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Internet Hysteria – Are We Losing Our Edge?

Thursday, December 15th, 2011

Scott Wallsten and Amy Smorodin

From Anthony Wiener’s wiener to the FCC’s brave stand on Americans’ shameful inability to turn down the damn volume by themselves, 2011 has been a big year for tech and communications policy. But how has one of the Washington tech crowd’s most important products—Internet hype—fared this year? In this post, we seek to answer this crucial question.

The Internet Hysteria Index

The Internet is without doubt the most powerful inspiration for hyperbole in the history of mankind. Some extol the Internet’s greatness, like Howard Dean, who called the Internet “the most important tool for re-democratizing the world since Gutenberg invented the printing press.”^{^[1]} Others fret about the future, like Canada’s Office of Privacy Commissioner, who claimed, “Nothing in society poses as grave a threat to privacy as the Internet Service Provider.”[2]

Sometimes the hyperbole is justified. For example, thanks to Twitter, attendees at this past summer’s TPI Aspen Summit were privy to a steady stream of misinformation even before the DC-area earthquake stopped.[3]

In the same spirit, we present the Internet Hysteria Index (IHI). The IHI, which the DOJ and FCC should take care not to confuse with the HHI, is the most rigorous and flexible tool ever conceived for gauging the Internet’s “worry zeitgeist”. It’s rigorous[4] because it uses numbers and flexible[5] because you can interpret it in so many different ways that it won’t threaten your preconceived ideas no matter what you believe.

The IHI has two components. The first tracks fears of an unrecognizable, but certainly Terminator-esque, future Internet. We count the number of times the exact phrases “the end of the internet as we know it” and “break the internet” appear in Nexis news searches each year since 2000.

Figure 1: The End of the Internet as we Know It!

Figure 1 shows that 2011 produced a bumper crop of “break the internet” stories, mostly related to the Stop Online Piracy Act and the Protect IP Act. The spike in 2006 reflects a wave of Net Neutrality stories after AT&T’s then-CEO proclaimed that “what they [content providers] would like to do is use my pipes free, and I ain’t going to let them do that because we have spent this capital and we have to have a return on it.”

As our research illustrates, the “End of the Internet” hyperbole shows a healthy, generally upward trend, reflecting the effectiveness of our collective fretting and hand-wringing. Our data do not allow us to identify[6] whether the trend is due to clever Washington PR, lazy hacks retreading old lines, real concerns, or collusion among interest groups simply ensuring they can all stay in business by responding to each other.

The second component of our index measures the incidence of hand-wringing regarding the state of broadband in the U.S. In particular, this measure counts the number of times phrases suggesting lagging U.S. broadband performance show up in Nexis since 2000.[7] Figure 2 shows the results of our analysis.

Figure 2: The Grass is So Much Greener on the Other Side of the Pond: U.S. Broadband Sucks

The big spike in 2010 is related to release of the National Broadband Plan. The prior high, in 2007, saw stories focusing on the OECD rankings, broadband mapping, and the beginnings of broadband plan discussions.

Unfortunately, 2011 was not a good year for misinterpreting shoddily-gathered statistics. Figure 2 shows a dramatic drop-off in bemoaning the dire state of U.S. broadband, possibly after everyone just got really, really tired of talking about the National Broadband Plan. We’re extremely concerned that as a result, the U.S. may have fallen dramatically in the OECD worry rankings. In fact, in a warning shot across our bow, on December 14 the BBC reported that “the UK remains in danger of falling behind when it comes to next-generation mobile services” and superfast broadband.^{^[8]} We’re hopeful American fretting will pick up once analysts actually read the FCC’s USF order that was promulgated under the cover of 23 days between approval and publication. On the other hand, there is a risk that the sheer volume of the Order—the equivalent of more than 4 million tweets—might dissuade people from talking about it ever again.

For generations, Americans have taken a back seat to nobody on the important issue of Internet hyperbole. Let’s hope the inside-the-beltway crowd pulls itself together and breathes some life back into the speech economy. Happy New Year.

