George S. Ford, PhD Thomas M. Koutsky, Esq. Lawrence J. Spiwak, Esq. (July 2007)

Transcription

1 PHOENIX CENTER POLICY PAPER SERIES Phoenx Center Polcy Paper Number 29: The Broadband Performance Index: A Polcy-Relevant Method of Comparng Broadband Adopton Among Countres George S. Ford, PhD Thomas M. Koutsky, Esq. Lawrence J. Spwak, Esq. (July 2007), George S. Ford, Thomas M. Koutsky and Lawrence J. Spwak (2007).

2 Phoenx Center Polcy Paper No. 29 The Broadband Performance Index: A Polcy-Relevant Method of Assessng Broadband Adopton Among Countres George S. Ford, PhD Thomas M. Koutsky, Esq. Lawrence J. Spwak, Esq. ( Phoenx Center for Advanced Legal & Economc Publc Polcy Studes, George S. Ford, Thomas M. Koutsky and Lawrence J. Spwak (2007).) Abstract: In ths PAPER, we present a new and polcy-relevant means of comparng the broadband adopton rates among countres the Broadband Performance Index ( BPI ). Unlke the OECD, whch ranks countres broadband performance usng raw, per capta subscrpton data alone, the BPI s a polcy-relevant means of comparng broadband adopton among countres because t measures whether actual broadband penetraton n a country meets, exceeds, or fals to meet ts expected performance. We generate the BPI for each OECD country wth econometrc technques that take nto account a number of factors, such as ncome, ncome nequalty, educaton, populaton age, and populaton densty. The BPI shows that among OECD countres, broadband adopton n the U.S. generally meets expectatons. Interestngly, countres often cted as broadband mracles, lke Korea and Japan, are average performers lke U.S., and several countres ranked hgher than the U.S. by the OECD (such as Denmark and Norway) are sgnfcantly underperformng. Countres lke Portugal and Turkey, each of whch rank behnd the Unted States n the OECD rankngs, are actually surpassng ther demographc and economc endowments substantally. Chef Economst, Phoenx Center for Advanced Legal & Economc Publc Polcy Studes. Resdent Scholar, Phoenx Center for Advanced Legal & Economc Publc Polcy Studes. Presdent, Phoenx Center for Advanced Legal & Economc Publc Polcy Studes. The vews expressed n ths paper are the authors alone and do not represent the vews of the Phoenx Center, ts Adjunct Fellows, or any of ts ndvdual Edtoral Advsory Board members. We are ndebted to Randy Beard, Adjunct Fellow, for hs assstance n formulatng the economc model presented n ths paper.

3 2 PHOENIX CENTER POLICY PAPER [Number 29 TABLE OF CONTENTS: I. Introducton... 2 II. The Need for a Polcy-Relevant Means of Comparng Broadband Subscrpton Rates Among Countres... 4 III. An Emprcal Approach to Analyzng Broadband Penetraton... 9 A. The Broadband Performance Index B. Emprcal Approach C. Expectatons D. Data E. Estmaton Detals F. Results G. Alternatve Specfcatons Endogenety of Prce Excludng Prce Exclude Year Addng Addtonal Data Unweghted Least Squares H. Summary IV. Broadband Subscrptons, Demographc and Economc Endowments, and Performance A. The Broadband Performance Index B. Senstvty Analyss V. Concluson I. Introducton A host of research papers have shown that a number of factors play a szable and statstcally sgnfcant role n broadband demand, ncludng prce, ncome, and populaton densty. Nevertheless, debates often rage about where countres rank among ther peers for broadband servces wth lttle regard for these demographc and economc factors. In ths PAPER, we present an alternatve, economcally-legtmate and polcy-relevant means of comparng the broadband adopton rates among countres that takes these factors nto effect the Broadband Performance Index, or BPI. There s a clear need for ths alternatve approach to comparng broadband adopton among countres. The Organsaton for Economc Co-operaton and Development (OECD) and Internatonal Telecommuncatons Unon (ITU) report the raw number of broadband subscrptons among ther members. Despte the nherent defects n such numbers, polcymakers around the globe pay

4 Summer 2007] THE BROADBAND PERFORMANCE INDEX 3 consderable attenton to these broadband rankngs. However, whle natonalstc debates rage about where countres rank among ther peers for broadband servces based upon the raw data n the OECD and ITU reports, polcymakers often fal to consder whether countres are over-performng or underperformng n broadband penetraton gven ther economc and demographc endowments. These demographc and economc endowments nclude the human and fnancal resources present n a country or socety that mpact ts broadband subscrpton rate, such as ncome, levels of hgher educaton, ncome nequalty, populaton densty, and other factors. To provde polcymakers a tool to compa re broadband subscrpton rates between countres, ths PAPER develops and presents the Broadband Performance Index (BPI). Ths ndex quantfes the relatonshp between a country s broadband subscrptons per capta and that country s economc and demographc endowments. Ths approach s polcy-relevant because t strps away many factors over whch telecom polcymakers have very lttle nfluence or control. As a result, we beleve that the BPI provdes telecom polcymakers wth a method of comparng broadband subscrpton rates among countres that s superor to exstng measurements, all of whch depend upon raw data that do not take these factors nto account. We compute the Broadband Performance Index for each OECD country by frst estmatng the relatonshp between these endowments and broadband subscrptons, and we use that nformaton to compare how that country performs relatve to expectatons. The ndex for each country ndcates whether a country s broadband subscrpton rate meets, exceeds, or falls below what would be reasonably expected for that country, gven ts demographc and economc endowments. Some of our fndngs wll be of sgnfcant nterest to polcymakers. For example, we fnd that the Unted States generally meets expectatons n ts converson of ts natonal endowments nto broadband subscrptons. Ths fndng conflcts wth clams that the Unted States s n a broadband dtch and s falng to perform up to expectatons, at least wth respect to subscrptons. 1 1 See, e.g., Commssoner Mchael J. Copps, Dsruptve Technology Dsruptve Regulaton, 2005 MICHIGAN STATE LAW REVIEW 1-8 (2005); Federal Communcatons Commsson, Avalablty of Advanced Telecommuncatons Capablty n the Unted States, Fourth Report to Congress, Statement of Commssoner Mchael J. Copps (Sep. 9, 2004) (avalable at: /hraunfoss.fcc.gov/edocs_publc/attachmatch/fcc a1.pdf), 5.

