Broadband in the U.S. Leah Axelrod Andy Deak Andrew Nagengast Raveendra Hegde Riggs Goodman.

Broadband in the U.S.

Leah Axelrod

Andy Deak

Andrew Nagengast

Raveendra Hegde

Riggs Goodman

“It is unacceptable that the United States ranks 15th in the world in broadband

adoption. Here, in the country that invented the Internet, every child should

have the chance to get online...”

President-elect Barack Obama, December 2008

Agenda

1. Where does the U.S. stand in the world?

2. What economic factors contribute to the U.S. ranking?

3. What is the U.S. outlook for the future?

OECD

• Organisation for Economic Co-operation and Development

• 34 Countries

• OECD Broadband Portal provides a range of broadband-related statistics gathered by OECDBroadband is any Internet connectivity offering which are capable of download speeds of at least 256 Kbps

Includes fixed (wired) broadband and wireless broadband

Ranks countries on multiple different levels of broadband connectivity, including speed, price, and adoption rates

OECD U.S. Rankings

Netherl

ands

Switz

erlan

d

Denmark

Norway

Korea

Fran

ce

Icelan

d

Luxem

bour

g

United

Kin

gdom

German

y

Swed

en

Belgiu

m

Canad

a

Finl

and

United

State

sJa

pan

New Z

ealan

d

Austra

liaIsr

ael

Austri

a0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

27.7

Fixed broadband Subscriptions per 100 inhabitants

OECD Broadband Portal. http://www.oecd.org/dataoecd/21/35/39574709.xls

OECD U.S. Rankings

OECD Broadband Portal. http://www.oecd.org/dataoecd/21/35/39574709.xls

Korea

(*)

Icelan

d

Swed

en

Norway

(*)

Netherl

ands

Denmark

Finl

and

Luxem

bour

g (*)

United

Kin

gdom

Canad

a (20

08)(*

)

German

y

United

State

s

Belgiu

m

Switz

erlan

d (20

07)

New Z

ealan

d (*)

Austra

lia (2

008)

(*)

Estoni

a

Japa

n (*)

Austri

a

Fran

ce0.0

20.0

40.0

60.0

80.0

100.0

120.0

63.5

Households with Broadband (%)

OECDU.S. Rankings

• Average Advertised Broadband Download Speed14.665Mbps (ranked 29th)

• Fixed Broadband Subscribers per 100 inhabitants27.7% (ranked 15th)

• Median USD Price (Monthly)$38.99 (ranked 14th)

• Percent of Households with Broadband63.5% (ranked 12th)

• Total Number of Fixed Broadband Subscriptions85,723,155 (ranked 1st)

OECD Broadband Portal. www.oecd.org/sti/ict/broadband

• Unique Advantage: over 50% of the population live in urban apartments, and all buildings are required to be broadband enabled

• Government Policy:

• Strong investment by government to build nation-wide broadband infrastructure reducing barriers of entry due to high costs of building out broadband network

• Licensing of additional telecommunication firms increases direct competition in a saturated market forcing largest firms to compete directly on price and speeds

• Provides free computers to students of low-income families with good grades, and subsidized computer purchase plans for low-income families increasing demand

Country AnalysisSouth Korea

Explaining International Broadband Leadership, Atkinson, Correa, Hedlund. The Information Technology & Innovation Foundation

May 2008, http://archive.itif.org/index.php?id=142

• Unique Advantage: First European country to develop broadband policy and is approaching 100% broadband availability to all inhabitants including rural areas.

• Government Policy:

• Took action to deliver broadband access in rural areas with no market development

• Local governments and utilities built and operate the network backbone providing open access to providers and reducing barriers of entry and increasing competition.

Country AnalysisSweden

Explaining International Broadband Leadership, Atkinson, Correa, Hedlund. The Information Technology & Innovation Foundation

May 2008, http://archive.itif.org/index.php?id=142

Country AnalysisJapan

• Unique Advantages: Private firms build and maintain networks, but government ensures open access and advancement through price control and part ownership of key telecommunication firms.

• Government Policy• Heavy subsidies and government-backed loans significantly reduced the cost of

building out broadband networks reducing barriers of entry for new firms

• Subsidized 1/3 of the cost of providing access to rural areas

• Requires network operators to share networks and sets very low price for firms to access network driving price down and increasing demand

• Partially owns NTT – Key national telecommunications firm influencing investment in network upgrades to benefit society

• Diversification of broadband services to include voice of IP (VoIP) and rapid increase in content particularly in entertainment has increased demand for broadband

Explaining International Broadband Leadership, Atkinson, Correa, Hedlund. The Information Technology & Innovation Foundation

May 2008, http://archive.itif.org/index.php?id=142

What economic factors contribute to the U.S. ranking?

