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Somewhere along the information highway, we forgot about entrepreneurial freedom and value

About fifteen years ago I started writing for a publication that was transmitted to its subscribers via e-mail.  We published twice a day on regulatory events on the federal and state level.  The content we provided had great value and our clients paid us for it.  Not only did the staff get paid for the production work, but I’m sure the company had to pay an internet service vendor to transmit our content to the end user.  It’s called business.

I define business in the following way.  Business is the activity that you partake in to create, develop, market, and sell a product for income.  Business is dynamic and along your production line you are going to pay employees and contractors in order to get your product to market.  Business also requires you to look for opportunities to reduce your costs for getting your product to market and in so doing may require you to strategically partner with another entity to meet the objective of being better and faster.  That strategic partner may develop a method for helping you be better and faster and would rightfully expect to be compensated for the value their innovation bestowed on you.

The end user or consumer may observe three alternative developments resulting from the value provided by the strategic partner and all resulting in an increase in consumer welfare.  One, the consumer may see improvement in speed or quality of service with no change in the price she pays.  Two, the consumer may see an increase in price but faster service and better quality.  Although her costs have gone up, they are offset by the increase in value that she identifies in the increased quality of service.  Third, she might see her prices fall as the innovations brought by the strategic partner increase efficiencies in the way the product is delivered.

The business provider has to pay for the innovation but given the increase in consumer welfare realizes that his welfare also increases because the consumer is satisfied.

Notice in my example that the “F” word, “free”, is missing.  It’s that word that has confused content providers and consumers.  Over the past two decades, content providers and consumers have been misled by the notion that access to and delivery of information on the internet was supposed to be free.  This thought was spawned by the misinterpretation of the phrase, “open internet”, which referred not to consumption of and access to information but to the ability of application entrepreneurs to develop services that made the movement and placement of content online easier.

The edge providers, such as Google, Facebook, and Twitter, benefiting from the ability to interconnect their servers and applications with the world wide web were able to turn around and ironically compound the myth of free access by offering certain services to end users for free.  ”Free” had a network effect all on its own and open internet provocateurs such as Free Press and Public Knowledge have been milking it for years.  From free consumer access to ignoring intellectual property rights by promoting the Aaron Schwartz paradigm that all data online should be freely accessed by everyone, they have fanned the flames of contagion, creating such nausea that consumers overlook or ignore the market nature of the internet: the production and delivery of a product called information and knowledge, and like all products moving through a free market its value should be recognized and monetized and the creators of the information and knowledge should expect not only to be compensated but to pay the cost of its delivery.

Yesterday’s opinion in Verizon v. FCC failed to acknowledge the true, core market characteristic of the net neutrality debate.  Net neutrality, which has nothing to do with the open internet, denigrates the market signaling between content providers and internet service providers such as AT&T, Comcast, and Verizon.  Google, Facebook, and other edge providers have signaled the need for greater capacity and speed and internet service providers wanted to address this demand.  Rather than recognizing this demand, the Federal Communications Commission, egged on by the open internet provocateurs, preferred to disrupt the basic law of supply and demand and risk upsetting the flow of commerce.

The opinion is a mixed bag when it comes to freedom of the entrepreneurial spirit of the internet service provider.  It still leaves open the door to regulating broadband providers and, in my opinion, by leaving in place transparency rules, violates the freedom of speech of internet service providers by forcing them to communicate information for a reason that no longer exist, namely compliance with anti-blocking and anti-discrimination rules correctly vacated by the court.

Freedom got a boost yesterday, but the boost was not high enough.  Policy and the law need a change in mindset to recognize that it’s okay to allow markets to work.

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Broadband helps disrupt the information markets

This morning I’m listening to a segment on C-SPAN’s Washington Journal where Greg Ip, U.S. economics editor for The Economist, is discussing whether the economy is growing.  A caller to the show, a former car salesman, raised the point that thirty years ago when a person went to a car dealer to buy a car, the dealer had very little competition when it came to information on pricing.  The caller pointed out that today’s consumer can access the Internet to obtain information on car prices and remove the car dealer as a bottleneck to information.

I had to agree with the caller.  I bought my first car back in 1985, admittedly on a whim.  You could do that back then.  All you needed was proof of a college degree and a bank account.  If I wanted to verify the price the dealer was offering, I could have referred to a Kelley Bluebook to check what the dealer was offering, but like I said, I bought on a whim.  Today, not only can I go online to the Kelley Bluebook website, I can review car ads online; go to Craig’s List, or shop the websites of multiple car dealers in the vicinity.

Broadband addresses what we wonks refer to as information asymmetry.  Markets fail where there is a lack of sufficient information held on both sides of the market such that an optimal outcome is realized.  Where a delaer may have enjoyed a 20 or 30 percent mark up on a vehicle’s price, the increase in available information may force that mark up significantly lower with savings passed on to the consumer in the form of lower prices; all because the consumer was able to walk onto the lot with additional info literally in the palm of their hands via a smartphone.

This disruption brought about by additional information means a disruption in other markets as well.  Prices paid to labor falls because prices and revenues fall as the result of consumers being better informed.  As prices on vehicles fall, the financial markets are forced to offer lower rates on loanable funds because the consumer is no longer cornered into an overly priced purchase.  They can exercise other options.

Broadband’s disruption of the information markets is great for consumer welfare.