Tag Archives: Technology

Sanchez on Netflix

Posted on by

Lynne Kiesling

You probably received the same apologetic email from Reed Hastings of Netflix that I did on Monday, stating the impending decision to split Netflix’s streaming business and its DVD subscription business. Foresightful or bad business decision, PR nightmare, or all of the above? The best analysis of its likely drivers and impacts is from Julian Sanchez:

Just as many people spend hours “watching TV” rather than watching any particular show, people often just want to “watch a movie”—de dicto, rather than de re, as the philosophers say—or rather have the option to watch any one of a number of movies, more than they want to see any particular one.

Julian goes through a good analysis comparing buying a DVD, getting a DVD from Netflix, or streaming a movie, both from the consumer’s perspective and from the studio’s perspective, and how all of these affect Netflix’s business model. Although he doesn’t couch it in economic terms specifically, his analysis hinges on the differences in option value of the various alternatives to consumers, and how both the studios and Netflix/Quikster can profit from these different option values and changes in them. Very thoughtful analysis.

My Kellogg colleague Sandeep Baliga also comments on the decision from a more operational and strategy perspective.

Smart appliances and the innovation cycle

Posted on by

Lynne Kiesling

Appliance and consumer electronics manufacturers are starting to incorporate digital technology with energy-related applications into their products … but as with most new technologies, the first commercial stage of the innovation cycle takes the form of “because we can” product differentiation rather than use-specific innovation. Take the example that Technology Review highlighted this week: Samsung’s new refrigerator with an Android LCD display panel on the door. This high-end, gorgeous, stainless-steel refrigerator has an Android touch screen, which I think is pretty neat even if it does not read from the scripture of “the Internet of Things” that Christopher Mims wants it to — if I store my recipes in Evernote or in an Epicurious app, I can pull up a recipe on the door as I’m cooking, or make a shopping list as I’m looking in the fridge to see what I need. Mims’ tone is almost condescending when he observes that

A really smart fridge, part of the Internet of Things, would know when you put that lettuce in the crisper, so it could alert you when it was about to become inedible. It would tweet its current temperature so you know when your kid failed to close the door all the way. A really smart fridge probably doesn’t even have a display — far better to control it from any other internet-connected device.

The cynical view of Samsung’s move to embed a tiny tablet in its fridge is that these devices have become so cheap that sticking one in a fridge hardly makes any difference to their margins. It’s just one of those features — like a pop-up spoiler on the back of a luxury sports car — that makes a buyer feel like they got their splurge’s worth. If that’s the case, we can all look forward to Android-powered microwave ovens and clothes washers.

No. First of all, while I agree that automated monitoring features like produce spoilage detection and door ajar detection are desirable and user-friendly, Mims’ hyperbole about “Oh noes! We’re doomed to useless technology kitchen candy because of this!” shows a strong misunderstanding of the economics of consumer product innovation life cycles. The “version 1.0 mass-market user friendly right out of the gates model” is an outlier, a great exception to the typical evolution of technology; in fact, I’m having trouble thinking of a consumer technology product other than the iPod that comes close to that description. The “because we can” product differentiation puts the technology in the hands of early adopters, who are eager to kick the tires and are willing to spend their income to do so. These customers guinea-pig the technology for the rest of us, and provide companies like Samsung with feedback, which I’m sure will include comments like “it would be great if this technology enabled me to detect produce spoilage” and “this screen is pretty useless if all I can do is get to the Internet and not monitor my food”. Those experiences get incorporated into the evolution of the technology. Starting with the “because we can” technology is not necessarily going to lead to missed opportunities, as Mims argues, as long as companies like Samsung combine their engineering and business knowledge of what’s possible with the feedback they receive throughout the new technology adoption process.

Second, I think his definition of a “really smart fridge” is too limited. A really smart fridge would be transactive. A really smart fridge would enable its owner to program in price triggers to change settings on the chiller during expensive hours, saving the owner (an admittedly fairly small amount of) money and reducing energy use (good if the owner cares about conservation) and reducing peak demand on the distribution infrastructure (good for the wires company) — all without changing the quality of the refrigeration that the owner experiences, thanks to the beauty that is thermal mass. A transactive fridge would enable its owner to choose to cycle the chiller down if there isn’t much green power available, up to the point where the temperature change impairs the refrigeration, if the owner has a preference for green power. A transactive fridge is empowering for consumers.

