Sweetbriar Broadband

P ROPELLING THE B ROADBAND
B ANDWAGON
JOHN HARING, JEFFREY H. ROHLFS &

HARRY M. SHOOSHAN*
PREPARED FOR
UNITED KINGDOM OFFICE
OF TELECOMMUNICATIONS
AND
OFFICE OF THE E-ENVOY
PUBLISHED 4 SEPTEMBER, 2002
*
John Haring, Jeffrey H. Rohlfs and Harry M. Shooshan are principals in Strategic Policy Research. Dr.
Haring formerly served as Chief Economist of the Federal Communications Commission and as Chief of
the Commission’s Office of Plans & Policy. Dr. Rohlfs formerly served as Head of Economic Modeling
Research at Bell Laboratories. Mr. Shooshan formerly served as Chief Counsel of what is now the
Subcommittee on Telecommunications and the Internet of the U.S. House of Representatives.
7979 OLD GEORGETOWN ROAD 7TH FLOOR BETHESDA, MARYLAND USA 20814-2429
+1.301.718.0111 FAX–+1.301.215.4033 EMAIL–spri-info@spri.com WEBSITE: www.spri.com
P ROPELLING THE B ROADBAND B ANDWAGON
EXECUTIVE SUMMARY
The increasingly widespread diffusion of information technology has played a significant
role in bolstering economic productivity, thus enabling government authorities in the
world’s leading economies to pursue aggressive macroeconomic policies promoting rapid
economic growth and high employment, consistent with low inflation. Broadband is the
latest manifestation of technical advance in communications technology, and
governments everywhere are keenly interested in the progress of broadband, perceiving it
as a significant harbinger and bellwether of future economic prospects.
This report offers an economic assessment of basic conditions of supply and demand
influencing the pace of broadband deployment and take-up in the United Kingdom and
elsewhere. It concludes that broadband is today primarily demand-constrained rather
than supply-constrained. Current broadband technologies (primarily DSL and cable-
modem) offer transmission speeds adequate to meet requirements for most of the
potential broadband applications now contemplated for the medium-term future.
Compared to the United States, the U.K. regulatory regime has displayed greater
sensitivity to broadband network investment incentive issues and has stolen a significant
march in terms of spectrum-based broadband developments, having already auctioned 3G
operating licenses the U.S. is still seeking to identify. There may exist a role for
governmental subsidy of broadband network deployments in rural and other areas, where
private investment cannot be economically justified but public investment may
nevertheless be deemed to be economical.
In analyzing the prospective demand for broadband, the report posits that broadband
Internet access is potentially subject to what economists call “bandwagon effects.”
Bandwagon effects are benefits that a person enjoys as a result of others’ consuming the
same product or service that he or she does. There are two types of bandwagon effects
relevant to broadband take-up: network externalities and complementary bandwagon
effects. Network externalities are benefits that users derive from being able to use a
particular service to communicate with other persons. Complementary bandwagon
effects refer to the increased supply of complementary products (service applications) as
the user set expands.
The use of broadband communications to enhance narrowband Internet applications is
potentially subject to both network externalities and complementary bandwagon effects:
both the value and supply of broadband applications are likely enhanced as the broadband
user set expands. Bandwagon effects are potentially quite important because they set the
stage for dynamic network growth—“positive feedback” and service “takeoff” in the
terminology of bandwagon economics. Demand is a “value-for-money” proposition, but
given bandwagon effects, value is also, simultaneously, a demand proposition. Thus,
increases in the demand for broadband increase the value of broadband (as the user set
expands), but increases in the value of broadband also increase the demand, resulting in
creation of a positive feedback loop that could conceivably lead to higher and higher
demand and increasing economic benefits.
Broadband is currently a “niche” service that has not achieved “critical mass” sufficient
to induce this kind of positive feedback and service takeoff. The service’s current
applications and costs have as yet failed to produce spontaneous creation of new demand-
increasing applications on a significant scale. Thus, high-definition web pages are not in
widespread use, in part, because the set of users is small, while the set of users is small,
in part, because of the limited availability of high-definition web pages. Increases in
supply and demand may eventually solve the problem by inducing sufficient
subscribership to produce feedback in the supply of complementary applications.
Downloading of music and video files is often cited as the “killer application” for
broadband that will produce critical mass, positive feedback and service takeoff, but
development of these applications is currently being frustrated by the difficulty and
inability therefore to resolve digital copyright problems. This is a traditional area for
government involvement, and performance rights are, of course, established both for the
benefit of the consuming public as well as the creators of intellectual property.
In addition to bandwagon effects, there are a variety of other broadband consumption
externality effects that are potentially “efficiency-relevant,” i.e., that could conceivably
warrant efficiency-enhancing government intervention to “internalize” them. Increased
use of broadband communications capabilities may permit greater conservation of scarce
energy resources, thereby fomenting oil cartel pricing instability and lowering expected
future prices, as well as affording a potential means of pollution abatement, congestion
relief and economizing on the state’s most precious resource, its citizens’ time.
Whether any of these potential rationales translate into actual justification for specific
interventions necessarily rests on identification of specific programmatic interventions
and their putative payoffs, as well as close assessment of any associated costs, including
the value of foregone benefits from alternative expenditures of scarce government
resources. One difficulty confronting systematic efforts to assess costs and benefits of
various potential interventions is the lack of relevant experience with broadband and the
consequent paucity of relevant empirical data to inform decision-making.
There may well exist an economic case for governmental efforts to promote broadband to
address the economic externalities we have identified. But to make that case, in the first
instance, requires a good deal of experiment, observation, data gathering and
interpretation. In this regard, given the apparent efficiency benefits of using advanced
communications capabilities to deliver government services, the government can likely
productively use its own experiences to inform this type of empirical research. As the
report describes in considerable detail, this is precisely the research methodology that
informs the latest and most credible estimates of productivity impacts from more
widespread diffusion of communications technology throughout the market economy,
and that was adopted at the initial behest of no less an economic authority than Alan
Greenspan, the Chairman of the U.S. Federal Reserve Board (Central Bank).
“AND NOW…BUT FIRST”
Aristophanes/Burt Shevelove, The Frogs

PROPELLING THE BROADBAND

BANDWAGON
TABLE OF CONTENTS
1. INTRODUCTION ..............................................................................................1
2. ANALYTICAL FRAMEWORK ..........................................................................3
3. AN OVERVIEW ................................................................................................5
4. BROADBAND APPLICATIONS AND DEMAND ...........................................15
4.1. Enhancements to Current Internet Applications.................................................. 16
4.2. Advanced Web Pages............................................................................................... 19
4.3. Bandwagon Demand................................................................................................ 23
4.4. Downloading of Music ............................................................................................. 25
4.5. Downloading of Video Entertainment Programming .......................................... 29
4.6. Copyright Issues and the Bandwagon.................................................................... 30
4.7. Two-Way Video Communications.......................................................................... 30
4.8. Online Gaming ......................................................................................................... 31
5. BROADBAND AND PRODUCTIVITY ............................................................32
5.1. Current E-Commerce Trends................................................................................. 34
5.2. The Ability of Broadband to Enhance E-Commerce............................................ 40
6. BROADBAND PENETRATION......................................................................41
i
6.1. Broadband Penetration by Technology ................................................................. 45
6.2. Geographic Distribution.......................................................................................... 46
6.3. Prices of Broadband Internet Access ..................................................................... 48
7. ADOPTION RATES OF COMPARATOR PRODUCTS..................................51
7.1. Non-Bandwagon Products....................................................................................... 52

7.1.1. Cable Television ................................................................................................. 52
7.1.2. Satellite Broadcasting ......................................................................................... 54
7.2. Bandwagon Products ............................................................................................... 54

7.2.1. TV/Broadcasting: color, HDTV.......................................................................... 54
7.2.2. VCR/Videocassettes ........................................................................................... 56
7.2.3. Mobile Telephony............................................................................................... 56
7.2.4. Home PCs ........................................................................................................... 57
7.2.5. CD Players .......................................................................................................... 59
8. DRIVERS OF TECHNOLOGY ADOPTION ....................................................59
8.1. Supply-Side Drivers ................................................................................................. 60

8.1.1. Productive Capacity ............................................................................................ 60
8.1.2. Producer Reputation............................................................................................ 60
8.1.3. Industry Concentration........................................................................................ 61
8.1.4. Vertical Integration ............................................................................................. 61
8.1.5. Promotional Pricing ............................................................................................ 61
8.1.6. Regulation ........................................................................................................... 61
8.1.7. Copyright ............................................................................................................ 62
8.2. Demand-Side Drivers............................................................................................... 62

8.2.1. Bandwagon Effects ............................................................................................. 62
8.2.2. Net Benefit from Innovation............................................................................... 63
8.2.3. Ease of Innovation .............................................................................................. 63
9. ”COMPARATOR” EXPERIENCE REGARDING SUPPLY DRIVERS ...........63
9.1. Productive Capacity................................................................................................. 63

9.1.2. Implications for Broadband ................................................................................ 64
9.2. Producer Reputation ............................................................................................... 66

9.3. Industry Concentration ........................................................................................... 67
ii
9.4. Vertical Integration ................................................................................................. 67

9.4.1. Black-and-White Television ............................................................................... 67
9.4.2. Color Television.................................................................................................. 68
9.5. Promotional Pricing................................................................................................. 69

9.5.2. DBS..................................................................................................................... 69
9.6. Regulation................................................................................................................. 70
9.7. Copyright .................................................................................................................. 70

9.7.2. Digital Audio Tape Players................................................................................. 71
10. “COMPARATOR” EXPERIENCE REGARDING DEMAND DRIVERS........71
10.1. Bandwagon Effects................................................................................................. 71

10.1.1. Color Television................................................................................................ 71
10.1.2. Videocassette Recorders ................................................................................... 72
10.1.3. Mobile Telephony............................................................................................. 72
10.1.4. Compact-Disc Players....................................................................................... 72
10.1.5. Implications for Broadband .............................................................................. 72
10.2. Net Benefit from Innovation ................................................................................. 73

10.2.1. Color Television................................................................................................ 74
10.2.2. Mobile Telephony............................................................................................. 74
10.3. Ease of Innovation.................................................................................................. 77

11. SUMMARY OF IMPLICATIONS OF DRIVER ANALYSIS FOR

BROADBAND INTERNET ACCESS..................................................................77
11.1. Supply-Side Drivers ............................................................................................... 78
11.2. Demand-Side Drivers............................................................................................. 78
iii
12. POLICY IMPLICATIONS: SUPPLY-SIDE ...................................................79
12.1. Introduction............................................................................................................ 79
12.2. Price Regulation ..................................................................................................... 80
12.3. Access Regulation................................................................................................... 83
12.4. Two Relevant Additional Considerations............................................................ 86
12.5. Technology “Retardation” .................................................................................... 88
12.6. Conclusion .............................................................................................................. 91
13. POLICY IMPLICATIONS: DEMAND-SIDE...................................................92
13.1. Introduction............................................................................................................ 92
13.2. Conventional Externality Analysis....................................................................... 93

13.2.1. Energy ............................................................................................................... 94
13.2.2. Traffic Congestion ............................................................................................ 95
13.2.3. Circuit-Switched Network Congestion ............................................................. 96
13.2.4. Import................................................................................................................ 97
13.3. Realizing Bandwagon Effects: The Case for “Pump-Priming”........................ 98
13.4. Increasing Supplies of Complementary Products............................................. 101

13.4.1. Supplies of Complementary Products............................................................. 101
13.4.2. Copyright Issues.............................................................................................. 103
13.4.3. Parameters Defining a Solution ...................................................................... 105
13.5. Possible Solutions ................................................................................................. 107
13.6. Conclusion ............................................................................................................ 109
14. SUMMARY AND PRINCIPAL CONCLUSIONS .........................................109
iv
1. INTRODUCTION
The government of the United Kingdom (“U.K.”) has adopted what might be
characterized as a “cross-bridges-as-they-are-come-to” policy for development of
broadband communications capabilities. In our view, this strikes as an economically
sensible approach as it avoids joining unnecessary battles and attendant waste of time and
energy, not to mention other scarce resources; moreover, it avoids the difficult/impossible
task of identifying all possible relevant contingencies in advance and specifying suitable
adaptations for each contingency. In an operating context in which there is rapid change
and uncertainty (as, certainly, in the instant context), employing an adaptive, sequential
decision process to policymaking affords a means to economize on scarce public- and
private-sector decision-making resources including production of decision-relevant
information. Governmental efforts can be efficiently focused where they are most
needed and costs of achieving policy objectives minimized as a result.
The government in the U.K. has assumed a leadership role (to a much greater extent than,
for example, the United States (“U.S.”) government has thus far ventured)1 in pointing up
the critically important role the information technology revolution now plays in driving
economic growth and productivity enhancement, and has proposed a variety of measures
to stimulate competition and reduce barriers to supply and demand of new services.2
These measures do not entail “heavy-duty” government intervention in individual
markets to ensure widespread and thoroughgoing diffusion of the technology throughout
the economy. Broadband is the “new new thing” (to borrow the title of Michael Lewis’
recent, best-selling book on related topics)3 and with the broadband market in a relatively
1
In the U.S., those with a private stake in the successful diffusion of broadband technology are very
actively proselytizing to get the U.S. authorities to put themselves “on record” and “out front” on the
importance of broadband in the forthright manner in which the U.K. authorities have already done. Those
efforts are apparently bearing some fruit: In a recent, widely publicized speech before the leading high-
tech business executives, Senator Joseph Lieberman (the former Democratic vice-presidential candidate
and a likely future Presidential candidate) said that “developing a national broadband strategy must be
established as a national economic priority.” He outlined plans for a government white paper and
legislation “to help formulate a comprehensive approach to bring on the broadband boom”:
To harness the power of the high-speed Internet, policymakers must first gain a better
understanding of the existing barriers to the development, demand, and deployment of broadband
technology. We need to identify the challenges facing both the public and private sectors and to
make the case for a comprehensive approach.
See “Bringing on the Broadband Boom” Remarks Prepared for Presentation at the Tech-Net Executive
Conference, Washington D.C. (March 7, 2002).
2
See Office of the e-Envoy, UK Online: The Broadband Future, February 2001, www.e-envoy.gov.uk.
3
See The New New Thing: A Silicon Valley Story (Penguin: 2001).
1
nascent state it is too early to determine whether natural market evolution will lead to
widespread service provision or a “broadband divide” with diffusion along (troubling)
socioeconomic demographic dimensions. In consequence, the current U.K. strategy is to
rely initially primarily on market forces (suitably conditioned to ensure competition and
an operating environment optimally conducive to market development) closely monitored
by relevant government authorities for any evidence of market failures that may require
governmental remedial action.
This strategy obviously depends on close and continuing market surveillance and analysis
to inform the government’s decision processes. The research contained in this report thus
represents an attempt to answer a set of highly topical questions regarding the current
economic status of the broadband market. Ours necessarily represents a “snapshot” of a
continuously changing and evolving operating environment as of the present moment.
Broadband is an area where market conditions and the questions that need to be
addressed by the relevant authorities are virtually guaranteed not to remain the same for
very long. Nevertheless, we think our analysis properly frames the currently most
relevant issues and accurately poses the most relevant economic tradeoffs.
We have often offered, and very much appreciate our U.K. public-sector clients’
willingness to allow us to offer, our “two cents” on key issues on which reasonable
persons may well hold different positions. While we hope our clients value our
opinions—having paid for them, they are certainly entitled to them—those opinions are
our own and do not necessarily reflect those of either Oftel or the Office of the e-Envoy.
What we hope we have supplied is a useful set of tools for thinking about this very
compelling subject and deciding what to do.
The “Terms of Reference” for this research pose the following key questions:
What are the key factors/drivers that influence the roll-out and diffusion of
broadband drawing from historical comparisons, if any, with similar
technologies and taking into account the particular features of broadband
technology?
In what areas, if any, is the market unlikely to meet consumer demands?
Is government involvement likely to overcome these failures?
What are the policy options for addressing these failures?
What policies are likely to be most effective based on impact, pros/cons,
tradeoffs, and practicality of implementation?
What is the evidence of the macroeconomic impact in terms of
productivity and long-term growth for broadband related technologies?
We address the last question in the introductory “overview” (Section 3) that follows and
in one of the introductory sections (Section 5) that prepares the ground for our discussion
of technology drivers in Sections 8-11. Section 4 discusses various broadband
2
applications and demand; Section 6 describes broadband penetration along different

dimensions; Section 7 examines the adoption rates of a set of illustrative comparator
products. Supply-side and demand-side policy implications are discussed in Sections 12
and 13, respectively. Section 14 summarizes our principal conclusions.
2. ANALYTICAL FRAMEWORK
This report deploys two sets of analytical tools from the “economist’s toolkit”4 to analyze
issues related to the take-up of broadband communications capabilities on a widespread
basis: diffusion analysis and bandwagon theory. It employs these economic analytical
frameworks to analyze a selected set of previous communications innovations with a
view toward illustrating both “how the world works” and extracting some lessons and
insights about our experience heretofore as well as the future prospects of broadband
technology.
We later describe both the relevant economic theory and the specific set of earlier
communications innovations analyzed in considerable detail. It may be useful, by way of
introduction and rationalization, to spend a little time at the outset talking about the
specific methodology and methods we have adopted to study broadband and the reasons
we have done so.
In economic terms, “methodology” provides the critical perspective/analytical criteria for
evaluating the comparative persuasiveness of different explanations of particular
phenomena, while “methods” are the various means utilized to implement measurements
of the extent to which specific conditions or criteria deemed methodologically relevant
exist or are satisfied in particular circumstances.
The economic analysis of technology diffusion focuses on the ways in which basic
economic conditions of supply and demand influence the rate at which new technologies
spread through the economy. It identifies a variety of specific influences that constrain or
propel the pace at which new technologies are adopted by relevant economic actors.
Supply-side influences include such factors as the amount of productive capacity and
input requirements in terms of specialized resources, the nature and specific identity of
relevant government regulations, and the degree of industry structural concentration and
vertical integration. Demand-side influences include such factors as ease and net benefits
of adoption and the existence of bandwagon and other types of consumption or network
externalities.
4
See Milton Friedman, “The Methodology of Positive Economics,” reprinted in Essays in Positive
Economics (Chicago & London: 1953); and John Neville Keynes, The Scope and Method of Political
Economy (London: 1891).
3
Bandwagon theory is a relatively new branch of economic analysis that analyzes various
kinds of “neighborhood” effects that occur when individual consumer demands are
interdependent. This may occur because demands are directly interdependent, as in the
case of “network externalities,” which involve increases in the utility of consumption
stemming directly from consumption by others (so the benefits one person derives from,
say, subscription to a particular network or service may increase as the number of other
subscribers increases).
Alternatively, and we think, particularly importantly, in the case of broadband
communications, this may occur because individual consumer demands are indirectly
interdependent, as in the case of so-called “complementary bandwagon effects.” These
effects derive from increases in the supplies of complementary products and services that
occur as the relevant user set expands (so the benefits one person might derive from
network subscription may increase as new, complementary network applications are
developed in response to an increase in the overall number of network subscribers). The
potential (and necessary conditions) for “the bandwagon to get rolling” in this manner is
a major theme of this study—i.e., the prospect for positive demand feedback developing
between broadband subscribership and applications and the various restraints and
incentives operating thereupon.
The perspectives afforded by these economic theories supply the basic methodological
framework for the analysis undertaken in this study. They provide the basic set of
reasons why we look at what we look at, as opposed to perhaps other interesting aspects
of the phenomena under analysis. From an economic perspective, “supply and demand”
is what “matters” and so it is naturally the basic conditions affecting broadband supply
and demand upon which we focus our primary attention in attempting to fathom the
economic forces impinging upon broadband take-up.
Concerning method, we have attempted to “concretize” and illustrate our economic
analysis by reference to analogous influencing factors operating in several earlier
contexts involving diffusion of various communications innovations. While some of
these may be more or less closely similar to broadband,5 the nature of the quest here is
not to find “the best” or “closest” analogy (viz., a “perfect” or “perfectly analogous”
comparator), but rather to convince the reader of our economic framework’s relevance
and value for understanding what factors determine the pace of technology adoption and
how they operate.
5
Thus, for example, the diffusion of color television appears to parallel fairly closely that of broadband (at
least to date) in that color television was adopted by consumers slowly until receiver set prices declined
from high levels. As set prices fell and penetration rose, additional color programming was transmitted
further stimulating demand. The amount of color programming initially transmitted in the U.S. did not
suffice “to get the bandwagon rolling” given the initially high set prices prevailing. Similarly, our analysis
suggests that the current broadband “value-for-money” proposition has not, as yet, sufficed to get the
broadband bandwagon rolling.
4
In the analytically germane sense, all of the comparators were conceived and selected as
relevant. The idea is not that broadband is like color television but not like cable
television (although there certainly is a sense in which that may coherently be said to be
so); rather the idea is to convey an understanding of how the combination of these
analytical frames (i.e., diffusion and bandwagon theory) explain or account for
differences and similarities amongst the various comparator innovations. The objective is
to afford the reader a good sense of the “the way the world works,” at least by these
(economic) lights, and grounds for critical assessment about the specific character of this
way of comprehending unfolding reality.6
As we shall presently discuss, some analysts have sought to point to experience with
previous communications innovations as a basis for (perhaps not unreasonably)
characterizing the speed or lack thereof with which broadband has been developing. We
contrast and compare with earlier experience to a different end: our purpose is simply to
highlight the supply and demand factors that are, generally speaking, important in
influencing the pace of technology adoption with a view towards explanation and
possible policy prescription. Notwithstanding our selected comparators’ common
identity as “communications” innovations, there remains considerable variability in their
developmental experiences—thus, for example, bandwagon effects loom notably larger
for some than others. For some (VCRs), initial “standalone” applications sufficed to
induce “positive feedback” and market takeoff; for others (videophone) the initial
standalone applications did not suffice.
3. AN OVERVIEW
The phenomenal worldwide interest in “broadband,” manifested in an almost unprece-

