The impact of broadband in Eastern and Southeast Europe · Western European jurisdictions. Whilst broadband demand in other European jurisdictions has also been growing, the current

© Frontier Economics Ltd, London.

The impact of broadband in Eastern and Southeast Europe A REPORT PREPARED FOR TELEKOM AUSTRIA GROUP

May 2010

Confidential May 2010 | Frontier Economics i

Contents

The impact of broadband in Eastern and Southeast Europe 1 Executive Summary 1

1.1 Scope of the study.......................................................................1

1.2 Current state of broadband provision in the ESE region.............2

1.3 Potential benefits from increased broadband provision ..............9

1.4 Achieving broadband growth – Key obstacles and enablers ....11

1.5 Summary conclusions and recommendation ............................12

2 Introduction 15

2.1 Scope of the study.....................................................................15

3 Current state of broadband provision in the ESE region 19

3.1 Regional overview .....................................................................19

4 Individual country overviews 35

4.1 Austria........................................................................................35

4.2 Bulgaria......................................................................................37

4.3 Croatia .......................................................................................40

4.4 Macedonia .................................................................................42

4.5 Serbia.........................................................................................44

4.6 Slovenia .....................................................................................46

5 Potential benefits from increased broadband service provision 49

5.1 Empirical evidence.....................................................................49

5.2 Methodology for calculating broadband benefits.......................57

5.3 Estimated economic benefits.....................................................61

6 Achieving broadband growth – Key obstacles and enablers 67

6.1 The role of public authorities in achieving broadband growth...67

6.2 Key obstacles in ESE countries.................................................69

7 Summary and recommendations 73

ii Frontier Economics | May 2010 Confidential

Contents

Annexe 1: Coverage Maps 75

Annexe 2: Empirical estimation of broadband benefits 81

Annexe 3: Empirical literature references 87

Confidential May 2010 | Frontier Economics iii

Tables & Figures

The impact of broadband in Eastern and Southeast Europe

Figure 1. Weighed average fixed broadband penetration (% of population), 2002 - 2009 3

Figure 2. Weighed average 3G mobile broadband penetration (% of population), 2002 - 2009 4

Figure 3. Dedicated mobile data service penetration rate (% of population) - dedicated mobile data cards, July 2009 5

Figure 4. Fixed broadband penetration Vs GDP per capita, 2008 7

Figure 5. Fixed broadband penetration Vs PC penetration, 2006 8

Figure 6. Recent trends in GPD p.c. and penetration gaps between TAG region and Western Europe, 2004 – 2008 9

Figure 7. Geographic scope of this study 16

Figure 8. Total fixed broadband connections in ESE region, Western Europe and TAG footprint, 2002 – 2009 20

Figure 9. Weighted average fixed broadband penetration in ESE region, Western Europe and TAG footprint (% of population), 2002 – 2009 21

Figure 10. Broadband (fixed) penetration in Eastern and Southeast Europe (% of population), 2009 22

Figure 11. Percentage of (fixed) broadband connections by technology, 2009 23

Figure 12. Geographic coverage of 3G networks, 2009 24

Figure 13. Weighted average 3G mobile penetration trends ESE region, Western Europe and TAG footprint (% of population), 2002 – 2009 25

Figure 14. Mobile broadband penetration rate (% of population) - dedicated data services, July 2009 27

Figure 15. Fixed broadband penetration (% of population) vs. GDP per capita, 2008 29

Figure 16. Total fixed broadband penetration vs. number of PCs per 100 inhabitants 31

Figure 17. DSL Coverage as % of population, 2008 32

Figure 18. Recent trends in GDP p.c. and penetration gaps between TAG footprint and Western Europe, 2004 - 2008 33

Figure 19. Austria – Fixed broadband take-up, 2004 – 2009 36

Figure 20. Bulgaria - Fixed broadband take-up, 2004 - 2009 39

iv Frontier Economics | May 2010 Confidential

Tables & Figures

Figure 21. Croatia - Fixed broadband take-up, 2004 - 2009 41

Figure 22. Macedonia - Fixed broadband take-up, 2004 - 2009 43

Figure 23. Serbia - Fixed broadband take-up, 2004 - 2009 45

Figure 24. Slovenia - Fixed broadband take-up, 2004 - 2009 47

Figure 25. Growth effects of a 10% increase in penetration rates (% of population) 50

Table 1. Potential benefits of increased broadband take-up (Conservative Scenario) in billion of Euros, 2010-2019 11

Table 2. Potential increase in fixed broadband subscriptions given GDP per capita (PPP adjusted), 2008 30

Table 3. Percentage of impact of broadband infrastructure on growth for each country, Koutroumpis (2009) 52

Table 4. Overview of job creation 53

Table 5. Overview of further empirical studies 54

Table 6. Summary of demand forecast across the TAG countries, 2010 - 2019, in millions of Euros 60

Table 7. Total direct and indirect benefits from increased fixed and mobile broadband penetration, in billions of Euros 62

Table 8. Total direct benefits of fixed and mobile broadband for 2010-2019 in billions of Euros 63

Table 9. Estimated cost savings by the use of eGovernment from 2010-2019, in million Euro 64

Table 10. Total indirect benefits of teleworking between 2010 to 2019, in millions of Euros 65

Table 11. 3G coverage maps - Bulgaria 75

Table 12. 3G coverage maps - Croatia 76

Table 13. 3G coverage maps - Serbia 76

Table 14. 3G coverage maps - Slovenia 77

Table 15. 3G coverage maps - Austria 78

Table 16. 3G coverage maps - France 79

Table 17. 3G coverage maps - United Kingdom 80

Table 18. Causality between investment and growth 82

Table 19. Overview of job creation 84

May 2010 | Frontier Economics 1

Executive Summary

1 Executive Summary Demand for broadband services has increased significantly in most countries across Europe in recent years. This growth has been particularly marked in Western European jurisdictions. Whilst broadband demand in other European jurisdictions has also been growing, the current take-up levels still remain below those experienced across Western Europe.

There is a growing literature on the economic benefits from broadband provision, both on a macro-economic level as well as for individual end-users. There is further an ongoing debate on the role of public authorities in facilitating future rollout of broadband infrastructure.

In light of these developments, Frontier Economics has been retained by Telekom Austria Group (TAG) to conduct a study on the impact of broadband provision in Eastern and Southeast Europe with a focus on the countries where TAG is currently present. This note presents a summary of our findings.1

1.1 Scope of the study The scope of our study can be summarised as follows.

• Geographic scope. The study focuses on Eastern and Southeast Europe (ESE)2 and Austria. We have further defined a Western European region3 to facilitate our review of recent trends in the broadband market in the ESE region and Austria. Furthermore, some parts of our analysis focus on jurisdictions where TAG currently has a presence.4

• Product scope. Within the study we aim to reflect both fixed and mobile broadband services for end-users. Unless stated otherwise, we refer to fixed broadband services as retail offerings with speeds of at least 256kbps in either direction, delivered via xDSL, cable, fibre (FTTx), or fixed wireless

1 The views expressed in this report represent the views of Frontier Economics, and not necessarily those of TAG or any other stakeholders which may have contributed to the study.

2 The Eastern and Southeast Europe (ESE) region includes: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia, and Slovenia.

3 The Western European region includes: Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and United Kingdom.

4 TAG currently operates in eight countries (Austria, Belarus, Bulgaria, Croatia, Liechtenstein Macedonia, Serbia, and Slovenia.). For consistency, we have excluded Liechtenstein and Belarus from the analysis. Austria is primarily reported as a benchmark for the remaining countries.


Executive Summary

access platforms. We further report on the provision of mobile broadband services, which we define as retail mobile offerings using dedicated mobile data cards only (i.e. access via, for example, data modems, data cards and USB keys).5

• Benefits estimated within the study. The study aims to illustrate the potential benefits of broadband provision in the countries within TAG’s current footprint. There is a considerable range of potential benefits associated with broadband services. Estimating all these potential benefits, in general, and for relevant countries in particular, is constrained by the availability of the required information. As such, we have focused on illustrating the potential benefits by providing a high-level assessment of the possible overall macro-economic impact of increasing broadband connections. This is then accompanied by an assessment of a range of benefits, such as the direct benefits to broadband users and indirect benefits, such as those arising from enhanced eGovernment rollout.

Where possible, we have aimed to apply conservative assumptions within our analysis. As such, the benefit values presented in this report represent a lower bound estimate of the possible scale of benefits likely to arise from broadband service provision in the relevant countries.

1.2 Current state of broadband provision in the ESE region

1.2.1 Current fixed broadband take-up levels lag behind Western Europe

Despite continuous growth in fixed broadband connections and penetration rates, current broadband take-up levels across the ESE region remain significantly lower than those across Western Europe. In 2009, the weighted average fixed broadband penetration rate (in terms of population) across the entire ESE region was 13.1% and 11.6% in TAG’s footprint countries within the region. This compares to 27.6% across Western Europe.

5 This report focuses on mobile broadband that is provided via dedicated data cards, which follows

the definition of mobile broadband of the 14th EU Implementation report http://ec.europa.eu/information_society/policy/ecomm/doc/implementation_enforcement/annualreports/14threport/annex2.pdf


Executive Summary

Figure 1. Weighed average fixed broadband penetration (% of population), 2002 - 2009

0%

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2002 2003 2004 2005 2006 2007 2008 2009

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Western Europe Eastern and Southeast Europe TAG footprint in ESE region

Source Frontier Economics

Fixed broadband penetration levels vary significantly across the ESE region, ranging from 28.2% in Estonia to less than 10.0% in Serbia, Bosnia-Herzegovina and Albania. Within TAG’s regional footprint, Slovenia reported the highest penetration rate (23.5%) followed by Croatia (15.9%), Macedonia (12.0%), Bulgaria (10.0%) and Serbia (6.9%).

1.2.2 Mobile broadband is likely to contribute significantly to future growth

Mobile broadband is a relatively new technology in many countries, especially within the ESE region. Although, current take-up levels are likely to be low, it is expected that mobile broadband will play an important role in future broadband provision. There are a range of definitions for mobile broadband services, including, amongst others, a wider definition of 3G mobile services and a more narrow definition of dedicated mobile data services only (We have used the more narrow definition in this report to estimate broadband benefits).

The penetration rates of 3G mobile services reached 37.6% in Western Europe, 18.1% within the TAG footprint and 15.1% in the ESE region by 2009 (see graph below).


Executive Summary

Figure 2. Weighed average 3G mobile broadband penetration (% of population), 2002 - 2009

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2002 2003 2004 2005 2006 2007 2008 2009

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Source: Frontier Economics

A similar picture emerges for the narrower definition of dedicated mobile data services, with current take-up levels being higher across Western European countries, compared to those in the ESE region (see graph below). For example, Austria and Sweden exhibit take-up levels of 13.0%6 and 12.6% in 2009, respectively.7 This compares to, for example, 3.25% in Croatia8, 2.5% in Slovenia and 1% in Bulgaria. Despite this current take-up gap, the longer-term potential for mobile broadband services is likely to be larger in ESE countries due to the more limited network coverage of the fixed networks in many of these countries.

6 The EU study “eGovernment Benchmark Survey 2009: Smarter, Faster, Better, eGovernment

Broadband access in the EU: situation at 1 July 2009” was published with a penetration rate for Austria of 13.8%. However, the currently available version on the website refers to 13.0%.

7 eGovernment Benchmark Survey 2009: Smarter, Faster, Better, eGovernment Broadband access in the EU: situation at 1 July 2009. Mobile broadband users are defined as users using broadband dedicated data services via data modems/cards/keys in last 90 days.

8 For Croatia, we had two possible figures for the mobile broadband penetration (% of population), which ranged from TAG’s internal estimate of 2% to the 4.5% quoted in Cullen International’s (March 2010): ‘Enlargement Countries Monitoring Report III’. We have therefore used an average of 3.25%.


Executive Summary

Figure 3. Dedicated mobile data service penetration rate (% of population) - dedicated mobile data cards, July 2009

13.0%12.6%

10.8%

8.3%7.6%

4.9% 4.7% 4.7% 4.5% 4.4%

3.3% 3.2% 3.2% 3.2%2.5%

2.1% 1.9% 1.8% 1.6% 1.6% 1.5% 1.4% 1.4%1.0% 0.8%

0.5%

3.8%

Aus

tria

Sw

eden

Por

tuga

l

Irela

nd

Den

mar

k

Uni

ted

Kin

gdom Ita

ly

Pol

and

Slo

vaki

a

Lith

uani

a

Hun

gary

Cro

atia

Cze

ch R

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lic

Spa

in

Ger

man

y

Slo

veni

a

Rom

ania

Fran

ce

Mal

ta

Gre

ece

Bel

gium

Net

herla

nds

Est

onia

Luxe

mbo

urg

Bul

garia

Latv

ia

Cyp

rus

Average

Source: Frontier Economics with EU Communications Committee Working document: Broadband access in the EU: situation at 1 July 2009.The countries included in the chart encompass all EU 27 countries.

1.2.3 Potential drivers of current take-up levels

There are several potential drivers of current broadband take-up levels, which may influence future take-up levels across the region, including, amongst others the following demand side and supply side drivers.

• Average income levels. Our study finds evidence in support of the hypothesis that countries with higher GDP per capita also tend to exhibit a higher broadband service take-up than lower income countries (see Figure 4). However, most countries within TAG’s footprint exhibit below average levels of broadband penetration compared to their level of GDP per capita.

