Some people believe that American broadband prices are too high. They claim that Europeans pay less for faster speeds. Frequently these assertions fail to standardize the comparisons, for example to compare similar networks and speeds. A higher speed, next generation network connection delivering more data generally costs more than a slower one. The challenge for measuring European and American prices is that networks are not uniform across the regions. The OECD comparisons are based on availability in at least one major city in each country, not the country as a whole.

As I describe in my report the EU Broadband Challenge, the EU’s next generation networks exist only in pockets of the EU. For example, 4G/LTE wireless networks are available to 97% of Americans but just 26% of Europeans. Thus it is difficult to prepare a fair assessment of mobile prices on the surface when Americans use 5 times as much voice and twice as much data as Europeans. Furthermore American networks are 75% faster when compared to the EU. The overall price may be higher in the US, but the unit cost is lower, and the quality is higher. This means Americans get value for money.

Another item rarely mentioned in international broadband comparisons is mandatory media license fees. These fees can add as much as $44 to the monthly cost of broadband. When these fees are included in comparisons, American prices are frequently an even better value. In two-thirds of European countries and half of Asian countries, households pay a media license fee on top of the subscription fees to information appliances such as connected computers and TVs. Historically nations needed a way to fund broadcasting, so they levied fees on the people.

Because the US took the route to fund broadcasting through advertising, these fees are rare in the US. State broadcasting has moved to the internet, and the media license fees are now applied to fixed line broadband subscriptions. In general in the applicable countries, all households that subscribe to information services (e.g. broadband) must register with the national broadcasting corporation, and an invoice is sent to the household once or twice year. The media fees are compulsory, and in some countries it is a criminal offense not to pay.

Defenders of media license fees say that they are important way to provide commercial free broadcasting, and in countries which see the state’s role to preserve national culture and language, media license fees make this possible. Many countries maintain their commitment to such fees as a deterrent to what they consider American cultural imperialism.

Media license fees may seem foreign to Americans because there is not a tradition for receiving an annual bill for monthly broadcasting. Historically many associated television and radio as “free” because it was advertising supported. Moreover, the US content industry is the world’s largest and makes up a large part of America’s third largest category of export, that of digital goods and services, which totaled more than $350 billion in 2011.

When calculating the real cost of international broadband prices, one needs to take into account media license fees, taxation, and subsidies. This information is not provided through the Organization for Cooperation and Development’s Broadband Portal nor the International Telecommunication Union’s statistical database.  However, these inputs can have a material impact on the cost of broadband, especially in countries where broadband is subject to value added taxes as high as 27%, not to mention media license fees of hundreds of dollars per year.

In a forthcoming paper for the Mercatus Center at George Mason University, Michael James Horney, Casper Lundgreen, and I provide some insight to media license fees and their impact to broadband prices. We have collected the media license fees for the OECD countries, and where applicable, added them to prevailing broadband price comparisons. Following is an excerpt from our paper.

Here are the media license fees for the OECD countries.

Here is an example of the media license fee invoice from Denmark, which is levied semi-annually. The fee of 1218 Danish crowns ($225.79) includes tax.

We added the price of the media license fees to the OECD’s broadband price report. The data is taken from section 4c-4m of the OECD broadband pricing database. The OECD compiles prices for a set of 10 broadband baskets of different speeds ranging from 2 GB at 0.25 Mbit/s to 54 GB at 45 Mbit/s and above in at least 1 major city in each country. The prices are current as of September 2012.

For a graphical illustration, we provide a subset of countries to show the fluctuation of prices depending on the speed and data of each package. The data show that when compulsory media fees are added, US prices are commensurate with other OECD countries.

We also calculated the average broadband price for each basket for all of the OECD countries, adjusted for media license fees. Here we find that among the ten baskets, the US price is lower than the world average in 4 out of 10 baskets. In 5 baskets, the US price is within 1 standard deviation of the world average, and in two cases just $2-3 dollars more. In only one case is the US price outside one standard deviation of the world average, and that is for the penultimate basket of highest speed and data.

These data call into questions assertions that the US is out of line when it comes to broadband prices. Not only are US prices within a normal range, but the entry level prices for broadband are below many other countries.

The ITU has also recognized this. According to the ITU in its 2013 report Measuring the Information Society, broadband prices should be no more than 5% of income. The US scored #3 in the world in 2012 for entry level affordability of fixed line broadband. The country is tied with Kuwait for fixed line broadband prices being just 0.4% of gross national income per capita. This means for as little as $15 per month, Americans could get a basic broadband package at purchasing power parity in 2011 ($48,450 annual income).

The figures are higher for mobile broadband (based on a post-paid handset with 500 MB of data), 2.1% of gross national income per capita, equating to $85/month. However, using mobile broadband for a computer with 1 GB of data compares to just 0.5% of gross national income per capita, about $20 in 2011. The US scores in the top ten for entry level affordability in the world for both prepaid and postpaid mobile broadband for use with a computer.

If you believe that broadband prices should scale with consumption, then you will likely support such an analysis. However, there are those who simply say broadband should be the same price regardless of how much or how little data is used. In general, the price tiers favor a pay as you go approach (and is particularly better for people of lower income) while the one size fits all models increases the overall price, with the heaviest users paying less than their consumption.

Taking the highly digital nation of Denmark as an example, 80% of broadband subscriptions are under 30 mbps. That corresponds to baskets 1-4 in the chart. If we assume that most American households subscribe to 30 mbps or less, then American prices are in line with the rest of the OECD countries. Only subscribers who demand more than 30 mbps pay more than the OECD norm.

The assertion that Americans pay more for broadband than people in other countries is frequently supported by incomplete and inappropriate data. To have a more complete picture of the real price of broadband across countries, media license fees need to be included.

This blog was made in cooperation with Michael James Horney, George Mason University master’s student, based upon our upcoming paper on broadband innovation, investment and competition.

Ezra Klein’s interview with Susan Crawford paints a glowing picture of  publicly provided broadband, particularly fiber to the home (FTTH), but the interview missed a number of important points.

The international broadband comparisons provided were selective and unstandardized.  The US is much bigger and more expensive to cover than many small, highly populated countries. South Korea is the size of Minnesota but has 9 times the population. Essentially the same amount of network can be deployed and used by 9 times as many people. This makes the business case for fiber more cost effective.  However South Korea has limited economic growth to show for its fiber investment. A recent Korean government report complained of “jobless growth”.  The country still earns the bulk of its revenue from the industries from the pre-broadband days.

It is more realistic and correct to compare the US to the European Union, which has a comparable population and geographic areas.  Data from America’s National Broadband Map and the EU Digital Agenda Scoreboard show that  the US exceeds the EU on many important broadband measures, including the deployment of fiber to the home (FTTH), which is twice the rate of EU.  Considering where fiber networks are available in the EU, the overall adoption rate is just 2%.  The EU government itself, as part of its Digital Single Market initiative, has recognized that its approach to broadband has not worked and is now looking to the American model.

The assertion that Americans are “stuck” with cable as the only provider of broadband is false.  It is more correct to say that Europeans are “stuck” with DSL, as 74% of all EU broadband connections are delivered on copper networks. Indeed broadband and cable together account for 70% of America’s broadband connections, with the growing 30% comprising FTTH, wireless, and other  broadband solutions.  In fact, the US buys and lays more fiber than all of the EU combined.

