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September 05, 2007

Rent vs. Buy – The Driver of Economics

We the people like to own stuff and not pay rent to use it (BTW, rent includes taxes but that’s another story). They the oligarchs like to own the stuff and charge us rent to use it. The rise of a middle class has historically meant the rise of a property-owning class. The underclass pays exorbitant rents.

The telecommunications world – or at least the US part of it – is a battle of rent vs. buy.

Economics says that ownership or rentership is all based on access to capital. Certainly capital is a huge part of the equation – can you spell “home loan”?; but it’s not the whole story. Advancing technology traditionally favors ownership. Regulation often protects the oligarchy’s perceived right to collect rents. Public or cooperative ownership of common infrastructure plays a role in encouraging or discouraging widespread private ownership of the stuff that needs the infrastructure.

A couple of examples:

Housing: It’s the American dream; ‘nuff said.

Transportation. When people walked, they owned their own means of transportation but they didn’t own the infrastructure. Some roads charged tolls explicitly; on others bandits collected rent; in some jurisdictions taxes or impressed labor paid the rent on the infrastructure to keep it repaired and keep the brigands away.

Then there were horses that most people couldn’t afford. To ride on a horse or in a  carriage, you paid rent. The upper class had horses and carriages to rent; the lower class rented or walked; the middle class – what their was of it – had just enough horses or carriages for their own use. Note that neither walking nor horses nor carriages are very practical without the common infrastructure of the roads.

Trains are invented. Almost no one owns his or her own (except for private railroad cars). Unless you’re a railroad magnate, you’re a renter when it comes to rail transport. Businesses might own their own rail cars but they paid rent to the railroad to pull them over its tracks.

Then there are trucks and cars. Yes, they are inefficient from an energy POV compared to trains. But they are delightfully free. And they can be owned, not rented. Note, of course, that they depend on an infrastructure of highways which we do pay rent to use in the form of tolls and gas tax. Travel exploded as some of the friction of transaction costs disappeared.

Communication: We use to buy stamps (rent!) to send letters. Now we OWN computers (not cheap) or Blackberries and can send email “free” or at least without paying by the message or by the kilobyte (usually). Of course we do still rent infrastructure in the form of access to the Internet and, through that rent, pay our share for the backbone of the Internet. Communication use exploded as the friction of transaction costs disappeared.

Historical note: In the early days of email, email pioneer MCI Mail charged by the “MCI Ounce” – I think it was a thousand characters. That’s when email was a distinct service with its own backbone network.

You didn’t used to be able to own phones; you had to rent them from your friendly carrier monopoly. The Carterphone decision put an end to that oligarchy rebt-collection scheme and spurred a connectivity device industry. We do own our phones now but we still pay rent for access lines and backbone network (local and long distance charges) if we’re using the Public Switched Telephone Network (PSTN). But, when our phones are hooked to the Internet, owning the phone has extra value. You can call (some) other phones which are also hooked to the Internet without paying special rent for the fact that you’re talking instead of sending email or photos. The “phone” in this case can be a computer as it is for more Skype users or a special adaptor as it is in the case of most Vonage users.

If we OWN a radio, we don’t pay any rent to reach other people DIRECTLY who have compatible radios whether these are walkie-talkies or sophisticated ham sets. We own; we don’t rent. But if we own a radio which has to connect through a network (WiFi, say, or cellular), then we still have to pay rent to the network owner for use of the radio.

The great battles over net neutrality, separation of network infrastructure from services, and regulation of radio frequencies are mostly important to the players because of the implication on rent vs. buy. There are only two reasons left why we still pay special rents for voice: the owners of much of the infrastructure like collecting these rents and the owners of much of the infrastructure also have the regulatory clout to slow down competition like VoIP. Nevertheless, it won’t be long (says I) that voice communication everywhere and anywhere will be as free of arbitrary rents as email. Voice is data in all but the regulatory environment.

Is it quite possible – even happening in some places – that access networks whether wire, fiber, or over-the-air will become common property or community infrastructure. Then owning an access device will free us from having to pay access rent (but beware of taxes). BTW, this doesn’t have to mean public ownership, it could mean a condominium right in infrastructure; it could mean that access right is purchased along with the equipment which does the accessing.

Rent vs. Buy is a theme I’ll come back to. However, if you’re planning a new business and want to know whether you’re perpetuating the past (which can be a good short-term strategy) or inventing the future, ask yourself whether you’re helping your customers buy their way out of paying a rent.

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