5 4 PHOENIX CENTER POLICY PAPER [Number 29 Also, we fnd that many relatvely poor countres, lke Turkey and Portugal, whch actually rank behnd the Unted States accordng to the OECD, are dong a better job of convertng ther natonal endowments nto broadband penetraton than many hghly ranked countres. Indeed, many countres that rank hgher than the Unted States accordng to the OECD, lke Denmark and Norway, are n fact underperformng the Unted States when one consders demographc and economc factors. The Broadband Performance Index also provdes a number of related nsghts for polcymakers, snce our analyss suggests that there are a number of ways to mprove broadband adopton and a number of lmtatons on dong so. Frst, a country s demographc and economc endowments explan the vast majorty of the varaton n broadband subscrpton across the OECD. Thus, other government programs-lke educaton polcy-can drectly affect those factors and ncrease the rate of broadband adopton. Educaton polcy, then, s broadband polcy. Second, publc polcy may be able to attenuate the effect of endowments that reduce subscrpton. Examples may nclude low-ncome assstance programs for computer purchases and tranng centers. Fnally, successful programs desgned to consoldate demand n order to facltate the deployment of broadband servce n sparsely populated areas, such as Connect Kentucky, could also be examned. The rest of the PAPER proceeds as follows. In Secton II, we dscuss the mportance of respectng the lmtatons of broadband rankngs, wth partcular attenton to the OECD broadband rankngs and the problems that emanate from use of ths raw data n polcy debates. In Secton III we outlne our emprcal approach whch we use to determne the extent to whch certan demographc and economc endowments, lke GDP per capta, educaton level, and ncome nequalty, affect a country s broadband subscrpton rate. Ths calculaton provdes the bass for Secton IV, n whch we descrbe and calculate the Broadband Performance Index for each of the 30 OECD countres. II. The Need for a Polcy-Relevant Means of Comparng Broadband Subscrpton Rates Among Countres As the global economy grows and becomes more compettve, natonal leaders are ncreasngly and approprately focusng on broadband subscrptons n ther countres as a way to benchmark themselves aganst other countres and

6 Summer 2007] THE BROADBAND PERFORMANCE INDEX 5 dentfy areas of concern. Every sx months, the OECD releases a rankng of broadband subscrpton rates for each of ts thrty country members, ncludng the Unted States and most other major ndustralzed countres of the world. 2 Unfortunately, almost by defnton, a lst n whch countres are ranked from 1 to 30 wll have every country (save one) lookng up at ther peers wth envy and oftentmes for polcy drecton. And there s no shortage of advocates who utlze the raw results of these rankngs and country-to-country comparsons to argue for polcy changes. 3 In some cases, comparsons across countres have led to a drect polcy response. Japan has explctly adopted a 2010 U-Japan Strategy polcy framework that was developed wth the ntenton of followng (and surpassng) Korea s u-korea Promoton Strategy. 4 The Slovak Republc, dsapponted wth ther broadband penetraton, n 2006 began to pay certan consumers drectly 160 Euro per year to subscrbe to broadband. 5 Table 1 summarzes the OECD broadband subscrpton and rankngs data for December 2006, whch s the most recent release that ranks the Unted States 15 th among the 30 OECD countres. Ths mddlng rank contnues a consstent downward trend for the Unted States: startng from 5 th place n 2001, the Unted States fell to 8th n 2002, to 10 th n 2003, to 12 th n 2004, to 13 th n 2005, and now 15 th n As measured by the OECD, the broadband subscrpton rate n the Unted States has ncreased 436% from 2001 through 2006, but obvously penetraton n other OECD countres has ncreased at an even faster rate. The 2 For the latest release of the broadband subscrpton statstcs, see OECD Broadband Statstcs, June 2006 (avalable at: / document/ 9/ 0,2340,en_2649_201185_ _1_1_1_1,00.html#TmeSere s). 3 See, e.g., Communcatons Workers of Amerca, Speed Matters: Affordable Hgh Speed Internet for All (June 2007) (avalable at: / fles.cwaunon.org/speedmatters/speedmatterscwapostonpaper.pdf). 4 T. Murakam, Nomura Research Insttute, Japan s Natonal IT Strategy and the Ubqutous Network (2005) (avalable at: / 5, 19 ( Sgns of the global evoluton of the ubqutous network were frst seen n Korea... By adoptng and promotng a typcal government-led ndustral polcy, Korea has steadly pursued the fulfllment of such a strategy. ). 5 European Commsson, IADC, E-Government Fact Sheet Slovaka Hstory (avalable at: / ec.europa.eu/dabc/en/document/6129/411).

7 6 PHOENIX CENTER POLICY PAPER [Number 29 ITU presents smlar lst for a larger collecton of countres, and the Unted States performs smlarly n these rankngs as well. 6 Table 1. Broadband Subscrptons per 100 Inhabtants and Rank (OECD Countres, December 2006) Country Subscrpton Rank Country Subscrpton Rank Denmark Australa Netherlands Austra Iceland Germany Korea Span Swtzerland Italy Norway New Zealand Fnland Portugal Sweden Ireland Canada Hungary Belgum Czech Republc Unted Kngdom Poland Luxembourg Slovak Republc France Greece Japan Turkey Unted States Mexco Source: The release of the broadband rankngs data always sparks collectve handwrngng of leaders around the globe. 7 It appears the natural frst response of 6 See Internatonal Telecommuncatons Unon, Broadband Goes Moble (Dec. 6, 2006) (rankng the Unted States 21st n broadband connectons per capta among a larger groupng of countres) (avalable at: / The OECD data s more recent and, therefore, our analyss focuses on the OECD fgures. 7 For example, n 2004, when the Unted States ranked tenth, Presdent George W. Bush s quoted as sayng, Tenth s ten spots too low as far as I m concerned. See Ashlee Vance, Bush Demands Net Access Tax Ban, THE REGISTER (Apr. 26, 2004) (avalable at: / A flurry of press releases from around the world follows the sem-annual release of the broadband rankngs by the OECD. Even a statstcs curosty lke Ireland droppng one place to the Czech Republc passng Ireland n the June 2006 rankngs, despte the fact that the two countres have been n a vrtual dead heat s taken serously and sparks a polcy debate. See Emmet Ryan, Czech mate for Irsh broadband, ELECTRICNEWS. NET (Oct. 14, 2006) (avalable at: / IrelandOfflne, IrelandOfflne Slams Ineffectve Government Broadband Polces, Ireland falls a place n OECD Broadband Rankngs, 14 countres gan more than Ireland (Oct. 14, 2006) (avalable at: / / 10/ 13/ relandofflne-slams-neffectve-governmentbroadband-polces/#more-285) (quotng charman of an Irsh advocacy group n response that (Footnote Contnued....)