The reality is that Europeans are “stuck” with a tortured regulatory approach to broadband, which disincentivizes investment in next generation networks. As data from Infonetics show, a decade ago the EU accounted for one-third of the world’s investment in broadband; that amount has plummeted to less than one-fifth today. Meanwhile American broadband providers invest at twice the rate of European and account for a quarter of the world’s outlay in communication networks. Americans are just 4% of the world’s population, but enjoy one quarter of its broadband investment.

The following chart illustrates the intermodal competition between different types of broadband networks (cable, fiber, DSL, mobile, satellite, wifi) in the US and EU.

The interview offered some cherry picked examples, particularly Stockholm as the FTTH utopia. The story behind this city is more complex and costly than presented.  Some $800 million has been invested in FTTH in Stockholm to date with an additional $38 million each year.  Subscribers purchase the fiber broadband with a combination of monthly access fees and increases to municipal fees assessed on homes and apartments. Acreo, a state-owned consulting company charged with assessing Sweden’s fiber project concludes that the FTTH project shows at best a ”weak but statistically significant correlation between fiber and employment” and that ”it is difficult to estimate the value of FTTH for end users in dollars and some of the effects may show up later.”

Next door Denmark took a different approach.  In 2005, 14 utility companies in Denmark invested $2 billion in FTTH.  With advanced cable and fiber networks, 70% of Denmark’s households and businesses has access to ultra-fast broadband, but less than 1 percent subscribe to the 100 mbps service.  The utility companies have just 250,000 broadband customers combined, and most customers subscribe to the tiers below 100 mbps because it satisfies their needs and budget. Indeed 80% of the broadband subscriptions in Denmark are below 30 mbps.  About 20 percent of homes and businesses subscribe to 30 mbps, but more than two-thirds subscribe to 10 mbps.

Meanwhile, LTE mobile networks have been rolled out, and already 7 percent (350,000) of Danes use 3G/4G as their primary broadband connection, surpassing FTTH customers by 100,000.  This is particularly important because in many sectors of the Danish economy, including banking, health, and government, users can only access services only digitally. Services are fully functional on mobile devices and their associated speeds.  The interview claims that wireless will never be a substitute for fiber, but millions of people around the world are proving that wrong every day.

The price comparisons provided between the US and selected European countries also leave out compulsory media license fees (to cover state broadcasting) and taxes that can add some $80 per month to the cost of every broadband subscription. When these real fees are added up, the real price of broadband is not so cheap in Sweden and other European countries.  Indeed, the US frequently comes out less expensive.

The US broadband approach has a number of advantages.  Private providers bear the risks, not taxpayers. Consumers dictate the broadband they want, not the government.  Also prices are scalable and transparent. The price reflects the real cost. Furthermore, as the OECD and the ITU have recognized, the entry level costs for broadband in the US are some of the lowest in the world. The ITU recommends that people pay no more than 5% of their income for broadband; most developed countries fall within 2-3% for the highest tier of broadband, including the US.  It is only fair to pay more more for better quality. If your needs are just email and web browsing, then basic broadband will do. But if you wants high definition Netflix, you should pay more.  There is no reason why your neighbor should subsidize your entertainment choices.

The interview asserted that government investment in FTTH is needed to increase competitiveness, but there was no evidence given.  It’s not just a broadband network that creates economic growth. Broadband is just one input in a complex economic equation.  To put things into perspective, consider that the US has transformed its economy through broadband in the last two decades.   Just the internet portion alone of America’s economy is larger than the entire GDP of Sweden.

The assertion that the US is #26 in broadband speed is simply wrong. This is an outdated statistic from 2009 used in Crawford’s book. The Akamai report references is released quarterly, so there should have been no reason not to include a more recent figure in time for publication in December 2012. Today the US ranks #8 in the world for the same measure. Clearly the US is not falling behind if its ranking on average measured speed steadily increased from #26 to #8. In any case, according to Akamai, many US cities and states have some of the fastest download speeds in the world and would rank in the top ten in the world.

There is no doubt that fiber is an important technology and the foundation of all modern broadband networks, but the economic question is to what extent should fiber be brought to every household, given the cost of deployment (many thousands of dollars per household), the low level of adoption (it is difficult to get a critical mass of a community to subscribe given diverse needs), and that other broadband technologies continue to improve speed and price.

The interview didn’t mention the many failed federal and municipal broadband projects.  Chattanooga is just one example of a federally funded fiber projects costing hundreds of millions of dollars with too few users  A number of municipal projects that have failed to meet expectations include Chicago, Burlington, VT; Monticello, MN; Oregon’s MINET, and Utah’s UTOPIA.

Before deploying costly FTTH networks, the feasibility to improve existing DSL and cable networks as well as to deploy wireless broadband markets should be considered. As case in point is Canada.  The OECD reports that both Canada and South Korea have essentially the same advertised speeds, 68.33 and 66.83 Mbps respectively.  Canada’s fixed broadband subscriptions are shared almost equally between DSL and cable, with very little FTTH.   This shows that fast speeds are possible on different kinds of networks.

The future demands a multitude of broadband technologies. There is no one technology that is right for everyone. Consumers should have the ability to choose based upon their needs and budget, not be saddled with yet more taxes from misguided politicians and policymakers.

Consider that mobile broadband is growing at four times the rate of fixed broadband according to the OECD, and there are some 300 million mobile broadband subscriptions in the US, three times as many fixed broadband subscriptions.  In Africa mobile broadband is growing at 50 times the rate of fixed broadband.  Many Americans have selected mobile as their only broadband connection and love its speed and flexibility. Vectoring on copper wires enables speeds of 100 mbps. Cable DOCSIS3 enables speeds of 300 mbps, and cable companies are deploying neighborhood wifi solutions.  With all the innovation and competition, it is mindless to create a new government monopoly.  We should let the golden age of broadband flourish.

**Verizon’s most recent report notes that it reaches 97 percent of America’s population with 4G/LTE networks. See Verizon, News Center: LTE Information Center, “Overview,” www.verizonwireless.com/news/LTE/Overview.html .

***This figure is based on 49,310,131 cable subscribers at the end of 2013, noted by Leichtman Research http://www.leichtmanresearch.com/press/031714release.html compared to 138,505,691 households noted by the National Broadband Map.

Answer: To check health information. Seniors who can investigate a symptom online will save a trip to the hospital. Not knowing whether a symptom is serious and not having the ability to investigate the condition online, many seniors without internet access go to emergency room to answer their health related questions.

This is the fourth post in a series about broadband. It investigates criticisms about America’s broadband market by Susan Crawford. Other posts are available here and here.

Crawford notes on a recent blog post, “One recent 2012 study showed that even after going through digital literacy training, 22% of participants still did not have a connection.”  The part that Crawford doesn’t mention is that 78% of the 33,000 people who participated in the digital literacy program (30 hours of classroom instruction on the basics of the computers and internet) went on to become sustainable broadband adopters (SBAs), meaning they secured their own broadband connection at home.

The National Technology Information Association reports that 99% of Americans have access to broadband download speeds of 3 Mbps, and 96% of Americans have access to download speeds of 6 Mbps.  Deployment– the provision of broadband infrastructure–is not issue with broadband in America; it is rather, adoption or users taking advantage of broadband, which needs improvement.  One-third of Americans don’t connect to the internet, even though their home is passed by a broadband technology.

