Breaking into the Regulation Market

In response to the new Tyler Cowen and Alex Alex Tabarrok piece on information asymmetry, Arnold Kling wonders if:

It becomes harder for new entrants to break into a market governed by reputation than one governed by regulation. Obtaining a license from a regulatory agency might be easier than obtaining visibility in a rating system.

My response:

Wouldn’t it be easier to break into the reputation based system? Assuming all sellers must attract buyers, a seller must build reputation regardless, which is usually done through word of mouth. However, immediately a buyer faces an information asymmetry problem. Review systems announce the reputation of a buyer reducing this information problem and the cost to obtain reputation. Still, in a license system, the seller must incur an additional fixed cost. In total, license system faces the cost of regulation and the cost of information.

The Genesis of the Career Entrepreneur

I have begun in earnest to read through Annalee Saxenian’s “Regional Advantage,” charting the computer industry’s genesis in both Silicon Valley and along Boston’s Route 128. As she explains, the culture of work and the resulting firm structures in Silicon Valley differed significantly from those in Boston, giving it critical advantages to become the preeminent region of technology development.

Even in the early days of the 1950s and 1960s, the West Coast had a far more open and decentralized network of employees, which contributed to intense knowledge sharing. Employees moved between competitors and would even help arch rivals solve problems. By way of contrast, Boston’s regional structure was based on hierarchical and independent firms. Knowledge in this region was located vertically within the company, which severely limited its ability to spillover and create new opportunities.

According to one executive:

“Here in Silicon Valley there’s a far greater loyalty to one’s craft than to one’s company. A company is just a vehicle which allows you to work. If you’re a circuit designer it’s more important for you to do excellent work.” [emphasis added]

From the beginning, the culture of work in the Valley was ad hoc and fluid. Engineers, programmers and other technical manufacturers became their own career entrepreneurs. Silicon Valley thus presaged by decades the labor market that we increasingly find ourselves in that has become a cause of concern. As a side comment, Saxenian mentions that many Silicon Valley workers far more rooted in the region than others. While the company man of the 1950s might move among the various arms of the firm to gain experience, which could be in different states, in the Valley, you would just move down the street. To me, that speaks volumes to the importance of regional knowledge hubs.

Saying “If You’re Not Paying, You Are The Product” Is Wrong

This week I heard the phrase that haunts tech policy. You know it. If you’re not paying for the product, you are the product. 

Concise? Yes. But wrong.

The product is actually an ad, positioned on the site and tailored for you. Countless weeklies across the US run under a free model and have done so for decades. The New York Times has defrayed the expense of printing by ad supplement since its beginning. And the first newspapers, which popped up in the trading ports of Venice and Amsterdam, helped merchants sell excess to offset expensive parchment.

But it makes sense why the pithy phrase has staying power.

Mull it over again.

If you’re not paying for the product, then you are the product.

Naturally, we wonder next, wait, am I being violated? It is a tradeoff dripping with ethical accusations. Steven Pinker gives us one way to understand it in “Better Angels of Our Nature,” when he reviews the work of political psychologist Phillip Tetlock:

Tetlock distinguishes three kinds of tradeoffs. Routine tradeoffs are those that fall within a single relational model, such as choosing to be with one friend rather than another, or to purchase one car rather than another. Taboo tradeoffs pit a sacred value in one model against a secular value in another, such as selling out a friend, a loved one, an organ, or oneself for barter or cash. Tragic tradeoffs pit sacred values against each other, as in deciding which of two needy transplant patients should receive an organ, or the ultimate tragic tradeoff, Sophie’s choice between the lives of her two children.

Are we selling a kidney? No, we are giving a small part of our attention for an ad that won’t be remembered 60 percent of the time. Advertising ethically can be done, as Derek Powazek, who helped to build Technorati, points out:

There are ways to do [ad supported media] while still maintaining respect for the consumers. We’ve been doing it for years.

Saying that you are the product if you aren’t paying for it, disintegrates under just a minimum of scrutiny. It’s time to get rid of that phrase.

Telecommunication’s Regulatory Cat and Mouse Game

My former colleague Jon Henke has reviewed “The People’s Network: The Political Economy of the Telephone in the Gilded Age” for Reason. I haven’t read the book, but his take has placed it on the top of the list. As anyone who has read about the history of telecommunication regulation, policy formation is and has been a cat-and-mouse game between regulators and the regulated. Jon explains:

The history of telecommunications is a long story of progressives and populists demanding “public interest” regulations that produce and protect monopolies, followed by progressive and populist demands for regulations to fix the problems that their earlier regulations created. At each step, activists were coached and coaxed by the political and business interests in question.

What can this history tell us? A lot, actually:

Progressives today are traveling the well-worn policy path of trying to fix old mistakes by making new ones. They demand competition while promoting municipal public utility broadband systems. “Open access creates competition,” they claim, never minding that the unbundling requirements that force providers to lease their systems to competitors only create “competition” by turning an existing provider into a de facto monopoly. The goals of the modern net neutrality movement—which in effect seeks to prevent Internet Service Providers from providing anything but lowest-common-denominator service—might as well adopt the same early slogan of monopoly-era AT&T: “One System, One Policy, Universal Service.”

