Tag Archives: technology

Has An Increase In Technology Caused An Increase In Risk?

Before the Internet, investors were constantly scrambling around making phone calls and doing other methods of research to discover the best ways to invest. Overall, technology soars in the realms of the Stock Market. According to Tim’s Paper, we have gone through three different sectors when relating to the stock market and each sector has gone through its own revolution. “First, there was the agricultural revolution, then the industrial revolution, and now we are in the information revolution.” More and more smaller companies are able to work their way into the market by breaking different barriers involving technology; for example smaller companies can create their own web pages to expand to more consumers. “Information technology based companies have a high market value. Companies create higher market value with expanded services using information technology.”

Has this increase been a good thing for all people? According to Burton Malkiel in A Random Walk Down Wall Street, “Some portfolio managers have argued that diversification has not continued to give the same degree of benefit as was previously the case. Globalization led to an increase in the correlation coefficients between the U.S. and foreign markets as well as between stocks and commodities” (210).

When a broker makes a decision to invest, there are many factors that come into play such as the buying and selling price for the past couple years and the stock’s beta. Malkiel states that “the beta measurement is one of putting some precise numbers on the subjective feelings money managers have had for years. The beta calculation is essentially a comparison between the movements of an individual stock and the movements of the market as a whole” (216-217).

But has the beta, otherwise known as systematic risk, always been correct? In fact, it does have its’ downfall in the sense that “betas for individual stocks are not stable over time, and they are very sensitive to the market proxy against which they are measured” (233). However, with the growth of information technology, we will continue to break barriers towards improvements of risk analysis. Stephen Ross was one of the first to do so. “Ross has developed a theory of pricing in the capital markets called arbitrage pricing theory(APT)” (229). When using systematic elemants of risk, particular stocks and porfolios may be too complicated to be captured by beta because any particular stock index is an imperfect representative of the general market. These flaws portrayed by beta may fail to capture a number of important systematic elements of risk.

I believe that information technology has caused an increase in risk, but many investors or have continued to use the “beta” calculation as one method which may be a downfall. Our internet has given us large amounts of information on the Stock Market and many corporations. And as Malkiel points out, “We must be careful not to accept beta or any other measure as an easy way to assess risk and to predict future returns of any certainty. You should know about the best of the modern techniques of the new investment technology—they can be useful aids” (233).

Facebook Makes Another Big Move: Oculus

Who would have thought that Facebook would make another major acquisition so soon after the purchase of WhatsApp? Facebook announced on Tuesday afternoon it has reached a deal to acquire Oculus VR for $2 billion. The deal, itself, was comprised of $400 million in cash and 23.1 million shares of Facebook stock. Although Oculus VR Inc. has only been a 20-month-old maker of virtual-reality goggles, they have also become the leaders of the industry; and Facebook saw an opportunity with them. According to the Wall Street Journal, there are many analysts that believe this is a great long term investment such as Doug Anmuth of J.P. Morgan. “We do not expect Oculus to have any impact on Facebook’s near-term revenue,” Anmuth said.

I personally don’t know everything that Facebook has in store with this purchase, but I can assure you it will definitely have an impact on our future. The product that Oculus makes is called the Rift. Currently it is still in its’ infant stages, but many have said it is different from anything they’ve ever experienced in their lives.

“Imagine enjoying a courtside seat at a game, studying in a classroom of students and teachers all over the world or consulting with your doctor face-to-face just by putting on goggles in your home,” said Mark Zuckerberg.

Although Facebook has made purchases like WhatsApp to narrow down their competitors, they are also looking to expand into new fields of business but this very acquisition will take a long time to see results.

Facebook will face many obstacles in the next decade such as trying to convince consumers to adopt to virtual-reality technology. “The technology has long been criticized for triggering motion sickness in users, a challenge that Oculus has said it is working to solve.” But Mr. Zuckerberg remains confident stating “we think people will love using this technology, and we’re making a long- term bet that immersive, virtual and augmented reality will become a part of people’s daily lives.”

Really? Is this what our world is coming to? Will this type of technology change the world and human behavior for the worse if this is able to reach the market in the next 10-15 years? Although I personally believe it would be a great experience to have a Rift, I have some setbacks for the product. Just like smartphones have completely changed the young generation’s soft skill behavior, I don’t want to imagine what the Rift would do either, but hey, why not right? According to the Huffington Post, Zuckerberg went on to state in a Facebook post “Virtual reality was once the dream of science fiction. But the internet was also was a dream, and so were computers and smartphones. The future is coming and we have a chance to build it together.”