Samantha Schartman-Cycyk, is the Assistant Project Director for OneCommunity, a non-profit expanding broadband adoption.  She leads the program Connect Your Community (CYC) that was offered in Detroit, MI; Wintson-Salem, NC, Bradenton, FL; Lexington, KY, Cleveland and surrounding areas in northeast Ohio. Schartman-Cycyk notes “There is no one silver bullet” for solving the adoption problem.  There are many reasons why people don’t connect to the internet, including fear, lack of interest, and to a lesser extent, cost.

Her report, a survey of 2267 participants in the CYC program, offers an encouraging story about narrowing the digital divide.  22% of all participants report  a positive workforce impact. Of this group, 35% who had never used a computer before, now do for their job as a result of the program. Additionally 65% now pay bills online who didn’t before, 29% communicate online with a health care provider, and 59% report feeling independent.

Once participants completed the program, instructors helped them find an affordable broadband provider.  In some locations, there are reduced price programs from carriers.  “We found that most of those we worked with are excited to add a home broadband connection and to use their new-found computer skills.”  The #1 reason to get online, more than twice the #2 reason of finding a job, is to find health information including managing prescriptions.  Over 80% of the participants surveyed said that the program helped them find health information.

This project speaks to the importance of investigating root causes of lack of broadband access.  Critics frequently offer oversimplified platitudes such as “people are poor” or “there is no access”. It’s important to break down the demographics to get at key reasons of poor broadband adoption.

Age is an important determinant in whether one has broadband access. ”The younger the population, the higher the connectivity”, notes Schartman-Cycyk.  Having children in the home is associated with higher rates of broadband.

Older adults who are not online are often ”digitally naive”, the opposite of a ”digital native”.  Many fear computers and associate the interent  with identity theft. Moreover many believe that the internet is not relevant for them. After all, they grew up without the internet, and their lives were not empty.  ”It’s not until older adults are shown how to do things online that reflect their personal interests that they make a connection to broadband.  This means health information, recipes, coupons, and communicating with family more regularly,” observes  Schartman-Cycyk

The program also speaks to the need for more research about how people use the internet. ”If the goal is to close the digital divide, ultra-expensive fiber to the home is not going to be the answer for thousands of people who don’t use broadband at home today,” notes Schartman-Cycyk  Without programs such as CYC, many Americans will never get online, even if fiber is brough to their home.  Thus public resources may be better spent on digital literacy programs such as CYC than on network infrastructure.

This is the third of a series of three blog posts about broadband in America in response to Susan Crawford’s book Captive Audience and her recent blog post responding to positive assessments of America’s broadband marketplace in the New York Times. Read the first and second blog.

If Crawford’s mind, this is a battle between the oppressor and the oppressed:  Big cable and big mobile vs. consumers. Consumers can’t switch from cable because there are no adequate substitutes. Worst of all, she claims, the poor are hardest hit because they have “only” the choice of mobile.

Before we go deeper into these arguments, we should take a look back.  It was not long ago that we didn’t have broadband or mobile phones.  In less than two decades, our society and economy have been transformed by the internet, and we have evolved so quickly that we can now discuss which kind of network we should have, how fast it is, which kind of device to use, and even how the traffic should be managed on that network. The fact that we have this discussion shows the enormous progress we’ve made in a short time. Plus we can discuss it on a blogging platform, yet another innovation enabled the internet.

Defining Competition:  Economists vs. Lawyers

Economics and lawyers differ on how they define competition.  Economists define a competitive market which has many firms, homogeneous products, free entry and exit from the market, independence of decisions among firms, and complete information.  They define an oligopoly by the amount it differs from these factors.  Lawyers, on the other hand, have in mind a standard of evaluation and to what extent firms serves the public interest.  The legal definition is necessarily subjective because it takes into account a lawyer’s value judgments.

Even a cursory look at the American broadband market shows that it is complex.  The website of the National Broadband Plan has a wealth of data about broadband in the USA, including breakdowns of providers by zip code.  As of December 2012 there are 2,083 broadband providers, of which 1,618 offer basic broadband speeds of 3 Mbps; 1,018 offer broadband speeds of 6 Mbps, and 200 offer 100-megabit connections.[1] Check out the report of the number of providers by speed tiers. Thus the idea of a duopoly is hard to prove by the numbers. Further it is hard to call broadband a homogeneous product as it is delivered on at least 5 different network technologies, appears in many tiers, and is packaged in a variety of ways based on the user.

Whether it is difficult to enter or exit the broadband market may depend on the municipality, and to be sure, broadband providers are regulated. As for information about broadband providers, it gets better all the time. Not only is the National Broadband Map a useful tool, there are a many websites about pricing and consumer reviews. Needless to say, consumers have many outlets for information on broadband from the providers themselves.

Crawford is one legal scholar who believes the duopoly thesis, but others don’t.  University of Pennsylvania Law School professor Christopher Yoo observed, “There has never been more competition in the cable industry than today” on Jerry Brito’s podcast. His book The Dynamic Internet:  How Technology, Users and Businesses Are Transforming the Network makes a compelling case about the complex internet ecosystem and how a myriad of actors create the market.  No one company or industry emerges dominant.

Intermodal Competition

Crawford doesn’t believe there is competition between different types of networks, but the Organization of Economic Cooperation and Development (OECD) ranks the US as #3 in world for intermodal competition.  Even though the US is is a member of the OECD, it would be a stretch to call it a US-centric body.  This group coordinates the G-20, is based in Paris, and has as its primary activities data collection and analysis.  The notion of intermodal competition means that a consumer has a variety of networks to choose from:  DSL, cable, mobile, satellite, and Wi-Fi.

The idea of cable/mobile duopoly would mean that there are only two networks, each with just two firms; Comcast and TimeWarner for cable, and AT&T and Verizon for mobile.   It’s difficult for me to swallow this notion because when I visit or live in the US these are not my providers, and further, I know many people in different parts of the US who have other providers.

Personally I use a 4G mobile dongle as my broadband connection, and it accommodates fast downloading and uploading of video. In spite of ample wire line infrastructure in Denmark, already 7% of the population uses mobile as its primary source of broadband. In fact, I have never in my life subscribed to cable; there are just too many books to read. Russ Roberts of the Mercatus Center noted that he does not subscribe to cable because he and his three sons would spend the entire day watching sports.[2]  Many professionals I know don’t have the time to watch long format video, and for them, DSL does the job.  However I know plenty of people who love cable.   Furthermore I know literate, gainfully employed people who don’t care to spend their life on the internet, or if so, only sparingly.  If anything, my sense is that many people are overwhelmed by the choices of broadband networks.

Another wrinkle in the duopoly thesis is that satellite broadband  is available to 99% of Americans. This is important technology for much of the country is mountainous and not well populated.  Crawford scoffs at satellite broadband because it is “generally considered unsuitable for 21 ^st century uses”, but it’s perhaps  because the only information she cites is eHow.com. For a more thorough discussion, see customer 24 reviews of ViaSat’s Exede  on DSLReports and reviews of 5 other satellite broadband companies.

Satellite broadband packages of 5-15 Mbps download start at $40/month[3]. There is a fee for equipment (for example a $10/month), or the equipment can be bought outright.  Satellite broadband is more than adequate for web browsing and email, the essential applications job hunting or health information.  Granted, it can’t be used to play video games and is probably not the best choice for VoIP applications such as Skype, but people use satellite broadband to watch Netflix (though satellite does reach data cap limits faster than wire line options).  See the demonstration of how fast a 20/6 Mbps satellite broadband connection loads in comparison to a fiber network.

