planet’s carrying capacity is changing rapidly and the public is still being held hostage by financial institutions that are too big to fail. What exactly about the Internet poses a similar danger? I can’t think of it, either.
The Sorcerer’s Apprentice
The Bureau of Labor Statistics announced on Friday that the economy added 192,000 jobs, which is only modestly above the level needed to keep job growth over the growth rate of the working population, but still the largest monthly number since the “false dawn” of February through April of last year. Back then, the economy suddenly produced over 300,000 jobs a month, but then promptly ran four job-losing months in a row, partly because the initial gain included the hiring of Census workers who left those jobs after the Spring count, and partly because the crisis in the Eurozone sent a new wave of fear into financial markets. So while most economists – or at least the ones I agree with -- expected the employment number to be higher, at least the direction is right – up.
With all that said, and mindful of my role earlier in life as Defender of the Statistical System (when, as Undersecretary of Commerce, the statistical system was my bailiwick), I don’t believe the number. The economy has to be generating more jobs than these numbers suggest. And there are a bunch of reasons to think so.
The first is simply that, going back to September, the initial estimate of new jobs created has been revised upwards in each of the two following months. (An “initial” estimate of the number of jobs created in any month, like last Friday’s estimate for February, is revised in each of the next two monthly reports, whereupon it sits for the better part of a year, when it is given a final revision as part of an annual review.) September, 2010, saw job losses of 95,000 when first reported in early October – early December BLS took this loss down to 24,000. October started at 151,000 new jobs and ended up at 210,000: November went from 39,000 to 93,000; December from 103,000 to 152,000. And given that errors usually move in the direction of the trend, there’s every reason to believe that the next annual revision will move the numbers yet higher from where they started.
This doesn’t mean that BLS is half-assed or sloppy. They understand this pattern of revision and report it candidly. But their job is not to guess what employment did – it’s to report what employers tell them it was, and then let opinionated blowhards offer their views about why BLS is wrong.
So why are they wrong? There’s always a little error in the data – that’s why they call them “data.” BLS surveys over 100,000 business each month to get a basis for estimating job growth. Sometimes the businesses don’t report on time, sometimes they change their internal numbers, and so on. But the real catch has to do with how BLS knows that a business exists – how does BLS know whether to put a business on the list from which it draws this sample of 100,000+ companies (which represents over 400,000 “establishments,” meaning an individual factory or store).
The answer is that they learn of a business’s existence when that company pays state unemployment taxes or otherwise reports itself to the government. In some cases, that lag can be short, in others, it might go on for a while. For example, my son Nick is a personal trainer and boxing instructor in Baltimore. He draws no salary – he’s paid by clients or by gyms or other facilities that want him to attract clients for them. The government “learns” of his employment at the end of the year, when he files a Schedule C on his tax return. That’s one reason why there are after-the-fact annual revisions – because there are millions of “proprietors” who work that way.
That’s an extreme example of the problem. When the economy grows, new businesses are formed, and it takes the system a while to learn that they’re there. BLS understands that and, using past experience, derives a statistical correction to the employment report for new businesses that they think are out there but haven’t reported yet, but I think they’re undercounting that. For example, ADP – the largest company that processes payrolls for companies - using their own data, think that companies with 49 or fewer employees have added 600,000 jobs over the last year, from February 2010 to February 2011. Half of that total occurred in the first nine months and the other total in the last three. So there’s good evidence that the pace of job creation by small businesses is accelerating, and those are the ones BLS’s process has the hardest time capturing.
Moreover, like ADP’s, other measures of employment are showing bigger gains than BLS’s survey of establishments. The most important of these is the Current Population Survey, which the Census Bureau undertakes on behalf of BLS in order to measure the unemployment rate.
You can’t estimate the unemployment rate except by asking people if they’re unemployed. You can track the number of people filing unemployment claims, but not all unemployed people do – some aren’t eligible, some have benefits that have run out, and so on. Many critics point to people who decide the-heck-with-it and stop looking for work (“discouraged workers”) but, once again, BLS’s job is not to guess what these folks would do if a job suddenly jumped out of a tree and bit them on the neck – it’s to report how many of them there are and let the opinionated blowhards do the rest.
So BLS hires the Census Bureau to interview 60,000 families every month, from which it estimates the unemployment rate. In some ways, it’s a little dicier an estimate, because 400,000 business establishments is a bigger and better chunk of all the economy’s business establishments than 60,000 families is a chunk of all the nation’s families. So the sampling errors are larger for the survey of households. Moreover, just as with businesses, new households are harder to catch – for example, a young person or family leaves their parents’ house and goes out or their own, or immigrants arrive, or people move. But young families usually split off when they have a job, and people move to go to new jobs, so it’s possible the survey undercounts the employed. On the other hand, if my trainer son (wait, that doesn’t sound right…) were to be in the “household survey,” he’d be counted as employed, as opposed to not being included in the “establishment survey.”
Regardless, over the past three months – that is, from November 2010 to February 2011 – the survey of business establishments says the economy’s added slightly over 400,000 new jobs. But the survey of households reports that it’s added 1,000,000 in the same three months. The ADP survey is closer to 600,000, but also north of the BLS establishment survey.
