Advanced Networking: A Critical f h fComponent of the Strategy for 

American InnovationAmerican Innovation

Johannes M. BauerKATP‐CITI International Joint Symposium

Seoul, Korea, June 24, 2011

ContextContext• Strong data growth causes imbalance between g gtraffic volumes and network capacity– Regular occurrence in infrastructure industriesg– Short term response: efficient network management– Long‐term response: investment, capacity expansiong p , p y p– Future imbalances are to be expected

• Effective responses face triple complicationsEffective responses face triple complications– Economic logic of high‐tech economy– Challenges of finding sustainable business models inChallenges of finding sustainable business models in an information economy

– Present sluggish economic  conditionsgg

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Three thesesThree theses

1 I l b l hi h t h ICT d1. In a global high‐tech economy, ICT and prosperity are linked in more complicated ways than commonly perceived

2 There is no “best” policy model: the2. There is no  best  policy model: the multiplicity of innovation processes requires i tit ti l di it d i t tiinstitutional diversity and experimentation

3. The race to leadership in ICT cannot be won permanently by one country/region

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OverviewOverview

• ICT in a high‐tech economy• U.S. policy initiativesU.S. policy initiatives• Assessment and outlook

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ICT in a high‐tech economy 

ICT and innovationICT and innovation• Notion of general purpose technology (GPT)Notion of general purpose technology (GPT) valid but misses multiplexity of roles of ICT

• Diversity of forms of innovation• Diversity of forms of innovation– Radical vs. incremental innovationsSustaining vs transforming innovations– Sustaining vs. transforming innovations

– Edge and core innovationsModular and coupled innovations– Modular and coupled innovations

– Soft innovation (Stoneman, 2010)• Flourish under different conditions and hence• Flourish under different conditions and hence will require diversity of policy approaches

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Open multi‐layer innovation systemOpen, multi layer innovation system

ertisers

sers

Adve U

Innovation performance

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Innovation performance 

Selected innovation scenariosSelected innovation scenariosR di lRadical 

innovation (Schumpeterian)

i‐modei‐Phone

FacebookiCloud

IPTV

novatio

n

Incremental S t hMobile appsyp

e of inn

Incremental innovation (Kirznerian)

SmartphonesWeb appsTy

Coupled innovation

Modular innovation

Inter‐layer dependence

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Inter layer dependence

Conditions facilitating innovationConditions facilitating innovationR di l biliRadical 

innovation (Schumpeterian)

Ability to negotiate exclusive 

Ability to appropriate super‐normal        High

dealsreturns

et pow

er  

Incremental

Access to quality‐

Low trans‐action costs    

  Marke

Incremental innovation (Kirznerian)

differentiated platforms

(e.g., net neutrality)Lo

w    

Coupled innovation

Modular innovation

Low Differentiation High

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Low               Differentiation              High

Reassessing the role of ICT & policyReassessing the role of ICT & policy• Increasing global mobility of knowledge industries andIncreasing global mobility of knowledge industries and knowledge jobs: ICT infrastructure alone is a fragile basis for national competitive advantagep g

• Difficulty of finding sustainable business models for many information industries due to rapid, easy imitation and consumer habits

• Policies in support of advanced technologies require supply and demand‐side measures as well as the ability to coordinate complex value netsP bli li d i i h ICT i• Public policy needs to interact with ICT ecosystem in new ways, as traditional forms of regulation and control are only partially effectivecontrol are only partially effective

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U.S. policy initiatives

U S contextU.S. context

• U.S. has historically had a mixed system, in which government and market components co‐existed and complemented each other

• Concern about weakening international positionConcern about weakening international position of U.S. in early 1990s (e.g., NTIA Infrastructure Report 1991) was met with deregulatory policiesReport, 1991) was met with deregulatory policies

• Renewed concerns during past few years and i h i h l dcomparisons to other countries have led to a 

rebalancing in favor of more state intervention

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From a traditional viewFrom a traditional view …

Infrastructure Adoption by Applications, deployment users services, devices

• Competition • Education • Competition• Competition • Regulation (fixed, wireless)

• Spectrum policy

• Education,digital literacy

• Pricing of services

• Competition• E-government• E-Health• Tele-education• Spectrum policy

• Rights-of-way• Industrial Policy• Subsidies

services• Universal service

• Public-private

• Tele-education• Equipment certification

• Interoperability

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Subsidies• Public investment