A better article on the same topic comes from Greentech Media from earlier this summer (and has been sitting open in my browser to be blogged for too long!). In it Katherine Tweed argues that the current, first generation of smart appliances are oversold relative to their features. Without saying it explicitly, she makes the point that these first-generation smart appliances are expensive and likely to appear to early adopters — buyers more at the Viking end of the product line than the bottom of the Whirlpool line. She also, correctly, points out that if the value proposition to the consumer is saving money by reducing energy savings, the smart appliance features do not contribute much at the margin beyond the EnergyStar appliance standard; so if you are buying to save money by saving energy, you aren’t going to get much bang for the buck at the margin by choosing a smart fridge over an EnergyStar fridge. But as I remarked earlier, that’s not the only value proposition, because consumers care about other features.

It’s going to take some time to get the technology integration across the value chain to create all of these features, from spoilage detection to transactive automated response to dynamic pricing to preferentially choosing green power to sending the beer order to the store when my supply is low. It’s also going to take some choice in terms of electricity pricing for residential customers, and (surprise surprise) monopoly utilities and regulators are dragging their feet on that front. But don’t dismiss smart appliances today simply because V1.0 isn’t perfect. V1.0 never is.

ETA: I also recommend reading the comment thread on the Greentech Media article; it has a good back-and-forth about dynamic pricing.

Free the electricity consumer!

Posted on by

Lynne Kiesling

In late July I spoke at Cato University, which was great; I met so many interesting and thoughtful people, and learned a lot from my fellow participants and speakers. I’m also happy that Cato has made the presentation notes and recordings of the presentations available on their website, so you can see and hear them too!

One of my talks was called “The Economics of Intervention”, which is a large topic … so I focused on the interplay of technological change and regulation, ranging from Schumpeterian disruptive innovation to the history of the electricity industry and its regulation to current smart grid issues. You can also listen to a recording of my talk. If you are a regular KP reader you will recognize the themes and connections that I drew in the talk — innovation makes monopolies temporary, regulation that purports to “stand in for competition” cannot do so, and unless smart grid includes transactive technology and transactive market options, it’s not smart. The best way to deliver these potential benefits, and to avoid the distrust and Orwellian concerns attached to having such technology at the behest of government-granted monopolies and regulators is to open up retail electricity markets, reduce entry barriers, and enable innovators and entrepreneurs to transition electricity from a commodity product to a service that can be differentiated, bundled with other services, etc.

While I was there I also talked with Caleb Brown about the potential value creation from smart grid technologies and customer-focused business models, and he has posted our conversation as a podcast. I like his framing of the issue: free the electricity consumer!

Schumpeterian tablet competition

Posted on by

Lynne Kiesling

If you want good examples of Schumpeterian competition, it doesn’t get much better than this: Amazon to take on Apple this summer with a Samsung-built tablet? The Engadget folks make

… a very reasoned argument that paints Amazon, not Samsung or the rest of the traditional consumer electronics industry, as Apple’s chief competition in the near-term tablet space. An idea that’ll be tough to argue against if Amazon — with its combined music (downloadable and streaming), video, book, and app ecosystem — can actually launch a dirt-cheap, highly-customized, 7-inch Android tablet this summer as Pete predicts.

This evolution is Schumpeterian in several ways, the most obvious of which is the process of creative destruction that disrupts equilibration by entrepreneurs creating a new product that will make some old products less valuable and ultimately obsolete. Note, interestingly, that one of the products likely to be made obsolete is Amazon’s own Kindle.

But the essential product, the tablet computer, is not actually new, which gets to the second, and in some ways more meaningful, Schumpterian aspects of this evolution: this is a good example of competition for the platform. This is not just about coming up with some new gadget that consumers might like; this is about integration of the various applications and services that might create value for consumers into an elegant platform. Given Apple’s announcement this week of iCloud and Amazon’s existing cloud services, this Amazon tablet is part of that platform competition.