And other economic evidence, however, circumstantial, support a higher number. Initial claims for unemployment insurance are dropping and are about 25 percent lower than a year ago. Retail sales continue to grow, and new orders and shipments of manufactured goods are 9 percent and 8 percent, respectively, over their levels of last June, the nadir following the Spring, 2010 “false dawn.”
The economy faces serious headwinds, among them the fiscal retrenchment of the states and the rising (although, in my view, temporary) price of oil. And there’s the risk of federal budget cuts at level above the economy’s ability to withstand their impact. But right now the economy is beginning to grow and employment isn’t tracking it. The numbers we’re seeing, then, suggest that output is being produced the way Mickey Mouse produced brooms in The Sorcerer’s Apprentice segment of Fantasia. I don’t buy it. We’re going to find out soon that there’s more employment in the economy than we now think.
Cut the Crap
President Obama had a pretty good night on Tuesday. His policy details were fine, and he’s awfully well-spoken. But the President floated past the emotional tone of this moment in America, neither co-opting nor confronting it. There’s a stunning difference between feeding on the rage in the country today, on the one hand, and understanding it and taking it somewhere, and the President is not there yet.
Sure, much of the Tea Party/Fox fantasy-industrial complex is as batty as it superficially appears. But it feeds off a mélange of strong emotions – despair, disenfranchisement, and outrage. Perhaps the President hears these frequencies, perhaps not. But the bottom line is this; the President needs to superimpose over his policy specifics something that recognizes the strong feelings in the country today. And, specifically, he needs to incorporate into his presentation the message that most Americans want their President to deliver:
Cut the crap.
That’s basically it. The President is doing a fine job of projecting his openness to a bipartisan dialogue. But he also needs to take the nation through a reality check, partly because Americans perceive, correctly, that the needles on the bullshit meters are all the way to the right, and partly because, once pushed, the vast bulk of Americans see the Tea/Fox segment of the spectrum as a self-reinforcing cocoon that talks to itself in its own language, much as the New Left of 40 years ago did. Like the Left of 40 years ago, the New Right is now a true “counterculture,” one that is floating away from the mainstream, complete with their own response to the President’s speech. Reality is their weakness, and the President has yet to hit them with it full bore.
To his credit, the President finally got around to defining his view of the future, an aspect of any “transformational” Presidency, but an errand Obama hasn’t gotten to until halfway through his term; perhaps his Herculean cleaning of the fouled stables he inherited distracted him from thinking about what was next. Moreover, I get the feeling that Obama’s intention is to embody Ghandiesquely the change he wishes to see – that is, to endow the political system with his own intelligence, composure, and open-mindedness (as opposed to brain-deadedness).
But that is sadly not enough. The President is good on God, but short on Mammon – he’s great when he’s addressing the spiritual world of race, tragedy, and human hope, frailty, and impulses. He looks out of place to me when discussing the economy and the realm of physical things. His message of investing in ourselves – consciously preferring the future over the present – is substantively correct, but its emotional context is wrong. He presents it as a choice that reflects his own thoughtfulness and intelligence. Instead, it needs to be placed in a harder-edged context, one that reflects the harder-edged emotions of the moment.
The American people see this and, more importantly, they feel it. They see a system out of control, and they are shopping for leadership that provides a way out of the woods while empathizing with their sense of rage and powerlessness. But they didn’t get it at the State of the Union. Instead, they got a passionless vision of how we can make the future a better one, even if it was a vision with a great deal of substantive appeal.
But they didn’t get cut the crap. In fact, if we got that level of connectedness, the policies we (as a supporter of the Administration) support would have a better chance of succeeding. Let me show why that’s true by making three substantive points could be added to the “future first” message -- regarding climate and environment, government delivery systems, and, to begin with, budget.
We say that “everything must be on the table” in fixing the federal budget. It’s easy to say, but until the President says straight-out that we need to fix Medicare and Medicaid, and to a lesser extent Social Security, and then rethink the tax system (as opposed to rationalizing the corporate income tax), the bullshit meters are going right, not left. I’m sure that many his supporters don’t want the President to be the guy who puts entitlements “in play” in a significant way. After all, his opponents would be happy to stop government from helping people, since they want the sate to go away. But not being brutally honest about the most popular programs is absurd – they are already in play, not talking about them straight-on is like not wanting to be the first to talk about a tsunami heading for shore, or a fire that’s burning down the house.
Right now, Paul Ryan is ahead of the Administration on budgetary cut the crap. But the President is well-situated to flank him and take the budget debate to the next level. The American people need to be taken to a point of emotional acceptance about fixing the deficit, one that builds on the outrage they feel about being bankrupted by the choices made by others. We’ve been kidding ourselves that we can fight wars, cut taxes, take care of everybody, and still fit ten pounds of potatoes in a five-pound bag. We’ve been kidding ourselves about what it takes to maintain our standard of living. And we’ve been stealing left and right from future generations, only to find that they will soon be us and our kids.
