Monthly Archives: June 2006

Network Neutrality

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I’ve not been following the net neutrality debate, so I presume all these points have been made by others. But I want to firm up my thoughts, just for fun.

There are a few frames you might map this into.

The traditional telco regulatory framing is about monopoly power v.s. the little guy. This framing the monopoly power of the telco arises from network effects and physical realities. The state steps in to help coordinate the creation of the monopoly; handing out one of a like license for airwaves and utility poles. The state also steps into limit the perfectly natural tendency for capital to abuse thier monopolies at any oportunity. This framing is all perfectly valid; etc. etc. In the current US poltical ecology it also write it’s own outcome. Capital wins, the little guy looses; an any public good is converted to a private good in the hands of the highest bidder. The only question is who runs the auction; the state or the legislators.

A second frame to drop this debate was nicely coined by Martin; ‘What’s the label on the tin?” Markets work smoothly, scale up quickly, and generate lots of wealth and externalities when the transactions can be executed quickly. That requires setting standards; those standards reduce what aspects of each transaction you need to negotiate. The state gets involved in these debates because of it’s unique power to set standards. Markets participants have a love/hate relationship with this standards making process. They love it because in the best scenarios everybody wins; and they hate it because during the game individual actors can sometimes capture huge benefits for their class of actors. You can predict which standards battle will be long v.s. short using various means. In this case I’d predict a long drawn out battle.

Yet another frame we can drop this into is old v.s. new capital. The distinquishing characteristic of old capital is that it tends to be much more politically connected and conservative. New capital has weak political muscles; since while it’s got them it hasn’t practiced using them. In this story we cast the telcos in the role of old capital and the new web businesses in the role of new capital. The new guys are a complementary industry of the old guys. The old guys would like a peice of the action. So they are looking to get the power to charge the new guys to deliver content over them. This frame predicts that the key question is can old capital move fast to lock-in advantagous regulations; faster than new capital can figure out how to use those untrained political muscles. I think that’s obvious new capital will learn quickly enough. That’s clear because they have common cause with some other large players: media, device makers, and software plaform vendors. Those three already played a round in this frame during the HDTV standards battles. If we presume that then we can also predict that this standards battle will be quite drawn out. Two very wealthy industries competing for the state’s attention is not a recipe for a quick resolution. Bearing that in mind I read this report as indicating that Alen Specter has recognized that could generate a lot of campaign contributions for a very long time.

It was unclear precisely what approach the Judiciary Committee would take. Specter, for one, indicated that he would prefer looking at the issue on a “case-by-case” basis rather than issuing a “general rule” about what network operators can and cannot do–an approach favored by Internet companies. He said it may be more productive to negotiate less formal “standards” for network access with the players involved because writing new laws is “extraordinarily difficult, candidly, when you have the giants on both sides of these issues.”

The final frame I notice in this discussion is how the telco industry is undergoing a very very fundimental shift. The telco industry does distirbution or brokage; like roads, canals, airlines, UPS, eBay, match makers, etc. Traditionally they transported phone calls; one end you place the call, the other end would recieve the call. Note how there are two kinds of actor there; that’s true in all these industries. If you and I play in both roles from day to day – we make calls, and we recieve calls. There are different labels for the two roles. In the internet we call them client and server. At eBay and other markets you call them buyer and seller. The match maker calls them wife and husband; or employee and employeer. The media industry calls the content producers and consumers. Most of the new capital businesses, ebay, google, etc. have very sharp distinctions between the two roles. They often charge one side and the other; and they always have very different pricing schemes for the two sides.

Telco is a interesting case, because historcially it had a reasonably weak two sided network nature. That’s changing, and fast. The emergance of the large web properties who serve vast populations of users means the telcos are now two sided businesses; but only if they can get the regulations written when they weren’t revised to allow them new forms of pricing power.

This frame has some hints in it about how what I suspect will be a very long drawn out standards/regulatory battle might be resolved. This is about how to label the tin; and both old and new capital find that a very puzzling problem. I’m bemused by the thought that the giant web properties might remain “free” by having the telco’s pay them; which is more or less the model uses in the cable TV industry. It’s an ugly outcome; but it’s consistent with the current political ecology; where the little guy doesn’t even have a seat at the table.

“Hope and fear are inseparable”

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Can the dollar be talked down gradually? Consensus economic models say no: once market expectations are that the dollar will be sharply lower in five years, speculators will make the dollar sharply lower tomorrow.

Nevertheless, there is hope: consensus economic models say the dollar crashed three years ago.

— Brad DeLong

Is this true?

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So here’s a bit of hearsay.

First some background. Flex fuel cars are cars that can run on either petrol or so called E85. E85 is a fuel made with 85% ethanol and 15% regular petrol. The big picture reason to find E85 cars interesting is that they offer the potential to transition the installed base of autos from a oil based supply chain into a bio-fuel based one. The hope is that we can find a means to produce bio-fuels at reasonable price points. Setting aside my doubts about how hopeful that is I recently came upon this bit-of-info. I wonder if it’s are true.

