Lack of Net Neutrality will be a competitive liability in the future for the US

Net Neutrality could be dead in the US¬†and I think that this creates problems for companies that do business in other parts of the world. Or rather, it creates incentives for companies based in the US to focus on non-US markets for conducting business. There are several reasons for this. Let’s take this from a Netflix perspective, assuming they were able to get the same catalog they currently have in the US and took it into Europe (this has been difficult for US companies while it’s been easier for EU companies to come into the US – see Pandora and Spotify as references). Let’s assume that can happen and they have they opportunity to continue to work in one region or the other.

The EU has recently enacted end-to-end Net Neutrality as the law of the land. So, Netflix traffic cannot be slowed down because of the volume. It cannot be slowed down because it is Netflix traffic, all traffic if it needs to be groomed happens at the same time (likely random or everything gets slowed down). Netflix cannot be charged by the ISP to ensure specific speed to guarantee quality of product, if Netflix wants to control this, it’s up to them (they could manage this through increased buffering before the video starts, for example). The average internet speed is significantly higher than in the US, so the quality will be higher and the need for buffering lower, because the speed can account for dropped packets much more effectively. This means if they charge 8 Euros a month, they are able to keep more of that.These conditions would also apply in Argentina.

In the US, Netflix traffic is now subject to the whims of the ISP. the ISP can slow down traffic based on the time of the day, based on the source of the traffic (using deep packet inspection). They can and have charged Netflix for equal access as, for example, Comcast Xfinity’s streaming service. The US has some of the lowest average internet speeds in the industrialized world. Netflix charges $8/month they have to pay Comcast to ensure that their service meets their end users requirements.

As a company that makes money based on the fact that they are able to deliver high quality content (where the price of said content is continually rising), I would prefer to operate in the EU rather than the US. I will have significantly less issues with the ISPs because they can’t discriminate my traffic and I won’t have to pay to make sure that they do not discriminate my traffic. This means that my quality will increase and my cost per user will not increase as it will in the US. I would begin focusing on providing local language content as well as the best content I can provide from the highest quality sources in the world.

As we start moving towards higher speed requirements in our applications, this will become a larger problem. I know of people online that have issue streaming up to Twitch and Mixify as well as streaming the content to their computer. This is a problem now. We will be moving into significantly higher quality video and games (PS4 streaming a game to your console, that will require a lot of bandwidth and low latency $$$$$). Furthermore, if we start having more tele-medicine we’ll need higher quality video feeds to ensure best results.

These are all examples of applications we know of that will suffer from a lack of net neutrality. As we get people that develop applications for gigabit connections, we’ll start to see net neutrality as paramount. These companies will not be able to afford the required costs for the internet speeds required for effective applications.

This means that the EU and other net neutral countries may become the source of innovation for these applications or companies that create them in the US will need to move to markets like the EU for a user base that can fully exploit their application.

We’ll effectively be playing on an Xbox 360, when high quality PCs are out there. We’ll be at a serious disadvantage.

Europe in the Driver’s Seat

Today I woke up to wonderful news. CERN has discovered the Higgs Boson particle, the so called “God” particle and the EU parliament has voted against ACTA. This is a great day for science and for freedom of expression.

What do these mean? Well, the Higgs particle is supposed to be the particle that gives everything else mass. It is the actual building block that everything in our universe is supposedly built upon. Why do I say supposedly? Well, the discovery is with a 5 sigma confidence. This is a really good, but in many cases they like to have 9 sigma. What does that mean in layman’s terms? So most testing is looking for a probability of less than 5% that this could happen by pure happenstance, or random error. This means that 95% of your data bear out the test your trying to answer. This happens around 2 sigma where sigma represents a standard deviation. Most products are made with safety specifications around 2 sigma, maybe three sigma (99.73%). The values that we’re talking about are so high, that you’re starting to get into the range of lottery winning (or plane accidents for that matter) likelihood for 5 or 9 sigma. With such high confidence you actually start to run into a greater likelihood of missing the actual signal than for it to not actually be there. You are being so strict on your data requirements that something that actually is the real signal is ignored by your data set.