Data center power use visualized

Posted on by

Lynne Kiesling

Here’s a fascinating visualization of data center power use at Boing Boing:

Note that over 10% of data center power use is for Facebook, with all of those updates and photos … as noted in the article:

The company’s data centers range from from 10,000 square feet to more than 35,000 square feet, and their energy use is enormous. The average leased data center uses between 2.25 megawatts of power and 6 megawatts of power. This could provide electricity for one month to somewhere between 1,730 and 4,615 homes.

With their new data center, however, Facebook aims to lift a little of its guilt, saving approximately 2.5 million kilowatt hours per year with efficiency measures. They’ll save the company $230,000 and reduce carbon emissions by more than 1,000 tons.

This gives you some sense of the electricity required to power our use of Internet applications, electricity use that is largely taken for granted by end-users, but is a substantial cost for firms. I recommend clicking through to the full post, which includes a detailed analysis of power use from Facebook, Google, Yahoo, and WordPress (all applications near and dear to our hearts at KP!).

The extended graphic discusses an important metric of data center power use — power usage effectiveness (PUE). According to Wikipedia,

Power usage effectiveness (PUE) is a measure of how efficiently a computer data center uses its power; specifically, how much of the power is actually used by the computing equipment (in contrast to cooling and other overhead). … PUE was developed by a consortium called The Green Grid. PUE is the inverse of Data Center Infrastructure Efficiency (DCiE). An ideal PUE is 1.0.

Realistically, PUE=1.0 is unattainable as long as computing technologies give off heat while working and thus require cooling. It’s a metric that provides Internet firms, data center operators, and chip manufacturers clear incentives to reduce the heat that chips produce while working. And it’s also a good illustration of an alignment of economic and environmental incentives — reducing the need for cooling reduces electricity use, reducing both electricity expenditure and the environmental consequences of electricity generation and use.

Google’s discussion of their data center PUE performance is thorough and informative, and explains the issues in a clear way to non-specialists. Note that they consider “state of the art” PUE to be 1.2, based on some industry benchmarking reported in an EPA analysis in 2006. At that time, they estimated the industry PUE to be 1.9, which means that for every watt used in computing, 0.9 watt is used in an ancillary way in the data center (largely for cooling). In the ensuing 5 years, Google reports that 10 of their large data centers have PUEs in the 1.1-1.35 range (Figure 1). They have invested substantial resources in reducing their data center power use, as this discussion and the visualization above indicate.

What I’ve been reading … and related videos!

Posted on by

Lynne Kiesling

One thing I’ve been doing a lot this summer is catching up on my reading, both on books I’ve had on my list for a while and new releases. Right now I am in the middle of Mises’ Human Action, which I am slightly embarrassed to say I’ve never read from the beginning in its entirety, although I’ve read extensive excerpts. At some point I would love to discuss Human Action with some of my friends who are more familiar with it and its historical context, like Pete Boettke or Pete Leeson or Steve Horwitz.

In terms of fiction I’m also in the middle of A.S. Byatt’s The Children’s Book, which is just out in paperback (although I’m reading the hardcover version). It’s right up my alley — set in late 19th-century England, opening scene in my favorite museum (the V&A), lots of Arts & Crafts themes and imagery, a multi-layered and historically-informed plot, all written with Byatt’s characteristic subtle language and rich visual imagery in her prose. I don’t think the casual reader would enjoy it (i.e., it’s not a beach book unless you’re already predisposed to like Byatt and/or historically-contextualized fiction), but I am enjoying it a great deal. It’s definitely going with me on vacation up to the Boundary Waters at the end of the month.

