December 03, 2002
High Tech Is Getting Really Cheap

For some time now, one of my standard points has been that high-tech goods greatly amplify our material standard of living beyond what conventional economic statistics suggest, but that high-tech goods do so only if we are rich enough to actually make use of them.

Guess what? The prices of modern high-tech goods are falling so far and so fast that even the world's poor are starting to be able to afford to use them. Here's a quote by Arnold Kling from Howard Rheingold:

Corante: The Bottom Line - The economics of information technology: ...One in eight people in Botswana have mobile telephones. Six weeks ago, in Sao Paolo, I saw barefoot people in the slums talking on their mobile telephones. Somali traders of the coast of Dubai make deals via telephone. In rural Bangladesh, the mobile telephone has been introduced via payshops run by local women -- and the shops have become new social centers.

Posted by DeLong at December 03, 2002 05:24 AM | Trackback

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An obvious failure of Democratic Capitalism. Where's good old Communism when you need it? It's outrageous that all these people in the Third World are wasting time talking on cell phones when they could be listening to lectures on Marxist class theory.

Soon enough, there will be a MacDonald's on every corner. Their indigenous culture of abysmal poverty and backward notions could be a thing of the past. We should be so ashamed.

Posted by: David Thomson on December 3, 2002 05:39 AM

Once more, David trolls in the manner of the trolliest troll in trolldom. One requires a shovel and brush to deal with what he leaves behind him. In fact, the mobile phone has become an important agent in the developing world in enabling social organisation against repressive governments: the popular demonstrations that led to Joseph Estrada's resignation as president of the Phillipines were organised, for the most part, through the 'text message'. Dontchaknow that the proletariat uses SMS for its samizdat these days, David?

Anyway, the interesting and slightly mischevious point is that it could only be an American assessment to regard the mobile phone in the developing world as a 'high tech good', given that the North American experience of mobile phone technology has been built up around expensive contracts and incompatible digital standards: all of which owe far too much to a highly deregulated market.

That's to say, anyone who has seen the mobile phone market grow in the rest of the developed world can quite easily see its easy exportation to the developing world, because it evades the high up-front infrastructure costs of land-lines.

Now, certainly, it can be argued that the relatively low provision of land-lines in these countries can be blamed on state monopolies, but there's more to the equation than the tired cliche of state vs. market. In fact, it can be argued that the technology involved in putting a mobile phone network across Africa, or even putting satellite phones in the hands of Afghan warlords, is in fact less complex and less costly (and more 'low-tech') than running Ye Olde Cable Lines to these areas: something I recall all too well from the cost of a 30-second phone call from rural Nepal in 1992. But that's not something which would be readily apparent to most Americans buying their first cellphone.

Posted by: nick sweeney on December 3, 2002 09:45 AM

>>Their indigenous culture of abysmal poverty and backward notions could be a thing of the past.<<

What a wonderful display of sheer ignorance. Do you know a thing about Botswana by any chance? Yes, I really mean _a_ thing, litterally...

BTW, Botswana is Africa's growth miracle. And its culture is far more than about poverty. And on this one you are completely revealing your racial prejudices (one more, of course.)

A liberal's only hope for Botswana is not that there'd be no MacDonald's over there (although, yes, I would hope Western culture doesn't completely stamp out their native culture). A liberal's only hope is that cheap AIDS drugs be made available to the people of Botswana (and that condoms become a social norm.)

Posted by: Jean-Philippe Stijns on December 3, 2002 10:08 AM

P.S. I guess the real question is how can neo-conservatives assume that the rest of the political spectrum is up against Democratic Capitalism...? So, we're communist now (I mean again). What a time travel...

Posted by: Jean-Philippe Stijns on December 3, 2002 10:16 AM

>> the North American experience of mobile phone technology has been built up around expensive contracts and incompatible digital standards: all of which owe far too much to a highly deregulated market. <<

Nice point Nick, although some of the credit also has to go the highly central policies of the FCC, and particularly the spectrum auctions whose high costs forced players to rely heavily on existing infrastructures while building out (or not building out, as it happened) their mobile infrastructures.

Incidentally, I was just chatting with a friend back from China who was describing exactly the same phenomenon -- villages where the inhabitants are pulling ox-carts chatting merrily away on cellphones.

Posted by: david on December 3, 2002 10:49 AM

"given that the North American experience of mobile phone technology has been built up around expensive contracts and incompatible digital standards: all of which owe far too much to a highly deregulated market."

That's a piece of outdated wisdom these days. Check up on recent news and put the story in the same pile as the QWERTY keyboard myth.

