1 New Estimates of Broadband Supply and Demand June 17, 2005 Wei-Min Hu and James E. Prieger Department of Economics University of California, Davis [email protected]

11

New Estimates of New Estimates of Broadband Supply and Broadband Supply and DemandDemand

June 17, 2005June 17, 2005

Wei-Min Hu and James E. PriegerWei-Min Hu and James E. Prieger

Department of EconomicsDepartment of Economics

University of California, DavisUniversity of California, Davis

[email protected]@ucdavis.edu

22

Broadband Access to the InternetBroadband Access to the Internet

The Latest Dimension of the Digital The Latest Dimension of the Digital DivideDivide– U.S. Telecommunications Act of 1996: U.S. Telecommunications Act of 1996:

encourages the “reasonable and timely” encourages the “reasonable and timely” deployment of broadband to all Americans.deployment of broadband to all Americans.

– FCC has considered whether to add broadband FCC has considered whether to add broadband to the Universal Service program.to the Universal Service program.

– Therefore, the diffusion of broadband requires Therefore, the diffusion of broadband requires measurement and scrutiny.measurement and scrutiny.

33

This StudyThis Study– Examines the supply and demand sides Examines the supply and demand sides

of the end-user broadband market.of the end-user broadband market.– Uses an unexploited dataset of where Uses an unexploited dataset of where

DSL is available and where it is DSL is available and where it is subscribed to.subscribed to.

– Research Questions:Research Questions:What role do race, ethnicity, and income What role do race, ethnicity, and income

play in the supply and demand decisions?play in the supply and demand decisions?What is the role of competition in What is the role of competition in

telecommunications for broadband S&D?telecommunications for broadband S&D?

Broadband Access to the InternetBroadband Access to the Internet

44

Plan of TalkPlan of Talk

Background on Broadband Internet Background on Broadband Internet AccessAccess

Describe the DataDescribe the Data ResultsResults

– DeploymentDeployment– Demand in areas where DSL is suppliedDemand in areas where DSL is supplied

ConclusionsConclusions

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Market Shares of Broadband Market Shares of Broadband Technologies in the U.S.Technologies in the U.S.

Residential and Small Business Broadband Lines Residential and Small Business Broadband Lines (National, 2000)(National, 2000)

66

Number of Broadband Lines

0

5

10

15

20

25

30

Mil

lio

ns

of

Su

bs

cri

be

r L

ine

s

Satellite or Wireless

Fiber Optic

T1 and similar

ADSL

Cable Modem

Broadband is Increasing in the U.S.Broadband is Increasing in the U.S.

77

In 2000, Ameritech was required by In 2000, Ameritech was required by regulators to say where DSL was regulators to say where DSL was available.available.– Condition for merger approval with SBCCondition for merger approval with SBC– Ameritech lagged behind other BOCsAmeritech lagged behind other BOCs

Ameritech provided a list of their DSL Ameritech provided a list of their DSL subscribers by ZIP+4.subscribers by ZIP+4.– Data are binary: DSL is subscribed to by Data are binary: DSL is subscribed to by

at least one household in the ZIP+4 areaat least one household in the ZIP+4 area– Also know the earliest subscription date Also know the earliest subscription date

for the ZIP+4 area.for the ZIP+4 area.

The DataThe Data

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The DataThe Data

Supplement with:Supplement with:– GIS data on ZIP+4 locationsGIS data on ZIP+4 locations– A telecommunications central office database A telecommunications central office database

(GIS)(GIS)– Census data on demographics (block level)Census data on demographics (block level)– Census data on business characteristics (ZIP Census data on business characteristics (ZIP

code level)code level)– FCC list of ZIP codes with at least one CLEC.FCC list of ZIP codes with at least one CLEC.

Eventually will add:Eventually will add:– Cable company information (cable modem)Cable company information (cable modem)– More complete CLEC informationMore complete CLEC information

99

DSL Subscribers in the Ameritech RegionDSL Subscribers in the Ameritech Region

1010

Characteristics of DSL DeploymentCharacteristics of DSL Deployment DSL is implemented in the LEC’s Central OfficeDSL is implemented in the LEC’s Central Office

– As a marketing decision, is available to all neighborhoods As a marketing decision, is available to all neighborhoods in area…in area…

– but only if they are close enough to CObut only if they are close enough to CO– Transmission speeds degrade beyond 2.2 miles.Transmission speeds degrade beyond 2.2 miles.