(Revised) Our Government Must Take Action

We are in a time where a current tech revolution is taking place. With this being said, the U.S. economy has a technology problem and could use a government intervention. There is a lot going on that many Americans are not very aware of.

Let’s take it back in time a little. Every time new technology has entered our economy, it has always put millions of people at risk of permanent unemployment; but this truly does not have to be the case. In the past, many believe that the government has intervened to help in all of the technology waves we have gone through, except the one we are in now.

Back during the industrial revolution, the government saw that our education system needed a boost. Reforming the way the “system” worked by teaching young adults to learn how to follow instructions, just like one would do in a factory, was the “name of the game…” until now.

This day in age the new game is the race to further advance technology; there’s no denying that. Whether or not you develop your own “big idea,” the future of many jobs will be needed on the Internet and using advanced technology. Companies like Domino’s Pizza already show signs of this need. Domino’s CEO J.Patrick Doyle “noted that 40 percent of all U.S. sales for Ann Arbor-based Domino’s are online, and nearly one-third of its employees use advanced technology in their jobs.” He went on to say, “If it’s affecting a pizza place, then I can tell you the same thing is happening at the automotive companies, and at furniture companies, and all the other employers in Michigan.”

How can our government help with this trend we will continue to encounter? A major policy change needs to take place; and it starts with our U.S. education.

Today, we are in the same “system.” I put system in quotations because it signifies our education system of forcing kids to follow instructions and continue to work under a boss and still “follow instructions.” Students from Pre-K to College are forced to learn certain traits and skills that are 1) outdated and 2) not helping the current generations that are entering the job market. Even though it does help one’s chances today in the job market by furthering your education and going to graduate school, our system is very flawed. Today, we are beginning to see a separation gap between those who are sticking to the “system” and learning how to follow instructions, between those that are taking it further by following their own passions to help increase their “creative” aspect. I believe this is one of the most underestimated factors that will affect our economy in the future; and the government is our only help. Technology will continue to grow and expand in the future, and if the government does not come up with a creative plan to fix our education system, we are going to have a major problem.

The government cannot keep funding for the traditional school system and forcing kids down a certain path. Our government needs to support schools’ programs like entrepreneurship and ways to increase students’ work with advanced technology.

“The capacity for creating jobs is obviously there. The question is: Is this going to happen on its own?” said John Schmitt, a senior economist at the left-learning Center for Economic and Policy Research. “It has to be part of a larger political process.”

While this “change” cannot happen all at once, especially in the K-12 education system, small steps need to be made. Chris Dede and John Richards are Harvard University professors who propose a digital teaching platform called ‘Time to Know’ that allows teachers to formulate large and small group learning, as well as individual education. Dede and Richards “envision a classroom where each student has a computer, but the teacher can press a button to make all devices freeze, capturing a large group’s attention. Beyond that, the teachers would use the broader big-group lessons to let each child find an individual understanding of how that lesson impacts them, personally.” This in turn would encourage students to follow their true passions in life; they should not be forced down a skillset they don’t want to learn or just have to “follow the instructions” to accomplish.

These are some of the small steps that our government truly needs to take to help the future of our economy. Technology will only keep growing and the jobs should increase when technology advances; not decrease. We are in a time where serious action needs to take place involving the government and our old education system. The education reforms by the government in the past have “protected a bunch of people from becoming unemployed because they didn’t have the right skills anymore.” Today, our government needs to work through major policy changes with our education system during this technology revolution to prevent a larger separation gap in the future of advanced technology users and all other “follow the instruction” employees.

Our Government Must Take Action

We are in a time where a current tech revolution is taking place. With this being said, the U.S. economy has a technology problem and could use an intervention. There is a lot going on that many Americans are not very aware of.

Let’s take it back in time a little. Every time new technology has entered our economy it has always put millions of people at risk of permanent unemployment. Many believe that the government has intervened to help in all of the technology waves we have gone through, except the one we are in now.

Back during the industrial revolution, the government saw that our education system needed a boost. Reforming the way the “system” works by learning how to follow instructions: just like one would do in a factory. Then it got to the point where many people were pushed to go to college: to help those learn more to do more for our economy.

