The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism (31 page)

Tarleton Gillespie, a professor of communications at Cornell University, says that algorithm manipulation is not entirely out of the question, especially when the algorithms are created by commercial players who might see a pecuniary or ideological rationale for tampering with the data. He writes:

The debate about tools like Twitter Trends is, I believe, a debate we will be having more and more often. As more and more of our online public discourse takes place on a select set of private content platforms and communication networks, and these providers turn to complex algorithms to manage, curate, and organize these massive collections. . . . [We] must . . . recognize that these algorithms are not neutral, and that they encode political choices, and that they frame information in a particular way.
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Gillespie says that as the public relies more on algorithms to sort, rank, and prioritize information, we will have to find some way to build in protocols and regulations to assure transparency and objectivity, especially when mostly commercial players control both the data and the algorithms.
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Not to do so and just hope that corporate goodwill will be sufficient to preserve the integrity of the process is at best naïve and at worst foolhardy.

The dilemma is that, as enterprises like Google, Facebook, and Twitter continue to grow, the increasing number of users in their networks benefits everyone using the network. But because the networks are commercial enterprises, their interest is in maximizing profits by being able to sell information about their users to third parties, while their users’ interest is optimizing their social connections. In other words, the problem is
that companies are operating a social Commons as a commercial venture. Zeynep Tufekci, a sociology professor at the University of North Carolina, calls this practice “the corporatization of the social Commons.”
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Not everyone worries that a handful of companies will monopolize the Internet. Some legal scholars argue that firms operating social media sites are not comparable to telecom companies or power and utility companies, whose huge up-front capital investments in physical infrastructure guarantee their natural monopoly. New entrants to the utility space, they argue, would find it difficult—if not impossible—to compete with an already established firm with a mature physical infrastructure in place and a captive user-base secured. On the other hand, new entrants in social media have far smaller up-front costs to contend with. Writing code and coming up with new apps can be done at a fraction of the cost of setting up a utility, allowing new players to come in and quickly gain dominance or, at least, competitive advantage. As proof, they point to social media market leaders like Myspace and Friendster, whose dominance looked invincible just a few years ago only to be nearly wiped off the map by upstarts like Facebook and Twitter.

Free-market advocates also warn that the very act of anointing companies like Google, Facebook, and Twitter as “social utilities” and regulating them as a natural monopolies makes them, in fact, just that—protecting them in perpetuity from potential competition. That is exactly what happened with AT&T after World War I. As mentioned in chapter 3, the federal government granted the phone company giant a natural monopoly status, regulated by federal law, virtually guaranteeing it an unchallengeable control of the telecommunications market for most of the twentieth century.

Finally, the opponents of regulating social media giants as social utilities contend, somewhat justifiably, that regulated utilities tend to be risk adverse and shy away from innovations without competition nipping at their heels. With a guaranteed rate of return and fixed prices built in, what possible incentives would they have to introduce new technologies and business models?

These counterarguments resonate. It’s also the case, however, that corporate giants like Google, Facebook, Twitter, eBay, and Amazon have each spent billions of dollars securing global markets whose user bases are many times larger than anything from the past we might want to measure them against. What does it mean when the collective knowledge of much of human history is controlled by the Google search engine? Or when Facebook becomes the sole overseer of a virtual public square, connecting the social lives of 1 billion people? Or when Twitter becomes the exclusive gossip line for the human race? Or when eBay becomes the only ring master for the global auction market? Or when Amazon becomes the go-to virtual marketplace for nearly everyone’s purchases online? There is
nothing comparable to these monopolies in the history of the brick-and-mortar world of commerce.

The reality is that while these companies got in near the ground floor of the Internet, could leverage a good idea, and depose market leaders with very little capital investment, it’s far more difficult to do so today. Google, Facebook, Twitter, eBay, Amazon, et al. are investing billions of dollars in expanding their user base while simultaneously creating impenetrable enclosures, protected by layer upon layer of intellectual property, all designed to profit from the global social Commons they helped create.

It’s highly unlikely that the companies capturing these vast social spheres will escape some kind of regulatory restriction by way of either antitrust action or treating them as global social utilities with appropriate regulatory oversight. The nature and extent of the oversight is still very much an open question.

What’s not in question is the need to address the worrisome commercial enclosure of a communications medium whose very existence is predicated on the premise of providing a universal Commons in which all of humanity can collaborate and create value across every sector of social life at near zero marginal cost.

The Energy Commons

Assuring that the Internet remains an open global Commons to optimize the vast social and economic benefits of its laterally scaled architecture is a formidable challenge. Harnessing the new communications media to the management of laterally scaled renewable energies and assuring that the Energy Internet also remains an open global Commons is no less challenging. Already, the creation of an Energy Internet Commons across locales, regions, countries, and continents is coming up against entrenched commercial interests every bit as formidable as those the Communications Internet is facing with the telecommunications and cable companies.

Global energy companies and power and utility companies are, in some cases, blocking the creation of an Energy Internet altogether. In other instances, they are attempting to force a centralized architecture on the smart grid, to enable the commercial enclosure of the new energies.

The European Union, the world’s largest economy, has taken steps to keep the Energy Internet an open architecture by requiring that conventional power and utility companies unbundle their power generation from their transmission of electricity. The unbundling regulations came about because of growing complaints by millions of small, new energy producers that the big power and utility companies were making it difficult for them to connect their local micropower plants to the main transmission grid. The companies were also accused of discriminatory practices that favored speedy connectivity for green electricity generated by affiliated business
partners and of imposing bureaucratic delays and even refusing to accept green electricity from others.