• PC penetration. There is further evidence for a positive relationship between current fixed broadband penetration and the number of PCs per 100 inhabitants (see Figure 5). The prevailing low levels of PC penetration ( which could also be seen as an indicator of the overall e-literacy and e-preparedness of consumers) in many of the countries within the ESE region (relative to some European countries) could have further contributed to the observed low fixed broadband penetration rates across the region.


Executive Summary

• Smart phone penetration. “Smart” mobile phone devices9, enabling the use of internet services have become a widespread alternative mean to access the internet in recent years. For example, in Western Europe, approximately 18% of total mobile handsets were smart phones in 2009.10 We further understand that the actual smart phone share of total customers across TAG’s subsidiaries in the ESE region ranged from 1.6% to 10.2% in 2009. As such, smart phones are expected to become a further important driver of mobile broadband demand across the ESE region.

• Network coverage. Recent studies11 have shown that current DSL network coverage levels (in terms of share of total population that could have access to DSL based broadband) are significantly lower in ESE countries than those experienced, on average, across Western Europe. A similar picture emerges for current 3G mobile network coverage. According to information published by the GSM Association12, there is currently a significant gap in 3G mobile coverage between ESE countries and those in Western Europe.

9 Including, for example, Blackberries, iPhones and Android phones

10 Arthur D Little (2009),”Mobile internet: blessing or curse?”

11 Europe's Digital Competitiveness Report Volume 1: i2010 — Annual Information Society Report 2009 Benchmarking i2010: Trends and main achievements.

12 http://www.gsmworld.com/roaming/gsminfo/index.shtml


Executive Summary

Figure 4. Fixed broadband penetration Vs GDP per capita, 2008

Eastern and Southeast Europe Average

Bulgaria

AustriaSlovenia

Croatia

Macedonia

Serbia

Western European Average

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0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000

GDP per capita (US dollars PPP adjusted)

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Source: Globalcomms, IMF


Executive Summary

Figure 5. Fixed broadband penetration Vs PC penetration, 2006

Serbia

Bulgaria

Austria



Macedonia

Slovenia

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0 10 20 30 40 50 60 70 80 90 100

Numbers of PCs per 100 inhabitants (2006)

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006

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Source: Globalcomms, World Bank. Data for Austria and Bulgaria are from 2005 and 2007 respectively.

1.2.4 Summary conclusions on take-up trends

Both fixed broadband and 3G mobile broadband take-up levels across the ESE region have increased substantially in recent years, however they remain significantly lower than those across Western Europe. The prevailing differences in average income across the two regions may explain some of these differences. However, whereas average incomes appear to have followed a convergence path, the gap in penetration rates, especially for 3G mobile services, has continued to increase. This is illustrated in the graph below.


Executive Summary

Figure 6. Recent trends in GPD p.c. and penetration gaps between TAG region and Western Europe, 2004 – 2008

9%

11%12%

2%

5%

11%12%

18%

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11%

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2004 2005 2006 2007 2008

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Fixed broadband penetration gap 3G Penetration gap GDP p.c. gap

Source: Frontier analysis based on Globalcomms, IMF and TAG data

This implies that whereas income growth can be expected to play a role in future broadband take-up, there are other drivers of broadband that governments and policy makers need to consider. The evidence from the chart suggests that these could have an even more important role to play in enabling the narrowing of the broadband gap compared to income.

1.3 Potential benefits from increased broadband provision Over recent years there has been a growing academic literature on the economic and employment impact of telecommunication investment in general, and more recently on broadband investment in particular. The vast majority of these papers show an unambiguous positive effect of investment on both economic growth and employment. For example, Koutroumpis (2009) and Qiang (2009) undertook two large scale studies to estimate the impact of an increase in broadband penetration in different jurisdictions. 13

13 Koutroumpis, Pantelis (2009). The economic impact of broadband on growth: A simultaneous

approach. Telecommunications policy 33(9) 471-485 and Qiang, Christine Zhen-Wei (2009) Telecommunications and Economic Growth. Unpublished working paper. World Bank.


Executive Summary

1.3.1 Estimated economic benefits

In this study we have focused on estimating the direct and selected indirect economic benefits from an increase in broadband provision in six countries where TAG currently operates in14. We derive these expected future benefits (on a present value basis) for the period 2010-2019.

• Direct benefits assess the value of using broadband to end users. These benefits are reflected in an end user’s willingness to pay for a broadband connection. As an estimate for customers’ willingness to pay we apply the average revenue a customer pays, which is likely to lead to a conservative direct benefit estimates.

• Indirect benefits encompass all other benefits that are not covered by direct benefits, include, amongst others, any positive externalities, cost savings to end-users and/or service providers and productivity gains from broadband provision. Within this study we focus on two indirect benefits:

Positive external effects from eGovernment. We estimate the value arising from time saved by end users from the online provision of government services, relative to the conventional way of providing these services, taking into account the expected share of people likely to use these services in each year over the forecast period. This approach is again likely to lead to conservative indirect benefit estimates, since we not take into account potential further benefits arising from, for example, a reduction in travel times or postage requirements.

Reduced external cost of transport from teleworking. Broadband connections allow people to work from home (“teleworking”) which reduces commuting and thereby the external effects of travel. We estimate the possible reduction in kilometres travelled due to the predicted take-up of teleworking to calculate the benefits from teleworking for each of the TAG countries over the ten year forecast period.

The resulting potential total direct and indirect benefits for the six TAG countries are summarised in Table 115.

14 Austria, Bulgaria, Croatia, Macedonia, Serbia and Slovenia.

15 The estimated economic benefits do not include the wider economic benefits from broadband provision, such as higher economic growth. Our estimated economic benefits should therefore be seen as cautious.


Executive Summary

Table 1. Potential benefits of increased broadband take-up (Conservative Scenario) in billion of Euros, 2010-2019

Direct Benefits

Indirect Benefits

Total Present Value

Bulgaria 3.2 0.1 3.3

Croatia 2.0 0.2 2.2

Macedonia 0.5 0.0 0.5

Serbia 1.2 0.1 1.3

Slovenia 1.7 0.2 1.9

Total TAG footprint in ESE region 8.5 0.7 9.2

Austria 8.1 1.5 9.6

Source: Frontier Economics. The benefits are based on a 5% discount rate applied to future benefits

The table above reveals that, even under conservative assumptions, potential total benefits in the next ten years could be close to € 9.2 billion (in present value terms) across the five Eastern and Southeast European countries. These benefit estimates are likely to represent conservative values of the total benefits from broadband provision due to the limited scope of benefits captured in our analysis and the application, where possible, of conservative assumptions within the calculations.

However, to support the projected future broadband growth, it is pivotal for public authorities to ensure that they create an enabling operating environment within each country.

1.4 Achieving broadband growth – Key obstacles and enablers As indicated above, the available evidence suggests that the broadband gap between Western Europe and the ESE region has increased, despite the convergence in income – especially in mobile broadband.

The economic and operating environment in any country will affect the further growth in broadband provision within that country. Public authorities can support (and actively create) a broadband friendly environment that will foster further broadband infrastructure deployment and thus service take-up and thereby generating the potential benefits associated with broadband provision. As part of our study we have undertaken stakeholder interviews to develop an


Executive Summary

understanding of the obstacles to further broadband provision across six countries within TAG’s footprint. The main obstacles are summarised below.

• Administrative barriers for rapid infrastructure deployment appear to remain a common obstacle across several countries. In particular, when erecting new mobile sites, operators are often confronted with significant administrative procedures and face long approval processes. This may in the long run constrain the deployment of mobile broadband infrastructure.

• Spectrum availability of frequencies to provide mobile broadband services in the future was also stated as a potential obstacle for future mobile broadband provision. However, there are commonly two options for further spectrum provision for mobile (broadband) services across the region:

refarming frequency bands formerly reserved for GSM technologies; and

releasing spectrum bands from the planned switchover from analogue to digital terrestrial TV.

A timely decision to permit the usage of these frequency bands for mobile broadband provision would reduce the regulatory uncertainty for operators and thereby strengthen investment incentives in mobile broadband.

• Barriers to infrastructure sharing amongst operators remain in place. Allowing for more consideration of active infrastructure arrangements (subject to compliance with general competition rules) may reduce the cost of rolling out broadband services to less densely populated areas, currently not covered by any broadband technology.

• The public support of demand side drivers of broadband demand is limited in TAG countries. The level of e-readiness and e-literacy, as proxied by the level of PC penetration, is relatively low in the TAG countries. From our interviews, we understand that demand side measures supporting the take-up of broadband in already covered areas could also be expected to result in higher benefits. Possible measures could, for example, focus on increasing PC penetration and improving the population’s IT literacy.

The above issues were common across all TAG countries. Selected further country-specific issues to consider are presented in the main part of our report.

1.5 Summary conclusions and recommendation Our study has identified significant potential for further growth in broadband provision across Eastern and Southeast Europe. This also holds for countries within TAG’s current footprint. If these countries were to achieve conservative


Executive Summary

estimates of further broadband take-up, then this may generate total benefits of € 18.8 billion (in present value terms) across all six TAG countries (i.e. including Austria) over a ten year period (or €9.2 billion excluding Austria). However, to support future take-up, public authorities need to design policy measures aimed at reducing prevailing obstacles whilst implementing further enablers of future broadband growth. Based on insights gained from stakeholder interviews, we recommend that policymakers consider:

1. encouraging future deployment of mobile and fixed broadband infrastructure by:

a. reducing and removing all unnecessary administrative procedures to deploy mobile and fixed broadband; and

b. developing investment friendly policy guidelines (including, for example, transparency, enforceability and incentives for investment);

2. taking a timely decision on the refarming of GSM and analogous TV spectrum, where still appropriate, to reduce investment uncertainty for mobile operators and facilitate future provision of mobile broadband;

3. active infrastructure sharing amongst operators, subject to competition rules;

4. assessing the merits of demand side policies that support broadband take-up in already covered areas by, for example:

a. increasing PC penetration and/or by improving peoples’ IT skills; and

b. minimising and/or removing any telecoms-specific taxation (in particular, consumption taxes). Our analysis suggests also that any extra mobile or telecoms-specific taxes could actually have detrimental effects, if by increasing the cost of providing broadband, they delay broadband take-up and rollout.


Introduction

2 Introduction Demand for broadband services has increased significantly in most countries across Europe in recent years. This growth has been particular marked in Western European jurisdictions (e.g. EU 15 Member States). Whilst broadband demand in other European jurisdictions has also been growing, the current take-up levels still remain below those experienced in Western Europe.

There is a growing literature on the economic benefits from broadband provision, both on a macro-economic level as well as for individual end users.

In light of these developments, Frontier Economics has been retained by Telekom Austria Group (TAG) to conduct a study on the impact of broadband in Eastern and Southeast Europe with a focus on the countries where TAG is present. This report presents our findings.

The views expressed in this report represent the views of Frontier Economics, and not necessarily those of TAG or any other stakeholders which may have contributed to the study.

2.1 Scope of the study

2.1.1 Geographic scope of the study

The study focuses on Eastern and Southeast Europe (ESE) and Austria as a benchmark country. We have defined the ESE region to include the following jurisdictions:

Albania

Bosnia and Herzegovina

Bulgaria

Croatia

Czech Republic

Estonia

Hungary

Latvia

Lithuania

Macedonia

Montenegro

Poland

Romania

Serbia

Slovakia

Slovenia

We have further defined a Western European region16 to facilitate our review of recent trends in the broadband market across the ESE region, presented in Section 3.1. Furthermore, some parts of our analysis focus particularly on

16 The Western European region includes: Austria, Belgium, Denmark, Finland, France, Germany,

Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and United Kingdom.


Introduction

jurisdictions within the ESE region and Austria where TAG currently has a presence (TAG footprint).17 The compositions of each of these three geographic regions are illustrated in the graph below.

Figure 7. Geographic scope of this study

Western EuropeEastern and Southeast Europe TAG presence* Western EuropeEastern and Southeast Europe TAG presence*


*excluding Belarus and Liechtenstein

2.1.2 Our definition of broadband services

The study focuses on end users. Unless stated otherwise, we refer to fixed broadband services as retail offerings with speeds of at least 256kbps in either direction, delivered via xDSL, cable, fibre (FTTx), or fixed wireless access platforms.

Where data was available, we further report on the provision of mobile broadband services, which we define as retail mobile offerings using dedicated mobile broadband devices, unless stated otherwise.18

17 TAG currently operates in eight countries (Austria, Belarus, Bulgaria, Croatia, Liechtenstein

Macedonia, Serbia, and Slovenia.). For consistency, we have excluded Liechtenstein and Belarus from the analysis. Austria is primarily reported as a benchmark for the remaining countries.


Introduction

2.1.3 Overview of benefits estimated within the study

The study aims to illustrate the potential benefits of broadband provision within the TAG footprint. There is a considerable range of potential benefits associated with broadband services, as discussed in greater detail in Section 5. Estimating all these potential benefits, in general and for the TAG footprint in particular, is constrained by the availability of the required information. As such, we have focused on illustrating the potential benefits by providing a high-level assessment of the possible overall macro-economic impact of increasing broadband penetration rates. This is then accompanied by a quantitative or qualitative assessment of a range of benefits, such as the direct benefits to broadband users and indirect benefits, such as those arising from enhanced eGovernment rollout.

Where possible, we have aimed to apply conservative assumptions within our analysis. As such, the benefit estimates presented in this study represent a lower bound estimate of the possible scale of benefits likely to arise from broadband service provision in the relevant countries.