8 Summer 2007] THE BROADBAND PERFORMANCE INDEX 7 polcymakers (and those attemptng to nfluence them) s to assume that the subscrpton rates and rankngs are solely the consequence of broadband polcy, that hghly-ranked countres must be dong somethng rght, and that lowranked countres are somehow dong somethng wrong. But ths reflexve response assumes that broadband polcy s the only determnant of broadband subscrpton. But broadband adopton s not a race broadband s nstead a servce purchased by households and busnesses, and t s reasonable to expect that households and busnesses n dfferent socetes wth dfferent condtons wll make dfferent purchasng decsons. Countres have dfferent economc and demographc endowments that play a vtal role n determnng broadband subscrpton. Snce thngs lke ncome, educaton, and age are all mportant determnants of broadband subscrpton, countres wth endowments that favor broadband adopton (e.g., hgh ncome and educaton, young populaton, and household sze) naturally wll have hgher rates of broadband subscrpton than others. One certanly cannot assume that such countres have superor broadband polces smply because they have younger, more hghly-educated workforces. Further, the OECD ranks countres by resdental and busness broadband subscrptons per capta. Ths method of presentng the raw data of broadband subscrptons does not account for dfferences n average household and busness sze. Whle some normalzaton s necessary when attemptng to compare countres that dffer substantally n sze, ths method of rankng countres wll brng a demographc bas to the result, partcularly because broadband crcuts are consumed not on a per capta bass but by households and busnesses. Indeed, two countres may have the same subscrpton rate of broadband for ts busnesses and households yet be ranked dfferently by the OECD smply because of dfferences n household or busness sze. A thought experment can hghlght the problems wth the OECD s approach. In Table 2, we use OECD data (and some other sources) to show what the OECD broadband rankngs would look lke n a Broadband Nrvana a stuaton n whch every household and busness establshment across the OECD has a broadband connecton. 8 One would ntally thnk that n a Broadband [n]othng short of a complete slash and burn of current telecoms polcy wll make a dent on our nternatonal poston for broadband. ). 8 Busness establshment data s reported by the OECD. Organsaton of Economc Cooperaton and Development, STRUCTURAL AND DEMOGRAPHIC BUSINESS STATISTICS: (2006). (Footnote Contnued....)

9 8 PHOENIX CENTER POLICY PAPER [Number 29 Nrvana, every OECD country would be ted for frst place, but the per capta method of rankng that the OECD utlzes does not show that result. In fact, n the scenaro n whch every home n busness n the Unted States and every other OECD country had a broadband connecton, the OECD would rank the Unted States 20 th fve spots lower than the Unted States ranked n December Moreover, the Unted States would be further from the top poston than t s today (16 percentage ponts back rather than 11 ponts back n 2006). Table 2. The Broadband Nrvana (Every home and busness has broadband) Country Subscrpton Rank Country Subscrpton Rank Sweden New Zealand Iceland Portugal Czech Republc Japan Denmark Unted Kngdom Fnland Unted States Germany Luxembourg Netherlands Greece Swtzerland Slovak Republc France Ireland Canada Poland Hungary Span Belgum Australa Austra Korea Italy Mexco Norway Turkey Source: Aprl 24, 2007 Testmony of George S. Ford before the House Energy & Commerce Commttee on Dgtal Future of the Unted States: Part IV, Broadband Lessons from Abroad (avalable at: / energycommerce.house.gov/cmte_mtgs/110-t-hrg ford-testmony.pdf). Table 2 shows that there wll be large dfferences n the per capta subscrpton rates across countres even f every household and busness n the OECD had a broadband subscrpton. As a result, we would stll be able to rank the countres (and cause polcymakers to wrng ther hands envously) even f all OECD countres were dentcal n terms of broadband avalablty and subscrpton. Household and busness sze vary consderably, wth the Unted States havng a larger average household sze than countres lke Sweden and In a few cases, statstcal procedures are used to estmate mssng observatons. Snce the defnton of establshment may vary across countres, the exact numbers n the tables should be consdered as llustratve.

10 Summer 2007] THE BROADBAND PERFORMANCE INDEX 9 Iceland that rank above t n the broadband subscrpton rankngs. OECD countres are smply not unform demographcally, so that rankng subscrpton rates on a per capta bass provdes an ncomplete and naccurate pcture. Polcymakers that want to use rankngs as a component of ther search for broadband polces to emulate should study Table 2. In the Broadband Nrvana that we post, there s nothng left for polcymakers to do because every household and every busness has a broadband connecton. Yet, by today s rhetorcal standards, Unted States polcymakers would contnue to lament the fact that the country has sunk to 20 th among the OECD and, no doubt, commsson studes about what polces Sweden and the Czech Republc have utlzed to acheve such a hgh rank. In realty, n ths scenaro of complete broadband adopton by each household and busness, the only means of movng up n the rankngs would be to, say, kck teenagers out of ther parents basement, whch would lower the relatve household sze n the Unted States and, consequently, ncrease subscrptons on a per capta bass. Thnkng about rankngs n ths Broadband Nrvana shows that countres wll obvously have dfferent subscrpton rates for a number of other reasons. Other factors, lke ncome have smlar mpacts. For example, the very poor are less lkely to own computers, much less purchase broadba nd. As a result, n poorer countres, the broadband subscrpton should be expected to be lower relatve to rcher countres. As a result, polcymakers need to consder ncome, educaton, and other factors just as much as household sze when they consder where ther country ranks among ts peers. To do so, polcymakers need a method of separatng demographc and economc factors that mpact broadband adopton from the effects of broadband polcy. Such a tool would measure the effectveness to whch a country converts ts demographc and economc condtons nto broadband subscrptons. The resultng measurement wll nform telecom polcymakers as to whch countres may be over-performng or underperformng as a result of broadband polcy. In the followng two Sectons, we descrbe and calculate such an approach: the Broadband Performance Index. III. An Emprcal Approach to Analyzng Broadband Penetraton There have been a number of attempts to quantfy the mpact of ncome, educaton, and so forth on broadband subscrpton at the household and natonal

