Referring to Bret Swanson’s and George Gilder’s prediction U.S. IP traffic will reach an annual total of 1,000 exabytes, or one million million billion bytes by 2015, Ethernet inventor Robert Metcalfe foresees a terabit-per-second Ethernet, according to Telephony. Although not sure eaxctly when, Metcalfe predicts –
New modulation schemes will be needed for the coming network, he said, as well as “new fiber, new lasers, new everything.”
The need to replace existing technologies will create “chaos,” Metcalfe said, but also opportunity for equipment vendors.
In preparation for the “Exaflood” paper, I read the November 2007 paper by Nemertes Research -- "The Internet Singularity Delayed: Why Limits in Internet Capacity Will Stifle Innovation on the Web." It is an exemplary supply-side work (low utilization rates signify inadequate bandwidth rather than lack of demand). Failure to invest in infrastructure will produce not a breakdown of the Internet but a breakdown of the innovation culture of the net that brought us YouTube et al.
I recommend the paper to all as a guide to the prospects of our network processor and hollow router paradigms. It contains a number of obvious errors (dates reversed on charts (p.22), confusions between zettabits per second and petabits), and a “What me worry?” approach to huge conflicts between Nemertes and Odlyzko estimates of global capacity in 2000 (Odlyzko 85 pettabytes per month; Nemertes 61 exabytes!). Today global access capacity is around a zettabyte (10 to the 21) per month (2 plus petabits per second), with the U.S. commanding only one seventh of it (300 Tbps) or 14% while our GDP was close to 20% and our market cap 40% (adjusting for dollar doldrums).
Meanwhile, U.S. investment in infrastructure (capex only) was roughly $5B out of a global total of $20B and U.S. investment in access equipment (again capex only) was under $1B or about a fifth of global access investment in capex ($5B plus). But the U.S. out-invests the rest of the world in edge router/switch connectivity for the metro and high-end enterprise. Enterprise IP traffic is estimated to be about 1.5 times Internet IP traffic, but convergence continues.
On page 29, the report contains a breakdown of core and edge router/switch unit growth that is relevant to our network processor paradigm. On the order of 10 to 15 thousand core routers are sold annually, compared to between 30 and 60 thousand edge and metro routers and literally billions of access nodes of all kinds. The NPA is a key product for volume production of NPUs for scale and learning curves.
The other insight is that IPV6 meets the need for addresses but does not respond to the expansion of router tables that will slow the net in coming years if it is not remediated. The conclusion is a large need for CAMs, Knowledge Processors, and other memory and lookup table accelerators.
Nemertes declares that the U.S. confronts a coming bandwidth crunch in 2010, when access constraints will begin seriously to limit investment in Internet service innovation. The argument is that Moore's law increases in capacity will yield rising utilization rate and that traffic is supremely sensitive to utilization rates. In other words, as bandwidth increases we use it more and innovate more. I believe this. Others don't.
"If we build it, they will come," is the underlying assumption of Nemertes and me. People laugh but it is true over any run longer than a year or so.
Driving the economy are not dollars in peoples’ pockets but the ideas in their heads. Not buying-power but incentives impel people to take risks and make efforts and investments. More dollars may even reduce peoples’ incentives to work and invent and invest. Every dollar rebated to a consumer comes from another consumer or investor. You cannot increase spending power (real income) without first increasing output. Supply creates its own demand. Demand does not increase supply except to the extent that the demand symbolizes previous productive efforts that expanded output.
Democrats and wobbly Republicans are panicked by class rhetoric from lowering the top rates which most affect incentives. These top marginal rates yield all the revenue (the lower the rates the more the revenue--see Art Laffer's superb piece in today's Wall Street Journal). Therefore the pols lower "business" taxes, helping profitable established businesses compete against fast growing new businesses, such as our technology companies.
The fact is that the only way to get more revenues without hurting the economy is to lower the rates on the rich. Cutting corporate rates is an indirect way of doing it.
