What if Information Technology and Communications Do Not Boost Productivity?

Is it a myth that investing in more information technology boosts productivity? A corollary: has information technology boosted living standards? Not so much,  some say. Others would argue the gains are there; just hard to measure.

The absence of huge productivity gains has created what economists call the “productivity paradox.”

Basically, the paradox is that the official statistics have not borne out the productivity improvements expected from new technology.

In fact, some might argue that higher investment in information technology investments have provided value less than expected.  The implication is that such investments should be avoided or limited.

None of that is good news for suppliers of IT goods and services. Nor, arguably, is that terribly good news for supporters of high speed access as a driver of economic development.

To make the point, most of us assume such investments drive economic growth. We actually do not know that, as an economic certainty.

Equally likely: some value is obtained, but less than some other investments might provide. It is possible that allowing workers to sleep more or commute less would provide higher productivity benefits. It is possible that any number of other “how you treat people” programs would provide more productivity growth than investing in IT.

Of course, none of that is likely to matter. We will behave as though high speed access is a necessary good, without any actual understanding of cause and effect.

St. Louis Federal Reserve Board

Some economists, and many business executives, might agree that productivity growth driven by applied information technology does not seem to be in much evidence in the 2016 market, Uber notwithstanding.

Many studies attribute a mid-1990s U.S. productivity surge to the direct and indirect effects of information technology investments, according to John Fernald, an economist working for the Federal Reserve Bank of San Francisco.

But such gains do not last forever. To be specific, by the mid-2000s, the low-hanging fruit of IT had been plucked, he argues, which accounts for a productivity slowdown in the broader U.S. economy.

Industry data support the IT story for the mid-2000s TFP (total factor productivity) slowdown, he argues.

That raises a question: if productivity gains driven by prior waves of technology now yield mostly incremental and modest gains, then the value of additional IT investments might be questioned.

A related question: what new wave of technology, applied to business processes, could reignite a wave of economic growth?

Historians of technology argue that a broad wave of technological breakthroughs led to a surge in productivity growth after World War I that finally played out around the 1970s. Among those drivers were electricity, the internal combustion engine, chemistry, entertainment, information, and communication.

Some would point to one-time gains from infrastructure programs such as the construction of the Interstate Highway System. An important corollary: any second wave of investment in similar infrastructure would have “one time” effects that would not be long-lasting.

IT-producing industries saw productivity explode in the 1995-2000 period. But after 2000, productivity returned close to its pre-1995 pace.

IT-intensive industries saw only a modest pickup in the late 1990s but a marked burst in 2000-2004. After 2004, TFP growth receded close to its pre-1995 pace, says Fernald.

“IT led firms to innovate in how they manage sales, inventories, and supply chains; the Internet is an extreme example, in that it made possible completely new ways of doing business,” according to Fernald.

For a wide swath of the economy, improved ability to manage information and communications has led to changes in how firms do business.

The gains from the IT revolution came after a period of subdued productivity growth. A working paper in 2014 by John Fernald (Federal Reserve Bank of San Francisco) asserts that productivity growth was “exceptional” due to the tech-boom and was restored, prior to the Great Recession, to “normal” levels of 1973-95.

The relative underperformance of information technology investments recently is a problem. It suggests we will have to wait for the next wave of advancements to boost productivity. 

And some might suggest the value of IT investments has to be weighed against investments in other parts of any business that could have equal or higher returns. 

AWS Will Generate $10 Billion in 2016 Revenue, Amazon Says

Amazon Web Services will reach $10 billion in annual sales in 2016, according to a Securities and Exchange Commission filing by Amazon, reaching that level even faster than Amazon did.

Amazon CEO Jeff Bezos says in the same filing that the company has achieved those successes  because Amazon has an organizational culture “that cares deeply about and acts with conviction on a small number of principles” of “customer obsession rather than competitor obsession, eagerness to invent and pioneer, willingness to fail, the patience to think long-term.”

“One area where I think we are especially distinctive is failure,” Bezos said. “I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins.”

“To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment,” said Bezos.

source: Synergy Research

“Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there,” Bezos said.

That is not such a “dumb” behavior, even Bezos admits. “Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right,” Bezos said.

In other words, conventional wisdom is right, perhaps 90 percent of the time.

“Given a ten percent chance of a 100 times payoff, you should take that bet every time,” said Bezos. “But you’re still going to be wrong nine times out of ten.”

Not many firms can withstand that level of “failure.”


source: IDC

No Surprise: Survey Finds Consumers Love Zero Rated App Usage

A new CTIA-commissioned Harris Poll survey found that Americans would overwhelmingly welcome new free data options that allow consumers to access more content and services without counting against their data plan.

That should come as absolutely no surprise. What consumer would turn down a chance to use desired apps, and learn about new apps, at no incremental cost?

In fact, opponents of zero rating are virtually required to argue that “despite clear consumer and end user value,” zero rating should be banned. Why? Because it is deemed potentially harmful to some suppliers.