Posted by: JT on December 3, 2002 11:31 AM

That's a piece of outdated wisdom these days.

Care to supply some of this 'recent news', JT? I cannot claim your curiously-understated wisdom on this subject; I do, however, know the experience of my fiancée over her past three years of dealing with Sprint as she moved across the USA, and the experience of many more of my friends who have moved from Europe to the USA, only to be astonished by the market-contorted complexities of getting a bloody mobile phone contract. You could always SMS your reply ;)

Posted by: nick sweeney on December 3, 2002 12:47 PM

Nick--I don't know, either, what is the 'recent news' to which JT refers. But I suspect your fiancee's experience has to do with her citizenship (I assume she is not a U.S. citizen). I've been able to walk into stores, buy a phone and a service plan, and have it working within minutes. One can easily obtain service plans that work across the country, though they cost more than do those with "roaming" charges; similarly, I've had no trouble changing the billing address and/or local area code for my plans. But I am a U.S. citizen with good credit; I've heard that the experience is much less pleasant for non-citizens. Perhaps it has something to do with worries that they will skip the country without paying the bill?

Posted by: Jesse on December 3, 2002 05:22 PM

Nick: Here's the link, which was written by Steve Den Beste who has worked on cellular technology. Next time leave the sarcasm out.

I am quoting from this link:

I apologize for the length of this but I actually am excerpting heavily from an exceptionally detailed piece:

“As I think many of my readers know, I used to work for Qualcomm designing cell phones. Qualcomm is the company which invented CDMA, and made it practical, and made it into a market success, and it now dominates the American market, where Verizon and Sprint both use it. There are two other nationwide cellular systems: AT&T currently uses IS-136 TDMA, which is obsolete and has no upgrade path. Cingular uses GSM, a more sophisticated form of TDMA from Europe. And right now I'm basking in the evil glow of a major case of schadenfreude.

The original cell phones were analog, using fairly straightforward FM for voice communication....GSM went further than that, and abandoned the old channel size entirely. It allocated 200 KHz channels and divided them into 8 slices, giving each phone somewhat less than 25 KHz effective bandwidth... GSM also included a very powerful set of features above that, and included some interesting features not directly associated with the RF link, such as a personality module which contained a customer's phone number and billing information that could be moved to another phone any time the customer wished to...GSM was clearly superior to IS-136… In Europe, various governments decided that they (the Europeans) had designed the ultimate digital cellular system, and they passed laws making it illegal to deploy anything except GSM, whose primary supporters/suppliers were Nokia, Ericsson, Siemens and Alcatel...Meanwhile, the FCC decided that it would not mandate any industry standard. It granted licenses for spectrum but permitted the licensee to choose whatever equipment and standard it wanted. (Within limits. There were certain certification standards required by the FCC to guarantee safety and to avoid interference between neighboring systems.)... And all through the 90's, me and everyone else in the US cell phone industry put up with constant ragging from Europeans about the evident virtues of GSM and the equally evident virtues of a government mandated standard. While in the US you had what seemed at the time to be utter chaos, with a huge number of small companies using a bewildering array of different standards, in Europe anyone could carry their phone almost anywhere in the continent, and if they couldn't use it they could move their personality module into a local phone and use that...Of course, that apparent chaos in the US was only a temporary phenomenon, and I think maybe the FCC and the rest of the government knew it would be. There's always shakeout, but in the meantime this kind of government policy of keeping hands off meant that the industry was given broad ability to experiment. And within that environment, early in the 1990's, the founders of my former employer Qualcomm began to work on a radically different way to handle cell phones called Code Division Multiple Access, or CDMA. It's radical in many, many ways but by far the most obvious is that all the phones in the system and all the cells in the system operate simultaneously on the same carrier frequency. They don't "take turns" because they don't need to...In fact, CDMA was so revolutionary that when it was first discussed, many thought it couldn't be made to work… Still, in the years of apparent chaos in the US, when loud voices in Europe proclaimed the clear advantage of a single continental standard, order began to appear out of the chaos here. Small companies using the same standards set up roaming agreements, and then started merging into larger companies, which merged into yet larger ones. One company (Sprint) started from scratch to build nationwide coverage. Bell Atlantic Mobile acquired GTE Mobile (who had been a joint partner in PrimeCo), and eventually merged with Airtouch to form Verizon, all of which was based on IS-95 CDMA, mostly on 800 MHz. Sprint eventually implemented a reasonable nationwide system also based on CDMA. The last major nationwide system to form was Cingular, after the various GSM carriers in the US realized they were in big trouble competing against Verizon and Sprint and AT&T (which uses IS-136)...With the push to greater and greater data rates, everyone recognized that a new generation of cellular equipment would be needed, the legendary 3G.
And for the reasons given above, and several others, it was equally clear that it had to use a CDMA air interface. GSM was the very best propeller-driven fighter money could buy, but CDMA was a jet engine, and ultimately TDMA could not compete. The fundamental weakness of TDMA at the RF layer could not be compensated for at any layer higher than that, no matter how well designed it was. GSM/TDMA was a dead end, and to create 3G, Europe's electronics companies were going to have to swallow their pride and admit that Qualcomm had been right all along. This article in the Economist says that it's not going well. When Qualcomm and its partners designed a new 3G system with new capabilities, they were able to make it backward compatible with IS-95. Thus existing operating companies using IS-95 can upgrade incrementally replacing individual cells as budget allows and selling new handsets without having to wholesale replace all existing ones at once. Most important of all, it means that you can take an existing system using an existing spectrum license, and phase it over without acquiring any new spectrum. None of that is true for GSM. CDMA and TDMA are fundamentally incompatible and there's no way to create a new system (which they're calling WCDMA) which can support existing TDMA handsets. It's technically impossible for the new standard to be backward compatible. Worse is that there's no easy way to phase existing spectrum over. In practice, when WCDMA appears, existing GSM systems will have to install it all, issue new handsets to all customers, and then one day throw a switch -- or else they'll have to license new spectrum for WCDMA while continuing to run GSM on the existing spectrum for legacy customers. It's all going to be very ugly when it happens. (Note: It is possible to design new WCDMA handsets so that they are capable of working with old GSM/TDMA infrastructure, but it adds substantially to the cost of the unit. It is not possible at all to make WCDMA infrastructure work with GSM/TDMA handsets.)

