Private solutions to broadband adoption: an economic analysis.

• Author: Beard, T. Randolph

TABLE OF CONTENTS I. INTRODUCTION 2 II. UNDERSTANDING THE BARRIERS TO BROADBAND ADOPTION 5 A. Demand-Side Barriers 5 B. Supply-Side Barriers 7 C. Social Value 8 D. Global Adoption Data 9 III. A MODEL OF BROADBAND ADOPTION 11 A. Choosing the Number of Quality Tiers 13 B. Awareness, Literacy, and Promotion 16 C. Summary 17 IV. ADDITIONAL WAYS "FREE-BUT-LIMITED" ACCESS ENCOURAGES ADOPTION 18 A. Increasing Adoption by Ensuring Continuous Access 18 B. Adoption Programs as Connectivity Insurance 19 V. CONCLUSION 22 I. INTRODUCTION

Broadband Internet service is seen as critical to economic and social progress, yet broadband is not ubiquitously available and, even where available, the adoption rate is often seen as being too low. Consequently, expanding broadband deployment and adoption are top policy goals in nearly every industrialized nation as well as in many developing regions. (1) It is not proving to be an easy task. Faced with many impediments of both a public and private nature, progress on improving availability and adoption has proven unsatisfactory, resulting in what is often described as a "digital divide" separating the information "haves" from the "have nots." (2) In the United States, for example, broadband adoption appears to have plateaued even while systematic differences in adoption rates exist among subpopulations. The global digital divide is even more pronounced. (3) In less-developed economies, the hurdles to availability and adoption are especially high and Internet adoption rates remain very low.

Despite differences in the economic fundamentals of nations, the barriers to deployment and adoption are categorically of the same underlying nature. On the supply side, the lack of access to broadband is mostly a financial issue driven by the high infrastructure costs of network deployment relative to the revenue potential. (4) On the demand side, research consistently points to the related concepts of awareness and digital literacy, as well as affordability. (5) An effective policy for expanding broadband adoption, therefore, seemingly must expose consumers to broadband service, do so at very low prices (or even free), and yet secure sufficient revenue for network deployment, maintenance, and upgrades. Thus far, despite much effort and discussion, no government has found an effective solution to this complex problem.

Private companies have begun their own search for methods to increase adoption, perhaps driven in part by altruism and in part by the pursuit of income. In the United States, for instance, Comcast's Internet Essentials program provides a subsidized 10-Mbps connection and low-cost computers to qualified lower-income households. (6) While privately funded, the program is connecting more households to the Internet than multibillion dollars efforts by the U.S. federal government. (7) Similarly, Facebook's Free Basics program helps to address the awareness and affordability barriers to adoption by offering consumers free access to basic online services such as communication tools, health services, educational information, and job tools. (8) Free Basics is available in more than fifty (mostly developing) countries and municipalities, and Facebook's connectivity efforts, including Free Basics, have successfully brought more than twenty-five million people online. (9)

Despite the obvious success of these programs at increasing adoption, some questions are being asked about the propriety of the basic connectivity offered by such programs. (10) These concerns often appear to be inspired by the belief that a program must provide a full Internet experience to be socially valuable. (11) Thus far, such claims are based on ideology alone and are bereft of any serious economic analysis.

In this paper, we take a more positive approach to the issue, using economic theory to demonstrate that these price-quality variations are economically sensible--if not necessary--to address the awareness, digital literacy and affordability barriers to broadband adoption. At the center of our analysis is the economic concept of the separating equilibrium, which requires that the "quality" of a free service be sufficiently adjusted relative to market-priced services to make it privately profitable. These programs obviously increase adoption, but we also show that such programs, due to network effects, both increase consumer surplus and restrain the market price of full Internet connectivity. If the user experience leads to the adoption of market-priced services, then the program also leads to increased income for providers, thereby providing motivation to providers to implement the program and increase infrastructure investment.