Today, we are in the same “system.” Although it does in fact help for the job market to further your education today by going to graduate school, our system is very flawed. Today there is a separation gap occurring between those who are sticking to the “system” and learning how to follow instructions, between those that are taking it further and on their own to be more “creative.” Technology will continue to grow and expand in the future, and if the government does not come up with a creative plan to fix our education system, we are going to have a major problem.

The government cannot keep funding for the traditional school system that is in place right now. Our government needs to support school’s programs like entrepreneurship and ways to increase students work with advanced technology.

“The capacity for creating jobs is obviously there. The question is: Is this going to happen on its own?” said John Schmitt, a senior economist at the left-learning Center for Economic and Policy Research. “It has to be part of a larger political process.”

While this “change” cannot happen all at once, especially in the K-12 education system, small steps need to be made. Chris Dede and John Richards are Harvard University professors who propose a digital teaching platform called Time to Know that allows teachers to formulate large and small group learning, as well as individual education. Dede and Richards “envision a classroom where each student has a computer, but the teacher can press a button to make all devices freeze, capturing a large group’s attention. Beyond that, the teachers would use the broader big-group lessons to let each child find an individual understanding of how that lesson impacts them, personally.”

These are some of the small steps that government truly needs to take to help the future of the economy. We are in a time where serious action needs to take place involving the government and our old education system. In turn, this will help the future of our economy allowing younger generations to become more involved and have a better grasp with our internet and technology in the future.

Move Over New York – Hello San Francisco

As a Bay Area native planning to work in San Francisco after graduation, I recently had a discussion about housing with my dad.  I casually mentioned that the SOMA (South of Market Street) neighborhood seems like an attractive place to live.  His eyes widened with shock as I said this.  “Why would you want to live with all the hookers and homeless?” he asked.

Twenty years ago, my dad’s question would be an excellent one.  At that time, you never ventured into the SOMA district unless you were looking for some illegal fun.  Today, however, the SOMA neighborhood is a thriving area with lots of young professionals.  And its transformation represents how San Francisco is becoming New York.  Given the Bay Area’s thriving technology industry and the ancillary business that this technology supports, San Francisco is on track to replace New York as America’s center of business.

Numerous statistics support the conclusion that New York is on the decline and San Francisco is on the rise.  The most obvious is the recent change in resident population of these two cities.  As is evident in the graph below, while New York’s population growth has been flat and sometimes even negative since the Great Recession, San Francisco continues to draw in new residents and accordingly new workers (SF is in blue).

Resident Population

This boom in resident population in San Francisco has also resulted in a boom in employment.  The following graph illustrates changes in unemployment in San Francisco and New York (SF is in blue).  While employment rates in New York have struggled to recover since the Great Recession, San Francisco’s economy is booming, and it boasts one of the lowest unemployment rates in all of California!

Unemployment

This boom in the economy has resulted in higher incomes in the Bay Area area relative to New York.  The next graph shows changes in per-capita income in these two cities and throughout the aggregate United States.  Notice that while all three graphs have an upward trend.  Both the slope and the magnitude of per-capita income is highest in San Francisco since the Great Recession (SF is in blue).

 Income

One unfortunate consequence of San Francisco’s strong economic growth is the impact on prices.  The cost of living in San Francisco has grown around 2.5% recently, whereas in New York, the cost of living has only grown about 2% annually.  The graph below illustrates this point by comparing changes in home prices in San Francisco, New York, and the aggregate United States.  Notice the huge spike in home prices in San Francisco (SF is in blue).  I have already written about this phenomenon in “San Francisco – Almost the Perfect City,” where I argue that this huge uptick in home prices is ultimately the result of a largely growing labor force and a strong job sector.

Home Prices

So why is it that San Francisco is growing so much faster than New York?  Ultimately there are two main factors contributing to San Francisco’s rise: (1) San Francisco’s growth is widely dependent on the booming tech sector, whereas most of New York’s industry is concentrated in finance (2) San Francisco’s political environment greatly favors technology-related business.

After the Great Recession, the financial industry was forced to take a step back.  Given the pivotal role banking played in causing the financial crisis, the industry took a huge hit in 2008 and is still recovering.  The hit was even larger in places where the economy relied heavily on banking, such as New York.   San Francisco’s economy, on the other hand, is primarily founded on its quickly growing tech sector, which is rapidly attracting ex-Wall Street workers.  At a time when many Americans are skeptical of banking, technology offers former bankers excellent work opportunities that allow them to contribute to economic growth through the creation of a tangible product.  In this way, the components of San Francisco’s economy are currently more stable.

