Truck and Barter: 13th in the World is Market Failure?

February 23, 2005

13th in the World is Market Failure?

By Ian

According to Lawrence Lessig, it seems that being 13th in the world for broadband penetration constitutes "market failure":

The private market has failed the US so far. At the beginning, we led the world in broadband deployment. But by 2004, we ranked an embarrassing 13th. There are many places, like Philadelphia, where service is lacking. And there are many places, like San Francisco, where competition is lacking.

Well, according to the OECD figures, the US is apparently 11th in terms of "Subcribers per 100 Inhabitants"here). These were the numbers that got some folks worked up about about a "broadband gap" in the US, but I'm not entirely certain these are the numbers Lessig cites.

But look at the list of the top 10: Korea, Denmark, Canada, Netherlands, Iceland, Switzerland, Belgium, Japan, Sweden, and Norway (in that order). Notice anything about these? Hint: Canada is the outlier. That's right, sheer size of a country matters, as does the distribution of population. Why did broadband start in cities first? Because the marginal cost of extending service to the next person is much lower: wiring one building can get you 200 clients, as opposed to rural areas or low-incomes neighborhoods. Canada's landmass is less significant when you consider where the vast majority of people live (land per capita is great, but density within certain borders is high). When compared to the relative size and dispersion of population within the United States, I'd say the slip from 1st to 11th should have been expected, and that we should be impressed that we haven't been overtaken by, say, big leaps in economic status in a small country like Ireland, or Britain, or France, or the historically-technologically-inclined Germany, or a whole host of other countries that face far smaller problems in terms of space but are on par with the US in terms of technical evolution.

This "failure", then, is the reason Lessig wrangles anti-communist crusading into his description of those who propose "anti-municipal broadband" regulation. Of course, the rhetoric is merely to draw people on the other side from himself as mildly nuts. Numerous points ought to be made about his assertions on things like private roads and police departments, but that's not my focus here.

No fan of regultation, I, even if it is under the guise of protecting industry, Lessig's argument is simply a different manifestation of the same beast. He complains that such regulation is the result of lobbying monies, then goes on to suggest that the solution is government expenditures of taxpayer money. At least the lobbying firms spend private money.

Even ignoring the fundamental argument about whether the government should or should not be, in a sense, competing with the private sector by offering broadband service, a government provided service would be a horrendous deal for current taxpayers, and a liability to future ones. These projects continually suffer from prolonged delays and massive cost overruns. Add to that the problem of upkeep. Companies that invest in extending broadband have to invest in maintenance and customer relations. To make a natural parallel, we might investigate how have cities done with keeping their electricity grids up-to-date and responding to customer needs. The reward structures for public service don't focus on reacting to customer needs the way a private company would, which is a serious liability when the level of technical expertise is so high. The only people who would consider a job with a county after being trained as electrical engineers are most likely those that are looking for the buffers against regular hiring and firing practices inherent in the private sector. Should taxpayers pay to make sure there are skilled technicians at the other end of a phone line?

Institutionally, the government is almost uniquely ill-equipped to deal with providing broadband and wireless service. Almost the very nature of government is anathema to an industry that flourishes on speed, dynamic learning, and constant change. With the notable exception of Japanese toilets, what was the last major developement in home water distribution? Indoor plumbing seems to still be the hot news, since it's not that common the world over. How about electricity? The Alternating-vs.-Direct Current in homes debate was hot stuff, but I don't seem to recall what was on the cover of "Electricity Today" magazine. Or phone service? Well, of course, there's some news there. Certainly we can find instances where the government, after marking phone line access as a necessity, has kept pace with the huge changes in the way the world uses phones. (The Do Not Call legislation was debated like the phenomenon of telemarketing didn't appear until late 2003.) Governmental decision-making is slow and ponderous on purpose.

The speed of "broadband" is continually ramping up (remember when ISDN lines were seen as almost impossibly fast? Me either, and that's my point precisely) while its cost is dropping. But there's a good reason for this: the demand for it is strong enough to warrant research and development outlays. If the access is ubiquitous and the cost almost nothing (in terms of making taxpayers take the hit for running lines out to the farthest reaches of Amish Pennsylvania or wherever), then what reason do companies like Verizon have for finding better and cheaper and faster methods of delivery? Who wants to pay twice for broadband access; once out of my paycheck by force, and once by choice to get a cable modem even when the phone company pipes in DSL?

Lessig also fails to consider that current governmental habits contribute to a lack of penetration in some areas. Should a company decide to make the capital investment in extending broadband despite the higher per-client expense, there's no guarantee that it will get to have sole ownership of that line. Time and again governments have decided that companies must share lines with competitors in the hopes that doing so will "enhance competition." Knowing this, a company like Verizon will understandably shy away from making the investment. Were such a sharing plan enforced later, the outlay is essentially a sunk cost, but since the forced sharing is documented and part of the expected future, the consideration is taken into account when planning investments.

FInally, future changes are poised to make such investments almost pointless. While it hasn't been as quick to arrive as they themselves claimed, WiMax is almost certainly coming soon. Wireless that can reach 30 miles (and more in the future) will radically change the cost of extending broadband access. Then there is the possibility of broadband over power lines (an uncertain idea, and one that faces an uncertain future). Government provision would mean years-long planning and building for a system that could well be outdated by the time it is finished. And the benefit (ubiquity of access) is likely to be answered elsewhere, and within the timeframe of numerous municipal projects. This would simply saddle residents with paying for antiquated service that provides no benefit; unless you think that these new workers wouldn't quickly organize to prevent layoffs and enforce pay hikes on par with the rest of municipal government).

For a more eloquent discussion (with a fair bit more detail, as well), try this article, which I've linked to before.

Posted at February 23, 2005 05:04 PM

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