In the political debate it is worth recalling that so-called Bush's tax cuts on capital gains and dividends were in fact proposed by Bill Thomas on Ways and Means and merely signed by Bush, after he proposed wimpy phased reductions of income taxes. The Bushes all consult Yale Keynesians who know nothing about the economy. Bush's entire administration, including its ability to prosecute the war in Iraq while drastically reducing the deficit, was fueled by Bill Thomas's revenue gushing tax rate reductions on capital gains and dividends.
Policy makers should recognize information technology as the centerpiece of economic policy and develop their plans accordingly, concludes the Digital Prosperity study published this week by the Information Technology and Innovation Foundation.
“In the new global economy information and communications technology (IT) is the major driver, not just of improved quality of life, but also of economic growth,” writes Foundation president, Dr. Robert D. Atkinson, author of the study.
Atkinson is a widely respected economist who formerly served as project director of the Congressional Office of Technology Assessment, and is the former director of the Progressive Policy Institute’s Technology and New Economy Project of the centrist Democratic Leadership Council.
Based on reviews of other studies, and Atkinson’s own research, the report maintains, “IT was responsible for two-thirds of total factor growth in productivity between 1995 and 2002 and virtually all of the growth in labor productivity” in the United States.
Continue reading "Digital Prosperity Report Concludes IT Investment Critical" »
EUROCHAMBRES, the association of European chambers of commerce, has a new report out measuring the EU's progress achieving its ambitious plan of becoming “the most dynamic and competitive knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion, and respect for the environment.” Unfortunately, the report concludes that the EU is still losing ground.
In two years’ time, the gap EU-US (sic) has widened for all economic indicators:
Income (GDP per capita). The current EU level for income was achieved by the US in 1985. Since the first edition of the study, the time gap has increased by 3 years;
Employment and R&D. Both the current EU levels for employment and R&D investment per capita were reached by the US in 1978. (+3 years and +5 years respectively);
Productivity (GDP per employed). The current EU productivity level was achieved by the US in 1989 (+3 years).
The current EU level of Internet users per capita was reached by the US in 2002. The gap for this indicator was assessed for the first time in this edition of the study.
European leaders are attempting to overtake the U.S. without cutting taxes or reducing regulation. That’s what they mean when they talk about sustainable economic growth, social cohesion and respect for the environment. I hope they’re successful, but I fear they’ve set unrealistic goals and will continue to punish innovative American companies as a result. After accusing Microsoft of market dominance for commanding a mere 34% of the server market in the aggregate, European Union regulators have turned their attention to other successful American companies. Qualcomm, which offers discounts on bundled products, and Intel, which offers volume discounts, are both under investigation as a result of complaints the EU has received from American and European competitors. This is because the current generation of European leaders, like their mercantilist forbears, possess a vision of finite possibilities in which one country’s success comes at the expense of another’s. At least that’s how I interpret the following passage from a high-level report prepared by the EU in 2004:
Europe has to develop its own area of specialisms, excellence and comparative advantage which inevitably must lie in a commitment to the knowledge economy in its widest sense — but here it is confronted by the dominance of the US. The US threatens to consolidate its leadership. The US accounts for 74 % of top 300 IT companies and 46 % of top 300 firms ranked by R & D spending. The EU’s world share of exports of high-tech products is lower than that of the US; the share of high-tech manufacturing in total value added and numbers employed in high-tech manufacturing are also lower. In a global economy, Europe has no option but radically to improve its knowledge economy and underlying economic performance if it is to respond to the challenges of Asia and the US.
In fact, "economic integration runs deep," as the EU commissioner for the internal market and services, Charlie McCreevy, noted this week in a Wall Street Journal column comparing Sarbanes-Oxley to the Europe's more cautious approach in regulating financial markets. The EU resisted the temptation to impose Sarbanes-Oxley regulation and this is a key reason their capital markets are thriving and outperforming ours as a result. Some Europeans are celebrating, but McCreevy pointed out "anything that hurts U.S. capital markets also hurts European companies and our economy." That's how the U.S. and the EU need to view antitrust and competition policy. Since we're economically integrated, anything that harms innovation on one side of the Atlantic hurts companies and the economy on the other side. And obviously the reverse also must be true.
