It took 15 years for laptops to reach 50 million units sold in a year. It took smartphones seven years. For tablets (not including Microsoft’s clunky attempt a decade ago), just two years. Mobile device volumes are astounding. In each of the last five years, global mobile phone sales topped a billion units. Last year smartphones outsold PCs for the first time – 488 million versus 432 million. This year well over 500 million smartphones and perhaps 100 million tablets could be sold.

Smartphones and tablets represent the first fundamentally new consumer computing platforms since the PC, which arrived in the late ’70s and early ’80s. Unlike mere mobile phones, they’ve got serious processing power inside. But their game-changing potency is really based on their capacity to communicate via the Internet. And this power is, of course, dependent on the cloud infrastructure and wireless networks.

But are wireless networks today prepared for this new surge of bandwidth-hungry mobile devices? Probably not. When we started to build 3G mobile networks in the middle of last decade, many thought it was a huge waste. Mobile phones were used for talking, and some texting. They had small low-res screens and were terrible at browsing the Web. What in the world would we do with all this new wireless capacity? Then the iPhone came, and, boom — in big cities we went from laughable overcapacity to severe shortage seemingly overnight. The iPhone’s brilliant screen, its real Web browsing experience, and the world of apps it helped us discover totally changed the game. Wi-Fi helped supply the burgeoning iPhone with bandwidth, and Wi-Fi will continue to grow and play an important role. Yet Credit Suisse, in a 2011 survey of the industry, found that mobile networks overall were running at 80% of capacity and that many network nodes were tapped out.

Today, we are still expanding 3G networks and launching 4G in most cities. Verizon says it offers 4G LTE in 196 cities, while AT&T says it offers 4G LTE in 28 markets (and combined with its HSPA+ networks offers 4G-like speeds to 200 million people in the U.S.). Lots of things affect how fast we can build new networks — from cell site permitting to the fact that these things are expensive ($20 billion worth of wireless infrastructure in the U.S. last year). But another limiting factor is spectrum availability.

Do we have enough radio waves to efficiently and cost-effectively serve these hundreds of millions of increasingly powerful mobile devices, which generate and consume increasingly rich content, with ever more stringent latency requirements, and which depend upon robust access to cloud storage and computing resources?

Capacity is a function of money, network nodes, technology, and radio waves. But spectrum is grossly misallocated. The U.S. government owns 61% of the best airwaves, while mobile broadband providers — where all the action is — own just 10%. Another portion is controlled by the old TV broadcasters, where much of this beachfront spectrum lay fallow or underused.

They key is allowing spectrum to flow to its most valuable uses. Last month Congress finally authorized the FCC to conduct incentive auctions to free up some unused and underused TV spectrum. Good news. But other recent developments discourage us from too much optimism on this front.

In December the FCC and Justice Department vetoed AT&T’s attempt to augment its spectrum and cell-site position via merger with T-Mobile. Now the FCC and DoJ are questioning Verizon’s announced purchase of Spectrum Co. — valuable but unused spectrum owned by a consortium of cable TV companies. The FCC has also threatened to tilt any spectrum auctions so that it decides who can bid, how much bidders can buy, and what buyers may or may not do with their spectrum — pretending Washington knows exactly how this fast-changing industry should be structured, thus reducing the value of spectrum and probably delaying availability of new spectrum and possibly reducing the sector’s pace of innovation.

It’s very difficult to see how it’s at all productive for the government to block companies who desperately need more spectrum from buying it from those who don’t want it, don’t need it, or can’t make good use of it. The big argument against AT&T and Verizon’s attempted spectrum purchases is “competition.” But T-Mobile wanted to sell to AT&T because it admitted it didn’t have the financial (or spectrum) wherewithal to build a super expensive 4G network. Apparently the same for the cable companies, who chose to sell to Verizon. Last week Dish Network took another step toward entering the 4G market with the FCC’s approval of spectrum transfers from two defunct companies, TerreStar and DBSD.

