SMART Letter #93
Pessimism without Paradox
February 27, 2004

SMART Letter #93 -- February 27, 2004
Some Rights Reserved by Creative Commons License - "east, west, south and north somewhat" -- -- 1-888-isen-com
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Status Report on WTF!?! A Gathering of Smart People
Pessimism Without Paradox
Ain't No Connectivity Oversupply at My House
If it's Funny it Must be True! by Scatt Oddams
Conferences on my Calendar
Creative Commons License Notice, Administrivia

** Come to WTF!?! A Gathering of Smart People, April 2-4 **
** It's your meeting! **
** WTF is happening at **
*WTF we're doing:
*Confirmed: Pepper's Policy Picnic with Robert Pepper,
* FCC Head of Strategic Planning
*Confirmed: Logical Layers and Law with Scott McCollough
* and James Seng
*Confirmed: Pedal-net with artist Yury Magic-Bike Gitman
*Confirmed: Our on-line legal rights with EFF attorney
* Wendy Seltzer
*Confirmed: Infrastructure for the next 20 years with
* Jerry Michalski
*Confirmed: Wireless access extravaganza with Dave Hughes
* and Gordon Cook
*Confirmed: How the U.S. is following telcos into
* bankruptcy with Porter Stansberry
*Confirmed: Grass-Roots Broadband in the UK with Malcolm
* Matson, Lindsey Annison and John Wilson
*Probable++:Telco Culture and Other Pathologies
* with Francis McInerney and Art Kleiner
*Probable: Misconceptions built into Product, Protocol
* and Policy with David P. Reed and Paul Kolodzy
*Probable: A debate on "IT Doesn't Matter" featuring IBM
* Director David Cohn and a rep from "IT Doesn't"
*Plus What's On our Minds and Crossing our Screens:
*Rants by Patrick "Alvarion" Leary, Martin "Telepocalypse"
*Geddes, Russ "Angry-Economist" Nelson, Michael "Sleepycat"
*Olson, Stan "Network Mercenary" Hanks, Steve G. Steinberg,
*Bob Frankston, Brough Turner, Lane Smith, Kenneth Tyler,
*Tom Mandel, Alan Freedman, and the rest of us.
*See for the latest.
*Register now. $350 cheap. And up. Up more after March 12.

Pessimism without Paradox
by David S. Isenberg

Columbia University Professor Eli Noam is a thoughtful
observer of the Communications Revolution, but he seems to
see the world through incumbent-colored glasses -- glasses
with dark lenses that are uncorrected for myopia. Through
them, the information economy appears as "a volatile,
cyclical, unstable mess."

Nevertheless, his recent Financial Times column, "Market
Failure in the Media Sector,"
usefully elucidates and extends one of the central themes
of The Paradox of the Best Network --
that marketplace nirvana does not necessarily follow from
rapid technology advances, that disruptive technology is
not a tea party -- it really disrupts things!

Noam's litany begins:
+ the dotcom bubble;
+ the telecoms crash;
+ the music industry bust;
+ the advertising downturn;
+ the e-publishing revenue stagnation;
+ the PC slowdown;
+ the wireless saturation;
+ the semiconductor slump;
+ the newspaper recession;
+ the R&D retrenchment.

Noam sees market failure, which "exists when market prices
cannot reach a self-sustaining equilibrium." He doesn't see
a paradox, because he fails to acknowledge the beauty of a
world where barriers to communication -- not to mention
music, news, video entertainment and product information --
fall away.

Noam sees that:
"The basic structural reason for this problem
[sic] is that information products . . . are
expensive to produce but cheap to reproduce and
distribute, and therefore exhibit strong
economies of scale with incentives to an over-
supply . . . prices for content, network
distribution and equipment are collapsing across
a broad front. It seems to have become difficult
to charge anything for information products and

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Noam vividly describes how disruptive technology's
"[IT companies will] cut costs, outsource, hedge,
diversify and use new processes such as
micropayments. They will try to innovate to
differentiate their products. . . . the main
strategy will be to consolidate and cartelise in
order to maintain pricing power. As a result,
prices and profits rise (as well as media
concentration), which will lead again to
expansion, entry, and by the same economic logic,
to a new price collapse, with a general downward
trend in prices . . . [and] price deflation
oscillating through the information sector will
drag down the rest of the economy . . . "
Grim stuff.