Does this change my daily life? No not at all. We won’t be able to do anything functional at this level for more than a century if ever. We’re still working on the results of Einstein’s theories and how to apply them. We haven’t really gotten quantum computing working or any of the other cool things we’re working on (teleporting light and particles for example). However, it does give us a greater understanding of how the universe works and we’ve had to develop a lot of new technologies to detect these particles. The technologies could be very useful in the future for completely unrelated applications.

ACTA is a very different story. I’ve talked about it in the past and mentioned how much of a risk it was to the openness of the internet and to our society as a whole. The largest political body in Europe has decided to reject ACTA. The vote wasn’t even remotely close. Our hard work has paid off and the treaty is effectively dead. In the US it hasn’t been ratified by the Legislative branch and is really only going to be between the US and Morocco, which really isn’t going to be very effective. This is fantastic news and I’m extremely excited about this.

Unfortunately, we can’t just take a break, we have to keep working on the main reason why these laws are even brought up for vote in the first place. The USTR is currently negotiating the TPP which is starting to be viewed in a similar fashion as ACTA. I believe that we’re on the right path for stopping these types of legislation and treaties.

Way to go Europe in two major things.

Innovation and government regulation

Yesterday during a short twitter discussion the topic of US governmental policies killing new business starts came up. With the 140 characters I wasn’t able to property address the issue that was raised. It is extremely clear that SOPA is an innovation killer, because it effectively requires everyone to have a copyright lawyer on staff at the start of any sort of web company. If you have pictures, video, commentary or whatever on your site you’ll possibly be the target of some copyright holder. This policy isn’t in place and appears, for the moment, to be killed. I expect this law to be resurrected in a year or so. Despite the face that the EU adopted a resolution against SOPA.

Let’s look beyond SOPA though, what other policies are in place that seem to prevent job growth? One of the biggest ones right now is tax levels for people making $250,000 or more. Politifact did an analysis of Congressman Boehner’s claim that taxing millionaires hurts small businesses and prevents hiring. They found this statement to be False. Of course this does depend on the definition of a small business, which Politifact expresses is difficult to define. One metric that I’m aware of is based off the annual sales, where sales over $500,000/year moves you out of the small business area. This may not be the best amount, but let’s say your company has sales of $3,000,000 a year and has enough profit to pay you $1,000,000 of that a year. This tells me that you aren’t reinvesting and trying to continue to grow your firm, probably aren’t paying your employees very well. Additionally, at this amount of sales it is likely that as an entrepreneur you’ve had to get capital investment in one of several ways, loans or from venture capital. A bank wouldn’t care if you were getting paid a million a year, but there’s no way a VC would allow you to pay yourself that if they weren’t getting a good size chunk of money too and you were still planning on reinvesting in the future enough to get a huge IPO. Now, if you’ve built this company from the ground up to this level on your own, then you aren’t paying yourself that kind of money. You would have to be re-investing that money back into the firm to get new equipment hiring the best people, etc.

Another way for companies to get started is through spin-off from another company, bootstrapping themselves to get going or spinning-out of a university. I have an article that will come out soon in the Urban times that addresses some policies that can help with the creation of Spin-outs and start-ups. In the US, we still have the best policies for this. The EU as a collective and European countries are modeling many of their intellectual property laws and funding methods off of US policies. A few examples are a very similar law to the Dole-Bayh law from the 80’s to allow universities to own IP and to give it to their employees if they wish. The creation of technology incubators – this was a truly American innovation, innovation prize contests and national seed funds. The continual reinvention of these policies in the US allows us to create more new companies than European counterparts from a variety of sources.

Are there other policies that hurt the creation of companies? Yes, sure. I’m sure there are some pollution regulations that negatively impact the survival rate of firms. However, from a purely economic perspective this regulation is forcing the company to internalize the cost of the negative externality. Which the company should innovate to reduce the amount of pollution they are creating or buy equipment that reduces their costs in other ways. Innovation to reduce pollution should reduce the cost of raw materials, because they are being used more efficiently and in lower quantities. Every company wants to be able to reduce the amount of raw materials they use. In the next few years we will see greener companies, not because they have a desire to be sustainable, but because it’s more profitable. The regulations the EPA puts into place requires companies to internalize negative externalities, which from both a evolutionary and neo-classical economic perspective is expected from the market and when the market fails then and only then the government needs to step in.

