Understanding the Basic Economics of the Internet: Building a Foundation for 21 st Century Public Policy. John W. Mayo

Transcription

1 Understanding the Basic Economics of the Internet: Building a Foundation for 21 st Century Public Policy John W. Mayo May 8, 2018

2 Policy questions abound What policies might ensure access to and use of the internet? (Universal Service) Is the internet the infrastructure of the 21 st century? And what role should government play in promoting buildout? Should we regulate price or pricing models of ISPs? Should we worry about and how can we prevent edge providers engaging in anticompetitive or other harmful practices? What might a legislative solution to the reoccurring net neutrality debate look like?

3 Many (too many?) sources of information and answers Listen to the masses

4 Many (too many?) sources of information and answers Listen to the theorists Source: Richard Ma and Vishal Misra Routing Money, Not Packets: A Tutorial on Internet Economics

5 Many (too many?) sources of information and answers Listen to your political party (Notice picture of save teh kittens!) 5

6 Violent (dis) Agreement! The survival of the internet as we know it is at risk GOP Platform The internet s free market needs to be free and open to all ideas GOP Platform [W]ithout net neutrality the internet as we know it ends. It s just that simple. We ve said yes to a free and open internet. Senator Ron Wyden (D-Oregon) 6

7 Another Option Understand the fundamental economics and facts of this economic sector and make your own improved decisions. Things we care about: Output, prices, quality, investment, competition Free and Open Internet 7

8 Internet Economics Fundamentals A Simple Taxonomy: Demand determinants and metrics Supply determinants and metrics Pricing and price models 8

9 Demand Determinants and metrics Demand for all things internet voice, data, video have exploded Aggregate Cisco forecasts Global IP traffic CAGR of 24 percent over Firm Level Google (1998) 3.5B searches per day! YouTube (2005) 5 billion videos watched daily. 9

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11 93 million streaming members, 125 million hours of entertainment per day!

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13 MOUs, Messages and Megabytes Mobile data consumption has increased 35-fold since 2010! Source: CTIA s Wireless Industry Indices Report, May 2017

14 The Connectivity of Americans Over the course of a day, an average of 92 percent of Americans are connected 14 Source: Jeffrey T. Macher, et al., From Universal Service to Universal Connectivity, Journal of Regulatory Economics, August 2017.

15 Supply determinants and metrics Deployment data Wireline Wireless Satellite Indicators of future capacity Investment Spectrum deployment Competition (the propensity to expand) 15 Geographic heterogeneity

16 16 Source: 2018 Broadband Deployment Report, FCC, February 2018

17 Pricing and Price Models Pricing Principles for Economic Efficiency: It is efficient (and arguably equitable) that consumers pay for the costs they impose on society by their consumption (actions) Pricing freedom ordinarily allocates resources more efficiently than alternative mechanisms such as regulation The fundamental purpose of prices in the economy including the internet is to send signals These signals cause desired marketplace behaviors

18 The Simple Economics of Internet pricing P P P With rapid demand growth, a key for success will be a policy environment to enable supply growth S S D D 18 Q Q Q

19 A Free and Open Internet 19 What do we mean by free? Something for which the out-of-pocket cost is zero Search for hotel online An app that tells me about traffic But free can get complicated free shipping BOGOF Opportunity Costs Is time spent on Facebook free? Two - sided markets can produce free services A market in which providers create value to both buyers and sellers) Newspapers, Credit cards The internet

20 A Wrinkle on Pricing: Two-sided markets Advertisers Newspapers customers Newspapers provide value to advertisers by placing advertising in front of consumers P? P? Newspapers provide value to consumers through information 20

21 A Wrinkle on Pricing: The Internet as a Two-sided market Content Providers ISPs customers P? P? 1. Does it improve economic welfare to set one of the Ps to zero by regulation? 2. If it is thought to improve economic welfare by allowing consumers to selectively prioritize bandwidths, what basis is there for disallowing this practice for the other side of the market? 21

22 22 Thank you!