Noam's plausible and disturbing conclusion is that "as
countries rely more on information-based activities, their
economies become more volatile." [Note that an empirical
test of this statement is whether the economies of Korea,
Finland, Switzerland and Japan are more volatile than the
U.S. economy.]

Noam continues,
". . . governments will inevitably be drawn into
the business of stabilization. But this is easier
said than done. Classic approaches such as
Keynesian demand stimulation, or monetary policy
or industrial strategy do not address the core
problem of the information sector. That problem
is not inadequate demand or investment, but over-
supply, competition and structural price

I really like Noam's suggestion that:
"Perhaps the most effective thing that government
can do . . . is to help diversify the economy to
a more balanced portfolio. This means encouraging
manufacturing industries that are not closely
correlated with the health of the information
sector, often low-tech industries."
Good thinking.

Noam's incumbent slant shows most clearly when he says that
"[v]olunteerist activities such as open-source
software, shared information or public hotspots
will not solve the problem, because they, too,
are subject to the instability known as the
'tragedy of the commons' . . . "

He fails to admit the possibility that such activities
might actually seed a new stability. Ethernet was licensed
openly, but was not trampled by free riders. The Internet
itself, as commonly owned a "property" as can be, shows rock-
solid stability despite 20 years of triple-digit growth and
relentless trampling by herds of bad actors.

Sure, the Internet will destroy the telephone business --
but let's cheer, not wring our hands, as we email, blog,
and call halfway around the world for free. And that's not
the only plausible positive outcome -- there are more
moderate ones. For example, the open-source software
movement is maturing into an institution that could live
co-dependently alongside proprietary software much as the
Red Cross coexists with commercial hospitals, big pharma
and the HMO business.

There is a nice historical parallel in the oil business. It
too had high fixed costs and low marginal costs. It
struggled with oversupply in its first decades. It
destroyed the whaling industry. Once pipeline and refinery
were built, energy was practically free. As a direct
result, over the next decades sailing and horseback riding
morphed from essential businesses to hobbies, much as news
gathering and movie making appear to be doing today. New
business models take time. [Today you don't hear anybody
accusing the oil industry of fostering economic volatility,
do you? Well, do you?]

Noam's current article has provoked great dialog in
Blogistan. Jeff Jarvis's blog
pointed it out to me, and Om Malik
has some thoughtful comments of his own and pointers to
many others.

Eli Noam is one of the great policy minds of the
Communications Revolution. I'm becoming a Noam fan. But I
have another set of glasses that I wish he'd wear
occasionally -- they have rose-colored lenses, and they can
help you see over the immediate horizon.

Ain't No Connectivity Oversupply at My House
by David S. Isenberg

Eli Noam's FT article applies a "high fixed costs, low
marginal costs, incentives to oversupply" formula equally
to infrastructure and application. But wait a minute!
Nobody got incented to oversupply my house with

High fixed costs -- check! Low marginal costs -- check!
So where's my oversupply?

There's no oversupply because the market for applications
is driven differently from the market for connections.

The apps market, despite Noam's litany of troubles, is
robust, competitive and dynamically stable. Microsoft has
successfully cartelized a big piece of it, but its monopoly
is far from secure. Other players hold chunky positions in
app space (Google, Oracle, Yahoo, Symbian, etc.). There's
a wide diversity of smart platforms -- from cell phones to
servers -- for all kinds of apps, new and old. As
technology advances, its newest benefits flow unimpeded to
end-users. Sure there's oversupply. I've got four
computers sitting there wasting megaflops, a 160 gig disk
that's 1% used, six browsers, nine email clients, dozens of
programs I've never touched and a stack of writable CDs in
the closet. I love it.

The connectivity market marches to a slower, more
lugubrious cadence. What's wrong? The technology isn't
lagging. There are optical interfaces on US$49.00 DVD
players. Gigabit Ethernet comes standard on today's

Then why does mass-market-priced connectivity run at a mere
0.3% of a gigabit in the U.S.? In advanced nations, e.g.,
Korea, why does mass-market connectivity run at 2% of a
gigabit? In three or four years, 10-gigabit hardware will
be "popularly priced." But will carriers deliver this
progress affordably to their customers? No way.