2.1.4 Research methodology

This study has been prepared using a range of primary and secondary research methodologies:

• Desk based research. As an initial step, we conducted research into the current status of the broadband markets across the ESE region as a whole and in each of the jurisdictions, where TAG is currently active. This research was aimed at developing an understanding of the current trends in each market as well as the likely enablers and constraints for future growth in broadband take-up in each market.

• Jurisdiction-specific information requests. The insights gained from the desk based research were then enhanced by detailed information requests sent to each TAG subsidiary.

• Stakeholder interviews. The information requests were then followed-up with further stakeholder interviews to foster our understanding of the current operating environments in each country where TAG is currently present.

18 We apply the EC implementation report (2009) definition for mobile dedicated data services. That

encompasses all mobile broadband services that were used via data modems/cards/keys in last 90 days.


Introduction

• Literature review. As part of our benefit analysis, we have conducted a literature review of the empirical evidence on the impact of broadband on productivity, economic growth and employment.

2.1.5 Structure of this report

In light of the objectives of the study, the remainder of this report is structured as follows.

• Section 3 provides an overview of the current state of the broadband provision in the ESE region.

• Section 4 analyses the current state of broadband in the individual TAG footprint countries.

• Section 5 sets out the potential benefits from increasing broadband penetration within the TAG footprint.

• Section 6 presents an assessment of key obstacles to further broadband growth.

• Section 7 summarizes our findings and presents our recommendations.


Current state of broadband provision in the ESE region

3 Current state of broadband provision in the ESE region This section provides an overview of the recent trends in broadband markets across the ESE region and compares these trends to those experienced across the Western European region.19 This is followed by a more detailed review of the current state of the broadband markets in five ESE countries where TAG currently has a presence (i.e., Bulgaria, Croatia, Macedonia, Serbia and Slovenia) in addition to Austria. By outlining the current state and potential scope for future developments in the broadband markets across the ESE region, we aim to set the scene for the potential benefits associated with these developments, presented in Section 5.

3.1 Regional overview ESE countries are lagging behind Western Europe when it comes to broadband connections20. Even within ESE there are large differences in broadband take-up, with Estonia leading the way.

3.1.1 The current market position for fixed broadband services

The graph below compares recent trends in total fixed broadband connections in Western Europe and the ESE region. Fixed broadband connections have been growing considerably in both regions over the past eight years. For example, in Western Europe fixed broadband connections increased from less than 13 million in 2002 to approximately 109 million in 2009, representing an average annual compound growth of 35.0% per year. This compares to a growth from less than 400,000 to just below 16 million fixed broadband connections in the ESE region, representing an average annual compound growth of 71.5%. In the TAG footprint fixed penetration increased from 34,000 in 2002 to 2.7 million (which corresponds to an average annual growth rate of 87%).

19 Please see Section 2.1 for a definition of both geographic regions.

20 In order to ensure comparability of the information provided, the main analysis presented in this section is based on fixed broadband connections, although we cover also in summary form the state of development of mobile broadband. However, the analysis of benefits in the next section is based on both fixed and mobile broadband connections.



Figure 8. Total fixed broadband connections in ESE region, Western Europe and TAG footprint, 2002 – 2009

0

20

40

60

80

100

120

2002 2003 2004 2005 2006 2007 2008 2009

Tota

l fix

ed b

road

band

con

nect

ions

(in m

illio

ns)


Source: Frontier Economics based on Globalcomms data

Figure 9 below compares the development of average fixed broadband penetration rates (as share of total population) across both regions during the period 2002 to 2009. In 2002, average fixed broadband penetration was less than 5% in both regions. However, in line with connection growth discussed above, fixed broadband penetration increased much faster, in level terms, in Western Europe, reaching 27.6% in 2009. Fixed broadband take-up across the ESE region was significantly slower, with average penetration rates currently standing at about 13%.



Figure 9. Weighted average fixed broadband penetration in ESE region, Western Europe and TAG footprint (% of population)21, 2002 – 2009

0%

5%

10%

15%

20%

25%

30%

2002 2003 2004 2005 2006 2007 2008 2009

Wei

ghte

d av

erag

e fix

ed b

road

band

pen

etra

tion


Source: Frontier Economics based on Globalcomms data

A breakdown of the average penetration rate across the ESE region for 2009 is presented in Figure 10. The graph reveals that fixed broadband penetration levels vary significantly across the ESE region, ranging from 28% in Estonia to less than 10% in Serbia, Bosnia-Herzegovina and Albania. Penetration rates also vary within the countries in which TAG operates. Slovenia is the best performing TAG country with a penetration rate of 24%, which is significantly greater than Serbia’s penetration rate of 7%. For comparison Austria had a fixed broadband penetration of 22% in 2009.

21 To generate an aggregate figure for the two country groups, we weighted penetration rates by

population. Thereby heavily populated countries have a relatively higher weight in the aggregate number.



Figure 10. Broadband (fixed) penetration in Eastern and Southeast Europe (% of population), 2009

28%

24%

20%19% 19%

17%16%

14% 13% 13% 12% 11% 11%10%

7%6%

2%

0%

5%

10%

15%

20%

25%

30%

Est

onia

Slo

veni

a

Latv

ia

Cze

ch R

epub

lic

Lith

uani

a

Hun

gary

Cro

atia

Rom

ania

Wei

ghte

d A

vera

ge

Slo

vaki

a

Mac

edon

ia(F

YR

OM

)

Pol

and

Mon

tene

gro

Bul

garia

Ser

bia

Bos

nia

and

Her

zego

vina

Alb

ania

Fixe

d br

oadb

and

pene

trat

ion

Source: Frontier Economics with Globalcomms data

There are several fixed network technologies available to provide broadband services, the two most common ones being xDSL and cable. As shown in the graph below, the mix of fixed technologies varies significantly across the regions. Whilst in Western Europe the vast majority of broadband connections are xDSL connections (84%), cable and other fixed technologies have a more prominent role across the ESE region (32% and 13% of total fixed broadband connections, respectively). For the TAG footprint cable technology is relatively strong with 35%, and DSL, with 60%, with others having only a market share of 5%.



Figure 11. Percentage of (fixed) broadband connections by technology, 2009

Western Europe

Cable14%

Others2%

DSL84%

Eastern and Southeast Europe

DSL55%

Others13%

Cable32%

TAG Footprint

DSL60%

Others5%

Cable35%

Source: Frontier Economics with Globalcomms data

3.1.2 The current market position for mobile broadband services

Mobile broadband is a relatively new technology in many countries, especially within the ESE region. Although, current take-up levels are likely to be low, it is expected that mobile broadband will play an important role in future broadband provision.

Network coverage

This trend can already be observed in Western European countries, where Austria and Sweden have mobile broadband penetration rates of 13.8% and 12.6% respectively.22 However, the potential for mobile broadband services is even larger in ESE countries, including those within TAG’s current footprint, due to the limited capacity and network coverage of the fixed networks in many countries. Croatia has already started to realise this potential with a mobile broadband penetration of 3.25%23, which is likely to be even higher now.

To be able to use mobile broadband services, a necessary condition is that a potential customer has access to third generation (3G) mobile networks that allows the usage of mobile data services. The coverage of these networks is commonly expressed as percentage of area or of population covered. An overview of the geographic area currently covered by 3G networks in the regions of interest is presented in Figure 12. The map reveals that the area coverage of 3G networks is significantly higher in Western Europe than in the ESE region, including those within TAG’s current footprint. A more detailed overview of the

22 EC implementation report (2009) – data for July 2009. Mobile broadband users are defined as users

using broadband dedicated data services via data modems/cards/keys.

23 See footnote 8 for a detailed explanation why we apply this number.



situation in the TAG footprint countries is provided in the 3G coverage maps in the Annexe.24 These maps show that there is a significant gap in 3G coverage ––on average–– between ESE countries and countries in Western Europe.

Figure 12. Geographic coverage of 3G networks, 2009

Source: GSM Association (GSMA)

Mobile broadband service take-up

There are a range of definitions for mobile broadband services, including, amongst others, a wider definition, based on 3G mobile services, and a more narrow definition, of dedicated mobile data services (i.e. access to mobile broadband via, for example, data modems, data cards and USB keys) only.

24 Directly comparable public data for third generation coverage as a percentage of population for

Western as well as the ESE region is not readily available. Telekom Austria provided us with data on the combined coverage for all operators in their footprint countries. The numbers give an impression of the differences: Austria reports a 94% third generation coverage of population (outdoor), and is followed by Macedonia with 85%, Serbia (without Kosovo) with 76.5% on-streets, Croatia with 75%, Slovenia with 74,5%, and Bulgaria with 72% (outdoor).



3G mobile services

The widest definition of mobile broadband includes all technical devices that allow customers to use mobile data services. A proxy for this penetration level is the number of 3G mobile connections25. The graph below presents recent trends in 3G mobile take up levels across the ESE region and Western Europe. Similar to the development of fixed broadband connections over time, the regional average 3G penetration rate (as percentage share of total population) has increased much faster in Western Europe than in the ESE region. Since 2003, average 3G mobile penetration levels reached 37.6% in Western Europe, 18.1% within the TAG footprint and 15.1% in the ESE region by 2009.

Figure 13. Weighted average 3G mobile penetration trends ESE region, Western Europe and TAG footprint (% of population), 2002 – 2009

0%

5%

10%

15%

20%

25%

30%

35%

40%

2002 2003 2004 2005 2006 2007 2008 2009

Wei

ghte

d av

erag

e 3G

mob

ile p

enet

ratio

n


Source: Frontier Economics based on Globalcomms data.

Dedicated mobile data services

A more narrow definition of mobile broadband is to only dedicated mobile data cards (i.e. mobile broadband access via, for example, data modems, data cards and USB keys). The number of dedicated mobile data service connections is still low across Europe. However, the take-up levels in ESE countries are again

25 These types of networks allow customers to use a wider range of mobile data services, but not necessarily at broadband speeds (i.e. 256kbps or more). As such, 3G connections represent an upper bound to mobile broadband connections.



lower than that experienced in Western Europe. For example, Austria, as a TAG footprint country, has the highest dedicated mobile broadband penetration in Europe of 13.0%26 in 2009. Croatia, Slovenia and Bulgaria have already started to make some progress with dedicated mobile broadband with penetration rates of 3.25%27, 2.5% and 1.0%, respectively28.

The remainder of this report focuses on mobile broadband that is provided via dedicated technologies29, which therefore excludes, for example, broadband access using smart phones. We have adopted this definition, so that it provides a conservative basis to calculate the indirect benefits of mobile broadband - this is explained in more details below.

26 The EU study “eGovernment Benchmark Survey 2009: Smarter, Faster, Better, eGovernment

Broadband access in the EU: situation at 1 July 2009” was published with a penetration rate for Austria of 13.8%. However, the currently available version on the website refers to 13.0%.

27 See footnote 8 for a detailed explanation why we apply this number.

28 We do not have mobile broadband take-up levels using dedicated technologies for Macedonia and Serbia.

29 Our definition is in line with one of the definitions used in the EU Implementation study i.e. mobile broadband using dedicated data service cards/modems/keys only. Mobile broadband take-up using this definition is presented in Figure 14.



Figure 14. Mobile broadband penetration rate (% of population) - dedicated data services, July 2009

13.0%12.6%

10.8%

8.3%7.6%

4.9% 4.7% 4.7% 4.5% 4.4%

3.3% 3.2% 3.2% 3.2%2.5%

2.1% 1.9% 1.8% 1.6% 1.6% 1.5% 1.4% 1.4%1.0% 0.8%

0.5%

3.8%

Aus

tria

Sw

eden

Por

tuga

l

Irela

nd

Den

mar

k

Uni

ted

Kin

gdom Ita

ly

Pol

and

Slo

vaki

a

Lith

uani

a

Hun

gary

Cro

atia

Cze

ch R

epub

lic

Spa

in

Ger

man

y

Slo

veni

a

Rom

ania

Fran

ce

Mal

ta

Gre

ece

Bel

gium

Net

herla

nds

Est

onia

Luxe

mbo

urg

Bul

garia

Latv

ia

Cyp

rus

Average

Source: Frontier Economics with EU Communications Committee Working document: Broadband access in the EU: situation at 1 July 2009.The countries included in the chart encompass all EU 27 countries.

Looking forward, mobile broadband take-up is likely to be boosted by improvements in technology. Advances to new, superior technologies, like Long Term Evolution (LTE), are likely to have a profound impact on the market. LTE has the potential to offer download speeds of up to 100Mbps. High speed mobile broadband will also give users more flexibility about where they can connect to the internet from, when they are on the move. Similar services are also increasingly being provided by both fixed and mobile technologies. For example, it is now possible to watch television not only on your TV, but also on your computer and mobile phone.

Furthermore, the longer-term potential for mobile broadband services is likely to be even larger in ESE countries, including those within TAG’s current footprint. Our stakeholder interviews indicate that due to the limited capacity and network coverage of the fixed networks in many countries, mobile could provide an alternative choice of larger parts of the potential customer base, compared to Western Europe.

3.1.3 Potential drivers of current take-up levels

Looking at the potential drivers of current take-up levels allows us to consider the factors that may influence take-up levels in future. In particular, such an



analysis can shed some light on the most appropriate role for public authorities to play in facilitating the future take-up of broadband. We examine socio-demographic and economic drivers and the importance of network coverage.