There are power users of broadband for whom satellite is not the right choice.  They play massive multiplayer online games.  They run YouTube 24/7. They are active in peer to peer file sharing.  They have a set of needs, but their needs are not the same as grandmothers who use an iPad to play bridge, send email and check pictures on Facebook.  The market should be able to respond to different needs—and price points–without imposing one standard on everyone.

Many like to go about evaluating competition but counting the number of players in the industry. But if you live in the age of the automobile, it matters little to you that are are 100 horse & buggy companies.  Indeed a competition specialists might assert that if antitrust rules are written well enough, there is little need for industrial regulation. This is essentially the criticism of the European market where DSL makes up 75% of broadband connections.  This is the outcome of the 28 national telecom regulators counting the number of entrants that get to use the incumbent’s copper wires.  If you can get free ride on infrastructure, there is no need invest in something different.  Cable makes up just 15% of broadband connections in the EU, according to EU Cable, a trade association. The US has a more balance between DSL and cable technologies, enabling them to compete with one another.[4]

Overall, Europeans regret losing first place in mobile as the USA has taken a quantum leap in LTE. Thus many Europeans are pushing for a digital single market so that their homegrown web companies might better compete against Google, Facebook, Amazon, LinkedIn and the other American broadband-based companies that dominate the European landscape.  It’s for this reason the EU Vice-President wants to allow European cable and telco companies to merge, so they don’t have the inefficiencies of operating with the individual rules of 27 different countries.

Wired vs. Wireless

Crawford insists that every American should have two broadband subscriptions, one wired and one wireless.  She fails to realize that many of us don’t want or need both of these.  The Progessive Policy Institute published a report by Clinton Administration economist Everret Ehrlich called Shaping the Digital Age: A Progressive Broadband Agenda which notes  “Thus, while activists claim that only a high-speed, wireline connection will suffice, consumers are moving in an entirely different direction, toward wireless.  They are driven by their own needs and preferences, whether it is because they rent or move, because they prefer mobility and convenience, because they can accomplish whatever tasks they want to do on a mobile system, or for other reasons. Demanding that they have access to a wireline system in the name of ‘competitiveness’ is a waste of resources and an elitist substitution of planners’ preferences for a competitive market.”

Indeed many can do what they need to do on the web with mobile alone, and for them a wireline subscription is needless money spent on amusement.  Over sixty percent of America’s wireline broadband usage goes to entertainment.[5]   Yes, American music and movies are wonderful, but there are only so many hours in a day.  As my parents said to me about declining to upgrade their cable subscription, “We have enough movies.  We would rather play with the grandchildren.” People have different needs which are matched by different networks at different prices.  It’s not my place to tell people what kind of broadband they should have, nor is it Crawford’s.

Finance in the Cable/Telco Industry 

Whether we like it or not, financial markets are a part of the cable/telecom industry. They provide capital for infrastructure, and investors rely on capital gains to fuel their retirement funds. Crawford portrays cable and telecom companies as greedy, but  Valueline’s 2013 reports puts telecom services in the lower bottom half of all global industries for return on capital, 13.66%, placing it just above the publishing industry.

Crawford decries that the cable industry invested some 30% of revenues in 2001, but just 12-14% in recent years.  However this can be explained simply by the fact that 2001 marked a major investment in the DOCSIS innovation. That year CAPEX was triple the level of 1998. Shifting from analog to digital TV was a game changer for cable. Naturally after a big shift, these numbers will decline in following years.  However cable CAPEX jumped up again in 2006 and has stayed relatively stable since.  In general, the cable/telco industry invests 13% of sales in innovation, a higher percentage than other equipment industries.

Crawford’s claim about higher cable ARPU (average revenue per user) can be explained by the fact that cable providers now offer broadband and telephony in addition to pay TV. To focus only on revenue and not profit margin or capital expenditure does not tell the whole story.  From 1999 to 2009, Comcast’s return on capital tripled, but that amount was just 7%. Yes, a big company will have more revenue and larger dividends, but it will also have more costs.

Crawford further charges that between 2002 and 2012, AT&T’s dividend increased by 64%, while Verizon’s grew by 47%.  Again the answer is simple if you look at the history.  Between 2000-2002 the American carriers divested their assets in Europe and other regions. At that time, there were a different mix of companies (Bell South, Ameritech etc) which later merged into AT&T. Verizon had a similar M&A evolution.  When a sale of assets occurs in a publicly traded company, any profits will be returned to shareholders. Crawford implies that this money was derived from overcharging American customers, but it was not.  This just reflects corporate finance activities.

Crawford further singles out AT&T and Verizon for neglecting their wires and focusing on the more profitable wireless business. I doubt this because there are too many stakeholders holding AT&T’s feet to the fire, from the FCC to investors to savvy consumers on social media. AT&T closed 2012 with a net profit margin of 5.7%, hardly the stuff of a swindler.  Naturally this number will fluctuate; in 2011 it was 3.11% and in 2010 it was 15.98 percent. The point is that a telco will have many business lines, but it has only one stock that trades on the exchange.   Thus it has an incentive to manage all its business lines well to maximize its profit and share price.

Though there are various metrics to consider, it’s hard to make a case that telecom companies are fleecing their customers when one looks at the profit margins and the fact that investors have many other choices for industries which have higher returns such as software, aerospace, chemicals, pharmaceuticals and so on.  Perhaps most telling is the fact that internet companies whose businesses are built on top of broadband infrastructure (Google, Facebook, Netflix etc) are generally more profitable than the network providers themselves.  Not only do carriers effectively subsidize the leading internet companies with broadband infrastructure and data delivery, they also subsidize equipment such as handsets, modems, set top boxes, satellite dishes and so on.

The Internet Ecosystem

Broadband is not just about networks.  The complex internet value chain includes equipment providers, software providers, device manufacturers, content and application providers, and users.  Carriers are not the only actors, and their decisions are impacted by the participants around them.  We cannot overstate the role of content/application providers and device manufacturers.  In essence, these are the reason people get on the internet in the first place.  Therefore these groups have the ability to drive major economic change and innovation with their offerings.

While it can make for a good yarn that there is a some cable/mobile duopoly, the reality is that the internet value chain is too complex for any one or two players to exert extraordinary control.  To focus on one or two actors in the value chain is a static and monolithic analysis.  It does not allow for inevitable change and evolution which happens quickly with the internet.  I suppose Crawford would have sacrificed some of her book’s sensational appeal by allowing for greys instead of black and white.  The novelist has this license, not the social scientist.

The other economic force in the broadband marketplace is over the top competition, the services on the internet itself that compete with the carriers, such as Skype, WhatsApp and Netflix.  Skype managed to disrupt the global market for long distance.  WhatsApp caused SMS revenue to plummet 40% for some carriers.  Even Google’s Chromecast, a dongle which enables streaming YouTube and Netflix from Google to a digital TV, offers consumers a cable-free existence for only for $35. These competitive forces change the economics for networks and render the duopoly thesis even less valid. It’s not the number of players that creates competition, but the technological development.

These blog posts have reviewed America’s broadband in relation to the rest of the world, competing broadband technologies for the future, and whether certain firms exert extraordinary influence on the broadband marketplace.  With data from the OECD, FCC, Akamai  and my university, interviews with Americans, and my personal experience living in a variety of countries, I conclude that the American broadband market is competitive and robust.  Living abroad one comes to appreciate all the good things about America; broadband and the vast economy it enables are two of them.  If this is what a legal scholar considers duopoly, then I would like some more.

