Six Internet Infrastructure Trends

From Digitopoly:

Today internet infrastructure encompasses root servers, broadband lines, routers, content delivery net-works, cloud storage and cellular towers. Broadly construed, these physical assets perform two related and essential services for the modern digital economy. Infrastructure acts as an intermediate input for the production of many services by firms and it acts as an intermediate input into the delivery of access and related services to the internet for households.

The improvements to infrastructure receive less heralding than a new and shiny app or device. Fewer financial analysts examine every imaginative aspect of clever business decisions. Nonetheless, improvements arrive apace, both motivated by and enabling advances in a plethora of new devices and platforms.

Today’s column will take a step back and marvel at the economic logic behind these long term changes. Let me issue apologies in advance for skirting past a ton of technical details. The column will try to make a complex economic topic digestible by focusing on “trends” in the recent past.

SHOW ME THE MONEY
Trend 1. Value chains grew. A value chain is a set of activities that together produce an outcome that users purchase and consume. Most networks support a chain around a single output – e.g., the electrical grid produces and delivers electricity. In contrast, internet infrastructure supports several chains, so it is challenging to estimate the value of the markets it supports.

Broadband internet access to homes and businesses is one important value supported by infrastructure. Official GDP statistics in the Service Annual Survey, collected and archived by the US Census, show enormous levels and growth in access fees. In 2017, the last year in which data is available, payments for access in wireline forms contributed over $88.7 billion to GDP, growing more than 30% from 2012 (in nominal terms). Payments for access in wireless forms amounted to over $96.0 billion in 2017, growing more than 57% from 2012.

A related value chain exists for electronic commerce in the same years. It has many parts. Official GDP statistics find online advertising contributed $105.9 billion to GDP in 2017 among Internet Publishing and Broadcasting and Web Search Portals. That has grown 250%. Another part of this chain involves electronic retailing, which the Census puts at over $545 billion for electronic shopping and mail order houses. It grew 65%.

That is not every value chain linked to the internet, of course, but it is enough to illustrate that hundreds of billions of dollars depend on the infrastructure, and this activity has grown tremendously in recent experience. It also illustrates a difference with the speculation of the dot.com era. Today’s investments support valuable services that users regularly buy. Even if every over-optimistic entrepreneur disappeared tomorrow, there would still be a large amount of value affiliated with the internet.

Trend 2. Generativity thrived. Internet infrastructure supports too many products and services to list. Smart phones helped supported a boom in apps, and massive change in platforms. Video and streaming worked their way into every device, altering music and video services, not to mention online advertising. Broadband provides the best experience for streaming movies, and numerous over-the-top services have been proposed and some have been widely adopted by users.

These experiments arrived in fits and starts, and punctuated events with new rollouts and inventive new products. Some of this went mainstream and some stayed with cutting-edge users. There is not enough space to mention even a tiny fraction of them. There is, however, a simple but obvious point to stress: Those experiments and the increase in the value chain could not have happened without associated improvements in the operations of infrastructure. Users experienced more resolution in their video, less waiting time for rendering, and faster reactions in their applications.

Notably, household and businesses paid higher prices for faster access in their wireline and wireless services. That is why the value chains grew in size. Similarly, investments in infrastructure grew where the money flowed, especially where users paid for the improved experience.

NEW VERSUS OLD ARCHITECTURE
Trend 3. Users increasingly received more data than they sent. Networking engineers today talk about ever increasing “asymmetric flows” in data. While the network flows were never perfectly symmetric, the engineers have a point. Blame the increasing popularity of streaming and video. Blame all those smart phones. Blame all the new addictive apps. Flows have steadily, almost inexorably, gotten more asymmetric each year....

....MUCH MORE