11 10 PHOENIX CENTER POLICY PAPER [Number 29 level. 9 Consumers purchase broadband not out of natonal prde but based on a standard set of factors that are nvolved n purchasng any product or servce, ncludng avalablty, prce, consumer ncome, and other demographcs and market condtons. Consequently, as dscussed above, t makes lttle sense to compare broadband subscrpton rates across countres wthout consderng the role of relevant economc and demographc factors. 9 W. Dstaso, P. Lup, F. M. Manent, Platform Competton and Broadband Uptake: Theory and Emprcal Evdence from the European Unon, 18 INFORMATION ECONOMICS AND POLICY (2006); W. Gong, Z. G. L, R. L. Stump, Global Internet Use and Access: Cultural Consderatons, 19 ASIA PACIFIC JOURNAL OF MARKETING AND LOGISTICS (2007); S. E. Polykalas and K. G. Vlachos, Broadband Penetraton and Broadband Competton: Evdence and Analyss n the EU Market, 8 JOURNAL OF POLICY, REGULATION AND STRATEGY FOR TELECOMMUNICATIONS, I NFORMATION AND MEDIA (2006); J. Choudre, Y. K Dwved, Investgatng Factors Influencng Adopton f Broadband n the Household, 46 THE JOURNAL OF COMPUTER INFORMATION SYSTEMS (2006); I. Cava-Ferreruela, and A. Alabau-Muñoz, Broadband Polcy Assessment: A Cross-Natonal Emprcal Analyss, 30 TELECOMMUNICATIONS POLICY (2006); I. Takanor Ida and T. Kuroda, Dscrete Choce Analyss of Demand for Broadband n Japan, 29 JOURNAL OF REGULATORY ECONOmcs 5-22 (2006); S. J. Savage and D. Waldman, Broadband Internet Access, Awareness, and Use: Analyss of Unted States Household Data, 29 TELECOMMUNICATIONS POLICY (2005); J. Choudre, Y. K Dwved, The Demographcs of Broadband Resdental Consumers n a Brtsh Local Communty: The London Borough of Hllngdon, 45 THE JOURNAL OF COMPUTER INFORMATION SYSTEMS (2005); S. Oh, J. Ahn, and B. Km, Adopton of Broadband Internet n Korea: The Role of Experence n Buldng Atttudes, 18 JOURNAL OF INFORMATION TECHNOLOGY (2003); K. T. Duffy-Deno, Busness Demand for Broadband Access Capacty, 24 JOURNAL OF REGULATORY ECONOMICS (2003); G. Madden and M. Smpson, Resdental Broadband Subscrpton Demand: An Econometrc Analyss of Australan Choce Experment Data, 29 APPLIED ECONOMICS (1997); D. J. Krdel, P. N. Rappoport, and L. D. Taylor, An Econometrc Model of the Demand for Access to the Internet by Cable Modem n FORECASTING THE INTERNET: UNDERSTANDING THE EXPLOSIVE GROWTH OF DATA COMMUNICATIONS (edted by D.G. Looms and L.D. Taylor (Kluwer Academc Publshers (2001)); P. Rappoport, D. Krdel, L. Taylor, K. Duffy-Deno, J. Alleman, Resdental demand for access to the Internet, n G. Madden (Ed.), THE INTERNATIONAL HANDBOOK OF TELECOMMUNICATIONS ECONOMICS: VOL. II (2002); Savage, S., & Waldman, D. Estmatng Consumer Preferences for Internet Access. n Broadband Demand Study Fnal Report, Telecommuncatons Research Group, Unversty of Colorado, Boulder (2002); CHARACTERISTICS AND C HOICES OF I NTERNET USERS, Unted States General Accountng Offce (2001); Z. Papacharss and A. Zaks, Is Broadband the Future? An Analyss of Broadband Technology Potental and Dffuson, 30 TELECOMMUNIC ATIONS POLICY (2006); A. Tookey, J. Whalley, S. Howck, Broadband Dffuson n Remote and Rural Scotland, 30 TELECOMMUNICATIONS POLICY (2006); E. Ferro, Broadband Dffuson Dynamcs: A Systemc Analyss, 4 INTERNATIONAL JOURNAL OF ELECTRONIC BUSINESS (2006); V. Spurge and C. Roberts, Broadband Technology: An Apprasal of Government Polcy and Use by Small- and Medum-szed Enterprses, 23 JOURNAL OF PROPERTY INVESTMENT & FINANCE (2005); J. Choudre and H. Lee, Broadband Development n South Korea: Insttutonal and Cultural Factors, 13 EUROPEAN JOURNAL OF I NFORMATION SYSTEMS (2004); S. Locke, Farmer Adopton of ICT n New Zealand, 3 THE BUSINESS REVIEW 197 (2005).

12 Summer 2007] THE BROADBAND PERFORMANCE INDEX 11 Our purpose n ths analyss s to provde a more refned analyss that takes nto account the demand and supply-sde condtons that drve broadband penetraton n a country. Only after such factors (lke populaton densty, GDP, populaton age, etc.) are consdered would comparsons between countres be vald. These factors create an expected (or natural ) level of subscrbershp. Wth that nformaton n hand, we can calculate the extent to whch a country s over- or underperformng ts expected level of subscrbershp. Ths method provdes a polcy-relevant tool for those nterested n comparng broadband polcy regmes between countres. A. The Broadband Performance Index Of nterest to us s to compare the actual broadband subscrpton rate of a country to the rate reasonably expected based on the country s economc and demographc endowments. The dfference forms the bass of the Broadband Performance Index (or BPI), and the value of ths ndex s determned by a wde range of dosyncratc factors n a country, ncludng but by no means lmted to broadband polces, that contrbute to broadband subscrpton. A rankng of the performance ndex may be very dfferent from a rankng of subscrpton rates. We mght fnd, for example, that a country wth a hgh subscrpton rate may actually be a poor performer relatve to ts endowments, suggestng that the country s not a partcularly good example of a successful broadband polcy. Or, countres wth low subscrptons rates may, n fact, have very good broadband polces f ther actual rate of subscrptons exceeds what our model would expect. In our vew, the success of a country s broadband polcy s not smply the achevement of hgh broadband subscrpton rate, but whether a country s actual subscrpton rate surpasses what would be reasonably expected based on endowments. The dea behnd calculatng the Broadband Performance Index can be stated smply. Say there s a sngle factor X that systematcally determnes broadband subscrpton B. Across a large number of countres t s determned that each unt of X translates nto 0.10 unts of broadband subscrpton, on average. So, a country s expected broadband subscrpton rate s smply Bˆ = 0. 1 X. Now, say we have two countres, Country A and Z wth X endowments of 3 and 5, respectvely. The expected broadband subscrpton rate n Country A s 0.3 and n Country Z s But, say actual subscrptons rates n Countres A and Z are 0.35 and Country A s performng better than expected, wth an addtonal 0.05 n subscrpton above expectaton (B = 0.35, Bˆ = 0.30). Country Z, however, s 0.05 unts below expectatons (B = 0.45, Bˆ = 0.50). These dfferences are the consequences of dosyncratc determnants (.e., not X) of broadband

