Archive for August, 2010

Research Roundup #5: Virtual Economics, E-Commerce Regulation, and more

Wednesday, August 18th, 2010

Today’s Research Roundup includes thirty studies on economics, law, and technology. Of these we highlight two papers that undertake complementary analyses of some implications of moving our lives increasingly online.

Vili Lehdonvirta of the Helsinki Institute for Information Technology offers an impressively lengthy look into virtual consumption, that is, the purchase of a unique class of not-quite-goods, not-quite-services that exist only within the confines of an online environment (items for sale in a computer game are the classic example).  With a decidedly sociological approach, Lehdonvirta seeks to answer “why do people spend real money on virtual goods?”

Miriam Cherry of the University of the Pacific looks at the virtual individual as producer by cataloging the phenomenon of “cyberwork.”  As opposed to Lehdonvirta’s more abstract academic exercise, Cherry considers for-pay online activity with an eye for how it relates to existing protections and legal frameworks in the offline labor market, including anti-discrimination laws, wage standards, and even unionization (for example, she believes virtual work will “encourage unions, out of necessity, to adopt a more global perspective”).

Neither study has many immediate policy implications.  Nevertheless, their consideration of such novel—and perhaps someday fundamental—elements of the economy remind us there is a lot left to learn about the digital age.

(Click through to the full post to see the list of papers and abstract excerpts)

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Satellite Broadband: Line-of-Sight, Not Out of Mind

Wednesday, August 11th, 2010

The National Broadband Plan (NBP) estimates that firms would need subsidies totaling $23.5 billion to invest in the infrastructure necessary for universal broadband coverage in the United States (Exhibit 1-A, click to enlarge).[1]

Base-case broadband availability gap

The problem with the Plan’s estimate is that it includes only DSL and 4G wireless and omits broadband-over-satellite, which is by far the cheapest option for serving the most costly areas.  Thus this “base case” grossly overstates the necessary costs of achieving 100% broadband availability.

The Broadband Plan notes that “while satellite is capable of delivering speeds that meet the National Broadband Availability Target, satellite capacity can meet only a small portion of broadband demand in unserved areas for the foreseeable future….[w]hile satellite can serve any given household, satellite capacity does not appear sufficient to serve every unserved household.” (p 137)

But satellite need not serve all “unserved” households.  Serving only the highest-cost households would yield enormous savings.

The 250,000 housing units (0.2% of the U.S. total) with the highest costs account for $13.4 billion of the claimed investment gap (OBI Technical Paper No. 1, p 41).  This eye-popping estimate reflects hypothetical decisions such as one to build out DSL to a single house in Orange County, NY for $366,126, which exceeds the county’s median home value, and to 30 dwellings in Kauai County, Hawaii at an average cost of $205,890 each, or about half of that county’s median.[2] Exhibit 3-H graphs the steep “hockey stick” costs implied by the base-case model.

In its technical supplement explaining the investment gap, the Broadband Team estimates that using satellite (with minor federal support) to serve those 250,000 homes would reduce the gap by at least $11.4 billion, or almost 50%.[3]

The authors have clearly considered the tremendous efficiencies afforded by satellite access, and acknowledge the adequacy of broadband-over-satellite at meeting the NBP requirement for connection quality.[4] Recommendation 8.13 urges the FCC to consider “alternative approaches, such as satellite broadband, for addressing the most costly areas of the country” (p 150).  As such, the “broadband availability gap” as calculated should not be considered a strict endorsement of the technologies assumed (DSL and 4G), but rather a starting point for comparing the costs and benefits of alternative proposals.

To be sure, broadband-over-satellite has some drawbacks compared to other technologies.  Existing satellite broadband plans offer slower download and upload speeds than most wireline or other wireless technologies, are more expensive, and exhibit higher latency due to extreme length of the “last mile” (more than 20,000 miles) to orbiting geostationary satellites.  Speeds will become less of an issue with two new satellites expected to go into service in the next two years, both offering up to 10 Mbps downstream to homes; Hughes says it will even sell business plans of up to 25 Mbps.

The question then becomes whether it is worth spending an additional $12 billion to give those households a DSL or 4G wireless broadband option.  To put that in perspective, consider that the U.S. government (NIH) budgets $50 million for discovery and development of drugs for “rare diseases”—defined as those affecting 200,000 or fewer people.[5] Many of those illnesses are deadly.  Does it make sense to spend billions to allow 250,000 households the option of reducing delays in their Internet transmissions by half a second?

Apparently the Omnibus Broadband team didn’t think so.  And thanks to the recent stimulus package, the USDA (the federal government’s longstanding supporter of rural broadband) is increasingly on board.  It’s time we unite to make satellite broadband a priority in proposals for access in America’s most remote communities.