dented “media hype” in the general, trade and financial press as well as the electronic
media (including the Internet itself), reflects the significant jump in economic
productivity growth the U.S. experienced from 1995-to-2000.7 This jump, now fairly
conclusively attributed to the spread of increasingly economical and powerful
information technology throughout the economy (and the service sector, in particular),8
6
One might thus, conceivably, agree that ours is a reasonable economic view without necessarily
conceding that economic views are reasonable, or that the economic frame we posit is reasonable but
disagree with our specific interpretations or assumptions.
7
The actual magnitude of the productivity jump has now been revised somewhat downward by the U.S.
government, but it remains well above historical trend and unaccounted for in terms of conventional
economic explanations.
8
See Dale W. Jorgenson, “Information Technology and the U.S. Economy,” American Economic Review
(March 2001). As Jorgenson (p. 2) notes:
The accelerated information technology price decline signals faster productivity growth in IT-
producing industries. In fact, these industries have been the source of most of aggregate
(footnote continued)
5
enabled U.S. authorities to run a very expansive monetary policy that fostered rapid and
sustained economic growth without prompting any significant price inflation. That is the
kind of economic performance that not only produces widespread consumer satisfaction
(minimizing the so-called “misery index”—the sum of the inflation and unemployment
rates), but also generally translates into popular political approval.9 Hence, the intense
interest in the elixir that produced it, of which broadband is reputedly “the latest and
greatest” development.
“Informed speculation”—which we might criticize as “oxymoronic” if we were not about
to engage in a good deal of it—has suggested that benefits of economically generous—
indeed, in some cases, truly monstrous—proportions are in the almost immediate offing.
One estimate by reputable analysts puts the potential gains to the U.S. economy from
broadband at some $500 billion—a large number even in a world of large numbers.10 To
gain some perspective, this compares to the Brookings Institution’s estimate of gains to
the U.S. economy over the next five years of $100-to-230 billion (0.2-to-0.4 percent
above trend productivity, for U.K. comparison’s sake), but the Brookings numbers
productivity growth throughout the 1990’s. Before 1995, this was due to the decline of
productivity growth elsewhere in the economy. The IT-producing industries have accounted for
about half the surge in productivity growth since 1995, but faster growth is not limited to these
industries.
There have been several recent studies that assess the role of information technology as an explanation for
the acceleration of productivity growth the U.S. economy has experienced at the close of the millennium,
which has resulted in high rates of “GDP” growth with (at least until recently) fairly modest price inflation.
During 1996-1999, the U.S. economy (GDP) grew at an annual rate of about 4.2 percent, while the inflation
(measured by change in the consumer price index) grew at a rate of 2.3 percent. For the twenty years prior
to 1996, productivity grew at an annual average rate of about 1.5 percent; in the non-financial corporate
sector productivity growth accelerated to more than 4 percent over the past couple of years.
Using a conventional productivity measurement model and disaggregating macroeconomic data on capital
into information and communications technology and other capital, Federal Reserve Board economists
Stephen Oliner and Daniel Sichel have estimated that a little more than half of the productivity acceleration
is due to “multifactor” productivity growth (i.e., growth in output that cannot be otherwise accounted for by
increases in capital and labor inputs) and a little less than half is due to “capital deepening” (i.e., installation
of new capital equipment). They find that most of the gain from capital deepening derived from
installation of information and communications technology equipment and that about 40 percent of the gain
in multifactor productivity growth derived from increased efficiency in the production of computers and
embedded semiconductors. See Stephen Oliner and Daniel Sichel, “The Resurgence of Growth in the Late
1990s: Is Information Technology the Story?” Journal of Economic Perspectives (forthcoming); see also
Dale W. Jorgenson and Kevin Stiroh, “Raising the Speed Limit: Growth in the Information Age,”
Brookings Papers on Economic Activity (January 2000).
9
The close result of the most recent U.S. presidential election obviously, in part, reflects the various
Clinton scandals. One may say that Gore lost despite the economy; or that, given the extraordinary
economy, Gore almost won despite the (at least publicly) unprecedented Clinton scandals.
10
See Robert W. Crandall & Charles L. Jackson, The $500 Opportunity: The Potential Economic Benefit
of Widespread Diffusion of Broadband Internet Access (Criterion Economics, L.L.C.).
6
reference the total incremental benefit of the Internet—not broadband alone as in the
previous case.11
It is worthwhile to trace briefly the logic underlying these projections to understand what
they mean, why they diverge so greatly, and what the pitfalls associated with them are.
The Brookings Institution’s estimates reflect a monumental effort (involving a large team
of researchers from leading business schools in the U.S.) to determine whether the
Internet will be a significant factor in sustaining the increases in productivity recently
recorded within the U.S. economy. Skeptics argue that the Internet is simply a different
way to communicate and is not likely to have any fundamental impact on the functioning
of the economy.12
At the suggestion of Alan Greenspan, the Chairman of the Federal Reserve Board (the
U.S. monetary authority), who has questioned the ability of conventional statistical
modeling techniques to produce illuminating results about prospective Internet-based
productivity effects, the Brookings researchers have been attempting to implement a
novel approach to assess such impacts.13 They are attempting “to extrapolate judgmental
estimates of the likely impact of the Internet at the industry level based on estimates by
individual firms and analysts, and then add up the results to see what they imply for the
11
The $500 billion estimate also references a longer time period. For a useful survey of recent evidence on
the impact of information and communications technology (ICT) and economic productivity and growth,
see Luisa Affuso and Leonard Waverman, “The Impact of Electronic Infrastructure on Economic Growth
and Productivity,” Report Prepared for the Performance and Information Unit, London Business School, 4
February 2002. These authors report, inter alia, on research indicating that telecommunications
infrastructure has strong external effects on economic growth, but only after a critical mass of near-
universal service has been achieved (i.e., strong non-linear externalities in growth effects). These authors
attribute the lack of specific studies on broadband to “its recent experience and its low market penetration
[limiting data] available to conduct a thorough investigation.” Furthermore, they argue that “adopting the
results of existing literature on the impact of ICT on the economy and transferring these to estimate the
impact of broadband is not a viable alternative.”
12
See, e.g., Robert J. Gordon, “Does the ‘New Economy’ Measure Up to the Great Inventions of the Past?”
Journal of Economic Perspectives, Fall 2000. We note that many of the applications that have been cited
as potential broadband services (e.g., movie delivery) are also available via alternative means. In these
cases, the benefits of broadband consist of the welfare benefits derived from lower costs of distribution
(convenience) and higher quality selections from which to choose (i.e., a closer matching of outputs with
tastes and preferences). Broadband’s potential contribution is thus the difference between the welfare
produced by specific applications with broadband and those produced without.
13
Greenspan has emphasized “the potential to improve our understanding of the performance of
productivity from delving into the microeconomic details of our current business environment.” His idea is
“to tie productivity performance directly to business practices in our offices, on our plant floors, and
through our distribution channels,’ and, by recalibrating this evidence to an economywide scale, “to bring
into sharper focus both the extent of the acceleration we are experiencing and the forces that underlie this
improvement.” See “Business Data Analysis,” remarks before the New York Association for Business
Economics, New York, New York (June 13, 2000).
7
overall economy.”14 They have focused on eight sectors, which collectively account for
about 70 percent of U.S. GDP on a value-added basis.15
The Brookings researchers identify three different types of Internet-induced productivity
growth: (1) savings in the costs of transactions necessary to produce and distribute goods
and services; (2) improvements in management efficiency through more effective supply-
chain management and improved communications among workers and with customers;
and (3) increases in effective competition as markets are broadened and prices become
more transparent which should further compel suppliers to adopt economizing
techniques.
Danzon and Furekawa find that the potential for transactions-cost savings from transition
to the Internet is especially high for the health-care sector because the sector is large,
information-intensive and reliant upon paper records.16 It is estimated that claim-
processing costs could be substantially reduced from as much as $15 per paper claim to
as little as two cents per web-based processor claim. There is also potential in the area of
managing medical records, not only for cost cutting, but also for care improvement
through enhanced research capabilities and information sharing among care providers.
Clemons and Hitt find that the costs of transactions in the financial-services industry are
falling significantly as online securities trades become cheaper to process producing
lower commissions on trades, and customers avail themselves of online information on
borrowing rates to comparison-shop and execute loan agreements more easily using
electronic means.17 Fountain finds that the Internet can substantially reduce transactions
costs at all levels of government.18
Firms in virtually all manufacturing industries are now using web-based technology to
rationalize supply-chain management and, thereby, reduce inventories and cut customer-
service costs. Fine and Raff find numerous potential opportunities in the auto industry
for Internet-aided increases in efficiency, product development, procurement and supply,
14
See Robert E. Litan and Alice M. Rivlin, “Projecting the Economic Impact of the Internet,” American
Economic Review: Papers and Proceedings (May 2001), p. 313; and the references to the Brookings Task
Force on the Internet cited therein.
15
The sectors are automobile manufacturing and sales, non-auto manufacturing, higher education and
private-sector training, financial services, government, health care, retailing, and trucking.
16
See “E-Health: Effects of the Internet on Competition and Productivity in Health Care,” in Brookings
Task Force on the Internet, The economic payoff from the Internet revolution (Washington, D.C.:
Brookings Institution Press, 2001).
17
See “The Internet and the Future of Financial Services: Transparency, Differential Pricing, and
Disintermediation,” in Brookings Task Force on the Internet, The economic payoff from the Internet
revolution (Washington, D.C.: Brookings Institution Press, 2001).
18
See “The Economic Impact of the Internet on the Government Sector,” in Brookings Task Force on the
Internet, The economic payoff from the Internet revolution (Washington, D.C.: Brookings Institution Press,
2001).
8
and in various aspects of the manufacturing process itself.19 In the future, there are likely
to be far fewer dealers and salesmen, and customers will use the Internet to define the
automobile they want built to their specific tastes and preferences.
Virtually all of the Brookings analysts identify an unexploited potential for significant
improvements in effectiveness of economic competition through the Internet’s ability to
expand the numbers of buyers and sellers “in the market” and to perfect the information
available to market participants about the specific circumstances of supply and demand at
different times or over different time horizons.
It is worth reiterating that these are productivity benefits identified for extension of
Internet- (rather than narrowly defined broadband-) based business applications on a one-
time basis over the next five years. The estimates do factor in broadband effects. As
Litan and Rivlin note:
The penetration rate of Internet access, especially broadband, will affect the
extent to which firms face intense competitive pressure to change existing
management methods, among other practices.20
While noting the potential for consumer benefit, particularly from more effective
competition stemming from broader markets and better information, the focus of the
Brookings effort is primarily on industrial productivity gains.
Notwithstanding marked differences in projections of future benefits, there is a fairly
close consensus among economists about how much consumers currently benefit from
broadband. Economists measure consumer welfare in terms of the difference between
consumers’ willingness to pay for different amounts of service, as measured by their
“demand curves,” and what they actually pay, as measured by the price of the service.
Estimates vary some depending on some of the specific technical assumptions adopted21
19
See “Internet Driven Innovation and Economic Performance in the American Automobile Industry,” in
Brookings Task Force on the Internet, The economic payoff from the Internet revolution (Washington,
D.C.: Brookings Institution Press, 2001).
20
See op. cit., p. 316.
21
The specific choice of functional form utilized to model demand and of the “choke point” at which
demand vanishes may significantly affect welfare estimates. With respect to the latter, there is usually not
much data regarding consumer preferences at very high prices.
9
and the type of data utilized.22 But when account is taken of these various differences,
estimates are similar and fairly modest—about $1 billion per year for the U.S.23
How do welfare gains grow from roughly $1 billion to hundreds of billions? In the
Crandall-Jackson analysis, mentioned earlier, the primary way is simply by claiming that
the value of broadband applications can potentially increase many-fold. That claim is
incontrovertible (though perhaps not useful) if one defines “potentially” in a sufficiently
loose fashion. Unfortunately, there is no rigorous logical argument or quantitative
evidence on how likely this potential is to be realized. Thus, the public-policy
implications of the $500 billion number are, to say the least, unclear and problematical at
best.
Very large increases in the value of broadband services cannot realistically be expected
merely through increases in the number of subscribers who utilize current broadband
applications. On the contrary, demand in that case would be subject to diminishing
marginal utility, as the user set expands by including users who place less and less value
on broadband applications.24
This is not to suggest that the value of broadband may not or could not increase
tremendously as time passes and perhaps surpass even the most optimistic current
estimates. As more consumers subscribe to broadband, aggregate benefits might grow
directly, if at a diminishing rate, but there is another more exciting and intriguing
possibility that, while not easy to model, implies the intellectually legitimate prospect of
very large gains. Very large increases in the value of broadband services are possible if
valuable new broadband applications are developed and/or the expansion of broadband
services yields large bandwagon benefits. The evaluation of these two possibilities is a
primary focus of this report.
22
Survey data are often criticized on the grounds that they do not reflect “real” decision-making with real
consequences and there is often a preference, other things equal, for reliance upon market data reflecting
real supply and demand decisions. At the same time, the presumption in favor of market data’s superiority
may not be applicable for a novel service for which there are little data based on real experience.
23
Austan Goolsbee of the University of Chicago puts the number (for the U.S. in 1999) at about $670
million per year in aggregate and suggests that, while the number could be increased arbitrarily high
through selection of functional form, it is probably biased upward by the potential for misunderstanding of
one of the survey questions that supplies the data upon which the estimate is based. See “Subsidies, the
Value of Broadband, and the Role of Fixed Costs,” October 2, 2001. Crandall and Jackson put the U.S.
number at between $1.4 billion and $2 billion, but their estimate was made before broadband service prices
increased by about $10 per month from $40 to $50. The extra $10 comes out of the estimated surplus and
prompts somewhat reduced consumption, other factors the same. Since these estimates were generated,
take-up has increased somewhat so that this surplus measure would now be somewhat higher, other factors
the same.
24
If we argued that foxhunting produces benefits of a certain magnitude for those who pursue it, you would
rightfully think we were crazy if we suggested that this implied that benefits of many times this magnitude
would be produced were all of the population to take up foxhunting! Nevertheless, some have taken this
tack in projecting broadband benefits.
10
The demand for broadband depends on both the price of the service and also on what the
service is capable of delivering. The latter is a matter of available applications, but
investments in development of new applications depend on prospective payoffs that, in
turn, depend on the number of subscribers. There is, thus, the potential for so-called
economic “bandwagon” effects given this positive “feedback” process—more subscribers
produce more applications, inducing more subscribers and more applications as “the
bandwagon gets rolling.” There is also an added feedback potential to the extent one
person’s subscription to broadband service makes the service more attractive to other
potential subscribers and leads them to sign up for the service.25
As one of our report’s referees notes:
Broadband is a ‘bandwagon’ product less because of external demand-side
economies (whereby the value of a network connection to an individual depends
on the number of other individuals with whom he/she can communicate, as in the
telephone network) since, presumably, the key broadband connections are
supplier-subscriber rather than subscriber-subscriber. It is more to do with
complementary supply-side bandwagon effects: whether and how quickly
broadband-delivered products will be developed to exploit broadband’s potential.
This is the basis of a ‘chicken-and-egg’ start-up problem: so many potential
subscribers regard broadband as unattractive because of the present shortage of
broadband-delivered products (high-definition websites, films, etc.).
While we agree in terms of the relative importance of the two types of external
economies, it is, nevertheless, possible to conceive of “conventional” network
consumption externalities also operating. Consider, for example, new file-sharing
software that permits the sharing of photographs, complemented by the broadband-
enabled ability to upload and download such files quickly. A consumer’s willingness to
subscribe to broadband service to exploit this type of sharing capability might well
depend on the number of other consumers (say, family members, fellow hobbyists, etc.)
possessing the ability to benefit easily from photo file sharing. In this circumstance, i.e.,
given the file-sharing application, the size of the universe of broadband subscribers itself
“matters.” We, thus, agree with the comment of another of our referee-critics who
observes that:
[E]ven if the number and type of application stays the same, the presence of more
people using broadband will tend to create some positive network externalities,
simply by increasing the number of other users with which to interact.
This critic goes on to note that “it may turn out that the effects are limited.” Our view is
that, given the specific identity of the set of applications commentators currently
25
It is sometimes hard to “disentangle” these different types of “consumption externality” effects that all
derive from the ability to exploit (or are manifested through) particular applications.
11
contemplate in the near future (notably, video and music file-sharing), the feedback
between subscribers and complementary products appears to loom more significantly
than feedback among subscribers, per se. This is not to rule out the possibility of a new,
currently unperceived application whose value turns significantly upon the size of the
universe of other subscribers with whom communications are thus enabled.
What is required to get this bandwagon rolling? The existence and specific identity of
the “critical mass” needed to get the broadband bandwagon rolling is uncertain and,
indeed, probably unknowable before the fact. One of the principal tasks we undertake in
this report is a close analysis of broadband “drivers” and of factors that operate to
constrain broadband take-up. Broadband currently amounts to a fairly limited “niche”
application, reflecting its value primarily as a means of quickly downloading large
computer files—an application of particular use to those who “tele-work” from home
base. What, if anything, is needed to drive the bandwagon beyond its current
equilibrium, characterized by limited usage and benefit?26 Are there cost-effective efforts
the government might undertake to give the broadband bandwagon a “nudge?” Those are
the questions we seek to address in this report.
There has obviously been a considerable amount of previous work on these topics, to
which we have had and make frequent reference herein. Some of this work has pointed
up the disabilities of some conceivable approaches to government intervention.
Goolsbee, for example, in the previously cited paper examines the efficiency
characteristics of different kinds of subsidies to broadband. His analysis shows that
subsidizing usage produces much smaller gains and costs much more than subsidizing
fixed investment costs of extending service to unserved regions. Subsidizing usage tends
to attract only marginal users with low valuations on the product with the result that the
26
Some suggest that the market is currently not in equilibrium, but growing “normally” and as one would
anticipate based on various historical precedents. These commentators often ask: “What is the problem?.”
For example, Gerald R. Faulhaber asks:
Has the rollout of broadband to the home been too slow? What is an appropriate standard of
comparison? Is there in fact a problem?
And answers:
Broadband deployment appears to be tracking the same growth path of other consumer
communications goods, such as cellular service. In the medium term, broadband is doing just
fine…In 3.5 years, broadband grew from zero to over 8.4 households, a penetration of 8.1
percent…By way of comparison, cellular telephones were commercially introduced in the US in
1985; it was not until the end of 1991, seven years later, that cell phone subscribership reached 7.5
million…Broadband appears to be deploying about twice as quickly as did cellular in the mid-
1980s to early-1990s. While 8.1 percent of households clearly isn’t the entire population,
broadband appears to be on a high-growth trajectory, similar to adoption trajectories of other
popular technologies such as cell phones, VCRs, and television.
See “Broadband Deployment: Is Policy in the Way?” Broadband Communications: Overcoming the
Barriers (October 4, 2001).
12
costs of the subsidy significantly exceeds the value of the surplus generated.27 An
investment subsidy avoids the problem of low-valuation consumers by inducing entry
into unserved markets where the new adopters have very high valuations. This does not
necessarily imply that such subsidies are economic rather, that they are comparatively
more efficient than uneconomic usage subsidies.28
Anticipating our principal conclusions, we identify the current relative paucity of
compelling broadband applications as an important stumbling block to greater take-up.
Broadband prices also remain high relative to other successful information goods and
services, and high installation charges have deterred greater take-up. Broadband costs
significantly more, but it currently does not deliver significantly more—at least
sufficiently more to induce faster take-ups.
A more positive “spin” on this state of affairs is that consumers today need not incur the
extra expense to subscribe to broadband to obtain most of the benefits of an Internet
connection (i.e., to exchange e-mail and download “low-definition” content from
websites, especially on a time-insensitive basis). This presumes an efficient pricing
regime: as we later note, “metered” narrowband pricing in some countries makes
broadband relatively more attractive, notwithstanding a relative paucity of broadband
applications. Of course, this comparative utility of narrowband will/would decrease to
the extent new applications are/were developed and innovated whose successful
operation requires higher speeds than available over narrowband connections.
The story for private and public business enterprises differs somewhat: there may well be
business operations (presumably, primarily small enterprises) that could enhance their
productivity using higher-speed Internet connections, but cannot do so economically
given current DSL and cable modem pricing or lack of availability of such capabilities in
unserved (primarily rural) regions. For these potential customers, lower prices and
greater availability might well lead to higher take-up and enhanced productivity.
Today, broadband is principally a “time-saver”; time is money, so the ability to conserve
time is valuable. The value of time increases with economic growth (viz., the opportunity
cost of leisure time grows as the value of time spent working increases).29 This implies
that the demand for broadband will grow as the economy grows, but gradually on this
27
Goolsbee does not consider the additional problem likely to occur as a result of consumer
gamesmanship—if subsidies are offered, consumers have incentives to hold out for a subsidy payment, so
unnecessary payments must be made.
28
In Goolsbee’s analysis, costs of investment subsidies are estimated to be lower than consumer gains, but
there may well exist more productive alternative uses of subsidy funds. See Goolsbee, op. cit.
29
See Stefan Linder, The Harried Leisure Class (New York & London, 1970).
13
account rather than rapidly. “Take off” requires lower prices and more reasons to
subscribe (i.e., better content).30
A major barrier to applications development, over which the government can exercise
some influence, is the unsettled state of copyright enforcement in the brave new world of
the Internet. File-sharing software now enables consumers to share, inter alia, their
“home videos”—not just their home-made videos but their personal copies of commercial
movie releases. In the past, both technology and the law mitigated against copyright
infringement; now technology enables easy infringement.
Heretofore, legal remedies have sought to suppress file-sharing software; the problem
with this “remedy” is that it compels the sacrifice of the potentially great benefits
associated with legitimate file sharing.31 It also does not address the problem of limited
broadband applications and the “stalled” bandwagon that (potentially) results. Our sense
is that effective resolution of these issues may take quite a long time to occur. In
consequence, widespread broadband take-up may also take a long time to occur to the
extent that it depends on content upgrades.32
30
In a recent article analyzing the U.S. government’s proposed settlement of its antitrust case against
Microsoft, the renowned economic trade theorist Paul Krugman deployed an illustrative example involving
a new application that allows the Internet to transmit smells using “sniffer” software (viz., “snf” and
proprietary Microsoft “sml” files). Krugman notes, in passing, that use of sniffers quickly “leads to the
discovery that most of the content out there stinks, but never mind!” See “The Smell Test,” The New York
Times (July 1, 2001), Section 4, p. 13.
31
By the same token, one of our referees points out, “More widespread availability of music in the form of
inexpensive (or even free) MP3 files would provide value to consumers, encouraging greater demand for
broadband. But at the same time it would breach copyright law and remove value from the copyright
holders.” Interestingly, he offers this example to make the point that the government “will have a range of
objectives, some of which will be synergistic with facilitation of broadband, but others of which may not
be. Hence a balance will need to be sought.” As we later discuss in some detail, this particular example
would appear to be a case where going either way will be synergistic with facilitation of broadband: The
policy optimization required is to balance the suppression of demand caused by less widespread availability
of music in the form of MP3 files against that caused by less widespread availability of music as a result of
copyright infringement. Alternatively, there may be technical or other types of policy fixes that improve
the terms of relevant tradeoffs (although we are not too optimistic on this score). Our critic’s larger point is
incontrovertible and one we make repeatedly throughout our policy discussion: the need to demonstrate
any intervention’s capacity to produce net benefits based on a prudent assessment of incremental costs and
benefits, including economic opportunity costs in the form of foregone benefits from best alternative
courses of action. Broadband is clearly but one of many important government objectives. Scarcity of
resources necessitates tradeoffs and balancing of conflicting objectives. As we later note, there may well
exist happy circumstances where objectives do not necessarily conflict: Cf. the use of broadband
capabilities to improve the efficiency with which government services are delivered. This may constitute a
situation where pursuit of one objective (government administrative efficiency) promotes another objective
(welfare-enhancing broadband “bandwagon” effects).
32
As the U.S. economic commentator, Robert J. Samuelson, has remarked:
14
Our report is organized as follows: We begin with an introduction to the salient issues
that draws extensively on previous research. We then turn to the analytical core of our
research—a close economic assessment of broadband drivers that analyzes the key
factors affecting the service’s take-up and capacity to reach a “critical mass” sufficient to
induce service “takeoff” and get the bandwagon rolling. In the next two chapters, we
consider the policy implications of the analysis for, respectively, the supply and demand
sides. We conclude with a summary of our main findings.
4. BROADBAND APPLICATIONS AND DEMAND
Broadband has recently become a topic of great interest to policymakers and economic
development analysts worldwide. In this section, we will examine the nature of
broadband technology and why it has garnered such attention. First, we will describe the
technology in its current manifestation and the improvements in service it offers over
traditional Internet access. We will investigate some of the most promising broadband
applications; namely, advanced web pages, downloading of music, downloading of video
entertainment and two-way video communications. We will address issues of
bandwagon demand and digital copyright as they relate to broadband applications. We
will review the potential improvements to productivity that broadband may offer by
enhancing current Internet applications, particularly in the area of e-commerce. We will
review the status of broadband to-date, in order to gauge the various levels of adoption
across G7 countries and Korea. This review includes an examination of the emerging
geographic distribution of broadband penetration across these countries.
Broadband provides access to the Internet at much higher speed than has been available
with traditional (narrowband) access. Broadband is a significant enhancement of the
already-available narrowband access. It can enormously expand the amount of
information that a user receives and/or sends or, alternatively, compress the time needed
to transmit large quantities of digitized information. Consequently, many observers
believe that the impact of broadband access on Internet usage will be so profound that it
may well instigate the “second wave” of the Internet revolution.
Someday it [broadband] will become more widespread, even universal. And someday there will
be a bandwagon effect, when more customers inspire more services, improved technology and
lower prices—and vice versa.
But for now it won’t salvage the economy. All the hype recalls what the humorist Will Rogers
once said of cigars: ‘Our country has plenty of good 5-cent cigars, but the trouble is they charge
15 cents for them.’ Same problem, different product.
See “Broadband’s Faded Promise,” The Washington Post (December 12, 2001) p. A35.
15
Because broadband adoption is potentially so important, public policymakers are keen to

understand the factors that may serve to speed or retard the “take-up” of broadband by
various types of users. Policymakers can use information on the relevant technology
drivers to decide whether, and how, to attempt to influence these factors to accelerate the
rate of adoption.
4.1. ENHANCEMENTS TO CURRENT INTERNET APPLICATIONS

The significance of broadband is best contemplated with reference to current Internet
usage. The current population of Internet users is the most likely, at least initially, to
migrate to broadband access, and their history of service adoption, their Internet usage
patterns, and their demographic make-up are useful in predicting the additional benefits
of broadband and the likelihood of broadband adoption.
In this report, we focus on experiences of technology adoption in the G7 countries as well
as (South) Korea, where broadband penetration has been exceptionally high.
Figure 4-1, below, displays the percentages in certain G7 countries and Korea of Internet
users who had access to the Internet at work or at home as of 1st quarter 2001. The U.S.
had the highest penetration of home access, at 57 percent. Korea had the second highest
penetration of home access, at 56 percent, followed by the U.K., at 46 percent. France
had the lowest penetration of at-home access at 22 percent. Though no data are available,
according to a report by BDRC Ltd., the Japanese have been relatively slow to adapt to
Internet use at home.33
33
See BDRC Report, “The Development of Broadband Access Platforms in Europe” (August 2001), p.
133.
16
Figure 4-1
Percent of Adults with Internet Access

(First Quarter 2001)
70%
60%
50%
% of Adult Population
40%
30%
20%
10%
0%
France Germany Italy Korea U.K. U.S.
At Home At Work
Non-U.S. Source: “429 Million People Worldwide Have Internet Access, According to
Nielsen/NetRatings,” Table 1, AC Nielsen/NetRatings Press Release (June 11, 2001),
reflecting 1st quarter 2001 data. Percentages are among the population of 16 years and
older with fixed line telephone(s).
U.S. Source: “Internet Penetration Rate Reaches 60 percent in the U.S. According to
Nielsen/NetRatings,” ACNielsen/NetRatings Press Release (February 14, 2001). In
Canada, the penetration of Internet access at home is reported in terms of households,
rather than of the adult population. In 2000, 50 percent of Canadian households were
reported to be online (Statistics Canada, IDC).
Take-up rates continue to evolve. As of February 2002, A.C. Nielsen reported in its
Nielsen Net Ratings that the United States had the highest rate of Internet penetration
among the G7 countries, with approximately 60 percent of the population connected to
the Internet. Canada followed the United States with just under 60 percent of the
population connected to the Internet. The UK ranked third, with slightly over 40 percent
of the population connected to the Internet.
Migration to broadband will be driven, in part, by current uses of the Internet, the extent
to which broadband access can enhance those uses, and the extent such enhancements
become more valuable. Internet subscribers currently use the Internet for a variety of
purposes. These uses are depicted in Figure 4-2, below.
As would naturally be expected, a large portion of Internet subscribers across the
countries examined regularly use e-mail. At least 10 percent of Internet users in each of
these countries have accessed government services on the Internet. Over 15 percent of
users in each of a number of the countries have researched medical health on the web;
17
Canadians have been particularly active in this area. Internet access at school is another
pervasive Internet application.
For these uses, broadband connections will be primarily useful for downloading large or
complex documents, including e-mail attachments, more quickly. One popular type of e-
mail attachment is likely to be photographs in digital format. The increase in e-mailed
photos will be spurred by the predicted growth in digital cameras sales—by the end of
2002, 20 percent of U.S. households are expected to own a digital camera.34 The use of
broadband connections will also be important for use by shared facilities (e.g., at schools)
as they allow multiple users simultaneously to access the Internet, check e-mail, conduct
research and download files.
Figure 4-2
Various Uses of Internet in G7 Countries & Korea
Access G overnment Services Healthcare Research
% o f In te rn e t Use rs
% o f In te rn e t Use rs
70% 100%
60% 80%
50%
40% 60%
30% 40%
20% 20%
10%
0% 0%
K
ly
a
y
e
ce
a
ea
y
ly
U
an
ad
nc
It a
an
ad
pa
U
It a
or
an
m
ra
an
an
Ja
m
K
Fr
er
er
F
C
C
G
Regular E m ail Us e Internet A c c es s at S chool
100% 70%
% o f Stu d e n ts
% of Inte rne t Use rs
60%
80% 50%
40%
60% 30%
20%
40% 10%
0%
20%
K
S
ly
y
e
an
0%
U
U
an
nc
It a
p
m
ra
Ja
Canada Franc e UK US
er
F
Source: Christopher Hobley, “Just Numbers,” published by the European Commission’s

Electronic Commerce Team (January 2001) for France, Germany, Italy, U.K. and U.S.,
(some Japan). Health Research and Government services in last three months, except
Canada. E-Government use for Japan, Korea and U.S. calculated from Taylor Nelson
Sofres, 2001 Benchmarking Research Study (released 5 November 2001).
34
See “Digital cameras developing,” News Press (February 5, 2002) Section F.
18
In addition to current Internet applications, broadband has the potential to enable a range
of new applications, which are briefly described below.
4.2. ADVANCED WEB PAGES

One of the advantages of broadband Internet is the ability to easily access advanced
websites, which often feature bandwidth-intensive features such as high-resolution
graphics, animation, streaming audio, and active menus. Many businesses exploit higher-
speed capabilities to make their websites more attractive, informative, and easy to
navigate. For example, many automobile manufacturers offer bandwidth-intensive
features on their websites. One such example is Honda—although the site does not offer
a high- or low-bandwidth option, it is clear that the site runs much more efficiently with a
high-bandwidth connection (indeed, it is frustratingly slow using a narrowband
connection). The site features animation and affords customers the opportunity to design
and customize the colors and features of the specific car model in which they are
interested.
An inviting website, with strong graphics and audio, that allows the potential purchaser
easily to access detailed information about a product as well as view the product in the
specific design they are considering, supplies a potentially powerful marketing tool. The
ability for consumers to alter selected features of a product and to obtain detailed
information provides additional confidence that the product is indeed what they want, and
may induce the consumer to purchase online rather than feel the need to visit a brick-and-
mortar store before completing the purchase. For example, website designers advertise
the benefit of a site that allows “3D visualization” and offer the example of a furniture
site that provides a 3D picture of a chair that the user can alter to reflect desired attributes
(e.g., color, finish and upholstery) and that can be animated to simulate the “tilt-and-
twirl” flexibility of the chair.
Active menus are also an important element of advanced websites. An active menu, such
as that found on the high-bandwidth website of the U.S. Naval Reserve Force, allows
visitors faster and easier navigation. By placing the cursor over menu options (“mouse-
overs”), a user displays the next “tier” of menu options without having to “click-through”
to another page. In contrast, on the low-bandwidth version of the site, the menus are text-
based, and it may take several “click-throughs” before the desired information is
accessed.
In addition to attractive and convenient access to information, advanced websites
promote a positive image of the retailer to prospective customers. For this reason,
companies have, in recent years, invested significant resources in the design and
construction of their websites. Similarly, advanced websites supply a means to provide
an image of stability, strength and sophistication. This capacity may be critical if a firm
wishes to maintain an image of being “cutting-edge” or appeal to technically-oriented
users.
19
In all these cases, the Internet—whether access is broadband or narrowband—contributes

to productivity in several ways, as later discussed in greater detail:
It may stimulate sales that would otherwise not have occurred and which
benefit both buyer and seller;
It may obviate the trip to a brick-and-mortar store, saving costs for the
supplier and increasing convenience for the buyer; and/or
The buyer may make a better choice, because the Internet offers a better
selection of products.35
Broadband can contribute to productivity by allowing the Internet to perform these

“market-making” functions more effectively. In particular, it affords a powerful means
of increasing knowledge about particular circumstances of supply and demand, including
product characteristics, terms and conditions of availability and critical evaluations. It
may allow potential buyers to get a “clearer view” of the product and other visual
information provided by the supplier. The better information can stimulate sales, avoid
trips to brick-and-mortar stores, and lead to smarter purchases. Similarly, sellers may
afford themselves of more efficient means of completing transactions, including
gathering of relevant credit information and means of developing profiles of customer
preferences.
High-definition web pages are beginning to be deployed, but they are not yet widely
utilized. In particular, none of the Top-10 U.S. websites (listed below, in Table 4-1) yet
offer high-definition web pages.
35
This is a gain in actual productivity in that the economy performs better in meeting the needs of
consumers. It is not, however, reflected in the usual productivity statistics.
20
Table 4-1
Top 10 U.S. Web Properties
Web Property Owner High-Definition Page?
AOL Time Warner No
Yahoo! No
MSN No
Microsoft No
Lycos Network No
Amazon No
About—Primedia No
Walt Disney Internet Group No
eUniverse Network No
Ebay No
Source: Nielsen//NetRatings Inc. for October 2001, obtained from
www.cyberatlas.com (downloaded November 19, 2001). Ranking based
on number of unique users of the website owned by the entity listed.
Similarly, as of Spring 2001, none of the Top-10 domains in the U.K. offered high-
definition web pages (see Table 4-2, below):
Table 4-2
Top 10 U.K. Domains
Website High-Definition Web Page?
MSN.com No
Yahoo.com No
Microsoft.com No
Freeserve.com No
Passport.com No
MSN.co.uk No
MSN Messenger Service No
Yahoo.co.uk No
BBC.co.uk No
AOL Proprietary No
Source: Jupiter MMXI Market Research (April 2001), obtained from
www.cyberatlas.com. Ranking based on number of unique visitors to the
website.
In both the U.S. and the U.K., the Microsoft, Yahoo and AOL websites are the most
heavily “hit upon.” Virtually all of the popular websites provide news updates, web
search tools, various communications tools and all are fairly quick-loading and designed
for the broadest possible use among Internet subscribers (viz., mass-use oriented) given
the currently prevailing modes of Internet access. These websites are also usually loaded
with advertising links. The current Internet business model would not support targeting
high-speed customers exclusively, thereby limiting the population exposed to the
advertising. Limiting the number of advertising exposures would reduce the advertising
21
revenues upon which the websites depend for economic support. Similarly, auction
websites need to be accessible to narrowband users in order to tap the largest pool of
prospective auction participants. If an auction website targets only broadband users, the
pool of participants will be reduced, auction revenues diminished, and the website is
much less likely to flourish. More generally, access to the greatest number of users
appears to be more important than the advantages or appeal of more sophisticated
graphics and audio on high-definition websites.
Although high-definition websites are not in widespread use, some significant niche
markets have begun to appear. These are mainly geared toward online games and
entertainment. One of these is the AIWA electronics website. The home page invites the
user to choose between the HTML site that relies on a regular connection and the FLASH
site that requires a high-speed connection. The FLASH site offers sophisticated graphics
and higher-quality sound.36
Another feature of advanced web pages is streaming video; i.e., movie trailers, animation,
news programs and product advertisements. Narrowband dial-up connections cannot
accommodate streaming video very well. Video motion may appear jerky and slow.
While some video may be specifically tailored for narrowband access, it is generally of
low technical quality and sophistication.
One of the two major purveyors of streaming video software, Real Networks, provides a
basic media player as well as higher-quality audio and video software. Thus, RealOne
Player is Real Networks’ “best player” and promises “amazing audio and brilliant full-
screen video” when the user is using a broadband connection.37 Real Networks also
offers from its home page “exclusive” video of CBS’ “Survivor: Africa” TV program,
ABC News TV/radio programs and breaking news. Real Networks offers a few free
electronic games as well. Premium services for which users must pay include more ABC
News services, Wall Street Journal access (for which the Journal charges a fee as well)
and CNN QuickCast service.
News network websites such as those operated by CNN and BBC offer video clips of
various news reports by reporters in the field.38 MSNBC allows viewers to watch its
cable network online as well via MVPD.39 Cartoons and games are popular over the
Internet, many of which are available for free. On U.S. websites, political games such as
those parodying elected officials such as the President and members of Congress or
36
www.aiwa.com (downloaded November 20, 2001).
37
www.real.com homepage (downloaded November 20, 2001).
38
www.cnn.com and www.bbc.co.uk (downloaded November 20, 2001).
39
www.msnbc.com (downloaded January 16, 2002).
22
business leaders such as Bill Gates are popular. Post 9/11 cartoons and games have taken
aim at Osama bin Laden and Al Qaeda.40
Most major movie (i.e., media) companies provide some form of streaming video via
their websites. Studios including Warner Brothers, Disney, MGM, and Sony all provide
streaming trailers and movie clips that are accessible on their websites. These trailers are
usually provided in Windows Media, RealPlayer, or QuickTime (by Apple) formats.
These sites generally provide both high-bandwidth and low-bandwidth options for
downloading, but the high-bandwidth video clips tend to be larger and have a
higher/better picture resolution than the low-bandwidth video clips.
4.3. BANDWAGON DEMAND

