Raul Katz - Presentation Americas Society

8/8/2019 Raul Katz - Presentation Americas Society

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Economic Impact of Broadband and

barriers to Bridging the Digital Divide

Opportunities and Challenges for Latin Americain the New Global Technology Environment

Miami, FloridaDecember 2, 2010

Dr. Ral L. Katz, Adjunct Professor, Division ofFinance and Economics, and Director, BusinessStrategy Research, Columbia Institute of Tele-

information


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Broadband has multiple economic impacts

Broadbanddeployment

Directbenefits

Investment ininfrastructuredeployment

Residentialpenetration

Consumersurplus

Householdincome

Businesspenetration

Total factorproductivity Contribution

to GDPgrowth andemployment

BROADBAND ECONOMIC IMPACT


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Research on the economic impact of broadband focuses on threeareas

Broadbanddeployment

Directbenefits

Investment ininfrastructure

deployment

Residentialpenetration

Consumersurplus

Householdincome

Businesspenetration

Total factorproductivity Contribution

to GDPgrowth andemployment

BROADBAND ECONOMIC IMPACT

Contribution to employmentand output of broadband

deployment

Impact ofexternalities

Creation ofconsumer surplus


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Infrastructure effects: Three types of network construction effectsexist

Consumer durables

Retail trade

Consumer services

Employment and productiongenerated by householdspending based on the incomeearned from the direct andindirect effects

Induced jobs and output

Metal products workers

Electrical equipment workers

Professional Services

Employment and productiongenerated by indirect spending(or businesses buying andselling to each other in supportof direct spending)

Indirect jobs and output

Telecommunications technicians

Construction workers

Civil and RF engineers

Employment and economicproduction generated in theshort term in the course ofdeployment of network facilities

Direct jobs and output

EMPLOYMENT EXAMPLESDESCRIPTIONEFFECT

4


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Infrastructure effects: Estimates from several countries indicate thatnetwork construction effects and multipliers are significant

3.602.58229,475165,81563,660$ 10,000Atkinson (ITIF)

AUSTRALIA

UNITEDKINGDOM

GERMANY

SWITZERLAND

UNITEDSTATES

COUNTRY

Government

Liebenau (LSE)

Katz (Columbia)

Katz (Columbia)

Katz (Columbia)

RESEARCHER/ INSTITUTION

3.421.83127,80059,50031,00037,300$ 6,390

~200,000$ 31,340

2.76211,000134,50076,500$ 7,463

1.94

N.A.

TYPEII (**)

1.45

1.38

TYPEI (*)

MULTIPLIERS

TOTALINDUCEDINDIRECTDIRECT

542,000

~110,000

135,000

N.A.

126,000

~30,000

281,000$ 47,660

~80,000~$ 10,000

NETWORK DEPLOYMENT JOBSESTIMATE

STIMULUSINVEST.

(US$

million)

5

(*) (Direct + indirect)/direct(**) (Direct + indirect + induced)/direct

NETWORK CONSTRUCTION EFFECTS OF BROADBAND

Sources: Katz, R. and Suter, S. (2009). Estimating the economic impact of the US broadband stimulus plan, ColumbiaInstitute for Tele-Information working paper; Katz, R., P. Zenhusern, S. Suter, P. Mahler and S. Vaterlaus (2008).Economic Modeling of the Investment in FTTHin Switzerland, unpublished report; Libenau, J., Atkinson, R. (2009) The UKsdigital road to recovery. LSE and ITIF; Australian government. Katz, R., S. Vaterlaus, P. Zenhusern, S. Suter and P. Mahler(2009). The Impact of Broadband on Jobs and the German Economy; Columbia Institute for tele-Information working paper


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Network effects: The externalities derived from broadband aresignificantly higher

Outsourcing of services

Virtual call centers

Core economic developmentclusters

Attract employment from other regions as

a result of the ability to processinformation and provide services remotely

Value chain

recomposition

New applications and services(telemedicine, Internet search, e-commerce, online education, VODand social networking)

New forms of commerce andfinancial intermediation

Acceleration of innovation resulting fromthe introduction of new broadband-enabled applications and services

Innovation

Marketing of excess inventories

Optimization of supply chains

Improvement of productivity as a resultof the adoption of more efficient businessprocesses enabled by broadband

Productivity

EMPLOYMENT EXAMPLESDESCRIPTIONEFFECT

6


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Network effects: Research to date confirms the contribution to GDPgrowth but the amount of impact varies widely

1.38

1.21

1.50

0.900.85 0.82

0.670.61

0.230.14

0.08

0.26 0.240.16

0.08 0.09

0.31

0.17

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Low-Med.Incom

e

High

Incom

e

OECD

-High

OECD

-Low

UK

US

France

German

y

OECD

-High

OECD

-Med

.