If it happens, for the other thing they're discovering over across the pond is that making CDMA work is a lot harder than they thought it was. They're having technical problems. This article talks about the experience that DoCoMo had in Japan when it deployed the first WCDMA system in the world. It doesn't mention that DoCoMo has had to recall and replace thousands of handsets at its own expense when it was discovered that the handsets had fatal technical problems which could not be fixed. (In fact, DoCoMo had to do this twice. Both times were fantastically expensive, and both times represented really bad public relations fiascos. DoCoMo's name is mud in Japan now; they may never fully recover.)

CDMA2K, on the other hand, is real and it works now. Commercial shipments of infrastructure and handsets began a long time ago. Both Sprint and Verizon began their conversion process more than a year ago, and it's been deployed elsewhere in the world (such a by DoCoMo's rival KDDI) and what everyone is discovering is that it works. The transition is clean. There haven't been any unfortunate surprises. And it works pretty damned well.
On the other hand, in Europe the service providers are in deep trouble. They spent truly vast amounts of money on licenses for new spectrum which they can't actually use yet. The licenses specify that they can only be used for WCDMA, and none of the equipment suppliers are actually ready for deployment. Some of the operating companies are talking about giving the licenses back.

And others are beginning to ask if they can have permission to deploy CDMA2K instead, but the bureaucrats in the EU aren't having any of it. Yet.

I confess to a deep feeling of satisfaction about this on a personal level, primarily because of all the horseshit I put up with from GSM fans over the years when they talked about how superior the European approach to this was.

The thing is that if the US had followed the same policy, CDMA would never have been given the chance to prove itself...
So I'm sitting here basking in the warm glow of schadenfreude because nemesis has caught up with European hubris in the cell phone industry.

But there's more to this, because in the microscopic this turns out to be a morality tale which more broadly shows the difference in approaches to most things between the Europeans and the Americans, and I think demonstrates quite clearly why our way is more successful.

Though the adoption of a continent-wide standard for Europe in the 1990's did have certain benefits, it also had some hidden prices. It gave them compatibility, but it was also protectionism, and as is always the case with industries shielded by protectionism, the European cell phone companies became arrogant and complacent, and as a result they fell badly behind. Now they're trying to catch up, and it isn't turning out to be easy... Like all protected industries, the GSM companies didn't make the investment they should have early enough.

Here are some of the lessons I see in this.

First, Europe pulled this decision up to as high a level as it could. When the legal mandate to use GSM was passed, the EU didn't yet exist. Individual nations each passed such laws based on a consensus. In the US, that decision was pushed down as far as possible, and the superiority of CDMA over any TDMA-based system was decided by millions of cell phone users who voted with their wallets.

Second, Europe tried to stop the clock. It decided that it had the final answer with GSM and that no further experimentation was necessary because no further improvement was possible. In the US, the government kept its hands off, and in fact if another newer system comes along which is superior to CDMA, it will have the same opportunity commercially that CDMA had. (Not quite; the market has evolved and we're into the "standardization and shakeout" phase now. But there won't be any government mandate preventing it.)