The Internet, and broadband Internet access in particular, are subject to what economists
call “bandwagon effects.”41 Bandwagon effects are benefits that a person enjoys as a
result of others’ doing the same thing that he or she does. In particular, a consumer may
enjoy bandwagon benefits as others consume the same product or service that he or she
consumes.
Bandwagon markets have dynamics that differ from those of conventional products and
services. Marketing a product or service that embodies bandwagon effects is difficult at
the start, when the user set is small and the bandwagon benefits are also small. The
bandwagon often ends up in a ditch before it can get under way. Once enough consumers
have climbed on a bandwagon, however, it may be unstoppable.
A key concept in the theory of bandwagon effects is “critical mass.” Bandwagon products
and services that do not reach a certain level of demand, the critical mass, can have only
limited success and may fail altogether. Those that do reach critical mass often grow
thereafter at a very rapid rate.
Once critical mass is achieved, demand in bandwagon markets becomes subject to what
is known as “positive feedback.” Virtually everyone is familiar with a common example
of positive feedback, namely, a speaker’s talking too loudly into a microphone. The
speaker’s voice first gets amplified. Then, the amplified sound is picked up by the
microphone and amplified again. Then the further amplified sound is picked up and
amplified still again; and so forth. The result is a deafening roar, which ends when the
speaker is frightened into utter silence. More generally, positive feedback is a process in
which increases in an activity lead to further increases in that activity, which lead to still
further increases, and so forth.
40
See, for example, www.newgrounds.com, a game and short cartoon website that may include some less
savory materials, as well.
41
For a full discussion of the economics of bandwagon effects, see Jeffrey H Rohlfs, Bandwagon Effects in
High Technology Industries (MIT Press, 2001).
23
Bandwagon effects lead to positive feedback of a much pleasanter sort. The feedback
starts when enough users join the bandwagon to exceed critical mass. The initial user set
then provides sufficient bandwagon benefits to induce additional users to join. When the
additional users join, more bandwagon benefits are generated, inducing still more users to
join. This positive feedback may continue until a very large user set is achieved.
There are two general types of bandwagon effects; viz., network externalities and
complementary bandwagon effects. Network externalities are the benefits that users
derive from being able to use the network to communicate with more persons.
Complementary bandwagon effects relate to the increased supply of complementary
products as the user set expands.
The use of broadband to enhance narrowband Internet applications is subject to both
network externalities and complementary bandwagon effects. Broadband users benefit
by being able to send large files to other users who have broadband access and can
therefore conveniently receive such files. Thus, as the set of broadband users expands,
the benefit of being a broadband user increases (network externalities). Additionally,
broadband users may choose to purchase digital cameras (a complementary product) for
the purpose of sending photographs (which are usually quite sizable files) over the
Internet as the potential “audience” size increases (i.e., there are complementary
bandwagon effects). As the stock of digital cameras increases, other Internet users have
an additional incentive to get broadband Internet access; viz., the prospect of conveniently
receiving more digital photographs over the Internet. Complementary bandwagon effects
also apply to the stock of digital video recorders. Indeed, it is generally impractical to
send video files to an Internet user who does not have broadband Internet access.
Advanced web pages are also subject to bandwagon effects. There are network
externalities from the perspective of the proprietors of web pages. That is, the more
broadband subscribers there are, the greater is the benefit to the proprietor of using
advanced web pages. There are, at the same time, complementary bandwagon effects
from the perspective of the residential broadband subscriber. The benefits of broadband
increase as the supply of the complementary product (advanced web pages) grows.
During the start-up phase, markets for complementary bandwagon effects are often
subject to a chicken-and-egg problem. That is, there may be little demand for the base
product until the complementary product is widely available. At the same time, there
may be little demand for the complementary products until a large number of consumers
have the base product. Unless this chicken-and-egg problem is solved, a product
involving complementary bandwagon effects cannot succeed.
Bandwagon effects begin after some initial user set is achieved, on the basis of so-called
“standalone” applications; i.e., applications which provide non-bandwagon benefits that
do not depend on the number of other users. A key issue is whether the standalone
applications can generate a sufficiently large user set to achieve critical mass.
24
For VCRs, the standalone application of “time-shifting” television programs sufficed to

achieve critical mass. That is, the standalone application attracted so many users that
videocassette rental stores spontaneously appeared. Thereafter, the VCR market was
subject to positive feedback. As more VCRs were sold, more videocassette rental stores
appeared, increasing the demand for VCRs in a virtuous cycle.
As we have discussed, broadband enhancements to narrowband Internet applications are
subject to bandwagon effects, but they also have value as standalone applications.
Indeed, they are the primary standalone application for broadband at the present time.
Those applications support some demand for broadband Internet access, but that level of
demand may well fall short of the critical mass necessary to induce positive feedback and
market takeoff.
In particular, the standalone applications for broadband have not thus far sufficed to
solve the chicken-and-egg problem with respect to advanced web pages. This, we
believe, is an observation diagnostically important and prescriptively relevant (i.e., a key
finding). High-definition web pages are not in widespread use because the set of
residential broadband Internet users is small. At the same time, the limited availability of
high-definition web pages limits the demand for broadband Internet access.
Increases in supply and demand could (eventually) solve the problem by inducing
sufficient subscribership to produce feedback in the supply of complementary
applications, possible feedback and takeoff or other potential broadband applications.
Downloading of music and video entertainment programming may offer a potential
solution to this chicken-and-egg problem. The resulting growth of the broadband user set
would increase bandwagon benefits associated with enhancements to narrowband
Internet applications and would thereby lead to positive feedback. Downloading of
music and video are unfortunately being frustrated by the difficulty of and inability
therefore to resolve digital copyright problems.
4.4. DOWNLOADING OF MUSIC

The possibility of distributing music over the Internet offers the potential efficiency of
the purchaser’s being able to browse and sample from a huge selection of music from
their home or office. This approach provides a very cost-effective means of distributing
music purchases—it increases selection and convenience to the consumer and saves
tremendously on overhead costs (e.g., store building, staff, etc.) to the seller (resulting in
lower prices). Broadband access provides a much more convenient means of selling
music via a download over the Internet than is possible with narrowband access. Music
downloads are much quicker with broadband. One recent estimate is that a typical digital
25
format MP3 music file takes 10 minutes to download with narrowband, but only one
minute with broadband.42
The problem is that electronic downloading of music via the Internet poses difficult
copyright issues. The convenience and accessibility to music over the Internet threatens
the copyright-holder’s ability to monitor copies (and thereby collect royalties) on any
copies made of the music. Furthermore, copyrights have historically been strongly
defended. Prior to the advent of sharing facilities (and even prior to the advent of the
Internet) the entertainment industry has been highly and aggressively protective of its
video and music products. Earlier technology and products such as audio and videotape
recorders caused great apprehension among artists and copyright owners, who relied
upon retail sales of their products and anticipated that copying of their products would
decrease sales.
The advent of music downloads began a new chapter in copyright protection concerns.
Prior to Napster, the music industry had already been fighting to shut down websites that
were amassing collections of illegal MP3 (digital format) recordings. The problem was
compounded when, with the debut of the Napster software and website, users could share
their personal collections of MP3 recordings with anyone else on the Internet. Napster’s
network of MP3 sites was much greater than any single site that the music industry had
previously confronted.
Napster was so popular on college campuses, where students had broadband access from
dormitory rooms and other campus facilities, that some universities such as Yale,
Stanford, Oregon State, Northwestern, and Oxford in the U.K. had to block access to
Napster for reasons of both legal liability and network capacity.43 The recording industry
sued Napster, the software developer, on grounds of copyright infringements.44 Napster
usage reached its peak in February 2001, coinciding with legal rulings in the copyright
suit. Napster experienced record usage the weekend prior to February 12th, when a court
injunction was expected to shut-down the service. That weekend, Napster users
downloaded 250 million songs, 130 million of which were downloaded on Sunday,
42
See “European Telcos Take Lead Over Cable in Broadband Race,” Dow Jones International News
(January 5, 2002).
43
See, for example, Courtney Macavinta, “Schools Crack Down on Net Music Software Napster,” CNET
News.com (posted January 20, 2000); Cecily Barnes, “Stanford Curbs Students’ Napster Use,” CNET
News.com (posted February 12, 2000); John Boland, “Yale Drops Napster After Legal Pressure,” CNET
News.com (posted April 19, 2000).
44
See “Napster: Net Market Destabilizer,” from www.zdnet.com/devhead/stories/articles (downloaded
November 13, 2001).
26
February 11.45 At its February peak, Napster recorded 26.4 million unique users
accessing shared files for a total of 6.3 billion minutes.46
While the recent chapter of free music-swapping appears to be closed, new mechanisms
for downloading music that protect copyrights are being developed. Today, Napster is in
the process of beta-testing its new membership service and is negotiating with the major
recording labels to legally carry their music.47 Under the new system, all music available
through the Napster site is to be legally licensed for the Napster community and, when
users make music available for sharing, the system will check for licensing to Napster.
The site will provide music in a secure “NAP” format, which defines how the file can be
used. The NAP files will not be playable on portable players upon launch of the new
Napster system (although Napster hopes to eventually secure licenses that will allow it).
Napster plans to launch the new membership service in early 2002. The “new Napster”
will charge a monthly fee.
A Napster chief executive reportedly stated in an interview that the new Napster pay
service would cost about $5-$10 a month, which fee would include 50 downloads per
month.48 The precise charge will depend partly upon the outcome of Napster’s
negotiations with the copyright-holders who license the music for sharing by the Napster
community.
Meanwhile, other websites have been launched to offer software to enable users to
download and trade music files. The new software relies on peer-to-peer technology that
allows PCs to be linked together without the need for a central server. The software
products listed below are being widely used as alternatives to Napster. Recent data
regarding the total downloads and downloads for the week of September 9, 2001, with
these software products are presented in below in Figure 4-3.
45
See Rachel Konrad, “Napster Fans Rally Before Closure Threat.” CNET News.com (posted February
12, 2001).
46
See “Global Napster Usage Plummets, But New File-Sharing Alternatives Gaining Ground, Reports
Jupiter Media Metrix,” ZDNet Tech InfoBase (posted July 23, 2001).
47
Information derived from Napster website: http://www.napster.com/newnapfaq/html (downloaded
January 2002).
48
See “USA: Napster launches test of new secure service,” Reuters English News Service (January 1,
2002).
27
Figure 4-3
Peer-to-Peer Software Downloads
30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
Kazaa Media Desktop

Audiogalaxy Satellite
IMesh
BearShare
LimeWire
SwapNut
MusicCity Morpheus
Total Downloads
Downloads for Week of September 9
Source: John Borland, “Rocky Financial Road Awaits File Swappers,” CNET.News.com
(http://news.cnet.com/news/0-1005-200-7230930.html, downloaded November 14,
2001). Total downloads reflect reported cumulative downloads.
The figure shows that peer-to-peer music downloading has become quite significant. It is
less convenient for users than a central site, such as Napster, but it is free. Peer-to-peer
downloading is, of course, subject to copyright challenges, but as a practical matter it is
not easy to shut down.49
Despite the demise of Napster, many others appear to anticipate the commercial appeal of
music downloads over “legitimate” (copyright-respecting) pay sites. The download sites
Presplay, RealOne (formerly RealPlayer) and Rhapsody all launched in December 2001.
Unlike Napster, the services charge a monthly access subscription and also charge per
song. Also, of the three, only Pressplay allows the user to download songs onto CDs that
can be taken elsewhere.50
In January, Virgin Megastore France announced plans to launch a website to allow
French Internet users to download MP3 music files. The site is to be produced in
49
Severe legal penalties might provide an effective remedy, but their legality and plausibility is
problematical.
50
See “Pay-for-music services can’t match old Napster,” The Providence Journal (January 14, 2002).
28
partnership with the British technology firm Tornado Group PLC. Tornado also reports
deals with Richard Branson’s Virgin Megastores and HMS in Britain and Danish retailer
Fredgaard to launch download services in upcoming months.51
4.5. DOWNLOADING OF VIDEO ENTERTAINMENT PROGRAMMING

Another Internet application for which broadband access is especially valuable is
downloading of video entertainment, particularly movies.52 This application is very
awkward using narrowband technology, because the downloading takes many hours and
may be subject to interruption. During the entire downloading period, the user’s
narrowband Internet channel is congested, causing other Internet applications to degrade
and other line uses to be precluded. In addition, plans to watch a movie must be made
many hours in advance; i.e., before going to work in the morning.
Some entertainment movies are beginning to become available. In the top 35 U.S.
markets (i.e., largest cities), MSN has co-ventured with SBC, Verizon and Qwest to
provide MSN Broadband service to make some movies available on-demand through the
company Intertainer, owned by Microsoft, Sony, NBC and Intel. Users may access the
Intertainer service through any ISP or cable operator. The company estimates that 70
percent of all broadband subscribers are in those cities and there is no immediate need to
expand beyond areas that have broadband available.53
In addition to limited availability of content, downloading of video programming also
faces potential copyright difficulties. The recent experience with Napster and users
downloading and swapping music files without copyright permission gravely concerns
the movie industry which perceives (what may well be) a threat to its commercial control
of creative product. Possible solutions to these concerns in the form of securing
copyright protection are “in the works” but have not yet materialized. For example, this
summer, five movie studios announced a joint venture to provide video-on-demand
services over the Internet and encoded by Sony’s “Moviefly” digital rights management
technology. The well-known U.S. Motion Picture Association President, Jack Valenti,
proclaims that there will be a spike in broadband connection sales once online movie
delivery becomes reality.54
51
See “UK: French retailer to launch music download service,” Reuters English News Service (January 14,
2002).
52
This is especially the case given the market power of the dominant MVPD operators.
53
See Jefferson Graham, “Companies Finally Get Busy Selling Downloadable Videos-on-Demand,” USA
Today (November 12, 2001), p. 6E.
54
See Declan McCullagh, “Securing the Broadband Revolution,” Wired (posted at www.wired.com on
August 22, 2001).
29
4.6. COPYRIGHT ISSUES AND THE BANDWAGON

Downloading of music and video entertainment programming can be supplied on a
relatively small scale. Consequently, they are standalone products—not bandwagon
products. They are not subject to serious start-up or chicken-and-egg problems. The
supply of these applications is, nevertheless, severely limited by (failures to resolve)
copyright problems. They may never be supplied on a truly large scale until the
copyright problems are resolved.
If and when those problems are resolved, these two applications could enormously
increase demand for broadband Internet access. They could well be the standalone
applications that allow critical mass in broadband to be achieved with respect to
enhancements to narrowband Internet applications and high-definition web pages, and
thus the “virtuous” positive feedback process that would then follow.
The interested parties are reportedly making some progress in resolving the copyright
problems, but they have been doing so for quite a long time. Perhaps they will work
something out before too long. Nevertheless, government intervention to help resolve
these issues could be constructive and may be necessary to produce a timely solution in
the public interest, as discussed in Section 12.4.3.
4.7. TWO-WAY VIDEO COMMUNICATIONS

Two-way video communications is a quintessential bandwagon service. The value of
having equipment for two-way video communications depends entirely on others’ having
the equipment. There is no standalone application. A single company could, however,
install video-conferencing facilities for communications among different company
locations. Similarly, two persons with a strong community of interest could install a
system to communicate with each other.
Experience to date is that deployment of two-way video communications is not at all
widespread. The user set consists of scattered small groups of users. The service is
nowhere near achieving critical mass as a general telecommunications service.
Currently, while video-conferencing can be accomplished at lower-than-broadband rates,
full-screen versions at slow rates produces jerky images. A solution to this slow-rate,
jerky-video problem has been to reduce the image size significantly but this carries its
own drawbacks.
The use of broadband greatly facilitates video-conferencing. Broadband allows users to
obtain the speed previously available only at video-conferencing centers in large
companies, affording full-screen, high-quality video.
The recent use of videophones (transmitting via satellite) for war reportage in
Afghanistan has brought new attention to the technology. Modern satellite videophone
base stations now weigh significantly less and are smaller than previous models. These
base station units can be connected to standard video cameras to provide two-way video
30
conferencing. There are reports that, spurred by drops in equipment pricing, satellite
telephone systems are being readied for use in ambulances, at remote domestic petroleum
and utility installations, and other sites.55
Despite these developments, video-conferencing has not yet taken off. Data on the
adoption and sales of desktop video-conferencing facilities are sparse. Nevertheless,
companies such as Intel are banking on the prospect that business will pick up; they have
invested in personal computer-based cameras and protocols for video-conferencing.
Avistar Communications Corporation (Redwood, California) recently announced its new
Avistar Personal Camera for use with Avistar’s desktop video-conferencing system. The
model is reportedly 75 percent smaller than conventional PC cameras, attaches to any
monitor, and has high-resolution video and advanced audio capabilities.56 Sony’s new
Notebook PC Vaio GT has a built-in video camera.57 The PC messaging company
Communique recently announced software InTouch that allows users to “peek in” at
home through video-monitoring features. Users can remotely monitor up to four video
cameras attached to their PC, through which they can check in on their family if staying
late at work, etc.58
The growth of two-way video communications is further impeded, because it requires
fundamental changes in the way that users perform the basic function of communication.
Such changes are certainly possible—witness the profound changes wrought by the
deployment of personal computers. But change is difficult and takes time. Bandwagon
effects make the transition all the harder.59
Government intervention could conceivably help solve the start-up problem, as discussed
in Section 13. Nevertheless, the start-up problem remains very difficult.
4.8. ONLINE GAMING

Online gaming has been cited as a primary driver of broadband adoption in Korea.
According to the Pacific Business News,60 online game play has been the major leader in
55
See Doug Bedell, “Will Videophones Ring in a New Era in Communications?,” Dallas Morning News
(January 1, 2002).
56
See “Avistar Releases Matchbook-Sized Camera for Desktop Videoconferencing; Personal Camera
included in Avistar’s New Desktop Suite,” Business Wire (January 7, 2002).
57
See “Ideal Component: Sony’s Notebook PC Vaio GT, with build-in video…,” South China Morning
Post (January 16, 2002).
58
See “Office Workers Access Home Email, PC Files and “Peek In” with I’m InTouch™,” PR Newswire
(January 7, 2002).
59
These issues are discussed at length in Rohlfs, op. cit. (cf. the marketing failure of Picturephone in the
1970s).
60
See “Bullish forecast for Asia broadband,” Pacific Business News (January 31, 2002).
http://pacific.bizjournals.com/pacific/stories/2002/01/28/daily48.html
31
broadband applications. Online gaming has gained popularity not only with young
people, but also adults.61 In 2000, the online gaming market in Korea was largely
dominated by NCsoft’s Lineage: The Blood Pledge™ medieval fantasy game. During
competitions, online gamers would play continuously for several days in succession.62
NCsoft, headquartered in Korea, claims that its game attracts the greatest number of
concurrent players in the world, and currently has more than 2.7 million active
subscribers worldwide playing Lineage.63
5. BROADBAND AND PRODUCTIVITY
The Internet has already introduced a sea change into the way business is conducted,
services are provided, and how people interact, generally. By doing what narrowband
Internet access does even more efficiently, broadband offers the potential to magnify the
Internet’s improvements to the economy and to society.
The impact of the Internet on economic development throughout the world has been
remarkable. By expediting the transactions carried out in all types of businesses far
beyond the communications sector, the Internet has enhanced the productivity and
efficiency of virtually every facet of the modern economy. Furthermore, the productivity
gains are subject to multiplier effects as they work their way through the macro economy.
The Internet has greatly expanded the availability of the information needed by business
and government to operate more efficiently and by individuals to make more informed
choices. It benefits the economy in many different ways; in particular:
The Internet is widely available, supplying to businesses and consumers a
powerful information system;
The Internet is easily accessible and permits new forms of communication
and interaction;
The Internet is distance-insensitive, helping to overcome the
disadvantages that stem from being located far from traditional commerce
hubs (e.g., railroads, shipping ports, major highways);
The Internet is a “democratizer”/“equalizer” that eliminates many of the
disparities between large and small;64 and
61
See “Korea thriving on broadband,” The News Straits Times (January 22, 2002), p. 4.
62
Ibid.
63
http:/www.lineage.com/nci (downloaded March 13, 2002).
64
We have documented these effects in The Internet and the New Economy (Strategic Policy Research,
March 29, 2001).
32
The Internet substantially lowers transaction costs (costs of using markets)

and, thus, significantly extends the boundaries of relevant economic
markets.
These effects have been manifested in a variety of ways. For example, economists
have observed a strong positive correlation between the growth of Internet usage and
the growth of the service sector of the economy.65 (See Figure 5-1, below.) The
vertical dimension is the growth rate of gross value-added in the service sector from
1994 to 1998. The horizontal dimension is the growth of Internet hosts (as a fraction
of 1997 population) from 1994 to 1998. Data are shown for the U.S., Canada, Japan,
and the EU countries for which data are available.
Figure 5-1
Growth of Value-Added in Services in Current U.S. $ Versus Growth
of Internet Hosts as a Fraction of Population, 1994-1998
8.0
Growth of Value-Added in Services in Current U.S. $
7.5 Finland
7.0
6.5
United Kingdom
United States
6.0 Denmark
Netherlands
5.5
5.0
4.5 Canada
Belgium
4.0 Portugal
Italy Japan
France
3.5 Greece Austria
Germany
Spain Luxembourg Sweden
3.0
0.0 2.0 4.0 6.0 8.0 10.0 12.0
Grow th of Interne t Hos ts as a Fraction of Population
The figure shows a strong correlation between Internet hosts and growth of the service
sector. The nine countries with the lowest growth of Internet usage have (with the
exception of Sweden) the lowest rates of growth of the service sector. The rate of growth
of the service sector then increases fairly systematically with Internet usage (again except
for Sweden). Our previous qualitative discussion notes many ways in which Internet
usage can augment productivity. The data suggest that this augmentation may be quite
substantial. There are, of course, always alternative explanations for any data correlation.
Nevertheless, the correlation is fairly striking and certainly consistent with Internet-led
expansion.
65
See ibid.
33
5.1. CURRENT E-COMMERCE TRENDS

Use of the Internet by businesses and consumers has contributed to greater economic
growth and has provided a means of productivity improvement. Regardless of the
bursting of the speculative “bubble” of Internet and other high-tech stocks, use of the
Internet is expanding by leaps and bounds. A great deal of economic activity among
businesses (business-to-business, or “B2B”) as well as between businesses and
consumers (“B2C”) is occurring. The amount of commerce on the Internet is, of course,
expected to increase substantially in the future. The extent of the use of the Internet by
businesses is great across a number of the countries of interest, as show in Figure 5-2,
below.
Figure 5-2
Business Use of Internet for Selected Countries
Percent of Businesses with Access to the Internet
100
95
Percent of Businesses
90
85
80
75
70
Canada France Germany Italy Japan UK US
Percent of Businesses with Website
100
90
80
70
60
50
40
30
20
10
0
34
Figure 5-2 (continued)

Business Use of Internet for Selected Countries
Percent of Businesses Trading Online
100
90
80
70
60
50
40
30
20
10
0
Percent of Businesses That Use the Internet for Marketing

100
90
80
70
60
50
40
30
20
10
0
Percent of Businesses Allowing Online Payment
100
90
80
70
60
50
40
30
20
10
0
Source: Department of Trade and Industry, UK “Business in the Information Age: International
Benchmarking Report 2001, www.ukonlineforbusiness.gov.uk/main/resources/publication-htm/
Bench2001/index.html (downloaded March 14, 2002).
35
Numerous research firms anticipate the growth of economic activity over the Internet.
One such analysis provides estimates the current and projected value of the total amount
of economic activity on the Internet. Estimates for the G7 countries and Korea are
presented in Figure 5-3, below.
Figure 5-3
Value Amount of Commerce over the Net (US$ billions)

3500
3000
2500
US$ billions
2000
1500
1000
500
0
2000 2001 2002 2003 2004
Canada France Germany Italy Japan Korea UK US
Source: Forrester Research, “Forrester Finding: Internet Commerce,”

www.forrester.com/ER/Press/ForrFind/0,1768,0,00.htm (downloaded November 19,
2001).
With regard to consumers, the percent of Internet users shopping online has grown
quickly since the late 1990s. Recent data shown in Figure 5-4 below indicate that a
significant portion of consumers have shopped and completed purchases online.
36
Figure 5-4
Percent of Internet Users Who Have Browsed and
Purchased Products Online
80%
70%
60%
Percent of Internet Users
50%
40%
30%
20%
10%
0%
Canada France Germany Italy Korea UK US
Internet Users Who Have Browsed Online Internet Users Who Have Purchased Online
Sources: France, Germany, Italy, Korea, U.K. and U.S.: AC Nielsen/NetRatings Inc.,
Press Release (June 11, 2001). Canada: Ipsos-Reid, printed by GDSourcing for
“Canadian Internet Stats Pack” (September 2001); (data on Internet purchasers in
Canada not available).
All these data and projections are indicators that the Internet has provided a means of
economic growth through improvements in the productivity of business operations,
reductions in transactions costs and expansion of economic activity.
The economic impact of reduced transaction costs/savings, themselves substantial, can
have far-reaching impacts. The Vice Chairman of the U.S. Federal Reserve Board
observed that “reduced transaction costs, in turn, can broaden the array of choices,
expand the size of markets, and ultimately, through competition, improve the quality of
existing goods and services.”66 Indeed, the increased economic productivity in the U.S.
economy has been evident. The U.S. Department of Commerce estimated that the annual
growth in economic productivity for the years 1996-1999, amounted to 2.8 percent,
double the average annual rate of 1.4 percent from 1973-1995.67 The growth of
66
See Roger W. Ferguson, Jr., Vice Chairman of U.S. Federal Reserve. “E-Commerce: Lessons to Date,”
at the Owen Graduate School of Management, Vanderbilt University, Nashville, Tennessee (February 14,
2001).
67
See Patricia Buckley, et al., “Digital Economy 2000,” U.S. Department of Commerce, Economics and
Statistics Administration (June 2000).
37
computing capacity, the increasing efficiency of networks across which computers could
communicate, and the decreasing costs of software and hardware have made the Internet
accessible to and useful for virtually every individual or organization of any size.
Similarly, the OECD finds that the Internet has reduced costs for businesses, improved
information available to consumers and helped businesses to bypass distribution and
market barriers to obtain access to foreign markets.68 Businesses that are strictly web-
based “e-tailers” are able to achieve efficiencies through the maintenance of a single
inventory and the ability to remain “open” 24 hours a day at low variable costs. Further,
Internet electronic data interchange (“EDI”) systems enable the seller to record efficiently
and accurately transaction information. Cisco, the communications equipment
manufacturer, reports that using e-commerce transactions has reduced its error rate on
orders from 25 percent to 2 percent.69
Though shipping expenses are incurred in the distribution of a number of products
purchased online, a number of service industries’ distribution costs have declined by 50
to 90 percent as a result of electronic delivery. Table 5-1, below, shows the dramatic
decreases in distribution cost per transaction of moving from a “traditional” delivery
system to e-commerce.
Table 5-1
Reduction in Various Distribution Costs
Traditional Cost E-commerce Cost Percent Savings
Airline Tickets $ 8.00 $ 1.00 88%
Banking $ 1.08 $ 0.13 88%
Bill Payment $ 2.22 – 3.32 $ .65 – 1.10 71 – 67%
Term Life Insurance $ 400 – 700.00 $ 200 – 350.00 50%
Software Distribution $ 15.00 $ 0.20 – 0.50 97 – 99%
Source: OECD, “Economic and Social Impact of Electronic Commerce” at 14.
A study conducted by the British Office of National Statistics70 (ONS) also found that
selling over the Internet could create “significant savings” for both businesses and
consumers. The study found that e-commerce allows for a reduction in procurement
costs, search costs, and supply-chain management.
68
See OECD, “The Economic and Social Impact of Electronic Commerce,” (1999) pp. 14, 58-64 and 86.
(hereinafter, “Economic and Social Impact”).
69
See OECD, “Economic and Social Impact,” pp. 13-14.
70
See “Measuring E-Commerce: Developments in the United Kingdom,” Office for National Statistics,
2001, p. 1-2.
38
The ONS study also identified important benefits from the Internet beyond reduced
transaction costs. Indeed, according to the study, the most important benefit of e-
commerce was the potential to reach higher numbers of consumers. Similarly, a survey
undertaken by the Department of Trade and Industry71 found that, in all countries
surveyed, businesses believed that the largest benefit from information and
communication technologies to be improved communication with customers and
suppliers and the workforce.
One innovation that has harnessed this improved communication to enable a number of
businesses to conduct commerce across national boundaries is ECeurope.com.
ECeurope.com is a trade bulletin board and touts itself as the “largest B2B eMarketplace
on the Net.” On ECeurope.com, a user can post an opportunity for purchase or sale of a
business or product (called a “trade lead).”72 The number of trade leads posted per month
increased over 10 times (from about 2,500 to 28,000) between December 2000 and July
2001. As of July 2001, 84,418 companies from 212 countries had registered to use the
trade bulletin board.73 Users attest to the value of the website in providing great
efficiencies. For example:
Yunus Jeftha, Managing Director of Crescent Shipping Services of South
Africa, stated that they “now have business relationships with companies
from all corners of the globe.”
Jean Dominique Bobet, GM of La Braderie in France, shows how efficient
his business has become since using this B2B site: “La Braderie warmly
thanks ECeurope.com for freeing us from the shackles of the old
economy. Our life has become a dream. A little click of the mouse in the
morning leaves the afternoon for golf with the GSM.”
From China, the Shenzen Polytop Industry Development Co. Ltd., said
that this website “provides result-oriented convenience.”
Doug Johnson, President of Johnson & Associates Int’l. needed a brass
part that was not readily available in North America or other parts of the
71
See Department of Trade and Industry, “Business in the Information Age” (International Benchmarking
Report 2001), Section 9.2. (http://www.ukonlineforbusiness.gov.uk/main/resources/publication-
htm/Bench2001/pages/chapter9/ch9_fr.html).
72
Postings are classified by a system of 23 industry sectors and 166 sub-sectors. Sectors include: Animals
and Animal Products; Precious Stones, Metals & Articles; Transport Vehicles & Equipment; Fruit &
Vegetable Products; Chemicals & Allied Industries; among many others. On October 2, 2001, the website
had currently posted 25,488 buy-leads, 25,151 business opportunity leads, 125,017 sell-leads, and 489,445
replies to posted leads. The Buy and Sell leads refer to offers, respectively, to Buy and Sell products,
services or businesses.
73
The largest segment of ECeurope.com users comes from the Far East (China, Korea, Singapore,
Vietnam); the next largest segments are from Western Europe, and then from North America. All
continents are represented in the bulletin board membership.
39
world. “In the past, without your service, it would have taken me six to
seven months of searching to achieve the same results and without the
same degree of success that I now find from ECeurope.com’s service.
Furthermore, this was done at very little cost. This service saves me time
and money.”
Another trade website, GlobalNetXchange.com, was set up by Sears, Roebuck and Co.
and Carrefour, major U.S. and French retailers, respectively.74 GlobalNetXchange.com is
an online marketplace for retailers worldwide and holds auctions for goods available.
Sears estimates that its current EDI costs of $150 per hour will be reduced to $1 per hour
with the new system. Many other industry exchange boards, such as one for the
aerospace industry, are in operation as well.75
Trade bulletin boards such as those described above are not only making business more
efficient, but are creating international trade that may not have otherwise occurred or that
would have occurred at much greater costs and at a slower pace. The OECD has
identified several factors that could inhibit the success of e-commerce in Europe. These
include the continued high costs and the lack of bandwidth, the slow pace of
liberalization of telecommunications, and a lack of awareness of potential benefits of e-
commerce.76
5.2. THE ABILITY OF BROADBAND TO ENHANCE E-COMMERCE

