From this demand function we calculate the "consumer surplus" associated with high- speed access priced at $40 per month. Our second approach examines specific benefits that high-speed access can eventually provide and calculates the consumer surplus associated with each source of benefits.
Introduction
This report provides a rough estimate of the potential that could be unleashed by more rapid connections – by the evolution to a broadband environment.
Information Technology and U.S. Economic Growth
As we went from personal computers to networked personal computers, our standard phone connection to the Internet was sufficient. 3 percent per year.5 At the same time, the estimated annual rate of price decline for computers more than doubled in the second half of the decade, from 15.8 to 32.1 percent.6 A consensus is now developing among economists that the surge in economic growth is attributable to investment in information technology, which in turn is attributable to the price decline in information technology equipment.7.
Technical Progress in the Information Technology Sector
The dramatic declines in prices for information technology equipment are obviously important for the economy because they provide businesses and consumers with more computing power at lower prices. Consumers did not buy securities, books, or airline tickets by sitting at their home computers in 1990.
Measuring IT's Contribution to Economic Growth
The Contribution of Networks
The Rise of the Internet
Household Computer Use
The Growth of the Internet
The Network Revolution Has Just Begun
The Internet is here to stay, if the regulators/legislators of the world don't kill it. 21 Vint Cerf, “Cerf’s Up: Social, Economic and Regulatory Issues – A Glimpse of the Future of the Internet”, (downloaded from: . http://www.worldcom.com/about_the_company/cerfs_up/issues/glimpse.phtml).
Opportunities with Network-Aware Products
The first is local networking – wire or radio communications connecting many devices in the home to the Internet. The third requirement is a router or switch to connect the various devices in the home to the single connection to the larger Internet.
Two Essential Attributes of Network Connections
If one has a quick impulse to check on the Web for data, using a connection that is already established, rather than establishing a dial-up connection, improves the response time by about a factor of ten.25. Cable modems and ADSL modems provide access at data rates of 1 to 2 megabits per second – twenty to fifty times faster than typical dial-up connections.26 The satellite services offered for home use today deliver data at about 500 kilobits per second – about ten times faster than a dial-up connection.27.
Network Service Alternatives
Economic Benefits from Broadband Connections
They consume it up to the point at which the marginal value of the product to them is equal to its price. In this section, we attempt to provide a rough estimate of the likely long-term gains to the economy – the sum of consumer and producer surplus – generated by widespread diffusion of broadband access.
Estimates of Consumer Value
Producers of new services that rely on broadband, of products used in conjunction with broadband service, and even of the broadband service itself also gain from the greater diffusion of broadband. Greater broadband availability would increase the fraction of households that use the Internet and thus would create larger increases in consumer welfare than can be deduced directly from current estimates of the demand for broadband alone.
Direct Evidence of Potential Consumer Surplus
An Estimate Based on Today's Demand Curve
20 an elasticity of –1.0, the value of the service to these consumers – the consumer surplus – is $2 billion per year in addition to the $4 billion they pay. Thus, the value to consumers of the enhanced availability of broadband could be more than $300 billion per year, assuming that an outward shift of a linear demand curve from today’s equilibrium is appropriate.
The Attractiveness of New Technologies Is Often Underestimated
Additions to Household Computing Capacity
It is reasonable to expect that, over the next two or three decades, always-on networking and home networks will lead to the installation of many devices in the home that take advantage of the network in the home and the connection to the Internet. Obviously, the rate of growth of the purchase of real computing power has been much greater. Not the entire surplus is in addition to the previous estimates of the benefits from broadband.
We could perform a similar analysis for other household equipment, such as our example of the thermostat with a web interface.
New Services Provided by Broadband Connectivity
- Retailing/Wholesaling
- Reductions in Commuting
- Home Entertainment
- Home Health Care
- Broadband Access and Telephone Services
The quantifiable benefits of telecommuting are the savings in transportation costs – both the time and expense of the worker and the reduction in congestion and pollution costs imposed on others. We reduce the estimated national congestion costs of $78 billion per year by 50 percent to reflect a more reasonable estimate of the value of travel time. Because the health care industry is very competitive, we would expect almost all of the savings in cost to be passed on to consumers.
Considering that some of the costs of remote health delivery are one-time costs (such as purchasing and setting up the equipment), cost savings would exceed the additional cost of remote home health care. Moreover, we have not included the potential benefits from telemedicine's contribution to improvements in the quality of health care in our quantitative estimates of the potential benefits from widespread adoption of broadband. A broadband connection can support several voice connections – the exact number depends on the speed of the connection and the degree of compression of the voice signal.