Almost nobody ever tries to argue the policy is harmful to users, consumers as a whole and customers.

The survey found that Millennial respondents:

• 94 percent were extremely/somewhat likely to try a new online service if it is a part of a free data offering
• 98 percent were extremely/somewhat likely to stay with their current provider if it offered free data
• 94 percent were extremely/somewhat likely to use more data if it some didn’t count against their monthly data usage
• 77 percent were extremely/somewhat likely to sign-up with a new wireless provider offering free data

Zero rating was attractive to all respondent adults as well:

• 84 percent were extremely/somewhat likely to try a new online service if it is a part of a free data offering
• 93 percent were extremely/somewhat likely to stay with their current provider if it offered free data
• 85 percent were extremely/somewhat likely to use more data if it some didn’t count against their monthly data usage
• 65 percent were extremely/somewhat likely to sign-up with a new wireless provider offering free data

Free data services help draw users to new entrants and start-ups competing with dominant mobile apps and web providers, CTIA and others argue.

Specifically, 94 percent of Millennials (18-34 years old) were more likely to try to a new online service if it was a part of free data offering.

Similarly, free data services enhance competition in the mobile services business. Some 77 percent of the Millennials said they were more likely to sign-up with a new wireless provider that offered free data, and 98 percent of the Millennials were more likely to stay with their current wireless provider if it offered free data services.

Mobile Remittances in China Surge

According to WeChat, owned by digital media business Tencent, 420 million people sent each other lucky money using the app’s payment service on the eve of Chinese New Year.

According to WeChat, it has seen a total of 8.08 billion red envelopes sent so far for Chinese New Year, eight times more than last year.

To put this into context, according to PayPal it made 4.9 billion transactions in 2015 (half of the number of transactions made on WeChat just for Chinese New Year) and only 28 per cent were made on a mobile device.

As in African markets, mobile  remittances have been highly successful because they replace existing methods of money transfer and payment that are costly and time-consuming.

That will be a factor in U.S. markets, but never has been seen as the primary value of mobile payments. That traditionally has been viewed as a “retail payment” mechanism.

The obvious point is that adoption curves for mobile “wallets” or “payment” services in the U.S and other markets where “financial inclusion” and “banking” systems are more developed, will be different from China’s pattern, or Africa’s pattern.  

Adoption of mobile banking, payments and money transfers is going to be much more rapid where such capabilities bring “convenient banking” services to people who do not have such access.

Adoption is likely to be far slower in markets where banking services are ubiquitous.

Similarly, Chinese social network Weibo released figures showing that 134 million active users logged on during the eve of Chinese New Year, with 100 million receiving lucky money digital envelopes using the platform.

Compared to China’s markets, it is likely that U.S mobile payments will be less driven by peer-to-peer cash transfer and much more by remote payments. In-person retail payments--the “poster child” for U.S mobile payments--might actually be dwarfed by remote payments.

In other words, U.S. mobile payments activity is likely to be driven by payments that today are conducted using debit or credit cards, but for online transactions, not so much retail payments.

source: Forrester Research

Global Enterprise Spending on Telecom to Drop 2% in 2016?

Worldwide IT spending is forecast to total $3.49 trillion in 2016, a decline of 0.5 percent over 2015 spending of $3.5 trillion, according to Gartner analysts.

"Most traditional IT now has a 'digital service twin' — license software has cloud software, servers have Infrastructure as a Service, and cellular voice has VoLTE," says  John-David Lovelock, Gartner VP. "Things that once had to be purchased as an asset can now be delivered as a service.”

That can change spending patterns, making them less “lumpy.” In place of stairstep capex, an entity might see a more-linear monthly subscription pattern.

Worldwide IT Spending Forecast (Billions of U.S. Dollars)
	2015 Spending	2015 Growth (%)	2016 Spending	2016 Growth (%)
Devices	650	-6.4	626	-3.7
Data Center Systems	171	2.9	175	2.1
Software	308	-1.9	321	4.2
IT Services	910	-4.7	929	2.1
Communications Services	1,470	-8.4	1,441	-2.0
Overall IT	3,509	-6.0	3,492	-0.5
source: Gartner

The device market will decline 3.7 percent in 2016. 

ommunications service spending will dip two percent, with global spending reaching $1.4 trillion, Gartner estimates. If IT spending captures the bulk of buisness spending on communications, then it appears--at an aggregate level--that business spending on communications will fall in 2016.

We are Moving to a Gigabit Market Standard, Yet Apps Requrie No More than 8 Mbps, Tops

Many would credit a 2015 Government Accountability Office report for a new “broadband labeling” program launched by the U.S. Federal Communications Commission. That report also indicates how little bandwidth actually is required for people to use any application.

The most intensive application--high definition streaming video--requires 5 Mbps to 8 Mbps per stream, for example. Two-way online gaming requires 4 Mbps.

