The Organization for Economic Cooperation (OECD) recently released its annual report comparing broadband penetration rates among OECD countries.  The House Commerce Committee recently invited several policy leaders from some OECD countries mentioned in the report to examine the issues and discuss policies related to broadband.  As can be noted in my past blog postings, we in Verizon appreciate that broadband deployment – especially in areas that do not have access to broadband, particularly rural areas – is an important issue that needs to be addressed and we understand the interest of members of Congress in the matter.

 

Falling Behind?  Global Leader?  Country rankings don’t ask the right questions.

I do think it is useful to constantly assess where we are in broadband deployment and to make progress in moving towards more capable broadband networks and more choice for consumers in broadband services.   But the OECD report is only one snapshot of where broadband markets and technologies are in the developed world.  There are in fact many other surveys and research reports on broadband – ranging from the Pew Trust Surveys on the Internet and Society to various studies done by think tanks and private analytical firms – that taken together provide a much more complete picture of what is going on with broadband deployment in the U. S.   Using only one metric – the OECD rankings -- is not only likely to lead to mistaken conclusions; it will also mean missing the very real and positive progress on broadband deployment we have made in the U. S. 

 

For example, a weakness in the OECD data is that nation-states are the geographic units of comparison.  Iceland, S. Korea and the United States are treated the same for comparative purposes despite wildly different geographies, population densities and more.  But if one tries to control for geography and density by attempting to compare “like” to “like,” then one gets very different results. 

 

Comparing the 50 individual states that comprise the U.S., for instance, to the 25 nations that comprise the European Union (EU) provides a rough way to control for geography and density, and this is done in some recent Pew Trust surveys.  A comparison of the entire United States with the entire European Union on the basis of connected households shows the U.S. with a significantly higher broadband adoption rate than the EU overall: 42% of all households have broadband in the U.S. compared to 23% in the EU. And a comparison of the broadband penetration rate in each of the 50 states with the penetration rate in each the 25 EU nation-states shows U.S. states would be 8 of the top 10 in a ranking of the entire list of the combined U. S. states and EU countries. 

 

Another example of problems with the OECD’s data is that high-speed private lines used by U.S. businesses aren’t included.  Since private-line broadband access is used far more widely in the U.S. than in Europe (where “private line” access is referred to as “leased lines”), this “failure to count” skews the results that are reported.  A great number of businesses use DSL in Europe which means that the totals for European countries are overstated compared to the U. S. where DSL lines are almost exclusively used by residential customers.

 

U.S. continues to lead the world, but bad policy could turn that around.

In absolute terms, the U.S. online market is huge and is the largest in the world.  Estimates are that about 70% of U.S. households subscribe to Internet access.  Of the estimated 74 million connected households, more than 56 million use broadband and more than 18 million use dial-up.  Given the wide availability of dial-up Internet access at flat rates and fast modem speeds, our adoption rate for broadband is driven heavily by applications and perception of value. 

 

In comparative terms, several important metrics linked to the size and dynamic nature of the American broadband market indicate that the U.S., which first developed the Internet and helped make the World Wide Web a commercial reality, is maintaining its world leadership position as the Internet evolves from dial-up to broadband.

 

Absolute market size drives economic benefits.

The first metric of key importance beyond the OECD ranking is the relative size of the U.S. broadband mass market: 56 to 58 million households, compared to a similar number in China, but only 26 million in Japan and 14 million in S. Korea.  The sheer number of broadband-connected households in the U.S., and the mature nature of our economy compared to China, means that the U.S. is and can continue to be the first choice in the world for developing and introducing new applications and content.  The hundreds of billions of dollars in new economic value and thousands of new jobs represented by U.S.-based companies like Google, Amazon.com and eBay are a direct result of the size of the U.S. broadband market.

 

Market-based competition drives network innovation; government-managed resale competition leads to stagnation.