[1] http://motherjones.com/politics/2007/06/interview-howard-dean-chairman-democratic-national-committee

[2] http://dpi.priv.gc.ca/index.php/essays/the-greatest-threat-to-privacy/

[3] Picture from Funny Potato, http://www.funny-potato.com/blog/august-23rd-2011-east-coast-quake.

[4] It’s not.

[5] In other words, “probably pretty meaningless.”

[6] Actually, they do, but we don’t want to do the work.

[7] Specifically, the search is ((“U.S. falling behind “OR “U.S. lagging”) AND broadband) OR ((“United States falling behind” OR “United States lagging”) AND broadband).

[8] http://www.bbc.co.uk/news/technology-16174745

Posted in Broadband, Competition and Antitrust, Intellectual Property, Net Neutrality, Privacy and Security | 4 Comments »

The AT&T/T-Mobile Merger Conundrum: Increase Efficiency AND Create Jobs?

Friday, December 2nd, 2011

How did the proposed AT&T and T-Mobile merger, which many viewed as so certain when announced, end up on life support? Is it because of the decision by the Department of Justice (DOJ) to challenge the merger in court? Or maybe because of skeptics’ claims regarding the likelihood of the merger “creating jobs?”

Those factors certainly played a role, but another reason the merger reached the brink of collapse is arguably because the current jobs crisis made it impossible for AT&T to justify the merger to antitrust authorities while also making it palatable to politicians and the FCC with its broader “public interest” standard.

For antitrust purposes, AT&T had to demonstrate that it would not substantially reduce competition and that if it did, the increased efficiency of a merged company would greatly outweigh those costs. For political purposes, in an era of persistent unemployment AT&T decided it had to demonstrate that the merger would create jobs.

Horizontal mergers between large competitors, such as the proposed one between AT&T and T-Mobile, are generally subject to tough antitrust scrutiny. Antitrust policy is indifferent to the effect of a merger on jobs, instead focusing on the effects of the merger on competition and consumers while weighing those effects against the potential economic benefits of a more efficient merged firm.

As the DOJ-FTC Horizontal Merger Guidelines note, “Competition usually spurs firms to achieve efficiencies internally. Nevertheless, a primary benefit of mergers to the economy is their potential to generate significant efficiencies and thus enhance the merged firm’s ability and incentive to compete, which may result in lower prices, improved quality, enhanced service, or new products” (p.29).

The efficiency argument is always a high bar in a merger case since “the antitrust laws give competition, not internal operational efficiency, primacy in protecting customers” (p.31). One way the merged company might increase efficiency would be to lay off large numbers of workers if it believed it could maintain service quality while doing so. By appearing to take that option off the table and arguing that the merger was, in fact, good for jobs, AT&T raised the efficiency bar even higher than it normally is.

It is, of course, possible to increase employment and efficiency if the firm increases output by more than it increases costs. AT&T made an argument consistent with that outcome in its filings by contending that spectrum constraints are distorting investment decisions at both AT&T and T-Mobile.

AT&T’s biggest claim regarding jobs was that the merger would lead to more jobs through better mobile broadband. However, the empirical link demonstrating that broadband increases employment—rather than simply being correlated with higher employment—has not been rigorously established, as Georgetown Professor John Mayo and I demonstrate in a paper published earlier this year.

As a result, even if DOJ were willing to consider effects external to the firms, industry, and direct consumers, the speculative nature of the claims would probably cause the DOJ to disregard them. As the Merger Guidelines note,

Efficiency claims will not be considered if they are vague, speculative, or otherwise cannot be verified by reasonable means. Projections of efficiencies may be viewed with skepticism, particularly when generated outside of the usual business planning process. (p.30)

The FCC is more sympathetic to the effect on jobs than DOJ, but the staff report made it clear that it expected the merger to result in a net loss of direct employment and was highly skeptical of the claims regarding the indirect effects on employment (see Section V(G), beginning at paragraph 259 for the jobs discussion).