Why not? It's not market demand. The adoption curve for
today's lame "high" speed connectivity is one of the
steepest in history. Customers want it.

So if it isn't affordable technology, and it isn't customer
demand, what is it? Let's return to Eli Noam's, "high
fixed costs, low marginal costs" formulation and ask what
makes Internet connectivity different.

I think it's the low marginal costs. They're not just low;
they're extremely low, and infinitely lowerable for all
practical purposes. Carriers can modulate faster, modulate
better, add another channel, or add another wavelength.
Because of this, if a carrier sells one fiber, or even one
"dry" (or sharable) copper pair, they might never sell
another. Connectivity providers have to restrict
connection speeds if they're to make a profit. But they
can't stop there. They must also keep competition at bay,
because if there's real competition some competitor surely
will offer better technology.

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This infinite lowerability works with a second property --
graceful degradation. Like the village green of old, where
all the townspeople turned their milk cows to graze, it is
always possible to add another user. And like the village
green, it is difficult to tell when adding one more user
causes the total utility of the connection to decrease. I
attended a conference recently where hundreds of packet-
grabbing geeks crowded onto a single T-1, which
occasionally became so congested that it was useless to
everybody. The good news was that unlike a village green
(where the grass, once overgrazed, might take years to
recover) the T-1 service degraded so gracefully and came
back so seamlessly that much of the time it was hard to
know which state was operative.

Graceful degradation theoretically lets me "share" my cable
connection with my neighbors. To the cableco, I'm
"stealing" customers. A cableco that added more capacity
would make it even easier for me to "share". It wouldn't
want to do that, because its goal is to maximize profits.

What kinds of network owner would be driven by a different
kind of goal: to maximize overall utility to users of its

It's no accident that fiber to the home (FTTH) is so slow
to catch on. Fiber is the most infinitely and cheaply
expandable of all connectivity media. It is not surprising
that (according to Light Reading
municipalities operate 32% of the FTTH in the United
States. Munis are interested in overall utility, not
in profit. Munis want their city to be a better place to

In summary, the telco (and the cableco) are not beneficiaries
of the Communications Revolution. They're victims, or maybe
villains. But they're not giving end-user customers what we
want, despite the fact that what we want is available.
This, then is the *real* market failure!

Fortunately there are alternatives. There are munis.
There are (still) CLECs. (Maybe some day some CLEC will
get that, "It's operational efficiency, stupid.") There are
other utilities. There's condominium network ownership.
There are networks owned by single customers. And there
are "volunteerist" networks without tragic instabilities.

I'm with you, Professor Noam; national economies are at
stake, global volatility is upon us. But let's not paint
with too broad a brush, and let's not declare "incentive to
oversupply" until I have price competition (or a public
spirited provider) for 10 gigabit-per-second connectivity
at my house.

If It's Funny It Must be True
by Scatt Oddams

Sometimes people don't even realize when they're telling
a howler.

For example, Condoleeza Rice never got it when she said,
"When you are dealing with secretive regimes that
want to deceive, you're never going to be able
to be positive."

Here's another one. Howard Dean explained why he hired
Roy "Bellhead" Neel to be Joe Trippi's boss:
"What we need is decision making that's centralized."
Dean "got it," but it took him about two weeks.

Here's a third example: The Prez sez:
"The illiteracy level of our children are appalling."
Here's hoping he gets the humor on the morning of
November 3.

Gotta run!

[Scatt Oddams is cartoonist in residence at the SMART
Letter. You can reach him at oddams at . . .
He's currently mulling whether to make an appearance at


March 12-16, 2004, Austin TX. Wireless Futures (A
conference within the South by SouthWest multi-palooza).

April 2-4, 2004, Westchester County NY. WTF!?! A Gathering
of SMART People. The very first gathering of The Smart
People, produced by, LLC and brought to life by
YOU! Everybody who wants will get stage time for a
favorite rant, a show-n-tell or whatever. Special
presentations. Mystery guests. Extracurricular activities.
Puzzles, Paradoxes, Prizes. $350 cheap.
And up. And up even higher after March 12.
Find out more (and register) at

June 24 & 25, 2004, Santa Clara CA. Supernova. Kevin
Werbach brings the advocates of decentralization together.

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