Broadband will serve as a catalyst to e-commerce primarily because of the always-on and
quick-access convenience that broadband offers. Much of the user time online with a
narrowband connection is spent waiting, which detracts from the convenience and
enjoyment of online shopping. Broadband will allow current e-commerce activities to
take place more quickly and easily. This is expected to induce more users to conduct
transactions online. Broadband will also promote e-commerce through broadband-
enabled applications such as advanced websites that are more attractive and information-
rich, as earlier discussed.
Broadband’s “friendliness” to e-commerce has been borne-out by recent experience. In
the U.S., comScore Network tracks online sales. It found that e-commerce holiday sales
skyrocketed on the Monday that people returned to work—and to their high-speed
Internet connections. Sales on Monday, November 26th were about equal to the sales for
the entire preceding weekend. ComScore Vice President Hess stated that, “While the
Friday following Thanksgiving is traditionally the day to watch in the off-line world, it’s
the following Monday—when people return to work and are able to use their companies’
74
A number of other retailers have subsequently joined the consortium.
75
See “Digital Economy 2000;” see also www.gnx.com
76
See OECD, “Economic and Social Impact,” p. 31.
40
high speed Internet connections—that really waves the starting flag for holiday e-
commerce.”77
A survey last year of 128 CEOs conducted by the consulting firm of Ernst & Young
found many CEOs stressing that broadband access would speed up online transactions,
improve customer service, entice people to spend more time and money online and
generally rejuvenate the e-commerce sector.78 Broadband was called, inter alia, “the tide
that lifts all ships” and “a snacking technology…with broadband’s convenience you will
eat more.”79
6. BROADBAND PENETRATION
The penetration of broadband access varies considerably across countries. In this section
we review the data on broadband penetration. In the next section, we assess the reasons
for the variation among countries, using the economic analytical framework of
technology adoption.80
Figure 6-1 and Figure 6-2 below contain statistics on the extent of Internet and broadband
service subscription for the G7 countries and Korea at mid-2001. While in all countries,
about 10 or more out of 100 inhabitants subscribed to Internet services at the end of 2000,
subscription for broadband services remains below 10 out of 100 inhabitants in G7
countries but is exceptionally high in Korea. There has been extensive speculation about
the factors driving the varying broadband penetration rates in these countries, including
extent of competition, amount of time since beginning of broadband deployment, local-
loop unbundling, demographics, and Internet penetration.
77
See “Monday Racks Up Highest Single Day E-Commerce Sales this Year,” Internet Wire (November 28,
2001).
78
See Rachel Konrad (Staff Writer, CNET News.com), “Study: Broadband will shape e-commerce”
(March 26, 2001).
79
Ibid.
80
I.e., analysis of factors influencing the costs and benefits of adoption.
41
Figure 6-1
Internet Users
180.00
160.00
140.00
120.00
Millions of Users
100.00
80.00
60.00
40.00
20.00
0.00
1995 1997 1998 1999 2000 2001
Canada France Germany Italy
Japan United Kingdom United States
Figure 6-2
Internet & Broadband Subscribers of G7 Countries & Korea
(Mid-2001)
60
50
40
Per 100 Inhabitants
30
20
10
0
Canada France Germany Italy Japan Korea U.K. U.S.
Internet Subscribers Broadband Subscribers
Source: Internet Subscribers: Net Users Association data from ratings analysis firms in the G7 countries’.
Relied upon June-July 2001 results, as available. Japan data are from December 2000. Obtained from
www.nua.ie/surveys/how_many_online/**.html (November 13, 2001). SPR analyzed data to obtain an
estimate of mid-2001 subscribers per 100 inhabitants based on December 2000 data using both methods of
measuring subscribership rates. Recent Internet penetration data may differ somewhat, but mid-2001
estimates used here for comparison with mid-2001 broadband purposes. For example, as of the February
2002 Nielsen Net Rating data, Italy had fallen to sixth among the G7 countries in Internet penetration.
Broadband Subscribers (includes DSL, cable modem, and other broadband technologies): The
Development of Broadband Access in OECD Countries, Table 4, OECD (October 29, 2001).
42
The country with the highest penetration rate is South Korea. Several factors contribute
to this high penetration. Korea has both demographics conducive to cost-effective rollout
(densely populated areas with large multiple-dwelling units) and strong competition
among providers. It also has significant government involvement in broadband
deployment. The government has traditionally fostered growth of the Korean telecom
industry through equipment regulation, “buy-local” policies and government funding of
the telecom industry. Similarly, South Korea’s government is committed to developing
an advanced information society through its Korea Information Infrastructure (“KII”)
initiative.81 Korean Government policy has been to promote use of computers and
Internet services through a series of nationwide campaigns to increase public awareness
of the importance of the Internet. In 1999, the government selected twelve companies to
develop low-priced Internet devices and services as part of a program to maximize
Internet use and diffusion of PCs and Internet services.82 The Korean government also
launched a plan in the 1990s to lay fiber connecting the entire country.
The broadband investment has produced some unanticipated consequences. Broadband
access is particularly popular in Korea and online gaming83 has become the “killer app”
not only for young people, but also for adults.84 The Korean Network Information
Center85 attributes the high Internet take-up rate to several different factors: Social,
Technical, Business and Government Policy. Among the Government initiatives cited
are: “active support of venture start-ups”, the “Korea Backbone Computer Network
project” (1987-1992, to facilitate use of PCs); Project to Build High-Speed National
Information Infrastructure (1995-2010, to provide nationwide multi-media facilities), and
Cyber-Korea (1998-2002, to reinvent Korea as an information powerhouse by creating a
pro-Internet environment), IT-related education in schools, nation-wide promotion of
“informatization” (including distribution of free and low-end PCs), and government-
initiated low tariff for Internet access.
Of the G7 countries, Canada has the highest broadband penetration at 4.5 subscribers per
100 inhabitants. The U.S., with the highest Internet subscription at about 25 subscribers
per 100 inhabitants, has a lower penetration of broadband at 2.2 per 100 inhabitants. The
U.K. ranked third with regard to Internet penetration, at 19 subscribers per 100
81
U.S. Department of Commerce, Office of Telecommunications Technologies, “Telecommunications
Market Overview” (Korea).
82
U.S. Department of Commerce, Office of Telecommunications Technologies, “Republic of Korea—
Information on Access to the Internet & Internet Protocol (“IP”) Telephony” (October 1999).
83
Australasian Business Intelligence: The Australian, “New giants invest in uneven S Korea” (May 10,
2000); U.S. Department of Commerce, Office of Telecommunications Technologies, “Telecommunications
Market Overview” (Korea).
84
“Korea thriving on broadband,” The New Straits Times (January 2, 2002), p. 4.
85
http://www.nic.or/kr/center/english/research.html (downloaded January 16, 2002).
43
inhabitants, yet had the lowest penetration of broadband services among the countries
surveyed.
The increase in Internet and broadband subscribership between year-end 2000 and mid-
year 2001 shows the growth trend. In both Germany and the U.K., while broadband
penetration remains low, it increased dramatically—over 200 percent—over the half-year
period. In Italy, France and Japan, broadband subscribership increased by nearly 100
percent. The increase in South Korea, the U.S. and Canada was more modest—at around
50 percent. As seen in Figure 6-3, increased broadband subscribership does not seem
strongly correlated with increased Internet subscribership; while Germany had the highest
increase in broadband subscribership, its increase in Internet subscribership was
relatively low.
Figure 6-3
Growth in Internet and Broadband Subscribers per 100 Inhabitants
from Dec. 2000 to Mid-2001
250%
200%
150%
100%
50%
0%
Canada France Germany Italy Japan South Korea UK USA
-50%
Internet Growth Rate Broadband Growth Rate
Perhaps the most interesting statistic for comparison’s sake is the percent of Internet
subscribers that are broadband users. Broadband users almost always previously used
narrowband Internet access. Thus, Internet users can be considered the population from
which broadband users are drawn. The ratio of broadband users to total Internet users is
the fraction of the relevant population that has adopted the innovation of broadband.
As shown in Figure 6-4 below, about one-fifth of Canadian and Korean Internet
subscribers used broadband technologies to access the Internet in December 2000, but
over one-fourth of Internet subscribers in those countries used broadband access by mid-
2001.
44
Figure 6-4
Broadband Users as Percent of Internet Subscribers

for G7 & Korea (Dec. 2000 & Mid-2001)
35%
30%
Percent of Internet Subscribers
25%
20%
15%
10%
5%
0%
Canada France Germany Italy Japan Korea U.K. U.S.
December 2000 Mid-2001
6.1. BROADBAND PENETRATION BY TECHNOLOGY

Broadband services are currently being provided primarily through DSL and cable
modem services. Alternative technologies such as fixed wireless access, electric power
lines and satellites, are anticipated but have not been fully brought to market in G7
countries. In Japan, NTT’s DoCoMo i-Mode service was recently launched. The i-Mode
service has been successful for text messaging and other packet-switched
communications.
In some G7 countries (France, Germany, Italy), the incumbent telephone company also is
(or has interest in) the major cable operator. That firm controls the roll-out of broadband
Internet access in both technologies in those countries.
In France and Italy, where cable networks pass very few homes,86 broadband services are
more likely to be provided through DSL technology. In Germany and Italy, no cable
modems are reported in service. In France and the U.K. broadband is provided about
equally between DSL and cable modem. In Italy, the “other” technology is a service
called Fast web, a joint venture between e.Biscon and the Milan utility AEM. Fast web
currently offers service just in Milan, but seeks to deploy fiber cable networks throughout
Italy (see Figure 6-5 below).
86
Synopsis of profiles in OECD and BDRC Ltd. Reports.
45
Figure 6-5
Technology Mix of Broadband Connections in G7 & Korea
100%
90%
80%
70%
60%
Other
50% Cable Modem
DSL
40%
30%
20%
10%
0%
6.2. GEOGRAPHIC DISTRIBUTION

In the U.K., data indicate that, of the current 55,856 ADSL lines subscribed to by
residential customers, about 50 percent of such lines are located in urban centers. About
34 percent are located in suburban centers. About 3 percent are in rural villages and less
than 0.5 percent are located in remote rural areas of the U.K. Of the 26,285 DSL lines
subscribed to by U.K. businesses, about 57 percent are located in urban centers, another
30 percent are in suburban centers. As with residential DSL lines, about 3 percent of
business DSL lines are in rural villages and just under 1 percent are in remote rural areas.
Virtually all cable modem subscribers are located in urban centers in the U.K., with a few
located in suburban centers. Only one U.K. operator provides fixed wireless Internet
access to about 2,000 subscribers, 60 percent of which are businesses. Over 70 percent of
all broadband access subscribers are in urban centers and less than 0.5 percent are in rural
remote areas.87
In the U.S., the Federal Communications Commission (“FCC”) recently reported that, at
the end of 2000, 7.1 million high-speed lines connecting homes and businesses to the
Internet were in service; 5.2 million of those lines were residential and small business
87
See Analysys, “U.K. Broadband States Report” (August 17, 2001) (Confidential).
46
subscribers.88 Subscribers to high-speed data lines were reported to be present in 75

percent of the U.S. mailing code areas, some of which are fairly large areas. High-speed
data subscribers were reported to be present in about 45 percent of the least-populated
mailing codes (i.e., rural areas) in the U.S. About 4.3 million of all high-speed lines in
the U.S. were connections at speeds over 200 Kbps.
In Canada, about 23 percent of Internet connections are through cable modem access,
while almost 60 percent are dial-up access. An additional 7 percent of Internet connec-
tions are through DSL connections.89 Almost 40 percent of cable modem subscribers are
located in the province of Ontario, which is slightly smaller than the total portion of
Internet users who are located in Ontario. The Prairie provinces contain about 23 percent
of cable modem users, while Quebec contains 15 percent and the Atlantic provinces
contain only 3 percent.90 These distributions appear to be consistent with distribution of
the Canadian population in general and patterns in most countries where the bulk of
broadband services are available in more populated areas.
While France has one of the higher broadband penetration rates among G7 European
countries, its penetration is not as significant as that in North America or Korea, as shown
in earlier charts. Currently, subscribers are primarily located in Paris and other major
cities. France Telecom provides DSL to over 170,000 subscribers. Cable networks,
though advanced and attractive to customers in major population centers, pass no more
than 32 percent of French homes. Fixed wireless and satellite Internet access appear to
be additional means considered to serve rural subscribers.91
In Germany, with the highest broadband penetration among European G7 countries,
many broadband customers use ISDN technology. Apparently, the widespread use of
ISDN has fed the awareness of (and consequently, demand for) broadband technology.
While a number of competitors are concentrating on urban areas to provide broadband
connections, the incumbent telecom operator (Deutsch Telekom) is providing service in
over 600 cities and plans to make it available to 90 percent of German households.
Of the G7 countries, Italy has the third highest Internet penetration rate. In June of 2001,
approximately 28 percent of Italian households had Internet access. Almost 5 percent of
Italy’s Internet subscribers access the Internet through a broadband connection. 4.2
88
See FCC, “Federal Communications Commission Releases Data on High-Speed Services for Internet
Access” (August 9, 2001).
89
See Canadian Internet Stats Pack, compiled by GDSourcing.com, Source: NFP CFGroup (Issue #11,
October 2001). This information is consistent with ITU data analyzed above.
90
The Daily: Internet Access by Cable, Statistics Canada (August 23, 2000).
91
“International Broadband Market Comparisons Report” (Initial Draft for the Office of the e-Envoy),
Analysys (August 17, 2001) pp. 29-31 (Confidential); “The Development of Broadband Access Platforms
in Europe: Technologies, Services and Markets,” prepared by BDRC, Ltd., commissioned by the European
Union (August 2001) pp. 80-81 (hereinafter, “BDRC Report”).
47
percent use a cable modem connection, while 0.6 percent subscribe to DSL services.
Most of the Internet and broadband development has occurred in the northern parts of
Italy. This area is home to many of Italy’s banks and large businesses.
In Japan, approximately 13 percent of households have access to the Internet. Broadband
access, however, has not yet had a great impact in Japan, as only 2.6 percent of
households have subscribed to broadband services. 1.6 percent of households use cable
modems while 1 percent access the Internet through a DSL connection. Most of Japan’s
Internet access occurs through work, or DoCoMo’s i-Mode mobile phone, as home
access has seen a relatively slow rate of adoption. However, the Japanese government
has stated that it plans to deliver broadband access to one-half of all households by the
year 2005.
South Korea leads all of the OECD countries in broadband penetration. Approximately
13 percent of all South Korean households have subscribed to broadband Internet
services. Korea is the third most densely populated country in the world, with over 470
people per square mile. Broadband service is found in those regions of South Korea,
such as Seoul, that are highly populated. Almost 50 percent of the population lives in the
greater Seoul area, and approximately half of the 12 million households are found in
apartment blocks. Due to its high population density and multi-dwelling units, it has
been easier, and cheaper, to install a broadband infrastructure than in many other
countries.
6.3. PRICES OF BROADBAND INTERNET ACCESS

Broadband penetration can be usefully assessed in light of the prices that have been
charged for the service, as well as those of related services. The OECD reports these
prices for many countries, including the G7 countries and Korea. At the time of OECD’s
last data update (March 2001), strong U.S., Canadian and Italian DSL providers did not
charge a connection fee, unlike operators in the other countries. The U.K. cable modem
rates were comparable to or lower than some cable modem rates of other countries. In
contrast, U.K. DSL initial connection price were considerably above those in other
countries. Figure 6-6 and Figure 6-7, below, show the relative (connection and monthly)
prices for two broadband services, in terms of USD purchasing power parity (“PPP”).
48
Figure 6-6
DSL Service Pricing in G7 & Korea
DSL
250
200
150
US$ PPP
100
50
0
Connection Monthly
Figure 6-7
Cable Modem Pricing in G7 and Korea
Cable Modem
140
120
100
US$ PPP
80
60
40
20
0
Canada France Japan Korea UK US
Connection Monthly
Sources: “The Development of Broadband Access in OECD Countries,” Working Party on

Telecommunication & Information Services Policies, OECD (October 29, 2001). DSL: Table 9. All
DSL unlimited usage, from major incumbent in each country. U.S. (Verizon) and Italy (Telecom
Italia) were waiving connection fees at time of data collection. Speed of DSL connections
(downstream/upstream): 1544-1800/64-640 (Korea), 1500/512 (Japan), 960/120 (Canada), 768/128
(Germany, US), 500/250 (U.K.), 500/128 (France), 256/128 (Italy). Cable Modem: Table 11. In
U.S., monthly rate for customer who also subscribes to cable is only $32.95. In Canada, monthly rate
for customer who also subscribes to cable is only $35.19. Price shown for France is for a customer
who also subscribes to cable. All cable modems are for unlimited use, except France (where service
includes 500 Mbytes).
49
The figures below illustrate the relationships between DSL monthly charge and
subscription rate and cable monthly charge and subscription rate. The scatters roughly
show a higher take-up where monthly charges are lower. For example, Canada, with a
relatively low rate for DSL, has a relatively high subscription rate while the U.K. has had
a high rate for DSL and low subscription rate.
Figure 6-8
DSL Charge v. Subscription Rate
DSL Monthly Charge vs. Subscription Rate
(June 2001)
2.5
2
Percent Population
1.5
0.5
0
0 10 20 30 40 50 60 70
US Dollars
Figure 6-9
Cable Broadband Charge vs. Subscription Rate
Cable Monthly vs. Subscription Rate
(June 2001)
3.5
3
Percent Population
2.5
1.5
0.5
0
0 10 20 30 40 50
US Dollars
Canada France Japan UK US
Source: The Development of Broadband Access in OECD Countries, Table 4, OECD

(October 29, 2001).
50
While absolute prices are interesting, most of the adopters of broadband service are likely
to be prior narrowband Internet-access users. Therefore, it is interesting to consider the
incremental cost (over narrowband service) to a user to obtain broadband service.
The incremental cost is the cost of broadband access less the cost of narrowband access.
The cost of narrowband access may well escalate with metered usage for more intense
usage. As a result, incremental cost (and the attractiveness of broadband access) is partly
determined by the availability of unmetered dial-up service (such as is widely available in
the U.K. and U.S.). As found by Oftel,92 broadband services actually cost less than dial-
up for those consumers with high usage in European countries (e.g., France, Germany
and Sweden) where unmetered dial-up service is not available. For these heavy users,
broadband is a bargain given that narrowband is not.
In the U.K., the incremental price of broadband for a heavy residential Internet user was
£94 per year. The incremental price in the U.S. was £140 per year.93 These incremental
prices do not include installation charges, which (as noted above) have been quite high in
the U.K. So for a potential U.K. broadband subscriber the issue is why spend a bundle of
money to acquire high-speed access that delivers little by way of enhanced services
compared to efficiently priced narrowband services. Why indeed? In other countries
where narrowband prices are high in the absence of unmetered service, the prospective
broadband customer finds it relatively more attractive to subscribe, not necessarily
because the service delivers more—it does not as yet to so—but because its price is
effectively lower than the price of narrowband access for high volumes of traffic.
7. ADOPTION RATES OF COMPARATOR PRODUCTS
In this section, we discuss the historical rates of adoption of a number of products. These
adoption rates serve as a standard of comparison for our assessment of the adoption of
broadband Internet access. In Sections 6 through 10, we have reference to the experience
of these comparator products in our analysis of the drivers of technology adoption.
The products discussed below are advanced technology products and services and have
faced a variety of challenges in achieving mass production by manufacturers and broad
92
See Oftel, International benchmarking study of Internet access (dial-up and broadband), issued by the
Director General of Telecommunications (December 7, 2001) (hereinafter “Oftel Benchmarking Report”).
93
See Oftel Benchmarking Report, op. cit., p. 65. A heavy residential user is measured as one who uses
150 hours. The incremental price was derived from the difference between the average of the two cheapest
broadband rates and the average of the two cheapest unmetered dial-up rates reported in August 2001.
(For data point details, see Oftel Benchmarking Report, op. cit. p. 84). The unmetered usage dial-up rates
include both the subscription rates and annual fixed charges for the year. For the comparison of broadband
to narrowband heavy users, OFTEL used the rate for either unmetered narrowband access or 150 hours of
narrowband access (for those countries where unmetered rates were not available).
51
acceptance by consumers. As such, they provide information that may inform assessment
of the adoption trends of broadband services. We focus on the experiences in the U.S., as
well as other G7 countries (U.K., France, Italy, Germany, Japan, and Canada), where data
are available.
In our discussion of comparator products, we first address products that have not
exhibited “bandwagon effects” and then those that have. “Bandwagon effects” are the
benefits a consumer enjoys as a result of others’ using the same product or service.94
High-technology products that generally have not exhibited “bandwagon” effects include:
cable television, and satellite broadcasting and mobile telephony. While these products
are subject to scale economies, subscribers do not significantly benefit from more
subscribers to the product.95 Products that do entail “bandwagon effects” include
television, VCRs/videocassettes, mobile telephony, home personal computers and
compact discs.
For each driver of technology adoption, we identify the comparator products for which
that driver was especially important. We then assess the likely importance of that driver
for adoption of broadband services. At the end, we summarize the implications of the
various drivers for the growth of broadband services.
7.1. NON-BANDWAGON PRODUCTS

7.1.1. Cable Television
The following graph shows the take-up of cable television in several countries. In the
U.S., subscription television was introduced in 1951 by the Zenith Corporation.
Development of coaxial cable distribution technology enabled the provision of cable
television (“cable TV”) in the 1960s and 1970s.96 As seen below in Figure 7-1, cable TV
has been particularly successful in Canada, the U.S., and Germany since 1980. Cable TV
penetration in the U.K., where cable TV has had to compete with widely used and
established satellite services, has been lower.97 Cable penetration in France (where there
has been relatively light use of TV, generally) has also historically been low.98 Cable TV
was not introduced in Italy until the 1990s, almost simultaneously with deployment of
94
The concept of “bandwagon effects” in the context of the products described herein is partly derived
from Jeffrey H. Rohlfs, op. cit.
95
There may be modest network externalities with mobile telephony at the relevant margin.
96
See David L. Morton, “History of Broadcast Technology: 1945 to Present,” IEEE Broadcast Technology
Society (downloaded from www.ieee.organizations/society/bt/online_exhibit.html, November 12, 2001).
97
See Chris Hobley, “Just numbers: Numbers on Internet Use, Electronic Commerce, IT and Related
Figures for the European Community,” European Commission’s Electronic Commerce Team (Information
Society Directorate) (January 2001), p. 60. Satellite TV penetration is 47 percent of homes with TV sets in
the U.K. (hereinafter “Hobley”).
98
See Hobley, op. cit., p. 28.
52
satellite TV.99 While penetration in Italy through 1999 remained low, recent data
indicate that cable TV penetration in Italy has recently increased significantly.100
Figure 7-1
Cable TV Subscribers as a Percent of Households: 1980-1999

80%
70%
60%
50%
40%
30%
20%
10%
0%
80 85 90 95 96 97 98 99
Year
Source: SPR analysis of ITU and OECD data.
The offer of digital cable services, begun in recent years, may affect the adoption of cable
service. Adoption of digital cable TV in the U.K. and U.S. has been relatively rapid. In
the U.S., large cable operators reported over 10 million subscribers collectively in
2001,101 about one-fifth of the total cable TV subscriber base in the U.S. and about 14
percent of U.S. households.102 The U.K. penetration rate is twice as high as France and
Germany.103 In both France and Germany, about 7 percent of their populations have
digital cable subscriptions. In Italy, 9 percent of the population has digital cable TV. In
Canada, cable operators are providing service to about 9 percent of their subscribers.104
99
See Italian Communications Regulatory Authority Annual Report on Activities and Programmes of Work,
Third Part, Section 1 (Rome, June 30, 1999).
100
See Hobley, op. cit., p. 41.
101
Based on SPR analysis of 2Q01 and 3Q01 financial reports of the largest U.S. cable operators: AT&T,
Time Warner, Adelphia Communications, Cablevision, Charter Communications, Comcast, Cox
Communications, Insight Communications, and RCN.
102
Calculated as one-fifth of the total cable penetration rate of 69 percent of U.S. households.
103
See Hobley, op. cit., pp. 28, 32, 41 and 59.
104
Letter to Mrs. Ursula Menke, Secretary General, CRTC, from Ron Keast, President & CEO, LTA
(March 12, 2001).
53
7.1.2. Satellite Broadcasting

The adoption of satellite broadcasting has shown wildly divergent patterns. Satellite
broadcasting was first demonstrated in 1962. However, it was another 13 years before
the first satellite distribution of TV programming by the U.S. network HBO (now a cable
network) occurred.105
Data for the G7 countries (Figure 7-2), while incomplete, show differences in adoption
rates. Over 30 percent of households in Japan and Germany subscribe to Direct-To-
Home (“DTH”) services, while, penetration rates had been much lower for Canada, U.S.,
and Italy.
Figure 7-2
Estimated DTH Satellite Receivers as a Percent of Households:
1980-2001
35%
30%
25%
20%
Percent
15%
10%
5%
0%
80 85 90 95 96 97 98 99 00 01
Year
Source: Non-U.S.: SPR analysis of ITU and OECD data. U.S.: SPR analysis of Satellite
Broadcast Communications Association data.
7.2. BANDWAGON PRODUCTS

7.2.1. TV/Broadcasting: color, HDTV
Television has been successful across the world. Figure 7-3 depicts the nearly universal
adoption of television in the countries examined.
105
See “Broadcast Technology Timeline” from www.wsiu.org/digitaltv/index/shtml (downloaded on
November 20, 2001).
54
Figure 7-3
% Households with Television
120%
100%
80%
60%
40%
20%
0%
1965 1970 1975 1980 1985 1990 1995 1999
Canada France Germany Italy Japan UK
Figure 7-4, below, shows the adoption of television and color television in the U.S.
Adoption of television in the U.S. exceeded 50 percent by 1955 (15 years after launch)
and 90 percent by 1965 (20 years after launch). Color television was somewhat less
quickly adopted, but has achieved nearly universal adoption today.
Figure 7-4
TV Users as Percent of Households
100%
90%
80%
70%
Percent of Households
60%
50%
40%
30%
20%
10%
0%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
% HH w TV % HH w Color TV
Sources: TV Basics, Television Bureau of Advertising, Inc. 2000.
55
7.2.2. VCR/Videocassettes
Figure 7-5, below, depicts adoption of videocassette recorders (“VCRs”) in the U.S.
Prices of VCRs decreased dramatically during the period recorded in the graph. VCRs
had achieved almost 50 percent penetration by 1990, about 15 years after the product’s
launch.
Figure 7-5
VCR Users as Percent of Households
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1970 1975 1980 1985 1990 1995 2000
%HH w VCR
Sources: TV Basics, Television Bureau of Advertising, Inc. 2000.
7.2.3. Mobile Telephony

Figure 7-6 shows that mobile telephony has been rapidly adopted in most countries
examined. Analog mobile telephony was introduced in the U.S. in the early 1980s, then
digital mobile telephony networks were introduced in the early 1990s. In most of Europe
and Japan, mobile technology (from networks to customer equipment) is much different
than in the U.S. As seen below, many G7 countries experienced faster growth in
penetration of mobile telephony services than the U.S. Although we have listed mobile
telephony as a non-bandwagon service, we note that SMS text messaging service (on
GSM systems) is subject to network externalities. As the number of mobile subscribers
grows, the value of this feature increases. The positive feedback associated with this
bandwagon effect probably contributed to the more rapid growth of mobile telephony in
Europe than in the United States.
56
Figure 7-6
Mobile Telephony Subscribers as Percent of Population:
1985-1999
60%
50%
40%
Percent
30%
20%
10%
0%
85 90 95 96 97 98 99
Year
Source: SPR analysis of ITU and OECD data.
7.2.4. Home PCs

Home personal computers (“PCs”) exhibited a fairly steady adoption rate in the U.S., but
it took over 15 years to achieve over 50 percent penetration. As with VCRs, the prices
decreased dramatically during the period reflected in Figure 7-7. The Internet has
undoubtedly affected the adoption of PCs.
57
Figure 7-7
PC Users as Percent of Households
60%
50%
40%
30%
20%
10%
0%
1984 1989 1993 1997 1998 2000
United States
Source: U.S. Census Bureau, “Home Computers and Internet Use in the
United States, August 2000,” September 2001.
ITU Internet penetration data for 1998-2000 show that increase has generally shown a
steady increase throughout the G7 countries, also.
Figure 6-8
PC Penetration
70
60
50
PCs per 100 Inhabitants
40
30
20
10
0
1998 1999 2000
Source: International Telecommunications Union, Internet Indicators

(www.itu.int/ITU-D/ict/statistics, downloaded on March 2002).
58
7.2.5. CD Players
Figure 6-9, below, depicts the rapid adoption of CD players in the U.S. As shown, they
achieved 30 percent penetration in seven years, and almost 90 percent penetration in less
than 20 years.
Figure 7-9
Compact Disc Player Users as Percent of Households
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1983 1986 1990 1993 1994 1999
United States
Sources: “Informated Households: A Market for New Media,” Institute for the
Future, 1996; “History of CD Technology” OneOff Media, Inc.
http://www.oneoffcd.com/info/historycd.cfm.; Health and Health Care 2010,”
Institute for the Future, 2000.
8. DRIVERS OF TECHNOLOGY ADOPTION
In this section, we develop an analytical framework for assessing the primary drivers of
technology adoption to provide a basis for predictions about the future of broadband.
This sub-section describes the analytical framework. Sections 8 and 9 then focus on
supply-side drivers and demand-side drivers, respectively.
Since broadband is a relatively new technology, there is less empirical evidence on
relevant technology drivers than is available for many older technologies. We, therefore,
examine a set of older “comparator” technologies as well as broadband in the G7
countries and in Korea, and compare the supply-side and demand-side adoption drivers
for these various technologies.
Of course, every technology is different and no one can precisely predict human behavior
with respect to any particular new product. Nevertheless, this structured approach and
59
examination of both old and new technologies provides some useful insights as to the
most promising targets for government intervention to promote broadband, should such
intervention be deemed appropriate. This analysis supplies the analytical basis for our
assessment of suitable government policies in Section 11 and Section 12.
The analytical framework described in this section draws heavily upon the ideas
presented in two papers by Gilbert and Rohlfs.106 These papers describe an economic
model of the principal supply- and demand-side factors that influence the rate of
technology adoption in the communications sector and, of course, operate more generally
as well. We adapted this analytical framework in light of experience since 1985 and in
order to reflect those factors which seem most important for the technologies we examine
as well as for broadband specifically.
8.1. SUPPLY-SIDE DRIVERS