So the budget message has to evolve into something so stripped of coyness as to be unavoidably true. Everything the government does now – both the money it spends and the taxes it foregoes – is there because doing it made someone happy. Fixing the problem means making people unhappy, and to say otherwise is to deny the truth. (27 years later, Mondale was right!) Let’s cut the crap and get to it.
The second area is the environment, specifically, planetary climate change. Am I the only person who looks at the deniers in the climate debate and thinks about the first scene in Superman, where Jor-El’s father tells the Elders of Krypton about how their planet’s doomed, and in response they snicker at him? At least he had his integrity. But Obama’s given up on the “Jor-El lecture.” The Administration’s approach is no longer to tell the Council of Kryptonians “our shit is deep” but that building rockets to take us to Earth will create good jobs!
This kind of bait-and-switch is bad politics and bad policy, and sets the bullshit meters off again. As a policy matter, you can play with research and demonstration projects and mandate that there be a million electric vehicles on the road by a date certain – excuse me, a million such vehicles other than on golf courses – and all the other stuff that creates “the green jobs of the future,” but you will not put a dent in the climate problem until you price carbon out of the system. In fact, our approach is a feeble attempt to mimic everything the system would do if you did price carbon correctly. It has everything except what works. You have to start there.
Right now, the Administration is living in fear of the deniers, and by so doing, makes them stronger. Instead, it needs to start with a cut the crap line-drawing that emphasizes the extraordinary risks we’re up against and moves the debate to the same plane of generational fairness the Administration’s opponents justifiably bring to the budget debate. So long as we run and hide from the message that there is undeniable danger, the opponents are right – we’re proposing big programs and taxes. As in the budget debate, “not talking about” the full implications of reality makes it impossible to address the reality. Instead, a cut the crap approach would isolate the deniers and their friends at the Department of Creation Science at Treefrog Bible College and reframe the debate. The purveyors of cautious instincts inside the Administration should ask Presidents Clinton and Gore if they regret not being more courageous on this score.
And a third – and perhaps most important -- arena in which the President’s program needs to find the emotional tone of cut the crap is that of government itself. Nice joke about salmon. But here we are talking about devoting much-needed resources to education and infrastructure, and not a mention about the profound problems plaguing both delivery systems.
Infrastructure first. The way to get more resources into infrastructure is to confront the reality that the political system thinks they’re a kind of bakshish. If you’re willing to outlaw earmarks, then it’s a small but productive pivot to attack “Bridges to Nowhere” and water projects that favor barge operators over the people of New Orleans. I have argued elsewhere, together with my co-author Felix Rohatyn, that we need to replace these money-chewing programs with a consolidated Infrastructure Bank that makes rational investment decisions among competing projects and project modes. The President endorsed such a concept in his 2008 campaign. But pitiful little has been done to fix the modal infrastructure programs – instead, most of the emotional energy in the area has gone into a panic over the falling collections of the Highway Trust Fund, a trough at which state legislatures and the asphalt and concrete crowd meet for lunch. The time has never been better for an argument that we need to reform the process and deprive the political system of its toys in order to make the investments we need. You can ignore these problems, but if you propose to expand the programs without talking about these problems, you’re going to end up hearing about the problems before too long anyway.
And it’s an order of magnitude more true when discussing schools. As in infrastructure, we are underfunding our schools, but without a better framework, we’ll never know by how much and how to go about getting it right. The first line of education policy is not “we need to educate our kids for the future” – that’s not a direction. It is we have to have a very difficult but very important conversation about what’s happening in our schools. And at the heart of that conversation is the role of the teacher. Everything about the way we hire, fire, and compensate them comes from another era, one in which the area was a ghetto for women who had few opportunities elsewhere. It’s a profession that you enter, absent an all-consuming desire, because it employs you for life, pays you for seniority and not talent (and therefore underpays the young and often overpays the old), disallows moving resources into where they’re needed or in short-supply (for example, into math and science or poor neighborhoods), and supports an overly-centralized administrative system in which a principal can’t order toilet paper without a permit slip from the Count Seat. It’s as if teaching were a monastic island unconnected to the labor market.
To talk about education policy without making the problems clear undercuts the good message the Administration brings to the table. Race To The Top was an important policy and did much good. But it can only be understood in the context of a wholesale break with illusion and denial – cut the crap. It’s a particularly hard conversation because of teacher unions, which deservedly feel that they’re under the gun; not only are schools underperforming, but states and localities are going broke and public sector unions are going to be on the firing live. But are they better off if the reforms needed come as a punishment, or as a platform for more resources and popular support?
So, as in the budget or climate, denial is the enemy. The President has a good agenda, and it may be the case that many of the issues raised here – the need to rein in Medicare and Medicaid, the need to price carbon correctly, the need to fix the delivery mechanisms for such vital public sector services as infrastructure and education – would reach positive conclusions anyway, and that we’re best not talking about the difficult underlying realities until they’re ripe in the process. But that’s an illusion – they’re ripe now. The President needs to cast himself as the person unafraid to recognize and confront these realities, not only because they’re the best disciplining measure for the policy process, but because they’re his best response to the “populist” fantasy/industrial complex that opposes him.
