The Coming Cyber -Trade Wars

Eli Noam

March  1999

The U.S. government has been impariously pushing other countries to avoid the regulation, taxation, or tariffing of e-commerce transactions.  The intensity of their effort was in no proportion to the actuality of e-commerce, which has still been miniscule within  the US (miniscule except in the press coverage and on Wall Street valuations) and hardly a blip internationally.  It also bear in relation to any actuality of restrictions by other countries aside from a few oft-told examples.  Why then the effort?  Why enlist many heavy-hitters of the US government from President Clinton and especially VP Gore down?   Part of the reason is the frequent tendency is the US government to lecture to the rest of the world to reach the same conclusion.  Part of it is a knee jerk libertarianism of the US Internet industry  which enlists the U.S. government in its efforts to prevent foreign countries from restricting it.  Mostly, however, it is the correct recognition that it will be earn to persuade other countries to follow a hands-off policy when the stakes were still low.  The U.S. government has used several arguments:  First, that trade is generally helpful to economic welfare.  Second, that e-commerce is an infant industry that should not be strangled in its cradle.  Third, that such controls are unbearable in practice, given the ability of electronic communications to by pass barriers.  And fourthly, US government employed a subtle shaming of any other  nation as being backward and out-of-touch with the unfolding revolution.  And indeed, the phenomenal success of the Internet and transaction on it would seem to validate these arguments.  But just because they make sense for the US does not prove them right for electronically less advanced countries.  Quite possibly these countries could conclude that slowing the transition to electronic commerce would help them catch up, or at least reduce internet upheavals of change.  This might explain the eagerness of US government to push these measures today, precisely because the impact and the analysis because the impact and the analysis of the Internet in many countries are still in the rosy-colored glasses, sci-fi stage. 

 

The conventional wisdom about network capacity is expressed by the dismissive term for Internet usage:  the World Wide Wait.  Inadequate network capacity slows down the applications and the evolution of the Internet.  Much of the blame is then assigned to the trade zonal telecom carriers, still not moving fast enough in the dawning cyber-age to keep up with the cyber age, but still in the way. It is their antique, circuit switched, twisted pair, their cob webbed utility mind set, that are supposed to be the problem.

 

Some of this is true. Some of it is simply a wealth of economic incentives.  For historic reasons, the Internet emerged largely outside the market system,  and individual usage was not tied to direct incremental payments.  In the absence of price signals, supply and demand rarely coincide.

Thus, market clearing prices will take care of part of the congestion problem.

 

Even more dramatically, technology and investments will soon set the problem  of congestion will be set on its head.  Simply put, the decade of the ‘90s was dominated by the revolution in processing power, based on fundamental VLSI component technology advances of the 80s. For a while, transmission could not keep up with processing, because it was much more expensive and time convincing to widen the channels than to add more  powerful chips, and therefore bottlenecks emerged. But in the next decade, transmission will be the driver instead of the brake.  Fiber optic technologies are increasing whose capacity is increasing enormously. Wave division multiplexing has reached now almost 100 channels. Erbium doping technology is increasing throughput multi-fold. 

 

Let us engage in a back-of-the envelope calculation of national transmission capacity just for order of magnitude.  Together, these lead to extraordinary capacities. Experimentally, NEC has reached 3.5 terabit per second per fiber strand. Suppose that the off-the-shelf technology in 5 years will be just half of that, 1.7 terabit per second.  Suppose that a conduit holds 144 such strands, which is Level 3's plan. Suppose that the companies which will offer such strands between US cities are AT&T, MCI World com, Sprint, two Rocs, 3 new-type long distance carriers such as Quest or level- 3, a cable wireless company, and a satellite provider.  That amounts to a national network of 2.2 Petabites per second. Divide this by the number of households, and it comes to a per household capacity of 20 Megabits per second, which is enough for several compressed video channels, simultaneously, for every American household, each watching something entirely different.  As far a vast capacity for Internet access.  Even if one scales down this calculation by some magnitudes, there will still be an awful lot of capacity out there. Of course, this calculation was about long distance capacity, but the local capacity will grow with it. DSL, FTTC, HFC, LMDS, blimps, HALO aircraft and move on the web.


 

Supply creates its demand.  Demand creates its supply.  The options for local high-speed transmission come as an alphabet soup of acronyms.   Therefore: The decade of the 00s will see vast increase of transmission capacity.  The talk about bandwidth shortage at the end of the 20th century will seem like the talk at the beginning of the same century, whether there was worry whether there would  be enough women in America to staff all those manual  switchboards.

 

And what will be the impact of this capacity?

