Of subways, government subsidies and broadband

Network World - There's a lot of talk these days of the "Internet as public utility." In fact, if you parse the language of the stimulus package, you definitely pick up that perspective as part of the motivation for investing US$7.2 billion in Internet infrastructure.

A couple years ago, I had a discussion with a friend, one of the few real experts in Internet traffic, who described the Internet as a public utility rather like public transportation systems -- such as the New York City subway. The implication was that governments do a good job running subways -- so why not the Internet?

I responded by pointing out that the NYC subway wasn't actually a public utility at its inception. Most folks don't know this, but the NYC subway started life (Oct. 27, 1904) as a for-profit initiative by the Interborough Rapid Transit company (IRT). The IRT was soon joined by the privately held Brooklyn Rapid Transit (BRT) and Brooklyn Manhattan Transit (BMT). The government eventually got into the act by developing its own system financed by taxpayer dollars, which competed directly with the IRT, BRT, and BMT.

During the period in which subways were largely privately owned and wholly competitive, there was an enormous amount of expansion and innovation. New lines went up and new technologies were pioneered. Prices stayed low. And the subway map of 1924 bears an eerie resemblance to that of 2009.

What happened? In the 1930s, when the great depression hit, the for-profit transit systems went bankrupt and were taken over by the city, which has operated them ever since. Happy ending, right?

Not exactly. On the bright side, the millions of folks who live and work in New York have had access to a more-or-less reliable, more-or-less affordable form of transportation for the past 80 years. On the downside, prices have risen, ridership has stagnated and some long-planned projects (such as the 2nd Avenue line, which would benefit yours truly) have been on ice for more than a half-century. (Metropolitan Transport Authority, I'm still waiting).

Last year, I mentioned all this to a financial analyst, Sanford-Bernstein's Craig Moffatt, who used the idea as the basis for a recent report (adding considerable detail and analysis, and generously remembering to credit me). Craig's conclusion? "Broadband is today's transportation grid. ... The story of the subways highlights the fundamental trade-offs between competition -- and its inherent sloppiness and redundancy -- and nationalization (or, in this case, municipalization), with its inherent stagnation."

Well put -- and the implication is that if the Internet does get nationalized, we can expect ubiquity and relative reliability, at the cost of innovation.

But that's not the entire story. One key difference between transportation grids and broadband services is what the economists call "demand elasticity." The appetite for subway rides is finite: You'll use the subway to get to work, and maybe to a couple of social engagements, but that's it. With the Internet, in contrast, we've documented an appetite that, in the absence of external constraints (such as cost) is essentially limitless. This has some interesting implications for broadband economics. Stay tuned.