How Big a Problem is the "Digital Divide?"

One always-present issue when looking at any particular social or economic problem is that we always face multiple problems at the same time. Drug overdoses, malnutrition, carbon and methane emissions, traffic, inflation, joblessness, homelessness, lack of medical care, uneven or inadequate educational opportunities, domestic violence, fair treatment of ehtnic, racial, religious or other minorities, corruption, crime and many other problems have to be tackled simultaneously. 

And it never is possible to rank order all of those problems in terms of allocating resources to solve the problems, in a holistic way, in real time, even assuming we have our means-ends causality chains correctly understood. 

In that vein, the “digital divide” is a bigger problem some places, compared to others, even if it can be seen as a problem no matter where we find it. 

That clearly is the case for people in many lower-income or middle-income countries, where internet access in lower-income countries exceeds four percent of monthly gross domestic product, for example. 

In most middle-income countries greater progress has been made, with costs below the International Telecommunications Union target of two percent of monthly GDP. 

In developed countries, the problems are mostly confined to rural areas or high-cost areas, as monthly recurring costs are below one percent of GDP. There still are issues to be solved, but they are relatively trivial compared to other problems we also face. 

source: ITU

How Far Can Fiber Asset Sales Go?

“Because we can” or “because we should” might explain a good deal of asset disposition behavior in the connectivity business these days. 

Optus owner Singtel, for example, is said to be mulling the sale of a stake in its Australian access facilities, a move that would allow Singtel to raise cash. 

Such opportunistic moves--as always--are driven by a combination of seller need, buyer interest and a broader rise in the value of optical fiber access and transport assets for investors in search of alternative assetshttps. 

Low interest rates mean lots of capital is available, while high valuations for other traditional assets also are driving investor interest in lower-valuation, higher-return financial vehicles and something more akin to a private equity approach to investing by institutional investors such as pension funds. 

Buyer interest has grown the value of optical fiber assets or the ability to create them,  while sellers are enticed by such higher valuations to monetize access network assets as they earlier monetized cell tower assets. Singtel itself sold a majority stake in its Australia cell towers in 2021. 

No doubt owner's economics still are important. But the issue is whether full ownership is required to reap that value. In a growing number of cases, partial ownership seems to be viewed favorably.

Streaming Does Not Change Everything

As much as video streaming has changed business models, there are some things it has not yet changed. At a high level, video entertainment and audio entertainment has been moving toward on-demand consumption for decades; virtual rather than physical media; unicast rather than multicast delivery. 

source: Statista 

But some things have not changed as much as observers say. Despite the virtually-universal description of AT&T’s ownership moves related to content, AT&T continues to own 71 percent of Discovery Warner Media. The results of that business are not fully consolidated, but AT&T reaps the reward of cash flow and profits related to that organization's success. 

In other countries different connectivity providers will have their distinct asset ownership profitles as well. But is is incorrect to say AT&T “has gotten out” of the content business. It has monetized some of its ownership and changed the way it continues to own such assets. But it still owns 71 percent of Discovery Warner Media. 

A few of us still believe that will be important, going forward, even if it is correct to say AT&T now can concentrate on its connectivity business with less distraction. 

But some things in the video content business have not changed. Subscriptions still dominate over full on-demand access. Content bundles still prevail over full a la carte access. Content catalogs still matter. 

What might be distinctively new is that the video content business has become globalized. No longer does it make as much sense for any content provider to operate in a single country, as streaming economics are vastly better on a global scale, as is true for most consumer-facing internet apps and services. The most-successful content services will operate globally. 

But bundles of content remain key, even if the delivery mechanism has changed.

Balancing "Connecting the Unconnected" with "Faster Speeds for Many"

 The new infrastructure bill is touted as making $65 billion available for demand and supply investments in U.S. broadband access. And there is an argument to be made that both supply and demand investments will change consumer behavior. The issue is how much. 

 

Many people use their smartphones--on purpose--for personal internet access, and do not buy fixed network service. That is a demand issue, not a supply failure. But look only at supply issues. 

