Stranded costs of the wetware infrastructure

[Geezer]

Stranded costs of the wetware infrastructure: Part 1,
from market-fast to way-too-slow
http://affordablehousinginstitute.org/b ... model.html
June 6, 2011
By: David A. Smith



Because infrastructure is a network, adding any one new node is so much cheaper than building a parallel system, so its economic end state must be either a natural monopoly (where the network power is used to exclude competition, think Microsoft Windows or railroad robber barons) or a public utility (where the government mandates access at a standard price – think toll roads, electrical grids, water and sewer systems, and the internet).

Urban value chains always link a hardware network to a wetware network

Public utilities are generally cheaper for consumers and better for the nation (or state, or city) as a whole, because they are large-scale, readily expandable, and reliable. But they don’t come into being without government imposition of standards, and either regulation to establish the mythical ‘level playing field’ or a compensated taking of some property rights. (Two decades ago, telephone and cable television companies got into a massive fights over the right to run the last wire into your house; and in the end, that wire became a regulated and profitable utility.)

Who says we have an advantage?

Now, we think of infrastructure networks as physical in nature – highways, power lines, municipal pipes, subways – but they can also be intangible. Information networks (and for that matter, government is an information network) are comprised of people linked in extensive and evolving value chains. They’re infrastructure as much as are pipes and wires and roads, and yet when they become obsolescent, either as individuals or as part of the network, the consequences are much more poignant than simply retiring stranded costs, as revealed by an interesting article by James Meek [hat tip: Matthew Healy] in The London Review of Books.



Somewhere in the Netherlands a postwoman is in trouble. Bad health, snow and ice and a degree of chaos in her personal life have left her months behind on her deliveries. … The postwoman is paid a pittance to deliver corporate mail. She hasn’t done her job well, yet so few people have complained about missed deliveries that she hasn’t been found out.

Aside from the personal tragedy – text I snipped out sounds suspiciously like hoarding, not overwork – the absence of complaints is indeed the tipoff that the role of physical mail has changed dramatically, shifting from an essential utility into a convenience and a low-value commodity. These shifts are interesting, both for themselves and for what they illustrate how people can be a valuable and integrated component in technological value chains, and how when the technology changes, retiring or repurposing the human component is much harder than junking obsolete hardware or software.



1. Electronic networks have supplanted physical mail as the critical information utility.

The mere fact of your reading this post on-line is proof, if proof were needed, that the information revolution has transformed the networks by which information can reach us, the speed of global communications, and hence the value propositions of every information-delivery network.
There was a time when postal mail was the fastest and best means of written business communications. Even through the mid-1970s, when the telecopier (as it was then known) debuted, its transmission costs were high and image quality was low: thermal and chemical paper that would fade after light exposure, so one had to photocopy the scrolled telecopy immediately upon its arrival.

State of the art, ultra fast – and 300 baud

(For younger readers, that’s 0.3 kb.)

Then things changed.

By 1982, a hundred thousand executives in the US were wired into a fad called ‘electronic mail’.
The office system consultants Urwick Nexos were scornful of this frivolous innovation. ‘Who wants to replace a diary by a thousand pound terminal and have to learn to type in the process?’ they sneered.

Do I look like I know how to type?

At the time, the sneer was not unjustified. Back then, executives had secretaries, who took dictation and typed letters.

Taking dictation, 1954

‘What is wrong with a memo? About 90% of letters are delivered next day and that is fast enough for most requirements. If you want to send an urgent telex you can always go to the telex room with a handwritten note.’

Limits on the communications network imposed limits on the business OODA loop. Negotiations were handled face to face; transactions were kept simpler, so that they could be documented in the time available. But the pace of business was about to change:
By 1985, the word ‘email’, initially spelled with a hyphen, began to replace ‘electronic mail’. The US firm MCI offered a transatlantic service to its American clients. It only took a minute for the sender’s email to flash to MCI’s state of the art receiving centre in Brussels, where it would be lovingly printed out and hand-carried to its destination by a Belgian postman.
As with many forms of new infrastructure, the electronic network started with high-volume transit via megahubs; for its last-kilometer delivery, it relied on the old infrastructure, because the old infrastructure was ubiquitous, and hence the marginal delivery cost of rare and isolated messages was low.

And then everybody learned to type.


Is this really going to eliminate calligraphy?

I learned to type in 1965, because I thought it might come in handy. It did, and over the last twenty years, the nature of business communications has been revolutionized.
Before I started working on this article, I thought about trying to set up the interviews by post. I didn’t think about it very long. I sent no letters for the article, and received none. I phoned, emailed, texted, Skyped, Vibered, Gmail Chatted and Googled.