The final part of this series investigates a digital literacy program and how it can help those without an internet connection get online. It also addresses to what extent cost is a barrier to internet access.

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This is the second of a series of three blog posts about broadband in America in response to Susan Crawford’s book Captive Audience and her recent blog post responding to positive assessments of America’s broadband marketplace in the New York Times. Read the first post here. This post addresses Crawford’s claim that every American needs fiber, regardless of the cost and that government should manage the rollout.

It is important to point out that fiber is extant in almost all broadband technologies and has been for years.  Not only are backbones built with fiber, but there is fiber to the mobile base station and fiber in cable and DSL networks.  In fact American carriers are already some of world’s biggest buyers of fiber.  They made the largest heretofore purchase in 2011, some 18 million miles of fiber optic cable.  In the last few years American firms bought more fiber optic cable than all of Europe combined.^[1]

The debate is about a broadband technology called fiber to the home (FTTH).  The question is whether and how to pay for fiber from the existing infrastructure—from  the curb into the house itself as it were.  Typically the it’s the last part of the journey that can be expensive given the need to secure rights of way, eminent domain, labor cost, trenching, indoor wiring and repair costs.  Subscribers should have a say in whether the cost and disruption are warranted by the price and performance.  There is also a question of whether the technology is so essential and proven that the government should pay for it outright, or mandate that carriers provide it.

Fiber in the corporate setting is a different discussion. Many companies use private, fiber networks.  The fact of that a company or large office building offers a concentration of many subscribers paying higher fees has helped fiber grow in as the enterprise broadband choice for many companies.  Households don’t have the same economics.

There is no doubt that FTTH is a cool technology, but the love of a particular technology should not blind one to look at the economics.  After some brief background, this blog post will investigate fiber from three perspectives (1) the bandwidth requirements of web applications (2) cost of deployment and (3) substitutes and alternatives. Finally it discusses the notion of fiber as future proof.

Broadband Subscriptions in the OCED

By way of background, the OECD Broadband Portal [2] report from December 2012 notes that the US has 90 million fixed  (wired) connections, more than a quarter of the total (327 million) for 34 nations in the study.  On the mobile side, Americans have three times as many mobile broadband subscriptions as fixed.  The 280 million mobile broadband subscriptions held by Americans account for 35% of the total 780 million mobile subscriptions in the OECD. These are smartphones and devices which Americans use to the connect to the internet.

Ordinary feature phones are additional and not include in this number. This report notes that FTTH accounts for 7.36% of America’s total fixed broadband subscriptions, about 6.6 million subscriptions.  The US falls in the middle of the distribution of fiber penetration in the OCED.  The average penetration is 14.88%, but when one removes Japan and South Korea which have over 60% fiber, the average falls to 8.63%. Germany, an advanced industrial nation, has less than 1% fiber penetration.  Israel has zero.

It is also important to note that the Netherlands and Belgium have less fiber penetration than the US.  These two nations are considered #1 and #2 by the OECD for intermodal competition, as more than 90% of homes have a high speed DSL and cable connection. The US measures #3 because of the diversity of network types: cable, DSL, mobile, fiber, and satellite.

Advocates of any particular broadband technology often like to make arguments that broadband will increase economic growth and that nations can compete on broadband alone.  The reality is more complex, and broadband is only a single input to a complex economy, like the level of literacy. Each country has a particular set of industries and policies, and their effectiveness in applying broadband can vary for many reasons.  Therefore the OECD reports only .64 correlation between broadband growth and GDP per capita, a mild correlation.

For this reason we should pause before investing more in FTTH, the most expensive broadband technology. See the following OECD chart. Only Switzerland, Norway and Luxembourg have higher GDP per capita than the US, and of these countries, only Norway has a higher fiber penetration than the US. More telling is that Japan and South Korea with their high fiber penetrations have a GDP that is a third less than the US. See the graph from the OECD report 1k. Broadband penetration and GDP (Dec. 2012).

Bandwidth Requirements of Web Applications

My institute the Center for Communication Media and Information Studies at Aalborg University in Copenhagen made a report about broadband needs in 2020.  It includes some scenarios about a family of four, providing extreme and a normal usage. In the extreme example, each family member is  in the midst of a bandwidth-heavy activity. Mom is a on a video conference, daughter is watching HDTV, and son is playing a video game.  The bandwidth needs for this scenario are 40-130 Mbps download and 10 Mbps upload. For the “normal” scenario the recommendation is 30-70 Mbps download and 10 Mbps upload.

While these scenarios are interesting, they fall well under the 1000 Mbps (1 gigabit) threshold that FTTH offers.  They require that the family upgrade to some serious hardware including devices that can properly render HDTV and 3DTV. Moore’s Law has helped the price of hardware decline tremendously but such a television costs a few hundred, if not a few thousand, dollars.  Furthermore the scenarios are less applicable to the fastest growing household segment in the US, the single person living alone, to whom a Wi-Fi network in a public place may be an additional appreciated location for broadband activities, rather than only at home.

The single largest source of traffic on American wire line networks today is Netflix[3]. The company has some 29 million subscribers[4] in the US and appears in roughly every third American home. Crawford’s book provides an example of the performance reports that Netflix publishes of how well its service runs on different networks, noting that 2.5 Mbps is sufficient for a high quality experience. Additionally Netflix is constantly making its service more efficient, and it has developed its own content delivery network to cache and speed content to its users. As for the leading websites, Google, Facebook, YouTube and Amazon; they want to have as wide exposure as possible, so they are not necessarily trying to make their applications more bandwidth intensive. Even YouTube, which takes up a disproportionate share of network traffic, continues to make its platform leaner.

Bandwidth needs for education

Crawford asserts that without FTTH we will not be able to take advantage of important applications in education and health. Let us review some of the leading modalities for online education and their bandwidth requirements.   The most bandwidth intensive modality is massive open online courses (MOOCs). These have been available on existing networks for years from many of America’s leading universities as well as some startup ventures.  Many enjoy MOOCs for its ability learn on a wide range of subjects.  Some education experts, however, find MOOCs less than ideal. They see MOOCs as an extrapolation of a large classroom without individualized attention and note that it works well for some kinds of learners not others.

The adaptive electronic textbook may be a format better suited to student’s needs. It is an ebook with interactive features as well as content that adjusts based upon the student’s level.  As textbooks can be downloaded or offered in chapters, they need not be high-bandwidth applications.  As for other modalities such as games, online social learning, tablets and independent certification, there is nothing inherent that requires they have FTTH. It depends on design parameters, and all of these modalities are alive on today’s networks.

The extent to which students use video and in what framework is an important question.  The flipped classroom model is one in which students watch lectures on their own (MOOC) and do homework during class. The student and teacher may meet in a video conference, but they may opt for mobile or VoIP as well.  Skype suggests 1.5 Mbps down/up for high definition video one to tone calls and 4/512 Mbps down/up for high definition video calls for 5 people.  Again, this requirement is well within the capacity of today’s networks.

The promise about online education is about more than a pipe. The point is not just to send canned high definition videos across the wires, but rather to provide intelligent customization to each student. The greater part of the value and engineering need is  upstream in the algorithms, less in the network delivery itself.  There is nothing inherent in online education that requires FTTH.  Indeed if the job is to educate millions, having light, low-bandwidth applications improves the efficacy of the business model.

