Salocin

In my usual, semi-random, pick-a-topic-and-go-with-it style, I've stumbled across an article that caused my vitriol to start flowing, and am going to run with it for a few moments in public. My audience of 17 automated search engines, 3 loyal readers and numerous random accidental-droppers-by will no doubt treat this with the disdain it deserves, because it is no doubt interesting only to me.

In a recent article on c|net, I learned that the US Supreme Court recently ruled on the issue of sharing telecom network cabling. You must be thinking, 'Oh My God, How Incredibly Boring' by now.

Well - perhaps - to someone who leaves it there. As with most things, you have to dig a little deeper to understand why the ramifications are so significant, and if you give me a few moments of your time, I'll do my best to illustrate, since - after all - it happens to be the industry I am currently working in (albeit not in the U.S.).

The issue at stake was whether the incumbent cable companies should be forced to share their infrastructure with competing cable companies.

I'm sure the visceral reaction to that statement is simple : of course they shouldn't, it's their cabling, why on earth should they be forced to share?

A little thought goes into the economics of the situation, however, and the answer is - 'yes, they should, it's the only way to develop the market'. An option now scuppered by this decision.

The issue at stake is whether home users get access to faster broadband. The example to follow is that of Japan, where for $22 per month, in urban areas, you can now get 40 megabits-per-second speeds at home. The 'Basic Broadband' offered in the U.S. at the moment is 1.5 megabits-per-second, and that costs you around $40 per month.

How did Japan get to where it is? It forced competition into the market by compelling operators to allow access at competitive prices to all their physical fibre. It then incentivised the laying of fibre across the whole country through tax breaks and other financial means. In no time the speeds started spiralling upwards as each new entrant into the broadband market sought to outdo their competitors.

Right now, in the U.S, the owners of the pathetic bandwidth into each home are the telephone companies and the Cable TV companies. The telephone companies have no incentive to hit speeds of 2mb and over because that enables IP Voice and they'll lose all their lucrative telephone revenue, and the Cable companies have no incentive to go any higher than 4mb because that might allow people to download movies and the like (legally, I should add). It's little wonder they're lobbying like crazy to protect their right to keep America in the dark ages when it comes to internet connectivity.

Meanwhile in Japan, you can stream HDTV quality content over the internet while simultaneously having a video-conference, surfing the internet, making 3 phone calls, checking your bank balance and surfing illicit high-resolution images.

Economically, there's little incentive to lay cable covering each household if you're only going to get one-in-fifty to subscribe, and even that will take you 3 months. The capital expenditure (which is in the high millions) will simply not be justified. What you need is an incremental model where you can start selling broadband off the back of the current network, and gradually build on that network through the installation of additional bandwidth and equipment at the local exchanges.

Unfortunately, the U.S. is governed by the lobbyists, and the cable TV and telephone companies can afford a lot of those, while entrepreneurial startups cannot.

What is really sad is that the U.S. is supposed to be the nation where entrepreneurship is most encouraged, but as my MBA teachers pointed out, the source of the encouragement is that it's OK to fail, which means it's OK to try. The fact that legislation protects incumbent monopolists and therefore destroys in sectors such as telecommunications is glossed over - the entrants will fail, but that's OK, it's America. The fact that they failed because of government legislation making the playing field uneven is - once again - glossed over.

What Americans really want, from the consumer point of view, is 40-meg broadband for $22, but you have to go to Japan to get that, and as a recent article in Foreign Affairs put it, America is too far behind to ever catch up, and Japan will get the first chance at developing the kinds of applications that can take advantage of such high speeds.

But what can you do with 40meg? I hear you ask. Well, they said the same when 1.5 meg superceded the 56k dialup connection, and the truth is, once you've gone to broadband - even the slowest kind - it's almost impossible to go back.

If you think the problem's bad in fixed-line broadband, just wonder how bad it is in wireless, where Japan is ever further ahead. The U.S. is lagging sadly behind with the recent introduction of m-mode - a copy of the Japanese i-mode, more than a few years after Japan introduced it and then moved on from it.

All in all, if America loses it's competitive edge in the next decade, it will do so through an obsessive but misplaced desire to protect incumbents, not only in industry, but also in government. Lobbyists are useful, but given too much power, they are poison, and America is suffering from it.

Band Aid / Live-8 and the Status Quo.

A furore has erupted over the resale of Live8 tickets on eBay. Geldof used every ounce of his celebrity clout to ensure that eBay took as much flak as was possible to dish out for allowing the auctions to occur in the first place, accusing them of 'sick profiteering' and managing to provoke the public intervention of an ambitious government minister (John Purnell).

I fundamentally disagree with the label he's chosen to use to describe the eBay sales, and while I understand where those who so vocally despise this behaviour are coming from, I don't agree with them.

There are a number of arguments interacting here, so it's beneficial to try to tease them out one at a time.

- The emotional argument: some bastards are making money from a charity event.

Not to be a pedant, but every charity event makes some people money. It's interesting that the criticisms are levelled at the people who are making a market and taking a margin rather than those who work on the gig and aren't giving their time away for free. Oh come one - you seriously think the entire stage crew are working for nothing?

Since the concept of a 'trader' first jumped from financial jargon into the public arena, people who 'make a market' by buying and selling have been loathed by those who watched them make money from an activity that seemed to generate no value to society. In fact, it does generate value - a point I'll come to in the economic section of my rebuttal - but the points I want to make here are of responsibility for the sales process and benefit to the cause of Live8.