The urge to make carriers a public utility or regulate them as such remains deeply embedded in telecommunications policy today. After all, if the telephone networks required the guiding hand of regulators, how could the Internet possibly work without regulations to mandate interconnection, to require settlement-free peering, to set prices, or to dictate which services providers are allowed to offer?

And yet the comparative regulatory anarchy of the Internet does work. We all enjoy a global network of independent systems that interconnect almost entirely through contractual agreements. And yet activists seem determined that, in order to prevent gatekeepers from “destroying the Internet,” the Federal Communications Commission must become the gatekeeper of the World Wide Web.

My post on the Satellite Television Extension and Localism Act (STELA) hits on a couple of these key issues for video law. Changing consumer preferences is ultimately undoing the myriad and complex rules put in place by the FCC under the guise of public interest. Like so many other areas of telecommunication law, the laws governing video must be updated to meet the 21st century marketplace.

Demand Destruction Signals Long Term Shift in Energy Markets

Recent estimates suggest the US might meet the Kyoto Protocol because of natural gas substitution. Slate is reporting on a related trend, energy demand destruction:

So strategic demand reduction and management are part of the industry’s operating system; demand destruction is not. Demand destruction occurs when you eliminate or substantially reduce the need for the resource on a near-permanent basis. Somebody trading in a Chevrolet Malibu for a Nissan Leaf won’t be buying any gasoline for the next 10 years. Replacing a 30-year-old air conditioner with a more efficient new one will significantly reduce the power associated with cooling. Innovations in technology and business models can hasten the process of demand destruction—think of how the advent of iTunes cut into the sales of CDs. And there are signs that this is beginning to happen with electricity.

Solar Industry Innovates With Contracts

Innovative products are not necessarily followed by broad adoption. There needs be a business model behind it.

Lynee Kiesling over at Knowledge Problem has a post on the solar industry, which is interesting throughout. She cites a New York Times article which helps to explain part of the mystery of innovation:

The reason that the residential solar industry has begun to buck this general trend is because, instead of appealing to our heartstrings, it has begun to appeal to our checkbooks. The innovation that made this possible — selling solar services instead of solar panels — was pioneered in the commercial market by Jigar Shah. Though Shah was trained as a mechanical engineer, his most important bit of engineering was financial: in 2003, he started a company called SunEdison, which offered something called a solar-power purchase agreement (P.P.A.) to commercial customers.

Instead of having to pay all of the money for a solar installation up front and then having to carry that payment as a debt on their balance sheets, which no publicly traded company wants to do, companies like Whole Foods and Staples contracted with SunEdison to have solar panels put up at no initial cost. SunEdison then charged the companies for the amount of energy that the panels produced at a fixed rate for a period of 20 years — a rate that was less than what the companies were already paying the utilities, and that would ultimately save them even more money as energy prices inevitably rose over time. The bold stroke was that they were selling the power, not the hardware.

And there you go. Deregulate the whole thicket of laws surrounding electricity, put residential customers on a payment plan and solar becomes a much more attractive investment. Financial innovation and credit markets can be disruptive, if you let it.

A Great Paragraph from Henry Jenkins

From this article:

History teaches us that old media never die. And before you say, “What about the eight-track,” let’s distinguish among media, genres and delivery technologies. Recorded sound is a  medium. Radio drama is a genre. CDs, MP3 files and eight-track cassettes are delivery technologies. Genres and delivery technologies come and go, but media persist as layers within an ever more complicated information and entertainment system. A medium’s content may shift, its audience may change and its social status may rise or fall, but once a medium establishes itself it continues to be part of the media ecosystem. No one medium is going to “win” the battle for our ears and eyeballs.

Notes & Quotes from Daniel Boorstin’s “The Republic of Technology”