There’s always an instinct in any raging centrist policy wonk – like me – to argue that you can do well by doing good. Perhaps that’s in the mix. But the rage and frustration in the country today reflects a feeling that institutions are perpetuating themselves without regard to what happens to the rest of us – the bullshit meters are twitching in the red. The President needs to show that he gets it, and that it’s time to have an honest debate over what to do, and cut the crap.
The Future Lies Ahead
There’s a thin – and sometimes imaginary – line between giving your view – a view based on a lifetime of evolving judgment, thoughtful reflection, and sober experience – and being a big-mouthed Herkimer who does his Steve Allen reads the Daily News impression and today I’m going to straddle it.
There are opinions I don’t share(the Second Amendment gives you the right to own an assault weapon, the corporate and personal income tax should be separate systems), and then there are matters about which I generally don’t want to hear opinions. And one of the latter is “what the President ought to say.” I cringe when I hear somebody start a conversation out that way – “You know, the President ought to get up and say…”, or even worse, “Why doesn’t the President just say…?”, usually followed by something about how the Congressional Republicans ought to be hanged like horse thieves (if I can say that without violating the New Civility). A bus buddy of mine, whom I won’t identify by name insofar as I have, by implication, just disparaged him, is a master at this craft –he’s been architecting the President’s message from Day One from behind his newspaper in the mornings.
My tolerance for this kind of armchair messaging is low because people have the same misunderstanding about being President that they do, for example, about being a baseball player. It just lookstoo easy – ballplayers seem to hang around a lot (often chewing stuff) and fail to get on base two out of three times. Same thing with being President – you just stand there and say stuff, isn’t that it? The idea that speaking is the 10 percent of the iceberg of being President that you can see, or that the President is obliged to speak in a very precise, disciplined way – as opposed to saying things that are satisfying to say – doesn’t seem to enter into this kind of advice. Nor does the idea that what you’re saying has to resonate with an intricate plan for how to lead the country, how to control the terms of the political debate, and the priorities for action you have at the moment. So much of the “President should say this” we get has elements of how he should accuse his opponents of being liars, dolts, doodyheads, or something similar, but worse.
Today, I prove myself no better. Because next Tuesday is the first day of the rest of the President’s life, his State of the Union address, and like Bill Clinton, who declared that “the era of big government is over” in 1995, President Obama gets one clean shot at reframing the post-shellacking debate.
So, however irksome the question, it’s time to start thinking about what he ought to say next week. To frame the question, let’s review. The President’s programs have had one big success – they averted an economic disaster akin to the Depression. Aside from some peripheral carping from both the far left and right, that’s more or less accepted. He’s done some other things, as well. One is a reregulation of the health insurance industry (mischaracterized as health care reform) that has some costs and benefits but that is neither the “job killer” its enemies claim nor the “big fucking deal” for which the Vice-President congratulated the President – if it was really that big a deal, then why is health care still linked to your job, and why do we still have a health care system that takes up twice the share of GDP that other countries spend to get the same result, and a ticking Medicare/Medicaid fiscal time bomb? A second accomplishment of some note would be Dodd-Frank, which is to commended for taking a balanced approach to regulating capital markets (largely by incorporating the “Volcker Rule”), even if the law relies on the future effort of regulators to decide on the particulars. I don’t want to sound dismissive, particularly given the agony of getting that much done, but that’s where we’re at.
But the ground has now shifted, and in ways other than the mid-term election. The bill for avoiding an economic disaster is now coming due. Granted, the entirety, or even the majority, of the fiscal mess isn’t of Obama’s making – The 2001 tax cuts – a response to a “long-term surplus” that proved a falsehood as damaging as “weapons of mass destruction” – and the Iraq War get some credit, but if we’re going to lay out who’s responsible for the fiscal deficit, we’re going to find more culprits than the final scene in Murder on the Oriental Express – (spoiler alert!) everyone did it. Imposing austerity is not an attractive backdrop for a Presidency, but there’s no avoiding it – if the President fails to square up to the problem, he cedes the center to his opponents. The question facing him, and his opponents, is this: what principles or rules will guide us through the retrenchment that we all know is coming? His opponents have an answer: Leviathan Government that threatens our liberty, and so on. Their answer – slay the beast. It’s catchy and you can dance to it.
This is the President’s challenge, and opportunity. Politics is about the future, and specifically, why the future is going to be better. If you can’t explain why the future is going to be better, then find another line of work. The vivid example of this was the 1996 election – President Clinton talked about a “bridge to the 21st century” (for the life of me, I still have no idea what the hell that meant, it’s almost felonious metaphor abuse) while Bob Dole talked about how he remembered a better time in the past. It was over before it began. Even when Don’t Tread On Me types express their reverence for a distant, idealized national origin story, they’re talking about where they want to go. For better and worse, Americans aren’t that interested in what just happened – they elected Obama because (in my view) they were sick to death of his predecessor or anything that reminded them of him. But once Obama became President, they were uninterested in hearing about his predecessor.
The President’s good fortune is that, to date, he was embodiedthe future more than articulated a view of it. He often speaks, I am told, about being a “transformative” President, but I can’t imagine that any President wants to be anything else. But reading the President’s books, listening to him, watching him these past two years, the transformation he seeks seems to be about behavior and attitude – it comes from the meticulousness with which he’s conducted himself all his life and it’s about how we all need to be more thoughtful, considerate, and reasonable. He was Civil before it was cool.