Summing Up the Consumer Benefits
The substantial economic benefits (principally savings from expenditures on telephone service) created by providing multiple services over a high-speed line almost cover the cost of a high-speed line – we have estimated that benefits of $35 per month are created by a broadband connection that costs $40 per month. These savings are one reason why we believe that it is reasonable to expect that the fraction of households with high-speed access services will ultimately approach the fraction that has telephone service today.74.
Producers’ Surplus
- Broadband Services
- Computer Equipment
- General Consumer Goods Distribution
- Entertainment
- The Benefits from Earlier Innovations in Network Industries
The retail and wholesale sectors of the economy – greater efficiency in the distribution of consumer products. But it is difficult to estimate – in general – how much of any increase in demand will accrue as rents to the owners of the risky capital invested in the technology required for the production of such equipment. We further assume that between 20 and 40 percent of the revenues absorbed by purchases of the requisite electronics equipment accrue as rents to the owners of scarce intellectual and physical capital required to produce it.
Similar to broadband service, a substantial share of the revenues for computer equipment accrues as rents to the intellectual capital used developing the technology.
Railroads
55 Obviously, if these assumptions prove to be incorrect because some other innovation intercedes in the next 25 years, these benefits will prove to have been overestimated. Without the cheap land transportation that railroads provided, the United States – and more particularly the trans-Appalachian region – would have found it more difficult to use the economies of specialization that were so important to both the level of per capita income and its rate of growth in the nineteenth century.81. In the absence of water transportation (when the only alternative to railroad transportation would be land transportation by wagon), the social saving from railroads would be $4 billion per year, or more than one-third of gross national product in 1890.
57 development of canals and improvements to other inland waterways, in combination with the huge investments in railroads in the nineteenth century, were responsible for a very large share of U.S.
Electricity
Anecdotal evidence, in the form of manufacturers’ reports, however, suggests that most of it is. It is found that the output of manufacturing establishments is materially increased in most cases by the use of electric driving. It is often found that this gain actually amounts to 20 or 30 percent or even more, with the same floor space, machinery, and number of workmen.84.
The Telephone
The largest users of toll and long-distance service in the mid-1920s were hotels, which furnished business executives and sales agents with lodging and vital services during their routine trips to the nation’s economic capital. In both cases, toll connections were essential to conduct wholesale trade, whether to reach retail customers in the trade area or to keep close contact with distant production facilities and distribution centers.89. Weiman, “Building Universal Service in the Early Bell System: The Reciprocal Development of Regional Urban Systems and Long Distance Telephone Networks,” mimeo, Russell Sage Foundation, (2001).
60 Productivity growth in the telecommunications sector has been far higher than average productivity growth, and investment in telecommunications infrastructure has contributed to overall productivity growth.
Multi-channel Video Distribution
Conclusions
Our second approach attempts to identify the sources of the specific benefits that broadband access can provide and to calculate the consumer surplus associated with such benefits. As Table 7 shows, these two different approaches provide quite comparable estimates of the prospective consumer benefits from broadband. Under optimistic – but still reasonable – scenarios the net present value of a faster rollout of high-speed access could be as high as $700 billion, and a mid-range estimate of the value of faster rollout is $500 billion.95.
With a discount rate of 8 percent the NPV of the difference between the base scenario and the faster scenario shown in Figure 5 is 100% of the end-year benefits and the NPV of the difference between the base scenario and the much faster scenario is 180% of the end-year benefits.
Alternative Delivery Systems for Broadband Service
ADSL
Unfortunately, DLC systems do not provide a copper connection all the way from the telephone company central office to the subscriber location. The solution to this is to upgrade the capabilities of DLC systems to enable then to support ADSL service over the copper connection to the subscriber premises.
Cable Modems
Wireless
Sprint and WorldCom have obtained the right to use many of the MMDS licenses and are using some of their licenses to provide high-speed Internet access. Typically, such systems run at data rates of about one million bits per second and can serve customers at ranges of up to about 15 miles.99 It is still unclear how successful unlicensed radio services can be for small business and residential Internet access. 70 substantial interest in providing broadband Internet access at public points, such as airports and restaurants using such technologies.
These short-range services will probably not be used to provide access for homes or businesses.101 However, they show the value that people attach to high-speed Internet access, and they will stimulate the adoption of high-speed Internet access more broadly.
Examples of Past Pessimism in New Technologies
Cable Television
The Photocopier
Wireless Telephony
Computer Communications