As part of the FCC’s National Broadband Report to Congress, Gregory Rosston, Scott Savage and Donald Waldman surveyed households to determine how much they would be willing to pay for specific features/attributes of broadband Internet service. Turns out that, across the board, people value reliability and speed the most. [Download Here]
No surprise there. But there are some interesting insights to be mined from the data. Household valuations of speed and reliability differ substantially, and are linked to how much time a household has spent online. While the average household is willing to pay $59 per month for basic Internet service, one with less than twelve months of online experience and a slow connection is willing to pay only $31. The willingness-to-pay data thus suggest that training in digital literacy, easy public access to broadband and discounted installation, if accurately targeted, could succeed in getting inexperienced users to take the plunge.
Interesting policy question: If they are right, and if there are positive social externalities in extending broadband penetration, would it make sense to lure new users with temporary subsidies?
Broad band has helped the world in a very crucial way as it has made the use of internet to be faster, and more reliable. It has also made organizations to reduce costs since many people can use the internet at one time from one source
The real question is whether it is the current subsidy that new low-volume users under flat rate tariff plans are paying to bandwidth ‘gluttons’ that should be ‘undone’ rather than creating yet another subsidy scheme to induce broadband purchase.
Why not instead offer menus of two-part tariffs (fixed cost to connect and variable charges for downloading, or different bundles of downloading volumes) as we have done in NZ and Australia? This makes it more attractive for new/low volume users to enter the market without having to pay effective subsidies to the small percentage of bandwidth ‘gluttons’ under flat-rate ‘all you can eat’ plans (in Australia and NZ most new broadband users enter on the low cost/low volume plans and increase bandwidth purchased as demand increases over time as new applications are used – and we have had lots of innovation in the means of informing users of volume and protection from high bills when caps are exceeded – e.g. ‘warning emails offering the chance to purchase ‘bonus bundles’ when reaching 80% of cap; downgrading speed when the cap is reached; online monitoring of consumption; online ‘menus’ helping consumers select the most cost-effective bundle for their usage patterns etc – i.e. very much like what is seen in the electricity market). Indeed, this is precisely how mobile operators have used ‘prepay’ phones to induce large numbers of low volume/price sensitive users to enter the market (for both calling and data i.e. zero fixed cost, but a positive charge per MB/minute used; high usage cost per MB/minute initially, but decreases in proportion to increases in the size of the fixed payment under monthly plans).
Two part tariffs also partially address some of the need for ‘traffic shaping’ – if content is not valued above the user’s marginal cost of downloading, it isn’t downloaded, thereby reducing volumes to be ‘managed’ and hence the relative importance of the consequent requirement to ‘shape’ traffic for network performance reasons. Importantly, under these arrangements users – rather than network operators – make the decisions about what content is valuable. It cannot be assumed that all broadband applications are equally valuable – and two-part tariffs are a more efficient (and arguably more effective) means of establishing users’ actual application values than arbitrary decisions by network operators as must occur under the ‘flat-rate’ system.
Admittedly, the small proportion of bandwidth ‘gluttons’ are not very happy with two-part tariff plans, but the relative welfare gain may be large considering that it is the ‘glutton’s’ lowest-valued (‘subsidised’) downloading that they will be foregoing compared to the ‘high valued’ downloading now enjoyed by those paying the lower fixed charge who would not have purchased at all (and is therefore welfare foregone) at the flat rate tariff. From the Australian and NZ experience, as median demand is substantially less than average demand even within ‘buckets’ of MBs, the number of the former is quite small but the latter much larger, suggesting that the aggregate welfare gained from such tariffs may be substantial. Increased usage leading to purchase of bigger buckets is then also determined by application value received by users rather than network charging practices.
I note that under these arrangements in Australia and New Zealand, there is considerable use of broadband by commercial users, but the use of the internet for residential applications is much less – likely due to the difference in value of the (different) range of applications used. In the residential market, the application range differs, with entertainment applications (video and audio streaming etc) dominating the volume of bandwidth consumed. A price signal will separate out the relative value users place on such applications. Low volumes of residential downloading in Australia and New Zealand may perhaps occur because at prevailing prices, for some (many?) users, the marginal benefit of (for example) high definition video on demand via the internet versus acquired from the local (or postal) video library or personal stock is not valued in excess of the marginal cost of acquiring it (i.e. close substitutes exist and are extensively utilised by many who do not value the benefits of additional broadband-based delivery (i.e. higher bandwidth volumes) sufficiently highly enough to purchase the extra bandwidth at prevailing prices, even though they do have broadband internet connections for the lower-volume but more highly-valued applications used – e.g. internet purchasing, online banking).
thanks for linking to this and high lighting it. Otherwise, this good research gets buried in the FCC’s docket. CWB