Patients, adept at using the internet to schedule travel, conduct business, and access information with the click of a mouse, are now driving changes in the way state and federal policymakers address health care reform.
“Health IT” is the new buzzword for health care, and information technology proposals for healthcare reform are sprouting like daffodils in April!
Tennessee Gov. Phil Bredesen
So far this year, the National Governor’s Association has announced the creation of the State Alliance for E-Health, co-chaired by Tennessee Gov. Phil Bredesen and Vermont Gov. Jim Douglas. Their purpose is to bring together office holders and policy experts to, “address state-level health information technology (HIT) issues and challenges to enabling appropriate, interoperable, electronic health information exchange (HIE)”.
As quoted in the National Journal’s coverage of the event, Gov. Bredesen explained, “…the states can move much more quickly….I don’t trust the federal government to actually do anything on my watch.”
Continue reading "Health IT Creating a Buzz" »
Eli Lilly CEO Sidney Taurel's observation about the effects of price controls in the pharmaceutical industry in a recent Wall Street Journal interview is worth remembering.
I've seen the bad effects that government policies of price controls and overregulation can have. When you look at Europe 30 years ago, that was where most of the innovation in pharmaceuticals used to take place. When I joined the industry the No. 1 was Roche and then it was Hoechst and Bayer and all these companies, which today are not as big. What 30 years of price controls have done is more and more of the research has come here. I think only about 25% of the total research in the whole industry is done in Europe.
At Discovery Institute, we are promoting transportation technologies that can help the United States break free from dependence on volatile parts of the world for oil and gas. (See this post at DiscoveryBlog.org)
Computers and network servers use enormous amounts of electricity, so prudence requires support for conservation--and major new sources of energy--wherever possible.
Economist Larry Hunter, an old friend, zeroes in on the real threat posed by the Medicare Part D prescription drug benefit -- price controls. Potential House Speaker Nancy Pelosi doesn't call them prices "controls" of course. She calls them "negotiations" and says she'll institute the change in her first 100 hours in office. Hunter reminds us of past intrusions into the crucial information-processing realm of prices:
These “negotiations” would have terrible consequences: They would create shortages, stunt new development, generate red tape, increase government intrusiveness into patients’ health-care decisions and eventually raise drug prices.
The historical record is clear: Price controls always have the opposite of intended effects.
Airfares were higher, not lower, after price controls were imposed in 1938. When price controls were finally removed from the airlines industry 25 years ago, prices fell dramatically.
Price controls imposed to stop skyrocketing inflation during the 1970s were also spectacularly unsuccessful. When President Reagan removed price controls on gasoline, long gas lines evaporated and the price of gasoline fell sharply.
I would add telecom to the mix. Price controls known as TELRIC and UNE-P, disguised as competition promoting mandates, were the key cause of the 2000-2002 telecom crash.
Although the Medicare prescription drug benefit irresponsibly adds large unfunded liabilities to our national balance sheet -- maybe as much as $20 trillion -- that has not been my primary worry. We are a wealthy nation, and we often ignore the large and growing asset side of the national ledger. The ultimate threat of Medicare Part D is as an innovation killer.
Price controls also would create other huge disincentives for companies to develop new life-saving drugs. Not only would price controls curtail overall research but they also would divert it into less risky and less promising areas — particularly with regard to seniors.
In other words, if drugs that are primarily used by seniors suddenly are made unprofitable by federal decree, the drug industry would lose all incentive to develop new cures for diseases — such as Alzheimer’s — that affect mostly senior citizens. Companies instead would focus on developing cures for which demand is more evenly spread among different age groups.
Such government-imposed distortions would compel the drug industry to shift R&D resources out of the seniors’ market. The end result would be a stealth form of drug rationing to old people.