Other key apps require far less: less than a megabit per second. And yet we are moving quickly to a gigabit per second market standard.

source: GAO

Municipal Broadband: Competition or Investment, Choose One

Regulation of communications services often poses a cruel and difficult choice, namely choosing between competition or investment. In fact, that is the explicit context of policymaking in the European Community and North America, for example.

In the EC, after decades of fostering policies leading to robust competition, policymakers now are focusing on methods of obtaining more of the other sort of good, namely robust investment in next generation networks.

In the U.S market, policymakers rapidly shifted to policies designed to encourage investment in next generation networks, at the expense of policies that deliberately encouraged competition.

Such trade-offs are a difficult but real constraint on all policymaking in the next generation networks arena, including that of local access and high speed access services.

The rationale for municipal broadband is that it provides social and economic good for the community, unobtainable from private providers. Occasionally, the argument is that doing so also will lead to more competition.

That is unlikely to be a stable long-term result. In the capital-intensive fixed networks business, there are huge constraints on sustainability.

Consider rural markets, where we routinely subsidize service, as there literally is no viable way for a private provider to create and sustain a business. “High cost subsidies” are precisely a recognition that, in fact, there is no private market business case for fixed network communications, in some markets.

Markets where municipal high speed access services are feasible often also are markets where existing private suppliers face the most-daunting business cases. That leads to underinvestment and also the attractiveness of municipal broadband.

One unlikely long term outcome is an increase in competition, though.

“Municipal systems regularly obtain 60 percent market share and remove a major anchor tenant (the government) from private networks, thereby weakening the economic case for private investment in upgrades, Ford notes.

In any market with two current suppliers, a third entrant grabbing 60 percent market share (installed base, actually) will drive one of the other existing competitors from the market.

In the near term, consumers might well benefit from a new entrant offering gigabit speeds in a market where none of the other providers is willing to supply more than 40 Mbps to 50 Mbps, if that. In the long term, that disparity will result in a new market share pattern that continues to support only two providers, as there is not enough profit left when two fixed network providers compete for 40 percent of the potential customer opportunity.

Generally speaking, with today’s economics, a fixed network services supplier probably requires share of about a third of potential customers to stay in business, long term.

That is ultimately unlikely, if one provider gains 60 percent share.  In the long run, the number of firms that can profitably serve a market “is what it is,” so eventually either the municipal entrant will fail or a private provider will exit or materially reduce its investments.

That is likely to be particularly true in the toughest markets, where incentives for private providers are most difficult.

Many would argue that municipalities should have the right  to create and operate their own high speed access business. But many also might argue that doing so is generally not the best use of municipal financial resources.

It is not that a municipal broadband network fails to deliver social benefits, but that it generally does so inefficiently.

One of the obvious justifications for municipal broadband is that it boosts economic development. That generally is the argument made for local government spending on sports arenas as well.

Skeptics might argue that such investments do not so much “create” economic activity as shift it from one existing area to another.

In other words, it is possible to argue both that broadband is economically important, and also that, on a net basis, such effort shift activity from one geographic area to another. For such reasons, state efforts to attract companies to move from elsewhere result in zero net gain, though helping one area at the expense of another.

As Ford argues, “most of the economic gains attributed to municipal broadband systems are based on economic migration rather than economic development.”

Municipal broadband networks should not be illegal, but most often should be deployed as a last resort, argues  Dr. George S. Ford, Phoenix Center for Advanced Legal and Public Policy Studies chief economist.

Many supporters of municipal broadband networks would agree, the difference perhaps being the evaluation of “last resort” necessity, and the inability of private actors to supply remedies.

Municipal broadband is in almost all scenarios subsidized entry, according to Dr. George S. Ford, Phoenix Center for Advanced Legal and Public Policy Studies chief economist.

“In Chattanooga-Tennessee, for example, the city’s system received a federal grant equal to about $2,000 per subscriber, while in Bristol-Virginia the subsidies received from various sources equaled about $7,000 per subscriber,” says Ford.  “Many if not most proponents of municipal broadband acknowledge that without subsidization, municipal broadband is a non-starter.”

The point is that municipal broadband provides social benefits, but at a relatively low level in most instances.

In many ways, the analysis presents the sort of “trade off” dilemmas many national telecom regulators have faced. It often, if not always, is the case that competition and investment are rival outcomes: more of one means less of the other.

As Ford argues, “the economics indicate that subsidized municipal broadband is incapable of increasing competition, if competition is measured as the number of firms offering service in a given area.”

Nor are municipal ISP operations necessarily free of the sort of predatory dynamics antitrust laws are designed to remedy.

“Subsidized municipal entry is prone to be predatory,” Ford argues. “Municipalities operating broadband networks are not, as the Supreme Court observed, acting only ‘to serve the public weal.’”

“Instead, the municipal entrant seeks to capture market share from private sector providers,” says Ford. “As such, if one discusses municipal broadband in the context of competition, the asymmetric subsidized entry of a municipal system is better characterized as anticompetitive in nature.”

“Economic theory suggests that the mere threat of municipal entry can reduce private sector investment,” Ford adds.