Entrepreneurial Innovation and the Internet

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As Washington and the states pile up mountainous liabilities - $3 trillion for unfunded state pensions, $10 trillion in new federal deficits through 2019, and $38 trillion (or is it $50 trillion?) in unfunded Medicare promises - the U.S. needs once again to call on its chief strategic asset: radical innovation.

One laboratory of growth will continue to be the Internet. The U.S. began the 2000's with fewer than five million residential broadband lines and zero mobile broadband. We begin the new decade with 71 million residential lines and 300 million portable and mobile broadband devices. In all, consumer bandwidth grew almost 15,000%.

Even a thriving Internet, however, cannot escape Washington's eager eye. As the Federal Communications Commission contemplates new "network neutrality" regulation and even a return to "Title II" telephone regulation, we have to wonder where growth will come from in the 2010's.

In a series of important new studies covering 25 years of data, economist Ed Glaeser of Harvard reconfirmed that "economic growth is highly correlated with an abundance of small, entrepreneurial firms." But Washington is pursuing a public utility model for most of the economy - health care, banks, insurance, autos, energy, and maybe the Internet. Instead of decentralized, messy experimentation, we'll get companies expert in wooing Washington. They will be big, regulated, centralized, and stagnant.

This approach could not clash more starkly with the hyper-innovation of today's Internet. Digital technologies create constant churn. Forget iTunes or satellite radio. We now get personal Internet radio like Pandora on our phones and in our cars. Big bandwidth enabled the iPhone, which launched the App Store, which allowed hundreds of software developers to create many thousands of jobs building serious and silly apps. Apple sees how "owning" music becomes obsolete and buys a tiny music-streaming company called Lala to replace the hugely successful music download business it created just a few short years ago.

A new "How Much Information?" report from UC-San Diego estimates that Americans consumed 3,600 exabytes of information in their homes in 2008, or 34 gigabytes per person per day. Microsoft researchers argue in a new book, "The Fourth Paradigm," that an "exaflood" of real-world and experimental data is changing the nature of science itself. We need completely new strategies to "capture, curate, and analyze" these unimaginably large info-waves.

Google and Facebook grow so fast, they build their own global networks. The iPhone is so popular (three billion "app" downloads so far) and consumes so much data (10 times the average cell phone) that demand outstrips network capacity in big cities. But innovation is not automatic. Wireless carriers will need a 12-fold upgrade of "backhaul" capacity connecting cell-sites to the Internet in just the next two years, not to mention the government liberation of much more radio spectrum.

The next generation of cloud computing will capitalize on more bandwidth and another key industry advance - graphics processors. We are familiar with Web-based email, search engines, remote data storage, and applications like Salesforce.com. Microsoft, Google, and Equinix data centers deliver these services from vast arrays of computers and disks in "the cloud."

Instead of warehouses full of microprocessors, however, what about a refrigerator-sized supercomputer built with a thousand graphics processors? The world's most powerful supercomputer is IBM's one-petaflops Roadrunner at Los Alamos National Labs. But in 1% of the space and for 3% of the cost, we can build a graphics supercomputer that delivers three times Roadrunner's performance - three petaflops.

Connect this computer to the Internet, and you can stream any real-time interactive 3D video experience at any resolution to thousands of people using any browser on any device, from a home-theater to an iPhone. This "exacloud" will transform video games, movies, virtual worlds, business software, and most other media. Piracy goes away. So do DVDs, game boxes, and maybe even expensive personal computers. New content and software subscription models open up. Based in the cloud instead of on your device, interactivity thrives.

Graphics chips, however, are also in Washington's cross-hairs. Intel, the world's leading microprocessor company, has fallen far behind graphics leaders Nvidia and AMD. Yet the Federal Trade Commission is charging Intel with the "dangerous probability" of monopolizing the graphics arena. Facts and law aside, the FTC's proposed remedy is outlandish, amounting to a government take-over of Intel.

Short of Bernie Sanders running the silicon industry, the graphics chip revolution will have a deep impact on the network. High-definition video requires big bandwidth, and real-time applications tolerate very little delay. UC-San Diego estimates that 55% of total American information consumption, or 1,991 exabytes per year, is (brace yourself) video games. If just 10% of these games moved online, they would generate twice the worldwide Internet traffic of 2008. Video is not always the most important content on the Web, but it defines the architecture and capacity of (and often pays for) the networks, data centers, and software that make all the Web's wonders possible.

U.S. info-tech investment is now 47% of all non-structure capital investment. Network companies alone annually invest more than $60 billion in new wired and wireless bandwidth, and they will do so again and again in years to come. But not if intrusive new rules prohibit them from managing their data traffic and pursuing new business models.

Rigid net neutrality rules would have blocked pathbreaking innovations like content delivery networks (the platform for YouTube) and "exclusive" mobile partnerships (which spawned the iPhone and App Store). We've long warned that because of the natural convergence of the digital world, neutrality regulation would spread beyond its intended political targets to swallow the entire Internet. Right on queue, academics are now calling for "search neutrality," with Twitter impartiality and Facebook fairness surely not far behind.

The algorithmic economy necessarily scales across the globe, gobbling up the largest markets and profit margins. The digital world requires high-end skills but is start-up friendly. If the U.S. has any hope of meeting our expanding financial obligations and giving our citizens a creative outlet to compete on the world stage, we might consider exempting the bottom-up Internet from Washington's top-down ways.


Bret Swanson, a visiting fellow at the American Enterprise Institute and a U.S. Chamber Foundation scholar, is president of Entropy Economics LLC. 

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