There will be regulations that are industry specific that may slow the amount of innovation and creation of firms, but some of that is surely death by a thousand paper cuts (too much paper work) and the inability to figure out a way to acquire enough funds to get the company going. Compared to European countries the US is the leader for ease of firm creation and the EU is still playing catch up in that regard.

China, Technology and creativity

Sorry I’ve been away for so long. I’ve been hanging out with my Awesome wife! She gave a talk in Ireland, which I went to for most of a week. It was a good time. She then came here to Eindhoven for a week and had an interview. So that’s why I haven’t been updating. Sorry faithful readers.

At a party on Saturday, I got into a fairly active discussion with 4 PhDs and myself. They are all engineering PhDs, so they understand research and how technology works rather well. We got into a discussion on if China was going to actually really over take the US in scientific research. I said I think it’s likely, but there were many arguments against that likelihood. I didn’t really get to finish my argument on why it’s possible. So, I’m going to do that now.

Basically, some of the core arguments against China being able to overtake is us lack of creativity. China is a country of followers, not a country of creative leaders. Another argument was the lack of high quality education and research centers in China. I’ll address the second argument first and then discuss the first argument.

Americans know that we educated a lot of foreigners at our universities, 2008 was an all time high for the number of international students. In fact my roommate at one point explained to me that one of the groups at the University of Texas was comprised entirely of Chinese students. They conduct their meetings and research all in Chinese and, in fact, leave the US speaking worse English than when they arrived. But why are they leaving? The link above notes that there simply aren’t enough H1B Visas or green cards for them all to stay. Effectively we’re throwing out the people we educate. Over time enough good scientists and engineers will be sent back and will start teaching in China. China has big ambitions and has been creating universities as fast as it can. Using an evolutionary perspective, we can see that it’s likely they will continue to create variation and students will be selecting the best universities. One of them is likely to start producing more science and better science than another. This will lead to the best students and best researchers going to that school. One or two could become the Chinese version of MIT, Berkeley or Harvard. I think it’s clear that education won’t hold them back. Eventually, they will have several universities in the top 200 list according to the Times Higher Education ranking.

The second argument is a little tricker to argue against. The Chinese aren’t creative enough to create radical innovations. First, I’m sure that the Chinese I know would object to this blanket statement. However, let’s assume for the moment that’s it’s some what correct. There’s a culture that doesn’t reward creativity and rewards conformity. I can think of two countries that have similar types of culture that have been creative and are excellent centers of research and innovation, Japan and South Korea. Now are they as good as the US at innovation or research, No. However, they have had some great innovations and do great research.

When it comes to patent research there’s something called a Triadic patent. It’s a patent that is filed in the US, Europe and Japan. Europe and Japan have higher standards for patents than the US and are more difficult to acquire. Why does this matter? Well effectively Japan is the only country in Asia that would fit better with the European countries in terms of GDP per capita, protection of IP and research.

Both South Korea and Japan have a few companies that are on the leading edge of their respective fields. Samsung is in a huge number of different areas and is the world leader in many of them. Japan has Nikon, Sony, Toyota and a few other big companies that are on the cutting edge in research, design and innovation. So, I don’t accept the argument that the Chinese couldn’t be creative.

Another point I was trying to make, is that over time as a country becomes the center of manufacturing and incremental innovation on a product, it’s likely that they are going to be able to create the next radical innovation in that field. There are two things that support this. First, in a book by Andrew Liveris, the British CEO of Dow Chemical, there is anecdotal evidence to support bringing manufacturing back to the US along with the R&D that goes with it. The other argument is based on the research of Cesar Hidalgo of MIT that shows through network theory, that to become a leader in technology you have to build your way through a series of other technologies. It helps explain why it’s so hard for countries to pick up creating semiconductors. However, as a country develops the technological capability to work within a type of technology they are likely to create innovation and changes in that technology.

China has effectively been given the ability to manufacture just about everything through outsourcing. They have the technological capabilities to build and design new technologies. China also has the resources devoted to it. They created a five year plan where they are going to invest $1.5 trillion in 7 science sectors. Because of these factors I believe that China is a real threat to US and European leadership in research and technology. For any one to dismiss China because of cultural reasons or technological capabilities is making a mistake and is likely to be surprised in 20 -30 years when China becomes a leader in at least one field, likely more than one.