Unintended consequences of price regulation: Traffic pumping

This order reveals the practice known as "traffic pumping". I believe that it is a good example of arbitrage that results from price regulation (footnotes deleted):

2. Qwest is an interexchange carrier, serving customers throughout the United States. Farmers is the incumbent local exchange carrier in Wayland, Iowa, serving approximately 800 access lines for local residents. Farmers provides local exchange and exchange access services. Qwest purchases tariffed access service from Farmers, which enables Qwest’s long distance customers to terminate calls to customers located in Farmers’ exchange.

3. In 2005 and 2006, Farmers entered into a number of commercial arrangements with conference calling companies for the purpose of increasing its interstate switched access traffic and revenues. Under the agreements, conference calling companies sent their traffic to numbers located in Farmers’ exchange and, in return, Farmers paid the companies money or other consideration. The agreements resulted in a substantial increase in the number of calls bound for Farmers’ exchange. As a result, the amounts of Farmers’ monthly bills to Qwest for terminating access charges rose precipitously.

Maybe Sony will help you build a supercomputer too!

I have known about using Sony PlayStation 3 platform as a supercomputer, but I still found this item over at Ars Technica interesting because it lays out the case better.

It leads me to wonder how long the business model for console gaming can last. Basically, game purchasers subsidizing unintended uses of the PS3 platform. This will produce one or more of the following consequences in the long run:

• Fewer gamers adopt the PS3 platform because the game prices are higher than on competing platforms;
  
• The profits of Sony and of game developers are lower;
  
• Sony does what Apple does and tries to "capture" the PS3 users, creating a future for people who can "jailbreak" PS3s
  
• Console manufacturers create "crippled" consoles that can't be effectively used in this way. For example, is anyone using clusters of Xbox 360s as a supercomputing platform?
  

iPhone Apps and economic networks

I have blogged around this subject before, so when this article in BusinessWeek showed up, my interest was piqued. When economists began looking at standards in IT in the 1980s, researchers like Joe Farrell, Garth Saloner, Carl Shapiro and Michael Katz began noting the importance of networks of tie-ins to the lock-in often associated with standards. They noted in particular the importance of software to the success of PCs vs. Macs (though this view was disputed by Margolis and others).

The BusinessWeek article is significant because it shows a weakening of the tie-ins to the iPhone, which would, according to the economic theories of standards, suggest that the durability of this platform in the face of other existing (and emerging platforms) is not particularly strong. Note that this is not unrelated to the "opaqueness" of the approval process by the Apple App Store and the relatively poor profitability of iPhone apps.

Economics in the wireless industry

This item over at the tech. liberation blog is fascinating. It makes clear the deeper battles going on releated to "wireless network neutrality". I am becoming more convinced than ever that the network neutrality discussion is largely a question about political economy -- that is, who gets which revenue and who pays which costs. But is allocating more spectrum to mobile, as the article goes on to suggest, the answer?

Regulation and cloud computing

This item over at the Tech Liberation blog got me thinking about regulation and cloud computing. Given the underlying economies of scale and scope, it seems to me to be almost certain that we'll see concentration in the market for cloud services. Thus, is it too soon to be thinking about marketplace rules for cloud computing? After all, we haven't seen serious market abuses (that I know of). If so, is the FCC the right agency to do this? As the article points out, there is no real statutory authority to do so. On the other hand, cloud computing is a deep integration between processing and communication to provide a service, so it is easy to see how they might be tempted to move in this direction. Where would you draw the line between communications and processing in cloud computing?

Google, Android, maps and more

I have been interested in Google's approach to business and, like others, have been a bit wary about it as well (See this search of this blog for more).  Thus, this item resonated with me, especially in combination with this item from the Washington Post (please be sure to read this follow-on from Tech Crunch in the spirit of completeness). This article over in BusinessWeek is another piece of the puzzle, I think, considering that gaming is a major profit business.