Almost all of my recent reading has been nonfiction; let’s see if you can infer the unifying theme. In no particular order:

  • Vernon Smith, Rationality in Economics: Constructivist and Ecological Forms. Here Vernon synthesizes the results of experimental economics (particularly findings of more cooperation and more sharing than game-theoretic models predict) with the work of Scottish Enlightenment scholars and F.A. Hayek to argue that individuals employ a more ecological rationality than the Cartesian, deductive, constructivist form that is embedded in most standard economic theory. Part of this ecological concept of rationality involves heuristics we use so we can function in the face of overwhelming information, and part involves recognizing the inherent sociability of humans. A valuable corrective against the excessively Cartesian constructivist concept of individual rationality that has gone unchecked for too long in economic theory (yeah, representative agent macroeconomics, I’m lookin’ at you … but you’re not alone there.)
  • Joel Mokyr, The Enlightened Economy. I’ll have more to say on this in a separate post (I promised Joel a review and then life happened), but for now I will give a hearty recommendation to read it. Joel does two extremely valuable things in this extensive work: he updates the scholarship on industrialization in Britain that has occurred since 1990 and the publication of his excellent Lever of Riches, and he extends the theoretical framework for understanding and “explaining” the Industrial Revolution to include knowledge, particularly what he classifies as “useful knowledge”. Thus he connects the intellectual developments of the Enlightenment explicitly to the Industrial Revolution. More commentary to come later …
  • Marco Iacoboni, Mirroring People: The Science of Empathy and How We Connect with Others. If you are curious about neuroscience and the recent research on mirror neurons but you aren’t interested in reading the primary neuroscience literature, Iacoboni’s written a very accessible summary of what neuroscientists have discovered and the likely connections of mirror neurons to social cognition, empathy, language acquisition, and interpersonal relations in general. If you have no idea what mirror neurons are but you enjoy reading Jonah Lehrer’s books or blog, and/or you listen to Radiolab, you’ll enjoy this book.
  • James Otteson, Adam Smith’s Marketplace of Life. Again, a work from which I’ve read snippets, but I’ve finally read it cover-to-cover this summer. Jim’s book is great. He does a very thorough analysis of Smith’s Theory of Moral Sentiments, and even though I’ve read TOMS cover-to-cover twice and reread various parts of it frequently, this is an outstanding analysis and companion. In particular, he argues (persuasively, to me) that Smith’s moral philosophy and moral psychology enable Smith to articulate the moral foundations of unintended, emergent social order. And he does so in a way that I think is accessible even if you’re not a philosopher or economist (yeah, I’m lookin’ at you, D.O.U.G.!).
  • Fonna Forman-Barzilai, Adam Smith and the Circles of Sympathy: Cosmopolitanism and Moral Theory. Hot off the press … I met Fonna at a Liberty Fund conference last fall, and we found that we had very similar perspectives and interpretations of Smith. Not surprisingly, then, I found a lot of her analysis here interesting and useful. Here she analyzes Smith’s moral theory and arguments in TOMS looking at how it relates to modern questions of cosmopolitanism. She is engaging with literatures in political theory that don’t overlap directly with my economics interests, but her analysis and application to modern concepts of distance and community (and, for example, globalization) is really thought-provoking.
  • Charles Griswold, Adam Smith and the Virtues of Enlightenment. This 1998 work is a go-to analysis of Smith’s moral philosophy and virtue ethics. I actually finished this before either Otteson or Forman-Barzilai, and my understanding of Smith’s arguments in TOMS and their broader moral and economic implications jumped discretely upon reading Griswold.
  • Matt Ridley, The Origins of Virtue: Human Instincts and the Evolution of Cooperation. Ridley has built an extensive oeuvre of works exploring human behavior that synthesize biology, anthropology, history, economics, and sociology, and this is a very useful example of his work. Here he covers evolutionary biology, anthropology, game theory, and economics to explore how it is that we humans create emergent social order through cooperation. If the set of ideas I’m tossing around in this post intrigues you but you are not familiar with them, this is where I’d start.
  • Matt Ridley, The Rational Optimist: How Prosperity Evolves. Ridley’s most recent work, and one that I enjoyed a great deal. Again a synthesis of economics, evolutionary biology, and anthropology, all animating the theme that humans do cooperate, do have incentives to behave in ways that are efficient and socially beneficial in the long run, create sustainability through innovation, and are not going to trash the planet. I am persuaded by his rendition of the argument, but I am predisposed to, because I already agreed with him … which leads to my only criticism of the work. The tone is too “just so”, the arguments too pat — I doubt that they will be persuasive to anyone who isn’t already predisposed toward his worldview and toward being an optimist. That said, I’ve been pretty cranky and pessimistic for the past couple of years because of the wretched, stupid, counterproductive policy decisions that are perpetuating our economic downturn and killing our individual liberties by a thousand cuts, so I needed a good dose of rational optimism! I’d encourage you to read Rational Optimist after reading Enlightened Economy, which will provide more depth and backstory to support Ridley’s arguments.