About 44,198 Hawaii households (10 percent) are said to have “no internet access.” It never is completely clear what definition is used. Some likely define it as having no networks which provide local service. But others might use the “25 Mbps” speed as the definition of broadband. So a household might have internet access, but not broadband. 

In fact, Hawaii internet access statistics are the same as for the United States as a whole. That suggests national statistics are relevant for judging where the greatest benefit from the new demand and supply policies is to be obtained. 

There are both supply and demand issues. About seven percent of households do not own a computer. If you do not use a computer, perhaps internet access is not so relevant. Recent surveys suggest seven percent of Americans do not use the internet, by choice. 

By some estimates, 23 percent of households have internet access, but not at the 25 Mbps rate defined as “broadband.” There is, in other words, a difference between “internet access” and “broadband.”

There also are key implications for investment. A home that has internet access, but not at 25 Mbps, must be upgraded. But the cost to do that often is far less than building brand-new facilities to a location without existing access. 

For the United States as a whole, only about two percent of households or less literally have no fixed network access. That two percent is where costs will be greatest, and also the most-isolated, cases. It might only be feasible to use satellite or some other wireless technology in those cases. 

For most locations, upgrades are called for, not necessarily greenfield construction. Most of the households “not buying or not able to buy” internet access are “upgrade” situations. To be sure, telcos will have to consider ripping out copper plant and switching to optical fiber, which might require new construction. 

So the issue there is the degree of benefit an average subsidy of $339 per location represents. 

Income almost certainly affects demand as well. About 19 percent of households with an annual income less than $75,000 have no internet subscription.

As always, educational attainment also matters. Some 10 percent of individuals without a high school diploma or equivalent do not buy internet access. 

 

Assume that total funding to affect demand and supply is about $300 million for the state. If half  the funds were spent on supply and half on demand, that implies $150 million to build new facilities. 

If 44,200 households need to be connected, that also implies capital investment and construction support of about $339 for each “non-subscribing” or “high cost”  location. Some might argue that is a helpful, but relatively small change in the business case for upgrades. It might be deemed generally insufficient to incentivize new construction in very high-cost areas.  

If one assumes a monthly cost of $50 for internet access, the $30 subsidy cuts costsof such plans 60 percent. 

source: Broadband Hui 

Again, however, many existing programs provide 25 Mbps broadband access at relatively low prices for low-income customers. It is not clear how much change the $30 a month additional subsidy will change buying behavior. But it certainly is reasonable to argue that the main impact is to create incentives for purchasing of higher-priced and faster-speed plans by customers now choosing to buy 25-Mbps service. 

On the supply side, since one big pool of money in the bill is allocated for “unserved” areas, we should expect to see incremental investment in such areas. Since another pool of money is allocated for “high-cost” areas, we similarly should see additional investment in such areas. But the actual additional lines added should be more modest than some expect, simply because such access lines are so hugely expensive. 

For practical political reasons, we are likely to see significant effort to show “big numbers” where it comes to improvement. And those results can be obtained mostly in cases where speed upgrades are possible for a wide number of lines. 

So it might be reasonable to expect a relatively small improvement in total “connected homes,” but a significant increase in homes able to buy service at speeds from 50 Mbps up to a gigabit per second. 

Not only is the impact likely to be wider for such incremental upgrades, but the total impact, compared to investment, will be highest as well. Assume two thirds of the supply-focused money will be spent on unconnected or hard-to-connect locations. Still, the third of funds spent to upgrade existing facilities will likely show the biggest numbers of locations that benefit.

Are Broadband Cost and Benefit Out of Alignment?

"Better broadband" is no less a "desirable thing" than better roads, bridges, elecrical grids and resource management programs that actually could work. So with decarbonization, elimination of disease, clean drinking water and sanitation, social equity or quality education. We always have multiple problems to solve.

But opportunity costs always exist. More of one thing means less of the others. Occasionally, it might be helpful to evaluate our priorities. We desire many positive outcomes, but our resources lag our ambitions. So cost and beneift always are legitimate questions.

Virtually all government programs to close the digital divide are touted as important because--it is is argued--broadband leads to economic growth. In fact, careful reports only use the word correlation, not “causation” when discussing broadband and economic growth. 