Rural Geography

Availability of Broadband Networks

Imperfect Competition:Wireline Present Day

Exhibit 4-A: Share of Housing Units in Census Tracts with 0, 1, 2, and 3 Wireline Providers7

Note: This data does not assume that in areas with two or more providers, consumers have the same number of options because the providers may not compete head-to-head.

Source: National Broadband Plan, Chapter 4.1 Networks (www.broadband.gov)

Imperfect Competition:Wireless 3G November 2009

Exhibit 4-E: Share of Population Living in Census Tracts with 0, 1, 2, 3 or More 3G Mobile Providers33

Source: National Broadband Plan, Chapter 4.1 Networks (www.broadband.gov)

Imperfect Competition: Market Segmentation & Regulatory Environment

• 20th century Telcos in many countries were state owned because of high infrastructure fixed costs.

• 1984: AT&T emerged as the De facto monopoly in U.S. but was broken up.•As a result these regional “baby bells” were fragmented and operated within the constraints their local governing institutions and often did not compete within each other’s markets.

• 1996: Telecommunications Act sought to encourage “cross media ownership” and develop open access(unbundling) network policies.

• 2002 FCC and supreme court passed series of decisions that abandoned open access network policies.

“Talking about ‘unbundling,’ or more broadly open access in the United States today is a bit like wearing bellbottoms…” – Berkman Center for Internet & Society at Harvard University.

Inefficient Markets

P*

P’

Q*Q’ Q

$/unit

D

S

Contributing Factors1. Geography & underserved areas2. Scarce competition3. Product bundling4. Market segmentation5. Regulatory environment

MR

∏

Current Gap and Outlook

• Availability

• Age

• Income

• Digital Literacy

• Relevance

• Other

Broadband Adoption by American Adults by Socio-Economic and Demographic Factors

Source: Federal Communications Commission (FCC), Omnibus Broadband Initiative (OBI) - Working Paper Series 1, 2009.

Current US Broadband Policy

• Telecommunications Act of 1996: United States’ most recent telecommunications policy.

• National Broadband Plan proposed in March 2010. FCC will try to push the plan through this year.

International Broadband Policies

• Japan’s Broadband Policy:

• u-Broadband Policy

• Sweden’s Broadband Policy:

• 2000: ICT Strategy

• South Korea’s Broadband Policy:3 Major Policies:

• 1995-2000: Korea Information Infrastructure (KII)

• 2004-2010: Broadband Convergence Network (BcN) Project

• 2009-2013: UBcN

What can the US Government do?

• Provide incentives to towns, cities, and/or states that encourage and allow additional companies to offer services, thus promoting competition.

• Similar to Japan, require banks to offer states 0% loans to fund infrastructure construction.

• Encourage them to build networks through tax breaks and other funding incentives.

• Require each to use either a simultaneous bidding process or a lottery to “rent out” wire space to broadband providers.

• Set a fixed time after which each municipality must open up their bidding or lottery process to those providers who do not currently rent out wire space.

What can the US Government do? (cont.)

• Subsidize private providers to expand into rural areas.

• URBAN AREAS!!!! (substitutes?)

• Offer tax breaks and zero-interest loans on network equipment to companies that build up wired lines that can be shared, very similar to Japan’s methods.

• Provide discounted rates to low income families.

QUESTIONS?

APPENDIX

Sources

• Caswell, Kimberly. Verizon Legal Council provided the America’s Broadband Connectivity plan authored by consortium of telecommunications businesses and submitted to the FCC for future regulation consideration. July 29 th, 2011.

• Berkman at Harvard University. Next Generation Connectivity, October 2009.

• Atkinson, Robert from the ITTF(Information Technology & Innovation Foundation). The Truth, and Nothing but the Truth about U.S. International Braodband Ranskings. May 12 th, 2010.

• National Broadband Plan (www.braodband.gov/plan) working technical papers.

• Organization for Economic Cooperation and Development . (www.oecd.org)

Imperfect Competition:Bundling As a Form of Price Discrimination

• The existence of price discrimination is commonly used in monopolistic or oligopolistic environments to maximize revenues.

TV Internet Phone Decision

Full Price Full Price Full Price No

Full Price Full Price ½ Price Yes

Consumer Surplus

$8 Billion

P*

P’

Q* Q’ Q

$/unit

D

S

•Additional consumer surplus generated if FCC lowers telco intercarrier compensation charges, which should result in lower flat rate bundled offers.

Source: excerpt from America’s Broadband Connectivity Plan Cover letter which was developed by consortium of telecommunications businesses.