OECD

-Low

Germany-Hig

h

Germany-Lo

w

L.Am

ericaBraz

il

Chile

India

Malays

ia

RESEARCH EVIDENCE OF BROADBAND IMPACT ON GDP GROWTH

Contribution toGDP growth of10% increase in

broadbandpenetration

KatzKou-

troumpis

Waver-manCzernichQiang

World Bank U. Munich LECG U. ColumbiaImperial C.

RESEARCHER/INSTITUTION


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Network effects: However, these estimates are consistent withgrowing evidence of increasing returns to broadband penetration

0

0.005

0.01

0.015

0.02

0.025

7%

14%

16%

17%

21%

22%

22%

24%

25%

30%

33%

Broadband Penetration (2007)

CountryAv

erage%

ImpactofBBon

growth

0

0.0005

0.001

0.0015

0.002

0.0025

0.003

0.0035

0.004

0.0045

Clusterav

erageimpactongrowth

Source: adapted from Koutroumpis (2009)

Low penetrationGreece, Portugal, Italy,New Zealand, Austria,Hungary, Spain, IrelandAverage contribution toGDP growth: 0.008

Medium penetrationGermany, France, Japan, Belgium, UK,Australia, US, Canada, LuxemburgAverage contribution to GDP growth: 0.014

High penetrationDenmark, Norway,Netherlands, Sweden,SwitzerlandAverage contributionto GDP growth: 0.023

INCREASING BROADBAND IMPACT ON GDP GROWTH


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Network effects: The contribution of broadband externalities toemployment comprises three simultaneous effects

Incrementalbroadband

penetration

e-business

impact on firmproductivity

Macro-

economicproductivity

Impact on

employment

Enhancedinnovation

Impact onemployment

Outsourcing of

services

Displacement to

service sector

Impact onemployment

+

+

+

+

+ +

+

-/+

-

-

Note: This causality chain was adapted from a model originally developed by Fornefeld et al., 2008 in a report for theEuropean Commission

+


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Network effects: These effects result in different output andemployment impact depending on broadband penetration

T+1 T+2 T+3 T+4

EconomicImpac

tHI

LO

GDP

Employment

T+1 T+2 T+3 T+4

EconomicImpac

tHI

LO

GDP

Employment

High Broadband Penetration Regions Low Broadband Penetration Regions

High economic growth initially,diminishing over time (supply shockeffect) New Economic Growth (innovation, newservices)

High stable economic growth (catch upeffect)Capital/labor substitution limits employmentgrowth (productivity effect)

Increase inBB

penetration

Increase inBB

penetration


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Consumer surplus: utility gain of broadband that can be purchasedat a price lower than what consumers are willing to pay

Benefits that broadbandtechnology (DSL, cablemodem, Fttx) yields in

relation to dial-up

Price declines as a resultof competition,

technology trends, andproductivity gains

Benefits derived fromincreased broadband

penetration (access tonew services and

information)

Consumer surplus=

Willingness to Pay-

Price of service


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Consumer surplus: this approach can be used either historically orforward-looking

Katz et al. (2008) comparative analysis of

consumer surplus to be generated in

Switzerland by alternative fiber deployment

strategies: consumer surplus is

maximized in competitive models that

promote infrastructure basedcompetition

Greenstein and McDevitt (2010)

comparative analysis of consumer value

generated by broadband diffusion in China,

Mexico, Spain, Canada and the United

Kingdom: scale of value creation is

proportionate to deployment

Crandall and Jackson (2001) analysis of

consumer surplus generated by broadband

adoption in the United States

Greenstein and McDevitt (2009) analysis of

broadband bonus in the United States

FORWARD-LOOKINGHISTORICAL STUDIES


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In Latin America, we estimate that a 10% increase in broadbandpenetration will contribute to 0.16% in GDP growth

Coefficient Standard error T-statistic P > [t]