8.1.1. Productive Capacity
An important supply-side constraint on technology adoption is the productive capacity of
the supplying firms. In high-technology industries, an important constraint is the
practical limit on the rate at which firms can grow. Extremely rapid growth involves
higher costs and possibly degradation of product quality.
The need for fixed investments can also limit growth. Fixed investments usually require
considerable time to carry out. Until new capacity can come on line, the pace of growth
is limited. Productive capacity for producing an innovative product in an established firm
may also be limited by insufficient funding and manpower. Capabilities and individuals
within a firm may be oriented toward prior technologies, and take time to evolve to
accommodate the new technology.107
8.1.2. Producer Reputation
Producer reputation can also play a role in the rate of adoption. A firm with an
established reputation for service and product quality can expect less resistance to a new
product introduction than a firm with no comparable track record. In order to maintain a
reputation for quality and service, a firm must generally take measures to ensure user
satisfaction with a new product and attempt to convince potential customers of this
106
See Richard J. Gilbert and Jeffrey H. Rohlfs, “Forecasting Technology Adoption,” Appendix A to
Access Charging and Bypass Adoption, Shooshan & Jackson, Inc., March 1985 and “Forecasting
Technology Adoption with an Application to Telecommunications Bypass,” Telecommunications Demand
Modelling: An Integrated View (Elsevier Science Publishers B.V., North-Holland, 1990).
107
See Clayton M. Christensen, The Innovator’s Dilemma (1997: Harvard Business School Press, Boston,
Massachusetts). As Utterback author remarked, “innovations either enhance or destroy competencies that
a firm already possesses.” (James J. Utterback, Mastering the Dynamics of Innovation (1994: Harvard
Business School Press, Boston, Massachusetts)).
60
commitment. Producer reputation is especially important for new products, whose

adoption is inherently risky for the user. It is important that the user not be additionally
concerned about whether the supplier will perform as expected.
8.1.3. Industry Concentration
Industry concentration can affect the adoption of new technology in various ways. A
larger number of firms participating in the market may spur innovation. Also, a
multiplicity of firms is likely to be more effective than a monopolist in identifying and
meeting user needs in many diverse market niches. On the other hand, a firm
commanding a large share of the industry demand is better positioned to make large risky
investments in a new technology. If the technology turns out to be successful, such a
firm is well-positioned to appropriate a large portion of the gains. Investment incentives
may thus be greater in this circumstance.
8.1.4. Vertical Integration
Vertical integration—i.e., integration between stages of production in the product
chain—can affect a supplier’s behavior in a particular market. A supplier who has a
vested interest in an upstream or downstream component may promote an innovation
largely because it expects to reap benefits in other parts of the product stream. For
example, a supplier may be willing to incur some losses in supply of content if doing so
induces purchase of a content player that it profitably supplies. Vertical integration may
also afford a means of ensuring adequate supplies of complementary goods needed to
promote demand for a new innovation.
8.1.5. Promotional Pricing
The rate of adoption for a new technology is affected by the use of promotional
campaigns and price competition to increase demand. An innovating supplier, faced with
the task of creating a new market or sub-market for an emerging product, may use pricing
strategies that promote adoption and accelerate the growth of market share. An
especially important kind of promotional campaign is to subsidize start-up costs of new
users; e.g., installation costs and/or the costs of user-owned equipment.
8.1.6. Regulation
Regulation can affect suppliers’ willingness and/or ability to produce a product. For
example, governments may intervene to allocate resources (e.g., spectrum) needed to
offer a service. Government may stipulate the technology or technical standards that
must be used for a particular good or service. Government may make production more
attractive through direct government support in the form of purchases (e.g., “buy local”
programs). Finally, government may offer financial incentives (e.g., preferential tax
treatment, export/import taxation) that serve to stimulate production.
Government regulation can also retard deployment of new technology. In this regard, a
perverse aspect of much regulation is to limit the upside potential to regulated firms that
61
introduce successful innovations. If the regulator appropriates the gains from successful
innovations or (worse) forces the firm to give those gains to its competitors, the odds
become “Heads, I lose; tails I break even.” To avoid such unfair gambles, the regulated
firm is likely to minimize investment risk. That means delaying innovations until they
are completely safe, rather than taking the calculated risks that are necessary to maximize
(expected) social welfare, or foregoing innovations altogether.
8.1.7. Copyright
We have already discussed copyrights in the context of broadband Internet access.
Resolution of copyright issues is always important where the innovation involves the
distribution of copyrighted material.
Often, a new technology supplies a means (i.e., platform) for distributing creative
product. Such distribution requires the permission of copyright-holders, who seek to be
compensated through royalties. Copyright-holders are often concerned that a new
technology may facilitate illegal copying of their material with no payment of royalties.
These issues must be worked out in negotiations between the distributor and the
copyright-holders. To the extent these negotiations are protracted or ultimately fail,
adoption proceeds at a slower pace and may even halt.
8.2. DEMAND-SIDE DRIVERS

8.2.1. Bandwagon Effects
We have already discussed the importance of bandwagon effects for broadband Internet
access. More generally, they are an important driver of technology adoption throughout
high-technology markets.108
The following factors all influence the pace of adoption of new technologies in
bandwagon markets:
Demand must reach critical mass, or the product cannot succeed;
Once critical mass is achieved, demand for bandwagon products is subject
to positive feedback. That is, growth in demand tends to stimulate further
growth;
A valuable standalone application—that is, an application that has
substantial value, even when the user set is small—greatly helps (but does
not guarantee) achievement of critical mass; and
With complementary bandwagon effects, expectations may play a
significant role. In particular, purchase of the platform product is often
108
See Rohlfs, op. cit., supplies documentation with respect to many high-technology industries.
62
based, in part, on the consumer’s expectations regarding the availability of

the complementary products in the future.
8.2.2. Net Benefit from Innovation
The most important demand-side driver is usually the expected benefit from innovation.
To start with, a consumer must expect that the benefit from using a product will exceed
its cost. Otherwise, he or she will presumably not purchase it.
More generally, one would expect that innovations with greater net benefits (i.e., benefits
less relevant expenses) will be adopted more quickly. But the magnitude of the net
benefit need not be the most important factor in adoption speed. Even apart from other
factors, the pace of adoption is not necessarily proportional to the net benefit.
8.2.3. Ease of Innovation
The ease of innovation can also affect the pace of technology adoption. In particular, a
new technology may require significant dislocations before it can be put to effective use.
An ideal technology would be extremely easy to adopt—simply plug it in and benefit
from the cheaper, faster, or better performance. Often, a new technology cannot be
adopted unless users substantially alter the way they do business. Users may be reluctant
to adopt a new product if it means starting at the top of a new learning curve.
Suppliers often respond to customers’ desires for ease of innovation by offering turnkey
packages. They strive to offer products that can be easily used, even by unsophisticated
users. Some high-technology products (e.g., personal computers) inherently require a
certain level of sophistication. In such cases, suppliers generally do the best they can to
minimize the sophistication required.
9. ”COMPARATOR” EXPERIENCE REGARDING SUPPLY

DRIVERS
9.1. PRODUCTIVE CAPACITY

Most of the comparator products that we have analyzed did not require heavy
infrastructure investments and did not appear to encounter any serious problems of
inadequate productive capacity. Mobile telephony is the exception.
Productive capacity appears to have been a constraint on the adoption rate of cellular
telephony, at least in the U.S. As discussed in Section 6, growth of the U.S. cellular
industry has been quite rapid over a period of almost two decades. Growth during this
period has been limited primarily by the speed at which cellular operations could
63
reasonably grow. Extremely rapid growth would, of course, have been possible, but it
usually involves higher costs and may lead to deteriorating service quality.
In the U.S., mobile telephony was introduced in the early 1980s, but penetration had
reached only about 2 percent by 1990. Penetration increased to about 13 percent by
1995. Penetration later increased somewhat more quickly, reaching 25 percent by 1998
and 31 percent by 1999.
As capacity of the industry increased during this period, operators lowered prices to
attract additional users to fill the new higher level of capacity. This pattern has persisted
until the current day. Prices did soften when PCS capacity came on line in the late
1990s—hardly a surprising outcome.
Productive capacity also may have constrained other countries. At one point, Nordic
countries were forced to put expansion plans on hold in order to deal with the capacity
constraint. In order to reduce the capacity problem, operators reduced the size of their
cells in busy areas. This allowed for a modest increase in the number of radio channels
per cell. However, this approach was not successful in all areas (such as Stockholm), so
a new tactic was devised. The network of “omni-directional base stations” was replaced
with two rings of sectored cells. This configuration (later termed a “Stockholm flower”)
eventually proved to be insufficient, as well.109 Other European countries similarly
encountered capacity problems in the early years of mobile. With the delay of the
planned 1991 introduction of the new GSM system to complement its existing NMT-450
system, Belgium was plagued with capacity problems.110 Capacity was also a problem in
Rome and Milan, until the market introduced sectored cells in those cities in 1989.111
Congestion posed a continual problem in France’s Radiocom 2000 system and, by 1988,
was limiting growth in Paris.112
9.1.2. Implications for Broadband
In the U.S., short-run capacity constraints have probably limited the growth of broadband
Internet access, somewhat. In particular, expansion requires infrastructure investments,
which take considerable time to plan and implement.113
The ability to provide DSL services is constrained by the quality and length of existing
telephone loop facilities. Loop characteristics may not support DSL services, or may
limit the particular type of DSL that may be supported. The length of the copper portion
109
See Garry A. Garrard, “Cellular Communications: Worldwide Market Development,” Artech House
Publishers: London, 1998, pp. 52-55.
110
Op. cit., p. 73.
111
Op. cit., p. 77.
112
Op. cit., p. 81.
113
As we later discuss, regulation has also operated to reduce investment incentives.
64
of the loop determines which technologies will work and at what data rates. There are a
number of different types of DSL, which differ in the transmission rates in each direction.
Some are symmetrical (e.g., SDSL), some asymmetrical (e.g., ADSL).
ADSL is the most commonly provided DSL in the U.S., and provides speeds of about 1.5
Mbps downstream and about 128 Kbps upstream. ADSL systems can reliably operate in
the U.S. up to about 12,000 feet. Other, more expensive DSL systems can operate up to
18,000 feet, beyond which the lines usually contain loading coils (a mechanism for
improving voice transmission at the expense of high frequency capability). Loaded
cables cannot support high-speed service.
One method of extending high-speed services to longer lines is to equip portions of the
lines with digital carrier systems operating on fiber. If the proper channel banks are
installed, these can provide whatever capacity is needed over the fiber lines, and the
limitation then becomes the length of copper as discussed above.
DSL constraints will vary with the particular characteristics of the extant telephone plant
infrastructure. For example, telephone loop plant in the UK generally uses thinner wires
than the standard (22-gauge) wires used in the US. Accordingly, the loops are shorter,
with the wire centers closer together. As a result, the maximum distance over which DSL
can operate (discussed above) may be shorter, and the standard ADSL downstream data
rate may differ, set to match the European digital hierarchy.
The capacity constraints for DSL do not apply so much in the early stages of growth; say,
up to 10 percent market penetration. Demand at that level can be largely met by using
loops that do not require conditioning. It will become increasingly important if and when
the product evolves from its current niche status to mass-market status. Then,
infrastructure investments will be required to support growth.
Cable modem service also involves capacity constraints. These relate to the capacity of
the coaxial cable that is allocated to Internet access. Cable companies have generally
been unwilling to devote a sizable portion of cable capacity to Internet, because doing so
would diminish the number of television channels they could deliver.
Given this concern, Internet growth must be supported by expansion of the cable
company’s fiber-optic capacity. Beyond the fiber-optic cable, the coaxial cable channels
used for Internet in each segment of the network can be dedicated to the Internet users in
that particular segment. Of course, that tradeoff could change if demand for broadband
substantially increases. In that case, cable operators might well choose to devote a larger
portion of their capacity to broadband Internet access, and a smaller portion to television
programming.
Because of these supply constraints, one would anticipate the growth of broadband
penetration to be somewhat slower than the growth of most of the comparator products
discussed in Section 6, other factors the same.
65
9.2. PRODUCER REPUTATION

Producer reputation was a positive factor in the roll-out of all the comparator products
that we analyzed. The producers generally had solid reputations from the outset. The
products did not develop serious problems in the field; so the producers’ good reputations
were reinforced.
A possible exception to this pattern is the cable industry in the U.S. Cable service has
always been subject to periodic outages, and the suppliers have long had a reputation for
poor service quality. The suppliers have been able to prosper with this level of
performance, because they have, until recently, had a virtual monopoly on distribution of
multi-channel video programming.
Adoption of cable television service was quite rapid, even given these problems. The
reason is that cable service—even given the outages and poor service quality—has great
value to television viewers. In particular, cable provides many more viewing options for
television viewers, who generally watch for several hours a day. In addition, many cable
subscribers could ensure continued enjoyment of television programming by maintaining
their outside aerials (or indoor rabbit-ear antennas), as a fallback.
The long-standing reputation of the telephone companies in providing telephone service
offered reassurance to subscribers in the quality of the telco-provided DSL service.
Producer reputation was particularly important to purchasers of DSL with which their
telephone service was bundled. If the DSL service failed, so could their telephone
service. Subscribers would be less inclined to bundle their telephone service with the
DSL service of an unfamiliar operator of unproven reputation, and thereby possibly
jeopardize their telephone connection.
As discussed above, U.S. cable companies did not (and still do not) have a reputation for
good service. Nevertheless, periodic service outages for Internet access are not a serious
problem for most residential users, so long as the outages are not too frequent. A key
point is that cable television service is not lost as a result of such an outage (unless it
would have been lost anyhow). For this reason, the reputation of the cable supplier has
less importance than that of the telephone supplier, because the DSL user could
potentially lose telephone service.
In any event, there are have been some problems in provision of both DSL and cable
modem service. DSL subscribers have had telephone service outages. Many subscribers
to cable modem service have been disappointed by the slowness of the response during
periods of high congestion (though the service may still be as fast as narrowband dial-up
access). These problems without doubt retard the adoption of broadband Internet access,
supplying excuses to delay adoption decisions until “kinks” in the service are ironed out.
66
9.3. INDUSTRY CONCENTRATION

Industry concentration has had different effects in different industries. In the cable
industry, which in the U.S. was largely a monopoly, deployment of cable facilities was
rapid because the operators’ exclusive franchises assured them of reaping the monopoly
rents on their investment. On the other hand, many other products that faced strong
competition also thrived. Competition has promoted product advancement and
aggressive marketing for companies hoping to gain an “edge” in the market. The CD and
VCR markets were both very competitive, and the products were deployed very quickly.
Mobile telephony and direct-to-home satellite service were concentrated industries, but
not monopolies. In those cases, oligopolistic rivalry appears to have been a strong
catalyst for rapid deployment.
The implications of competition for broadband adoption are not yet clear. As with cable,
a firm with control of a large share of the industry demand has more to gain from
inducing consumption of the product. The firm has more of an incentive to make
infrastructure investments to deploy the product, as it is taking less of a risk in terms of
prospects for recouping that investment. Nevertheless, as with the other products, a
larger number of firms participating in the market usually spurs greater innovation and
price competition through more intense competitive rivalry.
The broadband regulatory position in the U.S in this regard has been somewhat
schizophrenic in terms of whether to promote competition or exercise regulatory control
to promote faster broadband deployment: while there has been strong pressure to allow
open competition to telephone company DSL networks through unbundling, cable
operators have been allowed to maintain a virtual monopoly on cable modem service into
the home.
9.4. VERTICAL INTEGRATION

9.4.1. Black-and-White Television
Vertical integration played an important role in the development of black-and-white
television.114 At the dawn of television, FCC rules allowed television networks to own
VHF stations in up to five metropolitan areas. CBS and NBC acquired VHF stations in
the largest metropolitan areas and negotiated long-term affiliation agreements with
stations in smaller metropolitan areas. As a result of these station ties, the networks
could ensure that programming in which it invested would be aired on their stations.
Without this vertical integration, investment by networks in programming would have
presumably been much riskier. The revenues that a station obtained in any given
114
See discussion of television in Rohlfs, op. cit., pp. 142-143.
67
community would then have been the outcome of bilateral bargaining. Although the
major networks would have substantial bargaining power in these negotiations, the local
stations (especially those that controlled scarce VHF spectrum assignments) would also
have substantial bargaining power.
The outcome of bilateral bargaining with organizations that have substantial bargaining
power is always risky and uncertain. There is the additional problem that the network
would have to bargain to recover any costs that it had already incurred for programming
(i.e., sunk costs). Meanwhile, the station would know that those costs were already sunk,
and the network would benefit from virtually any deal, even it did not recover the full
amount of those sunk costs.
The bottom line is that vertical integration led to a much smoother production process. It
probably afforded incentives for the networks to produce more costly and popular
programming (though not necessarily to everyone’s aesthetic taste).
9.4.2. Color Television
Once a standard for color broadcasting was developed that was compatible with black-
and-white sets (so that color broadcasts would not sacrifice exposure to the black-and-
white-set audience), NBC and CBS stations began to deploy color programming quite
rapidly, with most deployment occurring in 1954. NBC was the leader in this venture
and broadcast for more hours of color programming than did CBS.115 Significantly,
NBC, via its RCA ownership, was vertically integrated into television set manufacturing.
The success of color television was extremely profitable for RCA in terms of revenues
per set sold. In the case of NBC/RCA, the profit from TV set sales far outweighed the
incremental cost of producing color programming. Despite the fact that this vertical
integration was only partial (NBC faced stiff competition in broadcasting and RCA also
faced competition in set manufacturing), it provided enough of a catalyst to jump-start the
color television industry and ultimately permit it to reach critical mass.
Vertical integration played a key role in the deployment of both black-and-white and
color television. It ensured a market for the programming of television networks. It
afforded incentives for NBC to lead the way in broadcasting programs in color.
The analogous relevant vertical integration for broadband Internet access is forward
integration by the suppliers into downstream services; particularly, Internet service
provision. This vertical integration, unlike that in television, appears to provide only
modest (if any) efficiency gains. For example, cable’s integration into Excite@Home’s
ISP service does not seem to have provided much benefit. Excite@Home recently filed
for bankruptcy, and threatened to cut off service to Comcast and other cable partners.
115
See Rohlfs, op. cit., p. 146.
68
Indeed, any little benefit that might have accrued from the vertical integration was likely
outweighed by the potential harms of allowing the cable control of broadband access to
the home. ISPs such as Excite@Home and RoadRunner were providing only the ISP
access service, and were not being stimulated to generate new content by the cable
interest. This scenario contrasts with vertical integration in the traditional cable service,
where cable MSO ownership of programming did result in funding of new content
because it would directly benefit the MSO.
9.5. PROMOTIONAL PRICING

In order to boost adoption rates, cable companies have engaged in promotional pricing
campaigns to encourage subscription. Often, cable providers offer low prices for the first
few months enabling users to try the service at a more reasonable price. After the trial
period, the price normally reverts to the original rate. Cable companies often enhance
adoption rates by adding trials for premium channels such as HBO, as well, in order to
“sweeten” the deal.
9.5.2. DBS
Similarly, Direct Broadcast Satellite (“DBS”) suppliers subsidize new suppliers by
offering substantial discounts on (and sometimes even free) earth-station equipment. By
doing so, the DBS operator reduces the customer’s risk and necessity for immediate cash
outlay.
Similarly, the cellular industry has seen the payoff from subsidizing handsets, a large up-
front cost associated with adoption of that technology. The cellular industry was able to
“soften the blow” to the consumer’s pocket by offering inexpensive handsets with a
commitment to a monthly fee of some amount for at least a year.
Promotional pricing could be a strong tool in broadband take-up. To-date, installation
rates for BT’s DSL service have been relatively high, as discussed in detail in Section
8.2.3. Usually, in a competitive environment, the producer will assume some of the up-
front investment to get the user “on-board.” BT does not, heretofore, seem to have taken
that approach with DSL service, and that may partially explain the low take-up rate in the
U.K. to this point.
The appropriate level of BT’s DSL prices is certainly controversial. Regardless, it
probably makes sense for BT to charge somewhat less than cost for installation. BT
69
could, if it chose, make up the shortfall (in an expected value sense) by charging higher
monthly charges. That is the way that competitive firms price products such as
broadband Internet access. BT recent announcements116 regarding some substantial
revisions in its service pricing appear quite encouraging on this score. Among other
things, BT is launching “Plug & Go” with a free activation charge (waiving customary
£65 activation charge). It has also announced a £10 reduction in the price of current retail
broadband products as well as reductions in the prices of its wholesale offerings.
9.6. REGULATION
Government regulation has affected the adoption of technologies in myriad ways. For
example, both cable television operators and mobile telephone operators were obligated
to reach certain coverage “build-out” requirements as a condition of their licensing. Both
standard television and high-definition television (“HDTV”) broadcasting rights came
with a “use-it-or-lose-it” clause (although some would argue that HDTV operators have
managed to skirt this requirement, to some extent). These government regulations on
licenses arguably encouraged the more rapid deployment of facilities.
In the context of broadband, governments have mandated unbundling of the incumbent
telephone network’s broadband facilities for the stated purpose of encouraging
deployment of competing broadband facilities. This requirement has the certain
drawback of making it less profitable for the incumbent to deploy initial broadband
facilities, as it will be required to share the benefits of its investment in those facilities
with competing suppliers. The benefits of the policy are questionable. This issue is
discussed in more detail in Section 10.5.
9.7. COPYRIGHT
At one time, cable television encountered serious copyright problems. The value which
cable provided at that time derived largely from retransmission of over-the-air television
signals. Cable companies could not do so without the permission of copyright-holders.
Negotiating copyright agreements would have been quite difficult. Local television
stations regarded cable television as a competitive threat, which could give users the
choice of programming other than local broadcasts. Furthermore, negotiating copyright
agreements with all the copyright owners that contributed to television programming
would have involved substantial transactions costs.
116
See www.btopenworld.com/broadband/news_article/0,2653,id=2085943,00html
70
This problem was resolved through government intervention. The government gave
cable companies a compulsory license to use copyrighted material without the permission
of the copyright-holders. The cable company was not required to pay any royalties on
local television programming but was required to carry all local television signals.
Copyright fees were, however, paid on distant signals and distributed to copyright
owners.
9.7.2. Digital Audio Tape Players
The importance of copyright issues has been evident for digital audio tape (“DAT”)
players. Manufacturers of DAT players hoped to follow the success of CDs, but
copyright complications contributed to their failure to do so. Record companies feared
illegal copying of the music from DAT format. In 1989, the Serial Copy Management
System (“SCMS”) provided some measure of protection against illegal copies, but did
not prevent it altogether. Therefore, record companies remained unconvinced that their
intellectual property would be secure. Eventually, in 1992, the record companies and
player manufacturers reached an arrangement for copyright issues. The resolution
required government intervention. A law was passed that required DAT players to
incorporate the copy-protection technology. In addition, royalties were assessed on blank
DATs and distributed to copyright-holders. Unfortunately, by the time this occurred, the
product was obsolete.
We have already discussed the importance of resolving copyright issues to accelerate
deployment of broadband Internet access. Governments, which are responsible for
copyright laws in the first place, can play a constructive role in this process. The above
discussion illustrates two possible approaches to government intervention. We later
conclude with an extended discussion of the current digital copyright “morass.”
10. “COMPARATOR” EXPERIENCE REGARDING

DEMAND DRIVERS
10.1. BANDWAGON EFFECTS

Bandwagon effects were instrumental in the pace of adoption of color television in the
U.S. During the early years of color television, there was only a limited amount of
programming available—primarily over the NBC network. The combination of this
limited programming and the high price of color television sets (which were over $1,000
for much of the period) prevented the product from achieving critical mass.
71
As the price of the sets decreased, more consumers purchased the product, and critical
mass was achieved. In particular, the greater penetration of color television sets induced
more broadcasters to increase color programming. This led to positive feedback. Once
the quantity and quality of color programming increased, still more consumers began to
purchase the sets in large quantities, and the technology was pervasively adopted.
(Further detail on this history is given in Section 8.4.2.)
10.1.2. Videocassette Recorders
Bandwagon effects played an important role in the adoption of VCRs. VCRs had a major
standalone application, the time-shifting of television programs. The standalone
application allowed the product to reach critical mass. The effect of critical mass was
that videocassette rental stores spontaneously appeared. The market was then subject to
positive feedback. The proliferation of videocassette rental stores stimulated the demand
for VCRs, which led to further proliferation of videocassette rental stores, and so forth.
Mobile telephony, like VCRs, had a strong standalone application. The standalone
application for mobile telephony is the ability to communicate with subscribers to the
fixed telecommunications network. For many users, this standalone application was/is
more valuable than the bandwagon application; viz., communicating with other mobile
subscribers. For this reason, mobile telephony did not encounter the start-up problems
often associated with bandwagon products.
10.1.4. Compact-Disc Players
Bandwagon effects appear to have been a major driver with respect to the adoption of
compact disc players. CDs offered major improvement in the fidelity of recorded music,
as well as the convenience of random access to selections on the disc. When the players
were first launched, however, only 650 titles of prerecorded music were available to the
consumer. The ability to play these 650 titles constituted the standalone application.
Even though 650 titles are miniscule, compared to the selection available on records or
(analog) tapes, they sufficed to achieve critical mass. An important consideration for
buyers was the expectation that more titles of prerecorded music would be available in
the future.
Once critical mass was achieved, this expectation was fulfilled. More and more titles
became available. This led to positive feedback, and demand for CD players was
stimulated, which induced further supply of prerecorded titles.
The experiences described above have several implications that are relevant for
broadband:
72
The experience of color television indicates that no matter how good the
product, the price must be right to achieve critical mass. Once the price
came down enough, color television rapidly achieved almost universal
acceptance. The product was also very good in the early years, but the
price was too high for mass-market acceptance.
The experience of VCRs and mobile telephony demonstrates the great
value of a standalone application in achieving critical mass.
The experience of CDs demonstrates the importance of expectations. The
standalone application of being able to play 650 titles was of limited
value. But consumers expected (correctly, as it turned out) that many
more titles would be available in the future.
The standalone application for broadband is the ability to perform current Internet
applications more rapidly (though this application also embodies network externalities
and complementary bandwagon effects, as previously discussed). This application does
support a sizable user set. It does not, however, appear to constitute critical mass. In
particular, the current user set has not sufficed to induce the widespread use of advance
web pages.
The applications of downloading music and video entertainment could potentially allow
broadband to achieve critical mass, but first important copyright issues need to be
resolved.
If and when the applications for downloading music and video entertainment become
legal and convenient, it is possible that critical mass could be achieved. Users may
subscribe to broadband, even if initial selection of music and video entertainment are not
wide. Even a modest selection, like the 650 titles originally available on CD, may
support the expectation that a much greater selection will be available in the future.
A serious consideration with respect to broadband is whether the price is right. More
precisely, is the price so right that it allows critical mass to be achieved on the basis of
the standalone applications? This issue is discussed in detail below.
Two-way video communication is another potential bandwagon application of broadband
Internet access, but the start-up problem for this service will likely prove very difficult to
solve.
10.2. NET BENEFIT FROM INNOVATION

All the comparator products that we analyzed provided substantial benefits to consumers.
For example, television offered entertainment for several hours a day (on average).
VCRs can be viewed as a way to substantially improve the quality of one’s television
viewing or a convenient low-cost alternative to movies. Cellular service, while not
utilized as much time per day as television, may be the sole means of communications in
many situations (most importantly in an emergency).
73
To calculate the net benefit, these considerable benefits must be compared to the price.
When color television made its U.S. debut in 1949, consumers did not rapidly adopt the
technology. It was not until after 1965 when sales of color televisions became
significant. One reason for this slow adoption was the high price of the sets. In the
1950s, a color television set cost $1,000, the equivalent of $4,000 today. A decade later,
color television sets were still priced at three to five times the amount of a black-and-
white television set. Consumers were unwilling to pay that much to watch color
television on a single station. It was not until 1965, when innovations in technology were
made, that the price of color sets was dramatically decreased. After prices were driven
down, mass adoption of the color television commenced.
The wireless telephone market (finally) came to the United States (after a long
regulatory-related delay) in 1984. At first, the rate of take-up was rather slow, then it
quickly grew, and surpassed the expectations of most service providers. Initially, the cost
of cellular telephone service was such that the first subscribers were the most prosperous
of the population or business users. These users were more interested in convenience
than in cost, and had few qualms with the high prices and, made over 500 minutes of
calls per month. This generated an average of $3,000 to $4,000 in annual revenue per
customer. This user set constituted a very profitable niche, but the prices were too high
to support mass-market acceptance.
Cellular providers soon began to reduce their prices and, by 1988, the average annual
revenue per customer had dropped to $1,100. After 1988, though, annual revenue per
customer began to fall by 8 percent each year. Penetration, at the same time, had begun
to rise sharply, and by 1991, there were 7.56 million subscribers. By the beginning of the
1990s, prices had declined dramatically.
While all judgments as to product value are necessarily subjective, broadband would (at
least at the current time) seem to offer relatively less incremental value at a higher
incremental price than many other past technologies that have proven successful. Most
current broadband applications can be conducted on a narrowband access, albeit with less
convenience (but then for many convenience is not that pressing an issue). Under the
current (price and applications) circumstances, it does not seem that quick expansion of
broadband to the mass-market should be expected.
74
Limited benefits obviously limit broadband adoption. McKinsey & Company predict117
that broadband take-up in France, Germany, Italy, the Netherlands, Sweden, and the U.K.
will be less than publicly reported forecasts. The McKinsey projections claim to take
account of several factors that influence subscription, one of which is an awareness of
broadband’s benefits and the price of a broadband connection. Even for those that do
adopt, Robert Samuelson notes118 that some broadband subscribers find the service to be
of minimal utility, given current applications. While downloading of large data files is
certainly quicker with broadband, the much-vaunted multimedia service and advanced
Internet applications are yet to be developed and innovated. E-mail, the most common
use of the Internet, benefits only modestly from a broadband connection. Plus,
subscribers sometimes realize that they do not spend as much time on the Internet as they
had thought, and find it difficult to justify the extra expenditure for broadband.
Samuelson notes that color TV had the same experience in the 1960s, when networks
would not produce color programs until people had the color sets but people would not
buy color sets until there were more color programs.
To calculate the net benefit of broadband Internet access, one must compare these
(limited) benefits to the price of service. As prices come down, the “value-for-money”
equation will look better and subscription may increase. But, as discussed in Section 5.3,
the incremental price of broadband Internet access is actually currently negative in
several European countries (e.g., France, Germany and Sweden) that do not have
unmetered dial-up service available. Given that the relevant price is negative, we must
ask why demand for broadband Internet service has not been subject to explosive growth
in these countries. Possible explanations are as follows:
Many Internet users have limited usage. For example, they may use the
Internet primarily for e-mail correspondence. For these users, the
telephone usage charges do not amount to much. For them, the
incremental price of broadband is positive, and the benefits to them are
relatively small.
There may be supply problems. Indeed, one would expect suppliers to
find technical problems when the relevant price is negative.
The users may (rightly or wrongly) perceive a risk that their telephone
service may be interrupted—the actual experience of some early adoptors.
The limitation on growth in those countries is certainly not that the value of the service to
heavy Internet users (apart from service-quality problems) is less than the price.
117
See “The dynamics of European broadband,” The McKinsey Quarterly, 2001 No. 3
(http://www.mckinsey quarterly.com).
118
See Robert J. Samuelson, “Broadband’s Faded Promise; High-speed home Internet service is the wave
of the future. But the future isn’t now,” Newsweek (December 17, 2001), p. 51.
75
The net benefit calculation is quite different in the U.K. and U.S., where the relevant
price, even for large residential Internet users, is positive. As noted in Section 5.3, the
incremental price is £94 per year in the U.K. and £140 in the U.S. plus installation
charges (which have been quite high in the U.K.)119
While not inconsiderable, these incremental prices do not appear excessive, compared to
the prices of many of the successful comparator products. But, the benefits of broadband
Internet access to a typical Internet user—given current applications—strike as
considerably less valuable than the benefits provided by the comparator products; e.g.,
color television, DBS, mobile telephony, and VCRs. That may change at the margin as
rates decline and the value of time becomes increasingly scarce.
The positive incremental price for broadband, even for high-volume users of the Internet,
likely factors into the relatively slow take-up of broadband services in the U.K. to date.
Indeed, BT has cited the low price of narrowband unlimited access in the U.K. as one
reason for the poor take-up of broadband.120 The relatively recent launch, dynamically
changing price levels and changes in other variables make it difficult to clearly
distinguish the relative importance of the different broadband drivers. We would put our
chips on demand rather than supply constraints, and on the relative paucity of
applications as the main “culprits” restraining take-up.
Broadband prices were relatively high when broadband service was first launched: cable
providers NTL launched cable modem service in April 1999 and Telewest in March
2000, while BT launched its DSL in July 2000.121 There were also other factors that may
have deterred take-up. For example, initial cable modem speeds were slow—NTL’s
initial service was only 265 Kbps (though it was later increased to 512 Kbps).122 The
cable industry was in a period of consolidation, with the result that some cable companies
may have delayed broadband deployment and promotion while awaiting the
determination of their fate. Also, cable companies may have been concerned about
undermining slower-speed connections already being offered on their facilities.
The pricing environment soon changed dramatically. Prices declined dramatically within
the year after BT began offering its DSL service. In February 2001, NTL dropped prices
to $27.85 per month, among the cheapest rates in the OECD. In May 2001, Telewest also
dropped prices, to $34.83 per month. In September 2001, BT halved its installation rate
119
In the U.S., such charges are frequently waived.
120
See “Germany beats Britain at broadband,” Newswire (VNU) (November 23, 2001).
121
See Working Party on Telecommunication and Information Services Policies, The Development of
Broadband Access in OECD Countries (OECD, November 29, 2001), p. 42.
122
Ibid., p. 42.
76
for selected business broadband Internet services.123 And now, as noted above, BT has
cut its rental and connection fees.
10.3. EASE OF INNOVATION