In short, even setting aside the substantive questions of the net effects on competition, consumers, and broadband availability, the merger was always going to be an especially tough sell in the current economic and political climate.

To win the day, AT&T had to convince antitrust authorities that improved efficiencies by the merged firm would outweigh any resulting reduction in competition while simultaneously convincing politicians that the merger was good for jobs. But convincing DOJ that the company would increase employment risked signaling to DOJ that the merger was not about efficiency, and convincing the FCC that the merger was good for efficiency risked signaling to the FCC that the merger would not produce jobs.

Unable to thread that needle, AT&T’s strategy collapsed. Whether it will succeed with a new strategy remains to be seen.

Posted in Broadband, Competition and Antitrust, Wireless and Spectrum | No Comments »

Use the Market to Allocate Spectrum

Wednesday, November 2nd, 2011

TPI President Tom Lenard has a post on The Hill’s Congress Blog discussing the benefits of allocating spectrum via voluntary incentive auctions. Authorizing the FCC to hold auctions would not only make more spectrum available for the development of wireless broadband, but will also be a big step in creating a more efficient, market oriented spectrum regime.

Purchasers of spectrum through an FCC auction receive an “exclusive license” allowing them to use the spectrum for whatever purpose they want, so long as they don’t interfere with other licensees. Those uses can change as new technologies emerge—e.g., as subscription TV overtakes over-the-air TV. This is why this market-based system is flexible and can be expected to achieve an efficient allocation over time. Moreover, these quasi-property rights are necessary for providers to invest the tens of billions of dollars necessary for advanced wireless services.

Lenard also addresses calls to allocate a significant portion of spectrum freed-up by incentive auctions to unlicensed uses.

Under the unlicensed model, the FCC establishes rules—such as power limits for approved devices—under which any device and any user can operate. While this approach has yielded benefits—WiFi most notably—as with the legacy command-and-control model, there is no market mechanism in an unlicensed regime to move spectrum to its highest-valued uses. It is also extremely difficult to determine the opportunity cost of allocating spectrum to unlicensed uses, and no way—other than relative lobbying clout—to determine how much, if any, should be so allocated.

Lenard warns that the amount of spectrum obtained from incentive auctions that is set aside for unlicensed uses would have a direct impact on the amount of funds available for reducing the federal deficit.

The Congressional Budget Office estimates that incentive auctions would yield about $16 billion assuming proposals on the table to allocate spectrum and money to a public safety network are adopted. The net contribution of incentive auctions to deficit reduction would be reduced substantially if any significant part of the spectrum is not auctioned and instead is set aside for unlicensed uses.

Read the entire post on The Hill’s Congress Blog.

Posted in Broadband, Wireless and Spectrum | No Comments »

Where Does the Cable Industry think It’s Going? Empirical Observations from the 2010 and 2011 Cable Shows: More Programming and Consumer Interface Applications

Monday, June 20th, 2011

Many aspects of the 2011 Cable Show were the same as the previous year. Like last year, the show featured:

Lots of swag,
My inability to understand why some people wait in lines of 30 minutes or more to get a free backpack (do they really value their time that little?),
The need to stay far away from the booth with the purple dinosaur crooning about how he loves you and you love him except that clearly nobody loves him, probably because of his pathetic cries for attention,
Company slogans that make you hope they put more thought into their products, like Huawei’s “Innovation Through Technology” (which is kind of like “construction through equipment”),
Lots of white, grey, and black boxes packed with all kinds of cool stuff, but still just look like white, grey, and black boxes, and
Painful feet at the end of the day from too much walking and not enough sitting.

Despite those consistencies, some things were conspicuously (almost) absent this year. Most notably, the 2010 show floor was full of 3D television exhibits. This year a few booths had a 3D TV, but it was typically shoved into a corner, and nobody ever seemed to be watching it. Whether this means that companies that sell to cable have decided consumer demand for 3DTV is less than expected or simply decided nobody wanted to see that display again is hard to know.

