Archive for June, 2013

The Great Disrupters of Silicon Valley

Last week, the Pepperdine School of Public Policy gathered an eclectic crew of economists (including your fearless blogger) and high-tech entrepreneurs to discuss tech policy over dinner in Silicon Valley. Among the entrepreneurs were startups like mobile-payment company Ribbon, voice-recognition-software maker Promptu, and mobile-platform provider Appallicious, as well as established players like portable-device maker Lab126 (think Kindle).

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Hit the Dish before collaborating

These entrepreneurs shared stories about spontaneous collaborations being struck over morning coffee at University Cafe. (Note to joggers: After taking out University Avenue on day one of your trip, make sure to hit the Dish near Stanford on day two.) To succeed here, one needed to tap into this vibe. Unlike the keep-your-head-down mentality of Washingtonians, strangers in Silicon Valley are inclined to interact based on a common mission to design the next great thing.

After being plied with a local Cabernet (or three), and without any prior warning, the economists were asked a difficult question: What role, if any, does tech policy have in promoting startups like the ones gathered around the table?

To understand what a pro-entrepreneur policy might look like, one must first understand what it means to be a tech startup. These hyper-caffeinated folks think of themselves as “great disrupters,” tearing down the establishment and building back the world in their vision.

It is no accident that one of the invited economists was writing a book titled Big Bang Disruption, a preview of which appeared recently in Harvard Business Review. I presume I was invited because my recent book grapples with communications policy—either that or my charm. In any event, disruption and how to promote it quickly became our focal point.

The entrepreneurs treat great disrupters like San Francisco-based Uber as demigods; there is no higher status in Silicon Valley. Uber has revolutionized taxi service by offering higher quality (there is no such thing as a smelly or noisy Uber sedan), and by fostering trust in a driver (through a rating system).

One can’t help rooting for these great disrupters. Indeed, it is the American way. But is there any role for government in promoting their efforts?

Not only did Uber invent a better mousetrap, but its success also depended on its ability to rally its customers to oppose regulations that sought to protect incumbents.   Local regulators like the D.C. Taxi Commission did everything they could to thwart Uber, including most recently seeking a requirement that Uber share ride data with the Commission for analysis and planning purposes.

What Uber needed was not a leg up, but more of an end to the monopoly protection afforded to its rivals. The same frictions delayed telco entry into video for years, as captured municipalities sought to protect incumbent cable operators—for example, by requiring entrants to provide services (such as the purchase of street lights or the provision of additional parking lots for public libraries) unrelated to the provision of video. In the 1950s, the FCC was so beholden to the old Bell System that it was willing to argue that attachments like the Hush-a-Phone presented a physical danger to Bell’s repairmen.

Once the underbelly of regulation comes into focus, the appropriate policy for promoting tech startups starts to take form: Rather than looking for ways to subsidize the next big disruption—market forces have a way of inducing these things naturally—policymakers should look for ways to restrain the authority of regulators, who often serve the whims of incumbents or special interests.

When it was my turn to answer the policy question, I took a swig of wine and lamely uttered something like: “Economics doesn’t provide much of a justification for an affirmative role of government in selecting the next big thing. The only possible exception is for basic research, which generates ‘spillovers’ or benefits to third parties that might not be fully captured by the entrepreneur, causing the market to generate too little investment there.” One wonders why economists don’t get invited back to cocktail parties!

Driving to the airport, I thought of the “right” answer to the policy question, and how I could have used their demigod (Uber) as an example of how regulation can often be less than helpful. Hopefully, it’s not too late to start that conversation. Let’s have it in a café.

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Wireless Competition Under the Senate’s Microscope

The future of wireless connectivity.

Today the Senate will convene a distinguished panel of experts to discuss the state of wireless competition in America. Although it is trendy among the cognoscenti to complain about the wireless industry, the reality is that wireless competition is vibrant here, and U.S. carriers are leaving their European counterparts in the dust.

A common refrain among those calling for regulators to “level the playing field” is that two carriers—AT&T T +1.8% and Verizon—are running away from the pack, due to their allegedly superior spectrum holdings. The resulting imbalance in competition can be remedied, they claim, by capping the spectrum holdings of the larger carriers and steering newly available spectrum to smaller carriers. Any relative improvement in the smaller carriers’ networks would attract more customers, which would reduce wireless concentration.

One problem with this story is that wireless concentration—a very fuzzy indicator of competition when it comes to wireless services—is not climbing as predicted. In fact, U.S. wireless concentration as measured by the FCC has held steady since 2008, indicating that Sprint and T-Mobile are not losing ground. Indeed, 2012 was a particularly good year for these carriers, as both enjoyed significant subscriber gains. T-Mobile recently completed its merger with MetroPCS, giving the combined company access to more subscribers and more spectrum.

Perhaps the best indicator of the smaller carriers’ prospects is the bidding war for Sprint that has erupted between Softbank and Dish Network. If Sprint stood no chance to compete with AT&T and Verizon due to its allegedly inferior spectrum, then these savvy investors would not be so bullish about Sprint’s future. Put differently, Sprint’s spectrum holdings are valued dearly in the marketplace despite their “high-frequency” nature.

The same voices calling for intervention will likely cite lower wireless prices in Europe as proof that reducing concentration will bring lower prices. But a new study by GSMA, a trade association representing 800 of the world’s mobile operators, concludes that “Europe now lags far behind the United States in the deployment of next-generation mobile technologies and the advanced services made possible through mobile,” rendering any straight-up price comparison unreliable. The study found that U.S. mobile customers consume five times more voice minutes and nearly twice as much data as their European counterparts, and average mobile data connection speeds in the United States are now 75 percent faster than those in Europe.

By convening a panel on the state of wireless competition, the Senate must be careful not to miss the forest for the trees. The phrase “wireless competition” implies incorrectly that wireless carriers compete exclusively among themselves. New data suggests that wireless competes increasingly with wireline connections such as cable modem and DSL for broadband customers. According to a consumer survey by Leichtman Research Group, hundreds of thousands of Americans canceled their home Internet service in 2012, taking advantage of the proliferation of Wi-Fi hot spots and fast new wireless networks accessible to smartphones and tablets. Indeed, more U.S. households stopped paying for home Internet subscriptions (and relied on wireless access instead) than cancelled their pay-television subscriptions (and relied on video over Internet services).

How quickly will wireless overtake wireline broadband connections? Dish’s chairman is projecting that as many as a third of all Americans one day could find it more efficient to get their home Internet service wirelessly; Cisco IBSG recently projected that up to 15 percent of U.S. consumers could “cut their cord” in favor of a mobile data connection by 2016; and Samsung recently predicted that mobile networks could supplant wireline broadband by 2020.

The oncoming battle between wireless and wireline Internet providers suggests a more permissive attitude toward wireless concentration. For those who can’t (or won’t) recognize this “inter-modal competition,” any increase in wireless concentration is mistakenly perceived as bad news for consumers. The quest to promote wireless competition via spectrum policy could result in less competition where it matters most.

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