May 4, 2006  ·  Tim Wu

So I’ve been in a debate with Christopher Yoo over at legal affairs on the topic of Network Neutrality –

Here’s a Snippet:

A lot of the difference in Chris and my own views stems from how we think the process of innovation occurs. Chris, rather like the later Schumpeter, believes that large firms — in this case, network operators, drive telecommunications innovation. As the later Schumpeter put it, the “large-scale establishment” is “the most powerful engine of [economic] progress and in particular of the long-run expansion of total output.”

Chris thinks incumbents like AT&T will rarely or perhaps never threaten innovation. Instead he views them as the driving force of the technologies of tomorrow.

I am skeptical. I think these view of incumbent behavior has been discredited, and that in general incumbents, particularly in a monopoly position, have a strong incentive to block market entry and innovative technologies that threat their existing business model.

  • http://www.techfutures.net Chris Varley

    As the former new market development vice president for AT&T Labs (and, before that, Managing Director for AT&T’s Interactive Services group) I can attest that companies like AT&T have absolutely no interest in advance radical, transformative innovation, although they do excel at incremental innovations to existing product lines.

    I don’t think this is what Schumpeter had in mind when he wrote about large companies innovating, however; and Christensen (Innovator’s Dilemma, which basically translates Schumpeter into language business people can understand) demonstrates the conundrm such firms face when they do try to innovate radically.

    When I arrived at AT&T to help re-launuch WorldNet, one of the first things I got hit with was a 200-plus page PowerPoint that made it “crystal clear” that AT&T’s customers were not interested in the Internet and that it was silly for us to go into that market. Seven years and three positions later, I finally gave up trying to turn the battleship around. (Actually, I gave up when I moved over to the Labs, which I thought might be a better environment from which to work; but even there my efforts were soon thwarted by changes in strategic direction within corporate that eliminated all the long-term, speculative research divisions within the corporation.)

    For real insight into the ways in which large companies actually can play a vital role in the large-scale commercialization of disruptive technologies, read Fast Second by Markides and Geroski. There is very definitaly an important–even pivotal–role for large companies to play in the advancement and large-scale commercialization of radical, disruptive innovations, but they are poorly positioned to be the “nurturing incubators” for such breakthroughs, and have sufficiently large legal divisions to impede market entry of any technology that threatens their core, existing operations.

  • http://johnthomson.org/blog John T.

    I’m curious why you think that so much of the debate on this issue has revolved around the issue of the possibility of providers blocking or degrading access (which many find to be unlikely). To me, the crucial issue is that TCP/IP and the neutral network have created a commons from which anyone with access can benefit (big and small content providers as well as users). The market plays a big role in why maintaining the commons is important, but there are also a number of non-market arguments which deserve attention. With user driven content just taking off (with “Web 2.0″), I would think this is hardly the time when we should be considering actions which may put speed bumps in the commons.

  • David Butcher

    The issue surely is incentives. Isn’t economics all about incentives? If a network is bundled with a service provider its retail arm has an incentive to block competition by any means. If service provision and network managment are in separate businesses, the incentives change. The network business now has an incentive to maximise traffic and the service company has an incentive to maximise the number of customers and the quality of services. The principal task for the regulator is to ensure that the network company never offers competitive retail services. Contrary to popular opinion, this can increase the value of the network business. Freed from service risks the network becomes a long-term safe institutional investment, like a road or a building, and this increases its potential p/e ratio.

  • David Butcher

    The issue surely is incentives. Isn’t economics all about incentives? If a network is bundled with a service provider its retail arm has an incentive to block competition by any means. If service provision and network managment are in separate businesses, the incentives change. The network business now has an incentive to maximise traffic and the service company has an incentive to maximise the number of customers and the quality of services. The principal task for the regulator is to ensure that the network company never offers competitive retail services. Contrary to popular opinion, this can increase the value of the network business. Freed from service risks the network becomes a long-term safe institutional investment, like a road or a building, and this increases its potential p/e ratio.

  • Ryan Humphrey

    “I’m curious why you think that so much of the debate on this issue has revolved around the issue of the possibility of providers blocking or degrading access”

    John, the reason that people are afraid of intentional degradation of services is that there is no other way to implement what they are talking about. Up to now, the service providers have not been holding back some sort of bandwidth or speed in order to offer this service later on. Currently, they are providing unrestricted performance. So, the only way they can offer increased performance to some paying customers is to make sure that there is an artificial limit on those who do not pay. After all, right now when I make a Google search, the number at the top of the page says it was done in .28 seconds. Now, tell me how the ISPs feel that they can speed that up.

    Beyond that, the simple act of putting in hardware that scrutinizes every packet that passes through their system to check if it is from/for a customer paying for the extra service is going to introduce a level of slowdown all by itself.