Some people say the proliferation of Wi-Fi or the increased use of new wireless technologies that economize on spectrum will make more spectrum availability unnecessary. I agree Wi-Fi is terrific and will keep growing and that software radios, cognitive radios, mesh networks and all the other great technologies that increase the flexibility and power of wireless will make big inroads. So fine, let’s stipulate that perhaps these very real complements will reduce the need for more spectrum at the margin. Then the joke is on the big companies that want to overpay for unnecessary spectrum. We still allow big, rich companies to make mistakes, right? Why, then, do proponents of these complementary technologies still oppose allowing spectrum to flow to its highest use?

Free spectrum auctions would allow lots of companies to access spectrum — upstarts, middle tier, and yes, the big boys, who desperately need more capacity to serve the new iPad.

— Bret Swanson

The second image scales down the first to make room for the next period.

The third image, using the same scale as image 2, shows 2005-2011.

These images use data compiled by MINTS, with our own further analysis and estimations. Other estimates from Cisco and Arbor/Labovitz — and our own analysis based on those studies — show even higher traffic levels, though roughly similar growth rates.

Steve Jobs designed great products. It’s very, very hard to make the case that he created large numbers of jobs in this country.

— Prof. Paul Krugman, New York Times, January 25, 2012

Turns out, not very hard at all.

The App Economy now is responsible for roughly 466,000 jobs in the United States, up from zero in 2007 when the iPhone was introduced.

— Dr. Michael Mandel, TechNet study, February 7, 2012

See our earlier rough estimate of Apple’s employment effects: “Jobs: Steve vs. the Stimulus.”

— Bret Swanson

“It is the single worst telecom bill that I have ever seen.”

— Reed Hundt, Jan. 31, 2012

Isn’t this rich?

One of the most zealous regulators America has known says Congress is overstepping its bounds because it wants to unleash lots of new wireless spectrum but also wants to erect a few guardrails so that FCC regulators don’t run roughshod over the booming mobile broadband market.

At a New America Foundation event yesterday, former FCC chairman Reed Hundt said Congress shouldn’t micromanage the FCC’s ability to micromanage the wireless industry. Mr. Congressman, you don’t know anything about how the FCC should regulate the Internet. But the FCC does know how to build networks, run mobile Internet businesses, and perfectly structure a wildly tumultuous economic sector. It’s just the latest remarkable example of the growing hubris of the regulatory state.

In his book, You Say You Want a Revolution, Hundt famously recounted his staff’s interpretation and implementation of the 1996 Telecom Act.

The passage of the new law placed me on a far more public stage. But I felt Congress — in the constitutional sense — had asked me to exercise the full power of all ideas I could summon. And I believed that I and my team had learned, through many failures, how to succeed. Later, I realized that we knew almost nothing of the complexity and importance of the tasks in front of the FCC.

…

Meeting in several overlapping groups of about a dozen people each . . . we dedicated almost three weeks to studying the possible readings of each word in the 150-page statute. The conference committee compromises had produced a mountain of ambiguity that was generally tilted toward the local phone companies’ advantage. But under the principles of statutory interpretation, we had broad authority to exercise our discretion in writing the implementing regulations. Indeed, like the modern engineers trying to straighten the Leaning Tower of Pisa, we could aspire to provide the new entrants to the local telephone markets a fairer chance to compete than they might find in any explicit provision of the law. In addition, the law gave almost no guidance about how to treat the Internet, data networks, . . . and many other critical issues. (Three years later, Justice Antonin Scalia agreed, on behalf of the Supreme Court, that the law was profoundly ambiguous.)

…

The more my team studied the law, the more we realized our decisions could determine the winners and losers of the new economy. We did not want to confer advantage on particular companies; that seemed inequitable. But inevitably

wink, wink,

a decision that promoted entry into the local market would benefit a company that followed such a strategy.

There are so many angles here.

(1) Hundt says he and his team basically stretched the statute to mean whatever they wanted. The law may have been ambiguous — and it was, I’m not going to defend the ‘96 Act — yet the Supreme Court still found in a series of early-2000s cases that Hundt’s FCC had wildly overstepped even these flimsy bounds. That’s how aggressive and unconstrained Hundt was.