Socio-demographic and economic drivers

Countries with higher average income (measured by GDP per capita) commonly exhibit a higher broadband service take-up than lower income countries. In countries with lower GDP per capita, consumers may be more sensitive to the cost of personal computers and broadband services, resulting in lower demand for broadband services. Therefore, more users may have to settle for dial-up connections or no internet connection at all. If consumers are willing to pay less for broadband services then this will impact upon the viability of private sector projects to expand and upgrade the country’s broadband infrastructure.

The relationship between broadband penetration and GDP per capita may also run in the other direction as higher broadband penetration has been shown to increase GDP per capita, as we discuss in Section 5.1.

Figure 15 confirms the positive link between total fixed broadband penetration and GDP per capita. The countries within which TAG operates exhibit mixed broadband performance once GDP per capita has been accounted for. Austria, Bulgaria, Croatia, Serbia and Slovenia appear to have below the expected levels of broadband penetration, given their level of GDP per capita.30

30 Some of the TAG subsidiaries provided us with data from sources other than Globalcomms. We

have used data exclusively from Globalcomms to facilitate cross-county comparisons. The data that we received from Mobiltel (Bulgaria) is the only data that is significantly different to that in the Globalcomms database. However, even if we used the Mobitel data, Bulgaria would still be below the predicted level of broadband subscribers, given Bulgaria’s current GDP per capita (PPP adjusted).



Figure 15. Fixed broadband penetration (% of population) vs. GDP per capita, 2008


Bulgaria

AustriaSlovenia

Croatia

Macedonia

Serbia


0%

5%

10%

15%

20%

25%

30%

35%

40%

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000

GDP per capita (US dollars PPP adjusted)

Fixe

d br

oadb

and

pene

trat

ion

(% o

f pop

ulat

ion)

Source: Frontier Economics based on Globalcomms and IMF data

Based on the estimated relationship between fixed broadband penetration rates and GDP per capita (PPP adjusted) we have estimated the “broadband gap” reflecting the increase in fixed broadband connections that would bring the TAG countries in line with the expected levels, given their current GDP per capita (PPP adjusted)31. The table below shows that even without any further growth in per capita terms, the TAG countries have considerable potential to increase the number of fixed broadband subscriptions.

31 We have applied the GDP per capita (PPP adjusted) values for five TAG countries to ascertain the

potential fixed broadband penetration rates (%) given 2008 levels of GDP per capita. Multiplying this value by the population in 2008 gives the potential number of fixed broadband subscriptions given 2008 levels of GDP per capita (PPP adjusted). The difference between this value and the actual 2008 fixed broadband subscriptions levels gives the potential increase in fixed broadband subscription levels given GDP per capita (PPP adjusted) in 2008.



Table 2. Potential increase in fixed broadband subscriptions given GDP per capita (PPP adjusted), 2008

Country Potential increase in

number of fixed broadband subscriptions

Potential % increase in the number of fixed broadband

subscriptions

Austria 604,000 33.9%

Bulgaria 110,000 16.9%

Croatia 106,000 20.2%

Serbia 200,000 44.2%

Slovenia 21,000 5.0%

Source: Frontier Economics based on IMF and Globalcomms data

PC and smart phone penetration

Figure 16 shows a positive relationship between the total fixed broadband penetration in a country and the number of PCs per 100 inhabitants. This suggests that a lack of PCs may provide an additional reason why broadband penetration is lower in ESE countries32. In this respect, PC penetration can be interpreted also as an indicator of the overall e-readiness and e-literacy of the population.

32 We used data from 2006, as this was the most recent year where we had comprehensive data on the

number of PCs per 100 inhabitants.



Figure 16. Total fixed broadband penetration vs. number of PCs per 100 inhabitants

Serbia

Bulgaria

Austria



Macedonia

Slovenia

0%

5%

10%

15%

20%

25%

30%

35%

0 10 20 30 40 50 60 70 80 90 100

Numbers of PCs per 100 inhabitants (2006)

Fixe

d br

oadb

and

pene

trat

ion

in 2

006

(% o

f pop

ulat

ion)

Source: Frontier Economics based on Globalcomms and ITU data, Data for Austria and Bulgaria are from 2005 and 2007 respectively

A growing number of mobile handsets, referred to as “smart phones”33, provide access to internet services. Due to a recent growth in smart phone sales, these devices have become a widespread alternative mean to access the internet in many countries. For future take up, it is expected that this market will grow steadily. Especially in Western Europe smart phones are already common and represented approximately 18% of all mobile handsets in 2009.34 Penetration rates are forecasted to increase by a further 8% per year between 2010 and 2013.35 For the TAG subsidiaries, smart phones constitute between 1.6% and 10.2% of all customers36. This shows that in the TAG countries smart phones have not yet reached the same take-up levels as they have in Europe more widely.

33 Including, for example, Blackberries, iPhones and Android phones.



36 According to data provided by TAG (Austria 10.2%, Slovenia 8.6%, Serbia 5.0%, Bulgaria 4.5%, Croatia 2.1% and Macedonia 1.6%).



Network coverage

Figure 17 presents the DSL coverage (as share of population) across selected European countries in December 2008. This is based on a study which defines coverage as percentage of population that can have access to DSL, even if this is not at their residence/business – hence the figures are not comparable to the earlier figures presented. However as we are interested in a relative comparison, these figures provide an indication of the relationship between availability of DSL between different regions, on a consistent basis. DSL coverage levels are generally significantly lower in ESE countries. It seems plausible that a lower level of DSL availability in ESE relative to Western Europe could also be a reason for the lower levels of broadband penetration in ESE.

Figure 17. DSL Coverage as % of population, 2008

80-90%~100% 90-100% <80%80-90%~100% 90-100% <80%

Source: Frontier Economics with Europe's Digital Competitiveness Report Volume 1: i2010 — Annual Information Society Report 2009 Benchmarking i2010: Trends and main achievements

3.1.4 Summary conclusions on take-up trends fixed and mobile broadband

Both fixed broadband and mobile broadband take-up levels across the ESE region have increased substantially in recent years, however they remain significantly lower than those across Western Europe. The prevailing differences



in average income across the two regions may explain some of these differences. However, whereas average incomes appear to have followed a convergence path, the gap in penetration rates, especially for mobile services, has continued to increase. This is illustrated in the graph below.

Figure 18. Recent trends in GDP p.c. and penetration gaps between TAG footprint and Western Europe, 2004 - 2008

9%

11%12%

2%

5%

11%12%

18%

15%

11%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 2007 2008

GD

P p.

c. g

ap (%

)

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Pene

trat

ion

gap

(ppt

)

Fixed broadband penetration gap 3G Penetration gap GDP p.c. gap

Source: Frontier analysis based on Globalcomms, IMF and TAG data37

Whereas the prevailing difference in average GDP per capita across the TAG region and Western European countries has fallen in recent years, the reverse can be observed for the differences in average fixed broadband and 3G mobile penetration rates across the two regions. In particular, the gap in 3G penetration rates has increased year-on-year, from two percentage points in 2004 reaching 18 percentage points in 2008. After an initial increase, the gap in fixed penetration rates has stabilised around eleven percentage points from 2006 onwards.

This suggests that there are likely to be a number of determinants of broadband take-up, other than income, and we return to this below in Section 6.

Next, we provide a summary of the development of mobile broadband. This is followed by more detailed reviews of some of the ESE markets, focusing on those where TAG currently has a presence.

37 The GDP per capita in Western Europe is higher than in Eastern Europe. Nevertheless, the gap in

GDP per capita has narrowed in recent years.


Individual country overviews

4 Individual country overviews We now explore the current state of the market in six countries in which TAG operates to provide an assessment of the relative position in each country. We first set out selected, high level economic statistics, followed by a discussion of the composition and growth of broadband technologies in each market. We then provide a brief overview of the operating environment in each country’s telecommunications sector.

The economic statistics will provide some context to the broadband markets and may help explain the take-up levels of broadband in the individual countries. Within the discussion on the regulatory, policy and operating environment in each country, we then identify key potential enablers and obstacles to future broadband provision in each jurisdiction. The presented information is predominantly based on our stakeholder interviews.

4.1 Austria Austria has a high GDP per capita relative to the other TAG countries. As we highlighted in Section 3.1.3 above, there tends to be a significant link between fixed broadband penetration and GDP per capita. Out of the TAG countries only Slovenia has a comparable fixed broadband penetration to Austria.

Broadband market position

Austria has had a steady number of cable broadband connections for a number of years. In contrast, xDSL subscribers have been increasing and now constitute 65% of total fixed broadband subscriptions. Few subscribers make use of other fixed broadband technologies (such as FTTx, WiMAX and FWA).

Austria

Total population 8,290,000

Number of households 3,541,000

Geographic area (km2) 84,000

Population density (per km2) 99

GDP per capita (€) 34,001

Source: IMF, World Bank and ITU, 2008



Figure 19. Austria – Fixed broadband take-up, 2004 – 200938

0

500

1,000

1,500

2,000

2,500

3,000

2004 2005 2006 2007 2008 2009

Fixe

d br

oadb

and

conn

ectio

ns (0

00s)

0%

10%

20%

30%

40%

50%

60%

Fixe

d br

oadb

and

pene

trat

ion

(% o

f hou

seho

lds)

DSL Cable Other Fixed broadband penetration

Source: Frontier Economics with IDATE and TAG data

As mentioned in Section 3.1.2, Austria has the highest mobile broadband penetration in the EU27 (13.0% of population). This shows that Austria has already made significant progress with regard to mobile broadband.

Operating Environment

The Austrian market is the by far the most developed market within the sample of TAG jurisdictions. This is partly due to its early and progressive approach to sector regulation. Four fixed and four mobile network operators are currently active in Austria.

Even in the wholesale market for broadband access – commonly a perceived bottleneck - the situation is rather competitive in Austria. In 2009 the Austrian regulatory authority, RTR, came to the conclusion that Telekom Austria as the incumbent has no dominant position in the market for wholesale broadband access for residential customers.39 According to RTR, the competitive constraints due to high mobile broadband take-up establish effective competition.40 Not

38 The percentage figure in this chart refers to percentage of households rather than percentage of

population.

39 http://www.rtr.at/de/pr/PI09122009TK

40 But Telekom Austria does still have significant market power in the market for wholesale broadband access for business customers and therefore faces regulation in this market. However, also this regulation is under consultation: http://www.rtr.at/de/tk/Edikt_M1_10Verh



many key obstacles were identified in Austria compared to the other countries. The main focus is on the currently outstanding decision on the digital dividend.

Key enablers

With an already well developed broadband infrastructure, we understand from stakeholder interviews that one key enabler for further broadband take-up would be the use of governmental initiatives to increase demand for broadband. This may, for example, include initiatives to support a higher PC penetration and provide ICT training for disadvantaged groups. In addition, further privately and publicly funded infrastructure initiatives are on their way. For example, there are the two public funding initiatives for broadband roll-out, the EU sponsored ELER41 initiative to support investments in rural areas and the Austrian Electronic Network (AT:net)42 initiative as an Austrian wide support for broadband deployment.

It should also be positively noted that Austria has not implemented any telecom specific taxes that could have a detrimental effect on private broadband investments.

4.2 Bulgaria Bulgaria is one of the lowest income countries in which TAG has a presence with a GDP per capita of €4,461.

41 http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/142&format=HTML&aged=0&

language=EN&guiLanguage=en

42 http://www.bmvit.gv.at/telekommunikation/politik/downloads/sonderrichtlinieatnet.pdf



Bulgaria








Bulgaria has experienced a strong growth in fixed broadband connections, although the rate of increase has partly diminished in recent years (see Figure 20 below). A large proportion of that connection growth can be attributed to the increase in the number of cable subscribers, with xDSL connections representing a smaller share of total fixed broadband connections (36.8%) than in many other ESE countries. The other common fixed broadband technologies (such as FTTx., WiMAX and FWA) are less prominent in Bulgaria.



Figure 20. Bulgaria - Fixed broadband take-up, 2004 - 200943

0

200

400

600

800

1,000

1,200

1,400

2004 2005 2006 2007 2008 2009

Fixe

d br

oadb

and

conn

ectio

ns (0

00s)

0%

5%

10%

15%

20%

25%

30%

35%

40%

Fixe

d br

oadb

and

pene

trat

ion

(% o

f hou

seho

lds)

DSL Cable Other Fixed broadband penetration (%)

Source: Frontier Economics based on Globalcomms and TAG data


We understand that the Bulgarian government has recently published ambitious plans for further broadband development in its national broadband plans.44 The latest policy aims, include, amongst others to provide:

broadband services of speeds of at least 20Mbps to 100% of the population in big cities

90% of the population with speed above 10Mbps in medium sized towns, and

50% of the population with access to the fixed network and 90% to the wireless network by 2013 in remote areas.

However, we understand that to date only limited public funds have been made available in order to achieve these ambitious goals. For example, only €20 million of EU funds will be invested in broadband networks in 2010 and 2011 and the Bulgarian government has yet to publish its plans to support the broadband deployment financially.


population.

44 http://www.mtitc.government.bg/upload/docs/NationalBroadbandStrategy_2009.pdf



A main change in the operating environment is the planed re-farming of the 900 MHz spectrum frequency bands. In January 2010, the regulatory authority adopted a draft amendment to the technical requirements for operation of mobile networks. This provides the necessary conditions for deployment of 3G service in the 900 MHz band. The final decision was outstanding by the time of writing.

During the stakeholder holder interview it was revealed that the key obstacle for further deployment of mobile broadband services is the time and costs to erect mobile sites.