Change in Broadbandpenetration

0.0158715 0.0080104 1.98 0.054

Per cpita GDP -0.0006957 0.0001806 -3.85 0.000

Investment/GDP -0.0471624 0.1689699 -0.28 0.782

Level of tertiary education 0.2139614 0.1108325 1.93 0.060Population Growth -0.4469177 1.40418 -0.32 0.752

Globalization index -0.0653024 0.1929498 -0.34 0.737

Constant 13.02883 12.04659 1.08 0.286

Number of observations = 49F(4, 14) = 7.18Prob > F = 0.0000R2 = 0.3814Root MSE = 7.024

CONTRIBUTION OF BROADBAND TO GDP GROWTH IN LATINAMERICA

Source: Katz, R. (2010). The impact of broadband on the economy:Research to date and policy issues. International Telecommunication Union,Discussion paper presented at the Global Symposium for Regulators inDakar, Senegal


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Broadband has also contributed to job creation in Latin America

0.038

0.070

0.033 0.029

Mxico Brasil Colombia Argentina

BROADBAND CONTRIBUTION TO REDUCTION OF

UNEMPLOYMENT IN LATIN AMERICA

(Effect of 10 percent increase in broadband penetration)

Sources: Katz (2011) Impacto economico de la banda ancha en Mexico, Anuario AMIPCI; Katz (2011) La Banda Ancha: UnObjetivo Irrenunciable Para Brasil, AHCIET; Katz (2010). "La contribucin de la banda ancha al desarrollo econmico", V. Jordn,W. Peres y H. Galperin (eds.), Acelerando la revolucin digital: banda ancha para Amrica Latina y el Caribe, Comisin Econmicapara Amrica Latina y el Caribe (CEPAL) / Dilogo Regional sobre Sociedad de la Informacin (DIRSI), Santiago de Chile


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The importance of economic effects of broadband points to thecriticality of a policy tool kit aimed at maximizing adoption

National broadband plans outline coverage and service targets, assign spectrum tomaximize the impact of wireless broadband, focus on demand stimulation, definecompetition policy, and tackle any potential supply obstacles

Articulate a vision and create awareness within polity and civil society

Coordinate policies and involvement from public and private sector

Develop state policies

Build ownership and accountability at the highest level of government

Competition policies aimed at stimulating private sector investment and innovation arecritical

At the same time, governments should acknowledge that they will need to intervene

Address any market failures through universal service funds Alleviate investment constraints to stimulate private sector flows

Potential entry as an investor of last resort


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A broadband policy should also address the demand gap: why arethere households that could buy broadband but do not?

BROADBAND DEMAND GAP

31 %62 %92 %United States

32 %68 %100 %United Kingdom

11 %89 %100 %Sweden

32 %61 %93 %Spain

7 %93 %100 %Republic of Korea40 %55 %95 %Italy

17 %83 %100 %Israel

40 %58 %98 %Germany

23 %77 %100 %France

20 %76 %96 %Denmark

20 %69 %89 %Australia

DemandGap

Householdsconnected

Householdspassed (*)Country

(*) Note: Household passed is defined as a residence where the broadbandnetwork is deployed; this differs from connected, which means the residenceis linked to the network for provisioning the service.

Sources: Analysis by the author, based on data from EU; FCC; BMWi;OECD; PTS - Sweden; and Israel Minister of Communication.

REASONS FOR NOT ACCESSING TO

THE INTERNET AT ALL

16 %22 %Easy to use (difficulty seniorcitizen physical handicap)

14 %16 %Service availability

28 %15 %Price (the cost of broadbandis too high, does not have acomputer)

60 %45 %Relevant ( lack of interest,busy doing other tasks, otherreasons)

UnitedKingdom

UnitedStates

Percentage ofanswers

Reasons

Sources: Horrigan, J. (2009); Ofcom (2008)


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It is imperative that fiscal policies affecting broadband adoption becoordinated with national objectives

Source: Adapted from Katz et al. (2010c)

0

5

10

15

20

25

30

35

40

45

50

1 3 5 7 911

13

15

17

19

21

23

25

27

29

31

33

35

37

39

41

43

45

47

49

51

Taxasaprop

ortionofTCMO

Mexico

TAX PERCENTAGE OF TOTAL COST OFOWNERSHIP OF MOBILE SERVICES

Malaysia

Brazil

South Africa

Zambia

Turkey

Tanzania

Argentina

Tunisia

Taxation has a negativeimpact on deployment ofmobile broadband: there is anegative relation betweenmobile taxes and 3G

handset penetration If taxes limit adoption of

wireless broadband, theyultimately affect economicgrowth

Country Distribution


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It is also important to build the data monitoring mechanismsnecessary to build evidence-based policies

An imperfectly informed regulator is constrained in his choice of the most appropriateapproaches to overseeing the ICT sector

Governments cannot formulate correct public ICT policies

Under conditions of limited data on ICT impact, governments in developing countries tendto imitate/copy the policy and regulatory models of developed countries

Common cases of mis-information due to the lack of data

The Solow paradox: is broadband affecting productivity?

