On feedback as a fundamental of economics: Part Three lessons from communications and telecommunications

I began this series of posts a while ago, but its theme is that two identifiable schools of economics focus on two economic phenomena as central and tend to underplay something else.   The two phenomena and their traditions are as follows:

1.    the pursuit of self interest  (economics in the classical and neoclassical traditions)
2.    the utilisation of information and knowledge widely distributed throughout the economy, not just at some executive centre (Hayeks approach within the Austrian tradition).

The purpose of these posts is to argue for a third critical aspect of economic life in some senses antecedent to the phenomena.  I ague that it has been seriously underplayed in economics and that is:

3.    the joint production of value by feedback between economic agents and the learning it produces.

A few months ago Josha Gans blog drew our attention to a very interesting multi-disciplinary theorist called Andrew Odlyzko.  Back in 2001 and based on his own knowledge of communications he correctly predicted two things which have since come to pass.  He predicted that dreams about using the net as a means of content delivery were likely to fall flat as indeed they have web TV anyone?  And he predicted that the nets forte would remain interaction.  Web 2.0 anyone?

So he’s got a great track record and as Joshua says, he’s uncommonly worth listening to.  And he has something important to say about our topic.  As an item in this series on feedback part of Troppos commitment to bringing homo dialecticus to a monitor near you lets have a look at the ways in which communications technologies have constantly been more valued in their role as facilitating interaction rather than in their other role of (simply) transmitting content from a central usually commercial provider to a passive and usually small retail recipient.

In a huge romp through the history of communications and telecommunications from the nineteenth century on Odlyzko shows us the extent to which “Content is not King“:

What is striking is how highly valued ¹ communications is.  If we combine the revenues of the phone industry with those of the postal service, we obtain a figure larger than military spending, and almost three times higher than the revenues of the airline industry. Just the spending on phone services is higher than all advertising outlays. So say good-bye to all those plans for financing the Internet through advertising! Yes, advertising can help fund some services, but it will not provide the generous revenue streams that are needed to support a communications infrastructure as large as the phone system. To obtain the funding that many dot-coms seem to be planning on, it will be necessary to get contributions from more than advertising. E-commerce can help, but even that probably will not be enough, and it will be necessary to persuade people to pay for a large chunk of their communications. The question is, what are people willing to pay for?

Odlyzko tablulates the revenues to various activities and shows how they are dominated by interactive communication, not the ‘content’ model of broadcasting from one provider to multiple consumers.

The postal system alone collects almost as much money as the entire movie industry, even though the latter benefits from large foreign sales. For all the publicity it attracts, entertainment is simply not all that large, because people are not willing to pay very much for it. The dream of the early 1990s of financing the “Information Superhighway” through “500 channels to the home on the cable TV network” was an obvious fantasy.

Content is not only a small part of the economy, it is often paid for indirectly. Well over two thirds of newspaper revenues, and almost all of broadcast TV and radio revenues come from advertising. Thus content is being given away in order to attract people to goods and services they are willing to pay for. Although spending for content (whether by consumers or advertisers) has been rising, it has been doing so at a sedate pace, and is unlikely to explode. . . .

Communications is far from being the largest segment of the economy. It is smaller than cars, housing, food, and especially medicine. It is also about two thirds the size of the primary and secondary education sectors, and comparable to the higher education enterprise. The main point, though, is that communications is huge, and represents the collective decisions of millions of people about what they want. It is also growing relative to the rest of the economy in a process that goes back centuries. As a fraction of the U.S. economy, it has grown more than 15-fold over the last 150 years. The key point of this section is that most of this spending is on connectivity, the standard point-to-point communications, and not for broadcast media that distribute “content.”

Odlyzko then comments that the overestimation of the importance of content is not new – but repeats a pattern first set in the nineteenth century.

In the early 19th century, the explicit policy of the U.S. government was to promote wide dissemination of newspapers. They were regarded as the main tool for keeping citizenry informed and engaged in building a unified nation. Hence newspaper distribution was subsidized from profits on letters. . . . The extent of the subsidy may be gauged by the fact that “²n 1832, newspapers generated no more than 15 percent of total postal revenues, while making up as much as 95 percent of the weight”.