Public private partnerships

Interoperability• R&D support

... to a Strategy for American Innovation

Innovation for sustainable growth and quality jobs

(White House, 2009, revised 2011)

g q y j

Catalyze breakthroughs

for national priorities

• Unleash clean energy revolution• Accelerate biotechnology,

nanotechnology and advanced manufacturing

• Health care, space, and education technology

Promote market-based innovation• Accelerate business innovation with the R&E tax credit• Promote investments in ingenuity through effective intellectual

property policy• Encourage high-growth and innovation-based entrepreneurship• Promote innovative open and competitive markets

Invest in the building blocks of American innovation• Educate Americans with 21st century skills and create a world-class workforce• Strengthen and broaden American leadership in fundamental research• Build a leading physical infrastructure

D l d d i f ti t h l t

Promote innovative, open and competitive markets

• Develop an advanced information technology ecosystem

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American Recovery and Reinvestment Act (ARRA) of 2009

Broadband Investment Program Broadband TelecommunicationsBroadband Investment Program (BIP)

• Funding $2.5 billion

Broadband Telecommunications Opportunity Program (BTOP)• Funding $ 4.7 billion

d d b l• Administered by Rural Utility Service (USDA)

• Administered by National Telecommunications and Information Administration (DOC)• Expansion of broadband to 

unserved areas (<10% b db d d i )

(DOC)• Unserved and underserved 

locations and populationsbroadband adoption)– Primarily loans to existing 

providers

– Infrastructure projects: comprehensive, middle mile, last mile Public computing centersproviders

– Wireline and wireless platforms

– Public computing centers– Sustainable broadband 

adoption

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Access technologygy(Number of projects, N=199)

92

8090100

49 47607080

49 47

304050

0 0 101020

0

Fiber Coax cable

ADSL Fixed wireless

Mobile Satellite

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Source: LaRose, Bauer, DeMaagd, Chew, Jang, Ma (2010)

Access speedsp(number of projects, N=256)

90

61

77

708090

48 48

61

405060

21203040

3010

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Source: LaRose, Bauer, DeMaagd, Chew, Jang, Ma (2010)

National Broadband Plan (NBP)National Broadband Plan (NBP)• Goal 1: At least 100 million U.S. homes should have affordable 

access to actual download speeds of at least 100 megabits per second and actual upload speeds of at least 50 megabits per second. 

• Goal 2: The United States should lead the world in mobile innovation, with the fastest and most extensive wireless networks of any nation. 

• Goal 3: Every American should have affordable access to robust ybroadband service, and the means and skills to subscribe if they so choose. 

• Goal 4: Every community should have affordable access to at least 1 y yGbps broadband service to anchor institutions such as schools, hospitals and government buildings. 

• Goal 5: To ensure the safety of Americans, every first responderGoal 5: To ensure the safety of Americans, every first responder should have access to a nationwide public safety wireless network. 

• Goal 6: To ensure that America leads in the clean energy economy, every American should be able to use broadband to track andevery American should be able to use broadband to track and manage their real‐time energy consumption.

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National Broadband Map (NBM)National Broadband Map (NBM)• Mandated by U.S. Congress in ARRA 2009Mandated by U.S. Congress in ARRA 2009• Developed jointly by FCC and NTIA

– NTIA State Broadband Data Development (SBDD) Program p ( ) g– FCC revised high‐speed Internet access data collection

• Key features and weaknesses– Searchable database, containing availability and financial information based on census blocks

– High level of granularity accurate at census block (but notHigh level of granularity, accurate at census block (but not at address) level

– Considerable amount of information from proprietary sources and hence not subject to close examinationsources and hence not subject to close examination

• First step toward better information base for advanced networking policiesnetworking policies

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NBM example: advertised speedsNBM example: advertised speeds

Source: http://www.broadbandmap.gov

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Wireless broadbandWireless broadband• Wireless Innovation and Infrastructure Initiative (February 2011) building on NBP– Reallocation of 500 MHz of spectrum ($27.8 billion)

• Reallocation from UHF TV band and Mobile Satellite Band (MSS)• Reallocation from UHF TV band and Mobile Satellite Band (MSS)• Incentive auctions to achieve voluntary transactions• Considerable political opposition from broadcasters