Often, even correlation cannot be shown, as is the case with much “foreign aid.” Still, correlation often does exist, and for obvious reasons. Some regions and industries are fast growing. It should come as no surprise that areas such as Silicon Valley show both high growth and high broadband availability. 

But it never is clear which holds: high growth leads to wealth; and wealth leads to excess spending power; which leads to demand for quality broadband, good restaurants and other outcomes associated with areas of high income. 

To use a phrase, perhaps high economic growth, high wealth, high educational levels, some industries and lots of younger people lead to quality broadband demand and supply, rather than broadband causing those outcomes. 

Will quality broadband really boost economic growth in sparsely settled rural areas far from urban centers, already losing residents and already suffering from low economic growth? 

To be sure, there is virtual agreement that universal broadband is a good thing, as universal telephone service, universal mobile service, electricity, education or medical care are  considered good things. 

But there still is no actual evidence--possible correlation, but not causal proof--that broadband access--or better quality broadband access--actually does “cause” economic development. 

Nor, for that matter, are many government reports actually clear about the differences between supply and demand issues; consumer choices and supplier business choices; or the ways people actually use the internet as it relates to potential economic benefit.

Reports often confuse “people who choose not to buy a product” with “inability to buy.” The former is a matter of consumer choice; the latter a supply chain issue. It is one thing to say “few people buy gigabit internet access.”

But that does not mean they “cannot buy.” They may choose to buy a different product, such as access at 200 Mbps. 

And while the internet can be used to conduct homework or conduct work,  it mostly gets used to “watch TV,” or engage in social media. 

Few--if any--really believe watching TV or engaging with non-business social media has a positive impact on economic growth in a direct sense, important though it is as a driver of income for influencers, advertisers, writers, directors, actors, studios, streaming services and TV networks. 

Beyond all that, improving broadband involves opportunity costs: other uses for that capital that are not undertaken because we spend the money on broadband. In a broad sense, all public policy choices involve such trade offs: things we cannot do because we chose to do something else.

Quality broadband is a good thing, don’t get me wrong. But it might not have nearly the economic upside people often wish to believe.

What Impact on Subscriptions from New Federal Broadband Program?

The actual impact of the 2021 infrastructure bill passed by the Congress will hinge on the rules governing disbursement of the funds. But the funds are sure to decrease the cost of adding new infrastructure and increase demand as well.

It also is worthwhile noting that not every household “does not have access” to broadband for reasons of supply. In Canada, for example, six percent of homes do not buy fixed network broadband. Some 63 percent report they do not wish to buy. Some 39 percent claimed they could buy, but that cost was the issue. 

Note the non-existent percentage of “non-buyers” who say they “cannot buy” because the service is not available. In the U.S. market, it often is estimated that about 1.5 percent to two percent of homes literally do not have any fixed network service available to them. 

The point is that most buyers unable to use “broadband” (defined as a minimum of 25 Mbps) actually do have internet access from one or more providers, though speeds are not what most of us prefer. 

That is important as we look at the potential impact of new U.S. federal government support for broadband. 

source: Statistics Canada 

Though money can be spent on digital literacy, equipment support or other training, most observers are likely waiting to see what impact can be made on quality of service. Connecting the “unconnected” also is important, for the last one to two percent of homes. 

But quality of service is the bigger issue for most. 

So how might the money could affect a single state, such as Hawaii. Assume total spending is about $300 million. What could that do? Much depends on the mix of demand and supply incentives, and none of that is clear yet. 

Assume, for the sake of argument, half is used to stimulate demand, and half is used to stimulate supply. At a subsidy rate of $30 per month, the fund means $360 in annual benefits for eligible households. That arguably means 416,667 annual subsidy accounts. Over a decade, that would mean 41,667 households per year could save $360 in access fees. 

That might actually exceed actual demand. 

Assume10 percent of people cannot buy internet access. Some might not buy because there are no facilities or cost is deemed too high. Those are easier problems to solve than gaining adoption by households that see no value to computers or internet access, or who see mobile broadband as a reasonable substitute product. 

