The Broadband Adoption Index: Improving Measurements and Comparisons of Broadband Deployment and Adoption

Beginning of article

  I. INTRODUCTION

 II. THE BROADBAND ADOPTION INDEX
     A. A Measure of Value
     B. The Broadband Adoption Index
     C. Accounting for Heterogeneity
     D. A Graphical Exposition

III. NUMERICAL SIMULATION OF THE BROADBAND ADOPTION
     INDEX
     A. Setup for Benchmark Case
     B. Results for Benchmark Case
     C. Alternative Scenarios

 IV. IMPLEMENTATION GUIDELINES, SUGGESTIONS, AND
     APPLICATIONS
     A. Econometric Implementation of the BAI
        1. Basic Setup
        2. Generating the Data Set
        3. Estimation of the Demand System
        4. Calculation of the BAI
        5. Subscription Targets at Different Costs
        6. Social Premia
     B. Comparative Valuation of Broadband Connection
        Technologies
     C. Simplification of the BAI and Quantity-Based Measures
        of Adoption
        1. The Single Modality and Per Capita Measures of
           Adoption
        2. Two Modalities
     D. Endowments and Broadband Adoption Targets

  V. MEASUREMENT, MULTIPLE MODALITIES, AND PUBLIC
     POLICY
     A. The Model
     B. Caveats and Discussion

 VI. POLICY RECOMMENDATIONS

VII. CONCLUSION

Editor's Note: A version of this Article originally appeared as Phoenix Center Policy Paper No. 36. (1)

I. INTRODUCTION

Policymakers around the globe regard the deployment and adoption of Internet technologies as critically important to the economic and social development of their countries. (2) Perhaps rightfully so: the Internet is commonly viewed not only as a general-purpose technology that can sharply reduce transaction costs in the modern economy and spur economic growth, but it also is argued to be a forum for increased political discourse, a tool for educational opportunities, and even a platform for social change. (3) As a result, for many policymakers, promoting the deployment and adoption of Internet access technologies is an important public policy. (4)

Given this attention to broadband Internet service--and even efforts in some countries to establish and spend funds efficiently to stimulate broadband deployment, adoption, and usage (5)--policymakers have a keen interest in measuring and benchmarking these efforts. It is, therefore, somewhat surprising that, in general, the current tools used to track Internet deployment and adoption worldwide are so crude. The most commonly cited statistics on broadband adoption--broadband connections per capita--are published regularly by the Organisation of Economic Cooperation and Development (OECD) and the International Telecommunications Union (ITU). (6) However, as we have discussed in prior research, this approach is inaccurate and can even be misleading, as fixed broadband connections, either at a household or business premise, are routinely the only connection in the household and, in some instances, are shared among multiple users. (7) This disconnect renders per capita measures conceptually defective and produces an incorrect index of relative adoption rates. Demographic and economic differences between countries make cross-country comparisons of raw Internet penetration rates of little policy relevance, even if a penetration rate is properly constructed. Indeed, ninety-one percent of the differences in fixed broadband adoption rates in the thirty OECD member countries can be explained by reference solely to differences in income, education, population, age, and other demographic factors that bear little relationship to broadband or telecommunications policy. (8)

More importantly, the method that the OECD currently uses to measure Internet adoption includes only fixed broadband connections and affirmatively excludes the growing class of connections based on mobile broadband technologies. (9) Other connection types, such as libraries and public Internet connection centers that serve many end users, are also ignored in the OECD's analysis. These shared methods of accessing the Internet provide considerable social value, particularly for low-income families. (10) The exceedingly narrow view of connectivity is significant because, as the ITU Secretary-General Dr. Hamadoun I. Toure recently said, "[i]n developing countries, wireless broadband technologies are increasingly viewed as the means of achieving universal access to [information and communications technologies]." (11) Because consumers and businesses can access and use the Internet in a number of ways, it is improper to disregard any significant connection modality, even to the point of including some accounting for dial-up access that continues to provide value to millions of subscribers worldwide (as is revealed by their willingness to pay for it). (12) To a rural household or small business, even the most rudimentary form of Internet access may generate a significant amount of economic and social value--value that is not taken into account in any current international or intra-national "rankings" methodologies.