It seems clear that Google is building a platform and ecosystem. It is a for-profit corporation, so the question is not if but how this platform will be monetized, how it will compete with other platforms (Apple-centric and Microsoft-centric), and how switching costs will be imposed to deter defections from the platform. Google's interest in certain intellectual property around Android provides some evidence of this. Will monetization come from advertising revenues? Or will we see a series of user fees that will emerge after users are invested in the platform?

The questions matter because our government has historically gotten interested in platform competition and how it relates to control. These questions will be at the core of future anti-monopoly policy, I believe.

iPhone Apps and the war for the web

There are a couple of items that have come to my attention recently that suggest change is on the way for app stores (perhaps the iPhone app store in particular):  The first comes by way of Seeking Alpha.  In it, the author cites this item from Gizmodo, which argues that, in the not to distant future, apps will be very cheap or free.  This has been a significant profit center for Apple, but may not be in the future.  The second item, from GigaOm, discusses the opaque approval process for iPhone apps which can be frustrating for developers.

Taken in tandem, the second item suggests higher than necessary transaction costs for developers (since the approval process is uncertain) and the first item suggests lower prices (tending to $0) because of competition.  High transaction costs for no profit suggests that developers will seek to monetize their investment in other ways, through advertising or through other kinds of tie-ins (where price is not $0) that are outside of the control of the app store.

But as O'Reilly points out, there are limits to this too.  Apple is not shy about blocking apps that try to escape their business model.  The O'Reilly article is interesting in that it argues for the shape of competition to come and makes the case for the tendency toward market concentration that we see in the Internet.

More on Clearwire

I found this item over at GigaOm a worthwhile followup to my earlier article.  The article lays out the dilemma faced by Clearwire and its backers.  On the one hand is the short term market opportunity and on the other is the current competition from WiFi and the future competition from LTE.

Economics of Wireless ISPs

In the FCC's Electronic Comment Filing System, you will find this contribution from the Wireless Internet Service Providers Association (WISPA). What is notable about this comment is that it contains useful traffic engineering and cost data. For example:

• "Middle Mile" capacity needs range from 50-260kbps per user and should be 5% of the aggregate bandwidth supplied to last mile business customers
• Second mile capacity needs range from 100-300kbps per user.  This is higher because it is averaged over fewer customers.
• Rural ISPs pay more than $200 per megabit for OCn connectiveity
• Capital expense for a Part 15 microwave is up to $10K and for a Part 101 (licensed), this cost goes up to $15-$20K.
• In the second mile, a DS3 router interface costs $8K and a fiber interface module $200.  
• One rural ISP reported paying $4K/mo for a burstable DS3 to support 250 rural customers.  This translates to $12/mo per customer for middle mile transport and limits how cheap service can be.
• For Internet service, WISPs pay from $2 to $300 per megabit per month to Tier 1 providers, depending on where they are.

There is a lot of info embedded in this paper, though it isn't in tabular form.  Instead, it is in more of an anecdotal form.  In any case, if you're interested in the economic foundations of wireless internet provision, you will find this an interesting read.

Separately, this Wiki, which describes a research project over at KU, is worthwhile reading.

Clearwire and the future of WiMAX

This article over at Forbes is interesting:

In a note to clients, Stifel Nicolaus analyst Christopher King said the latest round of financing will probably not cover all of Clearwire's cash needs over the next few years. He expects the company to lose several billion more dollars.

But he added that "Clearwire needs to build out its nationwide network as quickly as possible, as both Verizon and AT&T will begin to quickly catch up with what we believe will likely be a superior 4G network."

Clearwire's second-quarter loss, though narrower than a year earlier, came to $73.4 million. The company reports third-quarter results after the closing bell Tuesday.

So, Sprint and Comcast are investing an additional US$1.5 billion. Google decided against upping their ante in the WiMAX provider. So, is this a near term play? Will Clearwire switch to LTE when they can or will they focus on fixed wireless broadband?

Internet censorship as restraint of trade?