An additional benefit of such "free-but-limited" programs is that they can increase adoption by "smoothing" Internet consumption over time, increasing the present value of use and thereby increasing incentives for nonusers to make a commitment to the technology. For instance, if connectivity may be interrupted in the future, then non-users may be reluctant to commit to Internet-based communications modalities (e.g., email or Skype). Also, such programs may serve as a type of "connectivity insurance" by providing basic Internet connectivity to individuals or households during periods of financial stress. To illustrate how such programs can play this role, we provide empirical evidence demonstrating that the quantity of subscribers to the Lifeline program in the United States, which provides subsidies to consumers for telecommunications services, increases during periods of financial distress. (12) We expect that the value of "connectivity insurance" will be greater for private programs since they often have limited or no qualifications for subscription. Free Basics, for instance, is available through participating operators to all users without meeting or demonstrating income or other qualifications. (13) Also, government-funded programs may be caught up in political disputes about government spending along with fraud and abuse, thereby limiting their effectiveness and sustainability. (14) Privately provided programs are largely free from such concerns.

2. UNDERSTANDING THE BARRIERS TO BROADBAND ADOPTION

   Formulating a policy to solve a particular problem requires knowledge of the problem to be solved. Here, the quandary is a perceived shortfall in broadband adoption, which results from both demand-side and supply-side factors. Research suggests that the key barriers to adoption are the related concepts of (a) awareness; (b) digital literacy; and (c) affordability. (15) That is, some individuals are simply not aware of the benefits of broadband or have trouble using the technology, and others simply cannot afford to pay market prices for either the service or equipment required for connectivity. On the supply side, the barriers are financial in nature. (16) Networks are expensive to deploy, and in some instances the revenue potential is inadequate to justify the necessary investments. (17)

   A. Demand-Side Barriers

   Survey evidence indicates that it is demand-side factors that are most responsible for the failure of individuals to adopt broadband, at least in the United States where broadband is widely-available. Table 1 summarizes some findings from a 2013 survey by the Pew Research Center. (18) Awareness and digital literacy are the dominant explanations for the failure to adopt broadband. Affordability was also a determining factor, though much less significant than either relevance or usability, though we suspect affordability is more relevant in developing economies. (19) Also, affordability was mostly related to the cost of a computer rather than the broadband service. (20) Availability was not found to be one of the more significant explanations, though such responses are obviously impacted by the widespread availability of broadband services in the United States (a situation not common across all countries). (21)

   In economics terminology, the awareness issue implies that broadband is an experience good. An experience good is a product for which the value is difficult to ascertain prior to its consumption. (22) Experience goods are very common. Purveyors of such products often craft ways for potential customers to "taste" the product prior to purchase: computer software vendors offer trial versions of their software, wine distributors hold tastings, movie studios provide trailers, and record companies offer sound clips. It seems plain enough that a lack of awareness of the value of broadband can only be resolved by allowing customers to experience broadband connectivity somehow. This experience must also address affordability concerns, which can be pronounced in certain populations. (23) In many cases, using broadband also requires knowledge of how to operate a computer or a smartphone, and technology poses challenges for some users. For instance, below-average adoption by older adults is based in part on the complexity of operating the technology. (24) Illiteracy is also a barrier to adoption. (25) Again, getting some experience with the Internet, preferably at low cost, is the solution to such concerns. (26)

   B. Supply-Side Barriers

   On the supply side, availability is primarily a financial issue. Broadband networks are expensive to deploy, maintain, and upgrade. An analysis prepared by FCC staff as part of the United States' National Broadband Plan sums the issue up concisely: "[p]rivate capital will only be available to fund investments in broadband networks where it is possible to earn returns in excess of the cost of capital. In short, only profitable networks will attract the investment required." (27) In areas lacking access to broadband, the National Broadband Plan explains that "[b]ecause service providers in these areas cannot earn enough revenue to cover the costs of deploying and operating broadband networks, including expected returns on capital, there is no...