13 12 PHOENIX CENTER POLICY PAPER [Number 29 subscrpton whch may nclude a wde range of country-specfc nfluences on broadband subscrpton. In ths example, even though Country Z has a hgher subscrpton rate, Country A s the better performer, because t s dong more wth ts endowments than Country Z, whch fals to perform as well as the average country would f t had Country Z s endowments. More specfcally, the performance ndex s computed usng multvarate regresson. Say there are multple X factors that systematcally determne broadband subscrpton. To determne the relatonshp between broadband subscrpton B and the X s, we estmate usng data for a group of countres k B = α j= 1 k X k, + ε (1) where αk are the coeffcents for k systematc determnants of broadband subscrpton and ε s the econometrc dsturbance term that measures the dosyncratc nfluences on broadband subscrpton. The expected subscrpton rate s k B = αˆ kx k, j= 1 ˆ, (2) where the αˆ are estmates of the α n Equaton (1). The dfference between the actual and expected subscrpton rate s B ˆ = εˆ. (3) B where εˆ s an estmate of ε n Equaton (1). The Broadband Performance Index, then, s BPI = εˆ / max( εˆ ). (4) From Equaton (4) we see that the performance ndex les between -1 and 1. Values closer to 1 ndcate good performance, whereas values closer to -1 ndcate poor performance. A value close to 0 ndcates the country meets expectatons or s an average performer. We can certanly rank the BPI to create an ordnal scale of performance, but comparng the BPI tself across countres s more revealng snce t measures the degree of performance dfferences. Ordnal scales, lke rankngs, provde nformaton only on whch of two thngs s bgger

14 Summer 2007] THE BROADBAND PERFORMANCE INDEX 13 or smaller, not how much bgger or smaller. The how much s very mportant for polcy makng. B. Emprcal Approach From ths prevous secton, we see that the startng pont of the analyss s to quantfy the relatonshps between country endowments and broadband subscrpton rate across the OECD. That s, we need to calculate good estmates of α n Equaton (1). Once ths s accomplshed, computng the Broadband Performance Index s relatvely straghtforward. We have selected a number of economc and demographc factors for ths analyss, based upon the research that has been conducted to date and data avalablty. Usng the last three semesters of data on broadband subscrpton for OECD countres, we estmate an econometrc model of the general form: B = f ( PRICE, GDPCAP, GINI, EDUC, AGE65, DENSITY, BIGCITY, 2 PHONE, PHONE, HHSIZE, BUSSIZE, DEC05, JUNE06) + ε (6) where B s broadband subscrptons per capta n OECD country, PRICE s an ndex of broadband prce n country, GDPCAP s gross domestc product per capta n country, GINI s the naton s Gn Coeffcent (a measure of ncome nequalty) n country, EDUC s the percent of persons wth post-secondary or tertary educaton n country, AGE65 s the percent of the labor force age sxtyfve or older as a percentage of the labor force n country, DENSITY s the number of households per square klometer n country, BIGCITY s the percent of the populaton lvng n the country s largest cty n country, PHONE s the number of telephones (landlne and moble) per 100 persons n country and PHONE 2 s ts square, 10 HHSIZE measures persons per household n country, BUSSIZE measures persons per busness establshment n country, and DEC05 and JUNE06 are dummy varables that equals 1 for the relevant perod of the data (0 otherwse), and ε s the econometrc dsturbance term for country (the dosyncratc component of subscrpton). 11 The dummy varable for December 10 Specfcaton tests ndcated a non-lnear relatonshp wth respect to PHONE, so we nclude the square of the regressor. 11 We ntentonally exclude country-specfc dummy varables (fxed effects estmaton), snce that approach would account for most departures from average performance n such a lmted dataset. We also exclude varables for unbundlng regmes and do so ntentonally. The (Footnote Contnued....)

15 14 PHOENIX CENTER POLICY PAPER [Number data s left out to avod the dummy trap. We use data for perods December 2005, June 2006, and December 2006, for a total of 90 observatons, and lmt our sample (for much of the analyss) to the last three semesters of data to get a reasonably large sample sze of the latest subscrpton rates. We also consder and report the results from alternatve samples (both larger and smaller). Notably, we take the OECD subscrpton rate data and the value of the endowments as gven. Defects n the data create problems n econometrc estmaton, and numerous partes have crtczed the OECD s subscrpton data. But, ths crtcsm s vald for any and all uses of the OECD s data, so our approach s not more or less flawed than others n ths respect. We used the best data we could fnd and note ts potental shortcomngs. Further, we nclude prce n the regressons, and dong so allows publc polcy to enter nto the calculaton of the BPI, at least to some extent. Thus, t could be argued that only non-prce polcy effects are captured n the performance ndca. Nevertheless, we leave prce n the regressons snce excludng t could render based estmates of the coeffcents. Thus, we note ths lmtaton of the analyss. We provde, for llustratve purposes, the computed BPI based on a regresson model that excludes prce. C. Expectatons We have the followng expectatons regardng the regressors. Based on earler research, we expect the coeffcent on PRICE wll be negatve, though we cannot clam that Equaton (3) s a demand curve. 12 We also expect a negatve sgn on AGE65, snce earler research has shown that Internet use s lower for older persons. Alternately, we expect hgher levels of broadband subscrpton n experence n the U.S. and abroad ndcates that unbundlng regmes are far too dosyncratc for smple specfcatons. An unbundled loop dummy varable, for example, completely gnores the condtons and terms upon whch loops are avalable (ncludng prces). The unbundlng regme n the U.S., for example, s exceedngly complex wth numerous peculartes that cannot be captured wth smple specfcatons. The unbundlng regmes, therefore, are treated as dosyncratc and are relegated to the dsturbance term of the regresson. Earler research s unable to fnd a statstcallysgnfcant relatonshp between unbundlng and broadband subscrpton. See, e.g., S. Wallsten, Broadband and Unbundlng Regulatons n OECD Countres, AEI-Brookngs Jont Center Workng Paper No (June 2006) (avalable at: /papers.ssrn.com/sol3/papers.cfm?abstract_d=906865). 12 Rather than specfy a demand curve, Equaton (1) represents an equlbrum relatonshp.

