If you build it, they will come, but how much will they pay for a ticket?

I had dinner this summer with a friend of mine who works at VMWare. He tried to explain to me the idea of virtualization. “Wasn’t that the big scam Enron tried to pull in the late nineties?” I replied, nonplussed. He responded that at an abstract level his company enables something similar for PC hardware. I, in turn, appreciated his willingness to talk at a level of generality that would not make me appear to be a complete idiot.

Indeed, the difference between the two examples—once you get beyond my friend’s generous generality—is telling. The Enron example supports Carr’s notion that we have radically changed our way of thinking about bandwidth. It adds to the idea of the many switches that Carr addresses—the primary change he discusses being the move away from the client-server model to utility-supplied computing. Rather than call bandwidth a commodity, Carr makes the case that the revolution is in treating bandwidth as a utility. He relies strongly upon an electricity analogy throughout his book. Whereas “commodity” implies a sense of proprietary ownership—that the bandwidth will shift as a matter of trading and borrowing—“utility” imagines conglomeration and not just trading. General purpose technologies have broad application, the breadth of which comes about through capturing their potential economies of scale.

Just as the revolution in computing has changed our own labor makeup—increasing the demand for service-based occupations, Carr traces a parallel development in the IT world itself. He notes a shift from hardware to a services-based model. The ability to overcome capacity limitations (Grove’s Law, p. 58) does seem to unleash growth potential.

Some posters have expressed skepticism that the public would be open to such a shift. At one point, Carr makes an allusion that seems to capture some of this doubt. He describes the Dalles Google facility as looking like a nuclear power plant with its four cooling towers. We can imagine that the public might harbor beliefs about the dangers of centralized processing just as it does about nuclear power. Part of the problem with accepting new technology is, as one poster terms it “technophobia.” This idea also has parallels to electricity. As Carr points out in his description of the Chicago Fair, electricity struck people as “at once glamorous and dangerous, it seemed, in itself and even more so in its applications, like a mysterious, invisible force that had leapt into the world out of the pages of science fiction.”

At the same time, Carr and other posters have tracked the step-wise conditioning of the public to embrace new technologies. Carr has tracked the development of small-scale versions of bandwidth as utility. He has shown that in this realm the public is willing to set aside its squeamishness about privacy and its risk aversion to trying novel things. The popularity of Napster, the existing use of services-based technologies, and the widespread embrace of ecommerce has shown that the public eagerly adopts technologies that save it time, energy, and money with little concern over privacy or system-meltdowns. Perhaps the Y2K anti-climax has laid to rest many of our technophobic anxieties about catastrophe.

Just as the public already seems able to wrap its mind around such centralized IT systems, it also will likely not prefer this generation’s version of Burden’s wheel. Shifting to virtualization thus is not analogous to moving from cars to subways. Carr uses the analogy of an apartment building, writing, “With the use of virtualization in the utility model, that building can be divided into apartments that can be rented out to dozens of tenants. Each tenant can do whatever it likes inside the walls of its own apartment, but all of them share the building’s physical infrastructure—and all of them enjoy the resulting savings.” The analogy to the Internet as superhighway, therefore becomes more apt, rather than less. Each person continues to travel in her separate vehicle while enjoying the benefits of a smooth 6-lane road of a type that she could never build on her own. The beauty is that now, she doesn’t have to own an actual vehicle, but can ride in a virtual car that still provides the same experience but doesn’t require a garage or gas. It also has 1000x the horsepower.

This all comes from the economies of scale. Many posters have noted that economies of scale favor, promote, and reinforce natural monopolies, but have not touched upon the competing trend that Carr argues will result. One effect that Carr traces is the idea of democratization. His use of the amazon.com example shows the piggy-backing potential for small companies. He notes that “Amazon’s utility levels the playing field.” One can imagine that in the same way that sites like etsy.com and ebay have opened up the door to even the smallest sellers, treating bandwidth as a utility will also provide access to efficiencies that small companies can exploit. Perhaps we will even see the re-emergence of markets that were not able to survive under the old model—etsy has shown us that the Internet can reinvigorate the market for handcrafts. This technological innovation might be surprisingly retro and unexpectedly egalitarian.

Can we imagine this all as a part of creative destruction? Can we imagine that the large companies providing the resources and economies of scale will feed the smaller entrepreneurs who will eventually destroy the old titans of past? Do the natural monopolies allow for a Schumpeterian kind of economic growth? Whether or not these promises, like the “Home of a Hundred Comforts,” will actually materialize remains to be seen. Our existing experience with the Internet seems to suggest that they are, at least, possible. 

Not to add too much to Carr’s already abundant use of analogies, but I am also reminded of Grameen Bank. Grameen, which means village, capitalizes upon economies of scale to provide microfinance. The small loans that they give and their methods of lowering overhead costs (largely through requiring social networks and debtor participation in enforcing debts) allows them to take on the kind of debtors that large institutions will not touch. They have democratized lending by reducing the costs associated with commercial banking. In some ways we can see utility-style communications technology as analogous to banking and credit. Pooling and centralizing assets allows a bank to make growth-generating loans. The more that we can manage costs (e.g. overhead and risk in the banking context) the more we can include smaller, "riskier" debtors in the credit pool. If we think of one obstacle to market entry as access to capital, increasing access (to capital, and by analogy, to IT power) can promote healthy competition and decrease the tendency to monopoly.

Yet Grameen also requires careful management to maintain its peculiar brand of commitment to microfinance—i.e. that which targets the best kind of sustainable growth for its small debtors. For example, part of its mission is to have a majority of its debt-holders be women. It also has rules about being involved, which require joining Grameen as part of a group. It also has rules about interest rates and what happens in the event of default.

In this vein, the Enron example might still give us pause about the inevitable commoditization of this utility. Carr skimps over the problems that we will inevitably face, hastily rattling off a list of challenges (p. 61).  In half a paragraph he gestures to the issues of metering, price-setting, load-balancing, diversity factors, different countries’ regulatory regimes, security, reliability, and efficiency. Frank, I think rightly, acknowledges that security, reliability, and efficiency issues have largely been resolved, and likely will continue to be more successfully addressed via the increasingly global competition between talented programmers. Frank also raises a telling point distinguishing issues that innovation will solve from thorny problems like the intrusion of governments. We might note that the technological innovation of the Insulls of the IT world may face a limiting factor more difficult to surmount with cleverness than Grove’s Law. They must navigate government regulation, which is even slower to change than network capacity. 

How do we make normative choices about the government’s role in managing this utility, whether it’s price-setting, regulation, and even load-balancing? Carr gives us no answers on how or whether to regulate this utility in the same way we’ve managed telephones and electricity. One might imagine that this particular big switch will require us to change our attitudes toward regulation. And as we have seen in cases involving microfinance, one might also imagine that our choices in how we regulate can affect who has access to the benefits of this technological innovation and how it affects competition generally.

Comments

[Nathan Richardson]

Google's plant at the Dalles is not -that- imposing. It looks more like the back side of a Wal-Mart.

http://blogs.zdnet.com/storage/images/google-dalles-photo.jpg

http://www.robinmajumdar.com/wp-content/uploads/2006/08/the_dalles_google_data_centre_1.jpg

[Ruben Rodrigues]

Those pics are slightly deceiving, since they only capture the Cooling/utility building for one of the facilities.

http://www.nytimes.com/2006/06/14/technology/14search.html

2 Football fields is a decent chunk of server space. But considering the usual size of server farms, and given the size of Google, I agree that it's not *that* remarkable.