 

The most obvious one is that price drops. Basic transmission becomes commodity. This is true for domestic traffic as well as for international traffic, where new submarine cable projects, GEOs, and LEOs will raise capacity to unheard levels. Per- circuit cost drops, marginal cost is negligible, and prices become low as well as flat, instead of high and usage-based.

 

And what are the impacts of low and flat  price long distance?

This is the 64 trillion dollar question for the 21st century. Suppose that international calling becomes low and flat, what then? What will it be used for, and by whom? Let’s explore that.

First, television media:

Whenever a new media technology comes along, much of the early talk about culture, education, health, peace and democracy.  But the subsequent reality rarely unfolds as nobly.  If post of media means anything, then abundant cheap communications will be used, to a considerable extent, for entertainment. Films, games, sports, adult programs. Many of these will continue to delivered in the traditional ways of terrestrial broadcasting, and cable, and satellites, and abundance of transmission capacity permits interactivity, customization, and personalization of program delivery of advertising.   It becomes possible to operate video servers at a distance.  “Push” delivery in order on intermediate role between broadcasting and person-casting.  In that fashion, the step beyond narrow- casting is taken, that of person-casting. Me-TV. Kanal Ich. Canal-Moi.  Just as with narrow- casting, the need for all this diversity will be derided at first. But there is no deviance of an individualization of the revamp experience, why then do we have video stores? Cable TV will consolidate its operations considerably.  The need to have local headends is purely the result of the cost of transmission costs, plus franchise regulation. If transmission costs drop to near zero, headends will consolidate to national and international locations, like satellites today.

 

In that environment, who will gain? One of the big winners will be Hollywood. With distribution cheap, premium content becomes emperor, and only Hollywood sells us capable of producing the kind of program desirable around the world.  It is then that much of a competitive strength in content is extended into distribution.  This has always been the Hollywood strategy whether for theatrical distribution and exhibition, videocassettes and stores and TV networks.  Hollywood firms will therefore distribute their products from big video servers which they or their wholesale allies will run. It is a logical role for vertically integrated Hollywood firms to play. It fits with their presence in theatrical exhibition, videostores, and TV networks.  On a national level it combines  synergistically with the technological strength of US firms in server technology, the Internet, and with the desire of large transmission carriers to have anchor tenants to assure capacity utilization. 

 

What this means is that this form of TV will be strongly American in content and distribution can bypass the traditional gatekeepers of national TV stations and networks, and of national regulation by licensing. In the past, some of the at strength was offset by the government in various countries and the ability to control and license broadcast and cable stations, which function as gatekeepers.  This becomes much more difficult for Internet-delivered, server-based television. 

 

The Impact on business transactions

Zero cost global transmission leads to a great rise in electronic transactions.  The energy and dynamism will be in electronic modes of commerce. And here, too, it is likely that US firms that will be most successful. They will benefit from proximity to technology, of access to risk capital with advantage of early entrant, and a home market that is large in terms of general population and interest of Internet use base. And once you a successful model is established for the US market, and with transmission price near zero, there is no reason to stop at the border.

 

Higher  education

The traditional university system, goes back 2,600 years back to Nineveh and then Alexandria, and revitalized in 13th century Europe.  The basic organizational principle was that information is scarce, that it needs to be stored and shared, that scholars come to the information, and that students come to the scholars. But now, information has becoming abundant, and it can be anywhere. Therefore, scholars can be anywhere, linked to each other, and the students can come to the scholars electronically. This does not mean that such a form of education is superior to face-to-face. But the point is that it can be delivered at much lower cost, and at greater convenience.

 

And who will do the main delivery? Again, US providers will be at the forefront. American universities, of which there is a large number, are used to competing with each other for students and faculty and resources. They have already become the major world exporters of higher education, despite their high price tag. With electronic distance education, they could branch out globally.  (I am now offering a course in media management over the web to a major Swiss business school, from the comfort of New York).   While such courses are a major effort to develop, but once done, they can be distributed not just to dozens of students here, but to thousands everywhere.  Commercial firms such as publishers and new virtual universities that will be at the forefront of these developments. There are already several of them around, one financed by Michael Milken, the junk bond king. He has recognized education as a trillion dollar market run by amateurs by inefficient organizations.

Traditional organizations can mostly prevent students from taking such degrees by denying their recognition.  But his works only if employers do not value these credential in their job applicants, effective and selective programs well, are valued.

What this discussion shows, so far, is that US firms will be able to develop an interaction and transaction infrastructure, and that they will be able to benefit first and strongest from the emerging revolution in transmission capacity and prices.  It suggests that the US firms in this field will gain competitive strength.

