Expanding Broadband Connectivity
Governments and telecommunications regulators around the world continue to study and debate how to improve broadband connectivity as higher levels of broadband connectivity have been linked to higher levels of GDP and foreign direct investment (FDI). Particularly developing nations view broadband connectivity a key aspect of economic growth and consumer welfare. Even developed nations keep a careful eye on broadband development and studies, such as the OECD’s ranking of nations by broadband penetration, are discussed at the highest levels.
What do we mean by “broadband connectivity?” Broadband connectivity encompasses two aspects:
a) Accessibility – supply of a broadband networks and services
b) Utilization – demand or usage of a broadband services
The supply of broadband networks and services is a function of the return on investment and the level of competition in providing such services. The demand for broadband services is a function of service and equipment prices, digital literacy, speed (both download and upload) and service quality.
The question, which I frequently get from regulators and industry participants, is how to improve broadband connectivity. Specifically, should market forces determine the supply aspects of broadband connectivity or is consumer welfare enhanced by regulatory intervention? Some regulators apply existing regulatory tools from interconnection and competition frameworks. Chief among them is probably infrastructure sharing. Other tools include universal service funds, collocation requirements, site sharing (rights of way, ducts, poles, trenches, towers, equipment rooms, etc.). The European Commission, for example, hails its regulatory model for its high broadband penetration rates – claiming Northern Europe to be a world leader in broadband internet deployment.
The US has taken a different approach to broadband connectivity. While there have been a number of attempts to regulator broadband, ultimately broadband, whether provided by a cable company or a local exchange carrier, was defined as “information services.” This means that the provision of broadband services is not subject to the stringent regulation that applies to US voice services. Renewed regulatory efforts aim at regulating the terms and conditions by which broadband providers abide. Most prominent among these efforts is net neutrality which demands that broadband providers are not allowed to discriminate – price or otherwise – among it customers.
The driving force behind the US broadband deployment is the fierce competition between cable providers and regional bell operating companies (RBOCs). Critical in this competition is the bundling of services. For instance, RBOCs attract customers by offering triple or quadruple play bundles – discounted service offerings, combing voice, data, and video services. US RBOCs have also adopted aggressive pricing strategies, drastically lowering the prices of its DSL services. As bandwidth requirements increase, however, DSL providers will struggle as conditioned copper loops have limited bandwidth capacity. Hence, RBOCs are currently installing new fiber based networks, offering speeds in excess of 20Mbps. Verizon, for instance, has launched a US $1 billion initiative to lay fiber-to-the-home, under the brand name “FIOS.” AT&T has launched a similar effort under the brand name U-Verse.
In deciding on whether to intervene, regulators must carefully weigh the pro and cons of regulation. The potential pros of regulation involve higher broadband penetration rates, particularly in rural areas, lower prices and maybe improved service qualities. On the con side, are negative investment incentives, a distortion of competition and potentially a wealth transfer from incumbent carriers to entrants. The negative investment incentives can be particularly harmful in light of next generation network (NGN) developments. As a basic rule, regulation should be used as a last resort only. In determining whether regulation is needed, regulators must conduct a careful cost-benefit analysis.
I have performed many such analyses – not only for broadband deployment efforts, but also other services, such as wireline, wireless and MVNO services. These studies show that regulation is often misguided. For instance, California regulators have implemented a universal service fund for broadband services in rural areas, whereas public funds are being used to subsidize rural broadband providers. However, 96 percent of Californians have already access to broadband services. This compares to the penetration level in Canada at 93 percent. Hence, these funds are being used to increase broadband penetration by four some percent. This is particularly disturbing given the fact that only 59 percent of Californians actually use broadband services. If anything, it would appear more efficient to direct public funds to increase broadband demand (e.g., by subsidizing computers and broadband service rates) rather than broadband supply. However, even that is questionable as most, if not all, schools and libraries in California already have broadband access and it is unclear whether affordable broadband access should be a priority for public fund use, when affordable health care still is far from resolved and 19 percent of children live in poverty. It seems to me that gasoline is much more of a necessity than broadband internet access, yet there is no legislature regulating gasoline prices or gasoline subsidy to low-income families.
Some broadband statistics and useful information:
US Market shares:
Comcast: 19.13 percent
AT&T: 17.48 percent
Verizon: 11.92 percent
Time Warner: 11.43 percent
Cox: 5.35 percent
Others: 34.68 percent
California Broadband Initiative Recommendations:
1. Built out of broadband infrastructure via state investments and public funds
2. Increased partnership between private and public sector, collaboration among providers
3. Increase the use and adoption of broadband and computer technology
4. Engage and reward broadband innovation and research
5. Create statewide e-health network
6. Leverage educational opportunities to increase broadband use
7. Continue state-level and statewide leadership councils
California broadband coverage:
§ 96 percent of California residences have access to broadband
§ 1.4 million mostly rural Californians lack broadband access at any speed
§ Barely more than half of Californians have adopted broadband at home
§ Only half of Californians have access to broadband at speeds greater than 10 Mbps
§ Broadband infrastructure is deployed unevenly throughout the state, from state-of-the art to nonexistent
US Broadband Statistics
US broadband penetration rank (OECD): 15th
US average broadband price: $12.60
US average download speed: 9 Mbps
Japan average download speed: 95 Mbps
Percentage of US Zip codes with broadband services: 99
2007 US Broadband Penetration by State:
New Hampshire: 64.9 percent
Alaska: 62.5 percent
Massachusetts: 61.1 percent
Connecticut: 59.7 percent
Utah: 59.3 percent
Rhode Island: 59.2 percent
Washington: 58.4 percent
Colorado: 58.0 percent
Hawaii: 57.6 percent
Oregon: 57.1 percent
New Jersey: 57.1 percent
California: 56.4 percent
Maryland: 56.1 percent
Kansas: 55.2 percent
Nevada: 54.3 percent
New York: 54.1 percent
Nebraska: 54.1 percent
Arizona: 53.9 percent
Georgia: 53.9 percent
Virginia: 53.3 percent
Florida: 53.2 percent
Minnesota: 53.0 percent
Wisconsin: 52.6 percent
Washington, DC: 52.0 percent
Illinois: 51.6 percent
Wyoming: 50.4 percent
Delaware: 50.4 percent
Ohio: 48.8 percent
North Dakota: 48.7 percent
Maine: 48.4 percent
Pennsylvania: 47.7 percent
Texas: 47.6 percent
South Dakota: 48.7 percent
North Carolina: 47.1 percent
Iowa: 46.8 percent
Vermont: 46.8 percent
Michigan: 45.9 percent
Idaho: 45.5 percent
Missouri: 45.3 percent
New Mexico: 43.2 percent
Louisiana: 42.9 percent
Indiana: 42.3 percent
Tennessee: 41.6 percent
Montana: 40.2 percent
Kentucky: 40.0 percent
South Carolina: 39.1 percent
Oklahoma: 38.7 percent
Arkansas: 38.2 percent
Alabama: 37.4 percent
Mississippi: 33.2 percent
West Virginia: 32.7 percent