So on the question of “what does the future look like?,” the President has kept his powder dry. That’s the great opportunity the State of the Union provides – we have a chance to hear the President’s view of the future in terms other than the usual, bipartisan platitudes about how great our country and its people are. And we have a chance to hear it in the context of hard choices about retrenchment.
It won’t be about taxes – the President has already won on that score. His compromise with Congressional Republicans, to my thinking, was the sharpest moment in his tenure. It made a variety of good changes – keeping the estate tax on life support, a two-year partial respite on regressive Social Security taxes – and while it preserved the top rates of the Bush cuts, it kicked the issue of “should the rich pay more?” squarely into the 2012 election cycle. I’m not saying the public will rise from their seats and speak as one to tax the rich (and, their subset, the dead rich), but if the President can’t win that argument in a national election, he should (and will!) go home and write more books.
Instead, the vision has to go to what kinds of spending should we cut and what should we protect. And here is the opportunity to grab the future with both hands and hold on to it for dear life. The message is we have to favor the future over the present.
Cuts to Social Security, and restructurings of Medicare, along with cuts in a variety of other programs – some highway cost-sharing grants, commodity support programs, defense (perhaps following Secretary Gates’ recommendations) -- are long overdue. But the baby that will go out with the bathwater is spending that constitutes rational investment in the future. It includes an improved approach to building infrastructure, support for research and development (particularly in areas with social contexts, such as environmental preservation or health), (again, carefully devised) education and training incentives, expansion of the broadband Internet across the “digital divide,” and other programs. It’s an argument that the President needs to make not just to guide the retrenchment process, but to get past the “all spending by the Leviathan is evil” view that will hold the center ground until he explains to the contrary.
There’s an element of wishful thinking in this. I doubt there’s an economist drawing breath today who would disagree with the premise that (leaving aside some definitional issues) we should favor investment over consumption in the federal budget. But the idea that we should favor the future over the present has currency that it never did before: as a cornerstone of the President’s identity; as a rule for thinking about retrenchment; and as a defense against the blanket anti-statist view of the President’s opponents. There’s a reason why the classic parody of a platitudinous speech starts with the future lies ahead. That’s because it does. The President will explain to us next week how it’s all going to work.
Facebook at 50
We learned this week that Facebook has turned 50 – certainly not 50 years old – I wonder if Zuckerberg’s parents are 50 years old – but worth $50 billion, or at least that’s the value implied by the sale of a portion of its (privately held) stock to Goldman Sachs, which will own $450 million worth of the company, and a Russian company, Digital Sky, which added $50 million to the $700 million it owns in Facebook already.
If there was ever a time to sell a piece of Facebook, it’s now. Zuckerberg was just made Time’s Person of the Year – which prompted by new favorite satirist, Andy Borowitz, to applaud Time’s controversial decision that Zuckerberg was, indeed, a person – and the movie is going great guns, even if I’ve never seen it (although I’m told the novice actor given the part really nails Larry Summers – I thought the part really belonged to Gary Shandling). And we only recently learned that Facebook has now surpassed Google as the most visited site on the American Internet – about 9 percent of all site visits in the U.S. go there, although Google would account for 10 percent of you added in Google’s e-mail and YouTube affiliations. So Facebook is the Flavor of the Month, and if you think having money makes you immune to that kind of faddishness, I have mortgages to sell you.
Is Facebook really worth $50 billion? I don’t mean that in the cosmic shake-your-head-and-bemoan-man’s-fate sense, but in the down-to-earth context of whether this valuation is for real. The answer is more yes than you’d think.
The first perspective on this question is – who are the investors in question?. And when you think about Goldman and the Russians, it’s not an open-and-shut case. Digital Sky added incrementally to its already existing holding, so they have some incentive to create a demonstration effect that makes their existing stake in the company look more attractive. And since Facebook is not traded public in markets and therefore subject to the information disclosure requirements and open trading procedures the stocks you own are, it’s easier to try to manipulate its value. That’s not to say it would work, but you could try – Facebook’s limited number of existing shares are traded in a private market in which former employees and angel investors can buy and sell, and that means there’s limited liquidity and nebulous price revelation, as we economists like to say, which means you can’t really be sure what the hell it’s worth.
As for Goldman, I’ll pick that up in a moment. To get there, though, start here:
One issue raised by the Facebook valuation is whether the company will go public. Some analysts see this sale as a teaser to goose the market and get the public ready for an offering in the near future. Others take Zuckerberg at his word – or his mumble – that he’s not interested in ceding that much control, and see this sale as proof that he can raise enough money to finance whatever plans he has without a public offering. The reasons not to be become a public company boil down to the transparency it requires – you have to reveal your financial information and tolerate a distracting debate among investors, analysts, journalists, and idiots such as myself as to the extent to which you can differentiate your rear end from a hole in the ground. And while the regulation of securities has been proved by history to be an essential part of a well-functioning capital market, it’s no picnic for the regulated.