Larry ominously points out that a crash of health care innovation could lead to nationalization of the entire health care system -- just what Pelosi and others really want.
-Bret Swanson
 Yesterday, Ned Phelps of Columbia won the Nobel Prize in economics for his critique of the Philips Curve, one of the worst (and still persisting) ideas in the sad history of 20th centrury macroeconomics. Read Phelps's terrific celebration of dynamic capitalism -- and powerful critique of European style corporatism -- in today's Wall Street Journal.
-Bret Swanson
Microsoft's legal challenge to the European Commission's antitrust ruling got underway this week in the European Court of First Instance. At issue on the first day of the hearing was the requirement that Microsoft separate its media player from its operating system. The commission's ruling and subsequent enforcement gets more absurd every day, and I can't imagine it would have been taken seriously by any competent court of law in the U.S.
Jean-Francois Bellis, an attorney for Microsoft, told the court that 1,787 versions of Windows without Media Player (Edition N) have been ordered, compared with 35 million versions of Windows with Media Player, the Financial Times reports. The lawyer for the European Commission conceded that "I am afraid we cannot say our remedy has had any real impact, as far as we can see," according to the the Times of London. Then he hinted that the commission may regulate how Microsoft prices the two products, according to the International Herald Tribune, to entice consumers who otherwise lack any compelling reason to buy the stripped-down version. This case is thus a classic example of regulatory quicksand, or the inexorable tendency of regulation to degenerate into micromanagement.
This all may seem like good news to Microsoft's competitors, but its certainly a defeat for consumers and investors. When bureaucrats, here or there, attempt to suspend the laws of supply and demand, we all suffer.
Does the Bush Administration realize this?
Microsoft has been warned by Commissioner Neelie Kroes of the European Union that there are some features it should not bundle into its new operating system (see, e.g., "European regulator warns Microsoft about new operating system" from European Business News Online). The EU's competition directorate has already decided that competition could be costly and involve risk for Microsoft's competitors. Yes, it sounds ridiculous -- but essentially that's what it is. Kroes' warning may indicate that Microsoft is losing its freedom to innovate and in effect will now be required to obtain preapproval from the EU for any new product design. If so, the EU could be doing to Microsoft what the FCC did to the Regional Bell Operating Companies by forcing them to share every element of their business. Commenting on the folly of the FCC's grand strategy to achieve a state of perfect competitive equilibrium in telecom, Justice Breyer noted that forcing firms to share every resource creates "not competition, but pervasive regulation."
Yesterday the Supreme Court heard arguments in eBay v. MercExchange, where both sides agree that the courts nearly always issue an injunction anytime a patent is infringed. It is argued by Nathan Myhrvold (see "Inventors Have Rights, Too!" in today's Wall Street Journal) and others that without a strong presumption in favor of injunctions in patent cases, big tech companies would "stall and drown the little guy with legal fees." This is a variation on a familiar argument: Litigation normally isn't cheap; it isn't "predictable." So we should just get rid of it, right? The convoluted logic of tort reformers is now the convoluted logic of defenders of a questionable patent system.
Patents exist to promote innovation, but lately they have begun to resemble something like a lottery --where the holder of an insignificant patent can block a larger innovation while the Patent Office in effect admits that it didn't pay much attention to the patent application in the first place and probably shouldn't have approved it. Patents are supposed to promote innovation through rewards for innovators, but the rewards are a means to an end. This distinction is getting lost in the shuffle, as entrepreneurs turn the patent system itself into a big business. The present case provides an opportunity for the Supreme Court to restore some balance.
Are small inventors a threatened species? Small inventors can recover treble damages and attorney fees on top of compensatory damages in an infringement action. But a strong presumption in favor of injunctions is highly unusual and obviously susceptible to abuse, whether in this or in any other context. Justice Breyer zeroed in on the profit-maximizing behavior of patent trolls who have better alternatives than to negotiate licensing terms. MercExchange doesn't care about innovation (it has no interest in using its patent), it just wants to make money. I find nothing wrong with this, but it may have implications for innovation and the patent system. The courts cannot ensure that the patent system promotes innovation unless they can make necessary refinements on a case-by-case basis, and they can't do that if they are prevented from employing the equitable analysis that is always used when deciding whether to issue injunctions.