The policy of the U.S. government to promote newspaper “content” at the expense of person-to-person communication through letters may or may not have been correct. . . . However, there are reasonable arguments that the preoccupation with newspapers harmed the social and commercial development of the country by stifling circulation of the informal, non-content information that people cared about. . . . Thus content was king in the minds of policy makers, but it was definitely not king in terms of what people were willing to pay for. That is similar to the current situation. However, this differential in willingness to pay does not seem to be understood as well today as it was then.

Preoccupation with content has historically been common. For example, it was often thought (even by Alexander Graham Bell) that one of the principal uses of the telephone would be in broadcasting. Several substantial experiments in delivering content over the phone were attempted, including the Telefon Hirmondó in Budapest that lasted from 1893 past the end of World War I, and the Telephone Herald in Newark, New Jersey, which folded soon after its start in 1911.  In the end, though, the phone emerged as the prototypical example of point-to-point communication. The standard history books do not explain convincingly why this occurred. However, there is plenty of evidence for anyone interested enough to investigate this issue. For example, . . . the annual subscription for Telefon Hirmondó was 18 forints (about $7.50 in U.S. currency of that time), while regular phone service cost 150 forints per year. With customers willing to pay over 8 times as much for connectivity as for content, is it any wonder that the Telefon Hirmondó did not flourish?

He goes on:

³he future of the Internet is not with the Web, but with programs like Napster or (even more, because of its decentralized nature) Gnutella, which allow for informal sharing of data.

⁴ontent is not king of the Web. Most of the traffic on the Internet is corporate (especially if we include internal intranet traffic that is not visible on the public backbones). It is likely that in early 2000, under a third of the volume went to residential users . . . . Intranet traffic appears to be much less heavily biased towards the Web than that of private individuals. Furthermore, even the traffic that appears to be Web-based frequently represents a variety of database transactions that are not properly speaking “content.” Because browsers are a user-friendly tool that is ubiquitous, a multitude of services have been squeezed into a Web framework. They help perpetuate the image of the Internet as primarily a content-delivery mechanism. (Note that the Web was invented to allow scientists to communicate with each other and access data, not for content delivery.)

⁵ven if content were king on the Web now, the Web is not king of the Internet. This may again seem absurd, especially in view of the statistics quoted above, that most of the Internet traffic is Web transfers. However, consider again the U.S. postal system of 1832. Content certainly dominated in terms of volume of data. Newspapers sent by mail weighed about 20 times as much as letters. Further, the density of printed matter is higher than of handwriting, and a typical copy of a newspaper was likely read many more times than a typical letter. Hence newspaper “content” was probably delivering at least a hundred times as much information as letters. But volume is not the same as value. Letters were bringing in 85% of the money needed to run the postal system in 1832. On the Internet in 2000, it is e-mail that is king, even if its volume ⁶ is small.

Today, Web traffic dominates the Internet in volume, with about 20 times as many bytes as e-mail. . . . Even a decade ago, before the Web, e-mail typically accounted for under 10% of Internet volume. Yet e-mail has been and continues to be the real “killer app” of the Internet. The ARPANET (the progenitor of the Internet) was built primarily to connect computers. Yet e-mail quickly emerged as the application that mattered the most to users, even in the early days of the network. This was much to the surprise of the system’s designers . . . .

The popularity of e-mail was not foreseen by the ARPANET’s planners. Roberts had not included electronic mail in the original blueprint for the network. In fact, in 1967 he had called the ability to send messages between users “not an important motivation for a network of scientific computers” … Why then was the popularity of e-mail such a surprise? One answer is that it represented a radical shift in the ARPANET’s identity and purpose. The rationale for building the network had focused on providing access to computers rather than to people. . . .

More recent surveys . . . show that e-mail is still the most valuable service. Ask people whether they would rather give up e-mail or the phone, and the responses will typically be split. However, when a similar choice is offered between the Web and e-mail, there is no contest. This is true for both individuals and large organizations. Intranets are all the rage, but it is e-mail that makes enterprises run.

In our next instalment I think I promised this in the last instalment, but no-one expects the Spanish Inquisition – we find out how the very kind of dialectical mechanism that Adam Smith proposed was central to our acquisition of all that constitutes us as humans from our language, our internalisation of the ethical world of a community and our socialisation more generally is hard wired into our brains.  Yes folks, that’s what awaits you on the next post in this series.

1. two way interactive[↩]
2. i[↩]
3. T[↩]
4. C[↩]
5. And e[↩]
6. by bandwidth[↩]