BUSINESS : ECONOMICS AND POLICY FOR TMT University of Chicago, GSB Austan Goolsbee Week 3

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1 BUSINESS : ECONOMICS AND POLICY FOR TMT University of Chicago, GSB Austan Goolsbee Week 3 BROADBAND 1. What is it? US definition is at least 300 kbps Dial-up maximum 56 kbps, ISDN 144 kbps Available in 75% of zipcodes in U.S. (97% live there) 2. Currently a rapidly growing share of total access Last month, broadband was >65% of minutes Dial-up is falling 3. Prices 2-3X dial-up ($45/mo cable, 30/mo DSL)) Penetration rates still not huge

2 DISTRIBUTION OF ACCESS 1. Nielsen Data--January Year Broadband Dial-Up (+90%) 26.1 (+23%) 39.0 (+49%) 51.0 (+31%) 69.0 (+39%) (0) 79.4 (-6%) 69.6 (-12%) 67.4 (-3%) 65.2 (-3%) 2. Users of the two services look very different Are they different types or do people change behavior?

3 Broadband at Home No Broadband at Home Buy online 80% 65% 10+h/wk-onl home 44% 29% 25+h/wk-onl home 11% 6% 10+h/wk-onl work 18% 11% 25+h/wk-onl work 9% 4.7% Lexus ownership

4 DEMAND FOR BROADBAND 1. FCC/DOJ have ruled it a separate market from dial-up 2. Elasticity of demand estimates of -1.8 to Cross-price elasticity with respect to dial-up p: % of narrow band users say no bb even if p were <$25 5. Big switching costs from DSL to cable & vice versa 6. Chicken and Egg problem 7. How rest of the world differs

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6 TYPES OF BROADBAND 1. DSL Provided over the phone line (T1-HDSL needs 2 lines) ADSL 1-3 Mbps down, Mbps upstream Need to be close to the switching station to work No congestion but in practice slower than cable 2. Cable modems Need 2-way cable (upgrade) 2-10 Mbps down, upstream Shared on a node with neighbors (congestion?) 3. Most of the world is heavily DSL. We are 60% Cable.

7 BROADBAND DEMAND--ITU

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9 Broadband and Prices BB/1000 P/mo Kor Can Swe Den US Bel Ice Aust Net Ger Jap Nor Swi Fin Spa Fra Por Ausl Ita New UK Hun Lux Pol Ire Tur

10 PRICES IN THE U.S. 1. Prices are not declining in the latest data Cable modems still 60% and those prices rising DSL is getting bigger as prices fall 2. Is cable up from more market power or rising costs?

11 Price Sensitivity in Schools 1. Example: erate subsidy for broadband in schools Totals $2.25b per year Entire public school computer budget in 1999: $3.3b 2. Subsidy rate depends on poverty and urban/rural % lunch elig. % of schools Urban Subs. Rural Subs. < Time-Series Trends: % Classrooms with Internet Access (DOE) 1994: 3% 1996: 15% 1998: 51% 1999: 63%

12 INTERNET PER TEACHER BY 1997 POVERTY LEVEL.75 Group 1 Group 2 Group 3 Group Year But impact on student performance?

13 CABLE VS DSL: REGULATORY TREATMENT 1. Since a phone company, must provide access to ISPs Some of the DSL companies were just UNE sellers Open access policy but no price regulation 2. Cable Companies Not subject to open access rules Typically cable owns the ISP/Open Access debate Some argue this is why cable has 60% of domestic mkt 3. Release the phone from most telecom regulation in 2005 Apply universal service to broadband?/911, etc. 4. Battles over local franchising 12/2006 cities have 90 days to decide build out req Telcos tried to get ntl video license Net neutrality

14 CABLE VS. DSL: THE COMPETITION ISSUES 1.Whose investment costs are higher? - the upgrades for cable, DSL, satellite 2. How much market power comes from 1-stop shop - bundle prices 3. How competitive is broadband? - different types of customers 4. Is wireless broadband a serious competitor?

15 VOICE OVER IP 1. Packet switching versus the current system 2. Essentially voice=data Prices to be by the minute or by the bit? 3. Interesting wrinkles: Have whatever area code you want International calls massive discount - pay only termination fees, not intl settlement

16 VOIP MARKET FACTS 1. Forecasts of near-term use are very large Diffusion 11.5m by 2010 to Gartner/IDC 20m by 2008 Business use: 20% by 12/05 and 60% by Current usage is small but growing rapidly 12/05: 4m 12/04: 900k, 12/03: 130k, 12/02: 10k Vonage has dominated paying market so far Cable companies expected to be the majors 3. Business is main customer 2/3 of business users say for video conferencing 4. Consumers half say their primary line, 70% keep their #

17 VOIP 1. Technological improvement-deployment among L-D ATT, MCI, Sprint VZ all have rolled out or announced 2. Now getting entry of major players in local loop Comcast announcing local phone service over cable Skype has proprietary format/pc interface 3. Regulatory issues FCC is currently treating as unregulated Now phone call= , no interconnection charges Universal service rules on do not apply - 911, disabled access, rural access, etc. Taxes on VoIP long distance Taxes on VoIP specifically