4.3 Croatia Relative smaller in size, Croatia exhibits an average population density and GDP per capita relative to the other countries where TAG has a presence.

Croatia








Croatia has experienced significant growth in its number of fixed broadband connections since 2004. The vast majority of broadband connections are xDSL connections.



Figure 21. Croatia - Fixed broadband take-up, 2004 - 200945

0

200

400

600

800

1,000

1,200

2005 2006 2007 2008 2009

Fixe

d br

oadb

and

conn

ectio

ns (0

00s)

0%5%10%15%20%25%30%35%40%45%50%

Fixe

d br

oadb

and

pene

trat

ion

(% o

f hou

seho

lds)


Source: Frontier Economics based on Globalcomms and NRA data


The Croatian telecommunications market is comparatively competitive with nine active fixed network operators and three mobile network operators currently active in the market. We further understand that bitstream and local loop unbundled services have been mandated.

Stakeholders consider that one of the obstacles for further broadband service take-up in Croatia is the halted fibre roll out, which has arisen due to an ongoing dispute between the fixed incumbent and the regulatory authority over the access regulation of this network. Other concerns raised were the mobile specific tax of 6% on mobile voice, SMS/MMS and roaming revenues as well as the announced introduction of prepaid customer registration that could weaken the strong prepaid market by additional administrative burdens. The prevailing administrative burdens to erect mobile sites are a further issue in Croatia.

Enablers for broadband provision

Despite the prevailing obstacles discussed above, there have also been some positive developments in recent years. For example, the Croatian government recently refarmed the 900 MHz frequency band, enabling 3G service provision


population.



on these frequency bands. Furthermore, the government announced plans for the use of the digital dividend for mobile services, with a spectrum auction scheduled for 2011.

We further understand that due to a regulatory intervention, local loop unbundled service charges have been reduced considerably, making these services more attractive.

4.4 Macedonia Macedonia is currently the country where TAG has a presence with the lowest GDP per capita of €2,980. It further has a relatively small population.

Macedonia


Number of households 571,000




Source: World Bank, ITU and Macedonian state statistical office, 2008


The number of fixed broadband connections in Macedonia increased steeply between 2006 and 2008, with a smaller rise between 2008 and 2009 (see graph below). Macedonia has a more balanced composition of technologies relative to other ESE countries.



Figure 22. Macedonia - Fixed broadband take-up, 2004 - 200946

0

50

100

150

200

250

300

350

400

2004 2005 2006 2007 2008 2009

Fixe

d br

oadb

and

conn

ectio

ns (0

00s)

0%5%10%15%20%25%30%35%40%45%

Fixe

d br

oadb

and

pene

trat

ion

(% o

f hou

seho

lds)


Source: Frontier Economics based on Globalcomms and NRA data


On the Macedonian market two fixed network operators and three mobile network operators compete for customers.47

During the stakeholder interviews it was mentioned that an obstacle for broadband roll-out in some areas is a lack of public funds to support the future deployment.


We understand that the Macedonian Parliament is currently considering a draft National Strategy for the development of the next generation broadband.

Furthermore, the EU directive on the refarming of the 900 MHz spectrum is already implemented in Macedonia which could facilitate further mobile broadband provision. In addition we have been informed that there are currently no broadband specific taxation which may hinder broadband deployment.


population.

47 It is worth noting that only two of the three mobile operators offer mobile broadband yet and licence auctions for an additional 3G mobile network operator have not been successful.



4.5 Serbia Similar in size to Austria, Serbia has a significantly lower GDP per capita, which is more in line with that experienced in Bulgaria.

Serbia






Source: Official data from Serbian government and Ministry of Finance, 2002 (GDP from 2008)


As shown in Figure 23 below, most of Serbia’s growth in fixed broadband connections has come from a rise in the number of DSL subscribers. There was a particularly large increase between 2006 and 2007.



Figure 23. Serbia - Fixed broadband take-up, 2004 - 200948

0

100

200

300

400

500

600

700

800

2004 2005 2006 2007 2008

Fixe

d br

oadb

and

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ns (0

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8%

12%

16%

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24%

Fixe

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(% o

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lds)


Source: Frontier Economics with Globalcomms and RATEL data


The Serbian telecommunication market is currently still undergoing a liberalisation process. Whereas there are now three network operators active in the mobile market, Telecom Serbia has retained its monopoly in the fixed market until recently. We understand that Telenor, one of the three mobile operators, has been awarded a fixed network licence in January 2010, with its services to be launched soon. It is expected that this will have considerable affect on the broadband development considerably.

Mobile broadband has developed into an essential part of the Serbian broadband market. In 2008, there were 738,000 3G connections, compared to 490,000 fixed broadband connections.

The main obstacles raised in stakeholder interview were administrative burdens to erect additional mobile sites and a 10% tax on mobile revenues.


We also understand that the Serbian government is planning on undertaking the switchover from analogue to digital broadcasting in mid 2012. The government is yet to announce how it intends to use the released spectrum. Allocating, the


population.



spectrum, for example, to the provision of mobile broadband services could facilitate the broadband service provision in Serbia.

4.6 Slovenia With the exception of Austria, Slovenia is the most developed of the TAG countries with respect to GDP per capita. It is also the mostly densely populated TAG country.

Slovenia


Number of households 697,000




Source: IMF, World Bank, ITU and SURS, 2008


Slovenia is the only country in ESE that already had a significant number of fixed broadband subscribers in 2004 (see graph below). Since then, it has realised steady growth particularly in the number of DSL subscribers.. More recently, the number of subscribers using other technologies has shown a marked increase.


The liberalisation of the Slovenian telecommunication sector is still ongoing. In the fixed market three network operators compete with the fixed line incumbent, Telekom Slovenije. The former monopolist had a market share of about 81% total all fixed lines in 2009. The mobile market is more competitive with four operators currently players. However, even in this market the mobile arm of Telekom Slovenije (Mobitel) has a market share of 62%. According to our stakeholder interviews, another potential impediment to the development of the broadband market is possible anti-competitive behaviour in Slovenia – we understand from stakeholder interviews that this is currently under investigation.




We understand that there are currently EU funded broadband infrastructure investment programmes in Slovenia with approximately €47 million being invested in broadband coverage in rural areas, and a further €92 million expected until 2013. We further understand that mobile operators currently face little administrative obstacles when expanding their network coverage.

Figure 24. Slovenia - Fixed broadband take-up, 2004 - 200949

0

100

200

300

400

500

600

2004 2005 2006 2007 2008 2009

Fixe

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oadb

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ectio

ns (0

00s)

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40%

50%

60%

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80%

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Source: Frontier Economics with Globalcomms and SURS data


population.


Potential benefits from increased broadband service provision

5 Potential benefits from increased broadband service provision This section provides an overview of different approaches to estimating the benefits of broadband take-up. First, we present empirical studies on the macro-economic impact of increasing broadband provision. Most of theses studies focus on the impact of broadband on economic growth and employment. This is followed by an overview of our approach to estimating the potential benefits associated with further broadband provision in six of the countries where TAG is currently active (i.e., Austria, Bulgaria, Croatia, Macedonia, Serbia and Slovenia).

5.1 Empirical evidence Over recent years there has been a growing academic literature on the economic and employment impact of telecommunication investment in general, and more recently on broadband investment in particular. The vast majority of these papers show an unambiguous positive effect of investment on both economic growth and employment. Within this section we focus on the two latest empirical studies on the impact of broadband investments on economic growth, a paper published by Qiang and one by Koutroumpis50. Both studies cover countries within the ESE region.51 We then provide a brief overview of further main papers in this area (in Table 5). A more extensive literature survey can be found in Annexe 2.

Recent empirical papers

In her unpublished paper, Qiang (2009) investigates how telecommunications infrastructure affects growth in 120 countries over the period 1980 to 2006. She estimates the impact of an increase in fixed line, mobile internet and broadband penetration on the income per capita and finds the highest effect on growth for an increase in broadband penetration.

Figure 25 presents the effect of a 10 percentage points increase in penetration of fixed, mobile, internet and broadband penetration on annual GDP per capita growth. The graph reveals, amongst others, the following:

50 Koutroumpis, Pantelis (2009). The economic impact of broadband on growth: A simultaneous

approach. Telecommunications policy 33(9) 471-485 and Qiang, Christine Zhen-Wei (2009) Telecommunications and Economic Growth. Unpublished working paper. World Bank.

51 Also McKinsey published a study (Mobile broadband for the masses) on the impact on a further mobile broadband deployment and include Central and Eastern Europe in their data set. They found under the assumption that this region will reach a mobile broadband household penetration rate of 54%, and each 10% increase in penetration will increase GDP by 0.5%, this will increase the GDP in this region by 0.8-1.3 %.



• In the case of broadband services, a 10% increase in broadband penetration in high income countries increases the GDP per capita growth by 1.21 percentage points;

• in middle or low income countries the increase in GDP per capita is even higher, standing at 1.38 percentage points.52

The author attributes the higher impact in less developed countries to the lower penetration rates and the higher benefits associated with early adopters.

Figure 25. Growth effects of a 10% increase in penetration rates (% of population)

0.430.6

0.77

1.21

0.730.81

1.12

1.38

Fixed Mobile Internet Broadband

Per

cent

age

poin

t inc

reas

eG

DP

gro

wth

High income economies Low and middle income economies

Source: Qiang (2009)

In his paper, Koutroumpis (2009) applies a more comprehensive econometric approach. The author investigates the effect of broadband penetration on economic growth across 22 OECD countries over the period 2002 to 2007. Koutroumpis finds that a 1% increase in broadband penetration rates leads to an average increase in GDP of 0.025%. To illustrate the magnitude of this effect, Koutroumpis further estimates the total share of GDP growth accounted for by

52 All results are statistically significant at the 1% level except for the impact of broadband in

developing countries, which is at the 10 % level. However, at least part of this enormous growth can be explained by the so called two-way causality problem. Demand for telecommunications services rises with wealth and with an increase in wealth the demand for telecommunication also increases. The growth model approach used for the estimation does not deal with this problem explicitly.



broadband alone. With an average yearly GDP growth of 3.12% across all OECD countries during that period, the author concludes that almost 10% of this growth in GDP can be attributed to broadband growth. An overview of Koutroumpis country-specific findings is presented in Table 3. A further important finding of the study is that Koutroumpis can show important network effects for broadband investments. The theoretical argument behind this empirical finding is that high broadband benefits can only be generated once a lot of other people subscribe to broadband services (e.g., for video conferencing each existing broadband subscribers benefit from any additional subscribers since this increases the potential pool of people they can use video conferencing with). Koutroumpis’ study shows that, countries that already had a high penetration level in 2007 benefitted more from an increase in penetration than those with a lower penetration rate. The study differentiates between three country groups’ (First with a penetration of less than 20%, with a penetration between 20-30% and one with a penetration of more than 30%) and found much stronger effects for countries with a penetration rate that exceeded 30% of the population––which is equivalent to more than 50% of households having access to broadband.

The most recent papers that investigate the effects of broadband investment programmes on employment are summarised in Table 453. The effects differ widely with the amount invested. If one examines the European studies, the range of estimates provided is that a job is created for every €26,000-50,000 of expenditure on broadband.

53 A longer and more detailed presentation can be found in the Annexe.



Table 3. Percentage of impact of broadband infrastructure on growth for each country, Koutroumpis (2009)

Average annual GDP growth (%)

Average % impact of broadband

infrastructure on GDP per annum

Share of country’s growth attributed to

broadband infrastructure (%)

BB penetration >30% of population

Denmark 2.11 0.38 18.15

Netherlands 2.03 0.39 19.03

Switzerland 2.06 0.39 18.95

Norway 2.79 0.41 14.59

Sweden 3.1 0.37 11.80

BB penetration between 20% and 30% of population

Germany 1.44 0.24 16.86

France 1.89 0.26 13.49

Japan 2.07 0.20 9.77

Belgium 2.19 0.21 9.55

United Kingdom 2.72 0.26 9.53

Australia 3.44 0.27 7.75

United States 2.95 0.20 6.92

Canada 2.71 0.19 6.87

Luxemburg 3.92 0.27 6.81

BB penetration <20% of population

Portugal 0.85 0.14 16.04

Italy 0.94 0.15 15.89

New Zealand 2.88 0.15 5.33

Austria 2.42 0.12 4.94

Hungary 3.65 0.15 4.09

Spain 3.49 0.14 3.91

Greece 4.33 0.16 3.68

Ireland 5.02 0.16 3.13

Source: Table 7. Koutroumpis (2009)



Table 4. Overview of job creation

Katz (2008)

Atkinson (2009)

Katz and Sutner (2009)

Liebenau (2009)

Katz (2010)

Country CH US US UK DE

Cost of programme €9.1bn* €7.4bn* €4.7bn* €5.6bn* €20.2bn €15.7bn

Employment effects 114,00054 448,500 127,500 –

397,000 215,500 407,000 561,000

Cost per job €16,500 €11,900-

€37,000 €26,000 €49,500 €28,000

Source: Frontier Economics *Exchange rates of €1.12 per £, €0.74 per US$ and €0.70 per CHF

Overview of further empirical studies

Other empirical studies that provide some further insight on the effects of telecommunication infrastructure on employment and growth are briefly summarised in Table 5. A more detailed overview of these papers is presented in an Annexe.

54 The findings of the Swiss study are derived looking only at a subset of possible employment effects.

See Annexe for details.