Electric utilities are also fighting on a second front, with behind-the-scenes maneuvers to design a smart grid that is centralized, proprietary, and closed, and in which all transmission data flows only in one direction, from prosumers to headquarters. The objective is to withhold vital information from the millions of new prosumers on moment-to-moment changes in the price of electricity as well as to prevent them from controlling when to upload their electricity onto the grid to take advantage of peak electricity prices at various times of the day.

These efforts by the electricity transmission companies appear to be losing steam as countries all over the world introduce green feed-in tariffs to encourage millions of end users to produce their own green electricity and share it across an Energy Internet. A growing number of electricity-transmission companies are coming to grips with the new reality of energy prosumers and are changing their business model to accommodate the new Energy Internet. In the future, their income will increasingly rely on managing their customers’ energy use, reducing their energy needs, increasing their energy efficiencies and productivity, and sharing a percentage of the increased productivity and savings. Transmission companies will profit more from managing energy use more efficiently and selling less rather than more electricity.

At this early stage of the Energy Internet, questions are being raised about the best approach to manage distributed electricity generation. A new Commons model is just beginning to take form, and interestingly enough, it is an outgrowth of an older Commons model for managing electricity that arose in the 1930s to bring electricity to the rural areas of the United States.

The New Deal’s Greatest Success

Our story begins by revisiting Harold Hotelling’s speech of 1937 in which he suggested that the nation’s electricity transmission grid be paid for by the government. He argued that since the electricity grid is a public good that everyone needs, the general welfare would be best optimized by paying for it with federal monies rather than allowing it to remain in the hands of private utilities. Because consumers would not be paying “rent” to private utilities for their electricity, the price of electricity would not exceed the marginal cost, which would head toward zero, once the transmission grid was erected.

What I did not tell you in chapter 8 is that Hotelling used an example of a then new government program to illustrate the superiority of his idea. The project was the Tennessee Valley Authority (TVA), a massive public works project—the biggest ever conceived up to that time. On May 18, 1933, President Franklin Delano Roosevelt signed into law the Tennessee
Valley Authority Act. The plan called for building 12 dams and a steam plant between 1933 and 1944, employing 28,000 workers in the Tennessee Valley, which covered parts of seven of the poorest states—Tennessee, Kentucky, Virginia, North Carolina, Georgia, Alabama, and Mississippi. Construction was on a gigantic scale, equivalent to erecting 20 Empire State Buildings.
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The federal government would harness the hydropower and produce cheap electricity for many of the poorest communities in the nation, in the hope of stimulating long-term economic growth. Hotelling explained that bringing cheap hydroelectric power to the Tennessee Valley would “raise the whole level of economic existence, and so of culture and intelligence, in that region, and that the benefits enjoyed by the local population will be such as to exceed greatly in money value the cost of development, taking account of interest.”
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“But,” he warned, “if the government demands for the electricity generated a price sufficiently high to repay the investment, or even the interest on it, the benefits will be reduced to an extent far exceeding the revenue thus obtained by the government.”
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Therefore he concluded that “it appears to be good public policy to make the investment, and to sell electricity energy at marginal cost, which is extremely small.”
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Hotelling acknowledged that the cost of the TVA project would have to be paid for by taxpayers in the rest of the country, but suggested that the improved economic conditions in the Tennessee Valley would indirectly benefit other parts of the country by reducing the costs of agricultural exports from the region.
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An increase in income and the standard of living in the region would also mean greater consumption of products made in other parts of the country. Finally, he suggested that the success of the TVA project would spur similar public works programs in other parts of the country. He reasoned that

a government willing to undertake such an enterprise is, for the same reasons, ready to build other dams in other and widely scattered places, and to construct a great variety of public works. Each of these entails benefits which are diffused widely among all classes. A rough randomness in distribution should be ample to ensure such a distribution of benefits that most persons in every part of the country would be better off by reason of the program as a whole.
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Ronald Coase didn’t buy Hotelling’s arguments. Recall that Coase, a free-market advocate, didn’t think government was a good prognosticator of consumer demand, even in the case where the public good or service in question was undeniably something everybody needed. He wrote, “I do not myself believe that a government could make accurate estimates of individual demand in a regime in which all prices were based on marginal costs.”
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Coase’s first argument, on closer scrutiny, appears rather spurious. One wonders whether consumers would turn down cleaner tap water provided as a public good at marginal cost in favor of well water; or whether they would turn their backs on using public highways in favor of unpaved roads; or, for that matter, whether they would reject public electric lighting in favor of torches, when they could enjoy such conveniences at prices that reflected their marginal cost.

As to the contagion effect, Coase dismissed the argument that a successful public works venture like the TVA would stimulate copycat projects in other parts of the country, arguing that even if the project proved successful, there is no way to assume that roughly the same preexisting conditions would prevail in other regions, thereby favoring a similar result.

Coase wrote his rejoinder to Hotelling in 1946, when returning GIs and their families were anxious to make up for lost time during the war by using their pent-up savings to buy all the things they went without during the war years. The marketplace became the engine that would fuel consumer society. Understandably, after 15 years of economic depression, a world war, and government rationing of goods, millions of people were ready to embrace the marketplace and make their own individual decisions on how their income ought to be spent.