It takes a seriously naive or short-sighted person to not see the eBay resale of tickets as utterly predictable. If the organisers didn't want such resale to be possible, they should have organised their lottery in a way that tied the ticket to the identity of the participant. They didn't - their mistake.

The cause of Live8 benefits from this - there wouldn't have been so many text messages (at 1.50 each) sent had some touts not been participating.

- The Charity Argument: They shouldn't make a profit.

Bullshit. Take the example of a person who was really desperate for at least one pair of tickets, and texted in 15 times for that pair of tickets. But ended up with 2 pairs of tickets. What's the reasonable resale price for that second pair of tickets?

Geldof thinks the tickets should be given back for free. Of course he does, millionaires don't have to think any other way. Economically though, the argument is complex.

A friend of mine recently claimed that they should be sold on eBay for a buy-it-now price of 1.50, but that's clearly wrong, because the weighted average price of the pair of tickets from the point of view of the purchaser in this example is 11.25, why should they suck up the losses and give someone else the chance to buy them for just 1.50? What's more, there are people out there who texted only once, and got a pair of tickets, so why should this person not get the same treatment? Why shouldn't they be allowed to sell their spare tickets for 21 pounds, thus reducing the price of the tickets they're still holding to just 1.50?

It's utterly wrong to force someone to be charitable.

- The Profit-Makers-are-all-bastards argument: Nobody should walk away with more money than they started with.

This is the most naive of all the arguments, and also the most difficult to rebut to non-economists, but it's about value, and about allocation, and I'll give it my best shot.

I'll start by quoting the Economist: '...given [the Labour Government]'s much-publicised faith in market economics, it would be odd if the government decided in favour of legislating against people who are increasing economic efficiency by reallocating resources from those who value them little to those who value them a lot'.

This cuts to the heart of the issue - the people holding these tickets at the moment don't care about the concert, and there are a number of ways in which the tickets can be reallocated to others. The most economically efficient way by far is an auction. It allows those who value the tickets the most to obtain them, at a price that maximises the return to those who hold them. It's impossible for anyone to get 'ripped off' - you can't be forced to bid more than you're willing to pay for the goods on offer. The effect on Live8 is positive - it has more money than if the ticket touts hadn't participated, eBay was going to contribute the profits, and more importantly, it has a guaranteed audience of people who really really want to be there, rather than some lucky people who participated on a whim and were lucky with the roll of the dice. Lotteries are inherently random and allocatively unfair - auctions distribute goods to those who want them the most and are willing to sacrifice the most value to get them. Had the tickets been sold at auction to start with (not that I'm suggesting this would have been a good thing), there would be almost no secondary market.

- The 'We're making a point' argument: By fighting this, Geldof has demonstrated his principles, and somehow some intangible value is created.

Balderdash. Just like anyone else who sought to constrain the free market (Lenin, Mugabe, you name it) he has been circumvented. Within moments of eBay's decision, the auction migrated to a new home. You cannot hold it down, goods want to be sold at market values, and efforts to control prices artificially are doomed to failure almost by definition.

Conclusion

So what's my point, really?

First of all, I think Geldof is an ass. I'm sure that some benefit will come of this, but given the amount of energy and time spent on it, I think more could have been done with those raw materials, were they harnessed in some other way. As things stand, a lot of people will listen to an amazing line-up of musicians, and walk away feeling like they did something good. Good for them, but Africa will not necessarily feel the benefit. Compared to a single project of the World Bank, this endeavour is microscopic. If the G-8 decide to help due to the political pressure exerted by a bunch of people who showed up because they got cheap tickets, they might do something really dumb, like force the World Bank to double the proportion of gifts (rather than loans) out of it's soft loan fund, which would cripple the Bank in the long run. Let's face it - if the G-8 want to do something as a consequence of all this ruckus, they're just going to pick up the phone to the World Bank... Celebrity-pseudo-politicians using their platform for the greater good of humanity is a recipe for disaster - it's like putting the underage cheerleaders in charge of driving the bus to a football match.

Second, I think a lottery is a really dumb way to distribute tickets - with a line-up like this, you can afford to make a lot of money for charity by selling the tickets at only slightly-reduced cost. If you want to avoid touting for whatever personal reasons you have, then you print the names on the tickets and check IDs at the door, or use some similar system. When you sell something so far below it's market value, you have to expect someone to make money on the difference - it's normal, and it's the organisers stupidity that resulted in the vast majority of this cash not going to charitable endeavours.

Finally, I despair at the narrow-minded vision of the people who dismiss the activities of the touts as 'sick profiteering'. First of all, it's exploiting someone else's stupidity - profiteering has negative connotations, but it shouldn't have. In an economic context, the people who want to see the concert the most will get the tickets, and that's a good thing because it puts goods where they belong, rather than in the hands of a group of people who will attend, and not care. Second, when you sell something for below it's market price, you don't destroy the value of the product, you just give away the difference between your price and it's real value. Traders are quicker to see such opportunities than anyone else because to them, it's obvious. How much would you pay to see Pink Floyd? 1.50? I know people who would happily pay 80 pounds to see him play 5 songs in London. The value is there, and if Geldof won't take it, by definition, someone else will - either by getting something they think is worth 80 pounds for 1.50, or by being the intermediary who got the goods to where they belong, and took some margin in the process. It's still a good thing.