[okfn-discuss] value transmission / open transport

[Rufus Pollock]

Jo Walsh wrote:
> dear all,
> 
> The following is a nearly-done draft of something i mean to post on
> the OKFN blog. It comes to the list because it is a bit speculative
> and i would appreciate some feedback / pointers to common references
> that i may be missing here, as well as is this OT for the okfn blog. 
> 
> The thrust is that an interesting 2000 report on "money transmission"
> services and payment networks identifies structural problems in
> collective maintenance of infrastructure for competing services, which
> can be generalised to "transport" networks of many if not all kinds,
> more specifically than "things 'utility-like'"
> 
> Is it possible there is a whole class of enterprises that are "natural
> collectives" which have been filled by different monopolies or "small
> oligopolies" in the past, but where increasingly-virtual instances of
> them arise (like the payments networks, like the internet) they tend
> to be nonprofit collectives run with varying degress of openness?

Possibly, the crucial question here is: why were they monopolies or 
oligopolies in the past? If it was high transaction and coordination 
costs then the internet may well have a large impact (though perhaps not 
as large as we might think or hope -- see 
<http://blog.okfn.org/2007/02/08/copyright-and-the-digital-age/>). If 
however these concentrations happened for other reasons -- e.g. large 
investments in physical infrastructure, economies of scale in the same, 
risk sharing etc -- then one would not expect such dramatic changes.

> I have been grumbling a lot about "transport" being seen as an
> application or sub-topic of "environment" but perhaps we can also see
> it as, "environmental" issues tend to be applications of a collective
> action problem over transport networks?
> 
> Is this like way abstract, or stating the obvious? I can't tell.
> The longer version of the above:
> 
> 
> I ran across the Cruickshank Report, a review written in 2000 of the state of
> payment information systems in the UK, and enjoyed what it had to say about
> "money transmission" (Think ATM networks, point-of-sale networks in shops,
> credit card networks, as well as intra-bank schemes for larger sums.)
> http://www.hm-treasury.gov.uk/media/B/7/BankReviewChaptthree.pdf
> 
> A lot of value is apparently created by the transport mechanism itself, in the
> form of per-use access fees: "<i>around three quarters of a billion pounds per
> year are paid in this way to UK debit and credit card issuers. The interests
> of bank run schemes do not coincide with the public interest.</i>" These are
> <i>interchange fees</i>, paid between individual members to cover the cost of
> services supplied from one member to another.

Great digging Jo. This is fascinating stuff ...

> <blockquote>
> Inflated interchange fees create a number of detriments. First, they <b>raise
> the cost to retailers</b> of card payments. ... Second, allowing issuers to
> recover costs through interchange payments <b>weakens the incentive to cut
> costs</b> through greater efficiency ... Third, competition between payment
> mechanisms is distorted in favour of products with <b>artificially high
> interchange fees</b>.</p>
> </blockquote>
> 
> Money transmissions such as ATM networks conduct "network effects". Initially

Or more precisely indirect network effects: payment systems are 
intermediate platforms (like Operating system) that connect consumers 
(users) with merchants (software applications). Much of the competition 
issues arise then come around how easy it is enter, how easy it is move 
from one network/platform to another etc. Also crucial is the degree to 
which new entrants will have to interconnect (and pay access fees) to 
existing infrastructure owners (and who gets to set those fees). I've 
actually got a whole academic paper on porting on platform industries 
(The Control of Porting in Two-Sided Markets). [1]

[1]: see <http://www.rufuspollock.org/economics/> or
      <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1018902> or
      <http://ideas.repec.org/p/pra/mprapa/5023.html>

> there is a high entry cost to the builder of a network. People are more likely
> to join it, the more people they can reach over it - how widely a credit card
> is accepted, how widely a videophone is used. Each new user can be given the
> same level of service for less new cost than the previous one, and once
> maintenance cost is covered up until capacity is full, that cost is
> effectively zero. 
> 
> "<i>Network effects also have profound implications for competition,
> efficiency and innovation in markets where they arise...  Once a network is
> well established, it can be extremely difficult to create a new network in
> direct competition.</i>" A very high cost of initial capital investment, at a
> great deal of redundancy in services "raises entry barriers" to value
> transmission markets which "in turn leads to higher customer charges and lower
> levels of service in these markets. It also effects the geographic
> distribution..." where densely populated areas become over-served, sparse ones
> neglected.