Generally, “turnkey” products are less daunting to users and more readily adopted. Most
of the comparator products that were successful and quickly adopted were relatively easy
to install and operate.
One exception to the readiness of the population at large to take on the complexities of a
new technology was the personal computer. Personal computers could be difficult to
operate for the novice user. As a result, many consumers have been dissuaded from
purchasing a PC because they feared being unable to use it. Consequently, PC
penetration has grown much more slowly than penetration of the other comparator
products and is still lower.
Most adopters of broadband already use narrowband access, facilitating the ease of
innovation to high-bandwidth access. Robert Samuelson has noted124 that there may be
some difficulty in making broadband functional, even where it is offered. Samuelson has
described his frustrating and protracted personal experience in “self-installing” a DSL
line into his home—a not unique experience, apparently. While self-installation is not
mandatory, most customers do so because company installation is expensive.
Self-installation does not appear to be a sound strategy for achieving mass-market
acceptance. As we stated earlier, suppliers often subsidize the start-up costs of new
users. Furthermore, they do so without requiring the user to take on complex installation
tasks.
11. SUMMARY OF IMPLICATIONS OF DRIVER ANALYSIS

FOR BROADBAND INTERNET ACCESS
The implications of our driver analysis for broadband Internet access may be summarized
in the following terms:
123
See “BTopenworld slices 50 per cent off the cost of business broadband,” M2 Presswire (September 19,
2001).
124
See Robert J. Samuelson, “Broadband’s Faded Promise; High-speed home Internet service is the wave
of the future. But the future isn’t now,” Newsweek (December 17, 2001), p. 51.
77
11.1. SUPPLY-SIDE DRIVERS

Supply-side constraints will likely limit the rate of growth of broadband
Internet access to a significant extent in the future. Expansion to a mass-
market service will require substantial infrastructure investments, which
take time to plan and implement efficiently and consistent with low-cost
implementation.
The technical problems that DSL has encountered and the congestion
problems that cable-modem service has, heretofore, encountered will have
some negative effect on growth, but these effects should be transient in
nature.
Competition (which provides sharp incentives for efficiency and
innovation) will lead to more rapid roll-out of broadband Internet access
by speeding investment and fomenting price rivalry, but the government
must make a credible commitment to allow rewards for risk-taking to be
realized lest investors keep their wallets in their pockets.
Vertical integration between the suppliers of broadband Internet and ISPs
appears likely to provide little, if any, efficiency gains.
Competitive firms usually subsidize customer startup costs, including
installation and costs of customer-owned equipment. In contrast, BT has,
theretofore, had large installation charges that have undoubtedly repressed
growth. There is progress on their front in the form of BTs recently
announced changes in terms and various conditions of its service
offerings.
Regulation that limits the upside potential of broadband Internet access to
facilities deployers—particularly requirements for sharing of DSL loops—
diminish the incentives to deploy facilities.
11.2. DEMAND-SIDE DRIVERS

The standalone applications of broadband (viz, being able to perform
current Internet tasks more rapidly) do not appear to allow the service to
achieve critical mass. In particular, they have not led to the widespread
availability of advanced web pages. One sign of critical mass having been
attained will be spontaneous investments in website upgrades on a
ubiquitous basis.
The applications of downloading of music and video entertainment might
well allow broadband to achieve critical mass. First, important copyright
issues need to be resolved. Time is wasting on this score.
The incremental cost of broadband Internet access in the U.K. is not
excessive, compared to the prices of the comparator products that we
78
analyzed. The price does appear to exceed the value to the typical Internet
user of the standalone applications.
The tack of reducing installation costs by allowing the user to undertake
complex installation tasks for a discounted price does not appear to offer
great promise for achieving mass-market acceptance. This is not to
suggest that the offer is not worth making; merely that there are downsides
and that most may not find such inducements sufficient. The more usual
strategy in competitive markets is to subsidize installation and not ask the
user to perform complex installation tasks.
12. POLICY IMPLICATIONS: SUPPLY-SIDE
12.1. INTRODUCTION
Our positive analysis suggests that broadband is primarily “demand-constrained.” As a
“value-for-money” proposition, broadband does not currently command a large
subscriber base relative to the total population of households.125 It appeals to a limited
population segment for which perceived value is high relative to the costs entailed
because of extraordinary consumption and/or work-related utility derived from the
capacity to transfer large computer files quickly and conveniently to and from home base.
For the more “run-of-the-mill” user (whose demand intensity reflects lower utility from
the less frequent or less time-sensitive transfer of large files), greater speed and
convenience are not sufficiently highly valued (given the complementary
informational/entertainment file content value currently on offer) to warrant “paying the
price.”
Before turning in the next section to the normative question of what, if anything,
government policy can or should do to stimulate demand, here we consider several
important supply-side issues that warrant comment as they relate to demand stimulation
and service take-up.126
125
I.e., it occupies a “niche” and currently does not constitute a broad-based “mass” service in terms of
take-up.
126
Our earlier analysis (and the previous research undertaken by the Office of the e-Envoy, to which we
have had reference) suggests that broadband is not significantly “supply-constrained” in most regions
within the U.K. (although there are, evidently, some regional pockets where service deployment is
currently uneconomic). Comparatively speaking, the U.K. is significantly ahead of the U.S. in terms of
spectrum-based alternatives, having already licensed use of substantial spectrum resources for broadband
applications. As cable networks have only recently or are only now being deployed in the U.K., the
economic replacement/reconditioning of legacy assets is much less of an issue than in the U.S. where
extensive revamping of aged cable plant has proven necessary and is gradually occurring in due course. As
we discuss presently, the U.S. regulatory regime also likely restrains broadband network deployments by
79
12.2. PRICE REGULATION

If demand is conceived as a “value-for-money” proposition with higher perceived value-
for-money driving higher demand, demand stimulation can, in principle, reflect either
increases in value or decreases in price. Most of what we subsequently have to say about
demand stimulation and government policy relates to increases in the perceived value of
broadband connections. Government policy can also conceivably affect demand through
its ability to affect price, although this capacity is ultimately limited by the potential
value to be derived and the inability of price to fall below zero (i.e., alternatively, the
ability to fund a subsidy that produces a negative, i.e., a “below-zero” price).
The difficulty is that, while lower prices may enhance incentives to consume, they may
also reduce incentives to produce, depending on how they are financed. A policy that
seeks to “grow broadband” by stimulating demand through price controls on relevant
telephone companies by limiting investment incentives. The U.K. authorities (have been compelled by
external authorities and U.S. pressure, seemingly against their better judgment, to) operate a similar regime,
although our assessment is that the parameters of the U.K. regime have, in general, been calibrated with
greater sensitivity to supply incentives and, thus, with lesser adverse impacts on incentives for network
resource deployments. In particular, the U.K. authorities have relied upon an almost completely
transparent process for achieving industry consensus regarding the level of interconnection charges to be
established and have had reference to a variety of different costing methodologies resulting in a more
highly robust system of charges. The U.S. authorities, in contrast, initially “prejudged” the (non-)viability
of facilities-based (loop) competition and decided to rely upon service-based (rather than facilities-based)
competition premised on very low-cost (indeed, in our view, below-cost) interconnection charges (viz., very
low-priced charges for excessively unbundled service “elements”). Prompted in part by several caustically
critical judicial reviews and in light of widely judged failures of the current regime, the U.S. authorities
have now had “second thoughts” and are reevaluating several earlier, in our view, ill-considered decisions.
They have recently experienced “enlightenment” regarding the fundamental importance of “facilities-based
competition” and the need for fostering incentives for competitive facilities deployment in establishing
interconnection charges and various rules governing competitive interconnection. As FCC Chairman
Michael K. Powell recently stated:
Facilities-based competition is the ultimate objective. I believe that other methods of entry are
useful interim steps to competing for local service, but Commission policy should provide
incentives for competitors to ultimately offer more of their own facilities. This would decrease
reliance on incumbent networks, provide the means for truly differentiated choice for consumers,
and provide the nation with redundant communications infrastructure.
See “Digital Broadband Migration,” Remarks of FCC Chairman Michael K. Powell, Press Conference
(10/23/01). Good overviews of recent U.S. policy misadventures are supplied in: Robert W. Crandall and
Thomas W. Hazlett, “Telecommunications Policy Reform in the United States and Canada,”
Telecommunications Liberalization on Two Sides of the Atlantic, Martin Cave and Robert W. Crandall, eds.
(Washington, D.C., 2001); Robert W. Crandall and Jerry A. Hausman, “Competition in U.S.
Telecommunications Services: Effects of the 1996 Legislation,” Deregulation of Network Industries:
What’s Next?, Sam Peltzman and Clifford Winston, eds. (Washington, D.C., 2000); and Alfred E. Kahn,
Whom the Gods Would Destroy, or How Not to Deregulate (AEI-Brookings Joint Center for Regulatory
Studies, Washington, D.C.), 2001.
80
service offerings may thus prove counterproductive (and the source of considerable
frustration) if it simultaneously constrains supply and service deployment by dissipating
investment incentives.127 Unless the government is in a position to control prices and,
simultaneously, to command various resource deployments by private (or state)
enterprises, a broadband policy reliant upon price controls may remove with one hand
what it supplies with the other—surely a recipe for failure.128
There is both an “old” and a “new” economic growth theory that points to the potential
prospect of super-normal rewards to induce and, thus, the potential advantage of
“imperfect” competition to promote expansion of economic welfare through innovation
of advanced technology.129 Forthrightly stated, this view advocates limited regulation (of
profits) to maximize investment incentives as the appropriate supply-side policy for
promotion of new service offerings. By allowing innovators to make what they can from
innovating, incentives for investment in new services and requisite resource deployments
are maximized.
127
This is but one of many policy initiatives that might easily produce a “crisis of rising expectations.”
“Crisis” results as expectations are raised, in the worst case, by the very policies that thwart supplies—
notwithstanding their intent and (mis)conception. Consider, for example, the effects of various extreme
network element unbundling proposals in the U.S., which have “hyped” the arrival of competition and
consumer expectations, but produced a variety of service-delivery failures and consumer unhappiness and
disaffection.
128
This presumes controls are “binding”; “loose(r)” controls that supply an opportunity to reap adequate
rewards for innovation and risk-bearing are a different story—they (seek to) balance the objective to ensure
reasonable rates through prevention of price “gouging,” on the one hand, with the need to provide
necessary investment incentives, on the other. The basic point is that “new” services are, by their nature,
riskier to develop and deploy and, thus, demand higher rewards to be economic. Price controls may
activate otherwise dormant demand, but simultaneously suppress the needed motivation for deployment of
costly resources in risky ventures.
129
The “old” growth theory is exemplified by Joseph A. Schumpeter, Capitalism, Socialism and
Democracy (1942); the “new” growth theory in the work, inter alia, of Paul Romer. See Paul M. Romer,
“Why, Indeed, in America? Theory, History, and the Origins of Modern Economic Growth,” NBER
Working Papers 5443, January 1996. While the patent system and the United Kingdom’s initial duopoly
policy for telecom competition both reflect a favorable view of limitations on competition as a means for
promoting economic welfare enhancement, we judge the appropriate policy to be one of laissez-faire, i.e.,
specifically not one requiring affirmative steps to limit competition; rather one that, at least initially,
“accepts” the outcome of a suitably conditioned competitive process. The patent system lowers barriers to
competition in new products by, in effect, raising barriers to competition for existing products that involve
use of patented inventions. Similarly (as recent U.S. experience suggests), policies to promote “service”
competition may hamper “facilities-based” competition by making it less economic. The price a service-
based competitor is permitted by regulation to pay for a network element is, simultaneously, the price a
would-be competitor in the supply of network elements can charge. A low regulated price may help some
competitors (but does not necessarily do so if the market is thereby “spoiled” by over-stimulated entry), but
simultaneously harm others. The policymaker has to decide the amounts of different kinds of competition
desired as a matter of public policy. Note that it is primarily “facilities-based” competition that substitutes
for government regulation in the long run; service-based competition relies upon continued government
regulation for its continued existence.
81
Pursuit of this kind of (largely) “hands-off” policy carries two significant corollaries:
First, it implies that demand stimulation through efforts to reduce what people have to
pay should (if they are relied upon at all) operate through some kind of explicit
subsidization funded from general tax revenues (i.e., in a minimally distortionary way).
As we earlier noted,130 there are compelling economic arguments that indicate that
extraordinary inducements to expand supply to particular geographic areas, while
perhaps less politically attractive as the incidence of benefits is less geographically broad,
likely represent a more economic means for expanding take-up than broad user subsidies
(i.e., extraordinary inducements to expand demand).131
Not only are user subsidies less preferred to regional supply subsidies in terms of benefit-
cost ratios, they reduce investment incentives to the extent that they are narrowly
“funded” by BT’s or other broadband suppliers’ shareholders/general ratepayers.132 In
the absence of compulsion, suppliers will be willing to supply less than what buyers want
to buy at “controlled” prices; if compelled to meet demands at the controlled prices,
suppliers will have to make up the difference between (higher) costs at the higher rates of
demand133 induced by the subsidized prices and the revenues produced at those controlled
rates. Subsidies encourage greater output, but have a cost; net output effects depend on
how subsidy costs are specifically funded. All taxes distort to some extent; in general,
more broadly-based taxes minimize efficiency distortions.
The second corollary of a relatively laissez-faire policy is that its consistent application
may conflict with enforcement of other policies. In the U.S., for example, DSL rates are
relatively loosely regulated and, in some cases, virtually unregulated, but incumbent local
exchange carriers (“ILECs”) are required to offer competing local exchange carriers
(“CLECs”) various “building-block” elements from which different services, including
DSL, are “constructed” at very low rates. Thus the input price regulation scheme tends,
in effect, to undermine the potentially incentive-enhancing properties of the output price
regulation scheme: The ILECs’ ability to earn on their broadband investments is
constrained by the requirement that they, in effect, price discriminate in favor of their
competitive rivals. Their incentives to deploy broadband investments are thus attenuated,
and the pace of their rollout has (it is argued) suffered as a result.
130
See, supra, at Section 2.
131
This, by itself, does not imply that subsidization is warranted, i.e., that the benefits of subsidization are
worth the costs; the assertion is that one type of subsidy is comparatively more efficient than another.
Neither type of subsidy may be warranted on economic or other grounds. User subsidies tend to be
expensive as they seek to attract potential subscribers who, by definition, place a comparatively low
valuation on the service and, hence, require a significant “nudge” to take it up. A focused supply subsidy
seeks to make the service available in an otherwise unserved region to customers who place a high value
(although still perhaps less than what it costs to supply) upon it.
132
I.e., out of profits or increases in charges for other services.
133
Assuming an upward-sloping (i.e., increasing) cost/supply curve.
82
Resale requirements may serve useful purposes by, for example, preventing unreasonable
price discrimination. The problem in this case is not a resale requirement, per se, but the
failure to conform the input and output price regulation regimes—which, ironically, is
normally what resale itself does. In the U.S. case, the input regime does constrain what
happens in the output market; the problem is that input prices are set too low and the
result is (arguably) suppression of incentives to deploy broadband capabilities more
rapidly and widely.134 The large tin of (potentially resell-able) “tunny” fish is “on sale”
for five pence; but, not too surprisingly, few tins appear on the shelf. The potentially
salutary effects of the relatively “loose” retail price control (in terms of affording
incentives for innovation) are undermined by the perverse effects of the miscon-
ceived/miscalibrated input charge control.
12.3. ACCESS REGULATION

There are, in our view, legitimate economic issues raised in terms of the appropriate
interface between an economically “dominant” electronic “pipeline” operator135 and
suppliers of complementary products and services, notably various information content
134
As Alfred Kahn has argued:
Through ‘unbundling’ or forced sharing requirements, the local phone companies must now open
not only the old networks built when they were monopolists, but their new networks designed to
compete—indeed to catch up—with cable and wireless rivals in the new broadband market.
Moreover, the FCC has imposed—on the telephone companies only—a pricing scheme for these
shared resources that is manifestly hostile to the large, risky investments required for genuine
competition in these markets.
Why would any new competitor assume such risks, in an atmosphere of both competitive and
technological uncertainty, when regulators allow it to free ride on the investments of the phone
companies at rates intended to recover only the costs of an ideally efficient new entrant writing on
a clean slate? And why would any incumbent firm spend billions of dollars building a new
broadband network when confronted with the heads-competitors-win, tails-we-lose prospect of
having to make its successful investments available to rivals at rates below their actual costs,
while alone absorbing the costs of investments that fail?
In a 1999 opinion, Supreme Court Justice Stephen Breyer offered the FCC wise counsel: ‘Rules
that force firms to share every resource or element of a business would create not competition, but
pervasive regulation, for the regulators, not the marketplace, would set the relevant terms.’
See “Unleash the Broadband Economy,” The Wall Street Journal (December 13, 2001), p. A16. In
contrast, Faulhaber (op. cit., pp. 1-2) contends that:
In the short to medium term, impediments to deployment have been on the supply side: the ability
of cable and telephone companies to get the product into the hands of customers. The RBOCs in
particular have had problems executing installs and delivering reliable service with good customer
support. In the longer term, both the cable industry and the RBOCs were sluggish in recognizing
the strategic opportunity of broadband, and both entered rather late, dragged into it by competitive
necessity. We cannot expect these industries to have the strategic vision to take aggressively the
next steps in broadband; platform competition may push them forward.
135
I.e., an operator possessing significant unilateral market power.
83
providers. A variety of organizational failures may arise in consequence of the market

power possessed by an economically dominant firm, whose monopolistic control of
access may afford both the incentive and ability to behave in ways that reduce aggregate
economic welfare or are (at least perceivedly) unfair.136
At the same time, economic theory suggests that access regulation can potentially lessen
incentives to invest in initial deployment of a network or various network upgrades,
compared to circumstances where greater control over access is permitted. Thus the
incentive to build the only bridge to an island might conceivably be reduced were the
bridge builder not permitted to prevent competition in the supply of various
complementary products and services on the island itself.137 Note that, were the bridge
136
U.S. analysts and policymakers have, for example, worried that local monopoly cable system operators
(i.e., economically “dominant” MVPD operators in the U.S., in contrast to the U.K., where cable is “the
new kid on the block”) may have the incentive and ability to constrain the flow of subscriber revenues to
the program production industry, thus reducing the supply of programming with adverse direct
consequences in terms of program quality as well as the possibility of adverse indirect consequences in
terms of “system” competition through control of essential (program channel) inputs. There is also concern
that cable firms, integrated into complementary input supply, will discriminate against their unaffiliated
content and conduit rivals. While these concerns were initially manifested in the context of multichannel
video programming, with the evolution of system service delivery capabilities and the economically
dominant position U.S. multiple cable system operators have now achieved in residential broadband service
supply, the concept of “programming” is now being, correspondingly, more expansively conceived to
include a plethora of web-based content. Thus, the U.S. antitrust authorities have imposed (so far modest)
open access requirements on economically dominant cable system operators seeking to consolidate
ownership of multiple local monopoly systems. See, e.g., David Waterman and Andrew A. Weiss, Vertical
Integration in Cable Television (MIT Press/AEI Press: 1997):
The faulty logic by which the FCC arrived at the 30 percent limit on the number of homes passed
that a single MSO can have demonstrates that point…In defining its limit, the commission has
said little more than that 30 percent is a non-threatening market share by usual antitrust standards
and that the level of ‘MSO concentration is too low to be of serious concern’…In its 1990 report
recommending against any size limits on MSOs, the commission cited numerous commentators
who had made that argument or had appealed to economic rules of thumb that a single firm having
less than a 35 to 40 percent market share was unlikely to have sufficient market power to behave
anti-competitively…
The FCC is simply wrong to apply the HHI standards or other benchmarks of firm concentration
to the MSO case in that way…The rate at which an MSO can accumulate monopsony power has
nothing to do with the standard interpretation of the HHI, because virtually none of the cable
system buyers competes with another for programs…An MSO having a national market share well
below 30 percent could exert significant monopsony power over many cable networks.
In general, the ability to exercise upstream power, via any number of different modes of exploitation (viz.,
monopoly, monopsony, free-riding, extortionate threat, etc.), ultimately derives from imperfections in the
downstream retail market(s), that is, imperfections affording some, presumably substantial or significant,
market power/control over the means of service distribution via control of network access.
137
There may conceivably be only positive economic welfare consequences from such integration, or only
a limited potential for adverse welfare consequences. Cf. a hotel’s integration (via contract or
84
operator afforded pricing freedom,138 the inability to prevent competition from

“unaffiliated” competitors in the supply of such complementary products might not (or
only partially) prevent extraction of associated rents through artfully calibrated bridge toll
charges.139 In essence, control of access to the island over the bridge affords power to
extract (part of) the rents associated with production of the complementary goods as well
as that of the utility derived from bridge transport.140 Similarly, control of access to an
electronic pipeline could conceivably afford an operator considerable ability to extract
rents derived from trade in complementary goods and services, assuming the operator
“dominates” the market, i.e., possesses substantial unilateral market power in the supply
of the pipeline service.
This implies that “adverse” consequences of an “open access” requirement in terms of
reduced investment incentives are potentially mitigated somewhat by the ability to extract
rents for both transport and ancillary services through bridge/pipeline tolls. Indeed, with
complete pricing freedom and the ability to price discriminate perfectly, the monopoly
“bridge” operator ought, at least in principle, to be largely indifferent to an access
requirement, at least in terms of the capacity to extract rents.
As a response to economic dominance/monopoly, an open-access requirement carries
with it the promise of perhaps some increment in the diversity (in terms of unaffiliated
ownership)141 of offerings of complementary goods—the availability of some of which
may (even) operate to undermine the essential facility (bridge) monopoly (say, boat/ferry
slips).142 Consider that the bridge operator (assuming an effective transportation
monopoly) has the power to control demands for “on-island” amenities through the
setting of bridge tolls; investments in provision of such amenities that produce (quasi-)
rents are at the mercy of (i.e., subject to expropriation by) the operator. Since they are at
risk, incentives to produce them may be attenuated in the absence of institutional
arrangements to address the insecurity issues.
There are, speaking broadly, two potential solutions: (1) integrated operations or (2) an
open-access requirement. The latter induces investment in ancillary goods by ensuring a
incorporation) into the supply of various amenity operations (newsstand, barber shop, etc.), where there
exist numerous substitute alternatives readily at hand.
138
And also possessed the ability to price discriminate perfectly.
139
Integration and the ability to exclude competitors may enhance the ability to extract rents, assuming
“perfect” price discrimination is infeasible.
140
So the monopoly bridge operator can tap into the demand for, say, sustenance (viz., lunch) as well as
scenic island amenities.
141
Diversity of editorial viewpoint has often been regarded as a “merit good” in terms of public policy
toward the media and maintenance of an open society.
142
This was, of course, a core contention in the Microsoft antitrust litigation. Netscape’s browser supplied
a means of developing a competitive substitute for Microsoft’s operating system software.
85
means of delivery/access. The specific terms and conditions of access determine the
distribution of surplus. The former produces similar assurance, but under unified
ownership producing suitably aligned incentives. The issue might thus be conceptualized
in the following terms: Should ownership of the only bridge to an island carry with it the
power to lever the associated control of access to ownership and control of all other
economic activities on the island? We can certainly conceive of circumstances where
this might be reasonable (say, one of a large number of small undeveloped potential
“resort” islands). By the same token, it strikes us as difficult to justify extending control
of the Brooklyn Bridge (assuming it conveyed effective “gatekeeper” market power, i.e.,
assuming the absence of effective competitive alternatives) to control of (all economic
activity on) Manhattan Island! And the latter strikes as perhaps a closer analogy to
extending control of a monopoly or economically dominant communications pipeline to
control of complementary inputs, including content and other complementary inputs,
through limitations on access.
“Access” is akin to “interconnection.” The latter could conceivably reduce incentives for
network facilities deployment, especially in the early stages of such deployment when the
customer coverage offered may be an important bone of competitive contention among
competing carriers. By the same token, failure to compel interconnection when one
competitor has, as a result of historical circumstance, achieved a dominant position may
well doom would-be competitive networks to oblivion. In the first case,
access/interconnection might degrade incentives; in the second, absence of
access/interconnection might degrade incentives.
12.4. TWO RELEVANT ADDITIONAL CONSIDERATIONS

“Assuming away” strategic and exclusionary motivations on the premise that profitability
is little (or, in the limit, un-) affected does not necessarily “immunize” profit-maximizing
behavior by a dominant operator from the possibility of producing inefficient results.
First, good information cannot always be reasonably presumed to be a “given.” Often it
can only be produced as the consequence of the operation of a competitive discovery
process.143 A profit-motivated monopoly operator may not be able, through its own
devices, to mimic or exceed the results that the operation of a competitive discovery
process would produce. In this case, “mistakes” and welfare losses (compared to
potential) will result from failure to take steps to maintain an open market in which the
competitive process is allowed to condition results. An operator who lacks incentives to
make systematically bad decisions may, nevertheless, make bad decisions if the set of
alternatives from which choices are made is circumscribed or biased.
143
See F.A. Hayek, “The Use of Knowledge in Society,” Individualism and Economic Order (1972); and
“Competition as a Discovery Procedure,” New Studies (1978).
86
An operator’s decisions may also have “third-party” consequences on other operators and
their customers, consequences that the operator has no reason to consider in weighing the
beneficial and adverse consequences of a decision, say, not to carry a particular program
service or to minimize contributions to the service’s recovery of costs.144 In the standard
model of monopsony (i.e., exercise of market power by a buyer rather than a seller), the
operator has an incentive to restrict the input quantity purchased inefficiently because the
operator considers both the payment needed to attract the marginal unit and the higher
payments needed, as a result, to compensate all the infra-marginal units. In a “free-rider”
model, inefficiency results because average and marginal costs of an input diverge and an
individual operator, while reaping the full benefit of reducing payments to an input
supplier, does not bear the full burden of any adverse consequences (in the variety or
quality of programs available). Part of the “burden” of producing benefits for the
dominant operator in the form of reduced payments for inputs is borne by other operators
and their customers.145
This suggests that, even assuming, for purposes of argument, that strategic motivations to
insulate profits from confiscation by government or to prevent dissipation of market
power through development of greater access competition (viz., evolution of a more
effectively competitive industry structure) were absent (because government makes a
credible commitment to sustain profit incentives), there may still be grounds to
implement an open-access requirement. Such a requirement may help sustain the
operation of a competitive discovery process (which itself possesses the economic
properties of a “public good” and thus be subject to “underprovision” in the absence of
effective collective action)146 as well as the quality and diversity of various “program”
offerings.
“Pipeline” competition subverts the case for imposing an access requirement by
removing the “market-power” predicate. Access requirements may also dilute
investment incentives, particularly where the investor cannot expect to exercise
144
We note that this is a market failure that results from a structural rather than a behavioral infirmity—it is
a case where profit-maximizing behavior that might otherwise normally produce salutary consequences
potentially produces a market failure, given the prevailing market structure. Under U.S. antitrust law, it is
usually conduct rather than structure that constitutes a violation of the law (monopoly or oligopoly are
themselves not illegal). Thus it would appear that, under antitrust law, conduct that conduced to create the
problematical market structure (say, merger or consolidation via other means) might be attacked, while the
conduct itself may be insulated from attack.
145
Thus, this source of market failure disappears in the case of a monolithic monopoly distribution
operation for, in this circumstance, while there may be other problems deriving from the existence of such a
“Leviathan,” the monolithic monopoly operator would have incentives to internalize the external effects
posited.
146
In economic terms, a “public good” is characterized by non-rivalry in consumption and non-
excludability. One person’s consumption of the benefits deriving from operation of a competitive discovery
process does not leave less benefit for others to enjoy, and it would be highly costly to exclude individuals
from enjoyment of the benefits of the operation of a competitive discovery process within an economy.
87
significant power. Our conclusion is that imposition of access requirements should rest,
in the first instance, on a finding of economic dominance (i.e., significant unilateral
market power). Power is a necessary condition; in addition, imposition of such a
requirement will presumably reflect a considered judgment that expected benefits exceed
any attendant disabilities.
12.5. TECHNOLOGY “RETARDATION”