Bandwidth needs for health

The Norwegian Centre for Integrated Care and Telemedicine, the world’s oldest and leading institute for telemedicine, notes that most applications run fine on average broadband levels (for example, video consultation), and even the most advanced app would require no more than 10 Mbps[5]. Indeed the limiting factor for telemedicine is not broadband deployment but rather health care providers who are resistant to change.  The other requirements for telemedicine are mobile networks and devices, so investing exclusively in wire line networks is not necessarily an enabler for telemedicine.

Bandwidth needs for entertainment

While education or telemedicine may not require large amounts of bandwidth, ever increasing high definition entertainment could consume much bandwidth.  Games and movies on HDTV and 3DTV are the killer apps for FTTH.  Consider that 60% of traffic on American networks is entertainment.[6]  To be sure FTTH can facilitate rich entertainment experiences.  However I can’t find good arguments for why taxes should subsidize FTTH if the key use is entertainment.  Furthermore it is not clear how to avoid the unintended consequence of subsidizing piracy by subsidizing FTTH.  While online video platforms such as Netflix have a powerful effect to lessen piracy—people don’t trouble to pirate movies if they get get them at a good price—for the most hard core pirates, bandwidth is a boon to their activity.

Innovation and Mobile Broadband

In spite of the assertions that FTTH is essential for future applications of education and telemedicine, the greater part of experimentation and implementation is on mobile networks.  This is not just in the USA, but around the world.  For example, I study with a dozen PhD students from Ghana.  They are engaged in knowledge transfer from Denmark to Ghana in some of the most exciting applications of mobile technologies from intelligent transportation systems, education, social networking security, banking and so on.  Additionally some Indian colleagues are working on low-bandwidth video conferencing .

The world is being remade for mobile faster than we can adjust to it. All of the major websites and applications we use today have mobile versions, and those continue to improve with better usability and more modest bandwidth requirements.  That process, along with declining prices for mobile devices, is narrowing the digital divide. Even internet companies such as Yahoo! are remaking themselves to be mobile first.  Application developers have mobile on his mind when designing for the web. We can see that Google excelled on advertising for using its search engine with a pc. They reformulated that model to mobile.  

Cost of Deployment

Crawford notes that America doesn’t have a plan for fiber and that European and Asian nations are marching ahead.  The fact of the matter is that the EU government does not have a plan for fiber either.  The sources  that Crawford provides are from Europe’s Fiber to the Home Council, a trade association that lobbies the EU government subsidies for fiber.  The EU government has the wisdom to have a technology-neutral policy about broadband. Thankfully this is also the case for the US.

Crawford attempts to shame the US by mentioning the fiber build out in Bulgaria, Moldova, and the Baltics. It is important to understand the history from these former Eastern Bloc countries.  When communism fell, they were two generations behind in telecommunications. Carriers invested heavily in both fiber and mobile networks to help these countries leapfrog to modern era.  The leading broadband based company of this region is Skype in Estonia. While this notable, there is still a brain drain from this region to other parts of Europe and the world where there are better education and job opportunities.  I visited this region in 2012, and it is clear to me that it will take more than FTTH to lift these countries out of the past.

In Denmark in 2005, 14 local utility cooperatives attempted to create their own fiber networks, arguing that there is little difference between bringing fiber or electricity to homes. Their business case never worked because the price of broadband on other networks plummeted. Today, fewer than 240,000 Danish homes subscribe to these fiber networks, a number that’s small even for Denmark.  This case demonstrates the danger of considering broadband as a utility akin to electric service when broadband services – and needs – are so diverse.  Norway has a similar story.

Naturally I am keen to see how things fare next door in Sweden where the government has made huge investments in FTTH.  A series of reports from Acrea, a Swedish government owned consulting firm conclude ”It is difficult to estimate the value of FTTH for end users in dollars and some of the effects may show up later”.  They note positive but weak outcomes. However, those results may be even less strong when adjusted for the government’s devaluation of the Swedish currency. As such, in Danes are lucky that no new taxes were levied to pay for broadband, nor were the citizens made to bear the brunt of private investments that didn’t work out.  Nearly 100% of broadband investment is private in Denmark.  Carriers, not the citizens, bear the risks.

The OECD reports that more than 60% of Japan and South Korea’s broadband subscriptions are fiber.  What many overlook about the countries however are the important political, cultural and historical factors that allow them to deploy fiber.  Compared to the USA, these countries have more collective societies and cozy relationships between business and government.  While the zaibatsu and keiretsu systems no longer exist in name, both of these governments want to ensure that their incumbent telecom companies survive, and business plans of 200 years or more are not uncommon.  Thus any national fiber plan is certainly good for the incumbents.

I suspect that most Americans would not be keen about a national FTTH plan that expressly rewarded AT&T, Verizon, Comcast or TimeWarner.  Indeed Americans value the more decentralized nature of their government where communities have more flexibility to determine their broadband needs.

The greater metropolitan areas of Seoul and New York City have roughly the same population, but Seoul is eight times as dense as New York.  This is an important fact, whether the government or a private company is bearing the risk for investing in FTTH. The Japanese improved their case for fiber by using wires above the ground, similar to telephone phone lines of old.  This certainly helped to lower the deployment cost, as well as the fact that most people live in apartments.  Carriers were responsible for the cost of fiber to the building; the landlords are required by law to take it over from there.  Interestingly many Japanese youth are quitting fiber for LTE only broadband plans.[7]

We need not to go to abroad however to evaluate the business case of fiber.  There are important examples in the US. Chattanooga, TN has a municipal fiber project with some controversy. There may be different interpretations on how successful this project is, but the limiting factor in is that not every municipality can get a $100 million grant from the Department of Energy.

Plenty has been written about Google Fiber and the various concessions made by the Kansas City government to win the project. Recall as well that the $300 subscriber sign-up fee had to be nixed in order for the project to get off the ground, showing that consumers balked even for a small fee relative to the life of the subscription.  In the case of Provo, UT, for $1 Google took over a municipal fiber network, once $39 million had been sunk in the project.  The network was financed by a $5.35 monthly fee levied on all the households in the town whether they subscribed or not.  Now that Google takes over the network, only subscribers will pay, but if it doesn’t work out for Google, they can sell the network back to Provo for $1. It is interesting to note that Mountain View, CA, where Google is based, declined to make concessions for the company to build a fiber network.

Business model for broadband networks of the future

There is no doubt that FTTH can enable rich video and entertainment experiences, but for the needs of education and telemedicine, these applications don’t require the gigabit speeds that fiber provide.  Even with our knowledge of future scenarios, there are still have many important and unanswered ethnographic questions about how people will use networks.  Future proofing may make sense theoretically, but there is no reliable empirical or mathematical model for it. Many of the companies and governments that invest in FTTH as a future proof strategy found that their models didn’t work out.

The idea to throw the baby out with the bathwater—get rid of all of America’s networks and start over with FTTH is overkill.  Certainly there are ways we can make broadband network deployment more economical such as improving the process with local government.  A case in point is New York City. It can be difficult to get permissions to dig up the streets, and people working in buildings don’t enjoy the walls being ripped out.  To be sure, these disruptions can be streamlined.  Verizon would like to add more fiber, but the conduits are already full of copper wire, and by law Verizon is required to maintain this infrastructure.