The reason to go public is to raise money, a problem Facebook obviously doesn’t have. Moreover, it’s possible that Facebook and Goldman are showing us the first inklings an alternative to the public markets for raising large sums of capital. To wit: the Securities and Exchange Commission will allow stock in a company such as Facebook to be traded privately – that is, without the disclosure, governance, and other requirements made of public companies through laws such as Sarbanes-Oxley – so long as they have 499 or fewer shareholders. That’s a pretty tight limit. But Goldman is said to be considering a new investment structure in which it would buy Facebook’s private stock and then allow investors to buy shares of something like a “Goldman-Sachs Facebook Trust” or some such with a minimum participation of $2 million per investor.
That gets me back to Goldman and the valuation. I think Goldman sees itself as a competitor, down the line, to the New York stock Exchange – not for schleps such as, say you and me, but as a market-maker for big block institutional traders. It’s already in that business in a big way. And if it were to do so, the line between public and private companies would blur, since both would be traded behind Goldman’s closed doors, instead of in the more regulated environment of the NYSE. Regardless, Goldman’s interested in both private and public issues, and the idea of a Facebook structure in which it “owns” the stock and that it passes along all the goodness and badness of ownership to customers who don’t actually take title to the stock, has to be an intriguing one to a company with that kind of aspiration – it’s like a little Facebook stock exchange. Moreover, for Facebook, it’s a way to create liquidity without having to comply with regulations that require it to be forthright about its circumstances, which is its right unless it wants to come to public markets. As for whether I’d feel as protected in that arrangement as I do in a regulated, public exchange – well, I wouldn’t. But that doesn’t mean it wouldn’t fly. And Goldman’s buying into the company could be a step towards that kind of arrangement, or at least Facebook’s participation in it. So Goldman’s buying Facebook at a $50 billion valuation could be like the Nationals giving Jayson Werth seven years – OK, there’s a risk we overpaid, but it gets us closer to a strategic goal, so what-the-hey.
But there’s then the question of Facebook’s intrinsic worth. An interesting piece by an analyst named Andy Zaky, last August, made the case for a $50 billion Facebook, months before it actually traded at that implied valuation. His argument, if I may distill it, is this. Right now, Facebook doesn’t bring in much money, certainly in proportion to its user base; Zaky used the number 500 million users, but that was last August. It’s closer to 600 million now. And Facebook now has roughly the same number of visits as does Google, and Google’s worth $200 billion (in a public market). So if Facebook gets better at monetizing itself – primarily through advertising – there’s no reason why it can’t get close to valuations like Google’s.
I see one strong and one weak argument buried in this chain of reasoning and, one argument that Zaky’s analysis misses, or at least seems to from what I read into it. The strong argument is that Google became a dominant site through innovation, while Facebook became one through…well, what’s the technical term for bullshit? Ah yes…network effects. A product has network effects if its value increases the more people have it. Like the phone system, Facebook is more valuable to me, the individual user, if more people join me in using it. Sure, it’s more inviting looking than competitors such as MySpace (which was the most visited site in America as recently as 2007 -- Hey! How’s MySpace doing now?), but the real driver is reaching the network-based critical mass that generates the value to the individual user. Google, in contrast, got where they are by doing something very well, there’s no network effect behind it. Its value as a search engine has nothing to do with how many other people are using it. There are a myriad of questions about Google’s algorithm, about whether Google’s conflicted in its role as an “impartial” search algorithm and, at the same time, a purveyor of other services for which people search, and there are privacy issues(which they share, in some respects, with Facebook). But it’s possible to imagine that Google might one day face competition from someone who out-Googles them, that is, does the search job better. If Facebook is somehow out-competed, it will be because hundreds of millions of people were so pissed off at them for whatever reason that they switched to another, comparable service. Absent an ergotistic spore breaking out in Facebook’s headquarters, that’s harder to imagine. Google sits on top of a network; Facebook is a network. So that’s the strong argument for why Facebook out-survives Google.
The weaker argument, as it pertains to Zaky’s analysis, is that advertising is about selling people things, and Google’s clientele are people looking for things, as opposed to Facebook’s users, who are looking for each other. Advertising is relevant in the extreme to the value Google creates for its users, but only incidental to what Facebook’s users want. I can’t imagine that Facebook qua Facebook is going to be worth as much – in terms of ability to generate revenue per user or per visit from its core service – as is Google.
But Google’s valuation, to my thinking, isn’t completely, or really, about their value as a search engine. It’s about their value as a gateway into the tangled maze of value created on the Internet. Google is a search engine, but it’s already failed as an equipment manufacturer, succeeded as an e-mail provider and originator of operating systems for equipment, and could end up being everything from a travel agency to a television station to a carriage provider, a wistful vision to which it occasionally purports to subscribe. Facebook hasn’t added this kind of dimensionality, but it’s going to – yes, I said, will – because something to which so many people feel allegiance and are involved with daily cannot help but evolve in that direction. It will own a generation of users in a way Google cannot, even though Google, their monopolistic hearts, does something.