(2) Hundt’s rules helped crash the tech and telecom sectors in 2000-2002. His rules were so complex and intrusive that, whatever your views about the CLEC wars, the PCS C block spectrum debacle, and other battles, it’s hard to deny that the paralysis caused by the rules hurt broadband and the nascent Net.

(3) Is it surprising that, given the FCC’s poor record of reaching way past its granted powers, some in Congress want to circumscribe FCC regulators by giving them less-than-omnipotent authority? Is the new view of elite regulators that Congress should pass laws, the full text of which might read: “§1. Congress grants to the Internet Agency the authority to regulate the Internet. Go forth and regulate.”

(4) On the other hand, it’s not clear why Hundt would care particularly what Congress says in any new spectrum statute. He didn’t care much for the words or intent of the ‘96 Act, and he thinks regulators should “aspire” to grand self-appointed projects. Who knows, maybe all those Supreme Court smack downs in the early 2000s made an impression.

(5) Hundt says he and his team later realized, in effect, how naive they were about “the complexity and importance of the tasks in front of the FCC.” So he’s acknowledging after things didn’t go so well that his FCC underestimated the complexity and thus overestimated their own expertise . . . yet he says today’s FCC deserves comprehensive power to structure the mobile Internet as it sees fit?

(6) Hundt admitted his FCC relished its capacity to pick winners and losers. Not particular companies, mind you — that would be improper — merely the types of companies who win and lose. A distinction without very much of a difference.

(7) We don’t argue that Congress, instead of the FCC, should impose intrusive regulation through statute. We don’t advocate long and complex laws. That’s not the point. Laws should be clear and simple, but stating the boundaries of a regulator’s authority is not a controversial act. No one should be imposing intrusive regulation or overdetermining the structure of an industry. And that’s what Congress — perhaps in a rare case! — is protecting against here.

On Tuesday afternoon, Apple said it earned $13 billion in the fourth quarter on $46 billion in revenue. Thirty-seven million iPhones and 15 million iPads sold in the quarter helped boost its market cap to $415 billion. A few hours later, Indiana Gov. Mitch Daniels, in his State of the Union response message, contrasted the technology juggernaut with Washington’s impotent jobs efforts: “The late Steve Jobs – what a fitting name he had – created more of them than all those stimulus dollars the President borrowed and blew.”

First thing Wednesday morning, however, Paul Krugman countered with a devastating argument – “Mitch Daniels Doesn’t Read the New York Times.” Prof. Krugman referred to the first of the Times‘ multipart series on Apple’s Chinese manufacturing operations.

From Sunday’s Times:

Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.

…

Apple employs 43,000 people in the United States and 20,000 overseas, a small fraction of the over 400,000 American workers at General Motors in the 1950s, or the hundreds of thousands at General Electric in the 1980s. Many more people work for Apple’s contractors: an additional 700,000 people engineer, build and assemble iPads, iPhones and Apple’s other products. But almost none of them work in the United States. Instead, they work for foreign companies in Asia, Europe and elsewhere, at factories that almost all electronics designers rely upon to build their wares.

Steve Jobs designed great products. It’s very, very hard to make the case that he created large numbers of jobs in this country. Obama’s auto bailout, just by itself, saved a lot more jobs than Apple’s US employment.

So the New York Times thinks all those Chinese Foxconn assembly workers are the primary employment effect of Apple. And Prof. Krugman sidesteps the argument by noting the “auto bailout” – not the stimulus – “saved” – not created, mind you – more jobs than Apple’s under-roof American workforce.

CNNMoney jumped in:

Daniels’ math just doesn’t add up, no matter how successful and valuable Apple has become.

Not even close.

This little episode exposes quite a lot about the fundamentally different ways people think about the economy.

The economy is dynamic and complex. It’s a cooperative, competitive, and evolutionary. In recent pre-Great Recession history, the U.S. lost around 15 millions jobs every year — holy depression! But we created some 17 million a year, netting two million. There’s no way to quantify Jobs’ jobs impact exactly, which is one of the great virtues of capitalism.

An attempt to estimate in a very rough way, however, might be useful:

Apple

Apple has 60,000 total employees, around 43,000 in U.S.

Multiply these numbers by the years these jobs have existed, decades in the case of many. That’s many hundreds of thousands of “job-years.”