Ameritech clearly had 1.5 miles as a thresholdAmeritech clearly had 1.5 miles as a threshold

The distance threshold is clearly visible:The distance threshold is clearly visible:

Distribution of DSL Deployment Distance

00.10.20.30.40.50.60.70.80.9

1

0 1 2 3 4 5miles

1111

DSL Diffusion DSL Diffusion in Illinois: in Illinois:

April 1999April 1999

1212


June 1999June 1999

1313


August 1999August 1999

1414


Oct. 1999Oct. 1999

1515


Dec. 1999Dec. 1999

1616


Feb. 2000Feb. 2000

1717

Implications for Supply and Implications for Supply and Demand EstimationsDemand Estimations

Deployment decision:Deployment decision:– The marketing characteristics of the whole The marketing characteristics of the whole

central office area aren’t relevant, just a central office area aren’t relevant, just a subset.subset.

Demand decision:Demand decision:– Need to restrict attention to households Need to restrict attention to households

within 1.5 miles of the central office.within 1.5 miles of the central office. This matters most in non-urban COsThis matters most in non-urban COs

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Estimation Strategy – Supply SideEstimation Strategy – Supply Side

Unit of decision-making: central Unit of decision-making: central office area.office area.

Universe: Ameritech central offices Universe: Ameritech central offices in the five state regionin the five state region

Model DSL availability as a probit Model DSL availability as a probit regression on area characteristics.regression on area characteristics.

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Results of Deployment ProbitsResults of Deployment ProbitsEstimation 1

Race Estimation 2

Race and Income

Variable Coefficient Marginal Effect Coefficient Marginal

Effect Race and Ethnicity

% Asian 13.030*** 0.621 7.408** 0.155 % Black -0.701** -0.033 1.199*** 0.025 % Native American -127.046*** -6.057 -19.546 -0.410 % Other -13.682** -0.652 2.192 0.046 % Hispanic 8.591*** 0.410 -0.219 -0.005

Income and Poverty Income (log) 2.227*** 0.047 % in poverty -0.269 -0.006

Size of Market Households (log) 0.216** 0.010 0.157 0.003 Pop. density (log) 0.692*** 0.033 0.852*** 0.018

Intercept -7.364*** -33.406*** Log Likelihood -264.793 -220.818 N 1,120 1,119 Pseudo R2 0.490 0.575

* significant at the 10% level; ** significant at the 5% level; *** significant at the 1% level.

2020

When add all variables (estimation 4):When add all variables (estimation 4):– No race or income (!) variables are No race or income (!) variables are

significantsignificant– CLEC presence: no significant effectCLEC presence: no significant effect– Commuting: Commuting:

Work at home: +Work at home: +Longer commute: + (except longest group)Longer commute: + (except longest group)

– Cost variablesCost variablesPopulation density + / Rural –Population density + / Rural –Phone density +Phone density +Structure Age (proxy for age of network Structure Age (proxy for age of network

infrastructure): - (at least above median)infrastructure): - (at least above median)

Results of Deployment ProbitsResults of Deployment Probits

2121

Unit of Observation isUnit of Observation is Census block Census block – Y=1 if any of the DSL ZIP+4’s fall into that blockY=1 if any of the DSL ZIP+4’s fall into that block– So at least on household or business subscribes in So at least on household or business subscribes in

the blockthe block– Include blocks within 1.5 miles of a CO in which DSL Include blocks within 1.5 miles of a CO in which DSL

is deployed.is deployed.

Estimation Strategy: Demand SideEstimation Strategy: Demand Side

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The demand decision is a function of the The demand decision is a function of the utility of the relevant optionsutility of the relevant options

DSL:DSL: UUDSLDSL = = DSLDSL’x+’x+DSLDSL

No DSL:No DSL: UU00 = =

– The “outside option” has to stand in for dial-The “outside option” has to stand in for dial-up, cable modem, and no access.up, cable modem, and no access.

