cheap physical distribution of video

Low-price rental of DVDs through kiosks is growing rapidly. Redstar, the industry leader, has grown from 6,700 video kiosks U.S-wide about January 2008 to more than 20,000 expected by year-end 2009.  In early May of this year, Video Business reported that DVDPlay had 1,200 kiosks and NCR had 2,200 MovieCube kiosks, with plans to add another 10,000 in a venture with Blockbuster.  All of these companies’ kiosks offer movie rentals on DVDs for $1 a day.

Low-cost media rental kiosks will press downward on prices for video distributed via communications network.  If the history of the book rental business is any guide, the video rental business will fade away as persons get video cheaply and conveniently through alternative sources, and as genres, formats, and entertainment options multiply.  The marginal cost of producing and distributing a video through a kiosk is much lower than the marginal cost of printing a book and distributing it through a book rental location (books have more atoms in more macroscopically different forms).  Thus for video the price pressure is likely to be greater, and the incentive to differentiate, also greater.  An interactive program of personalized short videos, which is what YouTube offers, can’t be delivered physically via DVD rentals.  If the video market shifts away from blockbusters, the capacity constraints of kiosks will be more of a disadvantage. Video kiosks are a potent disruption in the traditional video distribution business.  They will force communication networks to invest more in new video and entertainment forms that play to the advantages of online communication.

A fundamental aspect of the challenge of generating revenue from online content is that renting and buying don’t map well onto the online experience.  What’s the difference between renting and buying online content?  Renting offline means you have the right to use some good for a fixed period of time.  But online, which offers access to everything all the time, why would anyone ever pay for the right to use something ahead of the actual use time?  Buying offline is typically understood as possession: you get a good that you buy.  But what does buying a video that’s delivered online mean?  It means acquiring some bundle of rights that are not at all familiar or intuitive.  That’s a business problem.

The development of common understandings of new use rights would help to make online content more commercially feasible.  New digital use rights might include rights such as rights to make conversions across output devices, to construct new content compilations (playlists), and to make derivative works (mashups, adding audio content to user-generated videos).  Developing alternatives to totalitarian copyright is in content creators’  best interests.

inertia in administratively determined prices

Because communication networks were being used in ways that undermined the rate structure established to recover interstate public telephone service costs, the U.S. Federal Communications Commission (FCC) created a special access surcharge.  This charge applied to interstate private lines that could connect with local public telephone service (“leaky PBX“).  Such facilities allowed persons to make interstate calls that avoided interconnection (access) rates associated with  interstate public telephone calls.  The special access surcharge recovered interstate public telephone service revenue that was lost when persons used private networks to transport calls interstate.

In its 1983 order establishing the special access surcharge, the FCC set the de facto rate. The order reasoned:

we note that private lines attached to a PBX are capable of ‘leaking’ into the local exchange. Because most private lines are connected to PBXs, most private lines are capable of leaking. Although one might assume that all private lines would leak if capable of doing so, we are aware of some private lines connected to PBXs that actually may not be used in connection with local exchange services to make interstate calls. We believe a fair estimate of the number of such lines would be 20 percent of all private lines. Thus, we estimate that 80 percent of all private lines do leak through a PBX or other patching or switching device. We shall assume that 8 percent of all communications made over such lines are interstate, based on the latest data available to us on average subscriber line usage for interstate MTS and WATS services.  Eight percent of 80 percent is 6.4 percent, which represents the proportion of all private line usage that ‘leaks’ into the local exchange. We further assume, based on estimates submitted in this proceeding, that nonpremium carriers would pay approximately $400-$500 in monthly carrier usage charge under the access charge plan.  Taking 6.4 percent of these figures, we arrive at a range of approximately $25-$32 per month per line. We will select the lower end of this range, $25, as a conservative estimate of what the interim surcharge should be.[1]

Under the regulations, a local-exchange telephone company had the opportunity to estimate and justify a different rate for a special access surcharge.[2]  Apparently none did.  At least for the large local-exchange telephone companies, the special access surcharge has remained at $25 per voice-grade-equivalent circuit from 1983 to the present.