It is curious how vehemently this competitive strength is being denied in the U.S.  Despite all evidence to the contrary, most Internet advocates, good internationalists almost by definition, deny that the Internet is a fundamentally and deeply American medium in ownership, usage, style, technology. The may be better than alternatives.  But it will be increasingly pointless to deny the fact of  emerging US dominance.  Sure, one can always point to some busy body Internet boards to non-random encounters in another country with Internet users who exist several standard deviations away from their own societies that there are more Finns per capita on the Internet than Americans.  But has anyone heard any good Finnish music over the Internet, or bought some merchandise over a Finnish online e-store lately?

 

Implications on international relations

How does all of this add up?  It is another instance of what creative destruction of capitalism.  There will be many losers.  It is characteristic of losers, especially if they are still large and powerful to seek protection in the political sphere.  Mancur Olsen traced these tendencies for Britain, explaining her rise and decline. It is always hard to fight change, but it helps politically if the threat can be identified with a foreign country. And therefore, as the changes in economic and social patterns caused by cheap  information flows will strengthen the US role and weaken that of others, there will be an inevitable backlash.

 

One can see it already:

 

In the fights over electronic data privacy, whose intensify can only be understood in the content of electronic trade protectionism.  On the issue of digital signatures, where some countries require domestic certification agents, instead of a mutual recognition, in a protectionist vein.

 

Indeed, one would wonder why an international regime is considered necessary for signature transmitted by fax.  After all, none was  on the domain name issue.  On the continued discussions over Anational culture@ quotas and other forms of protectionism that exist in Europe and North America.  The French, for a time, required computer servers located in France to be in French.  Who knows, next we will see requirements for servers to be in domiciled France.  It was the equivalent of say, the UK outlawing French-language menus in French restaurants in London. 

 

Thus, there will be more restrictions on e-commerce, rather than less. And it is easy for Americans to preach to the world, as the Administration has done, especially if the sacrifice is asked from other governments, whether other nations or by the states.  If the US government really thinks that there should be no tax U.S. burden on Internet transactions, it could just drop the federal income taxes on these companies instead of crouching the moratorium of state sales taxes.  Internet transactions instituted in the 1998 Internet Tax Freedom act that passed almost unanimously on the federal level, supported even by Republicans who normally vocally support states rights.  It is easy to criticize foreign restrictions on e-commerce in the abstract,. But  imagine the response in the US if we had a thriving entry by against Albanian tele-doctors; Thai child pornographers; Cuban cigar mail-order providers; Monaco tele-gamblers; and Nigerian blue-sky stock ventures.  The point is that each society has a variety of values and interests, for better or worth, which underlies its legal arrangements, and it is not going to drop them just because the new activities are done over computer networks. It is therefore naive to think that the Internet will be, in each country, a libertarian island in a society that runs on other rules.  But can foreign countries control activities, even if they wanted to?  The conventional wisdom of Internet infrastructure says no.  After all, kids can run electronic circles around flat-footed, heavy-handed government regulators.  Such assertions are wishful thinking.  Governments can regulate the Internet if they want to. Maybe not the electronic transactions themselves. But communications are not just about infrastructure streams, they involve -- people and institutions with domiciles and assets.  If one cannot control the flexible parts of this system, one can go after the least flexible, such as physical delivery, people, transmission facilities, and assets. This is not the perfect way to do it, but neither are the income taxes.

 

So what is the conclusion?

The next decade will see the impact of the death of distance that is caused by the radical increase in transmission capacity and the radical drop in transmission prices. All this will have enormous impacts on just about any societal institution.  In this transformation, the US is gaining disproportionately. Other countries could accelerate their own transformation, and they are trying.  But it will not be easy to catch up. The 3rd World, for all these telecom reform such as gradual privatization, is actually falling further behind once one moves away from dumb telephony. And furthermore, as they add to transmission capacity, they might open highways to American transaction and content.  Or they can wait for the US, or the leaders within revolution to choke on its change.  Which will happen, and will be the long-term corrective. But that will take time.  

 

Instead, the easier route is to slow down the winners, especially the US, and to do so collectively.  And the question now is, how can one prevent this?  How can we prevent this curse of success? How can one let the rest of the world have more of a  stake in the changes than in the status quo? How can one create openness and border-negating communications networks and prices and uses without leading to a neo-romantic, political Luddism that is presented as the alternative to the electronic Darwinism?  What kind of compensatory benefits can one offer other countries to keep them net winners, too?  What are the real corrots one can offer, not the real ones? We must explore the answers to these questions.  Because if we do not know where we are going, we may actually get there, to the age of cyber trade wars.