16 Summer 2007] THE BROADBAND PERFORMANCE INDEX 15 countres that are rcher (GDPCAP), have more educated ctzens (EDUC), and are more densely populated (DENSITY). We do not have an a pror expectaton for the BIGCITY regressor but nclude t as another measure of populaton densty. Whle one mght expect a postve sgn, wth DENSITY already n the regresson, the effect of BIGCITY s not so clear. If one holds densty constant, as BIGCITY gets larger t may mply that the populaton s more geographcally spread out or that the rural areas are very sparsely populated, suggestng a negatve sgn. Furthermore, a large urban populaton s not smply a measure of populaton densty but may reflect other factors. Income nequalty s expected to reduce broadband subscrpton (GINI). We expect the hstorcally hgh consumpton of communcatons servces ndcates both hgh demand for communcatons ad adequate supply of communcatons network, so the coeffcent on PHONE s expected to be postve. We expect a negatve sgn on PHONE 2, ndcatng that we expect broadband subscrpton to rse wth the number of telephones per capta, but at a decreasng rate. The varable BUSSIZE s expected to be negatvely sgned snce the subscrpton data s n per capta terms. In other words, larger values of BUSSIZE ndcate fewer busnesses thereby ndcatng fewer busness subscrptons on a per capta bass. For the same reasons, larger households (HHSIZE) also should reduce subscrptons per capta, snce presumably only one broadband connecton s needed per household. We make no a pror predctons on the sgn of HHSIZE, however, snce larger households may have larger demands for broadband servces. Snce broadband subscrpton grows over tme, we suspect the coeffcents on DEC05 and JULY06 wll be negatve snce both are measured relatve to the December 2006 perod. D. Data The bulk of the data s provded by the OECD FACTBOOK 2006 and the World Bank s WORLD DEVELOPMENT INDICATORS Most regressors are at least three-year lags (wth the excepton of PRICE), due to data avalablty. Usng lagged values has some advantages, snce t commonly asserted that broadband mpacts economc development and other economc and demographc factors. 13 Organsaton of Economc Co-operaton and Development, OECD FACTBOOK ECONOMIC, ENVIRONMENTAL AND SOCIAL STATISTICS 2006 (avalable at: /mranda.sourceoecd.org/vl=632386/cl=39/nw=1/rpsv/fact2006/).

17 16 PHOENIX CENTER POLICY PAPER [Number 29 Thus, the lagged data helps attenuate the potental for smultanety bas. 14 We use the last year of data avalable for all perods. Prce data s from an OECD report that provdes detaled prce data for broadband servces. 15 The varable PRICE s the ntroductory rate for broadband servce assumng the customer generates 1GB of traffc per month (snce some prces are metered). Of all the varables, prce s the most dffcult to measure snce qualty data on prces s scant. Also, there are many prces pad for broadband servces n a populaton, so any sngle measure of prce wll suffer from a varety of defects. Nevertheless, we expect prce to be an mportant determnant of subscrpton, so we nclude the varable as a regressor. Notably, we also employed many other measures of prce, but found none to be statstcally sgnfcant n the regresson. 16 Whle the prce varable we choose appears to perform well n the regressons, we nevertheless caveat our fndngs by observng that a sngle ndex of prce for broadband servce suffers from numerous shortcomngs, and the prce data s not of great qualty. Others have done the same. 17 Data on GDPCAP, EDUC, AGE65, DENSITY, TAXES, and PHONE are all provded by the OECD FACTBOOK The DEVELOPMENT INDICATORS FACTBOOK also provded data for BIGCITY. Mssng observatons on some 14 D. Gujarat, BASIC ECONOMETRICS (1995), 654. Ths choce of lag was also motvated by the avalable data. 15 Organsaton of Economc Co-operaton and Development, Workng Party on Telecommuncaton and Informaton Servces Polces, BENCHMARKING BROADBAND PRICES IN THE OECD (June 2004) (avalable at: / 16 For example, an alternatve measure of prce s constructed by dvdng the PRICE varable by the downstream speed of the broadband connecton. We also calculated the prce for the 1.5Mbt downstream servce, or as close to that downstream speed s avalable. Agan, we calculate based on 1GB traffc per month. We also dvded ths varable by download speed. None of these prces were statstcally sgnfcant n the regresson (though all negatvely sgned). The World Bank also prces a measure of prce, but ths prce measure was also nsgnfcant n the regresson. We also consdered a recent prce ndex reported by Correa and the Informaton Technology and Innovaton Foundaton. See Danel K. Correa, Assessng Broadband n Amerca: OECD and ITIF Rankngs (Apr. 2007) (avalable at: / 4. Ths prce ndex also was statstcally nsgnfcant (though t dd have a negatve sgn). Stepwse regresson was also performed on all the prce varables (the other regressors always ncluded), and our chosen measure of prce was the only addtonal regressor selected. 17 Wallsten, supra n. 11.