Second, San Francisco’s political environment is extremely supportive of it’s growing technology sector.  For example, San Francisco Mayor Ed Lee, who took office in early 2011, has strived to make San Francisco the most tech-friendly city in the world, outpacing Bay Area rivals like Mountain View and Palo Alto.  Lee has focused on introducing tax breaks for technology firms and he routinely meets with executives of local venture capital and technology firms to better understand the needs of San Francisco’s booming industry. 

As a result of San Francisco’s technology growth, the Bay Area has doubled its share of US venture capital funding in the last 10 years, as is illustrated in the graph below.

VC investment

This increase in funding serves as positive feedback look, fueling San Francisco’s economy and attracting even more funding.  Ultimately, San Francisco’s choice of industry and active decision to support its chosen industry has allowed the city to become the new hub of American economic activity.

Who Needs to Know How to Code?

In this week’s edition, Angela Chen of the Wall Street Journal explains how the fad of learning to code is taking the world by storm. Chen describes how many parents are beginning to buck the trend of sending their children to piano or foreign language lessons in favor of sending them to computer programming tutors. Children as young as 7 are starting to take classes at coding “bootcamps” to learn how to build apps, write simple websites, and to become fluent in a technical language. College and young job seekers are flocking to coding classes such as that at New York’s Flatiron School that “offers a 12-week, $12,000 program[s] to turn novices into developers.” Even corporate managers at companies such as American Express Co. and General Electric Co. have been sending senior teams on corporate development trips to learn topics including introductory data mining or product prototyping. It appears that strong coding ability is a hot commodity right now in the human capital market.

On the other hand, not everyone appears to be buying into the fad, and some fear that an overemphasis on coding could be harmful. For instance, Jathan Sadowski of Wired Magazine writes in his article “Pushing People to Code Will Widen the Gap Between the Rich and Poor” that we should focus on improving the literacy rate in the U.S. before making coding a mandatory class in school. He explains that the English literacy rate is still dismal in the U.S., as around 45 million adults “read below a 5th grade level” or are “functionally illiterate.” While many may dispute his sources and statistics, Sadowski does bring up the valid argument that by making coding a mandatory class in primary or secondary school, teachers would have to cut class time for other lessons. In addition,  wealthier kids, especially those at private schools, may have greater opportunities to achieve proficient literacy levels sooner, so they may benefit from coding classes more than less-fortunate students who lag behind in basic reading and math classes.

Despite Sadowski’s pessimism about the new fad, I’m confident that the pros of learning to code far outweigh the cons. In my opinion, coding shouldn’t be taught in primary or secondary school classes. This isn’t because I think it’s a waste of time, I just think this is a topic best learned in one’s free time. There are countless websites including Codeacademy.com or MIT Open Courseware that offer coding classes from the elementary all the way up to the graduate school level for free. Rather than having schools across the country wasting millions of dollars providing a poor learning product (let’s face it, how many high school teachers in the U.S. would be even marginally qualified to teach computer science? – mine could barely use MS Word), it’s far more time and cost efficient to have students learn to code on their home computers or at the local library. In my opinion, learning to code in this way trumps the expensive bootcamps as well, so long as you can stick to a plan and force yourself to learn. The most important reason is the cost-benefit ratio. First, these boot camps are expensive ($10k-20k at some places) which is a major hurdle to many young, underprivileged learners who may be turned away by the high tuition fees. Second, as interest in coding grows the supply of human capital in the programming space increases as well, which may eventually push down the wages in this sector. We already see this happening in large tech and financial firms who outsource many of their programming projects to places such as Bangladesh where coding talent is, for better or for worse, cheap and plentiful. This is not to say that learning to code won’t be valuable for job seekers in the future, or that masterfully talented programmers will become worthless. It will just mostly likely turn out that basic programming knowledge may become only one of many pre-requisites and instead of a direct ticket to a high-paying job.  Like with many things in life, a healthy dose of reality is required before taking the plunge, otherwise one might end up disappointed in the end.