  • “An athlete of steel and iron with not a superfluous ounce of metal on it” exclaimed William Dean Howells when he recalled the gigantic 700-ton Corliss steam engine that towered over Machinery Hall at the Philadelphia International Exhibition.   A festive crowd cheered as the engine set in motion a wonderful assortment of machines—pumping water, combing wool, spinning cotton, tearing hemp, printing newspapers, lithographing wallpaper, sewing cloth, folding envelopes, sawing logs, shaping wood, making shoes—8,000 machines spread over 13 acres.  Others, especially visitors abroad were troubled by the American spectacle.  Said Thomas Henry Huxley: “I cannot say that I am in the slightest degree impressed by your bigness or your material resources, as such. Size is not grandeur and territory does make a nation. The great issue, about which hangs a true sublimity and terror of overhanging fate, is what are you going to do with all these things?” p 1
  • For the most of human history, the norm had been continuity. Change was news.  Daily lives were governed by tradition. The most valued works were the oldest. The great works of architecture were monument that survived coming antique. Furnishings became increasingly valuable by becoming antique.  Great literature never went out of date. “Literature,” Ezra Pound observed, “is news that stays news.” he new enriched the old and was enriced by the old. Shakespeare enriched Chaucer. Shaw enriched Shakespeare. It was a world of the enduring and the durable. p 4
  • The importance of a scientific work, as the German mathemtician David Hilbert once observed, can be measured by the number of previous publications it makes superfluous to read. p 4
  • Each political revolution has its ancien regime and so inevitably looks backward to what must be redressed and revised. Even if the hopes are utopian, the blueprint for utopia is made from the raw materials of the recent past. p 22
    • Like each political revolution, every technological revolution has its ancien regime, an order that must be overthrown for the new.
  • We cannot forecast what will be the ruiles of any particular new world until after that new world has been discovered. It can be full of all sorts of outlandish monsters; it could be ruled by diabolic logic. Who for example coulpd have predicted that the internal-combustion engine and the automobile would spawn a new world of installment buying, credit cards, franchises, and annual models—that it would revise the meaning of cities and tranform morality by instigating new institutions of n-fault reparations? p 24
  • Gamut Fallacy:
    • “Gamut” an English word rooted in the Greek “gamma” for the lowest note in an old musical scale, means the complete range of anything.  When we think, for example, of our future political life and our governmental forms, we can have in mind substantially the whole range of possibilities… But the history of technology, again, is quite another story. We cannot envisage, or even imagine, the range of alternatives from which future technological history will be made. p 31
  • When looked back upon, the series of events between 1776 and 1789 are interesting not so much for the rationalized political ideology, but for the political technology—the application of English ideas to the circumstances of time and place. p 49
  • The Declaration of Independence was not like the Declaration of the Rights of Man and the Citizen or the English Bill of Rights, it was a set of grievances. It was a list of practical problems that the Crown had failed to properly consider.
  • The Swiss writer Max Frisch once described technology as “the knack of arranging the world that we don’t have experience it” p 59
  • The Census of 1890 declared that there was no frontier line.  In 1893, Turner published his thesis on the Frontier, connecting American virtue with the openness of the country. Once manifest destiny had ended, the country soon closed itself off to others. In 1917, Congress adopted a comprehensive immigration law which required a literacy test, added new classes of exclusions and established a barred zone in the Southwest Pacific which excluded immigrants not already kept out by the Chinese Exclusion Act of 1883 and the Gentleman’s Agreement of 1907-1908. p 78-83

Don’t Believe Everything you Hear

It seems intuitive that the rise of the Internet and social networking sites has made us all more lonely. Because we are all constrained with our time and because online connections seem shallow, it logically follows that the more time we spend online in lieu of face-to-face interactions, the more lonely we are. Though, the empirical evidence is not as clear on this as we have been lead to believe.

Fortunate or not, I remember the days when a phone call across the country to family was expensive and short. Now, I regularly have free conversations with friends a couple of continents away.  Advances in cameras and expanding bandwidth speeds have made those experiences more immersive and intimate. Simultaneously, social networking sites now allow us to more easily stay in touch with acquaintances, helping us to build and maintain much larger social networks.

Sociologists and psychologists tend to agree,

His new book, Still Connecteddefinitively refutes the Marche thesis that Americans have grown more detached. Drawing on 40 years of social surveys, Fischer shows that the quality and quantity of Americans’ relationships are about the same today as they were before the Internet.

I am not worried…

For all our talk of self-reliance and rugged individualism, Americans are actually far less likely to live alone and enjoy key forms of personal autonomy than people in other countries, including France, Germany, Sweden, Denmark, Britain, and Japan. What distinguishes Americans is not that we are more isolated, but that we spend more time and energy worrying about whether we are.

Notes & Quotes to Ithiel de Sola Pool’s “Technologies of Freedom”

  • A public network interconnecting computers must be license and, according to present interpretations of the 1934 Communications Act, may be denied a license if the government does not believe that it serves “the public convenience, interest, or necessity” p. 3
  • The Constitution, in Article 1, Section 8, gives the federal government the right to regulate interstate commerce, but in the First Amendment, equally explicitly, it excludes one kind of commerce, namely communication, from government authority. Yet here is the FCC trying to figure out how it can avoid regulating the commerce of the computer industry (an authority Congress could have given, but never did) while continuing to regulate communications whenever it considers this necessary. The Constitution has been turned on its head. p 3
  • The phrase “communications policy” rings oddly in a discussion of freedom from goverment. But freedom is also a policy. The question it poses is how to reduce the public control of communications in an electronic era. A policy of freedom aims at pluralism of expression rather than at dissemination of preferred ideas. p 8
  • Communications policy can be mapped on a few central questions
    • Definition of the domain in which the policy operates
    • Availability of resources
    • Organizations of access to resources
    • Establishment and enforcement of norms and controls
    • Problems at the system boundaries p 9
  • The physical printing plant was potentially hostage to state action and so the physical