Aside from the (thankfully, in my opinion) missing 3D experience, the plethora of inscrutable metal boxes makes it almost impossible to determine just from browsing the show floor what is new this year even if I were able to remember last year’s boxes.

Fortunately, the Cable Show categorizes exhibitors by what they do. These data make it possible to take an empirical look at where current industry participants think the cable industry is headed compared to what they thought last year.

The 2011 show featured 271 exhibitors, compared to 345 in 2010. On average, however, each exhibitor claimed to be promoting products in 4.0 product categories in 2011 compared to 2.7 product categories per exhibitor in 2010. Because exhibitors chose more categories and the number of categories remained roughly constant, the average share of firms in each category increased by almost one percentage point. Even recognizing that general increase, certain product categories showed large increases. The share of firms offering programming increased by 21 percentage points, consumer interface technologies (e.g., set-top boxes, program guides) increased by 8.4 percentage points, and wireless technologies increased by 8 percentage points. The biggest decrease was among exhibitors offering system management, by about two percentage points.

Data

Presumably to make it easier for attendees to find the products that interest them, the Cable Show website groups exhibitors into business categories: 130 categories in 2010 and 128 in 2011. Most categories appear in both years, but 2010 had 11 categories not represented in 2011, while 2011 had 9 categories not represented in 2010. Table 1 lists the categories in alphabetical order and the number of firms in each.

It is not possible to compare the numbers directly, however, due to changes in the number of exhibitors. As Table 1 shows, the number of exhibitors fell from 2010 to 2011 while each exhibitor identified itself, on average, as offering products in more categories.

Table 1: Cable Show Number of Exhibitors and Categories

	Number exhibitors	Average categories per exhibitor
2010	345	2.7
2011	271	4.0

Who’s at the show and how did that change from 2010 to 2011?

Figure 1 shows how well represented each category is at the show. In particular, it shows the share of exhibitors in each category, ordered from least to most in 2010. This approach only partially normalizes the data—it controls for the smaller show size but does not control for possible reasons why firms chose to include themselves in so many more categories in 2011 than they did in 2010. Nevertheless, the figure provides a good view of which categories are the most popular.

Figure 1

Figure 2 shows the percentage point change in the share of firms in each category. Because firms chose so many more categories in 2011, the average change is about 0.9 percentage points. Thus, we can assume that any change bigger than 0.9 means that the category is better represented while any change less than 0.9 means the category is less prevalent at the 2011 show.

The Figure shows that the share of exhibitors categorizing themselves as “programming” increased substantially, as did exhibitors focusing on end-user interfaces including set-top boxes, personal video recording, and interactive services. Mobile also increased from 2010. Systems management appeared to have the biggest decrease from the previous year.

Figure 2

Conclusions

The 2011 show had about 20 percent fewer exhibitors than did the 2010 show. Those exhibitors placed themselves into far more categories, on average, than they did the previous year.

Controlling for the smaller show size, programming was substantially better represented in 2011 than in 2010, as were all manner of devices and software targeted at end-user interfaces, and wireless. Systems management showed the biggest decrease.

These changes are broadly consistent with what we observe in the broader communications landscape: the power of content companies relative to distributors and the growing importance of wireless. Firms that sell to cable apparently see growing expected profits in those areas, as well. Whether they turn out to be correct remains to be seen.