On their faces these works may not appear directly relevant to the political economy of regulation and competition in large infrastructure industries experiencing technological change, but I think they are all likely to interest you if you are interested in the political economy issues inherent in regulation. Some of the Smith scholarship may verge too deeply into philosophy and political theory, depending on your personal interests, but I have certainly enjoyed every one of these works and recommend them all as worthwhile reads.

But, since it’s a Friday afternoon in late summer, I’m going to close with a couple of videos of Matt Ridley discussing The Rational Optimist. The first is a recent TED talk he gave in Oxford (can’t get the embed to play well with WordPress, grrr), using the “when ideas have sex” meme that is the tagline for the book. The second is from the PBS Newshour.

Have a great weekend!

What the Maryland PSC’s rejection of BG&E’s smart grid proposal reveals about regulation

Posted on by

Lynne Kiesling

Last week the Maryland Public Service Commission rejected Baltimore Gas & Electric’s proposed project to install over 2 million digital electric or gas meters, change the retail electricity rate structure to incorporate time-of-use pricing and peak-time rebates, and recover the meter capital costs through a surcharge on residential retail bills. BG&E’s ambitious and thoughtful project had undergone extensive pilot project testing and had generated economic and physical results similar to those seen in other such projects (customer savings, reduction in peak energy use and in peak strain on system infrastructure, reduction in peak wholesale prices due to the transmission of retail price signals). Their recommended technology and rate designs are not unusual relative to evolving practice in other states (although they are much, much less than I personally would like to see). Despite those promising results, the Maryland PSC rejected BG&E’s business case for structuring their cost recovery from the project as they did.

Although I am pretty familiar with the BG&E pilot, I am not sufficiently informed or expert in rate case matters to have an intelligent opinion on whether the PSC took the correct position. Their position, though, reveals some of the most important and pressing reasons why traditional economic regulation is incompatible with economic dynamism, with technological change, with innovation, and ultimately incompatible with widespread consumer well-being.

1. Traditional economic regulation is based on cost recovery, not on expected value creation, and therefore does a poor job of “standing in for the market” as it is (incorrectly) supposed to do in theory. Whether it’s enshrined in the legislation giving the regulatory agency its mission or in the deeply-embedded Populist culture and history of regulation, traditional regulatory procedures focus regulators and the regulated on providing a narrowly-defined, generic, highly reliable service at the lowest possible long-term cost. As long as you’re in a static environment, the static model from which this theory and culture emanate will do a decent job of providing that generic service. That’s the context in which regulators have developed a norm and a culture of ignoring value creation — focusing narrowly on the provision of generic electricity service and scoping your efforts accordingly fits with that static world. But regulatory models premised on cost recovery fail miserably in a more dynamic context, with pervasive economic and technological change and Schumpeterian creative destruction. That dynamism characterizes the economic and technological context of the early 21st century, and the reason that dynamism and creative destruction become so pervasive in human society is that they create value — value for consumers, variety for consumers, product differentiation for consumers, and value for the risk-taking and opportunity-seeking entrepreneurs who risk private capital to create that value.

If the regulatory institutions and the regulatory culture constrain the electricity value proposition to the provision of generic service to the exclusion of other product/service/pricing bundles, and if they constrain the business model to one of cost recovery instead of value creation, then the regulators will reject the types of projects that are most likely to create value for consumers and entrepreneurial producers. This rejection shows precisely why regulation cannot “stand in for markets”, because the most important function that market processes perform is the pathways for this new value creation. The static, price-determining, resource allocation function of markets is not the most important function of markets, and the formulators of static natural monopoly theory at the end of the 19th century got that wrong. Our current regulatory institutions are built on that incorrect, static natural monopoly theory.