As the bandwidth of mobile broadband technology increases to multiple megabits per second and as compression algorithms improve, it is increasingly probable that mobile broadband may become an important, if not the primary, method of accessing the Internet for a wide range of users. Mobile broadband is likely to be very important for users who do not own or know how to use a computer, since Internet access is also possible through smart mobile phones and other small, portable devices, such as Netbooks. Mobile broadband may also be the most efficient form of connectivity to users who live in areas where wireline telephone or cable networks do not exist and are very costly to construct; or, for those who have access at work or school or have mobile lifestyles, a mobile connection may better satisfy connectivity demands. Mobile broadband is always available, unlike the fixed connections widely used at the home and office. This mobility creates more opportunities for more efficient transactions and information sharing. Indeed, broadband provided over mobile networks may replace fixed connectivity for many users via embedded communications chips in laptops and wireless access cards. The impact of this mobile substitution for broadband service is already being felt in some countries. In Portugal, for example, more than half of all broadband connections are via mobile technologies, and nine percent of people with broadband access in the country use only a mobile technology. (13)

For these reasons, policymakers seeking to understand and measure the effectiveness of their Internet deployment and adoption programs clearly need a tool that does not simply "count" connections of a particular type, but which takes into account all technologies in a way that measures the value that each broadband technology offers their societies. Broadband matters to economic and social public policy because it generates value. As such, any meaningful performance index of broadband adoption should include the comparative value of various connection modalities, particularly when establishing deployment and adoption targets. In this Article, we provide the first such attempt, by deriving a Broadband Adoption Index (BAI) that considers these important ideas and accounts for heterogeneous connection modalities.

The BAI is a value-based index of broadband adoption that accounts for both the benefits and costs of adoption and deployment and also recognizes that these benefits and costs may differ, sometimes substantially, both within and across countries. Simply stated, the BAI compares the actual value of adoption to the target, welfare-maximizing value of adoption. This welfare-maximizing target level of adoption will vary from country to country and is a function of the social value of broadband connectivity, measured as the difference in the social benefits and costs of broadband. A country then can judge its progress against this welfare-maximizing target level of adoption. The BAI is specifically designed to accommodate different connection technologies into a single index--something that merely summing the number of connections cannot do.

The BAI is intended to be used by policymakers in individual countries for performance assessment and the establishment of deployment and adoption targets. (14) The index is also well-suited for policy-relevant, cross-country comparisons. Because the index is scaled to a target level of broadband adoption calculated for each country, this method of comparison is a legitimate comparative metric of performance. Each country's respective target (or optimal) level of broadband Internet adoption will, of course, vary because the costs and benefits vary and the ideal mix of connection modalities will vary by country. In essence, the BAI compares a country's actual adoption against that country's ideal, welfare-maximizing broadband adoption rate. This allows one to compare whether, for example, Turkey is closer to reaching the stated objective than, say, Japan. Merely comparing the raw adoption rates of Turkey and Japan--two countries with markedly different population demographics, economies, and population densities--provides little information relevant to broadband policy. (15) But comparing the BAI of those two countries would, in fact, carry great weight in determining whether one country's policy structure is more conducive to broadband deployment adoption than the other country's policy structure.

Taking a BAI-oriented approach naturally should lead policymakers to set and establish particular targets for broadband adoption of various connection modalities based on the different value that each mode presents. These country-specific targets would necessarily focus on conditions within that country. The BAI is a conceptually valid, but admittedly data-intensive, concept. This is, in part, our point. The process of measuring broadband adoption in a meaningful way is not simple. However, even if a country does not today collect all of the data necessary to calculate the target level of adoption in a rigorous way, in most industrialized economies there likely is enough data to guide rough approximations of broadband targets using the principles of the index.

This Article is organized as follows: In Section II, we define the BAI. We provide a general specification of that index and demonstrate how to incorporate heterogeneous modalities into a single index of adoption useable by individual countries to guide policy, yet also providing meaningful comparisons across countries or other geopolitical units. A graphical exposition of the BAI is also provided to aid in comprehension.

In Section III, we demonstrate the properties of the BAI with a numerical simulation. The simulation is based on a simple, linear model of demand and cost; it is not intended to represent a particular country or group of countries, or even real modalities. The purpose of the simulation is to shed significant light on the underlying issues of performance measurement with regard to broadband adoption.

Section IV provides policymakers with suggestions as to how to implement the BAI in practice. Complete implementation of the BAI, either for a specific country or group of countries, would require the collection of relevant market data that includes quantity, price, and cost data for each connection modality. Even without collecting such a rich set of data, policymakers can adopt aspects of the BAI approach immediately by incorporating the underlying logic of the index in policy decisions. We believe that adopting the BAI approach--that is, generally, a focus on value rather than connection counts--would naturally lead policymakers to establish a series of targets for broadband availability and adoption for each type of connection modality and speed. The mix of those targets will vary from country to country because a technology and adoption mix that maximizes social value in Portugal is apt to be different than that of Denmark and different still for Mexico.