The brief for the petitioner is here and the brief for the respondent is here.
Some people think we can protect shareowners, prevent corporate malfeasance and rein in lavish compensation of corporate CEOs by requiring companies to expense the value of employee stock options. Of course, the issue is a surrogate for many of the more fundamental problems of corporate governance.
Burton Malkiel, professor of economics at Princeton, and William Baumol, professor of economics at New York University, wrote in the Wall Street Journal in April 2002 that "there is no way to measure the ‘cost' - the value of the options at the time they are granted - with reasonable precision." But bad policy is not a compliance problem for public companies, who can easily assign a value to the options they issue because shares of their stock are traded on public exchanges every day.
What about nonpublic companies? They're supposed to guess. It’s a fool’s exercise that will impose compliance costs and headaches on the small start-ups who are the source of most of the nation’s innovation and entrepreneurial activity. They will be forced to pay for a formal appraisal or expert opinion – every time they award options -- and live with the threat that a bureaucrat can always second-guess the results. Naturally, these companies will reduce their risk exposure by reducing their use of employee stock options, and this will chiefly affect rank-and-file employees.
Now these companies will have to prove to the Internal Revenue Service that employee stock options can never be less than fair market value. A notice of proposed rulemaking and notice of a public hearing were issued in October. Comments are due Jan. 3 and the public hearing is scheduled for Jan. 25. But in typical IRS fashion, compliance begins this month. The regulations implement the new section 409A of the Internal Revenue Code, enacted by Congress.
The Republican and Democratic innovation agendas in the House both include platforms that promote employee stock ownership. The Democratic agenda, released just last month, would “Reward risk-taking and entrepreneurship by promoting broad-based stock options for rank-and-file employees.” Last year, the House voted 312-111 for legislation “that would have ensured the continued ability of innovative companies to offer stock options to rank-and-file employees,” according the Rep. David Dreier (R-CA).
Its not just the rank-and-file employees who will pay if nothing is done. We live in an ever more competitive world. Countries like China and India are increasingly prepared to do whatever it takes to stimulate innovation within their borders. In this country, we are apparently prepared to allow well-meaning but myopic bureaucrats, wherever they reside, to devise regulations that they deem easiest for them to enforce. As a nation, we all benefit when one of these small start-ups succeeds and we will all lose if misguided and half-baked policies are allowed to suffocate the technology sector.
President Bush's innovation agenda is silent on the issue. Its time for the Bush Administration to update its agenda and pay attention to what the bureaucrats are up to.
Microsoft's work group server competitors claim they can't keep up with the complexity of Microsoft's product upgrades.
“We are, in many fields, ten years behind Microsoft. And the lag is growing with every new step Microsoft takes”
according to Volker Lendecke of the Samba Users Group, an organization dedicated to free software that anyone can copy.
Continue reading "EU Threatens Innovation in Action Against Microsoft" »
Last week George Gilder, Bret Swanson and I met with a powerful Senator who told us he is being urged to "go slow" on deregulation because it would be unfair to change the market conditions that existed when investments were made. Of course, this is a Luddite argument against any progress at all. Telephone companies invested billions before VoIP. Cable companies invested billions before IPTV. And rural telephone companies invested billions before wireless offered a cheaper way to connect remote consumers. Should government slow the deployment of alternative technologies that cost less and offer greater functionality? Not if it cares about consumers and taxpayers.
Investment is motivated by a desire for inordinate profit. Successful investment achieves a temporary monopoly, and invites competitive entry and disruptive innovation. Nothing lasts forever. If government wants to be fair, it should neither accelerate nor decelerate this process. Government engages in industrial policy when it decides that some investments are more worthy than others.