That’s the issue I have with the Zaky analysis, the argument he misses, as does any other valuation that focuses on advertising revenue per view. Just what market are Google and Facebook in? They’re monopolists in their own bailiwicks, but the spaces they occupy are only islands in a larger archipelago of value on the Internet. They might be “service” or “software” companies, but that misses the point. If it turns out that Facebook can truly cement the attentions of a generation of (self-absorbed, to be sure) users, then they can dominate the decisions about what equipment gets used, what broadband providers area selected, what other services enter the Internet space. Is Facebook something you “get” on your mobile or broadband provider? Or is your mobile or broadband provider someone that lets you “get” Facebook? The difference comes down to who will capture the lion’s share of the value you realize by having the entire package – access, device, services, applications, the whole “stack.”
That’s why it’s possible to talk about Facebook’s being worth $50 billion – because it might end up, with all its gruesome banality (who gets to light the pyres that reward the villains who gave us Farmville or Mafia Wars?), the gateway to the broadband world. There’s some chance that one day, all broadband access, service, and device providers will have to dance to their tune.
Today, 500 million users. Tomorrow, the world.
Kabletown
Among the many myths and misimpressions on which the doctrine of “net neutrality” rests is that the Internet is a series of “dumb pipes,” a set of hollow vessels that carry messages the way the pneumatic tubes did on a vintage submarine in a black and white picture from the 1950s. In fact, it was the spectacularly out-of-touch Senator Ted Stevens who called the Internet exactly that – a bunch of tubes – and remarkably, without ever acknowledging it, the neutrality crowd is in full agreement with him. After all, that’s the essence of their argument – since the Internet is a set of “dumb pipes” – some kind of message-bearing plumbing -- there’s no reason why “everything should not be the same” as it is flushed to its final destination.
The fallacy of this premise, and the problems that arise when otherwise knowledgeable people tacitly endorse it, is most recently evident in a business tiff between Comcast and a private network company called Level 3.
Level three has been for some while one of the companies that make up the Internet backbone. In fact, rather than a dumb plumbing system, the Internet itself is a labyrinth of these pipes. That’s what the idea of “neutrality” doesn’t get – internet messages arrive at this labyrinth, are dispersed through the wormwood in “packets,” and then meet up once again at your computer, where they form a line in their original order and let you see or hear them. That’s why things freeze up – because the packets sometimes don’t get in line fast enough – and that’s why some services want to be able to pay to let their packets move together, so they don’t freeze up, like a live entertainment transmission, telemedicine, uninterruptible Dick Tracy wrist videophones, or an important financial transaction.
Websites -- content originators -- take stuff to one of the many big “backbone” networks, which in turn take that content and those messages to the local networks that ship them to the people in your neighborhood, the people that you meet each day. Or, sometimes, they hire a “Content Delivery Networks” o do the job for them; CDNs are companies that takes content from one place and deliver it to the entry way to the local networks that get them to your machine.
There are many of these backbone providers and they coexist, by and large, through a system called “peering.” Peering is a system that lets the backbone providers swap throughput so it gets to where it wants to go with the least cost, congestion, and aggravation. For example, Orange and BT are two of these backbone companies. If they billed each other every time a message jumped from one of their cables to the other’s, they’d go nuts processing the transactions. So, instead, they set up a peering relationship, which says that they will trade data – let messages go from one to the other – so long as the volume moving both ways is “roughly” in balance. In practice, “roughly” means that the volumes should differ by no more than a factor of two. If for some reason they fall out of balance, they’ll settle up with each other in cash, a process known as “settlements” – I love business lingo.
OK, those are the basics. Level 3 and Comcast, both having networks that are part of this labyrinth, had such a “peering” relationship. But recently, Level 3 signed a deal with Netflix stipulating that Netflix would pay Level 3 to carry its movies to the backbone so they could find their way to you. Netflix, remember, taught you how to get movies in your mailbox, but the pressures of competition and innovation have made that once-revolutionary premise passé. Now, they want to stream movies to your home, and God bless them for it. So they cut a deal with Level 3 to bring their films to the Internet, where they would find their way to movie-hungry customers.
So Level 3 showed up at the ports of Comcast’s Internet backbone – not their local networks, the one that brings phone and film and fun to the coaxial cable on your block, mind you, but the big hog cables that make up the digital Interstate – and said, “Hey! I’ve got some movies to pass through.” After all, they’ve got peering with Comcast, so there’s an environment of “trust but verify” between them. Well, sure, that’s how it works, but when Level 3 backed up the truck, the movies they loaded up weren’t a few selected matinees, but the entire Netflix library. And once they did, the balance of traffic between the two became decidedly one sided, by a ratio of about 5 to 1.
So Comcast, understandably, told Level 3 their peering relationship didn’t cover this kind of traffic, and Level 3 would have to buy more ports to Comcast’s network if they wanted to get Netflix’ movies to the movie-hungry final customer. After all, the point of “peering” on the Internet is to handle each other’s traffic when that’s the least-cost way to do it – it isn’t “you deliver my goods for me, thanks.”
Now, reasonable business practice at this point would be to sit down and work out some kind of arrangement – after all, Level 3 has just signed on to be the docking end of a movie fire hose; what were they thinking when they signed the deal with Netflix? That they’d simply show up at the door of Comcast or some other backbone provider and thank them for providing carriage as a community service?