– Household subscribes to DSL if it gives the Household subscribes to DSL if it gives the most utility:most utility: UUDSLDSL > 0> 0

2323

Specify Specify DSLDSL as standard normal: probit binary as standard normal: probit binary choice model choice model

Then Prob(at least one HH in ZIP+4 area Then Prob(at least one HH in ZIP+4 area jj has has DSL) isDSL) is

where where PPii is is (-(-’x’x). ). Do not observe HH demographics, so assign Do not observe HH demographics, so assign

Census block average to all HH in block.Census block average to all HH in block. Do MLE.Do MLE.

jN

iij PP

1

11


2424

Results of Demand EstimationsResults of Demand EstimationsEstimation 1

Race and Income Estimation 2

Race, Income, and Distance

Estimation 3 Race, Income, Distance, & FE

Variable Coefficient Marginal Effect Coefficient Marginal

Effect Coefficient Marginal Effect

Race and Ethnicity

% Asian -1.082*** -0.140 -1.159*** -0.194 -0.432*** -0.087 % Black 0.039*** 0.005 0.126*** 0.021 0.036 0.007 % Other Race 0.078** 0.010 0.206*** 0.035 0.409*** 0.082 % Hispanic -0.124*** -0.016 -0.117*** -0.020 -0.263*** -0.053

Income and Poverty Income (log) 0.104*** 0.014 0.047*** 0.008 0.209*** 0.042 HH Poverty Rate -0.026*** -0.003 -0.061*** -0.010 0.001 0.000

Distance from CO -1.032*** -0.174 -1.701*** -0.341 Intercept -2.659*** -1.058*** -2.228*** Central Office Fixed Effects Not included Not included Included

Log Likelihood -32,500.37 -26,063.34 -19,583.08 N 51,797 51,797 51,797 Pseudo R2 0.021 0.216 0.410

* significant at the 10% level; ** significant at the 5% level; *** significant at the 1% level.

2525

Results of Demand EstimationsResults of Demand Estimations

When add all variables:When add all variables:– CLEC present: demand down 2.2 % ptsCLEC present: demand down 2.2 % pts

– Asians & Hispanics (not Blacks): -Asians & Hispanics (not Blacks): -– Income: +Income: +– Household size: +Household size: +– Distance from CO: - Distance from CO: -

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Diffusion Curve over TimeDiffusion Curve over Time The coefficient on time since DSL deployed in the The coefficient on time since DSL deployed in the

area implies a diffusion curve:area implies a diffusion curve:

0.1

0.105

0.11

0.115

0.12

0.125

0.13

0 1 2 3 4 5

Years Since DSL Deployment

Pro

ba

bili

ty o

f H

ou

se

ho

ld D

SL

A

do

pti

on

2727

Business DemandBusiness Demand A limitation of the structural demand A limitation of the structural demand

model: all demand assumed from HHmodel: all demand assumed from HH Businesses account for 20% of DSLBusinesses account for 20% of DSL Do not know how many firms are in Do not know how many firms are in

Census block areaCensus block area Solution: switch to reduced form probitsSolution: switch to reduced form probits Business variables appear to matterBusiness variables appear to matter

– % in NAICS categories% in NAICS categories– Size of businessesSize of businesses

2828

ConclusionsConclusions

1.1. This is an interesting, unique dataset to This is an interesting, unique dataset to explore.explore.

2.2. Neither race nor income matters in supplyNeither race nor income matters in supply– Interesting, given the regulators’ concerns!Interesting, given the regulators’ concerns!

3.3. Race matters and income matter in demand Race matters and income matter in demand estimations.estimations.– Asians, Hispanics, and other races have less DAsians, Hispanics, and other races have less D

4.4. Competition from CLECs doesn’t significantly Competition from CLECs doesn’t significantly affect deployment decision.affect deployment decision.

5.5. Competition from CLECs reduces demand for Competition from CLECs reduces demand for incumbent’s product.incumbent’s product.

Documents

1 New Estimates of Broadband Supply and Demand June 17, 2005 Wei-Min Hu and James E. Prieger Department of Economics University of California, Davis [email protected]