Section V provides a brief theoretical discussion of why consideration of all connection modalities is important when making public policy for broadband deployment and adoption. The key aspect of the BAI approach is to recognize that all methods of accessing the Internet--fixed and mobile--offer positive economic value to society as a whole. Good policy aims at maximizing social value. As such, the policymaker's task is far more complex and subtle than increasing the number of broadband subscriptions. Not considering alternative forms of access, which is the approach the OECD takes today, can render a perverse assessment of a country's performance and lead to affirmatively less than optimal public policy decisions.

II. THE BROADBAND ADOPTION INDEX

This Article provides an economically meaningful index of broadband adoption by comparing actual adoption to the socially optimal level of adoption. The index is intended to help policymakers establish sensible policy targets for broadband deployment and adoption and to help establish measurement criteria to assess the efficacy of various broadband programs. Such an index could be used by a single government to evaluate its own performance with respect to its choices of adoption targets. If sufficient data were collected, the index may be used for comparisons among OECD member states, the European Union, other supranational organizations, or even among the political subdivisions of individual countries.

The approach we take is unique because it focuses on the value that subscribers (both businesses and consumers) place on broadband adoption and not only the number of connections. Simply counting broadband Internet connections--the technique currently used by the OECD and ITU--is an insufficient gauge of the importance of broadband to societal well-being. The social value of such connections, not the sheer number of them, is what makes the deployment and adoption of broadband interesting from a policy standpoint. Only by measuring the value that subscribers and society as a whole place upon a broadband Internet subscription and its use can one begin to consider whether a society is realizing the full economic, educational, and social potential that Internet technology offers. Incorporating value into broadband measurement is essential when combining the counts of heterogeneous modalities, such as mobile and fixed broadband, into a single adoption index.

Our approach is largely consistent with the recent trend to increase the sophistication of the analysis of broadband technology. A recent study by Leonard Waverman, Kylan Dasgupta, and Nicholas Brooks, titled Connectivity Scorecard 2009, considers broadband not as an end, but as an input of production for innovation-driven economies. (16) As such, broadband is one of many complementary inputs of products, all of which must be optimized in order to maximize the economic potential of an economy. While broadband connectivity is an important factor in the Scorecard, it is by no means the sole factor, and it is by no means the dominant factor. The study is one of a few recent reports that properly considers broadband as one of many important factors contributing to economic development and growth. (17) From the economist's perspective, success must be measured across all contributing factors, not just one. (18)

A. A Measure of Value

What is the value of broadband to a society? Does it vary by user, connection speed, or method of access? These are the questions that should be asked, but are almost always ignored, when attempting to measure where a country "ranks" among its peers. Stated simply, merely counting broadband connections or penetration, without regard to any consideration of value, assumes the following: all types of broadband connections are equal, all societies are equal and identical in how they value Internet access by speed and connection mode, all users of broadband place equal value upon that connection, and all such connections can be produced at equal cost. None of these assumptions are legitimate. Consequently, applying them across the board does not provide a policymaker with the ability to judge whether society is working toward attaining the maximum value from broadband technologies. Rather than count connections, a policy-relevant index requires that broadband adoption targets be established by reference to the value that each type of broadband connection modality provides society.

We measure value as follows: If the average value of a connection is v, and there are q connections, then the total value of broadband to a society is simply v.q. (19) This value is based on the benefits from consumption less the costs of production. If w is the average end-user benefit (i.e., willingness to pay), and c is the average incremental cost of production, then the total value of broadband service is simply (w - c)q. (20) Many claim that broadband has benefits outside those realized by private parties, and that these spillovers, or social premia, are easily incorporated into the value calculation. (21) We use the term social premia to abstract from the rigid economic concept of externalities. (22) Using social premia allows us to incorporate social value generally without necessarily satisfying the economic criterion of externality. (23) With the average social premia equal to e, social value is just (w - c + e)q. (24) This latter formulation of value is all inclusive and represents the full social value of broadband connections at some point in time, including the social premia commonly alleged to exist.

