Is the link between internet adoption and broadband pricing overstated?

Is the link between internet adoption and broadband pricing overstated?

by Doug Brake, Alexandra Bruer. Originally published on Policy Options
April 16, 2021

Broadband internet access offers a powerful tool – connecting to friends, family, business and government services online is increasingly central to our lives. Without broadband, users struggle to meaningfully participate in the digital economy. Governments around the world should work to make sure citizens have access to broadband and eliminate any barriers to widespread adoption.

Unfortunately, there are stark social disparities in the adoption of broadband internet service. Generally speaking, if you are older, less educated, poorer, a minority, or live in a rural area, you are less likely to use the internet. The reasons for not embracing broadband even where networks are available vary. Surveys indicate people go without broadband due to expense, limited digital literacy, or simply because they aren’t interested. However, now that we’re forced to rely on digital tools as we self-isolate during the pandemic, the importance of broadband is clearer than ever. Policy discussions have started to address affordability as a barrier to broadband adoption.

No doubt, for many low-income citizens, the cost of a broadband subscription and devices can be prohibitive. But too often advocates overstate the challenge as a generalized problem with the structure of competitive, privately provided broadband. They wrongly call for radical change – through complicated intervention in the competitive system – rather than a narrow, direct and more effective fix: subsidies for low-income users.

Broadband prices from municipal utility and private providers are comparable

Near universal broadband adoption is a worthy policy objective. Canada and other countries around the world would be better off if society could organize itself assuming everyone had access to the internet regardless of their income level. Given the benefits of near-universal broadband adoption, it is critical to understand barriers to adoption, including affordability.

Unfortunately, broadband prices are difficult to study. How products are offered – what speed, whether there is a data cap, whether it is bundled with other advertising-supported services – can have a significant effect on the advertised price. As a result, studies attempting to compare broadband prices are often riddled with flaws.

Consider, for example, New America’s Open Technology Institute (OTI) 2020 report which held up open-access municipal broadband as offering the most competitive prices in the United States. The report summary lauded advertised prices in Ammon, Idaho, (a municipal utility system) as “low as $9.99/month – faster and cheaper than plans available to many…around the country.” Yet deeper in the report the authors acknowledged this figure did not include monthly utility and construction fees charged by the municipality itself, which raised the cost to consumers by nearly $40 per month – in line with rates charged by private competitors. Residents connecting to Ammon’s fibre network also faced installation fees that, when paid upfront, came to $3,200 to $3,600.

The city of Wilson, North Carolina also provides municipal broadband. Here again OTI’s study neglected hidden costs. Advertised prices used in the analysis were only offered for those who purchased multiple services from the provider. Broadband pricing from Ammon and Wilson underscores that comparing prices requires a careful analysis if we’re to get an accurate sense of where prices stand. A closer evaluation indicates that for entry-level prices, private internet service providers offer competitive, if not lower, rates than municipalities.

Canadian broadband pricing is in line with rates abroad

While there is no definitive international pricing study, analysis of reputable sources put Canada and the United States on roughly even footing with peer countries. The International Telecommunications Union (ITU) ranks Canada as tied for sixth place globally for affordability of fixed broadband prices as a percentage of gross national income (GNI) per capita, on par with France and Singapore. The United States is also ranked sixth for affordability.

Separately, the Inclusive Internet Index for 2020, a report developed by The Economist Intelligence Unit (EIU), highlights where Canada and the United States stand in comparison to 98 other countries when evaluating internet availability, affordability, relevance (which measures the availability of content relevant to local users) and readiness. Importantly, the EIU index considers income and competition, which are omitted from other similar reports that focus narrowly on advertised prices. Canada and the United States are both ranked highly in terms of their affordability (seventh and third place respectively). Of note, Canada and the United States were ranked second and first, respectively, for their competitive environments, both of which rely primarily on facilities-based competition where those who own and operate broadband networks also sell internet service to individual consumers.

The lack of pricing comparison relative to income is a noticeable flaw in some studies. For example, OTI’s “Cost of Connectivity” report simply compares advertised prices without controlling for purchasing power in different countries. Of the OECD countries evaluated in the report (a total of 13, including the Canada and the United States), only four countries (one of which is the United States) have annual average wages greater than Canada and all but one have annual average wages well below that of the United States (Switzerland is the exception). Without factoring in average wages and purchasing power parity, it is difficult to compare the relative affordability of broadband prices (see figure one).

Address affordability directly with subsidies for low-income users

Evidence indicates the system of private competitors providing broadband works quite well, but this doesn’t mean affordability is not still a serious barrier to broadband adoption and inclusion that demands government action. Both the United States and Canada have existing programs to help address affordability – the Federal Communications Commission-run Lifeline program and Canada’s Connecting Families initiative (where providers volunteer lower rates for qualifying individuals). However, both programs could no doubt be improved and expanded.

A modernized low-income broadband support program should provide end-users a flexible subsidy that they can put toward connectivity tools of their choice, much like other assistance programs like the U.S.’s Supplemental Nutrition Assistance Program that subsidizes food for low-income Americans. Ideally these programs could automatically swell during emergencies or economic downturns, offering broader eligibility and a larger subsidy when people need it most.

The fact that we should ensure broadband is affordable for all does not mean there is a broader problem with providing broadband through a private, competitive system. We should look instead at improving existing subsidy systems to address broadband affordability head-on, rather than through wholesale changes to industry structure.

For more information, please see Broadband Myths: Are High Broadband Prices Holding Back Adoption? published by the Information Technology and Innovation Foundation.

This article is part of the Digital Connectivity in the COVID Era and Beyond special feature.

This article first appeared on Policy Options and is republished here under a Creative Commons license.

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