18 Summer 2007] THE BROADBAND PERFORMANCE INDEX 17 varables were flled usng other data sources. Notably, the BUSSIZE varable s computed usng populaton and busness establshment data, the latter of whch was unavalable for four countres. We employ two standard resolutons to ths problem: (a) estmate busness establshments for the four countres from the data avalable usng least squares regresson (BUSSIZE_1) and (b) replace BUSSIZE for these four countres wth the mean of BUSSIZE for the others (BUSSIZE_2). 18 The results were very smlar across the alternatves. All values of the regressors are constant over the sample. Fnally, data on broadband subscrpton, rankng, and populaton s provded by the OECD. E. Estmaton Detals We consder both the log-log and ln-ln functonal forms n our analyss. Heteroscedastcty s often a problem wth subscrpton rate data, and Whte s test confrms ts presence n ths data. 19 As prescrbed by Maddala, we estmate both specfcatons usng weghted least squares and use Whte s robust standard errors to compute the t-statstcs. 20 Whte s test ndcates that the weghtng scheme resolved the heteroscedastcty problem for both specfcatons. 21 The null hypothess of RESET ( no specfcaton error ) cannot be rejected at standard sgnfcance levels for the log-log specfcaton, but s easly rejected for the ln-ln functonal form. 22 Further, the log-log specfcaton predcted out-ofsample observatons better than the ln-ln functonal form. 23 Based on ths 18 See W. Greene, ECONOMETRIC ANALYSIS (2000), ; R. Pndyck and D. Rubnfeld, ECONOMETRIC MODELS & ECONOMIC FORECASTS (1991), Another alternatve would be to set BUSSIZE equal to zero for mssng values and nclude a dummy varable equal to one for these four countres. Ths approach, however, s dentcal to BUSSIZE_2. Greene, supra at The χ 2 statstcs for the Whte test on the unweghted data are (Prob < 0.01) for the log-log and (Prob < 0.07) for the ln-ln specfcatons. The absence of heteroscedastcty s mportant gven the role of the dsturbance term n computng the BPI. 20 G. S. Maddala, LIMITED DEPENDENT AND QUALITATIVE VARIABLES IN ECONOMETRICS (1983), 29. Ths specfcaton s the mnmum ch-square method for the lnear and log-lnear model. 21 The null hypothess of the Whte test for the weghted data s rejected at the 35% for the log-log and 70% for the ln-ln specfcaton. 22 The F-statstc for the ln-ln model s 7.27 wth a probablty level less than We excluded the December 2006 data from the sample, estmated the model, and then used that model to predct the excluded observatons. The Mean Absolute Percent Error and Thel Inequalty Coeffcent for the log-log model are about two-thrds of those of the ln-ln model across specfcatons.

19 18 PHOENIX CENTER POLICY PAPER [Number 29 analyss of the specfcatons, we rely on the log-log functonal form to compute the BPI. F. Results Our total sample contans 90 observatons (30 OECD countres, 3 sem-annual reports). The regresson results are summarzed n Table 3. We provde the estmates usng BUSSIZE_1 and BUSSIZE_2, to demonstrate the small effect of the alternate remedes for mssng data. Most of the dscusson s based on the BUSSIZE_1 varable. The margnal effects for a 10% ncrease n each varable are summarzed n Table 3. The models ft the data well, wth about 86% of the varaton n subscrpton rates explaned. In other words, the economc and demographc condtons we study account for 86% of the dfferences that we observe n broadband adopton among the OECD only 14% of the dfferences come from other factors lke telecommuncatons polcy (not affectng prce, whch s ncluded as a regressor). Both specfcatons exhbt strong statstcal sgnfcance of the regressors, wth nearly all varables statstcally sgnfcant at the 5% level or better. As prevously noted, we cannot reject the null hypothess of no specfcaton error for ether of the log-log equatons, and testng also ndcates homoscedastc dsturbances. By many accounts, then, the models appear to be good ones. All the estmated coeffcents have the expected sgn. A 10% ncrease n the prce ndex (PRICE) reduces the subscrpton rate by about 2.4%. 24 The effect of ncome (GDPCAP) s large, wth a 10% ncrease n per capta GDP ncreasng the subscrpton rate by about 8.1%. Importantly, the dstrbuton of ncome matters, and the elastcty s larger than ncome (GDPCAP) tself. A 10% ncrease n ncome nequalty (GINI) reduces broadband subscrptons by about 9% (8.5% or 10.6%), the largest effect of any of the regressors n the model. Educaton has a postve and sgnfcant effect, wth a 10% rse n the percentage of persons wth post-secondary educaton ncreasng subscrpton by 1.9%. Consstent wth earler research, the older s the populaton the lower s broadband subscrpton. A 10% rse n the percent of populaton age 65 or older reduces subscrpton by about 7%. Ths s a sgnfcant dfference and n and of tself accounts for much 24 Ths elastcty s not a measure of the own-prce elastcty of demand, snce we have not estmated a demand curve.

20 Summer 2007] THE BROADBAND PERFORMANCE INDEX 19 of the dfference between the broadband subscrpton rate n Korea, whch has a relatvely young populaton, and Japan, whch has a relatvely old populaton. 25 The role of populaton densty on broadband subscrpton s frequently contested. 26 Our regresson results ndcate a postve relatonshp between populaton densty and broadband subscrpton, ceters parbus, but that the mpact s small. A 10% rse n densty, ceters parbus, ncreases subscrpton by just less than 1%. The larger the populaton n the captal cty, other thngs constant, the lower the subscrpton rate, though ths result s just statstcally sgnfcant at the 10% level and the margnal effects s very small (0.6% or less). Ths negatve sgn was somewhat expected, snce a larger populaton n the largest cty, densty constant, suggests the cty covers a wder geographc area. 27 So, agan, the nterpretaton s that hgher populaton densty ncreases subscrpton but only slghtly. Densty s bound to nfluence avalablty, whch n turn nfluences subscrpton. The falure to detect such an effect n other studes s perhaps due to poor model specfcaton or poor mea sures of densty (or both) %). 25 The dfference n values for AGE65 between Japan and Korea s very large (26.9% to 26 See, e.g., Correa, supra n. 16 at 5-6 ( [p]opulaton densty s not a suffcent explanaton for Amerca s laggng broadband penetraton. ). 27 If DENSITY s excluded, then the sgn on the coeffcent for BIGCITY s postve, supportng ths nterpretaton. 28 Some of the arguments aganst DENSITY as a relevant factor are based on unvarate regressons of subscrpton on densty. Ths approach s clearly napproprate for determnng the relatonshp between the two snce there are so many other factors drvng subscrpton.