[1] The chart is actually taken from the corresponding technical supplement.  In the Broadband Plan itself (See Section 8.1) the gap is referred to as the “broadband availability gap” and was pegged at $24.3 billion before the estimate was revised.

[2] Estimated costs of buildout reflect net cost (initial capex and ongoing support less revenue) with a 20-year time horizon and 11.25% discount rate (the NBP standard). Data on gap by county available at http://www.broadband.gov/maps/availability.htm

[3] The team reports the gap to be $10.1 billion—that is, reduced by a full $13.4 billion—when factoring in satellite “even with a potential buy-down” (p 41).  It appears they have not factored in their estimate of a $800 million-$2 billion buy down, a program in which the government would subsidize subscriptions to existing (planned) satellite capacity to bring the expected high subscription charges to a level approaching terrestrial service (p 93-94).  If necessitated, this cost would rightfully be subtracted from the savings, yielding the possible low of $11.4B reported above.

[4] That is, they acknowledge that satellite broadband will be sufficient for the “actual” 4 Mbps download, 1 Mbps upload minimum (NBP p 137).

[5] NIH requested this amount for the Therapeutic Rare and Neglected Diseases Initiative (see FY 2011 budget, p 5).  The amount overstates the magnitude of spending per patient because the program also covers neglected diseases, from which very few Americans suffer, and because it includes more than 6,800 diseases classified as rare, which together afflict an estimated 25-30 million Americans.

If you like the Do Not Call List, should you want a Do Not Track List?

Thursday, August 5th, 2010

At a Senate Commerce Committee hearing last week, Federal Trade Commission Chairman Jon Liebowitz indicated that the agency is exploring the idea of a Do Not Track List that would allow consumers to block servers from tracking their online activities.  A Do Not Track List sounds like a good idea, because the Do Not Call List for telemarketing calls is popular.  Before moving forward with a Do Not Track List, however, the FTC should thoroughly analyze its benefits and costs and determine whether there are more cost-effective ways of achieving the same objective.  Here is my back-of- the-envelope assessment.

Benefits:

People who sign up for a Do Not Track List will do so because they derive some utility simply from knowing they are not being tracked.  This value is not easily quantifiable, but some people will surely be better off.

However, the more tangible benefits of the Do Not Call List – reducing unwanted marketing solicitations – are not there with a Do Not Track List.  Consumers would not necessarily receive fewer ads.  (Indeed, it would be difficult for them to know if the list were actually working)  They would just receive ads that are less-well-targeted to their interests.  There are ways that consumers can block ads on the Internet, but a Do Not Track List is not one of them.

Costs:

First, there are direct costs of implementation.  This would be a fairly major undertaking for the FTC, so these costs are probably not trivial.

Second, there are indirect costs in terms of the quantity and quality of services and content on the Internet.  These costs would be borne not only by Do Not Track List participants but by other Internet users as well.  A Do Not Track List (depending on how many people signed up) would reduce the value of the Internet as an advertising medium, and therefore would reduce the revenues available to support Internet content.  A Do Not Track List would also affect the quality of major Internet services, such as search engines, which use data on search histories to update and improve their algorithms, and to protect against threats such as search spam, click-fraud, malware and phishing.  If search engines have less data, they can’t do this as well.  In sum, there are positive externalities to the information generated by online tracking that support the services that everyone uses.  Consumers who signed up for a Do Not Track List would be free-riding off those consumers who allowed their data to be used.

Finally, consumers who signed up for a Do Not Track List would receive ads that were less-well-targeted and therefore less useful.  The cost of this would depend on the value these consumers place on advertising.

Cost-Effectiveness:

Even if one were to conclude that the benefits of a Do Not Track List were greater than the costs, there is still a cost-effectiveness question:  is this the least costly way for consumers to avoid being tracked?  The answer is probably not, because users can already adjust their browser settings to avoid being tracked.  Many (perhaps most) users don’t know how to do this, but it’s easy to learn if you want to.  It only takes a few clicks.  In fact, it would likely be just as easy to learn how to adjust your browser to avoid being tracked as to sign up for a Do Not Track List and it would be totally under the user’s control.  Why should the FTC set up a whole new program to do something that consumers can fairly easily do for themselves?  A better, more cost-effective alternative would be for the FTC to post an online tutorial showing consumers how to do it.

Of course, the fact that most consumers probably haven’t taken the trouble to learn how to adjust their browser settings may mean that they don’t place a very high value on not being tracked.  That suggests the benefits of a Do Not Track list would be small, likely far smaller than the costs.