2. Traditional economic regulation stipulates that the regulatory agency controls price determination on behalf of consumers, and regulators are loath to relinquish such power once they have had it for a century. This point is a political economy corollary to the first point. Legislation requires regulators to represent the interests of consumers, and they do so through administrative procedures to control both costs and prices, as well as controlling the profits that the regulated firms are allowed to earn. Control, control, control. Take, for example, this quote from the New York Times/Climatewire story linked above:

The Maryland commission took a fists-up stance toward its powers and prerogatives to rule on utility rates. “For one hundred years, since this Commission was created by the General Assembly in 1910, one of our primary functions has been to establish the rates that public service companies can charge their customers,” the commission said. Currently, it faces a growing trend by regulated companies to cover costs in advance through surcharges rather than subjecting costs to review after they have been incurred.

While it has approved such surcharges in some limited cases, it drew the line on BG&E’s current proposal, it said. “Surcharges guarantee dollar-for-dollar recovery of specific costs, diminish the Company’s incentive to control those costs,” and put those costs outside the commission’s reach, the commission said.

Ironically, Maryland is at least nominally a state that has retail competition and retail choice available for its residential consumers. If they were actually serious about competition and were willing to relinquish this control over prices and costs, then the regulation of prices and costs would occur through the decentralized market processes of firms making retail product/service bundle offerings to consumers, and consumers using their choice and autonomy to say NO. But if you are deeply steeped in regulatory culture, you do not believe that this decentralized process can work effectively for consumers, even though it does so in other markets and industries … even ones that have high infrastructure costs and are considered essential to daily life! You, therefore, believe that your power to control is a salutary intervention, even though the dynamism of economic and technological change are proving you wrong on a daily basis. So you make decisions that reinforce your power and control, believing them to be in the best interest of consumers while you deprive those same consumers of the opportunity to make their own autonomous choices.

3. Traditional economic regulation entrenches the political and economic power of easily identifiable, politically active special interests. Which leads us to the third lesson from this episode for the political economy of regulation. The legislative mandate for regulation, and the stated mission of every regulatory agency, is to control prices and allow the firm to recover costs for the provision of a generic service at a highly reliable level in a way that benefits all consumers. But in the time that I have been involved in regulation, and in debates over smart grid investments and policy, it is abundantly clear that Mancur Olson was correct, and that regulation actually represents the interests of easily identifiable, politically active interests, not the interests of consumers as a whole. On the consumer side, this means that decisions get made frequently based on the organized, coordinated political actions of so-called consumer advocates (who really represent low-income consumers, not all consumers) and groups like the AARP, who perceive their interests as being best served by the perpetuation of the traditional regulatory model — generic service provided at high reliability, controlling price through strict cost recovery.

Take, for example, this quote from the excellent Ahmad Faruqui in the New York Times/Climatewire story above:

While some state utility commissions are willing to back smart meter deployment, they are reluctant to approve new “dynamic” electricity rate plans that allow prices to rise during the day when power demand peaks and fall when demand is slack. Such real-time pricing plans are essential to prompt customers to shift energy usage to slack times and reduce overall consumption, he said.

“There is no doubt in my mind that without state commissions approving the business cases for advanced meters and the smart grid, this is not going anywhere. They control the dollars; they set the rates for the customers,” said Faruqui, an economist and principal with the Brattle Group. Faruqui testified before the Maryland commission in support of the BG&E plan and declined to comment on the commission’s decision in that case.

But he said that around the county, commissions are heeding warnings from state consumer advocates and retiree organizations about possible cost impacts on customers if electricity rates are linked to actual generation costs, hour by hour.

“Most of the state commissions are frozen in time. They are being subjected to these very, very pessimistic, worst-case arguments,” he said.

