The Georgetown Center for Business and Public Policy

Flexible Pricing Could Help U.S. Reach Broadband Goals, Study Says

WASHINGTON, D.C. – A change in broadband pricing models that allow broadband providers to shift a greater share of costs to consumers or content providers who consume the most bandwidth could help the U.S. reach its universal broadband goal more quickly, according to study released today by the Georgetown Center for Business and Public Policy (GCBPP). The issue is raised by the vast expansion in bandwidth demand associated with the rising use of video and audio services on the Web. This exploding demand for more capacity will require large-scale additional investments in the web infrastructure to accommodate this demand and avoid web congestion. The study, by Dr. Robert J. Shapiro and Dr. Kevin A. Hassett, says bandwidth-usage -based pricing approaches should keep the country on track towards universal broadband access, especially among lower-income Americans who are among the most price sensitive consumers of broadband service.

The study, “Towards Universal Broadband: Flexible Broadband Pricing and the Digital Divide,” shows that protecting most web users from some of the additional costs of expanding the web infrastructure to accommodate the much larger bandwidth demand generated by a relatively small subset of users, would help stimulate adoption by those who do not already subscribe or have limited financial means. The study notes that pricing is not the only factor influencing adoption rates and that the pace of achieving universal broadband could also vary with economic factors and public policy choices.

Still, the study projects that absent other policy changes, almost 99 percent of Americans at every income level should be expected to adopt broadband service by 2016 if those who consume the most bandwidth also pay the bulk of the added costs to expand networks to meet their demand for more, faster. By contrast, roughly 8 of 10 lower-income Americans (less than $30,000 in annual income) can be expected to adopt broadband by 2016 under pricing models that charges all users the same monthly fees regardless of how much bandwidth they consume. Even among Americans earning $75,000 or more, the study estimates that almost 13 percent would not subscribe to broadband in 2016 if investment costs are spread equally across all subscribers.

“If required network expansion is financed primarily by those who use the most bandwidth, America can likely reach the President’s national goal of universal broadband by 2016,” Dr. Shapiro said. “But, by requiring all users to pay the same regardless of how much bandwidth they use will slow the drive to universal broadband adoption and perpetuate the gap that now separates white from African-American and the less affluent from wealthier citizens.”

The study, which is designed to provide policy makers with insights into the effects of different pricing models, found that relatively small price increases for current broadband subscribers are unlikely to push them offline or back to dial up service.

The study also noted that the flat-fee, monthly pricing model that now predominates worked well in spreading broadband connections so long as Internet usage primarily consisted of using email and static, text-based sites that did not require much bandwidth, and operators could cover their costs at prices that enabled large numbers of Americans to sign up for service. However, the rapid increases in bandwidth demand seen as the Internet shifts to video and audio-based high-bandwidth services has created a new dynamic, including a need for substantial additional investment for network expansion.

John Mayo, Executive Director of the GCBPP, said the study highlights important considerations for policy makers’ desire to spread opportunity to all Americans.

“A delay in the universal broadband goal will allow for the continuation of a divide between the broadband haves and have-nots. Such a delay in broadband access for those at the bottom of the ladder will intensify inequality in our society by denying lower-income Americans economic, educational and other opportunities made possible by broadband.”

Drs. Shapiro and Hassett also wrote and op/ed piece for Roll Call, based on the study.  The piece, "Broadband Investment and 100 Percent Adoption: Who Pays?" was featured on Nov. 16, 2009.

To access the complete study, visit http://www.gcbpp.org/files/Academic_Papers/AP_Hassett_Shapiro_Towards.pdf. For additional information or media inquiries, please contact Andrea Salvatore at (202) 687-3686, or by e-mail at ams287@georgetown.edu. 

About the Authors
Shapiro, a senior policy fellow at the Georgetown Center for Business and Public policy, served as U.S. Under Secretary of Commerce for Economic Affairs during the Clinton Administration. Shapiro is also Chairman of Sonecon, Inc., an economic consulting firm, and chairman of the U.S. Climate Task Force and the Globalization Center at NDN. Hassett, senior fellow and director of economic policy studies at the American Enterprise Institute, was previously a senior economist at the Board of Governors of the Federal Reserve System.