$– Major investment incentives for network build‐out ($ 5 billion to expand 4G to rural areas)

– Wireless Innovation Fund to support research andWireless Innovation Fund to support research and development ($ 3 billion)

– Nationwide interoperable wireless network for public safety ($ 10 7 billion)safety ($ 10.7 billion)

• Goal to deploy 4G wireless broadband to 98 percent of US population by 2014p p y

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Fixed and wireless speedsFixed and wireless speeds(percent of Michigan census blocks, 2010)

60

70

40

50

20

30

0

10

768k‐1.5m 1.5‐3m 3‐6m 6‐10m 10‐25m 25‐50m 50‐100m 100m‐1g

Fixed Wireless

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Source: Bauer, Grubesic, LaRose (2011)

Fixed and wireless joint availabilityj y(percent of Michigan census blocks, 2010)

Maximum wireless download speeds

768k‐1.5m 1.5‐3m 3‐6m 6‐10m 10‐25m

speed 768k‐1.5m 0.44 0.40 1.32 0.01 0.00

1.5‐3m 0.53 0.51 1.77 0.01 0.00

download 

3‐6m 0.67 0.74 2.36 0.06 0.00

6‐10m 6.40 6.31 23.70 0.36 0.01

mum

 fixed  10‐25m 8.50 10.01 31.09 0.15 0.01

25‐50m 0.83 0.46 2.01 0.01 0.00

Maxim 50‐100m 0.16 0.30 0.78 0.00 0.00

100m‐1g 0.03 0.01 0.04 0.00 0.00

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Source: Bauer, Grubesic, LaRose (2011)

Connect AmericaConnect America• Existing universal service support system (USF)Existing universal service support system (USF)

– Based on 20th century technology and economy– Creates perverse incentives (e.g., traffic pumping,Creates perverse incentives (e.g., traffic pumping, phantom traffic) and outcomes 

• Pending reforms initiatives– Joint reform of inter‐carrier compensation (ICC) and Universal Service Fund (USF)E li it t f b db d d IP t k– Explicit support for broadband and IP networks

– Targeting of funds to areas that need supportReliance on economic incentives and markets– Reliance on economic incentives and markets

• Integrated approach to wireline and wireless platforms neededplatforms needed

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Rational universal service policyRational universal service policy• Private and shared costs of IP networksPrivate and shared costs of IP networks

– Equipment needed to connect: private costs– Local ISP, regional, global backbones: shared costs

i f l d d i• Economies of scale, scope, and density– Per user shared costs vary inversely with size of base (increase 

for smaller user group)g p)– Per user shared costs increase with user dispersion

• Justification for subsidies or public provision If b fit i t d bli ( ill )– If benefits are private and public (spill‐overs)

– If all benefits are private• If access costs < private benefits but (access + local shared  costs) > 

b f ff fprivate benefits:  no or insufficient private provision of access• If (access + local shared costs) <private benefits but (access + local + regional + global shared cost) < private benefits: private provision  financially unsustainablefinancially unsustainable

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Network managementNetwork management• Versions of network neutralityVersions of network neutrality

– Zero‐price rule (network operators prohibited from charging content and application providers)

– Non‐discrimination rules– Prohibition of unfair competition (antitrust)

• Core of findings from theoretical, experimental, and empirical research (see DeMaagd & Bauer, 2011)– Differentiation increases short‐term efficiency– Differentiation will often also increase incentive to invest and innovate for platform operatorsand innovate for platform operators

– Zero price rule enhances innovation incentives for modular innovation but may depress coupled innovationinnovation but may depress coupled innovation

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Non neutrality and innovationNon‐neutrality and innovationExpectedExpected profitabilityof content, applicationapplication innovations

Direct and indirect costs to ASPs > 0

Zero‐price mandate

Projects

Reduction in innovation activityReduction in innovation activity, could be compensate by public 

and private actionsS B (2011)

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Source: Bauer (2011)

FCC Open Internet Order (2010)FCC Open Internet Order (2010)Principle Fixed broadband Mobile broadbandPrinciple Fixed broadband 

service providers Mobile broadband service providers

Transparency “Providers must disclose the network management practices, performance characteristics, and terms and conditions of their broadband services?” (FCC, 2010)