Returning to the initial question, “who needs to know how to code?” my answer would be “almost everyone*.” I add an asterisk to reflect that many professions won’t require this skill, for instance if one wanted to be a concert musician or NFL linebacker this would not likely help. However, a surprising variety of professions are beginning to embrace the mantra that coding is key. Take lawyers for instance: instead of having to memorize and sort through thousands of physical case documents a savvy lawyer could combine their legal skills with the ability to design algorithms to search databases and the internet for key features of past court cases when organizing an argument. This is especially important in patent and tax law, as there may be hundreds of thousands of pages of documents containing vital legal information that would be inaccessible without the use of querying algorithms. On the quantitative side, coding is a vital skill for those who wish to do research in physics, economics, or neuroscience. From analyzing thousands of terabytes of collisions data in a particle physics lab, to simulating and forecasting economic supply shocks, to mapping billions of neurons using MRI technology, understanding how to program is fast becoming a necessity.

So is learning to code a quick way to make $100k a year at Google? Probably not. But is it distracting kids from learning about more “important” topics like reading and math? I’d say it’s doing quite the opposite. The important take away message is to remain realistic when confronted with this new fad, but to also maintain optimism about how far this long, long, long, and difficult journey can take you.

 

Better competition through mechanism design

Today, The Wall Street Journal highlighted the increase in consumers’ wireless bills despite a sort of “price war” in the wireless market.  T-Mobile had lowered its prices and started offering incentives in order to get people to switch from the major carriers Verizon and AT&T.  Those carriers followed suit.  In addition, there has even been a move away from having subsidized devices, thus allowing people out of their contracts with out a fee (now handsets are financed by the customer, and I wonder if the carriers aren’t better off for it). Even with all this price action, the industry has an HHI (the Herfindahl-Hirschman index, a measure of market concentration where 1 is perfect competition, 10000 is monopoly) of roughly 2600, and is increasing (see graphic below).  This is roughly equivalent to a market with only four carriers!  In addition, the CFO of T-Mobile believes that the carriers will consolidate further. Given the number of carriers to begin with this seems to indicate that the industry is heading toward further concentration of monopoly power.  In order to make sense of increased market concentration despite intense price competition we need to consider what makes a wireless company wireless.

fcc-wireless-report-2011-illo03

Wireless carriers broadcast over frequencies that make up the wireless spectrum.  In order to broadcast over a certain spectrum in a certain area, you need to have the licenses to do so.  Once a company has the license it can build a network of towers and provide service to the area. In short, no licenses, no wireless.  To get a better idea of how spectrum rights effect market share, consider the following two graphics.  As can be seen, owning spectrum effects your ability to grow and compete (Sprint is having network problems currently…the reader can decide for themselves whether the spectrum has anything to do with a carriers network).

fcc measuring competitionspectrumAllocation

The next auction is will be the most complex of any auctions the FCC has attempted before.  The FCC means to have two auctions going at once, one auction where broadcast companies get to auction off their old spectrum from broadcasting analog TV, while wireless carriers participate in an auction for newly bundled spectrum.  If the fierce competition that consumers currently enjoy is to continue, this auction needs to consider mechanisms that will ensure the big firms like AT&T and Verizon don’t put themselves in an unassailable position as incumbents.

To do accomplish this end, the FCC should implement a spectrum cap such that it ensures a new incumbent will enter.  Research shows that spectrum caps can ensure such outcomes.  In 2010, Germany used spectrum caps in its “Mega” spectrum auction.  The auction raised almost 4.4 billion euros for the German government, and included restrictions on how much of the new offerings the incumbents could purchase.  This ensures that smaller companies can expand and continue to compete with the larger firms.  It also weakens a main barrier to entry into the wireless market, further increasing competition.  Another provision that must be enforced is that no matter who buys the license, they must use it.  The above mechanisms are useless if incumbents can accumulate spectrum to deny it to others, or if “new entrants” just turn around and sell it to the incumbents.

Critics of policies like this one say that such restrictions will decrease the revenue of the auction.  This is accurate; but the goal of the auction is to encourage competition, not maximize the revenue.  While Verizon would pay handsomely for a wireless monopoly, and no doubt that auction would raise record profits, it would all but ensure there was no real competition.  Opponents may attack the less then optimal revenue, but to do so is missing the point of what the auction is designed to do.  On a lighter note, I doubt said critics would want to live under a government that did maximize its revenue, making their qualm more reassuring of the auctions effectiveness then concerning.