Table 2: Total Number Exhibitors in Each Category

Category	2010	2011
Accounting	3	5
Advertising	20	23
Amplifiers	3	6
Antennas	1	2
Architectural/Drafting	1	0
Billing Systems	14	14
Broadband Service Provider	5	4
Brokerage	0	1
Business Services	13	11
Cable Drop Installation	5	1
Cable Information	3	1
Cable Modem Manufacturer	0	3
Cable Modem Reseller	0	1
Cable Modems	3	4
Cable Programming	57	77
Cable Residential Gateways	7	14
Cable Supplies	1	0
Cablecasting Equipment	1	2
Calibrators	1	0
Children’s Programming	6	4
CMTS	4	6
Coaxial Cable Connectors	4	1
Coaxial Drop Cable	4	2
Commercial Insertion Equipment	2	2
Competitive Intelligence	2	4
Computer Aided Dispatch	1	1
Computer Services	3	5
Computer Software	22	24
Conditional Access	3	12
Construction Materials & Equipment	1	1
Consultants	10	6
Customer Retention	4	10
Datacommunications Equipment	2	8
Datacommunications Services	1	5
Digital Cable Receiver	4	4
Digital Compression	4	2
Digital Headend Equipment	14	18
Digital Video	14	23
Distribution Equipment	8	4
DVB Product	2	7
EAS Systems	1	0
Educational Programming	7	19
Electronic Entertainment	3	3
Electronic Recycling	1	1
Emergency Warning Systems	1	1
Engineering & Construction Services	0	1
Enhanced Systems	2	2
Equipment Recovery	2	0
Equipment Repair	3	1
Fiber Optic Cable	6	4
Fiber Optic Distribution Systems	5	6
Fiber Optic Equipment	6	7
Field Services	4	5
Filters	2	0
Financial Services	0	2
Fleet Management Services	3	4
Games	6	3
HDTV	36	36
Headend Equipment	17	14
HFC Cable Demodulators	3	1
HFC Cable Modulators	3	1
High-Speed Internet Access	4	3
Home Information Services	0	2
Home Shopping Program/Services	3	4
Installation Services	4	1
Intelligent Networking	6	5
Interactive Databases	4	4
Interactive Programming	14	21
Interactive Services	24	34
International Supplier	3	4
Internet Service Provider	4	6
Internet TV Provider	7	14
IPTV	42	46
Market Research	1	2
Marketing	7	7
Microwave Equipment	3	3
MMDS Equipment	1	0
Mobile	17	26
Multi-Media Systems	5	7
Music Library	1	0
Music Programming/Services	5	3
Network Management Systems	16	20
New Networks	3	6
News Services	3	6
Non-Profit Organization	6	2
Operational Support Systems Solutions	10	13
Optical Networking	8	6
Outside Plant, Fiber & Cable Enclosures	1	1
Pay Cable Programming	8	27
Pay-Per-View Equipment	1	1
Pay-Per-View Service	2	9
Personal Video Recording (PVR)	6	17
Primary Interactive Programming	0	2
Program Guides	7	10
Program Navigation Systems	1	4
Program Networks	29	19
Promotional Programs	3	0
Publications	3	2
Religious Programming	5	3
Remote Controls	5	6
Research & Development	5	2
Return Path Products	4	3
Routing Systems	1	3
Satellite	10	11
Security Dealer Programs	0	1
Security Systems	3	4
Set Top Boxes	18	25
Signal Security	2	1
Sound Services/Audio Equipment	2	0
Splitters	4	2
Sports Programming	9	7
Status Monitoring	6	3
Studios	0	6
Subscriber Authorization Systems	7	8
Subscriber Collection Services	2	5
Subscriber Pre-Screening	1	1
Subscriber Promotion	3	5
System Auditing	1	1
System Management	16	7
Systems Integrator	11	12
Telecommunications Equipment	20	14
Telecommunications Services	24	23
Telemarketing Services	1	0
Telephony Services	4	5
Test Equipment	6	6
Tools	2	2
Training Services	1	2
tru2way	19	20
Trunk & Distribution Cable	3	2
Video on Demand	52	52
VOIP	17	16
Voting/Polling	4	4
Weather Forecast Services	2	3
Weather Programming	2	3
WiFi Products/Services	6	9
Wire and Cable	3	1
Wireless Networking	9	9
Wireless Telephony Systems	1	4
Workforce Management System	7	14

[1] For an overview of the focus of the 2010 show, see http://www.cablefax.com/cfp/just_in/Cable-Show-Takeaways_41407.html

Posted in Broadband, Media, Wireless and Spectrum | No Comments »

Where is the USF Really Going?

