Tag Archives: Economics

Productivity Gains from Fiber networks

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This is going to be a bit of a random post based on a seminar I went to today before a meeting with two of my professors. The idea is that an increase in internet speed will lead to productivity gains at corporations, which of course will lead to a growing economy. First, why do we care about this? Well, in small countries like New Zealand and the Netherlands as well as South Korea and Japan where there is an extremely high broadband penetration there is discussion of using public money to build fiber networks. What’s the difference? Broadband basically means anything faster than dial-up internet. If you have DSL, aDSL or cable, you have a broadband connection. What I mean by penetration, is that a high number of users in many different areas have access to broadband connections. This means there are enough providers that the majority of users are able to access the internet at high enough rates to be able to stream videos and download pictures at reasonable rates.  What is fiber though? Fiber optics, because that’s what it is, are networks that use lasers to communicate information rather than electrons. On a cable line there are changes in voltages that indicate a one or a zero, whereas with fiber it’s either a light on or off (one or a zero). This is able to be transmitted at a much higher rate.

Based on productivity data and information about different firms the study indicated that the largest productivity gain was seen in the shift between dial up and broadband. It also indicated that firms that used fiber and firms that used broadband did not see any difference in productivity. A follow up study indicated that if there was any difference it was related to size and to industry. This basically showed that there is no reason to subsidize fiber. That the government should not try to force telecoms to lay down fiber networks and that individual firms will that require fiber should pay for the investment themselves. The study also indicated that there may not be the applications, for firms, that require fiber networks.

Personally, and the author agrees with me, I think this leads to a chicken and the egg problem. If there is no fiber network how do you create an application with a wide enough audience that requires fiber when there are few customers to use it? It also puts a large burden on firms that require the network, especially if they are a smaller firm. Larger firms would be better positioned to afford the cost of the fiber line to their office as well as the equipment to utilize it. Although, in many cases they will have to worry about their old equipment from the broadband system they used.

In all, I felt it was a very interesting talk that discussed various problems with trying to get the government to subsidize the creation of a broadband network. The author also suggested if you are trying to stimulate the economy by building the network, there might be better targets for the subsidy dollars.

I’ll try to post next week. I’m heading to Munich tomorrow morning.

Technological Layers and Layer Ownership

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This ars technica article outlines in extraordinary detail what is at risk in the smart phone wars. It discusses the various different layers involved with the smart phone industry. These layers are extremely important. Control of a layer allows you to move into another layer and can help you extract monopoly rents* from those layers as well. My friend Sean was complaining about bloatware** earlier today that comes a computer supplier. They are actually attempting to get into a different layer. If a PC company is able to provide support which can allow them to get money from a customer on a returning basis, monthly or yearly, they can help ensure return purchases on more expensive purchases as well as getting a lot more money out of first sale. Additionally, the manufacturer may also be using the bloat ware they install to subsidize the cost of the product you bought. If a third party asks to have software pre-installed the manufacturer could ask for money to put it on, which may be passed to you as a consumer, so you could get a computer at a slightly lower price.

Ars Technica, isn’t the only group of people that views this phenomenon as a stack with different layers in it. This is actually an economic model as well. Which was used in the original Microsoft EU case explaining how these different layers can be leveraged to foreclose on a new market.

Another way of looking at this is in a traditional manufacturing sense. When you are making a car you have many different suppliers. You have paint, tires, batteries, steel, etc… There are several different ways to make it cheaper for you to produce a car. You can become vertically integrated, with a very high production level, where you make the steel, tires, paint and the full car. If you were extremely good at producing steel you would be able to get the steel at cost whereas traditionally you would have to pay a higher cost so the producer could earn a profit.

We can see this same sort of thing happen within IT. There is serious concern with corruption of content and content providers, like Comcast, purchasing a wide range of companies. If they control the material and access to the material they could control what people can access and impact society in a serious manner.

I don’t think that Comcast is going to be able to significantly impact the smart phone layers as they have with TV. However, a company like Google or Apple definitely could. Google is actually attempting to get into every single layer in this market. They tried to purchase wireless spectrum (they are also installing a super fast network in Kansas City), they are going to purchase Motorola, they have an OS and they are an app provider.