The cost of providing a broadband connection differs across users, largely due to the geographic location of the user (i.e., it typically costs more to serve a rural customer than an urban one due to loop lengths, population density, and the lumpiness of investments). (25) Areas without any existing infrastructure are more costly to serve since the entire cost of the network is incremental (as opposed to network upgrades). Likewise, the benefits from connectivity can vary considerably across users. Some users benefit from broadband, some benefit less, and some do not benefit at all. (26) Even the social premia can vary considerably across users, with some broadband use focused on educational purposes (with presumably high social premia) but some merely on entertainment (with little to no social premia). (27)

Plainly, with costs and benefits varying, sometimes substantially, it follows that the social value of connections can likewise vary substantially. Extending our notation to account for this fact, we can say that, for some individual connection, n, of which there are N total, the value of connection n is ([w.sub.n, - [c.sub.n] + [e.sub.n]). In this way, each connection can have a unique value whether low, high, or in between. The social value of broadband service, as before, is simply the sum of all these individual values across all N connections. (28) Given this basic conceptual setup, it is easy to see that the value of broadband to society depends on how much of it is consumed (the q) and who is doing the consuming (the [v.sub.n] = [w.sub.n] - [c.sub.n] + [e.sub.n]).

Policymakers are expected to be interested in maximizing the total value to their countries that broadband technology service offers. The success or failure of broadband policy, and indeed technology policy in general, should be judged by reference to whether social value is maximized. It follows then that an appropriate way to measure whether a country's broadband policy is effective would be to measure or benchmark that country's actual, realized social value from broadband relative to its maximum social value.

With access to sufficient data, we can generate an index that makes this comparison and measures the degree to which a country is achieving the goal of maximizing the social value of broadband deployment and adoption. Because the social value of different modes of broadband access is different and will vary among societies, such an index provides a meaningful method of evaluating the evolution of broadband within and across countries by allowing for country-specific targets of adoption.

B. The Broadband Adoption Index

Stated simply, the BAI measures the actual value that a society is currently deriving from broadband against the value-maximizing target level of broadband adoption. By placing reference to value, the index can incorporate every form of network access technology (or modality) in a consistent manner and is both economically meaningful and policy relevant.

Algebraically, the BAI takes this general form:

[BAI.sub.t] - Actual Value at time t / Target Value, (1)

where t is the time period at which the actual value is measured. Given a single connection modality, if there are [q.sub.t] total connections at time t, the BAI at t can be written as

[BAI.sub.t] = [[bar.v].sub.t][q.sub.t] / [v.sup.*] [q.sup.*] (2)

where [[bar.v].sub.t] equals the average value of a connection at time t. Equation (2) is a highly general specification of the BAI. The actual value is simply [[bar.v].sub.t][q.sub.t], where [[bar.v].sub.t] is the average value at time t, and [q.sub.t] is the quantity at time t. We do not generally expect either [[bar.v].sub.t] or [q.sub.t] to remain constant over time, at least until the target value is reached. We can write the values at the social optimum as [v.sup.*][q.sup.*], where v is the average value and [q.sup.*] is total quantity at the welfare maximum. These optimal values coincide with the level of adoption that maximizes social welfare. Since broadband is likely to be deployed to, and purchased first by, those who value it the most, we generally expect that [[bar.v].sub.t] > [v.sup.*] as long as [q.sub.t] < [q.sup.*]. Further, prices for both service and complementary equipment fall over time, implying a diminishing average valuation of the service over q. This suggests that the first connections will have higher relative value than later connections, when more marginal users join the network. At the optimum, and probably only at the maximum, [[bar.v].sub.t] = [v.sup.*].

We can and do make the BAI less general later in this Article in order to provide deeper insight into the measurement of performance with regard to broadband adoption, particularly in the presence of multiple connection technologies or modalities. But, there are a number of properties of the BAI that are worth discussing at this point.

First, by design, the index has a theoretical maximum value of 1.0, where the actual value equals the maximum valuation of broadband connections. (29) Unlike per capita normalizations, the index is scaled in a manner that allows for proper cross-country comparisons. Per capita measures are not identically scaled across countries due to differences in the size of households or businesses. (30)

Second, by having a common scale in the numerator and denominator (i.e., value-weighted quantities), the index can be used to evaluate the relative performance both within and across geopolitical units. Despite the obvious desirability of proper scaling, the most commonly used measure of broadband adoption today--fixed connections divided by population, as published semi-annually by the OECD--does not possess this trait. (31) Population is not a "target" for connection counts in any meaningful sense. (32) Fixed connections, for example, are shared among many people within a household or business, and this share rate varies by country. (33) The scaling defect of per capita measures is exhibited plainly by the telephones per capita statistics released by the OECD. (34) In the mid-1990s, the telephone was available and purchased by almost everyone in the more advanced economies; yet, for none of the countries did the BAI approach 1.0. (35) In the United States, where billions are spent annually …