Friday, March 18th, 2011

Our own Scott Wallsten participated in a Heartland InfoTech and Telecom News podcast to discuss his recent paper, “The Universal Service Fund: What Do High-Cost Subsidies Subsidize?“ Just how much of of the funds are going to expenses not directly related to providing telecommunications service? According to Scott’s research, 59 cents of every dollar is used for administrative and overhead.

The podcast covers a brief description of the policy goals of the Universal Service Fund, issues with the way the program is funded and distributed, and the incentives resulting from the subsidies for firms to increase costs. In addition to discussing reforms underway to shift the program to subsidize broadband services, Scott also proposed specific reforms, including focusing on low-income assistance and distributing funds directly to consumers.

The podcast, hosted by Bruce Edward Walker, managing editor of Infotech & Telecom News, can be found on the Heartland Institute website.

Posted in Broadband, Uncategorized | No Comments »

Net Neutrality Regulation’s First Target: Small Wireless Competitors?

Friday, January 14th, 2011

Telecommunications regulations have a long history of protecting incumbents, often because incumbents are able to use the regulatory process to insulate themselves from competition. Unfortunately, we already see the seeds of that outcome in the response to a restrictive data plan offered by MetroPCS, but in this case due not to the actions of incumbents, but rather to the actions of some public interest groups.

MetroPCS, a regional mobile provider, offers a number of service plans with different voice and data combinations. Its cheapest plan is $40 per month and offers unlimited voice, messaging, and web access. The unlimited web access, however, does not allow access to certain sites like Netflix and Skype, but does allow access to YouTube. Access to the full Internet requires a more expensive plan.

Net neutrality advocates argue that the restricted plans violate at least the spirit, if not the letter, of the new regulations. The advocates may very well be correct, and that’s the problem.

MetroPCS is a small player in the mobile market, as the table from the FCC below demonstrates. It has no market power. Subscribers are not “locked in” when they sign up because they don’t have to sign contracts.

Source: FCC 14th Annual Report and Analysis of Competitive Market Conditions With Respect to Mobile Wireless, Including Commercial Mobile Services. 2010. P.9. Note that these are voice subscribers.

MetroPCS must believe that this combination of unlimited voice and unlimited use of a restricted set of web services will appeal to some people, and that walling off certain parts of the Internet will reduce its costs.

As an entrant in a high fixed-cost market, MetroPCS must find ways to differentiate itself from the larger carriers and reduce costs if it is to succeed. While it sounds appealing on its face to make the entire web accessible to MetroPCS subscribers, requiring MetroPCS to offer precisely the same services as larger carriers could leave it with no sustainable business model.

Allowing MetroPCS to experiment with business plans does not, however, mean that it should mislead consumers. Our perusal of its website and calls to customer service left us confused about which services, exactly, it excludes from the plan. Presumably MetroPCS uses a well-defined algorithm for deciding which sites it excludes. It should be able to explain that algorithm to potential subscribers, though any harm is limited due to the absence of contracts, meaning that consumers can switch plans or cancel if they find the restrictions too onerous.

Despite this (hopefully soon-to-be-rectified) transparency issue, this plan is a business model that one of the smallest players in the mobile industry hopes will help it to compete successfully against its much bigger rivals.

Prohibiting MetroPCS from offering its new plan would benefit the large, incumbent carriers, not consumers. Let MetroPCS experiment. It would be a shame if the Commission’s first enforcement action under the new regulation reduces wireless competition.

Posted in Broadband, Competition and Antitrust, Net Neutrality, Wireless and Spectrum | No Comments »

Peering or End of the Internet as we know It?

Tuesday, December 7th, 2010

One of the top tech stories in the headlines of late is the dispute between Comcast and Level 3. For those of you who were ignoring mass media last week: the dispute is over traffic handling agreements, apparently spurred by the announcement of a deal between Level 3 and Netflix to carry the latter’s streaming video.

Depending on who you listen to, the Comcast / Level 3 dispute is either a simple peering disagreement blown out of proportion or a gross violation of network neutrality principles and the beginning of the “tiered internet.” So, where does the truth lie? According to TPI’s Scott Wallsten, probably somewhere in the middle.