Of course not – when communication can be instantaneous, then the need to communicate becomes omnipresent. Anyone whose communications rate false behind market standards falls out of market competitiveness.

Faster broadband! Faster!

As a result, 99% of what mail used to be for – time-sensitive delivery-required communications – has disappeared. With that disappearance, the mail has lost its relevance to a newer and better technology, just as painting lost its principal relevance after photography was invented. (Much of painting has still not recovered from the shock of losing primacy of depiction.)
It’s almost Easter, but I’ve only just used the last of my Christmas stamps. I sent a card to a friend to thank her for dinner and she emailed back to thank me for my thank you.
Much of the mail delivery now is legacy to vestigial nodes – people who lack connection to the new network, the internet. Or it’s duplicative of electronic communications where the laws (e.g. legal service) have not caught up with the new network’s reliability:

This morning in the post I received a bank statement I don’t need, a credit card statement I don’t need and a card from Ed Miliband urging me to go online to tell him my priorities for moving Britain forward.


Since you don’t read your email, will you send me one that I can also not read?

Urban society is sustained by communication – indeed, people originally came to the city so they can communicate quickly, in markets and governments and factories. Today, when so much of our physical delivery is networked – think power grids, gas lines, and water/ sewer networks – what has to flow fastest are ideas, and when the network is global, people can form teams at global speed. The result is a stranded infrastructure, mostly paid for, and mostly depreciated:
Technological shifts are nothing new. In the late 18th century, new media meant horse-drawn mail coaches flashing information up and down the country, in the form of newspapers, at the blinding speed of six and a half miles an hour. Fifty years later, the railways came along, and, presumably, a lot of disgruntled mail-coach drivers found themselves looking for alternative employment. What is different this time is that text has broken free of the requirement for it to take material form, and for a human hand, at some point, to feel its weight.

What is different this time is only the speed of the network obsolescence. Everything else is exactly the same.

Unlike them, I will never be rendered obsolete

Mr. Meek does not acknowledge, and perhaps does not grasp, is that the snapshot he has taken is of one system dying and another one struggling to be born:
Somehow Selekt A private mail delivery service – Ed.] has not noticed it is getting fewer empty crates back than it sends full crates out.
To begin with, Selekt has reinvented itself from purely mail to mail and parcels: “an independent business
unit of DHL Express and one of the largest providers in the area of ​​consumer delivery in the Netherlands.” Letters have fallen from being the anchor delivery to an ancillary delivery achievable because Selekt maintains a network for packages:

When I followed the postwoman to the kitchen, I saw, like some recurring nightmare, 20 more crates filled with letters.

In other words, the mail is now used for unsolicited (not necessary unwanted) and non-time-sensitive experiential mail.
I watched the postwoman sorting mail in her kitchen, dividing it up into piles on the steel counter on either side of the sink, carefully dried after the evening’s washing-up. It seemed to be mainly Ikea catalogues, the cover showing an exquisitely lit arrangement of blond, cheerful furniture.

Half the fun is smelling the paper

Remarkably, such is the speed of business adaptation that mail, having been displaced from its role as a utility, is now undergoing aggressive mutation, for example with these variants.
Personalization significators. How often have you received bulk mail whose address appears to have been handwritten, or that has a stamp instead of a meter stripe? Because both are significators of personal correspondence, they get us to open the envelope, which is better than being auto-deleted by a spam filter – a humanized significator to defeat an inhuman censor.
High-sensory delivery – glossy paper, embossing, even scent patches – that cannot be reproduced electronically (at least, not yet). Such as snazzy catalogs – at least, that is, until Ikea discovers it is wasting enormous sums printing expensive doorstops that are never read even by the barely interested:
The Ikea ideal did not include any obvious area for the sorting of mail. As the greasy slap of the catalogues’ plastic covers hitting the counter became monotonous, my eye kept being drawn to a row of Smurfs balanced on the copper pipe above the sink. They were covered in a thick layer of black dust. The postwoman knows things are not going well. In an anguished email she sent me after my visit, she wrote: ‘Many tears are dropping.’

Electronic tears, no doubt.

You think software systems have no feelings?

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[Continued from yesterday's Part 1.]
By: David A. Smith



Yesterday’s post on the collapse of physical mail as a critical utility used as its source an empathetic and intriguing London Review of Books article by James Meek [hat tip: Matthew Healy] on the infeasibility of the current European mail delivery system because its product, physical mail, has been overtaken by email as the principal information-delivery utility. If it is to survive, the post office must reinvent itself around the leavings email cannot touch – and that means reinventing its business model around much smaller demand.