I think that other technology companies are aware of this. This is part of the reason why Google is being attacked on all sides. While until Google gets a hold of Motorola, they will be mostly in the top most two layers, OS and Applications. Google is clearly trying to move into every layer possible. This will allow them to have the greatest likelihood of a customer going onto a website and click an ad to give them money.

To prevent this, almost everyone is suing Google or some aspect of their technologies. Google is trying to get around this. They want the control.

I’m going to be gone for a little while. My brother is coming into town and I’ll be in Amsterdam for the next few days and then Munich this weekend. Hopefully I’ll have a post up Thursday or early next week.

Further Reading: The New ICT Ecosystem by Martin Fransman

*monopoly rents means higher prices from controlling the market. It allows a manufacturer to sell a product for a higher price than they would be able to do under a competitive market. Microsoft is able to do this with Windows. However to protect themselves from other OS providers undercutting their prices, MS sells the same OS at lower price points. They give discounts to students and charge a lower price in poor countries. This allows them to increase their monopoly to new markets.

**excess software which slows down a computer or smart phone.

Google’s Anti-Trust problems

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When Google announced the planned acquisition of Motorola Mobile investors weren’t exactly thrilled (see here here and here). Most of those investors are concerned over a lot of the issues i discussed in my last few posts (here and here), patents and potential issues with Android’s future. There are also discussions online about different types of antitrust and privacy probes that Google is being subjected to.

Some of these privacy probes are from the EU, such as the German probe into the Google Maps cars connecting to open networks and keeping records of these networks. Another recent issue comes from Google Ads itself. Where Google was advertising for illegal pharmacies. This one Google settled for $500 million, which may have been an effort to keep away antitrust investigators or at the very least prevent their attorneys from being distracted.

In the previous article it notes that European regulators are looking into Google’s ad practices to see if they are being anti-competitive. This could be a legitimate concern. Google has been purchasing a large number of ad related companies recently. However, in the long run I don’t think that purchasing of companies will make that much difference as it’s very easy to get into the internet ad game. New companies will be springing up on a routine basis.

I think that the EU will eventually look at Google in the same manner they looked at Microsoft in 2004. They were using an economic analysis tool called foreclosure. It’s a fairly simple manner of looking at markets and market share. Let’s say you have a monopoly in some market like desktop operating systems. You also know that the desktop market isn’t the only market out there, there’s another market related to servers. What are servers? Well they serve different functions but some of them are webservers, so when you go to a website that has some animation or data to be pulled there’s a webserver there that is connected to the website. This webserver pulls the required data to be displayed and in many cases actually creates the desired images. Other cases are for databases. The computer is extremely fast and can handle a massive amount of data processing at a time. Facebook for example uses a large number of them.

So, you already have control over the desktop market, and you want control over the server market. You can make it easier or harder for your desktop machines to connect to another machine. Basically you control the language in which that happens. You can make it easier for competing operating systems to decode your language. If you want to make it easy to connect a windows desktop to a linux server, you basically give the linux OS guys the lanugage and words to use to make the connection happen. If you don’t want them to connect you make it very difficult so they have to create their own rosetta stone to figure out how to connect to your machines. (I know this isn’t a very technical way to describe what’s going on here, but not everyone is computer literate that reads my blog)

Through this leveraging of your monopoly on desktop computers you can push your way into another market. In some ways Google is doing exactly this. In my next blog I’ll discuss a little bit more about what happened with Microsoft and how Google is attempting to foreclose on other markets using their search engine monopoly as a starting point.

Google’s Motorola Future

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According to Eric Schmidt of Google the purchase of Motorola Mobile is also it’s own foray into physical products. This is promising but it’s also dangerous for Google. While 98% of Google’s revenue comes from ads as of 2008, the majority of its revenue stream is free of a great deal of risk from patent infringements.  This is double true because the majority of Google’s patents are related to search and locating data. The products that it produces that people use on a regular basis have been designed around open standards which enables them to get around patenting and use licensing instead. If any of these technologies are accused of patent infringement Google can pull up the original source code, the version and the date. While this may be more expensive than the patent examiner finding this during the patent examining procedure, it still can save Google millions of dollars in patent suits. However, it hasn’t prevented them from having to pay a good deal in licensing fees despite this as I mentioned in my previous post.