It is sometimes argued that a firm with market power may be slow to introduce new
technology because it renders sunk capital equipment obsolete. Thus, the argument goes,
to prevent “cannibalization” the firm “sweats its assets” to an “impliedly” excessive
extent. In the instant context, the argument would be that the incumbent (BT) is was
slow to introduce broadband because of its sunk investments in older technology (say,
ISDN).
Economic theory, of course, indicates that monopoly (or, more generally, the exercise of
market power) leads to misallocation of resources. Prices are higher than optimal, and
output is less than optimal. But economic theory also indicates that there is not
necessarily an additional misallocation of resources associated with monopolists’
adopting innovations too slowly.
Reduced to essentials, the logic runs as follows: Consider a purely “cost-saving”
innovation and ignore the potential relevance of so-called “anticipatory retardation.”147
Once this new technology becomes available, all firms (i.e., whether competitive or
monopolistic) have incentives to avoid continuing investments in the old technology.
Future growth in industry output would be accommodated using the new technology. In
addition, the old technology would be phased out and displaced by the new technology.
The issue is what happens in the short run, when firms still have sunk costs in the old
technology. The contention is that, under monopoly industry organization, the new will
replace the old too slowly, allegedly to prevent “cannibalization,” i.e., inability to recover
sunk costs.
During the short run, a monopolist’s criterion for displacing the old technology with the
new one is whether the total cost of the new technology is less than the short-run
marginal costs (“SRMC”)148 associated with use of the old technology to produce output.
147
“Anticipatory retardation” occurs when firms (whether competitive or monopolistic) with perfect
foresight delay the introduction of new technology because they anticipate (correctly) that an even lower-
cost new technology will soon be available and, thus, rationally conclude that “it pays to wait.” Firms may
thus, under competition, not always adopt the “latest and greatest” technology when the “opportunity costs”
of proceeding immediately are high. See William Fellner, “The Influence of Market Structure on
Technological Progress,” American Economic Association, Readings in Industrial Organization and
Public Policy (Homewood: Richard D. Irwin, 1958), pp. 287-291.
148
SRMC is often approximated by “average variable cost.”
88
In this calculation, the SRMC associated with sunk costs is zero. Quite conceivably, even
though the new technology is superior in the long run (when capital embodying the old
technology must be maintained/replaced), displacing the old technology right away is
unprofitable (i.e., less profitable).
The key economic theoretic insight is that exactly the same thing happens in a
competitive market.149 Competitive firms with sunk costs in the old technology will
compete to sell their products after the new technology becomes available. As a result,
the market price may fall, possibly all the way down to SRMC of the old technology.
The (competitive) market outcome is that the new technology will displace the old
technology only to the extent that its total cost is less than the SRMC of the old
technology—exactly the same criterion as for monopoly.150
Thus this analysis implies that, in the instant context, one would not necessarily expect
BT to adopt new innovations at an inefficiently slow pace simply because it has market
power and has sunk costs in old technology. It might fail for any number of reasons, but
not necessarily because of the logic of profit-maximization combined with presumed
market power; indeed, it might fail because of failures to pursue maximum profit as an
objective.151
149
See Ibid. p. 572-573:
[A]s long as profit is maximized on correct anticipations,…there exists no additional dynamic
argument against barriers to entry. (emphasis in original)
[W]e have found no difference in the long-run rate of growth of output between closed and open
groups. (emphasis in original)
With profit maximization based on correct anticipation, the welfare case against restriction would
have to rest on its static merits.
If profit-maximization based on correct anticipation is postulated, the difference between blocked
and open entry is merely that discernible by static analysis.
150
Fellner refers to this as “simple retardation.” It results from continued use of old technology, whose
short-run marginal costs make it more economic to use than be displaced by new “lower-cost”
technology—which is not really lower-cost compared to decision-relevant costs, i.e., ignoring sunk costs.
Firms (again, whether competitive or monopolistic) may possess incentives to continue to use old
technology, not because they are able to “prevent” new technology from happening, and thus, to recover
sunk costs, but because the short-run marginal costs of the old technology make it less costly than
deploying the new. The “sunkedness” of investments in the old technology “retards” displacement by the
new, but this is a matter of economizing behavior rather than opportunistic prevention of otherwise
economic “cannibalization.”
151
As Fellner (op. cit., p. 575) remarks (emphasis added):
[W]ith correct foresight and complete rationality, dynamic analysis of the monopoly-oligopoly-
competition problem, or of the problem of free versus blocked entry, discloses no essential
modification of the static results. The specifically dynamic aspect of the problem calls primarily
for weighing, in specific instances, the probable consequences of incorrect foresight, and also the
89
As we have noted, whether a company chooses to replace an old technology with a new
one involves a comparison of relevant costs (the average variable costs of the old with
the average total cost of the new). As economists are (in)famously fond of saying, “sunk
costs are irrelevant,” so fixed costs of the old plant are irrelevant, regardless of whether
they are depreciated. But a regulated company cannot ignore the fixed costs on existing
assets, because the regulator may or may not include them in its costs of service once the
assets have been replaced. Suppose technical progress outruns regulatory allowances for
depreciation (a more relevant consideration in the U.S., where depreciation rates often
remain regulated, notwithstanding adoption of price cap regulation, than in the U.K.,
where decisions about depreciation are left to the regulated firm under the government’s
charge control regime). In this case, the regulated firm might not voluntarily install the
new equipment unless it were permitted to continue to charge customers to recover the
unamortized portion of the fixed costs.152
Incentives to deploy new technology may be similarly attenuated by other aspects of the
regulatory regime. For example, as we have previously argued, an inefficiently slow
pace of technology adoption could result if regulatory policy limits the profitability of
new innovations. This could occur as a result of direct price or profit controls or from
requirements that an incumbent firm provide access to new technology to its competitors
at regulated (“cost-based”) rates after the new technology is deployed.153 In this case, it
might be more profitable for the incumbent to continue using the old technology after
adoption of new technology would be (socially) efficient. Relatedly, if the administered
regulatory contract promises recovery of sunk capital and a “fair” return and regulation
simultaneously affords competitors the ability to exploit newly installed technology so as
to prevent that promise from being kept (through service substitution), the monopolist
might not voluntarily choose to invest in the means of its own undoing.
In all of these various cases, “retardation” results from investment disincentives produced
by regulation rather than market power, per se: either through direct or indirect controls
on permissible/achievable returns or as a legacy of the creation of (quasi-)legal rights to a
reasonable opportunity to recover costs prudently incurred to meet regulatory obligations.
Firms operating in competitive markets generally lack both the rights and the obligations
effects of deviations from profit-maximization due to inertia, high safety-preference, noneconomic

objectives, etc.
152
The return must be higher because regulation has increased the opportunity cost of proceeding by
affording the right to a reasonable opportunity to recover prudently incurred costs of providing the
regulated service.
153
The problem arises because “cost-based” rates may not reflect all relevant economic opportunity costs.
In the U.S., prices are based not on incremental costs that might conceivably accrue in this world, but on an
entirely artificial construct. In contrast to the U.K. authorities, the FCC’s total reliance on bottom-up cost-
estimation methods, with no real-world validation, is an indefensible methodology that is likely to seriously
underestimate costs.
90
of traditional regulated utilities, so the existence of such rights does not pose an issue
under competition. When they are relevant, i.e., where recovery of “legacy” costs is an
issue (because regulated firms would presumably not have undertaken the earlier service
obligations without some protection in the form of a reasonable “guarantee” of cost
recovery), the rights have some value whose potential sacrifice is an opportunity cost to
be factored in making investment decisions.
12.6. CONCLUSION
Broadband’s “niche” status reflects its current limitations as a “value-for-money”
proposition. While that proposition might be enhanced somewhat by decreases in
charges for the service, price controls could adversely affect investment incentives for
broadband network deployments and, further, engender efforts by network operators to
exclude non-affiliated suppliers of complementary inputs through (excessive) vertical
integration and (overly) exclusive contractual arrangements. If profits were less at risk,
not only would deployment incentives be enhanced, but the strategic motivation for
exclusionary tactics would also be reduced.
Our conclusion is that the benefits of price controls in terms of stimulating take-up are
likely to be limited, while there are likely to be significant adverse consequences for
investment incentives (viz., reduced incentives to invest in network facilities and
enhanced incentives to create a “closed” industry organization that increases and protects
rents). If the government can credibly commit to permit generous returns to broadband
infrastructure investments by an economically dominant operator, assuming there is one,
it follows that there should be little opposition by such a dominant operator to an “open
access” requirement—as long as such access is not excessively intrusive and does not
create operating difficulties.154
154
Interestingly, the one attempt of which we are aware to account for cable operator opposition to access
requirements in the U.S., where the government has conditioned approval of system consolidation with
access requirements, stresses the vulnerability of profits—not, as it happens, to degradations due to
potential imperfections in the capacity to price discriminate adequately, but to the inability of regulatory
authorities credibly to commit not to attempt to confiscate profits. See Thomas W. Hazlett and George
Bittlingmayer, “The Political Economy of Cable ‘Open Access’,” AEI-Brookings Joint Center for
Regulatory Studies, Working Paper 01-06 (May 2001). In the U.K., we are unaware of any attempt by BT
to limit network use, although we understand the government qualified the use of BT’s network to deliver
video service for a period of time.
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13. POLICY IMPLICATIONS: DEMAND-SIDE
13.1. INTRODUCTION
Normative economic analysis of public policymaking conceives of regulation—what
Pigou called “extraordinary encouragements” and “extraordinary restraints”155—as
supplying a means to supplement or correct the market’s (in)capacity to exploit
opportunities to enhance economic welfare through the transformation of scarce
resources in production or exchange. In economic terms, the “case” for regulation rests,
in the first instance, upon identification of some “failure” or “imperfection” that results in
an economic inefficiency—a situation in which some potentially economic welfare-
enhancing transformation remains unexploited, notwithstanding the putative net benefits.
Inefficiency is a necessary condition and the raison d’etre for regulation, but it is not a
sufficient condition. The case for specific regulatory intervention also rests on the
efficiency of the contemplated intervention itself: the efficiency-relevance of any
identified failure turns on the existence of feasible relief that will improve matters (i.e.,
whose benefits will exceed attendant costs) or, at least, of a sufficiently compelling
demonstration that proposed relief will have that result.156
So, to make out a case for intervention, one must pass through two hoops: (1)
identification of a problem; and (2) demonstration of any proposed remedy’s efficacy in
terms of producing net benefits, taking account of any sacrifices in terms of others
objectives.
In this section, we consider whether there exist any potentially efficiency-relevant bases
for “extraordinary encouragements or restraints” to promote greater or faster broadband
take-up than will occur in the (un-encouraged or unrestrained) course of events. Note
well that the issues, as noted above, are not whether broadband is a “good thing” and, as
155
“[I]t is possible for the state, if is so chooses, to remove the divergence [of private and social product] in
any field by ‘extraordinary encouragements’ or ‘extraordinary restraints’ upon investments in that field.”
See A.C. Pigou, The Economics of Welfare (Macmillan, 4th ed. 1932), p. 192. Economic Nobelist George J.
Stigler comments that “there would be no loss in content, and perhaps some gain in form, if the sentence
were rewritten: It is ridiculously simple for his Serene Omnipotence, if it pleases him, to remove the
divergence in any field by ‘extraordinary encouragements’ or ‘extraordinary restraints’.” See “Traditional
Theory of Economic Functions of the State,” in The Citizen and the State: Essays on Regulation (Chicago:
1975), p. 113.
156
As one of our commenters has remarked, government objectives may conflict and producing more of
one may entail producing less of another. The “opportunity cost” of resources potentially consumed in any
particular endeavor consists of the benefits in the best alternative use necessarily foregone.
92
such, deserves favorable treatment.157 The issues are specifically whether,

notwithstanding broadband’s being a good thing, there are economic grounds to think
that individuals and various relevant collectivities will be unable to realize benefits to the
extent that is truly economic, and whether there exist various specific interventions that
can remedy this inefficient state of affairs in a cost-effective way.
13.2. CONVENTIONAL EXTERNALITY ANALYSIS

A standard (textbook) case of an organizational failure that results in inefficient
production and consumption decisions involves beneficial or adverse effects of a
transaction on parties who are not parties to the transaction. In theory, the buyer and
seller’s failure to account completely for these exchange consequences results in their
choosing to produce and consume too much or too little from the standpoint of economic
efficiency and maximum economic welfare. If there were means available that would
lead them to account more fully for these “external” effects (i.e., to embody them in their
decision-making), economic welfare might be improved.158
When there are beneficial external/“third-party” effects, theory suggests there will be a
tendency toward “under-allocation” of resources—from an efficiency standpoint, not
enough of the good will be produced and consumed to the extent that benefits to third
parties are not reflected in economic demand and supply decisions. The existence of
positive external consumption benefits thus suggests a possible grounds for regulatory
intervention to “internalize” such benefits. The presumed thrust of such intervention
would be to induce an expansion of output reflecting regulatory recognition of previously
uncounted benefits (i.e., benefits not reflected in (unconditioned) market demand
valuations and supply decisions).
So-called “consumption externalities” are ubiquitous and, as we have explained, do not,
by themselves, constitute sufficient economic grounds to warrant regulatory intervention.
They suggest potential efficiency relevance; actual efficiency relevance turns on the
existence of cost-effective remedial action.
Our research suggests there are three types of consumption externalities plausibly (or, at
least, frequently conjectured to be) connected to broadband take-up. These involve
putative effects of broadband on energy consumption and various price, environmental
and security effects associated therewith, on traffic congestion and environmental,
security, and quality-of-life issues related thereto, and finally on utilization of BT’s
capacity- and design-constrained circuit-switched network.
157
The thrust of our supply-side arguments in the last section was that, as a good thing, broadband does not
deserve unfavorable treatment. Put differently, if there were a case for, say, subsidization, there would
surely be a case against disincentive regulation.
158
Of course, it might not if “the cure were worse than the disease.”
93
As we have earlier described, broadband communications may produce many different

kinds of benefits, but precisely for that reason may not require “extraordinary
encouragements.” If individuals can benefit by using broadband, they will presumably
do so to the extent they are willing and able to do so and consistent with their budget
constraints. If private and public enterprises can benefit through greater exploitation of
broadband capabilities, they possess economic incentives to do so. Private firms may be
able to increase their profitability by so doing. Indeed, effective competition compels
them to do so just to survive, let alone prosper. A different set of incentives operates
within the public sector, but there are likely to be significant electoral payoffs (i.e.,
political advantages to be reaped) from more efficient realization of potential productive
economies through utilization of broadband capabilities. Competitive democratic
processes operate analogously to competitive market processes to induce efficient
adaptations.
If the government itself (judges that it) can use broadband to economize on the costs or
improve the effectiveness of the various health, education, legal and welfare services it
supplies, plainly it makes sense for the government, qua service producer and consumer,
to acquire and utilize the capabilities to a greater extent. The issue for the government,
qua policymaker, is whether there exist broadband consumption externalities that
potentially warrant “extraordinary encouragements” for greater utilization to reflect the
existence of benefits beyond those attributable to cost savings and improvements in the
provision of public (and private) goods and services.
13.2.1. Energy
Prices for oil and derived products reflect the existence of a cartel of supplying producers
(OPEC). The stability of the cartel’s crude price reflects the impacts of both conservation
and efforts to develop economic substitutes for the cartel’s output. A consumer who
purchases a more fuel-efficient automobile can economize on expenditures for petrol.
The savings derived therefrom supply an economic incentive to do so (to be weighed
against any disincentives, say, possible sacrifices of safety and comfort). Note that the
true benefits that result from that conservation effort exceed the benefits the individual
consumer derives in terms of savings in petrol expenditures. The consumer benefits
primarily by consuming less petrol, but all other petrol consumers also benefit to the
extent reduced demand for oil threatens the cartel’s economic stability and, in
consequence, lowers expected future prices. The latter effect is a benefit of conservation;
if it could somehow be embodied in consumers’ purchase calculus (viz., in consumers’
valuations of fuel-efficient autos), more fuel-efficient autos would be produced and
consumed and oil prices would be lower. Conservation efforts are also touted to produce
beneficial consequences in terms of decreased reliance on insecure resource supplies in
geopolitically unstable regions as well as reductions in environmental pollution and
climate effects derived therefrom.
To the extent broadband and oil are economic substitutes for one another, this implies
that increased consumption of one supplies a means of economizing on the other. But as
94
with fuel-efficient automobiles, the savings in expenditures on oil (and complementary

goods and services, including highways and personal time) understate the savings that
potentially obtain in aggregate as a consequence of decreases in demand for the oil
cartel’s output (assuming there are any, on net) and the lower expected future oil prices
that may be anticipated to result therefrom. If those benefits were factored and thus
reflected in consumption and production decisions, broadband output would be greater
and oil output would be smaller.
There thus appears to be a plausible consumption externality rationale for “encouraging”
broadband, assuming conservation impacts are reasonable to project and/or can be
documented. But note that, even assuming the existence of benefits, there may be more
efficient means of conserving oil than greater deployment and use of broadband
capabilities, or that the magnitude of the external benefits from conservation of oil
through expansion of broadband does not warrant the costs entailed in encouraging
broadband. Those are “second-hoop” issues and cannot be resolved without (or perhaps
even with) careful analysis of specific proposals. By the same token, suppose (as in the
U.S.) that current policies could (arguably) be characterized as discouraging broadband
deployments. This externality argument (especially post-9/11) certainly calls the wisdom
and prudence of such policies into serious question—Why (metaphorically) shoot
yourself in the foot?
13.2.2. Traffic Congestion
“Telecommutation” and “telework” are potentially substitutes for “commutation” and
“work.” Substitution of the former to economize on the latter poses some tradeoffs, but
among the benefits are costs savings in terms of commutation expenses, more flexible
family arrangements, and economizing on what George Will has called “the state’s most
precious resource, its citizens’ time.”159 Weighed against various disabilities (usually
associated with physical absence from the workplace), these benefits currently suffice to
produce a modicum of telecommutation and telework. As traffic congestion, time costs,
parking fees and the quality of mass transport worsen, it seems reasonable to anticipate
increasing substitution against work in the conventional workplace. This does not spell
the end of the conventional workplace; it simply means people may spend less time there,
choosing to work from home more often (to the extent they are able to do so effectively,
i.e., consistent with effective performance).
159
“California’s gasoline tax has been unchanged during a decade in which 47 states raised theirs, some
several times. In the next 25 years the number of California vehicles will increase 35 percent, but miles
traveled will increase 68 percent, partly because housing costs (the median price is about $200,000) force
young couples to live far from jobs. In booming, affluent Orange County, only two miles of new freeways
were built in the 1980s. What else is booming? The cellular phone business for commuters gridlocked in
congestion, wasting the state’s most precious resource, its citizens’ time.” See “The End of an Era in
California,” The Washington Post (April 12, 1990), p. A25.
95
In the absence of extraordinary restraints and encouragements, the tradeoff between

conventional and tele-workplaces will be governed by private reckonings of benefits and
costs (e.g., personal savings in terms of time, energy and money). But as before, these
decisions have public (i.e., external) consequences for other people. The person who
decides to drive to work one day instead of telecommuting bears the costs of
transportation and personal time, but does not bear the additional costs of time and
energy imposed on others in terms of greater delay and more difficult navigation in the
face of greater congestion. By the same token, the person who telecommutes does not
fully reckon the benefits produced for others that result from that decision in consequence
of reduced congestion. Were both the external costs and benefits properly reckoned,
there would presumably be greater substitution in favor of tele-workplaces.
As in the case of energy, there are other external consequences to be reckoned in terms of
security and environmental pollution. And, similarly, the existence of these externalities,
by itself, does not make a case for specific extraordinary actions of one sort or another.
Thus, it might be that an increase in petrol taxes would be a more or less efficient means
to induce efficient adaptations (factoring feasibility)160 than, say, various subsidies to
promote broadband take-up (accelerated investment depreciation for tax purposes, user
subsidies, etc.).
Of course, as one commenter has remarked, to the extent broadband does not actually
substitute and permit economizing on energy resources or congestion, the potential case
for intervention collapses. Thus, if individuals who are empowered by broadband to
work at home, drive more (e.g., perhaps taking frequent trips to the local town center),
there will be no benefits in the form of lower oil prices, reduced congestion, etc.)
13.2.3. Circuit-Switched Network Congestion
A previous assessment of BT’s network undertaken for Oftel by SPR161 and a subsequent
assessment undertaken by a blue-ribbon panel under Oftel’s auspices,162 identified the
serious problem of network traffic congestion that characterizes BT’s circuit-switch
network—a problem exacerbated by demand growth and not easily remedied in light of
the network’s architectural design.163 As above, assume there is demand that can be
160
As William J. Baumol has noted, “If it ain’t feasible, it can’t be optimal!”
161
See Evaluation of the Efficiency of BT’s Network Operations (May 1997).
162
See IP Interconnection Study: A Report for Oftel by a Panel of Independent Telecommunications
Technologists (November 2000).
163
BT’s circuit switched network is centered on a large set of tandem switches through which almost all
interoffice traffic and interconnect traffic flows. These tandems are, by design, fully interconnected—hence
the number of interconnecting groups increases as the square of the number of switches, leading to massive
diseconomies of scale. The larger the network is, the more expensive and cumbersome it is to expand it.
Although the difficulties can be mitigated by the procurement of larger switches, they cannot be avoided
absent a change in network architecture (allowing traffic to avoid the tandems or foregoing full mesh
interconnection) or by a reduction in the rate of traffic growth.
96
addressed by the existing circuit-switched network and also by various packet-switched

networks that are being (or might be) deployed. Indeed, as voice-over-Internet protocols
are perfected, it may well (soon) be that even a “plain old telephone call” might go one
way or another.
In our previous examples, we noted that production and consumption decisions primarily
reflected a private calculation of relevant costs and benefits, and that often there are
external consequences that, if properly reckoned, would alter outcomes at the margin of
decision-making. We think economic amelioration of network congestion provides an
analogous example. When a user utilizes, say, a packet-switched network to
communicate—a communication that might alternatively have traveled on BT’s
congested (and, with the legacy architecture, bolstered only with increasing difficulty at
high cost) circuit-switched network—the user produces benefits for (perhaps less
sophisticated) users of the circuit-switched network. If those benefits were reflected in
relative charges, more rapid migration to packet-switched services might well be the
result.164
13.2.4. Import
Besides “first, do[ing] no harm,” what are the policy implications of this analysis? As we
have stressed, an externality by itself simply implies a potential for efficiency
enhancement through economic internalization of the externality. Thus, beneficial
broadband consumption externalities do not, by themselves (assuming they can be
persuasively documented), imply that broadband should be subsidized. Consider the
analysis we described in subsection 12.2, which suggests broadband user subsidies would
be very expensive. Not only might there exist preferred alternative uses of the funds
needed for subsidies, but it is also not clear that the external benefits derived warrant
subsidies of the magnitude required to induce greater take-up.165
Similarly, while subsidies to promote broadband supply deployments in particular
regions provide a more economically (although perhaps less politically) effective means
of expanding take-up than user subsidies, it is precisely in these regions where externality
arguments based on conservation and relief from pollution and congestion are prone to be
weakest. The same characteristic (viz., lack of demand density) that makes service
deployment uneconomic, given the significant fixed investments that must be sunk, is
what makes the ameliorative effects less significant.
164
In a perfectly functioning market, these types of “pecuniary” (as opposed to “real” or “technological”)
external economies and diseconomies would be automatically reflected in prices, and supply and demand
decisions. They will not be (or only imperfectly) be internalized in the presence of various market
imperfections. Appropriate pricing in this case would “point” consumers away from the high-cost and
toward the lower-cost means of communications.
165
Projection of external, bandwagon effects would necessarily be largely speculative and might fail the
burden of authentication on grounds of being unduly speculative.
97
Earlier we suggested that if the government’s evaluation is that broadband supplies a

cost-effective means of delivering governmental services to the public, it has incentive
“to put its money where its mouth is” and start using broadband facilities to address its
objectives. Similarly, it may wish to analyze more closely the prospective effects of
greater telecommuting in terms of private and public benefits (and costs) and what is
required to induce greater telecommuting. It may wish to experiment with
inducements/removal of impediments to its own workforce’s telecommuting to a greater
extent to develop some sense of qualitative effects and quantitative magnitudes. These
kinds of “pilot programs” could supply an empirical base on which to assess impacts
from application on a broader scale. With a firmer base on which to project benefits,
programs can be efficiently scaled to ensure cost effectiveness.
13.3. REALIZING BANDWAGON EFFECTS: THE CASE FOR “PUMP-

PRIMING”
Before turning to discussion of specific policies, one less conventional (but very
economically up-to-date) set of consumption externalities warrants specific attention. As
we discussed in subsection 4.3, broadband exemplifies a type of economic good for
which there are likely to be significant “bandwagon effects” (or at least it is so
conjectured). One of the analytical difficulties presented in estimating/projecting
broadband benefits is that the benefit an individual enjoys varies as others do the same
thing that he or she does, but the behavior of others is likewise affected and produces
further feedback.166
Of particular interest for our analysis are so-called “complementary bandwagon effects,”
which are a subclass of the genre that derive from increased supply of complementary
products as the user set of the base product expands. Complementary bandwagon effects
occur when the benefit of one product depends at least partially on the supply of
complementary products. Thus, complementary bandwagon effects derived from
increased supplies of various broadband applications (say, videoconferencing or photo
file sharing) that produce consumer benefits may occur as broadband take-up increases:
More subscribers make development of more applications economic, and more
applications attract more subscribers, setting the stage for further evolutionary
developments as the “bandwagon gets rolling” and positive feedback occurs.
166
Network externalities are a subclass of bandwagon effects that apply to the user set of a communications
network—consumers connected to a network benefit as other consumers are connected to the network. Our
focus is on the broader set of effects, which are themselves but one kind of an even broader set of external
demand-side scale economies. As earlier noted, our view is that feedback between subscribership and
application development is liable to loom more importantly for broadband development than subscriber-
subscriber feedback.
98
As we earlier described, products and services subject to complementary bandwagon

effects may be subject to so-called “chicken-and-egg” problems. Rohlfs defines the
generic problem in the following terms:167
The base product (the ‘chicken’) may have no value apart from the supply of
complementary products (the ‘egg’). The complementary products, in turn may
have no value without the base product. The problem is that the suppliers of the
base product may not supply it unless the complementary products are already
available. Suppliers of the complementary products may not supply them unless
the base product is already available. Without coordination of the suppliers of
base products and complementary products, there may be no way for either the
chicken or the egg to come first.
As a plausible bandwagon market candidate, the market for broadband service likely
possesses multiple equilibria of which the current one, reflecting limited “niche” status, is
but one of potentially many feasible outcomes.168 From an economy-wide or social
standpoint, the largest sustainable market equilibrium is best (viz., maximizes the
economic welfare of producers and consumers), but there is no necessary reason why this
outcome should occur in practice: equilibrium may well be reached at a much smaller,
less beneficial level.
If this is the case, government intervention can conceivably help “solve the start-up
problem” and enable the market to reach a larger, better equilibrium. The government
cannot make “a silk purse out of sow’s ear,” but there may be steps it can take which will
help the market reach “critical mass”—a level where product demand becomes subject to
positive feedback effects and “takes off,” growing extremely rapidly. Government
“pump-priming” could take a variety of forms and operate to improve both the value and
the money parts of the “value-for-money” equation.
We have conjectured that broadband Internet access may, indeed, involve bandwagon
effects; for example:
167
See Rohlfs, op. cit., p. 235.
168
See “E-Commerce (A Special Report): The Rules—Broadband—No Broad Consensus: Everybody
agrees high-speed access is crucial to the Web’s future; But how do we get there?,” The Wall Street Journal
(January 14, 2002), p. R12.
Certainly, broadband hasn’t taken off the way backers had hoped. Estimates vary, but only about
10 million U.S. households, or about 10 percent, have high-speed connections to the Internet, and
growth in the market appears to be is slowing [sic].
The problem, at least in part, is extending high-speed, high-capacity networks to the ‘last mile,’
the final leg that runs to consumers’ homes or businesses. But it’s also been difficult to get more
people to sign up for services even when they’re available; many consumers still balk at paying
$40 to $70 a month for broadband connections, compared with $20 to $25 for their existing dial-
up modes, or say there are few extra services that make them want to switch.
99
High-definition web pages could be effective vehicles for product

marketing. Nevertheless, businesses do not use them much today, because
few consumers have the broadband access that allows such pages to be
downloaded quickly;
Consumers often avoid sending large attachments to e-mail, because the
recipient does not have broadband access. If broadband access were more
widely available, more consumers might invest in digital cameras, etc.
Government subsidies or other kinds of interventions may be capable of overcoming the

“start-up” problem and getting the broadband bandwagon rolling. That does not suffice
to make them good policy. Consider Figure 12-1, which displays the usual hump-shaped
demand curve used to illustrate the basic idea of bandwagon theory in the simplest case.
As we have discussed, the challenge is to get to a high-value, stable equilibrium on the
downward-sloping part of the demand curve to the right. To get the bandwagon rolling
requires the number of users to grow beyond the “critical mass” located on the upward-
sloping part of the demand curve to the left.169
In Figure 12-1, as drawn, marginal cost is always above the hump, implying that
subsidies cannot be cost-effective—even if they solve the start-up problem and move the
market equilibrium to the downward-sloping part of the hump. The problem is simply
that the value of the bandwagon applications in this hypothesized case does not justify the
cost of the subsidy. The value may be quite substantial, but so too may be the cost of
scarce governmental resources reckoned in terms of other benefits foregone.
Figure 12-1
Price
(p)
MC
Demand
Quantity
(q)
169
The diagrammatic mechanics are described in Rohlfs, op. cit., p. 26
100
13.4. INCREASING SUPPLIES OF COMPLEMENTARY PRODUCTS