Scott shared his views on the Comcast / Level 3 dispute on the EEEI Spectrum podcast, “This Week in Technology,” hosted by Steven Cherry. In short, he identified the conflict as a dispute over who will pay for the increased cost resulting from the video traffic. He also explained that there is a possibility of incentives to erect barriers to competition in such a deal but that the DOJ can adequately deal with such concerns through antitrust enforcement. Scott also discusses his predictions on the outcome of the dispute and the future of the video delivery business. The podcast can be found here.

Posted in Broadband, Competition and Antitrust, Media, Net Neutrality | No Comments »

25,000 Reasons Why Broadband Price Data Matter

Tuesday, November 23rd, 2010

On Friday, TPI released Part 1 of an ongoing study of broadband prices in OECD countries. This part of our study uses extensive data and econometric tools to test the effects of different pricing tactics. Perhaps even more important than our results are our methods, which mark a significant step toward more mature understandings of “what we pay” for broadband in the United States and elsewhere.

Our study acknowledges that “broadband” refers to service that varies widely across multiple dimensions: Internet access is offered at different download and upload speeds, may be available with contracts of varying length, and may be bundled with complementary services such as voice, television, or both (the well-known “triple play”). In addition, “price” is more complicated than a simple monthly payment for such a service: many ISPs offer temporary promotional prices or other discounts, and impose other necessary charges such as start-up and equipment fees. All of these must be considered in order to reach a complete understanding of costs to consumers.

The FCC’s National Broadband Plan, in light of these complications, decries “a dearth of consistent, comprehensive, and detailed price data.” With this project we work towards filling that void. We assemble a dataset of about 25,000 residential and business broadband offerings from providers within the OECD from 2007-2009, keeping in mind the crucial nuances noted above.

With this improved data in hand, in Part 1 we econometrically examine several classes of broadband to decompose observed prices into their “determinants,” namely quality measures (e.g. download speed and limits on data), contract commitments, and fixed effects based on when and where the plan was offered.

Our findings (available in full here) are in some ways to be expected: bit caps—also referred to as data caps or metered billing—are associated with lower prices for all classes of users (on average), and our model finds that prices increase as bit cap size (i.e. the number of gigabytes allowed in a month) increases. Contract commitments are also associated with lower prices, though generally without statistical certainty. We do find an unexpected result regarding business consumers, who appear to pay more for longer contracts, other things being equal. In addition, we see that the price of triple play plans is significantly influenced by the number of television channels included.

This analysis is relevant to current debates, in which Internet Service Providers who have attempted to introduce bitcaps or metered billing have been met with fierce resistance. Our research shows that low- and mid-use consumers (and, in fact, the median U.S. user according to the FCC), could see savings from limited data use, at least if such plans were instituted in line with the average experience in other developed markets.

Posted in Broadband | No Comments »

One Economy

Friday, October 8th, 2010

I was delighted to be invited to One Economy’s 10th anniversary celebration at the Newseum yesterday evening. What this organization has accomplished in only ten years is truly remarkable. Rey Ramsey, who just stepped down as CEO, and the rest of the team there have good reason to be proud.

Posted in Broadband | No Comments »

Satellite Broadband: Line-of-Sight, Not Out of Mind

Wednesday, August 11th, 2010

The National Broadband Plan (NBP) estimates that firms would need subsidies totaling $23.5 billion to invest in the infrastructure necessary for universal broadband coverage in the United States (Exhibit 1-A, click to enlarge).[1]

The problem with the Plan’s estimate is that it includes only DSL and 4G wireless and omits broadband-over-satellite, which is by far the cheapest option for serving the most costly areas. Thus this “base case” grossly overstates the necessary costs of achieving 100% broadband availability.

The Broadband Plan notes that “while satellite is capable of delivering speeds that meet the National Broadband Availability Target, satellite capacity can meet only a small portion of broadband demand in unserved areas for the foreseeable future….[w]hile satellite can serve any given household, satellite capacity does not appear sufficient to serve every unserved household.” (p 137)

But satellite need not serve all “unserved” households. Serving only the highest-cost households would yield enormous savings.