Table 5. Overview of further empirical studies

Author(s) Time & scope Approach Key findings

Impact of telecommunications infrastructure on growth in general

Röller & Waverman (2001)

1970-1990; 21 OECD countries

Jointly estimate a micro-model for telecommunication investment with a macro- production function

Find evidence of a significant positive causal link between investment and growth, especially when a critical mass of telecommunications infrastructure is present.

Datta & Agarwal (2004)

1980-1992 22 OECD countries

A dynamic fixed effects method is used for estimation, using panel data, which corrects for omitted variable bias

of single cross-section regression. The fixed-effects model accounts for country specific differences in aggregate

production functions.

Results show that telecommunications is both statistically significant and positively correlated with growth in real GDP per capita growth. The results also indicate that the telecom investment is subject to diminishing returns. Thus countries at an earlier stage of development are likely to gain the most

from investing in telecom infrastructure.

Sridhar & Sridhar (2004)

1990-2001 63 developing

countries

Use 3-Stage Least square approach to estimate a system of equations that endogenises economic growth and

telecom penetration, along with supply of telecom investment and growth in telecom penetration

The impact of telecom penetration on total output is, significantly lower for developing countries than that reported for OECD countries, dispelling the convergence hypothesis

Impact of broadband infrastructure on growth in general

Models focusing on growth effects

Duggal et at. (2007)

1975–2001 United States

Estimate an aggregate production function for non-residential output in the US economy in order to quantify

statistically the component contribution of IT capital to GDP growth

Information technology was the largest contributing component to growth during the expansion of the 1990s in the US.

Greenstein & McDevitt (2009)

1999-2006 United States

Simulation model They find that between $8.3bn (€6.2bn) and $10.6bn (€7.8bn) additional revenue was created through broadband.



Models focussing on employment effects

Katz et al. (2008) Future Investment 2009-2035 Switzerland

Input-output analysis applying multipliers of job creation through investment in fibre networks

About 114,000 jobs would be created through the investment programme

Atkinson et al. (2009)

Future Investment United States

Measure the impact of additional investment in broadband by a stimulus proposal. Determine number of direct jobs created in each industry using industry-specific data on

employee compensation. Calculate the number of indirect and induced jobs created using industry-level employment multipliers. Applied a network effect multiplier to estimate additional job growth based on the expected immediate

network effect

About 60 jobs per €1m investment

Crandall et al (2007)

2003-2005 48 US states

OLS regression For every one percentage point increase in broadband penetration in a state, employment is projected to increase by 0.2 to 0.3 percent per year and about 300,000 new jobs.

Katz & Sutner (2009)

Future Investment for 4 y programme

United States

Input output analysis of the American Recovery and Reinvestment Act broadband investments

About 27-84 jobs per €1m investment

Liebeau et at. (2009)

Future investment UK

Determine the specific impact of investments in three ICT infrastructures (inter alia broadband) on direct, indirect,

and induced employment by taking estimates of the economic employment and output multipliers.

About 38 jobs per €1m investment

Katz et al. (2010) Future investment until 2020 Germany

Input-Output analysis to evaluate the impact of the German national broadband strategy

About €36bn costs results in value added through network construction of €22.3bn and network externalities of €137.5bn. About 20 jobs per €1m investment would be created in the first part of the programme (costs €20.2bn) about 36 jobs per €1m investment (costs of €15.7bn) in the second part

of the programme. Overall, the investment would generate 1m new jobs




5.1.2 Summary findings of empirical literature

The empirical studies generally show a positive impact of broadband infrastructure on economic growth and employment. As discussed above, Qiang (2009) finds that a 10 percentage point increase in broadband penetration could increase GDP growth per capita by about 1.21 percentage points. Applying these findings to the fixed broadband penetration projections for the five TAG footprint, countries in the ESE region implies GDP per capita will increase by 0.76% over the next ten years.

According to Koutroumpis (2009), a 1% increase in broadband penetration rates leads to an average increase in GDP of 0.025%. Again, applying these findings to the fixed broadband penetration forecasts for the five TAG countries in the ESE region, implies that GDP will increase by 0.16% over the next ten years, as a result of further fixed broadband take-up.

5.2 Methodology for calculating broadband benefits The literature review in the previous section has outlined the benefits that may arise from broadband provision. Applying these potential macro impacts to the ESE region and Austria alludes to significant potential benefits from current and future broadband take up and rollout within the region (as illustrated above).

Below, we aim to estimate a range of benefits from future broadband provision in five ESE countries where TAG is currently present (i.e., Bulgaria, Croatia, Macedonia, Serbia and Slovenia) and Austria, namely:

the direct benefits to end users; and

the indirect benefits to both end users and the wider economy.

Our estimates encompass the period 2010 to 2019 and are based on estimates for mobile and fixed broadband penetration provided by Telekom Austria. With these projected penetration forecast we calculate the direct and indirect benefits and discount them by 5% to be able to compare benefits that arise at different points in time.55

55 We applied a discount rate of 5% to all benefits in the future. This discount rate of 5% reflects the

time preference (i.e., receiving an amount of money today rather than in the future) as well as future risk and uncertainty. To evaluate public investment programs mostly a social time preference rate is applied that only reflects the valuation of time (e.g., in the UK a social time preference rate of 3.5% is applied). In case of private investment of a company, normally a company specific discount rate, that reflects time as well as company specific risk, is used. This would result in a higher private discount rate. We have chosen 5% as an intermediate approach that reflect the public and private character of broadband investment.



5.2.1 Direct benefits to end users

Economic theory assumes that the benefit a consumer derives from using a particular service or product is reflected in the customer’s willingness to pay for that service. However, the estimation of a customer’s willingness to pay is a complex and data-intensive task. This is particularly the case in the context of broadband services.56 Thus, we approximate the benefits to broadband subscribers on the basis of the average revenue each subscriber generates. The average revenue generated per subscriber provides an indication of the value of broadband to the end user. It is, in fact, a minimum estimate of the benefits accruing to subscribers from broadband since, for the majority of subscribers, the benefits they receive will exceed the amount they pay in access charges.

The direct benefits to end users are then calculated by multiplying the forecasts of broadband take up for each country by the forecast of average revenue per user.

5.2.2 Indirect benefits

In addition to the direct benefits to end users, there are several indirect benefits arising from broadband provision. These commonly include, amongst others:

positive externalities;

cost savings to end users and/or service providers; and

productivity gains.

Within this study, we focus on the first two indirect benefit types.

Positive externalities

When consumers subscribe to a broadband network this does not only benefit them, but may also have a positive impact on other parties using the network. Take the example of using a broadband connection for video conferencing. The existing broadband subscribers benefit from any additional subscribers since this increases the potential pool of people they can use video conferencing with (this benefit for third parties is referred to as a positive externality).

56 A broadband connection per se has no value to customers. Rather, the value to customers of

broadband access arises from the applications for which it is used. The net economic benefit is the difference between the total benefit that subscribers receive from these applications and the amount they pay for them. In practice, it is difficult to evaluate this economic benefit directly since there is very limited information on the price and quantity of individual applications that are provided over broadband. This makes estimating the benefits for these services difficult, especially as subscribers do not pay additional charges for a number of applications.



In the case of broadband services, a part of these externalities can accrue to public and private service and content providers. Any new broadband subscriber is also a potential new customer for these service and content providers. The consumer’s broadband connection enables the provider, for example, to generate revenues through advertisement, to generate savings from providing its services online or it could offer additional services to the consumer.

Quantifying externalities is a complex undertaking which requires detailed insights into a wide scope of benefits arising to third parties. This study does not endeavour to estimate the full range of externalities. Instead, we illustrate the potential significance of some of these externalities in the form of eGovernment service provision. We estimate the associated savings to consumers over the entire ten year period up to 2019. This is undertaken in a two step approach.

1. Average cost saving per online transaction. We apply an average number of minutes that can be saved if different government services are conducted online instead of the traditional way. We value this time savings by the average wage in each country.57 Thereby we obtain a country specific cost saving per transaction conducted online.

2. Total savings estimates. We then forecast the share of people who will use online government services in each country over the period up to 2019. Thus, we receive estimates of the potential savings to customers from the use of eGovernment services (relative to the alternative way of using these services.)

However it should be noted that this approach only focuses on one type of savings from the introduction of eGovernment services what is the value of the saved time through eGovernment. Other ways through which costs may be reduced, including, for example, a reduction in travelling or postage requirements, are not taken into account. Thereby, our approach is likely to result in conservative estimates of the potential cost savings.

Reduced external cost of transport

Broadband can further benefit those that do not necessarily have a broadband connection themselves. This positive externality arises mostly through the internalising of a previously negative external effect (i.e., costs). A commonly cited example is travelling to work. Commuting results in congestion, accidents, noise and air pollution and thus has a negative external effect on society. Broadband connections allow people to work more easily and effectively from home (commonly referred to as “teleworking”). This, in turn, reduces commuting and thereby the external effects of travel. The external cost of

57 We applied the findings for the time saved from the study: EU DG Information Society, Top of the

web, User Satisfaction and Usage, Survey of eGovernment services. Also the approach to value the time saved by average labour costs was taken in this study.



travelling is generally higher during peak hours (ACEA (2009))58, so if broadband allows workers to alter when they travel, there will also be an additional external benefit. In addition, broadband also allows meetings to take place by using video conference facilities, thus reducing the need to travel during business hours.

Using data on the total number of passenger kilometres travelled per year in each country, we estimate the number of passenger miles spent commuting based on three different scenarios. In the conservative scenario, we assume 10% of passenger miles are spent commuting. In the intermediate and optimistic scenarios, we assume that 20% and 30% respectively, of passenger miles are spent commuting. We then estimate the potential reduction in kilometres travelled due to the predicted take-up of teleworking. We forecast teleworking take-up by looking at current levels of teleworking and by using our predictions of how the number of broadband subscriptions will change over the next years.

5.2.3 Demand forecast

Demand forecasts represent a key input to our benefit calculations. TAG provided fixed and mobile broadband connection projections over the period 2010 to 2019 for most of the countries59 under consideration it currently operates in. The number of subscribers is projected to increase from 5.3m fixed and 2.8m mobile connections in 2010 to 7.2m fixed and 6.6m mobile connections in 2019. This corresponds to a compound growth rate of 10.1% for mobile and 3.4% for fixed broadband.

Table 6. Summary of demand forecast across the TAG countries, 2010 - 2019, in millions of Euros

2010 2019 CAGR

Fixed broadband 5.3 7.2 3.4%

Mobile broadband 2.8 6.6 10.1%

Total 8.1 13.8 6.1%

Source: Frontier Economics based on TAG data

These demand forecasts are then used to estimate the economic benefits of broadband over the next ten years. Demand forecasts will allow us to extrapolate

58 ACEA (2009) - External Costs in the transport sector

59 For some countries (i.e., Serbia and Slovenia) we did not receive disaggregated broadband connection projections for both fixed and mobile, we had to derive our own, conservative forecasts.



the current direct benefits and also predict the take-up of eGovernment services and teleworking which enables us to calculate the indirect benefits.

5.3 Estimated economic benefits We estimate both direct and indirect benefits.60 There are a large range of potential indirect benefits. As indicated, we estimated a subset of these benefits, focussing on the benefits arsing from teleworking and eGovernment. The total direct and indirect benefits over a ten year period (2010 to 2019) from increased broadband penetration are potentially very significant, as shown in the table below. In total, for all five TAG footprint countries in the ESE region, benefits from both fixed and mobile broadband could range from €9.2 billion to €12.8 billion over the ten year period. The following sections contain a breakdown of the direct and indirect benefits contained in the table below.

We consider three different scenarios for the evolution of benefits. In the conservative scenario we assume that ARPU declines by 4% per year, that only 10% of total kilometres travelled are spent commuting and that eGovernment take-up only increases by 1 percentage points per year. In the intermediate scenario we assume that ARPU declines by 2% per year, that 20% of total kilometres travelled are spent commuting and that eGovernment take-up increases by 3 percentage points per year. In the conservative scenario we assume that ARPU stays constant, that 30% of total kilometres travelled are spent commuting and that eGovernment take-up increases by 5 percentage points per year.

60 We have estimated the monetary value in real terms, i.e. we have not allowed for the impact of

inflation. The estimated economic benefits do not include the wider economic benefits from broadband provision, such as higher economic growth. Our estimated economic benefits should therefore be seen as cautious.



Table 7. Total direct and indirect benefits from increased fixed and mobile broadband penetration, in billions of Euros61

Conservative Intermediate Optimistic


Croatia 2.2 2.7 3.2


Serbia 1.3 1.6 1.9



Austria 9.6 11.6 13.7


5.3.1 Estimated direct benefits

As discussed in Section 5.2.1 we have estimated the direct benefits of broadband provision by using forecasts of the number of broadband connections, and actual ARPU data provided by TAG. We consider three different scenarios for the evolution of ARPU. In the conservative scenario, we assume ARPU declines by 4% per year. In the intermediate scenario we assume that ARPU declines by 2% per year, whereas in the optimistic scenario we assume that ARPU stays constant.

Multiplying the total broadband connections by ARPU gives us an estimate of the direct benefits for a particular year. We apply a discount rate of 5% to all future benefits. We then sum up the discounted benefits for all years for a particular country to give us the present value of the direct benefits between 2010 and 2019.