Well, garbage collecting doesn’t look like a good business for the network

2. With its loss of utility status, the business model is collapsing

Somewhere in the late eighteenth century, the developed world concluded that mail service was a utility, and in 1837, the year Victoria became queen, it was enshrined into law:
According to law, the Royal Mail must empty each of Britain’s 115,000 postboxes and deliver any letter to any of Britain’s 28 million addresses, six days a week, at the same, affordable price, wherever the letter is posted and wherever it’s going. The rule’s the same for parcels, except with them it’s only five days a week. This is the universal service obligation, the USO – ‘part of our economic and social glue’, as Richard Hooper puts it in the reports that have framed the debate over the Royal Mail’s privatisation.
Mandating that a thing be universally provided is equivalent to making it a right of citizenship [Are you going to take about Obamacare? – Ed. God, No – Auth.], so making mail delivery universal not only elevated it to a utility, but also made it a component of government delivery. Henceforth a place was not a city unless it had, in addition to roads and water/ sewer pipes and power lines, a universal mail service – and that meant that people, to be consider true inhabitants of the city, thus entitled to political and social benefits, had to have fixed addresses. That’s why for the better part of a century we used “of no fixed address” as a euphemism for vagrancy and social (and political) ostracism.

No fixed address?

Universality was next extended to the telephone (in America, in 1907) by making the phone lines interoperable with any carrier. So potent is the public-policy case for universality of transmission across a network that in the 1970s and 1980s, the nation’s largest company, Bell Telephone, was broken up by the courts, with the explicit goal of separating networks and allowing interoperability (and not coincidentally, reducing the Phone Company’s big-brother-like power).
The mail was similarly regulated, even to the point of becoming government-owned – and that was fine so long as total network demand kept growing. Which lasted until the new network, the internet, had faster transmission, simpler interoperability, lower network costs, and lower delivery costs. Collectively, a fatal blow to the mail:
Just after the turn of the millennium the growth in the amount of mail being sent became decoupled from the peaks and troughs of economic growth. The economy boomed, but the rate of increase in paper mail fell as email, text messages, web chat and the internet in general erased old paper trails.

For those of you operating utilities, when you observe that your business no longer has a connection to the overall economy, it’s proof that your business is losing its status as a utility.

The increase in the number of packages sent as people order goods over the internet can’t make up the difference. In 2005, the letters market went into absolute decline, and has fallen ever since. By 2015, according to the Hooper reports, letter volumes are likely to decline by another 25% to 40%.

If not more. In business terms, this is an implosion.

So much for postal headquarters

In 2006, London posted 861 million pieces of mail. By 2014, Royal Mail predicts, that will have fallen to 335 million.
That, readers, is a 61% business decline – a decline so sharp it is killing the network. Conceptually, the fees for each unit delivery represent the sum of three things:

+ That delivery’s marginal line cost (the postman)

+ A share of operational infrastructure (e.g. management)

+ A share of maintaining and upgrading physical infrastructure (e.g. post offices and sorting offices)

= Required fee charged to customers.


Flat-fee structures gain their power from scale, because those slivers add up, and when volume is rising, regulators push those fees down – because who could ever imagine that the mail, an essential utility whose absence would render urban life unthinkable, could be cut?

How can you replace people so dedicated?

Now the utility has to shrink itself, and it cannot cut its way down to a newly sustainable smaller infrastructure:
Across the country about a score of mail centres have been or will be shut, including Liverpool, Bolton, Hull, Oxford and Milton Keynes.
Reduced volume also means cuts, as aggressively as possible, into the marginal-cost delivery infrastructure – in other words, either reducing what carriers are paid, or laying off many of them.
TNT did experience a postal strike last year, after workers balked at union leaders’ negotiation of a 15% pay cut. But Egon Groen [one of the union leaders who put his signature to a reduced-pay deal with employers], has no illusions about the way things are going for paper mail. ‘Postal volumes are going down much faster than expected. Substitution by email is going up much faster than expected. We had to fill in our tax forms by today so I guess everyone’s doing it on the internet.’
Mail had its primacy as a utility only because governments could presume universality of access. Today email has yet to reach universality, but it has reached ubiquity – and with the rapid acceleration of broadband and the compaction of computing power, whether it is in a cell phone, BlackBerry, or iPad, wireless ubiquity is just around the corner, and that spells doom for mail as a utility.

Not with a postcard but a Tweeter

Yet Groen is optimistic about the future for the luggers, the heavers, the hefters and the trudgers of society. ‘About a third of the workforce is going to retire in ten years. That will be a huge problem which will give people like the private postmen you met more chances. Employers won’t be able to be so choosy. We can’t import two million people from Ireland or anywhere else. The price of labour will go up.’
That cheerful scenario is plausible only if mail will retain its monopoly position as the information-delivery network of choice, which it will not.