The economic circumstances relevant to the special access surcharge have changed considerably since 1983. Most private line traffic is now non-voice traffic. Interstate public telephone service is now generally much cheaper than $25 per month. A special access surcharge applied to a DS3 line would raise the current price of that line more than ten-fold. In the mid-1980s, regulations were amended to permit customers to certify that a private line is not capable of being interconnected with a local exchange telephone line. Customers could thus get the special access surcharge waived. Such waivers would now seem relevant to almost all the voice-grade-equivalent circuits in private networks.

How the special access surcharge has been applied in practice isn’t clear. Local telephone companies’ special access surcharge revenue rose from 1993 to a peak of roughly $46 million in demand year 2001.[3] From demand years 1991 to 2008, the minimum, median, and maximum share of the special access surcharge in total special access and trunking revenue was 0.25%, 0.43% and 0.83%.  From 1993 to 2008 the ratio shows no clear trend.[4]  Thus the ratio does not indicate the rapid growth of IP-based networks across that period. While the special access surcharge rate of $25 has endured since 1983, it apparently hasn’t been consistently applied.

*  *  *  *  *

Data:  online spreadsheet of special access surcharge revenue for selected telephone companies, 1991-2008 (Excel version).


[1] FCC, Petitions for reconsideration of MTS and WATS Market Structure, CC Docket No. 78-72, 97 FCC 2d 682 (1983), para. 88.

[2] See 47 CRF 69.115 (special access surcharge regulations).

[3] Calculated from tariff data in the Price Cap Review Dataset. The 2001 peak is scaled up to an industry estimate using a dataset coverage ratio of 75%.

[4] Based on tariff date included in the Price Cap Review Dataset. The telephone companies included in the data for 1991 and 1992 are a subset of those included in subsequent years.

COB-39: bureaucrats reduce waste

New activities often produce waste.  If an activity is new, then you don’t know what result it will produce.  If the new activity produces a result that you don’t want, then it was a waste.

Bureaucrats avoid new activities.  Thus bureaucrats avoid waste.

Individual initiative often wastes resources.  Consider, for example, a person who, on his own initiative, decides to water his garden.  He just pours water on the garden.  The water isn’t continually re-circulated like a well-crafted bureaucratic memo.  The water, which is never edited or revised, is seen only once, and then it vanishes into the ground. The water pours forward without the participants having had any meetings to establish a plan to set up a program to emit specifically authorized units of water.  The result, of course, is a waste of water.

Bureaucrats continually circulate and re-circulate documents. Rather than emitting resources, a well-functioning bureaucracy accumulates resources.  Resources that are accumulated are not wasted.

In short, bureaucrats conserve their environment.  Bureaucrats are the original environmentalists. If a society wants to reduce waste, it needs to develop bureaucracies.

Other bureaucratic insights this month:

sportsBYbrooks alleges, “Sometimes, rules were made to be broken.”  That’s incorrect.  Bureaucrats avoid waste.  Making a rule to be broken is a waste of a rule.  We do agree, however, that Layla Kiffin will soon rule the world.

At Not Always Right, a customer service representative who failed to follow standard bureaucratic appointment procedures lost a customer.  If you’re not sufficiently bureaucratic, your business will suffer.

The Help Desk at Ubersoft explains well the functioning of marketing departments. Having a large, multi-level marketing department helps it to better fulfill its function.

This just in from Thanh Nien:

Ha Van Phuc, who lives in Con Dau Hamlet in Dak Nong Province, said his two daughters had been going to Nguyen Du Elementary across the Serepok River in Dak Lak’s Buon Don District for years.

But the school has refused to let them return this year to comply with an order from Buon Don District, which says it’s dangerous for children to cross the river by ferry to get to school, Phuc said.

Phuc should follow the bureaucrats. You can count on bureaucrats to protect children.

Agence France-Presse (AFP) has impressive bureaucratic credentials as the oldest and one of the largest news agencies in the world.  We are thus deeply distressed to read this lead sentence in an AFP “news” article:

The party that swept Japan’s weekend elections said Tuesday it was ready to do battle with the mighty state bureaucracy to reduce civil servants’ smothering grip on the world’s number two economy.

We believe that bureaucrats, in Japan and elsewhere, make an irreplaceable contribution to economic welfare.  Evidently, the bureaucrats working in AFP do not recognize their own worth.

That’s all for this month’s Carnival of Bureaucrats. Nominations of posts to be considered for inclusion in next month’s carnival should be submitted using Form 376: Application for Bureaucratic Recognition.