The estimated direct benefits of broadband are substantial, as shown by the table below even in our conservative scenario. This is partly driven by forecasted

61 As explained above, we applied a discount rate of 5%. Alternatively, applying a social discount rate

of 3.5% rate would result in benefits in the five TAG countries in the ESE region of €9.8 billion in the conservative scenario, €11.7 billion in the intermediate scenario and €13.7 billion in the optimistic scenario. With a private discount rate of 10%, benefits for the five TAG countries in the ESE region would amount to €7.6 billion in the conservative scenario, €9.0 billion in the intermediate scenario and €10.5 billion in the optimistic scenario.



growth in broadband connections. For example, the estimated direct benefits amount to €3.2 billion to € 4.0 billion in Bulgaria over the ten year period (in present value terms).

Table 8. Total direct benefits of fixed and mobile broadband for 2010-2019 in billions of Euros



Croatia 2.0 2.3 2.5


Serbia 1.2 1.3 1.4



Austria 8.1 8.9 9.8


5.3.2 Estimated indirect benefits

Positive externalities

We have estimated the cost savings arising from the online provision of government services for three different scenarios of eGovernment take up (see Section 5.2.2 above for outline of our approach). Starting from low figures in 2009, we either assume that the eGovernment take-up increase by 1, 3 or 5 percentage points yearly. This results in the cost savings, as set out in the table below.

Overall, a present value of €97 million to €331 million in total savings could be achieved over the ten year period across the five TAG footprint countries in the ESE region. The absolute values of potential savings are mainly driven by the wage costs in the different countries as well as the number of transactions conducted and the eGovernment take-up. Therefore, Austria for example with the highest wage costs could realize higher cost savings than Macedonia with lower wage costs and a smaller population.



Table 9. Estimated cost savings by the use of eGovernment from 2010-2019, in million Euro

Conservative scenario

Intermediate scenario

Optimistic scenario

Bulgaria 18 37 56

Croatia 18 53 89

Macedonia 1 3 5

Serbia 11 33 56

Slovenia 49 87 125

Total TAG footprint in ESE region 97 213 331

Austria 600 957 1,315


In the conservative scenario, we assume that each year the take-up of eGovernment increases by 1 percentage point, in the intermediate scenario by 3 percentage points and in the optimistic scenario by 5 percentage points. All saving have been discounted with a discount rate of 5%.

Reduced cost of transport

We derived these indirect benefits in line with the approach outlined in Section 5.2.2 . The resulting benefits are potentially large- our total estimates for the TAG footprint countries in the ESE region, range from €0.6 billion to €1.9 billion. The table below shows that even when a low percentage of total passenger miles are spent commuting, the indirect benefits of teleworking may be € 200 million over a 10 year period in Croatia. This is driven by the high broadband penetration rates in Croatia, which has resulted in a significant predicted take-up of teleworking.



Table 10. Total indirect benefits of teleworking between 2010 to 2019, in millions of Euros


Bulgaria 100 210 310

Croatia 200 400 590

Macedonia 20 40 70

Serbia 120 250 370

Slovenia 180 370 550

Total TAG footprint in ESE region 620 1,270 1,890

Austria 880 1,750 2,630

Source: Frontier Economics based on EU data


Achieving broadband growth – Key obstacles and enablers

6 Achieving broadband growth – Key obstacles and enablers

6.1 The role of public authorities in achieving broadband growth Investments in broadband infrastructure are normally made by the private sector meaning that the risks of the investments are borne by private firms. For public authorities to intervene in the market there must be reasons why the private sector would otherwise under-invest in broadband.

Providing broadband access to part of the population may not be profitable for private firms. This is especially the case in areas were the population density is low. In such areas, the cost per broadband connection will tend to be high because of a lack of ‘economies of density’. Population density will typically be lower in rural areas, making a lack of broadband investment in such areas particularly likely. Nevertheless, even if an investment is not privately profitable it can be socially desirable if the economic benefits (i.e., direct and indirect benefits) outweigh the cost of the investment. In such circumstances, there is a case for public sector intervention in the form of:

policies to support private investment; and/or

a public investment programme.

In addition to these supply side measures, public authorities may further facilitate broadband take-up by, e.g. public funded schemes to increase PC penetration or IT skills (demand side measures).

Policies to support private investment

A government can support private investors by establishing an investment friendly framework. One way to establish such a framework is through supply side measures for broadband investments. This could encompass, for example, allowing co-operative investment in infrastructure by more than one entity and to keep the administrative and financial burdens for a network roll-out to a minimum.

Another way of creating an investment friendly environment are demand side programmes that stimulate the use of the internet. The structuring of these programmes will differ strongly with the needs of the different regions, for example programmes to increase PC penetration in disadvantaged regions, educational support in regions with low digital literacy rates to strengthen IT skills, or measures that support lower income households in getting access to broadband services.



These demand side measures aim to ensure that, in areas where broadband services are available, consumers make use of them.

Public investment programmes

If an investment friendly environment is not sufficient to make private sector investments viable, a public support measure may be justified on the basis of the indirect benefits of broadband investments.

Nevertheless, in the EU, public investment programmes are only permitted if they are compatible with the common market and do not distort competition. The European Commission (EC) has recognised the potential benefits of broadband deployment in rural62 and underserved white areas63 since these investments promote economic cohesion and address market failures, which are both objectives of the Lisbon strategy.

As such assessing whether a state aid measure is compatible with the common market, the EC weighs up the positive impact of the aid measure against its potential negative side effects, such as distortions to competition. In 2009, the EC published guidelines to make its decision making process transparent64. The chief guideline is that if a “balancing test” is passed then an aid measure is presumed to be compatible with the common market.

According to the guidelines, the following criteria will be applied during the balancing test:

5. Is the aid measure aimed at a well-defined objective of common interest, i.e. does the proposed aid address a market failure or other objective?

6. Is the aid well designed to deliver the objective of common interest? In particular:

Is State aid an appropriate policy instrument or are there other better-placed instruments?

Is there an incentive effect, i.e. does the aid change the behaviour of undertakings?

Is the aid measure proportional, i.e. could the same change in behaviour

62 “Broadband is of strategic importance because of its ability to accelerate the contribution of these technologies to growth and innovation in all sectors

of the economy and to social and territorial cohesion. The Commission actively supports the widespread availability of broadband services for all

European citizens as laid down in the Lisbon strategy and subsequent Communications.” http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2009:235:0007:0025:EN:PDF

63 The EC defines “white areas” as areas were no broadband infrastructure exists or is unlikely to be developed in the near term, “grey areas” where only one broadband network operator is present and “black areas” where at least two or more broadband network providers are present. See for example: Commission Decision N 201/06 — Greece, Broadband access development in underserved areas.

64 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2009:235:0007:0025:EN:PDF



be obtained with less aid?

7. Are the distortions of competition and the effect on trade limited, so that the overall balance is positive?

Therefore each public broadband investment initiative in EU countries needs to comply with the EC guidelines.

6.2 Key obstacles in ESE countries During our stakeholder interviews three common obstacles for further broadband provision across most of the countries emerged.65 .

Administrative barriers for rapid infrastructure deployment

During the stakeholder interviews a commonly stated obstacle for a rapid infrastructure deployment was the prevailing barriers to erect new mobile sites. These mainly affect the administrative process of getting permissions to erect further sites and were considered as a main obstacle especially in Bulgaria, Croatia and Serbia.

The form of administrative burdens is manifold, for example:

• Different authorities are in charge for the mostly decentralised process of applying for permissions and thereby requirements can vary in a country. The authorities request a wide range of documents and sometimes even external consultation. In some countries, specific requirement makes the erection of mobile sites even more burdensome.

• In Bulgaria the electromagnetic field (EMF) requirements for each operator are stricter than the often used ICNIRP standard. In Serbia operators have to further provide a technical documentation that often needs consulting support.

The combination of these factors makes the entire application process for the operators complicated, time consuming and costly. Even after fulfilling the requirements to obtain permission it can take a long time until the operators are granted with a licence. It can take up to a year for the entire process to be complete.

65 In view of the nature of the activities of the TAG subsidiaries these have focussed on obstacles for

mobile roll-out.



Limited spectrum availability

Another hurdle in the further deployment of mobile broadband cited by some stakeholders is the availability of frequencies to provide (faster) mobile broadband services. There are two common ways to provide further spectrum for mobile (broadband) services.

• National implementation of EU Directive 2009/114/EC66 that allows technology neutrality of frequency bands formerly reserved for GSM technologies only. Some ESE countries, such as Macedonia and Croatia, have taken first steps towards refarming former GSM frequency bands, with others possibly to follow.67

• Digital switchover –– that is the switchover from analogue to digital terrestrial TV –– will clear spectrum bands that could be used to provide mobile broadband services. This is yet to be implemented in most of the countries where TAG operates (i.e., Austria, Bulgaria, Serbia, and Slovenia) However, we also understand that plans to use this spectrum for mobile broadband have reached an advanced stage in Croatia.

A timely decision to permit the usage of these frequency bands for mobile broadband provision could be expected to reduce the regulatory insecurity for operators and thereby support investment incentives. Ideally the countries would go through the process of refarming in a way that the usage of the frequencies could start in the near future.

Infrastructure sharing

Barriers to infrastructure sharing amongst operators remain in place in some of the TAG footprint countries. Allowing for more consideration of active infrastructure arrangements (subject to compliance with general competition rules) may reduce the cost of rolling out broadband services to less densely populated areas. This can help to facilitate the roll-out to geographic areas, which are currently not covered by any broadband technology.

Public support of demand side drivers of broadband demand

To our understanding from stakeholder interviews, missing IT skills, prevailing low PC penetration rate and sometimes low income can be an obstacle for a higher broadband penetration rate in the ESE region. Thus, even if households have technically access to broadband, they do not necessarily subscribe to these

66 http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/1545

67 For example, we understand that in Bulgaria, the regulatory authority has adopted a draft decision to amend the current regulation to lift technological restrictions imposed on GSM frequency bands.



services and therefore none of the potential benefits are realized. Governmental schemes in support of demand side measures could thereby probably increase the take-up of broadband services and therefore further increase the associated benefits. Possible measures, some of which are already introduced in other EU countries, include, for example:

• Measures to increase the PC penetration. For example, in Sweden a tax break on PCs was introduced and according to an EU study was an important driver for the high level of internet usage.68

• Digital literacy initiatives to raise ICT skills of specific groups within the society. Such initiatives were introduced in several EU and non-EU countries.69 They commonly foster, if applied in a reasonable manner, disadvantaged groups and are likely to enable them to realize the potential benefits from broadband services.

• Further financial stimuli to consumers. Financial support for lower income users, including the possible introduction of tax breaks, are also means to increase broadband take-up.

68 eGovernment Factsheets, eGovernment in Sweden 2006

http://documentostics.com/component/option,com_docman/task,doc_view/gid,1175/

69 http://www.digital-literacy.eu/20776, For an assessment of the success of such initiatives, see “Developing Government objectives for broadband” Vodafone Policy Paper Series - Number 10 - March 2010

http://www.vodafone.com/etc/medialib/public_policy_series.Par.54646.File.dat/public_policy_series_10.pdf


Summary and recommendations

7 Summary and recommendations Our study has identified significant potential for further growth in broadband provision across Eastern and Southeast Europe. This also holds for countries within TAG’s current footprint. If these countries were to achieve the conservative estimates of further broadband take-up assumed within this study, this may generate total benefits of € 9.2 billion (in present value terms) across all five TAG countries in the ESE region over a ten year period. To support further take-up of broadband services governments and public authorities need to design policy measures aimed at reducing prevailing obstacles whilst implementing further enablers of future broadband growth. Based on insights gained from stakeholder interviews, we recommend that policymakers consider:

1. encouraging future deployment of mobile and fixed broadband infrastructure by:

a. reducing and removing all unnecessary administrative procedures to deploy mobile and fixed broadband; and

b. developing investment friendly policy guidelines (including, for example, transparency, enforceability and incentives for investment);

2. taking a timely decision on the re-farming of GSM and analogous TV spectrum, where still appropriate, to reduce investment uncertainty for mobile operators and facilitate future provision of mobile broadband;

3. active infrastructure sharing amongst operators, subject to competition rules;

4. assessing the merits of demand side policies that support broadband take-up in already covered areas by, for example:

a. increasing PC penetration and/or by improving peoples’ IT skills; and

b. minimising and/or removing any telecoms-specific taxation (in particular, consumption taxes). Our analysis suggests also that any extra mobile or telecoms-specific taxes could actually have detrimental effects, if by increasing the cost of providing broadband, they delay broadband take-up and rollout.


Annexe 1: Coverage Maps

Annexe 1: Coverage Maps This annexe provides a more detailed overview of the current 3G network coverage across the TAG footprint. In Figure 12 of the main report, we provided an overview of current 3G coverage across Europe.

In this annexe we first provide an overview of the coverage of 3G mobile networks in the TAG footprint across the ESE region (i.e. Bulgaria, Croatia, Macedonia, Serbia and Slovenia). We then show coverage in selected Western European countries, namely Austria, France and the UK as a benchmark for a higher deployment of 3G mobile networks.

For each country, all publicly available, operator specific coverage maps for 2010 are presented.

TAG footprint

Table 11. 3G coverage maps - Bulgaria

Bulgarian Telecommunications Company

Mobiltel EAD (M-Tel BG)

Source: GSMA coverage maps GSM coverage, 3G 2100 and GSM coverage



Table 12. 3G coverage maps - Croatia

Croatian Telecom Inc. (T-Mobile Croatia) VIPnet d.o.o. (VIP-NET)


Table 13. 3G coverage maps - Serbia

Telekom Srbija

Telenor D.o.o.