Google Fiber in Kansas City proved that lifting restrictions can translate into more investment.  Standardizing the rules for infrastructure rollout so that carriers don’t have to negotiate with each and every town and landlord would go a long way, so would improving the regime for cable franchising.  Another area for reform is spectrum.  And there is no doubt that companies will continue to innovate, whether it is DSL companies transitioning to IP switches, cable companies upgrading to DOCSIS 3.0, or R&D in mobile.  Ericsson, NSN, Alcatel / Lucent, and Qualcomm are just a few of the companies working on 5G standards for mobile, technologies that can download an entire movie in a minute.

The fact of the matter is that many technologies are competing to be the network of the future.  We should encourage this competition. Consumers only benefit from this dynamic interplay. As for the US having a low-average penetration of FTTH, if the argument is nationwide FTTH rollout for economic development, it seems to me to be prudent that the US has not invested more in FTTH, given that the global data does not show that countries necessarily improve their GDP by investing in FTTH.   Maybe that will change in the future, but that is what the data shows today.

People can fall in love with a technology and become blind to its shortcomings.  Thus we need to be careful about these silver bullet solutions, such as FTTH for everyone. There are many things to consider: the speeds of applications, the needs of users, the costs of deployment, and the price of substitutes.  Broadband at any cost is not a worthwhile investment.  If Americans can get access to the bandwidth they want at a fair price, they will care very little what kind of network it is.   The next blog post investigates whether there is a cable/mobile duopoly in broadband.

I am American earning an industrial PhD in internet economics in Denmark, one of the countries that law professor Susan Crawford praises in her book Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age. The crise du jour in America today is broadband, and Susan Crawford is echoed by journalists David Carr, John Judis and Eduardo Porter and publications such as the New York Times, New Republic, Wired, Bloomberg News, and Huffington Post. One can also read David Cay Johnston’s The Fine Print:  How Big Companies Use ‘Plain English’ to Rob You Blind.

It has become fashionable to write that American broadband internet is slow and expensive and that cable and telecom companies are holding back the future—even though the data shows otherwise.  We can count on the ”America is falling behind” genre of business literature to keep us in a state of alert while it ensures a steady stream of book sales and traffic to news websites.

After six months of pro-Crawford coverage, the New York Times finally published two op-eds[1] which offered a counter view to the “America is falling behind in broadband” mantra. Crawford complained about this in Salon.com and posted a 23 page blog on the Roosevelt Institute website to present “the facts”, but she didn’t mention that the New York Times printed two of her op-eds and featured her in two interviews for promotion of her book.   I read Crawford’s book closely as well as her long blog post, including the the references she provides.  I address Crawford’s charges as questions in four blogs.

1. Do Europeans and East Asians have better and cheaper broadband than Americans?
2. Is fiber to the home the network of the future (FTTH), or are there competing technologies?
3. Is there really a cable/mobile duopoly in broadband?
4.  What is the #1 reason why older Americans use the internet?

For additional critique of the America is falling behind broadband myth, see my 10 Myths and Realities of Broadband.   See also the response of one of the op-ed authors whom Crawford criticizes.

How the broadband myth got started

Crawford’s book quotes a statistic from Akamai in 2009. That year was the nadir of the average measured connection speed for the US, placing it at #22 and falling. Certainly presenting the number at its worse point strengthens Crawford’s case for slow speeds. However, Akamai’s State of the Internet Report is released quarterly, so there should have been no problem for Crawford to include a more recent figure in time for her book’s publication in December 2012. Presently the US ranks #9 for the same measure. Clearly the US is not falling behind if its ranking on average measured speed steadily increased from 22nd to 9th.

Crawford notes on her blog ”Tussling over contestable rankings is not a good use of our time” and then proceeds to list the rankings of the US from a number of content delivery networks.  She does not explain, however, the implication of this measurement.  Akamai is the world’s largest content delivery network, speeding over one-third of all the content on the web and capturing 1 billion IP addresses per day.  It is the most reliable longitudinal measure, but its methodology should be clarified.

Akamai measures speeds in a similar way to how cars are clocked on a freeway. For example a radar detector can measure the speed of a car at any moment, say 50 mph.  However that car could go 100mph or 25 mph. It’s just what is captured at the moment of measurement.  As for broadband, there may be a 100 Mpbs connection to a person’s home, but if that subscriber only signs up for 5 Mbps, Akamai will only report 5 Mbps.  As a matter of fact the Akamai Q1 2013 report shows Washington DC, Vermont and New Jersey with higher average peak speeds than South Korea, the #1 country. For an in depth discussion of broadband statistics see The Whole Picture: Where America’s Broadband Networks Really Stand from the Information Technology & Innovation Forum.

Incidentally recent reports from both the Federal Communications Commission[2] and the White House (Office of Science & Technology Policy and the National Economic Council) contradict the dour picture critics paint about American broadband. See the report Four Years of Broadband Growth.

Don’t Europeans and East Asians have better and cheaper broadband than Americans?

This is the wrong question. The question we should ask ourselves instead is how well have nations applied broadband technologies to improve their economy and standard of living? With all this discussion about speed, some consider ultra-high-speed wired broadband for its own sake, as an end in itself.  But bandwidth alone does not an economy make.   Instead we need to envision broadband as in important input to the information economy ecosystem.

Citing a report from the New America Foundation, Crawford asserts that Americans pay ”three or four times” more for the same download services as in other countries.  The fact of the matter is that I can find broadband prices both higher and lower around the world. The website of the leading Danish broadband provider TDC offers a package of 24 channels, 20Mbps broadband, and either fixed telephony or 4 hours mobile telephony for for 414 DKK ($58.73 + 25% tax = $73.41). There is a one-time fee of 399 DKK ($70 + 25% tax=$88).The similar monthly  package goes for $60-$70 in the US. The next level package of 50 Mbps is $80. So in this example, broadband is only slightly more expensive, depending on the local tax, than in the US. Indeed the OECD points out Spain and Norway as some of the most expensive countries for broadband.  Keep in mind as well that most of Denmark’s residents live in the major cities in apartments or in houses more closely packed that a typical American suburb, which also explains some of the price difference.

To be sure, we can find countries where broadband may be less expensive, but gasoline is four times as high. Local conditions and taxation will change the price. For this reason economists use a basket of goods and services to when evaluating consumer prices.  The market price of broadband in two countries may not reflect the same inputs.  The price can vary for many reasons including the network type, the network speed, the type of subscriber (individual, business, company etc), whether the item is sold in bundle, whether the subscriber has a certain exemption, taxes, and other factors not limited to geography, density and so on.  Economists and financial analysts who study prices build complex, dynamic models to reflect these factors.

The OECD provides the most comprehensive, global information on broadband prices, but it relies of national governments to provide the data, rather than collecting it directly from retailers or websites.  This challenge to determine “the facts” is also exacerbated by competing sources.  Indeed the most comprehensive source of broadband information comes from the Organization of Economic Cooperation and Development (OECD).  Their Broadband Portal offers a wealth of data on many broadband measurements.  Plus the new OECD Communications Outlook  published in July 2013, has the most recent comparison for prices globally.

Other positive information about the US appears in the the most recent from OECD report.  It notes the decline in the price of megabit per second of advertised speed. In the 2011 report showed that the US ranged between $1.10-71.49, but that number has fallen to $0.53-$41.70 in the 2013 report. That translates to a 51% improvement at the low end and a 41% improvement at the high end.   Some countries have lower prices, but the decline of the price for the US shows that thing are getting better, not worse, for broadband.