3. Utilities network-engineered for monopoly regulation cannot shrink their way to competitiveness

When a utility becomes a regulated monopoly, it becomes a closed internalized universe. The outside world does not matter, because as Ernestine the Operator said, “We’re the phone company. We’re omnipotent. That’s potent with an omni in front of it.”

One ringy-dingy … two ringy-dingy

Thus the gods of administrivia are in their overly specified glory:
One day in 1979, a British postal functionary settled down to write a five-page instruction called ‘Trap Doors in Postal Buildings’. He listed five kinds of permissible trap door. A trap door in category B ‘should be strong enough to carry the weight of a man who accidentally steps on the trap door. It must carry a label on self-adhesive vinyl, black on yellow, measuring 250 by 200 mm, saying DO NOT STAND ON THIS TRAP DOOR.’

Told you not to stand there

Who was this far-off bureaucrat? Did a superior send him a memo telling him that there was need for a fresh trap-door instruction? Why? Were they constructing postal buildings in 1979, or postal castles? Was the anonymous official, perhaps, the same person who wrote instruction number N02F0024, ‘Vocabulary of Grey Uniform with Corresponding Outer Clothing’, or declared in instruction K07B0400, ‘Clocks’, that ‘Clocks should be provided in cloakrooms that serve more than 50 persons, but not in corridors’?
Everything in the system’s core was engineered for high volume – hence high standardization – and having lashed itself to the mast of ‘internal consistency,’ the mail system cannot suddenly become flexible, nimble, and cheap.

Don’t be stiff, we’re soooo flexible

Instead, it ossified:
When Michel van Hulten [the last left-winger to run the Dutch mail] took charge of the Dutch post office [in 1973], it was losing money. His solution was straightforward: he doubled the price of stamps.

Mr. van Hulten in 1972

However empathetically this is portrayed, Mr. van Hulten demonstrated the monopolist’s arrogance: our costs are too high, so we will double the price of our essential commodity. What, you’re upset?
Still surprised after all these years
He still sounds surprised that he was attacked for it from the opposition benches by Neelie Kroes, who accused him of hurting business.

His idealism –

Idealism? If Mr. van Hulten had been a private capitalist – Cornelius Vanderbilt, say – then doubling the price of his essential utility would have branded him a gouging capitalist; Mr. Meek betrays his political predilections by praising Mr. van Hulten because he did it on behalf of a government monopoly.

– brought him up against the rightist finance minister, Wim Duisenberg, over the post office bank.

At issue was this question: Is the mail a business, to be run on a sound competitive and financial footing, or is it an instrumentality of government, to be supported by taxpayers?
No one has ever solved this problem, because during the twentieth century mail was ubiquitously essential and that allowed the mail not to have to choose: you could have universal service and a profitable, affordable entity. One only has to choose when the infrastructure costs are unsustainable on market consumption, a problem still unsolved by Amtrak and its other government pets, high-speed rail and light rail.
Across the world, postal services are being altered like this: optimised to deliver the maximum amount of unwanted mail at the minimum cost to businesses.
Again Mr. Meek betrays himself – if the mail is unwanted, the shippers will stop shipping it. The mail may be unsolicited and it may be delivery-time-insensitive, but that does not imply it’s unwanted. When I was a kid, for instance, the absolute best mail delivery was the annual Sears Christmas catalog, known universally as the wish book.

Hours of toy fantasy, and all free

For hours I and millions of other American kids pored over its contents, a sensual orgy of consumer longing. Everything about the book was seductive, from the sleek cover to the slippery and shiny pages, even the smell of its print aroused feelings of pre-adolescent longing.

Endless delights inside

Today the wish book is gone, as is Sears’s business model, engulfed by Amazon, eBay, and the like.

We’re here and we’re staying

With a faster network come faster OODA loops, business loops and consumer loops and trend loops, so the speed of regular mail is no longer good enough. Anything mission-critical uses electronic text. The mail is thus left only with the adversely selected uses.
Nothing is quite so funny as a government monopolist after its exclusivity is lost. Fifteen years ago, after the repeal of LIHPRHA, when owners regained their original contractual right to prepay their mortgages and convert to market rate, a state agency that held the loan of a large apartment property, sought to respond to my client’s newfound optionality by offering a better deal. Proudly they came to me, as the owner’s representative, saying, “Look, we’re competitive! We’ve cut the fees and lowered the interest rate.”

“That’s not being competitive,” I told them, using all my limited self-control not to smile. “You’re still too expensive. Being competitive means you offer us a better deal than we can get elsewhere.”

My counterpart was appalled. “We couldn’t do that.”



You’d be appalled too

[Ryan5ear]

The latest on the "Interoperability Charter" being pushed through parliment http://www.otmltd.com/docs11/trust_blog ... rter.shtml which hopes to standardize e-invoicing within the public sector