According to Broadband Hui, some 55,000 households in Hawai‘i (nearly 12 percent) do not buy internet access services. That does not mean they cannot, they simply do not. That might be a demand issue more than a supply issue.

Perhaps seven percent of those homes simply do not wish to buy internet access, or about 3850 households. That implies 51,150 households that either cannot currently buy internet access; have access but not at 25 Mbps or choose to use mobile access instead. 

Mobile-only households might be 15 percent to 20 percent of all homes. Use the lower figure. At 15 percent, that implies 8250 households prefer to use mobile access in place of fixed access. So the potential pool of customers for the $30 subsidies might be 42,900. 

It is not clear that all those households would qualify for, or use, the $30 subsidies, though. Nor is it clear that the new subsidy actually increases adoption very much. 

There are other assistance programs already in place. For example,98,000 households might qualify for the $30 subsidy as recipients of support from the Supplemental Nutrition Assistance Program (SNAP). Medicaid recipients also are eligible. So are students receiving Pell grants. 

But most internet service providers already were providing low-cost internet access for low-income customers,supplying 25 Mbps access at prices between $5 and $15 a month.

The point is that low-cost 25 Mbps access already has been available to households at prices between $5 and $15 a month from all the major suppliers. It is not clear how many low-income households that want internet access were not already buying. 

source: High Speed Internet.com 

The point is that the $30 subsidies are more likely to shift demand from some service plans to others than to cause non-subscribers to become subscribers, since the subsidies can be used to defray consumption of any tier of service. 

In that sense, allocating half the estimated $300 million to service subsidies might have relatively slight impact. The bigger problem might be lack of any service, and inability to buy any grade of service faster than 25 Mbps. 

So there is likely a public policy argument for spending most of the broadband funds on infrastructure improvements, rather than additional service subsidies.

In U.S., Federal Funding Changes FTTH, Mobile, Fixed Wireless, Cable Business Case

Facilities-based access network business models are changing, and higher levels of government spending to bring down costs for networks in rural and other high-cost areas is among the reasons. The 2021 passage of an “infrastructure” bill by the U.S. Congress will reduce costs in several ways. 

The bill includes $42.45 billion in grants to states for broadband projects, which can range from network deployment to data collection to help determine areas that lack service. Not all of that money will build infrastructure, to be sure. But much will. And the plan allocates at least $100 million in funds to every state, with lesser amounts to U.S. territories. 

source: S&P Global Market Intelligence 

If the money is not wasted, the cost of adding new internet access facilities should fall. Also, additional locations could find they are upgraded to  increase connection speed. 

There also are provisions that will stimulate demand. The bill allocates $14.2 billion for consumption subsidies. To be sure, there have been subsidy provisions before. But the new bill widens eligibility for such subsidies. 

Included in the bill is a $30-a-month voucher to low-income Americans to pay for internet service.

This program replaces the temporary $50-a-month Emergency Broadband Benefit program that was part of efforts to sustain the economy during the period when work and schooling were mostly shut down,  offering less money monthly, but increasing the number of those eligible.

Another demand stimulation effort is the allocation of $2.75 billion for digital inclusion and equity projects, such as improving digital literacy or online skills for seniors.

Additionally, $2 billion was allocated  for rural broadband construction by U.S. Department of Agriculture, as well as another $2 billion for a Tribal Broadband Connectivity Program run by the National Telecommunications and Information Administration (NTIA). Both ideally will help create new facilities. 

The bill also allocated $1 billion to build "middle mile" infrastructure to connect internet service providers to internet access points.

Finally, $600 million was authorized for bonds to finance broadband deployment projects in rural areas.

All that amounts to stimulating demand and supply of internet access, ideally. Undoubtedly some of the money will be wasted. 

But that much additional demand and supply stimulation is going to change business models for the better in many cases, directly lowering the cost of building facilities and defraying consumption as well. 

That is among the reasons many telcos are boosting their spending on fiber to home projects, AT&T, Lumen Technologies and Frontier Communications among them, and why other firms such as T-Mobile and Verizon are dramatically investing in fixed wireless on a national basis. 

Business models are better on the demand side, while the cost of such facilities is lower on the supply side.