What’s missed in that calculation is the unseen, lost value that could be created for both these vulnerable groups and for other consumers by moving away from that model. When regulators are already predisposed, by legislation and by culture, to constrain the value proposition of the regulated firm and focus on a generic service and cost recovery, the political action of those who seem to visibly benefit from that constraint will find a big foothold. In that environment, the value proposition based on the idea of better service provision (such as, for example, bundling home health care monitoring services in with a “senior care” electric service contract for the AARP constituency) is going to fight an uphill battle. In open markets with low entry barriers, that type of service bundle would be able to compete, and would sink or swim, fail or profit according to the value it creates for consumers and the ability of the provider to control costs.

In brief, traditional economic regulation is incompatible with economic dynamism, with technological change, with innovation, and ultimately incompatible with widespread consumer well-being because of the enormous extent to which traditional economic regulation stifles experimentation. The really valuable function that market processes provide is this ability for consumers and producers to experiment. Traditional economic regulation is almost reflexively anti-experimentation, and that reflex is the source of lost value creation opportunities from smart grid technologies.

A historical example illustrates why I think these points are important. In the medieval period, China was one of the most forward-looking, open, technologically creative and vibrant societies in the world. Chinese inventions became the foundation of many important technologies, machines, and industries. Yet by 1600, China’s backwardness was obvious to all observers; China had closed herself off from knowledge, had become technologically stagnant. Western Europe and then the young United States surged ahead of China in technology, in economic productivity, in per-capita income, and in living standards for most of the population (China’s elite, of course, continued to enjoy luxury). Economic historians credit this stagnation (or, what Needham argues was “homeostasis”, not stagnation) and worsening of living standards for most of the Chinese population to conscious technocratic policy decisions in China to look inward (growing through population growth and increasing intensification of agriculture), to be backward-looking, and to make strong top-down rules based on status quo bias. Writ large, the dynamic driving the stultification of China had at its core many of the same policy drivers and incentives as we seen in play in electricity regulation in the 21st century.

Google’s investment in wind generation

Posted on by

Lynne Kiesling

Yesterday Google announced that their ever-growing sustainability strategy now includes investing in wind generation. Although they pursue these opportunities through their philanthropic arm, they claim that they are looking for meaningful returns on their investments in addition to their sustainability impact:

To reach a clean energy future, we need three things: effective policy, innovative technology and smart capital. Through our philanthropic arm Google.org, we’ve been pushing for energy policies that strengthen the innovation pipeline, and we’ve been dedicating resources to developing new technologies, including making investments in early-stage renewable energy companies such as eSolar and AltaRock. Smart capital includes not only these early-stage company investments, but also dedicated funding for utility-scale projects. To tackle this need, we’ve been looking at investments in renewable energy projects, like the one we just signed, that can accelerate the deployment of the latest clean energy technology while providing attractive returns to Google and more capital for developers to build additional projects.

This moves adds to their portfolio of energy activities, including the Google PowerMeter and efforts to develop more energy efficient and green data center technologies and building techniques.

I do wonder, though, if such clean tech investments stretch the economies of scope in Google’s strategy. I’d love to know the exact arguments they have made internally in deciding on these renewable generation investments. While I think they take advantage of the expected policy environment (renewable portfolio standards, etc.), these investments are pretty different from Google’s traditional areas.

Apple and Adobe: it depends on what your definition of “open” is

Posted on by

Lynne Kiesling

I’ve seen two interesting things today in the ongoing debate between Apple and Adobe over Apple’s refusal to allow developers for the iPod Touch, iPhone, and iPad to develop Flash-based applications. First is an open letter from Steve Jobs with an extensive discussion of Apple’s long relationship with Adobe (including an ownership share at one point). His remarks emphasize the primary reasons that I have heard offered for Apple’s decision: Flash is a proprietary application that would require Apple and developers to rely on its third-party plugins, which can be very problematic in development; Flash’s security problems (the ability to exploit those plugins) and the closed/open issue have led to development of a more flexible, updated HTML5 video open standard; and empirically, Flash is a contributing factor in a majority of operating system crashes.

Jobs’ comments on open architecture particularly caught my attention:

Adobe’s Flash products are 100% proprietary. They are only available from Adobe, and Adobe has sole authority as to their future enhancement, pricing, etc. While Adobe’s Flash products are widely available, this does not mean they are open, since they are controlled entirely by Adobe and available only from Adobe. By almost any definition, Flash is a closed system.

