The Broadband Adoption Index: Policy Paper No. 36

1. The Broadband Adoption Index:Policy Paper No. 36 George Ford Chief Economist The Phoenix Center July 15, 2009 National Press Club

2. Create an economically meaningful and policy relevant index of broadband adoption that also is capable of handling heterogeneous connection modalities (e.g. fixed and mobile).

3. If the $7B achieves universal availability over the next few years, the U.S. will probably not change rank.

4. General Form Goal: Provide for meaningful performance evaluation across geo-political units (intra- and internationally). Incorporate the underlying economics of adoption and deployment Accommodate different connection modalities

5. Population is not a Target Population is not a target of adoption as implied by OECD statistics In the U.S., telephones were ubiquitously available and nearly universally adopted, yet TEL/POP was only 0.493. In Sweden, it was the same, but their TEL/POP was 0.686.

6. Broadband Nirvana(Phoenix Center Policy Paper No. 29, July 2007)

7. BB/POP tells you Little Economy B Pop/HH = 2 (eg, Sweden) Economy A Pop/HH = 3 (eg, Portugal) 1 OECD (BB/POP) 0.8 Share of Potential Market 0.6 0.4 Range of Deception (Economy A outperforms B, but BB/POP says otherwise.) 0.2 0 Hmax = 0.33 Hmax = 0.50 1.0 Population Ignores business connections (could assume proportional to households and scale up; no loss of generality).

8. Trends in OECD Rank: The Fall (Connections/Capita)

9. Trends in OECD Rank: The Rise (Connections/Capita)

10. Trends in OECD Rank: The Rise (Connections/Capita) Telecom Rank not in sequence. THE PHOENIX CENTER

11. OECD Rank (Fixed Telephones 1996; Broadband Dec 2007) 90% Match 80% Match 80% Match

12. Food for Thought Top 10 in broadband; 9 are Top 10 in Wireline Telephone (only 5 in 2001) Bottom 10 in broadband; 8 are Bottom 10 in Wireline Telephone (7 in 2001) Of the 14 above the U.S. in broadband, 12 are also above the U.S. in telephone subscriptions Of the 15 below the U.S. broadband, 12 are also below the U.S. in telephone subscriptions THE PHOENIX CENTER

13. Convergence to Telephone Rank Time Telephone Rank – Broadband Rank * Most other countries follow a similar path. THE PHOENIX CENTER

14. Terminal Expectations:Broadband and Wireline Telephone Ranks THE PHOENIX CENTER

15. Other Issues with OECD-Style Metric • Today, it includes only Fixed Connections • At the request of a few countries, OECD now plans to collect and report mobile broadband in the near future. • Broadband = 256kbps or more • Counted if you buy it or use it (in a specified interval of time) • But how is the data to be used as a measure of adoption performance?

16. OECD Style • Index Fixed = Fixed/Population ? • Index Mobile = Mobile/Population ? • How do you rank across 2 dimensions? • Can we just add the two for a single index? • Do we get the SIM card problem for Europe? • What about countries that do mostly one and hardly any of the other? • What if the count is high but due to some having multiple connections rather than many having at least one form of connection? • How do we deal with the fact that fixed is typically shared, mobile is often not (scaling problem).

17. How to Combine the Two? • Can we just add: Fixed + Mobile • Fixed is mostly shared, Mobile is mostly consumed by individuals • Mobile counts will swamp fixed counts • Should we scale Fixed by the share rate • Fixed + Mobile/ShareRate (sharerate may be hh size) • Assumes Mobile is a low quality fixed • How do homogenize unlike things? • We convert the counts to values • What is the value of fixed? • What is the value of mobile?

18. One Modality vi* = average social value of a connection of modality i at the “target” qi* = quantity of connections of modality i at the “target”

19. What is the Value of Broadband? • Willingness to Pay (w) • Social Premia (e) • Externalities • Spillovers • Etc. • Cost of Production (c) • Net Social Value v = w + e - c

20. Target Adoption $ c c - e w q* q’ qv=0

21. Social Value $ Social Value c - e w q* qv=0

22. Maximum Subscription is Not Ideal Social Value (V) $ Vi* Viv=0 Vi Social Value = A - B Welfare Loss from excess consumption. w A c- e W qv=0 qiv=0 qi* q* As long as c - e > 0, 100% consumption is not ideal.

23. Optimal Consumption Depends on Costs Low Cost Market $ $ High Cost Market c- e c- e w w q q* q q* If costs are higher, then optimal quantity is lower.

24. Optimal Consumption Depends on Demand High Demand Market $ $ Low Demand Market c- e c- e w w q q* q q* If demand is lower, then optimal quantity is lower.

25. Simple Graph $ Avg. Value = v* = V/q* Soc. Value = v*q* = V V c - e w q* q

26. BAI at Time t $ A B C ci w q1 qv=0 q* Assumption: Marginal, thus average, valuation declines over time. Here, highest valued users adopt first.

27. Two Modalities (f, m)

28. Does it simplify?

29. One Modality Diminishing Marginal Valuation

30. Simulation Two Modalities, f and m f is shared m is personal cf =40; cm = 20 Max value for m is 100 Average share rate: k = 2 Scale f demand to 200 (= 100·2) Personal Market = 2,000 persons Shared Market = 1,000 units (= 2,000/k) m is a mild net substitute for f

31. Willingness-to-Pay (Demand) System

32. Simulation Algorithm vi Compute q*, V*, then scroll through quantities up to qv=0. We compute V at each quantity then compute weights. Do so in 10 percentage point intervals, so we have a 11x11 matrix of wi’s. ci qi* qiv=0 qi

33. BAI Simulation: Two Modalities

34. BAI Simulation: Two Modalities(Zero costs; no substitution)

35. BAI Simulation: Alternatives

36. Can this be done?

37. Econometric Implementation • Data on • What is Purchased? • How much is Paid? • Demographics of Buyers • Cost data by modality • BAI can be computed using this data • Example provided in Paper No. 36

38. Target Setting

39. Some Portugal Targets Achieve at least 50% household broadband adoption. Increase public access to public Internet locations (16 per 100 POP). Increase number of computers in schools to one per five students. 100% of Central Government institutions with broadband access. 100% of hospitals with broadband access.

40. Target Setting It is unreasonable to expect a relatively poor and uneducated country to have the same broadband deployment and adoption rates as a relatively rich and educated country. Comparing such countries on per-capita terms says nothing about the success or failure of broadband policies. 50% adoption in Mexico or Turkey may be stellar, but in the U.S. would be considered a failure.

41. Target Setting Nearly all (93%) of the differences in fixed connections per capita across countries are explained by few demographic and economic endowments. N = 30; June-08 data; R2 = 0.93

42. Summary • Performance is a value-based concept • Any modality that generates value must be included in performance measures • Per- Capita Normalizations are misguided • Anyway, not clear how to do it with multiple modalities • Combining heterogeneous modalities is tricky, but the problem is understood • The underlying economics of deployment and adoption must be considered for good policy • Countries vary in their demand and cost profiles • Maximal deployment/adoption assumes external effects are enormous

43. Summary • Avoid the willy-nilly by focusing the analysis on the components of target setting • Willingness to Pay • Realistic size of the Social Premia • Cost of deployment