A second metric is the dynamism of the U.S. market for competing broadband infrastructures, compared to the relatively static infrastructures in many of America’s global economic rivals.  The U.S. is witnessing the construction of new, mass-market all-fiber networks and new wireless broadband networks at a rapid pace.  In no other country in the world are fiber networks with up to 400 mbps capacity (and more) being deployed on a wide scale to homes but it is happening in the U.S.  This is in part because the U.S. has platform competition – competition between facilities-based broadband providers who have invested in extensive local high speed networks using cable, fiber optics, DSL and wireless technologies.  The European Union itself in a recent report recognized that platform competition has made the Netherlands and Denmark – both of which have very competitive broadband markets in which both telcos and cable companies are striving to attract customers – among the better performers in the EU. 

 

Market-based competition drives higher speeds.

A third metric is the cross-country comparison of broadband speeds.  By the European Union’s own estimates, for example, U.S. broadband speeds are higher on average than those in most European countries.  This is because cable broadband infrastructure passes nearly every American household.  Average speeds over cable modem systems are twice as fast as DSL on average (although by shortening loop lengths DSL can achieve speeds comparable to cable modem service), which is the dominant technology used in Europe and in fact in most countries around the world.  The wide availability of cable broadband in the U.S. also demonstrates the reality of robust platform competition.   Providers try to differentiate and respond to customers, for instance, by offering a variety of speeds at different prices.  Verizon use DSL to offer high-speed options that range from 768kps to 3Mbps. New fiber networks being deployed by Verizon are taking both our overall speed advantage – and competition – to dramatically higher levels.

  

Sustainable prices are set by market-based competition, not government mandates.

A fourth metric is the cross-country comparisons of broadband prices.  The fact is that it’s difficult to arrive at true apples-to-apples comparison across countries because competition in the U. S. – unlike many countries – is not driven by just broadband services.   Increasingly Americans want bundles of services, and the bundled price of a triple play is an important part of the market.  Millions of Americans can today purchase a bundle of high speed (multimegabit) Internet service, unlimited voice service and 180 channel (20 HD channels in the total) video service for around $100 a month.  There is nothing similar in many overseas markets.   

 

But more important, perhaps, is the fact that cross-country price comparisons offer no insight into what drives broadband take rates.  Someone living in Virginia can’t buy a broadband connection in France, so any price comparison is meaningless and irrelevant to the Virginian’s behavior.   And in fact, the 50 states in the U.S., as a group, have a higher penetration rate than the 25 EU nation-states taken as a group as noted earlier.  No matter what price comparisons are made, the rapid uptake of broadband in the U. S. means that the service is affordable. 

 

There’s short-term investment . . . and then there’s long-term investment.

The international witnesses at the hearings were questioned about unbundling and investment.   In New Zealand, Great Britain and Japan, unbundling has been used to encourage competition, to a large degree because of the lack of platform competition (at least in New Zealand and Japan).  The witnesses were asked whether unbundling was harming investment and whether competition was growing. 

 

But almost no one asked whether these countries were seeing investment in advanced networks like those powered by fiber being deployed in the U. S.   In fact, British Telecom has said that it would not invest in fiber to the home because of the very unbundling regime that was praised by some at the hearing.  Yes, fiber is being deployed by NTT in Japan but the country is not seeing platform competition and no one but NTT is building advanced fiber networks on a wide scale.  In part, as an expert NTT official said recently, this is because unbundled copper loops are priced at such a low level that no one has the incentive to invest other than NTT – and NTT is investing in part because it is trying to stave off losses to companies leasing copper lines at “fire sale” rates by moving upscale to higher speeds via a fiber network.

 

Bottom line?   The U.S. remains a leader on many dimensions but can certainly lose ground.  Key to staying a leader is trust in market-based competition rather than government command-and-control.

The fact is the U. S. is making significant progress when it comes to broadband deployment and uptake.   We are one of the few countries with extensive platform competition.  We are seeing major new investments in everything from fiber to the home networks to new 3G networks in the cellular industry.   None of this is to criticize other countries where unbundling has been mandated – their policy is driven by the degree of competition they see and other market conditions.  In many of these countries, they have not seen the growth of competing broadband platforms and are using unbundled loops as a means of encouraging competition.   Time will tell whether investment in new technologies like fiber will grow in these countries and whether true platform competition will emerge. In the meantime, using the OECD report as the main measure of success in broadband growth, deployment and policy is not only unwise, it could mislead policy makers into adopting laws or rules that will undo the significant progress we have made.