Source: GSMA coverage maps, No 3G coverage map for Vip mobile d.o.o. available GSM coverage,

3G 2100 and GSM coverage



Table 14. 3G coverage maps - Slovenia

Mobitel D.D.

Source: GSMA coverage maps, No 3G coverage for SI.MOBIL d.d., Tusmobil d.o.o. available

GSM coverage, 3G 2100 and GSM coverage



Western European benchmarks

Table 15. 3G coverage maps - Austria

Mobilkom Austria AG (A1)

Orange Austria Telecommunication GmbH

Hutchison 3G Austria GmbH (3 AT)

T-Mobile Austria GmbH (telering)

Source: GSMA coverage maps, No 3G coverage for SI.MOBIL d.d., Tusmobil d.o.o. available

GSM coverage, 3G 2100 and GSM coverage



Table 16. 3G coverage maps - France

Bouygues Telecom

SFR

Orange France




Table 17. 3G coverage maps - United Kingdom

Hutchison 3G UK Ltd

T-Mobile (UK) Limited

VODAFONE Ltd

Orange PCS Ltd

Telefónica O2 UK Limited

Source GSMA coverage maps GSM coverage, 3G 2100 and GSM coverage


Annexe 2: Empirical estimation of broadband benefits


General telecom infrastructure investment

Empirical economic research on the impact of telecommunication infrastructure on productivity, growth and employment has become a considerable strand of economic literature. Since the early 1980s, academic researchers investigated the impact of fixed line usage and penetration on economic growth. The majority of these studies found a significant and positive correlation between telecommunication infrastructure deployment and growth.70 More recently and with more sophisticated econometric techniques other researchers tried to assess the impact of investments in telecommunication infrastructure. The three main recent studies are as follows.

• Röller and Waverman (2001) find in their seminal paper for 22 industrialized countries a strong causality between investment and growth. However, this impact is non-linear (i.e.,. they find that the effects are strong if the number of telephone lines exceeded a critical penetration of 40%).

• Sridhar and Sridhar (2004) focus on developing countries and find a significant impact of mobile infrastructure on output of a country.

• Datta and Agarwal (2004) focus on OECD countries and show a positive impact of investment on growth but with diminishing returns. This would suggest that countries at an earlier stage of development are likely to gain the most from investing in telecom infrastructure

Although the literature is conclusive that a casual relationship between telecommunication infrastructure and growth exists, the literature is also ambiguous on the direction of the causality. Do countries with a strong growth invest more into telecommunications infrastructure? Or runs the causality in reverse direction and countries that invest in telecommunication infrastructure grow significantly more? This is further summarised in the table below.

The studies we refer include Hardy (1980), Leff (1984), Cronin et al. (1991), Cronin et al. (1993) and Greenstein and Spiller (1995). They all show a positive and significant impact of telecommunication infrastructure on growth.



Table 18. Causality between investment and growth

Bidirectional relationship between growth and investment

Unidirectional relationship

Cronin et al. (1991, 1993a and 1993b) for the US market

Cieslik and Kaniewsk (2004) causality that runs from telecom infrastructure to income in Poland

Madden and Savage (1998) for counties in Eastern and Central Europe

Lam and Shiu (2009, 2010) causality in reverse direction for China

Chakraborty and Nandi (2003) for developing countries in Asia

Yoo and Kwak (2004) for South Korea

Wolde-Rufael (2007) for the US.


As a result of the above, more recent studies have taken econometric approaches that take a bidirectional direction of causality into account (for example, Röller and Waverman (2001) or Koutroumpis (2009)).

Impact of Broadband investment on growth

There is to date only limited economic research which is specifically focused on the impact of investment into broadband networks. The initial studies mainly focused on the regional impact of broadband and on selected economic indicators like employment effects, retail sales or housing prices.71 However, they all find a positive impact of broadband investment on these measures. Only some papers are yet published that undertake a more comprehensive, comparative analysis of the economic impact of broadband on a country level. We provide a brief summary of the key papers below. Please refer to Section 5.1 for a summary of the latest papers by Koutroumpis (2009) and Qiang (2009).

• Duggal et al. (2007) measured the economic impact of public and private investment into information infrastructure (i.e., cable, mobile, satellites broadcasting and internet facilities) based on regional data from the United States. Although broadband infrastructure formed part of the study, due to the time period covered (1975-2001), it only constituted a marginal share of the total infrastructure deployed at the time. The authors find that the

71 For example studies for the US from Lehr et al (2006), Kelly (2003), Ford and Koutsky (2005),

Thompson and Garbacz (2008) and Crandall and Jackson (2001) find a positive impact of broadband investment on these variables.



information technology was the largest contributing component to growth in the United States over the analysed time period.

• Greenstein and McDevitt (2009) also used data from the United States with the aim to simulate what the impact of broadband compared to dial-up has been between 1999 and 2006. The authors find that between $8.3 billion (€6.2 billion)72 and $10.6 billion (€7.8 billion) additional revenue was created through broadband.

• Katz et al. (2010) estimate the employment and GDP effect of a further broadband deployment in Germany using an Input-Output modelling approach. They particularly aim to assess the impact of the Government’s National Broadband strategy73, which had the goal to achieve a broadband penetration with speeds of at lease 50Mbps of 75% of all households by 2014, followed by a 50% household penetration of services with 100Mbps and 30% with 50Mbps by 2020. The authors estimate a total cost of €20.2 billion to achieve the 2014 target and a further €15.7 billion to meet the 2020 target. Overall, the policy would generate nearly one million new jobs. 541,000 jobs would be directly created through the construction of the network and the remaining 427,000 jobs would be created indirectly through enhanced innovation and new business creation. In total, the policy would result in direct value added through the network construction of €22.3 billion and network externalities of additional €137.5 billion.

Impact of Broadband investment on employment

There a five key recent academic papers which focus on the employment impact from broadband infrastructure investments.74 All five papers investigate the effects of broadband investment programs on the employment and the majority of them distinguish between direct, indirect, induced and network employment effect:

direct jobs are created through the network deployment;

indirect jobs are created by businesses selling to those businesses directly involved in network construction;

induced jobs are created by household spending based on the income earned from the direct and indirect effects; and

72 Based on an exchange rate of €0.74 per US$

73 http://www.bmwi.de/Dateien/BBA/PDF/breitbandstrategie-der-bundesregierung,property= pdf, bereich=bmwi,sprache=de,rwb=true.pdf

74 These are the papers of Katz et al. (2008), Atkinson et al. (2009), Crandall et al. (2009), Katz and Sutner (2009) and Liebeau et al. (2009).



network effects are created by using the broadband network.

The findings of each of the papers is summarised in the table below.

Table 19. Overview of job creation

Katz (2008)

Atkinson (2009)

Katz and Sutner (2009)

Liebenau (2009)

Katz (2010)

Summary overview of broadband investment program

Country CH US US UK DE

Cost of program €9.1bn* €7.4bn* €4.7bn* €5.6bn* €20.2bn €15.7bn

Program length 1 year 4 years 1 year 5 years 6 years

Costs per year €7.4bn €1.2bn €5.6bn €4.0bn €2.6bn

Employment effects

Direct 83,000 64,000 37,000 62,500 158,000 123,000

Indirect 31,000 79,000 71,000 55,000

Induced

31,000

–– 116,000

59,500 75,000 59,000

Network –– 268,500 0 – 270,000 74,000 103,000 324,000

Total over period 114,000 448,500 127,500 –

397,000 215,500 407,000 561,000

Induced cost per created job

Cost per job per year

€16,500 €11,900- €37,000 €26,000 €49,500 €28,000


*Exchange rates of €1.12 per £, €0.74 per US$ and €0.70 per CHF

Crandall et al (2009) took a different approach by estimating the employment effects of an increase in broadband penetration, rather than further investment. Based on data from the United States, the authors find an increase of employment of 0.2% to 0.3% per year for a 1 percentage point penetration



increase. That would suggest around 300,000 new jobs would be created per year for each 1 percentage point increase.


Annexe 3: Empirical literature references


• Atkinson, Robert, Daniel Castro Steven Ezell (2009). The Digital Road to Recovery: A Stimulus Plan to Create Jobs, Boost Productivity and Revitalize America. ITIF publication http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1334688

• Chakraborty, C. and B. Nandi (2003). Privatization, telecommunications and growth in selected Asian countries: An econometric analysis. Communications and Strategies 52 31-47.

• Cieslik A. And M. Kaniewsk (2004). Telecommunications infrastructure and regional economic development: The case of Poland. Regional Studies. 38. 713-725.

• Crandall, Robert W. and Charles L. Jackson (2001). The $500 billion opportunity: The potential Economic Benefit of Widespread diffusion of broadband internet access. Criterion Economics study.

• Crandall, Robert W., William Lehr and Robert Litan (2007). The effect of Broadband Deployment on Output and Employment: A Cross-sectional analysis of US Data. Issues in Economic Policy, The Brookings Institutions.

• Cronin F.J, E.B. Parker, E.K. Colleran and M.A. Gold (1991). Telecommunications infrastructure and economic growth: An analysis of causality. Telecommunications Policy 15(6), 529-535.

• Cronin F.J, E.B. Parker, E.K. Colleran and M.A. Gold (1993a). Telecommunications infrastructure and economic development. Telecommunications Policy 17, 415-430.

• Cronin F.J, E.B. Parker, E.K. Colleran and S. Lewitzky (1993b). Telecommunications and growth: The contribution of telecommunications infrastructure investment to aggregate and sectoral productivity. Telecommunications Policy 17, 677-690.

• Datta A. and S. Agarwal (2004). Telecommunications and economic growth: A panel data approach. Applied Economics 36(15) 1649-1654.

• Duggal, Vijaya G., Saltzman Cynthia and Lawrence Klein (2007). Infrastructure and productivity: An extension to private infrastructure and IT productivity. Journal of Econometrics. 140. 485-502.


• Ford, George S. and Thomas M. Koutsky (2005). Broadband and Economic Development: A Municipal Case Study from Florida. Review of Urban & Regional Development Studies 17 (3) 216-229.

• Hardy, A (1980). The role of the telephone in economic development. Telecommunications Policy 4 (4), 278-286.

• Greenstein, Shane and Ryan C. McDevitt (2009). The broadband Bonus: Accounting for Broadband Internet’s Impact on the US GDP. Working paper.

• Greenstein, S.M. and P.T. Spiller (1995). Modern Telecommunications infrastructure and economic activity: An empirical investigation. Industrial and Corporate Change 4(4) 647-665.

• Katz, Raul and Stephan Sutner (2009). Estimating the economic impact of the broadband stimulus plan. Discussion paper. http://www.ntia.doc.gov/broadbandgrants/comments/1EA7.pdf

• Katz, Raul L, Stephan Vaterlaus, Patrick Zenhausern and Stephan Suter (2010). The impact of broadband on jobs and the German economy. Intereconomics 45(1) 26-34. (Also Available as a longer study at http://www.polynomics.ch/dokumente/Polynomics_Broadband_Study_E.pdf)

• Kelley, Doris J. (2003). A Study of the Economic and Community benefits of Cedar Falls, Iowa’s Municipal and Telecommunications Network. Iowa Association of Municipal utilities.

• Koutroumpis, Pantelis (2009). The economic impact of broadband on growth: A simultaneous approach. Telecommunications policy 33(9) 471-485.

• Lam, Pun-Lee and Alice Shiu (2008). Productivity analysis of the telecommunications sector in China. Telecommunications policy 32 559-571.

• Lam, Pun-Lee and Alice Shiu (2010). Economic growth, telecommunications development and productivity growth of the telecommunications sector: Evidence around the world. Telecommunications policy (forthcoming).

• Leef, N.H. (1984). Externalities, information costs and social benefit-cost analysis for economic development: An example form telecommunications. Economic Development and Cultural Change 32(2) 255-276.



• Lehr, William H., Carlos A. Osori, Sharon E. Gillett and Marvin A. Sirbu (2006) Measuring Broadband’s Economic Impact. Report of the department of commerce, revised version of 2006.

• Liebenau, Jonathan, Robert Atkinson, Patrik Kärrberg, Daniel Castro and Stephen Ezell (2009). The UK’ digital road to recovery. ITIF and LSE Enterprise report. http://www.itsa.org/itsa/files/pdf/digitalrecovery.pdf

• Madden G. And S.J Savage (1998). CEE telecommunications investment and economic growth. Information Economics and Policy. 10(2) 559-571.

• Qiang, Christine Zhen-Wei (2009) Telecommunications and Economic Growth. Unpublished working paper. World Bank.

• Röller, Lars and L. Waverman (2001). Telecommunications infrastructure and economic development: A simultaneous approach. American Economic Review, 91. 909-923.

• Sridhar K.S and Sridhar V. (2004). Telecommunications infrastructure and economic growth. Evidence from developing countries. Working paper 04/14. National Institute of Public Finance and Policy.

• Thompson, Herbert and Garbacz, Christopher (2008). Broadband impacts on state GDP: Direct and Indirect impacts. Discussion paper

• Wolde-Rufael, Y. (2007). Another look at the relationship between telecommunications investment and economic activity in the United States. International Economic Journal 21. 199-205.

• Yoo, S.H. and S.J. Kwak (2004). Information technology and economic development in Korea: A causality study. International Journal of Technology Management 27. 57-67.

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The impact of broadband in Eastern and Southeast Europe · Western European jurisdictions. Whilst broadband demand in other European jurisdictions has also been growing, the current