See a former colleague of mine Scott Gottlieb getting slimed by the Seattle Times for -- gasp -- knowing something about financial markets. Scott used to write the Gilder Biotech Report and the Forbes Medical Technology Report, and he recently went back to the FDA as one of three deputy commissioners. The reporter seems to think that only people who don't like the pharmaceutical/medical technology industry should work at the FDA. Most people in government have little experience with business and financial markets, and so a Scott Gottlieb here or there is not only not going to hurt anyone but in fact provides a much needed new perspective in an institution that has trailed its foreign counterparts in approving new lifesaving medicines and procedures. We need more people from business and finance to do stints in government, not fewer. America will be healthier with Gottlieb at FDA.
-Bret Swanson
The companies delivering voice, video and data services rank low in customer satisfaction, reports the Washington Post. Customer service appears to be the primary culprit. The newspaper quotes the following expert opinion: when there is competition and consumer choice, it does get better.
Would the cable industry alone have spent almost $100 billion in network upgrades since it was deregulated in 1996 if not to compete against the satellite and phone companies? Competition is here. Customer service may not be as important as it once was, but that's because customers today can also shop for innovative products and competitive pricing.
Gold-plated customer service existed under regulation, when government controlled price and market entry. AT&T emphasized customer service because it was under rate-of-return regulation, which meant that is was legally entitled to pass along its costs plus earn a profit of approximately 15 percent. AT&T could increase its profit every time it found a way to justify new costs to regulators' and customer service was politically popular. Oh yes, it was easy for regulators to shift the cost to long-distance and business users. That's why it was expensive to make a long-distance call. Innovation also languished. Cell phones had been invented but not deployed. Answering machines were a status symbol.
Deregulation, though incomplete, has provided more appropriate incentives for telecom companies to strive to offer the best technology at competitive prices along with good customer service, not spend the majority of their time trying to fool regulators.
Back in 2001 I wrote about a technology company with a funny name that in a round-about way helped make the case for telecom deregulation. Narad Networks had developed sophisticated analog signal processing techniques that dramatically expanded the usable spectrum of the coaxial cables used in cable TV networks. With current analog and digital programming running from 5 to 860 MHz, Narad's network updates would open the spectrum up to 1.2 GHz, boosting by 50 percent the already considerable capacity of the cable companies' hybrid fiber coax (HFC) networks. Over this newly available spectrum, Narad could run Gigabit or even 10 Gigabit switched Ethernet trunks, enabling dedicated switched Internet services of 10, 50, 100 Mbps -- whatever -- to homes....Or to small and medium sized businesses currently served by the telephone companies.
Although most businesses are not wired for cable TV, Narad's research showed that cable networks pass some 70 percent of the nation's several million SMBs (small and medium businesses). Short runs of coaxial cable or wireless links from telephone poles could easily connect businesses as they signed up. The cable companies already compete in the enterprise market with CLEC leased lines and dedicated fiber connections (e.g., Time Warner Telecom, Cox Business Services), but now they could easily leverage their own existing coax networks and compete with the phone companies for the SMB communications market totalling some $35 billion a year.
Narad, however, struggled during the telecom crash, as all communications providers who didn't go bankrupt severely curtailed capital investments. The company founders, Dev Gupta and Andy Chapman, left, the company almost ran out of money several times, and management continued to turn over. Many of us lamented the surely imminent demise of this innovative company.
Several CEOs and tens of millions in new venture funding later, however, Narad said in late July that Cablevision, New York's main cable TV provider, had successfully trialed its system and would begin offering the new broadband business services in Oyster Bay on Long Island. Narad has also had some success internationally.
Although the cable companies are still digesting and leveraging their recent $100 billion digital upgrade and have not yet taken the plunge on Narad-like broadband upgrades, cable's potential to compete with the phone companies in the mid-range telecom services market is now clear. The phone companies want to offer video. The cable cos want to offer voice, data, and “storewidth” services. Federal, state, and local officials should be telling them: Go for it.
-Bret Swanson
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