Europe emphasized cooperation over competition, consensus and agreement over "let's try it and see what happens". It was viewed as important that there be compatibility over the whole continent, and to achieve that they outlawed competition. In the US, we valued competition, and ironically we not only ended up with compatibility over the whole continent but got that compatibility with a superior system which emerged out of competition.

Despite claims to the contrary, Europe passed those laws in part precisely because the standard which was being protected was European and most of the equipment which would be used was homegrown. Part of why those laws were passed was to lock out the US. (Some American companies made GSM equipment, but they never had much market share in Europe.) In the US, everyone was free to compete, and for quite a while the largest seller of handsets here was Nokia. GSM was deployed here and attempted to compete against CDMA on a level playing field, and got handed its ass.

GSM fans will point out that GSM is more broadly deployed elsewhere in the world than IS-95. They'll be careful not to point out the extent to which bribery played a role in that.
But that kind of thing is ultimately self-defeating, and TDMA/GSM isn't going to be competitive against CDMA2K, and the Europeans can't make WCDMA work reliably. And as a result of that, a lot of the cellular telecom companies in Europe are in deep financial trouble, not to mention facing legal deadlines for deployment of 3G which cannot possibly be met.

Another of the ironies in this is that "cooperative" Europe has turned out not to be cooperating as well as "competitive America". The companies involved in the CDMA2K process are cooperating closely because it's in their own best interest to do so, not because of some sort of fuzzy philosophy of "cooperation and centralization are good things". The companies in the CDMA2K process are cooperating because they know they'll be killed if they don't, not to mention the fact that they smell GSM's blood.

European centralization turned out to be a competitive advantage – for the US. And that's going to keep happening. If I was vicious and wanted to wish failure and misery on Europe, I could think of nothing better to inflict it than the process going on now whereby more and more authority will move to Brussels to be used by unelected bureaucrats who answer to no one.

Update 20021006: Michael Jennings offers his perspective. He was involved in the cellular industry in Australia and saw the same GSM arrogance I put up with.

Posted by: JT on December 4, 2002 07:02 AM

Everything after the initial quotation mark is from Den Beste.

I can't provide backup for the comment about the QWERTY argument but I'm sure someone here will be able to provide depth on that.

Posted by: JT on December 4, 2002 07:05 AM

In response to that: the comparitive expense of the US cellular market for consumers has everything to do with the structure of that market, and little or nothing to do with the underlying technology used.

Posted by: Jason McCullough on December 4, 2002 06:05 PM

But I suspect your fiancee's experience has to do with her citizenship (I assume she is not a U.S. citizen).

You assume incorrectly, Jesse. And my point is not simply the absurdities surrounding the pricing structure of American mobile phone contracts (a subject on which Danny O'Brien has commented) but rather that the US mobile market is comprised of operators that continue to use competing and incompatible standards, rather like the competing gauge standards for railways during the early days of the locomotive boom. By switching a small plastic SIM card, I can use my Nokia 8310 with most of the world's GSM operators; my fiancée can use her Motorola StarTAC with SprintPCS, and SprintPCS alone. I can send SMS messages to friends in Australia; were my fiancée to pay the extra monthly fee for text messaging, she'd not be able to send messages beyond her network.

As for JT, I'll quote from fellow-traveller dsquared on Mr Den Beste: "he has a fine line of shite in talking about mobile phone standards too." In short, you choose possibly the least likely source to impress me, give or take the intervention of Henry Kissinger.

(I have read the piece before; I disagree with its basic premise. It smacks of Den Beste's typical contrarian arrogance, since it accuses Europe of 'trying to stop the clock' when, in fact, the motivation was purely to ensure maximal interoperability. Which is surely what a mobile phone standard is for, no? He also has no clue about the manner by which 3G has been developed in order to bootstrap GSM, but again, his perspective is rather sadly constricted.)

Posted by: nick sweeney on December 4, 2002 06:21 PM

Both of you guys are begging the question.

Jason: I can't believe you actually believe your statement. Of course, the underlying technology affects the value consumers receive from their cellular phones (esp in the long-term). So does the market structure.

Nick: The motivation -- maximal interoperability -- is different from the results -- inflexible bureaucraticized regulation. The European choice hasn't "tried" to stop the clock, but it has slowed it down (and I know that wasn't the intent).

Let me ask you a question: do you honestly believe government can do an adequate job of establishing technology standards via regulation?

Posted by: JT on December 6, 2002 06:48 AM
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