Now the depressing rumor. The feds relaxed the fuel efficency requirements (the so called CAFE standards) for these cars as follows. In effect they decided that only the consumption of petrol would count in the ratings. So if the manufacture could make the case that 100% of his cars were using E85 rather then petrol he could calculate his miles/gallon based on the 15% of the fuel that was petrol. So rather than say 20miles/gallon he could claim about 120miles/gallon. Of course the presentage of of ethanol burnt wouldn’t be 100% but more like 20%; but that’s enough to provide a significant uptick in the CAFE numbers. For some car models, and for GM most of their models, this uptick is desperately needed. Otherwise they would have had to pay fines.

Just as an aside E85 isn’t as energy dense, about 30% less, as regular petrol, so it doesn’t get as good milage per gallon. One can only hope that’s reflected in the price at the pump.

We desperately need an exit strategy from the oil based transportation economy. Migrating that vast installed base is not going to be easy. E85 is one of the few scenarios out there that seems even slightly plausable. If the above is true it’s a shame. Since it suggests that GM’s only reason for advocating flex fuel cars was to avoid the tightening of the CAFE standards. Tightening the CAFE standards is, of course, about forcing the migration. So, if this is true it certainly taints the motives behind GM’s marketing campaign for it’s flex fuel vechiles.

Update:

Here’s an article about the so called Flex-Fuel Loophole.

The dual-fuel credit creates a stark difference. A flex-fuel 2005 Chrysler Sebring was rated at nearly 46 miles per gallon for the purposes of the federal mileage standards. Its actual miles per gallon running on conventional gasoline in a government test: Less than 28.

Honor Societies

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A year or two ago I read just a little about honor cultures and came away quite dissatisfied. The dissatisfaction has been stewing in my head.  Most of the literature about honor cultures is extremely dismissive or romantic, and mostly none of it talks about what problem the culture is solving.

So here’s a little model.  I think honor societies arise to solve a problem the elite have when the wealth distribution becomes extreme.   As this happens their position becomes increasingly risky.  The number of slots at the top keep shrinking.  The chance they will get back a slot if they lose it becomes vanishingly small.

Honor societies put a lot of calories into reputation management.  Stains on your reputation create substantial risk that you might fall out of the elite.  So the elite seek ways to formalize the reputation management.  That creates demand and the market will fulfill that demand with products, rituals, certification, etc. etc.   And, of course, the elite provide models for how to behave that are followed by everybody else.

Which sums up my guess about honor societies.

Much of what I read about honor societies confuses two things which we might describe as supply and demand. The problem outlined above is the demand – members of the elite desire things which will help to reduce the risk that they lose their status/reputation.   The rituals that arise; e.g. dueling, killing your daughters, fastidious adherence to this seasons fashion in manners, test prep services, etc. etc. are the supply.  Middlemen arise to fill this demand; and it seems to me that the literature about honor societies takes far too seriously the marketing brochures of these vendors.

There are plenty consequences of this model.  It predicts that the honor societies ebb and flow with the distribution of wealth.

The effect should be stronger in societies with large families; because only some of your offspring are going to survive into the next round.   If the family unit becomes the atomic economic unit rather than the individual; then honor killings (and the old French syndrome where a family can have their members thron in prison to protect the family’s honor) make more sense.

Note that increasing social mobility only makes things worse.  As long as the option space is shrinking and the wealth distribution is extreme mobility only makes the chance of a long hard permanent fall greater.

Note the perverse way that as the rich strive to capture a larger share of the total economic pie the risks to their positions only increase.

A society undergoing a transition, as the US has been for the last 35 years, toward a more severe wealth distribution should see some members of the elite figure out the new rules before others. I.e. some members of the elite will lobby the government to get tools that protect their social standing sooner than other.

Bummer, my Car is just a Software Applications

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John Robb asks if Cars are becoming O/Ss. Absolutely not. Operating systems are intermediaries between hardware and software applications – two sided network effects. Cars with 700 page users manuals are becoming applications. Applications with very weak network effects. (As an aside their collision avoidance systems can have network effects since the more cars/planes/etc. that adopt them the more effective they become.)

Failing to find a auto-OS they can rendezvous around is not a particularly good architecture for the auto industry. Retaining control over that software frustrates innovation on both the hardware and user facing sides. I’m reminded of the old story of Adobe, who wiped out a lot of in-house printer software teams. Maybe somebody will do the same to the in-house auto application teams. A similar mess frustrates scale and innovation in the real time control industry.

Of course the most amusing element of all this would be terminology. Imagine a future where you can swap out your car’s engine for an alternate just as we swap graphic cards and disk drives on computers today. Of course at that point you couldn’t sit down and drive away until you loaded up some new drivers.