Then consider the broad software industry, especially the world of “apps” being developed for iPhone and iPad, and now for Macs. More than 500,000 iOS apps now exist, and 1.2 billion were downloaded in the last week of December 2011. Lots of people are trying to quantify how many jobs this app ecosystem has created. Likely it will mean many tens of thousands of jobs for decades to come, meaning hundreds of thousands of job-years, though even the “app” won’t look this way forever or even for long. We’ll see.

Apple computers, iPhones, iPads, and multimedia software, like OSX, iOS, Quicktime, and WebKit, drive the Internet and wireless industries. (WebKit is an open software platform developed by Apple that most people have never heard of. But it’s crucial to Internet browsers and webpage development.) These devices allow people and companies to create content. They improve productivity and create new kinds of jobs. How many graphic designers would we have had over the years without the Mac?

Apple devices devour bandwidth and storage and drive new generations of broadband and mobile network build-outs, totaling about $65 billion per year in the U.S. So add some significant portion of networking equipment salesmen and telecom pole-climbers and Verizon and Comcast workers and data center technicians. The iPhone alone completely reinvigorated the U.S. mobile industry and ushered in a new paradigm of computing, moving from PC to mobile device. Apple jolted AT&T back to life when the two companies partnered on the first iPhone. How many jobs across the economy did the iPhone “save” by boosting our digital industries when the PC era had about run its course? A lot.

Jobs created a new digital music industry. It’s impossible to gauge how many jobs were created versus eliminated. But clearly the new jobs are higher value jobs.

Apple is now the largest buyer of microchips in the world. It buys 23% of all the world’s flash memory, for example. Much of that is South Korean. But Apple probably buys something like 20 million Intel microprocessors each year. That’s a huge part of Intel’s business. Intel employs 100,000 people (not all in the U.S.).

The notion that “almost none” of the “additional 700,000″ people who contribute to designing and building Apple products work in the U.S. is false. And silly.

Apple’s list of suppliers includes many of America’s leading-edge technology companies: Qualcomm, Intel, Corning, LSI, Broadcom, Seagate, Micron, Analog Devices, Linear, Maxim, Marvell, International Rectifier, Western Digital, ON Semi, Nvidia, AMD, Cypress, Texas Instruments, TriQuint, SanDisk, etc.

Lots of Apple’s foreign suppliers have substantial workforces in the U.S. Oft cited are the two Austin, Texas, Samsung fabs, which employ 3,500 workers who make NAND flash memory and Apple’s A5 chip. But many Asian and European Apple suppliers have sales, marketing, and support staff in America.

And of course no government or stimulus jobs are possible without private wealth creation. During the “stimulus” period — 2009-11 — Apple paid $16.5 billion in corporate income taxes, thus financing about 2% of the entire $821 billion stimulus package and thus 2% of the stimulus “jobs.” One might counter that stimulus was funded with debt, but money is fungible, and issuing debt depends on future claims on wealth. Moreover, because stimulus jobs were so extraordinarily expensive, a different accounting says that Apple’s $16.5 billion in taxes could have paid for 330,000 $50,000-a-year salaries.

Pixar

In 1986, Steve Jobs bought a tiny division of George Lucas’s LucasFilm and created what we know as Pixar, the leading movie animation studio. In 2006, Pixar merged with Walt Disney. Disney has 156,000 employees and $41 billion in sales, a growing portion of which directly or indirectly relate to Pixar properties, film development, characters, licensing, and distribution. Pixar really saved Hollywood during a dark time for film and spawned a whole new animation boom. Pixar developed and inspired many new technologies for film making, video games, and other interactive visual media.

An additional consideration: Over the 2009-11 period, Disney paid $7 billion in income taxes, thus financing just under 1% of the stimulus and 1% of the “jobs.” That $7 billion could have funded 140,000 $50,000-a-year salaries.