Size of the broadband supply gap in the United States: 20 million households or 10million households?

Reasons explaining the broadband demand gap: why do some countries have low

broadband penetration?

Broadband and job creation: does broadband contribute to employment?


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ICT data is the required basis for conducting rigorous policy cost-benefit analysis

Cost-benefit analysis feeding regulatory decisions requires accurate data

Limited data introduces considerable noise in the analytical process

Considering the amount of investment in ICT, and their economic impact, the amount

of data and analysis leading to decisions is typically sub-optimal

In our view, given the little data sometimes policy makers have about economic impactof ICT, this is not an issue of how to optimize regulation under imperfect information,

but how do we gain a better understanding of these effects


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Lack of impact data results in defining policy targets withoutunderlying rigorous analysis: example of broadband speeds

TARGETS OF COVERAGE AND DOWNLOAD SPEED FOR NATIONAL BROADBAND PLANS

COUNTRY Coverage Targets (as apercent of households)

Speed Targets (as a percent ofhouseholds)

United States 100 % (2012) 4 Mbps (100%) (2012) 50 Mbps

Germany 100 % (2014) 1 Mbps (100%) (2014) 50 Mbps (75%) (2014)

Singapore 100 % (2012) 100 Mbps (95%) (2012)

Australia 100 % (2012) 12 Mbps (100%) (2012)

United Kingdom 100 % (2012) 2 Mbps (100%) (2012)

Malaysia 75 % (2010) (33%) 50-100 Mbps (42%) 1.5 Mbps

Brazil 50% hogares urbanos y 25%hogares rurales 75% (512-784 kbps)

European Union 100 % (2013) 30 Mbps (100%) (2020) 100 Mbps (50%) (2020)

Sources: National Broadband Plans

2020


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Coverage and service targets need to be defined on the basis ofrigorous analysis of level of investment and social and economicreturns

Coverage and servicetargets

Existing

infrastructure

Infrastructuregap

Modernization ofexisting lines to deliver

target service levels Deployment of new

lines to achievecoverage targets

Required technology byzone

Cost per line

Total investmentrequirement

Consumersurplus

Economicbenefits

Construction effect(multipliers)

Contribution to GDPgrowth

Job creation Spill over effects

(innovation, newbusiness creation)

Access to publicservices and

information Savings in transport

time Health and education

services

RETURN ON INVESTMENT

2121


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For example, in Latin America investment needs to be conducted infour areas

PARAMETER CHARACTERISTICS NUMBER OFLINES

COST PERLINE

ESTIMATEDCOST

Modernization ofinstalled lines

Increase installed linecapacity

Latam:13,639,000 (*)

US $ 300 Latam: US $4,092 M

Demand stimulation

programs

Subsidies and digital

literacy programs

Demand gap to be

estimated

?

Deployment toachieve penetrationcommensurate toeconomic

development

Deployment andbroadband adoption

Latam:17,342,000

US $ 450 Latam:US $7,803 M

Deployment to reachunserved populations

Infrastructure deploymentprogram

Supply gap to beestimated

US: $ 3,357/line

Germany: $1,265/line

?

2222

LATIN AMERICA: INVESTMENT REQUIREMENTS TO REACH

UNIVERSAL BROADBAND PENETRATION

(*) Calculated for Argentina, Brazil, Chile, Per y Venezuela


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In summary

Research evidence is consistently pointing to the positive economic of broadband

Data analysis also indicates that economic impact increases with broadbandpenetration

Economic impact varies by region indicating that broadband deployment needs to becarefully coordinated with economic development policies (training, firm relocation,etc.) to maximize impact

Broadband policies are critical to maximize the economic impact of technology

(national broadband plans, competition policies, demand stimulation, alignment oftaxation with development and technology objectives)

Policy development needs to be based on rigorous economic analysis which requiresan important effort in data generation


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Raul Katz - Presentation Americas Society