Apparently yes, they did. In essence, they decided to use their status as a backbone “peer” network to get a cheapo foothold into the world of content distribution. Because rather than negotiate an arrangement, they yelped to the Federal Communications Commission that Comcast’s refusal to carry their goods for them was a violation of an “open” Internet and of the FCC’s oft-stated principle of “net neutrality.”
Remember, “neutrality” means that nobody can pay for preferred treatment on the Internet. Even if somebody’s doing robotic surgery on a patient in Ice Station Zebra, the signal carrying an image of Rock Hudson’s ruptured aorta will have to wait until Jimbo the teenager is done downloading a video of a cat playing the xylophone (“That is so cool!”). Nothing on Earth works that way – no priorities, no rules, everything just “works out.”
(Actually, I take that back. When I was a graduate student in Ann Arbor in the early ‘70s – Go Blue, one year we’ll give OSU a run for their money – there was a seven-street Intersection just before the Broadway bridge that led off into Ward One that had not a single traffic sign. I remember a guy named Rolf telling me his political science professor citing that intersection as the only working example of “pure communism” – seven streams of traffic intersecting with no rules as to what should happen when they do. Rolf’s professor was an idiot – I don’t see how that intersection in any way reflected worker control of the means of production, but it did have an idealistic communitarian air to it, which might lead the brainless to confuse it with worker Soviets running factories, but whatever. On my last visit to friends in A2 a few years ago, I went through the intersection and noticed there were now stop signs on each of the seven corners. So much for the last recorded instance of economic neutrality on the planet.)
Level 3’s complaint to the FCC speaks volumes of the misrepresentations that lie beneath the doctrine of “neutrality.” Does Comcast’s insistence that Level 3 pay for service provided make the Internet less “open?” In fact, imagine how their other backbone customers, who are either “peering” or “settling,” would feel if they found out that all the movies Netflix was streaming to its million-member customer base were travelling without financial consideration. Is their demand for payment somehow a form of “prioritization,” or pay for incremental service? Only in the sense that buying a loaf of bread is preferential, conditional on payment.
I don’t where the FCC will end up here – they know better than to mischaracterize the way business is done among the Internet’s backbone providers, and they can surely see that Level 3 is trying to turn itself into a CDN while maintaining the benefit of being a peering backbone provider. It reminds me of a cartoon I once saw with two naked guys with paper bags over their heads talking to Noah on the gangplanks of the Ark – “Let us on, we’re monkeys.” But the FCC (or at least some of it) and its neutrality cheerleaders made such a to-do over the words “open” and “neutral” and “prioritization” that they may feel backed into a corner.
Moreover, poor Comcast – or as they’re know on television’s funniest program, Kabletown – is trying to buy NBC (for reasons that make little sense to me, but that’s a tale for another day), and the FCC has the chance to make their lives miserable, Jack Donaghy’s efforts to elect Steve Austin to the Congress notwithstanding.
But wait a minute – let’s review what’s come up in this posting – Netflix, movies, videos of cats playing the xylophone. It’s all about video streaming – or as we called it in Jackson heights during Saturday double features at the Boulevard theater, movies. Video is coming to dominate the Internet, which bring us to this, a posting by Dan Rayburn, a representative of the streaming media industry. In his post, whether willfully or not, he misrepresents the situation:
Comcast was for the first time demanding, "a recurring fee from Level 3 to transmit Internet online movies and other content to Comcast’s customers who request such content."
This statement is not true. Comcast is not asking for a “fee” – that is, a price – for access to its customers. It’s asking for reimbursement for access to its backbone. In fact, Rayburn goes on to note that Comcast is not asking for an exorbitant price, or that before Level 3 showed up with an 18-wheeler full of data, peering between the two companies worked.
It’s the principle of the thing, Rayburn argues. Comcast, in his view, is setting up a situation in which they can charge video content for being carried to the user:
the real explosion of traffic on the Internet is from video, so while Comcast is not specifically calling out video related content from Netflix or anyone else, that's really what we we're talking about.
The key to unlocking Rayburn’s view is to remember that he’s a representative of the streaming video industry. Streaming video is the fastest growing traffic on the Internet, and unlike e-mail from your Aunt May or looking up last night’s NBA scores, it takes a lot of bandwidth. It eats it up, much like trucks on the road cause much more wear and tear to the road surface and much more congestion to other motorists than do families in their Ford Escorts. But the streaming video guys don’t want to pay for the bandwidth they use, just like the other Big Websites who thought up “net neutrality” aren’t interested in paying for the congestion they cause of the bandwidth they suck up.
Rayburn – like Level 3 -- is looking for a free ride, dressed up with platitudes about “neutral” and “open” and so on and so forth. And underlying his scam is the idea that the Internet is a bunch of plumbing-type pipes that flush data to your doorstep. It’s not. It’s a complex, dynamic, network of networks, and it has to be run to reflect those realities. And the burgeoning role of video makes it all the more important that we get past simplistic metaphors and provocative vocabulary and build a competitive, responsive broadband Internet.
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