Why is this a risk for Google? Well, every one of those patent lawsuits that were targeted at Motorola is now directly targeted at Google. Google is sitting on a huge pile of cash. Enough cash to outright buy Motorola. Additionally, any lawsuit that is directed towards an application of Android on a Motorola phone that Google will eventually be selling, is going to be directed towards Google now. Previously, when there was something infringing in an application on Android most of the risk was shifted towards the manufactures of the phones and away from Google. Google does have to pay Lodsys/Intellectual Ventrues for one of their patents which allows things to be purchased through apps. Like using the Android Market place. Google also has one other lawsuit related to Android at this point, which is related to a Java Patent. This is kind of an ongoing lawsuit, which Oracle has had to remove a blog post from a former Sun employee praising the use of Java in Android.

There’s got to be some sort of potential for payout for Google to take this risk though. Yes, I do think there is. Despite the fact that Google is going opening itself to direct lawsuit battles with Apple, it also allows its engineers another outlet for creativity now that Google has shuttered Google Labs. Engineers from the Motorola Mobile side will be able to have more freedom and the engineers that work in Google will be able to play more with Android to make a more superior product. Google will have direct control over their handset opposed to farming it out to HTC like they did with the Nexus One.

Are there any other risks besides the ones you’ve mentioned already? I think there’s one big one. Anti-trust case. Google is already in the cross eyes for an investigation. In my next blog I’ll discuss the case against Microsoft which the US and EU handled and then how the precedence could impact Google.

Google’s misstep with Patents

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Google has been in the news a lot recently related patents. Why? Well, I think they’ve managed their intellectual property in a naive way. Not an incorrect way. Just one that wasn’t keeping up with the behavior of competitors and trolls in the market place. To date Google has 782 patents, for a company that has produced as many innovative products as it has, this is not very many. Google has been around for 13 years now, founding in 1998. Comparing Google to Apple, looking at patents filed after 1998, is not a good comparison. Apple has filed and received 2600 patents. Sure they’ve been busy working on products and had an established market already. The iPod had already come out by then. Regardless, this indicates that Google has made a major misstep in regard to patents.

I fully applaud Google’s efforts to minimize the number of patents they own. It’s clear from a glance at the patents, they have focused their patents on the ability to search for data as well as data management. They are sorely lacking when it comes to most software. This is most likely why Google has licensing agreements with companies like Intellectual Ventures. To combat the growing web of lawsuits surrounding it’s handset manufacturers and developers Google has been on a spree of both purchasing patents (1,000 from IBM and 12,000 with the purchase of Motorola Mobile) and propaganda against software patents.

Motorola will give Google the patent expertise and experience at defending its patent claims as well as a huge number of patents it will need to defend. I believe this will create a great change in the way that Google deals with intellectual property in general. I’m not entirely sure this is a good thing either. Google may take the route of IBM which both patents things specifically so that other companies can’t patent them and publishes technologies in obscure journals which can be later used to invalidate patents as a form of prior art. However, Google could easily take the route of Apple. This would be extremely bad in my opinion. The route where Google continues to invest in new technologies but patents everything and then makes it difficult for other companies to use that technology. Google has the innovative capabilities to become a huge patent troll.

I think the only good that would come out of that is if Google went after patent trolls.With open source technologies some of the problems with software patenting does go away. As anything with an open source license is technically released into the public and becomes part of the prior art. Unfortunately, that’s also a huge problem with open source. It would be impossible for a patent examiner, who typically has 3 days to approve a patent, to actually find a given software technology which is already being used as open source.

Overall, I think Google is currently attempting to address its misstep with patents. I think that Google will push for patent reform for software patents. I think that with a large enough group of people, including billionaires like Mark Cuban, there could be a significant change in the manner in which software patents are issued. Gaming companies, search engines, and software developers need to work together to address this issue though.