We can observe today that if given the opportunity, competition can be intense in the wireless industry.  Even the little companies like Metro PCS and Boost Mobile can give Verizon and AT&T a run for their money in small markets.  In order to see this continue, the FCC should utilize mechanisms in their spectrum auctions that ensure this competition continues.  While market consolidation is a consequence of the market for wireless services maturing, the United States should take care now to make sure the wireless industry doesn’t grow up to be anti-competitive.

 

 

It’s Time to Unplug and Detox

Just this past weekend on March 7th and 8th was the fifth National Day of Unplugging, which encourages tech users to shut down their digital devices for 24 hours as a way to slow down, recharge, and reconnect themselves. We all need a digital detox at times this day in age. In fact, the Oxford Dictionary added the phrase “digital detox” into its’ online portal last year. I believe that we all need our own digital detox at times.

After a week’s worth off from school from the University of Michigan, I found my time away from work very relaxing. Not only was I away from my computer, but I also found time to be very distant from my phone, which would include Facebook, Twitter, Instagram, etc. Personally I have found that twitter is a bunch of nonsense and have not used it that much this past school year in generally. Overall, there were many positives I encountered while being away from my technological devices. I was able to be in a very happy and satisfied state of mind. Not once did I have any anxiety over what was going on in the world or what news I needed to constantly stay up with. I experienced JOMO: the joy of missing out. And JOMO was only one out of the nine experiences I was able to work on according to the Huffington Post.

“Harvard Medical School scientists found that using a cell phone or laptop before bed can disrupt the body’s production of melatonin and negatively affect sleep quality. And according to the Pew Research Internet Project, 44 percent of cell phone owners sleep with their phones next to their beds.”

I believe that over the next couple of years we will begin to see more awareness of the National Day of Unplugging, especially as our growth with technology continues. However I also believe that many people use technology for the wrong reasons at the wrong times as well, and I’m point straight at all social media sites and email as well.

“I think that people are overwhelmed. It’s physically taken a toll on people,” said Reboot’s communications manager, Tanya Schevitz. “If you think you have to respond to everything all the time, that’s an unrealistic expectation.”

It truly is unfortunate that we are expected to respond so quickly in the world. We must learn to teach ourselves to “be in the moment” and to connect to everything that is right in front of you. We are losing our small talk skills because we think we can get away with it by looking down at our smartphone while waiting somewhere for a couple minutes. After the fifth annual National Day of Unplugging, we need to continue our awareness to be true to ourselves and to do our best to live in the present. There is so much we can discover and think about when you take a step back from technology.

Inequality in a “Winner Takes All” World

Today in class, a question was asked about whether our best blog posts should be the ones we revise or should we aim to improve our mediocre ones. Professor Kimball responded that we should strive to make our best posts even better and put something out there that is worth reading. His discussion of how we live in a “winner takes all” society, which rewards the best producers of content and products, while inferior producers struggle and ultimately fail was echoed in a New York Times article “Winners Take All, but Can’t We Still Dream?” by Robert H. Frank, published just this weekend. In the article, Frank solidifies his case for a “Winner Take All” society where the best products and services dominate through access to cheap distribution channels. As Frank touches on in his article, I believe a winner-takes-all concept is an important underlying component to the rise in inequality.

First off, it is important to understand the basics of the winner-takes-all-theory. As distribution – both for physical and information goods – becomes cheaper, the best products take over as consumers have new choices and are not limited by geography or technology. As Frank describes, “In domain after domain… technology has enabled innovative business models to serve broader markets. Local accountants have been displaced by tax software, brick-and-mortar shops by Amazon.com and other online retailers. And now, there is even worry that live, in-theater HD broadcasts of Metropolitan Opera performances could displace local opera companies across the land.” When consumers have more choices than ever and lead increasingly busy lives, there is little time for anything but “the best”, whatever society believes that to be and the winners of this contest will take all.

The most important outcome of the winner-take-all concept from a theoretical standpoint is that it could be driving income inequality. As the proliferation of digital goods and service has strengthened the winner-take-all effect over the last several decades, the income of the wealthiest Americans has grown at a faster rate than middle and lower class incomes. According to the very definition of the winner-takes-all theory, the top income earners or the “winners” are taking all the income. They are the individuals with the best ideas, the best companies, the biggest customer bases, and it is incredibly difficult for these incumbents to be beat once they have succeeded in reaching this size. They are able to devote the money and resources they have accumulated to remaining successful and developing new innovations that will stifle upstart competitors.

