Wednesday, February 09, 2011

Is bandwidth the new corn?

With the recent push back by the Canadian Conservative party against the CRTC's choice to allow usage based billing for internet I can't help but to wonder if we are seeing the beginning of another corn in the economy.

It is pretty well recognized that while corn does grow pretty well the reason why it is the go to ingredient in so many products that we buy is because of its regulated availability and subsidization. Because it is subsidized marginal profits don't fall off (marginal costs should go up eventually but subsidies compensate) so you don't get a point where you stop producing. So we can't ever get to equilibrium demand. Prices don't rise to the point where buyers start considering alternatives. Alternatives that would be more efficient if not for the subsidies. Subsidies we all eat.

Aren't we slowly moving in this direction for on demand video? There are two extremes for non-physical delivery for on demand video. One is the deliverer has a separate stream of the same video for each watcher delivered at the time of demand. If three neighbours all want to watch the same show at the same time it takes up three times the bandwidth than if one person wanted to watch it.

The other extreme is the video is delivered to everyone at the same time via broadcast and stored at the household to be played at time of demand. In this case storage is the alternative to bandwidth.

Which is more efficient? Well clearly that depends on the popularity of the video. If it is very popular the broadcast and store method (or rather the PVR method) is more efficient. If the consumer were to feel the cost of the resources he is consuming the market should move towards this efficiency. But without some form of usage billing the consumer sees no benefit to the PVR method over the Hulu/Netflix/web streaming method. PVRs are almost certainly more popular than streaming TV shows at the moment. But there is no extra cost to streaming House rather than recording and playing House.

So where does this get you? This gets you to the world of corn. A world where the costs are externalized. Or another parallel, our streets with respect to traffic and gasoline. On our streets our roads, our gas, and now even our cars are all subsidized with an aim towards universal access. Because of this the consumer (ie commuter) doesn't feel the real costs of his decisions. The cost of traffic is externalized but the benefits of convenience and independence are fully realized. So we get busy roads instead of an exodus to mass transit1.

Yes, ISPs can put down more last mile cable to increase bandwidth to give user's this free choice. And corn producers can always produce more corn. And we can always build more roads. Of course this never sounds like a stupid answer when we take the first step down the road of externalizing cost. I'm sorry. I meant to say universalizing access.

1Note that mass transit is also subsidized, and almost certainly more heavily subsidized than driving since they also receive the subsidization of roads and gas. But the point is that driving is subsidized but the rewards are not diminished.

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