Sure though one needs to be careful when thinking through the dynamic 
effects. Sure people raise prices later on but maybe they lose money 
initially trying to attract customers (and building large infrastructure 
bases). Clearly bad stuff can happen but it won't always ...

> Except at times of high congestion, there isn't a per-access cost impact over
> and above the maintenance costs of the underlying network. Cost to install,
> fix and improve services may be significant; but the benefit of being able to
> join such a network is much greater across participants. 
> 
> Through sustaining it via a per-access fee levied against the ultimate end
> user.
> 
> The Cruickshank report's analysis suggests a license for entry into "money
> transmission" networks which reflects the risk. The current schemes have a
> "mutual governance" model, where the underlying network is operated by a
> not-for-profit company co-owned by the participating "competing" companies. 

This is appears to be regulated 'access fee'. Think of BT providing 
access to their local loop -- this is a traditional network (no indirect 
network effects) industry btw. Similarly one could think of the way 
microsoft is currently being forced to open up some of its APIs.

> Yet the industry associations have formed non-for-profit mutuals on the
> grounds that some aspects of their business are better run collaboratively.

e.g. VISA (though this could be seen as anti-competitive cartelling -- 
particularly if they are inefficient).

> There are many situations that look like this and which tend to involve the
> underlying transmission medium for moving things from one place to another. A
> network - a road network carrying a bus network, or a communications network
> with public terminals - becomes so widespread and the necessity of interchange
> with it so complete that the cost of replicating it - where that is physically
> possible - must tend to be prohibitively more than the cost of joining it. In
> a few very congested areas, private toll roads may be viable, but even then
> following the topology of a main network. Planning and licensing restrictions
> in the dependencies, additionally limit who can participate in building
> infrastructure.

Yes, the road infrastructure went public pretty quickly both for the 
usual public good reasons and the anticommons type issues.

> What does this look like? Well, it looks a lot like another non-Internet
> network which the Internet increasing depends on to be of commercial interest,
> the cellular network. To become a full member of the GSM alliance and
> therefore entitled to read, and use, the specifications for phone call data
> exchange, one needs to have a "license" for a slice of spectrum *and* at least
> a minimal physical infrastructure of cell towers. A moratorium on new phone

Also you need to license patents -- see 
<http://www.rufuspollock.org/archives/102>

> mast installation means that new market entrants must sublicense from
> competitors; even a really significant capital investment cannot do enough.

I'd be interested to know if OFCOM does any regulation of cell-phone 
interconnection charges ...

> I want to claim a strong argument that there is a whole class of enterprises
> in which competition at the infrastructure layer cannot produce a better
> result than cooperation, and is likely to produce a worse one. If there really

Well you've just hit on the nub of the whole literature on 'networks' 
(direct or indirect). What's the best structure in welfare terms for 
society: standardization (cooperatively via an open or semi-open 
standard), standardization via monopoly, or multi-platform/network 
competition?

Each of these structures will have different static (how good is it 
right now) and dynamic (investment in quality and innovation for the 
future) effects. For example open standards might be great statically 
but they might take ages to hammer out (while everyone negotiates) while 
a proprietary standard while bad statically is fast to do (and might be 
good quality -- since fewer compromises).

> is a class of works which are "natural cooperatives", I want to find out more
> about how they are constituted and how their runnings are best expressed in
> rules. For want of a better word, all these enterprises are some kind of
> "transport" and that's what I'm trying to get at in proposing an "Open
> Transport" session for next year's Open Knowledge Foundation conferences.

It sounds absolutely fascinating -- even if we don't know the answers :)

> Mutual governance may come in for criticism, but perhaps it is rather the
> governance of mutual governance that is the problem. A revision of the rules
> describing these sorts of systems ought to be workable; the creation of a
> status to which these networks can apply in order to get tax breaks etc, and
> could achieve the same as any regulatory regime which aimed to increase
> transparency, lower costs and encourage innovation. Surely all participants in
> the building of transmission networks which move value around - in the form of
> water and waste, data and energy - must share these aims?  

These are all great question Jo. I'd blog away.

~rufus