Bandwidth for the People

Policy Review, Oct/Nov 2004 by Crandall, Robert, Hahn, Robert, Litan, Robert, Wallsten, Scott

HIGH-SPEED ACCESS to the Internet, or "broad-band," could be a tremendous boon to economic growth. In March 2,004, the Bush administration made rapid deployment of broadband a national priority. The president asserted, "We ought to have universal, affordable access to broadband technology by the year 1007." As state and national policies develop in response to this vision, it is important for policymakers to understand the costs and benefits of different approaches aimed at promoting the diffusion of higher-speed Internet connections.

Over the past few years, the broadband market has grown dramatically: The number of subscribers has increased by nearly 300 percent since 2000, prices have declined, and the speed of some services has increased.

Nonetheless, there is room for further growth and improvement. Public policies can greatly affect how this market develops - for better or worse. The choices policymakers have before them include taxes and subsidies, incentives and price controls.

Policies should focus on the incentives for broadband suppliers to invest in network upgrades that extend service and improve quality and speed. State and federal regulators can help increase broadband penetration by eliminating any regulation of wholesale and retail prices and any policies that deter entry into these markets. Subsidies, meanwhile, should not generally be used to promote "universal" broadband service. They are likely to hurt the average consumer. If subsidies are required for political reasons, they should be offered only as one-time inducements to extend broadband into underserved areas. Likewise, a tax on access to broadband or on services delivered over broadband, such as Internet telephony, is likely to slow the spread of broadband and is also an economically wasteful way of raising revenues. Internet access or applications, therefore, should not be taxed. In short, the right set of policies will foster competition among suppliers and lower barriers to entry to the benefit of consumers in terms of both access and prices. Poor policy choices, on the other hand, though intended to improve access to broadband, could have the just the opposite effect.

Broadband's economic potential

BROADBAND INTERNET ACCESS could contribute substantially to economic growth. Consumers benefit from new ways to acquire information, enjoy audio and video entertainment, monitor remote locations, receive medical care, and buy items ranging from books to cars. A study in 2001 estimated that universal broadband adoption could yield annual consumer benefits of $300 billion.1 Businesses, meanwhile, may benefit from new opportunities to reduce their costs and to reach consumers with products and services. By one estimate, the Internet could reduce business costs by $125 billion to $250 billion annually while also increasing competition by making it easier for consumers to compare prices and services. Achieving these gains depends on many factors, including the penetration and rollout speed of broadband Internet access.

While there is general agreement that broadband could stimulate economic growth, there is less consensus about whether consumers are getting access to this technology fast enough. Americans receive broadband Internet access primarily through coaxial cable by cable television systems and digital subscriber lines (DSL) by traditional telephone networks. High-speed access is also increasingly available over new wireless technologies, including WiFi, mobile cellular networks, and satellite services. The popularity of broadband has increased over the past few years as prices have come down, as the number of applications that use it has increased, and as the technology has become available to ever greater numbers of homes. By the end of 2003, the FCC estimates, there were more than 28 million subscribers to some form of broadband Internet service.

Some broadband enthusiasts, such as former Federal Communications Commission chairman Reed Hundt, believe that U.S. broadband adoption and speed are lagging and that government should play a more active role both in promoting universal penetration and in increasing the speed of available broadband connections. Although broadband penetration in the U.S. is increasing rapidly, consumers in some other countries have adopted broadband even more quickly. According to OECD estimates, as of June 2003, the U.S. had about eight broadband connections per 100 people, behind Korea with 23 connections per hundred people, Canada with 13, Iceland and Denmark with 11, Belgium with 10, and the Netherlands, Sweden, Switzerland and Japan each with about nine. Moreover, average available download speeds are faster in some countries than in the U.S.

Others, however, contend that there is little analytical basis to conclude that the U.S. has a "broadband problem." Consumers are signing up for broadband services at record rates. The number of broadband subscribers increased from 400,000 at the end of 1998 to more than 23 million by June 2003 to more than 28 million by the end of 2003. This growth rate compares favorably to the speed with which other new landmark consumer technologies and services have been adopted.