13.4.1. Supplies of Complementary Products
As a potential “bandwagon” product, the essence of the broadband “problem” is how to
reach “critical mass,” assuming there is a critical mass at which point broadband growth
can become self-sustaining. The latter is, by no means, a foregone conclusion—
broadband (as with “Picturephone” before it!) may simply be a “niche” service that cost-
effectively addresses a relatively limited (although not as insubstantial as Picturephone)
domain of economic wants. Given what it costs to supply (including the opportunity
costs of risky venture capital), only a limited set of subscribers may find the service
sufficiently attractive to purchase. The limited size of the set of potential subscribers
may permit economic development of only a limited set of commercial and governmental
applications—end of story.
Alternatively, it may be that, at some point, the “value-for-money” proposition is or can
be made sufficiently attractive to attract a sufficiently large set of suppliers to induce
additional investments in development of additional applications that, in turn, attract
more subscribers, inducing more investment, in an ascending spiral of positive feedback
that ends in virtual universality (as with telephone and television). The specific identity
or even the existence of that critical level are unknown and, indeed, probably unknowable
in advance. So the policy target amounts to affording the best chance for realization of
“critical mass,” presuming it exists, consistent with an economically rational
promotional strategy (i.e., one based on prudent assessment of incremental costs and
benefits of different promotional tacks).
As we have noted, the “value-for-money” proposition that drives take-up turns on both
value and money. Our view is that the “money” part of the equation is important, but
ultimately not easy to do anything about. The problem is that to reduce the price of the
service may require very large subsidies, which are uneconomic (and probably
infeasible), may cause reductions in service supply (depending on the means of funding
adopted), which will limit the possibility of take-up, and may lead service suppliers to try
to close access and integrate or bargain strategically to capture rents from other input
suppliers, possibly discouraging the latters’ efforts and limiting diversity as well as
competition in both conduit and content. BT’s recent price cuts are certainly a plus and,
as we have earlier described, there appears to have been “plenty of room for
improvement” in terms of promotional pricing plans.170
What can be done to increase the value of broadband service, so as to make it a more
attractive proposition for consumers and lead them to subscribe? One set of applications
we have already discussed: government can do much to make acquisition of broadband
capabilities more attractive by providing more of its services online in ways that exploit
170
These, as noted, require managerial creativity and enlightened treatment by the regulators.
101
the ability to transfer larger files more rapidly. That ability means that communications
can convey greater information in a more compelling and effective manner (e.g.,
instructions can be made clearer and more vividly conveyed, thus making business with
the government easier to transact). This should translate into greater user friendliness, a
variety of performance enhancements and more satisfactory means for transacting
business with the government.
License applications and renewals, registrations and submission of legal filings,
announcements, disclosure of information, access to public records and plans—the
transactional efficiency with which all of these activities are completed can potentially be
enhanced by higher-speed data communications. The idea is to use enhanced
communications capabilities to make online government offerings sufficiently attractive,
convenient and simple to allow them to substitute economically for more conventional
methods of service delivery with the great mass of citizen-consumers—not merely the
technologically adept.
Government broadband content has the potential to attract many users from diverse
backgrounds. The British government has already begun to provide specific applications
utilizing broadband connections to the Internet. Two such applications can be found at
the website of the Prime Minister, “Number-10.com”. (www.number-10.gov.uk) On this
site, visitors can access two different sets of streaming media. First, a visitor can listen to
the Prime Minister’s broadcasts via streaming audio. Also, a visitor can watch streaming
video of Questions to the Prime Minister. For this application, there are specific versions
for broadband and narrowband connections.
While government exploitation of broadband service capabilities would enhance the
attractiveness of broadband connections to the public at large, it may still not suffice to
produce critical mass given the value consumers attach to enhanced government
offerings. As a matter of costs and benefits, incremental convenience in obtaining a
driver’s license renewal or building permit may not suffice to induce much additional
broadband take-up. Unless an individual transacts a considerable amount of business
with the government, the incremental benefit (over alternative means) may be small.171
We think there is fairly widespread agreement that, for broadband to reach critical mass,
a variety of compelling new applications—i.e., superior content—likely needs to be
developed. There is at present a major stumbling block thwarting the development of
such applications: the difficulties involved in reconciling provision of adequate
incentives for supply of creative content and different types of intellectual property, on
the one hand, and provision of adequate incentives for consumer take-up of broadband
171
Telebanking services afford enhanced convenience, but for many elderly people supply only modest
benefits, as trips to the bank supply an occasion for socializing. The option is nice to have and sometimes
useful to exercise, but not necessarily a case of one method of conducting transaction’s completely
displacing another.
102
capabilities, on the other. This appears to be an area where government, qua

policymaker, has an important role to play as it is governments that ultimately establish
and enforce terms and conditions that govern access to and use of copyrighted property.
To the policy issues (and challenges) in this area, we now turn.
This is not to say the government can or should try to solve the problem itself. But, as we
shall see, this appears to be a case where the stakes extend well above the players. The
matters should thus not be left solely to their discretion, either in terms of the specific
details of a solution or its timing.
13.4.2. Copyright Issues
Many have touted “music-downloading” and “video-streaming” as the “killer
applications” that will drive broadband take-up and ignite a reinforcing “positive
feedback” process and rapid service growth. The same people have tended to see the
legal sanctions that have, heretofore, been applied to services facilitating such
activities—sanctions that have significantly if not completely constrained downloading of
these kinds of files in the near term—as ill-advised, unfounded and counterproductive.
Intellectual property interests, in contrast, argue that without adequate compensation
incentives to create content will be degraded; rather than promote broadband, “free”
access will limit the value of the content that broadband can supply and, thus, hamper its
development.
There are also interesting “third-party” effects posed. For illustration, there is currently a
legal case involving “Morpheus,” a service that enables users to share various computer
files including, significantly, certain types of video files, including ones filled with
copyrighted video entertainment. Parents who wished to share “online” a video
recording of their baby’s christening with various far-flung relatives could thus avail
themselves of this software program to do so. By the same token, a user who wished to
share her copy of Titanic or Bridget Jones with friends could also do so. Intellectual
property interests (the movie production industry) have filed a lawsuit against Streamcast
Networks, the distributor of Morpheus, to have the service shut down on the grounds that
it materially contributes to copyright infringement, grounds that a U.S. court earlier found
compelling in the famous case of the Napster music file-sharing service and led to its
being shut down.172
Shutting these services down protects copyrights and, in that way, sustains incentives for
creation of copyrighted products (and, potentially, broadband take-up if legal access to
(all or portions of) such content, by means of broadband, is made available through
alternative means and spurs take-up). But, shutting them down simultaneously harms
parents who wish to share home videos with relatives and cousins who wish to share
home-made “garage-band” recordings. If these were broadband applications that spurred
172
A&M Records, Inc., et al., v. Napster, Inc., 239 F.3d 1004 (9th Cir. 2001).
103
take-up, the effect of suppressing the services that facilitate sharing is to lessen incentives
for take-up due to the loss of these capabilities.
From an economic standpoint, efficient resolution of this (type of) case entails a weighing
of beneficial and adverse consequences. Suppose some music producers wish to compete
by offering their music free of charge, so as to induce attendance at for-profit concerts or
sales of branded t-shirts or jewelry or perfume. Suppression of convenient means of
cheap distribution for their music restricts their ability to compete. A copyright infringe-
ment suit in this context could be characterized (although perhaps not to successful
effect) as an abuse of legal process to predate, i.e., an antitrust violation.173
By the same token, to take the property interests’ side, these sharing services are like
“dual-use” technological capabilities that have both peaceful and war-making
applications and pose difficult decisions for governments seeking to weigh the
consequences of their export to certain regimes.174 If the operation of these services is
harmful on net (i.e., taking account of the various impacts on different economic actors),
it literally “pays” to suppress them. The problem, as we have attempted to demonstrate
with our example, is that suppression favors incumbent/established interests and may
inhibit competition by newcomers and innovative or unconventional new sources of
content.
Stanford Law Professor Lawrence Lessig argues that:
‘Major copyright holders’ have enjoyed the benefits of a relatively concentrated
industry. The Internet threatens this comfortable existence. The low cost of
digital production and distribution could mean much greater competition in the
production of content…[I]nnovation and growth in broadband have been stifled as
courts have given control over the future to the creators of the past. The only
173
As Robert Bork remarks
Predation by abuse of governmental procedures, including administrative and judicial processes,
presents an increasingly dangerous threat to competition…In such cases, successful predation does
not require that the predator be able to impose larger costs on the victim, that the predator have
greater reserves than the victim, or that the predator have better access to capital than the victim.
No other technique of predation is able to escape all of these requirements, and that fact indicates
both the danger and the probability of predation by misuse of governmental processes.
See The Antitrust Paradox (New York, 1978), Chapter 18.
174
See Ronald A. Cass and John Haring, International Trade in Telecommunications (AEI/MIT Press:
1998), p. 57-59. Just as decisions about export of “dual-use” technologies are complicated by their
availability from multiple sources, so that export restraints do not necessarily restrain availability,
suppression of “dual-use” sharing software may be complicated by the availability of “outlaw” capabilities.
Thus, while Napster has been suppressed, other music sharing programs remain available. As consumers
become used to the availability of “free” downloads, it may become increasingly difficult to wean them
from such offerings and migrate them to legal “for-pay” offerings if and when they become available:
“How are you going to keep them down on the farm, after they’ve seen Par-ee?”
104
architecture for distribution that these creators will allow is one that preserves
their power within a highly concentrated market…Copyright laws should of
course give artists and creators an adequate return for their creativity; but they
should not become a tool for dinosaurs to protect themselves against evolution.175
One need not buy this argument to accept that there are, indeed, multiple interests to be
reconciled in addressing these issues, nor is it clear that the courts are the appropriate
venue within which to resolve the questions.176 The courts may well be making good law
in terms of the existing statutes and their interpretations of germane precedent. Copyright
is not an “entitlement;” it is an instrument used to balance the public’s dual interests in
affording incentive for creation of intellectual property and access to such property on a
widespread basis. When protection of property rights potentially compromises the
viability of new, innovative means for distribution of creative product, it strikes that the
balancing effort required to reach a good result is perhaps one that is not best undertaken
within a courtroom addressing the specific, perhaps narrowly framed issues posed in a
particular private law suit.
13.4.3. Parameters Defining a Solution
In the past both technology and the law provided means for enforcement of intellectual
property rights; now the technological barriers are disappearing.177 Increased digital
175
“Who’s Holding Back Broadband,” The Washington Post (1/8/02), p. A17. In a similar vein, Baumol &
Ordover observe that:
Protectionists are not prone to wait passively for overrestrictive rules to fall into their laps.
Rather, a central element in their strategy is persistent expenditure of money and effort to change
the rules in ways that favor their cause, and resistance to any attempt to reduce impediments to
effective competition.
See “Use of Antitrust to Subvert Competition,” Journal of Law and Economics (May 1985).
176
It is likely that there exist asymmetries in various impacts: effects on movie producers and distributors
are likely concentrated on a relatively few compared to effects on consumers likely to be spread over many.
This perhaps creates differential incentives to try to influence the outcome of judicial or legislative
proceedings and in the supply of relevant information about costs and benefits, potentially leading to
“skewed” outcomes when interests and impacts are divergent among different groups. There may exist
producer (i.e., focused) interests at odds with the movie industry, who might act as an effective counter to
pressure from such interests.
177
As Holman W. Jenkins Jr. has observed:
Once it was technology that let them warble a few tunes into a microphone and then resell that
single performance to thousands or millions of fans. Or rather, it was the clunkiness of the
distribution system (trucks, record stores) that multiplied the number of transactions so the record
companies could assess a tax on each one.
Now the technological worm is turning. Music fans can download Napster, a free piece of
software from a website, and instantly scour the web for downloadable music files, known as MP3
files, on the hard drives of millions of other fans. Napster leaves it up to users to worry about
105
storage capacity combined with high-speed transport and simple file-sharing software
provide increasingly easy, even if illegal access to copyrighted material. According to
MPAA President Jack Valenti, “The great moat that protects us [the Hollywood
production/ distribution industry], and it is only temporary, is lack of broadband
access.”178
It is difficult to believe (and few apparently do believe) that “the genie can be put back in
the bottle.” The new technology compels creation of a new paradigm.179 That paradigm
may contain elements of “the carrot and the stick,” but it seems doubtful that the stick
will provide an instrument for use against individual consumers with which political
decision-makers are likely to be comfortable. Putting college students in jail for sharing
music does not strike as an especially “winning” proposition.
One carrot that is now the object of discussion involves establishing a “reasonably
priced,” legal downloading alternative that “law-abiding” citizens would not resent
paying. The level of that fee might not permit collection of remuneration at historic
levels, but it is the new operating realities, not the level of fees, that determines what is
now feasible. Efforts are underway (although too slow for Professor Lessig’s comfort,
given his perception of established industry’s market power) to develop technical fixes
that control the (subsequent) uses to which fee-downloaded material might be technically
feasibly put—these to try to enforce limits on the ability to engage in illicit use, while the
carrot of a “reasonable fee” limits the incentive to engage in illicit use.180
copyright laws, which is to say no one worries about copyright laws. We have disorganized crime
on a massive scale.
This is wrong, terribly wrong, and yet it’s hard to think of anything to say but tough luck, buster.
A quirk of technology giveth and a quirk of technology taketh away.
See “Let’s Give It Up for Metallica,” The Wall Street Journal (May 10, 2000), p. A27.
178
See Amy Harmon, “Moving Beyond Music, Pirates Use New Tools to Turn the Net Into an Illicit Video
Club,” The New York Times (January 17, 2002).
179
As Thomas B. Fowler has observed:
Protection of intellectual property in the Internet age requires out-of-the-box thinking. Attempts
to stuff it into the old model, based on high legal and technological barriers, are doomed to failure.
This is because the old model was designed primarily to thwart corporate-level piracy, and today’s
greatest threat is individual piracy, albeit on a very large scale. Business models based on the old
model will most likely have to be significantly revised to deal with the new realities, as the
Napster case illustrates, and this means a shift to new ways of protecting content.
See “The Impact of Technology on Intellectual Property Rights,” The Telecommunications Review (Vol.
12, 2001).
180
The existence of a technical fix, of course, supplies a target for hackers. Our sense is that many are
skeptical about the long-run viability of any technical fix. On this view, the world has irrevocably changed
and new business models must be created consistent with new business realities.
106
Those who follow these activities have expressed considerable skepticism about the
viability of the approach given the ready availability of even more reasonably (i.e., zero-)
priced alternatives. On this view, the “foot-dragging” by the production industry, that
Professer Lessig bemoans and that leads to the search for and use of illegal alternatives, is
simply worsening an already difficult situation as users grow increasingly more used to
and comfortable with “illegal” means of file transfer.
From the standpoint of economic welfare and broadband take-up, there is a clear public
interest in prompt resolution of the issues posed by copyright protection. As we earlier
noted, “free access” is not necessarily very valuable if there is nothing worthwhile to
access. At the same time, a “fix” that is always just around the corner and carries with it
the cost of foregone benefits from suppressed use of currently available file-sharing
technology is also problematical. In our view, producing a prompt resolution of these
issues represents the single most productive endeavor in which the government might
engage to promote broadband development at this time.
13.5. POSSIBLE SOLUTIONS

Downloading of music and video entertainment are widely touted as the most important
applications for broadband Internet access. Unfortunately, both are currently impeded by
copyright problems. In particular, copyright-holders fear that excessive copying of
material over the Internet will diminish the value of their rights. They therefore resist
making their material available for downloading over the Internet and seek to suppress
the technical means that enable such “file-sharing” to occur.
Two possible approaches to “solutions” for this problem are as follows:181
181
As we have noted, the feasibility of these “solutions” is not transparent. Holman W. Jenkins Jr. argues
that:
There is no way to effectively copy-protect recorded music. Digital pirates will always get a clean
copy and soon it will be everywhere. But that doesn’t mean Napster’s main attraction is that it’s
free.
Online distribution is not merely a more efficient means of delivery; it also changes the way music
is used and enjoyed. Simply put, it’s like radio that plays whatever you want, whenever you
want…Fans having taken a bite of this apple, aren’t going to give it back. The record companies
have to offer a service that’s better than stealing: that means a price where an individual
download seems more or less free to the user. Hence a flat-rate subscription model. And it means
a comprehensive selection…Is it already too late? The Big Five [recording companies] could, in
theory, establish competing subscriber services if they move fast enough to get access to each
other’s playlists…Right now, they’re practicing strategies of denial, such as offering single
downloads for exorbitant prices or putting limited selections online for a flat fee. Even more
dismally, they are toying with licensing their music inventories to third-party sites, turning
themselves into mere suppliers, and eminently end-runnable ones at that.
107
1) One can envision a technological solution under which downloaded

material could be retransmitted only once (or a limited number of times)
from the computer to which it is sent (analogous to the Serial Copy
Management System for audio music players). That is, the material would
be corrupted when it arrived at any other computer (beyond authorized
usage), but it could be successfully transmitted once (or a limited number
of times) to a CD or DVD. Given such copy protection, copyright-holders
might voluntarily make their material available for downloading. The
government could cooperate in this effort by making it illegal to defeat the
copy-protection system and enforcing the proscription.
2) The government could establish a “compulsory-license” system. Under
such a system, suppliers of copyrighted material would not need to get
specific permission from copyright-holders to use copyrighted material.
Instead, they would pay a government-determined royalty, which would
go (probably through some government-sanctioned distribution inter-
mediary) to copyright-holders. Such a compulsory-licensing system
should probably also include license fees on blank CDs and DVDs. The
royalties from these might be distributed proportionally to the royalties on
downloaded material. The “enforceability” of this type of license applied
to “private” users presents a thorny issue.
If the copyright problems for downloading music and video entertainment are
successfully dealt with, either by the above or other means, that may enhance the
prospects for achievement of critical mass for broadband Internet access (assuming the
“touts” are correct in their assessment of these as “killer aps”). In particular, the set of
users for downloaded copyrighted material might suffice to induce web designers to offer
advanced web pages with more sophisticated content. Advanced web pages might then
provide positive feedback, expanding the number of broadband subscribers.
See “How to Survive a Post-Napster Copyright Holocaust,” The Wall Street Journal (01/6/00), p. A27. See
also Matt Richtel, “Free Music Service Is Expected to Surpass Napster,” The New York Times (November
29, 2001), p. C4, which, inter alia, reports as follows:
As the various services are introduced, music industry analysts have generally expressed
skepticism that the services will steal users from their free music counterparts. The analysts say
users have become accustomed to being able to own their music, not rent it, and to being able to
take it with them on homemade CD’s or on portable devices.
‘The commercial services are going to have a tough time getting any kind of foothold,’ Mr. Bailey
of Webnoize said.
108
13.6. CONCLUSION
The problem, as we see it, is that broadband is not yet valuable enough to warrant the
expense for most people. Certainly more people might be attracted were the attendant
expenses to fall and that would help produce “critical mass” to support spontaneous
market takeoff and a dynamic “feedback” process. We believe there are two important
things the government can do to enhance the value of broadband connections: First, it
can exploit broadband capabilities to offer consumers attractive and economic means of
transacting the business they need to transact with the government—everything from
“soup to nuts”—from health care insurance claims to drivers license renewals. Second,
the government can play a beneficial role as both umpire and public interest
representative in fostering a prompt solution to the problem of copyright in the brave new
world of technologically easy sharing of information. With respect to the latter, we think
an appropriate tack will not try to turn the clock back—an impossible task, in any
event—but rather to develop new economical means of balancing the interests of
producers and consumers of creative outputs.
14. SUMMARY AND PRINCIPAL CONCLUSIONS
Information and communications technology plays an increasingly important role in the

Wealth of Nations.182 It provides powerful tools that enable private and public enterprises
182
Adam Smith’s theory of economic growth emphasized the “division of labor” (what we would now refer
to as “productive specialization”), and he famously argued that growth through the division of labor was
limited by “the extent of the market.” He thus favored the extension of markets overseas and the expansion
of trade as operational means of extending market boundaries and, thereby, the scope available for further
division of labor. Within Smith’s framework, the reason the great improvements in maritime navigation
and the subsequent development of the steam engine and rail transportation were important was that they
increased the size of economically relevant markets and thereby fostered greater productive specialization.
Modern economics proposes a more elaborate set of economic benefits that may stem from increases in
“the extent of the market.” In addition to “learning-by-doing” as Smith suggested, modern economics
notes the possibility of various kinds of technological economies of scale and scope that may be realized
with expansion of outputs, enhanced incentives to undertake various economizing activities with increases
in the scope of the market and, hence, the magnitude of the benefits to be realized and, finally, benefits
from the increasing intensity of competition as a larger number of competitors becomes viable in a broader
market (viz., more “room” for competitors, consistent with exploitation of available scale and scope
economies).
In the first Industrial Revolution, improvements in transportation played a key role in expanding the
effective breadth of economic markets and thus affording greater scope (and incentives) for enterprise
competition, economizing behavior and productive specialization. In the Information Age, it is
improvements in the availability of decision-relevant information and the ability to communicate that are
driving advances in economic productivity via the same means. Expanding access to information is what is
removing/expanding market boundaries and thereby improving the efficiency with which markets operate.
109
to meet the demands of consumers and citizens in more effective and less costly ways,
and thus improve the efficiency with which economic and political “marketplaces”
operate. Broadband is but the latest in a remarkable stream of technical advances that
afford potentially powerful means to improve life, expand liberty and facilitate the
pursuit of happiness.
Given the magnitude of these various changes, it is, at this early stage of development,
quite difficult to segment “broadband effects” from more general effects of information
and communications technology developments.183 As the author of one recent empirical
study of productivity impacts has waggishly remarked: Broadband effects likely amount
to a “rounding error” in the larger scheme of things.184 This does not, of course, mean
that such effects are not potentially quite large in absolute terms, particularly to the extent
that they can be compounded over extended periods of time: Very small percentages of
very large numbers compounded continuously can produce very large aggregate
economic impacts over a decade or two.
The supply of broadband network capabilities has rapidly expanded throughout the
developed world; the take-up by residence customers and businesses has also grown,
some argue at a normal or reasonable pace, others at a frustratingly slow pace given the
benefits they perceive or hope might derive from more rapid take-up.185
It is easy to see how improvements in transportation extend effective market boundaries: in the absence of
low-cost transportation, buyers will not regard sellers who operate in distant locations as viable competitive
alternatives, nor will the sellers regard distant buyers as potential customers. As transportation costs
decline, distant buyers and sellers become more viable trading partners. Similarly, even buyers and sellers
in relatively close proximity to one another may still not regard each other as potential trading partners if
they are unaware of each other’s existence. A buyer or seller may be literally “next door” to one another,
but might as well be a thousand miles apart if they are unaware of each other and do not readily perceive
their viability as potential trading partners. By the same token, a buyer and seller may be a physically a
“world away” from one another, but still be figuratively “next door” if high-quality transportation and
communications effectively render physical distance irrelevant.
183
Truth be told, it is by no means easy to distinguish information technology effects in aggregate given
other forces in operation, including cyclic forces, and the usual limitations of macroeconomic data. These
difficulties are what has motivated recent attempts to gauge prospective productivity impacts through
micro-analysis of specific enterprise operations and how these are potentially affected by utilization of new
technical capabilities. Even these new studies are limited by limits on the ability to comprehend the
opportunities new technologies afford: It may be possible to figure out how new technology allows
existing tasks to be accomplished more economically; it is harder to figure out what new tasks might be
thereby productively enabled.
184
Remarks of L. Waverman at public release of London Business School study. See op. cit.
185
Broadband component and service suppliers and their financial backers naturally ardently wish for this
particular “ship to come in” and seek to cloak their private interests in the mantle of the public interest.
There may well be, as we have suggested, significant public interests, but they are not necessarily
synonymous with the various private interests.
110
Amongst economists there has been a great deal of discussion about the extent to which
broadband is demand-constrained, or supply-constrained, or both, or neither. Our take is
that broadband is more supply-constrained in the U.S. than in the U.K., primarily in
consequence of greater sensitivity by the U.K. authorities to investment incentive issues
up to (and including) the present and, in particular, more “investment-friendly” policies
than have been adopted, at least heretofore, in the U.S.186 The U.K. has also stolen a
march on the U.S. in terms of spectrum-based broadband, with the U.K. having already
auctioned licenses to resources for 3G applications the U.S. authorities are still seeking to
identify.
At the same time, we think broadband is more demand- than supply-constrained in both
the U.S. and the U.K. Given the potential broadband applications now contemplated,
currently feasible transmission speeds appear adequate to meet at least medium-term
requirements. Those who think very high speeds (in the gigabit rather than megabit
range) are necessary now maintain that broadband is supply-constrained, notwithstanding
its relatively rapid and fairly ubiquitous deployment, given the limitations of current
technologies. Both DSL and cable-modem service are retrofit technologies (at least in
the U.S. where cable systems were first installed several decades ago) and will likely
ultimately be displaced, probably by an all fiber system. Nevertheless, it is quite another
thing to conclude that now is the time to deploy an all-fiber system. There do not
currently appear to be any (mass-market) residential broadband applications that require
more than about 1.5 Mbs (for streaming video at VHS quality). Gigabit applications
appear to be a fairly long way off.
Current “standalone” applications do not as yet appear to have sufficed to produce a
virtuous dynamic feedback process between increased broadband subscribership and
development of attractive new broadband applications, i.e. “to get the broadband
bandwagon rolling.” The current take-up by subscribers has not as yet been sufficiently
great to induce the principal websites to deploy “high definition” content that might, in
turn, prompt greater broadband take-up and market “takeoff.”187
Demand is obviously a “value-for-money” proposition, and price reductions thus hold
some promise for getting the bandwagon rolling. BT’s recent announcements of
significant reductions in rates for its wholesale and retail broadband offerings are
certainly “good news” on this front. Economic growth that raises the opportunity cost of
time and thus makes economizing on time more valuable will also presumably promote
greater broadband take-up as time passes. As the number of broadband subscribers
186
We would note in this regard a plethora of (viz., six) recent proceedings opened by the FCC to remedy
perceived flaws in the U.S. regime that mitigate against broadband facilities deployment.
187
There are some promising lights on this horizon: BBC is, for example, reportedly upgrading its website
resources with a view toward enabling quick and easy retrieval from its virtually unmatched archive of
documentary resources. Access to this type of educational resource could well supply an attractive
broadband complement to parents seeking to afford their children an effective learning aid.
111
grows as a proportion of the subscriber base, the greater will be the incentives for website
designers to develop service improvements to compete for traffic and allow subscribers to
realize greater benefits from the capacity to communicate at higher speeds.
As we have remarked, it appears that high installation/connection costs have operated as
a drag on demand to this point. In Korea, monthly broadband charges have been higher
than in the U.K., but broadband penetration is nevertheless significantly higher. This
reflects a variety of differences in circumstances to be sure, but there have, at least until
now, been marked differences in connection charges, and it is easy to see how high initial
connection charges might scare away many would-be subscribers. This is a common
problem faced by new service innovators that has been successfully addressed in a
variety of different ways in a variety of different contexts. These typically involve
transactional means to spread fixed installation costs and/or attractive offers designed to
compensate for the initial wallet “hit” in the form of “free” usage or complementary
goods and services.
We think there needs to be greater creativity in addressing this problem from a marketing
standpoint as well as greater regulatory sensitivity to the need (and economic
justification) for such creativity, to the extent fear of regulatory reaction has perhaps
stifled creative initiative in the past. Regulators need not “give away the store,” but
neither should they err in overly limiting the flexibility of pricing arrangements and other
terms and conditions of broadband offerings. Theirs is a task that entails balancing the
harms of unfair competition against the harms of limiting fair competition. They can err
in two ways and must identify an optimal tradeoff.
“Value” is the other key variable in the “value-for-money” demand equation and
relieving the current constraints on content is an important key to unlocking higher-value
content. In addition to making it less costly to subscribe to broadband service, demand
may be enhanced by making it more attractive and beneficial to subscribe. The unsettled
current state of digital copyright embodies both technical and legal dimensions. The
wider stakes involved imply that resolution of these matters, while requiring participation
by the interested parties with the most focused interests (i.e., content creators and
distributors), also demands that government play an active role in adjudication of
disputes and in compelling their prompt resolution.
Definition and enforcement of property (i.e., resource) rights are widely recognized as
necessary pre-conditions for efficient operation of a market economy. Resolution of the
difficult issues in this area has been very slow to materialize, partially because each of the
main factions has perceived some advantage in delay. There is, we believe, increasingly
widespread consensus that improved content is key for driving broadband demand.
Without meaningful progress on the intellectual property rights front, the “killer
applications” necessary to drive rapid broadband take-up and dynamic feedback will be
slow to materialize.
This is not necessarily to argue for “compromise” of such rights; indeed, it strikes us as
self-evident that incentives to create compelling intellectual property in the form of
112
software applications and other types of content must be sustained for there to be value
for realization through broadband connections. At the same time, short-term “fixes” in
this area have generally entailed “throwing the baby out with the bathwater”—
suppressing both legal and illegal (i.e., rights-infringing) uses of file-sharing software.
This is a traditional area for government involvement, and rights are, of course,
established both for the benefit of the public as well as the creators of products of
intellect. Again, there is more than one way to fail and a careful balancing of conflicting
considerations is necessarily entailed, including the possibility that delay may advance
private but harm public interests.
We have pointed to a variety of potential rationales for government intervention to
promote faster and greater broadband development. These include internalization of a
variety of consumption externalities, including threats to the stability of the oil cartel’s
pricing, pollution abatement, control of traffic congestion and other “crowding”
externalities, and realization of economic benefits from broadband derived from
internalization of “bandwagon” externalities. Whether these potential rationales translate
into actual justifications for specific interventions must necessarily rest on identification
of such specific programmatic interventions and their putative payoffs, as well as close
assessment of any associated costs, including the value of foregone benefits from
alternative expenditures of scarce government resources.
Consider the energy conservation rationale in this regard: There are a variety of ways for
the government to induce greater petrol-economizing efforts: higher petrol sales taxes,
fuel-efficient auto subsidies or direct controls, mass-transit subsidies, automobile day-of-
the-week use restrictions—the list could be arbitrarily extended to considerable length.
To justify a broadband-based conservation policy requires an assessment of expected fuel
savings, itself a difficult task. The cost assessment also requires considerable effort, i.e.¸
to weigh the competing value of relevant foregone alternatives, including the comparative
efficacy of the other conservation approaches. In our view, the government has an
important role to play as a clearinghouse for relevant information and as the initiator of
research to assess broadband impacts and their import for government policy. “Mining &
milling” of its own experiences appears to provide a logical starting point.
Our take is that there may well exist an economic case for promoting broadband to
address the externalities we have identified. But, to make that case, in the first instance,
demands a good deal of experiment, observation, data gathering and interpretation. In
this regard, given the apparent efficiency benefits of using advanced communications
capabilities to deliver government services, the government can productively use its own
experiences to inform this type of empirical research. Various “pilot” programs for, say,
telecommutation by government workers can provide an empirical base to make
inferences about costs and benefits. This, as we have noted, is precisely the research
methodology that informs the latest and most credible estimates of productivity impacts
from more widespread diffusion of communications technology.
113

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P ROPELLING THE B ROADBAND

JOHN HARING, JEFFREY H. ROHLFS &

PUBLISHED 4 SEPTEMBER, 2002

Aristophanes/Burt Shevelove, The Frogs

PROPELLING THE BROADBAND

2. ANALYTICAL FRAMEWORK ..........................................................................3

4. BROADBAND APPLICATIONS AND DEMAND ...........................................15

4.1. Enhancements to Current Internet Applications.................................................. 16

4.2. Advanced Web Pages............................................................................................... 19

4.3. Bandwagon Demand................................................................................................ 23

4.4. Downloading of Music ............................................................................................. 25

4.5. Downloading of Video Entertainment Programming .......................................... 29

4.6. Copyright Issues and the Bandwagon.................................................................... 30

4.7. Two-Way Video Communications.......................................................................... 30

4.8. Online Gaming ......................................................................................................... 31

5. BROADBAND AND PRODUCTIVITY ............................................................32

5.1. Current E-Commerce Trends................................................................................. 34

5.2. The Ability of Broadband to Enhance E-Commerce............................................ 40

6.1. Broadband Penetration by Technology ................................................................. 45

6.2. Geographic Distribution.......................................................................................... 46

6.3. Prices of Broadband Internet Access ..................................................................... 48

7. ADOPTION RATES OF COMPARATOR PRODUCTS..................................51

7.1. Non-Bandwagon Products....................................................................................... 52

7.2. Bandwagon Products ............................................................................................... 54

8. DRIVERS OF TECHNOLOGY ADOPTION ....................................................59

8.1. Supply-Side Drivers ................................................................................................. 60

8.2. Demand-Side Drivers............................................................................................... 62

9. ”COMPARATOR” EXPERIENCE REGARDING SUPPLY DRIVERS ...........63

9.1. Productive Capacity................................................................................................. 63

9.2. Producer Reputation ............................................................................................... 66

9.3. Industry Concentration ........................................................................................... 67

9.3.1. Implications for Broadband ................................................................................ 67

9.4. Vertical Integration ................................................................................................. 67

9.5. Promotional Pricing................................................................................................. 69

9.7. Copyright .................................................................................................................. 70

10. “COMPARATOR” EXPERIENCE REGARDING DEMAND DRIVERS........71

10.1. Bandwagon Effects................................................................................................. 71

10.2. Net Benefit from Innovation ................................................................................. 73

10.3. Ease of Innovation.................................................................................................. 77

11. SUMMARY OF IMPLICATIONS OF DRIVER ANALYSIS FOR

11.1. Supply-Side Drivers ............................................................................................... 78

11.2. Demand-Side Drivers............................................................................................. 78

12. POLICY IMPLICATIONS: SUPPLY-SIDE ...................................................79

12.2. Price Regulation ..................................................................................................... 80

12.3. Access Regulation................................................................................................... 83

12.4. Two Relevant Additional Considerations............................................................ 86

12.5. Technology “Retardation” .................................................................................... 88

12.6. Conclusion .............................................................................................................. 91

13. POLICY IMPLICATIONS: DEMAND-SIDE...................................................92

13.2. Conventional Externality Analysis....................................................................... 93

13.3. Realizing Bandwagon Effects: The Case for “Pump-Priming”........................ 98

13.4. Increasing Supplies of Complementary Products............................................. 101

13.5. Possible Solutions ................................................................................................. 107

13.6. Conclusion ............................................................................................................ 109

14. SUMMARY AND PRINCIPAL CONCLUSIONS .........................................109

applications and demand; Section 6 describes broadband penetration along different

The phenomenal worldwide interest in “broadband,” manifested in an almost unprece-

4. BROADBAND APPLICATIONS AND DEMAND

Because broadband adoption is potentially so important, public policymakers are keen to

4.1. ENHANCEMENTS TO CURRENT INTERNET APPLICATIONS

Percent of Adults with Internet Access

Various Uses of Internet in G7 Countries & Korea

Access G overnment Services Healthcare Research

The Internet substantially lowers transaction costs (costs of using markets)