There is no easy solution to the winner-takes-all theory’s outcome of inequality. If we believe that the theory is indeed a key driver of inequality, then it would seem there is little that can be done to unseat such a powerful force. Winner-takes-all is a symptom of a healthy capitalist system in the digital age. While I disagree with some of his analysis (as I mentioned in a previous blog post), perhaps it is time to give a second-thought to William Galston’s idea, which he outlined in a recent Wall Street Journal piece, that it is time for a new social contract, where the “losers” in society are provided for by the “winners”. That is a topic for another post, but in a winner-takes-all society, we must be open to different solutions to the inequality that is a result of the competitive process.

The Quest for Faster Internet

If you are anything like me, you spend a lot of time on the Internet.  Probably too much.  Consumers do a range range of things on the internet, like shopping, researching, reading, and playing games.  Everyone has a favorite browser (please don’t say Internet Explorer), and a way they format tabs (I prefer somewhere between one and five, anything more is a little cluttered for me).  Despite all of these numerous uses and styles, one thing that everyone likes is speed.  The faster your Internet connection, the better.  The future is a gigabit (1,000 Mbps) connection.

Sitting at home, my browser gets about 25 Mbps downloading content, and 10 Mbps uploading content.  The servers at the University of Michigan are significantly faster; I can recall hitting 100+ Mbps in downloading speed tests.  The average connection speed in the United States is slightly under 10 Mbps, not great by global standards.  Not surprising, tech powerhouses South Korea, Japan, and Hong King lead the way.  South Korea has average internet speeds 50% faster than the United States.

Obviously, the United States faces infrastructure challenges much greater than these Southeast Asian countries.  The U.S. population is spread more thinly across the country rather than the urban-centric countries with the top internet speeds.  This means that the resources required to upgrade networks in the U.S. are exponentially greater than in more urbanized countries. The larger hurdle consumers face in getting faster internet is the providers themselves.

Gigabit connections are possible.  Google, not a traditional ISP, has installed gigabit connections via Google Fiber in several cities like Kansas City and Austin, charging about $70 for internet service approximately 100 times faster than a standard broadband line.  In comparison, Verizon offers a 500 Mbps connection, half the speed of a gigabit connection, for a measly $300 dollars, over four times the cost.  The obvious question is: why would anyone choose an inferior Verizon service at a higher cost?  The answer is that they have no choice.

Cable Company Mergers

Most homes in the United States have access to limited options when it comes to internet providers.  Thirty percent of homes have access to zero or one internet provider with 6 Mbps or more.  An additional 37% have access to two such networks.  The lack of gigabit connection makes more sense with these facts in mind; it makes little sense for a business with little to no competition to charge a competitive rate for services.  A cable company Comcast has little incentive to upgrade their lines to gigabit levels when they can charge a similar price for a service that is cheaper for them to provide.  Unfortunately for consumers, this problem will only be exacerbated by the acquisition of Time Warner by Comcast (pending government approval).  With the two largest cable companies in the U.S. combining, consumers will have even less choice in the the cable marketplace.  Since cable service is a market with an incredibly high entry costs, firms cannot enter because the risk is extremely high.  (One wonders at what point will the government perhaps take over or strictly regulate this service like they do electricity.) New streaming services try to avoid these entry costs by providing television over the internet, but they are still restricted by the cable companies bandwidth limitations.  For example, Netflix has recently agreed to pay Comcast for direct access to their services, because Comcast had slowed down their connection due to the large amount of bandwidth their customers were using.

With the cable companies having little incentive to upgrade their capital, Google has tried to step in to offer access to high-speed lines.  Again, unfortunately for consumers, this is no easy task.  Achieving gigabit speeds requires hardware in the ground.  This means tearing up yards, roads and the like just to eat faster internet connection.  Google asks for significant concessions from cities in order to expedite the process, but often times they are too much to make a deal possible.  Thus, between local governments being reluctant to give so much to Google (a company worth far more than basically any city), and the cable companies providing obstacles at every turn (AT&T has denied access to utility poles in Austin), Google Fiber’s growth has been slow.

Thus, as much as consumer might hope for lightning fast connection speeds to match their Asian neighbors, it is unlikely.  Only with significant government action will gigabit connection become readily accessible any time soon.