Apple has many proprietary products too. Though the operating system for the iPhone, iPod and iPad is proprietary, we strongly believe that all standards pertaining to the web should be open. Rather than use Flash, Apple has adopted HTML5, CSS and JavaScript – all open standards. Apple’s mobile devices all ship with high performance, low power implementations of these open standards. HTML5, the new web standard that has been adopted by Apple, Google and many others, lets web developers create advanced graphics, typography, animations and transitions without relying on third party browser plug-ins (like Flash). HTML5 is completely open and controlled by a standards committee, of which Apple is a member.

Makes sense to me, particularly in light of all of the smart grid interoperability standard work I did and how I think such interoperability at shared interfaces is crucial to the development of competitive retail markets, in electricity service as well as in other markets. However, when Steve Jobs talks about open architecture it doesn’t entirely ring true to me, and an article from Daniel Lyons in Newsweek discusses why I sense that cognitive dissonance:

Now along comes Apple with a walled garden. Not only does it produce the iPad’s processor, its operating system, and the device itself, but Apple sells its content, via iTunes, and keeps 30 percent of the money. It also operates the App Store, the only place selling applications to run on the iPad, and it keeps a 30 percent slice there, too. This summer it will start selling ads that run inside the apps and will keep a 40 percent slice of that revenue. …

Part of me is glad Apple is doing this, because someone needs to buck the “everything is free” trend and see what happens. But I think the company is taking things to an extreme, exerting a degree of control that may ultimately undermine its own success. If you own an iPad or an iPhone, you’re aware (and no doubt frustrated) that it won’t run videos created in Adobe’s Flash software, which accounts for half or more of all the videos on the Web. An Apple spokesman says Flash is “closed and proprietary” and that Apple supports other development tools that are “open and standard.” But banning Flash also pushes customers to buy movies and TV shows from iTunes rather than watch them on a free Web site. It pushes developers to write apps that get distributed through Apple’s App Store, rather than through a Web browser.

Lyons then goes on to recall how Apple lost market share to Microsoft in the 1980s by following a very similar strategy. Will repeating this strategy in this dramatically different market and context lead to Apple walling itself off and limiting its market potential?

I am more interested in, and worried about, Apple’s walled garden creating application-based walls within the Internet, while at the same time Jobs is talking about open standards in all web interfaces. In fact, this is one big reason why I don’t own an iPhone and won’t own an iPhone (the other is that I will never give AT&T my voluntary business), despite my Mac computer use and my iPod ownership.

Information costs and snowfall data

Posted on by

Lynne Kiesling

Here’s a paper that befits the snowy month we’ve had in the U.S. … Jonathan Zinman and Eric Zitzewitz at Dartmouth find that ski resorts over-report snowfall, and that the proliferation of iPhones has led to more consumer information on accurate snowfall and ski conditions. The paper abstract:

Casual empiricism suggests that deceptive advertising is prevalent, and several classes of theories explore its causes and consequences. We provide some unusually sharp empirical evidence on the extent, mechanics, and dynamics of deceptive advertising. Ski resorts self-report 23 percent more snowfall on weekends; there is no such weekend effect in government precipitation data. Resorts that plausibly reap greater benefits from exaggerating do it more. We find little evidence that competition restrains or encourages exaggeration. Near the end of our sample period, we observe a shock to the information environment: a new iPhone application feature makes it easier for skiers to comment on resort ski conditions in real time. Exaggeration falls sharply, especially at resorts where iPhones can get reception.

This kind of empirical economic research is particularly valuable, because it highlights the role that technology can play in enabling the aggregation of dispersed information, which better enables reputation mechanisms to discipline otherwise deceptive behavior. In many contexts this combination of technology and diffuse information feeding into a reputation mechanism provides more effective regulation than some form of centralized, government regulation. Imagine, for example, a law requiring ski resorts to report accurate conditions, with an entire agency established to monitor and enforce their compliance. Likely to be much more expensive, and less effective, than the simple threat of losing weekend business!

Hat tip to Salon article on the research.