Macro

The economy-wide effects of Steve Jobs are of course impossible to measure with precision. But a new study from Robert Shapiro and Kevin Hassett estimates that advances in mobile Internet technologies boosted U.S. employment by around 400,000 per year from 2007 to 2011, or by a total of around 1.2 million over the 2009-11 stimulus period. The Phoenix Center found similar employment effects. What proportion of these can be attributed to Steve Jobs is, again, impossible to say. But it’s clear Apple was the primary innovator in mobile Internet technologies in this period, towering over a multitude of other important technologies. More than any other device, the iPhone exploited the new, larger-capacity 3G mobile networks of the period, and once it proved wildly popular it was the chief impetus for additional 3G mobile capacity.

Stimulus

CBO estimates ARRA (the Stimulus bill) yielded between 1.3 and 3.5 million job-years net, meaning created or saved. But as the stimulus wanes, many of these jobs go away, or at least are not attributable to the stimulus.

Robert Barro of Harvard questions whether ARRA created any jobs at all. He says the question isn’t whether the Keynesian multiplier is greater than 1 (meaning break even; spend $1, get $1 in GDP), let alone whether it’s 1.5 (spend a dollar, get $1.50), but whether the multiplier is greater than zero.

Stanford’s John Taylor also thinks ARRA had no positive effect.

And do stimulus-boosters really want to equate these two activities?

(1) the federal government pays a state worker’s salary for a year instead of the state paying the salary;

(2) a new job derived from an entrepreneur who’s created whole new industries with new kinds of higher value jobs that last for decades, spurring yet more growth and jobs.

In Keynesian macro world those two jobs are equivalent, I guess.

The CNNMoney report acknowledged the 43,000 U.S. employees of Apple and also the 850 employees of Pixar at the time it merged with Disney in 2006. It even allowed that perhaps Pixar could employ twice as many people now. It also grudgingly admitted that maybe some Americans are building apps for the App Store. That’s about it.

This imprecise exercise misses the deeper truths of entrepreneurial capitalism and short-changes the dynamic versus static view of the economy. In a new article today, which I just see as I’m finishing this post, Prof. Krugman quite rightly notes the importance of industrial clusters to growth. He cites the Chinese supply-chains highlighted in the NYT series. But he entirely ignores the most famous and successful cluster on earth — Silicon Valley. How many jobs in Silicon Valley do we think are dependent on or symbiotic with Apple. It’s incalculable, but its a lot.

I asked Gov. Daniels what he thought.

“I won’t be reading Herr Krugman,” Gov. Daniels replied, “but I did read the New York Times, and it changes nothing. Just means Dr. K doesn’t understand the dynamism of innovation, either.”

— Bret Swanson

Consider Sprint’s apparent decision to use “roaming” in Oklahoma and Kansas instead of building its own network. Now, roaming is a standard feature of mobile networks worldwide. Company A might not have as much capacity as it would like in some geography, so it pays company B, who does have capacity there, for access. Company A’s customers therefore get wider coverage, and Company B is paid for use of its network.

The problem comes with the FCC’s 2011 “digital roaming” order. Last spring three FCC commissioners decided that private mobile services — which the Communications Act says “shall not . . . be treated as a common carrier” — are a common carrier. Only D.C. lawyers smarter than you and me can figure out how to transfigure “shall not” into “may.” Anyway, the possible effect is to subject mobile data — one of the fastest growing sectors anywhere on earth — to all sorts of forced access mandates and price controls.

We warned here and here that turning competitive broadband infrastructure into a “common carrier” could discourage all players in the market from building more capacity and covering wider geographies. If company A can piggyback on company B’s network at below market rates, why would it build its own expensive network? And if company B’s network capacity is going to company A’s customers, instead of its own customers, do we think company B is likely to build yet more cell sites and purchase more spectrum?

With 37 million iPhones and 15million iPads sold last quarter, we need more spectrum, more cell towers, more capacity. This isn’t the way to get it. And what we are seeing with Sprint’s decision to roam instead of build in Oklahoma and Kansas may be the tip of this anti-investment iceberg.

Last spring when the data roaming order came down we began wondering about a possible “slow walk to a reregulated communications market.” Among other items, we cited net neutrality, possible new price controls for Special Access links to cell sites, and a host of proposed regulations affecting things like behavioral advertising and intellectual property (see, PIPA/SOPA). Since then we’ve seen the government block the AT&T-T-Mobile merger. And the FCC is now holding up its own important push for more wireless spectrum because it wants the right to micromanage who gets what spectrum and how mobile carriers can use it.