Let’s look at the mobile example. Using information from Bernstein Research and analyst Craig Moffett, Crawford asserts that mobile prices are too high.  On this point, one should defer to the GSM, the global standards organization for the mobile industry. Its report on mobile in the US and Europe notes that yes, Americans do pay more for mobile than Europeans ($69 vs. $38 for an average monthly subscription), but Americans use five times more voice and twice as much data.  From a G-20 perspective the OECD notes that “Given that mobile broadband constitutes a relatively new market compared to fixed broadband, there tends to be greater experimentation in wireless markets. Moreover, the evolution of the smartphone ecosystem has resulted in a complex array of stakeholders who determine these prices.“ [3]

Furthermore Europeans may have lower prices for mobile, but this is because wholesale rates are regulated to be artificially low. European consumers have a low price in the short term, but in the long run they are shortchanged because European carriers haven’t made enough profits to invest in infrastructure.  This is outcome of the “services based competition model” (allowing new entrants to resell incumbent’s services at a low price) which hasn’t panned out to deliver the infrastructure investments as hoped. Clinton Administration economist Ev Ehrlich who also studies this issue published his op-ed The Myth of America’s Inferior Broadband in the Wall Street Journal describing this situation.

Finally, roaming prices are still not harmonized, so when a European travels from one country to another, there are surcharges on calls and SMS. Imagine if you were charged a different rate each time you entered a new state in the US.  Such is the case in Europe.

OECD updated pricing information published in July 2013 notes that entry level prices should be no more than $30 purchasing power parity.  The America entry level monthly price is $27.Thereafter, if people want faster speeds, they pay for it.  That is only fair.  This means that for as little as $27, people can be assured bandwidth to do essential email and web browsing for job applications, online banking, and so forth.  A forthcoming blog post will investigate the issue of low-income Americans for whom $27 is too much.

As for people who pay $100 or more per month for broadband, which amounts to cost of a daily visit to Starbucks, that number should be put into perspective by measuring it against the cost to purchase the same content and communication services piecemeal.  One would have to add up the price of all the newspaper subscriptions, the movie tickets, the DVDs, the CDs, the long distance calls as well as to add some kind of premium to cover the applications we have today that never existed before the web.  On balance, broadband is a tremendous value in the US. When one sees cheaper prices in other countries, one needs to consider that often these citizens pay three times for broadband: with subscriptions, with rent/home owners fees, and with taxes.  The benefit for Americans is that they pay for broadband once, and they pay what it costs.

High Speed Broadband Adoption

From the research perspective, the leaders of my institute, The Center for Communication, Media and Information Studies in Copenhagen, published a report titled “Broadband Bandwidths in a 2020 Perspective” reflecting on the needs of developed countries such as the US. Their assessment is speeds are increasing faster than consumers demand them. The report notes that in Denmark, one of the perennial top performing countries in the OECD for broadband adoption, 65% of homes are passed by a broadband technology that can deliver 100 Mbps, but only 0.7% subscribe to the fastest tier.^[4]  Danes can get what they need from lesser speeds, and the price of the faster service is not justified from their perspective.

Even during the financial crisis in 2009, the supposed low point of performance of broadband speed, activity on America’s broadband networks was in full swing.  At the time I worked for a web analytics software company in Silicon Valley. Our software was enabled on over 2000 enterprise websites visited by millions of Americans every day.  These websites ran the gamut: ecommerce, news, banking, education, student financial aid applications, B2B, video-embedded media, and so on.  Never once did our customers complain that there a was not sufficient broadband for end users’ needs, that they were missing out on customers because of lack of broadband access, or that speeds were too slow. On the contrary, broadband had enabled new markets.  Broadband was so ubiquitous that it was no longer a differentiator. Thus these companies wanted to deploy every additional advantage, including search marketing, behavioral targeting, multivariate testing and so on.  Even more impressive was that almost none of these companies were based in major cities or even Silicon Valley.  In that way, broadband brought the death of distance.

Broadband and Employment

We can learn a lot of the folly of the broadband for its own sake mentality from South Korea, #1 in Akamai’s study with an average measured speed of 45 Mbps. Their primary uses of broadband are by far video game entertainment for consumers and video conferencing for businesses.  The problem with these two applications is that they drive little revenue versus the traffic they consume on the web.  Much of real time entertainment is piracy, and the money in games is largely in the hardware.  As for online gaming, less than 5% of players pay for games.  Video conferencing was thought to be a great revenue opportunity for platform providers, but users are choosing free versions of Skype instead.  So these two endeavors don’t generate the cash flow that create jobs.

Broadband has enabled some industrial productivity and supports a marginal “Gangam Style” entertainment economy in South Korea.  It is estimated that performer Psy made about $8 million from his famous song, including the 1.6 billion YouTube views and the iTunes sales.[5]  Few performers will ever achieve that level of success. His is not a replicable business model, let alone a business case for broadband.  The real money in South Korea’s economy still comes from electronics, automobiles, shipbuilding, semiconductors, steel, and chemicals — the same growth engines from the pre-broadband days. Ditto for Japan and Sweden.

Most important, the national broadband project in South Korea has not yielded the jobs that were expected. Broadband has enabled entertainment but not employment. A new report by the Korea Information Society Development Institute, “A Study on the Impact of New ICT Service and Technology on Employment,” bemoans the situation of “jobless growth.” The government is also concerned about internet addiction, which afflicts some 10 percent of the country’s children aged between 10 and 19, who essentially function only for online gaming but not in other areas of society.

Europe also has challenges translating broadband into employment. My colleague at the Ifo Center for the Economics of Education and Innovation in Munich published the results of her econometric study of the impact of broadband internet on employment on 8460 municipalities in West Germany. Over the last five years the German government has invested €454 million (almost $600 million) to bring broadband to the rural areas. Though there is an impact on local employment by local broadband infrastructure, the impact is very slight. The econometric study shows that an increase of DSL penetration by 10% yields between 0.03-0.16% increase in employment. This research suggests is that broadband alone is not enough to stimulate employment. Other factors such as level of education, professional skills, existing employment opportunities, types of extant industries and so on also play a role in employment.

Broadband and Economic Growth

What is important about broadband is not measuring speeds and counting rank, but turning technology in productive use in the economy. In spite of all of the challenges of broadband, America leads the world in broadband-based industries.  Mary Meeker of Kleiner Perkins Caulfield Byers assessed the world’s top internet companies, and found the US an unusually strong performer.  Of the top 25, the US had the most, 14; China, 3; Japan, 2; South Korea, 2; Russia, 2; and the UK and Argentina each have 1.[6]  The point is that the USA, with just a fraction of the world’s internet users and with an oversized investment (one-quarter of the world’s financial outlay in internet infrastructure) has been able to leverage broadband into over $1 trillion of market value in 2013 alone with just 14 companies.  This is a stunning achievement, and it does not even take into account all of the small and medium sized American companies that would have never existed without broadband.

Given Crawford’s supposition of alleged high prices that limit adoption and force consumers to slower speeds, I conclude the opposite after reviewing the data. Consumers have broadband at all price levels as well as speeds.  The vast economic growth and the transformation of the US from and industrial to an informational economy means that the US gets a lot of bang for its broadband buck.  Whatever the circumstances, the US has managed to turn broadband into productive use better than other nations.  To be sure, the broadband and economic development equation is complex, but it’s not true that Europeans and East Asians have it better when it comes to broadband. The next blog post addresses the question of whether fiber to the home will be the network of the future or whether network technologies will compete.