The 250,000 housing units (0.2% of the U.S. total) with the highest costs account for $13.4 billion of the claimed investment gap (OBI Technical Paper No. 1, p 41). This eye-popping estimate reflects hypothetical decisions such as one to build out DSL to a single house in Orange County, NY for $366,126, which exceeds the county’s median home value, and to 30 dwellings in Kauai County, Hawaii at an average cost of $205,890 each, or about half of that county’s median.[2] Exhibit 3-H graphs the steep “hockey stick” costs implied by the base-case model.

In its technical supplement explaining the investment gap, the Broadband Team estimates that using satellite (with minor federal support) to serve those 250,000 homes would reduce the gap by at least $11.4 billion, or almost 50%.[3]

The authors have clearly considered the tremendous efficiencies afforded by satellite access, and acknowledge the adequacy of broadband-over-satellite at meeting the NBP requirement for connection quality.[4] Recommendation 8.13 urges the FCC to consider “alternative approaches, such as satellite broadband, for addressing the most costly areas of the country” (p 150). As such, the “broadband availability gap” as calculated should not be considered a strict endorsement of the technologies assumed (DSL and 4G), but rather a starting point for comparing the costs and benefits of alternative proposals.

To be sure, broadband-over-satellite has some drawbacks compared to other technologies. Existing satellite broadband plans offer slower download and upload speeds than most wireline or other wireless technologies, are more expensive, and exhibit higher latency due to extreme length of the “last mile” (more than 20,000 miles) to orbiting geostationary satellites. Speeds will become less of an issue with two new satellites expected to go into service in the next two years, both offering up to 10 Mbps downstream to homes; Hughes says it will even sell business plans of up to 25 Mbps.

The question then becomes whether it is worth spending an additional $12 billion to give those households a DSL or 4G wireless broadband option. To put that in perspective, consider that the U.S. government (NIH) budgets $50 million for discovery and development of drugs for “rare diseases”—defined as those affecting 200,000 or fewer people.[5] Many of those illnesses are deadly. Does it make sense to spend billions to allow 250,000 households the option of reducing delays in their Internet transmissions by half a second?

Apparently the Omnibus Broadband team didn’t think so. And thanks to the recent stimulus package, the USDA (the federal government’s longstanding supporter of rural broadband) is increasingly on board. It’s time we unite to make satellite broadband a priority in proposals for access in America’s most remote communities.

[1] The chart is actually taken from the corresponding technical supplement. In the Broadband Plan itself (See Section 8.1) the gap is referred to as the “broadband availability gap” and was pegged at $24.3 billion before the estimate was revised.

[2] Estimated costs of buildout reflect net cost (initial capex and ongoing support less revenue) with a 20-year time horizon and 11.25% discount rate (the NBP standard). Data on gap by county available at http://www.broadband.gov/maps/availability.htm

[3] The team reports the gap to be $10.1 billion—that is, reduced by a full $13.4 billion—when factoring in satellite “even with a potential buy-down” (p 41). It appears they have not factored in their estimate of a $800 million-$2 billion buy down, a program in which the government would subsidize subscriptions to existing (planned) satellite capacity to bring the expected high subscription charges to a level approaching terrestrial service (p 93-94). If necessitated, this cost would rightfully be subtracted from the savings, yielding the possible low of $11.4B reported above.

[4] That is, they acknowledge that satellite broadband will be sufficient for the “actual” 4 Mbps download, 1 Mbps upload minimum (NBP p 137).

[5] NIH requested this amount for the Therapeutic Rare and Neglected Diseases Initiative (see FY 2011 budget, p 5). The amount overstates the magnitude of spending per patient because the program also covers neglected diseases, from which very few Americans suffer, and because it includes more than 6,800 diseases classified as rare, which together afflict an estimated 25-30 million Americans.

Tags: fcc, National Broadband Plan, rural broadband
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