Many of these items can be thoughtfully debated. But the number of new encroachments onto the communications sector threatens to slow its growth. Many of these encroachments, moreover, are taking place outside any basic legislative authority. In the digital roaming and net neutrality cases, for example, the FCC appeared clearly to grant itself extra- if not il-legal authority. These new regulations are now being challenged in court.

We need some restraint across the board on these matters. The Internet is too important. We can’t allow a quiet, gradual reregulation of the sector to slow down our chief engine of economic growth.

— Bret Swanson

— Holman Jenkins, The Wall Street Journal, January 18, 2011

Genachowski, however, wants overarching control of the new spectrum and, by extension, the mobile broadband ecosystem. The FCC wants the authority to micromanage the newly available radio waves — who can buy it, how much they can buy, how they can use it, what content flows over it, what business models can be employed with it. But this is an arena that is growing wildly fast, where new technologies appear every day, and where experimentation is paramount to see which business models work. Auctions are supposed to be a way to get more spectrum into the marketplace, where lots of companies and entrepreneurs can find the best ways to use it to deliver new communications services. ”Any restrictions” by Congress on the FCC “would be a real mistake,” said Genachowski. In other words, he doesn’t want Congress to restrict his ability to restrict the mobile business. It seems the liberty of regulators to act without restraint is a higher virtue than the liberty of private actors.

At the end of 2011, the FCC and Justice Department vetoed AT&T’s proposed merger with T-Mobile, a deal that would have immediately expanded 3G mobile capacity across the nation and accelerated AT&T’s next generation 4G rollout by several years. That deal was all about a more effective use of spectrum, more cell towers, more capacity to better serve insatiable smart-phone and tablet equipped consumers. Now the FCC is holding hostage the spectrum auction bill with its my-way-or-the-highway approach. And one has to ask: Is the FCC really serious about spectrum, mobile capacity, and a healthy broadband Internet?

— Bret Swanson

— John Cochrane, Bloomberg View, December 21, 2011

Ken Skarbeck’s column (Nov. 19) addressed a new strategy the Indiana Public Retirement System is using to diversify its portfolio. The new strategy, known as risk parity, has been around for over 20 years and will eventually compose 10% of INPRS assets.

Since the financial crisis of 2008, INPRS has dedicated significant time and resources to improve its risk management infrastructure. The decision to move a portion of the assets into risk parity – which seeks to diversify risk, rather than merely diversify asset classes – is one direct outcome of the new risk management program.

Risk parity attempts to balance risk across equities, bonds, commodities, and inflation-linked bonds. It recognizes the distinct performance characteristics of these assets during periods of robust or slow growth, for instance, or high or low inflation. For any given rate of return target, risk can be mitigated. Likewise, for a given risk appetite, returns can be improved. Nothing is a sure bet, but risk parity strategies have achieved robust returns while minimizing risk over most time periods.

Mr. Skarbeck makes a good point that historical volatility does not measure all types of risk. We heartily agree.

Mr. Skarbeck thinks stocks are a good bet right now. He may be correct. INPRS owns billions of dollars of equities and works with investment managers who have strong views, perhaps similar to Mr. Skarbeck’s, about the direction of stocks, bonds, and other assets. But as an entity charged with funding the retirements of 500,000 Hoosier workers and retirees, INPRS as a whole should not make overly concentrated bets.

Truly balanced portfolios recognize that neither INPRS, nor anyone else, knows with certainty what the global economy has in store. Committing to a concentrated asset mix because of a particular view on equities would represent the very type of risk Mr. Skarbeck warns against.

Fortunately, risk parity has performed well in all environments – from low inflation, high growth periods where stocks might outperform to high-inflation periods where commodities and TIPS might do better. That’s the point of the strategy: seek healthy returns sufficient to fund the retirements of INPRS members while minimizing downside risk.

Bret T. Swanson
Trustee and Investment Committee Member
Indiana Public Retirement System (INPRS)