I found this item interesting, though I have yet to read the full report. It reminds me of how telecom reform in the EU was developed and pushed under the guise of competition policy rather than communications policy in the early 1990s. In similar fashion, the US FCC introduced competition into telecommunications not as a common carrier matter but as a frequency allocation matter (the "Above-890" decision in the late 1950s). It clearly matters how you frame the question!

"Censorship is the most important non-tariff barrier to the provision of online services, and a case might clarify the circumstances in which different forms of censorship are WTO-consistent," said the study by Brian Hindley and Hosuk Lee-Makiyama.

Intel and Dell

I found this article, which describes the background behind Andrew Cuomo's (NY Attorney General) suit against Intel, interesting. Intel apparently made payments to Dell in exchange for their continued (exclusive) use of Intel processors in their machines. These payments were substantial:

In 2006, Dell received $1.9 billion. During two quarters that year, Intel payments even exceeded Dell earnings. In the quarter that ended in April, payments were $805 million, compared with $776 million in net income. For the quarter that ended in July 2006, Intel's payment amounted to 116% of net income.

I find this article interesting because it illustrates the "sponsorship" a "standard". Economists who have studied standards (Farrell, Saloner, Katz, Shapiro, David and others) have cited sponsorship as a rational strategy for firms wishing to establish (or defend) a de facto standard. In its interactions with Dell, Intel seems to view its processors as a standard platform for PCs (as opposed to Intel). Thus, this reveals the costs of (and limits to) sponsorship.

Business models for 4G mobile systems

This article over at Forbes essentially points out that there are two different business models implied by the upcoming technology: one that provides for higher bit rates and new services and another that minimizes costs.

The Big Four are scrambling to offset any drop in calling revenue by shifting their focus to new wireless opportunities. They are just beginning to spend tens of billions of dollars deploying new "fourth generation" cellular technology to greatly expand their data-moving capacity and make all sorts of new wireless devices possible, from e-books to dog collars that let you track Fido's whereabouts. Linquist [of MetroPCS] just signed contracts to buy the same 4G technology for a very different reason: He plans to use it to radically improve his ability to carry phone calls--and do it much more cheaply.

[SNIP]

The new gear is so powerful that he will be able to simultaneously increase the quality of cell phone calls while cutting the cost of providing each minute, from just under a penny today to closer to a tenth of a cent. Linquist charges 2.1 cents a minute, just under half of the industry's average revenue. He'll continue cutting, confident his singular focus on running the cheapest voice network will keep his costs well below those of the rest of the industry.

A decade ago there were three phone businesses: local, long distance and cellular. The first two have already collapsed, done in by advancing Internet and cellular technology and the cutthroat competition they unleashed. Americans paid $110 billion annually for long-distance phone calls nine years ago. It's now down to $55 billion and still shrinking. Local phone companies took in $126 billion at its peak eight years ago; that sum has fallen to $86 billion and is dropping fast.

Another interesting quote (it is always nice when data is included):

MetroPCS has pioneered the use of new technology that lets it pack more bits into high-traffic areas. On a recent afternoon in East Los Angeles, dozens of parents waited to pick up their kids from school, many chatting away on their phones. While most calls linked invisibly to large cell phone towers, the MetroPCS subscribers unknowingly connected to a tiny antenna no bigger than a car radio antenna that dangled from a nearby telephone pole. From there the calls traveled via fiber-optic cables that snaked alongside old phone wires back to a dingy building and then to the main network. These clever minicells are only one way the company keeps chopping the cost of providing each customer with unlimited calls. Providing unlimited calls now costs the company $16.82 per customer per month, down from $18.23 a year ago.

Economics of SIP

I found this article over at GigaOm interesting. The article argues that Skype's "Global Index" technology is much cheaper than SIP, which is a significant factor in its (i.e., Skype's) success. I only wish they had provided real numbers. I wonder if anyone has done a careful cost analysis of VoIP signalling?