21 20 PHOENIX CENTER POLICY PAPER [Number 29 Table 3. Regresson Results Coef. (t-stat) Approxmate Margnal Effect (10% ncrease) Coef. (t-stat) Approxmate Margnal Effect (10% ncrease) Constant (-6.55)* (-6.36)* lnprice % % (-4.09)* (-3.23)* lngdpcap % % (7.42)* (7.53)* lngini % % (-5.72)* (-6.37)* lneduc % % (3.33)* (2.97)* lnage % % (-8.64)* (-7.12)* lndensity % % (5.86)* (3.42)* lnbigcity % % (-1.66) (-0.99) lnphone % % (4.38)* (4.39)* lnphone (-4.05)* (-4.01)* lnhhsize % % (0.38) (0.89) lnbussize_ % (-7.27)* lnbussize_ % (-6.12)* DEC (-3.25)* (-2.97)* JULY (-8.18)* (-7.29)* Unw. R RESET F Whte χ * Statstcally sgnfcant at the 5% le vel or better. We also fnd a postve effect on broadband subscrpton from the consumpton of tradtonal telephone servces. A 10% ncrease n the number of telephones per capta ncreases broadband subscrpton rate by nearly 3% (at the sample mean of PHONE). 29 Thus, past communcatons demand s a relevant 29 The margnal effect s the coeffcent on PHONE plus the two tmes the coeffcent on PHONE 2 multpled by the mean of PHONE.

22 Summer 2007] THE BROADBAND PERFORMANCE INDEX 21 factor n determnng broadband subscrptons per capta, whch s not surprsng. 30 The postve sgn on PHONE and the negatve sgn on PHONE 2 ndcate that broadband subscrpton rses wth telephone consumpton but does so at a decreasng rate. Recent OECD data ndcates that the Unted States ranks 24 th n telephone subscrpton per capta, so the fact the country s not ranked very hgh n broadband subscrpton s not necessarly surprsng. The negatve coeffcents on the tme dummes ndcate broadband subscrpton rates are growng at about 8.5% per semester. 31 Table 4 presents the results of the frst regresson shown n Table 3 n a dfferent format. In Table 4, we rank the endowments by ther relatve mpacts on broadband subscrpton, and do so based on two measures of mpact. To show whch demographc and economc condton have the most mpact on broadband subscrptons, the left sde of Table 4 smply sorts the factors we study based on ther margnal effects as summarzed n Table 3. The largest margnal effect (n absolute value) s the ncome nequalty measure, GINI: on average, a 10% ncrease n GINI reduces a country s broadband subscrpton rate by 8.5%. In contrast, a 10% ncrease n GDP per capta (GDPCAP) ncreases a country s broadband subscrpton rate by 8.1%. 30 Snce PHONE s expressed on a per capta bass, the varable may explan a part of the varaton n subscrpton based on the per capta defnton of the subscrpton rate. 31 The coeffcents n the log-log model are nterpreted as exp(β)-1.

23 22 PHOENIX CENTER POLICY PAPER [Number 29 Varable Ranked by Sze Effect Table 4. Broadband Subscrpton and Endowments Magntude of Effect (for 10% ncrease) Varable Ranked by Sze Effect Magntude of Varaton Explaned (Partal R 2 ) GINI -8.5% AGE GDPCAP +8.1% GDPCAP 0.42 AGE65-7.2% BUSSIZE 0.41 BUSSIZE -3.5% DENSITY 0.30 PHONE +2.8% GINI 0.31 PRICE -2.4% PHONE 0.20 EDUC +1.9% PRICE 0.18 DENSITY +0.8% PHONE HHSIZE +0.7% EDUC 0.13 BIGCITY -0.6% BIGCITY 0.04 HHSIZE 0.00 The rght sde of Table 4 sorts the endowments by ther Partal R 2 values, where the Partal R 2 measures the proporton of the varaton n broadband subscrpton explaned by the regressor havng already accounted for the varaton n subscrpton explaned by the other regressors. 32 In other words, the regressors are ranked by ther relatve addtonal power to explan the varaton n broadband subscrpton across the OECD countres. Age and ncome (GDPCAP) are the most potent determnants of broadband subscrpton. Busness sze, ncome nequalty and densty are also sgnfcant contrbutors to explanng varatons across the OECD n broadband subscrpton. The large effect of BUSSIZE suggests that the per capta presentaton of the data that the OECD reports twce a year may be napproprate. 32 The Partal R 2 s t 2 /(t 2 + n k), where t s the t-statstc, n s sample sze and k s the number of regressors. A. Darnell, A DICTIONARY OF ECONOMETRICS (1994),

24 Summer 2007] THE BROADBAND PERFORMANCE INDEX 23 G. Alternatve Specfcatons The estmates n Table 3 are based on the chosen specfcaton of the model; a specfcaton whch appears to perform well based on a varety of crtera. If our fndngs are to be useful to polcymakers, then an evaluaton of the robustness of the results reported n Table 3 (and the calculaton of the BPI, nfra) s worthwhle. As a result, n ths Secton III.G we consder a varety of alternatve specfcatons. Whle these adjustments to sample and specfcaton are sometmes sgnfcant, the results of our regresson are not materally altered. 1. Endogenety of Prce A common crtcsm of models such as Equaton (6) s that prce and subscrpton are jontly determned. To account for ths possblty, we specfy an equaton for prce and estmate the subscrpton and prce equaton jontly usng Two-stage Least Squares ( TSLS ). 33 Addtonal nstruments for the prce equaton nclude (the natural log of) an ndex of the prce of telephone servces, the share of the domnant technology (DSL or cable) n the country, the rato of government tax revenue to Gross Domestc Product, and average temperature n the captal cty. 34 TSLS s also benefcal snce t s often employed n the presence of ms-measured varables (and prce s crudely measured here). 35 The results are summarzed n Table 5, Column A. Prce remans statstcally sgnfcant and the coeffcent s slghtly larger (more negatve). In all, there are no sgnfcant changes to report. 2. Excludng Prce We also recognze that the prce varable s crudely measured. As a result, we estmate the model excludng the prce varable. We would argue ths model s ms-specfed, but the null of RESET s not rejected. The results are summarzed n Table 5, Column B. 33 Gujarat, supra n. 14 at Phone prce data s from OECD COMMUNICATIONS OUTLOOK (2005), Table Gujarat, supra n. 14 at In the prce equaton, three of the four addtonal regressors are statstcally sgnfcant at the 5% level or better. The R 2 of the regresson s 0.75, and the null hypothess of RESET ( no specfcaton error ) s not rejected. See J. Wooldrdge, ECONOMETRIC ANALYSIS OF CROSS SECTION AND PANEL DATA (2002),