No blocking “Providers may not block “Providers may not blockNo blocking Providers may not block lawful content, applications, services, or non‐harmful devices” (FCC, 2010)

Providers may not block lawful websites, or block applications that compete with their voice or video ( , )telephony services” (FCC, 2010)

No unreasonable “Providers may not N/ANo unreasonable discrimination

Providers may not unreasonably discriminate in transmitting lawful network traffic” (FCC, 2010)

N/A

traffic  (FCC, 2010)

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Assessment and outlook

Performance metricsPerformance metrics• System of indicators required to meaningfully measure y q g yperformance in ICT– Single indicators (e.g., OECD’s broadband lines per 100 inhabitants, price indices, download speeds, QoS)

– Composite indicators (e.g., Networked Readiness Index, E‐Readiness Index Connectivity Scorecard)Readiness Index, Connectivity Scorecard)

• Risk that they generate mistaken focus on snapshot at a particular point in time but short‐term globala particular point in time, but short term global leadership has switched repeatedly between regions (U.S., Europe, Asia) and countries( p )

• Systematic national reporting that allows comparisons over time would be desirable

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US broadband diffusionUS broadband diffusion

Source: FCC (2011), p. 1131

An assessmentAn assessment• U.S. embarked on a bold deregulatory experiment during 

th l 2000the early 2000s– Has boosted commercial investment relative to prior policy of 

stringent regulation– Has not delivered broadband on a ubiquitous basis across 

diverse regions of the country• Recent policy initiativesRecent policy initiatives

– Embed advanced networks in a broader, national  innovation strategyFinancial support toward advanced networking particularly in– Financial support toward advanced networking, particularly in rural and underserved areas

– Legal and regulatory initiatives (net neutrality) to safeguard d l i ti i ti l l t d k t ith tmodular innovation in vertical related markets without 

quenching coupled innovation– Institutional initiatives (open network platforms via BTOP, RUS, 

700 MH C bl k) t f ilit t titi700 MHz C‐block) to facilitate competition32

Outlook and lessonsOutlook and lessons• Market forces play a strong role in advanced ICT p y gindustries and support investment and innovation

• Policies to support advanced networks and ppservices are important to set framework for markets and mitigate their weaknesses

• To achieve high overall sector performance, advanced networks need to be complemented with other supply and demand side measureswith other supply and demand‐side measures

• Not all relevant factors are under the control of policy makers (e g entrepreneurship risk taking)policy‐makers (e.g., entrepreneurship, risk‐taking)

• Countries can inspire each other but lessons are better emulated than copiedbetter emulated than copied

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ReferencesReferences• Bauer J M (2011) Network Openness Innovation and SectorBauer, J. M. (2011), Network Openness, Innovation, and Sector 

Performance, in: I. Spieker genannt Döhmann & J. Krämer (Eds.) Network Neutrality and Open Access, Baden‐Baden: Nomos.

• Bauer, J. M., Grubesic, T., & LaRose, R. (2011), From Data to Action: Mining , , , , , ( ), gthe National Broadband Map to Improve Policy, Report submitted to NTIA, East Lansing, Michigan.

• DeMaagd, K. & Bauer, J. M. (2011), Network neutrality and sector f l i li i i h i l i h d ” i Gperformance: exploring policy options with simulation methods”, in: G. 

Faulhaber, G. Madden & J. Petchey (Eds.) Regulation and the performance of communication and information networks, Cheltenham, UK and Northampton, MA: Edward ElgarNorthampton, MA: Edward Elgar 

• FCC (2011), Internet Access Services: Status as of June 30, 2011. Washington, D.C.

• LaRose, R., Bauer, J. M., DeMaagd, K., Chew, H. E., Jung, Y. and Ma, W.LaRose, R., Bauer, J. M., DeMaagd, K., Chew, H. E., Jung, Y. and Ma, W. (2010), Public Broadband Investment Priorities in the United States, Paper presented at the 61st Annual Conference of the International Communications Association, Boston, MA, May 26‐30, 2011.

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ContactContact

Johannes M. BauerDepartment of Telecommunication, Information Studies, & MediaMichigan State University, East Lansing, Michigan, 48824, USA

Email: bauerj@msu.edu, Phone: +1‐517‐432‐8003SSRN Author page: http://ssrn.com/author=107549

Internet: http://www.msu.edu/~bauerj

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